As filed with the Securities and Exchange Commission on October 16, 1998 Registration Statement No. 333-64195 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- CHRYSLER CORPORATION (Exact name of Registrant as specified in its charter) STATE OF DELAWARE (State of incorporation) 38-2673623 (I.R.S. Employer Identification No.) ------------------------------ 1000 CHRYSLER DRIVE AUBURN HILLS, MICHIGAN 48326-2766 (248) 576-5741 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------------------ RICHARD D. HOUTMAN, ESQ. 1000 CHRYSLER DRIVE AUBURN HILLS, MICHIGAN 48326-2766 (248) 512-3992 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: PAUL H. WILSON, JR., ESQ. J. MICHAEL SCHELL, ESQ. PETER H. DARROW, ESQ. MEREDITH M. BROWN, ESQ. MARGARET L. WOLFF, ESQ. CLEARY, GOTTLIEB, STEEN & HAMILTON DEBEVOISE & PLIMPTON SKADDEN, ARPS, SLATE, MEAGHER & FLOM ONE LIBERTY PLAZA 875 THIRD AVENUE LLP NEW YORK, NEW YORK 10006 NEW YORK, NEW YORK 10022 919 THIRD AVENUE (212) 225-2000 (212) 909-6000 NEW YORK, NEW YORK 10022 (212) 735-3000 -------------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, please check the following box. /X/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPLANATORY NOTE This Registration Statement contains a Prospectus relating to a public offering of [ ] shares of Common Stock of Chrysler Corporation (the "Offering"), together with separate Prospectus pages in connection with a contribution or sale (the "Pension Contribution") of up to [ ] shares of Common Stock of Chrysler Corporation to the Chrysler Corporation Master Retirement Trust and the Chrysler Canada Ltd. Pension Fund. The complete Prospectus for the Offering follows immediately. Following such Prospectus are the following alternate pages with respect to the Pension Contribution: a front cover page, an inside front cover page, a "Prospectus Summary--The Offering" section, a "Use of Proceeds" section, a "Pension Contribution" section and a back cover page. All other pages of the Prospectus for the Offering are to be used for both the Offering and the Pension Contribution, except for the "Selling Shareholder" and "Plan of Distribution" sections, which will be used only for the Offering. The complete prospectuses for each of the Offering and the Pension Contribution in the forms in which they are to be used will be filed with the Commission pursuant to Rule 424 or in an amendment to the Registration Statement. SUBJECT TO COMPLETION, DATED OCTOBER 16, 1998 SHARES INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. [LOGO] COMMON STOCK ($1.00 PAR VALUE) -------------- Chrysler Corporation, a Delaware corporation ("Chrysler"), may offer to or through the underwriters named below shares of Common Stock, par value $1.00 per share, of Chrysler (the "Chrysler Common Stock"). [Certain shares of Chrysler Common Stock may also be sold by Tracinda Corporation (the "Selling Shareholder")] See "Plan of Distribution." The supplement to this Prospectus will describe the number of shares, the method of distribution and the other specific terms of the offering. The Chrysler Common Stock is traded on The New York Stock Exchange (the "NYSE") under the symbol "C." Chrysler has entered into a Business Combination Agreement, dated as of May 7, 1998 (as amended and restated, the "Combination Agreement"), with Daimler-Benz Aktiengesellschaft, a stock corporation (AKTIENGESELLSCHAFT) organized and existing under the laws of the Federal Republic of Germany ("Daimler-Benz"), and DaimlerChrysler AG, a stock corporation (AKTIENGESELLSCHAFT) organized and existing under the laws of the Federal Republic of Germany ("DaimlerChrysler"). The Combination Agreement provides for the business combination of Chrysler and Daimler-Benz in a series of transactions which will result in Chrysler becoming a wholly owned subsidiary of DaimlerChrysler and Daimler-Benz merging with and into DaimlerChrysler, with DaimlerChrysler remaining as the surviving entity. At the effective time of the Chrysler Merger (as hereinafter defined), each share of Chrysler Common Stock offered hereby will be converted into the right to receive 0.6235 of an Ordinary Share, no par value, of DaimlerChrysler (a "DaimlerChrysler Ordinary Share") in connection with the transactions. See "The Transactions." Immediately after the consummation of the transactions, the former stockholders of Chrysler, including the persons who acquire the shares of Chrysler Common Stock in any offering for which this Prospectus is delivered, and the former stockholders of Daimler-Benz will own all of the issued and outstanding DaimlerChrysler Ordinary Shares. This Prospectus contemplates the reissuance of Chrysler Common Stock presently held as treasury shares to enable the transactions to qualify for "pooling-of-interests" accounting treatment. See "Purpose of Offering." Although prior to the completion of any offering for which this Prospectus is delivered, Chrysler and Daimler-Benz will confirm that certain of the conditions to the consummation of the transactions have been met, there can be no assurance that the transactions will be consummated following the completion of any such offering. Chrysler also may contribute or sell (the "Pension Contribution"), prior to consummation of the transactions, all or part of the shares of Chrysler Common Stock covered hereby to the Chrysler Corporation Master Retirement Trust and the Chrysler Canada Ltd. Pension Fund (collectively, the "Trust"). The Trust serves as the funding medium for and holds the assets of various pension and retirement plans maintained by Chrysler and its subsidiaries. If the transactions are not consummated, purchasers of shares of Chrysler Common Stock covered hereby will remain holders of Chrysler Common Stock, a security with investment characteristics that are significantly different from those of the DaimlerChrysler Ordinary Shares expected to be received in connection with the Chrysler Merger. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN CHRYSLER COMMON STOCK OR DAIMLERCHRYSLER ORDINARY SHARES, SEE "RISK FACTORS" BEGINNING ON PAGE 21 HEREIN. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------- JOINT LEAD MANAGERS AND JOINT BOOKRUNNERS CREDIT SUISSE FIRST BOSTON GOLDMAN, SACHS & CO. --------- DEUTSCHE BANK SECURITIES The date of this Prospectus is , 1998. CERTAIN PERSONS PARTICIPATING IN ANY OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CHRYSLER COMMON STOCK OFFERED THEREBY AND THE DAIMLERCHRYSLER ORDINARY SHARES TO BE EXCHANGED THEREFOR UPON CONSUMMATION OF THE CHRYSLER MERGER, INCLUDING STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS IN SUCH OFFERED SECURITIES. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION." As used in this Prospectus, unless the context otherwise requires: "Chrysler" refers to Chrysler Corporation and its consolidated subsidiaries, and "Daimler-Benz" refers to Daimler-Benz Aktiengesellschaft and its consolidated subsidiaries, in each case prior to the consummation of any of the Transactions (as hereinafter defined). As used in this Prospectus, unless the context otherwise requires, the term "DaimlerChrysler" refers to DaimlerChrysler and its consolidated subsidiaries which is to be the owner of all outstanding shares of the surviving corporation following the Chrysler Merger as a result of the Chrysler Exchange (as hereinafter defined) and the successor corporation to Daimler-Benz as a result of the consummation of the Daimler-Benz Exchange Offer and the Daimler-Benz Merger (as hereinafter defined). ------------------------ AVAILABLE INFORMATION Chrysler is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information concerning Chrysler can be inspected and copied at the Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's Regional Offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, New York, New York 10048. Copies of such material can be obtained from the Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Information on the operation of the Commission's Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Certain reports, proxy statements and other information concerning Chrysler may also be obtained at the Commission's World Wide Web site, located at http://www.sec.gov. In addition, material filed by Chrysler can be inspected at the offices of the NYSE at 20 Broad Street, New York, New York 10005. This Prospectus constitutes part of a registration statement on Form S-3 (together with all amendments and exhibits thereto, the "Registration Statement") filed by Chrysler with the Commission under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto. Such information may be obtained from the Commission's principal office in Washington, D.C. at the address set forth above upon payment of the fees prescribed by the Commission. Statements contained in this Prospectus, or in any document incorporated by reference or deemed to be incorporated by reference into this Prospectus with respect to the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each case reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. ------------------------ INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents previously filed by Chrysler with the Commission under the Exchange Act are incorporated herein by reference: i (a) Chrysler's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-9161); (b) Chrysler's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998, June 30, 1998 and September 30, 1998 (File No. 1-9161); (c) Chrysler's Current Reports on Form 8-K, dated February 6, 1998 and May 7, 1998 (File No. 1-9161); (d) The description of the Chrysler Common Stock contained in Chrysler's Registration Statement on Form 8-A (File No. 1-9161) filed with the Commission on May 23, 1986; and (e) The Joint Proxy Statement/Prospectus of Chrysler and DaimlerChrysler (as successor corporation to Daimler-Benz) on Form F-4, filed with the Commission on August 6, 1998, as amended by Post-Effective Amendment No. 1 thereto, filed with the Commission on September 16, 1998, relating to the Transactions (File No. 333-60767). The following document previously filed by Daimler-Benz with the Commission under the Exchange Act is incorporated herein by reference: Daimler-Benz' Annual Report on Form 20-F for the fiscal year ended December 31, 1997 (File No. 1-2356). All documents filed by Chrysler pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, all Forms 20-F filed by Daimler-Benz pursuant to the Exchange Act and all Forms 6-K filed by Daimler-Benz pursuant to the Exchange Act that indicate on the cover page thereof that such Forms 6-K are to be incorporated by reference, after the date of this Prospectus and prior to the date of the consummation of the Transactions shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the date of filing of such documents. Any statements contained herein, or in a document incorporated or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement herein, or in any other subsequently filed document that is or is deemed to be incorporated by reference herein, modifies or supersedes such previous statement. Any statement so modified or superseded shall not be deemed to constitute a part hereof except as so modified or superseded. ------------------------ THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST FROM THE DIRECTOR, INVESTOR RELATIONS, CIMS 485-06-07, CHRYSLER CORPORATION, 1000 CHRYSLER DRIVE, AUBURN HILLS, MICHIGAN 48326-2766, TELEPHONE NUMBER (248) 512-2950. No person has been authorized to give any information or make any representations not contained or incorporated by reference in this Prospectus and, if so given or made, such information or representation must not be relied upon as having been authorized by Chrysler or any other person. This Prospectus does not contain an offer to sell or a solicitation of any seller to buy any securities other than those offered hereby or an offer to sell or a solicitation of any seller to buy any securities in any jurisdiction in which, or to any person to whom, it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor the sale of any securities hereunder shall, under any circumstances, create an implication ii that there has been no change in the affairs of Chrysler since the date hereof or that the information herein is correct as of any time subsequent to its date. ------------------------ ENFORCEABILITY OF CIVIL LIABILITIES Upon completion of the Chrysler Merger, purchasers of the shares of Chrysler Common Stock covered hereby will become holders of ordinary shares of DaimlerChrysler, a stock corporation (AKTIENGESELLSCHAFT) organized under the laws of the Federal Republic of Germany. Following the Transactions most of the members of the Supervisory Board (AUFSICHTSRAT) of DaimlerChrysler (the "DaimlerChrysler Supervisory Board") and a number of the members of the Management Board (VORSTAND) of DaimlerChrysler (the "DaimlerChrysler Management Board") and certain of the officers of DaimlerChrysler and certain experts named herein will reside outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce, in courts outside the United States, judgments against such persons obtained in United States courts and predicated upon the civil liability provisions of the federal securities laws of the United States. Furthermore, since a substantial portion of the assets of DaimlerChrysler will be located outside the United States, any judgment obtained in the United States against DaimlerChrysler may not be collectible within the United States. The Daimler-Benz legal department has advised that German courts will enforce judgments of United States courts for liquidated amounts in civil matters subject to certain conditions and exceptions. Such counsel has expressed no opinion, however, as to whether the enforcement by a German court of any judgment would be effected in any currency other than in German marks ("marks" or "DM") and, if in marks, the date of determination of the applicable exchange rate from United States dollars ("dollars" or "$") to marks. The Daimler-Benz legal department has further advised that there may be doubt as to the enforceability, in original actions in German courts, of liabilities predicated solely upon the federal securities laws of the United States. CURRENCY PRESENTATION AND EXCHANGE RATES For the convenience of the reader, this Prospectus contains translations of certain mark amounts into dollar amounts, and dollar amounts into mark amounts, at specified exchange rates. Unless otherwise indicated, the translation of marks into dollars and of dollars into marks herein has been made at the indicated noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate") on June 30, 1998, which was DM 1.8033 per $1.00. Such rate may differ from the actual rates used in the preparation of the consolidated financial statements and the selected consolidated financial data of Daimler-Benz and the pro forma financial information for DaimlerChrysler included or incorporated by reference in this Prospectus, which are expressed in marks. Accordingly, dollar amounts appearing herein may differ from the actual dollar amounts that were translated into marks in the preparation of such financial statements, data and information. Fluctuations in the exchange rate between the dollar and the mark will affect the dollar equivalent of the mark price of DaimlerChrysler Ordinary Shares traded on the German stock exchanges and, as a result, are likely to affect the market price of the DaimlerChrysler Ordinary Shares on the NYSE. Such fluctuations will also affect the dollar amounts received by holders of DaimlerChrysler Ordinary Shares on the conversion by The Bank of New York, DaimlerChrysler's transfer agent and registrar in New York, New York (the "U.S. Transfer Agent"), into dollars of cash dividends declared in marks on the DaimlerChrysler Ordinary Shares. iii The following table sets forth, for the periods and dates indicated, the average, high, low and period-end Noon Buying Rates for marks expressed in marks per $1. YEAR ENDED DECEMBER 31, AVERAGE(1) HIGH LOW PERIOD-END - ------------------------------------------------------ ------------- ------------- ------------- ------------- 1993.................................................. DM 1.6610 DM 1.7405 DM 1.5675 DM 1.7395 1994.................................................. 1.6119 1.7627 1.4920 1.5495 1995.................................................. 1.4261 1.5612 1.3565 1.4345 1996.................................................. 1.5070 1.5655 1.4354 1.5387 1997.................................................. 1.7394 1.8810 1.5413 1.7991 1998 (through October 14, 1998)....................... 1.7872 1.8542 1.6060 1.6408 - ------------------------ (1) The average of the Noon Buying Rates on the last business day of each month during the relevant period. FORWARD-LOOKING INFORMATION This Prospectus contains or incorporates by reference certain forward-looking statements and information relating to Chrysler, DaimlerChrysler and Daimler-Benz that are based on the beliefs of their respective managements as well as assumptions made by and information currently available to each of Chrysler, DaimlerChrysler and Daimler-Benz. When used in this document, the words "anticipate," "believe," "estimate," "expect," "plan" and "intend" and similar expressions, as they relate to Chrysler, DaimlerChrysler or Daimler-Benz or their respective managements, are intended to identify forward-looking statements. Such statements reflect the current views of each such company with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the actual results, performance or achievements of Chrysler, Daimler-Benz or DaimlerChrysler to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, among others, changes in general economic and business conditions, changes in currency exchange rates, introduction of competing products by other companies, lack of acceptance of new products or services by Chrysler's, Daimler-Benz' or DaimlerChrysler's targeted customers, changes in business strategy, risks that the synergies anticipated from the Transactions may not be fully realized and various other factors, both referenced and not referenced in this Prospectus. See "Risk Factors." Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, planned or intended. None of Chrysler, DaimlerChrysler or Daimler-Benz intends, or assumes any obligation, to update these forward-looking statements. iv SUMMARY THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS NOT, AND IS NOT INTENDED TO BE, COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND THE DOCUMENTS REFERRED TO OR INCORPORATED HEREIN BY REFERENCE. THE COMPANY Chrysler and its consolidated subsidiaries operate in two principal industry segments: Automotive Operations and Financial Services. Automotive Operations include the research, design, manufacture, assembly and sale of cars, trucks and related parts and accessories. Substantially all of Chrysler's automotive products are marketed through retail dealerships, most of which are privately owned and financed. Financial Services include the operations of Chrysler Financial Corporation ("CFC") and its consolidated subsidiaries, which are engaged principally in providing consumer and dealer automotive financing for Chrysler's products. THE BUSINESS COMBINATION On May 7, 1998, Chrysler announced that it would be combining its businesses with those of Daimler-Benz, the largest industrial group in Germany. The businesses of the two companies are combining through the Transactions provided for in the Combination Agreement, which will have the effect of combining the respective businesses, stockholder groups, managements and other constituencies of Chrysler and Daimler-Benz in a "merger-of-equals" transaction. The entity created by the combination will be called DaimlerChrysler. Immediately after the consummation of the Transactions, the former stockholders of Chrysler, including the persons who acquire the shares of Chrysler Common Stock covered hereby, and of Daimler-Benz will own all of the issued and outstanding DaimlerChrysler Ordinary Shares. Each share of Chrysler Common Stock covered hereby will be converted into the right to receive 0.6235 of a DaimlerChrysler Ordinary Share. The combination of Chrysler and Daimler-Benz was initiated because top management of Chrysler and Daimler-Benz shared the view that consolidation in the worldwide automotive industry was likely in light of industry overcapacity and the potential benefits of combining automotive companies arising from joint product design, development and manufacturing, combined purchasing, other economies of scale and brand expansion and diversification. Industry overcapacity has led to increased competitiveness in the automotive industry, particularly with respect to pricing, which could affect profitability. Chrysler and Daimler-Benz entered into the Combination Agreement so that they could play a leading role in this process of expected industry consolidation and choose a partner with optimal strategic fit. STRATEGIC RATIONALE FOR THE BUSINESS COMBINATION The combination of Chrysler and Daimler-Benz will create a leading automotive company well positioned to exploit the growth opportunities of the global automotive market. Expected strategic benefits include: - SIZE. DaimlerChrysler will be one of the world's largest automotive manufacturers in terms of revenues, market capitalization, earnings and unit sales, based on pro forma 1997 results. It will have significant financial strength and access to financial resources to develop new products and to expand its business in emerging markets, including those in Asia and Latin America. DaimlerChrysler's pro forma revenues for 1997 and the first six months of 1998 were approximately $127.1 billion and $71.2 billion, respectively. DaimlerChrysler's pro forma net income for 1997 and the first six months of 1998 were approximately $4.5 billion (exclusive of approximately $2.7 billion of special, non-recurring tax benefits) and $3.2 billion, respectively. 1 - COMPREHENSIVE PORTFOLIO OF PRODUCTS AND BRANDS. DaimlerChrysler's automotive products will cover virtually the entire range of market segments. Daimler-Benz' strength in premium automobiles complements Chrysler's strength in sport-utility vehicles and minivans. DaimlerChrysler's principal automotive brands will be Chrysler, Dodge, Jeep-Registered Trademark-, Mercedes-Benz, Plymouth and smart. In addition, DaimlerChrysler will market commercial vehicles carrying the Freightliner, Mercedes-Benz, Setra and Sterling brand names. - CAPACITY UTILIZATION. Both Chrysler and Daimler-Benz currently operate at or near full capacity. Management believes that the combined companies will be able to allocate production to utilize capacity even more effectively. - DISTRIBUTION. Daimler-Benz provides an expanded distribution system for Chrysler cars and trucks. For example, in Latin America, Daimler-Benz' commercial vehicle distribution system can be used for Chrysler's light trucks. - MANUFACTURING AND DESIGN. Chrysler's strength in product development complements Daimler-Benz' strength in quality and engineering. - SYNERGIES. Chrysler and Daimler-Benz management expect the business combination to lead to savings of $1.4 billion in 1999, the first year of merged operations, with annual benefits of $3.0 billion within three to five years. These savings are expected to be achieved through the exchange of components and technologies, combined purchasing power, shared distribution logistics, and shared know-how in engineering and manufacturing. - NON-AUTOMOTIVE BUSINESSES. Daimler-Benz' non-automotive businesses, including aerospace, services and rail systems, diesel engines and automotive electronics operations, should enable DaimlerChrysler to be a world leader in the areas of traffic and transportation. CHRYSLER AUTOMOTIVE OPERATIONS. Chrysler manufactures, assembles and sells cars and trucks under the brand names Chrysler, Dodge, Jeep-Registered Trademark- and Plymouth, and related automotive parts and accessories, primarily in the United States, Canada and Mexico. Passenger cars are offered in various size classes and models. Chrysler produces trucks in pickup, sport-utility and van/wagon models, which constitute the largest segments of the truck market. Chrysler also purchases and distributes certain passenger cars manufactured in the United States by Mitsubishi Motor Manufacturing of America, a subsidiary of Mitsubishi Motors Corporation. Although Chrysler currently sells most of its vehicles in North America, Chrysler also participates in other international markets through its wholly owned subsidiaries in Argentina, Brazil, Venezuela, Taiwan, Korea, Japan, Thailand, Egypt, Austria, Italy, France, Belgium, the Netherlands and Germany, a joint venture in Austria, and through minority-owned affiliates located in China and Egypt. Chrysler sells vehicles and parts, and provides related services, to independent distributors and dealers in various other markets throughout the world. FINANCIAL SERVICES. Chrysler's wholly owned subsidiary CFC is a financial services organization that provides retail and lease financing for vehicles, dealer inventory and other financing needs, dealer property and casualty insurance and dealership facility development and management, primarily for Chrysler dealers and their customers. CFC is the major source of wholesale and retail financing for Chrysler vehicles throughout North America. CFC also offers dealers working capital loans, real estate and equipment financing and financing plans for fleet buyers, including daily rental car companies. The automotive financing operations of CFC are conducted through 29 zone offices in the United States and Canada (Chrysler Credit Canada Ltd.). CFC also provides automotive financial products and services in Europe and Asia. 2 During 1997, CFC financed or leased approximately 870,000 new and used vehicles at retail in the United States, including approximately 611,000 new Chrysler passenger cars and light-duty trucks, representing 27 percent of Chrysler's U.S. retail and fleet deliveries. During 1997, CFC financed or leased approximately 114,000 vehicles at retail in Canada, including approximately 102,000 new Chrysler cars and trucks, representing 40 percent of Chrysler's Canadian retail and fleet deliveries. CFC also financed approximately 1,625,000 and 175,000 new Chrysler passenger cars and light-duty trucks at wholesale in the U.S. and Canada, respectively, representing 70 percent and 66 percent of Chrysler's U.S. and Canadian vehicle shipments, respectively, in 1997. Chrysler's principal executive offices are located at Chrysler World Headquarters, 1000 Chrysler Drive, Auburn Hills, Michigan 48326-2766, and its telephone number is (248) 576-5741. DAIMLER-BENZ Daimler-Benz operates in four business segments--Automotive (Passenger Cars and Commercial Vehicles), Aerospace, Services and Directly Managed Businesses. Daimler-Benz is primarily active in Europe, North and South America and Japan and is continuing to expand in markets such as Eastern Europe and East and Southeast Asia, which are also assuming strategic importance as production locations. In 1997, approximately 33% of Daimler-Benz' revenues was derived from sales in Germany, 25% from sales in other member states of the European Union and 21% from sales in the United States and Canada. AUTOMOTIVE. Daimler-Benz is world renowned for its high quality luxury Mercedes-Benz passenger cars which reflect a long tradition of exceptional engineering, performance, service and safety. Daimler-Benz is also the world's leading manufacturer of trucks over six metric tons ("t") gross vehicle weight ("GVW") and of buses over 8t GVW. It manufactures and assembles passenger cars and commercial vehicles in 46 manufacturing plants and assembly facilities on six continents reaching across all product lines and has a worldwide distribution and service network. The Automotive segment contributed approximately 71% of Daimler-Benz' revenues in 1997. The passenger car division has one of the world's strongest car brand names, and the number one position in the upper luxury segment of the passenger car market. It has added new innovative products which give Daimler-Benz access to new markets and customer segments. These products include the A-Class, the M-Class, the SLK, the CLK and, as a second brand, the smart, a two-seat eight foot long car designed for heavily congested city use. With the new S-Class, introduced in the fall of 1998, the passenger car division expects to solidify its leading position in the upper luxury segment. The commercial vehicle division has updated the entire range of vans and trucks it offers in the European market. Following the introduction of three new van lines and the Actros truck line in the heavy weight category, the presentation in early 1998 of the Atego truck in the light and medium weight categories represents the most recent step in this innovation cycle. In the United States, Freightliner expects to strengthen its leading market position with the new Sterling product line derived from the heavy truck lines it has acquired from Ford Motor Company. AEROSPACE. Daimler-Benz Aerospace is one of the leading European aerospace companies and the German partner (with a 37.9% share) in the European Airbus consortium, Airbus Industrie G.I.E. ("Airbus"). Principal Aerospace activities include civil aircraft and helicopters, military aircraft, space systems infrastructure, satellites, defense and civil systems and aeroengines. Aerospace contributed approximately 12% of Daimler-Benz' revenues in 1997. At Daimler-Benz Aerospace, comprehensive cost-cutting and restructuring measures markedly improved its competitive position. The pronounced increase of incoming orders for Airbus aircraft in 1997 and early 1998 will define the civilian aircraft business of Daimler-Benz during the next several years. The 3 anticipated combination of the Airbus activities into a single corporate entity will form the basis for future efficiency and productivity gains, thereby further strengthening the competitive position of Airbus. SERVICES. Daimler-Benz InterServices ("debis") engages in financial services supporting the sale of Mercedes-Benz cars and trucks and other Daimler-Benz products, insurance brokerage, information technology services, telecommunications and media services, trading and real estate management services. debis contributed approximately 11% of Daimler-Benz' revenues in 1997. debis is using the strong growth potential of the service industry to position itself to compete successfully in promising markets, primarily in the areas of financial services, information technology and telecommunications and media services. It also will continue to expand internationally and strive to open up new markets, primarily in Asia, Latin America and Northern Europe. DIRECTLY MANAGED BUSINESSES. This segment consists of rail systems, automotive electronics and diesel engines. The semiconductor activities which were part of this segment in 1997 were sold in March 1998. This segment contributed approximately 6% of Daimler-Benz' revenues in 1997. Within the Directly Managed Businesses, Adtranz, the rail systems joint venture between Daimler-Benz and ABB, has positioned itself as one of the leaders in the global rail transportation market. It will continue to concentrate on its core competencies and use every opportunity to achieve greater economies of scale, for example through increased use of modularization in product development. Through these and other measures, Adtranz expects to lower its cost base in order to achieve positive results and continue to deliver competitive products and systems. Since the sale of the semiconductor activities, Daimler-Benz' microelectronics activities have focused exclusively on the fast growing automotive electronics market. MTU/Diesel Engines has introduced a series of new and innovative products and will work on expanding its market position, primarily in the area of diesel engines for civilian applications. Daimler-Benz' principal executive offices are located at Epplestrasse 225, 70567 Stuttgart, Germany, and its telephone number is 011-49-711-17-0. DAIMLERCHRYSLER DaimlerChrysler is a newly formed AKTIENGESELLSCHAFT organized and existing under the laws of the Federal Republic of Germany that has not, to date, conducted any activities other than those incident to its formation, and its execution of and performance of its obligations under, the Combination Agreement and related agreements. DaimlerChrysler will be the successor corporation to Daimler-Benz following consummation of the Daimler-Benz Exchange Offer and the Daimler-Benz Merger. As a result of the Transactions, the business of DaimlerChrysler and its subsidiaries will be the businesses currently conducted by Chrysler and Daimler-Benz. Immediately after the consummation of the Transactions, based upon the number of shares of Chrysler Common Stock and no par value Ordinary Shares of Daimler-Benz ("Daimler-Benz Ordinary Shares") issued and outstanding on July 20, 1998, the former stockholders of Chrysler, including the persons who acquire the shares of Chrysler Common Stock covered hereby, will own approximately 42% and the former stockholders of Daimler-Benz will own approximately 58% of the outstanding DaimlerChrysler Ordinary Shares. The following table sets forth the respective percentage contributions of Daimler-Benz and Chrysler to the pro forma total revenues and pro forma income before income taxes of DaimlerChrysler for the year 4 ended December 31, 1997 and for the six months ended June 30, 1998, and to the pro forma net assets of DaimlerChrysler as at June 30, 1998. DAIMLER-BENZ CHRYSLER ----------------- ------------- Pro Forma Total Revenues Year ended December 31, 1997....................................... 54% 46% Six months ended June 30, 1998..................................... 53% 47% Pro forma Income Before Income Taxes Year ended December 31, 1997....................................... 35% 65% Six months ended June 30, 1998..................................... 40% 60% Pro forma Net Assets at June 30, 1998................................ 56% 44% There are currently no plans for the combined company to change the nature of the business operations of Daimler-Benz and Chrysler described above. Following consummation of the Chrysler Merger, DaimlerChrysler will have its registered seat in Stuttgart, Germany and will maintain two operational headquarters--one located at the current Chrysler headquarters, 1000 Chrysler Drive, Auburn Hills, Michigan 48326-2766, and one located at the current Daimler-Benz headquarters, Epplestrasse 225, 70567 Stuttgart, Germany. THE TRANSACTIONS GENERAL Chrysler has entered into the Combination Agreement with Daimler-Benz and DaimlerChrysler, pursuant to which (i) DaimlerChrysler has commenced an offer (the "Daimler-Benz Exchange Offer") to (a) the holders of Daimler-Benz Ordinary Shares, to exchange one DaimlerChrysler Ordinary Share for each Daimler-Benz Ordinary Share held by such holder, and (b) the holders of American Depositary Shares of Daimler-Benz each representing one Daimler-Benz Ordinary Share (the "Daimler-Benz ADSs"), to exchange one DaimlerChrysler Ordinary Share for each Daimler-Benz ADS held by such holder; PROVIDED that, if at least 90% of the outstanding Daimler-Benz Ordinary Shares, including Daimler-Benz Ordinary Shares represented by Daimler-Benz ADSs were tendered so that the Transactions can be accounted for as a pooling-of-interests, then each exchanging holder will receive 1.005 DaimlerChrysler Ordinary Shares for each share exchanged (such ratio referred to in the foregoing clauses (a) and (b), as it may be so adjusted, being referred to herein as the "Daimler-Benz Exchange Offer Ratio"); (ii) Immediately following consummation of the Daimler-Benz Exchange Offer, and after the completion of this offering, a newly incorporated Delaware corporation will merge with and into Chrysler (the "Chrysler Merger"). In the Chrysler Merger, each share of Chrysler Common Stock (other than Chrysler Common Stock held in treasury or by a wholly owned subsidiary of Chrysler) will be converted into the right to receive 0.6235 (the "U.S. Exchange Ratio") of a DaimlerChrysler Ordinary Share; and (iii) As soon as possible following the consummation of the Chrysler Merger, Daimler-Benz will merge with and into DaimlerChrysler (the "Daimler-Benz Merger" and, together with the Chrysler Merger, the "Mergers"). As a result of the Daimler-Benz Merger, (a) each outstanding Daimler-Benz Ordinary Share will be converted into the right to receive that number of DaimlerChrysler Ordinary Shares equal to the Daimler-Benz Exchange Offer Ratio and (b) each outstanding Daimler-Benz ADS will be converted into the right to receive that number of DaimlerChrysler Ordinary Shares equal to the Daimler-Benz Exchange Offer Ratio (such exchange ratio being referred to herein as the "Daimler-Benz Merger Exchange Ratio"). The Mergers, including the U.S. Share Exchange (as hereinafter defined) and the Daimler-Benz Exchange Offer, are referred to collectively as the "Transactions." 