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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 20, 2003
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 1-12356
------------------------
DAIMLERCHRYSLER AG
(Exact name of Registrant as specified in its charter)
DAIMLERCHRYSLER AG
(Translation of Registrant's name into English)
FEDERAL REPUBLIC OF GERMANY
(Jurisdiction of incorporation or organization)
EPPLESTRASSE 225, 70567 STUTTGART, GERMANY
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
<Table>
<Caption>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Ordinary Shares, no par value Frankfurt Stock Exchange
New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Philadelphia Stock Exchange
GUARANTEE OF THE FOLLOWING SECURITIES OF:
DaimlerChrysler North America Holding Corporation
8.50% Notes Due January 18, 2031 New York Stock Exchange
7 3/8% Notes Due September 15, 2006 New York Stock Exchange
</Table>
------------------------
Securities registered or to be registered pursuant to Section 12(g) of the Act.
NONE
(Title of Class)
------------------------
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NONE
(Title of Class)
------------------------
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
Ordinary Shares, no par value. . . . . . . . . 1,012,803,493
(as of December 31, 2002)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
<Table>
Yes /X/ No / /
</Table>
Indicate by check mark which financial statement item the registrant has elected
to follow.
<Table>
Item 17 / / Item 18 /X/
</Table>
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<Page>
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
--------
PART I
Item 1. Identity of Directors, Senior Management and Advisers....... 2
Item 2. Offer Statistics and Expected Timetable..................... 2
Item 3. Key Information............................................. 2
Selected Financial Data................................. 2
Risk Factors............................................ 5
Item 4. Information on the Company.................................. 9
Introduction............................................ 9
Description of Business Segments........................ 12
Mercedes Car Group.................................. 12
Chrysler Group...................................... 16
Commercial Vehicles................................. 23
Services............................................ 28
Other Activities.................................... 30
Supplies and Raw Materials.............................. 32
Government Regulation and Environmental Matters......... 32
Description of Property................................. 37
Item 5. Operating and Financial Review and Prospects................ 40
New Accounting Pronouncements........................... 40
Inflation............................................... 43
Critical Accounting Policies............................ 43
Operating Results....................................... 51
2002 Compared With 2001............................. 54
2001 Compared With 2000............................. 62
Liquidity and Capital Resources......................... 69
Off-Balance Sheet Arrangements.......................... 75
Research and Development................................ 76
Outlook................................................. 79
Item 6. Directors, Senior Management and Employees.................. 81
Supervisory Board....................................... 81
Board of Management..................................... 85
Compensation............................................ 88
Employees and Labor Relations........................... 89
Share Ownership......................................... 90
Item 7. Major Shareholders and Related Party Transactions........... 91
Item 8. Financial Information....................................... 93
Consolidated Financial Statements....................... 93
Other Financial Information............................. 93
Export Sales........................................ 93
Legal Proceedings................................... 93
Dividend Policy..................................... 96
Item 9. The Offer and Listing....................................... 96
</Table>
i
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<Table>
<Caption>
PAGE
--------
Item 10. Additional Information...................................... 100
Options to Purchase Securities from Registrant or
Subsidiaries........................................ 100
Memorandum and Articles of Association.................. 100
Material Contracts...................................... 105
Exchange Controls....................................... 105
Taxation................................................ 106
Documents on Display.................................... 109
Item 11. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 109
Exchange Rate Risk...................................... 110
Interest Rate Risk...................................... 111
Equity Price Risk....................................... 112
Item 12. Description of Securities Other than Equity Securities...... 112
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies............. 113
Item 14. Material Modifications to the Rights of Security Holders and
Use of Proceeds........................................... 113
Item 15. Controls and Procedures..................................... 113
Item 16. [Reserved].................................................. 113
PART III
Item 17. Financial Statements........................................ 114
Item 18. Financial Statements........................................ 114
Item 19. Exhibits.................................................... 114
</Table>
ii
<Page>
PRESENTATION
We have prepared the audited consolidated financial statements included in
this annual report (the "Consolidated Financial Statements") in accordance with
generally accepted accounting principles in the United States of America which
we refer to as U.S. GAAP. Please refer to Note 1 to our Consolidated Financial
Statements for a summary of significant accounting policies we employ.
CURRENCY TRANSLATION
For your convenience, we have translated some of the financial information
contained in this annual report from euros into United States dollars ("U.S.
dollars" or "$"). Except where indicated otherwise, we have used an assumed rate
of [EURO]1 = $1.0485 for these convenience translations. This rate represents
the noon buying rate for euros on December 31, 2002, in New York City as
certified by the Federal Reserve Bank of New York for customs purposes. Our
convenience translations do not mean that the dollar amounts actually represent
the underlying euro amounts or that you could convert the euro amounts into
dollars at the assumed rate. The rate we used for the convenience translations
also differs from the currency exchange rates we used in the preparation of our
Consolidated Financial Statements. Additional information about recent rates of
exchange between euros and dollars appears in "Item 3. Key Information."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements that reflect our
current views about future events. We use the words "anticipate," "assume,"
"believe," "estimate," "expect," "intend," "may," "plan," "project," "should"
and similar expressions to identify forward-looking statements. These statements
are subject to many risks and uncertainties, including:
- changes in general political, economic and business conditions, especially
an economic downturn or slow economic growth in Europe or North America;
- changes in currency exchange rates and interest rates;
- introduction of competing products and lack of acceptance of our new
products or services;
- increased competitive pressures which limit our ability to reduce sales
incentives and raise prices;
- whether Chrysler Group, Freightliner, and Mitsubishi Motors will be able
to continue to implement their turnaround plans successfully and
especially whether they will be able to meet their revenue enhancement,
efficiency and cost reduction initiatives;
- shortages or interruptions in the supply of fuel or production materials,
or labor strikes;
- changes in laws, regulations and government policies, particularly those
relating to vehicle emissions, fuel economy and safety, and the outcome of
current pending and possible future legal proceedings;
- decline in resale prices of used vehicles;
- changes in business strategy; and
- other risks and uncertainties, some of which we describe under the heading
"Risk Factors" in "Item 3. Key Information."
If any of these risks and uncertainties occur, or if the assumptions
underlying any of our forward-looking statements prove incorrect, then our
actual results may be materially different from those we express or imply by
such statements. We do not intend or assume any obligation to update these
forward-looking statements. Any forward-looking statement speaks only as of the
date on which it is made.
REFERENCES
Unless otherwise specified or required by the context, in this annual
report, "we," "us," "our," "DaimlerChrysler," the "DaimlerChrysler Group" or the
"Group" refers to DaimlerChrysler AG and its consolidated subsidiaries.
<Page>
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not applicable.
ITEM 3. KEY INFORMATION.
SELECTED FINANCIAL DATA
We have derived the selected consolidated financial data presented in the
table below from our audited consolidated financial statements for the years
ended December 31, 2002, 2001, 2000, 1999 and 1998. You should read the table
together with "Item 5. Operating and Financial Review and Prospects" and our
Consolidated Financial Statements. We prepared the selected consolidated
financial data in accordance with U.S. GAAP, except for our accounting for a
material joint venture in 1998. With permission from the SEC, we accounted for
this joint venture using the proportionate method of consolidation instead of
the equity method of accounting which is mandated by U.S. GAAP.
We were able to treat the business combination of Chrysler and Daimler-Benz
consummated in November 1998 as a "pooling of interests" for accounting
purposes. Consequently, we restated the results of both companies as if they had
been combined for all periods presented.
2
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<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
2002(1) 2002 2001 2000 1999(4) 1998(2,4)
-------- --------------- --------------- ------------- ------------- -------------
(IN MILLIONS, EXCEPT FOR ORDINARY SHARE AMOUNTS)
INCOME STATEMENT DATA:
Revenues.............................. $156,838 [EURO]149,583 [EURO]152,873 [EURO]162,384 [EURO]149,985 [EURO]131,782
Income (loss) before financial
income.............................. 4,047 3,860 (1,637) 4,320 9,324 7,330
Income (loss) before extraordinary
items and cumulative effects of
changes in accounting principles.... 5,114 4,877 (662) 2,465 5,087 4,820
Basic earnings (loss) per share..... 5.08 4.84 (0.66) 2.46 5.07 5.03
Diluted earnings (loss) per share... 5.06 4.82 (0.66) 2.45 5.04 4.91
Net income (loss)..................... 4,947 4,718 (662) 7,894(3) 5,746 4,820
Basic earnings (loss) per share..... 4.91 4.68 (0.66) 7.87(3) 5.73 5.03
Diluted earnings (loss) per share... 4.90 4.67 (0.66) 7.80(3) 5.69 4.91
BALANCE SHEET DATA (END OF PERIOD):
Total assets.......................... $196,412 [EURO]187,327 [EURO]207,410 [EURO]199,274 [EURO]174,667 [EURO]136,149
Short-term financial liabilities...... 31,799 30,328 33,942 35,840 36,721 20,475
Long-term financial liabilities....... 51,150 48,784 56,966 48,943 27,767 19,955
Capital stock......................... 2,761 2,633 2,609 2,609 2,565 2,561
Stockholders' equity.................. 36,607 34,914 39,004 42,409 36,060 30,367
OTHER DATA:
Weighted average number of shares
outstanding
Basic............................... 1,008.3 1,008.3 1,003.2 1,003.2 1,002.9 959.3
Diluted............................. 1,013.9 1,013.9 1,003.2 1,013.9 1,013.6 987.1
</Table>
- ------------------------------
(1) We converted the amounts in this column from euros into dollars solely for
your convenience at an exchange rate of [EURO]1 = $1.0485, the noon buying
rate for euros on December 31, 2002. Please note that the convenience
translation is not part of U.S. GAAP and, accordingly, our auditors have not
audited these converted dollar amounts.
(2) We prepared the consolidated financial statements as of and for the year
ended December 31, 1998, in deutsche marks and translated them into euros at
the fixed rate of DM1.95583 per euro.
(3) Net income for 2000 includes [EURO]5,516 million of extraordinary gains from
the disposals of businesses. Without these gains, the basic earnings per
ordinary share in 2000 were [EURO]2.37 and the diluted earnings per ordinary
share were [EURO]2.36.
(4) To comply with the new U.S. GAAP rule SFAS 145 which requires losses on
extinguishments of debt to be classified as losses from continuing
operations rather than as extraordinary items as previously required under
SFAS 4, we have adjusted the 1998 and 1999 amounts accordingly.
DIVIDENDS
The following table shows the annual dividends we paid on our ordinary
shares for the years 1998, 1999, 2000 and 2001. The table also discloses the
dividend amount per ordinary share for 2002 which our supervisory board and our
board of management plan to propose to our stockholders. We will ask our
stockholders for approval of the dividend amount at the annual general meeting
we plan to hold on April 9, 2003. For each of the years presented, the table
shows the dividend amount paid in euros and the dollar equivalent.
The table does not reflect tax credits that may be available to German
taxpayers who receive dividend payments. If you own our ordinary shares and if
you are a United States resident, please refer to "Taxation" in "Item 10.
Additional Information" for a discussion of potential German and United States
federal income tax consequences resulting from any dividends you may receive
from us.
3
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<Table>
<Caption>
DIVIDEND PAID
YEAR ENDED PER ORDINARY
DECEMBER 31, SHARE
- ------------ -------------------------
1998 .............................. [EURO] 2.35 $ 2.50
1999 .............................. 2.35 2.22
2000 .............................. 2.35 2.08
2001 .............................. 1.00 0.88
- --------------------------------------------------------------------------------
2002 (proposed)(1) .............................. [EURO]1.50 $ 1.63
</Table>
- ------------------------------
(1) We have translated the euro dividend amount proposed for 2002 into dollars
solely for your convenience at an exchange rate of [EURO]1 = $1.0834, the
noon buying rate for euros on February 13, 2003.
------------------------------
For additional information on our dividends, please also refer to the
discussion under the heading "Dividend Policy" in "Item 8. Financial
Information."
EXCHANGE RATE INFORMATION
The following table shows average, high, low and period-end noon buying
rates. For 1998, the table reflects the average, high, low and period-end noon
buying rates for the deutsche mark which we converted into euros at the fixed
rate of DM1.95583 per euro. For periods after January 1, 1999, the table shows
the average, high, low and period-end noon buying rates for the euro.
<Table>
<Caption>
YEAR AVERAGE(1) HIGH LOW PERIOD-END
- ---- ---------- ---------- ---------- ----------
(IN $ PER [EURO])
1998......................................... 1.1120 1.2178 1.0548 1.1733
1999 ....................................... 1.0588 1.1812 1.0016 1.0070
2000 ....................................... 0.9207 1.0335 0.8270 0.9388
2001 ....................................... 0.8909 0.9535 0.8370 0.8901
2002 ....................................... 0.9495 1.0485 0.8594 1.0485
2002
July................................. 1.0156 0.9730 0.9796
August............................... 0.9882 0.9640 0.9806
September............................ 0.9959 0.9685 0.9879
October.............................. 0.9881 0.9708 0.9881
November............................. 1.0139 0.9895 0.9932
December............................. 1.0485 0.9927 1.0485
2003
January.............................. 1.0861 1.0361 1.0739
February (through February 13,
2002).............................. 1.0875 1.0716 1.0834
</Table>
- ------------------------------
(1) This column shows the average of the noon buying rates on the last business
day of each month during the relevant year.
------------------------------
On February 13, 2002, the noon buying rate for [EURO]1 was $1.0834.
4
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Since the beginning of 1999 the Frankfurt Stock Exchange has quoted our
ordinary shares in euros. Fluctuations in the exchange rate between the euro and
the dollar will affect the dollar equivalent of the euro price of our ordinary
shares on the German stock exchanges. Accordingly, exchange rate fluctuations
are likely to affect the market price of our ordinary shares on the New York
Stock Exchange. Exchange rate fluctuations may also affect the amount of any
cash dividend we pay if you receive the dividend in dollars rather than in
euros. You can find a more detailed discussion of how you may receive your
dividends in dollars under the heading "Dividends" in "Memorandum and Articles
of Association" in "Item 10. Additional Information."
Please refer to "Item 5. Operating and Financial Review and Prospects" and
"Item 11. Quantitative and Qualitative Disclosures About Market Risk" if you
would like to read about the effect exchange rate fluctuations have on our
business and our operations. In these sections you can also find a discussion of
the hedging techniques we use to manage our exposure to exchange rate
fluctuations.
RISK FACTORS
Many factors could affect our financial condition, cash flows and results of
operations. We are subject to various risks resulting from changing economic,
political, social, industry, business and financial conditions, particularly in
our primary markets, North America and Europe. The principal risks are described
below.
ECONOMIC
A FURTHER WORLDWIDE DECLINE IN CONSUMER CONFIDENCE COULD PUSH THE UNITED
STATES AND WESTERN EUROPEAN ECONOMIES BACK INTO RECESSION WHICH MAY
SIGNIFICANTLY ADVERSELY AFFECT OUR PROFITABILITY AND DELAY OUR STRATEGIC
EXPANSION PLANS.
We derive substantial revenues from the United States and Western Europe. A
significant U.S. automotive industry-wide decline in vehicle sales could result
if the U.S. economy falls back into recession or if the current phase of weak
economic growth persists for a prolonged period of time and consumer confidence
is not restored. A renewed U.S. recession could stall economic growth in Western
Europe and cause a significant reduction in vehicle demand in that market.
Vehicle sales in Germany, a key market for our Mercedes-Benz and Setra
commercial vehicles and Mercedes-Benz passenger cars, may be particularly
vulnerable to the effects of a renewed U.S. recession because of the current
weakness of the German economy. Consumer confidence is threatened by
international political and military instability, rising energy prices, the
continuing war on terrorism, concern about potential terrorist attacks and the
fear that stock markets may not recover in the near to medium term. A decline in
consumer confidence due to continued weak economic conditions and political
uncertainties could significantly adversely affect our future sales and
operating results.
An important feature of our long-term strategic plan for growth is our
expansion in Asian markets. An economic decline in Asia, particularly a
continued recession in Japan or a major economic downturn in Korea or China
could delay that expansion. Moreover, deteriorating economic conditions in Asia,
especially if coupled with depreciating Asian currencies, could lead Asian
competitors with excess capacity to intensify their efforts to export vehicles
to North America and Western Europe.
We also maintain production facilities and sales and finance companies in
South America. Since the pronounced recession of the Argentinean economy has
also negatively affected neighboring countries and created uncertainties for the
future development of South American economies in general, our future sales,
operating results and production plans in this region could be adversely
affected.
Apart from general economic conditions, the political environment in the
markets in which we operate also affects our sales. More stringent legislation
on emissions and fuel consumption, regulations on energy prices or luxury or
other taxes could affect the growth in different product segments, and thus our
profitability.
5
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INDUSTRY AND BUSINESS
OVERCAPACITY AND INTENSE COMPETITION IN THE AUTOMOTIVE INDUSTRY, COMBINED
WITH WEAK GLOBAL ECONOMIC CONDITIONS MAY AMPLIFY PRICING PRESSURE AND FORCE
FURTHER COST REDUCTIONS.
Intense price competition and overcapacity in the automotive industry could
force manufacturers of passenger cars and commercial vehicles to decrease
production, reduce capacity and increase sales incentives. These actions would
increase our costs and decrease our revenues. Sales incentives in the new
vehicle business also influence the price level of used vehicles and thus could
result in a decline in resale prices of used vehicles.
Intensifying competition and increasing pricing pressure could also
negatively affect our future profitability if we are unable to continue to
provide competitive sales incentives. The revenues and operating results of the
Chrysler Group are particularly sensitive to sales incentives because consumers
in the U.S. and Canadian automotive markets have come to expect them. In 2002,
retail industry sales (including fleet sales) of new cars and trucks in the
United States and Canada decreased slightly compared to 2001. Sales incentives
may have influenced customers to accelerate into 2002 purchases otherwise
planned for 2003. In the absence of continued sales incentives, retail industry
sales may decrease significantly in 2003 compared to 2002.
OUR FUTURE PROFITABILITY WILL DEPEND ON THE CHRYSLER GROUP AND FREIGHTLINER
SUCCESSFULLY COMPLETING THEIR TURNAROUND PROGRAMS.
The financial performance of Chrysler Group and Freightliner will depend in
large part on the success of their turnaround plans to address the decline in
sales and increased competition in the automotive and commercial vehicle
markets. Our profitability will be adversely affected if Chrysler Group and
Freightliner are unable to complete their turnaround plans successfully.
THE CHRYSLER GROUP MAY NOT BE ABLE TO RENEW ITS LABOR AGREEMENT WITH THE UAW
WITHOUT A STRIKE.
The collective bargaining agreement between DaimlerChrysler Corporation and
the UAW expires in September 2003. A prolonged work stoppage that could occur in
connection with negotiating the terms of a new agreement could significantly
adversely affect our operating results.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO OFFER NEW INNOVATIVE PRODUCTS
AND MEET CONSUMER DEMAND.
Meeting consumer demand with new vehicles developed over increasingly
shorter product development cycle times is critical to the success of automobile
manufacturers. Our ability to strengthen our position within our traditional
product and market segments through research and development of innovative
products and services while expanding into additional market segments with
innovative new products will play an important role in determining our future
success. A general shift in consumer preference towards smaller, lower-margin
vehicles, which could result from, among other things, government regulations,
environmental concerns and increasing fuel prices, could have a negative effect
on our profitability. Potential delays in bringing new vehicles to market, the
inability to achieve defined efficiency targets without suffering from quality
losses and the lack of market acceptance of our new models would adversely
affect our financial condition, results of operations and cash flows.
SERVICE ACTIONS OR RECALL CAMPAIGNS COULD BE COSTLY AND HURT SALES BY
CREATING A NEGATIVE PERCEPTION OF OUR VEHICLES AMONG CONSUMERS.
Product quality significantly influences the consumer's decision to purchase
passenger cars and commercial vehicles. Component parts or assembly defects
could require us publicly to undertake service actions or recall campaigns.
These actions or campaigns could require us to expend considerable resources in
correcting these
6
<Page>
problems and could influence purchasing decisions of potential purchasers of our
vehicles, thereby negatively affecting our future sales and profitability.
Please refer to "Critical Accounting Policies" in "Item 5. Operating and
Financial Review and Prospects" for additional information regarding our product
warranties.
In addition, due to the increasingly competitive market environment, we and
other automobile manufacturers may be forced to increase efficiency by further
reducing costs along the automotive value chain which may result in additional
cost and pricing pressure on suppliers. Pricing pressure on suppliers, however,
may affect product quality.
WE ARE SUBJECT TO LEGAL PROCEEDINGS AND ENVIRONMENTAL AND OTHER GOVERNMENT
REGULATIONS.
An adverse outcome in one or more of our pending legal proceedings could
significantly affect our future financial condition, operating results and cash
flows. Please also refer to the discussion under the heading "Legal Proceedings"
in "Item 8. Financial Information" for further information.
The automotive industry is subject to extensive government regulation
worldwide. Laws in various jurisdictions regulate occupant safety and the
environmental impact of vehicles, including emission levels, fuel economy and
noise, as well as the levels of pollutants generated by the plants that produce
them. The cost of compliance with these regulations could be significant, and we
expect to incur such compliance costs in the future. New legislation may also
subject us to additional expense in the future, which could be significant.
We are subject to taxation in many different jurisdictions. The amount of
taxes we pay is based on our interpretation of the tax laws enacted by various
governmental entities. The tax authorities in each of the jurisdictions in which
we operate have the ability to audit us and determine whether we interpreted the
tax laws appropriately and paid the correct amount of tax. In many countries,
the results of these audits may not be known for several years after we file our
tax declaration. In particular, the United States Internal Revenue Service
continues to audit the tax declarations in the United States of our subsidiary
DaimlerChrysler Corporation for various years. The results of these audits and
audits in other jurisdictions may result in the payment of additional taxes,
which could significantly affect our cash flows. Our reported results may also
be negatively affected if existing provisions for income taxes are not adequate.
For additional information regarding our income taxes, please refer to Note 9 to
our Consolidated Financial Statements.
DECLINING USED VEHICLE PRICES MAY ADVERSELY AFFECT OUR LEASING AND SALES
FINANCING BUSINESS AND OUR FUTURE OPERATING RESULTS.
Sales incentives have become an integral part of sales promotion as a result
of overcapacity in the automotive industry and intense competition and pricing
pressure, especially in the North American automobile market. Because sales
incentives have the effect of reducing new vehicle prices, their continued use
means that resale prices of used vehicles and the carrying value of leased
vehicles may experience further downward pressure. If resale prices of used
vehicles decline, such a decline will likely adversely affect our future
operating results.
A decline in resale prices of used vehicles could also negatively affect the
collateral value of our sales financing and finance lease receivables. In
addition, the financial services we offer in connection with the sale of
vehicles involve risks relating to increased cost of capital and consumer and
dealer insolvencies. Continued weakness in the U.S. or European economies may
affect our future credit losses on lease and finance receivables.
Please refer to "Critical Accounting Policies" in "Item 5. Operating and
Financial Review and Prospects" for additional information on how sales
incentives affect our leasing and sales financing business.
7
<Page>
FINANCIAL
WE ARE EXPOSED TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND INTEREST
RATES.
Our businesses, operations and reported financial results and cash flows are
exposed to a variety of market risks, including the effects of changes in the
exchange rates of the dollar, the euro and other world currencies. In addition,
in order to manage the liquidity and cash needs of our day-to-day operations, we
hold a variety of interest rate sensitive assets and liabilities. We also hold a
substantial volume of interest rate sensitive assets and liabilities in
connection with our lease and sales financing business. In order to mitigate the
impact of currency exchange rate and interest rate fluctuations, we continually
assess our exposures to these risks. When we deem it appropriate, we hedge a
portion of these risks through the use of derivative financial instruments.
Nevertheless, changes in currency exchange rates and interest rates can have
substantial adverse effects on our operating results and cash flows.
DOWNGRADES OF OUR LONG-TERM DEBT RATINGS WOULD INCREASE OUR COST OF CAPITAL
AND COULD NEGATIVELY AFFECT OUR LEASE AND SALES FINANCING BUSINESS.
In 2001, Moody's Investors Service and Standard & Poor's Ratings Services
each lowered its ratings for our senior unsecured long-term debt and our
commercial paper and/or revised the outlook in respect of its ratings. Although
Standard & Poor's Ratings Services improved that outlook in July 2002 from
negative to stable, the rating agencies may change the outlook on our credit
ratings and/or review our credit ratings for possible further downgrades if, for
example, the U.S. economy falls back into recession and expectations for vehicle
sales decline or if competitive pressure within the automotive industry
intensifies significantly. Downgrades by the rating agencies would increase our
cost of capital and could negatively affect our businesses, especially the lease
and sales financing business which is typically financed with a high proportion
of debt. For a more detailed discussion of our credit ratings, please refer to
the discussion under the heading "Liquidity and Capital Resources" in "Item 5.
Operating and Financial Review and Prospects."
WE DEPEND ON THE ISSUANCE OF TERM DEBT TO MANAGE LIQUIDITY AND DECLINES IN
OUR OPERATING PERFORMANCE MAY LIMIT OUR ABILITY TO ISSUE SUCH DEBT.
To manage the liquidity of the Group, we depend on the issuance of term
debt, principally in the U.S. and European capital markets. Declines in our
operating performance and changes in demand for this type of debt instrument
could increase our borrowing costs or otherwise limit our ability to fund
operations, which would negatively affect our operating results and cash flows.
THE CARRYING VALUE OF OUR EQUITY INVESTMENTS IN MITSUBISHI MOTORS
CORPORATION AND EADS DEPENDS ON THE ABILITY OF THOSE COMPANIES TO OPERATE THEIR
BUSINESSES PROFITABLY.
We hold non-controlling equity interests in Mitsubishi Motors Corporation
and in the European Aeronautic and Defence and Space Company EADS N.V. We
account for these investments using the equity method of accounting.
Accordingly, risks negatively affecting the profitability of the businesses of
these companies may adversely affect our proportionate share in their future
operating results and our ability to recover the full amount of our investments.
For example, a significant deterioration of the commercial airline business in
EADS' case, or the failure of Mitsubishi Motors to successfully implement its
turnaround plan could have such an adverse effect on EADS' and MMC's respective
profitability. For further information on how we account for these investments,
please refer to "Critical Accounting Policies" in "Item 5. Operating and
Financial Review and Prospects."
WE MAY NEED TO MAKE SIGNIFICANT CASH CONTRIBUTIONS OR INCREASE ACCRUALS WITH
RESPECT TO THE FUNDING OF OUR PENSION AND POSTRETIREMENT PLANS.
The funded status of our off-balance sheet pension and postretirement
benefit plans is subject to actual developments and changes in actuarial and
other related assumptions.
8
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Actual developments such as a significant change in the performance of the
investments in plan assets or a change in the portfolio mix of plan assets can
result in corresponding increases or decreases in the valuation of plan assets,
particularly with respect to equity securities. Lower or higher plan assets and
a change in the rate of expected return on plan assets can result in significant
changes of the expected return on plan assets in the following year and, as a
consequence, could result in higher or lower net periodic pension cost in the
following year.
In addition, pension and postretirement benefit plan valuation assumptions
could have an effect on the funded status of our plans. Changes in assumptions
such as discount rates, rates for compensation increase, mortality rates,
retirement rates, health care cost trend rates and other factors, may lead to
significant increases or decreases in the value of the respective obligations,
which would affect the reported funded status of our plans and, as a
consequence, could negatively affect the net periodic pension cost in the
following year.
Please refer to the sections "Critical Accounting Policies" and "Liquidity
and Capital Resources" within "Item 5. Operating and Financial Review and
Prospects" as well as to Note 25a to our Consolidated Financial Statements for a
more detailed discussion on pension accounting.
ITEM 4. INFORMATION ON THE COMPANY.
INTRODUCTION
ORGANIZATION
The legal and commercial name of our company is DaimlerChrysler AG. It is a
stock corporation organized under the laws of the Federal Republic of Germany
and was incorporated on May 6, 1998. Our registered office is at Epplestrasse
225, 70567 Stuttgart, Germany, telephone +49-711-17-0. Our agent for U.S.
federal securities law purposes is DaimlerChrysler North America Holding
Corporation, located at 1000 Chrysler Drive, Auburn Hills, MI 48326-2766.
HISTORY
On May 7, 1998, Daimler-Benz Aktiengesellschaft and Chrysler Corporation
entered into an agreement to combine their businesses. The stockholders of each
company approved the agreement on September 18, 1998. Chrysler became a wholly
owned subsidiary of DaimlerChrysler AG through a merger transaction completed on
November 12, 1998. In the merger, Chrysler shareholders received ordinary shares
of DaimlerChrysler AG. Following an exchange offer in which more than 98% of
Daimler-Benz stockholders exchanged their Daimler-Benz ordinary shares for
DaimlerChrysler AG ordinary shares, Daimler-Benz was merged into DaimlerChrysler
AG on December 21, 1998. Accordingly, DaimlerChrysler AG is the successor
corporation to Daimler-Benz AG and we comprise the respective businesses,
stockholder groups, managements and other constituencies of Chrysler and
Daimler-Benz.
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BUSINESS SUMMARY AND DEVELOPMENTS
We develop, manufacture, distribute and sell a wide range of automotive
products, mainly passenger cars, light trucks and commercial vehicles. We also
provide financial and other services relating to our automotive business. We
presently have five business segments:
- MERCEDES CAR GROUP
- CHRYSLER GROUP
- COMMERCIAL VEHICLES
- SERVICES
- OTHER ACTIVITIES
We offer our automotive products and related financial services primarily in
Europe and in the NAFTA region, which consists of the United States, Canada and
Mexico. Through our alliances with Mitsubishi Motors Corporation and Hyundai
Motor Company, we expect to increase our presence in the Asian markets. In 2002,
our automotive business, including related financial services, contributed 98%
of our revenues. Approximately 52% of our 2002 revenues derived from sales in
the United States, 15% from sales in Germany and 16% from sales in other
countries of the European Union. In line with our strategy of concentrating on
the automotive core business and related services, we also disposed of several
non-core business assets and expanded our core automotive activities through a
series of transactions. For a further discussion of these disposals and of
changes in revenues, please refer to "Operating Results" in "Item 5. Operating
and Financial Review and Prospects."
On January 6, 2003, Mitsubishi Motors Corporation spun off its "Fuso Truck
and Bus" division, creating Mitsubishi Fuso Truck and Bus Corporation (MFTBC).
Pursuant to a share sale and purchase agreement with Mitsubishi Motors
Corporation dated September 20, 2002, we (DaimlerChrysler AG) agreed to purchase
from Mitsubishi Motors a non-controlling 43% interest in MFTBC for approximately
[EURO]760 million in cash. Ten Mitsubishi Group companies, including Mitsubishi
Corporation, Mitsubishi Heavy Industries and Bank of Tokyo-Mitsubishi, entered
into a separate share sale and purchase agreement with Mitsubishi Motors
pursuant to which they agreed to purchase from Mitsubishi Motors a total of 15%
of MFTBC's shares for approximately [EURO]265 million in cash. We expect the
transactions under both agreements to close in March 2003. Mitsubishi Motors
will then hold a non-controlling 42% interest in MFTBC.
In June 2001, we (DaimlerChrysler AG) entered into a commercial vehicle
joint venture agreement with Hyundai Motor Company (HMC). In a first phase, we
and HMC established DaimlerHyundai Truck Corporation (DHTC), of which we and HMC
each own 50%. We formed DHTC to produce and distribute engines and engine parts.
The commercial vehicle joint venture agreement with HMC also included an option
providing us with the right to acquire 50% of the commercial vehicle business of
HMC. Pursuant to this option, which we exercised in December 2002, HMC is in the
process of contributing its entire commercial vehicle business to a new legal
entity. Subject to receiving all necessary governmental approvals, we currently
plan to acquire a 50% interest in that entity from HMC for approximately
[EURO]400 million at the end of February 2003. The purpose of the new commercial
vehicle joint venture is to design, produce and distribute commercial vehicles
above 4 metric tons (t) gross vehicle weight (GVW), including buses, as well as
components for those vehicles. We and HMC intend to combine our commercial
vehicle and engine joint ventures in the first half of 2003. We continue to hold
a 10% equity interest in HMC.
In June 2002, our subsidiary DaimlerChrysler Corporation formed a joint
venture, Global Engine Alliance LLC, with Hyundai Motor America and Mitsubishi
Motor Manufacturing of America, Inc. The joint venture is equally owned by the
three companies and is registered as a limited liability company under the laws
of the State of Delaware in the United States. The purpose of the joint venture
is to design, develop, and engineer a family of world-class in-line four
cylinder gasoline engines. Each of the three founding companies will utilize the
same base engine in some of its future vehicles and work with the other two to
reduce the cost of the engine, improve quality and maximize production
efficiencies. The three companies will manufacture the engine in production
facilities
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located in Korea, Japan and the United States. Hyundai and Mitsubishi will
individually manage the production facilities in Korea and Japan, respectively,
while the three companies will jointly operate the production facility in the
United States. The first Global Engine Alliance partner to manufacture the
engine will be Hyundai, which will begin production in 2004. Chrysler and
Mitsubishi plan to start engine production in 2005.
In refocusing our financing and leasing services business on our core
business, the automotive sector, we have negotiated and concluded a series of
transactions to tailor our portfolio of financial assets accordingly. In
June 2002, we completed the sale of a substantial portion of our commercial real
estate and asset-based lending portfolios to GE Capital and other financial
services providers for [EURO]1.3 billion. In October 2002, we concluded an
agreement for the sale of an additional portion of our capital services
portfolio.
In October 2000, our subsidiary DaimlerChrysler Services AG combined its
information technology activities with those of Deutsche Telekom AG in a joint
venture. As part of the transaction, Deutsche Telekom contributed
[EURO]4.6 billion in cash to our information technology subsidiary debis
Systemhaus in exchange for a 50.1% controlling interest in that company. In
2001, debis Systemhaus was renamed T-Systems ITS. In January 2002, we decided to
exit the joint venture by exercising our option to sell our 49.9% interest in
T-Systems ITS to Deutsche Telekom for [EURO]4.7 billion. We consummated the sale
in March 2002.
In April 2001, we sold a 60% interest in TEMIC TELEFUNKEN microelectronic
GmbH (now known as Conti Temic microelectronic GmbH) and its subsidiaries to
Continental AG. The sale agreement provided Continental with the option to
purchase our 40% interest, and gave us the option to sell our 40% interest to
Continental. On April 1, 2002, we exercised our option and sold our 40% interest
to Continental for [EURO]215 million.
For additional information and a description of other acquisitions and
dispositions of businesses during the last three years, please refer to Notes 4
and 11 to our Consolidated Financial Statements.
Net income before cumulative effects of changes in accounting principles was
[EURO]4.9 billion in 2002 compared to a net loss before cumulative effects of
changes in accounting principles of [EURO]0.7 billion in 2001. Basic and diluted
earnings per ordinary share (before cumulative effects of changes in accounting
principles) were [EURO]4.84 and [EURO]4.82 in 2002, compared to a basic and
diluted ordinary loss per share of [EURO]0.66 in 2001.
According to a new U.S. accounting standard, SFAS 142, amortization of
goodwill no longer affects net income (loss). Instead, SFAS 142 requires that
goodwill be tested for impairment at least annually. In connection with the
transitional impairment evaluation, as required by SFAS 142, we recorded an
impairment charge of [EURO]0.2 billion in 2002 which related solely to companies
for which we account for using the equity method of accounting, primarily EADS.
The impairment charge represents our proportionate share of our equity method
investees' transitional goodwill impairment charge resulting from the adoption
of SFAS 142.
Net income was [EURO]4.7 billion in 2002 compared to a net loss of
[EURO]0.7 billion in 2001. Basic and diluted earnings per ordinary share were
[EURO]4.68 and [EURO]4.67 in 2002, while in 2001 the basic and diluted loss per
ordinary share was [EURO]0.66.
For additional information on our financial performance, please refer to
"Item 3. Key Information" and "Item 5. Operating and Financial Review and
Prospects."
Our aggregate capital expenditures for property, plant and equipment were
[EURO]7.1 billion in 2002, [EURO]8.9 billion in 2001 and [EURO]10.4 billion in
2000. In 2002, the United States accounted for 40% and Germany for 35% of these
capital expenditures. Expenditures on operating leases were [EURO]17.7 billion
in 2002, somewhat less than in the two prior years (2001: [EURO]18.0 billion;
2000: [EURO]19.1 billion). For information on our capital expenditures by
business segment, please refer to "Description of Business Segments."
As of December 31, 2002, we had 1,012,803,493 ordinary shares outstanding
and approximately 1.8 million stockholders. Our ordinary shares trade on various
stock exchanges throughout the world, including the Frankfurt Stock Exchange and
the New York Stock Exchange.
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SIGNIFICANT SUBSIDIARIES
The following table shows the significant subsidiaries we owned, directly or
indirectly, as of December 31, 2002:
<Table>
<Caption>
PERCENTAGE
NAME OF COMPANY OWNED
- --------------- ----------
DaimlerChrysler North America Holding Corporation, Auburn
Hills, MI, a Delaware corporation......................... 100.0
DaimlerChrysler Motors Company LLC, Auburn Hills, MI, a
Michigan limited liability company..................... 100.0
DaimlerChrysler Corporation, Auburn Hills, MI, a
Delaware corporation................................ 100.0
DaimlerChrysler Services North America LLC,
Farmington Hills, MI, a Michigan limited
liability company.............................. 100.0
DaimlerChrysler Services AG, registered in Berlin,
Germany................................................... 100.0
</Table>
We own 100% of DaimlerChrysler North America Holding Corporation and
DaimlerChrysler Services AG. DaimlerChrysler North America Holding Corporation
owns 100% of DaimlerChrysler Motors Company LLC. DaimlerChrysler Motors Company
LLC owns 100% of DaimlerChrysler Corporation. DaimlerChrysler Corporation owns
100% of DaimlerChrysler Services North America LLC.
DESCRIPTION OF BUSINESS SEGMENTS
MERCEDES CAR GROUP
The Mercedes Car Group, formerly Mercedes-Benz Passenger Cars & smart, is
responsible for the design, production and sale of Mercedes-Benz passenger cars,
Maybach high-end luxury sedans and smart micro compact passenger cars. In 2002,
the Mercedes Car Group contributed approximately 34% of our revenues.
MERCEDES-BENZ. Our Mercedes-Benz passenger cars are world renowned for
their innovative technology, highest levels of comfort, quality, safety, and
pioneering design. The Mercedes-Benz passenger car product range consists of the
following series:
S-CLASS. S-Class full-size luxury sedans range from the S 350 to the S 600.
In addition to various gasoline-powered models, two diesel engine versions with
common-rail technology - the S 320 CDI and the S 400 CDI - and two models with
permanent all-wheel drive - the S 430 4MATIC and the S 500 4MATIC - are
currently available. A sportier version, the S 55 AMG, and two stretched Pullman
sedans based on the S 500 and S 600 models complete the line-up. In
September 2002, we introduced an updated version of our S-Class.
The CL-Class is a top-of-the-line coupe derived from the S-Class platform.
The CL-Class represents a unique combination of superior driving performance,
comfort and state-of-the-art technology. Customers can choose among three models
- - the CL 500, the CL 600, and the CL 55 AMG.
We introduced a new version of our SL-Roadster series, the SL-Class, in
October 2001 in the European markets and in March 2002 in the United States. The
new SL models, the SL 500 and the SL 55 AMG, feature an all-new body style and
several technological innovations, including a retractable hard top, an
electronic braking system, and an active suspension system. We will introduce an
additional model, the SL 350, in Europe in the first quarter of 2003.
We have also commissioned McLaren Cars Ltd., a wholly owned subsidiary of
TAG McLaren Holding Ltd., to design and produce a new high-performance
Mercedes-Benz sports car, the SLR. We expect to launch the SLR in Europe at the
end of 2003. Through one of our German subsidiaries, we hold a 40% interest in
TAG McLaren Holding Ltd.
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E-CLASS. The E-Class is a line of luxury sedans and station wagons. E-Class
sedans are available in five gasoline engine versions ranging from the E 200 to
the E 55 AMG and three common-rail diesel engine versions. E-Class station
wagons come in six gasoline engine versions and three common-rail diesel
versions. Three models are also available with permanent all-wheel drive -- the
E 240 4MATIC, the E 320 4MATIC and the E 500 4MATIC. We introduced an all-new
version of the E-Class sedan in March 2002 (August 2002 in the United States)
and plan to follow up with a new station wagon. We will introduce the new wagon
in March 2003 in Western Europe and in September 2003 in the United States.
C-CLASS. The C-Class is a line of compact luxury sedans and station wagons.
Eight gasoline engine versions - ranging from the C 180 to the C 32 AMG - and
four common-rail diesel engine versions are available. Two models come with
permanent all-wheel drive - the C 240 4MATIC and the C 320 4MATIC. The C-Class
sports coupe, the SLK-Class (a two-seat roadster), the CLK coupe, and the CLK
convertible complement the C-Class product family.
In March 2002, we introduced an all-new version of the CLK coupe in the
European markets (September 2002 in the United States), and we expect to offer a
new version of the CLK convertible in Western Europe in May 2003
(September 2003 in the United States).
THE A-CLASS. The A-Class is a front-wheel drive four-door hatchback that
comes in a short and a long wheelbase version. Customers can choose from four
gasoline engines of varying displacements and two diesel engines with
common-rail technology. We do not offer the A-Class in the United States.
THE M-CLASS. The M-Class is a line of sport-utility vehicles with permanent
all-wheel-drive. They combine off-road capabilities with the comfort of a
passenger car. We offer two diesel engine versions - the ML 270 CDI and the ML
400 CDI - and three gasoline engine versions - the ML 350, ML 500 and ML 55 AMG.
THE G-CLASS. The G-Class is a four-wheel drive cross-country vehicle that
has been consistently successful in its market segment since it was introduced
in 1979. It comes in a short and a long wheelbase version and is also available
as a convertible. We currently offer three gasoline engine models and two
common-rail diesel engine models. Since December 2001, we have been offering the
long wheelbase version of the G 500 in the United States.
MAYBACH. In mid-1998, we decided to enter the exclusive luxury sedan market
segment which is synonymous with superior vehicle design and unsurpassed luxury,
comfort, and individuality. For that purpose we revived the prestigious Maybach
brand and developed a high-end luxury car that would carry that brand name.
We introduced the first Maybach models in the summer of 2002. The Maybach 57
and the Maybach 62 are high-end luxury sedans which combine precision
craftsmanship and cutting edge-technology. The Maybach 62 has a 50 cm (19.7
inches) longer wheelbase than the Maybach 57. Customers can customize their
vehicles by choosing from an extensive selection of the finest interior
furnishings and materials. Deliveries began at the end of 2002.
SMART. smart is a micro compact car brand that represents a trend-setting
response to the challenges of urban mobility and optimum use of resources. It is
currently available as a two-seat city-coupe, a convertible and as the
crossblade, a limited edition lifestyle version. The smart cdi, a diesel version
of the smart, achieved a fuel efficiency performance of 3.4 liters per 100 km,
or approximately 69 miles per gallon, in New European Driving Cycle (NEDC)
tests. We do not offer the smart in the United States.
We plan to expand the smart product line by adding a two-seat roadster model
and a coupe derivative in April 2003 and a four-door model in 2004. Our Asian
partner, Mitsubishi Motors Corporation, offers a vehicle under its own brand
name using the same platform and major components of the four-door smart.
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MARKETS, SALES AND COMPETITION
In 2002, the most important markets for the products of the Mercedes Car
Group were Germany (34% of unit sales), the remainder of Western Europe (34% of
unit sales), the United States (17% of unit sales) and Japan (4% of unit sales).
In Germany, new passenger car registrations for all manufacturers reached
3.25 million units, 3% less than in the previous year. In Western Europe
(excluding Germany), new registrations of passenger cars decreased 3% to
11.33 million units.
The following table shows the distribution of revenues and unit sales for
our Mercedes Car Group segment by geographic market since 2000:
REVENUES AND UNIT SALES
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 % CHANGE 2001 % CHANGE 2000
--------- -------- --------- -------- ---------
REVENUES(1)
Western Europe.................... 30,940 +6 29,226 +11 26,396
Germany....................... 16,975 +3 16,433 +5 15,661
Other......................... 13,965 +9 12,793 +19 10,735
NAFTA region...................... 12,173 +2 11,891 +7 11,112
United States................. 11,257 +2 11,034 +7 10,303
Canada and Mexico............. 916 +7 857 +6 809
Asia.............................. 4,694 +11 4,236 +9 3,886
Japan......................... 2,438 +14 2,139 -1 2,154
Other......................... 2,256 +8 2,097 +21 1,732
Other markets..................... 2,363 +0 2,352 +2 2,306
--------- --------- ---------
World......................... 50,170 +5 47,705 +9 43,700
========= ========= =========
UNITS
Western Europe.................... 835,900 0 838,800 +6 787,800
Germany....................... 417,000 -4 436,500 -1 440,000
Other......................... 418,900 +4 402,300 +16 347,800
NAFTA region...................... 231,800 +1 229,400 +4 220,600
United States................. 213,700 0 213,400 +4 205,700
Canada and Mexico............. 18,100 +13 16,000 +7 14,900
Asia.............................. 94,100 0 93,800 +12 84,100
Japan......................... 47,100 -2 48,100 +12 43,000
Other......................... 47,000 +3 45,700 +11 41,100
Other markets..................... 70,500 +4 67,700 +8 62,400
--------- --------- ---------
World......................... 1,232,300 0 1,229,700 +6 1,154,900
========= ========= =========
</Table>
- ------------------------------
(1) [EURO] in millions.
------------------------------
In 2002, worldwide unit sales of the Mercedes Car Group were slightly higher
than in 2001, while revenues increased 5% compared to 2001. Unit sales reached
1,232,300 units compared to 1,229,700 in the previous year and, based on
reported unit sales, our Mercedes-Benz passenger cars were once again the leader
within the luxury car segment. Sales of the new E-Class sedan were particularly
strong at 179,200 units while the entire E-Class family achieved sales of
242,300 units. The S-Class family continued to perform solidly. The new
SL-Roadster
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showed very strong sales performance, overcompensating for lower unit sales of
the S-Class sedan, which experienced an anticipated sales decline as customers
postponed purchases pending release of the facelifted S-Class sedan in
September 2002.
In Germany, unit sales of our Mercedes Car Group reached 417,000 in 2002, a
4% decrease over the previous year. This decrease was mainly in line with the
overall 3% decline of the German passenger vehicle market. Unit sales in Western
Europe (excluding Germany) increased 4% from 402,300 in 2001 to 418,900 in 2002.
This was primarily due to higher demand for passenger cars in the United
Kingdom, Italy, France and Spain. In the United States, the most important
non-European market for Mercedes-Benz passenger cars, sales reached 213,700
units, a level comparable to 2001. The continued strong sales performance of the
successful S-Class family and the new E-Class and CLK coupe supported this
result. Unit sales in Japan fell 2% to 47,100 units in a very difficult market.
In the rest of Asia (excluding Japan), we were able to outperform last year's
sales level with 47,000 units. Sales performance in emerging markets such as
China was especially encouraging. For a discussion of changes in revenues,
please refer to "Operating Results" in "Item 5. Operating and Financial Review
and Prospects."
In Western Europe, our Mercedes-Benz passenger cars principally compete with
products of BMW (BMW and, since January 2003, Rolls Royce), Volkswagen (Audi,
Bentley, VW) and, depending on the market segment, Fiat (Lancia, Alfa Romeo,
Ferrari, Maserati), Ford (Jaguar, Aston Martin, Land Rover, Volvo), General
Motors (Opel, Saab, Vauxhall), Porsche, PSA (Peugeot/Citroen), Renault and
Toyota (Lexus). In the United States, our principal competitors include BMW
(BMW, Rolls Royce), Ford (Jaguar, Aston Martin, Land Rover, Lincoln, Volvo),
Honda (Acura), Nissan (Infiniti), Porsche, Toyota (Lexus), Volkswagen (Audi,
Bentley, VW) and, depending on the market segment, Nissan, Toyota and certain
models produced by General Motors (Cadillac, Saab). Competitors of Maybach are
Rolls Royce and Bentley sedans. Principal competitors of the smart are Fiat,
Ford, PSA (Peugeot/Citroen), Renault, Suzuki, Toyota (Daihatsu) and Volkswagen
(Seat, Skoda, VW).
The following table shows, by vehicle line, the number of units sold since
2000:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
UNITS
S-Class (including CL-Class and SL-Class)............ 107,100 106,500 108,500
E-Class.............................................. 242,300 201,400 246,900
C-Class (including CLK-Class and SLK-Class).......... 478,300 506,700 389,400
A-Class.............................................. 171,500 190,600 198,400
M-Class.............................................. 102,000 102,300 105,700
G-Class.............................................. 8,800 6,000 3,900
Smart................................................ 122,300 116,200 102,100
--------- --------- ---------
Total............................................ 1,232,300 1,229,700 1,154,900
========= ========= =========
</Table>
Deliveries of Maybach began in December 2002.
DISTRIBUTION
We distribute Mercedes-Benz passenger cars through a worldwide distribution
system covering over 200 countries and customs areas. The sales organization
differs depending on local needs and requirements. At the wholesale level, we
distribute Mercedes-Benz passenger cars through affiliated or independent
general distributors or through wholly-owned subsidiaries. In the United States,
in Canada and in major European markets we operate our own wholesale
subsidiaries which we call market performance centers. Recently, we established
market performance centers in Korea and Malaysia. In Europe and Canada, we also
operate an increasing number of retail outlets, and it is our goal to establish
our own retail locations in select major European metropolitan areas.
The Maybach distribution network consists of 25 Maybach centers around the
world. In the United States, we distribute Maybach through more than 80 select
Mercedes-Benz dealers. The Maybach centers are outposts of our newly opened
Center of Excellence at our largest passenger car production plant in
Sindelfingen, Germany. We
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entrust the responsibility of caring for our Maybach customers only to specially
trained personal liaison managers. These managers are not only knowledgeable in
all technical details relating to Maybach vehicles, but are also intimately
familiar with the demanding lifestyles of our customers which enables them to
provide a maximum level of support. In the future, in addition to the Maybach
distribution centers, customers will also be able to call on several specialized
service centers.
A network of approximately 600 smart centers in 24 countries provides sales
and repair services for our smart vehicles.
Effective October 2002, the European Commission adopted revised legislation
concerning automotive retailing and services in the European Union. The new
legislation no longer permits territorial and brand exclusivity in automotive
distribution agreements. Under the new law, independent repair shops may become
authorized service partners if they meet the qualitative criteria established by
the manufacturer. Beginning in October 2005, authorized automotive retailers
have the right to establish additional sales outlets anywhere in the European
Union. In light of the new legislation, we concluded new contracts with our
retail partners. The new contracts establish binding qualitative standards,
which we will enforce by audits at regular intervals.
CAPITAL EXPENDITURES; RESEARCH AND DEVELOPMENT
Our Mercedes Car Group spent [EURO]2.5 billion on capital expenditures for
fixed assets in 2002. Principal areas of investment were the preparation for
production of the successor models of the A-Class, the M-Class, the E-Class and
the SLK-Class as well as the new cross-over model GST and the new Maybach.
Capital expenditures also included production equipment for manufacturing new
engines and transmissions.
In 2002, research and development activities of the Mercedes Car Group
related primarily to the development of new car models and new engines and
transmissions. The new car models under development included the new Maybach,
the SLR, the smart roadster and the GST as well as the successor models of the
A-Class, the M-Class and the SLK-Class. The following table shows the capital
expenditures for fixed assets and the research and development expenditures of
the Mercedes Car Group segment during the last three years:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
([EURO] IN MILLIONS)
Capital expenditures for fixed assets.................. 2,495 2,061 2,096
Research and development............................... 2,794 2,402 2,241
</Table>
CHRYSLER GROUP
Our Chrysler Group segment consists of DaimlerChrysler Motors Company LLC
and its subsidiaries DaimlerChrysler Corporation, DaimlerChrysler Canada Inc.,
and DaimlerChrysler de Mexico S.A. de C.V., as well as other international
automotive affiliates. These companies manufacture, assemble and sell cars and
trucks under the brand names Chrysler, Jeep-Registered Trademark- and Dodge. The
Chrysler Group segment contributed approximately 40% of our revenues in 2002.
TURNAROUND PLAN FOR THE CHRYSLER GROUP
The Chrysler Group continued to make progress in 2002 with respect to the
key initiatives announced in February 2001 as part of a turnaround plan designed
to improve its financial performance and market position. The status of the main
elements of the turnaround plan is as follows:
- SUPPLIER COST REDUCTIONS -- After asking suppliers to voluntarily reduce
prices for material and services by 5%, effective January 1, 2001, the
Chrysler Group requested suppliers to help identify an additional 10% in
cost reductions through joint design and commercial activities. The
Chrysler Group realized substantial savings in 2002 as a result of these
efforts, and intends to continue them in 2003.
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- REVENUE ENHANCEMENT -- Following the introduction of a new
performance-based dealer incentive program in 2001 that featured cash
payments to dealers for exceeding monthly retail sales goals, the Chrysler
Group reorganized its 24 individual sales zone offices throughout the
United States into 8 regional business centers. Each business center has
responsibility for decisions affecting advertising, incentives, and
product distribution within its region, so that dealers can respond more
quickly to differing local market demands. The Chrysler Group is also
pursuing a plan, called "Project Alpha," to develop a new style of
dealership in key markets that combines in one modern facility the
display, sale and servicing of all three brands of Chrysler Group vehicles
(Chrysler, Jeep-Registered Trademark- and Dodge). In addition, to
encourage sales by highlighting product quality, the Chrysler Group began
offering an extended 7 year or 70,000 mile limited powertrain warranty
with its 2003 model year vehicles.
- WORKFORCE REDUCTION -- The Chrysler Group reduced its workforce by
approximately 20% over the last two years. It achieved this reduction,
which affected about 26,000 employees, through a combination of
retirements, special programs, attrition and layoffs. An additional
reduction of about 3,600 employees resulted from the sale of the Dayton
Thermal Products facility and the Graz, Austria plant in 2002.
- MANUFACTURING EFFICIENCIES -- The Chrysler Group continued to implement
its plan to reduce excess production capacity and adjust production
volumes by idling, closing, or disposing of several manufacturing
facilities; eliminating shifts and reducing line speeds at others; and
adjusting volumes at component, stamping and powertrain facilities.
Chrysler Group management continues to explore opportunities for
divestiture of selected assets.
As part of the turnaround plan, we recorded a restructuring charge in 2001
which primarily related to workforce reductions, asset write-downs and contract
cancellation costs. The additional charges we recorded for the plan in 2002 were
[EURO]0.7 billion (2001: [EURO]3.1 billion) related to ongoing workforce
reductions and asset divestitures. For a further discussion of the Chrysler
Group's turnaround plan, please refer to "Operating Results" in "Item 5.
Operating and Financial Review and Prospects" and Note 7 to our Consolidated
Financial Statements.
PRODUCT CREATION PROCESS
In 2001, we implemented a new product creation process at the Chrysler Group
intended to facilitate reduced vehicle development times and improved quality.
This process utilizes product innovation teams to guide the strategy and
execution of new vehicle development programs. These teams will work within the
Chrysler Development System, which establishes "quality gates" to assure that we
meet predetermined objectives at every stage of the vehicle development process
from creation to production. The product innovation teams are organized as
follows:
- PRODUCT STRATEGY TEAM -- This team analyzes the strategic issues that must
be addressed in developing a business case for a new product or product
line. These issues include customer trends, design ideas, technological
innovation and the economic environment. The Product Strategy Team was
already successful in lengthening platform life-cycles and instituting a
strategy of re-using manufacturing equipment for more than one product
launch in an effort to utilize capital resources more effectively.
- PRODUCT TEAMS -- These multi-functional teams, which have evolved from the
platform team concept, consist of co-dependent representatives of product
development and design, manufacturing and marketing functions, one of whom
will be designated the product team leader. The five vehicle product teams
are: Small Vehicles, Premium Vehicles, Family Vehicles, Activity Vehicles
and Trucks. The evolved product teams will permit greater flexibility than
platform teams in the assignment of vehicle development programs and will
ensure improved speed-to-market while meeting increasingly differentiated
customer product needs and expectations. A powertrain product team works
closely with the product teams.
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- COMPONENT TEAMS -- We have charged teams, which cross all product teams,
with maximizing value for a specific vehicle area or subsystem, while
reducing complexity across all vehicle lines. The component teams achieve
these goals mainly through increased component sharing where appropriate
and improved communication with suppliers. The component teams will draw
on the best practices from our Mercedes Car Group segment and our partner
Mitsubishi Motors Corporation.
DaimlerChrysler Corporation and Mitsubishi Motors Corporation have agreed to
work together on compact and mid-size cars. The companies have agreed to share
research and development costs relating to these platforms (chassis and
underbody components, including suspension, engine box, floor pan, etc.). Each
company will develop and design its own upper bodies (sheet metal, interiors,
exterior trim, etc.) to meet unique brand requirements. In addition to
development cost sharing, DaimlerChrysler Corporation also agreed to leverage
the combined volumes on the common compact and mid-size platforms to attain
volume bundling cost synergies in global automotive parts procurement. Each
company is responsible for all aspects of its vehicle sales, distribution and
marketing.
PRODUCTS
Following are brief descriptions of the vehicles we offer under the
Chrysler, Jeep-Registered Trademark- and Dodge brand names:
NEON. Neon is a compact four-door front-wheel drive sedan which we sell
under the Dodge brand name in the U.S. market, as the Dodge SX 2.0 in the
Canadian market, and as the Chrysler Neon in all other markets. This vehicle is
available with a choice of two 2.0-liter four-cylinder engines and a choice of a
five-speed manual or a four-speed automatic transmission. In 2003, we will offer
a new SRT-4 performance version of this vehicle with a 2.4-liter turbo
four-cylinder engine and a five-speed manual transmission. A 1.6-liter
four-cylinder engine with a five-speed manual transmission and a 2.0-liter
four-cylinder engine with a five-speed manual or a four-speed automatic
transmission are available in select markets outside the NAFTA region.
SEBRING AND STRATUS SEDANS. The Chrysler Sebring and Dodge Stratus are
mid-size front-wheel drive four-door sedans offering contemporary cab-forward
styling. In the NAFTA region, we offer these sedans in multiple models, powered
by either a 2.4-liter four-cylinder or a 2.7-liter aluminum V-6 engine. In
select markets outside the NAFTA region, we offer the Sebring sedan with a
2.0-liter four-cylinder or a 2.7-liter aluminum V-6 engine.
INTREPID, CONCORDE AND 300M. Dodge Intrepid is a full-size front-wheel
drive four-door sedan offered with a 2.7-liter or 3.5-liter aluminum V-6 engine.
The Intrepid is available only in the NAFTA region. The Chrysler Concorde is a
full-size front-wheel drive sedan available in three models and powered by
either a 2.7-liter or 3.5-liter aluminum V-6 engine. The Chrysler 300M is a
front-wheel drive luxury performance sedan powered by a 3.5-liter aluminum V-6
engine for both the NAFTA region and other markets, with an optional 2.7-liter
V-6 engine for markets outside the NAFTA region. Concorde and 300M models are
available in the NAFTA region and in other select markets.
CROSSFIRE. The all-new Chrysler Crossfire sports coupe will go on sale in
mid-2003 as a 2004 model year vehicle. Powered by a Mercedes-Benz 3.2-liter V-6
engine, the two-seater Crossfire is a combination of American design and German
engineering. Transformed from a concept car to production in about two years, we
will sell the Crossfire predominately in the NAFTA region, but will also offer
it in other select markets.
OTHER CARS. Other cars include the all-new redesigned Dodge Viper SRT-10
model, a two-seat sport roadster with a high performance V-10 powertrain; and
the Dodge Stratus and Chrysler Sebring - two-door coupes produced for us by
Mitsubishi Motor Manufacturing of America in its Normal, Illinois, assembly
plant. Another version of the Chrysler Sebring is the front-wheel drive
four-passenger mid-size convertible with a power top. It is available in the
NAFTA region with a 2.4-liter four-cylinder or a 2.7-liter aluminum V-6 engine
and in other markets with a 2.0-liter four-cylinder engine or a 2.7-liter
aluminum V-6 engine. The Dodge Atos is a sub-compact monovolume vehicle equipped
with a 1.0-liter four-cylinder engine produced by Hyundai which we sell
exclusively in Mexico.
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PACIFICA. The all-new Chrysler Pacifica, which goes on sale in the first
half of 2003 as a 2004 model year vehicle, creates an all-new market segment
called Sports Tourer. Available in all-wheel drive, the Pacifica is powered by a
3.5-liter V-6 engine and has a four-speed automatic transmission with AutoStick.
With three rows of seats and room for up to six passengers, the Pacifica has
front and rear first-class seating and various amenities that provide
alternatives to existing luxury and sport-utility vehicles.
MINIVANS. The long wheelbase Dodge Grand Caravan and Chrysler Town &
Country come with either front-wheel or all-wheel drive. The short wheelbase
Dodge Caravan and Chrysler Voyager are front-wheel drive vehicles. Gasoline
engines available on minivans include a 2.4-liter four-cylinder, a 3.3-liter V-6
and a 3.8-liter V-6. For select markets, a common rail 2.5-liter four-cylinder
diesel engine is also available. In 2002, the Chrysler and Dodge minivans
continued to lead the market as the best-selling minivans in the world.
PT CRUISER. PT Cruiser offers the interior volume of a full-size sedan or
sport-utility vehicle, even though it is shorter than many compact cars. The
front-wheel drive PT Cruiser is available with a choice of a 2.4-liter or a
2.4-liter turbo four-cylinder engine and either a five-speed manual or a
four-speed automatic transmission. In select markets outside the NAFTA region,
the choice of four-cylinder engines includes the 1.6-liter gasoline, 2.0-liter
gasoline and 2.4-liter gasoline engines as well as a 2.2-liter common-rail
diesel produced by Mercedes-Benz.
RAM PICK-UP. We completely redesigned the Dodge Ram 1500 pick-up truck for
the 2002 model year. We also launched redesigned versions of the Dodge Ram
2500/3500 pick-up in the third quarter of 2002 as 2003 models. Ram pick-up
trucks compete in the large pick-up truck segment and are available in standard
cab and quad cab body styles. The gasoline engine lineup includes a 3.7-liter
V-6, a 4.7-liter V-8, a 5.9-liter V-8 and an 8.0-liter V-10. A 5.9-liter I-6
diesel is available with a five-speed manual or four-speed automatic
transmission, and a diesel high-output version is available with a six-speed
manual transmission. Our Saltillo engine plant in Mexico started production of
the new high performance 5.7-liter HEMI engine, which is replacing the 5.9-liter
V-8 in both the light- and heavy-duty Ram pick-up trucks.
DAKOTA. The Dakota pick-up truck is available in standard, club and quad
cab body styles. The engine lineup consists of a 3.9-liter V-6, a 4.7-liter V-8
and a 5.9-liter V-8. Dakota is the only competitor in the compact pick-up truck
segment to offer a V-8 engine.
DURANGO. The Dodge Durango, a five- to eight-passenger sport utility
vehicle, was derived from the Dakota platform and competes in the full-size
sport utility segment. The Durango is available with a 4.7-liter or 5.9-liter
V-8 engine, packaged in the bold, Dodge Ram-inspired exterior. We redesigned the
Durango for the 2004 model year. The new version will become available in the
second half of 2003.
RAM VAN. The Ram Van is Dodge's entry in the full-size van market and is
available in two wheelbases and three body configurations. Dodge builds both
cargo and conversion vans. We plan to discontinue Ram Van production in the
second quarter of 2003.
SPRINTER VAN. Available in both passenger and cargo versions, the Dodge
Sprinter Van is powered by a high-performance Mercedes-Benz 2.7-liter diesel
engine. The Sprinter Van is available in three different wheelbases. Customers
can combine each wheelbase with one of two different roof heights. The Sprinter
Van is able to adapt to custom business demands through a wide range of
available vocational upfit packages.
JEEP-REGISTERED TRADEMARK- GRAND CHEROKEE. The Grand Cherokee exemplifies
four-wheel drive capability and style with an exceptional balance of power,
performance, on-road handling, security and luxury. Grand Cherokee is a
full-size sport utility vehicle which is available in a four-door body style in
both two- and four-wheel drive configurations. In the NAFTA region, we offer it
with a 4.0-liter I-6 or a 4.7-liter V-8 engine. Outside the NAFTA region, the
Grand Cherokee is also available with a 2.7-liter I-5 diesel engine, which is
engineered by Mercedes-Benz.
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JEEP-REGISTERED TRADEMARK- LIBERTY. The Liberty with its four-wheel drive
capability adds on-road refinement through an independent front suspension and
isolated multi-link rear suspension. The Liberty is a mid-size sport utility
vehicle which is available with two- or four-wheel drive, and either a 2.4-liter
four-cylinder or a 3.7-liter V-6 gasoline engine. We offer this vehicle as a
Jeep-Registered Trademark- Cherokee in other selected markets outside the NAFTA
region with an optional 2.5-liter turbo diesel engine.
JEEP-REGISTERED TRADEMARK- WRANGLER. The Wrangler, a small sport utility
vehicle, is the authentic four-wheel drive vehicle that is the icon of the
Jeep-Registered Trademark- brand. We offer the Wrangler with four-wheel drive,
removable soft and hard top systems, and a choice of four- or six-cylinder
gasoline engines.
MARKETS, SALES AND COMPETITION
In 2002, our most important markets for Chrysler, Jeep-Registered Trademark-
and Dodge vehicles were the United States with 81% of factory shipments or unit
sales, Canada with 9% of unit sales and Mexico with 4% of unit sales. In the
United States and Canada we sold 2,452,200 vehicles in the retail market in
2002, which compares to 2,518,800 in 2001. For 2002, this represents a 13.0%
share of the United States and Canada car and truck market, compared to 13.2% in
2001. Industry retail sales in the United States and Canada for 2002 were
18.9 million units, a decrease of 1% from 2001.
The following table shows the distribution of revenues and unit sales for
the Chrysler Group segment by geographic market since 2000:
REVENUES AND UNIT SALES
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 % CHANGE 2001 % CHANGE 2000
--------- -------- --------- -------- ---------
REVENUES(1)
NAFTA region........................ 55,304 -5 58,210 -7 62,814
United States................... 48,958 -5 51,548 -8 55,924
Canada.......................... 4,595 +1 4,529 -9 4,963
Mexico.......................... 1,751 -18 2,133 +11 1,927
European Union...................... 3,122 -12 3,546 +7 3,309
Other markets....................... 1,755 +2 1,727 -23 2,249
--------- --------- ---------
World........................... 60,181 -5 63,483 -7 68,372
========= ========= =========
UNITS(2)
NAFTA region........................ 2,650,700 +3 2,569,600 -10 2,858,500
United States................... 2,277,100 +4 2,196,000 -11 2,469,700
Canada.......................... 253,800 +5 240,600 -10 267,400
Mexico.......................... 119,800 -10 133,000 +10 121,400
European Union...................... 84,100 -20 105,100 +2 103,000
Other markets....................... 87,900 +8 81,200 -3 83,700
--------- --------- ---------
World........................... 2,822,700 +2 2,755,900 -10 3,045,200
========= ========= =========
</Table>
- ------------------------------
(1) [EURO] in millions.
(2) Unit sales represent factory shipments by the Chrysler Group.
------------------------------
In 2002, revenues of our Chrysler Group segment decreased, primarily as a
result of the appreciation of the euro against the dollar and higher sales
incentives. This decrease was partially offset by an increase in unit sales.
Measured in dollars, the principal currency for the Chrysler Group, revenues
were approximately
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the same compared to 2001. Total unit sales increased by 2% to 2,822,700 as a
result of stronger dealer orders. For additional information regarding Chrysler
Group's revenues, please refer to "Operating Results" in "Item 5. Operating and
Financial Review and Prospects."
In the NAFTA region, principal competitors of our Chrysler,
Jeep-Registered Trademark- and Dodge passenger cars and trucks are products of
General Motors, Ford, Toyota, Honda and Nissan. Intense competition in the NAFTA
region is likely to continue as Korean manufacturers offer additional
value-based products and European manufacturers offer new minivans and
sport-utility vehicles. Due to the economic conditions in other markets,
particularly in Asia, and a relatively strong U.S. dollar compared to the
Japanese yen, non-U.S. competitors with excess capacity in both North America
and Asia may intensify their efforts to produce vehicles for sale in the NAFTA
region.
The following table shows, by vehicle line, the number of units sold since
2000:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
UNITS(1)
Cars
Neon.............................................. 171,600 188,400 236,300
Sebring and Stratus Sedans(2)..................... 201,000 203,600 197,100
Intrepid, Concorde and 300M(3).................... 202,200 200,000 293,400
Other............................................. 109,000 105,900 92,300
Minivans.............................................. 558,800 591,600 589,000
PT Cruiser............................................ 191,200 214,300 141,200
Trucks
Ram Pick-up....................................... 466,500 375,900 434,700
Dakota............................................ 161,700 163,100 195,800
Durango........................................... 122,200 132,600 180,900
Ram Van........................................... 42,000 57,500 77,000
Other............................................. 900 -- --
Jeep-Registered Trademark-
Grand Cherokee.................................... 289,000 249,900 336,600
Liberty/Cherokee.................................. 230,100 201,300 174,500
Wrangler.......................................... 76,500 71,800 96,400
--------- --------- ---------
Total............................................. 2,822,700 2,755,900 3,045,200
========= ========= =========
</Table>
- ------------------------------
(1) Unit sales represent factory shipments by the Chrysler Group.
(2) Includes former Cirrus and Breeze sedans.
(3) Includes former LHS sedan.
DISTRIBUTION
Dealers in the NAFTA region, who have sales and service agreements with
DaimlerChrysler Motors Company LLC, sell new Chrysler,
Jeep-Registered Trademark- and Dodge passenger cars and trucks at retail. The
dealers purchase cars, trucks, parts and accessories from DaimlerChrysler Motors
Company LLC for sale to retail customers. In the United States, we distribute
our Chrysler, Jeep-Registered Trademark- and Dodge products through 4,234
dealers at December 31, 2002, compared to 4,320 dealers at December 31, 2001. In
Canada, the dealer network comprised 512 dealers at December 31, 2002, compared
to 525 dealers at December 31, 2001. In Mexico, the dealer network comprised 124
dealers at December 31, 2002, compared to 121 dealers at December 21, 2001.
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Chrysler International Corporation, a 100% owned subsidiary of
DaimlerChrysler Corporation which in turn is a 100% owned subsidiary of
DaimlerChrysler Motors Company LLC, sells vehicles in various other countries
through wholly-owned, affiliated and independent distributors and dealers.
CAPITAL EXPENDITURES; RESEARCH AND DEVELOPMENT
In 2002, our Chrysler Group segment invested [EURO]3.2 billion in fixed
assets. These capital expenditures related primarily to new product programs
that include the recent launch in 2002 of Dodge Ram 2500/3500 pick-up trucks and
the Chrysler Pacifica launch in early 2003. In addition, Chrysler Group made
capital expenditures to upgrade powertrains, component facilities, and maintain
other existing facilities.
Research and development expenditures in 2002 were primarily for new product
development, but also included development costs for improving existing
products. These expenditures included compliance costs associated with
regulations promulgated by various governmental agencies worldwide.
The following table shows the capital expenditures for fixed assets and the
research and development expenditures of the Chrysler Group segment during the
last three years:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
([EURO] IN MILLIONS)
Capital expenditures for fixed assets..................... 3,155 5,083 6,339
Research and development.................................. 2,062 2,201 2,456
</Table>
The decrease of capital expenditures for fixed assets is mainly attributable
to improved production and development processes and fewer major product
launches.
INTERNATIONAL OPERATIONS/COOPERATIONS
The Chrysler Group's international operations in South America include a
manufacturing facility in Venezuela, where it assembles the Chrysler Neon,
Jeep-Registered Trademark- Cherokee and Grand Cherokee. Prior to August 2002,
international operations in Europe included the manufacture of the PT Cruiser,
subsequently transferred to Mexico, and the Chrysler Voyager at the Eurostar
plant located in Graz, Austria. The Chrysler Group sold the Eurostar plant to
Magna International Inc., in July 2002.
International cooperations in Austria include the continued production of
Jeep-Registered Trademark- Grand Cherokees and the transferred production of
Chrysler Voyagers from Eurostar under an assembly contract with Magna Steyr
Fahrzeugtechnik AG & Co KG. The segment's automotive affiliations in the
Asia-Pacific region include the assembly and distribution of
Jeep-Registered Trademark- Cherokees and Grand Cherokees in China by Beijing
Jeep-Registered Trademark- Corporation, Ltd., a minority-owned joint venture. In
Brazil, it participates in a joint venture with Bayerische Motoren Werke AG to
manufacture a 1.6-liter gasoline engine for use in both Chrysler Group and BMW
vehicles. DaimlerChrysler Corporation also has a minority interest in a company
that assembles Jeep-Registered Trademark- Cherokees in Egypt.
In the first quarter of 2003, production of the Chrysler Crossfire two-seat
coupe will begin in Germany under an assembly contract with Wilhelm Karmann
GmbH, one of our long-time business partners.
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COMMERCIAL VEHICLES
We manufacture and sell commercial vehicles under the brand names
Mercedes-Benz, Freightliner, Sterling, Setra, Thomas Built Buses, American La
France, Western Star and Orion. Our worldwide facilities provide us with a very
strong production and assembly network for commercial vehicles and core
components. We also have a worldwide distribution and service network for
commercial vehicles. In 2002, our Commercial Vehicles segment contributed
approximately 19% of our total revenues.
STATUS OF IMPLEMENTATION OF TURNAROUND PLAN FOR FREIGHTLINER
In the NAFTA region, we operate our truck business through our U.S.
subsidary, Freightliner LLC. During 2002, Freightliner continued to implement
its four-point turnaround plan we announced in October 2001. The status of the
four main elements of the turnaround plan is as follows:
- MATERIAL COST SAVINGS -- Freightliner targets a 10% reduction in direct
material expenditures by 2004. The target reflects potential design
changes, optimized workflow between Freightliner and its supplier base,
improved terms and conditions in existing supplier agreements and more
standardized and modular vehicle content. Freightliner achieved a 5%
reduction in material costs in 2002. It plans to achieve the remaining
target reductions in 2003 and 2004.
- PRODUCTION COST SAVINGS -- Freightliner expects to reduce production costs
up to 15% by 2004 through various plant closures, efficiency improvements,
and wage reductions. In this regard, its subsidary Thomas Built Buses
closed its Woodstock, Ontario, school bus assembly plant in the fourth
quarter of 2001. In the third quarter of 2002, Freightliner further
consolidated its parts production which led to the closure of its Portland
parts plant. In the fourth quarter of 2002, Freightliner closed the truck
plant of its Canadian subsidiary Freightliner Ltd. in Kelowna, British
Columbia, after it moved the production of Western Star trucks to its
Portland truck plant. Freightliner also achieved a 5% plant efficiency
improvement in 2002, and it plans to achieve an additional 10% over the
2003 - 2004 period. In addition, Freightliner's American La France
subsidiary closed down two facilities in 2002 after it decided to relocate
its fire truck production to an existing facility in Charleston, SC.
- OVERHEAD REDUCTIONS -- Freightliner plans to reduce its salaried workforce
by a total of 1,100 employees or 25%. It achieved 70% of this reduction by
year end 2002 and it plans to achieve the remaining 30% in 2003 and 2004.
Effective January 2002, Freightliner also reduced salaries by 5% and
changed health and welfare benefits. Freightliner expects additional
savings from lower non-production material costs and other non-manpower
expenses.
- IMPROVEMENTS TO THE BUSINESS MODEL -- Freightliner revised its business
model and now focuses on securing profitable business rather than
accumulating market share. More specifically, it emphasizes applying more
stringent criteria to new truck pricing and residual value commitments and
streamlining the cost structure of used truck operations.
PRODUCTS
VANS. Worldwide, we currently offer four series of Mercedes-Benz vans
between 1.9 metric tons (t) and 7.5t gross vehicle weight (GVW): the Sprinter,
the Vito/V-Class, the Vario, and the Vaneo -- a new compact van we launched in
February 2002. We manufacture Mercedes-Benz vans in Germany and Spain for all
markets, except South America, South Africa, Australia and several Asian
markets. For the South American, South African, Australian, and several Asian
markets we manufacture the Mercedes-Benz Sprinter in Argentina. We also assemble
the Sprinter van in the United States for the U.S. and Canadian markets where we
currently sell it under the Freightliner brand name. Since January 2003, we
offer the Sprinter also under the Dodge brand name and sell it in these markets
through Chrysler Group dealers in an effort to broaden the Sprinter's customer
base. We plan to introduce the successor model of the Vito/V-Class in Europe in
2003, and in 2004 in other markets.
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TRUCKS. Our current European Mercedes-Benz truck lines consist of the
Actros in the heavy weight category, the Atego in the medium and heavy weight
categories, the Axor and the Econic. The Axor is a new semi-trailer truck we
launched in January 2002. In terms of price and function it is positioned
between the Actros and the Atego. The Econic is a specialty vehicle that
customers can adapt for a variety of applications. Complementing our line-up is
the Unimog, a four-wheel drive vehicle designed for special purpose
applications, such as street maintenance, some construction industry uses,
fire-fighting, forestry and agriculture.
In September 2002, we introduced a new Mercedes-Benz Actros and a new Unimog
series. To complete our truck portfolio we plan to introduce a new light truck
line, the Accelo, in the first quarter of 2003, mainly for the Latin American
markets.
In Turkey, we manufacture medium and heavy duty trucks mainly for the local
market. Our subsidiary DaimlerChrysler do Brasil develops and produces
Mercedes-Benz trucks in the light, medium and heavy duty segments, especially
for the South American markets. We also sell trucks we manufacture in our
European factories in Africa, Asia and Australia.
Our U.S. subsidiary Freightliner manufactures trucks and buses (based on
truck chassis) in Classes 5 through 8 (from 16,000 lbs GVW to 33,000 lbs GVW and
over) under the Freightliner, Sterling, Western Star, and Thomas Built Buses
brand names, primarily for the U.S. and Canadian markets. Through American
La France, Freightliner is active in the custom fire truck chassis market.
Freightliner also manufactures chassis for trucks, buses and motorhomes in
Classes 3 through 7 (from 10,000 lbs GVW to 33,000 lbs GVW).
In mid 2002, Freightliner introduced its new M2 Business Class truck line in
the United States and Canada. In 2003, Freightliner will expand the model range
by adding new versions, including the M2 Heavy Duty models and Crew Cab options.
BUSES. We are a full-line supplier in the worldwide bus and coach market.
We utilize our global production facilities in France, Germany, Spain, Turkey,
Canada, Mexico, Brazil, and the United States to tailor our product range to
local market requirements and preferences. Our product portfolio includes city
buses, coaches, interurban buses, midi buses, school buses and bus chassis. In
Europe, we sell complete buses under the Mercedes-Benz and Setra brands and in
the United States and Canada under the Setra and Orion brand names. We also sell
Mercedes-Benz buses in Mexico and produce bus chassis in various countries.
In 2002, Setra launched several new bus models, including one with a new
"Com Air" roof-mounted air conditioning system. We also began offering two
standard versions of the Mercedes-Benz Citaro city bus with Euro 4 natural gas
engines. In October 2002, we presented the first bus of a fleet of 30
emission-free fuel cell buses. These buses, which are based on the Mercedes-Benz
Citaro bus, will be deployed and tested successively in 10 major European cities
beginning in mid-2003. For additional information regarding our fuel cell
activities, please refer to the discussion under the heading "Research and
Development" in "Item 5. Operating and Financial Review and Prospects."
DAIMLERCHRYSLER POWERSYSTEMS. In 2002 we decided to separate our off
highway activities from DaimlerChrysler Powersystems, effective January 2003.
DaimlerChrysler Powersystems will continue to produce diesel engines, axles,
transmissions and steering systems under the Mercedes-Benz and Detroit Diesel
brand names for on-highway use, mainly for our commercial vehicles.
DaimlerChrysler Off-Highway will focus exclusively on off-highway
applications, such as rail and marine products and stationary industrial or
commercial applications, for example, electrical back-up generators. We sell our
off-highway-products under the brand names Mercedes-Benz, Detroit Diesel and
MTU.
RECENT DEVELOPMENTS
On January 6, 2003, Mitsubishi Motors Corporation spun off its "Fuso Truck
and Bus" division, creating Mitsubishi Fuso Truck and Bus Corporation (MFTBC).
Pursuant to a share sale and purchase agreement with
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Mitsubishi Motors Corporation dated September 20, 2002, we (DaimlerChrysler AG)
agreed to purchase from Mitsubishi Motors a non-controlling 43% interest in
MFTBC for approximately [EURO]760 million in cash. Ten Mitsubishi Group
companies, including Mitsubishi Corporation, Mitsubishi Heavy Industries and
Bank of Tokyo-Mitsubishi, entered into a separate share sale and purchase
agreement with Mitsubishi Motors pursuant to which they agreed to purchase from
Mitsubishi Motors a total of 15% of MFTBC's shares for approximately
[EURO]265 million in cash. We expect the transactions under both agreements to
close in March 2003. Mitsubishi Motors will then hold a non-controlling 42%
interest in MFTBC.
In June 2001, we entered into a commercial vehicle joint venture agreement
with Hyundai Motor Company (HMC). In a first phase, we and HMC established
DaimlerHyundai Truck Corporation (DHTC), of which we and HMC each own 50%. We
formed DHTC to produce and distribute engines and engine parts. The commercial
vehicle joint venture agreement with HMC also included an option providing us
with the right to acquire 50% of the commercial vehicle business of HMC.
Pursuant to this option, which we exercised in December 2002, HMC is in the
process of contributing its entire commercial vehicle business to a new legal
entity. Subject to receiving all necessary governmental approvals, we currently
plan to acquire a 50% interest in that entity from HMC for approximately
[EURO]400 million at the end of February 2003. The purpose of the new commercial
vehicle joint venture is to design, produce and distribute commercial vehicles
above 4 metric tons (t) gross vehicle weight (GVW), including buses, as well as
components for those vehicles. We and HMC intend to combine our commercial
vehicle and engine joint ventures in the first half of 2003. We continue to hold
a 10% equity interest in HMC.
MARKETS, SALES AND COMPETITION
The market for commercial vehicles depends significantly on the prevailing
general economic conditions and developments since they directly influence
transportation needs and the availability of funds for capital investment. Our
most important commercial vehicle markets are Western Europe, North America and
South America. Due to weak economic conditions in several of our core markets
and the regional crises in South America, 2002 demand lagged behind 2001. In
addition, excess capacity and fierce competition among the primary truck
manufacturers resulting in intense pricing pressure continue to characterize the
truck industry.
Total commercial vehicle registrations in Western Europe (excluding Germany)
decreased 5% to 997,100 units. Registrations in Germany declined 7% to 290,500
units.
In the NAFTA region, sales for all manufacturers of trucks in Classes 6
through 8 decreased approximately 5% to 312,200 vehicles. In the United States,
retail sales of all manufacturers in the Class 6/7 truck segment decreased from
134,100 units in 2001 to 114,400 units in 2002, while sales for all
manufacturers in the Class 8 heavy duty truck category increased from 139,600
units in 2001 to 146,000 units in 2002. This increase was the result of
accelerated vehicle purchases during 2002 triggered by new engine emission
standards which became effective in the United States on October 1, 2002.
In several South American countries, demand for commercial vehicles dropped
significantly, especially in Argentina, where the economic and financial crisis
led to a decrase in unit sales of 61% to 3,800. This crisis also affected the
Brazilian market where unit sales declined 9% to 82,900.
25
<Page>
The following table shows the distribution of revenues and unit sales for
our Commercial Vehicles segment by geographic market since 2000:
REVENUES AND UNIT SALES
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2002 % CHANGE 2001 % CHANGE 2000
-------- -------- -------- -------- --------
REVENUES(1)
Western Europe.......................... 13,765 -5 14,415 -1 14,578
Germany............................. 6,788 -6 7,227 -5 7,599
Other............................... 6,977 -3 7,188 +3 6,979
NAFTA region............................ 9,970 +5 9,463 -9 10,347
United States....................... 8,462 +5 8,076 -8 8,826
Canada.............................. 936 +31 716 -7 773
Mexico.............................. 572 -15 671 -10 748
South America........................... 1,088 -25 1,456 -16 1,734
Brazil.............................. 748 -21 943 -20 1,186
Other............................... 340 -34 513 -6 548
Other markets........................... 3,578 +11 3,238 +3 3,145
------- ------- -------
World............................... 28,401 -1 28,572 -4 29,804
======= ======= =======
UNITS
Western Europe.......................... 265,200 -4 275,800 -2 281,500
Germany............................. 103,300 -3 106,000 -6 113,100
Other............................... 161,900 -5 169,800 +1 168,400
NAFTA region............................ 118,000 +11 105,900 -31 153,700
United States....................... 99,800 +12 89,400 -32 131,700
Canada.............................. 9,600 +52 6,300 -36 9,900
Mexico.............................. 8,600 -16 10,200 -16 12,100
South America........................... 37,000 -14 43,000 -15 50,700
Brazil.............................. 29,600 -12 33,800 -9 37,100
Other............................... 7,400 -20 9,200 -32 13,600
Other markets........................... 65,200 -4 68,200 +8 63,100
------- ------- -------
World............................... 485,400 -2 492,900 -10 549,000
======= ======= =======
</Table>
- ------------------------------
(1) [EURO] in millions.
------------------------------
Worldwide unit sales of our Commercial Vehicles segment decreased 2% to
485,400 in 2002 compared to 492,900 vehicles in 2001. Sales of vans decreased 5%
to 246,100 in 2002 from 257,800 in 2001, bus unit sales were 8% lower in 2002 at
25,300 units, while sales of trucks increased 3% to 214,000 units.
Lower demand in the Western European markets was the main reason for the
decrease in unit sales of trucks, vans and buses sold under the Mercedes-Benz
and Setra brand names. In the NAFTA region, our total commercial vehicle sales
increased 11% to 118,000 units in 2002. This increase was primarily due to
higher unit sales in the United States and Canada of premium class trucks in the
Class 8 heavy weight category, which increased 42% to 44,000 units, mainly due
to new emission laws in the United States which became effective on October 1,
2002. These new laws accelerated unit sales of trucks into 2002. In addition,
2001 unit sales were unusually low as dealers focused on reducing their existing
inventories. These factors were the
26
<Page>
primary reasons for the overall sales increase of Freightliner, Sterling and
Western Star vehicles, because they more than offset a 13% decline in sales of
Thomas Built school buses and commercial vehicle chassis manufactured by a
Freightliner subsidiary.
In Germany, the most important market for our Mercedes-Benz and Setra
commercial vehicles, we sold 103,300 units in 2002, a decrease of 3% compared to
the previous year. Unit sales in Germany represented 21% of our total commercial
vehicle sales and the remaining Western European market accounted for an
additional 33% with 161,900 units. The overall 4% decrease in unit sales in
Western Europe resulted primarily from lower truck sales.
The economic and financial crisis in Argentina also affected our commercial
vehicle sales in Brazil and in other South American countries. As a result, our
unit sales in South America decreased 14% from 43,000 units in 2001 to 37,000
units in 2002.
In Western Europe, the primary sales market for Mercedes-Benz vans, our
principal competitors are Renault, Fiat (Fiat and IVECO), Volkswagen and Ford.
In the truck segment, competitors vary in each geographic region. In Western
Europe, our main competitors are Volvo/Renault, Fiat (IVECO), MAN, Scania and
Paccar (DAF). In the NAFTA markets, our main competitors in the Class 5 through
8 truck categories are Navistar, Paccar (Kenworth/Peterbuilt), Volvo/Renault
(Mack), General Motors and Ford.
Our principal competitors in the bus sector (over 8t GVW) include Irisbus
(Renault, Iveco, Heuliez, Karosa, Ikarus), Neoman (MAN, Neoplan), Volvo, Dennis
and Scania in Western Europe and Volvo, Scania and Volkswagen in South America.
The following table shows, by vehicle category, the unit sales of our
Commercial Vehicles segment since 2000:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
UNITS
Vans(1)............................................. 246,100 257,800 249,300
Trucks(2)........................................... 214,000 207,500 271,300
Buses............................................... 25,300 27,600 28,400
------- ------- -------
Total........................................... 485,400 492,900 549,000
======= ======= =======
</Table>
- ------------------------------
(1) The unit sales in this category include sales of Mitsubishi pickup trucks (L
200) which our subsidiary DaimlerChrysler South Africa assembles and sells.
In addition, DaimlerChrysler South Africa sells Mitsubishi Pajero vehicles,
which are also included.
(2) As of 2002 unit sales in this category also include school buses and other
buses manufactured by Freightliner's subsidiary Thomas Built Buses.
Previously, we reported these unit sales in the bus category and we adjusted
the figures for the prior years accordingly. Unit sales of Thomas Built
Buses reached 12,900 units in 2002, 15,700 units in 2001 and 20,800 units in
2000.
For a discussion of changes in revenues, see "Operating Results" in "Item 5.
Operating and Financial Review and Prospects."
DISTRIBUTION
In Germany, we sell our commercial vehicles through our own wholesale
network. In Germany, we also own several retail outlets for our commercial
vehicles. In other major European markets, a local DaimlerChrysler subsidiary
provides wholesale services to a network of independent dealers. Outside Europe,
we sell our commercial vehicles through independent distributors or, if we have
a local production company, through the sales organization of the production
company.
Following the new legislation adopted by the European Commission in
October 2002, we concluded new dealer contracts with the majority of our
independent dealers. These new agreements contain clear qualitative standards
that seek to ensure the exceptional positioning in the market of our premium
Mercedes-Benz brand. Furthermore we began to strengthen our retail activities in
major European metropolitan centers, such as Rome, Paris, Brussels, and Milan,
by establishing our own retail outlets.
27
<Page>
CAPITAL EXPENDITURES; RESEARCH AND DEVELOPMENT
In 2002, our Commercial Vehicles segment had capital expenditures for fixed
assets of [EURO]1.3 billion. These expenditures primarily related to the
preparation of the successor model of the Vito/V-Class, the preparation for
production of the new Accelo light truck line in Latin America, the new Actros
and new Detroit Diesel engines.
Research and development projects in the commercial vehicles area focused on
new products, especially the new Actros, the new bus by Thomas Built Buses to be
introduced in 2004 and successor models of other existing product lines,
primarily the Vito/V-Class and the Accelo to be introduced in 2003 in South
America.
The table below shows capital expenditures for fixed assets and research and
development expenditures of our Commercial Vehicles segment during the last
three years:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
([EURO] IN MILLIONS)
Capital expenditures for fixed assets..................... 1,263 1,484 1,128
Research and development.................................. 959 1,015 974
</Table>
SERVICES
Our services activities, which contributed approximately 10% of our revenues
in 2002, consist almost exclusively of financial services supporting our
automotive businesses. We provide these services through our wholly-owned
subsidiary, DaimlerChrysler Services AG.
In October 2000, Deutsche Telekom acquired a 50.1% controlling interest in
our information technology activities, and in March 2002 we exercised our option
to sell to Deutsche Telekom our 49.9% interest in these activities. You can find
additional information about these transactions under the heading "Operating
Results -- Overview" in "Item 5. Operating and Financial Review and Prospects,"
under the heading "Material Contracts" in "Item 10. Additional Information" and
in Note 11 to our Consolidated Financial Statements.
The following table shows the revenues generated by our services business
since 2000:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
([EURO] IN MILLIONS)
Financial Services..................................... 15,699 16,851 15,088
IT Services(1)......................................... -- -- 2,438
------ ------ ------
Total.............................................. 15,699 16,851 17,526
====== ====== ======
</Table>
- ------------------------------
(1) In October 2000, Deutsche Telekom acquired a 50.1% controlling interest in
our IT subsidiary. As a result, our revenues for 2000 include IT-related
revenues only for the first nine months of the year.
------------------------------
The financial services we offer consist mainly of customized financing and
leasing packages for our retail and wholesale customers in the automotive
sector. In addition, we offer insurance and reinsurance brokerage and fleet
management services. We also assist our dealers in the development and
management of their facilities and we provide dealer property and casualty
insurance.
In July 2002, we began to operate a fully licensed bank, the DaimlerChrysler
Bank, in Germany. The DaimlerChrysler Bank offers financial services to our
retail customers and employees in Germany. These services include leasing and
sales-financing as well as demand-deposit accounts, car savings plans, and
customer credit cards.
28
<Page>
In the context of refocusing our financing and leasing services business on
the automotive sector, which is our core business, we negotiated and concluded a
series of transactions in different countries to streamline our portfolio of
financial assets accordingly. In addition to several minor dispositions, we sold
a substantial portion of our commercial real estate and asset-based lending
portfolios to GE Capital and other financial services providers for
[EURO]1.3 billion in June 2002. In October 2002, we concluded an agreement to
sell an additional portion of our capital services portfolio.
We also own, or hold minority investments in, several smaller companies for
which we account using the equity method of accounting. Some of these companies
provide services in the areas of mobility management, including traffic
management, telematics products and toll collection. One of these investments is
a 45% share in Toll Collect, a company that plans to operate a toll collection
system on behalf of the German federal government starting in August 2003. The
tolls will apply to all commercial vehicles over 12t GVW using German highways.
MARKETS, SALES AND COMPETITION
The following table shows the distribution of revenues derived from our
services activities by geographic market since 2000:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000(1)
-------- -------- --------
([EURO] IN MILLIONS)
European Union......................................... 5,048 4,646 6,073
Germany............................................ 3,497 3,182 4,139
Other.............................................. 1,551 1,464 1,934
NAFTA region........................................... 9,994 11,596 10,643
United States...................................... 8,578 9,868 9,229
Canada and Mexico.................................. 1,416 1,728 1,414
Other markets.......................................... 657 609 810
------ ------ ------
World.............................................. 15,699 16,851 17,526
====== ====== ======
</Table>
- ------------------------------
(1) In October 2000, Deutsche Telekom acquired a 50.1% controlling interest in
our IT subsidiary. As a result, our revenues for 2000 include IT-related
revenues only for the first nine months of the year.
------------------------------
In 2002, we generated approximately 64% of our total financial services
business volume in the NAFTA region, 22% in Germany and 10% in other European
Union countries. We discuss period-to-period changes in revenues under the
heading "Operating Results" in "Item 5. Operating and Financial Review and
Prospects."
The Services segment processed new leasing and finance contracts covering
approximately 1,991,000 units in 2002 with a total value of [EURO]51.8 billion.
In 2001, we processed new leasing and finance contracts covering 1,972,000 units
with a total value of [EURO]53.7 billion. The 4% decrease in total contract
value is due to foreign currency translation effects. The average monthly
payment for new vehicle installment sale contracts in 2002 was [EURO]595. The
average new contract balance amounted to [EURO]26,020 and the average original
term was 47 months.
29
<Page>
The following table shows the number of units and the value covered by new
leasing and finance contracts as well as the number of units and the value
covered by all our outstanding leasing and finance contracts at December 31,
2002 (in each case by geographic area and in total):
<Table>
<Caption>
UNITS UNITS
COVERED BY COVERED BY
NEW VALUE ALL VALUE
CONTRACTS ([EURO] IN MILLIONS) CONTRACTS ([EURO] IN MILLIONS)
---------- ---------------------- ---------- ----------------------
United States(1)............ 1,186,147 32,726 4,090,387 74,447
Germany(1).................. 284,196 6,829 613,464 12,238
Canada(1)................... 184,795 4,001 530,834 7,109
United Kingdom(1)........... 54,736 1,668 119,484 2,787
Mexico...................... 52,377 842 122,746 1,504
Italy....................... 51,695 1,080 159,179 2,390
France...................... 33,715 830 75,720 1,500
Japan(1).................... 26,021 856 78,712 1,583
Australia(1)................ 16,530 484 42,122 1,000
Netherlands................. 15,747 448 48,427 1,070
Other(1).................... 84,974 2,040 229,490 3,624
--------- ------ --------- -------
Total................... 1,990,933 51,804 6,110,565 109,252
========= ====== ========= =======
</Table>
- ------------------------------
(1) These figures include contracts which we included in several asset-backed
receivables transactions in these countries.
------------------------------
In the leasing and financial services area, our competitors include leasing
and finance subsidiaries of banks and financial institutions. We also compete
with the financial services businesses of other automobile manufacturers to the
extent they do not limit their activities to their own automobile brands.
CAPITAL EXPENDITURES
In 2002, our Services segment spent [EURO]95 million on fixed assets
compared to [EURO]112 million in 2001. These expenditures related largely to the
acquisition of data processing equipment. We also added [EURO]12.9 billion of
equipment under operating leases compared to [EURO]14.3 billion in 2001.
OTHER ACTIVITIES
This segment includes the MTU Aero Engines business unit, our holdings in
EADS and Mitsubishi Motors Corporation, our real estate and corporate research
activities, our holding companies, and our financing subsidiaries through which
we refinance the capital needs of our operating businesses in the capital
markets. The revenues of this segment originate mainly from our MTU Aero Engines
business.
The MTU Aero Engines business unit consists of MTU Aero Engines GmbH and its
subsidiaries. MTU Aero Engines develops, produces and maintains engines for
commercial, executive and military aircraft. MTU Aero Engines cooperates with
other aircraft engine manufacturers, including, for example, General Electric,
Pratt & Whitney and Rolls Royce, in several international aircraft engine joint
ventures. MTU Aero Engines is also one of the leading providers of maintenance
and repair services for jet engines.
In July 2000, we combined the aerospace activities operated by our
subsidiary DaimlerChrysler Aerospace AG, with the businesses of the French
aerospace company Aerospatiale Matra S.A. and the Spanish aerospace company
Construcciones Aeronauticas S.A. in European Aeronautic Defence and Space
Company EADS N.V. As part of the transaction, we exchanged our controlling
interest in DASA for a 33% minority interest in EADS. We retained the aero
engines business operated by MTU Aero Engines GmbH and its subsidiaries.
In October 2000, we acquired a non-controlling 34% interest in Mitsubishi
Motors Corporation. In June 2001, we purchased AB Volvo's 3.3% equity interest
in Mitsubishi Motors Corporation, increasing our non-controlling interest in
Mitsubishi Motors Corporation to 37.3%. A rights offering by Mitsubishi Motors
in
30
<Page>
November 2002 reduced our equity interest to 37.1%. In conjunction with the
acquisition of Volvo's 3.3% equity interest we received Volvo's rights in
several operational contracts with Mitsubishi Motors Corporation, including all
rights resulting from Volvo's cooperation with Mitsubishi Fuso Truck & Bus
Company.
We account for the minority interests we hold in EADS and Mitsubishi Motors
Corporation using the equity method of accounting, and we report our share of
the operating results of EADS and of Mitsubishi Motors Corporation as part of
this segment.
In April 2001 we sold a controlling interest in our TEMIC automotive
electronics business. In April 2002 we sold our 40% minority interest in that
business.
In 2002, our Other Activities segment contributed approximately 2% of our
total revenues. The following table shows the revenues generated by this segment
since 2000:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
-------- -------- --------
([EURO] IN MILLIONS)
MTU Aero Engines..................................... 2,215 2,487 2,106
Former aerospace activities (excluding MTU Aero
Engines)(1)........................................ -- -- 3,281
Automotive Electronics(2)............................ -- 294 1,067
Rail Systems(3)...................................... -- 1,086 3,900
Other Businesses(4).................................. 508 640 261
----- ----- ------
Total............................................ 2,723 4,507 10,615
===== ===== ======
</Table>
- ------------------------------
(1) In July 2000, we disposed of all our aerospace activities with the exception
of the aero engines business. As a result, we included the revenues from the
activities we disposed of only for the first half of 2000.
(2) In April 2001, we sold a controlling interest in our automotive electronics
business. As a result, we included the revenues derived from this business
only through March 31, 2001.
(3) On May 1, 2001, we completed the sale of our rail systems activities.
Consequently, we included the revenues derived from these activities only
through April 30, 2001.
(4) The revenues in this category relate primarily to real estate projects.
------------------------------
For a discussion of changes in revenues, see "Operating Results" in "Item 5.
Operating and Financial Review and Prospects."
MARKETS, SALES AND COMPETITION
The following table sets forth the distribution of revenues of this segment
by geographic market since 2000:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------
2002(1) 2001(2) 2000
-------- -------- --------
([EURO] IN MILLIONS)
European Union..................................... 1,079 2,068 7,168
Germany........................................ 836 1,377 2,944
Other.......................................... 243 691 4,224
NAFTA region....................................... 1,453 2,012 2,285
United States.................................. 1,304 1,804 2,054
Canada and Mexico.............................. 149 208 231
Asia............................................... 152 167 325
Other markets...................................... 39 260 837
----- ----- ------
World.......................................... 2,723 4,507 10,615
===== ===== ======
</Table>
- ------------------------------
(1) The decrease in 2002 revenues is primarily due to our dispositions of the
rail systems business and the sale of 60% of our investment in our
automotive electronics business in 2001. The 2001 figure included revenues
from the rail systems through April 2001 and from the automotive electronics
business through March 2001.
(2) The decrease in 2001 revenues is primarily due to our disposition in 2000 of
all of our aerospace activities with the exception of the aero engines
business, and the sale in 2001 of our rail systems activities and a
controlling interest in our automotive electronics activities.
31
<Page>
SUPPLIES AND RAW MATERIALS
In 2002, we purchased goods and services from suppliers around the world
with a total value of approximately [EURO]102.1 billion compared to
[EURO]106.5 billion in 2001. Chrysler Group accounted for 42% of our total
purchase volume, Mercedes Car Group for 36%, Commercial Vehicles for 19%,
Services for 1%, and Other Activities for 2%. We purchase various commodities
used in vehicle manufacturing, such as steel, through long-term supply
agreements. From time to time, we also purchase commodities on the spot market.
We operate our worldwide procurement and supply activities through a single
global procurement and supply function. We are aiming at maximizing the
efficiency of our supply networks by working not only with the first tier
supplier but also with sub-suppliers, raw material suppliers, and transportation
carriers. We increasingly use e-business services, such as electronic purchasing
of supplier products (e-procurement) and electronic management of logistics
processes. In particular, we work closely with Covisint, L.L.C., a joint venture
that operates a business-to-business internet marketplace offering e-procurement
services to participants in the automotive industry. Other vehicle manufacturers
using Covisint's procurement services include Ford, General Motors, Nissan, PSA
and Renault.
In 2002, prices for steel products in the United States increased slightly
due to the tariffs imposed by the U.S. government on steel imported into the
United States. We were able to minimize price increases through long-term
contracts and an exclusion to the federally mandated tariff. We were granted the
exclusion to the tariff for certain types of imported steel.
In Germany, we negotiate steel prices generally on an annual basis and we
attempt to negotiate a fixed price if we think it will be to our benefit.
Aluminum and copper prices remained relatively stable.
Resin (plastic) prices fluctuated with the price of oil and demand. We
avoided material shortages and substantial price increases through close
cooperation with suppliers and sub-suppliers.
In the precious metals market, palladium and rhodium prices decreased while
average platinum prices increased. These metals are used in catalytic converters
to reduce emissions. To minimize our exposure to the high price volatility of
these metals, we improved our existing processes through our purchasing and
engineering initiatives and we continue to research alternative materials and
processes.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The automotive industry is subject to extensive government regulation. Laws
in various jurisdictions regulate the emission levels, fuel economy, noise, and
safety of vehicles, as well as the levels of pollutants generated by the plants
that produce them. The cost of complying with these regulations can be
significant, and we expect to incur significant compliance costs in the future.
We recognize, however, that leadership in environmental protection is an
increasingly important competitive factor in the marketplace.
VEHICLE EMISSIONS
U.S. STANDARDS. FEDERAL. The Clean Air Act directs the Environmental
Protection Agency, or EPA, to establish and enforce national ambient air quality
standards. As part of that directive, the EPA has imposed tailpipe emission
control standards on passenger cars and light trucks, including minivans, sport
utility vehicles, and pickup trucks. The standards in effect for model year
1994-2003 passenger cars and light trucks are known as Tier 1 standards.
Manufacturers are obligated to recall vehicles that fail to meet those standards
for ten years or 100,000 miles, whichever occurs first.
The EPA also adopted Tier 2 standards that establish identical stringent
tailpipe emission requirements for passenger cars and light trucks. Tier 2
standards, which will be phased in over model years 2004-2009, extend to 120,000
miles the obligation to recall vehicles that fail to meet the standards. The
Tier 2 standards present a significant technological challenge to the automobile
industry, particularly with respect to diesel
32
<Page>
engines. Beginning with 2004 model year vehicles, manufacturers will not be able
to sell vehicles in the United States that do not meet the new standards.
Complying with these new standards will require further research and development
achievements on the part of the automotive industry.
Separate standards are in effect for heavy-duty commercial vehicles. More
stringent standards will apply to model year 2004-2006 vehicles, and even more
stringent standards will take effect in model year 2007.
CALIFORNIA STANDARDS. The State of California sets its own stringent
emission control standards for passenger cars and trucks under the low emission
vehicle program run by the California Air Resources Board (CARB). California
will phase in more restrictive standards over model years 2004-2007 which will
succeed the standards in effect for model years 1993-2003. Meeting these new
standards will require significant progress in the development of engine,
exhaust, and fuel technologies.
An important part of California's low emissions vehicle program is the
introduction of zero-emission vehicles. Beginning with model year 2003, up to
10% of the passenger cars and light trucks produced and delivered for sale each
year by a large-volume manufacturer in California must be certified as
zero-emission vehicles that produce no emissions of regulated pollutants (the
"ZEV mandate"). DaimlerChrysler Corporation's efforts to comply with the ZEV
mandate include the use of credits earned through the sale of neighborhood
electric vehicles by its subsidiary, Global Electric Motorcars, LLC.
In December 2001, CARB amended the ZEV mandate regulations to limit the use
of such credits by manufacturers. After the California Office of Administrative
Law invalidated the amendments, CARB announced that it would re-promulgate the
amendments and that the ZEV mandate regulations in effect in 1999, which are
more stringent in certain respects than the regulations as proposed to be
amended, would apply in the interim. Our subsidiary DaimlerChrysler Corporation
and other vehicle manufacturers and dealers then filed lawsuits in state and
federal court challenging both the proposed amendments and the reversion to the
1999 regulations. CARB is appealing a preliminary injunction issued in that case
which prevents enforcement of the regulations for model years 2003 and 2004.
CARB has announced that it will amend the ZEV regulations in March 2003 to
address the deficiencies that resulted in the issuance of the injunction. The
amended regulations would then be in effect for model year 2005.
Other states may either adopt the California standards, or participate in
the national low emission vehicle program established by the U.S. automotive
industry and subsequently adopted as a rule by the EPA. That program requires
manufacturers to sell low emission vehicles nationwide beginning with the 2001
model year. The states of Maine and New York have adopted the California
standards, including the requirement for zero-emission vehicles. Vermont has
indicated that it intends to adopt the zero-emission standards when they become
final.
We participate with other vehicle manufacturers and the U.S. Department of
Energy in Freedom CAR, a research project formed to develop fuel cell technology
to power vehicles. Development of a commercially viable fuel cell vehicle will
require further intensive research. Without new technology, we and other
manufacturers may be forced to take costly actions such as reducing the number
of non-zero-emission vehicles offered for sale in California or selling
battery-powered electric vehicles below cost.
Our subsidiary DaimlerChrysler Corporation has held discussions with CARB
and the EPA about the performance of the catalytic converters in some of its
1991-1999 model year vehicles, and the on-board diagnostic systems used to
monitor catalytic converter function in certain of its 1996-2001 model year
vehicles. DaimlerChrysler Corporation would incur significant costs if it were
required to repair or replace these emission control devices.
EUROPEAN STANDARDS. Current vehicle emission control standards in the
European Union are generally no more restrictive than U.S. standards. However,
the EU Commission and the European Parliament have adopted a directive that
establishes increasingly stringent emission standards for passenger and light
commercial vehicles for model years 2005 and thereafter (EURO 4). Under the
directive, manufacturers will be obligated to recall vehicles that fail to meet
those standards for five years or 80,000 kilometers, whichever
33
<Page>
occurs first. Standards for heavy commercial vehicles have been adopted by the
EU Commission and the European Parliament for model years 2005 (EURO 4) and 2008
and thereafter (EURO 5). We believe that our passenger cars and commercial
vehicles will comply with the European standards.
VEHICLE FUEL ECONOMY
U.S. STANDARDS. Under the federal Motor Vehicle Information and Cost
Savings Act, a manufacturer is subject to significant penalties for each model
year its vehicles do not meet Corporate Average Fuel Economy standards, commonly
referred to as the CAFE standards. CAFE standards for passenger cars and
light-duty trucks are currently 27.5 miles per gallon and 20.7 miles per gallon,
respectively. A manufacturer earns credits by exceeding CAFE standards. Credits
earned for the three preceding model years and credits projected to be earned
for the next three model years can be used to meet CAFE standards in the current
model year, except that credits earned in respect of cars may not be used for
trucks. In December 2002, the National Highway Traffic Safety Administration
(NHTSA) proposed new CAFE standards for light-duty trucks, including minivans
and sport utility vehicles, of 21.0 miles per gallon for 2005 model year
vehicles, 21.6 miles per gallon for 2006 model year vehicles, and 22.2 miles per
gallon for 2007 model year vehicles.
We expect to meet the current and proposed U.S. domestic fleet CAFE
standards for both passenger cars and light-duty trucks, although we will likely
use credits to meet the standard for light-duty trucks. However, increased
demand for larger light-duty trucks could jeopardize our ability to comply with
those standards and require us to take additional costly steps, including the
sale of ethanol flexible fuel vehicles.
The United States may adopt more stringent CAFE standards as a way of
reducing "green house gas" carbon dioxide emissions by increasing fuel economy.
Individual states may also adopt new regulations limiting such emissions. These
emissions are said to contribute to global warming, which has become a matter of
international concern. In 2001, the United States withdrew from the Kyoto
Protocol to the United Nations Framework Convention on Climate Change, which
called for the United States to reduce substantially its fossil energy use
during years 2008-2012. Nevertheless, the United States is considering ways to
achieve reductions in fossil energy use, including more stringent CAFE
standards, higher fuel costs and restrictions on fuel usage. In July 2002,
California passed a law that requires CARB to develop regulations that will
require automakers to reduce significantly carbon dioxide emissions from their
vehicles starting with 2009 models. These actions could be costly to us and
could significantly restrict the products we are able to offer in the United
States.
In addition to conventional gasoline powered vehicles, we manufacture
vehicles that operate on compressed natural gas, liquid petroleum gas, and
electricity, and flexible fuel vehicles capable of operating on both gasoline
and ethanol blend fuels.
EUROPEAN STANDARDS. The European Union signed and ratified the Kyoto
Protocol, pursuant to which it is required to substantially reduce carbon
dioxide emissions during years 2008-2012. In 1999, the European Union entered
into a voluntary agreement with the European automotive manufacturers
association which establishes an emission target of 140 grams of carbon dioxide
per kilometer for the average new car fleet sold in the European Union in 2008.
That target represents an average reduction in passenger vehicle fuel usage of
25 percent, measured from 1995 levels. The European Union has reaffirmed its
goal of reducing carbon dioxide emissions from new passenger cars to an average
of 120 grams per kilometer by 2010. Vehicle manufacturers have agreed to
reexamine in 2003 whether further reductions are possible by 2010. Achievement
of these reductions will require European vehicle manufacturers, including us,
to improve engine and overall efficiency and reduce vehicle weight. In addition,
the European Union and the European automotive manufacturers association are
expected to enter into a voluntary agreement for light commercial vehicles in
2003, after discussion of the final report authorized by the EU Commission.
VEHICLE SAFETY
The U.S. National Traffic and Motor Vehicle Safety Act of 1966, or the
Safety Act, requires new vehicles and original equipment sold in the United
States to meet various safety standards established by NHTSA. The
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Safety Act also requires manufacturers to recall vehicles found to have safety
related defects and to repair them without charge. The cost of such recalls can
be substantial depending on the nature of the repair and the number of vehicles
affected.
In general, vehicle safety regulations in Canada are similar to those in the
United States. Vehicles sold in Europe are subject to comparable vehicle safety
regulations established by the European Union or by individual countries. In
1999, the EU Commission proposed to expand existing vehicle safety regulations
by a directive on pedestrian protection. In 2001, the EU Commission proposed a
voluntary agreement that would replace the proposed directive and promote
pedestrian protection earlier than 2005. The European Union and the European
automotive manufacturers association are expected to enter into such agreement
in 2003 and will immediately start to enhance active safety measures. Countries
in South America and Asia have also established vehicle safety regulations.
In 2001, NHTSA completed its Interim Final Rule relating to advanced airbag
systems. The rule imposes a new regimen of tests with stringent new injury
criteria, and sets forth a compliance phase-in schedule mandating that 35% of
all vehicles produced by a manufacturer for the 2004 model year, 65% for the
2005 model year, and 100% for the 2006 and 2007 model years, meet the new safety
standard. These standards add to the cost and complexity of designing and
producing new motor vehicles and original motor vehicle equipment.
On November 1, 2000, the United States enacted the Transportation Recall
Enhancement, Accountability and Documentation Act, or the TREAD Act. This act
requires, among other things:
- a tire pressure warning system;
- a program to inform consumers of a vehicle's rollover propensity as
established in a dynamic rollover test;
- upgraded tire safety standards; and
- the development of a system of collecting from manufacturers information
relating to vehicle performance and customer complaints to assist in the
early identification of potential vehicle defects.
The implementation of such requirements is likely to impose significant
additional cost and complexity to the vehicle development process. The TREAD Act
also increases NHTSA's authority to impose civil penalties for noncompliance and
specifies possible criminal penalties.
STATIONARY SOURCE REGULATION
Our assembly, manufacturing and other operations in the United States must
meet a substantial number of regulatory requirements under various federal laws,
including the Clean Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act, the Pollution Prevention Act of 1990 and the Toxic Substances
Control Act. State laws parallel and, in some cases, impose more stringent
requirements than federal law. Together these laws impose severe restrictions on
airborne and waterborne emissions and discharges of pollutants, the handling of
hazardous materials, and the disposal of wastes. Similar requirements apply to
our operations in Europe and Canada. Increasing governmental regulation and
environmental enforcement is also likely to develop in Mexico.
ENVIRONMENTAL MATTERS
In the United States, the EPA and various state agencies have notified our
subsidiary DaimlerChrysler Corporation that it may be a potentially responsible
party for the cost of cleaning up hazardous waste storage or disposal facilities
pursuant to the Comprehensive Environmental Response, Compensation and Liability
Act and other federal and state environmental laws. A number of lawsuits allege
that DaimlerChrysler Corporation violated environmental laws and seek to recover
costs associated with remedial action. DaimlerChrysler Corporation is only one
of a number of potentially responsible parties who may be found to be jointly
and
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severally liable for remediation costs. As of December 31, 2002, DaimlerChrysler
Corporation may incur remediation costs at 158 sites in connection with the
foregoing matters and other remediation issues at its active or deactivated
facilities.
Pollution remediation is also a potentially significant issue in Germany at
some of our older sites, including manufacturing plants and some of our own
service outlets. These remediation issues involve ten principal sites.
Estimates of future costs of these environmental matters are inevitably
imprecise due to numerous uncertainties, including the enactment of new laws and
regulations, the development and application of new technologies, the
identification of new sites for which we may have remediation responsibility and
the apportionment and collectibility of remediation costs among responsible
parties. We establish reserves for these environmental matters when the loss is
probable and reasonably estimable. It is possible that final resolution of some
of these matters may require us to make expenditures in excess of established
reserves, over an extended period of time and in a range of amounts that we
cannot reasonably estimate. Although final resolution of any such matters could
have a material effect on our consolidated operating results for the particular
reporting period in which an adjustment of the estimated reserve is recorded, we
believe that any resulting adjustment should not materially affect our
consolidated financial position.
In 2000, the EU Commission issued a directive that requires automobile
manufacturers to take back all end-of-life passenger cars (up to 9 seats) and
light trucks (up to 3.5t total weight) sold after July 1, 2002, and, beginning
in January 1, 2007, all end-of-life passenger cars including those sold before
July 1, 2002. This directive stipulates that automotive manufacturers incur all,
or a significant part of, the costs of recycling these vehicles. The directive
affects all end-of-life-vehicles in the European Union and imposes additional
costs on automobile manufacturers which could be significant. Currently,
manufacturers already take back vehicles sold before July 1, 2002, and batteries
for disposal or recycling, but are allowed to charge their costs in these
circumstances. In addition, German manufacturing facilities are subject to
enhanced noise restrictions.
We are committed to reducing the environmental impact of our operations and
products beyond currently applicable regulatory requirements where this is
technically and financially feasible. Our policy is environmental protection in
pursuit of sustainable development. This policy is set forth in our
environmental guidelines and designed to minimize further the environmental
effects generally associated with the type of manufacturing operations we
conduct. We have installed environmental management systems in both our plant
operations and our development departments to consider environmental effects at
the planning stage of a new manufacturing process or product. We publish
environmental reports summarizing our use of resources and measures we have
undertaken to minimize further the environmental impact of our products and
operations.
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DESCRIPTION OF PROPERTY
At December 31, 2002, we had 104 manufacturing facilities worldwide, of
which 18 are located in Germany and 43 in the United States. Most of the
remaining facilities are in Mexico, Canada, France, Brazil and South Africa. We
also have other properties, including office buildings, spare parts centers,
research laboratories, testing tracks and warehouses, mainly in Germany and in
the United States. We own most of these manufacturing facilities and other
properties.
The following table shows a list of our principal production and other
facilities worldwide:
PRODUCTION FACILITIES
<Table>
MERCEDES CAR GROUP
GERMANY
- Berlin............................................ Manufacturing plant for engines and components
- Bremen............................................ Bodywork and assembly plant
- Hamburg........................................... Manufacturing plant for axles and components
- Rastatt........................................... Bodywork and assembly plant
- Sindelfingen...................................... Bodywork and assembly plant
- Stuttgart-Untertuerkheim.......................... Manufacturing plant for engines, axles and gearboxes
UNITED STATES
- Tuscaloosa, Alabama............................... Bodywork and assembly plant
BRAZIL
- Juiz de Fora...................................... Bodywork and assembly plant
FRANCE
- Hambach........................................... Bodywork and assembly plant
SOUTH AFRICA
- East London....................................... Bodywork and assembly plant
CHRYSLER GROUP
UNITED STATES
- Belvidere, Illinois............................... Bodywork, assembly and stamping plant
- Detroit, Michigan................................. Bodywork and assembly plants, manufacturing plants for
engines, axles and glass
- Fenton, Missouri.................................. Bodywork and assembly plants
- Huntsville, Alabama............................... Manufacturing plant for automotive electronics
- Indianapolis, Indiana............................. Foundry for engine blocks
- Kenosha, Wisconsin................................ Manufacturing plant for engines
- Kokomo, Indiana................................... Transmission plants, aluminum die castings plant
- New Castle, Indiana............................... Forging, machining and assembly plant for components
- Newark, Delaware.................................. Bodywork and assembly plant
- Sterling Heights, Michigan........................ Bodywork and assembly plant, stamping and subassembly
plant
- Syracuse, New York................................ Transmission and transfer case plant
- Toledo, Ohio...................................... Bodywork and assembly plants, machining plant for
components
- Trenton, Michigan................................. Manufacturing plant for engines
- Twinsburg, Ohio................................... Stamping and subassembly plant
- Warren, Michigan.................................. Bodywork and assembly plant, stamping and subassembly
plant
</Table>
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<Table>
CANADA
- Brampton.......................................... Bodywork, assembly and stamping plant
- Windsor........................................... Bodywork and assembly plants
MEXICO
- Saltillo.......................................... Bodywork and assembly plant, manufacturing plant for
engines
- Toluca............................................ Bodywork and assembly plant
VENEZUELA
- Valencia.......................................... Bodywork and assembly plant
CHINA
- Beijing........................................... Bodywork, assembly and stamping plant
This facility is operated by a joint venture, in which our subsidiary Chrysler International Corporation and
some of its affiliates own 42.4%.
COMMERCIAL VEHICLES
GERMANY
- Duesseldorf....................................... Bodywork and assembly plant, manufacturing plant for
steering systems
- Friedrichshafen................................... Manufacturing plant for diesel engines
- Gaggenau.......................................... Bodywork and assembly plant, manufacturing plant for
axles and transmissions
- Kassel............................................ Manufacturing plant for axles
- Ludwigsfelde...................................... Bodywork and assembly plant
- Mannheim.......................................... Bodywork and assembly plant, manufacturing plant for
engines
- Ulm............................................... Bodywork and assembly plant
- Woerth............................................ Bodywork and assembly plant
UNITED STATES
- Cleveland, North Carolina......................... Bodywork and assembly plant
- Gaffney, South Carolina........................... Assembly plant
- High Point, North Carolina........................ Bodywork and assembly plant
- Mt. Holly, North Carolina......................... Bodywork and assembly plant
- Portland, Oregon.................................. Bodywork and assembly plant
- Redford, Michigan................................. Assembly plant, manufacturing plant for engines
ARGENTINA
- Buenos Aires...................................... Bodywork and assembly plant
BRAZIL
- Sao Bernardo do Campo............................. Bodywork and assembly plant
CANADA
- St. Thomas........................................ Bodywork and assembly plant
MEXICO
- Santiago Tianguistenco............................ Assembly plant
SPAIN
- Barcelona......................................... Manufacturing plant for engines, transmissions and axles
- Vitoria........................................... Bodywork and assembly plant
</Table>
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<Table>
TURKEY
- Aksaray........................................... Bodywork and assembly plant, manufacturing plant for
engines and axles
- Hosdere........................................... Assembly plant
OTHER ACTIVITIES
GERMANY
- Muenchen.......................................... Manufacturing plant for aircraft engines
- Hannover.......................................... Maintenance plant for commercial aircraft engines
- Ludwigsfelde...................................... Maintenance plant for commercial aircraft engines and
industrial gas turbines
OTHER FACILITIES
GERMANY
- Berlin............................................ Potsdamer Platz real estate project, including
DaimlerChrysler Services headquarters
- Stuttgart-Moehringen.............................. DaimlerChrysler headquarters
- Ulm............................................... Research center
UNITED STATES
- Auburn Hills, Michigan............................ DaimlerChrysler headquarters and technology center
</Table>
In January 2003, our subsidiary DaimlerChrysler Corporation contributed its
New Castle machining and forging facility to NC-M Chassis Systems LLC, a joint
venture company formed with Metaldyne Corporation. DaimlerChrysler Corporation
owns 60% of the common stock of the joint venture company and Metaldyne owns the
remaining 40%. In addition, in January 2003, DaimlerChrysler Corporation and
General Motors Corporation ended their New Venture Gear powertrain joint venture
formed in 1990. DaimlerChrysler Corporation assumed 100% ownership of New
Venture Gear, Inc., with plants in Syracuse, New York and Roitzsch, Germany, and
General Motors acquired ownership of New Venture Gear's plant in Muncie,
Indiana.
At year-end 2002, the total amount of indebtedness secured by mortgages and
other security interests on our principal facilities was [EURO]1.6 billion.
These mortgages and other security interests related primarily to the Potsdamer
Platz real estate project.
We believe that our principal manufacturing facilities and other significant
properties are in good condition and that they are adequate to meet our needs.
There is significant production overcapacity in the worldwide automotive
industry which threatens continued profitability of many manufacturers. As part
of our strategic planning and operations, we monitor our production capacity to
ensure that overcapacity does not jeopardize our financial position. We also
continually review worldwide capacity and capacity requirements and developing
and anticipated industry changes, and position ourselves accordingly. As market
conditions fluctuate, we make adjustments to our capacity by opening, closing,
expanding or downsizing production facilities. We use capacity considerations in
conjunction with other business objectives, such as plant modernization and
labor market conditions, to determine where, and to what extent, we should alter
or shift our production capacity. In 2002, we made capacity adjustments in
response to a variety of business considerations. As market conditions evolve,
we may adjust our production capacity accordingly.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
We have prepared our Consolidated Financial Statements in accordance with
U.S. GAAP. Please refer to Note 1 to our Consolidated Financial Statements for a
description of our significant accounting policies.
This annual report contains forward-looking statements that reflect our
current views about future events. We use the words "anticipate," "assume,"
"believe," "estimate," "expect," "intend," "may," "plan," "project," "should"
and similar expressions to identify forward-looking statements. These statements
are subject to many risks and uncertainties, including:
- changes in general political, economic and business conditions, especially
an economic downturn or slow economic growth in Europe or North America;
- changes in currency exchange rates and interest rates;
- introduction of competing products and lack of acceptance of our new
products or services;
- increased competitive pressures which limit our ability to reduce sales
incentives and raise prices;
- whether Chrysler Group, Freightliner, and Mitsubishi Motors will be able
to continue to implement their turnaround plans successfully and
especially whether they will be able to meet their revenue enhancement,
efficiency and cost reduction initiatives;
- shortages or interruptions in the supply of fuel or production materials,
or labor strikes;
- changes in laws, regulations and government policies, particularly those
relating to vehicle emissions, fuel economy and safety, and the outcome of
current pending and possible future legal proceedings;
- decline in resale prices of used vehicles;
- changes in business strategy; and
- other risks and uncertainties, some of which we describe under the heading
"Risk Factors" in "Item 3. Key Information."
If any of these risks and uncertainties occur, or if the assumptions
underlying any of our forward-looking statements prove incorrect, then our
actual results may be materially different from those we express or imply by
such statements. We do not intend or assume any obligation to update these
forward-looking statements. Any forward-looking statement speaks only as of the
date on which it is made.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, "Business Combinations,"
and SFAS 142 "Goodwill and Other Intangible Assets." SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS 141 also specifies the types of acquired intangible
assets that must be recognized and reported separately from goodwill and those
acquired intangible assets that must be included in goodwill. SFAS 142 requires
that goodwill no longer be amortized, but instead tested for impairment at least
annually. SFAS 142 also requires recognized intangible assets with a definite
useful life to be amortized over their respective estimated useful lives and
reviewed for impairment in accordance with SFAS 144 (see below). Any recognized
intangible asset determined to have an indefinite useful life will not be
amortized, but instead tested for impairment in accordance with SFAS 142 until
its life is determined to no longer be indefinite.
We adopted the provisions of SFAS 141 and SFAS 142 as of July 1, 2001, and
January 1, 2002, respectively. These statements require that goodwill acquired
in a business combination completed after June 30, 2001, and any intangible
asset determined to have an indefinite useful life acquired after June 30,
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2001, should not be amortized. We amortized goodwill acquired in business
combinations completed before July 1, 2001, and intangible assets with
indefinite useful lives acquired before July 1, 2001, until December 31, 2001.
SFAS 142 required us to evaluate our existing intangible assets and goodwill
and to make any necessary reclassifications in order to conform with the new
separation requirements at the date of adoption. We reassessed the estimated
useful lives and residual values of all intangible assets of the Group other
than goodwill and determined that no adjustments regarding amortization periods
were necessary.
In connection with the transitional impairment evaluation, SFAS 142 required
us to perform an assessment of whether there is an indication that goodwill is
impaired as of January 1, 2002. To accomplish this, we (1) identified our
reporting units, (2) determined the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units, and (3) determined the fair value
of each reporting unit. We completed this first step of the transitional
assessment for all of our reporting units by June 30, 2002, and determined there
was no indication that goodwill had been impaired as of January 1, 2002.
Accordingly, no transitional goodwill impairment charge was necessary.
Investments for which we account using the equity method, such as EADS and
Mitsubishi Motors are also subject to the requirements of SFAS 141 and
SFAS 142. Our proportionate share of our equity method investees' (primarily
EADS) transitional goodwill impairment charge resulting from the adoption of
SFAS 142 was [EURO]159 million or [EURO]0.16 per share. We have reported this
transitional impairment charge and the related per share amount as the
cumulative effect of a change in accounting principle in our consolidated
statement of income (loss) for the year ended December 31, 2002.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." The statement applies to legal obligations associated with the
retirement of tangible long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived asset,
except for certain obligations of lessees. SFAS 143 requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset and subsequently allocated to expense over the asset's
useful life. We adopted SFAS 143 on January 1, 2003. The adoption of SFAS 143
did not have a material impact on our consolidated financial statements.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 retains the previous requirement to
recognize an impairment loss only if the carrying amounts of long-lived assets
to be held and used are not recoverable from their expected undiscounted future
cash flows. However, goodwill is no longer required to be allocated to these
long-lived assets when determining their carrying amounts. SFAS 144 requires
that a long-lived asset to be abandoned, exchanged for a similar productive
asset, or distributed to owners in a spin-off be considered held and used until
it is disposed. SFAS 144 requires the depreciable life of an asset to be
abandoned, be revised to its shortened useful life. SFAS 144 requires all
long-lived assets to be disposed of by sale, be recorded at the lower of its
carrying amount or fair value less cost to sell and to cease depreciation
(amortization). Thus, future operating losses from discontinued operations are
no longer recognized before they occur. SFAS 144 is effective January 1, 2002.
The adoption of SFAS 144 compared to previous requirements, except for goodwill,
did not have an impact on our consolidated financial statements.
In December 2001, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 01-06, "Accounting by Certain
Entities (Including Entities With Trade Receivables) That Lend to or Finance the
Activities of Others." SOP 01-06 aligns accounting guidance related to loans and
trade receivables for all entities. The measurement provisions of the statement
only apply to financial institutions. The disclosure and classification
requirements for loans and trade receivables apply to all entities. This SOP is
effective for financial statements issued for fiscal years beginning after
December 15, 2001.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement 13 and Technical Corrections."
SFAS 145 requires gains and losses on extinguishments of
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debt to be classified as gains or losses from continuing operations rather than
as extraordinary items as previously required under SFAS 4, unless the gains and
losses meet the criteria to be classified as extraordinary pursuant to APB 30.
SFAS 145 also amends SFAS 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The rescission of SFAS
4 is effective for fiscal years beginning after May 15, 2002. The provisions of
SFAS 145 related to SFAS 13 are effective for transactions occurring after
May 15, 2002. The adoption of these provisions had no impact on our consolidated
financial statements.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The statement requires that a liability for
costs associated with exit or disposal activities be recognized in the period in
which the costs are incurred if a reasonable estimate of fair value can be made.
Under current accounting guidance, a liability can be recognized when management
has committed to an exit plan. The requirements under SFAS 146 are effective
prospectively for exit or disposal activities initiated after December 31, 2002.
Restatement of previously issued financial statements is not permitted. The
adoption of this statement will affect our accounting for exit and disposal
activities initiated after December 31, 2002.
In November 2002, the Emerging Issue Task Force (EITF) reached a final
consensus on EITF 00-21, "Revenue Arrangements with Multiple Deliverables." EITF
00-21 addresses certain aspects of the accounting of revenue arrangements with
multiple deliverables by a vendor. The issue outlines an approach to determine
when a revenue arrangement for multiple deliverables should be divided into
separate units of accounting and, if separation is appropriate, how the
arrangement consideration should be allocated to the identified accounting
units. The consensus reached in the issue will be effective for us in our
financial statements beginning July 1, 2003. We will apply the consensus
prospectively in 2003. We are currently determining the impact of the adoption
of EITF 00-21 on our consolidated financial statements.
Also in November 2002, the FASB issued FASB Interpretation (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others -- an interpretation of FASB
statements 5, 57, and 107 and rescission of FASB Interpretation 34." This
Interpretation elaborates on the disclosure to be made by a guarantor in its
financial statements regarding obligations under certain guarantees that it has
issued. FIN 45 also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation due
to the issuance of the guarantee. Disclosure requirements are effective for
financial statements of interim and annual periods ending after December 15,
2002 (see Notes 25b and 31 to our Consolidated Financial Statements). The
recognition and measurement provisions are effective for guarantees issued or
modified after December 31, 2002. We are currently determining the impact of the
recognition and measurement provisions of FIN 45 on our consolidated financial
statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement
No. 123." SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation" to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 requires more prominent disclosures in both interim and
annual financial statements about the method of accounting used for stock-based
employee compensation and the effect of the method used on reported results. We
apply APB 25 that uses an intrinsic value based approach to measure compensation
expense. We are currently considering the adoption of SFAS 123 in 2003. Under
SFAS 123, compensation expense of stock option plans is measured at the grant
date based on the fair value of the award using an option-pricing model.
Compensation expense is recognized over the service period with an offsetting
credit to equity (paid-in capital). If adopted, use of the fair value based
method will result in additional compensation expense in the Group's statement
of income (loss) depending upon the number, price and other significant terms of
the stock options granted. Please refer to Note 24 to our Consolidated Financial
Statements for more information on this topic.
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In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities -- an interpretation of ARB No. 51," which clarifies the application of
the consolidation rules to certain variable interest entities. FIN 46
established a new multi-step model for the consolidation of variable interest
entities when a company has a controlling financial interest based either on
voting interests or variable interests. Consolidation based on variable
interests is required by the primary beneficiary if the equity investors lack
essential characteristics of a controlling financial interest or if the equity
investment at risk is not sufficient for the entity to finance its activities
without additional subordinated financial support from other parties. The
primary beneficiary of a variable interest entity is the party that absorbs a
majority of the entity's expected losses, receives a majority of its expected
residual returns, or both, as a result of holding variable interests. FIN 46
also provides disclosure requirements related to investments in variable
interest entities, whether or not those entities are consolidated. For us, FIN
46 applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which we obtain an interest after
that date. For variable interest entities created prior to February 1, 2003, the
consolidation requirements of FIN 46 will be effective as of July 1, 2003.
For additional information regarding our off-balance sheet arrangements,
please refer to the discussion under the heading "Off-Balance Sheet
Arrangements" in "Item 5. Operating and Financial Review and Prospects."
INFLATION
In Germany, the average inflation rate in 2002 was 1.3% compared to 2.5% in
2001 and 1.9% in 2000. In the United States, the average inflation rates for
those years were 1.6% in 2002, 2.8% in 2001 and 3.4% in 2000. Inflation has not
had a significant effect on our operations in recent years.
CRITICAL ACCOUNTING POLICIES
Our financial condition and results of operations are sensitive to the
accounting methods we select and the accounting estimates underlying the
preparation of our financial statements. The following critical accounting
policies, and the related judgments and other uncertainties affecting the
application of those policies are factors you should consider in reviewing our
financial statements and the discussions below under the headings "Operating
Results" and "Liquidity and Capital Resources."
RECOVERABILITY OF INVESTMENT IN EQUIPMENT ON OPERATING LEASES
We own equipment, primarily passenger cars and commercial vehicles, that we
lease to customers under operating leases. At December 31, 2002, the total
carrying value of this equipment was [EURO]28.2 billion. Operating leases for
equipment representing approximately 88% of the total 2002 carrying value
originated with our financial services business. At December 31, 2001, that
percentage was 92%.
We carry equipment on operating leases initially at its acquisition cost and
depreciate it over the contractual term of the lease, using the straight-line
method, until it reaches its estimated residual value. The estimated residual
value represents our best estimate of the fair value of the leased equipment at
the end of the lease term. We base our initial estimate on publicly available
information, and also on our own projections and historical experience regarding
expected resale values for the types of equipment leased.
Our accounting policy is to frequently reevaluate our estimates and
consider, at least quarterly, whether any indications of impairment of our
ability to recover the carrying value of our investment in equipment on
operating leases exist. If we determine that indications of impairment exist, we
evaluate whether the total future cash flows, undiscounted and before interest,
that we expect to derive from the lease and the ultimate sale of the equipment,
are less than its carrying value. If the carrying value is higher than the
expected total cash flows, the amount of the impairment we recognize is equal to
the excess of the carrying value of the equipment over its fair value. Further,
if the estimated residual value of the equipment has changed significantly from
previous estimates, we will revise the amount of future depreciation expense to
be recorded over the remaining term of the lease.
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We believe that the accounting estimates related to recoverability of the
carrying value of our investment in equipment on operating leases is a critical
accounting estimate because:
(1) the evaluation is inherently judgmental and highly susceptible to change
from period to period because it requires us to make assumptions about
future vehicle supply and demand, and what selling prices for used
equipment will be at the end of the lease; and
(2) the impact of an impairment charge or changes in future depreciation
expense could be material to our financial statements.
If sales incentives remain an integral part of sales promotion - thereby
reducing new vehicle prices - or if weak economic conditions prevail in our
primary markets, resale prices of used vehicles and, correspondingly, the
residual value of our leased equipment could be subject to continued downward
pressure. If resale prices of used vehicles decline, our future operating
results are likely to be adversely affected by increased depreciation expense or
incremental impairment charges.
Since the risk associated with the recoverability of our investment in
equipment on operating leases is primarily attributable to our Services segment,
the following information refers to that segment.
As a result of changes in estimates of residual values, our Services segment
recognized a pre-tax impairment charge of [EURO]0.5 billion in 2000, that we
recorded in the statement of income (loss) line item "Cost of sales." At that
time, the companies included within our Services segment also increased their
depreciation rates for certain equipment for the remaining terms of the
underlying leases. In 2001, no impairment charge was recorded. In 2002, the
reevaluation of the recoverability of the carrying value of our Services
segment's investment in equipment under operating leases resulted in impairment
charges of [EURO]0.3 billion due to continuing declines in estimated residual
values.
The recognition of impairment charges initially does not affect our reported
cash flows. The rate of recovery of the carrying value of our investments in
equipment on operating leases depends on the cash we collect in the form of
operating lease payments from our customers and the proceeds we derive from the
sale of the vehicle when the lease matures. To the extent that used vehicle
values continue to decrease, we will realize less cash inflows from sales of
vehicles coming off lease agreements. In addition, the inability of customers to
make their monthly lease payments could also adversely affect our liquidity and
capital resources.
COLLECTIBILITY OF SALES FINANCING AND FINANCE LEASE RECEIVABLES
We have sales financing and finance lease receivables, which consist
primarily of retail installment sales contracts, finance lease contracts, and
revolving wholesale facilities secured by passenger cars and commercial
vehicles. At December 31, 2002 and at December 31, 2001, our financial services
business held substantially all of our sales financing and finance lease
receivables. We are exposed to collectibility risk if consumers or dealers
default on these receivables or become insolvent and the collateral values are
insufficient, after selling costs, to realize the full carrying values of these
receivables. Collectibility risks impact the recoverability of our owned
(on-balance sheet) portfolio of finance receivables, through the allowance for
credit losses, and the valuation of retained interests in finance receivables
sold and securitized.
ALLOWANCE FOR CREDIT LOSSES
Our policy is to maintain an allowance for credit losses representing our
best estimate of the amount of the losses incurred at the balance sheet date in
our sales finance and finance lease receivable portfolio. We base our estimate
on a systematic, ongoing review and evaluation which we perform as part of our
credit-risk evaluation process. As part of this evaluation, we take into account
our historical loss experience, the size and composition of our portfolios,
current economic events and conditions, the estimated fair value and adequacy of
collateral and other pertinent factors. When we evaluate homogeneous loan
portfolios, we do that collectively, taking into consideration primarily
historical loss experience, adjusted for the estimated impact of current
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economic events and conditions, including fluctuations in the fair value and
adequacy of collateral. We evaluate other receivables, such as wholesale
receivables and loans to large commercial borrowers, for impairment individually
based on the fair value of available collateral. Increases to the allowance for
credit losses reduce the net carrying value of the balance sheet line item
"Receivables from financial services" with a corresponding charge to the
statement of income (loss) line item "Cost of sales."
We believe that the accounting estimate related to the establishment of the
allowance for credit losses is a critical accounting estimate because:
(1) the evaluation is inherently judgmental and requires the use of
significant assumptions about expected customer default rates and
collateral values, which may be susceptible to significant change; and
(2) changes in the estimates about the allowance for credit losses could
have a material affect on our financial statements.
Since the risk associated with the collectibility of sales financing and
finance lease receivables is almost exclusively attributable to our Services
segment, the following information refers to that segment.
We consider the allowance for credit losses to be adequate based on
information currently available and several assumptions, including expected
average credit loss rate assumptions for financing of 0.4% for Mercedes Car
Group, 0.8% for Chrysler Group and 2.4% for Commercial Vehicles, respectively,
at December 31, 2002. However, additional provisions may be necessary if
(1) actual credit losses exceed our estimates and assumptions about credit
losses and collateral values or (2) recent changes in economic and other events
and conditions adversely impact our estimates. Continued weakness in the U.S. or
European economies could increase the likelihood that actual credit losses may
exceed current estimates. To the extent that sales incentives remain an integral
part of sales promotion with the effect of reducing new vehicle prices, resale
prices of used vehicles and, correspondingly, the collateral value of our
Services segment's sales financing and finance lease receivables could
experience further downward pressure. If these factors require a significant
increase in the allowance for credit losses, it could negatively affect our
Services segment's and the Group's future operating results.
At December 31, 2002, 2001 and 2000, our Services segment's sales financing
and finance lease receivables totaled [EURO]52.1 billion, [EURO]49.5 billion and
[EURO]48.6 billion, respectively. The allowance for credit losses associated
with those receivables amounted to [EURO]1.6 billion at December 31, 2002,
[EURO]1.6 billion at December 31, 2001 and [EURO]0.9 billion at December 31,
2000. Included within cost of sales were net charges of [EURO]1.0 billion in
2002, [EURO]1.4 billion in 2001 and [EURO]0.8 billion in 2000 to increase the
allowance for credit losses.
The recognition of provisions for credit losses initially has no impact on
our reported cash flows. The recoverability of our sales finance receivables and
finance lease receivables depends predominantly on installment collections over
the respective contract terms. Our liquidity and capital resources could be
adversely affected if the inability of our customers to make their monthly
installment payments exceeds our estimates. Decreases in collateral values would
generally impact our future cash flows only if customers default and we have to
repossess the vehicles.
RETAINED INTERESTS IN SOLD RECEIVABLES
We regularly sell receivables to special purpose trusts in securitization
transactions. In these transactions we usually retain residual beneficial
interests in the sold and securitized retail and wholesale finance receivables.
The value of these retained interests depends on the present value of the
estimated residual cash flows after repayment of all senior interests in the
sold receivables. We determine the value of our retained interests upon the sale
of the receivables and at the end of each calendar quarter using discounted cash
flow modeling. The valuation methodology considers historical and projected
principal and interest collections on the sold receivables, estimated future
credit losses arising from the collection of the sold receivables, and expected
repayment of principal and interest on notes issued to third parties and secured
by the sold
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receivables. To the extent the discounted expected future cash flows are less
than the carrying amount of a retained interest, we record an impairment charge
if the situation is considered other-than-temporary, which reduces the net
carrying value of the balance sheet line item "Other Receivables" with a
corresponding charge to the statement of income (loss) line item "Revenues."
We believe that the valuation of retained interests in sold receivables is a
critical accounting estimate because:
(1) the valuation is inherently judgmental and requires us to use
significant assumptions about expected customer default rates and
collateral values, which are susceptible to significant change; and
(2) changes in the estimates about the value of these retained interests
could have a material affect on our financial statements.
Since the risk associated with retained interests in sold receivables is
primarily attributable to our Services segment, the following information refers
to that segment.
We believe the amounts recognized on the balance sheet for our retained
interests in sold receivables are appropriate based on information currently
available and several assumptions, including an expected composite average
remaining credit loss rate of 1.3% at December 31, 2002. However, an additional
impairment may be necessary if (1) actual losses exceed our estimates and
assumptions about credit losses and collateral values or (2) changes in economic
and other events and conditions adversely impact future cash flows from sold
loans. Continued weakness in the U.S. or European economies could increase the
likelihood that actual credit losses exceed current estimates. To the extent
that sales incentives remain an integral part of sales promotion with the effect
of reducing new vehicle prices, resale prices of used vehicles and,
correspondingly, the collateral value realized upon repossession of defaulted
sold receivables could experience further downward pressure. If these factors
result in a significant impairment of our ability to recover the carrying value
of our retained interests, it could negatively affect our future operating
results and cash flows.
At December 31, 2002, 2001 and 2000, the carrying value of our retained
interests of our Services segment totaled [EURO]4.2 billion, [EURO]5.5 billion
and [EURO]4.8 billion, respectively. The unrealized gains associated with those
retained interests amounted to [EURO]0.2 billion at December 31, 2002,
[EURO]0.2 billion at December 2001 and [EURO]0.1 billion at December 31, 2000.
Our Services segment recorded impairment charges of [EURO]0.1 billion in
2002 and [EURO]0.3 billion in 2001. The revenue figures for the respective year
include these charges. We did not record any impairment charges in 2000.
The initial recognition of impairment charges to reduce the carrying value
of our retained interests do not impact our reported cash flows. The realization
of our retained interests predominantly depends on the excess cash flows
distributed by the special purpose trusts that purchased the sold receivables.
The inability of customers to make their monthly installment payments to the
trusts could result in less excess cash flows that can be distributed by the
trusts. To the extent that distributable excess cash flows are lower than our
estimates, our liquidity and capital resources could be adversly affected.
REALIZABILITY OF INVESTMENTS IN EADS AND MITSUBISHI MOTORS CORPORATION (MMC)
We evaluate the recoverability of the carrying value of our significant
equity method investments, primarily in EADS and MMC, when there is an
indication of potential impairment. If we were to receive such an indication, we
would record a write-down of the investment if and when the amount of its
estimated realizable value below carrying value is considered
other-than-temporary. Indications of a potential impairment that would cause us
to perform this evaluation include, but are not necessarily limited to, an
inability of the investee to sustain an earnings capacity that would justify the
carrying amount of the investment, or a quoted market price per share that is
significantly below our carrying amount per share for the investee for a
sustained period of time.
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Approximately 34% and 30% of the outstanding shares of common stock of EADS
and MMC, respectively, trade publicly. However, a decline in the quoted market
price of these shares below our carrying amount or the existence of operating
losses is not necessarily indicative of a loss in value that is
other-than-temporary. In determining whether a decline in the investment's
estimated realizable value is other-than-temporary, we consider the length of
time and the extent to which such value has been less than the carrying value,
the financial condition and prospects of the investee, and our ability and
intent to retain our investment in the investee for a period of time sufficient
to allow for any anticipated recovery in value. In the event that we would
determine that a decline in value is other-than-temporary, we would recognize an
impairment charge for the reduction in the value of the investment, which would
be reflected in the balance sheet line item "Investments and long-term financial
assets" and the statement of income (loss) line item "Financial income
(expense), net." Impairment charges of this type are non-cash items and
therefore would not directly impact our reported cash flows.
We believe that the evaluation of the realizability of the carrying values
of our investments in EADS and MMC is a critical accounting estimate because:
(1) the determination of the realizable value of these investments considers
not only their quoted market prices, but also
a) the fair value based on calculations using estimated future results
of EADS and MMC and the consideration of the time period we intend to
maintain our ownership in EADS and MMC, and
b) the value of the benefit of the synergies we expect from cooperative
strategic arrangements with MMC, both of which are inherently
subjective;
(2) MMC may require additional sources of liquidity (including future cash
infusions or some form of credit support by us) in order to justify the
carrying value of the investment; and
(3) the size of these investments is substantial and the impact of an
impairment charge on our results of operations could be material.