5 At a special meeting of stockholders of Chrysler held on September 18, 1998, Chrysler stockholders approved and adopted the Combination Agreement and the transactions contemplated thereby, including the Chrysler Merger. Chrysler stockholders are not entitled to appraisal rights under the Delaware General Corporation Law ("DGCL") in connection with the Chrysler Merger. As soon as possible after the time the Chrysler Merger becomes effective in accordance with applicable law (the "Chrysler Effective Time"), DaimlerChrysler will issue the DaimlerChrysler Ordinary Shares to be issued in the Chrysler Merger to The Bank of New York (the "U.S. Exchange Agent") for the account of the former stockholders of Chrysler, and the U.S. Exchange Agent will contribute, for the account of the former stockholders of Chrysler, all of the issued and outstanding common stock of the surviving corporation in the Chrysler Merger to DaimlerChrysler as a transfer in kind (the "U.S. Share Exchange" and, together with the Chrysler Merger, the "Chrysler Exchange"). As a result of the Transactions, if the Chrysler Merger takes place promptly after the delivery of the shares of Chrysler Common Stock offered hereby to the Underwriters, the Underwriters will deliver 0.6235 of a DaimlerChrysler Ordinary Share for each share of Chrysler Common Stock purchased by the purchasers. See "Plan of Distribution." GOVERNANCE OF DAIMLERCHRYSLER FOLLOWING THE CHRYSLER MERGER Chrysler, Daimler-Benz and DaimlerChrysler have agreed that following the Chrysler Effective Time DaimlerChrysler shall have a corporate governance structure reflecting that the Transactions contemplate a "merger-of-equals." The parties have agreed that: (i) the Articles of Association (SATZUNG) of DaimlerChrysler (the "DaimlerChrysler Articles of Association") and the Management Board (VORSTAND) Rules of Procedure (GESCHAFTSORDNUNG) of DaimlerChrysler, in each case, following the Chrysler Effective Time, shall be in form and substance reasonably acceptable to Chrysler and Daimler-Benz. (ii) until the DaimlerChrysler Supervisory Board has to be composed in accordance with Germany's Co-determination Law of 1976, the DaimlerChrysler Supervisory Board shall be composed of twelve members representing the stockholders, six of whom shall have been recommended, immediately prior to the Chrysler Effective Time, by Daimler-Benz from the then-current non- employee representative members (ANTEILSEIGNERVERTRETER) of the Daimler-Benz Supervisory Board and six of whom shall have been recommended, immediately prior to the Chrysler Effective Time, by Chrysler from the then-current outside members of the Board of Directors of Chrysler (the "Chrysler Board"). For the period thereafter, the DaimlerChrysler Supervisory Board shall consist of twenty members; five of the members of the restructured DaimlerChrysler Supervisory Board shall have been recommended by Daimler-Benz from non-employee representative members (ANTEILSEIGNERVERTRETER) of the Daimler-Benz Supervisory Board, five of the members shall have been recommended by Chrysler from the outside members of the Chrysler Board, and the remaining ten members shall be employee representatives. The German metalworkers union IG Metall and the United Automobile Workers union (the "UAW") have announced that IG Metall will nominate a UAW member for election to one of the three seats on the DaimlerChrysler Supervisory Board reserved for nominees of IG Metall. (iii) for a period of not less than two years following the Chrysler Effective Time, the current Chairman of Daimler-Benz' Supervisory Board (AUFSICHTSRAT) shall continue as the Chairman of the DaimlerChrysler Supervisory Board. (iv) the DaimlerChrysler Management Board shall initially consist of 18 members. In general, 50% of such members shall be those designated by Chrysler, and 50% of such members shall be those designated by Daimler-Benz, and there will be two additional members with responsibility for Daimler-Benz' non-automotive businesses. For three years following the Effective Time, Jurgen E. Schrempp and Robert J. Eaton shall be the Co-CEOs and Co-Chairmen of the DaimlerChrysler 6 Management Board (VORSTANDSVORSITZENDE) and members of the Office of the Chairmen of DaimlerChrysler. Mr. Eaton has indicated his intention to retire from such position after three years. The Combination Agreement also provides that (a) the DaimlerChrysler Management Board will also establish an Integration Committee with a consultative function which will consist of the Co-Chairmen of the DaimlerChrysler Management Board (VORSTANDSVORSITZENDE), who will also serve as Co-Chairmen of the Integration Committee, and 12 or more members (including such Co-Chairmen), 50% of whom will initially be designated by Chrysler and 50% of whom will initially be designated by Daimler-Benz; (b) following the Chrysler Effective Time, DaimlerChrysler shall maintain two operational headquarters, one located at the current headquarters of Chrysler and one located at the current headquarters of Daimler-Benz; and (c) following the Chrysler Effective Time, English shall be the official language for the management of DaimlerChrysler. See "The Transactions--Governance of DaimlerChrysler." The Combination Agreement contains no provisions that would bar governance changes after the Transactions have been consummated. CONDITIONS TO THE TRANSACTIONS Although prior to the issuance of the shares of Chrysler Common Stock covered hereby, Chrysler and Daimler-Benz will confirm that certain of the conditions to the consummation of the Transactions have been met, there can be no assurance that the Transactions will be consummated following the completion of such issuance. Consummation of the Transactions is subject to various conditions, including, among others, the consummation of the Daimler-Benz Exchange Offer, the receipt of tax opinions from the respective tax counsel of Daimler-Benz and Chrysler regarding certain United States federal income and German tax consequences of the Transactions and the receipt by Chrysler of a private letter ruling from the United States Internal Revenue Service (the "IRS"), which was received from the IRS on September 4, 1998. If the Transactions are not consummated, purchasers of the shares of Chrysler Common Stock covered hereby will remain holders of Chrysler Common Stock, a security with investment characteristics that are significantly different from those of the DaimlerChrysler Ordinary Shares expected to be received in connection with the Chrysler Merger. See "The Transactions--Conditions to the Transactions." DESCRIPTION OF DAIMLERCHRYSLER ORDINARY SHARES The share capital of DaimlerChrysler consists of DaimlerChrysler Ordinary Shares issued in registered form. Record holders of DaimlerChrysler Ordinary Shares will be registered in the share register (AKTIENBUCH) administered on behalf of DaimlerChrysler by the Transfer Agents (as hereinafter defined) pursuant to the Transfer Agent Agreement (as hereinafter defined). The Transfer Agents will together maintain the register of stockholders of DaimlerChrysler. Generally, the share capital of DaimlerChrysler may be increased (other than by contingent capital or authorized capital) in consideration of contributions in cash or in property by a resolution passed at a general meeting of the stockholders of DaimlerChrysler by a majority of the votes cast or at least a majority of the issued shares represented at the meeting of the stockholders at which the resolutions are passed. See "Description of DaimlerChrysler Ordinary Shares." STOCK EXCHANGE LISTING The DaimlerChrysler Ordinary Shares have been approved for listing, subject to official notice of issuance, on the NYSE and will trade thereon under the symbol "DCX," and it is expected that the DaimlerChrysler Ordinary Shares will be approved for listing on the FSE. In addition, it is expected that DaimlerChrysler Ordinary Shares will be traded on the Chicago, Pacific, Philadelphia, London, Paris, Montreal, Toronto, Swiss, Vienna and Tokyo stock exchanges as well as all German stock exchanges. There is currently no public market for the DaimlerChrysler Ordinary Shares. Because holders of Daimler-Benz Ordinary Shares and Daimler-Benz ADSs will have the right to exchange one Daimler-Benz Ordinary 7 Share or one Daimler-Benz ADS for one DaimlerChrysler Ordinary Share (or 1.005 DaimlerChrysler Ordinary Shares, as the case may be) pursuant to the Daimler-Benz Exchange Offer, it is expected that the market price of a DaimlerChrysler Ordinary Share received in the Chrysler Exchange or the Daimler-Benz Exchange Offer should be substantially equivalent to the market price of a Daimler-Benz Ordinary Share immediately prior to the consummation of the Daimler-Benz Exchange Offer. See "Market Prices" and "Risk Factors." DIVIDENDS The Daimler-Benz Management Board (VORSTAND) (the "Daimler-Benz Management Board") and the Chrysler Board have determined, and the prospective DaimlerChrysler Management Board has indicated its concurrence, that an appropriate dividend policy for DaimlerChrysler under current business and economic conditions would result in DaimlerChrysler paying approximately the same annual dividend amount currently paid to Chrysler stockholders (after giving effect to the change in share ownership resulting from the U.S. Exchange Ratio). The dividend would be paid annually after the DaimlerChrysler annual stockholders meeting, subject to stockholder approval. Although dividends will be paid in marks (or, following the changeover by DaimlerChrysler to the Euro, in Euros), for purposes of distribution to holders of DaimlerChrysler Ordinary Shares in the United States, such amounts will be converted by the U.S. Transfer Agent into dollars, at the holder's election. There can be no assurance as to the actual level of dividends that will be paid in any year. See "Dividends." RECENT DEVELOPMENTS CHRYSLER'S RESULTS FOR THE THIRD QUARTER OF 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 Chrysler reported earnings before income taxes of $1.079 billion for the third quarter of 1998 compared with $726 million for the third quarter of 1997. For the first nine months of 1998, Chrysler reported earnings before income taxes of $4.353 billion, compared with $3.241 billion for the first nine months of 1997. Net earnings for the third quarter of 1998 were $682 million, or $1.05 per common share ($1.02 per diluted common share), compared with $441 million, or $0.66 per common share ($0.65 per diluted common share), for the third quarter of 1997. Net earnings for the first nine months of 1998 were $2.737 billion, or $4.23 per common share ($4.14 per diluted common share), compared with $1.953 billion, or $2.86 per common share ($2.82 per diluted common share), for the first nine months of 1997. The increase in earnings for the third quarter of 1998 compared with the third quarter of 1997 primarily reflects an increase in vehicle shipments, partially offset by an increase in depreciation and special tools amortization. The increase in earnings for the first nine months of 1998 compared with the first nine months of 1997 primarily reflects an increase in vehicle shipments and decreased warranty costs, partially offset by an increase in average sales incentives and depreciation and special tools amortization. Vehicle shipments for the first nine months of 1997 were negatively impacted by the 29-day strike at an engine plant in Detroit, Michigan. The decrease in warranty costs was primarily related to several voluntary customer service actions and recalls which occurred in 1997. The increase in average sales incentives was attributable to an increasingly competitive automotive market environment. Earnings for the third quarter and first nine months of 1997 also included a $41 million charge ($25 million after taxes) for costs related to discontinuing Chrysler's Eagle brand at the end of the 1998 model year. Chrysler's worldwide vehicle shipments in the third quarter and first nine months of 1998 were 673,163 units and 2,348,252 units, respectively, compared with 605,356 units and 2,125,048 units, respectively, in the third quarter and first nine months of 1997. The increase in worldwide shipments for the third quarter of 1998, as compared to the third quarter of 1997, primarily reflects increased shipments of Chrysler's Dodge Durango and full-size sedans, partially offset by decreased shipments of Jeep(-Registered Trademark-) Grand Cherokees. The increase in worldwide shipments for the first nine months of 1998, as compared to the first nine months of 1997, primarily reflects increased shipments of Chrysler's Dodge Durango and Dodge Ram 8 pickup trucks as well as a general increase in passenger cars, partially offset by decreased shipments of Jeep Grand Cherokees. Decreased shipments of Jeep Grand Cherokees resulted from the changeover to the all-new Jeep Grand Cherokee which began in the second quarter of 1998 and was substantially completed in the third quarter of 1998. Shipments for the first nine months of 1997 also reflect the unfavorable impact of a 29-day strike during the second quarter of 1997. Chrysler's vehicle shipments outside of the U.S., Canada and Mexico in the third quarter and first nine months of 1998 were 38,228 units and 145,919 units, respectively, compared with 54,138 units and 179,298 units, respectively, in the third quarter and first nine months of 1997. The decrease in shipments outside of the U.S., Canada and Mexico is primarily caused by economic difficulties in Asian markets. Chrysler's revenues and results of operations are principally derived from the U.S. and Canada automotive marketplaces. In the third quarter of 1998, retail industry sales (including fleet) of new cars and trucks in the U.S. and Canada, on a Seasonally Adjusted Annual Rate basis, were 16.7 million units compared with 17.2 million units for the third quarter of 1997. In the first nine months of 1998, retail industry sales (including fleet) of new cars and trucks in the U.S. and Canada, on a Seasonally Adjusted Rate basis, were 17.1 million units compared with 16.9 million units for the first nine months of 1997. DAIMLER-BENZ' RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 Daimler-Benz revenues for the first six months of 1998 were DM 67.7 billion, a 21.1% increase from the DM 55.9 billion of revenues achieved in the same period of 1997. Revenues of Daimler-Benz' Passenger Car division rose 22.7% to DM 30.6 billion compared to DM 25.0 billion in the first half of 1997, while revenues of Daimler-Benz' Commercial Vehicle division increased 21.5% from DM 17.8 billion to DM 21.7 billion. Daimler-Benz' Aerospace segment revenues in the first half of 1998 were DM 7.6 billion and exceeded revenues for the comparable period in 1997 (DM 6.7 billion) by 13.2%. Revenues in Daimler-Benz' Services segment improved by 21.7% and revenues of Directly Managed Business segment decreased 6.0%. Excluding the 1997 revenues of the semiconductor business of Daimler-Benz sold in the first half of 1998, revenues of the Directly Managed Business segment increased 19.2%. Cost of sales and selling, administrative and other expenses, in the aggregate, decreased as a percentage of revenues from 93.8% to 92.1%. In the first half of 1998 Daimler-Benz had an operating profit of DM 3.8 billion compared to DM 1.8 billion in the first six months of 1997. The business segment contributions to Daimler-Benz' operating profit in the first half of 1998 were as follows: Passenger Car division, DM 2.1 billion (first half of 1997: DM 1.5 billion); Commercial Vehicle division, DM 0.9 billion (first half of 1997: break even); Aerospace, DM 0.3 billion (first half of 1997: DM 0.1 billion); Services, DM 0.4 billion (first half of 1997: DM 0.2 billion); and the Directly Managed Businesses, DM 0.2 billion (first half of 1997: DM 0.1 billion). Net income of Daimler-Benz for the first six months of 1998 was DM 2.0 billion, compared to DM 1.0 billion for the same period in 1997. Worldwide unit sales of the Daimler-Benz' Passenger Car division during the time period from January 1 to June 30, 1998 were 427.7 thousand, an increase of 27.4% compared to the first six months of 1997 (335.8 thousand cars). Unit sales for the Commercial Vehicle division rose 19.2% from 192.0 thousand units to 228.9 thousand units. In the first six months of 1998, the Passenger Car division produced 433.1 thousand automobiles, 28.7% more than during the same period of the previous year, while production of commercial vehicles increased 21.3% from 202.0 thousand to 245.0 thousand vehicles. Incoming orders at Daimler-Benz Aerospace for the first six months of 1998 were DM 13.4 billion compared to DM 6.5 billion in the first six months of 1997. 9 INTRODUCTION OF THE SINGLE EUROPEAN CURRENCY On January 1, 1999, eleven member states of the European Union--Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain--will introduce the Euro as a common legal currency among those states for "paperless" transactions, pending the substitution of Euro banknotes and coins for the national currencies of the participating member states. As of that date, fixed exchange rates will be introduced, according to which funds denominated in the currency of one participating member state will be converted into the currency of another participating member state. It is anticipated that by July 1, 2002, the Euro will be the official legal tender for the participating member states and that the national currencies of those member states will be withdrawn from circulation. Daimler-Benz has committed to adopting the Euro as its corporate currency throughout its operations beginning January 1, 1999. Recognizing its significant manufacturing and transactional activity within Europe, the management of Daimler-Benz believes that it will realize significant long-term benefits from adoption of the Euro by capitalizing on the greater transparency and market efficiency resulting from the institution of a single European currency. The management of Daimler-Benz believes that its revenue and cost results with respect to products which it manufactures, exports, markets and sells in the eleven participating member states will be exchange rate neutral, and therefore the introduction of the Euro is likely to enhance the overall operating results of the Daimler-Benz group to some degree. As sales and production costs will both be calculated in Euros, it will also be easier for Daimler-Benz to monitor its price competitiveness relative to its competitors in the participating member states. In addition, the introduction of the Euro should, over varying periods of time, produce the following effects: BUSINESS AND COMPETITIVE IMPLICATIONS. Daimler-Benz is reviewing the various ways in which the introduction of the Euro will affect its business and competitive position. It is expected that the introduction of the Euro will result in greater market efficiency and will foster a more competitive economic environment within and among the participating member states. This is largely a function of the fact that the pricing of products and services will be more transparent through the use of a single common currency within the participating member states. The management of Daimler-Benz believes there will be significant opportunities as a result of these potential developments of which it plans to take advantage by, for example, enhancing its marketing strategies and reducing production costs. Costs of funds may be relatively lower due to increased competition among financial intermediaries resulting in downward pressure on fees and other transaction costs due to the elimination of, for example, currency exchange and hedging activities due to the introduction of the Euro. There can be no assurance, however, whether and to what extent the introduction of the Euro will affect the business, financial condition and results of operations of DaimlerChrysler, or whether it will be able to realize any strategic or operational benefits from the introduction of the Euro. SYSTEMS ANALYSIS. The introduction of the Euro will necessitate changes in information technology and other systems in order to accommodate the use of the Euro in corporate transactions and in financial reporting. Daimler-Benz is also currently preparing all of its internal processes and systems for the transition to the Euro and expects to spend approximately DM 200 million in completing this project. Daimler-Benz will continue to monitor closely this modification process and to identify and address additional information technology issues as they arise during this process. CURRENCY AND FOREIGN EXCHANGE EXPOSURE. The introduction of fixed exchange rates among the participating member states and the ultimate transition to the Euro will eliminate the need for currency exchange transactions in the national currencies of these states, resulting in transaction cost savings to companies, such as Daimler-Benz, based in those states. In addition, interest rate differences between the participating member states will also disappear, eliminating the basis for hedging and other derivative transactions with respect to such national currencies and thereby creating further opportunities for transaction cost savings. The substitution of the Euro for existing national currencies in the participating member states will also trigger the need to modify many financial instruments, 10 including derivatives. These instruments will most likely be replaced by instruments denominated in Euros or subject to exchange rates or interest rates based on the Euro. Financial innovation with respect to these new Euro-based financial instruments could expand the range of financial options for companies such as Daimler-Benz, and may enable such companies to raise funds on more advantageous terms. Additional, positive effects are expected to stem from the elimination of speculative runs on member state currencies as a result of the introduction of fixed exchange rates, as well as an expanded source of liquidity for the companies resulting from the replacement of the separate markets of the individual member states with a new "Euro-zone" comprised of the entire area of the participating member states. To the extent that Daimler-Benz engages in significant hedging and other investment transactions in the national currencies of the participating member states, it expects that its foreign exchange rate exposure will be significantly reduced once the Euro has been introduced. Moreover, the management of Daimler-Benz believes that DaimlerChrysler will realize considerable annual savings due to reduced transaction and foreign currency hedging costs. There can be no assurance, however, when and to what degree DaimlerChrysler will ultimately realize these benefits from the introduction of the Euro. Daimler-Benz intends to continue exploring various strategic and operational measures with respect to the introduction of the Euro with a view to enhancing its overall financial position, operating results and market position. These strategic and operational options will be shaped to some extent by both European and national rules and regulations regarding the particular measures required to complete the transition to the Euro as the legal currency of the participating member states. UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE CHRYSLER EXCHANGE The obligation of Chrysler to consummate the Chrysler Exchange is conditioned upon the receipt by Chrysler from Debevoise & Plimpton of an opinion, based in part on a private letter ruling received from the IRS on September 4, 1998 addressing certain issues under Section 367(a)(1) of the Code, substantially to the effect that for United States federal income tax purposes, the Chrysler Exchange should be treated as a non-recognition transfer of Chrysler Common Stock by the holders thereof in exchange for DaimlerChrysler Ordinary Shares. Assuming the Chrysler Exchange is treated as a non-recognition transfer of Chrysler Common Stock by the holders thereof in exchange for DaimlerChrysler Ordinary Shares, no gain or loss will be recognized for United States federal income tax purposes by U.S. Holders (as hereinafter defined) who exchange their Chrysler Common Stock for DaimlerChrysler Ordinary Shares pursuant to the Chrysler Exchange. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE CHRYSLER EXCHANGE AND OF HOLDING DAIMLERCHRYSLER ORDINARY SHARES. FOR A MORE DETAILED DISCUSSION OF THE TAX CONSEQUENCES OF THE CHRYSLER EXCHANGE AND OF HOLDING DAIMLERCHRYSLER ORDINARY SHARES, SEE "THE TRANSACTIONS--CERTAIN TAX CONSEQUENCES TO U.S. HOLDERS" AND "--CERTAIN TAX CONSEQUENCES TO NON-U.S. HOLDERS." 11 THE OFFERING Securities Offered........................... Chrysler Common Stock, par value $1.00 per share. See "Description of Chrysler Capital Stock." If the Chrysler Merger is consummated, each share of Chrysler Common Stock covered hereby will be converted into the right to receive 0.6235 of a DaimlerChrysler Ordinary Share. See "The Transactions--General." Chrysler also plans to contribute or sell shares of Chrysler Common Stock to the Trust prior to consummation of the Transactions (the "Pension Contribution"). Chrysler Common Stock Issued and Outstanding as of September 30, 1998................... Approximately 647 million shares Chrysler Common Stock of Chrysler Offered Hereby..................................... [ ] million shares [Chrysler Common Stock of the Selling Shareholder Offered Hereby................. shares] Total Shares Offered Hereby................ million shares Chrysler Common Stock Contributed or Sold to the Trust.................................. [ ] million shares Total Shares Outstanding After Offering and Pension Contribution....................... [ ] million shares Use of Proceeds.............................. The net proceeds of any offering for which this Prospectus is delivered [other than the proceeds from the shares sold by the Selling Shareholder] will be used by Chrysler for general corporate purposes, including working capital. Chrysler will not receive any of the proceeds from any shares [sold by the Selling Shareholder or] contributed or sold to the Trust. New York Stock Exchange Symbol............... C (DaimlerChrysler Ordinary Shares will be listed on the NYSE under the symbol "DCX." It is expected that the DaimlerChrysler Ordinary Shares will be approved for listing on the Frankfurt Stock Exchange and are expected to be traded on the Chicago, Pacific, Philadelphia, London, Paris, Montreal, Toronto, Swiss, Vienna and Tokyo stock exchanges, as well as on all other German stock exchanges.) PURPOSE OF OFFERING Chrysler's purpose in issuing the shares covered hereby is to enable the Transactions to qualify for pooling-of-interests accounting treatment. See "Purpose of Offering." RISK FACTORS In considering an investment in Chrysler Common Stock and the DaimlerChrysler Ordinary Shares to be received in connection with the Transactions, prospective investors should carefully review and consider the following: the issuance of the shares of Chrysler Common Stock covered hereby is not conditioned on consummation of the Transactions; such issuance is conditioned on the satisfaction of the 90% Minimum Condition; the value of the DaimlerChrysler Ordinary Shares to be received by holders of Chrysler Common Stock is subject to fluctuation; risks relating to the integration of the companies; and risks relating to the valuation proceeding available under German law (SPRUCHVERFAHREN). See "Risk Factors." 12 SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA SELECTED HISTORICAL FINANCIAL DATA OF CHRYSLER The unaudited selected consolidated financial data set forth below as of September 30, 1998 and for the nine-month periods ended September 30, 1998 and 1997 should be read in conjunction with, and are qualified in their entirety by reference to, the unaudited consolidated financial statements as of September 30, 1998 and for the nine-month periods ended September 30, 1998 and 1997 included in this Prospectus. The selected consolidated financial data set forth below as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997 should be read in conjunction with, and are qualified in their entirety by reference to, the consolidated financial statements as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997 included in this Prospectus. NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, -------------------- ----------------------------------------------------- 1998 1997(1) 1997(2) 1996(3) 1995(4) 1994(5) 1993(6) --------- --------- --------- --------- --------- --------- --------- (DOLLARS AND SHARES IN MILLIONS EXCEPT PER COMMON SHARE DATA) Total revenues................................. $ 48,758 $ 43,680 $ 61,147 $ 61,397 $ 53,195 $ 52,235 $ 43,600 Earnings before extraordinary item and cumulative effect of changes in accounting principles................................... 2,737 1,953 2,805 3,720 2,121 3,713 2,415 Basic earnings per common share*............... 4.23 2.86 4.15 5.09 2.81 5.13 3.38 Net earnings (loss)............................ 2,737 1,953 2,805 3,529 2,025 3,713 (2,551) Basic earnings (loss) per common share*.... 4.23 2.86 4.15 4.83 2.68 5.13 (3.81) Diluted earnings (loss) per common share*................................... 4.14 2.82 4.09 4.74 2.56 4.55 (3.19) Dividends declared per common share*........... 1.20 1.20 1.60 1.40 1.00 0.55 0.33 Total assets................................... 67,736 60,119 60,418 56,184 53,756 49,539 43,679 Total debt..................................... 18,133 15,934 15,485 13,396 14,193 13,106 11,451 Convertible preferred stock (in shares)........ -- 0.02 0.02 0.04 0.14 1.72 1.72 - ------------------------------ * Per share data have been adjusted to reflect the two-for-one stock split in 1996. In addition, per share data have been restated to reflect the adoption of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which replaces the presentation of primary earnings per share ("EPS") and fully diluted EPS with a presentation of basic EPS and diluted EPS, respectively. (1) Earnings for the first nine months of 1997 include an estimated unfavorable impact related to a 29-day strike at an engine plant in Detroit, Michigan. The full-year estimated impact of the strike was $590 million ($364 million after taxes) after taking into account the effect of a partial recovery of production losses that occurred during the remainder of 1997. Earnings for the period also reflect a $41 million charge ($25 million after taxes) for costs related to the decision to discontinue Chrysler's Eagle brand at the end of the 1998 model year. (2) Earnings for the year ended December 31, 1997, reflect the unfavorable impact of a 29-day strike which reduced earnings by an estimated $590 million ($364 million after taxes) after considering partial recovery of production losses from the strike, and a $41 million charge ($25 million after taxes) for costs related to the decision to discontinue Chrysler's Eagle brand at the end of the 1998 model year. The effect of these unfavorable items was partially offset by the recognition of $97 million ($60 million after taxes) of previously deferred profits from the sale of vehicles from Chrysler to Dollar Thrifty Automotive Group, Inc. ("DTAG," formerly Pentastar Transportation Group, Inc.) as a result of the December 1997 initial public offering of Chrysler's common stock interest in DTAG. (3) Earnings for the year ended December 31, 1996, include a charge of $97 million ($61 million after taxes) for costs associated with a voluntary early retirement program for certain salaried employees, a charge of $77 million ($51 million after taxes) related to a write-down of Pentastar Electronics, Inc., a charge of $65 million ($100 million after taxes) related to a write-down of Thrifty Rent-A-Car System, Inc., a charge of $50 million ($31 million after taxes) for lump-sum retiree pension costs related to the 1996 UAW collective bargaining agreement, and a gain of $101 million ($87 million after taxes) from the sale of Electrospace Systems, Inc. and Chrysler Technologies Airborne Systems, Inc. 13 (4) Earnings for the year ended December 31, 1995, were reduced by a $263 million charge ($162 million after taxes) for costs associated with production changes at Chrysler's Newark, Delaware assembly plant and a $115 million charge ($71 million after taxes) for a voluntary minivan owner service action. Net earnings in 1995 also include an after-tax charge of $96 million for the cumulative effect of a change in accounting principle related to the consensus reached on Emerging Issues Task Force ("EITF") Issue 95-1, "Revenue Recognition on Sales with a Guaranteed Minimum Resale Value." (5) Earnings for the year ended December 31, 1994, include favorable adjustments to the provision for income taxes aggregating $132 million. These adjustments related to: (1) the recognition of tax credits related to expenditures in prior years for qualifying research and development activities, in accordance with an Internal Revenue Service settlement which was based on U.S. Department of Treasury income tax regulations issued in 1994, and (2) the reversal of valuation allowances related to tax benefits associated with net operating loss carryforwards. (6) Results for the year ended December 31, 1993, include a pretax gain of $205 million ($128 million after taxes) on the sale of Chrysler's remaining 50.3 million shares of Mitsubishi Motors Corporation stock, a pretax gain of $60 million ($39 million after taxes) on the sale of Chrysler's plastics operations, a $4.7 billion after-tax charge for the adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and a $283 million after-tax charge for the adoption of SFAS No. 112, "Employers' Accounting for Postemployment Benefits." ------------------------------ 14 SELECTED HISTORICAL FINANCIAL DATA OF DAIMLER-BENZ The selected unaudited consolidated financial data set forth below as of June 30, 1998 and for the six-month periods ended June 30, 1998 and 1997 should be read in conjunction with, and are qualified in their entirety by reference to, the unaudited consolidated financial statements as of June 30, 1998 and for the six-month periods ended June 30, 1998 and 1997 included in this Prospectus. The selected consolidated financial data set forth below as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997 should be read in conjunction with, and are qualified in their entirety by reference to, the consolidated financial statements as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997 (the "Daimler-Benz Consolidated Financial Statements") included in this Prospectus. SIX MONTHS ENDED JUNE 30, ---------------------------------------- 1998(1) 1998 1997 --------- -------------- ------------- (IN MILLIONS, EXCEPT FOR DAIMLER-BENZ ORDINARY SHARE AND ADS AMOUNTS) U.S. GAAP INCOME STATEMENT DATA: Revenues................................................................ $ 37,550 DM 67,714 DM 55,892 Income before financial income and income taxes......................... 1,868 3,368 1,322 Net income.............................................................. 1,115 2,010 992 Basic earnings per Ordinary Share/ADS(2)(3)............................. 2.11 3.81 1.89 Diluted earnings per Ordinary Share/ADS(3)(4)........................... 2.04 3.68 1.88 BALANCE SHEET DATA (END OF PERIOD): Inventories, net of advance payments.................................... 8,839 15,940 Total assets............................................................ 78,741 141,994 Total borrowings........................................................ 23,048 41,563 Stockholders' equity.................................................... 18,725 33,767 - ------------------------------ (1) Amounts in this column are unaudited and have been translated solely for the convenience of the reader at an exchange rate of DM 1.8033 = $1.00, the Noon Buying Rate on June 30, 1998. (2) Basic earnings per Daimler-Benz Ordinary Share/ADS are calculated by dividing net income by the weighted average of Daimler-Benz Ordinary Shares/ADSs outstanding, without regard to options and conversion rights. Net income represents total income generated by Daimler-Benz after minority interest. (3) Basic and diluted earnings per Daimler-Benz Ordinary Share/ADS information have been adjusted to reflect the approximately 20% discount to market value at which the Daimler-Benz Ordinary Shares and Daimler-Benz ADSs were sold in the Rights Offering (as hereinafter defined). (4) Earnings per Daimler-Benz Ordinary Share/ADS on a diluted basis reflects the potential dilution that would occur if all dilutive options to acquire and rights to convert securities convertible into Daimler-Benz Ordinary Shares were exercised. 15 YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------- 1997(1) 1997 1996 1995 1994 1993 --------- -------------- -------------- -------------- -------------- ------------- (IN MILLIONS, EXCEPT FOR DAIMLER-BENZ ORDINARY SHARE AND ADS AMOUNTS) U.S. GAAP INCOME STATEMENT DATA:(2) Revenues........................ $ 68,791 DM 124,050 DM 106,339 DM 102,985 DM DM Income (loss) before interest and taxes..................... 2,014 3,631 1,465 (8,162) Net income (loss)............... 4,460 8,042(3) 2,762 (5,729) 1,052(4) (1,839) Basic earnings (loss) per Ordinary Share/ ADS(5)(6)..... 8.48 15.30(7) 5.27 (10.96) 2.11(4) (3.88) Diluted earnings (loss) per Ordinary Share/ ADS(6)(8)..... 8.32 15.01(7) 5.25 (10.96) 2.11(4) (3.88) Regular annual dividends per Ordinary Share/ ADS(6)........ 0.87 1.57 1.08 -- 1.08 0.78 Special Distribution............ 10.89 19.63(9) -- -- -- -- BALANCE SHEET DATA (END OF PERIOD):(10) Inventories, net of advance payments...................... 7,980 14,390 13,602 14,329 Total assets.................... 76,027 137,099 112,461 102,098 102,635 99,029 Short-term borrowings........... 12,248 22,086 16,011 13,614 Long-term borrowings............ 9,546 17,216 12,839 8,671 Stockholders' equity............ 19,456 35,085 26,393 22,860 29,435 26,281 GERMAN GAAP INCOME STATEMENT DATA: Revenues........................ 103,549 104,075 98,534 Results from ordinary business activities.................... (835) 2,077 (1,473) Extraordinary results(11)....... (3,884) -- 2,603 Net income (loss)............... (5,734) 895 615 Earnings (loss) per Ordinary Share/ ADS(5)(6).............. (10.85) 2.12 1.27 BALANCE SHEET DATA (END OF PERIOD): Inventories, net advance of payments...................... 15,764 14,976 16,945 Total assets.................... 91,540 93,536 90,926 Short-term borrowings........... 16,410 12,524 11,093 Long-term borrowings............ 8,578 10,667 12,174 Stockholders' equity............ 13,842 20,251 18,145 - ------------------------------ (1) Amounts in this column are unaudited and have been translated solely for the convenience of the reader at an exchange rate of DM 1.8033 = $1.00, the Noon Buying Rate on June 30, 1998. (2) Net income (loss) includes other income of DM 1,620, DM 1,402, and DM 1,742, for the years ended December 31, 1997, 1996 and 1995, respectively. Other income includes gains on sales of property, plant and equipment (DM 186, DM 254, and DM 148 in 1997, 1996, and 1995, respectively), gains on sales of companies (DM 228 and DM 233, in 1997 and 1996, respectively) rental income (DM 132, DM 68, and DM 72 in 1997, 1996, and 1995, respectively), foreign currency exchange gains (DM 69, DM 5, and 16 DM 69 in 1997, 1996 and 1995, respectively), and reductions in certain accruals (DM 302, DM 222, and DM 295 in 1997, 1996, and 1995, respectively). (3) The amount shown for 1997 includes DM 4,870 ($2,701) of special non-recurring tax benefits. These tax benefits resulted from the Special Distribution and the reversal of the remaining valuation allowances previously established on deferred tax assets on Daimler-Benz books at year-end which resulted primarily from net operating loss carryforwards of Daimler-Benz' German group companies that file a combined tax return (ORGANSCHAFT). The Special Distribution tax benefit was DM 2,908 and the valuation allowance reversal tax benefit was DM 1,962. (4) Net income in 1994 includes DM 178 of income for the cumulative effect of accounting changes. Basic and diluted earnings per Daimler-Benz Ordinary Share/ADS in 1994 increased by DM 0.36 as a result of such changes. (5) Basic earnings (loss) per Daimler-Benz Ordinary Share/ADS are calculated by dividing net income by the weighted average of Daimler-Benz Ordinary Shares/ADSs outstanding, without regard to options and conversion rights. Net income represents total income generated by Daimler-Benz after minority interest. See Note 25 to the Daimler-Benz Consolidated Financial Statements. (6) Effective as of July 1, 1996, the nominal value of the Daimler-Benz Ordinary Shares was reduced to DM 5 per share from the previous level of DM 50 per share. This reduction had the effect of a 10 for 1 stock split, which in turn reduced the price at which one Daimler-Benz Ordinary Share trades to 1/10 of the price at which it previously traded. As a result, earnings (loss) and dividends per Daimler-Benz Ordinary Share/ADS are calculated on the basis of a nominal value of DM 5 per Daimler-Benz Ordinary Share. Earnings (loss) and dividends per Daimler-Benz Ordinary Share/ADS for 1995 and prior years have been recalculated to reflect this change in nominal value. In connection with the 10 for 1 stock split, Daimler-Benz also changed the ratio of Daimler-Benz Ordinary Shares to Daimler-Benz ADSs from its previous 1 to 10 ratio to a 1 to 1 ratio. Accordingly, per Daimler-Benz ADS amounts are calculated on the basis of one Daimler-Benz ADS for one Daimler-Benz Ordinary Share. In addition, earnings (loss) per Daimler-Benz Ordinary Share/ADS and regular annual dividends per Daimler-Benz Ordinary Share/ADS and Special Distribution information have been adjusted to reflect the approximately 20% discount to market value at which the Daimler-Benz Ordinary Shares and Daimler-Benz ADSs were sold in the Rights Offering. (7) The 1997 amounts of basic and diluted earnings per Daimler-Benz Ordinary Share/ADS include special non-recurring tax benefits. Excluding these benefits, the basic and diluted earnings per Daimler-Benz