The realization of the carrying value of our investment in EADS is primarily
dependent on EADS' ability to compete successfully with its Airbus aircraft in
the commercial aircraft industry in terms of price, product quality and market
acceptance of new models. A continued weakness in the airline industry, declines
in residual values of leased aircraft and deteriorating financial condition of
EADS' major customers could have a significant impact on EADS. As a result,
orders for new aircraft and the exercise rate of existing purchase options may
be significantly lower in the future which could adversely affect EADS' expected
net cash flows, its ability to recover the carrying value of its assets and
therefore our determination of realizable value. Consequently, both the
recognition of our proportionate share of EADS' future operating results - if
such operating results were to deteriorate significantly from current trends -
and an impairment charge related to our ability to recover the carrying amount
of our investment in EADS could adversely affect our operating results.
From the time that we obtained our investment in EADS in July 2000 until
December 31, 2002, the quoted market value per EADS share has generally exceeded
our carrying value per share and has only been below the carrying value per
share for a temporary period of time. At December 31, 2002, our carrying value
of the investment in EADS was [EURO]4.4 billion. The quoted market value of our
investment in EADS was [EURO]2.6 billion, based on the quoted market price per
share of EADS of [EURO]9.85 at December 31, 2002. We believe that the decline in
quoted market value is the result of recent geopolitical and economic
uncertainties, stalling recovery in air traffic, U.S. airlines' difficulties and
delays in obtaining significant new orders. We have the ability, and we intend,
to hold our investment in EADS for a period of time sufficient to allow for us
to recover the carrying value of our investment. Our estimate about our ability
to recover the carrying value of our investment in EADS has not changed and we
have not recognized any impairment charges.
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We consider our investment in MMC to be a strategically important component
of our long-term strategy in Asia. The realization of the carrying value of our
investment in MMC is primarily dependent upon MMC's ability to improve its
financial performance and market position. Key initiatives included in MMC's
2001 restructuring plan consist of management changes, workforce reduction,
elimination of excess production capacity and reduction of costs of purchased
materials. MMC's ability to generate sufficient cash flows to recover the
carrying value of its assets, satisfy its financial obligations and stay
competitive in the market place depends, among other factors, upon its ability
to develop vehicles successfully and produce vehicles cost effectively and for
the consumer market to regain trust in MMC's products. Because it is essential
that MMC have adequate sources of funding to meet its liquidity needs, this may
require an additional equity infusion or some form of credit support. MMC's
forecasted operating cash flows and MMC management's estimates about MMC's
ability to recover the carrying value of its assets could also change.
Consequently, our operating results could be adversely affected by both the
recognition of our proportionate share of MMC's future operating results - if
such operating results were to deteriorate significantly from current trends -
and an impairment charge related to our ability to recover the carrying amount
of our investment in MMC.
From the time that we made our initial investment in MMC in October 2000
until December 31, 2002, the quoted market value per MMC share has generally
exceeded our carrying value per share and has only been below the carrying value
per share for a temporary period of time. At December 31, 2002, the carrying
value of our investment in MMC was [EURO]1.3 billion. The quoted market value of
our investment in MMC was [EURO]1.1 billion, based on the quoted market price
per share of MMC of [EURO]2.05 at December 31, 2002. Because of the strategic
importance of our relationship with MMC, we have the intent, and the ability, to
hold our investment in MMC for a period of time sufficient to allow us to
recover our carrying value. Therefore, our estimate about our ability to recover
the carrying value of our investment in MMC has not changed and we have not
recognized any impairment charges.
LIABILITY FOR PRODUCT WARRANTIES
We generally warrant our products against a variety of manufacturing and
other defects for periods of up to seven years. We provide product warranties
for specific periods of time and/or usage of the product and the warranties vary
depending upon the nature of the product, the geographic location of its sale
and other factors. The liability for product warranties covers for example our
various contractual warranty programs, policy coverage, recall campaigns and
buyback commitments which could result from regulatory requirements. Our product
warranties are generally consistent with commercial practices. We record a
liability for the expected cost of warranty-related claims when the product is
sold to a third party, when we initiate a new warranty program, or -- depending
on the reporting segment -- upon lease inception. The amount of the warranty
liability, which is included in the balance sheet line item "Accrued
liabilities," with a corresponding charge included as a component of "Cost of
sales" in the statement of income (loss), reflects our estimate of the expected
future costs of fulfilling our obligations under the respective warranty plans.
Our obligations for product warranties predominately affect our Chrysler Group
segment, our Mercedes Car Group segment, and our Commercial Vehicles segment. At
December 31, 2002 and 2001, our total accrued liability for product warranties
was [EURO]9.0 billion and [EURO]9.1 billion, respectively.
We base our estimates for accrued warranty costs primarily on historical
warranty claim experience. Because portions of the products sold and warranted
by us contain parts manufactured (and warranted) by our suppliers, the amount of
warranty costs accrued also contains an estimate of warranty claim recoveries
from suppliers. Since we have to use a variety of assumptions when we develop
the estimates for accrued warranty costs, our estimated warranty obligations can
vary depending upon the assumptions used.
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We believe that the determination of our liability for warranty obligations
is a critical accounting estimate for each of our three vehicle segments
because:
(1) the evaluation is inherently judgmental and requires the use of
significant assumptions about future warranty claim rates, amounts of
future repair costs per vehicle, the impact of no mileage or time limits
for recall campaigns, and the extent of any recoveries we can obtain
from suppliers; and
(2) warranty cost accruals require adjustments from time-to-time when actual
warranty claim experience differs from our estimates and the resulting
impact on our results of operations and financial condition could be
material.
The recording of the warranty obligation initially has no impact on our
operating cash flows. Our operating cash flows change as we pay or settle actual
warranty costs. Our liquidity and capital resources could be negatively impacted
if actual warranty costs exceed our estimates.
PENSION AND OTHER POSTRETIREMENT BENEFITS
As more fully described in Note 25a to our Consolidated Financial
Statements, we provide pension benefits to substantially all of our hourly and
salaried employees, and also provide other postretirement benefits to employees
in North America. We actuarially determine these pension and other
postretirement benefit costs and obligations using the projected unit credit
method, and the amounts calculated depend on a variety of assumptions. These
assumptions include discount rates, rates for expected returns on plan assets,
rates for compensation, mortality rates, retirement rates, health care cost
trend rates and other factors. Under U.S. GAAP we accumulate and amortize over
future periods actual results that differ from the assumptions used. Therefore,
actual results generally affect our recognized expense and recorded liabilities
for pension and other postretirement benefit obligations in future periods.
PENSION BENEFITS
At December 31, 2002, our projected pension benefit obligations exceed plan
assets on the Group level, which represents the "underfunded status" of our
plans, by [EURO]4.1 billion for all German plans and [EURO]4.3 billion for all
non-German plans. The following table shows the effect of assumed changes in the
rate of actual return on plan assets, the discount rate and the expected
long-term return rate on plan assets on the funded status of our pension benefit
obligations at December 31, 2002:
<Table>
<Caption>
NON-GERMAN
GERMAN PLANS PLANS
------------ ----------
([EURO] IN MILLIONS)
Actual 2002 return on plan assets +/- 5 points...... +/- 350 +/- 1,000
Year-end 2002 discount rate +/- 25 basis points..... +/- 400 +/- 525
Long-term return rate on plan assets................ None None
</Table>
At December 31, 2002, pension benefit obligations reduced our stockholders'
equity by [EURO]1.1 billion for all German plans and [EURO]5.2 billion for all
non-German plans. The following table shows the effect of assumed changes in the
rate of actual return on plan assets, the discount rate and the expected
long-term return rate on plan assets on our stockholders' equity at
December 31, 2002:
<Table>
<Caption>
NON-GERMAN
GERMAN PLANS PLANS
------------ ----------
([EURO] IN MILLIONS)
Actual 2002 return on plan assets +/- 5 points...... +/- 210 +/- 600
Year-end 2002 discount rate +/- 25 basis points..... +/- 170 +/- 300
Long-term return rate on plan assets................ None None
</Table>
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In accordance with U.S. GAAP, we determine our pension benefit expense at
the beginning of the calendar year based on assumptions which include a weighted
average expected rate of return on plan assets. Pension benefit expense was
[EURO]335 million for German plans while we recognized a net pension benefit
credit of [EURO]183 million for non-German plans for the year ended
December 31, 2002, which is based in part on our assumed weighted average long
term expected rate of return on plans assets of 7.9% for German plans and 10.1%
for non-German plans as of January 1, 2002. The actual return on plan assets in
2002 was a negative return of 15.5% for German plan assets and a negative return
of 8.8% for non-German plan assets.
Actual experience different from that assumed and changes in assumptions can
result in gains and losses that are not yet recognized in our consolidated
financial statements. We recognize amortization of any unrecognized net gain or
loss as a component of our pension expense for a year if, as of the beginning of
the year, such unrecognized net gain or loss exceeds 10% of the greater of (1)
the projected benefit obligation or (2) the market-related value of the plan's
assets. In such case, the amount of amortization we recognize is the resulting
excess divided by the average remaining service period of active employees
expected to receive benefits under the plan. For 2003, we will assume a weighted
average long-term rate of return on plan assets of 7.5% for German plans and
8.5% for non-German plans. As a result of amortization of unrecognized net
losses, which resulted from actual experience being different from assumptions
used, and the effect of changes in plan assumptions, we estimate that our total
pension expense will increase by [EURO]0.7 billion in 2003, based on the
assumptions used and our plan assets at December 31, 2002.
In addition to the estimated increase in our total pension expense of
[EURO]0.7 billion in 2003, the following table shows the effect of assumed
changes in the rate of actual return on plan assets, the discount rate and the
expected long-term return rate on plan assets on our pension benefit expense
(before income tax benefits) for the year ended December 31, 2003:
<Table>
<Caption>
NON-GERMAN
GERMAN PLANS PLANS
------------ ----------
([EURO] IN MILLIONS)
Actual 2002 return on plan assets +/- 5 points...... +/- 50 +/- 30
Discount rate +/- 25 basis points................... +/- 20 +/- 25
Long-term return rate on plan assets +/- 50 basis
points............................................ +/- 30 +/- 120
</Table>
OTHER POSTRETIREMENT BENEFITS
The extent to which our accumulated postretirement benefit obligations
exceed plan assets on the Group level, referred to as "funded status," was
[EURO]13.7 billion at December 31, 2002. Had the following occurred or been
used, the funded status of our other postretirement benefit obligations at
December 31, 2002 would have been impacted accordingly:
<Table>
<Caption>
ALL PLANS
----------------------
([EURO] IN MILLIONS)
Actual 2002 return on plan assets +/- 5 points.... +/- 120
Year-end 2002 discount rate +/- 25 basis points... +/- 470
Assumed health care cost trend rate +/- 1 point... +/- 180
Long-term return rate on plan assets.............. None
</Table>
Changes in the rate of actual return on plan assets, the discount rate and the
assumed health care cost trend rate would not have an impact on our net
liability recognized in our consolidated balance sheet. Effects from changes in
these assumptions would be included in our unrecognized net actuarial losses at
December 31, 2002.
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In accordance with U.S. GAAP, we determine our other postretirement benefit
expense at the beginning of the calendar year. We have based our determination
on a variety of assumptions, including an expected rate of return on plan
assets. For the year ended December 31, 2002, our total other postretirement
benefit expense was [EURO]1.1 billion for all plans. We have determined our 2002
total other postretirement benefit expense using an assumed weighted average
long-term expected rate of return on our plans assets of 10.5% as of January 1,
2002. The actual return on plan assets in 2002 was a negative return of 10.6%.
Actual experience different from that assumed and changes in assumptions can
result in gains and losses that are not yet recognized in our consolidated
financial statements. We recognize amortization of any unrecognized net gain or
loss as a component of our total other postretirement benefit expense for a year
if, as of the beginning of the year, such unrecognized net gain or loss exceeds
10% of the greater of (1) the accumulated postretirement benefit obligation or
(2) the market-related value of the plan's assets. In such case, the amount of
amortization we recognize is the resulting excess divided by the average
remaining service period of active employees expected to receive benefits under
the plan. For 2003, we will assume a weighted average long-term rate of return
on plan assets of 8.5%. As a result of amortization of unrecognized net losses
from actual experience different from assumptions used and the affect of changes
in plan assumptions, we estimate that our total other postretirement benefit
expense will increase by [EURO]0.4 billion in 2003, based on the assumptions
used and our plan assets at December 31, 2002.
In addition to the estimated increase in our total other postretirement
expense of [EURO]0.4 billion in 2003, the following table shows the effect of
assumed changes in the rate of actual return on plan assets, the discount rate,
the assumed health care cost trend rate and the expected long-term return rate
on plan assets on our total other postretirement benefit expense (before income
tax benefits) for the year ended December 31, 2003:
<Table>
<Caption>
ALL PLANS
--------------------
([EURO] IN MILLIONS)
Actual 2002 return on plan assets +/- 5 points.............. +/- 25
Discount rate +/- 25 basis points........................... +/- 45
Health care cost trend rate +/- 1 point..................... +/- 30
Long-term return rate on plan assets +/- 50 basis points.... +/- 15
</Table>
For a discussion of a potential impact on our liquidity and capital
resources, please refer to the explanations we provide under the heading
"Liquidity and Capital Resources -- Benefit Plan Obligations and Costs" in "Item
5. Operating and Financial Review and Prospects."
OPERATING RESULTS
We measure the performance of our operating segments primarily through
"Operating Profit". We define segment operating profit as income (loss) before
financial income included in the consolidated financial statement of income
(loss), modified:
- to exclude pension and postretirement benefit expense other than service
costs;
- to include pretax operating profit (loss) from affiliated and associated
companies;
- to include financial income (loss) from related operating companies;
- to include gains (losses) from the sale of operating businesses; and
- to include or exclude other miscellaneous items.
We currently operate in five business segments: (1) Mercedes Car Group;
(2) Chrysler Group; (3) Commercial Vehicles; (4) Services; and (5) Other
Activities.
You should read the following discussion in conjunction with Notes 1 and 34
to the Consolidated Financial Statements, "Application of Critical Accounting
Policies" in Item 5 and "Risk Factors" in Item 3. For a discussion of the
hedging instruments and hedging techniques we employ, please refer to the
discussion in "Item 11. Quantitative and Qualitative Disclosures About Market
Risk." and to Note 32 to our Consolidated Financial Statements.
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OVERVIEW
The following table shows revenues and operating profit (loss) for each of
our five business segments during the last three fiscal years.
DAIMLERCHRYSLER GROUP
BUSINESS SEGMENT REVENUES AND OPERATING PROFIT (LOSS)
([EURO] IN MILLIONS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2002 2001 2000
------------------------ ------------------------ ------------------------
OPERATING OPERATING OPERATING
REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS)
-------- ------------- -------- ------------- -------- -------------
Mercedes Car Group.................... 50,170 3,020 47,705 2,951 43,700 2,145
Chrysler Group........................ 60,181 609 63,483 (5,281) 68,372 501
Commercial Vehicles................... 28,401 (343) 28,572 (514) 29,804 1,212
Services.............................. 15,699 3,060 16,851 612 17,526 2,457
Other Activities...................... 2,723 903 4,507 1,181 10,615 3,590
Eliminations.......................... (7,591) (395) (8,245) (267) (7,633) (153)
------- ----- ------- ------ ------- -----
Total............................. 149,583 6,854 152,873 (1,318) 162,384 9,752
======= ===== ======= ====== ======= =====
</Table>
------------------------------
In the following paragraphs, we describe a number of acquisitions and
dispositions that significantly affected the year-to-year comparability of
revenues and operating profit (loss) in our Services and Other Activities
segments. You can find additional information about these transactions under the
heading "Material Contracts" in "Item 10. Additional Information" and in Notes 4
and 11 to the Consolidated Financial Statements.
SERVICES SEGMENT DISPOSITIONS
- In October 2000, our subsidiary DaimlerChrysler Services AG combined its
information technology activities conducted by its subsidiary debis
Systemhaus with those of Deutsche Telekom AG in a joint venture. As part
of the transaction, Deutsche Telekom contributed [EURO]4.6 billion in cash
to debis Systemhaus - which was renamed T-Systems ITS - in return for
which Deutsche Telekom received a controlling (50.1%) interest in that
company. We recognized a gain of [EURO]2.3 billion as a result of that
transaction, that we included in our 2000 operating profit.
- In January 2002, DaimlerChrysler Services AG exercised its option to sell
its 49.9% interest in T-Systems ITS to Deutsche Telekom AG for
[EURO]4.7 billion. The sale closed in March 2002 and resulted in a gain of
[EURO]2.5 billion that we included in our 2002 operating profit.
As a result of these transactions, revenues of our Services segment included
revenues derived from the information technology business of debis Systemhaus
only through September 30, 2000. For the period January 1, 2000 through
September 30, 2000, our operating profit included the entire operating profit of
debis Systemhaus. For the period October 1, 2000 through February 28, 2002, our
operating profit only included our 49.9% share of the operating profit of
T-Systems ITS.
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OTHER ACTIVITIES SEGMENT ACQUISITIONS AND DISPOSITIONS
- In April 2001, we sold a controlling 60% interest in our TEMIC automotive
electronics business, which is now known as Conti Temic microelectronic
GmbH, to Continental AG for [EURO]0.4 billion. The sale agreement gave
Continental the option to purchase our 40% interest, and it gave us the
option to sell our 40% interest to Continental. The initial transaction
resulted in a gain of [EURO]0.2 billion which is included in our 2001
operating profit.
- On April 1, 2002, we exercised our option to sell our 40% interest in
Conti Temic microelectronic GmbH for [EURO]0.2 billion, which resulted in
a gain of [EURO]0.2 billion. We included this gain in our 2002 operating
profit.
As a result of these transactions, revenues and operating profit of our
Other Activities segment include revenues and the entire operating profit of the
TEMIC automotive electronics business only through March 31, 2001. For the
period April 1, 2001 through March 31, 2002, operating profit of this segment
only includes our 40% share of the operating profit of Conti Temic
microelectronic GmbH.
- In July 2000, we combined the aerospace activities of our subsidiary
DaimlerChrysler Aerospace AG (DASA), with the businesses of the French
aerospace company Aerospatiale Matra S.A. and the Spanish aerospace
company Construcciones Aeronauticas S.A. in the European Aeronautic
Defence and Space Company EADS N.V. As part of the transaction, we
exchanged our controlling interest in DASA for a 33% non-controlling
interest in EADS. The transaction resulted in a pre-tax gain of
[EURO]3.3 billion which is included in our 2000 operating profit. We
account for the non-controlling interest we hold in EADS using the equity
method of accounting.
As a result of this transaction, our Other Activities segment includes
revenues and operating profit of DASA only through June 30, 2000. Thereafter our
operating profit includes our 33% share of the operating results of EADS.
- In October 2000, we acquired a 34% non-controlling equity interest in
Mitsubishi Motors Corporation (MMC). In June 2001, we purchased AB Volvo's
3.3% equity interest in MMC. As a result, our non-controlling equity
interest in MMC increased to 37.3%. We account for the non-controlling
interest we hold in MMC using the equity method of accounting. In
November 2002, a rights offering by Mitsubishi Motors reduced our equity
interest to 37.1%.
As a result of these transactions, our Other Activities segment includes our
34% share of MMC's operating results for the period from October 1, 2000 through
May 31, 2001. It includes our 37.3% share of MMC's operating results thereafter.
- On May 1, 2001, we transferred control of our rail systems activities
(Adtranz) to the Canadian company Bombardier Inc. for $725 million. This
transaction resulted in a pre-tax gain of [EURO]0.3 billion that we
included in our 2001 operating profit.
As a consequence of this transaction, revenues and operating profit of our
Other Activities segment include revenues and operating profit of Adtranz only
through April 30, 2001.
The segment discussions on pages 58 to 62 describe in more detail the
specific market factors which affected the operating results of our segments.
53
<Page>
2002 COMPARED WITH 2001
We computed the percentage expressions used in the following discussion from
unrounded amounts and numbers. Some of these percentage expressions may,
therefore, not reflect the precise relationships between the stated rounded
amounts and numbers.
DAIMLERCHRYSLER GROUP
REVENUES
Our revenues declined 2% from [EURO]152.9 billion in 2001 to
[EURO]149.6 billion in 2002. Our 2001 revenues included revenues of
[EURO]1.4 billion generated by Adtranz and the TEMIC automotive electronics
business prior to the dispositions of Adtranz and a 60% controlling interest in
TEMIC which were not repeated in 2002. Currency translation effects were another
reason for the decline in 2002. Since our reporting currency is the euro, we
have to translate revenues our subsidiaries derive in foreign currencies into
euros which exposes us to translation risk. The currency translation effects on
2002 revenues were mainly caused by the appreciation of the euro against the
U.S. dollar, which accounted for a [EURO]4.4 billion revenue decline. Higher
revenues in the Mercedes Car Group partially offset these negative effects.
MERCEDES CAR GROUP revenues increased 5% to [EURO]50.2 billion due primarily
to strong unit sales of the new E-Class launched in 2002, partially offset by
lower unit sales of C-Class vehicles.
CHRYSLER GROUP revenues decreased 5% to [EURO]60.2 billion, primarily as a
result of the appreciation of the euro against the U.S. dollar and higher sales
incentives. The decrease in revenues caused by currency translation and reduced
vehicle prices as a result of sales incentives was partially offset by a revenue
improvement attributable to higher unit sales. Measured in U.S. dollars, the
principal functional currency for the Chrysler Group, revenues were
approximately the same as in 2001.
COMMERCIAL VEHICLES revenues were virtually flat at [EURO]28.4 billion,
mainly reflecting weak markets in Western Europe and South America. A decrease
in revenues in Western Europe and South America was partially offset by higher
unit sales and revenues in North America where new U.S. emission laws, which
became effective on October 1, 2002, accelerated customer purchases of Class 8
heavy trucks into the first nine months of 2002.
SERVICES revenues were [EURO]15.7 billion, a 7% decline compared to
[EURO]16.9 billion in 2001. The decrease in revenues mainly resulted from the
appreciation of the euro against the U.S. dollar and lower aggregate operating
leases as increased customer financing incentives in the United States resulted
in a migration of customer preference from operating leases to sales finance
transactions.
OTHER ACTIVITIES revenues decreased from [EURO]4.5 billion to
[EURO]2.7 billion. Revenues for 2001 included revenues of [EURO]1.4 billion
generated by Adtranz and TEMIC prior to the dispositions of Adtranz and a 60%
controlling interest in TEMIC which were not repeated in 2002. Lower revenues at
the MTU Aero Engines business unit also adversely affected 2002 revenues of this
segment.
COST OF SALES
In 2002, cost of sales amounted to [EURO]121.5 billion compared to
[EURO]128.4 billion in 2001, a 5% decrease. The decrease in cost of sales was
mainly due to the appreciation of the euro against the U.S. dollar and cost
reductions and other actions realized as part of the turnaround plan at Chrysler
Group. Cost reductions and lower customer satisfaction costs at Chrysler Group
were the primary driver of the increase in gross margin from [EURO]24.5 billion
(16.0%) in 2001 to [EURO]28.1 billion (18.8%) in 2002. Cost of sales in 2002
included charges of [EURO]0.5 billion relating to restructuring measures and
impairment charges on long-lived assets within the Commercial Vehicles segment.
Due to declining resale prices of used passenger cars in North America, in 2002
we also recorded [EURO]0.3 billion of impairment charges for the recoverability
of the carrying values of
54
<Page>
leased vehicles. In 2001, cost of sales included charges totaling
[EURO]0.5 billion in respect of Freightliner's turnaround plan initiated in 2001
and costs associated with unforeseen market developments as well as to the
decision of the Argentine government to reform its financial system and monetary
policy.
SELLING EXPENSES
Selling expenses were [EURO]12.1 billion in 2002 compared to
[EURO]11.8 billion in 2001, a 2% increase. Selling expenses as a percentage of
revenues were 8.1% in 2002 compared to 7.7% in 2001. The increase in selling
expenses was mainly the result of higher promotion expenses in connection with
newly launched vehicles at the Mercedes Car Group and Commercial Vehicles
segments. This increase was partially offset by lower selling expense at the
Chrysler Group due to ongoing cost reduction efforts.
GENERAL ADMINISTRATIVE EXPENSES
General administrative expenses declined 3% from [EURO]5.5 billion in 2001
to [EURO]5.4 billion in 2002. General administrative expenses as a percentage of
revenues were 4% in both 2002 and 2001. The decrease in general administration
expenses was mainly the result of cost reduction measures.
OTHER EXPENSES
Other expenses were [EURO]0.8 billion in 2002 and [EURO]1.0 billion in 2001.
This decrease resulted from the application of SFAS 142. As a result of the
adoption of SFAS 142, we no longer amortize goodwill and, therefore, it no
longer affects net income. Other expenses included charges of [EURO]0.2 billion
in each of 2002 and 2001 in connection with losses on the sale of a significant
portion of our capital services portfolio. The 2002 amount also includes
impairment charges related to other portions of our capital services portfolio
that we currently hold for sale.
RESEARCH AND DEVELOPMENT
Research and development funded by us amounted to [EURO]6.1 billion in 2002
compared to [EURO]5.9 billion in 2001. The increase in research and development
expense was mainly attributable to higher pre-production costs for new or
updated Mercedes-Benz passenger car and smart models.
OTHER INCOME
Other income was [EURO]0.8 billion in 2002 and [EURO]1.2 billion in 2001.
Other income includes primarily gains from the disposition of subsidiaries,
rental income and gains from the sale of property, plant and equipment. The
decrease of other income was primarily attributable to the sales transactions in
2001 involving Adtranz and TEMIC, which led to gains totaling [EURO]0.5 billion
in 2001.
TURNAROUND PLAN EXPENSES -- CHRYSLER GROUP
As a result of the Chrysler Group turnaround plan, which was initiated in
2001, we recorded additional restructuring charges in 2002 of
[EURO]0.7 billion. These additional charges related to costs associated with the
idling, closing or disposal of several manufacturing facilities in 2002 and
2003, ongoing workforce reduction measures and revisions of prior estimates
based on current information or actual settlements. The charges appear as a
separate line item in the consolidated statement of income (loss). Otherwise,
[EURO]680 million of these costs would have appeared in cost of sales and
[EURO]14 million in selling, administrative and other expenses.
FINANCIAL INCOME, NET
Financial income (net) increased from [EURO]0.2 billion in 2001 to
[EURO]2.2 billion in 2002. Financial income (net) is comprised of "Income from
investments," "Interest expense" and "Other financial income (expense)."
55
<Page>
INCOME FROM INVESTMENTS was [EURO]2.6 billion in 2002 and [EURO]0.3 billion
in 2001. This increase was mainly the result of higher gains from the sales of
businesses. In 2002, we recognized gains from sales of our interest in T-Systems
ITS ([EURO]2.5 billion) and Conti Temic microelectronic ([EURO]0.1 billion).
Income from investments in 2001 included our [EURO]0.7 billion share of the gain
arising at EADS in connection with its formation of Airbus SAS, and a gain of
[EURO]0.3 billion from the sale of our remaining 10% interest in debitel to
Swisscom. In 2001, we had a [EURO]0.2 billion share of the restructuring charges
of Mitsubishi Motors and an impairment charge of [EURO]0.1 billion relating to
our e-business activities.
INTEREST EXPENSE (NET) remained at [EURO]0.3 billion consistent with the
prior year.
OTHER FINANCIAL EXPENSE was [EURO]0.1 billion in 2002 versus other financial
income of [EURO]0.1 billion in 2001. The decrease of other financial income
(loss) was predominantly the result of lower gains of [EURO]0.2 billion from the
sale of securities and the contribution of securities to the DaimlerChrysler
Pension Trust. Other financial income (net) included foreign currency exchange
losses of [EURO]0.1 billion in both 2002 and 2001 relating to the depreciation
of the Argentine peso in relation to the U.S. dollar.
INCOME TAXES
In 2002, we recorded income tax expense of [EURO]1.2 billion compared to an
income tax benefit of [EURO]0.8 billion in 2001. We computed income tax expense
in 2002 based on pre-tax income of [EURO]6.1 billion. The income tax benefit in
2001 resulted from a pre-tax loss of [EURO]1.5 billion. Accordingly, our
effective tax rate decreased from 52.4% in 2001 to 19.4% in 2002. The lower tax
rate in 2002 compared to 2001 was primarily due to the tax-free gains on the
sale of our interests in T-Systems ITS and Conti Temic microelectronic. The
higher tax rate in 2001 was the result of the pre-tax loss reported in 2001
offset by the tax-free gains realized from the sale of our remaining interest in
debitel, the sale of a 60% controlling interest in TEMIC and the sale of our
Adtranz rail systems business. Due to the pre-tax loss reported in 2001, the
tax-free gains had the effect of increasing the tax rate.
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING
PRINCIPLES
Net income before cumulative effects of changes in accounting principles was
[EURO]4.9 billion in 2002 compared to a net loss before cumulative effects of
changes in accounting principles of [EURO]0.7 billion in 2001. Basic and diluted
earnings per ordinary share (before cumulative effects of changes in accounting
principles) were [EURO]4.84 and [EURO]4.82 in 2002, compared to a basic and
diluted ordinary loss per share of [EURO]0.66 in 2001.
CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES
According to a new U.S. accounting standard, SFAS 142, amortization of
goodwill no longer affects net income (loss). Instead, SFAS 142 requires that
goodwill be tested for impairment at least annually. In connection with the
transitional impairment evaluation, as required by SFAS 142, we recorded an
impairment charge of [EURO]0.2 billion in 2002 which related solely to companies
for which we account using the equity method, primarily EADS. The impairment
charge represents our proportionate share of our equity method investees'
transitional goodwill impairment charge resulting from the adoption of
SFAS 142.
NET INCOME (LOSS)
Net income was [EURO]4.7 billion in 2002 compared to a net loss of
[EURO]0.7 billion in 2001. Basic and diluted earnings per ordinary share were
[EURO]4.68 and [EURO]4.67 in 2002, while in 2001 the basic and diluted loss per
ordinary share was [EURO]0.66.
In accordance with the new U.S. accounting standard SFAS 142, amortization
of goodwill and intangible assets with indefinite useful lives no longer affect
net income. If we had been able to apply this standard from January 1, 2001, our
reported net loss for 2001 would have been [EURO]0.4 billion lower and our
reported basic and diluted loss per share would have been reduced by [EURO]0.40.
56
<Page>
OPERATING PROFIT (LOSS)
In 2002, our operating profit was [EURO]6.9 billion compared to an operating
loss of [EURO]1.3 billion in the previous year.
In 2002, operating profit included a gain of [EURO]2.5 billion from the sale
of our interest in T-Systems ITS and a gain of [EURO]0.2 billion from the sale
of our interest in Conti Temic microelectronics. In connection with the sale of
a significant portion of our capital services portfolio and anticipated losses
on other capital services portfolios held for sale, we recorded a charge of
[EURO]0.3 billion. This amount included actual and expected losses on the
recoverability of lease receivables and assets under operating leases.
As a result of idle capacities in a German commercial vehicles assembly
plant, we recorded an impairment charge of [EURO]0.2 billion related to the
recoverability of carrying values of manufacturing equipment and tooling.
Associated with the implementation of the Chrysler Group turnaround plan in
2001, we recognized additional restructuring charges of [EURO]0.7 billion in
operating profit. Additional restructuring charges of [EURO]0.3 billion
resulting from the prolonged weakness of the economy, mainly in Western Europe
and South America, and the decision to discontinue the wire harness production
in a German plant affected the 2002 operating results of our Commercial Vehicles
segment.
As a result of the depreciation of the Argentine peso following the decision
of the Argentine government to reform its financial system and monetary policy,
we recorded a charge in 2002 of [EURO]0.1 billion to recognize the further
impairment of our ability to recover the carrying value of certain assets.
The 2001 operating loss includes charges of [EURO]3.1 billion relating to
the turnaround plan of the Chrysler Group, charges of [EURO]0.5 billion relating
to Freightliner's turnaround plan and special costs associated with unforeseen
market developments. It also includes our proportionate [EURO]0.4 billion share
of Mitsubishi Motors Corporation's restructuring charges.
In addition, in 2001 we recognized a [EURO]0.9 billion share of EADS' gain
arising in connection with the formation of Airbus SAS and a gain of
[EURO]0.3 billion from the sale of our remaining 10% equity interest in debitel
to Swisscom. Further gains resulted from the sale of Adtranz
([EURO]0.3 billion) and the sale of a 60% controlling interest in our TEMIC
automotive electronics business ([EURO]0.2 billion). These gains were partially
offset by a charge of [EURO]0.2 billion relating to the recoverability of lease
receivables in anticipation of the intended sale in 2002 of the commercial real
estate and asset-backed lending portfolio of our Services segment.
Due to the decision of the Argentine government to reform its financial
system and monetary policy and to introduce a floating exchange rate relative to
the U.S. dollar effective January 11, 2002, our Services segment recognized a
loss of [EURO]0.1 billion in 2001.
An impairment charge of [EURO]0.1 billion relating to our e-business
activities affected 2001 operating results of which [EURO]10 million related to
activities of the Mercedes Car Group segment, [EURO]34 million to activities of
the Chrysler Group segment and [EURO]31 million to activities of the Commercial
Vehicles segment.
In addition to the aforementioned gains and losses included in operating
profit in 2002 and 2001, improved operating results at Chrysler Group, which
were mainly due to cost reduction measures and other actions taken as part of
the turnaround plan, predominantly contributed to the increase in our operating
profit in 2002. The other segments also increased their operating results. The
table on page 52 shows the business segment contributions to Group operating
profit. The segment discussions on pages 58 to 62 describe in more detail the
specific market factors which affected the operating results of the segments.
As a result of adopting SFAS 142, our operating profit/loss is no longer
affected by the amortization of goodwill. If we had applied this standard from
January 1, 2001, we would have reported a [EURO]0.4 billion lower operating loss
in 2001.
57
<Page>
SEGMENT DISCUSSIONS
MERCEDES CAR GROUP
Revenues of our Mercedes Car Group segment increased [EURO]2.5 billion, or
5%, from [EURO]47.7 billion in 2001 to [EURO]50.2 billion in 2002.
Total unit sales of the Mercedes Car Group segment rose slightly from
1,229,700 in 2001 to 1,232,300 in 2002. Unit sales of Mercedes-Benz vehicles
decreased slightly from 1,113,500 in 2001 to 1,110,000 in 2002 while smart
showed a 5% increase in unit sales to 122,300 from 116,200 in 2001.
The increase in total segment revenues resulted primarily from the
successful market introduction in 2002 of the new E-Class sedan which increased
E-Class unit sales. Continued strong performance of our S-Class family,
particularly the SL-Class, and increased customer preference for better
equipped, higher priced vehicles in the S-Class, E-Class and M-Class categories
also supported the increase. In addition, higher unit sales of the smart
contributed to the increase in revenues. The overall increase in revenues was
partially offset by a lifecycle-based decline in unit sales of the C-Class
family.
At [EURO]17.0 billion, 2002 revenues in Germany were 3% higher than in 2001
even though unit sales fell 4% in an overall declining German market. Germany
continues to be the most important market for our Mercedes Car Group segment
with 2002 unit sales of 417,000. These sales represented 34% of the segment's
worldwide unit sales compared to 35% in 2001.
In the other Western European countries, Mercedes Car Group revenues rose 9%
to [EURO]14.0 billion while unit sales were 4% higher, reaching 418,900 units.
These increases were primarily due to higher demand for passenger cars in the
UK, Italy, France, and Spain. The disproportionate increase in revenues is
predominantly a result of a shift in the model mix towards higher priced
vehicles.
In the United States, revenues increased by [EURO]0.2 billion or 2% to
[EURO]11.3 billion, while unit sales remained at the prior year's level with
213,700. The revenue increase in the United States was mainly due to the strong
sales performance of the successful S-Class family and the new E-Class and CLK
coupe. The SL-Roadster and the newly introduced products caused a favorable
shift in the model mix towards higher priced vehicles.
At [EURO]2.4 billion, revenues in Japan were up 14% despite a 2% decrease in
unit sales. The disproportionate increase in revenues was the result of currency
effects and a favorable shift in the model mix towards higher priced vehicles.
In Asia (excluding Japan), revenues increased 8% to [EURO]2.3 billion while unit
sales of 47,000 represented a 3% increase over the 2001 unit sales of 45,700.
In 2002, our Mercedes Car Group segment recorded an operating profit of
[EURO]3.0 billion, slightly above the previous year. A shift to higher priced
Mercedes-Benz vehicles, including the E-Class sedan, which we successfully
introduced in 2002, the CLK coupe and the strong sales performance of the
SL-Roadster were largely responsible for this result. Higher unit sales of the
smart and further efficiency improvements also contributed to the increase.
Slightly lower overall unit sales of Mercedes-Benz vehicles and higher
pre-production costs partially offset these improvements. We incurred higher
pre-production costs for new or updated Mercedes-Benz passenger car and smart
models, especially the new E-Class and CLK coupe, the successor models of the
E-Class station wagon and the CLK convertible, the successors of A-Class and
M-Class, and the facelifted version of the S-Class. In addition, the new Maybach
and the new smart roadster, smart roadster coupe and the smart four-seater
contributed to increased pre-production costs.
CHRYSLER GROUP
The Chrysler Group reported revenues of [EURO]60.2 billion compared with
revenues of [EURO]63.5 billion for 2001. This decrease in revenues is primarily
the result of the appreciation of the euro against the U.S. dollar and higher
sales incentives, partially offset by an increase in unit sales (factory
shipments). Measured in U.S. dollars, the principal functional currency for the
Chrysler Group, revenues were approximately the same as in 2001.
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In 2002, the Chrysler Group sold 2.82 million units, 2% more than in the
year before. Worldwide factory unit sales increased as a result of stronger
dealer orders in 2002. Consistent with industry patterns, U.S. dealer inventory
levels rose from 442,000 units at December 31, 2001 to 517,000 units at
December 31, 2002. In the NAFTA region, total sales increased 3% to 2,650,700
units. Unit sales outside the NAFTA region decreased to 172,000 in 2002, a
decrease of 14,300 units or 8%. The Chrysler Group successfully launched the
all-new Dodge Ram 2500/3500 pick-up trucks at two plants in North America with
total shipments of all Ram pick-ups increasing by 90,600 units from 2001.
The Chrysler Group's operating profit was [EURO]0.6 billion in 2002 compared
with an operating loss of [EURO]5.3 billion in 2001. The 2002 operating results
included restructuring charges of [EURO]0.7 billion and the 2001 operating
results reflected restructuring charges of [EURO]3.1 billion, each relating to
actions taken under the turnaround plan described below. Cost reductions and
other actions taken as part of the turnaround plan, lower customer satisfaction
costs and increased shipments also benefited the 2002 operating results,
partially offset by net vehicle price reductions. Net vehicle price reductions
included higher vehicle pricing which was more than offset by higher sales
incentives.
In February 2001, the Chrysler Group announced a turnaround plan designed to
improve its financial performance and market position. Key initiatives over the
period 2001 through 2003 include a workforce reduction, elimination of excess
plant capacity, reduction of the cost of purchased materials and services, a new
dealer performance-based incentive program and the implementation of a product
creation process, which reorganized the former platform teams into product
innovation teams. By adjusting its cost structure, workforce and production
capacity while continuing to develop exciting products, the Chrysler Group
expects to position itself for profitable growth in the world automotive
markets.
As a result of the turnaround plan, the Chrysler Group recorded
restructuring charges of [EURO]0.7 billion in 2002 and [EURO]3.1 billion in
2001. The restructuring charges in 2001 primarily related to workforce
reductions, asset write-downs and contract cancellation costs. The additional
restructuring charges recognized in 2002 were for costs associated with the
idling, closing or disposal of several manufacturing facilities in 2002 and 2003
and ongoing workforce reduction measures as well as revisions of estimates based
upon current information or actual settlements. The Chrysler Group may recognize
additional restructuring costs in 2003 relating to the divestiture of selected
assets. The Chrysler Group expects cash payments of $0.3 billion in 2003 for the
previously recorded charges.
The Chrysler Group surpassed the turnaround plan's break-even operating
target for 2002, excluding restructuring charges of [EURO]0.7 billion. The
savings the Chrysler Group achieved through its successful cost reduction
programs more than offset the negative impact on revenue resulting from the
intensely competitive North American market.
For a further discussion of the Chrysler Group's turnaround plan, see
"Description of Business Segments -- Chrysler Group" in "Item 4. Information on
the Company."
The Chrysler Group derives revenues and operating profit principally from
the U.S. and Canadian automotive markets. Retail industry sales (including fleet
sales) of new cars and trucks in the U.S. and Canada were 18.9 million units in
2002, compared with 19.1 million units in 2001, a decrease of 1%. Retail
industry sales may have decreased further were it not for the introduction of
more extensive sales incentives, such as zero percent financing, beginning in
late 2001.
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The U.S. and combined U.S. and Canada retail sales and market share data for
the Chrysler Group in 2002 and 2001 are set forth below:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------
INCREASE/
2002 2001 (DECREASE)
--------- --------- ----------
U.S. RETAIL MARKET(1)
Car sales................................................... 527,056 558,017 (30,961)
Car market share............................................ 6.6% 6.6% --
Truck sales (including minivans)............................ 1,678,390 1,715,191 (36,801)
Truck market share.......................................... 18.4% 19.0% (0.6%)
Combined car and truck sales................................ 2,205,446 2,273,208 (67,762)
Combined car and truck market share......................... 12.9% 13.0% (0.1%)
U.S. AND CANADA RETAIL MARKET(1)
Combined car and truck sales................................ 2,452,223 2,518,760 (66,537)
Combined car and truck market share......................... 13.0% 13.2% (0.2%)
</Table>
- ------------------------------
(1) All retail sales and market share data include fleet sales.
------------------------------
Retail sales of cars for the Chrysler Group in the U.S. market for 2002
decreased 6% compared to 2001 and the total car market in the U.S. decreased by
5% compared to 2001. Retail sales of trucks for the Chrysler Group in the U.S.
market for 2002 decreased 2% compared to 2001 while the total truck market in
the U.S. increased by 1% compared to 2001. The decrease in retail sales and
related market share of trucks is a result of increased competition,
particularly in the minivan, full-size sport utility and mid-size pick-up truck
segments. The decrease in the Chrysler Group's truck sales was partially offset
by an increase in retail sales in the large pick-up truck segment.
COMMERCIAL VEHICLES
In 2002, revenues of our Commercial Vehicles segment were virtually flat at
[EURO]28.4 billion. Unit sales were 485,400 compared to 492,900 in 2001, a 2%
decline. This decline reflects a 5% decrease in unit sales of vans to 246,100
units, an 8% decline in unit sales of buses to 25,300 units, partially offset by
a 3% increase in truck sales to 214,000 units.
In Germany, revenues went down 6% to [EURO]6.8 billion from
[EURO]7.2 billion in 2001. Unit sales decreased 3% to 103,300 vehicles, mainly
due to fewer truck sales. Truck unit sales went down 16% and bus unit sales 8%
while van sales in Germany increased 4%. Due to weak commercial vehicle markets
in the rest of Western Europe, primarily in France, Belgium and Spain, revenues
were down 3% at [EURO]7.0 billion while overall unit sales in Western Europe
(excluding Germany) declined 5% to 161,900 units.
In the NAFTA region revenues of the Commercial Vehicles segment increased 5%
to [EURO]10.0 billion in 2002, while unit sales climbed 11% to 118,000 units. In
the United States, unit sales improved 12%, primarily as a result of sales of
Class 8 trucks which customers accelerated into 2002 due to new emission
requirements that became effective on October 1, 2002. In addition, 2001 unit
sales were unusually low as dealers focused on reducing their existing
inventories. The overall increase in 2002 unit sales in the United States was
partially offset by lower unit sales of Thomas Built-school buses and commercial
vehicle chassis manufactured by a Freightliner subsidiary. The 5% increase of
revenues in the U.S. due to overall higher unit sales was partially offset by
the appreciation of the euro against the U.S. dollar. Unit sales and revenues in
Canada also contributed to the overall increase in revenues and unit sales in
the NAFTA region, partially offset by a drop in unit sales and revenues in
Mexico.
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The economic crisis in Argentina also affected the Brazilian and other South
American markets. Consequently, unit sales in South America dropped 14% to
37,000 from 43,000 in 2001. Revenues derived from sales in South America fell
25% to [EURO]1.1 billion.
In 2002, our Commercial Vehicles segment reported an operating loss of
[EURO]0.3 billion compared to an operating loss of [EURO]0.5 billion in 2001.
The 2002 operating result was burdened by the following impairment and
restructuring charges totaling [EURO]0.5 billion: As a result of our long-term
product and production strategy, we wrote off manufacturing and tooling
equipment which led to an impairment charge of [EURO]0.2 billion. Due to
continued weak demand for commercial vehicles worldwide, we also had to reduce
our workforce in this segment which resulted in charges totaling
[EURO]0.2 billion. Last, we recognized restructuring charges of
[EURO]0.1 billion in connection with the discontinuation of the wire harness
production at one of our German plants. In 2001, the segment's operating results
were burdened by charges of [EURO]0.5 billion recorded by Freightliner for its
turnaround plan and special costs associated with unforeseen market
developments.
On the operational level, weak demand in the truck markets of Western Europe
and South America was more than compensated by higher unit sales of Class 8
trucks in the United States. In addition, lower costs resulting from the
restructuring measures initiated at Freightliner in 2001 contributed to the
improved result, while the other businesses of the Commercial Vehicles segment
did not match results of the prior year in a generally difficult market.
SERVICES
In 2002, our Services segment reported revenues of [EURO]15.7 billion
compared to [EURO]16.9 billion in 2001 which related exclusively to our
financial services business. The appreciation of the euro against the U.S.
dollar and a migration of customer preference from operating leases to sales
finance transactions were primarily responsible for this decline.
Activities of our Services segment in the NAFTA region contributed
[EURO]10.0 billion or 64% of total revenues in 2002, a 14% decrease compared to
2001. This decrease was due to the appreciation of the euro against the U.S.
dollar, which resulted in adverse currency translation effects, and a decline in
operating leases in favor of sales financing transactions. The shift away from
operating leases to sales financing contracts resulted from prior year's sales
promotion practices which included below-market interest rate financing plans.
Revenues generated in Germany were [EURO]3.5 billion or 22% of total
revenues in 2002 compared to [EURO]3.2 billion or 19% of total revenues in 2001.
Revenues derived from service activities in the European Union (excluding
Germany) amounted to [EURO]1.6 billion or 10% of total revenues in 2002 compared
to [EURO]1.5 billion or 9% in 2001.
In 2002, our Services segment processed new leasing and finance contracts
with a total value of [EURO]51.8 billion compared to [EURO]53.7 billion in 2001.
Substantially all the 4% decline compared to 2001 is related to foreign currency
translation effects. At December 31, 2002, our Services segment managed a
portfolio of finance receivables of [EURO]109.3 billion, 15% less than the
portfolio of [EURO]128.4 billion at December 31, 2001. Excluding foreign
currency translation effects, the portfolio volume in 2002 was 2% below last
year's level which resulted from a significant reduction of our portfolio of
non-automotive assets.
Operating profit of our Services segment increased to [EURO]3.1 billion in
2002 from [EURO]0.6 billion in 2001. The 2002 operating profit includes a gain
of [EURO]2.5 billion from the sale of our 49.9% equity interest in T-Systems ITS
to Deutsche Telekom. This gain was partially offset by impairment charges of
[EURO]0.3 billion arising from the sale of a significant portion of our capital
services portfolio and anticipated losses on expected sales of other portions of
our capital services portfolio. This amount includes actual and expected losses
on the recoverability of lease receivables and assets under operating leases.
The 2002 operating result also includes a [EURO]0.1 billion charge relating to
the further devaluation of the Argentine peso against the U.S. dollar.
The 2001 operating profit of this segment included a gain of
[EURO]0.3 billion from the sale of our remaining 10% equity interest in debitel
to Swisscom, a charge of [EURO]0.1 billion as a result of the devaluation of the
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Argentine peso against the U.S. dollar, and a charge of [EURO]0.2 billion
related to the expected loss on the recoverability of certain lease receivables
in connection with the intended sale in 2002 of our commercial real estate and
asset-backed lending portfolios.
In 2002, favorable refinancing conditions resulting from continued low
interest rates in our main markets also had a positive influence on operating
profit. Optimized remarketing activities for vehicles coming off-lease,
especially in the United States, and an overall decrease of loss provisions
further supported this development. We were able to reduce our loss provisions
because of lower credit risks inherent in the U.S. portfolios of leasing and
finance contracts of Chrysler Group and Freightliner vehicles. Higher provisions
for credit losses mainly in Europe and Mexico, which related primarily to our
commercial vehicle portfolio, and impairment charges of [EURO]0.3 billion due to
declining resale prices of used passenger cars in the United States partially
offset the positive effect of lower credit loss provisions in the United States.
The impairment charges relate to the recoverability of the carrying values of
our leased vehicles. A [EURO]0.1 billion loss related to our minority interest
in debis Air Finance, an aircraft leasing and finance company, also negatively
affected operating profit in 2002.
OTHER ACTIVITIES
Revenues of our Other Activities segment originate mainly from our MTU Aero
Engines business. The operating results of this segment include our share in the
operating results of our equity method investees EADS and Mitsubishi Motors
Corporation. In addition, the segment includes our real-estate activities,
corporate research and our holding and finance companies, and it previously
included the revenues and operating results of our TEMIC automotive electronics
business and our Adtranz rail systems business.
The transactions involving Adtranz and Conti Temic microelectronic described
on page 53 significantly influenced the year-to-year comparability of revenues
and operating profit of the Other Activities segment.
Revenues in 2002 decreased by [EURO]1.8 billion from [EURO]4.5 billion in
2001 to [EURO]2.7 billion in 2002. MTU Aero Engines recorded a decrease in
revenues from [EURO]2.5 billion in 2001 to [EURO]2.2 billion in 2002.
Additionally, 2001 revenues include revenues derived from our TEMIC automotive
electronics business through March 31, 2001 and revenues of our Adtranz rail
systems business through April 30, 2001, which were [EURO]1.4 billion in the
aggregate. The decrease in revenues also reflected the impact of the
September 11, 2001 terrorist attacks which had a significant adverse effect on
the civil aviation industry and, as a consequence, on our MTU Aero Engines
business.
In 2002, our Other Activities segment had an operating profit of
[EURO]0.9 billion compared to [EURO]1.2 billion in 2001. Our shares in the
operating results of EADS, which performed well despite the general weakness of
the civil aviation industry, and Mitsubishi Motors, which improved its operating
results through implementation of its restructuring plan, were the main
contributors to 2002 operating profit. Operating profit in 2002 also included a
gain of [EURO]0.2 billion resulting from the sale of our 40% interest in Conti
Temic microelectronic. Operating Profit in 2001 included our [EURO]0.9 billion
share of a gain arising at EADS in connection with the formation of Airbus SAS
as well as gains of [EURO]0.3 billion and [EURO]0.2 billion from the
transactions involving Adtranz and Conti Temic microelectronic, respectively.
These gains were partially offset by our proportionate [EURO]0.4 billion share
of Mitsubishi Motors' restructuring charges in 2001.
2001 COMPARED WITH 2000
DAIMLERCHRYSLER GROUP
In 2001, our revenues declined 6% from [EURO]162.4 billion to
[EURO]152.9 billion. Excluding the effects on revenues of the transactions
involving Adtranz and TEMIC in 2001, and EADS and debis Systemhaus (later
renamed T-Systems ITS) in 2000, our revenues from ongoing business activities in
2001 declined 1% versus comparable revenues in 2000. Revenues of our Mercedes
Car Group segment rose 9% to [EURO]47.7 billion in 2001, due to strong sales of
the C-Class and higher demand in the segment's principal markets outside
Germany.
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Revenues of our Chrysler Group segment fell 7% to [EURO]63.5 billion, primarily
as a result of lower unit sales. This decrease in revenues was partially offset
by the depreciation of the euro against the dollar. Revenues of our Commercial
Vehicles segment decreased 4% to [EURO]28.6 billion due to a worldwide decline
in demand for trucks and buses. Our Services segment contributed revenues of
[EURO]16.9 billion in 2001, compared to [EURO]17.5 billion in 2000, a 4%
decline. Revenues of our Services segment in 2000 included [EURO]2.4 billion
attributable to the information technology business conducted by debis
Systemhaus which we no longer control. Excluding the revenue share attributable
to debis Systemhaus from the 2000 amounts, revenues of Services increased 12% in
2001. This improvement was mainly the result of a significant increase in 2000
of the number of new leasing and finance contracts. These contracts generated
full year revenues for the first time in 2001. Revenues of our Other Activities
segment decreased from [EURO]10.6 billion to [EURO]4.5 billion. The decline was
exclusively due to the dispositions in 2001 of Adtranz and a controlling
interest in TEMIC, and the part year inclusion in 2000 of revenues of the
aerospace activities prior to our exchange of our interest in DaimlerChrysler
Aerospace for an equity interest in EADS.
In 2001, cost of sales amounted to [EURO]128.4 billion, a decrease of 4%.
Cost of sales as a percentage of revenues increased to 84% in 2001 compared to
83% in 2000. This increase was mainly due to higher costs for customer
satisfaction, depreciation, and amortization at Chrysler Group and charges at
Freightliner in connection with its turnaround plan, and increased residual
value provisions on future truck commitments.
Our selling expenses amounted to [EURO]11.8 billion in 2001, compared to
[EURO]11.7 billion in 2000, a 1% increase. This increase resulted mainly from
higher unit sales at the Mercedes Car Group. Selling expenses as a percentage of
revenues were 8% in 2001 and 7% in 2000.
Our general administrative expenses in 2001 were [EURO]5.5 billion compared
to [EURO]5.9 billion in 2000, a 6% decrease. The decline was mainly the result
of cost reductions at Chrysler Group in connection with its turnaround plan,
partially offset by additional expenses incurred in connection with the
Freightliner turnaround plan. General administrative expenses as a percentage of
revenues remained at last year's level of 4%.
Research and development funded by us amounted to [EURO]5.9 billion in 2001
compared to [EURO]6.3 billion in 2000. The decline in research and development
expense is due to the transactions involving Adtranz and TEMIC in 2001 and
DaimlerChrysler Aerospace in 2000.
In February 2001, in response to production overcapacity and changing market
demand, we adopted a comprehensive turnaround plan for the Chrysler Group. The
charges we recorded for the plan in 2001 were [EURO]3.1 billion,
[EURO]1.9 billion net of taxes, which appear as a separate line item in the
consolidated statement of income (loss). We otherwise would have shown
[EURO]2.6 billion and [EURO]0.5 billion in cost of sales and in selling,
administrative and other expenses, respectively.
In 2001, we had an operating loss of [EURO]1.3 billion compared to an
operating profit of [EURO]9.8 billion in the previous year. The 2001 operating
loss includes charges of [EURO]3.1 billion relating to the turnaround plan of
the Chrysler Group, charges of [EURO]0.5 billion relating to Freightliner's
turnaround plan and special costs associated with unforeseen market
developments, and our proportionate [EURO]0.4 billion share of Mitsubishi Motors
Corporation's restructuring charges. Our operating results were also negatively
affected by an impairment charge of [EURO]0.1 billion relating to our e-business
activities. Due to the decision of the Argentine government to reform its
financial system and monetary policy and to introduce a floating exchange rate
against the dollar effective January 11, 2002, we recognized a loss of
[EURO]0.1 billion in 2001. We also recorded a charge of [EURO]0.2 billion in
2001 relating to the recoverability of lease receivables in anticipation of the
intended sale in 2002 of the commercial real estate and asset-backed lending
portfolio of Capital Services. Our [EURO]0.9 billion share of a gain arising at
EADS in connection with the formation of Airbus SAS partially offset the effects
of these charges. In 2001, we had additional gains of [EURO]0.3 billion from our
sale of Adtranz, [EURO]0.2 billion from our sale of 60% of TEMIC, and
[EURO]0.3 billion from the disposal of our remaining 10% equity interest in
debitel to Swisscom.
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Operating profit in 2000 includes gains of [EURO]3.3 billion from the
exchange of our controlling interest in DaimlerChrysler Aerospace for a 33%
interest in EADS, [EURO]2.3 billion from the disposition of our controlling
interest in debis Systemhaus (renamed T-Systems ITS), [EURO]0.1 billion from the
sale of the fixed installations activities of Adtranz, and [EURO]0.1 billion
from the dilution of our equity interest in Ballard Power Systems, a Canadian
company focusing on fuel cell technology. A write-down of [EURO]0.5 billion on
the carrying values of leased vehicles and charges of [EURO]0.5 billion relating
to the smart brand in connection with the joint development of a new small car
platform with Mitsubishi Motors reduced our operating profit in 2000. In
addition, we recorded a charge of [EURO]0.3 billion in 2000 relating to the
adoption of the European Union's directive regarding end-of-life-vehicles.
After the elimination of one-time items, which resulted in a net charge of
[EURO]2.7 billion in 2001 and a net gain of [EURO]4.5 billion in 2000, our
operating profit decreased from [EURO]5.2 billion in 2000 to [EURO]1.3 billion
in 2001. This decline was mainly attributable to significantly lower operating
results of our Chrysler Group and Commercial Vehicles segments caused by the
intense competition in the North American automotive markets. The table on page
52 shows the business segment contributions to Group operating profit. The
segment discussions of our Chrysler Group and Commercial Vehicles segments on
pages 65 to 69 describe in more detail the specific market factors which
affected the operating results of these two segments and the one-time items
included in their results. We define one-time items as significant transactions
that are not part of ongoing operations or are expected to be nonrecurring.
Financial income (net) was [EURO]0.2 billion in both 2001 and 2000.
Financial income (net) in 2001 includes our [EURO]0.7 billion share of a gain
arising at EADS in connection with the formation of Airbus SAS, and a gain of
[EURO]0.3 billion from the sale of our remaining 10% interest in debitel to
Swisscom. Our proportionate [EURO]0.2 billion share of the restructuring charges
of Mitsubishi Motors and an impairment charge of [EURO]0.1 billion relating to
our e-business activities partially offset these additions to financial income
(net). Higher interest expense from increased debt in the industrial business
and the effects of the depreciation of the Argentine peso against the dollar as
a result of the economic crisis in Argentina had an additional negative effect.
Financial income (net) in 2000 includes an aggregate total loss of
[EURO]0.2 billion from our equity investments in EADS and Mitsubishi Motors.
In 2001, we recorded an income tax benefit of [EURO]0.8 billion compared to
income tax expense of [EURO]2.0 billion in 2000. A pre-tax loss of
[EURO]1.5 billion generated our income tax benefit in 2001. Income tax expense
in 2000 resulted from pre-tax income of [EURO]4.5 billion plus two significant
changes in German tax law. The first one called for a reduction, effective
January 1, 2001, of the German corporate income tax rate from 40% on retained
earnings and 30% on distributed earnings to a uniform 25%. The other change
exempted from taxation gains from sales of investments, effective January 1,
2002. These two changes triggered a current revaluation of our net deferred tax
assets in Germany, the effect of which was additional tax expense in 2000. The
changes resulted in a total net income tax charge in 2000 of [EURO]0.3 billion.
Excluding the effects on net income (loss) of the one-time items described in
operating profit (loss) and financial income in 2001 and 2000 as well as the
effects of the changes in German tax laws in 2000, our effective tax rate
increased from 39.5% in 2000 to 44.3% in 2001. This increase is principally due
to negative contributions in 2001 to our operating results from equity method
investments for which we do not incur a tax liability, and consequently did not
generate any associated tax benefits.
In 2001, we had a net loss of [EURO]0.7 billion compared to net income of
[EURO]7.9 billion in 2000. The 2000 net income includes net gains on
dispositions of [EURO]5.5 billion, which we classified as extraordinary under
special accounting rules applicable only to transactions occurring within a
two-year period following the business combination of Daimler-Benz and Chrysler
in November 1998, which we accounted for as a pooling of interests.
Additionally, net income in 2000 contains a net expense of [EURO]87 million from
cumulative effects of changes in accounting principles for derivative financial
instruments (SFAS 133) and retained interests in sold receivables (EITF 99-20).
Net income (loss) including extraordinary items and cumulative effects of
changes in accounting principles decreased by [EURO]8.6 billion to a net loss of
[EURO]0.7 billion in 2001. Before extraordinary items and cumulative effects of
changes in accounting principles, we had a basic and diluted loss per ordinary
share of [EURO]0.66 in 2001, compared to basic and diluted earnings per ordinary
share in 2000 of [EURO]2.46 and [EURO]2.45, respectively. Including
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extraordinary items and cumulative effects of changes in accounting principles,
the basic and diluted loss per ordinary share in 2001 remained unchanged at
[EURO]0.66, compared to basic and diluted earnings per share in 2000 of
[EURO]7.87 and [EURO]7.80, respectively.
MERCEDES CAR GROUP
Revenues of our Mercedes Car Group segment rose [EURO]4 billion or 9% to
[EURO]47.7 billion. The increase was mainly the result of the strong performance
of the C-Class, partially offset by a decline in E-Class unit sales in
anticipation of the market introduction of the successor model in March 2002.
Total unit sales rose 6% from 1,154,900 in 2000 to 1,229,700 in 2001, primarily
due to a 30% increase in unit sales of the C-Class.
At [EURO]16.4 billion, revenues from sales in Germany were 5% higher than in
2000, but unit sales declined 1% in an overall declining market. Germany
continued to be the most important market for our Mercedes Car Group segment,
with 2001 unit sales of 436,500, representing 35% of the segment's worldwide
2001 unit sales compared to 38% in 2000.
In the other Western European countries, revenues of the Mercedes Car Group
rose 19% to [EURO]12.8 billion in 2001, while unit sales were 16% higher
reaching 402,300 units. These increases were primarily due to significantly
higher demand for passenger cars in the United Kingdom, France, Spain and Italy.
Revenues increased at a comparatively higher rate than unit sales due to a
favorable shift in the model mix towards higher priced vehicles. In the United
States, revenues increased by [EURO]0.7 billion or 7% to [EURO]11.0 billion and
unit sales rose 4% to 213,400 units. The revenue increase in the United States
was mainly due to the substantial increase in demand for C-Class vehicles and
the appreciation of the dollar against the euro. At [EURO]2.1 billion, revenues
in Japan were 1% lower compared to the previous year despite an increase in unit
sales. This was mainly due to the depreciation of the Japanese yen against the
euro. In Asia, excluding Japan, revenues increased 21% to [EURO]2.1 billion
while unit sales climbed 11% to 40,700. The comparatively larger increase of
revenues was caused by a favorable shift in the model mix towards higher priced
vehicles.
Operating profit of our Mercedes Car Group segment increased 38% from
[EURO]2.1 billion in 2000 to [EURO]3.0 billion in 2001. The 2000 operating
profit included a [EURO]0.3 billion charge relating to the adoption of the
European Union's directive regarding end-of-life-vehicles and total charges of
[EURO]0.5 billion relating to the smart brand in connection with our joint
development of a small car platform with Mitsubishi Motors. A gain of
[EURO]0.1 billion relating to the reduction in 2000 of our equity interest in
Ballard Power Systems partially offset these charges. If these one-time charges
and gains are excluded from the 2000 operating profit, operating profit in 2001
improved by 3% or [EURO]0.1 billion. This improvement was mostly the result of
higher unit sales, primarily of the new C-Class sedan, sports coupe and station
wagon. A shift of consumer interest from the higher priced E-Class to the
smaller C-Class models in anticipation of the impending E-Class model change
partially offset the positive effect of higher unit sales. Pre-production costs
related to new or revised passenger car models, particularly the successor
models of the E-Class, the C-Class sports coupe, the CLK coupe and the A-Class
as well as the updated version of the M-Class, also negatively affected the 2001
operating profit of our Mercedes Car Group segment.
CHRYSLER GROUP
Our Chrysler Group segment achieved revenues of [EURO]63.5 billion compared
with [EURO]68.4 billion for 2000. This decrease in revenues was primarily due to
a decrease in unit sales, partially offset by an appreciation of the dollar
against the euro. Measured in dollars, the currency in which our Chrysler Group
segment earns a significant portion of its sales, revenues declined by 10%.
In 2001, the Chrysler Group sold 2.76 million units, 10% less than in the
prior year. Worldwide factory unit sales decreased due to substantial
competitive pressure in the North American market and a softening of vehicle
industry sales. This competitive environment particularly affected the key
market segments of the Chrysler Group, including upper-middle sport utility
vehicles and pick-up trucks. In the NAFTA region, total sales decreased 10% to
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2,569,600 units. Unit sales outside the NAFTA region decreased by 400 units to
186,300 in 2001. The Chrysler Group successfully launched the all-new Jeep
Liberty in 2001, which it produces in its new assembly plant in Toledo, Ohio,
and the all-new Dodge Ram 1500 pick-up truck.
In 2001, our Chrysler Group segment had an operating loss of
[EURO]5.3 billion compared to an operating profit of [EURO]0.5 billion in 2000.
Excluding restructuring charges of [EURO]3.1 billion relating to actions taken
under the turnaround plan described below, operating results declined
[EURO]2.7 billion. This decrease resulted primarily from lower factory unit
sales, an unfavorable shift in product mix, increased sales incentives, and
higher costs for customer satisfaction, depreciation and amortization. Cost
reduction initiatives and other actions the Chrysler Group took as part of its
turnaround plan partially offset the deterioration in operating results. Higher
sales incentives more than offset improvements resulting from higher vehicle
pricing.
In February 2001, the Chrysler Group announced a turnaround plan designed to
improve its financial performance and market position. Key initiatives over the
period 2001 through 2003 include a workforce reduction, elimination of excess
plant capacity, reduction of the cost of purchased materials and services, a new
dealer performance-based incentive program and the implementation of a product
creation process, which reorganized the former platform teams into product
innovation teams. By adjusting its cost structure, workforce and production
capacity while continuing to develop exciting products, the Chrysler Group
expects to position itself for profitable growth in the world automotive
markets.
As a result of the turnaround plan, our Chrysler Group segment recorded
restructuring charges of [EURO]3.1 billion in 2001 primarily related to
workforce reductions, asset write-downs and contract cancellation costs.
Additional restructuring costs of up to $0.9 billion are expected to be
recognized in 2002 and 2003, including $0.3 billion of charges currently
identified for 2002. The Chrysler Group expects cash payments of $0.7 billion in
2002 for the previously recorded charges as well as the currently identified
restructuring actions.
Prior to implementing the turnaround plan, the Chrysler Group had forecasted
an unadjusted operating loss between [EURO]5.5 billion and [EURO]5.9 billion for
2001. Turnaround plan actions taken in 2001, generated net savings of
[EURO]3.6 billion from this forecasted loss by reducing variable and fixed costs
within cost of sales and selling, administrative and other expenses. Our
Chrysler Group segment surpassed the turnaround plan's cost reduction targets
for 2001. An under-achievement of the plan's revenue enhancement target due to
substantial competitive pressures in the North American market partially offset
this over-achievement. The favorable cash impact of such actions and related
reductions in capital expenditures totaled [EURO]5.4 billion in 2001, net of
related cash payments of [EURO]0.4 billion relating to restructuring measures.
The Chrysler Group expects to achieve break-even operating results in 2002
(excluding any additional restructuring charges or other one-time actions) and
will continue to take the necessary savings and profit improvement actions as
part of the turnaround plan to achieve this objective. For a further discussion
of the Chrysler Group's turnaround plan, see "Description of Business
Segments -- Chrysler Group" in "Item 4. Information on the Company."
Our Chrysler Group segment derives its revenues and operating results
principally from the U.S. and Canadian automotive markets. Retail industry sales
(including fleet sales) of new cars and trucks in the U.S. and Canada were
19.1 million units in 2001, compared with 19.4 million units in 2000, a decrease
of 2%. Retail industry sales would likely have decreased further were it not for
the introduction of more extensive sales incentives, such as zero percent
financing, beginning in September 2001. It is reasonably possible that these
sales incentives may have influenced customers to accelerate into 2001 purchases
otherwise planned for 2002. In the absence of continued costly sales incentives,
retail industry sales may decrease more significantly in 2002 than in 2001.
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The table below shows the U.S. and combined U.S. and Canada retail sales and
market share data for our Chrysler Group segment in 2001 and 2000:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------
INCREASE/
2001 2000 (DECREASE)
--------- --------- ----------
U.S. RETAIL MARKET(1)
Car sales................................................... 558,017 649,373 (91,356)
Car market share............................................ 6.6% 7.3% (0.7%)
Truck sales (including minivans)............................ 1,715,191 1,873,322 (158,131)
Truck market share.......................................... 19.0% 20.9% (1.9%)
Combined car and truck sales................................ 2,273,208 2,522,695 (249,487)
Combined car and truck market share......................... 13.0% 14.2% (1.2%)
U.S. AND CANADA RETAIL MARKET(1)
Combined car and truck sales................................ 2,518,760 2,791,483 (272,723)
Combined car and truck market share......................... 13.2% 14.4% (1.2%)
</Table>
- ------------------------------
(1) All retail sales and market share data include fleet sales.
------------------------------
Retail sales of cars for the Chrysler Group in the U.S. market for 2001
decreased 14% compared to 2000, while retail sales for the Chrysler Group in the
U.S. truck market for 2001 decreased 8% compared to 2000. The decrease in retail
sales and related market share of cars and trucks is primarily the result of
increased competition, particularly in the large car, minivan, upper-middle
sport utility and pick-up truck segments. The decrease in the Chrysler Group's
truck sales was partially offset by an increase in retail sales in the
lower-middle sport utility segment.
COMMERCIAL VEHICLES
Revenues of our Commercial Vehicles segment decreased 4% to
[EURO]28.6 billion, and unit sales of 492,900 were 10% lower than in 2000. The
change in total unit sales was the result of a 24% decrease in truck sales to
207,500 units and a 3% decline in bus sales to 27,600 units, partially offset by
a 3% increase in unit sales of vans to 257,800 units.
In 2001, revenues in Germany were 5% lower at [EURO]7.2 billion while unit
sales decreased 6% to 106,000 vehicles. In Western Europe (excluding Germany),
revenues were up 3% reaching [EURO]7.2 billion while unit sales rose 1% to
169,800 units in 2001. The increase in unit sales resulted primarily from the
success of our Mercedes-Benz vans, especially in France, Italy, and the United
Kingdom. In Western Europe (including Germany), Mercedes-Benz vans in the
categories between 2t and 6t GVW had a market share of 19% in both 2001 and
2000. In addition, in the category of trucks over 6t GVW, we maintained our
position as the market leader in Germany with a market share of 44%, slightly
higher than in the previous year (43%). Our market share for trucks above 6t GVW
in Western Europe (excluding Germany) was 15% (2000: 16%). With a combined
Western European market share of 26% in both 2001 and 2000, our Mercedes-Benz
and Setra bus brands maintained their position as market leader in Western
Europe.
Revenues of our Commercial Vehicles segment in the NAFTA region decreased 9%
to [EURO]9.5 billion in 2001. This decline was mainly due to a 31% drop in unit
sales to 105,900 units, partially offset by the appreciation of the dollar
against the euro and the full year inclusion of revenues generated by Detroit
Diesel Corporation. Detroit Diesel does not contribute to vehicle unit sales.
Our Commercial Vehicles segment had revenues of [EURO]8.1 billion in the United
States and [EURO]0.7 billion in Canada, a decrease of 8% and 7%, respectively.
Unit sales decreased 32% in the United States and 36% in Canada, primarily as a
result of the weak economy which led to significantly lower demand for trucks in
the Class 8 heavy duty segment. In Mexico, revenues from sales of commercial
vehicles fell
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10% to [EURO]0.7 billion and unit sales decreased 16%. Our Commercial Vehicles
segment was able to sell 43,000 commercial vehicles in South America, a 15%
decrease compared to 2000. Revenues in South America fell 16% to
[EURO]1.5 billion.
In 2001, our Commercial Vehicles segment contributed an operating loss of
[EURO]0.5 billion compared to an operating profit of [EURO]1.2 billion in 2000.
Charges of [EURO]0.5 billion recorded by Freightliner for its turnaround plan
and special costs associated with unforeseen market developments burdened the
2001 operating results of this segment. In 2000, a small charge relating to the
adoption of the European Union's directive regarding end-of-life vehicles
impacted the segment's operating profit.
Adjusted for these one-time effects, our Commercial Vehicles segment had
positive earnings of [EURO]0.1 billion in 2001 compared to an operating profit
of [EURO]1.3 billion in 2000. The sharp contraction of the market for commercial
vehicles in the NAFTA region, which led to significant price reductions for new
and used vehicles and to a 31% drop in the segment's unit sales, was primarily
responsible for the decline in operating profit. The deterioration of used
vehicle prices may continue to affect demand for new vehicles and, consequently,
may further negatively impact the profitability of our Commercial Vehicles
segment. Further factors depressing earnings were the drop in demand due to the
economic crisis in Argentina and the economic slow-down in Turkey and lower
demand for trucks in Western Europe.
SERVICES
The transaction involving debis Systemhaus (renamed T-Systems ITS) described
on page 52 affected the year-to-year comparability of revenues and operating
profit of our Services segment.