Ordinary Share/ADS in 1997 were DM 6.04 and DM 5.96, respectively. (8) Earnings per Daimler-Benz Ordinary Share/ADS on a diluted basis reflects the potential dilution that would occur if all options to acquire and rights to convert securities convertible into Daimler-Benz Ordinary Shares were exercised. See Note 25 to the Daimler-Benz Consolidated Financial Statements. (9) On June 15, 1998, Daimler-Benz paid a special distribution (the "Special Distribution") of DM 20 (DM 19.63 after adjustment to reflect the approximately 20% discount to market value at which the Daimler-Benz Ordinary Shares and Daimler-Benz ADSs were sold in a rights offering (the "Rights Offering")) per Daimler-Benz Ordinary Share/ADS (approximately DM 10.3 billion in the aggregate). The source of funds for the Special Distribution was Daimler-Benz' retained earnings, including DM 2.9 billion attributable to a German tax refund resulting from a 20% differential in the tax rates to which Daimler-Benz is entitled by reason of the Special Distribution (I.E., the difference between the 50% German tax rate (TARIFBELASTUNG) paid in prior years on retained corporate earnings and the current 30% tax rate (AUSSCHUTTUNGSBELASTUNG) on distributed earnings). (10) At December 31, 1997 and 1996, current assets (due within one year) were DM 66,902 and DM 53,332, respectively, and current liabilities (due within one year) were DM 53,387 and DM 43,029, respectively. (11) Extraordinary results under German GAAP represent: in 1995, expenses incurred in connection with the decision to discontinue financial support for NV Koninklijke Nederlandse Vliegtuigenfabriek Fokker, write-downs and provisions for certain businesses of AEG Daimler-Benz Industrie held for sale and closure of AEG Daimler-Benz Industrie's headquarters; and, in 1993, accounting changes related to provisions, reserves and valuation adjustments. Under U.S. GAAP the extraordinary results in 1995 would be included in results from ordinary business activities, and the 1993 extraordinary results would not have arisen. ------------------------------ 17 SELECTED DAIMLERCHRYSLER PRO FORMA COMBINED FINANCIAL DATA The selected unaudited pro forma financial information set forth below was derived from and should be read in conjunction with the Unaudited Pro Forma Combined Financial Information, including the notes thereto, appearing elsewhere in this Prospectus. The following selected unaudited pro forma financial information is being provided under the pooling-of-interests method of accounting. SIX MONTHS ENDED JUNE 30,(1) YEAR ENDED DECEMBER 31,(1) --------------------------------------- ------------------------------------------------------ 1998(2) 1998 1997 1997(2) 1997 1996 1995 --------- ------------- ------------- --------- ------------- ------------- ------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Revenues................... $ 71,152 DM 128,308 DM 106,925 $ 127,131 DM 229,255 DM 198,082 DM 178,551 Net income (loss).......... 3,174 5,721 3,542 7,158(4) 12,906(4) 8,359 (2,689) Basic earnings (loss) per Ordinary Share/ADS(3).... 3.31 5.96 3.62 7.37(4) 13.29(4) 8.44 (2.64) Diluted earnings (loss) per Ordinary Share/ADS(3).... 3.23 5.83 3.60 7.30(4) 13.16(4) 8.41 (2.64) BALANCE SHEET DATA: Total assets............... 148,318 267,462 Total borrowings........... 43,999 79,343 Stockholders' equity....... 33,112 59,711 - ------------------------------ (1) The Selected Pro Forma Combined Financial Data should be read in conjunction with the Unaudited Pro Forma Combined Financial Information, including the notes thereto, which notes are an integral part of these Selected Pro Forma Combined Financial Data. (2) Amounts in this column have been translated solely for the convenience of the reader at an exchange rate of DM 1.8033 = $1.00, the Noon Buying Rate on June 30, 1998. (3) Basic and diluted earnings (loss) per Daimler-Benz Ordinary Share/ADS information have been adjusted to reflect the approximately 20% discount to market value at which the Daimler-Benz Ordinary Shares and Daimler-Benz ADSs were sold in the Rights Offering. (4) Includes DM 4,870 million ($2,701 million) of special non-recurring tax benefits. These tax benefits resulted from the Special Distribution and the reversal of the remaining valuation allowances previously established on deferred tax assets on Daimler-Benz' books at year-end which resulted primarily from net operating loss carryforwards of Daimler-Benz' German group of companies that file a consolidated tax return (ORGANSCHAFT). The Special Distribution benefit was DM 2.908 billion and the valuation allowance reversal was DM 1.962 billion. Excluding such non-recurring tax benefits, 1997 pro forma combined net income and basic and diluted earnings per Ordinary Share/ADS would have been as follows: Net income................................................................................ DM 8,036 $ 4,456 Basic earnings per Ordinary Share/ADS..................................................... DM 8.28 $ 4.59 Diluted earnings per Ordinary Share/ADS................................................... DM 8.21 $ 4.55 18 UNAUDITED COMPARATIVE PER SHARE DATA The following table sets forth for Chrysler and Daimler-Benz certain historical and pro forma equivalent per share data as of June 30, 1998 and December 31, 1997 and for the six-month periods ended June 30, 1998 and 1997 and for each of the years in the three-year period ended December 31, 1997. The pro forma equivalent per share data are presented for pooling-of-interests method of accounting for the Transactions. The information presented herein should be read in conjunction with the selected historical financial data and the unaudited selected combined pro forma financial information appearing elsewhere in this Prospectus. See "Selected Historical and Pro Forma Financial Combined Data" and "Unaudited Pro Forma Combined Financial Information." AS OF OR FOR THE SIX MONTHS ENDED JUNE 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- ----------------------------------------------- 1998(1) 1998 1997 1997(1) 1997 1996 1995 ----------- ---------- --------- ----------- ---------- --------- ----------- CHRYSLER HISTORICAL ($) Earnings per share(2) Basic................................. $ 3.18 $ 2.20 $ 4.15 $ 4.83 $ 2.68 Diluted............................... 3.12 2.17 4.09 4.74 2.56 Cash dividends per share................ .80 .80 1.60 1.40 1.00 Book value per share.................... 19.77 17.52 CHRYSLER HISTORICAL (DM)(3) Earnings per Share(2) Basic................................. DM 5.74 DM 3.71 DM 7.20 DM 7.27 DM 3.84 Diluted............................... 5.64 3.65 7.09 7.13 3.67 Cash dividends per Share................ 1.45 1.35 2.77 2.11 1.43 Book value per Share.................... 35.76 31.40 DAIMLER-BENZ HISTORICAL(4) Earnings (loss) per Ordinary Share/ADS: Basic................................. $ 2.11 DM 3.81 DM 1.89 $ 8.48 DM 15.30(5) DM 5.27 DM (10.96) Diluted............................... 2.04 3.68 1.88 8.32 15.01(5) 5.25 (10.96) Cash dividends per Ordinary Share/ADS(2).......................... 0.87 1.57 1.08 Special Distribution.................... 10.88 19.63(6) Book value per Ordinary Share........... 32.89 59.31 36.94 66.61 DAIMLERCHRYSLER PRO FORMA(4) Earnings (loss) per Ordinary Share:(2) Basic................................. $ 3.31 DM 5.96 DM 3.62 $ 7.37 DM 13.29(5) DM 8.44 DM (2.64) Diluted............................... 3.23 5.83 3.60 7.30 13.16(5) 8.41 (2.64) Cash dividends per Ordinary Share(8).... Book value per Ordinary Share........... 33.01 59.52 30.72 55.39 DAIMLERCHRYSLER PRO FORMA EQUIVALENT FOR CHRYSLER STOCKHOLDERS(4), (6) Earnings per share of Chrysler Common Stock(2): Basic................................. $ 2.06 DM 3.72 DM 2.26 $ 4.60 DM 8.29(5) DM 5.26 DM (1.65) Diluted............................... 2.01 3.64 2.24 4.55 8.21(5) 5.24 (1.65) Cash dividends per share of Chrysler Common Stock(8)....................... Book value per share of Chrysler Common Stock.......................... 20.58 37.11 19.15 34.53 - ------------------------ (1) Amounts in this column have been presented solely for the convenience of the reader at an exchange rate of DM 1.8033 = $1.00, the Noon Buying Rate on June 30, 1998. (2) Represents earnings before extraordinary item and cumulative effect of changes in accounting principles. (3) The Chrysler historical earnings and cash dividends per share information for the six months ended June 30, 1998 and 1997 and years ended December 31, 1997, 1996, and 1995 have been translated into marks at the weighted-average rates of exchange for the six months ended June 30, 1998 and 1997 and years ended December 31, 1997, 1996, and 1995 of $1.00 = DM 1.8064, DM 1.6862, DM 1.7340, DM 1.5048, and DM 1.4331, respectively. The book value per share amount at June 30, 1998 and December 31, 1997 has been translated into marks at the June 30, 1998 and December 31, 1997 exchange rates of $1.00 = DM 1.8087 and DM 1.7921, respectively. 19 (4) Daimler-Benz Historical, DaimlerChrysler Pro Forma and DaimlerChrysler Pro Forma Equivalent for Chrysler Stockholders per share data have been adjusted to reflect the approximately 20% discount to market value at which Daimler-Benz Ordinary Shares and Daimler-Benz ADSs were sold in the Rights Offering. (5) The 1997 amounts of basic and diluted Daimler-Benz Historical earnings per Ordinary Share/ADS include special non-recurring tax benefits of DM 9.26 ($5.14) and DM 9.04 ($5.02) per Ordinary Share/ADS, respectively. See Note 3 to "Selected Historical and Pro Forma Combined Financial Data--Selected Historical Financial Data of Daimler-Benz." Excluding these tax benefits, the Daimler-Benz Historical basic and diluted earnings per Ordinary Share/ADS in 1997 would have been DM 6.04 ($3.35) and DM 5.97 ($3.30) per Ordinary Share/ADS, respectively, the DaimlerChrysler Pro Forma basic and diluted earnings per Ordinary Share in 1997 would have been DM 8.28 ($4.59) and DM 8.21 ($4.55) per Ordinary Share, respectively, and the DaimlerChrysler Pro Forma for Chrysler stockholders basic and diluted earnings per Ordinary Share in 1997 would have been DM 5.16 ($2.86) and DM 5.12 ($2.84) per Ordinary Share. (6) See footnote 9 to "Selected Historical and Pro Forma Combined Financial Data--Selected Historical Financial Data of Daimler-Benz." (7) For purposes of calculating DaimlerChrysler pro forma equivalent for Chrysler stockholders, it has been assumed that each share of Chrysler Common Stock is exchanged for 0.6235 of a DaimlerChrysler Ordinary Share, each Daimler-Benz Ordinary Share is exchanged for 1.005 DaimlerChrysler Ordinary Shares, and each Daimler-Benz ADS is exchanged for 1.005 DaimlerChrysler Ordinary Shares. (8) See "Dividends" for information with respect to the expected dividend policy of DaimlerChrysler. ------------------------------ 20 RISK FACTORS PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS IN EVALUATING AN INVESTMENT IN CHRYSLER COMMON STOCK AND THE DAIMLERCHRYSLER ORDINARY SHARES TO BE RECEIVED IN CONNECTION WITH THE TRANSACTIONS. CONDITIONS TO THE TRANSACTIONS Although prior to the issuance of the shares of Chrysler Common Stock covered hereby, Chrysler and Daimler-Benz will confirm that certain of the conditions to the consummation of the Transactions have been met, there can be no assurance that the Transactions will be consummated following the completion of such issuance. Consummation of the Transactions is subject to various conditions, some of which have not yet been satisfied. The following conditions have been satisfied: the expiration or termination of any applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976; the granting of approval of the transactions contemplated by the Combination Agreement by the Commission of the European Union; the receipt by Chrysler of a private letter ruling from the IRS; and the receipt of the Chrysler and Daimler-Benz stockholder approval. The following conditions have not yet been satisfied: the consummation of the Daimler-Benz Exchange Offer; and the receipt of tax opinions from the respective tax counsel of Daimler-Benz and Chrysler regarding certain United States federal income and German tax consequences of the Transactions. If the Transactions are not consummated, purchasers of the shares of Chrysler Common Stock covered hereby will remain holders of Chrysler Common Stock, a security with investment characteristics that are significantly different from those of the DaimlerChrysler Ordinary Shares expected to be received in connection with the Chrysler Merger. See "The Transactions--Conditions to the Transactions." FIXED EXCHANGE RATIO Because the U.S. Exchange Ratio is a fixed exchange ratio, determined pursuant to the formula contained in the Combination Agreement, the number of DaimlerChrysler Ordinary Shares that will be received by Chrysler stockholders in the Chrysler Merger will not increase if there is a decline in the market price of Daimler-Benz Ordinary Shares between the signing of the Combination Agreement and the closing of the Chrysler Merger. On the other hand, the number of DaimlerChrysler Ordinary Shares that will be received by Chrysler stockholders in the Chrysler Merger will not be reduced if there is an increase in the market price of Daimler-Benz Ordinary Shares between the signing of the Combination Agreement and the closing of the Chrysler Merger. GOVERNMENT APPROVALS The consummation of the Transactions is conditioned upon, among other things, (i) the termination or expiration of any applicable waiting periods under the HSR Act (which were terminated as of July 30, 1998) and (ii) the approval or deemed approval of the Commission of the European Union (which approval was granted on July 22, 1998). In addition, the antitrust and competition laws of certain other non-U.S. jurisdictions require (or in some instances, provide for on a voluntary basis) notification of certain transactions and the observance of pre-consummation waiting periods. There can be no assurance that all required government approvals will be obtained without conditions that may require operating restrictions or divestitures of business operations. UNCERTAINTIES OF INTEGRATING BUSINESS OPERATIONS AND ACHIEVING SYNERGIES Although the managements of Chrysler and of Daimler-Benz expect the Transactions will produce substantial synergies, the integration of two large companies, incorporated in different countries, with geographically dispersed operations, and with different business cultures and compensation structures, presents significant management challenges. There can be no assurance that this integration, and the 21 synergies expected to result from that integration, will be achieved as rapidly or to the extent currently anticipated. INDUSTRY AND MARKET FACTORS AFFECTING DAIMLERCHRYSLER DaimlerChrysler will be affected by a variety of social, political and economic factors, developments and conditions in the United States, Germany and the European Union, and by economic and competitive conditions affecting the industries and markets in which it operates. Examples of these factors, developments and conditions include, among other things: - The worldwide automotive industry is highly competitive in several specific respects, including vehicle quality, pricing, development and introduction time, reliability, safety, fuel economy, customer service and financing terms. The influence of these factors may differ in various geographical markets and often with respect to individual product segments. Moreover, during cyclical economic downturns, overcapacity in the industry is a particular risk. While DaimlerChrysler believes that it will have the financial and human resources and products necessary to compete successfully, there can be no assurance that it will be successful in all geographic markets or in all product segments. - The marketability of DaimlerChrysler's automotive products and the profitability of its automotive businesses will to some degree depend on the ability of DaimlerChrysler to comply on an ongoing basis with government regulations applicable to its products. Regulations and standards relating to emission controls, fuel economy, safety and recalls are applicable to new motor vehicles, engines and equipment manufactured for sale in the United States, Canada, Europe and elsewhere. Because a large portion of DaimlerChrysler's automotive products will be sold in the United States, DaimlerChrysler will be particularly affected by regulations and standards in the United States. At the present time, these regulations and standards include the National Traffic and Motor Vehicle Safety Act of 1966, the Clean Air Act, Titles I and V of the Motor Vehicle Information and Cost Savings Act and the Noise Control Act of 1972. - Incoming orders in the civil aircraft industry are highly cyclical as a result of the industry's dependency on the development of global air traffic and the profitability and fleet renewal cycles of airlines worldwide. The future success of Airbus Industrie, in which Daimler-Benz Aerospace is the German participant, will depend on its ability to continue to compete successfully in terms of price and product quality and innovation with Boeing as the largest manufacturer of civil aircraft after its merger with McDonnell Douglas. - As a consequence of the global nature of the combined businesses of Chrysler and Daimler-Benz, DaimlerChrysler will be exposed to market risks from changes in interest rates and foreign currency exchange rates which may adversely affect its results of operations and financial condition. DaimlerChrysler's currency risk exposure will primarily affect DaimlerChrysler's automotive businesses to the extent sales are denominated in currencies other than those in which manufacturing costs are incurred. Similarly, revenues generated by DaimlerChrysler's Aerospace business through the sale of aircraft, aircraft engines and certain other aerospace related products will continue to be mainly denominated in dollars due to the requirements of the marketplace, but the products are manufactured exclusively in Germany. DaimlerChrysler will seek to minimize the risks from interest rate and foreign currency exchange rate fluctuations through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. DaimlerChrysler does not expect to use financial instruments for trading or other speculative purposes. DaimlerChrysler expects that its foreign exchange rate exposure will be somewhat lower as a result of the introduction of a single European currency in 1999. - DaimlerChrysler, a German stock corporation with a large portion of its operations and manufacturing activities located in Germany, will be affected by all social, political and economic conditions 22 in Germany. Labor costs, corporate taxes and employee benefit expenses in Germany are high and weekly working hours are shorter compared to many other European Union member states, the United States and Japan. - By virtue of its significant operations outside Germany and the United States, DaimlerChrysler will be subject to the risks normally associated with cross-border business transactions and activities, principally those relating to delayed payments from customers in certain countries or difficulties in the collection of receivables generally. In addition, DaimlerChrysler will be exposed to the risk of changes in social, political and economic conditions in the countries where it engages in business, particularly in portions of Asia and Latin America and in Eastern Europe. Political and economic instability could adversely affect DaimlerChrysler's business activities and operations in these regions. Unexpected changes in regulatory requirements, tariffs and other trade barriers and price or exchange controls could limit operations and make the repatriation of profits difficult. In addition, the uncertainty of the legal