In 2001, our Services segment recorded revenues of [EURO]16.9 billion
compared to [EURO]17.5 billion in 2000, a 4% decline. Revenues of the financial
services business unit increased 12% from [EURO]15.1 billion in 2000 to
[EURO]16.9 billion in 2001. As a result of the transaction involving debis
Systemhaus in October 2000, revenues of our financial services business unit
represented all revenues achieved by our Services segment in 2001 compared to
86% in 2000. Overall, our financial services business unit processed new leasing
and finance contracts in 2001 with a total value of [EURO]53.7 billion, a
decline of 3% in new contract value compared to 2000. In 2001, our financial
services business unit managed a portfolio of finance receivables of
[EURO]128.4 billion, a 4% increase over the 2000 portfolio of
[EURO]123.1 billion. Excluding exchange rate effects, the portfolio volume in
2001 was only slightly higher than in the previous year.
In 2001, activities of our Services segment in the NAFTA region contributed
[EURO]11.6 billion or 69% of its total revenues, a 9% increase over 2000.
Revenues generated in Germany amounted to [EURO]3.2 billion or 19% of the
Services segment's total revenues, compared to [EURO]4.1 billion or 24% of total
revenues in 2000. Revenues originated in the other European Union countries
amounted to [EURO]1.5 billion or 9% of total Services revenues in 2001, compared
to [EURO]1.9 billion or 11% of total Services revenues in 2000.
Operating profit in our Services segment decreased to [EURO]0.6 billion from
[EURO]2.5 billion in 2000. Services' operating profit in 2001 includes a gain of
[EURO]0.3 billion from the sale of our remaining 10% equity interest in debitel
to Swisscom and a charge of [EURO]0.1 billion as a result of the depreciation of
the Argentine peso against the dollar. Our Services segment's operating profit
in 2001 also includes a charge of [EURO]0.2 billion related to the
recoverability of lease receivables in connection with the intended sale in 2002
of the commercial real estate and asset-backed lending portfolio of our capital
services business unit. The 2000 operating profit of our Services segment
includes a gain of [EURO]2.3 billion resulting from the disposition of our
controlling interest in debis Systemhaus, partially offset by charges of
[EURO]0.5 billion due to an impairment charge on the carrying values of leased
vehicles in the NAFTA and U.K. markets.
Excluding these effects in 2001 and 2000, our Services segment achieved an
operating profit in 2001 of [EURO]0.6 billion, which is on the prior year's
level. Pressure on margins, loss reserves for receivables of the Commercial
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Vehicles portfolio and residual value losses of Chrysler Group vehicles
negatively influenced the operations of our Services segment. The use of
refinancing instruments with more favorable conditions, benefits from
asset/liability management and cost reduction measures within our Services
segment partially offset these negative effects.
OTHER ACTIVITIES
Revenues of our Other Activities segment originate mainly from our MTU Aero
Engines business unit. Operating results of this segment also include our share
in the operating results of our equity method investments in European Aeronautic
Defence and Space Company EADS N.V. (EADS), Mitsubishi Motors Corporation and in
TEMIC TELEFUNKEN microelectronic GmbH (now known as Conti Temic microelectronic
GmbH) and its subsidiaries (TEMIC). Our Other Activities segment also contains
our real-estate activities, corporate research and our holding and finance
companies.
The transactions involving DaimlerChrysler Aerospace, Adtranz and TEMIC
described on page 53 significantly affected the year-to-year comparability of
revenues and operating profit of our Other Activities segment.
Revenues decreased by [EURO]6.1 billion from [EURO]10.6 billion in 2000 to
[EURO]4.5 billion in 2001. The decrease was mainly due to the sale of Adtranz
and the disposition of our controlling interest in TEMIC. The segment's total
2001 revenues include revenues of Adtranz and TEMIC, which in 2001 amounted to a
total of [EURO]1.4 billion, only through the date of completion of the
respective transaction. Similarly, the revenue figure for 2000 includes
[EURO]3.3 billion in revenues attributable to the former aerospace activities
for the first half of the year and revenues of [EURO]5.0 billion attributable to
Adtranz and TEMIC. Continuing 2001 revenues originate mainly from MTU Aero
Engines, which recorded an 18% increase in revenues from [EURO]2.1 billion in
2000 to [EURO]2.5 billion in 2001.
The [EURO]1.2 billion operating profit achieved by our Other Activities
segment in 2001 includes our [EURO]0.9 billion share of the gain that arose at
EADS in connection with the formation of Airbus SAS. The 2001 operating profit
also includes a gain of [EURO]0.3 billion from the transaction involving Adtranz
and a [EURO]0.2 billion gain from the transaction involving TEMIC. Our
proportionate [EURO]0.4 billion share of Mitsubishi Motors' restructuring
charges partially offset these gains. The 2000 operating profit of our Other
Activities segment includes a gain of [EURO]3.3 billion as a result of the
exchange of our controlling interest in DaimlerChrysler Aerospace for a 33%
interest in EADS and a gain of [EURO]0.1 billion from the sale of the fixed
installations activities of Adtranz.
LIQUIDITY AND CAPITAL RESOURCES
In 2002, as in 2001 and 2000, we managed our liquidity using funds from
operations, external borrowings, and sales of finance receivables in
securitization transactions. We used these funds primarily to finance our
working capital and capital expenditure requirements and the cash needs of our
lease and sales financing business. We typically finance our lease and sales
financing activities with a high proportion of debt.
Liquidity refers to the liquid financial assets we have available to fund
our business operations and pay for near term future obligations. These liquid
financial assets consist of cash and cash equivalents as well as securities. The
following table shows our liquid financial assets (in billions of euro) as of
the end of each of the last three years:
<Table>
<Caption>
DECEMBER 31
------------------------------
2002 2001 2000
-------- -------- --------
Cash and cash equivalents................................. 9.1 10.7 7.1
Securities................................................ 3.3 3.8 5.4
---- ---- ----
Liquidity................................................. 12.4 14.5 12.5
==== ==== ====
</Table>
We hold our cash and cash equivalents primarily in U.S. dollars and euros.
As of December 31, 2002, U.S. dollar denominated liquid assets represented 48%
and euro denominated liquid assets represented 44% of total liquid financial
assets. Liquid financial assets as a whole were 6.6% of total assets compared to
7.0% at the end of 2001. For further information on our liquidity, please see
Note 21 to the Consolidated Financial Statements.
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In recent years, funds from operations, funds raised in the capital markets
and proceeds from sales of finance receivables were our primary sources of
liquidity. We believe the funds available from these and other sources will be
sufficient to satisfy our working capital needs and to service our debt in the
foreseeable future. We also believe that our liquidity and capital resources
give us adequate flexibility to manage our planned capital spending programs as
appropriate to address short-term changes in business conditions. Our capital
needs depend primarily on the size and the timing of our capital expenditures
and investments as set forth in our business plans. Subject to developments
which we cannot predict or control, we currently intend to increase our capital
expenditures slightly in 2003 compared to 2002.
ANALYSIS OF CASH FLOW STATEMENT
Net cash provided by operating activities increased by [EURO]1.9 billion to
[EURO]17.8 billion, compared to [EURO]15.9 billion in 2001, and
[EURO]16.0 billion in 2000. The increase is mainly attributable to Chrysler
Group and reflects the improvements in that segment's operating results. Our
future ability to maintain or increase the amount of cash we generate from our
operations depends heavily on future demand for our products in markets
worldwide and on our continued success in implementing cost reduction measures,
including the turnaround plans at Chrysler Group and Freightliner.
We used net cash of [EURO]12.9 billion for investing activities in 2002,
compared to [EURO]14.0 billion in 2001 and [EURO]32.7 billion in 2000. Net cash
used for our lease and sales financing activities, net of disposals and
repayments, increased to [EURO]11.6 billion in 2002 from [EURO]7.9 billion in
2001 ([EURO]19.4 billion in 2000). In 2002, we used [EURO]7.1 billion to
purchase fixed assets, principally property, plant and equipment, compared to
[EURO]8.9 billion in 2001 and [EURO]10.4 billion in 2000. We also disposed of
several businesses in 2002, which generated [EURO]5.1 billion, net of
acquisitions, compared to [EURO]0.9 billion in 2001. In 2000, we used
[EURO]4.6 billion, net of disposals, to acquire businesses and make strategic
equity investments. In 2002, our net cash generated from acquisitions and
dispositions of businesses originated primarily from the sale of our 49.9%
interest in T-Systems ITS. In 2001, we disposed of our Adtranz rail systems
business, a 60% controlling interest in our TEMIC automotive electronics
business, and our remaining 10% equity interest in debitel, which were the
primary sources of net cash generated from acquisitions and dispositions of
businesses in 2001. In 2000, we used net cash for the acquisitions (net of
dispositions) of businesses principally for the acquisitions of Western Star
Trucks, Detroit Diesel and a 34% non-controlling interest in Mitsubishi Motors.
For further information on our acquisitions and dispositions, please also refer
to Notes 4 and 11 to our Consolidated Financial Statements.
In 2002 our financing activities used net cash of [EURO]5.3 billion, of
which [EURO]1.0 billion relates to our dividend payment for 2001. We used
[EURO]4.3 billion for repayment (net) of financial liabilities. In 2001 and 2000
our financing activities provided net cash of [EURO]1.4 billion and
[EURO]14.5 billion, respectively, including dividend payments of
[EURO]2.4 billion in both 2001 and 2000. This decrease in net cash provided from
financing activities was primarily due to our industrial business, reflecting
improved business results and lower investing activities, as discussed above.
The positive effects from our industrial business were partially offset by our
lease and sales financing business, which we typically finance with a high
proportion of debt. At December 31, 2002, our financial liabilities were
[EURO]79.1 billion of which [EURO]30.3 billion are due within one year. This
compares to [EURO]90.9 billion of financial liabilities at the end of 2001, of
which [EURO]33.9 billion were due within one year. The 2002 decrease in
financial liabilities resulted primarily from changes in foreign currency
exchange rates, primarily a depreciation of the U.S. dollar against the euro,
and from net repayments of debt. The extent to which we are able to use external
financing in the future as a means of growing our industrial and financial
services businesses will depend in large part on our credit ratings, which we
discuss in more detail below.
PRINCIPAL SOURCES OF FUNDING
FUNDING POLICIES
Our policy is to maintain a high degree of flexibility in our funding and
investment activities by using a broad variety of financial instruments.
Depending on our cash needs and market conditions, we issue bonds,
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notes and commercial paper in various currencies. Therefore, we are exposed to
risks associated with changes in interest rates and foreign currency exchange
rates. Moreover, the global nature of our businesses exposes us to risks
associated with fluctuations in foreign currency exchange rates and interest
rates, which may adversely affect our businesses, operations and reported
financial results and cash flows. We hedge these risks with derivative financial
instruments, primarily foreign exchange contracts, currency options, interest
rate swaps and cross-currency interest rate swaps.
In addition, we use credit facilities in our day-to-day financial
management. As part of our liquidity management, we also hold money market
investments and variable-rate or fixed-rate securities. These instruments
subject us to market risks which we typically hedge with interest rate swaps,
forward rate agreements, caps, floors, futures and options.
For additional information on our market risk exposure, including risks
associated with currency exchange rates and interest rates, please refer to
"Item 11. Quantitative and Qualitative Disclosures About Market Risk."
In accordance with the guidelines established by the Bank for International
Settlements, we separate our corporate treasury function organizationally,
physically and in its technical systems from the administrative functions of
settlement, financial accounting and controlling.
FINANCIAL LIABILITIES
We use a variety of short- and long-term financial instruments, principally
notes/bonds, commercial paper and borrowings from financial institutions. The
following table presents the carrying values as of December 31, 2002 and 2001 in
billions of euro:
<Table>
<Caption>
DECEMBER 31,
-------------------
2002 2001
---- ----
Notes and bonds............................................. 51.9 65.4
Commercial paper............................................ 9.5 7.5
Borrowings from financial institutions...................... 14.0 15.4
</Table>
As of the end of 2002, the breakdown by currency of our financial
liabilities was as follows: 62% in U.S. dollars, 20% in euros and euro zone
currencies, 5% in Canadian dollars and 4% in Japanese yen. In most cases, our
subsidiaries borrow money in their operational currency. In 2002, our aggregate
borrowing rate for outstanding indebtedness was 5.6%, and approximately 36% of
our financial liabilities were at fixed rates. Our total financial liabilities
represented 42.2% of total stockholders' equity and liabilities in 2002,
compared to 43.8% in 2001. Please refer to Note 26 to our Consolidated Financial
Statements for information on the amounts, maturities and interest rates of our
financial liabilities.
On a stand-alone basis, our financial services entities had financial
liabilities of [EURO]66.9 billion in 2002 and [EURO]75.2 billion in 2001. Both
figures include intercompany financial liabilities among members of our Group.
We eliminate these intercompany amounts upon consolidation into our financial
statements. The liabilities incurred by our financial services entities closely
correspond to the assets they finance, for example, equipment on operating
leases and receivables from financial services. These assets totaled
[EURO]77.0 billion in 2002 and [EURO]82.5 billion in 2001. Sales of receivables
are a significant source of funding for us, principally in the United States. In
2002, net proceeds from the sales of financial receivables were
[EURO]58.2 billion compared to [EURO]76.7 billion in 2001 and
[EURO]63.6 billion in 2000.
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CREDIT LINES
At December 31, 2002 and 2001, we had short- and long-term credit lines
available of [EURO]35.6 billion and [EURO]41.5 billion, respectively, of which
[EURO]21.6 billion and [EURO]26.1 billion were unused as of such dates. In 2002,
the weighted average interest rate payable under our lines of credit was 5.3%.
Our credit lines include an $18 billion revolving credit facility with a
syndicate of international banks. This facility includes three elements:
- a multi-currency revolving credit facility which allows us
(DaimlerChrysler AG) and several of our subsidiaries to borrow up to
$5 billion until 2006,
- a U.S. dollar revolving credit facility which allows our wholly-owned
subsidiary DaimlerChrysler North America Holding Corporation to borrow up
to $6 billion until 2004, and
- a multi-currency revolving credit facility for working capital purposes
which allows us (DaimlerChrysler AG) and several of our subsidiaries to
borrow up to $7 billion until 2003.
A portion of the $18 billion facility serves as a back-up for commercial paper
drawings.
COMMERCIAL PAPER PROGRAMS
We also rely on several commercial paper programs. In addition to commercial
paper programs denominated in U.S. dollars, Canadian dollars, Mexican pesos and
Australian dollars, we have a multi-currency commercial paper program and an
asset-backed commercial paper program. In the United States, DaimlerChrysler
North America Holding Corporation has a $30.2 billion debt securities shelf
registration filed with the U.S. Securities and Exchange Commission, of which
$21.4 billion remained unused as of February 13, 2003.
CREDIT RATINGS
Moody's Investors Service, Inc., (Moody's) and Standard & Poor's Rating
Services (S&P) rate our commercial paper (short-term) and our senior unsecured
long-term debt (long-term). Our current ratings are as follows:
<Table>
<Caption>
MOODY'S S&P
-------- --------
Short-term debt............................................ P-2 A-2
Long-term debt............................................. A3 BBB+
</Table>
Debt ratings are an assessment by the rating agencies of the credit risk
associated with our company and are based on information provided by us or other
sources that the rating agencies consider reliable. Lower ratings generally
result in higher borrowing costs and reduced access to capital markets.
MOODY'S RATINGS. Moody's Investors Service changed neither its rating nor
its rating outlook for us in 2002. At the end of the year, Moody's had us on a
long-term rating of A3 with a negative outlook and a short-term rating of P-2.
S&P RATINGS. On July 19, 2002, after the publication of results for the
second quarter, S&P raised its outlook for our long-term rating from negative to
stable. S&P's actual ratings remained unchanged at BBB+ for our senior unsecured
long-term debt and A-2 for our short-term debt, i.e., our commercial paper.
We want you to understand that debt ratings are not a recommendation to buy,
sell or hold securities. Ratings may be subject to revision or withdrawal by the
rating agencies at any time. As rating agencies may have different criteria in
evaluating the risks associated with a company, you should evaluate each rating
independently of other ratings.
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CONVERTIBLE BONDS AND NOTES
We may issue ordinary shares of our company or bonds convertible into our
ordinary shares as another potential source of funding. Our board of management
may issue up to [EURO]256 million, in nominal amount, of new ordinary shares for
cash until April 30, 2003, if our supervisory board approves the issue.
Additionally, the board of management may issue up to [EURO]15 billion, in
nominal amount, of convertible bonds and notes with attached warrants, with a
term of up to 20 years, until April 18, 2005. The convertible bonds and notes
with attached warrants may grant to the holders or creditors up to
[EURO]300 million, in nominal amount of capital stock, in option or conversion
rights for new shares in our company.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The table below presents our on- and off-balance sheet contractual
obligations as of December 31, 2002:
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
------------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL CASH OBLIGATIONS TOTAL 1 YEAR 1 - 3 YEARS 3 - 5 YEARS 5 YEARS
- ---------------------------- ----- ------ ----------- ----------- -------
([EURO] IN MILLIONS)
Financial liabilities(1)................. 78,691 30,279 22,613 12,338 13,461
Capital Lease Obligations................ 421 49 76 77 219
Operating Leases......................... 2,683 581 623 405 1,074
Purchase and Investment Obligations...... 3,663 2,298 1,295 41 28
Other Contractual Obligations............ 1,836 1,467 71 37 260
------ ------ ------ ------ ------
Total Contractual Obligations.......... 87,294 34,674 24,678 12,898 15,042
====== ====== ====== ====== ======
</Table>
- ------------------------------
(1) Capital lease obligations are included in the caption "Financial
Liabilities" in our consolidated balance sheet.
The table below presents the maximum amount (on- and off-balance sheet) of
our commercial commitments as of December 31, 2002, classified by periods in
which the contingent liabilities or commitments expire:
<Table>
<Caption>
EXPIRATION DATE
------------------------------------------------------------
LESS THAN MORE THAN
COMMERCIAL COMMITMENTS TOTAL 1 YEAR 1 - 3 YEARS 3 - 5 YEARS 5 YEARS
- ---------------------- ----- ------ ----------- ----------- -------
([EURO] IN MILLIONS)
Guarantees for Third Party Liabilities... 2,119 830 211 94 984
Performance Guarantees and Environmental
Protection.............................. 581 88 83 143 267
Buy-back Commitments..................... 3,232 1,801 1,335 91 4
Other Contingent Liabilities............. 830 116 461 83 171
------ ------ ------ ------ ------
Total Contingent Liabilities and
Commitments........................... 6,762 2,835 2,090 411 1,426
====== ====== ====== ====== ======
</Table>
Please refer to Note 31 to our Consolidated Financial Statements for a
detailed description of our contractual obligations and commercial commitments.
BENEFIT PLAN OBLIGATIONS AND COSTS
The obligations and expenses recognized in our Consolidated Financial
Statements for our employee benefit plans are not necessarily indicative of our
projected obligations and cash funding requirements. The reason is that under
U.S. GAAP we normally accumulate actual results that differ from the assumptions
used in the actuarial determination of our benefit plan obligations and costs
and then recognize the accumulated differences in our consolidated financial
statement through amortization over future periods when certain conditions are
met. Please refer to the discussion under the heading "Critical Accounting
Policies -- Pension
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and Other Postretirement Benefits" in "Item 5. Operating and Financial Review
and Prospects" and to Note 25a to our Consolidated Financial Statements for
further information regarding pension benefit and other postretirement benefit
obligations, the significant assumptions used, and the sensitivity of those
assumptions to our consolidated financial statements.
PENSION BENEFIT OBLIGATIONS
CURRENT FUNDING AND ASSET ALLOCATION
Plan assets which are primarily held in trusts and invested to provide for
current and future pension benefits partially offset our projected pension
benefit obligations. Plan assets consist of investments in equity securities,
fixed-income securities, cash, and investments in real estate.
The funded status of our pension benefit obligations expresses the extent to
which plan assets are available to satisfy our obligations. At December 31,
2002, our pension plans had an underfunded status of [EURO]8.4 billion compared
to an underfunded status of [EURO]3.0 billion at December 31, 2001. During 2002,
we contributed [EURO]1.4 billion to our pension benefit plans. The deterioration
of the funded status of our pension benefit plans in 2002 is mainly attributable
to the weak performance of the equity markets in 2002. As a result, we realized
losses as compared to expected gains on our plan assets. Actual rates of return
for German and non-German plans were negative 15.5% and 8.8%, respectively. In
addition, we decreased the discount rates for all significant plans in 2002,
which led to an increase of our pension benefit obligations at the end of 2002
and further deteriorated the funded status of our plans.
Specific U.S. GAAP accounting rules that are applicable due to the
underfunded status of our accumulated pension benefit obligations required us to
recognize an additional pension liability in 2002 of [EURO]4.7 billion. We
charged [EURO]2.4 billion of this liability against stockholders' equity and
recognized the remaining [EURO]2.3 billion as an intangible asset, neither of
which affected our net earnings. U.S. GAAP also required us to eliminate
[EURO]7.6 billion of prepaid pension assets which existed at December 31, 2001,
due to the underfunded status of our pension benefit obligations. This
elimination resulted in a corresponding decrease of stockholders' equity equal
to [EURO]7.6 billion at December 31, 2002. In total, as a result of the
underfunded status of our accumulated pension benefit obligations, our
stockholders' equity decreased [EURO]6.3 billion after tax. The initial
recognition of these transactions did not have a negative effect on our
liquidity and capital resources.
The sum of our plan assets of [EURO]24.6 billion and our pension accruals of
[EURO]7.4 billion is [EURO]32.0 billion, while our total pension benefit
obligations amount to [EURO]33.0 billion.
FURTHER FUNDING REQUIREMENTS
We do not need to increase substantially our cash contributions to our
pension plans in the near term. If actual returns on plan assets are
substantially below expected return assumptions over an extended period of time,
however, this could adversely affect our liquidity requiring additional pension
funding.
FUTURE PENSION EXPENSE
We estimate that our total pension benefit expense will increase by
[EURO]0.7 billion in 2003. This is mainly due to lower expected returns on plan
assets in 2003, which resulted from both lower plan assets at December 31, 2002
and lower rates for the expected return on plan assets in 2003. In addition,
amortization of unrecognized net losses will result in higher total pension
benefit expense in 2003.
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OTHER POSTRETIREMENT BENEFIT OBLIGATIONS
CURRENT FUNDING AND ASSET ALLOCATION
Plan assets invested to provide current and future plan benefits partially
offset accumulated other postretirement benefit obligations. Plan assets mainly
consist of investments in equity securities and fixed income securities.
The funded status of our other postretirement benefit obligations expresses
the extent to which plan assets are available to satisfy our obligations. At
December 31, 2002, our other postretirement benefit obligations had an
underfunded status of [EURO]13.7 billion compared to an underfunded status of
[EURO]12.1 billion at December 31, 2001. After deducting the accruals recognized
for our other postretirement benefit obligations at December 31, 2002 and 2001,
of [EURO]8.2 billion and [EURO]9.4 billion, respectively, we had underfunded
other postretirement benefit obligations of [EURO]5.5 billion and
[EURO]2.7 billion at December 31, 2002 and 2001, respectively, which were not
recognized. The deterioration of this underfunded position is mainly
attributable to the decrease of the discount rates and the increase of the
healthcare inflation rates, which led to an increase of our other postretirement
benefit obligations at the end of 2002. In addition, the weak performance of the
equity markets in 2002 resulted in lower plan assets and, as a consequence,
increased our underfunded status.
FURTHER FUNDING REQUIREMENTS
We are not required by law or labor agreements to make contributions to our
other postretirement benefit plans.
FUTURE POSTRETIREMENT BENEFIT EXPENSE
We estimate that our total other postretirement benefit expenses will
increase by [EURO]0.4 billion in 2003. This is the result of lower discount
rates used, an increase in the healthcare inflation rates and amortization of
unrecognized net losses in 2003.
OFF-BALANCE SHEET ARRANGEMENTS
Our financial services business enters into transactions which provide
customers with the opportunity to finance the purchase of passenger cars and
commercial vehicles over an extended period of time through sales financing and
lease transactions. Based on market conditions and our current liquidity needs,
we combine portfolios of sales financing and finance lease receivables and use
several methods of selling interests in those receivables to third parties as
described below. In connection with these types of transactions, we receive cash
in exchange for the interests in the receivables sold and retain subordinated
interests and residual cash flows. These transactions allow us flexibility in
managing the extent to which we offer financing to customers and reduces the
need for us to issue long-term debt.
We utilize various special purpose entities to securitize (monetize)
wholesale and retail automotive receivables. Public retail and public wholesale
transactions typically involve the sale of a portfolio of receivables through
trusts that issue securities to the public. These trusts meet the criteria in
SFAS 140 for qualifying special purposes entities (QSPE) and, therefore, such
securitizations are treated as sales with de-recognition of the transferred
receivables from our balance sheet. In most of these transactions, we receive a
servicing fee in exchange for collecting and posting all payments, responding to
inquiries of customers, investigating delinquencies, performing necessary and
reasonable collection efforts, accounting for collections, and furnishing the
reports and other information required under the respective servicing
agreements. We retain a subordinated beneficial interest in the receivables
sold, which is designed to absorb substantially all of the credit, prepayment
and interest-rate risk of the receivables transferred. Our risk of loss from the
beneficial interests is limited to the amount of the carrying value of our
retained interests, which are classified as "Other receivables" in our
Consolidated Financial Statements. These transactions are not subject to the FIN
46. For a description of FIN 46, please see "New Accounting Pronouncements."
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We also sell automotive receivables to multi-seller and multi-collateralized
bank conduits, which are variable interest entities as defined in FIN 46. In
these transactions, we generally remain as servicer. We also retain residual
beneficial interests in the receivables sold. Through these residual beneficial
interests we absorb substantially all of the credit, prepayment, and
interest-rate risk of the receivables transferred to the conduit. The risk we
retain, however, is limited to the carrying value of our retained interests,
which are classified as "Other receivables" in our Consolidated Financial
Statements. These transactions are subject to FIN 46. We are currently
evaluating whether we will be required to consolidate these variable interest
entities as the primary beneficiary.
The outstanding balance of receivables we have sold to QSPEs and the
corresponding retained interest balance as of December 31, 2002 are
approximately [EURO]22.9 billion and [EURO]3.2 billion, respectively. The
outstanding balance of receivables we have sold to conduits and the
corresponding retained interest balance as of December 31, 2002 are
approximately [EURO]7.2 billion and [EURO]1.0 billion, respectively.
For additional information on retained interests in sold receivables and
sales of finance receivables, please refer to "Critical Accounting Policies --
Collectibility of Sales Financing and Finance Lease Receivables" in "Item 5.
Operating and Financial Review and Prospects" and to Note 33 to the Consolidated
Financial Statements.
Our industrial businesses are very capital intensive. To a limited extent,
we use off-balance-sheet leasing structures which afford us with flexibility in
the timing of cash payments for property and equipment and provide us with a
less costly form of financing compared to purchasing. In these structures one or
more third parties not controlled by us establish and own, a special purpose
entity (SPE). The SPE raises funds by issuing debt and equity securities to
third party investors. The SPE uses the debt and equity proceeds to purchase
property and equipment, which we lease and use in the normal course of our
business. During the lease term, we make periodic rental payments which we
expense, and do not capitalize the leased asset on our balance sheet. At the end
of the lease term, we generally have the option to purchase the property and
equipment at fair value or re-lease the property and equipment under new terms.
We are currently evaluating whether we are required to consolidate these leasing
transactions in accordance with FIN 46. If we have to consolidate these leasing
transactions in accordance with FIN 46, their aggregate size is not expected to
be material to our Consolidated Financial Statements. Further, we do not expect
that our maximum exposure to loss as a result of our involvement with these
entities is significant.
We are evaluating the extent to which we have involvement in other entities,
in addition to those described above, and whether our interests are subject to
the requirements of FIN 46. It is reasonably possible that we may be required to
consolidate or disclose information about any of these entities when FIN 46
becomes effective. We believe, however, the aggregate size and our maximum
exposure to loss as a result of our involvement with these entities is also
insignificant.
RESEARCH AND DEVELOPMENT
STRATEGIC APPROACH AND ORGANIZATION
To be competitive in our principal markets, and to secure technological
leadership, it is essential for us to develop innovative products and production
systems and to shorten lead times in research and development. Innovation is
also an important element of our overall corporate strategy, and our corporate
research function plays a critical role in meeting this strategic goal. Our
corporate research function:
- approaches research and development systematically and comprehensively
and, in close cooperation with our business units, formulates a
technological strategy for our Group as a whole;
- performs research tasks that cross divisional boundaries or require long
lead times;
- works as a centralized forum for the exchange of new ideas and a think
tank for the development of new technologies, materials and concepts;
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- assists the product development teams of our divisions to apply new
technologies in the design, development and testing of new products and
production processes; and
- performs internal research audits to ensure the quality, efficiency, and
effectiveness of our research programs.
On the corporate level, we conduct our research work in 16 laboratories
which are assigned to three primary research areas:
- BODY AND POWERTRAIN; researching combustion engines and powertrain,
alternative energy and drive systems, body and human-machine-interaction,
surface and functional materials, structural materials, and manufacturing
technology.
- ELECTRONICS AND MECHATRONICS; researching acoustics and climate comfort,
vehicle sensing and communication electronics, mechatronic systems,
electrics/electronics architecture and integration, and automotive
microsystems.
- INFORMATION AND COMMUNICATION; researching autonomous systems and pattern
understanding, information technology for engineering, software
technology, telematics and e-business, and society and technology.
Most of these research facilities are located in Germany, but we also
maintain several research centers in North America and Asia. These include a
research and technology center in Palo Alto, California, a vehicle systems
technology center in Portland, Oregon, and a research center for information and
communication technology in Bangalore, India. We also have a joint venture with
the Shanghai Institute of Metallurgy in Shanghai, China, in the area of
automotive electronics. In addition, we participate actively in the
international exchange of new ideas and concepts through cooperations with
world-renowned research institutes and exchange programs for scientists and
employees.
FUTURE CHALLENGES
A key challenge for the future viability of automotive transportation will
be the sustainable reduction of hydrocarbons emitted by vehicles using internal
combustion engines. Reducing consumption of fossil fuels will be a critical
factor in reducing hydrocarbon emissions generated by vehicle traffic. We
believe that optimizing conventional propulsion systems using internal
combustion engines and developing alternative propulsion systems mainly based on
new biogenic or renewable fuels will be the two key elements in realizing a
vision of sustainable individual mobility in the medium and long term. We invest
in the development of future motor vehicle propulsion technologies, in
particular fuel cell and hybrid propulsion. Maintaining and securing our
leadership position in the area of alternative propulsion technologies is a
cornerstone of our corporate strategy.
HYBRID VEHICLES. Hybrid technology combines a conventional internal
combustion engine with an electric propulsion system. Hybrid vehicles use
established technologies and fuels while permitting a significant reduction in
fuel consumption and a simultaneous marked improvement in dynamic response
characteristics.
Over the last twenty years, we have built several hybrid concept vehicles
using different vehicle platforms. These range from smaller size vehicles like
the Mercedes-Benz A-Class and the smart up to sport utility vehicles like the
Dodge Durango and mid-size cars like the Chrysler Sebring which we introduced in
April 2002.
Since the more complex technology of hybrid vehicles results in higher costs
and consequently higher prices to the consumer, automobile manufacturers have
thus far only been able to market these vehicles successfully in the context of
special user applications. For example, our Dodge Ram Contractor Special can
function as a mobile hybrid and also as a stationary generator supplying
electric power. Reducing the production costs of these vehicles is the primary
focus of our current development efforts in this area.
FUEL CELL VEHICLES. Fuel cell propulsion systems can be powered by a range
of new fuels, including hydrogen or methanol. Since fuel cells operate with a
significantly higher degree of efficiency compared to internal
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combustion engines, fuel cells have enormous potential when it comes to reducing
carbon dioxide emissions. As a fundamentally new propulsion concept, however,
the fuel cell only marks the beginning of a new long-term technological
development phase. The wide use of fuel cells in automotive transportation would
also require a new fuel infrastructure for the supply of hydrogen or methanol.
As a consequence, large-scale production of fuel cell powered vehicles may not
occur before the next decade.
To support further our research activities in the area of fuel cells we hold
a 16.8% equity interest in Ballard Power Systems, Inc., of Burnaby, Canada, and
a 49.9% interest in Ballard Power AG of Kirchheim, Germany. Ballard is one of a
small group of companies leading the research, development, manufacture and sale
of fuel cells and fuel cell systems with PEM technology (Proton Exchange
Membrane, also called Polymer Electrolyte Membrane) for various applications.
Within the eight-year period following the presentation of our first NECAR 1
fuel cell concept study in 1994, we developed and tested as many as 20 different
vehicle prototypes with fuel cell drives. These range from the Mercedes-Benz
A-Class and the Jeep-Registered Trademark- Commander to a Mercedes-Benz van and
the NeBus bus. In October 2002, we presented the first fuel cell powered
vehicles for fleet use. In 2003, we will begin the delivery of 30 Citaro city
buses which we will supply to local public transport operators in ten European
cities. The buses will operate in regular line service under different climatic
and topographical conditions and will, on a day-to-day basis, familiarize
thousands of passengers in Europe with this innovative and clean propulsion
system. In 2003, we will also start to provide 60 Mercedes-Benz A-Class fuel
cell powered cars to selected customers. These customers will drive and test the
vehicles under everyday conditions in different parts of the world.
With these steps, we will have completed the concept stage of fuel cell
powered vehicles and will have achieved another milestone on the way to market
maturity of this revolutionary propulsion technology. Further development will
now largely depend on the practical experience gained through day-to-day
operation of these fleet vehicles.
FUNDING
As of December 31, 2002, our corporate research function had approximately
2,600 employees compared to 2,700 in 2001 and 2,500 in 2000. Together with the
development departments of our business units, we employ a total of 27,500
scientists, engineers and technicians worldwide in our research, development and
testing activities compared to 28,100 in 2001 and 28,000 in 2000.
In 2002, we spent a total of [EURO]6.2 billion on overall research and
development (2001: [EURO]6.0 billion; 2000: [EURO]7.4 billion). The decrease
from 2000 to 2001 is due primarily to the sale in 2000 of our aerospace and
defense businesses. Research and development costs (including costs reimbursed
by third parties) reached 4.1% of our total revenues in 2002. Research and
development performed for and funded by third parties accounted for
[EURO]0.1 billion in 2002 and [EURO]0.1 billion in 2001.
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The following table shows the research and development expenditures funded
by us and expenditures funded by third parties, which in prior years were
principally the German government and the European Space Agency:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001(1) 2000(2)
-------- -------- --------
([EURO] IN MILLIONS)
Research and development
Group funded projects............................... 6,071 5,933 6,337
Third party projects................................ 85 75 1,058
----- ----- -----
Total........................................... 6,156 6,008 7,395
===== ===== =====
</Table>
- ------------------------------
(1) Since we disposed of a controlling interest in our automotive electronics
unit, TEMIC, in April 2001, we only included research and development
expenditures relating to these activities through March 31, 2001. We also
included research and development expenditures relating to our rail systems
activities only through April 30, 2001, because we transferred control over
these operations to Bombardier Inc. effective May 1, 2001. See "Description
of Business Segments -- Other Activities" in "Item 4. Information on the
Company."
(2) In July 2000, we disposed of our aerospace activities with the exception of
our aero engines business. As a result, the numbers in this column include
research and development expenditures relating to the aerospace activities
only for the first half of 2000. See "Description of Business Segments --
Other Activities" in "Item 4. Information on the Company."
OUTLOOK
ECONOMIC AND MARKET CONDITIONS
If there is a reasonably stable global political framework and return of
confidence among investors and consumers, we believe that global economic growth
will begin to improve in 2003. We expect the economies of the United States and
the European Union, including Germany, to strengthen as the year progresses, and
the Japanese economy to emerge from its prolonged recession. We anticipate above
average growth rates for the emerging economies in Asia and Eastern Europe and
from 2004 also in South America. Overall, we expect global economic growth of
2.7% in 2003 and 3.2% in 2004 and 2005. Compared to the average exchange rates
in 2002, we assume that the euro will strengthen moderately against the U.S.
dollar, the Japanese yen and the British pound between 2003 and 2005.
Global automotive markets, however, will probably improve only slowly. We
anticipate a decrease in overall demand in North America in 2003, even if
manufacturers continue to offer generous incentives in the United States. We do
not expect a significant recovery this year in the automobile markets of Western
Europe and Japan, or in the international commercial vehicle markets. In the
United States we expect a further significant decline in demand for heavy trucks
in the first half of 2003 due to purchases brought forward into the prior year
in anticipation of new emission requirements. Beginning in 2004, we expect
increased growth of unit sales of passenger cars and commercial vehicles as a
result of improvements in the global economy. We also expect, however, that
modest growth prospects for the major automobile markets, shorter product
lifecycles and worldwide surplus manufacturing capacity
will further intensify competition and put upward pressure on unit costs in all
market segments. In addition, stricter environmental and safety regulations will
require substantial investment by all manufacturers.
In this environment, the importance of brands as a competitive advantage
will increase. Customers' increasingly specific demands for niche products and
segment-busting vehicles with universal applications should create growth
opportunities for us which we will vigorously pursue.
REVENUES
Based on our current market forecasts, we expect to achieve revenues in 2003
approximately at the same level as in 2002. Our forecast reflects not only
difficult markets, but also our assumption that the euro will appreciate against
the U.S. dollar. A stronger euro would mean lower revenues measured in euros
from the
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Chrysler Group, Freightliner and the Services segment. As a result of improving
markets and the introduction of new models, we expect revenues to grow
significantly by 2005, with the more substantial anticipated growth occurring in
Asia.
BUSINESS SEGMENTS
FURTHER GROWTH AT MERCEDES CAR GROUP. The Mercedes Car Group will continue
to renew its product range in the coming years and expand into select new market
segments. In addition, sustained efficiency improvements in procurement,
production, development and distribution should occur, partly as a result of
optimized processes. By taking these measures, we expect to sustain growth in
revenues, unit sales and earnings, and strengthen the market position of the
Mercedes Car Group worldwide. The Maybach will be widely available in 2003 and
will reinforce our leading position in the top market segment. Product renewals
in 2003 will include the E-Class station wagon and the CLK convertible. We will
also launch the Mercedes-Benz McLaren SLR super sports car and add a roadster
and a roadster coupe to the smart range this year. Mercedes Car Group intends to
develop and launch several new models in the following years.
STRATEGIC REFOCUS BY CHRYSLER GROUP. The Chrysler Group's plans to
strengthen its market position and profitability include differentiating its
products from the competition in both design and quality, and by defining new
segments with a series of innovative products. The Chrysler Group expects to
increase collaboration within the DaimlerChrysler Group and with Mitsubishi
Motors, to improve its cost structure and margins, and enhance its innovative
flair. Examples of the new long-term product strategy include the versatile
Chrysler Pacifica family vehicle, the Chrysler Crossfire sports car and the new
Dodge Durango truck, which we will all launch in 2003. The first range of
rear-drive vehicles under the Chrysler and Dodge brands will follow in 2004.
COMMERCIAL VEHICLES SEGMENT TO IMPROVE EFFICIENCY AND UTILIZE ECONOMIES OF
SCALE. We expect the cost reduction efforts underway in our Commercial Vehicles
segment to result in improved financial performance in 2003, despite weak
markets. The Commercial Vehicles segment plans to achieve cost reductions
through closer coordination of its worldwide activities as well as strong
cooperation with its Asian partners. We will continue our product offensive in
the commercial vehicle area by launching various new vehicles in 2003, including
a successor to the Mercedes-Benz Vito van and, in South America, the Accelo
light truck. We also plan to pursue additional opportunities in the van market
segment in North America with the Sprinter and the successor to the Vito. In
addition, together with our partners we expect to benefit from the further
growth of the Asian markets.
EXPANSION OF AUTOMOTIVE SERVICES. In the services area we will expand
further our core business of automotive services. Close worldwide collaboration
with our various automotive brands should lead to additional cost reductions and
optimization of processes in our key markets. Among other things, we plan to
improve the marketing of off-lease vehicles and develop new services in
collaboration with the automotive brands. The DaimlerChrysler Bank will
introduce new investment products and extend its "RoadMiles" bonus program that
provides customers with bonus points which can be redeemed for attractive
merchandise items. Our Services segment also intends to expand its mobility
management services which include traffic management, telematics products and
toll collection.
CAPITAL EXPENDITURES; RESEARCH AND DEVELOPMENT
In the period 2003 through 2005, we expect to invest about [EURO]42 billion
in property, plant and equipment, and research and development on a groupwide
basis. We expect to spend a large portion of this amount on the development and
the preparation for production of new vehicles and components. We also plan to
spend significant amounts on modernizing our manufacturing facilities and on the
research and development of new technologies directed at enhancing the safety,
environmental compatibility and economic viability of road transportation.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
In accordance with the German Stock Corporation Law (AKTIENGESETZ), we have
a two-tier board system consisting of a supervisory board (AUFSICHTSRAT) and a
board of management (VORSTAND). The two boards are separate and no individual
may simultaneously be a member of both boards.
The principal function of the supervisory board is to supervise our board of
management. The supervisory board is also responsible for appointing and
removing members of the board of management. The supervisory board may not make
management decisions. In accordance with German Stock Corporation Law, however,
our supervisory board has determined that several matters not in the ordinary
course of business that are of fundamental importance require the approval of
the supervisory board.
The board of management is responsible for managing our day-to-day business
in accordance with the German Stock Corporation Law and our memorandum and
articles of association. The board of management is authorized to represent us
and to enter into binding agreements with third parties on our behalf.
SUPERVISORY BOARD
As required by the German Stock Corporation Law, the German Co-determination
Law (MITBESTIMMUNGSGESETZ) and our articles of association, our supervisory
board consists of twenty members. Ten members are elected by our shareholders at
the annual general meeting of shareholders and ten members are elected by our
employees. Any member of our supervisory board elected by our shareholders may
be removed by a majority of the votes cast at a general meeting of shareholders.
Any member of our supervisory board elected by our employees may be removed by
three-quarters of the votes cast by the relevant class of employees.
The supervisory board elects a chairman and a deputy chairman from among its
members. Unless the shareholder and employee representatives on the board agree
on candidates for chairman and deputy chairman, the representatives of the
shareholders have the right to elect the chairman and the representatives of the
employees have the right to elect the deputy chairman.
At least half of the total number of members of the supervisory board, in
our case at least 10, must be present or participate in decision-making to
constitute a quorum. Unless otherwise provided for by law, the supervisory board
passes resolutions by a simple majority of the votes cast. In the event of a
deadlock, it has to hold another vote and, in the case of a second deadlock, the
chairman of the supervisory board casts the deciding vote.
Under German corporate law, the maximum permissible term of office for
members of a supervisory board is five years. If appointed for the maximum
permissible term, a member's term expires at the end of the annual general
shareholders' meeting after the fourth fiscal year following the year in which
the supervisory board member was elected. Supervisory board members may be
re-elected and are not subject to a compulsory retirement age. Our rules of
procedure for the supervisory board, however, provide that future candidates
under consideration for membership on our supervisory board should generally not
reach the age of 70 before their prospective term of office would expire. Our
articles of association establish the compensation of our supervisory board
members.
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In May 2002, Mr. Yokich resigned from his position as a member of the
supervisory board. The district court in Stuttgart appointed Mr. Gooden as his
successor representing the employees. The current term of all employee
representatives will expire in April 2003. The current term of the shareholder
representatives on our supervisory board will expire in April of 2004.
The following table shows the name, age (as of February 20, 2003) and
principal occupation of each current member of our supervisory board, the year
in which he was first elected to the board and whether he is a member of the
supervisory or other non-executive board of any other company. Employee
representatives are identified by an asterisk.
<Table>
Hilmar Kopper, Age: 67
Chairman First elected: 1998 (Daimler-Benz AG: 1990)
Principal Occupation: Chairman of the Supervisory Board of
DaimlerChrysler AG
Supervisory Board
Memberships/
Directorships: Akzo-Nobel N.V.; Solvay S.A.; Xerox
Corporation; Unilever N.V.
Erich Klemm*, Age: 48
Deputy Chairman First elected: 1998 (Daimler-Benz AG: 1988)
Principal Occupation: Chairman of the Corporate Works Council,
DaimlerChrysler AG and DaimlerChrysler Group
Manfred Goebels* Age: 61
First elected: 1998 (Daimler-Benz AG: 1993)
Principal Occupation: Director, Service and Mobility Concept,
DaimlerChrysler AG
Nate Gooden* Age: 64
First elected: 2002
Principal Occupation: Vice President of the International Union,
United Automobile, Aerospace and
Agricultural Implement Workers of America
(UAW)
Earl G. Graves Age: 68
First elected: 2001
Principal Occupation: Chairman and Chief Executive Officer of Earl
G. Graves, Ltd. (Publisher, Black Enterprise
magazine); Chairman of Pepsi's Customer
Advisory and Ethnic Marketing Committee;
Managing Director, Black
Enterprise/Greenwich Street Corporate Growth
Partners
Supervisory Board
Memberships/
Directorships: Aetna Life and Casualty Company; AMR
Corporation (American Airlines); Federated
Department Stores, Inc.; Rohm & Haas
Corporation
Prof. Victor Age: 63
Halberstadt First elected: 2001
Principal Occupation: Professor of Public Economics at Leiden
University, Netherlands
Supervisory Board
Memberships/
Directorships: International Advisors Group of Goldman,
Sachs & Co.; Investment Committee of ABP
Pension Fund; Royal KPN N.V.; TPG N.V.;
Concertgebouw N.V.; Board of Overseers of
Koc University, Istanbul; PA Holdings Ltd.,
London
</Table>
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<Table>
Robert J. Lanigan Age: 74
First elected: 1998 (Chrysler Corporation: 1984)
Principal Occupation: Chairman Emeritus of Owens-Illinois, Inc.;
Founder Partner, Palladium Equity Partners
Helmut Lense* Age: 51
First elected: 1998 (Daimler-Benz AG: 1993)
Principal Occupation: Chairman of the Works Council,
Stuttgart-Untertuerkheim Plant,
DaimlerChrysler AG
Peter A. Magowan Age: 60
First elected: 1998 (Chrysler Corporation: 1986)
Principal Occupation: President of San Francisco Giants
Supervisory Board
Memberships/
Directorships: Safeway Inc.; Caterpillar Inc.
Gerd Rheude* Age: 57
First elected: 1999
Principal Occupation: Chairman of the Works Council, Woerth Plant,
DaimlerChrysler AG
Udo Richter* Age: 56
First elected: 2001
Principal Occupation: Chairman of the Works Council, Bremen Plant,
DaimlerChrysler AG
Wolf Juergen Roeder* Age: 55
First elected: 2000
Principal Occupation: Member of the Executive Council, German
Metalworkers' Union
Supervisory Board
Memberships/
Directorships: Robert Bosch GmbH; AOK Baden-Wuerttemberg
Dr. rer. pol. Age: 64
Manfred Schneider First elected: 1998 (Daimler-Benz AG: 1993)
Principal Occupation: Chairman of the Supervisory Board of Bayer
AG
Supervisory Board
Memberships/
Directorships: Allianz AG; Metro AG; RWE AG; Linde AG; TUI
AG
Peter Schoenfelder* Age: 53
First elected: 1998 (Daimler-Benz AG: 1990)
Principal Occupation: Chairman of the Works Council, Augsburg
Plant, EADS Deutschland GmbH
Stefan Schwaab* Age: 50
First elected: 2000
Principal Occupation: Vice Chairman of the Works Council, Gaggenau
Plant, DaimlerChrysler AG; Vice Chairman of
the Corporate Works Council, DaimlerChrysler
AG and DaimlerChrysler Group
G. Richard Thoman Age: 58
First elected: 1998 (Chrysler Corporation: 1998)
Principal Occupation: Former President and Chief Executive Officer
of Xerox Corporation; Managing Partner,
Corporate Perspectives
Supervisory Board
Memberships/
Directorships: Union Bancaire Privee; DB Capital Partners
Advisory Board
</Table>
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<Table>
Bernhard Walter Age: 60
First elected: 1998 (Daimler-Benz AG: 1998)
Principal Occupation: Former Chairman of the Board of Managing
Directors of Dresdner Bank AG
Supervisory Board
Memberships/
Directorships: BilfingerBerger AG; Deutsche Telekom AG;
Henkel KGaA; Joint Stock Company
"Sibirsko-Uralskaya Neftegazohimicheskaya
Companiya" (AK Sibur); KG Allgemeine Leasing
GmbH & Co.; mg technologies ag; Staatliche
Porzellan-Manufaktur Meissen GmbH; Thyssen
Krupp AG; Wintershall AG
Lynton R. Wilson Age: 62
First elected: 1998 (Chrysler Corporation: 1994)
Principal Occupation: Chairman of the Board of CAE Inc.; Chairman
of the Board of Nortel Networks Corporation
Supervisory Board
Memberships/
Directorships: CAE, Inc.; DaimlerChrysler Canada Inc.; J.P.
Morgan Chase & Co. (International Council);
Nortel Networks Corp.
Dr.-Ing. Mark Woessner Age: 64
First elected: 1998 (Daimler-Benz AG: 1998)
Principal Occupation: Former CEO and Chairman of the Supervisory
Board of Bertelsmann AG
Supervisory Board
Memberships/
Directorships: eCircle AG; Dussmann KGaA; Loewe AG; EQT-
Investors; Chairman Citibank Deutschland
Bernhard Wurl* Age: 58
First elected: 1998 (Daimler-Benz AG: 1979)
Principal Occupation: Head of Department Responsible for Co-
determination Policy, German Metalworkers'
Union
Supervisory Board
Memberships/
Directorships: Babcock Borsig AG
</Table>
Our supervisory board has established and maintains the following committees
responsible for audit and compensation matters:
- The PRESIDENTIAL COMMITTEE is responsible for deciding the terms of the
service contracts and other contractual arrangements between us and
members of our board of management. In particular, the Presidential
Committee determines salaries and incentive compensation awards for
members of the board of management and establishes corporate goals for our
performance-based compensation plans. The current members of the
Presidential Committee are Hilmar Kopper, Erich Klemm, Dr. Manfred
Schneider, and Bernhard Wurl. The Presidential Committee held three
meetings in 2002.
- The AUDIT COMMITTEE recommends the appointment of independent auditors to
be elected by our shareholders at the annual general meeting. The Audit
Committee also engages the independent auditors, determines their
compensation and reviews the scope of the external audit. The Audit
Committee reviews our annual, half-year, and, since October 2002,
quarterly reports and financial statements, taking into account the
results of the audits and/or reviews performed by the independent
auditors. The current members of the Audit Committee are Hilmar Kopper,
Erich Klemm, Stefan Schwaab, and Bernhard Walter. The Audit Committee held
three meetings in 2002.
The business address of the members of our supervisory board is the same as
our business address, Epplestrasse 225, 70567 Stuttgart, Germany.
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BOARD OF MANAGEMENT
Our articles of association require our board of management to have at least
two members. Our supervisory board determines the size of the board of
management and appoints its members. Our supervisory board may also appoint
deputy members to the board of management. Our board of management currently has
thirteen members.
Our supervisory board appoints each member of the board of management for a
maximum term of five years. The supervisory board may reappoint members of the
board of management or extend their term for one or more additional terms of up
to five years each. The normal retirement age for members of the board of
management is 60, although it is possible for a member of the board of
management to continue in office beyond this age with the approval of the
supervisory board. If the supervisory board so decides, however, it may extend
the contract term of the board of management member only in one-year increments.
The supervisory board may remove a member of the board of management prior to
the expiration of his term if he commits a serious breach of duty or is
incapable of carrying out his duties or if there is a vote of no confidence by a
majority of the votes cast at an annual general meeting of shareholders.
A member of the board of management is under a duty to disclose any material
interest the member has in proposals, arrangements or contracts between us and
third parties. Significant transactions between a member of the board of
management and us or one of our subsidiaries require the approval of the
supervisory board.
The following table shows the name and age (as of February 20, 2003) of each
current member of our board of management, the year in which he was first
appointed to the board of management, the year in which his term expires, his
current position/area of responsibility and any prior positions he held within
the last five years.
The table also reflects recent actions of the supervisory board concerning
the board of management. Effective December 2003, it extended the terms of
Dr. Cordes and Dr. Zetsche five years to 2008 and the term of Dr. Gentz for one
year to 2004 to ensure continuity on the board of management; it extended the
term of Mr. Sidlik five years to 2008 with added responsibility for global
procurement and supply; and it entrusted Mr. Grube with responsibility for the
Group's alliance with Mitsubishi Motors. The terms of Dr. Bischoff, Dr. Mangold
and Mr. Valade will expire at the end of 2003, and DaimlerChrysler intends to
retain each of them to render advisory services, reporting to the chairman of
the board of management. The supervisory board also appointed Mr. Bodo Uebber a
deputy member of the board of management, effective December 2003, with
responsibility for DaimlerChrysler Services.
<Table>
Juergen E. Schrempp Age: 58
First appointed: 1998 (Daimler-Benz AG: 1987)
Term expires: 2005
Current Position: Chairman of the Board of Management
Prior Position(s): Chairman of the Board of Management of
Daimler-Benz AG
Dr. rer. pol. Age: 42
Wolfgang Bernhard First appointed: 2000
Term expires: 2007
Current Position: Chief Operating Officer Chrysler Group
Prior Position(s): CEO of Mercedes-AMG GmbH; General Manager for
S-Class assembly at the Sindelfingen Plant,
DaimlerChrysler AG
</Table>
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<Table>
Dr. rer. pol. Manfred Bischoff Age: 60
First appointed: 1998 (Daimler-Benz AG: 1995)
Term expires: 2003
Responsible for: Aerospace & Industrial Businesses
Prior Position(s): Member of the Board of Management of
Daimler-Benz AG and President and Chief
Executive Officer of Daimler-Benz Aerospace
AG
Dr. rer. pol. Eckhard Cordes Age: 52
First appointed: 1998 (Daimler-Benz AG: 1996)
Term expires: 2008
Responsible for: Commercial Vehicles
Prior Position(s): Member of the Board of Management of
DaimlerChrysler AG -- Corporate Development &
IT-Management; Member of the Board of
Management of Daimler-Benz AG -- Corporate
Development and Directly Managed Businesses
Guenther Fleig Age: 54
First appointed: 1999
Term expires: 2004
Responsible for: Human Resources & Labor Relations Director
Prior Position(s): President of DaimlerChrysler France S.A.S.,
DaimlerChrysler Holding S.A. France and Head
of the Corporate Representation Office,
France; President of Mercedes-Benz France
Dr. iur. Manfred Gentz Age: 61
First appointed: 1998 (Daimler-Benz AG: 1983)
Term expires: 2004
Responsible for: Finance & Controlling
Prior Position(s): Member of the Board of Management of
Daimler-Benz AG -- Finance & Controlling,
Human Resources
Dr. phil. Age: 51
Ruediger Grube First appointed: 2001
Term expires: 2007
Responsible for: Corporate Development
Prior Position(s): Senior Vice President Corporate Development
of DaimlerChrysler AG; CEO of Haeussler
Group; Head of Corporate Strategy and Member
of the Executive Board of DaimlerChrysler AG;
Head of Corporate Strategy and Member of the
Executive Board of Daimler-Benz AG
Prof. Juergen Hubbert Age: 63
First appointed: 1998 (Daimler-Benz AG: 1987)
Term expires: 2005
Responsible for: Mercedes Car Group
Prior Position(s): Member of the Board of Management of
Daimler-Benz AG -- Passenger Cars; Member of
the Board of Management of Mercedes-Benz
AG -- Passenger Cars
</Table>
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<Table>
Dr. iur. Klaus Mangold Age: 59
First appointed: 1998 (Daimler-Benz AG: 1995)
Term expires: 2003
Responsible for: Services
Prior Position(s): Member of the Board of Management of
Daimler-Benz AG and President and Chief
Executive Officer of Daimler-Benz
InterServices (debis) AG
Thomas W. Sidlik Age: 53
First appointed: 1998 (Chrysler Corporation: 1992)
Term expires: 2008
Responsible for: Procurement & Supply Chrysler Group
Prior Position(s): Executive Vice President of Chrysler
Corporation -- Procurement & Supply and
General Manager -- Jeep-Registered Trademark-
Operations; Vice President and Chairman of
Chrysler Financial Corporation and General
Manager -- Small Car Operations
Gary C. Valade Age: 60
First appointed: 1998 (Chrysler Corporation: 1990)
Term expires: 2003
Responsible for: Global Procurement & Supply
Prior Position(s): Executive Vice President and Chief Financial
Officer of Chrysler Corporation
Dr.-Ing. Dieter Zetsche Age: 49
First appointed: 1998 (Daimler-Benz AG: 1997)
Term expires: 2008
Responsible for: Chrysler Group
Prior Position(s): Member of the Board of Management of
DaimlerChrysler AG -- Commercial Vehicles;
Member of the Board of Management of
DaimlerChrysler AG -- Sales and Marketing;
Member of the Board of Management of
Daimler-Benz AG -- Sales and Marketing
Dr.-Ing. Thomas Weber Age: 48
(Deputy member) First appointed: 2003
Term expires: 2005
Responsible for: Research & Technology
Prior Position(s): Vice President, Speaker of the Model Series
A-Class and Rastatt Plant Manager; Director,
Engine Plant Stuttgart-Untertuerkheim;
Director V6/V8 Engine Plant Stuttgart-Bad
Cannstatt, DaimlerChrysler AG
</Table>
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COMPENSATION
SUPERVISORY BOARD
The compensation we pay to our supervisory board members is set forth in our
articles of association. Members of our supervisory board receive a fixed annual
amount of [EURO]51,129 for serving on the board plus reimbursement of expenses.
The chairman of our supervisory board receives twice that amount, the deputy
chairman receives 1.5 times that amount and members serving on committees of our
supervisory board receive 1.3 times that amount. Members also receive a flat fee
of [EURO]1,023 for each meeting of the supervisory board.
The aggregate amount of compensation we paid to all members of our
supervisory board, as a group, for services to us in all capacities for the year
ended December 31, 2002, was [EURO]2.5 million.
BOARD OF MANAGEMENT
We have entered into service agreements with members of our board of
management. These agreements establish the following four principal elements of
compensation:
- BASE SALARY -- Base salaries are established based on a comparative
analysis of base salaries paid within a select peer group of international
companies.
- ANNUAL BONUS -- Annual bonuses are based on corporate performance,
primarily in relation to profitability. Bonuses are expressed as a
percentage of base salary and may be adjusted, upward or downward, based
on other corporate objectives, such as shareholder return or revenue
growth, and on individual performance.
- MEDIUM-TERM-INCENTIVE -- Members of the board of management receive
medium-term-incentive awards that track, among others, the market value of
our ordinary shares over three year performance periods. The amount
ultimately earned in cash at the end of a performance period is primarily
based on the degree of achievement of corporate goals derived from
competitive and internal planning benchmarks and the value of our ordinary
shares at the end of three year performance periods. The benchmarks are
return on net assets and return on sales. Board of management members
received 476,500 performance-based awards in 2002.
- STOCK OPTIONS -- Stock option plans provide long-term-incentives based on
the appreciation of our ordinary shares. In 2002, we granted board of
management members, as a group, 3,030,000 stock options under a
shareholder approved option plan. Those options are exercisable at a
reference price of [EURO]42.93 plus a 20% exercise premium. They become
exercisable in two equal installments on April 1, 2004 and on April 1,
2005 and expire on April 1, 2012. If the market price per ordinary share
on the date of exercise is at least 20% higher than the reference price,
the holder is additionally entitled to receive a cash payment equal to the
original exercise premium of 20% multiplied by the number of stock options
exercised. See also "Share Ownership."
The aggregate amount of compensation we paid to all members of the board of
management, as a group, for services to us in all capacities for the year ended
December 31, 2002, was [EURO]50.8 million, of which [EURO]13.4 million consisted
of fixed compensation including benefits in kind and [EURO]37.4 million of
short-term and mid-term incentive remuneration components. The aggregate amount
accrued by us during the year ended December 31, 2002, to provide pension,
retirement and similar benefits for the members of the board of management was
[EURO]19.4 million.
In the past, our supervisory board has negotiated limited benefits upon
termination of a board of management member's service prior to the expiration
date stated in his service contract. If we terminate a U.S. member of the board
of management, or if a U.S. member terminates his service with good reason, as
defined in the service agreement, then, in addition to the foregoing, he is
entitled to receive a severance payment expressed as a multiple of the sum of
his base salary and his average bonus over the last three years. He is also
entitled to an additional amount to reimburse him for any excise tax assessable
on any amounts so received. The supervisory board may also negotiate additional
or different terms with board of management
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members at the time their service to us terminates. Moreover, if a U.S. member
of the board of management, who was party to a pre-merger employment contract
with Chrysler Corporation, dies during the term of his service agreement, then,
in addition to benefits payable under pension and retirement plans, his estate
will be entitled to receive an annual bonus payment and a medium-term-incentive
payment. We will calculate both payments as if corporate goals have been
achieved and pro rate them through the date of death.
For further information regarding compensation of our supervisory board and
our board of management, please refer to Note 37 to our Consolidated Financial
Statements. For further information regarding stock based compensation and
incentives, please refer to Notes 1 and 24 to our Consolidated Financial
Statements.
EMPLOYEES AND LABOR RELATIONS
At December 31, 2002, we employed a workforce of 365,571 people worldwide,
which represented a decrease of 2% from year-end 2001. The decrease resulted
primarily from workforce reductions in the context of the turnaround plan
implemented at Chrysler Group and our plant dispositions, for example X-Cellsis,
Eurostar Graz or Dayton Thermal. In 2001, the decrease in the number of
employees was due to workforce reductions in the context of the turnaround plans
implemented at Chrysler Group and Freightliner and our dispositions of Adtranz
and our controlling interest in TEMIC. For further information on the status of
the turnaround plans of Chrysler Group and Freightliner, please refer to the
discussion under the heading "Description of Business Segments" in "Item 4.
Information on the Company."
Of the total number of our employees, 191,574 employees were based in
Germany and 101,437 in the United States. The following table shows the number
of our employees at December 31, 2002, 2001 and 2000:
<Table>
<Caption>
EMPLOYEES AT DECEMBER 31,
------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------ ------------------------------ ------------------------------
TOTAL GERMANY U.S. TOTAL GERMANY U.S. TOTAL GERMANY U.S.
-------- -------- -------- -------- -------- -------- -------- -------- --------
Mercedes Car Group... 101,778 93,741 1,906 102,223 93,055 2,003 100,893 92,099 1,910
Chrysler Group....... 95,835 1 74,157 104,057 4 77,800 121,027 2 90,536
Commercial
Vehicles........... 94,111 49,512 16,577 96,644 51,927 15,413 101,027 52,161 18,526
Sales organization
for automotive
business........... 42,142 27,815 1,644 38,733 27,020 1,549 36,857 26,048 1,508
Services............. 10,521 2,510 4,757 9,712 2,440 4,637 9,589 2,321 4,787
Other
Activities(1)...... 21,184 17,995 2,396 21,101 16,712 3,469 47,108 24,230 6,366
------- ------- ------- ------- ------- ------- ------- ------- -------
DaimlerChrysler
Group.............. 365,571 191,574 101,437 372,470 191,158 104,871 416,501 196,861 123,633
======= ======= ======= ======= ======= ======= ======= ======= =======
</Table>
- ------------------------------
(1) Including holding companies and corporate functions.
------------------------------
On average, we had approximately 11,100 temporary employees in 2002.
Almost all our employees in Germany who are members of labor unions belong
to the German metalworkers' union (INDUSTRIEGEWERKSCHAFT METALL). We do not
operate any of our facilities in Germany on a "closed shop" basis. In Germany,
the regional association of the companies within a particular industry and the
unions covering that industry negotiate collective bargaining agreements for
blue collar workers and for white collar employees below management level. We
are a member of the associations of employers in the regions in which we
operate. Even though the collective bargaining agreement is legally binding only
for members of the negotiating parties, i.e., the member companies of the
employers' associations and the employees who are union members, we extend the
applicability of the agreement to all employees below senior management level by
including a pertinent clause in our employment contracts.
In May 2002, employers and representatives of the metalworkers' union
concluded a new collective bargaining agreement. For 2002, the agreement
provides for a 4% increase in wages, of which employees received a portion as a
lump sum payment in July 2002. The remaining wage increase was 3.1%. For 2003,
the agreement calls for another 3.1% increase, of which employees will receive a
portion as a lump sum payment
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in April 2003, resulting in a remaining increase of 2.6%. The total wage
increases in both 2002 and 2003 do not apply to elements of compensation which
the employer pays voluntarily and which go beyond the compensation level fixed
in the collective bargaining agreement. As a result of a previous agreement
between us and our central works council, we were able to limit the remaining
3.1% wage increase in 2002 by applying a factor of 0.93, which means that the
actual increase in total wages for our workers and employees, exclusive of the
lump sum payment, was only 2.9% in 2002. We have not yet reached a decision
whether we will similarly exercise our right to limit the overall increase under
the collective bargaining agreement in 2003 pursuant to the agreement with our
central works council.
In the United States and Canada, most of the hourly employees and 27% of the
salaried employees of the Chrysler Group are represented by unions. The United
Automobile, Aerospace, and Agricultural Implement Workers of America (UAW) and
the National Automobile, Aerospace, Transportation and General Workers Union of
Canada (CAW) represent substantially all of these represented employees.
DaimlerChrysler Corporation and the UAW are parties to a four-year
collective bargaining agreement that covers more than 58,000 hourly and salaried
workers in the United States and expires in September 2003. The agreement
provides for an annual base wage increase of 3% for each contract year, a
one-time lump sum payment of $1,350 per worker, increases in pension benefit
rates, and improvements in certain health care, supplemental unemployment and
other benefits. The agreement limits DaimlerChrysler Corporation's ability to
close plants, reduce employment levels, or dispose of operations that constitute
a UAW bargaining unit, but provides flexibility in establishing job assignments
and work rules in order to increase productivity in plants.
In October 2002, DaimlerChrysler Canada, Ltd. and the CAW agreed to a
three-year collective bargaining agreement that covers approximately 11,000
workers in Canada. It provides for an annual base wage increase of 3% in each of
the first two contract years and a 2% increase in the last year, a one-time lump
sum payment of $1,000 per full time worker, as well as increases in other
benefits.
The turnaround plans at the Chrysler Group and Freightliner include
workforce reductions, which were largely completed by the end of 2002. For
further information on the Chrysler Group and Freightliner turnaround plans, see
"Description of Business Segments -- Chrysler Group" and "Description of
Business Segments -- Commercial Vehicles" in "Item 4. Information on the
Company."
SHARE OWNERSHIP
As of December 31, 2002, the current members of our supervisory board and
our board of management, as a group, owned 229,283 of our ordinary shares (0.02%
of all outstanding shares), and had the right to acquire 7,873,020 ordinary
shares under the option plans described below.
Our predecessor, Daimler-Benz AG, instituted a shareholder approved stock
option plan for management board members and other senior executives in 1996.
For reasons of German law applicable at the time, the options granted under this
plan took the form of conversion rights attached to convertible bonds, with the
principal amount corresponding to a stated value (or par value equivalent) of
the ordinary shares subject to the option. This stated value was [EURO]2.56 per
ordinary share in all cases and the optionee paid this amount in cash at the
time he or she received the convertible bond (or option). The optionholders have
the right to exercise the conversion rights under the 1996 plan during specified
three-week window periods on or before July 12, 2006, at a conversion price of
[EURO]42.62 per ordinary share. Conversion rights are only exercisable if the
price per share exceeds a threshold of [EURO]49.01.
In 2000, we instituted a shareholder approved stock option plan for board of
management members and other levels of management. Options granted in 2000 under
this stock option plan are exercisable at a reference price of [EURO]62.30 plus
a 20% exercise premium. They become exercisable in two equal installments on
April 21, 2002 and on April 21, 2003 and expire on April 21, 2010. If the market
price per ordinary share on the date of exercise is at least 20% higher than the
reference price, the holder is additionally entitled to receive a cash payment
equal to the original exercise premium of 20% multiplied by the number of stock
options exercised. In May 2000, several shareholders challenged the approval of
the stock option plan at the shareholders' meeting on April 19, 2000. In
October 2000, the Stuttgart District Court (LANDGERICHT STUTTGART) dismissed the
case and the Stuttgart Court of
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Appeals (OBERLANDESGERICHT STUTTGART) dismissed an appeal in June 2001. The
shareholders appealed the decision of the Stuttgart Court of Appeals (REVISION)
to the Federal Supreme Court (BUNDESGERICHTSHOF) in July 2001. In March 2002 the
Federal Supreme Court decided not to admit the appeal. In April 2002, the
shareholders appealed to the Federal Constitutional Court
(BUNDESVERFASSUNGSGERICHT).
In 2001, we granted board of management members and other levels of
management stock options under a shareholder approved option plan. Those options
are exercisable at a reference price of [EURO]55.80 plus a 20% exercise premium.
They become exercisable in two equal installments on April 1, 2003 and on
April 1, 2004 and expire on April 1, 2011. If the market price per ordinary
share on the date of exercise is at least 20% higher than the reference price,
the holder is additionally entitled to receive a cash payment equal to the
original exercise premium of 20% multiplied by the number of stock options
exercised. For a description of options granted in 2002, see the discussion
under the heading "Compensation."
Please refer to "Compensation" as well as Notes 1 and 24 to our Consolidated
Financial Statements for additional details on options granted to members of our
board of management and our supervisory board.
As part of our value-based management approach, we support employee stock
ownership. We offer the opportunity to purchase our ordinary shares to employees
of our companies incorporated in Germany, Austria, France, Italy, the
Netherlands, Portugal, Spain, Switzerland and the United Kingdom. In 2002, each
eligible employee of our companies incorporated in Germany had the right to
acquire up to 90 shares with a maximum aggregate discount of [EURO]154 plus one
bonus share. Employees of our German companies acquired a total of approximately
1,075,000 shares in 2002. The programs established for employees in other
European countries follow the German program except for changes resulting from
different national legal requirements. In these countries, employees acquired a
total of approximately 34,000 shares in 2002.
In addition, under the option plan pursuant to which we provided options to
members of our board of management in 2002 we also provided options to other
levels of management.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
MAJOR SHAREHOLDERS
Our capital stock consists of ordinary shares without par value
(STUECKAKTIEN). Our ordinary shares are issued in registered form. Under our
memorandum and articles of association (SATZUNG), each ordinary share represents
one vote. Major shareholders do not have different voting rights.
Under the German Securities Trading Act (WERTPAPIERHANDELSGESETZ),
shareholders of a listed German company must notify the company of the level of
their holding whenever it reaches, exceeds, or falls below specified thresholds.
These thresholds are 5%, 10%, 25%, 50% and 75% of a company's outstanding voting
rights.
The table below shows, as of December 31, 2002, holders of 5% or more of our
ordinary shares, the number of ordinary shares they hold, and their percentage
ownership:
<Table>
<Caption>
IDENTITY OF PERSON OR GROUP SHARES OWNED PERCENT
- --------------------------- ------------ --------
DB Value GmbH, a wholly owned subsidiary of Deutsche Bank
AG(1)..................................................... 119,818,714 11.8%
Kuwait Investment Authority as agent for the Government of
the State of Kuwait....................................... 73,169,320 7.2%
</Table>
- ------------------------------
(1) Deutsche Bank AG filed a Schedule 13G on February 5, 2003, in which Deutsche
Bank reported dispositive power with respect to 137,241,393 shares (13.5% of
the shares outstanding), including shares held by its subsidiary DB
Industrial Holdings AG.
------------------------------
As of December 31, 2002, we had approximately 1.8 million stockholders.
Approximately 250,000 were U.S. holders, of which approximately 75,000 were
record holders. Based on our share register, U.S. holders held approximately 14%
of our ordinary shares as of that date.
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For further information, you should read "Share Ownership" in "Item 6.
Directors, Senior Management and Employees."
RELATED PARTY TRANSACTIONS
We purchase materials, supplies and services from numerous suppliers
throughout the world in the ordinary course of our business. These suppliers
include firms in which we hold an ownership interest and firms that are
affiliated with some members of our Supervisory Board.
DB Value GmbH, a wholly owned subsidiary of Deutsche Bank AG, owns
approximately 12% of our outstanding shares. Deutsche Bank AG and its
subsidiaries provided us with various financial and other services for which we
paid them reasonable and customary fees. Hilmar Kopper, the Chairman of our
Supervisory Board was also Chairman of the Supervisory Board of Deutsche Bank AG
until May 22, 2002.
Mitsubishi Motor Manufacturing of America, a subsidiary of Mitsubishi Motors
Corporation, produces the Dodge Stratus and Chrysler Sebring coupes for us. We
beneficially own a 37.1% equity interest in Mitsubishi Motors Corporation.
We have an agreement with McLaren Cars Ltd., a wholly owned subsidiary of
TAG McLaren Holdings Ltd., for the design and production of a new
high-performance sports car, the SLR, which we expect to launch by the end of
2003. We own a 40% equity interest in TAG McLaren Holdings Ltd.
We increased our stake in the Formula 1 engine manufacturer Ilmor
Engineering Ltd. from 25% to 55% in December 2002 and have agreed to gradually
acquire the remaining shares by 2005. We have shared responsibility with Ilmor
Engineering Ltd. for the development, design and production of Mercedes-Benz
Formula 1 engines since 1993. We supply these engines to the West McLaren
Formula 1 team in support of motor sport activities under the Mercedes-Benz
brand.
In May 2002, DaimlerChrysler Corporation sold its Dayton thermal products
facility to Behr Dayton Thermal Products LLC, a joint venture company in which
Behr America, Inc. owns a majority interest and DaimlerChrysler Corporation owns
a minority interest. Under a supply agreement entered into in connection with
the sale, DaimlerChrysler Corporation has the obligation to maintain its
minority interest through May 2004 and to purchase products from the joint
venture company.
Our subsidiaries DaimlerChrysler Services AG, DaimlerChrysler Coordination
Center S.A. and DaimlerChrysler Aerospace AG granted a series of loans to debis
AirFinance B.V., an aircraft leasing and finance company. Through our
subsidiaries DaimlerChrysler Services AG and DaimlerChrysler Aerospace AG, we
hold a 45% interest in debis AirFinance B.V. The total book value of these loans
as of December 31, 2002, was [EURO]623 million, the highest aggregate amount
outstanding during 2002 was [EURO]650 million. The interest rates are partially
fixed, partially based on Libor. We consider those interest rates to be in line
with interest terms currently available in the financial markets.
In October 2000, we combined our information technology activities with
those of Deutsche Telekom AG in a joint venture which became known as T-Systems
ITS GmbH. We held a 49.9% equity interest in T-Systems ITS until March 2002. We
continue to purchase products and services from T-Systems ITS.
In April, 2002, we exercised our option to sell our 40% interest in Conti
Temic microelectronic GmbH to Continental. We continue to purchase products from
Conti Temic.
We incurred expenses of approximately $846,000 in 2002 for advertising and
related marketing activities with Black Enterprise magazine. Earl G. Graves, a
member of our Supervisory Board, is the Chairman, Chief Executive Officer and
sole stockholder of the magazine's ultimate parent company.
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ITEM 8. FINANCIAL INFORMATION.
CONSOLIDATED FINANCIAL STATEMENTS
Please refer to "Item 18. Financial Statements" and to pages F-i, F-1
through F-76 and page S-1 of this annual report.
OTHER FINANCIAL INFORMATION
EXPORT SALES
In 2002, we exported approximately 731,000 or 63% of all passenger cars and
commercial vehicles we produced in Germany and approximately 357,000 or 18% of
all passenger cars and trucks we produced in the United States to other
countries.
LEGAL PROCEEDINGS
Various legal proceedings are pending against the Group. With two
exceptions, we believe that such proceedings constitute ordinary routine
litigation incidental to our business. These exceptions are the purported class
actions by South African plaintiffs and the shareholder lawsuit discussed below.
For information on regulatory and administrative proceedings please also refer
to the discussion under the heading "Government Regulation and Environmental
Matters -- Environmental Matters" in "Item 4. Information on the Company."
Various legal proceedings pending against our subsidiary DaimlerChrysler
Corporation allege defects in various components (including door and liftgate
latches, occupant restraint systems, seats, brake systems, and fuel systems) in
several different vehicle models or allege design defects relating to vehicle
stability (rollover propensity), pedal misapplication (sudden acceleration), or
crashworthiness. Some of these proceedings seek repair or replacement of the
vehicles or compensation for their alleged reduction in value, while others seek
recovery for personal injuries. Adverse decisions in these proceedings could
require DaimlerChrysler Corporation to pay substantial compensatory and punitive
damages, or undertake service actions, recall campaigns or other costly actions.
As previously reported, on February 18, 1999, a jury awarded $54.75 million
([EURO]52.22 million) in compensatory damages and $3.7 million
([EURO]3.5 million) in punitive damages to the owners of approximately 75,000
1988 3/4 -1990 model year Chrysler vehicles in Crawley vs. Chrysler Corporation,
a class action lawsuit tried in the Court of Common Pleas, Philadelphia,
Pennsylvania. The complaint alleged that the air bags in those vehicles were
defective because the vent hole positions could cause hand burns when the air
bags deploy. Our subsidiary DaimlerChrysler Corporation appealed the decision
and in October 2002, the court of appeals decertified the class and vacated the
judgment.
Four purported class action lawsuits are pending in various U.S. and
Canadian courts that allege that the paint applied to 1982-1997 model year
Chrysler, Plymouth, Jeep-Registered Trademark- and Dodge vehicles delaminates,
peels or chips as the result of defective paint, paint primer, or application
processes. Plaintiffs seek compensatory and punitive damages, costs of repair or
replacement, attorneys' fees and costs. Six other previously reported class
action lawsuits regarding paint delamination have been dismissed.
As previously reported, we received a "statement of objections" from the
European Commission on April 1, 1999, which alleged that we violated EC
competition rules by impeding cross-border sales of Mercedes-Benz passenger cars
to final customers in the European Economic Area. In October 2001, the European
Commission found that we infringed EC competition rules and imposed a fine of
approximately [EURO]72 million. Our appeal is pending.
As previously reported, in the fourth quarter of 2000, Tracinda Corporation
filed a lawsuit in the United States District Court for the District of Delaware
against us (DaimlerChrysler AG) and some of the members of
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our supervisory board and board of management (Messrs. Kopper, Schrempp and
Gentz). Shortly thereafter, other plaintiffs filed a number of actions against
the same defendants, making similar claims to those in the Tracinda complaint.
Two individual lawsuits and one consolidated class action lawsuit are pending.
The plaintiffs, current or former DaimlerChrysler shareholders, allege that the
defendants violated U.S. securities law and committed fraud in obtaining
approval from Chrysler stockholders of the business combination between Chrysler
and Daimler-Benz in 1998. In essence, the complaints allege that by describing
the transaction as a "merger of equals" in the proxy statement/prospectus and
other statements preceding the special meeting of Chrysler stockholders called
to vote on the business combination agreement, the defendants misrepresented
that DaimlerChrysler would operate as two equal companies, while they always
intended to relegate Chrysler to division status and to replace Chrysler's
management with executives from Daimler-Benz. The complaints generally seek
(a) actual damages, including an acquisition premium, (b) "recissory" damages
representing the difference between the value of the Chrysler common stock
exchanged and the present value of the DaimlerChrysler shares, (c) compensatory
and, in the individual actions, punitive damages, (d) an order unwinding the
transaction, (e) pre- and post-judgment interest, and (f) such other relief as
may be just and proper. In April 2001, all of the pending class action
complaints were consolidated into a single consolidated class action complaint
that included two claims not previously alleged in any of the complaints. The
new claims alleged that we had violated U.S. securities laws by making false and
misleading statements in 1999 and 2000 regarding our prospects for the year
2000. On May 9, 2001, we filed motions to dismiss all three complaints. In
March 2002, the Court granted the motion as to the consolidated class action
complaint, denied the motion as to the Tracinda Corporation complaint except for
the civil conspiracy claim in that complaint, and denied the motion as to the
other complaint filed by Glickenhaus & Co., et al. The Court subsequently
allowed the class action plaintiffs to amend their complaint, which is now
pending. These cases have been consolidated for purposes of discovery and are
captioned In re: DaimlerChrysler AG Securities Litigation. The parties
substantially completed discovery in January 2003. In February 2003, we filed
motions seeking summary judgment on all claims in the cases. We are presently
scheduled for trial of all the consolidated actions in the second quarter of
2003. We believe the complaints in this litigation are without merit and plan to
continue defending against them vigorously.
As previously reported, on April 30, 2001, we sold our subsidiary,
DaimlerChrysler Rail Systems GmbH, (also known as Adtranz), to
Bombardier, Inc., for cash consideration of $725 million. In July 2002,
Bombardier filed a request for arbitration with the International Chamber of
Commerce in Paris, and asserted claims for sales price adjustments under the
terms of the sale and purchase agreement as well as claims for alleged breaches
of contract and misrepresentations. Bombardier seeks total damages of
approximately [EURO]960 million. The agreement limits the amount of such price
adjustments to [EURO]150 million, and, to the extent legally permissible, the
amount of other claims to an additional [EURO]150 million. We plan to continue
defending against such claims vigorously.
Like other companies in the automotive industry, we (primarily
DaimlerChrysler Corporation) have experienced a growing number of lawsuits which
seek compensatory and punitive damages for illnesses alleged to have resulted
from direct and indirect exposure to asbestos used in some vehicle components
(principally brake pads). Typically, these suits name many other corporate
defendants and may also include claims of exposure to a variety of
non-automotive asbestos products. A single lawsuit may include claims by
multiple plaintiffs alleging illness in the form of asbestosis, mesothelioma or
other cancer or illness. The number of claims in these lawsuits increased from
approximately 14,000 at the end of 2001 to approximately 19,000 at the end of
January 2003. In the majority of these cases, plaintiffs do not specify their
alleged illness and provide little detail about their alleged exposure to
components in our vehicles. Some plaintiffs do not exhibit current illness, but
seek recovery based on potential future illness. In 2001, we and other
automobile manufacturers asked the federal bankruptcy court in Delaware
overseeing the bankruptcy proceedings of an automotive supplier, Federal-Mogul
Corporation, to consolidate all of the asbestos brake cases pending in state
courts throughout the U.S. with the asbestos brake litigation involving Federal
Mogul supervised by the bankruptcy court. We believed that consolidation would
reduce the cost and complexity of defending these individual cases. In 2002, the
bankruptcy court decided that it did not have the authority to consolidate these
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cases, and the U.S. Court of Appeals upheld that decision. The U.S. Supreme
Court in January 2003 denied our request and that of other manufacturers to
review the decision. We believe that many of these lawsuits involve
unsubstantiated illnesses or assert only tenuous connections with components in
our vehicles, and that there is credible scientific evidence to support the
dismissal of many of these claims. Although our expenditures to date in
connection with such claims have not been material to our financial condition,
it is possible that the number of these lawsuits will continue to grow,
especially those alleging life-threatening illness, and that the company could
incur significant costs in the future in resolving these lawsuits.
In September 2000, Freightliner LLC, our North American commercial vehicles
subsidiary, acquired Western Star Trucks Holdings Ltd., a Canadian company
engaged in the design, assembly, and distribution of heavy duty trucks and
transit buses. Prior to its acquisition by Freightliner, Western Star had
completed the sale of ERF (Holdings) Plc, a company organized in England and
Wales and engaged in the assembly and sale of heavy duty trucks, to MAN AG and
MAN Nutzfahrzeuge AG for CAD195 million. In September 2002, MAN filed a claim
against Freightliner Ltd. (formerly Western Star) with the London Commercial
Court for breach of representations and warranties in the share purchase
agreement. The claim includes allegations that ERF's accounts and financial
statements were misstated and seeks to recover damages in excess of
GBP300 million. Freightliner Ltd. intends to defend itself vigorously against
such claims.
A purported class action lawsuit was filed in 2002 in the United States
District Court for the District of New Jersey against our subsidiary
Mercedes-Benz USA, LLC (MBUSA), and against MBUSA's wholly-owned subsidiary
Mercedes-Benz Manhattan, Inc. The lawsuit alleges that MBUSA and Mercedes-Benz
Manhattan participated in a price fixing conspiracy among Mercedes-Benz dealers.
A motion for class certification is pending. MBUSA and Mercedes-Benz Manhattan
intend to defend themselves vigorously. In addition, the Antitrust Division of
the U.S. Department of Justice, New York Regional Office, advised MBUSA and
Mercedes-Benz Manhattan that it is conducting a criminal investigation in
connection with the allegations made in the lawsuit. MBUSA and Mercedes-Benz
Manhattan have been served with grand jury subpoenas in connection with this
investigation.
Three lawsuits have recently been brought against us (DaimlerChrysler AG) or
some of our affiliates raising claims arising out of the practice of apartheid
in South Africa before 1994. In particular, on September 27, 2002, a putative
class action covering claims arising between 1952 and 1994, captioned Digwamaje
v. Bank of America, No. 02-CV-6218 (RCC) (S.D.N.Y.), was filed in the United
States District Court for the Southern District of New York naming 84 U.S.,
European and Japanese companies, including DaimlerChrysler AG, as defendants. On
November 11, 2002, 91 individuals filed a lawsuit captioned Khulumani v.
Barclays National Bank Ltd., Civ. A. No. 02-5952 (E.D.N.Y.) in the United States
District Court for the Eastern District of New York against 22 U.S., European
and Japanese corporate defendants, including DaimlerChrysler AG and Daimler-Benz
Industrie. This lawsuit covers the period from 1960 to 1993. On November 19,
2002, another putative class action lawsuit, Ntsebeza v. Holcim Ltd.,
No. 02-74604 (RWS) (E.D. Mich.), was filed in the United States District Court
for the Eastern District of Michigan naming as defendants four U.S. and European
companies, including DaimlerChrysler Corporation, and asserting claims arising
from 1948 to 1993. All three lawsuits allege, in essence, that the corporate
defendants knew about or participated in human rights violations and other
abuses of the South African apartheid regime, cooperated with the apartheid
government during that period, and benefited financially from such cooperation.
The plaintiffs assert various claims, including conspiracy, aiding and abetting
the apartheid regime, violations of the Racketeering Influence and Corrupt
Organizations Act, violations of international law and the Alien Tort Claims
Act, unjust enrichment and unfair and discriminatory labor practices. The
plaintiffs seek compensatory and punitive damages, disgorgement of purported
illicit profits, an accounting, restitution of the value of defendants'
purported unjust enrichment, and other forms of relief, including in the
Digwamaje case the establishment of a "historic commission." Plaintiffs in the
Digwamaje case purport to seek compensatory damages in excess of $200 billion
and punitive damages in excess of $200 billion. The complaints in the other two
lawsuits to not specify damages. We intend to defend against these claims
vigorously.
Litigation is subject to many uncertainties, and we cannot predict the
outcome of individual matters with assurance. It is reasonably possible that the
final resolution of some of these matters could require us to make expenditures,
in excess of established reserves, over an extended period of time and in a
range of amounts that we
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cannot reasonably estimate. Although the final resolution of any such matters
could have a material effect on our consolidated operating results for a
particular reporting period, we believe that it should not materially affect our
consolidated financial position.
DIVIDEND POLICY
Our supervisory board and our board of management propose dividends based on
the earnings shown in our year-end unconsolidated financial statements, prepared
under German generally accepted accounting principles pursuant to the German
Commercial Code. The two boards then submit their proposal for approval at the
annual general meeting of shareholders, which we generally hold during the
second quarter of the following year. Shareholders of record on the date of the
annual general meeting at which we declare a dividend are entitled to receive
the dividend, less any amounts required to be withheld on account of taxes or
other governmental charges. We generally pay dividends each year and expect to
continue to do so in the near future. We may not, however, pay dividends in the
future at rates we have paid in previous years. Our payment of future dividends
will depend upon our earnings, our financial condition, including our cash
needs, our future earnings prospects and other factors. For a discussion of our
2002 operating results, please refer to "Item 5. Operating and Financial Review
and Prospects."
Deutsche Bank AG acts as our global paying agent and distributes cash
dividends payable to holders of our ordinary shares. In Germany, the paying
agent generally makes the payment to the holder's depot bank where the holder
maintains a securities account. The depot bank then credits the payment to the
shareholder's cash account. The Bank of New York acts as our U.S. paying agent
and distributes cash dividends to shareholders of record in the United States.
Shareholders in the United States that are not recorded on the books of the U.S.
paying agent receive the dividend payment as a credit to their brokerage or
other account through the Depository Trust Company system established by U.S.
banks and brokers. Unless instructed otherwise, the U.S. paying agent will
convert cash dividends payable to shareholders in the United States from euros
into U.S. dollars. Fluctuations in exchange rates may affect the U.S. dollar
amounts of dividends received by holders of our ordinary shares. For additional
information on dividends and exchange rates please refer to "Item 3. Key
Information."
ITEM 9. THE OFFER AND LISTING.
TRADING MARKETS
The principal trading markets for our ordinary shares are the Frankfurt
Stock Exchange and the New York Stock Exchange. Our ordinary shares are also
listed on the German stock exchanges in Berlin, Bremen, Duesseldorf, Hamburg,
Hanover, Munich and Stuttgart, in the United States on the Chicago, Pacific, and
Philadelphia stock exchanges, on the stock exchanges in Paris and Tokyo, and on
the Swiss stock exchange.
As of December 31, 2002, our ordinary shares represented approximately 8.1%
of the Deutsche Aktienindex (DAX), the leading index of trading on the Frankfurt
Stock Exchange. Our shares also represented 1.2% of the Dow Jones STOXX 50(SM),
which covers stocks from 8 European equity markets, and 2.1% of the Dow Jones
EURO STOXX 50(SM), which covers stocks from the equity markets of those member
states of the European Union that adopted the euro as their common legal
currency. The transfer agents for our ordinary shares are Deutsche Bank AG in
Germany and The Bank of New York in the United States.
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TRADING ON THE FRANKFURT STOCK EXCHANGE
Deutsche Boerse AG is the legal entity operating the Frankfurt Stock
Exchange. The Frankfurt Stock Exchange is the most significant of the eight
German stock exchanges and accounts for the vast majority of the turnover in
exchange-traded shares in Germany. As of December 31, 2002, equity securities of
5,768 companies traded on the Frankfurt Stock Exchange, of which 4,901 were
non-German.
Trading on the floor of the Frankfurt Stock Exchange commences each business
day at 9:00 a.m. and continues until 8:00 p.m., Central European Time. Markets
in listed securities are generally of the auction type, but listed securities
also change hands in inter-bank dealer markets both on and off the stock
exchange. Price formation is by open outcry as determined by state appointed
specialists (AMTLICHE KURSMAKLER) who are exchange members. These specialists do
not, as a rule, deal with the general public. The exchange quotes prices for
active stocks, including those of larger companies, continuously during stock
exchange hours. For all other stocks, a fixed price is determined by auction
around mid-session of each trading day. Transactions settle on the second
business day following the day of their trade.
Our ordinary shares trade on the floor of the Frankfurt Stock Exchange and
also on Xetra which stands for Exchange Electronic Trading. Xetra is an
integrated electronic exchange system operated by Deutsche Boerse AG that is
available daily from 9:00 a.m. to 8:00 p.m., Central European Time. The system
may be used by brokers and banks admitted to Xetra by the Frankfurt Stock
Exchange. Securities traded in this system include liquid stocks, warrants, and
bonds traded on the floor of the Frankfurt Stock Exchange. Xetra is an integral
part of the Frankfurt Stock Exchange and is subject to its rules and
regulations. In 2002, Xetra accounted for approximately 96% of the trading
volume of our ordinary shares at the Frankfurt Stock Exchange.
The Federal Financial Supervisory Authority (BUNDESANSTALT FUER
FINANZDIENSTLEISTUNGSAUFSICHT) monitors all trading activities on the German
stock exchanges. All orders from customers to buy or sell listed securities must
be executed on a stock exchange unless a customer gives specific instructions to
the contrary.
The table below shows, for the periods indicated, the Xetra high and low
sales prices for our ordinary shares from November 17, 1998, the first day on
which our ordinary shares officially traded on the Frankfurt Stock Exchange. The
table also shows, for the periods indicated, the Xetra highs and lows of the
DAX. The DAX is a continuously updated, capital-weighted performance index of
the 30 largest German companies that are part of the prime standard. Since
January 1, 2003, the German securities markets consist of only two segments, the
general standard and the prime standard. The prime standard is the top category
of the two segments and requires its participants to meet additional criteria
and to follow more stringent disclosure and reporting requirements. We have been
included in the DAX since the merger of Daimler-Benz and Chrysler in
November 1998 and, effective January 1, 2003, became a member of the prime
standard. A German stock corporation must be listed in the prime standard
segment in order to be eligible for inclusion in the German indices, such as the
DAX. Adjustments of the DAX are made for capital changes, subscription rights
and dividends. For additional information regarding rates of exchange between
the U.S. dollar and the deutsche mark, and the U.S. dollar and the euro, please
refer to "Exchange Rate Information" in "Item 3. Key Information."
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<Table>
<Caption>
PRICE PER
DAIMLERCHRYSLER
ORDINARY SHARE DAX
---------------------- ----------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
([EURO])
ANNUAL HIGHS AND LOWS
1998 (from November 17, 1998)(1)....................... 85.90 70.61 5,174.42 4,435.94
1999................................................... 95.79 63.26 6,992.92 4,601.07
2000................................................... 79.97 42.70 8,136.16 6,110.26
2001................................................... 58.19 27.24 6,795.14 3,539.18
2002................................................... 55.44 28.16 5,467.31 2,519.30
QUARTERLY HIGHS AND LOWS
2001
First Quarter...................................... 57.39 43.27 6,795.14 5,351.48
Second Quarter..................................... 58.19 48.65 6,337.47 5,383.99
Third Quarter...................................... 57.80 27.24 6,131.97 3,539.18
Fourth Quarter..................................... 51.25 32.55 5,341.86 4,157.60
2002
First Quarter...................................... 54.47 40.36 5,467.31 4,706.01
Second Quarter..................................... 55.44 43.06 5,379.64 3,946.70
Third Quarter...................................... 49.38 32.81 4,483.03 2,719.49
Fourth Quarter..................................... 40.45 28.16 3,476.83 2,519.30
MONTHLY HIGHS AND LOWS
2002
July............................................... 49.38 37.65 4,483.03 3,265.96
August............................................. 47.98 38.00 3,930.96 3,235.38
September.......................................... 45.50 32.81 3,698.69 2,719.49
October............................................ 40.45 30.17 3,299.01 2,519.30
November........................................... 37.31 30.85 3,443.49 2,987.85
December........................................... 37.42 28.16 3,476.83 2,836.01
2003
January............................................ 31.95 25.42 3,157.25 2,563.92
February (through February 13, 2003)............... 29.73 26.41 2,802.40 2,528.90
</Table>
- ------------------------------
(1) We converted the 1998 deutsche mark sales prices into euros at the fixed
rate of DM1.95583 per euro.
------------------------------
On February 13, 2003, the closing sales price for our ordinary shares on
Xetra was [EURO]26.68. This price was equivalent to $28.91 per ordinary share,
translated at the noon buying rate for euros on that date.
Based on turnover statistics supplied by the Frankfurt Stock Exchange, the
average daily volume of our ordinary shares traded on the exchange (including
Xetra) in 2002 was 5.7 million. As of December 31, 2002, the market
capitalization of our company on the Frankfurt Stock Exchange was [EURO]29.7
billion.
TRADING ON THE NEW YORK STOCK EXCHANGE
Official trading of our ordinary shares on the New York Stock Exchange
commenced on November 17, 1998. Our ordinary shares trade under the symbol
"DCX."
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The following table shows, for the periods indicated, the high and low sales
prices per ordinary share as reported on the New York Stock Exchange Composite
Tape.
<Table>
<Caption>
PRICE PER
DAIMLERCHRYSLER
ORDINARY SHARE
-------------------
HIGH LOW
-------- --------
($)
ANNUAL HIGHS AND LOWS
1998 (from November 17, 1998)............................... 99.06 82.38
1999........................................................ 108.63 65.31
2000........................................................ 78.69 37.75
2001........................................................ 52.72 25.60
2002........................................................ 50.88 29.78
QUARTERLY HIGHS AND LOWS
2001
First Quarter........................................... 52.72 41.01
Second Quarter.......................................... 51.75 42.42
Third Quarter........................................... 50.48 25.60
Fourth Quarter.......................................... 44.68 30.30
2002
First Quarter........................................... 48.12 35.33
Second Quarter.......................................... 50.88 42.66
Third Quarter........................................... 48.31 32.94
Fourth Quarter.......................................... 38.72 29.78
MONTHLY HIGHS AND LOWS
2002
July.................................................... 48.31 37.67
August.................................................. 47.30 38.16
September............................................... 44.75 32.94
October................................................. 38.72 29.83
November................................................ 36.91 31.18
December................................................ 36.69 29.78
2003
January................................................. 33.14 28.10
February (through February 13, 2003).................... 31.69 28.63
</Table>
------------------------
On February 13, 2003, the closing sales price for our ordinary shares on the
New York Stock Exchange as reported on the NYSE Composite Tape was $28.95.
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ITEM 10. ADDITIONAL INFORMATION.
OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
In connection with the transfer of most of our aerospace activities to EADS
in July 2000, Dornier GmbH became an indirect subsidiary of EADS. Some of
Dornier's minority shareholders may at any time exchange their shares in Dornier
for cash or for our ordinary shares or shares in our subsidiary DaimlerChrysler
Luft- und Raumfahrt Holding Aktiengesellschaft which previously held a majority
interest in Dornier. One of the Dornier minority shareholders partially
exercised this right in 2002 and asked to exchange some of his Dornier shares.
As of February 20, 2003, the exchange transaction was not completed. Those
Dornier shareholders who previously exchanged some or all of their Dornier
shares for shares of DaimlerChrysler Luft- und Raumfahrt Holding
Aktiengesellschaft retain the right to exchange these new shares for cash or for
our ordinary shares and some of them have already partially exercised this
right.
In 1996, our subsidiary Daimler-Benz Capital (Luxembourg) AG, now known as
DaimlerChrysler Luxembourg Capital S.A., issued 4 1/8% bearer notes with
accompanying warrants due July 5, 2003. These notes bear a nominal amount of DM
1,000 ([EURO]511) per note. The warrants accompanying each note originally
entitled the noteholder to receive 10.254 ordinary shares of our predecessor,
Daimler-Benz AG. These shares were to consist in part of shares already issued
and in part of newly issued shares. Following the merger of Daimler-Benz with
Chrysler, these warrants changed into warrants for our ordinary shares pursuant
to Section 23 of the German Transformation Act (UMWANDLUNGSGESETZ). The warrant
accompanying each note now entitles the noteholder to receive 10.30527 of our
ordinary shares. As of February 13, 2003, warrants for approximately
1.1 million of new ordinary shares were outstanding.
In 1997, Daimler-Benz AG issued 5 3/4% subordinated mandatory convertible
notes due June 14, 2002 which were convertible into newly issued Daimler-Benz
shares on or before June 4, 2002. Following the merger of Daimler-Benz with
Chrysler, these notes, including notes represented by American Depositary Notes
and DM Book Entry Securities, became our obligations pursuant to Section 23 of
the German Transformation Act and became convertible into our ordinary shares.
Between January 1 and June 4, 2002, we issued 17,927 of our ordinary shares upon
exercise of these notes. As of June 14, 2002, the mandatory conversion date,
7,572,881 notes remained outstanding. These notes were mandatorily converted
into 9,506,483 of our ordinary shares in accordance with the formula prescribed
in the terms of the notes. In addition, we paid a total amount of [EURO]438,202
in cash in lieu of fractional shares. For additional information on this
conversion, please refer to Note 23 to our Consolidated Financial Statements.
In addition, members of our board of management and other levels of
management hold options granted under the stock option plan approved by the
shareholders of Daimler-Benz AG in 1996 and under the stock option plan approved
by the shareholders of DaimlerChrysler AG in 2000. Tranches of the approved 2000
stock option plan were granted in 2000, 2001 and 2002. For additional
information on shares and options held by members of our supervisory board and
our board of management please refer to "Item 6. Directors, Senior Management
and Employees -- Share Ownership."
MEMORANDUM AND ARTICLES OF ASSOCIATION
ORGANIZATION AND REGISTER
DaimlerChrysler AG is a stock corporation organized in the Federal Republic
of Germany under the German Stock Corporation Law (AKTIENGESETZ). It is
registered in the Commercial Register (HANDELSREGISTER) maintained by the local
court in Stuttgart, Germany, under the entry number "HRB 19360."
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CORPORATE GOVERNANCE
German stock corporations are principally governed by three separate bodies:
the annual general meeting of shareholders, the supervisory board and the board
of management. Their roles are defined by German law and by the corporation's
memorandum and articles of association (SATZUNG), and may be described generally
as follows:
- THE ANNUAL GENERAL MEETING OF SHAREHOLDERS -- ratifies the actions of the
corporation's supervisory board and board of management. At the annual
general meeting, shareholders approve the amount of the annual dividend,
the appointment of an independent auditor, and certain significant
corporate transactions. In corporations with more than 2,000 employees,
such as us, shareholders and employees elect or appoint an equal number of
representatives to the supervisory board. The annual general meeting must
be held within the first eight months of each fiscal year.
- THE SUPERVISORY BOARD -- appoints and removes the members of the board of
management and oversees the management of the corporation. Although German
law requires that a corporation's articles of association or its
supervisory board specify categories of transactions which will require
the approval of the supervisory board, German law prohibits the
supervisory board from making management decisions.
- THE BOARD OF MANAGEMENT -- manages the corporation's business and
represents it in dealings with third parties. The board of management
submits regular reports to the supervisory board about the corporation's
operations, business strategies, financial condition and other important
matters affecting its long-term performance and profitability. It also
prepares special reports upon request. A person may not serve on the board
of management and the supervisory board of a corporation at the same time.
Several of our specific corporate governance provisions are summarized
below.
BUSINESS PURPOSES
Our articles of association state that our business purpose is to pursue,
directly or indirectly, business in the fields of development, production and
sale of products and rendering of services, especially in the following lines of
business:
- vehicles for use on land;
- vehicles for use on water, in the air and in space and other products in
the fields of transport, aerospace, space, and marine technology;
- engines and other technological propulsion systems;
- plants, machinery and equipment for power generation, distribution and
utilization;
- electrical and electronic equipment, plants and systems;
- communication and information technology, business consulting;
- financial services of all kinds, insurance brokerage, and activities in
the fields of media and expositions; and
- management and development of real property.
Our articles authorize us to take all actions that serve the attainment of
our business purposes, except that we (DaimlerChrysler AG) are not permitted to
carry out directly banking and real property transactions that require a
government license.
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DIRECTORS
Under German law, our supervisory board members and board of management
members owe a duty of loyalty and care to our company. They must exercise the
standard of care of a prudent and diligent businessman and bear the burden of
proving they did so if their actions are contested. Both boards must consider
the interests of our shareholders, our workers and, to some extent, the common
interest. Those who violate their duties may be held jointly and severally
liable for any resulting damages, unless their actions were validly approved by
resolution at a shareholders' meeting. According to German law, our supervisory
board or board of management members may not receive a loan from us unless
approved by our supervisory board, and may not vote on a matter that concerns
ratification of his or her own acts or in which he or she has a material
interest. Separate from the limitations on loans imposed by German law, the
Sarbanes-Oxley Act, which was enacted in the United States in July 2002 and
which is also applicable to foreign private issuers such as us, now prohibits
almost all loans to directors and executive officers. This prohibition applies
to members of our supervisory board and our board of management. The
compensation of our supervisory board members is fixed in our articles of
association. A change to our articles requires the approval of our shareholders.
At the present time, the terms of the members of our supervisory board are not
staggered, except that the current term of the current employee representatives
on our supervisory board expires one year prior to the term of our current
shareholder representatives. For further information about our supervisory board
and board of management, please refer to "Item 6. Directors, Senior Management
and Employees."
ORDINARY SHARES
Our capital stock consists solely of ordinary shares without par value
(STUECKAKTIEN), which we issued in registered form. Record holders of our
ordinary shares are registered in our share register (AKTIENREGISTER). Deutsche
Bank AG acts as our transfer agent and registrar in Germany and various other
countries and administers our share register on our behalf. Our transfer agent
and registrar in the United States is The Bank of New York.
Following is a summary of significant provisions under German law and our
articles of association relating to our ordinary shares:
- CAPITAL INCREASES. We may increase our share capital in consideration of
contributions in cash or in property, or by establishing authorized
capital or conditional capital. Authorized capital provides our board of
management with the flexibility to issue new shares during a period of up
to five years, generally to preserve liquidity. Conditional capital allows
our board of management to issue new shares for specified purposes,
including employee stock option plans, mergers, and upon conversion of
option bonds and convertible bonds. Authorized and conditional capital
increases require an approval by 75% of the issued shares present at the
shareholders' meeting at which the increase is proposed. Our board of
management must also obtain the approval of our supervisory board before
issuing new shares. Our articles of association do not contain conditions
regarding changes in the share capital that are more stringent than the
law requires.
- REDEMPTION. Our share capital may be reduced by an amendment of the
articles of association approved by 75% of the issued shares present at
the shareholders' meeting.
- PREEMPTIVE RIGHTS. Our articles of association provide that the preemptive
right of shareholders to subscribe (BEZUGSRECHT) for any issue of
additional shares, debt instruments convertible into shares, or
participating debt instruments in proportion to their shareholdings in the
existing capital may be excluded under certain circumstances.
- LIQUIDATION. If we were to be liquidated, any liquidation proceeds
remaining after all of our liabilities were paid would be distributed to
our shareholders in proportion to their shareholdings.
- NO LIMITATION ON FOREIGN OWNERSHIP. Neither German law nor our articles of
association limit the right of persons who are not citizens or residents
of Germany to hold or vote our ordinary shares.
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DIVIDENDS
We declare and pay dividends on our ordinary shares once a year after
approval by the annual general meeting of our shareholders. Our supervisory
board and board of management ratify the unconsolidated financial statements of
DaimlerChrysler AG for each fiscal year and recommend a disposition of all
unappropriated profits, including the amount of net profits to be distributed as
a dividend, to our shareholders for approval at the meeting. Shareholders
registered in the share register on the date of the meeting are entitled to
receive the dividend. We pay dividends to shareholders in proportion to their
percentage ownership of our outstanding capital stock.
Our articles of association authorize our board of management, with the
approval of our supervisory board, to make an interim payment to shareholders
with respect to the unappropriated profit of the prior financial year, if a
preliminary closing of the financial statements for that year shows a profit.
The interim payment may not exceed 50% of the amount of the foreseeable
unappropriated profit, after deducting any amounts required to be added to the
disclosed reserves. Furthermore, the interim payment may not exceed 50% of the
previous fiscal year's unappropriated profit.
Our articles of association permit our board of management, with the
approval of our supervisory board, to issue new shares from capital previously
approved by the shareholders at any time during the year. Our articles further
provide that such new shares are entitled to the entire per ordinary share
annual dividend for the year in which they are issued.
Under the transfer agent agreement in place with our U.S. transfer agent,
shareholders registered in our share register with addresses in the United
States may elect to receive dividends in either euros or U.S. dollars. Unless
instructed otherwise, our U.S. transfer agent will convert all cash dividends
and other cash distributions it receives with respect to our ordinary shares
into U.S. dollars before payment to the shareholder. The U.S. transfer agent
will reduce the amount distributed by any amounts we or the U.S. transfer agent
are required to withhold on account of taxes or other governmental charges.
VOTING RIGHTS
Each of our ordinary shares represents one vote. German law does not permit
cumulative voting. Our articles of association provide that resolutions are
passed at shareholder meetings by a simple majority of votes cast, unless a
higher vote is required by law. German law requires that the following matters,
among others, be approved by the affirmative vote of 75% of the issued shares
present at the shareholders' meeting at which the matter is proposed:
- changing the objects and purposes provision in the articles of
association;
- approving authorized and conditional capital increases and capital
decreases;
- excluding preemptive rights of shareholders to subscribe for new shares;
- dissolving our company;
- merging into, or consolidating with, another stock corporation;
- transferring all or virtually all of our assets; and
- changing our corporate form.
SHAREHOLDER MEETINGS
Our board of management, our supervisory board, or shareholders owning in
the aggregate at least 5% of our issued shares may call a meeting of
shareholders. There is no minimum quorum requirement for shareholder meetings.
At the annual general meeting we ask our shareholders to ratify the actions of
our
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board of management and supervisory board during the prior year and to approve
the disposition of unappropriated profit and the appointment of an independent
auditor. Our shareholders also elect their representatives to our supervisory
board at the annual general meeting for terms of up to five years.
If a shareholder wants to participate and vote at any of our meetings, the
shareholder must be registered in the share register on the meeting date and
must also have notified us no later than the third day before the meeting that
he or she wishes to attend the meeting. Instead of voting in person at the
meeting, shareholders may vote their shares by proxy after having conferred a
power of attorney by signing and returning the proxy card mailed to them or via
Internet in advance of the meeting. We mail a meeting notice to our shareholders
which includes a proxy card, an agenda describing the items to be voted on at
the meeting, and a short form of our annual report. As a foreign private issuer,
we are not required to file a proxy statement under U.S. securities law. The
proxy voting process for our shareholders in North America is substantially
similar to the process utilized by publicly held companies incorporated in the
United States.
Amendments to our articles of association and other items for the agenda may
be proposed either by our supervisory board and board of management, or by a
shareholder or group of shareholders holding a minimum of either 5% of the
issued shares or shares representing at least [EURO]500,000 of the company's
capital stock.
CHANGE IN CONTROL
Our articles do not contain any specific provisions that would have an
effect of delaying, deferring or preventing a change in control or that would
only apply in the context of a merger, acquisition or corporate restructuring
involving us or any of our subsidiaries. On January 1, 2002, the German Takeover
Act (WERTPAPIERERWERBS- UND UEBERNAHMEGESETZ) became effective. It requires,
among other things, that a bidder seeking control of a company with its
corporate seat in Germany and traded on a European Union stock exchange must
publish advance notice of a tender offer; submit a draft offer statement to the
Federal Supervisory Authority for Securities (BUNDESANSTALT FUER
FINANZDIENSTLEISTUNGSAUFSICHT) for review; and obtain certification from a
qualified financial institution that adequate financing is in place to complete
the offer. Once a bidder has acquired shares representing 30% of the voting
power, it must make an offer for all remaining shares of the target. The
Takeover Act requires the board of management of the target to refrain from
taking any measures that may frustrate the success of the takeover offer.
However, the target board of management is permitted to take any action which a
prudent and diligent management of a company that is not the target of a
takeover bid would also take. Moreover, the target board of management may
search for other bidders and, with the prior approval of the supervisory board,
may take other defensive measures, provided that both boards act within the
parameters of their general authority under the German Stock Corporation Law.
The board of management may also adopt specific defensive measures if the
supervisory board has approved such measures and if the measures were
specifically authorized by the shareholders no later than 18 months in advance
of a takeover bid by resolution of 75% of the votes cast.
DISCLOSURE OF SHAREHOLDINGS
Our articles do not require shareholders to disclose their shareholdings.
The German Securities Trading Act (WERTPAPIERHANDELSGESETZ), however, requires
holders of voting securities of a corporation whose shares are listed on a stock
exchange to notify the corporation of the number of shares they hold if that
number reaches, exceeds or falls below specified thresholds. These thresholds
are 5%, 10%, 25%, 50% and 75% of the corporation's outstanding voting rights.
BASIS OF POTENTIAL CLAIMS
Claims against members of our supervisory board or board of management may
be asserted on our behalf if the shareholders' meeting so resolves by simple
majority or upon request of shareholders holding in the aggregate at least 10%
of the issued shares. The shareholders' meeting or a court of competent
jurisdiction,
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upon request by shareholders holding in the aggregate at least 10% (under
special circumstances 5%) of the issued shares or shares representing at least
[EURO]1,000,000 (under special circumstances [EURO]500,000) of our capital stock
must then appoint a special representative to pursue such a claim.
GERMAN CORPORATE GOVERNANCE CODE DECLARATION
We, like other publicly traded companies in Germany, are subject to the
German Corporate Governance Code. The Code, which was issued in 2002 by a
government appointed commission, recommends specific governance practices, and
requires a company's supervisory board and board of management to declare
annually whether or not the company complies with those recommendations. As 2002
is the first year in which such declarations are mandatory, they can consist
merely of a statement to the effect that the recommendations are being met or,
if not, which recommendations are not being applied. Our supervisory board and
board of management issued a statement declaring that we comply with the
Corporate Governance Code, subject to the exceptions identified in the
declaration. For shareholders and others who may wish to read the English
translation of the declaration, we have filed it as an exhibit to this annual
report and also made it available on our website at
WWW.DAIMLERCHRYSLER.COM/COMPANY/CORP_GOVERNANCE/DECLARATION/DECLARATION_E.HTM.
MATERIAL CONTRACTS
As previously reported in our annual report on Form 20-F for the year 2000,
we established an alliance with Mitsubishi Motors Corporation in October 2000.
The alliance calls for cooperation in the design, development, production and
distribution of passenger cars and light commercial vehicles. We also hold a
37.1% equity interest in Mitsubishi Motors Corporation.
As previously reported in our annual report on Form 20-F for the year 2000,
Deutsche Telekom AG and our subsidiary DaimlerChrysler Services AG formed an
information technology joint venture. Deutsche Telekom contributed
[EURO]4.6 billion in cash to DaimlerChrysler Services' information technology
subsidiary debis Systemhaus GmbH in return for which Deutsche Telekom received a
50.1% interest in debis Systemhaus (now known as T-Systems ITS). In
January 2002, we decided to exit the joint venture by exercising our option to
sell our 49.9% interest in T-Systems ITS to Deutsche Telekom for
[EURO]4.7 billion. The sale closed in March 2002 and the joint venture
terminated.
EXCHANGE CONTROLS
The euro is a fully convertible currency. There are currently no legal
restrictions in Germany on international capital movements and foreign exchange
transactions (except in limited embargo circumstances) that would prevent us
from transferring capital or paying dividends or other payments to our
shareholders who are non-residents of Germany. For statistical purposes only,
every individual or corporation residing in Germany must report to the German
Central Bank (DEUTSCHE BUNDESBANK) any payment in excess of [EURO]12,500
received from, or made to, an individual or a corporation that resides outside
of Germany (a non-resident). In addition, all German residents, except financial
institutions, must report any claims against, or liabilities payable to,
non-residents that exceed, in the aggregate, [EURO]1.5 million during any month.
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TAXATION
In this section we discuss the material United States federal income and
German tax consequences to you if you:
- are a beneficial owner of some of our ordinary shares;
- are a resident of the United States for purposes of the United States --
Germany income tax treaty (the "Income Tax Treaty"), which generally
includes: an individual United States resident; a corporation created or
organized under the laws of the United States, any state thereof or the
District of Columbia; and a partnership, estate or trust, to the extent
its income is subject to taxation in the United States as the income of a
United States resident, either in its hands or in the hands of its
partners or beneficiaries;
- are holding some of our ordinary shares as a capital asset;
- are not holding any of our ordinary shares as part of the business
property of a permanent establishment you have in Germany or, if you are
an individual, as part of a fixed base in Germany that you use to perform
independent personal services; and
- are not subject to the limitation on benefits restrictions in the Income
Tax Treaty, if you are not an individual.
We have based our discussion on existing United States federal income and
German tax law, including legislation, regulations, administrative rulings and
court decisions, as in effect on the date of this annual report. These tax laws
are subject to change, possibly with retroactive effect. Our discussion does not
address all aspects of United States federal income and German taxation that may
be relevant to you in light of your particular circumstances. For example, our
discussion does not address tax consequences resulting from shares acquired
pursuant to the exercise of an employee stock option or shares otherwise
received as compensation and it does not include tax consequences to
shareholders who are subject to special treatment under United States federal
income tax laws (for example, financial institutions, insurance companies,
tax-exempt organizations, broker-dealers and corporations that own 10% or more
of our ordinary shares). The discussion also does not address any aspects of
state, local or non-United States tax law other than some aspects of German tax
law.
WE STRONGLY URGE YOU TO CONSULT YOUR TAX ADVISOR AS TO THE UNITED STATES
FEDERAL INCOME AND GERMAN TAX CONSEQUENCES AND ANY OTHER TAX CONSEQUENCES OF
HOLDING OUR ORDINARY SHARES. YOU SHOULD ALSO DISCUSS WITH YOUR TAX ADVISOR ANY
FACTS AND CIRCUMSTANCES THAT MAY BE UNIQUE TO YOU.
TAXATION OF DIVIDENDS
German law requires German corporations, including DaimlerChrysler AG, to
withhold German tax on dividends paid to non-resident stockholders at a total
rate of 21.1%, consisting of a 20% withholding tax and a 1.1% surcharge. You can
obtain a partial refund of this 21.1% aggregate German withholding tax under the
Income Tax Treaty. Generally, United States federal income tax law requires you
to pay taxes on dividends you receive from a German corporation. You may be
permitted to claim a foreign tax credit for German income taxes that you paid on
the dividend to the extent that you are not entitled to a refund for those taxes
from the German tax authorities.
The Income Tax Treaty reduces the German withholding tax rate from 21.1% to
15% of the gross amount of the dividend you receive from a German corporation.
Therefore, you may apply for a refund of German withholding tax in an amount
equal to 6.1% of the gross amount of the dividend you received (21.1% aggregate
German withholding tax rate minus 15% Income Tax Treaty withholding tax rate).
Thus, each $1,000 of gross dividend paid to you will be subject to a German
withholding tax of $211, of which $61 may be refunded to you under the Income
Tax Treaty. Assuming you receive the $61 refund, you
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will receive in total $850 of cash for each $1,000 of gross dividend ($789
directly and $61 by way of refund). The United States federal income tax rules
will treat you as if you received a total dividend of $1,000, and you will have
to include $1,000 in your gross income. You may also be entitled to a foreign
tax credit of $150, subject to applicable limitations of United States federal
income tax law.
You must include DaimlerChrysler's euro-denominated dividends in your gross
income in a dollar amount that is based on the exchange rate on the date you
receive or are treated as having received the dividends. If you convert these
dividends into dollars on the date you receive or are treated as having received
the dividends, you should not be required to recognize foreign currency gain or
loss on the dividend. You may, however, be required to recognize foreign
currency gain or loss on your receipt of refunds of German withholding tax to
the extent that (A) the dollar value of the refund you received or were treated
as having received differs from (B) the dollar equivalent of the refund on the
date you received or were treated as having received the underlying dividend.
United States federal income tax rules treat any such foreign currency gain or
loss as ordinary income or loss.
REFUND PROCEDURES
SIMPLIFIED REFUND PROCEDURES
If you are a record holder of our ordinary shares registered in our share
register, our U.S. transfer agent, The Bank of New York, will initially receive
your dividends and will then distribute them to you. The U.S. transfer agent
will also assist you in obtaining the refund of German withholding tax under the
Income Tax Treaty. These arrangements may be amended or revoked at any time in
the future.
The U.S. transfer agent will prepare a German claim for refund on your
behalf and file it electronically with the German tax authorities. In order for
the U.S. transfer agent to file this claim for refund, the U.S. transfer agent
will prepare and mail to you, and request that you sign and return to the U.S.
transfer agent:
- a statement authorizing the U.S. transfer agent to perform these
procedures and agreeing that the German tax authorities may inform the IRS
of any refunds of German taxes you receive; and
- a document authorizing the German tax authorities to remit the refund of
withholding tax to an account other than your account.
The U.S. transfer agent will attach this signed statement to the claim for
refund of German withholding tax and file the claim with the German tax
authorities. You should request certification (IRS Form 6166) of your last filed
United States federal income tax return from the IRS and have it ready for
presentation to the U.S. transfer agent upon request. Under German tax audit
procedures, the German tax authorities may request the U.S. transfer agent to
provide them with your certification (IRS Form 6166). If you do not provide the
U.S. transfer agent with this certification within a reasonable time, the German
tax authorities will deny your refund of the German withholding taxes.
A simplified refund procedure also applies to you if you hold your ordinary
shares through a broker participating in the Depository Trust Company. Under
this procedure, the Depository Trust Company claims a refund of German
withholding taxes on your behalf by certifying your U.S. taxpayer status to the
German tax authorities. This certification is based on information that you
provide to your broker. Accordingly, if you hold your ordinary shares through a
broker participating in the Depository Trust Company, you do not need to file
refund claims through the U.S. transfer agent.
The German tax authorities will issue refunds denominated in euros. The
German tax authorities will issue these refunds to the U.S. transfer agent or
the Depository Trust Company, as the case may be, which will convert the refunds
to dollars and pay the dollar amounts to you or your broker. If the funds are
remitted to your broker, your broker will in turn remit your refund amounts to
you.
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OTHER REFUND PROCEDURES
If you are not eligible for the simplified refund procedures discussed
above, you must submit a special claim for refund to the German tax authorities
to request your refund of German withholding tax. You have to include with your
claim the original or a certified copy of the bank voucher that you received
from the U.S. transfer agent. This voucher must show the amount of tax that was
withheld. You must submit your claim within four years from the end of the
calendar year in which you received the dividend. You can obtain a form for your
claim for refund from the German tax authorities at the same address where you
will have to file your claim, which is: Bundesamt fuer Finanzen, 53221 Bonn,
Germany. Alternatively, you may obtain the form from the Embassy of the Federal
Republic of Germany at 4645 Reservoir Road, N.W., Washington, D.C. 20007-1998;
alternatively, you can download the form from the following website:
WWW.BFF-ONLINE.DE/STEUER_VORDRUCKE/KST
KAPST/CLAIMREFUNDWITHHOLDINGTAXESDIVIDENDSINTERESTS.PDF.
You must also submit to the German tax authorities a certification (IRS
Form 6166) of your last filed United States federal income tax return. You can
obtain this certification from the office of the Director of the Internal
Revenue Service Center by filing a request for the certification with the
Internal Revenue Service -- Philadelphia Service Center, Foreign Certification
Request, P.O. Box 16347, Philadelphia, PA 19114-0447. You can obtain additional
information, including IRS Publication 686, which describes the procedures for
obtaining this certification, from the Internal Revenue Service website at
WWW.IRS.GOV/PUB/IRS-PDF/P686.PDF. You must make requests for certification in
writing and include your name, social security number or employer identification
number, tax return form number and you must identify the tax period for which
you request certification. The Internal Revenue Service will send the
certification directly to the German tax authorities if you authorize the
Internal Revenue Service to do so. This certification remains valid for three
years, and you need only resubmit it in a fourth year if you would like to apply
for a refund after the initial three-year period ends.
TAXATION OF CAPITAL GAINS
The Income Tax Treaty provides that the German capital gains tax does not
apply to gains on the sale or other disposition of your DaimlerChrysler ordinary
shares.
If you sell or otherwise dispose of your DaimlerChrysler ordinary shares,
you will recognize capital gain or loss for United States federal income tax
purposes equal to the difference between the amount realized and your adjusted
tax basis in those shares. If you are an individual and you have held the
DaimlerChrysler ordinary shares more than 12 months, the capital gain will
generally be subject to a maximum United States federal income tax rate of 20%.
GERMAN CAPITAL TAX (VERMOEGENSTEUER)
As a result of a judicial decision, the German capital tax (VERMOEGENSTEUER)
is not imposed at the present time. In addition, under the Income Tax Treaty you
would not have to pay German capital tax (VERMOEGENSTEUER) even if it were
currently in effect.
OTHER GERMAN TAXES
There are no German transfer, stamp or other similar taxes that apply to you
in connection with receiving, purchasing, holding or selling our ordinary
shares.
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DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended. In accordance with these requirements, we file reports
and other information with the Securities and Exchange Commission. Members of
the general public may read and copy these materials, including this annual
report and the exhibits thereto, at the Commission's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511,
and 233 Broadway, New York, New York 10274, and may also obtain copies of the
materials by mail from the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The public may obtain
information on the operation of the Commission's Public Reference Room by
calling the Commission in the United States at 1-800-SEC-0330. The Commission
also maintains a website at WWW.SEC.GOV that contains reports, proxy statements
and other information regarding registrants that file electronically with the
Commission. You may access our annual reports and some of the other information
we submit to the Commission through this website. In addition, you may inspect
material we file at the offices of the New York Stock Exchange at 20 Broad
Street, New York, New York 10005.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The global nature of our businesses exposes us to market risks resulting
from changes in foreign currency exchange rates and interest rates. To a minor
degree we also have exposure to changes in market prices of equity securities.
Accordingly, changes in foreign currency exchange rates, interest rates and, to
a lesser degree, market prices of equity securities may adversely affect our
operating results and financial condition. We seek to manage and control these
market risks primarily through our regular operating and financing activities,
but, when we deem it appropriate, we use derivative financial instruments. We
evaluate these market risks by monitoring changes in key economic indicators and
market information on an ongoing basis.
As part of our risk management control systems we employ value at risk
analyses as recommended by the Bank for International Settlements. In performing
these analyses we quantify our market risk exposure to changes in foreign
currency exchange rates, interest rates and equity prices, on a continuous basis
by predicting the potential maximum loss (or worst loss) over a target time
horizon within a given confidence interval. The value-at-risk calculations we
employ:
- express potential losses in fair values;
- are based on the variance-covariance approach; and
- assume a 99% confidence level and a holding period of five days.
When we calculate the value-at-risk of our portfolio of financial
instruments, we first compute the current fair value of these financial
instruments. We then determine the impact of relevant market risk factors, such
as foreign currency exchange rates or interest rates, on our portfolio value,
which means we quantify the sensitivity of our portfolio to these factors. Based
on expected volatilities and correlations of these market risk factors which we
obtain from the RiskMetrics-TM- dataset, we compute potential changes of the
portfolio value by applying the variance-covariance approach. The
variance-covariance approach is a statistical method used to quantify the joint
impact of all relevant market risks factors on the portfolio value. Through
these calculations, and by assuming a 99% confidence level and a holding period
of five days, we obtain our value-at-risk. The 99% confidence level and the
five-day holding period indicate that there is only a 1% historical statistical
probability that the value-at-risk will be exceeded by losses within the next
five days.
In accordance with the organizational standards of the international banking
industry, we maintain our risk management control systems independent of our
corporate treasury and with a separate reporting line.
Please also consult Note 32 to our Consolidated Financial Statements for
additional information regarding our exposure to these market risks and the
various activities and instruments we use to manage them.
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EXCHANGE RATE RISK
TRANSACTION RISK AND CURRENCY RISK MANAGEMENT
The global nature of our businesses exposes our operations and reported
financial results and cash flows to the risks arising from fluctuations in the
exchange rates of the dollar, the euro, and other world currencies. Our
businesses are exposed to transaction risk whenever we have revenues in a
currency that is different from the currency in which we incur the costs of
generating those revenues. Once we convert the revenues into the currency in
which we incur the costs, the revenues may be inadequate to cover the costs if
the value of the currency in which we generated the revenues declined in the
interim relative to the currency in which we incurred the costs. This risk
exposure primarily affects our Mercedes Car Group segment, which generates a
significant portion of its revenues in foreign currencies and incurs
manufacturing costs primarily in euros. Our Commercial Vehicles segment is also
subject to transaction risk; however, because of its global production network
only to a minor degree. Our Chrysler Group segment generates almost all its
revenues and incurs most of its costs in dollars. Therefore, the transaction
risk of this segment is relatively low compared to that of the Mercedes Car
Group segment. Our Other Activities segment is exposed to transaction risk
primarily as a result of the dollar exposure of the aircraft engine business
which we conduct through MTU Aero Engines.
Cash inflows and outflows of the business segments are offset if they are
denominated in the same currency. This means that revenues generated in a
particular currency balance out costs in the same currency, even if the revenues
arise from a different transaction than that in which we incur the costs. As a
result, only the unmatched amounts are subject to transaction risk. Our overall
currency exposure is additionally reduced through the natural hedging potential
arising from the mutual offsets of the Chrysler Group's euro exposure with the
dollar exposure of our Mercedes Car Group and Commercial Vehicles segments. To
provide an additional natural hedge against any remaining transaction risk
exposure, we attempt, where appropriate, to increase cash outflows in the same
currencies in which we have a net excess inflow. We do this primarily through
increased purchases of parts, raw materials or services in the currencies in
which our revenues exceed our costs and by increasing local production in those
countries that are primary markets for our products.
In order to mitigate the impact of currency exchange rate fluctuations, we
continually assess our exposure to currency risks and we hedge a portion of
those risks by using derivative financial instruments. We manage our currency
exposure and the use of currency derivatives through our currency committee. The
currency committee consists of two separate sub-groups - one for our vehicle
businesses and one for MTU Aero Engines - and is comprised of members of senior
management from each of the respective businesses as well as from our corporate
treasury and risk controlling departments. Our corporate treasury department
assesses foreign currency exposures and carries out the currency committee's
decisions concerning foreign currency hedging through transactions with
international financial institutions. Our risk controlling department regularly
informs our board of management of the corporate treasury department's actions.
The principal derivative financial instruments we use to cover foreign
currency exposure are forward foreign exchange contracts and currency options.
Our policy is to use a mixture of these instruments depending on our view of
market conditions. Our view of market conditions is based on both fundamental
and technical analyses. Please refer to Note 32 to our Consolidated Financial
Statements for a description of how we account for derivative financial
instruments.
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The following table shows the period-end, high, low and average
value-at-risk figures for our 2002 and 2001 portfolio of derivative financial
instruments used to hedge the underlying currency exposure. We have computed the
average exposure based on an end-of-quarter basis.
<Table>
<Caption>
2002 2001
----------------------------------------- -----------------------------------------
PERIOD- PERIOD-
VALUE-AT-RISK END HIGH LOW AVERAGE END HIGH LOW AVERAGE
- ------------- -------- -------- -------- -------- -------- -------- -------- --------
([EURO] IN MILLIONS)
Exchange Rate Risk.................... 236 431 212 304 368 504 368 430
</Table>
------------------------
The average and period-end values-at-risk of our derivative financial
instruments used to hedge exchange rate risk decreased in 2002, primarily as a
result of lower foreign exchange rate volatilities, despite a slightly increased
foreign exchange derivatives' volume.
EFFECTS OF CURRENCY TRANSLATION
Many of our subsidiaries are located outside the euro zone. Since our
financial reporting currency is the euro, we translate the income statements of
these subsidiaries into euros so that we can include their financial results in
our consolidated financial statements. Period-to-period changes in the average
exchange rate for a particular country's currency can significantly affect the
translation of both revenues and operating income denominated in that currency
into euros. Unlike the effect of exchange rate fluctuations on transaction
exposure, the exchange rate translation risk does not affect local currency
cash-flows.
We have significant assets and liabilities outside the euro zone. These
assets and liabilities are denominated in local currencies and reside primarily
at our U.S. holding subsidiary, DaimlerChrysler North America Holding
Corporation, and at our financial services companies. When we convert net asset
values into euros, currency fluctuations result in period-to-period changes in
those net asset values. Our equity position reflects these changes in net asset
values, and we continually assess and evaluate the long-term currency risk
inherent in these investments. We generally do not hedge against this type of
risk, except in specific circumstances.
INTEREST RATE RISK
We hold a variety of interest rate sensitive assets and liabilities to
manage the liquidity and cash needs of our day-to-day operations. Additionally,
a substantial volume of interest rate sensitive assets and liabilities relates
to the leasing and sales financing business operated by our subsidiary
DaimlerChrysler Services. DaimlerChrysler Services enters into transactions with
customers which primarily result in fixed-rate receivables. Our general policy
is to match funding in terms of maturities and interest rates. For a limited
portion of the receivables portfolio, however, the funding does not match in
terms of maturities and interest rates. As a result, we are exposed to risks due
to changes in interest rates.
We coordinate funding activities of the industrial business and the
financial services business at the Group level. We use interest rate derivative
instruments, such as interest rate swaps, forward rate agreements, swaptions,
caps and floors, to achieve the desired interest rate maturities and
asset/liability structures.
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The following table shows the period-end, high, low and average
value-at-risk figures for our 2002 and 2001 portfolio of interest rate sensitive
financial instruments. We have computed the average exposure based on an
end-of-quarter basis.
<Table>
<Caption>
2002 2001
----------------------------------------- -----------------------------------------
PERIOD- PERIOD-
VALUE-AT-RISK END HIGH LOW AVERAGE END HIGH LOW AVERAGE
- ------------- -------- -------- -------- -------- -------- -------- -------- --------
([EURO] IN MILLIONS)
Interest Rate Risk.................... 157 334 97 185 334 442 126 272
</Table>
------------------------
In 2002, the average and period-end values-at-risk of our portfolio of
interest rate sensitive financial instruments decreased, primarily due to less
volatile interest rates and a reduced mismatch in terms of interest rate
maturities between both, the receivables from our leasing and sales financing
business and the respective funding of that business.
EQUITY PRICE RISK
We also hold to a minor extent investments in equity securities as part of
our strategy to manage excess liquidity. We hedge the risk inherent in these
securities mainly through equity derivatives. Since we significantly reduced our
portfolio of equity securities in 2001, the corresponding market risk in 2002
was not, and is not currently material to us. Thus, we are not presenting the
value-at-risk figures for our remaining equity price risk in tabular form.
Please refer to Note 20 to our Consolidated Financial Statements for additional
information. According to international banking standards we do not include
investments in equity securities, which we classify as long term investments in
our equity price risk assessment.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not applicable.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
None.
ITEM 15. CONTROLS AND PROCEDURES.
The chairman of our board of management and the member of the board of
management responsible for Finance & Controlling, with the assistance of other
members of management, performed an evaluation of our disclosure controls and
procedures, as that term is defined in Rule 13a-14(c) of the Securities Exchange
Act of 1934, as amended, within 90 days of the date of this report. Based on
that evaluation, they concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed in this report is
recorded, processed, summarized and reported on a timely basis.
There were no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of the evaluation. No significant deficiencies and material weaknesses were
identified that required corrective actions.
ITEM 16. [RESERVED].
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PART III
ITEM 17. FINANCIAL STATEMENTS.
Not applicable.
ITEM 18. FINANCIAL STATEMENTS.
You can find our consolidated financial statements and schedule on pages
F-i, F-1 through F-76 and page S-1.
ITEM 19. EXHIBITS.
<Table>
We have filed the following documents as exhibits to this
annual report:
1.1 Memorandum and Articles of Association (SATZUNG) of
DaimlerChrysler AG as amended to date (English translation
filed as an Exhibit to DaimlerChrysler AG's annual report on
Form 20-F for the year ended December 31, 2000, and
incorporated herein by reference.)
2.1 The total amount of long-term debt securities of
DaimlerChrysler AG authorized under any instrument does not
exceed 10% of the total assets of the Group on a
consolidated basis. We hereby agree to furnish to the
Commission, upon its request, a copy of any instrument
defining the rights of holders of long-term debt of
DaimlerChrysler AG or of its subsidiaries for which
consolidated or unconsolidated financial statements are
required to be filed.
4.1 The following agreements (without exhibits and schedules):
the Amended and Restated Master Alliance Agreement dated as
of September 8, 2000 between DaimlerChrysler AG and
Mitsubishi Motors Corporation; the Amended and Restated
Standstill Agreement between those parties dated as of
September 8, 2000; the Securities Subscription Agreement
between DaimlerChrysler AG, Mitsubishi Motors Corporation,
and DaimlerChrysler Japan Holding, LTD. dated as of July 28,
2000; the Amendment to the Securities Subscription Agreement
dated as of September 8, 2000; and Amendment No. 2 to the
Securities Subscription Agreement dated as of September 28,
2000. (Filed as an Exhibit to DaimlerChrysler AG's Annual
Report on Form 20-F for the year ended December 31, 2000,
and incorporated herein by reference.)
4.2 Joint Venture Agreement, dated April 3, 2000, between
DaimlerChrysler Services (debis) AG, Deutsche Telekom AG and
Rubin Telekommunikationsdienste GmbH, and Option Agreement,
dated April 3, 2000, between DaimlerChrysler Services
(debis) AG and Deutsche Telekom AG (Filed as an Exhibit to
DaimlerChrysler AG's Annual Report on Form 20-F for the year
ended December 31, 2000, and incorporated herein by
reference.)
8.1 Significant subsidiaries owned, directly or indirectly, by
DaimlerChrysler AG as of December 31, 2002, as defined in
Regulation S-X, Section 210.1-02(w): See "Significant
Subsidiaries" in "Item 4. Information on the Company."
10.1 Independent Auditors' Report on Schedule and Consent of KPMG
Deutsche Treuhand-Gesellschaft AG.
10.2 Independent Auditors' Consent of Deloitte & Touche LLP.
10.3 Independent Auditors' Report of Deloitte & Touche LLP on the
consolidated financial statements of DaimlerChrysler
Corporation.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Declaration by the Board of Management and Supervisory Board
of DaimlerChrysler AG pursuant to Section 161 Joint Stock
Corporation Act (AktG).
</Table>
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
Date: February 20, 2003
<Table>
DAIMLERCHRYSLER AG
By: /s/ JUERGEN E. SCHREMPP
------------------------------------------
Juergen E. Schrempp
Chairman of the Board of Management
By: /s/ MANFRED GENTZ
------------------------------------------
Dr. Manfred Gentz
Member of the Board of Management
Finance & Controlling
</Table>
115
<Page>
CERTIFICATIONS
I, Juergen E. Schrempp, certify that:
1. I have reviewed this annual report on Form 20-F of DaimlerChrysler AG;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 20, 2003
<Table>
/s/ JUERGEN E. SCHREMPP
------------------------------------------------
Juergen E. Schrempp
Chairman of the Board of Management
DaimlerChrysler AG
</Table>
116
<Page>
CERTIFICATIONS
I, Dr. Manfred Gentz, certify that:
1. I have reviewed this annual report on Form 20-F of DaimlerChrysler AG;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 20, 2003
<Table>
/s/ MANFRED GENTZ
------------------------------------------------
Dr. Manfred Gentz
Member of the Board of Management
Finance & Controlling
DaimlerChrysler AG
</Table>
117
<Page>
DAIMLERCHRYSLER AG
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<Table>
<Caption>
PAGE
--------
Independent Auditors' Report................................ F-1
Consolidated Financial Statements:
Consolidated Statements of Income (Loss) for the years
ended December 31, 2002, 2001 and 2000.................. F-2
Consolidated Balance Sheets at December 31, 2002 and
2001.................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2002, 2001 and 2000.... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000........................ F-6
Consolidated Fixed Assets Schedule for the year ended
December 31, 2002....................................... F-8
Notes to the Consolidated Financial Statements............ F-10
Financial Statement Schedule:
Allowance for Doubtful Accounts........................... S-1
</Table>
F-i
<Page>
INDEPENDENT AUDITORS' REPORT
The Supervisory Board
DaimlerChrysler AG:
We have audited the accompanying consolidated balance sheets of
DaimlerChrysler AG and subsidiaries ("DaimlerChrysler") as of December 31, 2002
and 2001, and the related consolidated statements of income (loss), changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2002. These consolidated financial statements are the
responsibility of DaimlerChrysler's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We
did not audit the financial statements of DaimlerChrysler Corporation or certain
of its consolidated subsidiaries ("DaimlerChrysler Corporation") for the year
ended December 31, 2000, which statements reflect total revenues constituting
42 percent of the related consolidated totals. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion for the
year ended December 31, 2000, insofar as it relates to the amounts included for
DaimlerChrysler Corporation, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of DaimlerChrysler as of December 31,
2002 and 2001, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2002, in conformity
with generally accepted accounting principles in the United States of America.
As discussed in Note 10 to the consolidated financial statements,
DaimlerChrysler adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," in 2002 and Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and Emerging Issues Task Force Issue No. 99-20, "Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets," in 2000.
KPMG Deutsche Treuhand-Gesellschaft AG
Stuttgart, Germany
February 11, 2003
F-1
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
<Table>
<Caption>
CONSOLIDATED
---------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2002
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) NOTE (NOTE 1) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues 34 $ 156,838 [EURO]149,583 [EURO]152,873 [EURO]162,384
- ---------------------------------------------------------------------------------------------------------------------------------
Cost of sales 5 (127,348) (121,457) (128,394) (134,370)
- ---------------------------------------------------------------------------------------------------------------------------------
GROSS MARGIN 29,490 28,126 24,479 28,014
- ---------------------------------------------------------------------------------------------------------------------------------
Selling, administrative and other expenses 5 (19,180) (18,293) (18,331) (18,303)
- ---------------------------------------------------------------------------------------------------------------------------------
Research and development (6,365) (6,071) (5,933) (6,337)
- ---------------------------------------------------------------------------------------------------------------------------------
Other income 6 830 792 1,212 946
- ---------------------------------------------------------------------------------------------------------------------------------
Turnaround plan expenses -- Chrysler Group 7 (728) (694) (3,064) --
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE FINANCIAL INCOME 4,047 3,860 (1,637) 4,320
- ---------------------------------------------------------------------------------------------------------------------------------
Financial income (expense), net (therein gain on
issuance of associated company stock of [EURO]747
in 2001) 8 2,315 2,208 154 156
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 6,362 6,068 (1,483) 4,476
- ---------------------------------------------------------------------------------------------------------------------------------
Effects of changes in German tax law -- -- -- (263)
- ---------------------------------------------------------------------------------------------------------------------------------
Income taxes (1,233) (1,177) 777 (1,736)
- ---------------------------------------------------------------------------------------------------------------------------------
Total income taxes 9 (1,233) (1,177) 777 (1,999)
- ---------------------------------------------------------------------------------------------------------------------------------
Minority interests (15) (14) 44 (12)
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING
PRINCIPLES 5,114 4,877 (662) 2,465
- ---------------------------------------------------------------------------------------------------------------------------------
Extraordinary items: 11
- ---------------------------------------------------------------------------------------------------------------------------------
Gains on disposals of businesses, net of taxes
(therein gain on issuance of subsidiary and
associated company stock of [EURO]2,418 in 2000) -- -- -- 5,516
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative effects of changes in accounting
principles: transition adjustments resulting from
adoption of SFAS 142, SFAS 133 and EITF 99-20, net
of taxes 10 (167) (159) -- (87)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 4,947 4,718 (662) 7,894
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE 35
- ---------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary items and
cumulative effects of changes in accounting
principles 5.08 4.84 (0.66) 2.46
- ---------------------------------------------------------------------------------------------------------------------------------
Extraordinary items -- -- -- 5.50
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative effects of changes in accounting
principles (0.17) (0.16) -- (0.09)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 4.91 4.68 (0.66) 7.87
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary items and
cumulative effects of changes in accounting
principles 5.06 4.82 (0.66) 2.45
- ---------------------------------------------------------------------------------------------------------------------------------
Extraordinary items -- -- -- 5.44
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative effects of changes in accounting
principles (0.16) (0.15) -- (0.09)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 4.90 4.67 (0.66) 7.80
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
<Table>
<Caption>
INDUSTRIAL BUSINESS* FINANCIAL SERVICES*
- --------------------------------------------------- --------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
- --------------------------------------------------- --------------------------------------
2002 2001 2000 2002 2001 2000
- --------------------------------------------------- -------------------------------------- ------------------------------------
[EURO]133,883 [EURO]136,020 [EURO]147,260 [EURO]15,700 [EURO]16,853 [EURO]15,124 Revenues
- --------------------------------------------------- -------------------------------------- ------------------------------------
(108,276) (113,342) (120,474) (13,181) (15,052) (13,896) Cost of sales
- --------------------------------------------------- -------------------------------------- ------------------------------------
25,607 22,678 26,786 2,519 1,801 1,228 GROSS MARGIN
- --------------------------------------------------- -------------------------------------- ------------------------------------
Selling, administrative and other
(16,578) (16,756) (17,059) (1,715) (1,575) (1,244) expenses
- --------------------------------------------------- -------------------------------------- ------------------------------------
(6,071) (5,933) (6,337) -- -- -- Research and development
- --------------------------------------------------- -------------------------------------- ------------------------------------
724 1,160 842 68 52 104 Other income
- --------------------------------------------------- -------------------------------------- ------------------------------------
Turnaround plan expenses -- Chrysler
(694) (3,064) -- -- -- -- Group
- --------------------------------------------------- -------------------------------------- ------------------------------------
INCOME (LOSS) BEFORE FINANCIAL
2,988 (1,915) 4,232 872 278 88 INCOME
- --------------------------------------------------- -------------------------------------- ------------------------------------
Financial income (expense), net
(therein gain on issuance of
associated company stock of
2,327 146 166 (119) 8 (10) [EURO]747 in 2001)
- --------------------------------------------------- -------------------------------------- ------------------------------------
5,315 (1,769) 4,398 753 286 78 INCOME (LOSS) BEFORE INCOME TAXES
- --------------------------------------------------- -------------------------------------- ------------------------------------
Effects of changes in German tax
law
- --------------------------------------------------- -------------------------------------- ------------------------------------
Income taxes
- --------------------------------------------------- -------------------------------------- ------------------------------------
(800) 743 (2,152) (377) 34 153 Total income taxes
- --------------------------------------------------- -------------------------------------- ------------------------------------
(11) 46 (11) (3) (2) (1) Minority interests
- --------------------------------------------------- -------------------------------------- ------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS AND CUMULATIVE EFFECTS OF
4,504 (980) 2,235 373 318 230 CHANGES IN ACCOUNTING PRINCIPLES
- --------------------------------------------------- -------------------------------------- ------------------------------------
Extraordinary items:
- --------------------------------------------------- -------------------------------------- ------------------------------------
Gains on disposals of businesses,
net of taxes (therein gain on
issuance of subsidiary and
associated company stock of
-- -- 5,516 -- -- -- [EURO]2,418 in 2000)
- --------------------------------------------------- -------------------------------------- ------------------------------------
Cumulative effects of changes in
accounting principles: transition
adjustments resulting from
adoption of SFAS 142, SFAS 133 and
(124) -- 10 (35) -- (97) EITF 99-20, net of taxes
- --------------------------------------------------- -------------------------------------- ------------------------------------
4,380 (980) 7,761 338 318 133 NET INCOME (LOSS)
- --------------------------------------------------- -------------------------------------- ------------------------------------
EARNINGS (LOSS) PER SHARE
- --------------------------------------------------- -------------------------------------- ------------------------------------
Basic earnings (loss) per share
- --------------------------------------------------- -------------------------------------- ------------------------------------
Income (loss) before
extraordinary items and
cumulative effects of changes
-- -- -- -- -- -- in accounting principles
- --------------------------------------------------- -------------------------------------- ------------------------------------
-- -- -- -- -- -- Extraordinary items
- --------------------------------------------------- -------------------------------------- ------------------------------------
Cumulative effects of changes in
-- -- -- -- -- -- accounting principles
- --------------------------------------------------- -------------------------------------- ------------------------------------
-- -- -- -- -- -- Net income (loss)
- --------------------------------------------------- -------------------------------------- ------------------------------------
Diluted earnings (loss) per share
- --------------------------------------------------- -------------------------------------- ------------------------------------
Income (loss) before
extraordinary items and
cumulative effects of changes
-- -- -- -- -- -- in accounting principles
- --------------------------------------------------- -------------------------------------- ------------------------------------
-- -- -- -- -- -- Extraordinary items
- --------------------------------------------------- -------------------------------------- ------------------------------------
Cumulative effects of changes in
-- -- -- -- -- -- accounting principles
- --------------------------------------------------- -------------------------------------- ------------------------------------
-- -- -- -- -- -- Net income (loss)
- --------------------------------------------------- -------------------------------------- ------------------------------------
</Table>
* Additional information about the Industrial Business and Financial Services is
not required under U.S. GAAP and is unaudited.