environment could limit DaimlerChrysler's ability to enforce effectively its rights in certain markets. See the discussion under the heading "Automotive Operations--Government Regulation" and the discussion in Part II of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Chrysler's Annual Report on Form 10-K, both of which are incorporated herein by reference. GERMAN VALUATION PROCEEDING (SPRUCHVERFAHREN) Under the German Transformation Act (UMWANDLUNGSGESETZ), any Remaining Stockholder (which does not include any Daimler-Benz stockholder who tenders his shares in the Daimler-Benz Exchange Offer), who holds Daimler-Benz Ordinary Shares, including those formerly represented by Daimler-Benz ADSs, may, within two months following effective publication of the registration of the Daimler-Benz Merger, bring a court valuation proceeding (SPRUCHVERFAHREN) seeking a determination that the Daimler-Benz Merger Exchange Ratio is inadequate, even if such stockholder acquired Daimler-Benz Ordinary Shares or Daimler-Benz ADSs after the date of the special meeting of Daimler-Benz stockholders that approved the Transactions or if such stockholder voted in favor of the Daimler-Benz Merger. Should such an award be made, all Remaining Stockholders, not just holders who voted against the Daimler-Benz Merger or who brought such a proceeding, would be entitled to a supplementary cash payment, without having to surrender the DaimlerChrysler securities received by them in the Daimler-Benz Merger. Regardless of the outcome of the proceeding, DaimlerChrysler would bear the cost of the proceeding unless the court determined that it would be inequitable for DaimlerChrysler to do so. Daimler-Benz stockholders who tender their Daimler-Benz securities in the Daimler-Benz Exchange Offer will not be able to participate in a German valuation proceeding (SPRUCHVERFAHREN.) EXCLUSION OF DAIMLERCHRYSLER FROM THE S&P 500 INDEX On October 1, 1998, the index committee of the S&P 500 stock index announced that, because DaimlerChrysler is incorporated outside the U.S., DaimlerChrysler Ordinary Shares will not be included in the S&P 500 stock index. As a result, mutual funds that track the S&P 500, which currently hold a substantial number of shares of Chrysler Common Stock, will be required to sell such shares (or the DaimlerChrysler Ordinary Shares they receive in the Chrysler Merger). Such sales could adversely affect the market price for Chrysler Common Stock and DaimlerChrysler Ordinary Shares. YEAR 2000 Each of Daimler-Benz and Chrysler has conducted an evaluation of the actions necessary in order to ensure that its business critical computer systems (and, therefore, those of DaimlerChrysler) will be able to function without disruption with respect to the application of dating systems in the Year 2000. As a result 23 of these evaluations, each of Daimler-Benz and Chrysler is engaged in the process of upgrading, replacing and testing certain of its information and other computer systems so as to be able to operate without disruption due to Year 2000 issues. Chrysler's remedial actions are scheduled to be completed during the third quarter of 1999 and, based upon information currently available, Chrysler does not anticipate that the costs of its remedial actions will be material to DaimlerChrysler's results of operations or financial condition. Daimler-Benz' remedial actions are scheduled to be completed during the third quarter of 1999 and, based upon information currently available, Daimler-Benz does not anticipate that the costs of its remedial actions will be material to DaimlerChrysler's results of operations or financial condition. However, there can be no assurance that the remedial actions being implemented by Daimler-Benz and Chrysler will be able to be completed by the time necessary to avoid dating systems problems or that the cost of doing so will not be material. If each of Daimler-Benz and Chrysler is unable to complete its remedial actions in the planned time frame, in each case, contingency plans will be developed to address those business critical systems which may not be Year 2000 compliant. In addition, disruptions with respect to the computer systems of suppliers or dealers, which systems are outside the control of Daimler-Benz and Chrysler, could impair the ability of Daimler-Benz and Chrysler (and, therefore, DaimlerChrysler) to obtain necessary materials or products or to sell to or service their dealers. Disruptions of DaimlerChrysler's computer systems, or the computer systems of DaimlerChrysler's suppliers or dealers, as well as the cost of avoiding such disruption, could have a material adverse effect upon DaimlerChrysler's financial condition and results of operations. Each of Daimler-Benz and Chrysler has a process in place to assess the Year 2000 readiness of its business critical suppliers and of its dealers. Each of Daimler-Benz and Chrysler believes that the most reasonably likely worst case scenario is that a small number of suppliers will be unable to supply components for a short time after January 1, 2000. As part of the assessment process, Daimler-Benz and Chrysler will develop contingency plans for those business critical suppliers who are either unable or unwilling to develop remediation plans to become Year 2000 compliant. Although these plans are yet to be developed, both Daimler-Benz and Chrysler expect that these plans will include a combination of actions including stockpiling of components and selective resourcing of materials to Year 2000 compliant suppliers. Each of Daimler-Benz and Chrysler expects that suppliers in this category will represent an insignificant part of DaimlerChrysler's total supply base. In each case, it is expected that these plans will be in place by the third quarter of 1999. USE OF PROCEEDS The net proceeds from the sale of the shares covered hereby [other than the proceeds from the shares sold by the Selling Shareholder] will be used for general corporate purposes, including working capital. Chrysler will not receive any of the proceeds from any shares [sold by the Selling Shareholder or] contributed to the Trust. PURPOSE OF OFFERING Chrysler's purpose in issuing the shares covered hereby and in making the Pension Contribution is to enable the Transactions to qualify for pooling-of-interests accounting treatment. Under United States generally accepted accounting principles ("U.S. GAAP"), it is a condition for qualification for pooling-of-interests accounting treatment that no more than 10% of the shares of stock to be exchanged in a business combination may be so-called "tainted shares." To the extent that any shares of Chrysler Common Stock have been reacquired and held by Chrysler as treasury stock ("Chrysler Treasury Stock") within the two years prior to initiation of the Transactions, such shares must have been acquired for certain specific purposes unrelated to a business combination in order for them not to be considered to be tainted shares. To the extent that shares of Chrysler Treasury Stock have been reacquired for other than such specified purposes, such shares of Chrysler Treasury Stock must be reissued prior to the consummation of the Chrysler Merger to "cure" the taint associated with the shares. During the two-year period prior to the initiation of the Transactions, Chrysler reacquired approximately 109.9 million shares of Chrysler Common Stock presently held as Chrysler Treasury Stock, of which approximately 89.6 million shares were not 24 reacquired for the specific purposes allowed under U.S. GAAP. Assuming the number of shares of Chrysler Common Stock issued and outstanding at the Chrysler Effective Time does not change from the approximately 647 million shares issued and outstanding on September 30, 1998, Chrysler must reissue not less than approximately 22.6 million shares of the Chrysler Common Stock prior to the consummation of the Chrysler Merger in order for the Transactions to qualify for pooling-of-interests accounting treatment. This would leave approximately 67.0 million tainted shares, or 10% of the approximately 670 million shares outstanding after the issuance of the shares covered hereby. Chrysler will issue the shares covered hereby only if the 90% Minimum Condition is satisfied. See "The Transactions--General." Although prior to the issuance of the shares of Chrysler Common Stock covered hereby, Chrysler and Daimler-Benz will confirm that certain of the conditions to the consummation of the Transactions have been met, there can be no assurance that the Transactions will be consummated following the completion of such issuance. Consummation of the Transactions is subject to various conditions, including, among others, the consummation of the Daimler-Benz Exchange Offer and the receipt of tax opinions from the respective tax counsel of Daimler-Benz and Chrysler regarding certain United States federal income and German tax consequences of the Transactions. If the Transactions are not consummated, purchasers of the shares of Chrysler Common Stock covered hereby will remain holders of Chrysler Common Stock, a security with investment characteristics that are significantly different from those of the DaimlerChrysler Ordinary Shares expected to be received in connection with the Chrysler Merger. See "The Transactions--Conditions to the Transactions." MARKET PRICES The principal trading market for Chrysler Common Stock is the NYSE, and Chrysler's shares trade under the symbol "C." The Chrysler Common Stock is also traded on the Philadelphia, Chicago and Pacific stock exchanges, and the stock exchanges of Frankfurt, Berlin, Munich, Montreal, Toronto and London, and options on Chrysler Common Stock are traded on the Chicago Board of Options Exchange. The principal trading market for the Daimler-Benz Ordinary Shares is the Frankfurt Stock Exchange (the "FSE"). The Daimler-Benz Ordinary Shares are also traded on the other German stock exchanges in Berlin, Bremen, Dusseldorf, Hamburg, Hannover, Munchen and Stuttgart, on the stock exchanges of London, Paris, Tokyo and Vienna and on the Swiss Stock Exchange. Options on Daimler-Benz Ordinary Shares are traded on the German options exchange (DEUTSCHE TERMINBORSE) and on the Chicago Board of Options Exchange. All Daimler-Benz Ordinary Shares have been issued in bearer form. The Daimler-Benz ADSs are listed on the NYSE and trade under the symbol "DAI." The DaimlerChrysler Ordinary Shares are expected to be approved for listing on the FSE. In addition, the DaimlerChrysler Ordinary Shares have been approved for listing, subject to official notice of issuance, on the NYSE and will trade on that exchange under the symbol "DCX." It is expected that DaimlerChrysler Ordinary Shares will also be traded on the Chicago, Pacific, Philadelphia, London, Paris, Montreal, Toronto, Swiss, Vienna and Tokyo stock exchanges as well as on all the German stock exchanges. 25 TRADING ON THE NEW YORK STOCK EXCHANGE The following table sets forth, for the calendar periods indicated, the high and low sales prices per share of Chrysler Common Stock (giving effect to a two-for-one stock split effected on July 15, 1996) and the high and low sales prices per Daimler-Benz ADS as reported on the NYSE Composite Tape for the periods indicated. CHRYSLER DAIMLER-BENZ COMMON STOCK ADSS(1) ------------------ ------------------ HIGH LOW HIGH LOW ------- ------- ------- ------- 1996 First Quarter................................................................... $31 13/16 $25 5/8 $55 $49 3/4 Second Quarter.................................................................. 35 29 9/16 54 5/8 52 1/8 Third Quarter................................................................... 32 1/16 26 1/4 55 1/8 50 7/8 Fourth Quarter.................................................................. 36 3/8 28 1/4 67 1/2 53 3/8 1997 First Quarter................................................................... $36 1/4 $29 $78 7/8 $66 Second Quarter.................................................................. 33 7/16 28 1/8 81 5/8 71 7/8 Third Quarter................................................................... 38 9/16 32 3/8 85 1/2 71 1/16 Fourth Quarter.................................................................. 38 1/4 32 83 1/8 61 7/8 1998 First Quarter................................................................... $44 3/16 $31 1/4 $95 7/8 $66 1/4 Second Quarter(2)............................................................... 57 9/16 38 3/8 117 3/8 91 1/4 Third Quarter................................................................... 61 44 1/2 105 81 1/4 Fourth Quarter (through October 14, 1998)....................................... 46 5/16 35 1/8 79 13/16 62 15/16 - ------------------------------ (1) Figures for 1996, 1997 and the first and second quarters of 1998 have been adjusted to reflect the approximately 20% discount to market value at which the Daimler-Benz Ordinary Shares and Daimler-Benz ADSs were sold in the Rights Offering. (2) Holders of Daimler-Benz Ordinary Shares on May 27, 1998, the date of the Annual General Meeting, became entitled to receive the Special Distribution of DM 20 (DM 19.63 after adjustment to reflect the approximately 20% discount to market value at which the Daimler-Benz Ordinary Shares and Daimler-Benz ADSs were sold in the Rights Offering) per Daimler-Benz Ordinary Share/ADS (approximately DM 10.3 billion in the aggregate), and subsequent sales of shares were "ex" such right. On June 12, 1998, and on June 15, 1998, the Daimler-Benz Ordinary Shares and the Daimler-Benz ADSs, respectively, began to trade "ex" the rights which were distributed to holders of Daimler-Benz Ordinary Shares and Daimler-Benz ADSs in connection with the Rights Offering. The following table sets forth the closing price per share of Chrysler Common Stock and per Daimler-Benz ADS as reported on the NYSE Composite Tape and the equivalent price per share of Chrysler Common Stock (determined in accordance with the U.S. Exchange Ratio Formula computed as if the Chrysler Effective Time had occurred on such date) as of (i) May 5, 1998 (the last full trading day before public disclosure of the proposed Transactions); (ii) certain interim dates of significance in relation to dividends; and (iii) October 14, 1998 (the latest practicable trading day prior to the effective date of the Registration Statement of which this Prospectus forms a part): EQUIVALENT PRICE CHRYSLER DAIMLER-BENZ OF CHRYSLER COMMON STOCK ADSS(1) COMMON STOCK(2) -------------- ------------ --------------- May 5, 1998....................................................... $ 41.4375 $ 102.0625 $ 55.8486 May 27, 1998...................................................... 54.7500 95.9375 58.6850 June 12, 1998..................................................... 53.7500 96.8750 59.2584 June 15, 1998..................................................... 51.7500 92.0625 57.4010 October 14, 1998.................................................. 43.5000 77.0000 48.0095 - ------------------------------ (1) Holders of Daimler-Benz Ordinary Shares on May 27, 1998, the date of the Annual General Meeting, became entitled to receive the Special Distribution of DM 20 per share as of that date, and subsequent sales of shares were "ex" such right. In addition, on June 12, 1998, and on June 15, 1998, the Daimler-Benz Ordinary Shares and the Daimler-Benz ADSs, respectively, began to trade "ex" the rights which were distributed to holders of Daimler-Benz Ordinary Shares and Daimler-Benz ADSs in connection with the Rights Offering. 26 (2) The U.S. Exchange Ratio Formula included in the Combination Agreement established a fixed share-for-share exchange ratio as of the May 7 date of the Combination Agreement, with additional agreed upon arithmetic adjustments to the exchange ratio that would take into account the anticipated effects of Chrysler's first quarter dividend and Daimler-Benz' regular annual dividend, Daimler-Benz' Special Distribution and Daimler-Benz' Rights Offering. The ratio under the formula before making any of the prescribed adjustments was 0.5472, and on such date no event had occurred for which the U.S. Exchange Ratio Formula provides any adjustment. Accordingly, the prices shown in this column at May 5, 1998 utilizes an exchange ratio of 0.5472. On May 27, 1998, holders of Daimler-Benz Ordinary Shares became entitled to receive the regular annual dividend of DM 1.60 and the Special Distribution, which resulted in an adjustment to the exchange ratio pursuant to the U.S. Exchange Ratio Formula. Accordingly, the prices shown in this column at May 27, 1998 and at June 12, 1998 utilize an exchange ratio of 0.6117. On June 15, 1998, all events for which adjustments are prescribed had occurred and their effect had been computed under the U.S. Exchange Ratio Formula. Such adjusted exchange ratio was 0.6235, which has been used to compute the price in this column on and after such date. ------------------------------ PROSPECTIVE INVESTORS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE CHRYSLER COMMON STOCK AND THE DAIMLER-BENZ ADSS. THE DAIMLERCHRYSLER ORDINARY SHARES HAVE NOT PREVIOUSLY BEEN PUBLICLY TRADED. FOLLOWING THE CONSUMMATION OF THE DAIMLER-BENZ EXCHANGE OFFER AND THE CHRYSLER MERGER, (I) IT IS INTENDED THAT THE DAIMLERCHRYSLER ORDINARY SHARES WILL BE LISTED AND TRADED ON THE SAME EXCHANGES AS THE DAIMLER-BENZ ORDINARY SHARES AND THE DAIMLER-BENZ ADSS AND (II) IT IS EXPECTED THAT THE DAIMLER-BENZ ORDINARY SHARES AND THE DAIMLER-BENZ ADSS WILL CEASE TO BE SO LISTED, AND THERE WILL BE NO ACTIVE TRADING MARKET THEREFOR. FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN THE DOLLAR AND THE MARK WILL AFFECT THE DOLLAR EQUIVALENT OF THE MARK PRICE OF DAIMLERCHRYSLER ORDINARY SHARES TRADED ON THE GERMAN STOCK EXCHANGES AND, AS A RESULT, ARE LIKELY TO AFFECT THE MARKET PRICE OF THE DAIMLERCHRYSLER ORDINARY SHARES ON THE NYSE. SUCH FLUCTUATIONS WILL ALSO AFFECT THE DOLLAR AMOUNTS RECEIVED BY HOLDERS OF DAIMLERCHRYSLER ORDINARY SHARES ON THE CONVERSION BY THE U.S. TRANSFER AGENT INTO DOLLARS OF CASH DIVIDENDS PAID IN MARKS ON THE DAIMLERCHRYSLER ORDINARY SHARES. On October 1, 1998, the index committee of the S&P 500 stock index announced that, because DaimlerChrysler is incorporated outside the U.S., DaimlerChrysler Ordinary Shares will not be included in the S&P 500 stock index. As a result, mutual funds that track the S&P 500, which currently hold a substantial number of shares of Chrysler Common Stock, will be required to sell such shares (or the DaimlerChrysler Ordinary Shares they receive in the Chrysler Merger). Such sales could adversely affect the market price for Chrysler Common Stock and DaimlerChrysler Ordinary Shares. TRADING ON THE FRANKFURT STOCK EXCHANGE The FSE is the most significant of the eight German stock exchanges and accounted for approximately 80% of the turnover in exchange-traded shares in Germany in 1997. As of December 31, 1997, equity securities traded on the FSE included the shares of 1,461 companies, 1,011 of which were non-German. Trading on the floor of the FSE commences each business day at 8:30 a.m. and continues until 5:00 p.m. Central European Time ("CET"). 