F-3
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
FINANCIAL
CONSOLIDATED INDUSTRIAL BUSINESS* SERVICES*
------------------------------------- ------------------------ -----------------------
AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31,
------------------------------------- ------------------------ -----------------------
2002
(IN MILLIONS) NOTE (NOTE 1) 2002 2001 2002 2001 2002 2001
- ---------------------------------------------------------------------------- ------------------------ -----------------------
ASSETS
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Goodwill 12 $ 2,171 [EURO] 2,071 [EURO] 2,371 [EURO] 2,009 [EURO] 2,311 [EURO] 62 [EURO] 60
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Other intangible assets 13 2,993 2,855 492 2,755 351 100 141
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Property, plant and
equipment, net 14 38,028 36,269 41,165 36,111 41,016 158 149
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Investments and long-term
financial assets 20 9,742 9,291 12,375 8,922 11,349 369 1,026
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Equipment on operating
leases, net 15 29,613 28,243 36,002 3,313 3,004 24,930 32,998
- ---------------------------------------------------------------------------- ------------------------ -----------------------
FIXED ASSETS 82,547 78,729 92,405 53,110 58,031 25,619 34,374
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Inventories 16 16,401 15,642 16,754 13,965 15,338 1,677 1,416
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Trade receivables 17 6,602 6,297 6,430 6,005 6,134 292 296
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Receivables from financial
services 18 54,614 52,088 49,512 10 26 52,078 49,486
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Other receivables 19 18,425 17,573 16,188 11,159 7,512 6,414 8,676
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Securities 20 3,453 3,293 3,759 2,911 3,318 382 441
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Cash and cash equivalents 21 9,573 9,130 10,746 8,191 7,375 939 3,371
- ---------------------------------------------------------------------------- ------------------------ -----------------------
NON-FIXED ASSETS 109,068 104,023 103,389 42,241 39,703 61,782 63,686
- ---------------------------------------------------------------------------- ------------------------ -----------------------
DEFERRED TAXES 9 3,788 3,613 3,010 3,496 2,930 117 80
- ---------------------------------------------------------------------------- ------------------------ -----------------------
PREPAID EXPENSES 22 1,009 962 8,606 866 8,480 96 126
- ---------------------------------------------------------------------------- ------------------------ -----------------------
TOTAL ASSETS (THEREOF
SHORT-TERM 2002:
[EURO]68,118; 2001:
[EURO]68,676) 196,412 187,327 207,410 99,713 109,144 87,614 98,266
- ---------------------------------------------------------------------------- ------------------------ -----------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Capital stock $ 2,761 [EURO]2,633 [EURO]2,609
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Additional paid-in capital 8,104 7,729 7,286
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Retained earnings 31,618 30,156 26,441
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Accumulated other
comprehensive income (5,876) (5,604) 2,668
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Treasury stock -- -- --
- ---------------------------------------------------------------------------- ------------------------ -----------------------
STOCKHOLDERS' EQUITY 23 36,607 34,914 39,004 [EURO]26,294 [EURO]29,009 [EURO]8,620 [EURO]9,995
- ---------------------------------------------------------------------------- ------------------------ -----------------------
MINORITY INTERESTS 453 432 417 414 403 18 14
- ---------------------------------------------------------------------------- ------------------------ -----------------------
ACCRUED LIABILITIES 25 45,832 43,712 42,194 42,709 41,158 1,003 1,036
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Financial liabilities 26 82,949 79,112 90,908 12,201 15,701 66,911 75,207
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Trade liabilities 27 12,941 12,342 14,157 12,106 13,773 236 384
- ---------------------------------------------------------------------------- ------------------------ -----------------------
Other liabilities 28 9,271 8,843 10,262 6,152 7,431 2,691 2,831
- ---------------------------------------------------------------------------- ------------------------ -----------------------
LIABILITIES 105,161 100,297 115,327 30,459 36,905 69,838 78,422
- ---------------------------------------------------------------------------- ------------------------ -----------------------
DEFERRED TAXES 9 2,424 2,312 4,851 (4,425) (2,212) 6,737 7,063
- ---------------------------------------------------------------------------- ------------------------ -----------------------
DEFERRED INCOME 29 5,935 5,660 5,617 4,262 3,881 1,398 1,736
- ---------------------------------------------------------------------------- ------------------------ -----------------------
TOTAL LIABILITIES (THEREOF
SHORT-TERM 2002:
[EURO]72,791; 2001:
[EURO]80,874) 159,805 152,413 168,406 73,419 80,135 78,994 88,271
- ---------------------------------------------------------------------------- ------------------------ -----------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 196,412 187,327 207,410 99,713 109,144 87,614 98,266
- ---------------------------------------------------------------------------- ------------------------ -----------------------
</Table>
* Additional information about the Industrial Business and Financial Services is
not required under U.S. GAAP and is unaudited.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<Table>
<Caption>
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
-----------------------------------------------
ADDITIONAL CUMULATIVE AVAILABLE- DERIVATIVE MINIMUM
CAPITAL PAID-IN RETAINED TRANSLATION FOR-SALE FINANCIAL PENSION TREASURY
(IN MILLIONS OF [EURO]) STOCK CAPITAL EARNINGS ADJUSTMENT SECURITIES INSTRUMENTS LIABILITY STOCK TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1,
2000 2,565 7,329 23,925 1,922 347 -- (28) -- 36,060
- ---------------------------------------------------------------------------------------------------------------------------
Net income -- -- 7,894 -- -- -- -- -- 7,894
Other comprehensive
income (loss) -- -- -- 1,363 (149) (408) 6 -- 812
- ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive
income 8,706
- ---------------------------------------------------------------------------------------------------------------------------
Increase in stated value
of capital stock 44 (44) -- -- -- -- -- -- --
Issuance of capital stock -- 1 -- -- -- -- -- -- 1
Purchase of capital stock -- -- -- -- -- -- -- (88) (88)
Re-issuance of treasury
stock -- -- -- -- -- -- -- 88 88
Dividends -- -- (2,358) -- -- -- -- -- (2,358)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31,
2000 2,609 7,286 29,461 3,285 198 (408) (22) -- 42,409
- ---------------------------------------------------------------------------------------------------------------------------
Net loss -- -- (662) -- -- -- -- -- (662)
Other comprehensive
income (loss) -- -- -- 565 (137) 71 (884) -- (385)
- ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss (1,047)
- ---------------------------------------------------------------------------------------------------------------------------
Purchase of capital stock -- -- -- -- -- -- -- (66) (66)
Re-issuance of treasury
stock -- -- -- -- -- -- -- 66 66
Dividends -- -- (2,358) -- -- -- -- -- (2,358)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31,
2001 2,609 7,286 26,441 3,850 61 (337) (906) -- 39,004
- ---------------------------------------------------------------------------------------------------------------------------
Net income -- -- 4,718 -- -- -- -- -- 4,718
Other comprehensive
income (loss) -- -- -- (3,250) (135) 1,402 (6,289) -- (8,272)
- ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss (3,554)
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of shares upon
conversion of notes 24 482 -- -- -- -- -- -- 506
Purchase of capital stock -- -- -- -- -- -- -- 49 49
Re-issuance of treasury
stock -- -- -- -- -- -- -- (49) (49)
Dividends -- -- (1,003) -- -- -- -- -- (1,003)
Other -- (39) -- -- -- -- -- -- (39)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31,
2002 2,633 7,729 30,156 600 (74) 1,065 (7,195) -- 34,914
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
CONSOLIDATED
-------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2002
(IN MILLIONS) (NOTE 1) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,947 [EURO]4,718 [EURO](662) [EURO]7,894
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) applicable to minority interests 15 14 (44) 12
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative effects of changes in accounting principles 166 159 -- 87
- ------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
- ------------------------------------------------------------------------------------------------------------------------------
Gains on disposals of businesses (2,773) (2,645) (768) (5,568)
- ------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization of equipment on operating leases 7,595 7,244 7,254 6,487
- ------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization of fixed assets 6,688 6,379 7,022 7,131
- ------------------------------------------------------------------------------------------------------------------------------
Change in deferred taxes 281 268 (1,058) 1,220
- ------------------------------------------------------------------------------------------------------------------------------
Equity (income) loss from associated companies 17 16 (97) 244
- ------------------------------------------------------------------------------------------------------------------------------
Change in financial instruments 224 214 (409) (90)
- ------------------------------------------------------------------------------------------------------------------------------
(Gains) losses on disposals of fixed assets/securities (624) (595) (600) (455)
- ------------------------------------------------------------------------------------------------------------------------------
Change in trading securities 269 257 (4) 22
- ------------------------------------------------------------------------------------------------------------------------------
Change in accrued liabilities 3,473 3,312 2,825 1,778
- ------------------------------------------------------------------------------------------------------------------------------
Turnaround plan expenses -- Chrysler Group 728 694 3,064 --
- ------------------------------------------------------------------------------------------------------------------------------
Turnaround plan payments -- Chrysler Group (537) (512) (365) --
- ------------------------------------------------------------------------------------------------------------------------------
Changes in other operating assets and liabilities:
- ------------------------------------------------------------------------------------------------------------------------------
-- inventories, net 6 6 (725) (876)
- ------------------------------------------------------------------------------------------------------------------------------
-- trade receivables (320) (305) 620 (731)
- ------------------------------------------------------------------------------------------------------------------------------
-- trade liabilities (510) (486) (838) (424)
- ------------------------------------------------------------------------------------------------------------------------------
-- other assets and liabilities (986) (942) 729 (714)
- ------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 18,659 17,796 15,944 16,017
- ------------------------------------------------------------------------------------------------------------------------------
Purchases of fixed assets:
- ------------------------------------------------------------------------------------------------------------------------------
- -- Increase in equipment on operating leases (18,563) (17,704) (17,951) (19,117)
- ------------------------------------------------------------------------------------------------------------------------------
- -- Purchases of property, plant and equipment (7,492) (7,145) (8,896) (10,392)
- ------------------------------------------------------------------------------------------------------------------------------
- -- Purchases of other fixed assets (330) (315) (655) (480)
- ------------------------------------------------------------------------------------------------------------------------------
Proceeds from disposals of equipment on operating leases 15,845 15,112 11,042 8,285
- ------------------------------------------------------------------------------------------------------------------------------
Proceeds from disposals of fixed assets 921 878 1,043 862
- ------------------------------------------------------------------------------------------------------------------------------
Payments for investments in businesses (587) (560) (821) (4,883)
- ------------------------------------------------------------------------------------------------------------------------------
Proceeds from disposals of businesses 5,962 5,686 1,680 311
- ------------------------------------------------------------------------------------------------------------------------------
Change in cash from exchange of businesses -- -- -- (1,351)
- ------------------------------------------------------------------------------------------------------------------------------
Additions to receivables from financial services (129,363) (123,379) (130,863) (116,507)
- ------------------------------------------------------------------------------------------------------------------------------
Repayments of receivables from financial services:
- ------------------------------------------------------------------------------------------------------------------------------
- -- Finance receivables collected 58,803 56,083 53,251 44,276
- ------------------------------------------------------------------------------------------------------------------------------
- -- Proceeds from sales of finance receivables 61,072 58,247 76,662 63,649
- ------------------------------------------------------------------------------------------------------------------------------
Acquisitions of securities (other than trading) (5,562) (5,305) (2,151) (7,786)
- ------------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of securities (other than trading) 5,637 5,376 3,531 10,224
- ------------------------------------------------------------------------------------------------------------------------------
Change in other cash 83 80 142 200
- ------------------------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (13,574) (12,946) (13,986) (32,709)
- ------------------------------------------------------------------------------------------------------------------------------
Change in commercial paper borrowings and short-term financial liabilities 3,038 2,898 (12,431) (3,238)
- ------------------------------------------------------------------------------------------------------------------------------
Additions to long-term financial liabilities 10,447 9,964 26,582 29,257
- ------------------------------------------------------------------------------------------------------------------------------
Repayment of financial liabilities (17,947) (17,117) (10,394) (9,152)
- ------------------------------------------------------------------------------------------------------------------------------
Dividends paid (including profit transferred from subsidiaries) (1,064) (1,015) (2,367) (2,379)
- ------------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of capital stock (including minority interests) 51 49 75 112
- ------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (51) (49) (66) (88)
- ------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (5,526) (5,270) 1,399 14,512
- ------------------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and cash equivalents
(maturing within 3 months) (1,253) (1,195) 276 501
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (MATURING WITHIN 3
MONTHS) (1,694) (1,615) 3,633 (1,679)
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS (MATURING WITHIN 3 MONTHS)
- ------------------------------------------------------------------------------------------------------------------------------
AT BEGINNING OF PERIOD 11,235 10,715 7,082 8,761
- ------------------------------------------------------------------------------------------------------------------------------
AT END OF PERIOD 9,541 9,100 10,715 7,082
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<Table>
<Caption>
INDUSTRIAL BUSINESS* FINANCIAL SERVICES*
- ------------------------------------ --------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
- ------------------------------------ --------------------------------------
2002 2001 2000 2002 2001 2000
- ------------------------------------ -------------------------------------- ---------------------------------------------
[EURO]4,380 [EURO](980) [EURO]7,761 [EURO]338 [EURO]318 [EURO]133 Net income (loss)
- ------------------------------------ -------------------------------------- ---------------------------------------------
Income (loss) applicable to minority
11 (46) 11 3 2 1 interests
- ------------------------------------ -------------------------------------- ---------------------------------------------
Cumulative effects of changes in accounting
124 -- (10) 35 -- 97 principles
- ------------------------------------ -------------------------------------- ---------------------------------------------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
- ------------------------------------ -------------------------------------- ---------------------------------------------
(2,645) (762) (5,568) -- (6) -- Gains on disposals of businesses
- ------------------------------------ -------------------------------------- ---------------------------------------------
Depreciation and amortization of equipment
544 290 207 6,700 6,964 6,280 on operating leases
- ------------------------------------ -------------------------------------- ---------------------------------------------
Depreciation and amortization of fixed
6,257 6,917 7,047 122 105 84 assets
- ------------------------------------ -------------------------------------- ---------------------------------------------
(498) (1,595) 590 766 537 630 Change in deferred taxes
- ------------------------------------ -------------------------------------- ---------------------------------------------
Equity (income) loss from associated
(78) (90) 185 94 (7) 59 companies
- ------------------------------------ -------------------------------------- ---------------------------------------------
205 (365) (76) 9 (44) (14) Change in financial instruments
- ------------------------------------ -------------------------------------- ---------------------------------------------
(Gains) losses on disposals of fixed
(599) (600) (454) 4 -- (1) assets/securities
- ------------------------------------ -------------------------------------- ---------------------------------------------
312 3 22 (55) (7) -- Change in trading securities
- ------------------------------------ -------------------------------------- ---------------------------------------------
3,292 2,472 1,742 20 353 36 Change in accrued liabilities
- ------------------------------------ -------------------------------------- ---------------------------------------------
694 3,064 -- -- -- -- Turnaround plan expenses -- Chrysler Group
- ------------------------------------ -------------------------------------- ---------------------------------------------
(512) (365) -- -- -- -- Turnaround plan payments -- Chrysler Group
- ------------------------------------ -------------------------------------- ---------------------------------------------
Changes in other operating assets and
liabilities:
- ------------------------------------ -------------------------------------- ---------------------------------------------
172 (549) (725) (166) (176) (151) -- inventories, net
- ------------------------------------ -------------------------------------- ---------------------------------------------
(314) 540 (698) 9 80 (33) -- trade receivables
- ------------------------------------ -------------------------------------- ---------------------------------------------
(317) (831) (498) (169) (7) 74 -- trade liabilities
- ------------------------------------ -------------------------------------- ---------------------------------------------
(2,187) (1,444) (623) 1,245 2,173 (91) -- other assets and liabilities
- ------------------------------------ -------------------------------------- ---------------------------------------------
8,841 5,659 8,913 8,955 10,285 7,104 CASH PROVIDED BY OPERATING ACTIVITIES
- ------------------------------------ -------------------------------------- ---------------------------------------------
Purchases of fixed assets:
- ------------------------------------ -------------------------------------- ---------------------------------------------
(4,842) (3,617) (3,566) (12,862) (14,334) (15,551) -- Increase in equipment on operating leases
- ------------------------------------ -------------------------------------- ---------------------------------------------
(7,052) (8,785) (10,340) (93) (111) (52) -- Purchases of property, plant and equipment
- ------------------------------------ -------------------------------------- ---------------------------------------------
(250) (564) (422) (65) (91) (58) -- Purchases of other fixed assets
- ------------------------------------ -------------------------------------- ---------------------------------------------
Proceeds from disposals of equipment on
4,974 3,951 3,374 10,138 7,091 4,911 operating leases
- ------------------------------------ -------------------------------------- ---------------------------------------------
828 991 836 50 52 26 Proceeds from disposals of fixed assets
- ------------------------------------ -------------------------------------- ---------------------------------------------
(532) (801) (4,723) (28) (20) (160) Payments for investments in businesses
- ------------------------------------ -------------------------------------- ---------------------------------------------
5,168 1,456 298 518 224 13 Proceeds from disposals of businesses
- ------------------------------------ -------------------------------------- ---------------------------------------------
-- -- (1,351) -- -- -- Change in cash from exchange of businesses
- ------------------------------------ -------------------------------------- ---------------------------------------------
Additions to receivables from financial
232 207 133 (123,611) (131,070) (116,640) services
- ------------------------------------ -------------------------------------- ---------------------------------------------
Repayments of receivables from financial
services:
- ------------------------------------ -------------------------------------- ---------------------------------------------
-- -- -- 56,083 53,251 44,276 -- Finance receivables collected
- ------------------------------------ -------------------------------------- ---------------------------------------------
-- -- -- 58,247 76,662 63,649 -- Proceeds from sales of finance receivables
- ------------------------------------ -------------------------------------- ---------------------------------------------
Acquisitions of securities (other than
(5,250) (1,931) (5,594) (55) (220) (2,192) trading)
- ------------------------------------ -------------------------------------- ---------------------------------------------
Proceeds from sales of securities (other than
5,283 2,381 8,355 93 1,150 1,869 trading)
- ------------------------------------ -------------------------------------- ---------------------------------------------
(191) 267 385 271 (125) (185) Change in other cash
- ------------------------------------ -------------------------------------- ---------------------------------------------
(1,632) (6,445) (12,615) (11,314) (7,541) (20,094) CASH USED FOR INVESTING ACTIVITIES
- ------------------------------------ -------------------------------------- ---------------------------------------------
Change in commercial paper borrowings and
1,191 1,264 (393) 1,707 (13,695) (2,845) short-term financial liabilities
- ------------------------------------ -------------------------------------- ---------------------------------------------
1,910 3,100 2,523 8,054 23,482 26,734 Additions to long-term financial liabilities
- ------------------------------------ -------------------------------------- ---------------------------------------------
(7,696) (347) 2,324 (9,421) (10,047) (11,476) Repayment of financial liabilities
- ------------------------------------ -------------------------------------- ---------------------------------------------
Dividends paid (including profit transferred
(434) (2,356) (2,370) (581) (11) (9) from subsidiaries)
- ------------------------------------ -------------------------------------- ---------------------------------------------
Proceeds from issuance of capital stock
(227) (88) (224) 276 163 336 (including minority interests)
- ------------------------------------ -------------------------------------- ---------------------------------------------
(49) (66) (88) -- -- -- Purchase of treasury stock
- ------------------------------------ -------------------------------------- ---------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING
(5,305) 1,507 1,772 35 (108) 12,740 ACTIVITIES
- ------------------------------------ -------------------------------------- ---------------------------------------------
Effect of foreign exchange rate changes on
cash and cash equivalents (maturing within
(1,087) 223 471 (108) 53 30 3 months)
- ------------------------------------ -------------------------------------- ---------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
817 944 (1,459) (2,432) 2,689 (220) EQUIVALENTS (MATURING WITHIN 3 MONTHS)
- ------------------------------------ -------------------------------------- ---------------------------------------------
CASH AND CASH EQUIVALENTS (MATURING WITHIN 3
MONTHS)
- ------------------------------------ -------------------------------------- ---------------------------------------------
7,344 6,400 7,859 3,371 682 902 AT BEGINNING OF PERIOD
- ------------------------------------ -------------------------------------- ---------------------------------------------
8,161 7,344 6,400 939 3,371 682 AT END OF PERIOD
- ------------------------------------ -------------------------------------- ---------------------------------------------
</Table>
F-7
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
* Additional information about the Industrial Business and Financial Services is
not required under U.S. GAAP and is unaudited.
F-8
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
CONSOLIDATED FIXED ASSETS SCHEDULE
<Table>
<Caption>
ACQUISITION OR MANUFACTURING COSTS
-------------------------------------------------------------------------------------------
BALANCE AT CHANGE IN BALANCE AT
JANUARY 1, CURRENCY CONSOLIDATED RECLASSI- DECEMBER 31,
(IN MILLIONS OF [EURO]) 2002 CHANGE COMPANIES ADDITIONS FICATIONS DISPOSALS 2002
- ----------------------------------------------------------------------------------------------------------------------
Goodwill 3,980 (547) 1 132 (62) 6 3,498
Other intangible assets 1,034 (227) 14 2,689 106 127 3,489
- ----------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS 5,014 (774) 15 2,821 44 133 6,987
- ----------------------------------------------------------------------------------------------------------------------
Land, leasehold
improvements and
buildings including
buildings on land owned
by others 20,999 (1,776) 18 381 350 614 19,358
Technical equipment and
machinery 36,946 (4,240) 5 808 2,061 1,760 33,820
Other equipment, factory
and office equipment 23,734 (2,815) 3 858 1,961 1,361 22,380
Advance payments relating
to plant and equipment
and construction in
progress 5,914 (852) 31 5,144 (4,462) 109 5,666
- ----------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND
EQUIPMENT 87,593 (9,683) 57 7,191 (90) 3,844 81,224
- ----------------------------------------------------------------------------------------------------------------------
Investments in affiliated
companies 1,059 (49) 33 340 -- 162 1,221
Loans to affiliated
companies 143 -- 6 43 -- 98 94
Investments in associated
companies 8,574 (121) 1 617 -- 2,732 6,339
Investments in related
companies 1,871 (65) (4) 68 2 614 1,258
Loans to associated and
related companies 341 (36) -- 30 -- 39 296
Long-term securities 369 4 1 70 -- 247 197
Other loans 368 (7) (1) 6 -- 68 298
- ----------------------------------------------------------------------------------------------------------------------
INVESTMENTS AND LONG-TERM
FINANCIAL ASSETS 12,725 (274) 36 1,174 2 3,960 9,703
- ----------------------------------------------------------------------------------------------------------------------
EQUIPMENT ON OPERATING
LEASES (2) 48,388 (6,274) 192 17,704 44 22,365 37,689
- ----------------------------------------------------------------------------------------------------------------------
</Table>
(1) Currency translation changes with period end rates.
(2) Excluding initial direct costs.
THE CONSOLIDATED FIXED ASSETS SCHEDULE IS PART OF THE NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
F-8
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
CONSOLIDATED FIXED ASSETS SCHEDULE (CONTINUED)
<Table>
<Caption>
DEPRECIATION/AMORTIZATION BOOK VALUE(1)
- ----------------------------------------------------------------------- ------------------
CHANGE IN
BALANCE CONSOL BALANCE BALANCE BALANCE
AT -IDATED AT AT AT
JANUARY CURRENCY COMPA- RECLASSI- DECEMBER DECEMBER DECEMBER
1, 2002 CHANGE NIES ADDITIONS FICATIONS DISPOSALS 31, 2002 31, 2002 31, 2001
- ----------------------------------------------------------------------- ------------------ ------------------------------
1,609 (204) 1 40 (18) 1 1,427 2,071 2,371 Goodwill
542 (56) 3 175 19 49 634 2,855 492 Other intangible assets
- ----------------------------------------------------------------------- ------------------ ------------------------------
2,151 (260) 4 215 1 50 2,061 4,926 2,863 INTANGIBLE ASSETS
- ----------------------------------------------------------------------- ------------------ ------------------------------
Land, leasehold improvements
and buildings including
buildings on land owned by
9,174 (646) (1) 684 (16) 365 8,830 10,528 11,825 others
Technical equipment and
23,054 (2,385) (7) 2,756 (5) 1,684 21,729 12,091 13,892 machinery
Other equipment, factory and
14,074 (1,572) (3) 2,929 28 1,174 14,282 8,098 9,660 office equipment
Advance payments relating to
plant and equipment and
126 (21) 1 16 (8) -- 114 5,552 5,788 construction in progress
- ----------------------------------------------------------------------- ------------------ ------------------------------
46,428 (4,624) (10) 6,385 (1) 3,223 44,955 36,269 41,165 PROPERTY, PLANT AND EQUIPMENT
- ----------------------------------------------------------------------- ------------------ ------------------------------
Investments in affiliated
130 -- 9 23 -- 23 139 1,082 929 companies
-- -- 7 -- -- -- 7 87 143 Loans to affiliated companies
Investments in associated
(2) -- 2 -- -- -- -- 6,339 8,576 companies
Investments in related
210 (4) -- 40 -- 2 244 1,014 1,661 companies
Loans to associated and
1 -- -- 14 -- 2 13 283 340 related companies
1 -- (1) -- -- -- -- 197 368 Long-term securities
10 -- (1) 1 -- 1 9 289 358 Other loans
- ----------------------------------------------------------------------- ------------------ ------------------------------
INVESTMENTS AND LONG-TERM
350 (4) 16 78 -- 28 412 9,291 12,375 FINANCIAL ASSETS
- ----------------------------------------------------------------------- ------------------ ------------------------------
EQUIPMENT ON OPERATING
12,598 (1,669) 44 7,244 -- 8,583 9,634 28,055 35,790 LEASES(2)
- ----------------------------------------------------------------------- ------------------ ------------------------------
</Table>
F-9
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL -- The consolidated financial statements of DaimlerChrysler 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 herein are shown in euros and for the year 2002
amounts are also presented in U.S. dollars ("$"), the latter being unaudited and
presented solely for the convenience of the reader at the rate of [EURO]1 =
$1.0485, the Noon Buying Rate of the Federal Reserve Bank of New York on
December 31, 2002.
Certain amounts reported in previous years have been reclassified to conform
to the 2002 presentation.
Commercial practices with respect to certain products manufactured 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'
understanding of the Group's consolidated financial statements, the accompanying
financial statements present, in addition to the audited consolidated financial
statements, unaudited information with respect to the financial position,
results of operations and cash flows of the Group's industrial and financial
services business activities. Such information, however, is not required by U.S.
GAAP and is not intended to, and does not represent the separate U.S. GAAP
financial position, results of operations or cash flows of the Group's
industrial or financial services business activities. Transactions between the
Group's industrial and financial services business activities principally
represent intercompany sales of products, intercompany borrowings and related
interest, and other support under special vehicle financing programs. The
effects of transactions between the industrial and financial services businesses
have been eliminated within the industrial business columns.
USE OF ESTIMATES -- Preparation of the financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
DaimlerChrysler's financial position, results of operations, and cash flows
are subject to numerous risks and uncertainties. Factors that could affect
DaimlerChrysler's future financial statements and cause actual results to vary
materially from expectations include, but are not limited to, further adverse
changes in global economic conditions; overcapacity and intense competition in
the automotive industry; the concentrations of DaimlerChrysler's revenues
derived from the United States and Western Europe; the significant portion of
DaimlerChrysler's workforce subject to a collective bargaining agreement;
fluctuations in currency exchange rates and interest rates; significant legal
proceedings and environmental and other government regulations.
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the financial statements of DaimlerChrysler AG and all of its
material, majority-owned subsidiaries. All significant intercompany transactions
and balances relating to these majority-owned entities have been eliminated.
INVESTMENTS IN ASSOCIATED COMPANIES -- Significant investments in which
DaimlerChrysler has 20% to 50% of the voting rights or the ability to exercise
significant influence over the operating and financial policies of the investee
("associated companies") such as the European Aeronautic Defence and Space
Company EADS N.V. ("EADS") and Mitsubishi Motors Corporation ("MMC") are
accounted for using the equity method. Because the financial statements of EADS
and MMC are not made available timely to DaimlerChrysler in order to apply the
equity method of accounting, the Group's proportionate share of the results of
operations of these associated companies are included in DaimlerChrysler's
consolidated financial statements on a three month lag. An
F-10
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
impairment loss on its investment in an associated company is recognized when
the loss in value of the investment is determined to be other than temporary.
FOREIGN CURRENCIES -- The assets and liabilities of foreign operations where
the functional currency is not the euro are generally translated using
period-end exchange rates while the statements of income (loss) and the
statements of cash flows are translated using average exchange rates during the
respective periods. The resulting translation adjustments are recorded as a
separate component of accumulated other comprehensive income (loss).
The assets and liabilities of foreign operations in highly inflationary
economies are translated into euro on the basis of period-end rates for monetary
assets and liabilities and at historical rates for non-monetary items, with
resulting translation gains and losses recognized in earnings. Further, in such
economies, depreciation and gains and losses from the disposal of non-monetary
assets are determined using historical rates.
Due to the economic and political situation in Argentina, assets and
liabilities of Argentine subsidiaries at December 31, 2001 were translated from
Argentine peso ("ARP") into euro using the first subsequent rate after the
balance sheet date at which exchanges could be made ([EURO]1 = ARP 1.498).
The exchange rates of the significant currencies of non-euro countries used
in preparation of the consolidated financial statements were as follows:
<Table>
<Caption>
EXCHANGE RATE
AT DECEMBER 31, ANNUAL AVERAGE EXCHANGE RATE
------------------- ------------------------------
2002 2001 2002 2001 2000
[EURO]1 [EURO]1 [EURO]1 [EURO]1 [EURO]1
= = = = =
------ ------ ------ ------ ------
CURRENCY:
Brazil................................... BRL 3.71 2.05 2.78 2.11 1.69
Great Britain............................ GBP 0.65 0.61 0.63 0.62 0.61
Japan.................................... JPY 124.39 115.33 118.04 108.69 99.47
United States............................ USD 1.05 0.88 0.95 0.90 0.92
</Table>
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 incentives, customer
bonuses and rebates granted. Non-cash sales incentives that do not reduce the
transaction price to the customer are classified within cost of sales. Shipping
and handling costs are recorded as cost of sales in the period incurred.
DaimlerChrysler uses price discounts (primarily at the Chrysler Group) to
adjust market pricing in response to a number of market and product factors,
including: pricing actions and incentives offered by competitors, economic
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 given point in time, including: cash
offers to dealers and consumers, lease subsidies which reduce the consumer's
monthly lease payment, or reduced financing rate programs offered to consumers.
The Group records as a reduction to revenue at the time of sale to the
dealer the estimated impact of sales incentives programs offered to dealers and
consumers. This estimated impact represents the incentive programs offered to
dealers and consumers as well as the expected modifications to these programs in
order for the dealers to sell their inventory. The accrued liability for sales
incentives is based on the estimated cost of the sales incentive programs and
the number of 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 actual experience.
F-11
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
When below market rate loans under special financing programs are used to
promote sales of vehicles and the vehicle is financed by the Services segment,
the effect of the rate differential at the contract origination date is recorded
as unearned income in the consolidated balance sheet. Services amortizes the
unearned income balance into earnings using the interest rate method over the
original (contractual) life of the receivables. Upon prepayment or sale of the
receivable, the unamortized unearned income is recognized into earnings.
Sales under which the Group guarantees the minimum resale value of the
product are accounted for as operating leases with the related revenues and
costs deferred at the time of title passage. Revenue from operating leases is
recognized on a straight-line basis over the lease term. Revenue on long-term
contracts is generally recognized under the percentage-of-completion method
based upon contractual milestones or performance.
Revenue from sales financing and finance lease receivables is recognized
using the interest method. Recognition of revenue is generally suspended when a
finance or lease receivable becomes contractually delinquent for periods ranging
from 60 to 120 days.
The Group offers extended warranty contracts for certain products. Revenues
from these contracts are deferred and recognized into income over the contract
period in proportion to the costs expected to be incurred based on historical
information. In circumstances in which there is insufficient historical
information, income is recognized on a straight-line basis. A loss on these
service contracts is recognized in the period, if the sum of expected costs for
services under the contract exceeds unearned revenue.
The Group sells significant amounts of finance receivables as asset-backed
securities through securitization. The Group sells a portfolio of receivables to
a non-consolidated trust and usually remains as servicer, and is paid a
servicing fee. Servicing fees are earned on a level-yield basis over the
remaining term of the related sold receivables. In a subordinated capacity, the
Group retains residual cash flows, a beneficial interest in principal balances
of sold receivables and certain cash deposits provided as credit enhancements
for investors. Gains and losses from the sales of finance receivables are
recognized in the period in which sales occur. In determining the gain or loss
for each qualifying sale of finance receivables, the investment in the sold
receivable pool is allocated between the portion sold and the portion retained
based upon their relative fair values.
ESTIMATED CREDIT LOSSES -- DaimlerChrysler determines its allowance for
credit losses based on a systematic, ongoing review and evaluation performed as
part of the credit-risk evaluation process. The evaluation considers historical
loss experience, the size and composition of the portfolios, current economic
events and conditions, the estimated fair value and adequacy of collateral and
other pertinent factors. Certain homogeneous loan portfolios are evaluated
collectively, taking into consideration primarily historical loss experience
adjusted for the estimated impact of current economic events and conditions,
including fluctuations in the fair value and adequacy of collateral. Other
receivables, such as wholesale receivables and loans to large commercial
borrowers, are evaluated individually for impairment based on the fair value of
collateral. Credit exposures deemed to be uncollectible are charged against the
allowance for doubtful accounts.
VALUATION OF RETAINED INTERESTS IN SOLD RECEIVABLES -- DaimlerChrysler
retains residual beneficial interests in certain pools of sold and securitized
retail and wholesale finance receivables. Such retained interests represent the
present value of the estimated residual cash flows after repayment of all senior
interests in the sold receivables. The Group determines the value of its
retained interests using discounted cash flow modeling upon the sale of
receivables and at the end of each quarter. The valuation methodology considers
historical and projected principal and interest collections on the sold
receivables, estimated future credit losses arising from
F-12
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the collection of the sold receivables, and expected repayment of principal and
interest on notes issued to third parties and secured by the sold receivables.
The Group recognizes unrealized gains or losses attributable to the change
in the fair value of the retained interests, which are recorded in a manner
similar to available-for-sale securities, net of related income taxes as a
separate component of accumulated other comprehensive income (loss) until
realized. The Group is not aware of an active market for the purchase or sale of
retained interests, and accordingly, determines the estimated fair value of the
retained interests by discounting the expected cash flow releases (the cash-out
method) using a discount rate that is commensurate with the risks involved. In
determining the fair value of the retained interests, the Group estimates the
future rates of prepayments, net credit losses and forward yield curves. These
estimates are developed by evaluating the historical experience of comparable
receivables and the specific characteristics of the receivables sold, and
forward yield curves based on trends in the economy. An impairment adjustment to
the carrying value of the retained interests is recognized if the expected cash
flows decline below the cash flows inherent in the cost basis of an individual
retained interest (the pool-by-pool method) is considered other-than-temporary.
Other-than-temporary impairment adjustments are generally recorded as a
reduction of revenue.
PRODUCT WARRANTIES -- A liability for the expected warranty-related costs is
established when the product is sold, upon lease inception, or when a new
warranty program is initiated. Estimates for accrued warranty costs are
primarily based on historical experience. Because portions of the products sold
and warranted by the Group contain parts manufactured (and warranted) by
suppliers, the amount of warranty costs accrued also contains an estimate of
recoveries from suppliers.
RESEARCH AND DEVELOPMENT AND ADVERTISING -- Research and development and
advertising costs are expensed as incurred.
SALES OF NEWLY ISSUED SUBSIDIARY STOCK -- Gains resulting from the issuance
of stock by a Group subsidiary or equity method investment which reduces
DaimlerChrysler's percentage ownership ("dilution gains") are recorded in the
statement of income (loss).
STOCK-BASED COMPENSATION PLANS -- At December 31, 2002, DaimlerChrysler has
various stock appreciation rights plans ("SARs"), two stock option plans and a
medium term incentive award plan which are described more fully in Note 24. For
the periods presented herein, the Group has applied the recognition and
measurement provisions of APB Opinion No. ("APB") 25, "Accounting for Stock
Issued to Employees," and related Interpretations in accounting for those plans.
The following table illustrates the effect on net income (loss) and earnings
(loss) per share as if the fair value method of Statement of Financial
Accounting Standards No. ("SFAS")
F-13
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
123, "Accounting for Stock-Based Compensation," had been applied to all
outstanding and unvested stock options in each period.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Net income (loss) (in millions of [EURO]):
Net income (loss), as reported before
extraordinary items and cumulative effects of
changes in accounting principles............... 4,877 (662) 2,465
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects................. 35 12 8
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects........................ (149) (84) (20)
Pro forma net income (loss).................... 4,763 (734) 2,453
Earnings (loss) per share (in [EURO]):
Basic -- as reported before extraordinary items
and cumulative effects of changes in accounting
principles..................................... 4.84 (0.66) 2.46
Basic -- pro forma............................. 4.72 (0.73) 2.45
Diluted -- as reported before extraordinary
items and cumulative effects of changes in
accounting principles.......................... 4.82 (0.66) 2.45
Diluted -- pro forma........................... 4.71 (0.73) 2.44
</Table>
PENSION AND OTHER POST RETIREMENT 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, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," respectively. As permitted under SFAS 87 and SFAS 106, changes in the
amount of either the projected benefit obligation (for pension plans), the
accumulated benefit obligation (for other postretirement plans) or plan assets
resulting from experience different from that assumed and from changes in
assumptions can result in gains and losses not yet recognized in the Group's
consolidated financial 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
periodic benefit plan cost for a year if, as of the beginning of the year, that
unrecognized net gain or loss exceeds 10 percent of the greater of 1) the
projected benefit obligation (for pension plans) or the 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).
EARNINGS PER SHARE -- Basic earnings per share is calculated by dividing net
income by the weighted average number of shares outstanding. Diluted earnings
per share reflects the potential dilution that would occur if all securities and
other contracts to issue Ordinary Shares were exercised or converted (see
Note 35). Net income represents the earnings of the Group after minority
interests.
INTANGIBLE ASSETS -- Purchased intangible assets, other than goodwill, with
a definite useful life, are valued at acquisition cost and are amortized over
their respective useful lives (2 to 10 years) on a straight-line basis. Goodwill
and intangible assets with an indefinite useful life are no longer amortized as
a result of the adoption of SFAS 142, "Goodwill and Other Intangible Assets" in
2002 (see NEW ACCOUNTING PRONOUNCEMENTS). The Group now
F-14
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
evaluates the recoverability of its goodwill at least annually or when
significant events occur or there are changes in circumstances that indicate the
fair value of a reporting unit of the Group is less than its carrying value. The
Group determines the fair value of each of its reporting units by estimating the
present value based on cash flows. Prior to the adoption of SFAS 142, goodwill
derived from acquisitions that were completed before July 1, 2001, was
capitalized and amortized over 3 to 40 years. Goodwill acquired in business
combinations after June 30, 2001, and intangible assets with an indefinite
useful life acquired after June 30, 2001, were not amortized in accordance with
SFAS 142. Goodwill acquired in business combinations that were completed before
July 1, 2001, and intangible assets with an indefinite useful life acquired
before July 1, 2001, were amortized until December 31, 2001.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is valued at
acquisition or manufacturing costs less accumulated depreciation. Depreciation
expense is recognized using either the declining balance method until the
straight-line method yields larger expenses or the straight-line method. The
costs of internally produced equipment and facilities include all direct costs
and allocable manufacturing overhead. Costs of the construction of certain
long-term assets include capitalized interest, which is amortized over the
estimated useful life of the related asset. The following useful lives are
assumed: buildings -- 10 to 50 years; site improvements -- 5 to 33 years;
technical equipment and machinery -- 3 to 30 years; and other equipment, factory
and office equipment -- 2 to 33 years.
For the Group's subsidiaries in Germany, depreciation expense for property,
plant and equipment placed in service before January 1, 2001 is being recognized
using either the straight-line method or the declining balance method until the
straight-line method yields larger expenses. Property, plant and equipment
placed in service at these companies after December 31, 2000 is depreciated
using the straight-line method of depreciation. This change in accounting method
for new additions beginning January 1, 2001 was made to reflect improvements in
the design and flexibility of manufacturing machinery and equipment and
improvements in maintenance practices. These improvements have resulted in more
uniform productive capacities and maintenance costs over the useful life of an
asset, and straight-line depreciation is preferable in these circumstances. The
effect of this change in method on net income in 2002 and on the net loss in
2001 was not significant.
As part of its Turnaround Plan objectives (see Note 7), the Chrysler Group
has lengthened its platform life-cycles and is aggressively pursuing a strategy
to use manufacturing equipment for more than one product launch. The Chrysler
Group performed an extensive engineering review of the assets utilized in its
manufacturing facilities. These studies resulted in revisions to the estimated
remaining useful lives as well as a reduction in estimated salvage values of
certain manufacturing machinery, equipment and tooling to better represent the
revised platform strategy and the increased use of flexible manufacturing
techniques in its facilities. The change in these estimated useful lives and
salvage values was applied to existing assets and new additions beginning in
2002. The change in estimates resulted in reduced depreciation and amortization
expenses of machinery, equipment and tooling of [EURO]324 million
([EURO]206 million, net of taxes, or [EURO]0.20 per diluted share) for the year
ended December 31, 2002.
LEASING -- The Group is a lessee of property, plant and equipment and lessor
of equipment, principally passenger cars and commercial vehicles. All leases
that meet certain specified criteria intended to represent situations where the
substantive risks and rewards of ownership have been transferred to the lessee
are accounted for as capital leases. All other leases are accounted for as
operating leases. Rent expenses on operating leases, 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 cost and is depreciated over the contractual term of the
lease, using the straight-line method, to its estimated residual value. The
estimated residual value is initially determined using published third party
information as well as historical and projected experience about expected resale
values for the types of equipment leased.
F-15
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-LIVED ASSETS -- The Group evaluates its long-lived assets (which
includes equipment on operating leases where the Group is lessor, but excludes
goodwill) in accordance with the provisions of SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (see NEW ACCOUNTING
PRONOUNCEMENTS). This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset or group of
assets may not be recoverable. Recoverability of assets to be held and used is
assessed by comparing the carrying amount of an asset or asset group to the
expected future undiscounted net cash flows of the asset or group of assets. If
an asset or group of assets is considered to be impaired, the impairment to be
recognized in the Group's financial statements is measured as the amount by
which the carrying amount of the asset or group of assets exceeds fair value.
Long-lived assets meeting the criteria to be considered as held for sale are
reported at the lower of their carrying amount or fair value less costs to sell.
NON-FIXED ASSETS -- Non-fixed assets represent the Group's inventories,
receivables, securities and cash, including amounts to be realized in excess of
one year. In the accompanying notes, the portion of assets and liabilities to be
realized and settled in excess of one year has been disclosed.
INVENTORIES -- Inventories are valued at the lower of acquisition or
manufacturing cost or market, cost being generally determined on the basis of an
average or first-in, first-out method ("FIFO"). Certain of the Group's U.S.
inventories are valued using the last-in, first-out method ("LIFO").
Manufacturing costs comprise direct material and labor and applicable
manufacturing overheads, including depreciation charges.
MARKETABLE SECURITIES AND INVESTMENTS -- Securities and certain investments
are accounted for at fair value, if readily determinable. Unrealized gains and
losses on trading securities, representing securities bought principally for the
purpose of near term sales, are included in earnings. Unrealized gains and
losses on available-for-sale securities are included as a component of
accumulated other comprehensive income (loss), net of applicable taxes. All
other securities are recorded at cost. Unrealized losses on all marketable
securities and investments that are other than temporary are recognized in
earnings.
CASH EQUIVALENTS -- The Group's liquid assets are recorded under various
balance sheet captions as more fully described in Note 21. For purposes of the
consolidated statements of cash flows, the Group considers all highly liquid
instruments with original maturities of three months or less to be cash
equivalents.
FINANCIAL INSTRUMENTS -- DaimlerChrysler uses derivative financial
instruments such as forward contracts, swaps, options, futures, swaptions,
forward rate agreements, caps and floors for hedging purposes. The accounting of
financial instruments is based upon the provisions of SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS 137 and 138
(see Note 10). SFAS 133 requires that all derivative instruments are recognized
as assets or liabilities on the balance sheet and measured at fair value,
regardless of the purpose or intent for holding them. Changes in the fair value
of derivative instruments are recognized periodically either in earnings or
stockholders' equity, as a component of accumulated other comprehensive income
(loss), depending on whether the derivative is designated as a hedge of changes
in fair value or cash flows. For derivatives designated as fair value hedges,
changes in fair value of the hedged item and the derivative are recognized
currently in earnings. For derivatives designated as cash flow hedges, fair
value changes of the effective portion of the hedging instrument are recognized
in accumulated other comprehensive income on the balance sheet, net of
applicable taxes, until the hedged item is recognized in earnings. The
ineffective portions of the fair value changes are recognized in earnings
immediately. Derivatives not meeting the criteria for hedge accounting are
marked to market and impact earnings. SFAS 133 also requires that certain
derivative instruments embedded in host contracts be accounted for separately as
derivatives.
Further information on the Group's financial instruments is included in
Note 32.
F-16
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMITMENTS AND CONTINGENCIES -- Liabilities for loss contingencies are
recorded when it is probable that a liability has been incurred and the amount
can be reasonably estimated.
DaimlerChrysler accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures for environment remediation obligations are not
discounted to their present value. Recoveries of environmental remediation costs
from other parties are recorded as assets when their receipt is deemed probable.
DEPOSITS FROM DIRECT BANKING BUSINESS -- Demand deposit accounts are
classified as financial liabilities. Interest paid on demand deposit accounts is
recognized in cost of sales as incurred.
NEW ACCOUNTING PRONOUNCEMENTS -- In July 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS 141, "Business Combinations," and
SFAS 142. SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS 141 also specifies
the types of acquired intangible assets that are required to be recognized and
reported separately from goodwill and those acquired intangible assets that are
required to be included in goodwill. SFAS 142 requires that goodwill no longer
be amortized, but instead tested for impairment at least annually. SFAS 142 also
requires recognized intangible assets with a definite useful life to be
amortized over their respective estimated useful lives and reviewed for
impairment in accordance with SFAS 144 (see below). Any recognized intangible
asset determined to have an indefinite useful life will not be amortized, but
instead tested for impairment in accordance with SFAS 142 until its life is
determined to no longer be indefinite.
DaimlerChrysler adopted the provisions of SFAS 141 and SFAS 142 as of
July 1, 2001, and January 1, 2002, respectively. These Statements require that
goodwill acquired in a business combination completed after June 30, 2001, and
any intangible asset determined to have an indefinite useful life acquired after
June 30, 2001, should not be amortized. Goodwill acquired in business
combinations completed before July 1, 2001, and any intangible assets with
indefinite useful lives acquired before July 1, 2001, were amortized until
December 31, 2001.
SFAS 142 required the Group to evaluate its existing intangible assets and
goodwill and to make any necessary reclassifications in order to conform with
the new separation requirements at the date of adoption. The Group reassessed
the estimated useful lives and residual values of all intangible assets other
than goodwill and determined that no adjustments regarding amortization periods
were necessary.
In connection with the transitional impairment evaluation, SFAS 142 required
DaimlerChrysler to perform an assessment of whether there is an indication that
goodwill is impaired as of January 1, 2002. To accomplish this, DaimlerChrysler
(1) identified its reporting units, (2) determined the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units, and (3) determined the
fair value of each reporting unit. DaimlerChrysler completed this first step of
the transitional assessment for all of the Group's reporting units by June 30,
2002, and determined there was no indication that goodwill had been impaired as
of January 1, 2002. Accordingly, no transitional goodwill impairment charge was
necessary.
Companies accounted for by DaimlerChrysler using the equity method, such as
EADS and MMC are also subject to the requirements of SFAS 141 and SFAS 142.
DaimlerChrysler's proportionate share of its equity method investees' (primarily
EADS) transitional goodwill impairment charge resulting from the adoption of
SFAS 142 was [EURO]159 million ([EURO]0.16 per share). This transitional
impairment charge and the related per share amount are reported as the
cumulative effect of a change in accounting principle in the Group's
consolidated statement of income (loss) for the year ended December 31, 2002
(see Note 10).
F-17
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." The statement applies to legal obligations associated with the
retirement of tangible long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived asset,
except for certain obligations of lessees. SFAS 143 requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset and subsequently allocated to expense over the asset's
useful life. The Group adopted SFAS 143 on January 1, 2003. The adoption of
SFAS 143 did not have a material impact on the Group's consolidated financial
statements.
In August 2001, the FASB issued SFAS 144, which retains the previous
requirement to recognize an impairment loss only if the carrying amounts of
long-lived assets to be held and used are not recoverable from their expected
undiscounted future cash flows. However, goodwill is no longer required to be
allocated to these long-lived assets when determining their carrying amounts.
SFAS 144 requires that a long-lived asset to be abandoned, exchanged for a
similar productive asset, or distributed to owners in a spin-off be considered
held and used until it is disposed. SFAS 144 requires the depreciable life of an
asset to be abandoned, be revised to its shortened useful life. SFAS 144
requires all long-lived assets to be disposed of by sale, be recorded at the
lower of its carrying amount or fair value less cost to sell and to cease
depreciation (amortization). Thus, future operating losses from discontinued
operations are no longer recognized before they occur. SFAS 144 is effective
January 1, 2002. The adoption of SFAS 144 compared to previous requirements,
except for goodwill, did not have an impact on the Group's consolidated
financial statements.
In December 2001, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 01-06, "Accounting by Certain
Entities (Including Entities With Trade Receivables) That Lend to or Finance the
Activities of Others." SOP 01-06 aligns accounting guidance related to loans and
trade receivables for all entities. The measurement provisions of the Statement
only apply to financial institutions. The disclosure and classification
requirements for loans and trade receivables apply to all entities. This SOP is
effective for financial statements issued for fiscal years beginning after
December 15, 2001.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement 13 and Technical Corrections."
SFAS 145 requires gains and losses on extinguishments of debt to be classified
as gains or losses from continuing operations rather than as extraordinary items
as previously required under SFAS 4, unless the gains and losses meet the
criteria to be classified as extraordinary pursuant to APB 30. SFAS 145 also
amends SFAS 13, "Accounting for Leases," to eliminate an inconsistency between
the required accounting for sale-lease back transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-lease back transactions. The rescission of SFAS 4 is effective
for fiscal years beginning after May 15, 2002. The provisions of SFAS 145
related to SFAS 13 are effective for transactions occurring after May 15, 2002.
The adoption of these provisions had no impact on the Group's consolidated
financial statements.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The Statement requires that a liability for
costs associated with exit or disposal activities be recognized in the period in
which the costs are incurred if a reasonable estimate of fair value can be made.
Under current accounting guidance, a liability can be recognized when management
has committed to an exit plan. The requirements under SFAS 146 are effective
prospectively for exit or disposal activities initiated after December 31, 2002.
Restatement of previously issued financial statements is not permitted. The
adoption of this Statement will affect the Group's accounting for exit and
disposal activities initiated after December 31, 2002.
In November 2002, the Emerging Issue Task Force ("EITF") reached a final
consensus on EITF 00-21, "Revenue Arrangements with Multiple Deliverables." EITF
00-21 addresses certain aspects of the accounting of revenue arrangements with
multiple deliverables by a vendor. The Issue outlines an approach to determine
when
F-18
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a revenue arrangement for multiple deliverables should be divided into separate
units of accounting and, if separation is appropriate, how the arrangement
consideration should be allocated to the identified accounting units. The
consensus reached in the Issue will be effective for DaimlerChrysler in its
financial statements beginning July 1, 2003. DaimlerChrysler will apply the
consensus prospectively in 2003. DaimlerChrysler is currently determining the
impact of the adoption of EITF 00-21 on the Group's consolidated financial
statements.
Also in November 2002, the FASB issued FASB Interpretation ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others -- an interpretation of FASB
statements 5, 57, and 107 and rescission of FASB Interpretation 34." This
Interpretation elaborates on the disclosure to be made by a guarantor in its
financial statements regarding obligations under certain guarantees that it has
issued. FIN 45 also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation due
to the issuance of the guarantee. Disclosure requirements are effective for
financial statements of interim and annual periods ending after December 15,
2002 (see Notes 25 b and 31). The recognition and measurement provisions are
effective for guarantees issued or modified after December 31, 2002.
DaimlerChrysler is currently determining the impact of the recognition and
measurement provisions of FIN 45 on the Group's consolidated financial
statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement
No. 123." SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation" to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 requires more prominent disclosures in both interim and
annual financial statements about the method of accounting used for stock-based
employee compensation and the effect of the method used on reported results.
DaimlerChrysler applies APB 25 that uses an intrinsic value based approach to
measure compensation expense. The Group is currently considering the adoption of
SFAS 123 in 2003. Under SFAS 123, compensation expense of stock option plans is
measured at the grant date based on the fair value of the award using an
option-pricing model. Compensation expense is recognized over the service period
with an offsetting credit to equity (paid-in capital). If adopted, use of the
fair value based method will result in additional compensation expense in the
Group's statement of income (loss) depending upon the number, price and other
significant terms of the stock options granted (see Note 24).
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities -- an interpretation of ARB No. 51," which clarifies the application of
the consolidation rules to certain variable interest entities. FIN 46
established a new multi-step model for the consolidation of variable interest
entities when a company has a controlling financial interest based either on
voting interests or variable interests. Consolidation based on variable
interests is required by the primary beneficiary if the equity investors lack
essential characteristics of a controlling financial interest or if the equity
investment at risk is not sufficient for the entity to finance its activities
without additional subordinated financial support from other parties. The
primary beneficiary of a variable interest entity is the party that absorbs a
majority of the entity's expected losses, receives a majority of its expected
residual returns, or both, as a result of holding variable interests. FIN 46
also provides disclosure requirements related to investments in variable
interest entities, whether or not those entities are consolidated. For
DaimlerChrysler, FIN 46 applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which
DaimlerChrysler obtains an interest after that date. For variable interest
entities created prior to February 1, 2003, the consolidation requirements of
FIN 46 will be effective as of July 1, 2003.
DaimlerChrysler utilizes various special purpose entities to securitize
wholesale and retail automotive receivables in the ordinary course of business.
Public retail and public wholesale transactions typically involve the sale of a
portfolio of receivables through trusts that issue securities to the public.
These trusts meet the criteria in SFAS 140 for qualifying special purposes
entities (QSPE) and therefore, such securitizations are treated as sales with
de-recognition of the transferred receivables. In these transactions,
DaimlerChrysler generally receives a
F-19
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
servicing fee in exchange for primarily collecting payments, responding to
inquiries of obligors on the sold receivables and furnishing the reports as
required under the respective servicing agreements. DaimlerChrysler retains a
subordinated beneficial interest in the receivables sold and legally its risk of
loss is limited to the amount of the carrying value of these retained interests.
These transactions are not subject to the provisions of FIN 46.
DaimlerChrysler also sells automotive receivables to multi-seller and
multi-collateralized bank conduits, which are considered variable interest
entities, in the ordinary course of business. DaimlerChrysler generally remains
as servicer. DaimlerChrysler also retains residual beneficial interests in the
receivables sold which are designed to absorb substantially all of the credit,
prepayment, and interest-rate risk of the receivables transferred to the
conduit. These transactions are subject to the provisions of FIN 46.
DaimlerChrysler is currently evaluating whether it is the primary beneficiary of
these variable interest entities and therefore would be required to consolidate
them.
The outstanding balance of receivables sold to QSPEs and corresponding
retained interest balance as of December 31, 2002 are approximately
[EURO]22.9 billion and [EURO]3.2 billion, respectively. The outstanding balance
of receivables sold to conduits and corresponding retained interest balance as
of December 31, 2002 are approximately [EURO]7.2 billion and [EURO]1.0 billion,
respectively.
To a limited extent, DaimlerChrysler uses off-balance-sheet leasing
structures. In these structures, a variable interest entity is established and
owned by third parties. The variable interest entity raises funds by issuing
debt and equity securities to third party investors. The variable interest
entity uses the debt and equity proceeds to purchase property and equipment,
which is leased by the Group and used in the normal course of business. At the
end of the lease term, DaimlerChrysler generally has the option to purchase the
property and equipment at fair value or re-lease the property and equipment
under new terms. DaimlerChrysler is currently evaluating whether its interests
in these entities require consolidation or information to be disclosed when FIN
46 becomes effective. If these entities are required to be consolidated in
accordance with FIN 46, their aggregate size is not expected to be material to
the Group's consolidated financial statements. Further, the Group's maximum
exposure to loss as a result of its involvement with these entities is also not
expected to be significant.
DaimlerChrysler is evaluating the extent to which it has involvement in
other entities, in addition to those described above, and whether its interests
are subject to the requirements of FIN 46. It is reasonably possible that
DaimlerChrysler may be required to consolidate or disclose information about any
of these entities when FIN 46 becomes effective. However, DaimlerChrysler
believes the aggregate size and the Group's maximum exposure to loss as a result
of its involvement with these entities is also insignificant.
2. SCOPE OF CONSOLIDATION
SCOPE OF CONSOLIDATION -- DaimlerChrysler comprises 451 German and
non-German subsidiaries (2001: 470). A total of 102 (2001: 102) companies are
accounted for in the consolidated financial statements using the equity method
of accounting. During 2002, 45 subsidiaries were included in the consolidated
financial statements for the first time. A total of 64 subsidiaries were no
longer included in the consolidated group. Significant effects of changes in the
consolidated group on the consolidated balance sheets and the consolidated
statements of income (loss) are explained further in the notes to the
consolidated financial statements. A total of 305 subsidiaries ("affiliated
companies") are not consolidated as their combined influence on the financial
position, results of operations, and cash flows of the Group is not material
(2001: 296). The effect of such non-consolidated subsidiaries for all years
presented on consolidated assets, revenues and net income (loss) of
DaimlerChrysler was approximately 1%. In addition, 5 (2001: 5) companies
administering pension funds whose assets are subject to restrictions have not
been included in the consolidated financial statements. The consolidated
financial statements include 112 associated companies (2001: 96) accounted for
at cost and recorded under investments in related
F-20
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
companies as these companies are not material to the respective presentation of
the financial position, results of operations or cash flows of the Group.
3. EQUITY METHOD INVESTMENTS
At December 31, 2002, the significant investments in companies accounted for
under the equity method were the following:
<Table>
<Caption>
OWNERSHIP
COMPANY PERCENTAGE
------- ----------
European Aeronautic Defence and Space Company EADS N.V...... 33.0%
Mitsubishi Motors Corporation............................... 37.1%
</Table>
Further information with respect to the transactions which resulted in the
Group's holdings in EADS and MMC is presented in Note 4 (ACQUISITIONS AND
DISPOSITIONS) and Note 11 (EXTRAORDINARY ITEMS). The aggregate quoted market
prices as of December 31, 2002, for DaimlerChrysler's shares in EADS and MMC
were [EURO]2,627 million and [EURO]1,124 million, respectively.
The carrying value of the significant investments exceeded DaimlerChrysler's
share of the underlying reported net assets by approximately [EURO]840 million
at December 31, 2002. The excess of the Group'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 considered as investor level goodwill. The fair value
adjustments and goodwill are accounted for in the respective equity method
investment balances. Under the equity method, investments are stated at initial
cost and are adjusted for subsequent contributions and DaimlerChrysler's share
of the equity investees' earnings, losses and distributions. Investor level
goodwill relating to the Group's investments in EADS and MMC was being amortized
over a 20 year period until December 31, 2001. After December 31, 2001, such
goodwill was no longer amortized as a result of adopting SFAS 142. The total
carrying value, including goodwill, of each equity method investment will
continue to be evaluated for impairment when conditions indicate that a decline
in fair value below the carrying amount is other than temporary.
F-21
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables present, on a three month lag, summarized U.S. GAAP
financial information for EADS and MMC (amounts shown on a 100% basis in
millions of [EURO]) which are the basis for applying the equity method in the
Group's consolidated financial statements:
EADS:
INCOME STATEMENT INFORMATION:
<Table>
<Caption>
2002 2001
-------- --------
Revenues.................................................... 28,769 27,004
Net income.................................................. 521 2,598
</Table>
BALANCE SHEET INFORMATION:
<Table>
<Caption>
2002 2001
-------- --------
Fixed assets................................................ 26,254 26,505
Non-fixed assets............................................ 19,207 22,119
------ ------
Total assets................................................ 45,461 48,624
====== ======
Stockholders' equity........................................ 13,143 11,409
Minority interests.......................................... 942 598
Accrued liabilities......................................... 8,262 11,149
Other liabilities........................................... 23,114 25,468
------ ------
Total liabilities and stockholders' equity.................. 45,461 48,624
====== ======
</Table>
MMC:
INCOME STATEMENT INFORMATION:
<Table>
<Caption>
2002 2001
-------- --------
Revenues.................................................... 27,847 30,057
Net income (loss)........................................... 154 (1,209)
</Table>
BALANCE SHEET INFORMATION:
<Table>
<Caption>
2002 2001
-------- --------
Fixed assets................................................ 10,465 11,974
Non-fixed assets............................................ 11,971 12,697
------ ------
Total assets................................................ 22,436 24,671
====== ======
Stockholders' equity........................................ 1,422 1,528
Minority interests.......................................... 121 (61)
Accrued liabilities......................................... 5,039 5,800
Other liabilities........................................... 15,854 17,404
------ ------
Total liabilities and stockholders' equity.................. 22,436 24,671
====== ======
</Table>
F-22
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS AND DISPOSITIONS
DaimlerChrysler signed contracts to sell a controlling (51%) interest in VM
Motori S.p.A. and its 100% ownership interest in Detroit Diesel Motores do
Brasil Ltda, both wholly-owned subsidiaries of DaimlerChrysler, in the fourth
quarter of 2002. The sales of these ownership interests are expected to be
concluded in the first quarter of 2003. The expected losses from the sales of
these ownership interests has been allocated to impairment losses on
(1) long-lived assets in the disposal groups held for sale, (2) goodwill in the
disposal groups held for sale, (3) long-lived assets to be retained and
(4) goodwill to be retained. The total goodwill impairment charge recognized in
2002 amounted to [EURO]40 million and is included in other expenses of the
Commercial Vehicles segment (see Note 5). Within the consolidated balance sheet,
[EURO]122 million of total assets and [EURO]102 million total liabilities have
been classified as held for sale at December 31, 2002. DaimlerChrysler will
account for the remaining 49% of VM Motori S.p.A. using the equity method.
On January 6, 2003, MMC spun off its "Fuso Truck and Bus" division, creating
Mitsubishi Fuso Truck and Bus Corporation ("MFTBC"). Pursuant to a share sale
and purchase agreement with MMC dated September 20, 2002, DaimlerChrysler agreed
to purchase from MMC a non-controlling (43%) interest of MFTBC's shares for
approximately [EURO]760 million in cash. Ten Mitsubishi Group companies,
including Mitsubishi Corporation, Mitsubishi Heavy Industries and Bank of
Tokyo-Mitsubishi, entered into a separate share sale and purchase agreement with
MMC pursuant to which they agreed to purchase from MMC a total minority interest
of 15% of MFTBC's shares for approximately [EURO]265 million in cash.
DaimlerChrysler and the Mitsubishi Group purchasers expect to consummate their
respective transactions in March 2003. After the transactions are executed, MMC
will hold a non-controlling (42%) interest in MFTBC. DaimlerChrysler will
account for its investment in MFTBC using the equity method with the excess of
the purchase price of DaimlerChrysler's share of the underlying net assets of
MFTBC allocated to any identifiable tangible and intangible assets based on
estimated fair values. Any remaining excess purchase price will be allocated to
investor-level goodwill.
In June 2001, DaimlerChrysler entered into a commercial vehicle joint
venture agreement with Hyundai Motor Company ("HMC"). In a first phase, the
Group and HMC established DaimlerHyundai Truck Corporation ("DHTC"). The Group
acquired a non-controlling (50%) interest in DHTC. DHTC was formed to produce
and/or distribute engines and engine parts. The commercial vehicle joint venture
agreement with HMC also included an option for the Group to acquire 50% of the
commercial vehicle business of HMC. Pursuant to this option, which
DaimlerChrysler exercised in December 2002, HMC is in the process of
contributing its entire commercial vehicle business to a new legal entity.
Subject to receiving all necessary governmental approvals, DaimlerChrysler
currently plans to acquire a 50% interest in that entity from HMC for
[EURO]400 million at the end of February 2003. DaimlerChrysler will account for
its investment in the commercial vehicle business using the equity method with
the excess of the purchase price of DaimlerChrysler's share of the underlying
net assets allocated to any identifiable tangible and intangible assets based on
estimated fair values. Any remaining excess purchase price will be allocated to
investor-level goodwill. The purpose of the new commercial vehicle joint venture
is to design, produce and distribute commercial vehicles above 4t gross vehicle
weight (GVW), including buses, as well as components for those vehicles.
DaimlerChrysler and HMC intend to combine their commercial vehicle and engine
joint ventures in the first half of 2003. The Group continues to hold a 10%
equity interest in HMC, which was acquired in two installments in
September 2000 and in March 2001 for approximately [EURO]484 million and is
accounted for as an available-for-sale security.
During 2002, in separate transactions, the Group acquired various
dealerships in Europe and completed certain other acquisitions, none of which
were material. The aggregate purchase price paid in these separate acquisitions
resulted in additions to goodwill of approximately [EURO]132 million.
On October 18, 2000, DaimlerChrysler acquired a 34% equity interest in MMC
for approximately [EURO]2,200 million. At the closing date of the transaction,
the Group also purchased MMC bonds with an aggregate face value of
F-23
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JPY19,200 million and a stated interest rate of 1.7% for [EURO]206 million,
which are convertible into shares of MMC stock. The bonds are only convertible
by DaimlerChrysler in the event that its ownership percentage would be diluted
below 34% upon conversion of previously issued convertible bonds. To the extent
not converted, the bonds and accrued interest are due on April 30, 2003. In
June 2001, Volvo AB sold its 3.3% interest in MMC, plus its operational
contracts with MMC, to DaimlerChrysler for $297 million ([EURO]343 million)
increasing DaimlerChrysler's interest in MMC to 37.3%. In November 2002, a
rights offering at MMC reduced the Group's interest to 37.1%.
In August 2000, DaimlerChrysler signed a sale and purchase agreement with
the Canadian company Bombardier Inc. for the sale of DaimlerChrysler Rail
Systems GmbH ("Adtranz"). With the closing of the transaction on April 30, 2001,
control over the operations of Adtranz was transferred to Bombardier on May 1,
2001. Accordingly, the operating results of Adtranz are included in the
consolidated financial statements of DaimlerChrysler through April 30, 2001. The
sales price of $725 million was received during 2001. On July 5, 2002,
Bombardier filed a request for arbitration with the International Chamber of
Commerce, Paris, and thereby raised claims for sales price adjustments under the
terms of the sale and purchase agreement as well as claims for alleged breaches
of contract and misrepresentation, and seeks total damages of approximately
[EURO]960 million. The sale and purchase agreement limits the amount of such
price adjustments to [EURO]150 million, and, to the extent legally permissible,
the amount of other claims to an additional [EURO]150 million. DaimlerChrysler
believes the complaints are without merit and is defending itself vigorously
against such claims in the current arbitration proceedings. Due to uncertainties
with respect to the ultimate outcome of these proceedings, the Group has
recognized a partial after-tax gain of [EURO]237 million on the sale of Adtranz
in the fourth quarter of 2001, representing the maximum possible adjustment to
the sales price and the aforementioned maximum amount with respect to any
further claims in accordance with the sale and purchase agreement.
In April 2001, DaimlerChrysler completed the sale of 60% of the interest in
its Automotive Electronics activities to Continental AG for [EURO]398 million,
resulting in a pretax gain of [EURO]209 million. In April 2002, DaimlerChrysler
exercised its option to sell to Continental AG the Group's 40% interest in the
Automotive Electronics activities for proceeds of [EURO]215 million, resulting
in a pretax gain of [EURO]128 million.
In October 2000, DaimlerChrysler acquired all the remaining outstanding
shares of Detroit Diesel Corporation for approximately [EURO]500 million. The
acquisition of the remaining 78.6% interest in Detroit Diesel was accounted for
using the purchase method of accounting and resulted in goodwill of
approximately [EURO]310 million, which was being amortized on a straight-line
basis over a 20 year period until December 31, 2001. After December 31, 2001,
goodwill will no longer be amortized, but instead tested for impairment at least
annually, as a result of adopting SFAS 142.
In October 2000, DaimlerChrysler Services AG and Deutsche Telekom AG formed
a joint venture in the area of information technology. In accordance with the
agreement, Deutsche Telekom received a 50.1% interest in T-Systems ITS through
an investment of approximately [EURO]4,571 million for new shares of T-Systems
ITS (see Note 11). In January 2002, DaimlerChrysler exercised its option to sell
to Deutsche Telekom the Group's 49.9% interest in T-Systems ITS for proceeds of
[EURO]4,694 million. The sale was consummated in March 2002 with the termination
of the joint venture, resulting in a gain of [EURO]2,484 million.
In September 2000, DaimlerChrysler acquired 100% of the outstanding shares
of the Canadian company Western Star Trucks Holdings Ltd. for approximately
[EURO]500 million. The acquisition was accounted for using the purchase method
of accounting and resulted in goodwill of approximately [EURO]380 million, which
was being amortized on a straight-line basis using a useful life of 20 years
until December 31, 2001. After December 31, 2001, goodwill will no longer be
amortized, but instead tested for impairment at least annually, as a result of
adopting SFAS 142.
Information on the exchange of the Group's controlling interest in
DaimlerChrysler Aerospace for shares of EADS and the related initial public
offering of EADS in July 2000 is included in Note 11.
F-24
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES TO CONSOLIDATED STATEMENTS OF INCOME (LOSS)
5. FUNCTIONAL COSTS AND OTHER EXPENSES
Selling, administrative and other expenses are comprised of the following:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
(IN MILLIONS OF [EURO]) -------- -------- --------
Selling expenses................................... 12,059 11,823 11,666
Administration expenses............................ 5,390 5,539 5,921
Goodwill amortization and impairments.............. 40 184 279
Other expenses..................................... 804 785 437
------ ------ ------
18,293 18,331 18,303
====== ====== ======
</Table>
Moderate demand and strong competition in the European market for commercial
vehicles resulted in idle capacity at one of the Group's German assembly plants.
Consequently, DaimlerChrysler determined that it does not expect to recover the
carrying value of certain long-lived assets (primarily manufacturing equipment
and tooling) at this plant. In accordance with the provisions of SFAS 144, an
impairment charge amounting to [EURO]201 million was recognized in 2002. The
charge is included in cost of sales of the Commercial Vehicles segment.
In 2002, a goodwill impairment charge of [EURO]40 million was recognized in
connection with the contracted sale of controlling interests in two businesses
in the Commercial Vehicles segment (see Note 4).
In October 2002, DaimlerChrysler reached a final agreement with GE Capital
to sell a significant portion of its portfolio of corporate aircraft, consisting
of finance lease receivables and owned aircraft currently under operating
leases. The sale will be consummated in tranches beginning in November 2002 over
a period of approximately 12 months. The agreement contains provisions for
DaimlerChrysler to receive a share of future payments throughout the remaining
term of the contracts in the portfolio. As a result of current economic
conditions, the Group also re-evaluated the recoverability of its remaining
leasing portfolio in the fourth quarter of 2002. In connection with the sale
agreement, the Group classified finance lease receivables with a carrying value
of [EURO]493 million and equipment under operating leases with a carrying value
of [EURO]40 million as held for sale at December 31, 2002. The Services segment
recognized impairment losses amounting to [EURO]191 million in other expenses
and [EURO]20 million in cost of sales related to the assets held for sale and
the re-evaluation of the remaining portfolio.
In 2002, due to declining resale prices of used passenger cars and
commercial vehicles in North America, DaimlerChrysler recognized impairment
charges totaling [EURO]256 million upon re-evaluation of the recoverability of
the carrying value of its leased vehicles. This re-evaluation was performed
using product specific cash flow information. As a result, the carrying values
of these leased vehicles were determined to be impaired as the identifiable
undiscounted future cash flows were less than their respective carrying values.
In accordance with SFAS 144, the resulting impairment charges, recorded as a
component of cost of sales in the Services segment, represent the amount by
which the carrying values of such vehicles exceeded their respective fair market
values.
Following a decision of DaimlerChrysler's Board of Management in the fourth
quarter of 2001, DaimlerChrysler, GE Capital and other financial services
providers reached an agreement during the six months ended June 30, 2002 to
purchase a portion of the DaimlerChrysler's commercial real estate and
asset-based lending portfolios in the United States for [EURO]1,260 million. The
decision resulted in a charge of [EURO]166 million, which is included in other
expense of the Services segment in 2001.
As discussed in Note 7, the DaimlerChrysler Supervisory Board approved a
multi-year turnaround plan for the Chrysler Group in February 2001. The related
charges are presented as a separate line item on the
F-25
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accompanying consolidated statements of income (loss) and are not reflected in
cost of sales or selling, administrative and other expenses.
In October 2001, the DaimlerChrysler Board of Management approved a
turnaround plan for its North American truck subsidiary Freightliner. The
turnaround plan is designed to return Freightliner to sustainable profitability
and comprises four main elements: material cost savings, production cost
savings, overhead reductions and improvements to the existing business model.
The implementation of the turnaround plan resulted in charges of
[EURO]310 million, reflecting employee termination benefits of
[EURO]83 million, asset impairment charges of [EURO]170 million, and other costs
to exit certain activities of [EURO]57 million (see Note 25b). The charges were
recorded in cost of sales ([EURO]173 million) and selling, administrative and
other expenses ([EURO]137 million) in 2001. Employee termination benefits
related to voluntary and involuntary severance measures affected hourly and
salaried employees. As a result of the voluntary and involuntary measures,
1,314 and 1,484 hourly and salaried employees were affected by the plan in 2002
and 2001, respectively. The amount of employee termination benefit paid and
charged against the liability was [EURO]38 million in 2002.
Based on its investment in MMC and the corresponding strategic alliance
entered into in the fourth quarter 2000, DaimlerChrysler conducted a review of
its compact car strategy in 2000, and concluded that it was necessary to revise
the current strategic plan for the smart brand, including restructuring of
supplier contracts. As a result, the carrying values of certain of the brand's
long-lived assets were determined to be impaired as the identifiable,
undiscounted future cash flows from the operation of such assets were less then
their respective carrying values. In accordance with SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," DaimlerChrysler recorded an impairment charge of [EURO]281 million. The
impairment charge represents the amount by which the carrying values of such
assets exceeded their respective fair market values. The impairment relates
principally to the carrying values of the manufacturing facility, equipment and
tooling. In addition, charges of [EURO]255 million were recorded related to
fixed cost reimbursement agreements with MCC smart suppliers. The charges were
recorded in cost of sales ([EURO]494 million) and other expenses
([EURO]42 million) for the year 2000.
In 2000, DaimlerChrysler recorded an impairment charge in cost of sales of
approximately [EURO]500 million for certain leased vehicles in the Services
segment. Declining resale prices of used vehicles in the North American and the
U.K. markets required the Group to re-evaluate the recoverability of the
carrying values of its leased vehicles. This re-evaluation was performed using
product specific cash flow information. As a result, the carrying values of
these leased vehicles were determined to be impaired as the identifiable
undiscounted future cash flows from such vehicles were less than their
respective carrying values. In accordance with SFAS 121, the resulting pre-tax
impairment charges represent the amount by which the carrying values of such
vehicles exceeded their respective fair market values.
Personnel expenses included in the statement of income (loss) are comprised
of:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
(IN MILLIONS OF [EURO]) -------- -------- --------
Wages and salaries................................. 19,701 20,073 21,836
Social levies...................................... 3,132 3,193 3,428
Net pension cost (see Note 25a).................... 152 630 327
Net postretirement benefit
cost (see Note 25a).............................. 1,119 1,173 830
Other expenses for pensions and retirements........ 59 26 79
------ ------ ------
24,163 25,095 26,500
====== ====== ======
</Table>
F-26
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Number of employees (annual average):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Hourly employees................................ 232,304 244,938 270,814
Salaried employees.............................. 125,110 122,094 165,117
Trainees/apprentices............................ 13,263 12,512 13,663
------- ------- -------
370,677 379,544 449,594
======= ======= =======
</Table>
In 2001 and 2000, 28 people were employed in each of the years in joint
venture companies.
Information on the remuneration to the current members of the Supervisory
Board and the Board of Management is included in Note 37. In 2002, disbursements
to former members of the Board of Management of DaimlerChrysler AG and their
survivors amounted to [EURO]9 million. An amount of [EURO]150 million has been
accrued for pension obligations to former members of the Board of Management and
their survivors. As of December 31, 2002, no advances or loans existed to
members of the Board of Management of DaimlerChrysler AG.
6. OTHER INCOME
Other income includes gains on sales of property, plant and equipment
([EURO]49 million, [EURO]104 million and [EURO]106 million in 2002, 2001 and
2000, respectively) and rental income, other than relating to financial services
leasing activities ([EURO]197 million, [EURO]191 million and [EURO]178 million
in 2002, 2001 and 2000, respectively). In 2001, gains on sales of companies of
[EURO]465 million were recognized in other income.
7. TURNAROUND PLAN FOR THE CHRYSLER GROUP
The DaimlerChrysler Supervisory Board approved a multi-year turnaround plan
for the Chrysler Group in 2001. Key initiatives for the turnaround plan over the
period 2001 through 2003 include a workforce reduction and an elimination of
excess capacity. The workforce reduction affected represented and
non-represented hourly and salary employees. To eliminate excess capacity, the
Chrysler Group is idling, closing or disposing of certain manufacturing plants,
eliminating shifts and reducing line speeds at certain manufacturing facilities,
and adjusting volumes at component, stamping and powertrain facilities.
The net charges recorded for the plan in 2001 were [EURO]3,064 million
([EURO]1,934 million net of taxes) and are presented as a separate line item on
the accompanying consolidated statements of income (loss) ([EURO]2,555 million
and [EURO]509 million would have otherwise been reflected in cost of sales and
selling, administrative and other expenses, respectively).
The initial charges of [EURO]3,047 million were recorded in February 2001
with the approval of the turnaround plan. Additional charges of
[EURO]268 million in 2001 resulted from the subsequent impairment and disposal
costs associated with a component plant as well as costs for a special early
retirement program. The return to income adjustments of [EURO]251 million in
2001 include revisions of estimates based upon information currently available
or actual settlements. These adjustments reflect lower than anticipated costs
associated with workforce reduction initiatives, including the involuntary
severance benefits, and favorable resolution of supplier contract cancellation
claims.
The net charges recorded for the plan in 2002, were [EURO]694 million
([EURO]439 million net of taxes) and are presented as a separate line item on
the accompanying consolidated statements of income (loss) ([EURO]680 million and
[EURO]14 million would have otherwise been reflected in cost of sales and
selling, administrative and other expenses, respectively). These charges were
for additional costs associated with the idling, closing or disposal of certain
manufacturing facilities in 2002 and 2003 and ongoing workforce reduction
measures as well as revisions of estimates based upon information currently
available or actual settlements.
F-27
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pretax amounts for turnaround plan charges since initiation in the first
quarter of 2001 are comprised of the following:
<Table>
<Caption>
WORKFORCE ASSET OTHER
REDUCTIONS WRITE-DOWNS COSTS TOTAL
(IN MILLIONS OF [EURO]) ---------- ----------- -------- --------
Reserve balance at January 1, 2001....................... -- -- -- --
Initial charges........................................ 1,403 836 808 3,047
Additional charges..................................... 93 148 27 268
Adjustments............................................ (122) -- (129) (251)
----- ---- ---- ------
Net charges.............................................. 1,374 984 706 3,064
----- ---- ---- ------
Payments............................................... (211) -- (154) (365)
Amount charged against assets.......................... -- (984) (63) (1,047)
Amount recognized by and transferred to the employee
benefit plans........................................ (695) -- -- (695)
Currency translation adjustment........................ 38 -- 21 59
----- ---- ---- ------
Reserve balance at December 31, 2001..................... 506 -- 510 1,016
===== ==== ==== ======
Additional charges..................................... 353 269 99 721
Adjustments............................................ (41) 30 (16) (27)
----- ---- ---- ------
Net charges.............................................. 312 299 83 694
----- ---- ---- ------
Payments............................................... (297) -- (215) (512)
Amount charged against assets.......................... -- (299) (6) (305)
Amount recognized by and transferred to the employee
benefit plans........................................ (152) -- -- (152)
Currency translation adjustment........................ (89) -- (67) (156)
----- ---- ---- ------
Reserve balance at December 31, 2002..................... 280 -- 305 585
===== ==== ==== ======
</Table>
Workforce reduction charges in 2002 and 2001 relate to early retirement
incentive programs ([EURO]160 million and [EURO]725 million, respectively) and
involuntary severance benefits ([EURO]152 million and [EURO]649 million,
respectively). The voluntary early retirement programs, accepted by 3,175 and
9,261 employees in 2002 and 2001, respectively, are formula driven based on
salary levels, age and past service. In addition, 5,106 and 7,174 employees were
involuntarily affected by the plan in 2002 and 2001, respectively. The amount of
involuntary severance benefits paid and charged against the liability was
[EURO]199 million and [EURO]131 million in 2002 and 2001, respectively. The
amount recognized by and transferred to the employee benefit plans represents
the cost of the special early retirement programs and the curtailment of prior
service costs actuarially recognized by the pension and postretirement health
and life insurance benefit plans.
As a result of the planned idling, closing or disposal of certain
manufacturing facilities, the recovery of the carrying values of certain
long-lived assets at these plants were determined to be impaired. Accordingly,
the Chrysler Group recorded impairment charges of [EURO]299 million in 2002 and
[EURO]984 million in 2001. The impairment charges represent the amount by which
the carrying values of the property, plant, equipment and tooling exceeded their
respective fair market values as determined by third party appraisals or
comparative market analyses developed by the Chrysler Group.
The Chrysler Group sold the Dayton Thermal Products facility on May 1, 2002
to a joint venture company with Behr America, Inc. and will maintain a minority
interest for two years. In addition, the Chrysler Group sold the Graz, Austria
plant to Magna International Inc. on July 12, 2002. The exit costs of these two
plant sales were provided for in the Turnaround Plan charges.
F-28
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other costs primarily include supplier contract cancellation costs.
Other key initiatives of the plan include additional cost reduction and
revenue enhancing measures. Specifically, in an effort to reduce costs,
suppliers were requested to voluntarily reduce the prices charged for materials
and services. Under the revenue enhancement measures of the turnaround plan,
certain dealer programs were replaced with a new performance-based incentive
program under which dealers may earn cash payments based on levels of
achievement compared to pre-assigned monthly retail sales objectives as well as
24 individual sales offices throughout the United States were reorganized into
eight regional business centers.
8. FINANCIAL INCOME, NET
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
(IN MILLIONS OF [EURO]) -------- -------- --------
Income from investments of which from affiliated
companies [EURO]44 (2001: [EURO](2); 2000:
[EURO]24).................................... 74 24 73
Gains, net from disposals of investments and shares
in affiliated and associated companies............. 2,645 320 1
Write-down of investments and shares in affiliated
companies.......................................... (63) (109) (54)
Income (loss) from companies included at equity...... (16) 97 (244)
------ ------ ------
Income (loss) from investments, net.................. 2,640 332 (224)
------ ------ ------
Other interest and similar income of which from
affiliated companies [EURO]9 (2001: [EURO]31; 2000:
[EURO]20).......................................... 720 1,040 1,268
Interest and similar expenses of which from
affiliated companies [EURO]21 (2001: [EURO]21;
2000: [EURO]14).................................... (1,040) (1,317) (988)
------ ------ ------
Interest income (expense), net....................... (320) (277) 280
------ ------ ------
Income from securities and long-term receivables of
which from affiliated companies [EURO]7 (2001:
[EURO]9; 2000: [EURO]10)........................... 84 291 161
Write-down of securities and long-term receivables... (71) (16) (3)
Other, net........................................... (125) (176) (58)
------ ------ ------
Other financial income (loss), net................... (112) 99 100
------ ------ ------
2,208 154 156
====== ====== ======
</Table>
In 2002 the Group sold its 49.9%-interest in T-Systems ITS. This sale
resulted in a gain of [EURO]2,484 million, which is included in gains from
disposals of investments and shares in affiliated and associated companies (see
Note 4).
In 2001, EADS, an equity method investee of the Group, created a new
company, Airbus SAS, and contributed all of its Airbus activities into the new
company for a 100% ownership interest. Also in 2001, Airbus SAS issued new
shares to BAe Systems in exchange for all of its Airbus activities. As a result
of this transaction, EADS' ownership interest in Airbus SAS, which is
consolidated by EADS, was diluted to 80%. DaimlerChrysler recognized under U.S.
GAAP its share of the gain resulting from the formation of Airbus SAS in the
amount of [EURO]747 million in income (loss) from companies included at equity.
The Group capitalized interest expenses related to qualifying construction
projects of [EURO]147 million (2001: [EURO]275 million; 2000:
[EURO]181 million).
F-29
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
Income (loss) before income taxes consists of the following:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
(IN MILLIONS OF [EURO]) -------- -------- --------
Germany............................................... 4,379 4,498 2,729
Non-German countries.................................. 1,689 (5,981) 1,747
----- ------ -----
6,068 (1,483) 4,476
===== ====== =====
</Table>
Income tax expense (benefit) is comprised of the following components:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
(IN MILLIONS OF [EURO]) -------- -------- --------
Current taxes
Germany........................................... 1,195 793 (45)
Non-German countries.............................. (286) (512) 1,160
Deferred taxes
Germany........................................... (430) 637 1,490
Non-German countries.............................. 698 (1,695) (606)
----- ------ -----
1,177 (777) 1,999
===== ====== =====
</Table>
For German companies, the deferred taxes at December 31, 2002 are calculated
using a federal corporate tax rate of 26.5% (2001 and 2000: 25%) for deferred
taxes which will reverse in the next year and 25% (2001 and 2000: 25%) for
deferred taxes which will reverse after one year. Deferred taxes are also
calculated with a solidarity surcharge of 5.5% for each year on federal
corporate taxes payable plus the after federal tax benefit rate for trade tax of
11.842% (2001 and 2000: 12.125%) for deferred taxes which will reverse in the
next year and 12.125% (2001 and 2000: 12.125%) for deferred taxes which will
reverse after one year. Including the impact of the surcharge and the trade tax,
the tax rate applied to German deferred taxes amounts to 39.8% (2001 and 2000:
38.5%) for deferred taxes which will reverse in the next year and 38.5% (2001
and 2000: 38.5%) for deferred taxes which will reverse after one year.
In 2002, the German government enacted new tax legislation for the purpose
of financing the flood disaster which, among other changes, increased the
Group's statutory corporate tax rate for German companies from 25% to 26.5%,
effective for the calendar year 2003. The effect of the increase in the tax rate
on the deferred tax assets and liabilities of the Group's German companies was
recognized in the year of enactment and as a result, a net charge of
[EURO]3 million is included in the consolidated statement of income (loss) in
2002.
In 2000, the German government enacted new tax legislation which, among
other changes, reduced the Group's statutory corporate tax rate for German
companies from 40% on retained earnings and 30% on distributed earnings to a
uniform 25%, effective for the Group's year beginning January 1, 2001. The
significant other tax law change is the exemption from tax for certain gains and
losses from the sale of shares in affiliated and unaffiliated companies. The
effects of the reduction in the tax rate and other changes on the deferred tax
assets and liabilities of the Group's German companies were recognized in the
year of enactment. As a result, a net charge of [EURO]263 million is included in
the consolidated statement of income (loss) in 2000. The effects of the
reduction in the tax rate resulted in deferred tax expense of
[EURO]373 million. The exemption from tax for certain gains from the sale of
shares resulted in deferred tax benefit of [EURO]110 million due to the
elimination of the net deferred tax liabilities on the net unrealized gains.
F-30
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect of the tax law changes in Germany in 2002 and 2000 are reflected
separately in the reconciliations presented below.
For the year ending December 31, 2000, the German corporate tax law applied
a split-rate imputation with regard to the taxation of the earnings of a
corporation. In accordance with the tax law in effect for 2000, retained
corporate income was initially subject to a federal corporate tax of 40% plus a
solidarity surcharge of 5.5% on federal corporate taxes payable. Including the
impact of the surcharge, the federal corporate tax rate amounted to 42.2%. Upon
distribution of certain retained earnings generated in Germany to stockholders,
the corporate income tax rate on the earnings was adjusted to 30%, plus a
solidarity surcharge of 5.5% on the distribution corporate tax, for a total of
31.65%, by means of a refund for taxes previously paid. Under the new German
corporate tax system, during a 15 year transition period beginning on
January 1, 2001, the Group will continue to receive a refund on the distribution
of retained earnings which existed as of December 31, 2000. As of December 31,
2002, the Group has used substantially all of its credit for German corporate
tax on the distribution of retained earnings.
A reconciliation of expected income taxes to actual income tax expense
(benefit) determined using the applicable German corporate tax rate for the
calendar year of 25% (2001: 25%; 2000: 40%) plus a solidarity surcharge of 5.5%
on federal corporate taxes plus the after federal tax benefit rate for trade
taxes of 12.125% (2001: 12.125%; 2000: 9.3%) for a combined statutory rate of
38.5% in 2002 (2001: 38.5%; 2000: 51.5%) is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
(IN MILLIONS OF [EURO]) -------- -------- --------
Expected expense (benefit) for income taxes........... 2,336 (571) 2,305
Tax rate differential with non-German countries....... (238) 96 (346)
Gains from sales of business interests (T-Systems ITS,
TEMIC, Adtranz, debitel)............................ (1,012) (191) --
Trade tax rate differential........................... (31) (50) (28)
Changes in valuation allowances on German deferred tax
assets.............................................. -- 29 --
Tax effect of equity method investments............... 2 (25) 113
Amortization of non-deductible goodwill............... -- 5 52
Tax free income and non-deductible expenses........... 114 (76) 48
Effect of changes in German tax laws.................. 3 -- 263
Dividend distribution credit at DC AG................. (57) -- (491)
Other................................................. 60 6 83
------ ----- -----
Actual expense (benefit) for income taxes............. 1,177 (777) 1,999
====== ===== =====
</Table>
In 2002, income tax credits from dividend distribution reflected the tax
benefit from the 2001 dividend distribution of [EURO]1.00 per Ordinary Share
paid in 2002. In 2000, income tax credits from dividend distribution reflected
the tax benefit from the dividend distribution of [EURO]2.35 per Ordinary Share
to be paid for that year.
F-31
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax assets and liabilities are summarized as follows:
<Table>
<Caption>
AT DECEMBER 31,
-------------------
2002 2001
(IN MILLIONS OF [EURO]) -------- --------
Property, plant and equipment............................. 611 365
Investments and long-term financial assets................ 2,132 2,135
Equipment on operating leases............................. 956 689
Inventories............................................... 709 697
Receivables............................................... 663 1,369
Net operating loss and tax credit carryforwards........... 3,002 3,078
Pension plans and similar obligations..................... 3,424 3,682
Other accrued liabilities................................. 4,938 6,340
Liabilities............................................... 1,733 1,331
Deferred income........................................... 1,138 944
Other..................................................... 120 423
------- -------
19,426 21,053
Valuation allowances...................................... (241) (145)
------- -------
Deferred tax assets....................................... 19,185 20,908
------- -------
Property, plant and equipment............................. (3,733) (4,095)
Equipment on operating leases............................. (7,855) (8,286)
Inventories............................................... (115) (385)
Receivables............................................... (2,558) (2,542)
Securities................................................ (472) (448)
Prepaid expenses.......................................... (388) (482)
Pension plans and similar obligations..................... (1,497) (4,794)
Other accrued liabilities................................. (112) (673)
Taxes on undistributed earnings of non-German
subsidiaries............................................ (399) (514)
Liabilities............................................... (567) (197)
Other..................................................... (188) (333)
------- -------
Deferred tax liabilities.................................. (17,884) (22,749)
------- -------
Deferred tax assets (liabilities), net.................... 1,301 (1,841)
======= =======
</Table>
At December 31, 2002, the Group had corporate and trade tax net operating
losses ("NOLs") amounting to [EURO]5,234 million (2001: [EURO]4,668 million) and
credit carryforwards amounting to [EURO]1,788 million (2001:
[EURO]1,552 million), determined in accordance with U.S. GAAP. The corporate tax
NOLs and credit carryforwards relate to losses of non-German companies and
German non-Organschaft companies and are partly limited in their use to the
Group. The valuation allowances on deferred tax assets of German and non-German
operations increased by [EURO]96 million. In future periods, depending upon the
financial results, management's estimate of the amount of the deferred tax
assets considered realizable may change, and hence the valuation allowances may
increase or decrease.
The Group has various income tax years unresolved with the taxing
authorities. The open years are either under review by taxing authorities or not
yet under examination. The Group believes it has made adequate provision for any
future income taxes that may be owed for all open years.
F-32
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net deferred income tax assets and liabilities in the consolidated balance
sheets are as follows:
<Table>
<Caption>
AT DECEMBER 31, 2002 AT DECEMBER 31, 2001
---------------------- ----------------------
THEREOF THEREOF
TOTAL NON-CURRENT TOTAL NON-CURRENT
(IN MILLIONS OF [EURO]) -------- ----------- -------- -----------
Deferred tax assets................... 3,613 1,714 3,010 425
Deferred tax liabilities.............. (2,312) (1,535) (4,851) (4,761)
------ ------ ------ ------
Deferred tax assets (liabilities),
net................................. 1,301 179 (1,841) (4,336)
====== ====== ====== ======
</Table>
DaimlerChrysler recorded deferred tax liabilities for non-German withholding
taxes of [EURO]288 million (2001: [EURO]371 million) on [EURO]5,760 million
(2001: [EURO]7,421 million) in cumulative undistributed earnings of non-German
subsidiaries and additional German tax of [EURO]111 million (2001:
[EURO]143 million) on the future payout of these foreign dividends because the
earnings are not intended to be permanently reinvested in those operations.
The Group did not provide income taxes or non-German withholding taxes on
[EURO]6,950 million (2001: [EURO]12,357 million) in cumulative earnings of
non-German subsidiaries because the earnings are intended to be indefinitely
reinvested in those operations. It is not practicable to estimate the amount of
unrecognized deferred tax liabilities for these undistributed foreign earnings.
Including the items charged or credited directly to related components of
accumulated other comprehensive income (loss) and the expense (benefit) for
income taxes of extraordinary items and from changes in accounting principles,
the expense (benefit) for income taxes consists of the following:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
(IN MILLIONS OF [EURO]) -------- -------- --------
Expense (benefit) for income taxes before
extraordinary items................................ 1,177 (777) 1,999
Income tax expense of extraordinary items............ -- -- 324
Income tax benefit from changes in accounting
principles......................................... -- -- (53)
Stockholders' equity for items in accumulated other
comprehensive income............................... (2,699) (507) (338)
------ ------ ------
(1,522) (1,284) 1,932
====== ====== ======
</Table>
In 2002, tax benefits of [EURO]175 million from the reversal of deferred tax
asset valuation allowances at subsidiaries of MMC were recorded as a reduction
of the investor level goodwill relating to the Group's investment in MMC.
10. CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES
GOODWILL AND OTHER INTANGIBLE ASSETS: Adoption of SFAS 142 --
DaimlerChrysler adopted SFAS 142 on January 1, 2002. The transitional goodwill
impairment charge recognized in the consolidated statement of income (loss) in
2002 by DaimlerChrysler was [EURO]159 million ([EURO]0.16 per share), which
represents the Group's proportionate share of the transitional goodwill
impairment charges from equity method investees, primarily EADS (see Note 1).
BENEFICIAL INTERESTS IN SECURITIZED FINANCIAL ASSETS: Adoption of EITF
99-20 -- As of July 1, 2000, DaimlerChrysler adopted EITF 99-20 which specifies,
among other things, how a transferor that retains an interest in a
securitization transaction, or an enterprise that purchases a beneficial
interest, should account for interest income and impairment. The cumulative
effect of adopting EITF 99-20 was a charge of [EURO]99 million (net of income
tax benefits of [EURO]58 million).
F-33
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES: Adoption of
SFAS 133 and SFAS 138 -- DaimlerChrysler elected to adopt SFAS 133 on
January 1, 2000. Upon adoption of this Statement, DaimlerChrysler recorded a net
transition adjustment gain of [EURO]12 million (net of income tax expense of
[EURO]5 million) in the statement of income (loss) and a net transition
adjustment loss of [EURO]349 million (net of income tax benefit of
[EURO]367 million) in accumulated other comprehensive income. Adoption of
SFAS 138 did not have an impact on the Group's consolidated statement of income
(loss).
11. EXTRAORDINARY ITEMS
In October 2000, Adtranz sold its fixed installations business which
primarily focuses on rail electrification and traction power to Balfour Beatty
for [EURO]153 million resulting in an extraordinary after-tax gain of
[EURO]89 million (net of income tax expense of [EURO]52 million).
In October 2000, DaimlerChrysler and Deutsche Telekom combined their
information technology activities in a joint venture. In accordance with an
agreement announced on March 27, 2000, Deutsche Telekom received a 50.1%
interest in T-Systems ITS through an investment of approximately
[EURO]4.6 billion for new shares of T-Systems ITS. In 2000, the transaction
resulted in an extraordinary after-tax gain of [EURO]2,345 million. The
agreements also confer on Deutsche Telekom the option to acquire from the Group,
and on DaimlerChrysler the option to sell to Deutsche Telekom, the Group's 49.9%
interest in T-Systems ITS. The DaimlerChrysler option was exercised in
January 2002 (see Note 4). DaimlerChrysler accounted for its interest in
T-Systems ITS using the equity method until February 28, 2002.
In July 2000, the Group exchanged its controlling interest in
DaimlerChrysler Aerospace for shares of EADS, which subsequently completed its
initial public offering. EADS is a global aerospace and defense company which
was established through a merger of Aerospatiale Matra S.A., DaimlerChrysler
Aerospace AG and Construcciones Aeronauticas S.A. ("CASA"). DaimlerChrysler
accounted for the shares of EADS received in the exchange at their fair value on
that date and recorded an extraordinary after-tax gain of [EURO]3,009 million.
The Group accounts for its 33% interest in EADS using the equity method of
accounting. DaimlerChrysler has the right to sell all of its ownership interest
in EADS to certain French shareholders. This put option may be exercised
immediately in the event of a voting deadlock on certain matters or at certain
times after three years. The price is based on the average closing mid-market
price of EADS shares during the 30 trading days prior to the exercise of the put
option.
In 2000, Ballard Power Systems Inc., a developer of fuel cells and related
power generation systems, issued additional common shares to its shareholders.
DaimlerChrysler elected not to purchase additional shares thereby reducing its
ownership interest. The dilution of its ownership interest resulted in an
extraordinary gain of [EURO]73 million.
The gains from each of the foregoing transactions are reported as
extraordinary items in the consolidated statements of income (loss) for the year
2000 because U.S. GAAP requires such presentation when a significant disposition
of assets or businesses occurs within two years subsequent to accounting for a
business combination using the pooling-of-interests method.
F-34
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES TO CONSOLIDATED BALANCE SHEETS
12. GOODWILL
Information with respect to changes in the Group's goodwill is presented in
the Consolidated Fixed Asset Schedule included herein.
Upon adoption of SFAS 142, intangible assets relating to distribution rights
with a net carrying amount of [EURO]44 million were reclassified from goodwill
to other intangible assets. In 2002, goodwill of [EURO]61 million was recorded
in connection with the acquisition of dealerships in Europe and
[EURO]71 million was recorded in connection with certain other acquisitions,
none of which were material. A goodwill impairment charge of [EURO]40 million
was recognized in connection with the contracted sales of two businesses in the
Commercial Vehicles segment (see Note 4). The remaining changes in the carrying
amount of goodwill primarily relate to currency translation adjustments.
At December 31, 2002, the carrying value of goodwill, excluding investor
level goodwill, allocated to the Group's reportable segments are: Mercedes Car
Group ([EURO]104 million), Chrysler Group ([EURO]1,165 million), Commercial
Vehicles ([EURO]696 million), Services ([EURO]62 million) and Other Activities
([EURO]44 million).
There is no goodwill that has not been allocated to a reporting unit as of
December 31, 2002.
DaimlerChrysler's investor level goodwill in companies accounted for using
the equity method was [EURO]845 million at December 31, 2002. Such goodwill is
not subject to the impairment tests required by SFAS 142. Instead, the total
investment, including investor level goodwill, will continue to be evaluated for
impairment when conditions indicate that a decline in fair value of the
investment below the carrying amount is other than temporary.
ADJUSTED PRIOR PERIOD INFORMATION
Net income (loss) and earnings (loss) per share for the years ended
December 31, 2001 and 2000, adjusted to exclude goodwill amortization expense
(including amounts recognized in income (loss) from investments representing
investor level equity method goodwill amortization) and investee level goodwill
amortization resulting from the Group's investment in EADS, were as follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
-------------------
2001 2000
-------- --------
Net income (loss) (in millions of [EURO]):
Reported net income (loss).............................. (662) 7,894
Goodwill amortization............................... 236 297
Goodwill amortization -- investee level............. 168 93
------ ------
Adjusted net income (loss).............................. (258) 8,284
====== ======
Income (loss) per share (in [EURO]):
Reported income (loss) per share -- basic............... (0.66) 7.87
Goodwill amortization............................... 0.24 0.30
Goodwill amortization -- investee level............. 0.16 0.09
------ ------
Adjusted income (loss) per share -- basic............... (0.26) 8.26
====== ======
Reported income (loss) per share -- diluted............. (0.66) 7.80
Goodwill amortization............................... 0.24 0.29
Goodwill amortization -- investee level............. 0.16 0.09
------ ------
Adjusted income (loss) per share -- diluted............. (0.26) 8.18
====== ======
</Table>
F-35
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OTHER INTANGIBLE ASSETS
Information with respect to changes in the Group's other intangible assets
is presented in the Consolidated Fixed Asset Schedule included herein.
Other intangible assets comprise:
<Table>
<Caption>
AT DECEMBER 31,
-------------------
2002 2001
(IN MILLIONS OF [EURO]) -------- --------
Other intangible assets subject to amortization
Gross carrying amount.................................. 1,036 897
Accumulated amortization............................... (634) (542)
------ ------
Net carrying amount...................................... 402 355
------ ------
Other intangible assets not subject to amortization........ 2,453 137
------ ------
2,855 492
====== ======
</Table>
DaimlerChrysler's other intangible assets subject to amortization primarily
represent software. In 2002, additions of [EURO]374 million were recognized with
a weighted average useful life of 6 years. Distribution rights amounting to
[EURO]44 million were reclassified from goodwill to other intangible assets on
January 1, 2002. The aggregate amortization expense for the years ended
December 2002, 2001 and 2000, was [EURO]175 million, [EURO]172 million and
[EURO]153 million, respectively.
Amortization expense for the gross carrying amount of other intangible
assets at December 31, 2002, is estimated to be [EURO]138 million in 2003,
[EURO]96 million in 2004, [EURO]59 million in 2005, [EURO]29 million in 2006 and
[EURO]18 million in 2007.
Other intangible assets not subject to amortization represent intangible
pension assets. The Group recorded an intangible pension asset totaling
[EURO]2.3 billion in connection with the requirement to recognize an additional
minimum pension liability in 2002, principally at the Chrysler Group (see
Note 25a).
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 [EURO]152 million
(2001: [EURO]148 million). Depreciation expense and impairment charges on assets
under capital lease arrangements were [EURO]15 million (2001: [EURO]13 million;
2000: [EURO]188 million).
15. EQUIPMENT ON OPERATING LEASES, NET
Information with respect to changes in the Group's equipment on operating
leases is presented in the Consolidated Fixed Assets Schedule included herein.
Of the total equipment on operating leases, [EURO]27,361 million represent
automobiles and commercial vehicles (2001: [EURO]35,015 million).
Noncancellable future lease payments due from customers for equipment on
operating leases at December 31, 2002 are as follows:
<Table>
(IN MILLIONS OF [EURO])
2003........................................................ 6,669
2004........................................................ 3,745
2005........................................................ 2,217
2006........................................................ 628
2007........................................................ 204
thereafter.................................................. 172
------
13,635
======
</Table>
F-36
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. INVENTORIES
<Table>
<Caption>
AT DECEMBER 31,
-------------------
2002 2001
(IN MILLIONS OF [EURO]) -------- --------
Raw materials and manufacturing supplies................... 1,900 2,251
Work-in-process............................................ 2,693 3,038
Finished goods, parts and products held for resale......... 11,567 11,904
Advance payments to suppliers.............................. 63 97
------ ------
16,223 17,290
------ ------
Less: Advance payments received............................ (581) (536)
thereof relating to long-term contracts and programs in
process [EURO]127 (2001: [EURO]110)
------ ------
15,642 16,754
------ ------
</Table>
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 [EURO]724 million (2001: [EURO]1,102 million). For the years
ended December 31, 2002, 2001 and 2000, inventory quantities were reduced, which
resulted in a liquidation of LIFO inventory carried at lower costs which
prevailed in prior years. The effect of the liquidation was to decrease cost of
sales by [EURO]42 million, [EURO]29 million and [EURO]14 million in 2002, 2001
and 2000, respectively.
17. TRADE RECEIVABLES
<Table>
<Caption>
AT DECEMBER 31,
-------------------
2002 2001
(IN MILLIONS OF [EURO]) -------- --------
Receivables from sales of goods and services................ 6,879 7,052
Long-term contracts and programs, unbilled, net of advance
payments received......................................... 47 24
----- -----
6,926 7,076
Allowance for doubtful accounts............................. (629) (646)
----- -----
6,297 6,430
===== =====
</Table>
As of December 31, 2002, [EURO]110 million of the trade receivables mature
after more than one year (2001: [EURO]136 million).
18. RECEIVABLES FROM FINANCIAL SERVICES
<Table>
<Caption>
AT DECEMBER 31,
-------------------
2002 2001
(IN MILLIONS OF [EURO]) -------- --------
Receivables from:
Sales financing.......................................... 41,386 38,882
Finance leases........................................... 16,423 17,400
------ ------
57,809 56,282
Initial direct costs....................................... 250 248
Unearned income............................................ (5,590) (6,833)
Unguaranteed residual value of leased assets............... 1,178 1,417
------ ------
53,647 51,114
Allowance for doubtful accounts............................ (1,559) (1,602)
------ ------
52,088 49,512
====== ======
</Table>
F-37
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2002, [EURO]34,472 million of the financing receivables
mature after more than one year (2001: [EURO]35,551 million).
Changes in the allowance for doubtful accounts for receivables from
financial services were as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
(IN MILLIONS OF [EURO]) -------- -------- --------
Balance at beginning of year......................... 1,602 890 599
Provisions for credit losses......................... 1,004 1,446 755
Net credit losses.................................... (639) (783) (455)
Reversals............................................ (36) (88) (9)
Currency translation and other adjustments........... (372) 137 --
----- ----- ----
Balance at end of year............................... 1,559 1,602 890
===== ===== ====
</Table>
Sales financing and finance lease receivables consist of retail installment
sales contracts secured by automobiles and commercial vehicles. Contractual
maturities applicable to receivables from sales financing and finance leases in
each of the years following December 31, 2002 are as follows:
<Table>
<Caption>
(IN MILLIONS OF [EURO])
2003........................................................ 19,810
2004........................................................ 11,735
2005........................................................ 9,549
2006........................................................ 6,362
2007........................................................ 3,377
thereafter.................................................. 6,976
------
57,809
======
</Table>
Actual cash flows will vary from contractual maturities due to future sales
of finance receivables, prepayments and charge-offs.
19. OTHER RECEIVABLES
<Table>
<Caption>
AT DECEMBER 31,
-------------------
2002 2001
(IN MILLIONS OF [EURO]) -------- --------
Receivables from affiliated companies....................... 1,118 1,250
Receivables from related companies(1)....................... 1,265 1,041
Retained interests in sold receivables and subordinated
asset backed certificates................................. 4,241 5,482
Other receivables and other assets.......................... 11,672 9,141
------ ------
18,296 16,914
Allowance for doubtful accounts............................. (723) (726)
------ ------
17,573 16,188
====== ======
</Table>
- ------------------------------
(1) Related companies include entities which have a significant ownership in
DaimlerChrysler or entities in which the Group holds a significant
investment.
As of December 31, 2002, [EURO]3,847 million of the other receivables mature
after more than one year (2001: [EURO]2,584 million).
F-38
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. SECURITIES, INVESTMENTS AND LONG-TERM FINANCIAL ASSETS
Information with respect to the Group's investments and long-term financial
assets is presented in the Consolidated Fixed Assets Schedule included herein.
Securities included in non-fixed assets are comprised of the following:
<Table>
<Caption>
AT DECEMBER 31,
-------------------
2002 2001
(IN MILLIONS OF [EURO]) -------- --------
Debt securities............................................. 1,871 2,314
Equity securities........................................... 29 120
Equity-based funds.......................................... 84 91
Debt-based funds............................................ 1,309 1,234
----- -----
3,293 3,759
===== =====
</Table>
Carrying amounts and fair values of debt and equity securities included in
securities and investments for which fair values are readily determinable are
classified as follows:
<Table>
<Caption>
AT DECEMBER 31, 2002 AT DECEMBER 31, 2001
----------------------------------------- -----------------------------------------
UNREALIZED UNREALIZED
FAIR ------------------- FAIR -------------------
COST VALUE GAIN LOSS COST VALUE GAIN LOSS
(IN MILLIONS OF [EURO]) -------- -------- -------- -------- -------- -------- -------- --------
Available-for-sale....... 3,085 3,086 19 18 3,327 3,295 34 66
Trading.................. 202 207 6 1 460 464 6 2
----- ----- --- --- ----- ----- --- ---
Securities............... 3,287 3,293 25 19 3,787 3,759 40 68
----- ----- --- --- ----- ----- --- ---
Investments and long-term
financial assets
available-for-sale..... 685 728 43 -- 731 987 316 60
----- ----- --- --- ----- ----- --- ---
3,972 4,021 68 19 4,518 4,746 356 128
===== ===== === === ===== ===== === ===
</Table>
The aggregate costs, fair values and gross unrealized holding gains and
losses per security class are as follows:
<Table>
<Caption>
AT DECEMBER 31, 2002 AT DECEMBER 31, 2001
----------------------------------------- -----------------------------------------
UNREALIZED UNREALIZED
FAIR ------------------- FAIR -------------------
COST VALUE GAIN LOSS COST VALUE GAIN LOSS
(IN MILLIONS OF [EURO]) -------- -------- -------- -------- -------- -------- -------- --------
Equity securities........ 695 733 44 6 819 1,083 333 69
Debt securities issued by
the German government
and its agencies....... 4 4 -- -- 112 112 -- --
Municipal securities..... 13 14 1 -- 27 27 -- --
Debt securities issued by
non-German
governments............ 275 277 2 -- 520 523 3 --
Corporate debt
securities............. 710 715 6 1 588 592 7 3
Equity-based funds....... 94 84 -- 10 96 91 -- 5
Debt-based funds......... 1,308 1,309 1 -- 1,239 1,234 -- 5
Asset-backed
securities............. 323 330 8 1 247 253 7 1
Other marketable debt
securities............. 348 348 -- -- 410 367 -- 43
Available-for-sale....... 3,770 3,814 62 18 4,058 4,282 350 126
Trading.................. 202 207 6 1 460 464 6 2
----- ----- --- --- ----- ----- --- ---
3,972 4,021 68 19 4,518 4,746 356 128
===== ===== === === ===== ===== === ===
</Table>
F-39
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair values of investments in debt securities, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalty.
<Table>
<Caption>
AT DECEMBER 31,
(IN MILLIONS OF [EURO]) -------------------
AVAILABLE-FOR-SALE 2002 2001
- ------------------ -------- --------
Due within one year......................................... 2,011 1,477
Due after one year through five years....................... 493 1,007
Due after five years through ten years...................... 228 422
Due after ten years......................................... 265 202
----- -----
2,997 3,108
===== =====
</Table>
Proceeds from disposals of available-for-sale securities were
[EURO]5,254 million (2001: [EURO]3,402 million; 2000: [EURO]9,422 million).
Gross realized gains from sales of available-for-sale securities were
[EURO]157 million (2001: [EURO]425 million; 2000: [EURO]275 million), while
gross realized losses were [EURO]23 million (2001: [EURO]145 million; 2000:
[EURO]140 million). DaimlerChrysler uses the specific identification method as a
basis for determining cost and calculating realized gains and losses.
Other securities classified as cash equivalents were approximately
[EURO]4.6 billion and [EURO]6.6 billion at December 31, 2002 and 2001,
respectively, and consisted primarily of purchase agreements, commercial paper
and certificates of deposit.
21. LIQUID ASSETS
Liquid assets recorded under various balance sheet captions are as follows:
<Table>
<Caption>
AT DECEMBER, 31
------------------------------
2002 2001 2000
(IN MILLIONS OF [EURO]) -------- -------- --------
Cash and cash equivalents (1)
originally maturing within 3 months.............. 9,100 10,715 7,082
originally maturing after 3 months............... 30 31 45
------ ------ ------
Total cash and cash equivalents.................... 9,130 10,746 7,127
------ ------ ------
Securities......................................... 3,293 3,759 5,378
Other.............................................. 5 20 5
------ ------ ------
12,428 14,525 12,510
====== ====== ======
</Table>
- ------------------------
(1) Cash and cash equivalents are mainly comprised of cash at banks, cash on
hand and checks in transit
The following represents supplemental information with respect to cash
flows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
(IN MILLIONS OF [EURO]) -------- -------- --------
Interest paid......................................... 3,615 4,616 5,629
Income taxes paid (refunded).......................... (1,178) (624) 775
</Table>
F-40
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. PREPAID EXPENSES
Prepaid expenses are comprised of the following:
<Table>
<Caption>
AT
DECEMBER 31,
-------------------
2002 2001
(IN MILLIONS OF [EURO]) -------- --------
Prepaid pension cost........................................ 243 7,584
Other prepaid expenses...................................... 719 1,022
--- -----
962 8,606
=== =====
</Table>
As of December 31, 2002, [EURO]352 million of the total prepaid expenses
mature after more than one year (2001: [EURO]7,632 million).
As a result of the underfunded status of the accumulated pension benefit
obligations in 2002, DaimlerChrysler eliminated prepaid pension cost totaling
[EURO]7.6 billion (see Note 23 and Note 25a).
23. STOCKHOLDERS' EQUITY
NUMBER OF SHARES ISSUED AND OUTSTANDING
DaimlerChrysler had issued and outstanding 1,012,803,493 registered Ordinary
Shares of no par value at December 31, 2002 (2001: 1,003,271,998). Each share
represents a nominal value of [EURO]2.60 of capital stock.
TREASURY STOCK
In 2002, DaimlerChrysler purchased approximately 1.1 million (2001 and 2000:
1.4 million) Ordinary Shares in connection with an employee share purchase plan,
of which 1.1 million (2001: 1.2 million; 2000: 1.4 million) were re-issued to
employees. The remaining 0.2 million in 2001 were resold in the market.
AUTHORIZED AND CONDITIONAL CAPITAL
Through April 30, 2003, the Board of Management is authorized, upon approval
of the Supervisory Board, to increase capital stock by a total of up to an
aggregate nominal amount of approximately [EURO]256 million and to issue
Ordinary Shares of up to an aggregate nominal amount of approximately
[EURO]26 million to employees.
DaimlerChrysler is authorized to issue convertible bonds and notes with
warrants in a nominal volume of up to [EURO]15 billion with a term of up to
20 years by April 18, 2005. The convertible bonds and notes with warrants shall
grant to the holders or creditors option or conversion rights for new shares in
DaimlerChrysler in a nominal amount not to exceed [EURO]300 million of capital
stock. DaimlerChrysler is also entitled to grant up to 96,000,000 rights
(representing up to a nominal amount of approximately [EURO]250 million of
capital stock) with respect to the DaimlerChrysler Stock Option Plan by
April 18, 2005.
In 2002, 7,035 Ordinary Shares of DaimlerChrysler were issued upon exercise
of options from the Stock Option Plan 1996.
DaimlerChrysler is authorized through October 10, 2003, to acquire treasury
stock for certain defined purposes up to a maximum nominal amount of
[EURO]260 million of capital stock, representing approximately 10% of issued and
outstanding capital stock.
CONVERTIBLE NOTES
In June 1997, DaimlerChrysler issued 5.75% subordinated mandatory
convertible notes due June 14, 2002, with a nominal amount of [EURO]66.83 per
note. These convertible notes represented at the date of issue a nominal amount
of [EURO]508 million including 7,600,000 notes which could be converted, subject
to adjustment, into 0.86631
F-41
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
newly issuable shares of DaimlerChrysler AG for each note before June 4, 2002.
During 2002, 17,927 DaimlerChrysler Ordinary Shares were issued upon exercise
(2001: 87; 2000: 92). On June 14, 2002, the mandatory conversion date, 7,572,881
notes were converted into 9,506,483 newly issued Ordinary Shares of
DaimlerChrysler AG. The conversion price of [EURO]52.72 was determined on
June 8, 2002, on the basis of the average closing auction price for the shares
in Xetra-trading for the period between May 13, 2002 and June 7, 2002. Because
this conversion price was below the adjusted minimum conversion price of
[EURO]53.19, the number of shares was calculated based on the adjusted minimum
conversion price. Thus each shareholder received 1.25643 Ordinary Shares of
DaimlerChrysler AG per note. Fractions that remained after aggregation were
settled in cash based on a conversion rate of [EURO]52.72 amounting to a total
cash payment of [EURO]0.4 million.
During 1996, DaimlerChrysler Luxembourg Capital S.A., a wholly-owned
subsidiary of DaimlerChrysler, issued 4.125% bearer notes with appertaining
warrants due July 5, 2003, in the amount of [EURO]613 million (with a nominal
value of [EURO]511 each) entitling the bond holders to subscribe for a total of
12,366,324 shares (7,728,048 of which represent newly issued shares totaling
[EURO]383 million) of DaimlerChrysler. According to the note agreements the
option price per share is [EURO]42.67 in consideration of exchange of the notes
or [EURO]44.49 in cash. During 2002, 50 options for the subscription of newly
issued DaimlerChrysler Ordinary Shares (2001: -; 2000: 10,416) were exercised.
COMPREHENSIVE INCOME
The changes in the components of accumulated other comprehensive income
(loss) are as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------ ------------------------------ ------------------------------
TAX TAX TAX
PRETAX EFFECT NET PRETAX EFFECT NET PRETAX EFFECT NET
(IN MILLIONS OF [EURO]) -------- -------- -------- -------- -------- -------- -------- -------- --------
Unrealized gains (losses) on
securities (incl. retained
interests):
Unrealized holding gains
(losses)................. 122 (77) 45 (129) 149 20 (250) 46 (204)
Reclassification
adjustments for (gains)
losses included in net
income (loss)............ (223) 43 (180) (46) (111) (157) 61 (6) 55
------- ----- ------ ------ ---- ---- ------ ---- -----
Unrealized gains (losses)
on securities............ (101) (34) (135) (175) 38 (137) (189) 40 (149)
Unrealized gains (losses) on
derivatives
Hedging variability of cash
flows:
Unrealized derivative gains
(losses)................. 2,417 (952) 1,465 (708) 257 (451) (1,932) 978 (954)
Reclassification
adjustments for (gains)
losses included in net
income (loss)............ (111) 48 (63) 829 (307) 522 1,113 (567) 546
------- ----- ------ ------ ---- ---- ------ ---- -----
Unrealized derivative gains
(losses)................. 2,306 (904) 1,402 121 (50) 71 (819) 411 (408)
Foreign currency translation
adjustments.................. (3,170) (80) (3,250) 598 (33) 565 1,474 (111) 1,363
Minimum pension liability
adjustments.................. (10,006) 3,717 (6,289) (1,436) 552 (884) 8 (2) 6
------- ----- ------ ------ ---- ---- ------ ---- -----
Other comprehensive income
(loss)....................... (10,971) 2,699 (8,272) (892) 507 (385) 474 338 812
======= ===== ====== ====== ==== ==== ====== ==== =====
</Table>
MISCELLANEOUS
The minority stockholders of Dornier GmbH, a subsidiary of DADC Luft- und
Raumfahrt Beteiligungs AG, have the right, exercisable at any time, to exchange
their shareholdings in Dornier for cash or holdings in DaimlerChrysler AG or its
subsidiary DaimlerChrysler Luft- und Raumfahrt Holding Aktiengesellschaft. Some
of the Dornier minority stockholders partially exercised this right in 2001. In
2002, an additional minority shareholder partially exercised his right to
transfer his Dornier shares to DaimlerChrysler AG.
F-42
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the German corporation law (Aktiengesetz), the amount of dividends
available for distribution to shareholders is based upon the unappropriated
accumulated earnings of DaimlerChrysler AG (parent company only) as reported in
its statutory financial statements determined in accordance with the German
commercial code (Handelsgesetzbuch). For the year ended December 31, 2002,
DaimlerChrysler management has proposed a distribution of [EURO]1,519 million
([EURO]1.50 per share) of the 2002 earnings of DaimlerChrysler AG as a dividend
to the stockholders.
As the result of the underfunded status of the accumulated pension benefit
obligations in 2002, DaimlerChrysler was required to recognize an additional
minimum pension liability of [EURO]6.3 billion, after tax (see Note 22 and
Note 25a).
24. STOCK-BASED COMPENSATION
The Group currently has two stock option plans, various stock appreciation
rights ("SARs") plans and medium term incentive awards, which are accounted for
based on APB 25.
STOCK OPTION PLANS
In April 2000, the Group's shareholders approved the 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 determined in advance plus a 20% premium. The
options become exercisable in equal installments on the second and third
anniversaries from the date of grant. All unexercised options expire ten years
from the date of grant. If the market price per 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
premium of 20%.
The table below shows the basic terms of options issued (in millions) under
the Stock Option Plan 2000:
<Table>
<Caption>
REFERENCE CONVERSION OPTIONS OPTIONS OPTIONS
YEAR OF GRANT PRICE PRICE GRANTED OUTSTANDING EXERCISABLE
AT DECEMBER 31, 2002
- ------------- ------------ ------------ -------- ----------- -----------
2000......... [EURO]62.30 [EURO]74.76 15.2 15.0 7.5
2001......... [EURO]55.80 [EURO]66.96 18.7 18.2 --
2002......... [EURO]42.93 [EURO]51.52 20.0 19.8 --
</Table>
In May 2000, certain shareholders challenged the approval of the Stock
Option Plan 2000 at the stockholders' meeting on April 19, 2000. In
October 2000, the Stuttgart District Court (Landgericht Stuttgart) dismissed the
case and the Stuttgart Court of Appeals (Oberlandesgericht Stuttgart) dismissed
an appeal in June 2001. The shareholders appealed the decision of the Stuttgart
Court of Appeals to the Federal Supreme Court (Bundesgerichtshof) in July 2001.
In March 2002, the Federal Supreme Court decided not to admit the appeal. In
April 2002, a constitutional appeal was filed against this decision. The Stock
Option Plan 2000, approved by the shareholders of DaimlerChrysler AG in
April 2000, was judicially confirmed lawful and valid by the above named courts
and remains valid unless a court decides to the contrary.
DaimlerChrysler established, based on shareholder approvals, the 1998, 1997
and 1996 Stock Option Plans (former Daimler-Benz plans), which provide for the
granting of options for the purchase of DaimlerChrysler Ordinary Shares to
certain members of management. The options granted under the plans are evidenced
by non-transferable convertible bonds with a principal amount of [EURO]511 per
bond due ten years after issuance. During
F-43
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain specified periods each year, each convertible bond may be converted into
201 DaimlerChrysler Ordinary Shares, if the market price per share on the day of
conversion is at least 15% higher than the predetermined conversion price and
the options (granted in 1998 and 1997) have been held for a 24 month waiting
period. The basic terms of the rights issued (in millions) under these plans are
as follows:
<Table>
<Caption>
BONDS STATED CONVERSION NUMBER OF RIGHTS RIGHTS
GRANTED IN INTEREST RATE PRICE RIGHTS OUTSTANDING CONVERTIBLE
AT DECEMBER 31, 2002
- ---------- ------------- ------------- --------- ----------- -----------
1996 5.9% [EURO]42.62 0.9 -- --
1997 5.3% [EURO]65.90 7.4 6.0 --
1998 4.4% [EURO]92.30 8.2 6.6 --
</Table>
In the second quarter of 1999, DaimlerChrysler converted all options granted
under the 1998 and 1997 Stock Option Plans into SARs. All terms and conditions
of the new SARs are identical to the stock options which were replaced, except
that the holder of a SAR has the right to receive cash equal to the difference
between the exercise price of the original option and the fair value of the
Group's stock at the exercise date rather than receiving DaimlerChrysler
Ordinary Shares.
Analysis of the stock options issued is as follows (options in millions):
<Table>
<Caption>
2002 2001 2000
----------------------- ----------------------- -----------------------
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF STOCK PRICE PER OF STOCK PRICE PER OF STOCK PRICE PER
OPTIONS SHARE OPTIONS SHARE OPTIONS SHARE
-------- ------------ -------- ------------ -------- ------------
Balance at beginning of year......... 33.6 [EURO]70.43 15.3 [EURO]74.65 0.1 [EURO]42.62
Options granted...................... 20.0 51.52 18.7 66.96 15.2 74.76
Bonds sold........................... -- -- -- -- -- --
Converted............................ -- -- -- -- -- --
Forfeited............................ (0.5) 61.29 (0.4) 70.08 -- --
Repayment............................ -- -- -- -- -- --
Exchanged for SARs................... -- -- -- -- -- --
---- ------------ ---- ------------ ----- ------------
Outstanding at year-end.............. 53.1 63.40 33.6 70.43 15.3 74.65
==== ============ ==== ============ ===== ============
Exercisable at year-end.............. 7.6 [EURO]74.56 0.1 [EURO]42.62 0.1 [EURO]42.62
==== ============ ==== ============ ===== ============
</Table>
For the year ended December 31, 2002, the Group recognized compensation
expense on stock options of [EURO]57 million (2001: [EURO]19 million; 2000:
[EURO]13 million).
STOCK APPRECIATION RIGHTS PLANS
In 1999, DaimlerChrysler established a stock appreciation rights plan (the
"SAR Plan 1999") which provides eligible employees of the Group with the right
to receive cash equal to the appreciation of DaimlerChrysler Ordinary Shares
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 million SARs at an exercise price of [EURO]89.70 each, of
which 10.7 million SARs are outstanding and exercisable at year-end 2002.
F-44
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 17.0 million SARs
are outstanding and exercisable at year-end 2002. The initial grant of SARs
replaced Chrysler fixed stock options that were converted to DaimlerChrysler
Ordinary Shares as of the consummation 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.
A summary of the activity related to the Group's SAR plans as of and for the
years ended December 31, 2002, 2001 and 2000 is presented below (SARs in
millions):
<Table>
<Caption>
2002 2001 2000
-------------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SARS PRICE OF SARS PRICE OF SARS PRICE
----------- ------------ -------- ------------ -------- ------------
Outstanding at beginning of year..... 42.5 [EURO]84.75 44.5 [EURO]82.87 45.8 [EURO]80.25
Granted.............................. -- -- -- -- -- --
Exercised............................ -- -- -- -- -- --
Forfeited............................ (2.2) 78.31 (2.0) 85.93 (1.3) 78.52
----------- ------------ ---- ------------ ---- ------------
Outstanding at year-end.............. 40.3 79.13 42.5 84.75 44.5 82.87
----------- ------------ ---- ------------ ---- ------------
SARs exercisable at year-end......... 40.3 [EURO]79.13 42.5 [EURO]84.75 33.6 [EURO]80.63
----------- ------------ ---- ------------ ---- ------------
</Table>
Compensation expense or benefit (representing the reversal of previously
recognized expense) on SARs is recorded based on changes in the market price of
DaimlerChrysler Ordinary Shares. For the years ended December 31, 2002 and 2000
the Group recognized compensation benefits of [EURO]9 million and
[EURO]58 million, respectively, in connection with SARs. For the year ended
December 31, 2001, the SARs had no effect on the consolidated statement of
income (loss).
MEDIUM TERM INCENTIVE AWARDS
The Group grants medium term incentives to certain eligible employees that
track, among other things, the value of the DaimlerChrysler Ordinary Shares at
the beginning of three year performance periods. The amount ultimately earned in
cash at the end of a performance period is particularly based on the degree of
achievement of corporate goals derived from competitive and internal planning
benchmarks and the value of DaimlerChrysler Ordinary Shares at the end of three
year performance periods. The benchmarks include return on net assets and return
on sales. The Group issued 1.2 million medium term incentives in 2002 (2001:
0.9 million; 2000: 0.7 million).
For the year ended December 31, 2002 the Group recognized compensation
expense of [EURO]20 million (2001: [EURO]17 million; 2000: [EURO]14 million) in
connection with the medium term incentive awards.
FAIR VALUE INFORMATION
Had the Group adopted SFAS 123, stock options would have been accounted for
based on their fair values. The fair values of the DaimlerChrysler stock options
issued in 2002, 2001 and 2000 were calculated at the grant dates with a modified
Black-Scholes option pricing model, which considers the terms of issuance.
F-45
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below presents the underlying assumptions as well as the resulting
fair values and total values (in millions of [EURO]):
<Table>
<Caption>
STOCK OPTIONS GRANTED IN 2002 2001 2000
- ------------------------ ------------ ------------ -----------
Expected dividend yield............................. 2.0% 4.6% 3.8%
Expected volatility................................. 30% 33% 25%
Risk-free interest rate............................. 4.2% 4.2% 4.8%
Expected lives (in years)........................... 3 3 3
Fair value per option............................... [EURO]18.70 [EURO]12.15 [EURO]9.50
Total value by award................................ 374.0 227.2 144.4
</Table>
25. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following:
<Table>
<Caption>
AT DECEMBER 31,
-------------------------------------------
2002 2001
-------------------- --------------------
DUE AFTER DUE AFTER
TOTAL ONE YEAR TOTAL ONE YEAR
(IN MILLIONS OF [EURO]) -------- --------- -------- ---------
Pension plans and similar obligations
(see Note 25a)......................... 15,909 14,658 12,647 11,650
Income and other taxes................... 3,621 1,602 2,393 651
Other accrued liabilities (see Note
25b)................................... 24,182 9,876 27,154 10,104
------ ------ ------ ------
43,712 26,136 42,194 22,405
====== ====== ====== ======
</Table>
A) PENSION PLANS AND SIMILAR OBLIGATIONS
Pension plans and similar obligations are comprised of the following
components:
<Table>
<Caption>
AT DECEMBER 31,
-------------------
2002 2001
(IN MILLIONS OF [EURO]) -------- --------
Pension liabilities (pension plans)........................ 7,393 2,612
Accrued postretirement health and life insurance
benefits................................................. 8,167 9,442
Other benefit liabilities.................................. 349 593
------ ------
15,909 12,647
====== ======
</Table>
As a result of the underfunded status of the accumulated pension benefit
obligations, DaimlerChrysler recognized additional pension liabilities amounting
to [EURO]4.7 billion in 2002, which did not impact the consolidated statement of
income (loss). Of the [EURO]4.7 billion, the Group recognized [EURO]2.3 billion
as an intangible pension asset (see Note 13) and [EURO]2.4 billion within
accumulated other comprehensive income (see Note 23).
As described in Note 5 and Note 7, DaimlerChrysler implemented in 2001
restructuring plans at Freightliner and Chrysler Group, including certain
workforce reduction initiatives. The impacts on the pension and postretirement
obligations resulting from settlements and curtailments of these turnaround
plans are contained in the following disclosures.
F-46
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION PLANS
The Group provides pension benefits to substantially all of its hourly and
salaried employees. Plan benefits are principally based upon years of service.
Certain pension plans are based on salary earned in the last year or last five
years of employment while others are fixed plans depending on ranking (both wage
level and position).
At December 31, 2002, plan assets were invested in diversified portfolios
that consisted primarily of debt and equity securities, including 14,855 shares
of DaimlerChrysler Ordinary Shares with a market value of [EURO]0.4 million in a
Canadian plan. Assets and income accruing on all pension trust and relief funds
are used solely to pay pension benefits and administer the plans.
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.):
<Table>
<Caption>
AT DECEMBER 31, 2002 AT DECEMBER 31, 2001
--------------------- ---------------------
GERMAN NON-GERMAN GERMAN NON-GERMAN
PLANS PLANS PLANS PLANS
(IN MILLIONS OF [EURO]) -------- ---------- -------- ----------
Change in projected benefit obligations:
Projected benefit obligations at beginning of
year............................................. 10,483 24,139 9,579 21,878
------ ------ ------ ------
Foreign currency exchange rate changes........... -- (3,829) -- 1,026
Service cost..................................... 226 384 198 404
Interest cost.................................... 629 1,622 612 1,696
Plan amendments.................................. (1) 16 1 109
Actuarial losses................................. 45 1,199 613 563
Dispositions..................................... -- -- (179) (765)
Acquisitions and other........................... 63 37 140 25
Settlement/curtailment loss...................... 2 292 2 964
Benefits paid.................................... (506) (1,852) (483) (1,761)
------ ------ ------ ------
Projected benefit obligations at end of year....... 10,941 22,008 10,483 24,139
====== ====== ====== ======
Change in plan assets
Fair value of plan assets at beginning of year..... 7,503 24,125 7,908 25,962
------ ------ ------ ------
Foreign currency exchange rate changes........... -- (3,465) -- 1,199
Actual return (loss) on plan assets.............. (1,101) (1,756) (720) (1,309)
Employer contributions........................... 807 621 713 843
Plan participant contributions................... -- 21 -- 25
Dispositions..................................... -- -- -- (865)
Acquisitions and other........................... -- 36 -- 17
Benefits paid.................................... (420) (1,827) (398) (1,747)
------ ------ ------ ------
Fair value of plan assets at end of year........... 6,789 17,755 7,503 24,125
====== ====== ====== ======
</Table>
F-47
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the funded status to the amounts recognized in the
consolidated balance sheets is as follows:
<Table>
<Caption>
AT DECEMBER 31, 2002 AT DECEMBER 31, 2001
--------------------- ---------------------
GERMAN NON-GERMAN GERMAN NON-GERMAN
PLANS PLANS PLANS PLANS
(IN MILLIONS OF [EURO]) -------- ---------- -------- ----------
Funded status (1).................................... 4,152 4,253 2,980 14
Unrecognized actuarial net losses................ (3,837) (8,762) (2,168) (4,112)
Unrecognized prior service cost.................. (6) (2,507) (5) (3,261)
Unrecognized net obligation at date of initial
application.................................... -- (11) -- (24)
------ ------ ------ ------
Net liability (asset) recognized..................... 309 (7,027) 807 (7,383)
====== ====== ====== ======
Amounts recognized in the consolidated balance sheets
consist of:
Prepaid pension cost............................. -- (243) -- (7,584)
Accrued pension liability........................ 3,484 3,909 2,164 448
Intangible assets................................ -- (2,453) -- (137)
Accumulated other comprehensive income........... (3,175) (8,240) (1,357) (110)
------ ------ ------ ------
Net liability (asset) recognized..................... 309 (7,027) 807 (7,383)
====== ====== ====== ======
</Table>
- ------------------------------
(1) Difference between the projected benefit obligations and the fair value of
plan assets.
The measurement dates for the Group's pension plans are principally
December 31. Assumed discount rates and rates of increase in remuneration used
in calculating the projected benefit obligations together with long-term rates
of return on plan assets vary according to the economic conditions of the
country in which the pension plans are situated. The weighted-average
assumptions used in calculating the actuarial values for the principal pension
plans were as follows (in %):
<Table>
<Caption>
GERMAN NON-GERMAN
PLANS PLANS
------------------------------ ------------------------------
2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- --------
Weighted-average assumptions:
Discount rate............................................. 5.8 6.0 6.5 6.7 7.4 7.7
Expected return on plan assets (at the beginning of the
year)................................................... 7.9 7.9 7.9 10.1 10.1 10.2
Rate of long-term compensation increase................... 3.0 3.0 3.0 5.4 5.4 5.5
</Table>
The expected return on plan assets for 2003 is 7.5% for German plans and
8.5% for non-German plans (primarily U.S. plans).
F-48
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of net pension cost were as follows for the years ended
December 31, 2002, 2001 and 2000:
<Table>
<Caption>
2002 2001 2000
--------------------- --------------------- ---------------------
GERMAN NON-GERMAN GERMAN NON-GERMAN GERMAN NON-GERMAN
PLANS PLANS PLANS PLANS PLANS PLANS
(IN MILLIONS OF [EURO]) -------- ---------- -------- ---------- -------- ----------
Service cost............................... 226 384 198 404 242 433
Interest cost.............................. 629 1,622 612 1,696 696 1,570
Expected return on plan assets............. (595) (2,692) (649) (2,750) (625) (2,487)
Amortization of:
Unrecognized net actuarial (gains)
losses............................... 74 3 -- (11) 3 (18)
Unrecognized prior service cost........ -- 291 -- 356 1 371
Unrecognized net obligation............ -- 1 -- 148 -- 146
Other.................................. -- -- -- -- 1 (6)
---- ------ ---- ------ ---- ------
Net periodic pension cost (benefit)........ 334 (391) 161 (157) 318 9
---- ------ ---- ------ ---- ------
Settlement/curtailment loss............ 1 208 1 625 -- --
---- ------ ---- ------ ---- ------
Net pension cost........................... 335 (183) 162 468 318 9
==== ====== ==== ====== ==== ======
</Table>
The accumulated benefit obligations and fair value of plan assets for
pension plans with accumulated benefit obligations in excess of plan assets were
[EURO]31,206 million and [EURO]23,882 million, respectively, as of December 31,
2002, [EURO]10,224 million and [EURO]7,934 million, respectively, as of
December 31, 2001 and [EURO]1,697 million and [EURO]343 million, respectively,
as of December 31, 2000.
OTHER POSTRETIREMENT BENEFITS
Certain DaimlerChrysler operations in the U.S. and Canada provide
postretirement health and life insurance benefits to their employees. Upon
retirement from DaimlerChrysler the employees may become eligible for
continuation of these benefits. The benefits and eligibility rules may be
modified periodically.
At December 31, 2002, plan assets were invested in diversified portfolios
that consisted primarily of debt and equity securities.
F-49
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following information is presented with respect to the Group's
postretirement benefit plans:
<Table>
<Caption>
AT DECEMBER 31,
-------------------
2002 2001
(IN MILLIONS OF [EURO]) -------- --------
Change in accumulated postretirement benefit obligations:
Accumulated postretirement benefit obligations at
beginning of year.................................... 15,095 12,857
------ ------
Foreign currency exchange rate changes............. (2,454) 652
Service cost....................................... 262 257
Interest cost...................................... 1,062 1,033
Plan amendments.................................... (90) (18)
Actuarial losses................................... 2,863 941
Settlement/curtailment loss........................ 59 186
Acquisitions and other............................. 7 (13)
Benefits paid...................................... (871) (800)
------ ------
Accumulated postretirement benefit obligations at end
of year.............................................. 15,933 15,095
====== ======
Change in plan assets:
Fair value of plan assets at beginning of year......... 2,982 2,995
------ ------
Foreign currency exchange rate changes............. (447) 167
Actual losses on plan assets....................... (294) (181)
Employee and employer contributions................ 1 9
Benefits paid...................................... (10) (8)
------ ------
Fair value of plan assets at end of year................... 2,232 2,982
====== ======
</Table>
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:
<Table>
<Caption>
AT DECEMBER 31,
-------------------
2002 2001
(IN MILLIONS OF [EURO]) -------- --------
Funded status *)............................................ 13,701 12,113
Unrecognized actuarial net losses....................... (4,979) (1,828)
Unrecognized prior service cost......................... (555) (843)
------ ------
Net liability recognized.................................... 8,167 9,442
====== ======
</Table>
- ------------------------------
*) Difference between the accumulated postretirement obligations and the fair
value of plan assets.
Assumed discount rates and rates of increase in remuneration used in
calculating the accumulated postretirement benefit obligations together with
long-term rates of return on plan assets vary according to the economic
conditions of the country in which the plans are situated. The weighted-average
assumptions used in calculating the actuarial values for the postretirement
benefit plans were as follows (in %):
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
Weighted-average assumptions at December 31:
Discount rate............................................. 6.8 7.4 7.7
Expected return on plan assets (at the beginning of the
year)................................................... 10.5 10.5 10.4
Health care inflation rate in following (or "base")
year.................................................... 10.0 6.9 7.5
Ultimate health care inflation rate (2008)................ 5.0 5.0 5.0
</Table>
The expected return on plan assets for 2003 is 8.5%.
F-50
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of net postretirement benefit cost were as follows for the
years ended December 31, 2002, 2001 and 2000:
<Table>
<Caption>
2002 2001 2000
(IN MILLIONS OF [EURO]) -------- -------- --------
Service cost................................................ 262 257 208
Interest cost............................................... 1,062 1,033 873
Expected return on plan assets.............................. (345) (346) (308)
Amortization of:
Unrecognized net actuarial (gains) losses............... 38 (7) 5
Unrecognized prior service cost......................... 76 82 54
Other................................................... -- -- (2)
----- ----- -----
Net periodic postretirement benefit cost.................... 1,093 1,019 830
----- ----- -----
Settlement/curtailment loss............................. 26 154 --
----- ----- -----
Net postretirement benefit cost............................. 1,119 1,173 830
===== ===== =====
</Table>
The following schedule presents the effects of a one-percentage-point change
in assumed health care cost trend rates:
<Table>
<Caption>
1%-INCREASE 1%-DECREASE
(IN MILLIONS OF [EURO]) ----------- -----------
Effect on total of service and interest cost components..... 178 (144)
Effect on accumulated postretirement benefit obligations.... 1,811 (1,525)
</Table>
PREPAID EMPLOYEE BENEFITS
In 1996 DaimlerChrysler established a Voluntary Employees' Beneficiary
Association ("VEBA") trust for payment of non-pension employee benefits. At
December 31, 2002 and 2001, the VEBA had a balance of [EURO]2,833 million and
[EURO]3,648 million, respectively, of which [EURO]2,140 million and
[EURO]2,848 million, respectively, were designated and restricted for the
payment of postretirement health care benefits. No contributions to the VEBA
trust were made in 2002, 2001 and 2000.
B) OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
<Table>
<Caption>
AT DECEMBER 31,
-------------------
2002 2001
(IN MILLIONS OF [EURO]) -------- --------
Accrued warranty costs and price risks...................... 9,120 9,213
Accrued losses on uncompleted contracts..................... 507 549
Restructuring............................................... 758 1,190
Accrued personnel and social costs.......................... 2,286 2,386
Accrued sales incentives.................................... 4,813 4,395
Other....................................................... 6,698 9,421
------ ------
24,182 27,154
====== ======
</Table>
F-51
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accruals for restructuring comprise certain employee termination benefits
and costs which are directly associated with plans to exit specified activities.
The changes in these provisions are summarized as follows:
<Table>
<Caption>
TERMINATION EXIT TOTAL
BENEFITS COSTS LIABILITIES
(IN MILLIONS OF [EURO]) ----------- -------- -----------
Balance at January 1, 2000.................................. 407 188 595
Utilizations and transfers.................................. (229) (56) (285)
Reductions.................................................. (43) (34) (77)
Additions................................................... 16 11 27
----- ------ ------
Balance at December 31, 2000................................ 151 109 260
Utilizations and transfers.................................. (947) (275) (1,222)
Reductions.................................................. (135) (144) (279)
Additions................................................... 1,504 927 2,431
----- ------ ------
Balance at December 31, 2001................................ 573 617 1,190
Utilizations and transfers.................................. (461) (358) (819)
Reductions.................................................. (57) (39) (96)
Additions................................................... 323 160 483
----- ------ ------
Balance at December 31, 2002................................ 378 380 758
===== ====== ======
</Table>
In connection with the Group's restructuring, provisions were recorded for
termination benefits of [EURO]323 million (2001: [EURO]1,504 million; 2000:
[EURO]16 million), in 2002 principally within Chrysler Group (see Note 7) and
Commercial Vehicles, in 2001 principally within Chrysler Group (see Note 7) and
Freightliner (see Note 5) and in 2000 principally within Mercedes Car Group and
Commercial Vehicles. In connection with these restructuring efforts, the Group
effected workforce reductions of approximately 11,500 employees (2001: 17,700;
2000: 2,600) and paid termination benefits of [EURO]431 million (2001:
[EURO]269 million; 2000: [EURO]135 million), of which [EURO]359 million (2001:
[EURO]227 million; 2000: [EURO]120 million) were charged against previously
established liabilities. At December 31, 2002, the Group had liabilities for
estimated future terminations for approximately 7,100 employees.
In 2002, exit costs primarily result from restructuring within Chrysler
Group. Exit costs in 2001 primarily due to the restructuring within Chrysler
Group and Freightliner. In 2000 exit costs primarily result from the
restructuring of industrial businesses.
The Group issues various types of contractual product warranties under which
it generally guarantees the performance of products delivered and services
rendered for a certain period or term (see Note 31). In addition, the accrued
liability for product warranties covers expected costs for policy coverage,
recall campaigns and buyback commitments. The changes in provisions for those
product warranties are summarized as follows:
<Table>
<Caption>
(IN MILLIONS OF [EURO])
Balance at January 1, 2002.................................. 9,059
Currency change............................................. (1,057)
Utilizations and transfers.................................. (4,384)
Changes from product warranties issued in 2002.............. 5,423
Changes from prior period product warranties issued......... (27)
Balance at December 31, 2002................................ 9,014
</Table>
F-52
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
26. FINANCIAL LIABILITIES
<Table>
<Caption>
AT DECEMBER 31,
-------------------
(IN MILLIONS OF [EURO]) 2002 2001
- ----------------------- -------- --------
Notes/Bonds................................................. 12,971 17,726
Commercial paper............................................ 9,494 7,480
Liabilities to financial institutions....................... 5,593 7,183
Liabilities to affiliated companies......................... 339 361
Deposits from direct banking business....................... 768 --
Loans, other financial liabilities.......................... 29 86
Liabilities from capital lease and residual value 1,134 1,106
guarantees................................................