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 themselves exchange members, but who do not, as a rule, deal with the public. Prices for active stocks, including those of larger companies, are quoted 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 trade execution. The FSE publishes a daily official list which includes the volume of recorded transactions in each listed stock, together with the prices of the highest and lowest recorded trades of the day. The list reflects price and volume information for trades completed by members on the floor during the day as well as for inter-dealer trades completed off the floor. The Daimler-Benz Ordinary Shares are, and the DaimlerChrysler Ordinary Shares are expected to be, traded on XETRA-Registered Trademark- (Exchange Electronic Trading), an integrated electronic exchange system introduced by Deutsche Borse AG in November 1997. XETRA-Registered Trademark- is available daily from 8:30 a.m. to 5:00 p.m. CET to 27 brokers and banks which are members of a German stock exchange. Securities traded by this system, which replaces IBIS (INTEGRIERTES BORSENHANDELS- UND INFORMATIONS-SYSTEM) with respect to all equity securities, include the thirty stocks of the Deutsche Aktienindex, the leading index of trading on the FSE ("DAX Index"), and the other 70 stocks included in the DAX 100 index. XETRA-Registered Trademark- is integrated into the FSE and is subject to its rules and regulations. Trading activities on the German stock exchanges are monitored by the Federal Supervisory Authority for Securities Trading (BUNDESAUFSICHTSAMT FUR DEN WERTPAPIERHANDEL). Following an amendment in 1995 of the German banks' standard terms and conditions for securities transactions, 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 sets forth, for the period indicated, the high and low closing sales price for the Daimler-Benz Ordinary Shares on the FSE (giving effect to the dilution caused by the discount to market at which the Daimler-Benz Ordinary Shares were sold in the Rights Offering), as reported by the FSE, together with the highs and lows of the DAX Index. PRICE PER DAIMLER-BENZ ORDINARY SHARE(1) DAX INDEX(2) -------------------- -------------------- HIGH LOW HIGH LOW --------- --------- --------- --------- (DM) (DM) 1996 First Quarter.......................................................... 81.04 71.35 2,525.42 2,248.86 Second Quarter......................................................... 83.59 77.51 2,573.69 2,457.49 Third Quarter.......................................................... 82.90 75.84 2,666.55 2,447.80 Fourth Quarter......................................................... 104.00 81.28 2,909.91 2,655.73 1997 First Quarter.......................................................... 130.88 102.62 3,460.59 2,848.77 Second Quarter......................................................... 139.32 120.43 3,805.29 3,215.24 Third Quarter.......................................................... 156.29 125.09 4,438.93 3,819.85 Fourth Quarter......................................................... 142.85 107.68 4,347.24 3,567.22 1998 First Quarter.......................................................... 171.00 116.65 5,102.35 4,087.28 Second Quarter(3)...................................................... 201.84 164.20 5,915.13 5,018.67 Third Quarter.......................................................... 184.90 139.80 6,171.43 4,433.87 Fourth Quarter (through October 14, 1998).............................. 131.50 105.80 4,318.52 3,896.08 - ------------------------ (1) Effective July 1, 1996, the nominal value of the Daimler-Benz Ordinary Shares was reduced to DM 5 per share from the previous level of DM 50 per share. This reduction had the effect of a 10 for 1 stock split, which in turn reduced the price at which one Daimler-Benz Ordinary Share trades to 1/10 of the price at which it previously traded. The figures for the first and second quarters of 1996 have been restated to reflect this change. In addition, figures for 1996, 1997 and the first and second quarters of 1998 have been adjusted to reflect the approximately 20% discount to market value at which the Daimler-Benz Ordinary Shares and Daimler-Benz ADSs were sold in the Rights Offering. See Note 3 below. (2) The DAX Index is a continuously updated, capital-weighted performance index of 30 German blue chip companies. Daimler-Benz represented approximately 6.2% of the DAX Index as of December 31, 1997. In principle, the shares included in the DAX Index were selected on the basis of their stock exchange turnover and their market capitalization. Adjustments to the DAX Index are made for capital changes, subscription rights and dividends. (3) Holders of Daimler-Benz Ordinary Shares on May 27, 1998, the date of the Annual General Meeting, became entitled to receive the Special Distribution of DM 20 per share as of that date, and subsequent sales of shares were "ex" such right. In addition, on June 12, 1998, the Daimler-Benz Ordinary Shares began to trade "ex" the rights which were distributed to holders of Daimler- Benz Ordinary Shares in connection with the Rights Offering. 28 CAPITALIZATION CHRYSLER The following table sets forth the consolidated capitalization of Chrysler at September 30, 1998. This table should be read in conjunction with the consolidated financial statements and related notes thereto. SEPTEMBER 30, 1998 ------------------ (IN MILLIONS OF DOLLARS) Short-Term Debt: Chrysler, excluding CFC, short-term debt.................................................... $ 386 Chrysler, excluding CFC, long-term debt due within one year................................. 43 CFC short-term debt......................................................................... 3,322 CFC long-term debt due within one year...................................................... 3,038 ------- TOTAL SHORT-TERM DEBT..................................................................... 6,789 ------- Long-Term Debt: Chrysler, excluding CFC, long-term debt due after one year.................................. 2,248 CFC long-term debt due after one year....................................................... 9,096 TOTAL LONG-TERM DEBT...................................................................... 11,344 Shareholders' Equity: Common stock................................................................................ 824 Additional paid-in capital.................................................................. 5,219 Retained earnings........................................................................... 12,557 Treasury stock.............................................................................. (5,398) ------- TOTAL SHAREHOLDERS' EQUITY................................................................ 13,202 ------- TOTAL CAPITALIZATION.......................................................................... $ 31,335 ------- ------- - ------------------------ DAIMLERCHRYSLER The following table sets forth the pro forma capitalization of DaimlerChrysler at June 30, 1998, reflecting the effects of the issuance in the Offering of the shares covered hereby and the Transactions, net of estimated expenses of $47.4 million (DM 85.7 million). (The June 30, 1998 pro forma information has been adjusted to reflect the current estimated offering price of the shares.) JUNE 30, 1998(1) ------------------------ (IN MILLIONS) Financial Liabilities(2).............................................................. $ 43,999 DM79,343 Shareholders' Equity.................................................................. 32,699 58,967 --------- ------------- TOTAL CAPITALIZATION.................................................................. $ 76,698 DM138,310 --------- ------------- --------- ------------- - ------------------------ (1) Translation of DaimlerChrysler combined financial information to U.S. dollars as of June 30, 1998 has been made solely for the convenience of the reader, at the rate of DM1.8033=$1.00, the Noon Buying Rate on June 30, 1998. (2) Of these liabilities, $37,486 (DM 67,599) relate to CFC and Daimler-Benz' financial services business. 29 DIVIDENDS CHRYSLER Chrysler declared cash dividends of approximately $277 million, $271 million, $266 million and $261 million in the first, second, third and fourth quarters of 1997, respectively, and approximately $257 million, $259 million and $259 million in the first, second and third quarters of 1998, respectively. Chrysler's ability to pay dividends depends upon its financial results, liquidity and financial condition and its ability to fund its product development and facility modernization programs. Dividends on the Chrysler Common Stock are payable at the discretion of Chrysler's Board of Directors out of surplus, as defined by the DGCL, or, in case there is no such surplus, out of Chrysler's net profits for the fiscal year in which the dividend is declared, the preceding fiscal year or both. See "Description of Chrysler Capital Stock." DAIMLERCHRYSLER Dividends will be proposed by the DaimlerChrysler Supervisory Board and the DaimlerChrysler Management Board, based on the year-end unconsolidated financial statements of DaimlerChrysler, and will be approved in respect of the prior year at the annual general meeting of DaimlerChrysler stockholders. It is anticipated that the annual general meeting will be convened during the second quarter of each year. Holders of record of DaimlerChrysler Ordinary Shares on the date of the general meeting of stockholders at which a dividend is declared are entitled to receive payment in full of the dividend declared in respect of the year for which it is declared, less any amounts required to be withheld on account of taxes or other governmental charges. Cash dividends payable to such holders will be paid in marks (or, following the changeover by DaimlerChrysler to the Euro, in Euros) and, for purposes of distribution to holders of DaimlerChrysler Ordinary Shares in the United States, will be converted by the U.S. Transfer Agent into dollars, at the holder's election. The dollar amount of dividends received by holders of DaimlerChrysler Ordinary Shares may be affected by fluctuations in exchange rates. See "Description of DaimlerChrysler Ordinary Shares--Dividends and Other Distributions." Subject to stockholder approval, dividends are expected to be declared and paid annually by DaimlerChrysler, although there can be no assurance as to the particular amounts that would be paid from year to year. The payment of future dividends will depend upon DaimlerChrysler's earnings, financial condition (including its cash needs), future earnings prospects and other factors. Dividends paid by DaimlerChrysler must be recommended by the DaimlerChrysler Management Board and the DaimlerChrysler Supervisory Board and approved by the stockholders of DaimlerChrysler at the annual general meeting. The Daimler-Benz Management Board and the Chrysler Board have determined, and the prospective DaimlerChrysler Management Board has indicated its concurrence, that an appropriate dividend policy for DaimlerChrysler under current business and economic conditions would result in DaimlerChrysler paying approximately the same annual dividend amount currently paid to Chrysler stockholders (after giving effect to the change in share ownership resulting from the U.S. Exchange Ratio). For a discussion of certain U.S. and German tax consequences with respect to the payment of dividends, see "The Transactions--Certain Tax Consequences to U.S. Holders--Certain Tax Consequences of Holding DaimlerChrysler Ordinary Shares" and "--Certain Tax Consequences to Non-U.S. Holders-- Certain German Tax Consequences to Non-German Holders of Holding DaimlerChrysler Ordinary Shares." 30 THE TRANSACTIONS GENERAL DaimlerChrysler has commenced the Daimler-Benz Exchange Offer to (a) the holders of Daimler-Benz Ordinary Shares to exchange one DaimlerChrysler Ordinary Share for each Daimler-Benz Ordinary Share held by such holder, and (b) the holders of Daimler-Benz ADSs to exchange one DaimlerChrysler Ordinary Share for each Daimler-Benz ADS held by such holder; PROVIDED that, if the 90% Minimum Condition is satisfied so that the Transactions can be accounted for as a pooling-of-interests, then each exchanging holder will receive 1.005 DaimlerChrysler Ordinary Shares for each share exchanged. Immediately following consummation of the Daimler-Benz Exchange Offer, the Chrysler Merger will be consummated. Any issuance by Chrysler of the shares covered hereby will be completed prior to consummation of the Chrysler Merger. In the Chrysler Merger, each share of Chrysler Common Stock, including the shares covered hereby (other than Chrysler Common Stock held in treasury or by a wholly owned subsidiary of Chrysler), will be converted into the right to receive 0.6235 of a DaimlerChrysler Ordinary Share. As soon as possible following the consummation of the Chrysler Merger, the Daimler-Benz Merger will be consummated. As a result of the Daimler-Benz Merger, each outstanding Daimler-Benz Ordinary Share will be converted into the right to receive that number of DaimlerChrysler Ordinary Shares equal to the Daimler-Benz Exchange Offer Ratio. The Transactions will have the effect of combining the respective businesses, stockholder groups, managements and other constituencies of Chrysler and Daimler-Benz in a "merger-of-equals" transaction. As a result of the Transactions, Daimler-Benz will be merged with and into DaimlerChrysler, with DaimlerChrysler remaining as the surviving entity, and Chrysler will become a wholly owned subsidiary of DaimlerChrysler. Immediately after the consummation of the Transactions, the former stockholders of Chrysler, including the persons who acquire the shares of Chrysler Common Stock covered hereby, and Daimler-Benz will own all the issued and outstanding DaimlerChrysler Ordinary Shares. See "Selected Historical and Pro Forma Combined Financial Data--Selected Pro Forma Combined Financial Data" and "Unaudited Pro Forma Combined Financial Information." 31 The diagrams set forth below are intended to provide a graphic illustration of the corporate mechanics and the immediate corporate structuring results of (1) the Daimler-Benz Exchange Offer and the Chrysler Merger and (2) the Daimler-Benz Merger. [LOGO] 32 [LOGO] 33 CONDITIONS TO THE TRANSACTIONS It is currently expected that the Transactions will be completed by year-end 1998, but delays could result if all conditions to the Transactions are not satisfied. The Combination Agreement may be terminated by either party if the Transactions are not consummated by January 31, 1999. Consummation of the Transactions is subject to various conditions, including, among others, the following: - the tender into the Daimler-Benz Exchange Offer no later than at the time of its expiration of at least 90% of the outstanding Daimler-Benz Ordinary Shares and Daimler-Benz ADSs in the aggregate; PROVIDED, HOWEVER, that if the number of Daimler-Benz Ordinary Shares and Daimler-Benz ADSs tendered do not satisfy the 90% Minimum Condition but equals at least 75% of the issued and outstanding Daimler-Benz Ordinary Shares on a primary basis, including Daimler-Benz Ordinary Shares represented by Daimler-Benz ADSs, at the time of registration with the commercial register (HANDELSREGISTER) of the capital increases relating to the DaimlerChrysler Ordinary Shares being issued in exchange therefore (the "75% Minimum"), the minimum condition for the Daimler-Benz Exchange Offer shall be the 75% Minimum (and this offering will not be made). Consistent with the private letter ruling received from the IRS on September 4, 1998, and in accordance with the provisions of the Combination Agreement, Chrysler and Daimler-Benz have agreed to the 75% Minimum which represents a reduction from the requirement set forth in the Combination Agreement that shares representing at least 80% of the capital stock of Daimler-Benz on a fully diluted basis (the "80% Minimum") be tendered in order to satisfy the 80% Minimum and permit the 90% Minimum Condition to be redefined as the 80% Minimum. - if the Transactions are to be accounted for as a "pooling of interests," the issuance and sale for cash by Chrysler of the shares of Chrysler Common Stock covered hereby (or such greater or lesser number as will allow the Mergers to be accounted for as a "pooling of interests") - the receipt of tax opinions from the respective tax counsel of Daimler-Benz and Chrysler regarding certain United States and German income tax consequences of the Transactions and the receipt by Chrysler of a private letter ruling from the IRS (which private letter ruling was received from the IRS on September 4, 1998) - satisfaction of all the conditions to the consummation of the Daimler-Benz Exchange Offer, except that Chrysler's obligation to complete the Chrysler Merger is subject to completion of the Daimler-Benz Exchange Offer Except for the 75% Minimum and the required regulatory approvals, the conditions to the Transactions may be waived by the party entitled to assert the condition. Waiver of the 75% Minimum would require the written consent of both Daimler-Benz and Chrysler. Neither Daimler-Benz nor Chrysler intends to waive the condition for receipt of the tax opinions; Chrysler will not waive this condition without first circulating revised proxy materials to, and resoliciting the vote of, its stockholders with respect to the Transactions. The Combination Agreement may be terminated at any time prior to the effective time of the Chrysler Merger by the mutual consent of Chrysler and Daimler-Benz and by either of them individually under certain specified circumstances, including, among others, (i) the failure to consummate both the Chrysler Merger and the Daimler-Benz Exchange Offer by January 31, 1999; or (ii) the imposition or enactment of any judgment, order, statute, law, rule or regulation or other legal restraint or prohibition which effectively prevents the consummation of the Transactions, or which otherwise is reasonably likely to have a material adverse effect on Chrysler or Daimler-Benz. There can be no assurance whether or under what terms the Transactions will be consummated, or as to the extent to which, if the Transactions are consummated, DaimlerChrysler (as the successor to Daimler-Benz) will realize any of the anticipated benefits of the Transactions. 