------ ------
Short-term financial liabilities (due within one year)...... 30,328 33,942
------ ------
MATURITIES
---------
Notes/Bonds................................................. 2004-2097 38,887 47,632
of which due in more than five years: [EURO]11,492 (2001:
[EURO]10,712)
Liabilities to financial institutions....................... 2004-2020 8,465 8,194
of which due in more than five years: [EURO]1,911 (2001:
[EURO]2,702)
Liabilities to affiliated companies......................... 62 71
of which due in more than five years: [EURO]-- (2001:
[EURO]--)
Loans, other financial liabilities.......................... 193 82
of which due in more than five years: [EURO]28 (2001:
[EURO]66)
Liabilities from capital lease and residual value 1,177 987
guarantees................................................
of which due in more than five years: [EURO]249 (2001:
[EURO]209)
------ ------
Long-term financial liabilities............................. 48,784 56,966
------ ------
79,112 90,908
------ ------
</Table>
Weighted average interest rates for notes/bonds, commercial paper and
liabilities to financial institutions are 6.3%, 2.6% and 5.3%, respectively, at
December 31, 2002.
Commercial paper is denominated in euros and U.S. dollars and includes
accrued interest. Bonds and liabilities to financial institutions are largely
secured by mortgage conveyance, liens and assignment of receivables of
approximately [EURO]1,754 million (2001: [EURO]1,804 million).
Aggregate nominal amounts of financial liabilities maturing during the next
five years and thereafter are as follows:
<Table>
<Caption>
THERE-
2003 2004 2005 2006 2007 AFTER
(IN MILLIONS OF [EURO]) -------- -------- -------- -------- -------- --------
Financial liabilities.......................... 30,204 12,285 9,643 9,058 3,259 13,016
</Table>
At December 31, 2002, the Group had unused short-term credit lines of
[EURO]11,026 million (2001: [EURO]5,796 million) and unused long-term credit
lines of [EURO]10,597 million (2001: [EURO]20,322 million). The credit lines
include an $18 billion revolving credit facility with a syndicate of
international banks. The credit agreement is comprised of a multi-currency
revolving credit facility which allows DaimlerChrysler AG and several
subsidiaries to borrow up to $5 billion until 2006, a U.S. dollar revolving
credit facility which allows DaimlerChrysler North America Holding Corporation,
a wholly-owned subsidiary of DaimlerChrysler AG, to borrow up to $6 billion
available until 2004, and a multi-currency revolving credit facility for working
capital purposes which allows DaimlerChrysler AG and several subsidiaries to
borrow up to $7 billion until 2003. A part of the $18 billion facility serves as
a back-up for commercial paper drawings.
F-53
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
27. TRADE LIABILITIES
<Table>
<Caption>
AT DECEMBER 31, 2002 AT DECEMBER 31, 2001
--------------------------------- ---------------------------------
DUE AFTER DUE AFTER DUE AFTER DUE AFTER
TOTAL ONE YEAR FIVE YEARS TOTAL ONE YEAR FIVE YEARS
(IN MILLIONS OF [EURO]) -------- --------- ---------- -------- --------- ----------
Trade liabilities...................... 12,342 1 1 14,157 12 1
</Table>
28. OTHER LIABILITIES
<Table>
<Caption>
AT DECEMBER 31, 2002 AT DECEMBER 31, 2001
--------------------------------- ---------------------------------
DUE AFTER DUE AFTER DUE AFTER DUE AFTER
TOTAL ONE YEAR FIVE YEARS TOTAL ONE YEAR FIVE YEARS
(IN MILLIONS OF [EURO]) -------- --------- ---------- -------- --------- ----------
Liabilities to affiliated companies.... 338 -- -- 416 -- --
Liabilities to related companies....... 161 3 -- 293 -- --
Other liabilities...................... 8,344 708 151 9,553 828 232
------ --- --- ------ --- ---
8,843 711 151 10,262 828 232
====== === === ====== === ===
</Table>
As of December 31, 2002, other liabilities include tax liabilities of
[EURO]827 million (2001: [EURO]620 million) and social benefits due of
[EURO]782 million (2001: [EURO]877 million).
29. DEFERRED INCOME
As of December 31, 2002, [EURO]1,989 million of the total deferred income is
to be recognized after more than one year (2001: [EURO]1,911 million).
OTHER NOTES
30. LITIGATION AND CLAIMS
Three lawsuits have recently been brought against DaimlerChrysler AG or some
of its affiliates raising claims arising out of the practice of apartheid in
South Africa before 1994. In particular, on September 27, 2002, a putative class
action covering claims arising between 1952 and 1994, captioned Digwamaje v.
Bank of America, No. 02-CV-6218 (RCC) (S.D.N.Y.), was filed in the United States
District Court for the Southern District of New York naming 84 U.S., European
and Japanese companies, including DaimlerChrysler AG, as defendants. On
November 11, 2002, 91 individuals filed a lawsuit captioned Khulumani v.
Barclays National Bank Ltd., Civ. A. No. 02-5952 (E.D.N.Y.) in the United States
District Court for the Eastern District of New York against 22 U.S., European
and Japanese corporate defendants, including DaimlerChrysler AG and Daimler-Benz
Industrie. This lawsuit covers the period from 1960 to 1993. On November 19,
2002, another putative class action lawsuit, Ntsebeza v. Holcim Ltd.,
No. 02-74604 (RWS) (E.D. Mich.), was filed in the United States District Court
for the Eastern District of Michigan naming as defendants four U.S. and European
companies, including DaimlerChrysler Corporation, and asserting claims arising
from 1948 to 1993. All three lawsuits allege, in essence, that the corporate
defendants knew about or participated in human rights violations and other
abuses of the South African apartheid regime, cooperated with the apartheid
government during that period, and benefitted financially from such cooperation.
The plaintiffs assert various claims, including conspiracy, aiding and abetting
the apartheid regime, violations of the Racketeering Influence and Corrupt
Organizations Act, violations of international law and the Alien Tort Claims
Act, unjust enrichment and unfair and discriminatory labor practices. The
plaintiffs seek compensatory and punitive damages, disgorgement of purported
illicit profits, an accounting, restitution of the value of defendants'
purported unjust enrichment, and other forms of relief, including in the
Digwamaje case the establishment of a "historic commission." Plaintiffs in the
Digwamaje case purport to seek compensatory damages
F-54
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in excess of $200 billion and punitive damages in excess of $200 billion. The
complaints in the other two lawsuits do not specify damages. DaimlerChrysler
intends to defend against these claims vigorously.
Like other companies in the automotive industry, DaimlerChrysler (primarily
DaimlerChrysler Corporation) have experienced a growing number of lawsuits which
seek compensatory and punitive damages for illnesses alleged to have resulted
from direct and indirect exposure to asbestos used in some vehicle components
(principally brake pads). Typically, these lawsuits name many other corporate
defendants and may also include claims of exposure to a variety of
non-automotive asbestos products. A single lawsuit may include claims by
multiple plaintiffs alleging illness in the form of asbestosis, mesothelioma or
other cancer or illness. The number of claims in these lawsuits increased from
approximately 14,000 at the end of 2001 to approximately 19,000 at the end of
January 2003. In the majority of these cases, the plaintiffs do not specify
their alleged illness and provide little detail about their alleged exposure to
components in DaimlerChrysler vehicles. Some plaintiffs do not exhibit current
illness, but seek recovery based on potential future illness. In 2001,
DaimlerChrysler and other automobile manufacturers asked the federal bankruptcy
court in Delaware overseeing the bankruptcy proceedings of an automotive
supplier, Federal-Mogul Corporation, to consolidate all of the asbestos brake
cases pending in state courts throughout the U.S. with the asbestos brake
litigation involving Federal Mogul supervised by the bankruptcy court.
DaimlerChrysler believed that consolidation would reduce the cost and complexity
of defending these individual cases. In 2002, the bankruptcy court decided that
it did not have the authority to consolidate these cases, and the U.S. Court of
Appeals upheld that decision. The U.S. Supreme Court in January 2003 denied
DaimlerChrysler's request and that of other manufacturers to review the
decision. The Group believes that many of these lawsuits involve unsubstantiated
illnesses or assert only tenuous connections with components in DaimlerChrysler
vehicles, and that there is credible scientific evidence to support the
dismissal of many of these claims. Although DaimlerChrysler's expenditures to
date in connection with such claims have not been material to its financial
condition, it is possible that the number of these lawsuits will continue to
grow, especially those alleging life-threatening illness, and that the Group
could incur significant costs in the future in resolving these lawsuits.
In the fourth quarter of 2000, Tracinda Corporation filed a lawsuit in the
United States District Court for the District of Delaware against
DaimlerChrysler AG and some of the members of its Supervisory Board and Board of
Management (Messrs. Kopper, Schrempp and Gentz). Shortly thereafter, other
plaintiffs filed a number of actions against the same defendants, making similar
claims to those in the Tracinda complaint. Two individual lawsuits and one
consolidated class action lawsuit are pending. The plaintiffs, current or former
DaimlerChrysler shareholders, allege that the defendants violated U.S.
securities law and committed fraud in obtaining approval from Chrysler
stockholders of the business combination between Chrysler and Daimler-Benz in
1998. In essence, the complaints allege that by describing the transaction as a
"merger of equals" in the proxy statement/ prospectus and other statements
preceding the special meeting of Chrysler stockholders called to vote on the
business combination agreement, the defendants misrepresented that
DaimlerChrysler would operate as two equal companies, while they always intended
to relegate Chrysler to division status and to replace Chrysler's management
with executives from Daimler-Benz. The complaints generally seek (a) actual
damages, including an acquisition premium, (b) "recissory" damages representing
the difference between the value of the Chrysler common stock exchanged and the
present value of the DaimlerChrysler Ordinary Shares, (c) compensatory and, in
the individual actions, punitive damages, (d) an order unwinding the
transaction, (e) pre- and post-judgment interest, and (f) such other relief as
may be just and proper. In April 2001, all of the pending class action
complaints were consolidated into a single consolidated class action complaint
that included two claims not previously alleged in any of the complaints. The
new claims alleged that DaimlerChrysler had violated U.S. securities laws by
making false and misleading statements in 1999 and 2000 regarding its prospects
for the year 2000. On May 9, 2001, DaimlerChrysler filed motions to dismiss all
three complaints. In March 2002, the Court granted the motion as to the
consolidated class action complaint, denied the motion as to the Tracinda
Corporation complaint except for the civil conspiracy claim in that complaint,
and denied the motion as to the other complaint
F-55
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
filed by Glickenhaus & Co., et al. The Court subsequently allowed the class
action plaintiffs to amend their complaint, which is now pending. These cases
have been consolidated for purposes of discovery and are captioned In re:
DaimlerChrysler AG Securities Litigation. The parties substantially completed
discovery in January 2003. In February 2003, DaimlerChrysler filed motions
seeking summary judgment on all claims in the cases. The Group is presently
scheduled for trial of all the consolidated actions in the second quarter of
2003. DaimlerChrysler believes the complaints in this litigation are without
merit and plans to continue defending against them vigorously.
In September 2000, Freightliner LLC, DaimlerChrysler's North American
commercial vehicles subsidiary, acquired Western Star Trucks Holdings Ltd., a
Canadian company engaged in the design, assembly, and distribution of heavy duty
trucks and transit buses. Prior to its acquisition by Freightliner, Western Star
had completed the sale of ERF (Holdings) plc, a company organized in England and
Wales and engaged in the assembly and sale of heavy duty trucks, to MAN AG and
MAN Nutzfahrzeuge AG for CAD 195 million. In September 2002, MAN filed a claim
against Freightliner Ltd. (formerly Western Star) with the London Commercial
Court for breach of representations and warranties in the share purchase
agreement. The claim includes allegations that ERF's accounts and financial
statements were misstated and seeks to recover damages in excess of GBP
300 million. Freightliner Ltd. intends to defend itself vigorously against such
claims.
A purported class action lawsuit was filed in 2002 in the United States
District Court for the District of New Jersey against DaimlerChrysler's
subsidiary Mercedes-Benz USA, LLC ("MBUSA"), and against MBUSA's wholly-owned
subsidiary Mercedes-Benz Manhattan, Inc ("MBM"). The lawsuit alleges that MBUSA
and MBM participated in a price fixing conspiracy among Mercedes-Benz dealers. A
motion for class certification is pending. MBUSA and MBM intend to defend
themselves vigorously. In addition, the Antitrust Division of the U.S.
Department of Justice, New York Regional Office, advised MBUSA and MBM that it
is conducting a criminal investigation in connection with the allegations made
in the lawsuit. MBUSA and MBM have been served with grand jury subpoenas in
connection with this investigation.
Various other claims and legal proceedings have been asserted or instituted
against the Group, including product liability and other lawsuits, some of which
purport to be class actions. In the event of adverse decisions in these
proceedings, DaimlerChrysler could be required to pay substantial compensatory
and punitive damages, or undertake service actions, recall campaigns or other
costly actions. Litigation is subject to many uncertainties, and the outcome of
individual matters is not predictable with assurance. It is reasonably possible
that the final resolution of some of these matters may require the Group to make
expenditures, in excess of established reserves, over an extended period of time
and in a range of amounts that cannot be reasonably estimated. The term
"reasonably possible" is used herein to mean that the chance of a future
transaction or event occurring is more than remote but less than likely.
Although the final resolution of any such matters could have a material effect
on the Group's consolidated operating results for the particular reporting
period in which an adjustment of the estimated reserve is recorded, the Group
believes that any resulting adjustment should not materially affect its
consolidated financial position.
See Note 4 for a description of claims raised by Bombardier.
F-56
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
31. COMMITMENTS AND CONTINGENCIES
Obligations from issuing guarantees as a guarantor (excluding product
warranties) are as follows:
<Table>
<Caption>
AT DECEMBER 31,
-----------------------------------------------
MAXIMUM AMOUNT
POTENTIAL RECOGNIZED
FUTURE OBLIGATION AS A LIABILITY
---------------------- ----------------------
2002 2001 2002 2001
(IN MILLIONS OF [EURO]) -------- -------- -------- --------
Guarantees for third party liabilities...................... 2,119 2,839 370 317
Guarantees under buy-back commitments....................... 3,232 3,280 609 673
Performance guarantees and environmental risks.............. 581 608 370 200
Other....................................................... 830 616 246 231
----- ----- ----- -----
6,762 7,343 1,595 1,421
----- ----- ----- -----
</Table>
Guarantees for third party liabilities principally represent guarantees of
indebtedness of non-consolidated affiliated companies and third parties and
commitments by Group companies as to contractual performance by joint venture
companies and certain non-incorporated companies, partnerships, and project
groups. The term under these arrangements generally cover the range of the
related indebtedness of the non-consolidated affiliated companies and third
parties or the contractual performance period of joint venture companies,
non-incorporated companies, partnerships, and project groups. The parent company
of the Group (DaimlerChrysler AG) provides guarantees to third parties of
certain obligations of its consolidated subsidiaries. At December 31, 2002,
these guarantees amounted to [EURO]51.7 billion. To a lesser extent,
consolidated subsidiaries provide guarantees to third parties of obligations of
other consolidated subsidiaries. All intercompany guarantees are eliminated in
consolidation and therefore are not reflected in the above table.
Guarantees under buy-back commitments principally represent arrangements
whereby the Group guarantees specified trade-in values for assets or products
sold to non-consolidated affiliated companies and third parties. Such guarantees
provide the holder with the right to return purchased assets or products back to
the Group in connection with a future purchase of products or services. The
table above excludes residual value guarantees related to arrangements for which
revenue recognition is precluded due to the Group's obligation to repurchase
assets sold to unrelated guaranteed parties.
Performance guarantees principally represent pledges or indemnifications
related to the quality or timing of performance by third parties or
participations in performance guarantees of consortiums. Performance guarantees
typically provide the purchaser of goods or services with the right to be
reimbursed for losses incurred or other penalties if the third party or the
consortium fails to perform. Amounts accrued under performance guarantees
reflect estimates of probable losses resulting from a third party's failure to
perform under obligating agreements.
DaimlerChrysler Services, Deutsche Telekom, and Compagnie Financiere et
Industrielle des Autoroutes S.A. ("Cofiroute"), (individually, the "partners;"
collectively, the "consortium"), entered into an agreement with the Federal
Republic of Germany ("FRG") to develop and operate a toll collection system for
the use of German roadways by commercial vehicles over 12 tons (gross vehicle
weight). DaimlerChrysler Services and Deutsche Telekom each represent 45% of the
consortium and Cofiroute represents the remaining 10%.
Pursuant to the agreement, the partners have guaranteed the successful
completion of the toll system, in phases with applicable late penalties, with
ultimate completion scheduled for August 2003. The partners have also guaranteed
the successful operation of the toll system. In the event the toll system is not
developed on schedule or does not operate effectively upon completion, the
consortium will be obligated to pay penalties which cannot be
F-57
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
presently estimated. These guarantees have not been included in the table above
since they relate, in part, to the Group's own future performance.
The Group is subject to potential liability under certain government
regulations and various claims and legal actions that are pending or may be
asserted against DaimlerChrysler concerning environmental matters. The maximum
potential future obligation related to certain environmental guarantees cannot
be estimated due to numerous uncertainties including the enactment of new laws
and regulations, the development and application of new technologies, the
identification of new sites for which the Group may have remediation
responsibility and the apportionment and collectibility of remediation costs
when other parties are involved.
When circumstances indicate that payment is probable, guarantees made by the
Group are recognized as a liability in the consolidated balance sheet with an
offsetting amount recorded as an expense.
The Group periodically initiates voluntary service actions and recall
actions to address various customer satisfaction, safety and emissions issues
related to vehicles it sells. The Group records a liability for product
warranty, including the estimated cost of these service and recall actions, when
the related sale is recognized based on historical experience as to product
failures as well as current information on repair costs. The Group also enters
into extended product warranty arrangements in consideration for a separate
arrangement fee. The consideration received in extended product warranty
arrangements is deferred and amortized to revenue over the term of the extended
warranty period. Costs related to extended product warranty services contracts
are expensed as incurred. The ultimate costs associated with product warranty
arrangements cannot be estimated due to numerous uncertainties including the
enactment of new laws and regulations, the number of vehicles affected by
service or recall actions, and the nature of the corrective action which may
result in adjustments to the established liabilities (see Note 25b). In
accordance with FIN 45, the obligations associated with product warranties are
not reflected in the above table.
In addition to the above guarantees and warranties, in connection with
certain production programs, the Group has committed to purchase various levels
of outsourced manufactured parts and components over extended periods at market
prices. The Group has also committed to purchase or invest in the construction
and maintenance of various production facilities. Amounts under these guarantees
represent commitments to purchase plant or equipment at market prices in the
future. As of December 31, 2002, commitments to purchase outsourced manufactured
parts and components or to invest in plant and equipment are approximately
[EURO]3.7 billion. These amounts are not reflected in the above table.
The Group also enters into noncancellable operating leases for facilities,
plant and equipment. Total rentals under operating leases charged to expense in
2002 in the statement of income (loss) amounted to [EURO]737 million (2001:
[EURO]819 million; 2000: [EURO]881 million). Future minimum lease payments under
noncancellable lease agreements which have initial or remaining terms in excess
of one year at December 31, 2002 are as follows:
<Table>
<Caption>
OPERATING LEASES
(IN MILLIONS OF [EURO]) ----------------
2003........................................................ 581
2004........................................................ 348
2005........................................................ 275
2006........................................................ 214
2007........................................................ 191
thereafter.................................................. 1,074
</Table>
F-58
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
32. INFORMATION ABOUT FINANCIAL INSTRUMENTS AND DERIVATIVES
A) USE OF FINANCIAL INSTRUMENTS
The Group conducts business on a global basis in numerous major
international currencies and is, therefore, exposed to adverse movements in
foreign currency exchange rates. The Group uses bonds, medium-term-notes,
commercial paper and bank loans in various currencies. As a consequence of using
these types of financial instruments, the Group is exposed to risks from changes
in interest and foreign currency exchange rates. DaimlerChrysler holds financial
instruments, such as financial investments, variable- and fixed-interest bearing
securities and to a minor extent equity securities that subject the Group to
risks from changes in interest rates and market prices. DaimlerChrysler manages
the various types of market risks by using derivative financial instruments.
Without these instruments the Group's market risks would be higher.
DaimlerChrysler does not use derivative financial instruments for purposes other
than risk management.
Based on regulations issued by regulatory authorities for financial
institutions, the Group has established guidelines for risk controlling
procedures and for the use of financial instruments, including a clear
segregation of duties with regard to operating financial activities, settlement,
accounting and controlling.
Market risks are quantified according to the "value-at-risk" method which is
commonly used among banks. Using historical variability of market data,
potential changes in value resulting from changes of market prices are
calculated on the basis of statistical methods.
B) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the price at which one party
would assume the rights and/or duties of another party. Fair values of financial
instruments have been determined with reference to available market information
at the balance sheet date and the valuation methodologies discussed below.
Considering the variability of their value-determining factors, the fair values
presented herein are only an indication of the amounts that the Group could
realize under current market conditions.
F-59
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts and fair values of the Group's financial instruments
are as follows:
<Table>
<Caption>
AT DECEMBER 31, 2002 AT DECEMBER 31, 2001
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(IN MILLIONS OF [EURO]) -------- -------- -------- --------
Financial instruments (other than derivative
instruments):
Assets:
Financial assets................................... 1,870 1,870 1,209 1,209
Receivables from financial services................ 52,088 52,622 49,512 49,678
Securities......................................... 3,293 3,293 3,077 3,077
Cash and cash equivalents.......................... 9,130 9,130 11,428 11,428
Other receivables.................................. 5 5 20 20
Liabilities:
Financial liabilities.............................. 79,112 83,861 90,908 94,513
Derivative instruments:
Assets:
Currency contracts................................. 1,759 1,759 477 477
Interest rate contracts............................ 3,776 3,776 1,011 1,011
Equity contracts................................... -- -- 4 4
Liabilities:
Currency contracts................................. 105 105 806 806
Interest rate contracts............................ 302 302 1,434 1,434
Equity contracts................................... -- -- 4 4
</Table>
The methods and assumptions used to determine the fair values of financial
instruments are summarized below:
FINANCIAL ASSETS AND SECURITIES -- The fair values of securities were
estimated using quoted market prices. The Group has certain equity investments
in related and affiliated companies not presented in the table, as these
investments are not publicly traded and determination of fair values is
impracticable.
RECEIVABLES FROM FINANCIAL SERVICES -- The carrying amounts of variable rate
finance receivables were estimated to approximate their fair values since the
contract rates of those receivables approximate current market rates. The fair
values of fixed rate finance receivables were estimated by discounting expected
cash flows using the current interest rates at which comparable loans with
identical maturity would be made as of December 31, 2002 and 2001.
The carrying amounts of CASH AND OTHER RECEIVABLES approximate fair values
due to the short-term maturities of these instruments.
FINANCIAL LIABILITIES -- The fair value of publicly traded debt was
estimated using quoted market prices. The fair values of other long-term notes
and bonds were estimated by 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 exchange rates adjusted for the
respective interest rate differentials (premiums or discounts). Currency options
were valued on the basis of quoted market prices or on estimates based on option
pricing models.
INTEREST RATE CONTRACTS -- The fair values of existing instruments to hedge
interest rate risks (e. g. interest rate swap agreements) were estimated by
discounting expected cash flows using market interest rates over the
F-60
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remaining term of the instrument. Interest rate options are valued on the basis
of quoted market prices or on estimates based on option pricing models.
EQUITY CONTRACTS -- The fair values of existing instruments to hedge equity
price risk (e. g. futures or options) were determined on the basis of quoted
market prices or on estimates based on option pricing models.
C) CREDIT RISK
The Group is exposed to credit-related losses in the event of
non-performance by counterparties to financial instruments. DaimlerChrysler
manages the credit risk exposure to financial institutions through
diversification of counterparties and review of each counterparties financial
strength. DaimlerChrysler does not have a significant exposure to any individual
counterparty, based on the rating of the counterparties performed by established
rating agencies. DaimlerChrysler Services has established detailed guidelines
for the risk management 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 of the Group's financial instruments (other than
derivative instruments), with the exception of receivables from financial
services and financial liabilities related to leasing and sales financing
activities, is recognized in financial income, net. Interest income on
receivables from financial services and gains and losses from sales of
receivables 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 related 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
operations and its reported financial results and cash flows are exposed to the
risks associated with fluctuations in the exchange rates of the U.S. dollar, the
euro and other world currencies. The Group's businesses are exposed to
transaction risk whenever revenues of a business are denominated in a currency
other than the currency in which the business incurs the costs relating to those
revenues. This risk exposure primarily affects the Mercedes Car Group segment.
The Mercedes Car Group segment generates its 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 relatively low transaction risk for this segment. The Other Activities segment
is exposed to transaction risk resulting primarily from the U.S. dollar exposure
of the aircraft engine business, which DaimlerChrysler conducts through MTU Aero
Engines.
In order 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 Committee. The
Currency Committee, which consists of two separate subgroups, one for the
Group's vehicle businesses and one for MTU Aero Engines, is comprised of members
of senior management from each of the respective businesses as well as from
Corporate Treasury and Risk Controlling. Corporate Treasury implements decisions
concerning foreign currency hedging taken by the Currency Committee. Risk
Controlling regularly informs the Board of Management of the actions of
Corporate Treasury based on the decisions of the Currency Committee.
F-61
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE AND EQUITY PRICE RISK MANAGEMENT
DaimlerChrysler holds a variety of interest rate sensitive assets and
liabilities to manage the liquidity and cash needs of its day-to-day operations.
In addition a substantial volume of interest rate sensitive assets and
liabilities is related to the leasing and sales financing business which is
operated by DaimlerChrysler Services. In particular, the Group's leasing and
sales financing business enters into transactions with customers, primarily
resulting in fixed rate receivables. DaimlerChrysler's general policy is to
match funding in terms of maturities and interest rates. However, for a limited
portion of the receivables portfolio funding does not match in terms of
maturities and interest rates. As a result, DaimlerChrysler is exposed to risks
due to changes in interest rates. DaimlerChrysler coordinates funding activities
of the industrial business and financial services on the Group level. The Group
uses interest rate derivative instruments such as interest rate swaps, forward
rate agreements, swaptions, caps and floors to achieve the desired interest rate
maturities and asset/liability structures.
The Group assesses interest rate risk by continually 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 analytical techniques,
including value-at-risk analyses, to estimate the expected impact of changes in
interest rates on the Group's future cash flows.
DaimlerChrysler also holds, to a minor extent, investments in equity
securities as part of its strategy to manage excess liquidity. The risk inherent
in these securities is hedged through the use of equity derivatives.
The Group assesses equity price risk by continually monitoring changes in
key economic, industry and market information and maintains risk management
control systems independent of Corporate Treasury to monitor risks attributable
to both DaimlerChrysler's investments as well as its offsetting hedge positions.
The risk control systems involve the use of analytical techniques, including
value-at-risk analyses, to estimate the potential loss and support the risk
management of the Group's investments.
INFORMATION WITH RESPECT TO FAIR VALUE HEDGES
Gains and losses in fair value of recognized assets and liabilities and firm
commitments of operating transactions as well as gains and losses on 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, as the transactions being hedged involve sales or production of
the Group's products. Net gains and losses in fair value of both recognized
financial assets and liabilities and derivative financial instruments designated
as fair value hedges of these financial assets and liabilities are recognized
currently in financial income, net.
For the year ended December 31, 2002, net gains of [EURO]34 million (2001:
net losses of [EURO]17 million) were recognized in operating and financial
income, net, representing principally the component of the derivative
instruments' gain or loss excluded from the assessment of hedge effectiveness
and the amount of hedging ineffectiveness.
INFORMATION WITH RESPECT TO CASH FLOW HEDGES
Changes in the value of forward foreign currency exchange contracts and
currency options designated and qualifying as cash flow hedges are reported in
accumulated other comprehensive income. These amounts are subsequently
reclassified into operating income, in the same period as the underlying
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
comprehensive income. These amounts are subsequently reclassified into financial
income, net, as a yield adjustment in the same period in which the related
interest on the floating-rate debt obligations affect operating income.
F-62
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the year ended December 31, 2002, no gains or losses (2001: net losses
of [EURO]12 million), representing principally the component of the derivative
instruments' gain/loss excluded from the assessment of the hedge effectiveness
and the amount of hedge ineffectiveness, were recognized in operating and
financial income, net.
For the year ended December 31, 2002, no gains or losses (2001: gains of
[EURO]1 million) had to be reclassified from accumulated other comprehensive
income into earnings as a result of the discontinuance of cash flow hedges.
It is anticipated that [EURO]517 million of net gains included in
accumulated other comprehensive income at December 31, 2002, will be
reclassified into earnings during the next year.
As of December 31, 2002, DaimlerChrysler held derivative financial
instruments with a maximum maturity of 43 months to hedge its exposure to the
variability in future cash flows from foreign currency forecasted transactions.
INFORMATION WITH RESPECT TO HEDGES OF THE NET INVESTMENT IN A FOREIGN
OPERATION
In specific circumstances, DaimlerChrysler seeks to hedge the currency risk
inherent in certain of its long-term 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, 2002, net gains of
[EURO]127 million (2001: net gains of [EURO]53 million) hedging the Group's net
investments in certain foreign operations were included in the cumulative
translation adjustment without affecting DaimlerChrysler's net income (loss).
33. RETAINED INTERESTS IN SOLD RECEIVABLES AND SALES OF FINANCE RECEIVABLES
The fair value of retained interests in sold receivables was as follows:
<Table>
<Caption>
AT DECEMBER 31,
(IN MILLIONS OF [EURO]) ----------------------
2002 2001
-------- --------
Fair value of estimated residual cash flows, net of
prepayments, from sold receivables, before expected future
net credit losses......................................... 4,119 5,311
Expected future net credit losses on sold receivables....... (644) (787)
----- -----
Fair value of net residual cash flows from sold
receivables............................................... 3,475 4,524
----- -----
Restricted cash accounts.................................... 2 2
Retained subordinated securities............................ 764 956
----- -----
Retained interests in sold receivables, at fair value....... 4,241 5,482
----- -----
</Table>
In 2002, the Group recorded an impairment charge of [EURO]98 million on the
retained interest in sold receivables resulting from a decline in the expected
pool by pool cash flows. This decrease in cash flows was primarily the result of
an increase in the estimate of future credit losses.
F-63
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2002, the significant assumptions used in estimating the
residual cash flows from sold receivables and the sensitivity of the current
fair value to immediate 10% and 20% adverse changes are as follows:
<Table>
<Caption>
IMPACT ON FAIR
VALUE
BASED ON ADVERSE
----------------------
ASSUMPTION 10% 20%
PERCENTAGE CHANGE CHANGE
(IN MILLIONS OF [EURO]) ---------- -------- --------
Prepayment speed, monthly............................... 1.5% (11) (16)
Estimated remaining net credit losses as a percentage of
receivables sold...................................... 1.3% (61) (122)
Residual cash flow discount rate, annualized............ 12.0% (33) (66)
</Table>
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 [EURO]18 million and [EURO]34 million, respectively. Similar changes
to the monthly prepayment speed and the estimated remaining net credit losses as
a percentage of receivables sold for the retained subordinated securities would
have no adverse effect on the fair value of the retained subordinated
securities.
These sensitivities are hypothetical and should be used with caution. The
effect of a variation in a particular assumption on the fair value of the
retained interests is calculated without changing any other assumption; in
reality, changes in one assumption may result in changes in another, which might
magnify or counteract the sensitivities.
Actual and projected credit losses for receivables securitized were as
follows:
<Table>
<Caption>
RECEIVABLES SECURITIZED IN
-----------------------------------------
ACTUAL AND PROJECTED CREDIT LOSSES PERCENTAGES AS OF: 1999 2000 2001 2002
- ----------------------------------------------------- -------- -------- -------- --------
December 31, 2002........................................... 2.6% 2.3% 2.4% 2.6%
December 31, 2001........................................... 2.2% 1.7% 2.4%
December 31, 2000........................................... 1.1% 1.2%
December 31, 1999........................................... 1.0%
</Table>
Static pool losses are calculated by summing the actual and projected future
credit losses and dividing them by the original balance of each pool of assets.
The amount shown above for each year is a weighted average for all
securitizations during that year and outstanding at December 31, 2002.
Certain cash flows received and paid to securitization trusts were as
follows:
<Table>
<Caption>
2002 2001
(IN MILLIONS OF [EURO]) -------- --------
Proceeds from new securitizations........................... 10,705 18,219
Proceeds from collections reinvested in previous wholesale
securitizations........................................... 49,888 56,040
Amounts reinvested in previous wholesale securitizations.... (49,965) (56,040)
Servicing fees received..................................... 304 353
Receipt of cash flows on retained interest in securitized
receivables............................................... 553 580
</Table>
F-64
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The outstanding balance, delinquencies and net credit losses of sold
receivables and other receivables, of those financial services businesses that
sell receivables, as of and for the years ended December 31, 2002 and 2001,
respectively, were as follows:
<Table>
<Caption>
NET CREDIT
LOSSES FOR
OUTSTANDING DELINQUENCIES THE YEAR
BALANCE AT > 60 DAYS AT ENDED
---------------------- ---------------------- ----------------------
2002 2001 2002 2001 2002 2001
(IN MILLIONS OF [EURO]) -------- -------- -------- -------- -------- --------
Retail receivables..................... 48,476 58,224 506 584 652 691
Wholesale receivables.................. 16,754 17,448 -- 24 19 18
------- ------- ---- ---- ---- ----
Total receivables managed.............. 65,230 75,672 506 608 671 709
Less: receivables sold................. (30,103) (42,312) (160) (182) (342) (310)
------- ------- ---- ---- ---- ----
Receivables held in portfolio.......... 35,127 33,360 346 426 329 399
</Table>
During the year ended December 31, 2002, DaimlerChrysler sold
[EURO]8,653 million (2001: [EURO]19,290 million) and [EURO]49,592 million (2001:
[EURO]57,372 million) of retail and wholesale receivables, respectively. From
these transactions, the Group recognized gains of [EURO]162 million (2001:
[EURO]414 million) and [EURO]201 million (2001: [EURO]182 million) on sales of
retail and wholesale receivables, respectively.
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 year) at December 31,
2002 and 2001:
<Table>
<Caption>
RETAIL WHOLESALE
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Prepayment speed assumption (monthly rate)............. 1.0-1.5% 1.0-1.5% *) *)
Estimated lifetime net credit losses
(an average percentage of sold receivables)............ 2.6% 2.4% 0.0% 0.0%
Residual cash flows discount rate (annual rate)........ 12.0% 12.0% 12.0% 10.0%
</Table>
- ------------------------------
*) For the calculation of wholesale gains, the Group estimated the average
wholesale loan liquidated in 210 days.
In 2002, the Group's financial services business in North America developed
an asset-backed commercial paper program to be used as part of its
securitization activities. To support the asset-backed commercial paper program,
several banks have provided contractually committed liquidity facilities
aggregating $3 billion. As of December 31, 2002, no receivables have been sold
into this program and none of the liquidity facilities have been utilized.
34. SEGMENT REPORTING
In 2002, the Board of Management decided to rename the Mercedes-Benz
Passenger Cars & smart segment to Mercedes Car Group, effective as of
January 1, 2003. The decision to rename the segment was made to reflect the
recently enhanced brand portfolio and did not impact the composition of this
reportable segment. Information with respect to the Group's reportable segments
follows:
MERCEDES CAR GROUP. This segment includes activities 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-Registered Trademark- and Dodge and related automotive parts and
accessories.
F-65
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMERCIAL VEHICLES. This segment is involved in the development, design,
manufacture, assembly and sale of vans, trucks, buses and Unimogs as well as
related parts and accessories. The products are sold mainly under the brand
names Mercedes-Benz and Freightliner.
SERVICES. The activities in this segment extend to the marketing of
services related to financial services (principally retail and lease financing
for vehicles and dealer financing), insurance brokerage, trading and information
technology. In October 2000, the information technology activities were
contributed into a joint venture. The Group's 49.9% interest in T-Systems ITS is
included at equity subsequent to that date. In January 2002, DaimlerChrysler
exercised its option to sell to Deutsche Telekom the Group's 49.9% interest in
T-Systems ITS. The sale was consummated in March 2002 with the termination of
the joint venture.
OTHER ACTIVITIES. These activities principally represents the business MTU
Aero Engines and the Group's equity method investments in MMC, EADS and
Automotive Electronics. Other Activities also contains corporate research, real
estate activities and holding and financing companies. In April 2001,
DaimlerChrysler completed the sale of 60% of the interest in its Automotive
Electronics activities to Continental AG. The Group's 40% interest in the
Automotive Electronics activities (Conti Temic microelectronic) is included at
equity from that date. In April 2002, DaimlerChrysler exercised its option to
sell to Continental AG the Group's remaining 40% interest in Conti Temic
microelectronic.
The Group's management reporting and controlling systems use accounting
policies that are substantially the same as those described in Note 1 in the
summary of significant accounting policies (U.S. GAAP). The Group measures the
performance of its operating segments through "Operating Profit." Segment
Operating Profit is defined as income (loss) before financial income included in
the consolidated statement of income (loss), modified to exclude pension and
postretirement benefit expenses other than service costs, to include pretax
operating profit (loss) from affiliated and associated companies, to include
financial income (loss) from related operating companies, to include gains
(losses) from the sale of operating businesses, and to include or exclude
certain miscellaneous items.
Intersegment sales and revenues are generally recorded at values that
approximate third-party selling prices.
Revenues are allocated to countries based on the location of the customer;
long-lived assets are disclosed according to the physical location of these
assets.
Capital expenditures represent the purchase of property, plant and
equipment.
F-66
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Segment information as of and for the years ended December 31, 2002, 2001
and 2000 follows:
<Table>
<Caption>
MERCEDES CHRYSLER COMMERCIAL OTHER
CAR GROUP GROUP VEHICLES SERVICES ACTIVITIES ELIMINATIONS CONSOLIDATED
(IN MILLIONS OF [EURO]) ---------- -------- ----------- -------- ---------- ------------ ------------
2002
Revenues.............................. 46,796 59,716 26,905 13,765 2,401 -- 149,583
Intersegment sales.................... 3,374 465 1,496 1,934 322 (7,591) --
------ ------ ------ ------- ------ ------- -------
Total revenues........................ 50,170 60,181 28,401 15,699 2,723 (7,591) 149,583
Operating Profit (Loss)............... 3,020 609 (343) 3,060 903 (395) 6,854
Identifiable segment assets........... 22,103 52,807 15,269 87,833 33,970 (24,655) 187,327
Capital expenditures.................. 2,495 3,155 1,263 95 137 -- 7,145
Depreciation and amortization......... 1,652 4,276 1,210 6,804 157 (255) 13,844
2001
Revenues.............................. 44,002 62,676 27,084 14,975 4,136 -- 152,873
Intersegment sales.................... 3,703 807 1,488 1,876 371 (8,245) --
------ ------ ------ ------- ------ ------- -------
Total revenues........................ 47,705 63,483 28,572 16,851 4,507 (8,245) 152,873
Operating Profit (Loss)............... 2,951 (5,281) (514) 612 1,181 (267) (1,318)
Identifiable segment assets........... 20,558 63,325 16,232 100,570 31,200 (24,475) 207,410
Capital expenditures.................. 2,061 5,083 1,484 112 168 (12) 8,896
Depreciation and amortization......... 1,853 5,364 922 7,071 197 (217) 15,190
2000
Revenues.............................. 40,822 67,405 28,521 15,322 10,314 -- 162,384
Intersegment sales.................... 2,878 967 1,283 2,204 301 (7,633) --
------ ------ ------ ------- ------ ------- -------
Total revenues........................ 43,700 68,372 29,804 17,526 10,615 (7,633) 162,384
Operating Profit (Loss)............... 2,145 501 1,212 2,457 3,590 (153) 9,752
Identifiable segment assets........... 19,355 53,660 15,879 94,369 34,298 (18,287) 199,274
Capital expenditures.................. 2,096 6,339 1,128 282 547 -- 10,392
Depreciation and amortization......... 2,038 3,878 847 6,603 425 (204) 13,587
</Table>
Capital expenditures for equipment on operating leases for 2002, 2001 and
2000 for the Services segment amounted to [EURO]12,862 million,
[EURO]14,334 million and [EURO]15,551 million, respectively.
The Operating Profit of the Mercedes Car Group segment for the year ended
December 31, 2000, includes [EURO]470 million of non-cash charges related to the
adoption of the European Union's directive regarding end-of-life vehicles and
related to fixed cost reimbursement agreements with MCC smart suppliers.
For the year ended December 31, 2001, Operating Loss of the Chrysler Group
segment includes [EURO]1,715 million of non-cash turnaround plan charges, other
than depreciation and amortization.
The Operating Loss of the Commercial Vehicles segment for the year ended
December 31, 2002, includes [EURO]161 million (2001: [EURO]353 million) of
non-cash turnaround plan and other charges, other than depreciation and
amortization.
For the years ended December 31, 2002, 2001 and 2000, Operating Profit of
the Services segment includes [EURO]10 million, [EURO]41 million and
[EURO]1 million, respectively, from the equity investment in T-Systems ITS,
representing
F-67
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Group's percentage share of the Operating Profit of T-Systems ITS. In
addition, Operating Profit of the Services segment for the year ended
December 31, 2000, includes a non-cash gain of [EURO]2,315 million from the
transaction involving T-Systems ITS (see Note 11). At December 31, 2001 and
2000, the identifiable assets of the Services segment includes
[EURO]2,193 million and [EURO]2,152 million, respectively, of the investment in
T-Systems ITS. For the year ended December 31, 2002, Operating Profit of the
Services segment includes impairment charges of [EURO]537 million, which
primarily relate to equipment on operating leases and receivables from financial
services.
For the year ended December 31, 2002, Operating Profit of the Other
Activities segment includes [EURO]778 million from EADS and MMC, the significant
companies accounted for using the equity method. For the year ended
December 31, 2001, Operating Profit of the Other Activities segment includes
[EURO]694 million from EADS and MMC, including a [EURO]876 million gain from the
formation of Airbus SAS. For the year ended December 31, 2000, Operating Profit
of the Other Activities segment includes [EURO]3,259 million from EADS and MMC,
including a [EURO]3,303 million gain in connection with the exchange of the
Group's controlling interest in DaimlerChrysler Aerospace for shares in EADS
(see Note 11). At December 31, 2002, 2001 and 2000, the identifiable assets of
the Other Activities segment include [EURO]5,714 million, [EURO]5,393 million
and [EURO]5,143 million, respectively, of investments in these equity method
investees.
A reconciliation to Operating Profit (Loss) follows:
<Table>
<Caption>
2002 2001 2000
(IN MILLIONS OF [EURO]) -------- -------- --------
Income (loss) before financial income....................... 3,860 (1,637) 4,320
Pension and postretirement benefit expenses other than
service costs........................................... (242) (450) (228)
Operating income (loss) from affiliated and associated
companies, and financial income (loss) from related
companies............................................... 494 516 (35)
Gains (losses) from the sale of operating businesses...... 2,640 292 5,832
Miscellaneous items....................................... 102 (39) (137)
----- ------ -----
Consolidated Operating Profit (Loss)........................ 6,854 (1,318) 9,752
===== ====== =====
</Table>
Revenues from external customers presented by geographic region are as
follows:
<Table>
<Caption>
OTHER
EUROPEAN UNITED AMERICAN OTHER CONSOLI-
GERMANY UNION(1) STATES COUNTRIES ASIA COUNTRIES DATED
(IN MILLIONS OF [EURO]) -------- -------- -------- --------- -------- --------- --------
2002................... 23,121 23,425 77,686 12,104 6,284 6,963 149,583
2001................... 24,340 21,300 81,132 13,585 6,208 6,308 152,873
2000................... 25,988 24,360 84,503 14,762 5,892 6,879 162,384
</Table>
- ------------------------------
1) Excluding Germany.
Germany accounts for [EURO]19,627 million of long-lived assets (2001:
[EURO]20,584 million; 2000: [EURO]17,450 million), the United States for
[EURO]44,758 million (2001: [EURO]58,850 million; 2000: [EURO]51,996 million)
and other countries for [EURO]14,344 million (2001: [EURO]12,971 million; 2000:
[EURO]19,633 million).
F-68
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
35. EARNINGS (LOSS) PER SHARE
The computation of basic and diluted earnings (loss) per share for "Income
(loss) before extraordinary items and cumulative effects of changes in
accounting principles" is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------
(IN MILLIONS OF [EURO] OR MILLIONS OF SHARES, 2002 2001 2000
EXCEPT EARNINGS (LOSS) PER SHARE) -------- -------- --------
Income (loss) before extraordinary items and cumulative
effects of changes in accounting principles --
basic................................................ 4,877 (662) 2,465
======= ======= =======
Interest expense on convertible bonds and notes (net of
tax)................................................. 12 -- 18
------- ------- -------
Income (loss) before extraordinary items and cumulative
effects of changes in accounting principles --
diluted.............................................. 4,889 (662) 2,483
======= ======= =======
Weighted average number of shares outstanding --
basic................................................ 1,008.3 1,003.2 1,003.2
======= ======= =======
Dilutive effect of convertible bonds and notes......... 5.6 -- 10.7
------- ------- -------
Weighted average number of shares outstanding --
diluted.............................................. 1,013.9 1,003.2 1,013.9
======= ======= =======
EARNINGS (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING
PRINCIPLES
Basic................................................ 4.84 (0.66) 2.46
======= ======= =======
Diluted.............................................. 4.82 (0.66) 2.45
======= ======= =======
</Table>
See Note 23 for shares issued upon conversion of bonds and notes in 2002.
Because the Group reported a loss before extraordinary items and cumulative
effects of changes in accounting principles for the year ended December 31,
2001, the diluted loss per share does not include the antidilutive effects of
convertible bonds and notes. Had the Group reported income before extraordinary
items and cumulative effects of changes in accounting principles for the year
ended December 31, 2001, the weighted average number of shares outstanding would
have potentially been diluted by 10.7 million shares resulting from the
conversion of bonds and notes.
Stock options issued in 2002, 2001 and 2000 in connection with the Stock
Option Plan 2000 were not included in the computation of diluted earnings per
share for all years presented, because the options' underlying exercise prices
were greater than the average market prices for DaimlerChrysler Ordinary Shares
on December 31, 2002, 2001 and 2000.
Income tax charges of [EURO]263 million relating to changes in German tax
laws were included in the consolidated statement of income for the year ended
December 31, 2000 and resulted in a reduction of basic and diluted earnings per
share of [EURO]0.26 and [EURO]0.26 in 2000 (see Note 9).
36. RELATED PARTY TRANSACTIONS
The Group purchases materials, supplies and services from numerous suppliers
throughout the world in the ordinary course of our business. These suppliers
include firms in which the Group holds an ownership interest and firms that are
affiliated with some members of DaimlerChrysler's Supervisory Board.
Mitsubishi Motor Manufacturing of America, a subsidiary of Mitsubishi Motors
Corporation, produces the Dodge Stratus and Chrysler Sebring coupes for the
Group. As discussed in Note 3, DaimlerChrylser owns a 37% equity interest in
Mitsubishi Motors Corporation.
F-69
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DaimlerChrysler has an agreement with McLaren Cars Ltd., a wholly owned
subsidiary of TAG McLaren Holdings Ltd., for the design and production of a new
high-performance sports car, the SLR, which DaimlerChrysler expects to launch by
the end of 2003. The Group owns a 40% equity interest in TAG McLaren
Holdings Ltd.
DaimlerChrysler increased its stake in the Formula 1 engine manufacturer
Ilmor Engineering Ltd. from 25% to 55% in December 2002 and has agreed to
gradually acquire the remaining shares by 2005. The company has been renamed
Mercedes-Ilmor. Ilmor Engineering Ltd. and DaimlerChrysler have been responsible
for the development, design and production of Mercedes-Benz Formula 1 engines
since 1993, which DaimlerChrysler supplies to the West McLaren team in support
of motor sport activities under the Mercedes-Benz brand.
In May 2002, DaimlerChrysler Corporation sold its Dayton thermal products
facility to Behr Dayton Thermal Products LLC, a joint venture company in which
Behr America, Inc. owns a majority interest and DaimlerChrysler Corporation owns
a minority interest. DaimlerChrysler Corporation is required to maintain its
minority interest through May 2004 and to purchase products from the joint
venture company under a supply agreement entered into in connection with the
sale.
The Group's subsidiaries DaimlerChrysler Coordination Center S.A. (DCCC) and
DaimlerChrysler Aerospace AG (DASA) granted a series of loans to debis Air
Finance B.V. (dAF). Through DaimlerChrysler's subsidiaries DaimlerChrysler
Services AG and DaimlerChrysler Aerospace AG, the Group holds a 45%
non-controlling interest in debis Air Finance B.V. The total book value of these
loans as of December 31, 2002, was [EURO]519 million, the highest aggregate
amount outstanding during 2002 was [EURO]546 million. The interest rates are
partially fixed, partially based on Libor.
The Group purchases products and services from T-Systems ITS GmbH, an
information technology company. As discussed in Note 4, the Group beneficially
owned a 49.9% equity interest in T-Systems through a joint venture prior to
March 2002 and then decided to exit the joint venture by exercising its option
to sell its interest to Deutsche Telekom for [EURO]4.7 billion. The sale closed
in March 2002. The Group continues to purchase products from T-Systems ITS.
As discussed in Note 4, in April, 2002, DaimlerChrysler exercised its option
to sell its 40% interest in Conti Temic microelectronic GmbH to Continental. The
Group continues to purchase products from Conti Temic.
The following represent transactions with shareholders:
- DaimlerChrysler incurred expenses of approximately $846,000 in 2002 for
advertising and related marketing activities with a U.S. magazine. Earl G.
Graves, member of DaimlerChrysler's Supervisory Board and shareholder of
DaimlerChrysler AG, is the Chairman, Chief Executive Officer and sole
stockholder of the magazine's ultimate parent company.
- DB Value GmbH, a wholly owned subsidiary of Deutsche Bank AG, owns
approximately 12% of DaimlerChrysler's outstanding shares. Deutsche Bank
AG and its subsidiaries provided the Group with various financial and
other services for which they were paid reasonable and customary fees.
Hilmar Kopper, the Chairman of DaimlerChrysler's Supervisory Board and
shareholder of DaimlerChrysler AG, was also Chairman of the Supervisory
Board of Deutsche Bank AG until May 22, 2002.
37. COMPENSATION AND SHARE OWNERSHIP OF THE MEMBERS OF THE BOARD OF MANAGEMENT
AND THE SUPERVISORY BOARD AND FURTHER ADDITIONAL INFORMATION CONCERNING GERMAN
CORPORATE GOVERNANCE CODE
REMUNERATION - The total remuneration paid by Group companies to the members
of the Board of Management of DaimlerChrysler AG are calculated from the amount
of compensation paid in cash and from the
F-70
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
non-cash benefits in kind. The total remuneration in 2002 for the members of the
Board of Management of DaimlerChrysler AG amount to [EURO]50.8 million, of which
[EURO]13.4 million is fixed and [EURO]37.4 million is short-term and mid-term
incentive remuneration components. In 2002, no compensation resulted from
long-term incentive remuneration components.
In 2002, 3.03 million stock options from the Stock Option Plan 2000 were
granted to members of the Board of Management as a long-term remuneration
component. Also in 2002, 476,500 performance-based awards were granted to the
members of the Board of Management based on a 3 year performance plan. For
detailed information on stock based compensation programs, see Note 24.
The remuneration paid in 2002 to the members of the Supervisory Board of
DaimlerChrysler AG for services in all capacities to the Group amounted
[EURO]2.5 million.
DIRECTORS' DEALINGS - Transactions of ordinary shares, options and
derivatives of DaimlerChrysler AG and Group related companies(1), exercised by
members of the Board of Management as well as by their spouses and first-grade
relatives since July 1, 2002, which are to be published according to
Article 15a of the German Securities Trading Act, are listed below:
<Table>
<Caption>
TYPE OF TITLE (SECURITY NOMINAL DATE OF NUMBER PRICE
NAME TRANSACTION COMPANY OR RIGHT) AMOUNT TRANSACTION OF UNITS IN [EURO]
- ---- ----------- -------- --------------- ----------- ----------- -------- ----------
Dr. Dieter Zetsche............... Purchase DCAG Share [EURO]2.60 7/3/2002 4,255 46.93
Prof. Klaus-Dieter Voehringer.... Purchase DCAG Share [EURO]2.60 9/4/2002 1,000 39.50
Prof. Klaus-Dieter Voehringer.... Purchase DCAG Share [EURO]2.60 9/19/2002 1,000 37.90
Prof. Klaus-Dieter Voehringer.... Purchase DCAG Share [EURO]2.60 9/25/2002 2,000 34.92
Prof. Klaus-Dieter Voehringer.... Purchase DCAG Share [EURO]2.60 10/9/2002 1,000 31.90
</Table>
Members of the Supervisory Board as well as their spouses and first-grade
relatives exercised no transactions of ordinary shares, options and derivatives
of DaimlerChrysler AG and Group related companies(1) in the second half of 2002,
which are to be published.
- ------------------------
(1) at the present time: EADS and Maschinenfabrik Esslingen AG
SHARE OWNERSHIP - As of December 31, 2002, the current members of the Board
of Management and the members of the Supervisory Board as a group owned
9.6 million Ordinary Shares, options or derivatives (SAR) of DaimlerChrysler AG
(0.95% of all outstanding shares).
TRANSACTIONS WITH RELATED PARTIES - For transactions with shareholders,
please see last paragraph of Note 36.
38. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
DaimlerChrysler AG, the parent company of the Group, fully and
unconditionally guarantees certain publicly issued debt of its 100% owned
subsidiary DaimlerChrysler North America Holding Corporation. The following
condensed consolidating financial information for DaimlerChrysler AG,
DaimlerChrysler North America Holding Corporation and all other subsidiaries on
a combined basis set forth below is intended to provide investors with
meaningful and comparable financial information about DaimlerChrysler AG and its
subsidiary issuer. Investments and long-term financial assets include the
investments in consolidated subsidiaries recorded under the equity method for
purposes of the condensed consolidating financial information. Financial income,
net includes the income or loss related to such investments.
F-71
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
DAIMLERCHRYSLER OTHER
2002 DAIMLERCHRYSLER AG NORTH AMERICA SUBSIDIARIES CONSOLIDATING DAIMLERCHRYSLER AG
(IN MILLIONS OF [EURO]) (PARENT COMPANY) HOLDING CORPORATION (COMBINED) ADJUSTMENTS (CONSOLIDATED)
- --------------------------------- ------------------- ------------------- ------------ ------------- -------------------
ASSETS
Intangible assets............ 95 -- 4,831 -- 4,926
Property, plant and
equipment, net............. 5,973 -- 30,296 -- 36,269
Investments and long-term
financial assets........... 27,706 52,331 12,684 (83,430) 9,291
Equipment on operating
leases, net................ 3,722 -- 24,713 (192) 28,243
------- ------- -------- -------- --------
FIXED ASSETS..................... 37,496 52,331 72,524 (83,622) 78,729
------- ------- -------- -------- --------
Inventories.................. 5,750 -- 10,638 (746) 15,642
Trade, finance and other
receivables................ 15,920 4,517 71,591 (16,070) 75,958
Securities................... 369 318 2,606 -- 3,293
Cash and cash equivalents.... 3,100 3,982 2,048 -- 9,130
------- ------- -------- -------- --------
NON-FIXED ASSETS............... 25,139 8,817 86,883 (16,816) 104,023
------- ------- -------- -------- --------
DEFERRED TAXES AND PREPAID
EXPENSES....................... 2,881 552 8,601 (7,459) 4,575
------- ------- -------- -------- --------
TOTAL ASSETS................... 65,516 61,700 168,008 (107,897) 187,327
======= ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
STOCKHOLDERS' EQUITY........... 34,914 11,010 66,543 (77,553) 34,914
------- ------- -------- -------- --------
MINORITY INTERESTS............. -- -- 432 -- 432
------- ------- -------- -------- --------
ACCRUED LIABILITIES............ 10,891 158 32,957 (294) 43,712
------- ------- -------- -------- --------
Financial liabilities........ 11,838 48,427 37,803 (18,956) 79,112
Trade liabilities............ 3,279 -- 9,063 -- 12,342
Other liabilities............ 1,675 2,105 8,386 (3,323) 8,843
------- ------- -------- -------- --------
LIABILITIES.................... 16,792 50,532 55,252 (22,279) 100,297
------- ------- -------- -------- --------
DEFERRED TAXES AND DEFERRED
INCOME......................... 2,919 -- 12,824 (7,771) 7,972
------- ------- -------- -------- --------
TOTAL LIABILITIES.............. 30,602 50,690 101,465 (30,344) 152,413
------- ------- -------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY........... 65,516 61,700 168,008 (107,897) 187,327
======= ======= ======== ======== ========
Revenues....................... 55,430 -- 132,418 (38,265) 149,583
Cost of sales.................. (43,890) -- (114,956) 37,389 (121,457)
------- ------- -------- -------- --------
GROSS MARGIN..................... 11,540 -- 17,462 (876) 28,126
Selling, administrative and
other expenses............... (6,830) (16) (12,407) 960 (18,293)
Research and development....... (3,272) -- (2,907) 108 (6,071)
Other income................... 555 -- 928 (691) 792
Turnaround plan
expenses--Chrysler Group..... -- -- (694) -- (694)
------- ------- -------- -------- --------
INCOME (LOSS) BEFORE FINANCIAL
INCOME......................... 1,993 (16) 2,382 (499) 3,860
Financial income (expense),
net.......................... 3,611 334 4,299 (6,036) 2,208
------- ------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 5,604 318 6,681 (6,535) 6,068
Income taxes................... (727) 730 (1,371) 191 (1,177)
Minority interests............. -- -- (14) -- (14)
------- ------- -------- -------- --------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECTS OF CHANGES
IN ACCOUNTING PRINCIPLES....... 4,877 1,048 5,296 (6,344) 4,877
Cumulative effects of changes
in accounting principles..... (159) -- (159) 159 (159)
------- ------- -------- -------- --------
NET INCOME (LOSS).............. 4,718 1,048 5,137 (6,185) 4,718
======= ======= ======== ======== ========
</Table>
F-72
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
DAIMLERCHRYSLER OTHER
2002 DAIMLERCHRYSLER AG NORTH AMERICA SUBSIDIARIES CONSOLIDATING DAIMLERCHRYSLER AG
(IN MILLIONS OF [EURO]) (PARENT COMPANY) HOLDING CORPORATION (COMBINED) ADJUSTMENTS (CONSOLIDATED)
- --------------------------------- ------------------- ------------------- ------------ ------------- -------------------
CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES........... 7,434 484 12,999 (3,121) 17,796
------- ------- -------- -------- --------
Increase in equipment on
operating leases............. (2,682) -- (15,175) 153 (17,704)
Purchases of property, plant,
equipment and other fixed
assets....................... (2,235) -- (5,225) -- (7,460)
Proceeds from disposals of
equipment on operating
leases....................... 2,150 -- 12,962 -- 15,112
Proceeds from disposals of
fixed assets................. 197 -- 681 -- 878
Payments for investments in
businesses................... (331) -- (405) 176 (560)
Proceeds from disposals of
businesses................... 292 -- 5,570 (176) 5,686
(Increase) decrease in
receivables from financial
services, net................ (116) -- (8,942) 9 (9,049)
Disposition (acquisitions) of
securities (other than
trading), net................ (14) (353) 438 -- 71
Other.......................... (239) 454 230 (365) 80
------- ------- -------- -------- --------
CASH USED FOR INVESTING
ACTIVITIES..................... (2,978) 101 (9,866) (203) (12,946)
------- ------- -------- -------- --------
Change in financial
liabilities.................. (2,763) (1,195) 2,350 (2,647) (4,255)
Dividends paid................. (1,003) -- (7,015) 7,003 (1,015)
Other.......................... -- -- 1,032 (1,032) --
------- ------- -------- -------- --------
CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES........... (3,766) (1,195) (3,633) 3,324 (5,270)
------- ------- -------- -------- --------
Effect of foreign exchange rate
changes on cash................ -- (801) (394) -- (1,195)
------- ------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........... 690 (1,411) (894) -- (1,615)
------- ------- -------- -------- --------
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD......... 2,410 5,393 2,912 -- 10,715
------- ------- -------- -------- --------
AT END OF PERIOD............... 3,100 3,982 2,018 -- 9,100
======= ======= ======== ======== ========
</Table>
F-73
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
DAIMLERCHRYSLER OTHER
2001 DAIMLERCHRYSLER AG NORTH AMERICA SUBSIDIARIES CONSOLIDATING DAIMLERCHRYSLER AG
(IN MILLIONS OF [EURO]) (PARENT COMPANY) HOLDING CORPORATION (COMBINED) ADJUSTMENTS (CONSOLIDATED)
- --------------------------------- ------------------- ------------------- ------------ ------------- -------------------
ASSETS
Intangible assets............ 84 -- 2,779 -- 2,863
Property, plant and
equipment, net............. 5,524 -- 35,641 -- 41,165
Investments and long-term
financial assets........... 38,386 68,287 15,499 (109,797) 12,375
Equipment on operating
leases, net................ 3,234 -- 32,836 (68) 36,002
------- ------- -------- -------- --------
FIXED ASSETS................... 47,228 68,287 86,755 (109,865) 92,405
------- ------- -------- -------- --------
Inventories.................. 5,428 -- 11,953 (627) 16,754
Trade, finance and other
receivables.................. 11,832 3,250 75,866 (18,818) 72,130
Securities................... 370 -- 3,389 -- 3,759
Cash and cash equivalents.... 2,410 5,393 2,943 -- 10,746
------- ------- -------- -------- --------
NON-FIXED ASSETS............... 20,040 8,643 94,151 (19,445) 103,389
------- ------- -------- -------- --------
DEFERRED TAXES AND PREPAID
EXPENSES....................... 1,979 -- 15,093 (5,456) 11,616
------- ------- -------- -------- --------
TOTAL ASSETS................... 69,247 76,930 195,999 (134,766) 207,410
======= ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
STOCKHOLDERS' EQUITY........... 39,004 18,556 84,874 (103,430) 39,004
------- ------- -------- -------- --------
MINORITY INTERESTS............. -- -- 417 -- 417
------- ------- -------- -------- --------
ACCRUED LIABILITIES............ 8,067 1,603 32,930 (406) 42,194
------- ------- -------- -------- --------
Financial liabilities........ 14,600 54,417 43,351 (21,460) 90,908
Trade liabilities............ 3,138 -- 11,019 -- 14,157
Other liabilities............ 1,969 2,289 9,930 (3,926) 10,262
------- ------- -------- -------- --------
LIABILITIES.................... 19,707 56,706 64,300 (25,386) 115,327
------- ------- -------- -------- --------
DEFERRED TAXES AND DEFERRED
INCOME......................... 2,469 65 13,478 (5,544) 10,468
------- ------- -------- -------- --------
TOTAL LIABILITIES.............. 30,243 58,374 111,125 (31,336) 168,406
------- ------- -------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY........... 69,247 76,930 195,999 (134,766) 207,410
======= ======= ======== ======== ========
Revenues....................... 54,638 -- 136,076 (37,841) 152,873
Cost of sales.................. (42,464) -- (123,492) 37,562 (128,394)
------- ------- -------- -------- --------
GROSS MARGIN..................... 12,174 -- 12,584 (279) 24,479
Selling, administrative and
other expenses............... (6,454) (25) (12,603) 751 (18,331)
Research and development....... (2,821) -- (3,207) 95 (5,933)
Other income................... 393 -- 1,406 (587) 1,212
Turnaround plan
expenses--Chrysler Group..... -- -- (3,064) -- (3,064)
------- ------- -------- -------- --------
INCOME (LOSS) BEFORE FINANCIAL
INCOME......................... 3,292 (25) (4,884) (20) (1,637)
Financial income (expense),
net.......................... (3,146) (5,190) 3,095 5,395 154
------- ------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 146 (5,215) (1,789) 5,375 (1,483)
Income taxes................... (808) 1,073 1,227 (715) 777
Minority interests............. -- -- 44 -- 44
------- ------- -------- -------- --------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECTS OF CHANGES
IN ACCOUNTING PRINCIPLES....... (662) (4,142) (518) 4,660 (662)
------- ------- -------- -------- --------
NET INCOME..................... (662) (4,142) (518) 4,660 (662)
======= ======= ======== ======== ========
</Table>
F-74
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
DAIMLERCHRYSLER OTHER
2001 DAIMLERCHRYSLER AG NORTH AMERICA SUBSIDIARIES CONSOLIDATING DAIMLERCHRYSLER AG
(IN MILLIONS OF [EURO]) (PARENT COMPANY) HOLDING CORPORATION (COMBINED) ADJUSTMENTS (CONSOLIDATED)
- --------------------------------- ------------------- ------------------- ------------ ------------- -------------------
CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES........... 3,892 (1,097) 11,138 2,011 15,944
------- ------- -------- -------- --------
Increase in equipment on
operating leases........... (2,496) -- (15,470) 15 (17,951)
Purchases of property, plant,
equipment and other fixed
assets..................... (1,987) -- (7,619) 55 (9,551)
Proceeds from disposals of
equipment on operating
leases..................... 1,986 -- 9,056 -- 11,042
Proceeds from disposals of
fixed assets............... 322 -- 776 (55) 1,043
Payments for investments in
businesses................. (1,473) -- (141) 793 (821)
Proceeds from disposals of
businesses................. 881 -- 1,592 (793) 1,680
(Increase) decrease in
receivables from financial
services, net.............. 3 -- (1,048) 95 (950)
Disposition of securities
(other than trading),
net........................ 88 2 1,290 -- 1,380
Other........................ (154) (1,292) (5,862) 7,450 142
------- ------- -------- -------- --------
CASH USED FOR INVESTING
ACTIVITIES..................... (2,830) (1,290) (17,426) 7,560 (13,986)
------- ------- -------- -------- --------
Change in financial
liabilities................ 2,198 5,649 5,968 (10,058) 3,757
Dividends paid............... (2,358) -- (1,967) 1,958 (2,367)
Other........................ -- -- 1,480 (1,471) 9
------- ------- -------- -------- --------
CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES......... (160) 5,649 5,481 (9,571) 1,399
------- ------- -------- -------- --------
Effect of foreign exchange rate
changes on cash.............. -- 163 113 -- 276
------- ------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIV............... 902 3,425 (694) -- 3,633
------- ------- -------- -------- --------
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD....... 1,508 1,968 3,606 -- 7,082
------- ------- -------- -------- --------
AT END OF PERIOD............. 2,410 5,393 2,912 -- 10,715
======= ======= ======== ======== ========
</Table>
F-75
<Page>
DAIMLERCHRYSLER AG AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
DAIMLERCHRYSLER AG OTHER
2000 DAIMLERCHRYSLER AG NORTH AMERICA SUBSIDIARIES CONSOLIDATING DAIMLERCHRYSLER
(IN MILLIONS OF [EURO]) (PARENT COMPANY) HOLDING CORPORATION (COMBINED) ADJUSTMENTS (CONSOLIDATED)
- ----------------------------- ------------------- ------------------- ------------ ------------- -------------------
Revenues................... 50,946 -- 147,457 (36,019) 162,384
Cost of sales.............. (39,759) -- (130,010) 35,399 (134,370)
------- ------- -------- ------- --------
GROSS MARGIN................. 11,187 -- 17,447 (620) 28,014
Selling, administrative and
other expenses........... (6,197) (12) (12,794) 700 (18,303)
Research and development... (2,728) -- (3,753) 144 (6,337)
Other income............... 404 -- 997 (455) 946
------- ------- -------- ------- --------
INCOME (LOSS) BEFORE
FINANCIAL INCOME........... 2,666 (12) 1,897 (231) 4,320
Financial income (expense),
net...................... 6,348 (153) 2,950 (8,989) 156
------- ------- -------- ------- --------
INCOME (LOSS) BEFORE INCOME
TAXES...................... 9,014 (165) 4,847 (9,220) 4,476
Income taxes............... (1,141) 1,048 (2,000) 94 (1,999)
Minority interests......... -- -- (12) -- (12)
------- ------- -------- ------- --------
INCOME BEFORE EXTRAORDINARY
ITEMS AND CUMULATIVE
EFFECTS OF CHANGES IN
ACCOUNTING PRINCIPLES...... 7,873 883 2,835 (9,126) 2,465
Extraordinary items........ 14 -- 5,502 -- 5,516
Cumulative effects of
changes in accounting
principles............... 7 (6) (88) -- (87)
------- ------- -------- ------- --------
NET INCOME................. 7,894 877 8,249 (9,126) 7,894
======= ======= ======== ======= ========
CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES....... 7,370 (1,725) 12,726 (2,354) 16,017
------- ------- -------- ------- --------
Increase in equipment on
operating leases......... (2,120) -- (17,032) 35 (19,117)
Purchases of other fixed
assets................... (2,267) -- (8,605) -- (10,872)
Proceeds from disposals of
equipment on operating
leases................... 1,455 -- 6,830 -- 8,285
Proceeds from disposals of
other fixed assets....... 252 -- 610 -- 862
Payments for investments in
businesses............... (3,113) (3) (1,854) 87 (4,883)
Proceeds from disposals of
businesses............... 46 12 340 (87) 311
Increase in receivables
from financial services,
net...................... (142) -- (8,447) 7 (8,582)
Dispositions of securities
(other than trading),
net...................... 519 420 1,499 -- 2,438
Other...................... (336) (11,367) (1,633) 12,185 (1,151)
------- ------- -------- ------- --------
CASH USED FOR INVESTING
ACTIVITIES................. (5,706) (10,938) (28,292) 12,227 (32,709)
------- ------- -------- ------- --------
Change in financial
liabilities.............. 812 14,688 1,568 (201) 16,867
Dividends paid............. (2,358) (390) (2,968) 3,337 (2,379)
Other...................... 24 -- 13,009 (13,009) 24
------- ------- -------- ------- --------
CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES....... (1,522) 14,298 11,609 (9,873) 14,512
------- ------- -------- ------- --------
Effect of foreign exchange
rate changes on cash....... -- 13 488 -- 501
------- ------- -------- ------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIV........ 142 1,648 (3,469) -- (1,679)
------- ------- -------- ------- --------
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD..... 1,366 320 7,075 -- 8,761
------- ------- -------- ------- --------
AT END OF PERIOD........... 1,508 1,968 3,606 -- 7,082
======= ======= ======== ======= ========
</Table>
F-76
<Page>
DAIMLERCHRYSLER AG
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<Table>
<Caption>
BALANCE AT CHARGED TO EXCHANGE RATE BALANCE
BEGINNING COSTS AND AMOUNTS EFFECTS AND AT END
OF 2002 EXPENSES WRITTEN OFF OTHER CHANGES OF 2002
(IN MILLIONS OF [EURO]) ---------- ---------- ----------- ------------- --------
Receivables from financial services...... 1,602 968 (639) (372) 1,559
Trade receivables........................ 646 95 (63) (49) 629
Other receivables........................ 726 28 (11) (20) 723
----- ----- ------ ---- -----
2,974 1,091 (713) (441) 2,911
===== ===== ====== ==== =====
</Table>
<Table>
<Caption>
BALANCE AT CHARGED TO EXCHANGE RATE BALANCE
BEGINNING COSTS AND AMOUNTS EFFECTS AND AT END
OF 2001 EXPENSES WRITTEN OFF OTHER CHANGES OF 2001
(IN MILLIONS OF [EURO]) ---------- ---------- ----------- ------------- --------
Receivables from financial services...... 890 1,358 (783) 137 1,602
Trade receivables........................ 711 21 (49) (37) 646
Other receivables........................ 957 50 (363) 82 726
----- ----- ------ ---- -----
2,558 1,429 (1,195) 182 2,974
===== ===== ====== ==== =====
</Table>
<Table>
<Caption>
BALANCE AT CHARGED TO EXCHANGE RATE BALANCE
BEGINNING COSTS AND AMOUNTS EFFECTS AND AT END
OF 2000 EXPENSES WRITTEN OFF OTHER CHANGES OF 2000
(IN MILLIONS OF [EURO]) ---------- ---------- ----------- ------------- --------
Receivables from financial services...... 599 746 (455) 0 890
Trade receivables........................ 798 79 (37) (129) 711
Other receivables........................ 1,127 109 (339) 60 957
----- ----- ------ ---- -----
2,524 934 (831) (69) 2,558
===== ===== ====== ==== =====
</Table>
S-1
<Page>
INDEX OF EXHIBITS
<Table>
<Caption>
EXHIBIT
--------
Independent Auditors' Report on Schedule and Consent of KPMG
Deutsche Treuhand-Gesellschaft AG........................... 10.1
Independent Auditors' Consent of Deloitte & Touche LLP...... 10.2
Independent Auditor's Report of Deloitte & Touche LLP on the
consolidated financial statements of DaimlerChrysler
Corporation................................................. 10.3
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section906 of the Sarbanes-Oxley Act of 2002.... 99.1
Declaration by the Board of Management and Supervisory Board
of DaimlerChrysler AG pursuant to Section161 Joint Stock
Corporation Act (AktG)...................................... 99.2
</Table>