34 GOVERNANCE OF DAIMLERCHRYSLER The Combination Agreement contemplates that following the Chrysler Effective Time, DaimlerChrysler will have a corporate governance structure reflecting that the Transactions contemplate a "merger-of-equals." Daimler-Benz, Chrysler and DaimlerChrysler have agreed that: (i) the DaimlerChrysler Articles of Association and the Management Board (VORSTAND) Rules of Procedure (GESCHAFTSORDNUNG) of DaimlerChrysler, in each case, following the Chrysler Effective Time, shall be in form and substance reasonably acceptable to Chrysler and Daimler-Benz. (ii) until the DaimlerChrysler Supervisory Board has to be composed in accordance with Germany's Co-determination Law of 1976, the DaimlerChrysler Supervisory Board shall be composed of twelve members representing the stockholders, six of whom shall have been recommended, immediately prior to the Chrysler Effective Time, by Daimler-Benz from the then-current non- employee representative members (ANTEILSEIGNERVERTRETER) of the Daimler-Benz Supervisory Board and six of whom shall have been recommended, immediately prior to the Chrysler Effective Time, by Chrysler from the then-current outside members of the Chrysler Board. For the period thereafter, the DaimlerChrysler Supervisory Board shall consist of twenty members; five of the members of the restructured DaimlerChrysler Supervisory Board shall have been recommended by Daimler-Benz from non-employee representative members (ANTEILSEIGNERVERTRETER) of the Daimler-Benz Supervisory Board, five of the members shall have been recommended by Chrysler from the outside members of the Chrysler Board, and the remaining ten members shall be employee representatives. The German metalworkers union IG Metall and the United Automobile Workers union (the "UAW") have announced that IG Metall will nominate a UAW member for election to one of the three seats on the DaimlerChrysler Supervisory Board reserved for nominees of IG Metall. (iii) for a period of not less than two years following the Chrysler Effective Time, the current Chairman of Daimler-Benz' Supervisory Board (AUFSICHTSRAT) shall continue as the Chairman of the DaimlerChrysler Supervisory Board. (iv) the DaimlerChrysler Management Board shall initially consist of 18 members. In general, 50% of such members shall be those designated by Chrysler, and 50% of such members shall be those designated by Daimler-Benz, and there will be two additional members with responsibility for Daimler-Benz' non-automotive businesses. For three years following the Chrysler Effective Time, Jurgen E. Schrempp and Robert J. Eaton shall be the Co-CEOs and Co-Chairmen (VORSTANDSVORSITZENDE) of the DaimlerChrysler Management Board and members of the Office of the Chairmen of DaimlerChrysler. Mr. Eaton has indicated his intention to retire from such position after three years. Set forth in the chart below are the names and areas of responsibilities of those persons expected to be members of the DaimlerChrysler Management Board following the Chrysler Effective Time. The Combination Agreement also provides that (a) the DaimlerChrysler Management Board shall establish an Integration Committee with a consultative function which shall consist of the Co-Chairmen of the DaimlerChrysler Management Board, who shall also serve as Co-Chairmen of the Integration Committee, and 12 or more members (including such Co-Chairmen), 50% of whom shall be designated by Chrysler and 50% of whom shall be designated by Daimler-Benz; (b) following the Chrysler Effective Time, DaimlerChrysler shall maintain two operational headquarters, one located at the current headquarters of Daimler-Benz, and one located at the current headquarters of Chrysler; and (c) following the Chrysler Effective Time, English shall be the official language for the management of DaimlerChrysler. There will also be a Chairmen's Integration Council which will consist of the persons identified on the chart set forth below. The DaimlerChrysler Management Board (VORSTAND) is responsible for managing DaimlerChrysler and representing DaimlerChrysler in its dealings with third parties. The DaimlerChrysler Supervisory Board appoints and removes the members of the DaimlerChrysler Management Board and oversees the 35 management of DaimlerChrysler, but is prohibited by the German Stock Corporation Law (AKTIENGESETZ) from making management decisions. The German Stock Corporation Law (AKTIENGESETZ) prohibits simultaneous membership on the board of management and the supervisory board of a company. The Integration Committee will be a stockholders advisory body including the Co-Chairmen and consisting principally of the stockholder representatives on the DaimlerChrysler Supervisory Board. The Integration Committee will provide advice to the Management Board (VORSTAND) of DaimlerChrysler in connection with the combined businesses and operations of DaimlerChrysler following consummation of the Transactions. The Chairmen's Integration Council (Office of the Chairmen) will be responsible for, among other things, managing the integration of Chrysler and Daimler-Benz. The Combination Agreement contains no provisions that would bar governance changes after the Transactions have been consummated. 36 [GRAPHIC] 37 CERTAIN TAX CONSEQUENCES TO U.S. HOLDERS UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE CHRYSLER EXCHANGE The following is a discussion of the material United States federal income tax consequences to U.S. Holders of Chrysler Common Stock who exchange such shares for DaimlerChrysler Ordinary Shares pursuant to the Chrysler Exchange. This discussion is based upon existing United States federal income tax law, including legislation, regulations, administrative rulings and court decisions, as in effect on the date of this Prospectus, all of which are subject to change, possibly with retroactive effect. For purposes of this discussion, a "U.S. Holder" is a beneficial owner of Chrysler Common Stock that is (i) an individual citizen or resident of the United States, (ii) a corporation created or organized in or under the laws of the United States, any state thereof or the District of Columbia or (iii) a partnership, trust or estate treated, for United States federal income tax purposes, as a domestic partnership, trust or estate. This discussion assumes that U.S. Holders hold Chrysler Common Stock as a capital asset as of the Chrysler Effective Time. This discussion does not discuss all aspects of United States federal income taxation that may be relevant to all U.S. Holders in light of their particular circumstances, such as U.S. Holders whose stock was acquired pursuant to the exercise of an employee stock option or otherwise as compensation or U.S. Holders who are subject to special treatment under the United States federal income tax laws (for example, financial institutions, insurance companies, tax-exempt organizations and broker-dealers). This discussion also does not address any aspects of state, local or non-United States tax law. EACH PROSPECTIVE INVESTOR IS STRONGLY ADVISED TO CONSULT HIS OR HER OWN TAX ADVISORS AS TO THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE CHRYSLER EXCHANGE, INCLUDING THE PARTICULAR FACTS AND CIRCUMSTANCES THAT MAY BE UNIQUE TO SUCH INVESTOR, AND AS TO ANY ESTATE, GIFT, STATE, LOCAL OR NON-UNITED STATES TAX CONSEQUENCES OF THE CHRYSLER EXCHANGE. The Chrysler Exchange is intended to qualify as a reorganization within the meaning of Section 368(a) of the Code and/or, when integrated with the Daimler-Benz Exchange Offer and taking into account the Daimler-Benz Merger, to be treated as a transaction described in Section 351(a) of the Code. The obligation of Chrysler to consummate the Chrysler Exchange is conditioned upon the receipt by Chrysler from Debevoise & Plimpton of an opinion, based on a private letter ruling from the IRS addressing certain issues under Section 367(a)(1) of the Code (the "Private Letter Ruling") (which private letter ruling was received from the IRS on September 4, 1998), representation letters and assumptions, substantially to the effect that for United States federal income tax purposes, the Chrysler Exchange, taking into account the Daimler-Benz Exchange Offer and the Daimler-Benz Merger, should be treated as a non-recognition transfer of Chrysler Common Stock by the holders thereof in exchange for DaimlerChrysler Ordinary Shares (the "Chrysler Tax Opinion"). Assuming that the Chrysler Exchange does qualify for such non-recognition treatment, in the opinion of Debevoise & Plimpton, subject to the assumptions and qualifications set forth under the heading "Certain Tax Consequences to U.S. Holders--United States Federal Income Tax Consequences of the Chrysler Exchange," the following discussion, to the extent it describes matters of law and legal conclusions, sets forth the material United States federal income tax consequences of the Chrysler Exchange to the U.S. Holders of Chrysler Common Stock under the law in effect as of the date of this Prospectus. A U.S. Holder who receives DaimlerChrysler Ordinary Shares in exchange for Chrysler Common Stock will not recognize gain or loss upon such exchange (except as described below with respect to cash that is received with respect to a fractional DaimlerChrysler Ordinary Share). Accordingly, (i) the aggregate tax basis of the DaimlerChrysler Ordinary Shares received by the U.S. Holder will be the same as the aggregate tax basis of the Chrysler Common Stock surrendered in exchange therefor pursuant to the Chrysler Exchange (adjusted with respect to fractional shares) and (ii) the holding period of the DaimlerChrysler Ordinary Shares will include the holding period of the Chrysler Common Stock surrendered in exchange therefor pursuant to the Chrysler Exchange. A U.S. Holder who is a "5% shareholder" 38 of DaimlerChrysler in accordance with applicable Treasury Regulations under Section 367(a) of the Code will qualify for the treatment described in this paragraph only if such U.S. Holder files a "gain recognition agreement" with the IRS. A U.S. Holder who receives cash with respect to a fractional DaimlerChrysler Ordinary Share in the Chrysler Exchange will be treated as having received such fractional share pursuant to the Chrysler Exchange and then as having sold such fractional share for cash. The amount of any capital gain or loss attributable to such sale will be equal to the difference between the cash received with respect to the fractional share and the ratable portion of the tax basis of the Chrysler Common Stock surrendered that is allocated to such fractional share. Chrysler is permitted under the Combination Agreement to waive (but does not intend to waive) the receipt of the Chrysler Tax Opinion as a condition to its obligation to consummate the Chrysler Exchange. Chrysler will not waive this condition without first recirculating revised proxy materials and resoliciting the vote of its stockholders. Furthermore, the Chrysler Tax Opinion is not binding on the IRS or a court and does not preclude the IRS or a court from adopting a contrary position. Chrysler will not seek a ruling from the IRS as to the tax treatment of the Chrysler Exchange as a non-recognition transfer, except with respect to certain issues under Section 367(a)(1) of the Code. If the Chrysler Exchange is not treated as a non-recognition transfer, a U.S. Holder would recognize capital gain or loss equal to the difference between the aggregate fair market value of the DaimlerChrysler Ordinary Shares received and the aggregate tax basis of the Chrysler Common Stock surrendered in exchange therefor. CERTAIN TAX CONSEQUENCES OF HOLDING DAIMLERCHRYSLER ORDINARY SHARES The following is a discussion of the material United States federal income and German tax consequences to Qualified Holders holding DaimlerChrysler Ordinary Shares. This discussion is based upon 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 Prospectus, all of which are subject to change, possibly with retroactive effect. For purposes of this discussion, in general, a "Qualified Holder" means a U.S. Holder that (i) is 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, (ii) does not hold DaimlerChrysler Ordinary Shares as part of the business property of a permanent establishment located in Germany or as part of a fixed base of an individual located in Germany and used for the performance of independent personal services and (iii) if not an individual, is not subject to the limitation on benefits restrictions in the Income Tax Treaty. This discussion assumes the Qualified Holder holds DaimlerChrysler Ordinary Shares as a capital asset. This discussion does not discuss all aspects of United States federal income and German taxation that may be relevant to all Qualified Holders in light of their particular circumstances, such as Qualified Holders whose stock was acquired pursuant to the exercise of an employee stock option or otherwise as compensation or Qualified Holders who are subject to special treatment under the United States federal income tax laws (for example, financial institutions, insurance companies, tax-exempt organizations and broker-dealers). This discussion also does not address any aspects of state, local or non-United States (other than certain German) tax law. 39 EACH PROSPECTIVE INVESTOR IS STRONGLY ADVISED TO CONSULT HIS OR HER OWN TAX ADVISORS AS TO THE UNITED STATES FEDERAL INCOME AND GERMAN TAX CONSEQUENCES OF HOLDING DAIMLERCHRYSLER ORDINARY SHARES, INCLUDING THE PARTICULAR FACTS AND CIRCUMSTANCES THAT MAY BE UNIQUE TO SUCH INVESTOR, AND AS TO ANY OTHER TAX CONSEQUENCES OF HOLDING DAIMLERCHRYSLER ORDINARY SHARES. TAXATION OF DIVIDENDS Under German law, German corporations are required to withhold tax on dividends in an amount equal to 25% of the gross amount paid to resident and nonresident stockholders. A partial refund of this 25% withholding tax can be obtained by Qualified Holders under the Income Tax Treaty (subject to certain limitations). Qualified Holders generally are subject to United States federal income tax on dividends paid by German corporations. Subject to applicable limitations of United States federal income tax law, Qualified Holders may be able to claim a foreign tax credit for certain German income taxes paid. The amount of the refund of German withholding tax and the determination of the foreign tax credit allowable against United States federal income tax generally depend on whether or not the Qualified Holder is a United States corporation owning at least 10% of the voting stock of DaimlerChrysler (a "10% Holder"). In the case of any Qualified Holder other than a 10% Holder, the German withholding tax is partially refunded under the Income Tax Treaty, effectively reducing the withholding tax to 15% of the gross amount of the dividend. In addition, so long as the German imputation system provides German resident individual stockholders with a tax credit in respect of dividends paid by German corporations, the Income Tax Treaty provides that Qualified Holders (other than 10% Holders) are entitled to an additional refund equal to 5% of the gross amount of the dividend. For United States federal income tax purposes, the benefit resulting from this additional 5% treaty refund is treated as a refund received by the Qualified Holder with respect to German corporate taxes equal to 5.88% of the gross amount of the dividend, subject to a German withholding tax of 0.88% (15% of 5.88%). Qualified Holders (other than, in certain circumstances, 10% Holders) will not be entitled to the dividends received deduction with respect to dividends paid by DaimlerChrysler. Thus, for each $100 of gross dividend paid by DaimlerChrysler to a Qualified Holder (other than a 10% Holder), the dividend after partial refund of the 25% withholding tax under the Income Tax Treaty will be subject to a German withholding tax of $15. If the Qualified Holder also applies for the additional 5% treaty refund, German withholding tax is effectively reduced to $10; the cash received per $100 of gross dividend is $90. For United States federal income tax purposes, the Qualified Holder generally is treated as receiving a total dividend of $105.88 (to the extent paid out of current or accumulated earnings and profits of DaimlerChrysler as determined for United States federal income tax purposes), consisting of the $100 gross dividend and the deemed refund of German corporate tax of $5.88. The notional $105.88 dividend is deemed to have been subject to German withholding tax of $15.88. Thus, for each $100 of gross dividend, the Qualified Holder will include $105.88 in gross income and may be entitled to a foreign tax credit of $15.88, subject to applicable limitations of United States federal income tax law. In the case of a 10% Holder, the 25% German withholding tax is reduced under the Income Tax Treaty to 5% of the gross amount of the dividend. Such 10% Holders may, therefore, apply for a refund of German withholding tax in the amount of 20% of the gross amount of the dividend. Subject to applicable limitations of United States federal income tax laws, a 10% Holder may be entitled to a foreign tax credit for the 5% German withholding tax on dividends and for the portion of the total income taxes (trade income tax and corporation income tax including any surtax) paid by DaimlerChrysler attributable to the distributed profits. Dividends paid in marks (or Euros) to a Qualified Holder of DaimlerChrysler Ordinary Shares will be included in income in a dollar amount calculated by reference to the exchange rate in effect on the date the dividends (including any deemed refund of German corporate tax) are received or treated as received 40 by such holder. If dividends paid in marks (or Euros) are converted into dollars on the date received or treated as received, Qualified Holders generally should not be required to recognize foreign currency gain or loss in respect of each dividend. A surtax on the German withholding tax is currently levied on dividend distributions paid by a German resident company. Effective January 1, 1998, the rate of this surtax has been reduced from 7.5% to 5.5%. Based on the new rate, the surtax amounts to 1.375% (5.5%X25%) of the gross dividend amount. Under the Income Tax Treaty, Qualified Holders are entitled to a full refund of this surtax. Under Section 904(g) of the Code, dividends paid by a foreign corporation that is treated as more than 50% owned by United States persons may be treated as United States source income (rather than foreign source income) for foreign tax credit purposes, to the extent the foreign corporation earns United States source income. Such treatment may adversely affect Qualified Holders' ability to use foreign tax credits. It is possible that, after the Transactions, DaimlerChrysler may be treated as more than 50% owned by United States persons for purposes of Section 904(g) of the Code. REFUND PROCEDURES To claim the refund reflecting the reduction of the German withholding tax from 25% to 15% (to 5% for 10% Holders), the additional 5% treaty refund and the refund of the 5.5% German surtax, when applicable, a Qualified Holder must submit (either directly or, as described below, through the U.S. Transfer Agent) a claim for refund to the German tax authorities, with the original bank voucher (or certified copy thereof) issued by the paying entity documenting the tax withheld within four years from the end of the calendar year in which the dividend is received. Claims for refund are made on a special German claim for refund form, which must be filed with the German tax authorities: Bundesamt fur Finanzen, 53221 Bonn-Beuel, Germany. The German claim for refund forms may be obtained from the German tax authorities at the same address where the applications are filed, from the Embassy of the Federal Republic of Germany, 4645 Reservoir Road, N.W., Washington, D.C. 20007-1998 or from the Office of International Operations, Internal Revenue Service, 1325 K Street, N.W., Washington, D.C. 20225, Attention: Taxpayer Service Division, Room 900. Qualified Holders must also submit to the German tax authorities certification (IRS Form 6166) of their last filed United States federal income tax return. Such certification is obtained from the office of the Director of the Internal Revenue Service Center by filing a request for certification with the Internal Revenue Service Center in Philadelphia, Pennsylvania, Foreign Certificate Request, P.O. Box 16347, Philadelphia, PA 19114-0447. Requests for certification are to be made in writing and must include the Qualified Holder's name, social security number or employer identification number, tax return form number and tax period for which certification is requested. The IRS will send the certification directly to the German tax authorities. This certification is valid for three years and need only be resubmitted in a fourth year in the event of a subsequent application for refund. In accordance with arrangements under the U.S. Transfer Agent Agreement (as defined herein), the DaimlerChrysler Ordinary Shares held by certain Qualified Holders will be registered with the U.S. Transfer Agent, which will receive and distribute dividends to Qualified Holders of DaimlerChrysler Ordinary Shares and perform administrative functions necessary to claim the refund reflecting the reduction in German withholding tax from 25% to 15% (to 5% for 10% Holders), the additional 5% treaty refund and the refund of the 5.5% German surtax, when applicable, for such holders. These arrangements may be amended or revoked at any time in the future. The U.S. Transfer Agent will prepare the German claim for refund forms on behalf of certain of the Qualified Holders of DaimlerChrysler Ordinary Shares and file them with the German tax authorities. In order for the U.S. Transfer Agent to file the claim for refund forms, the U.S. Transfer Agent will prepare and mail to the Qualified Holders of such DaimlerChrysler Ordinary Shares, and such holders will be requested to sign and return to the U.S. Transfer Agent, (i) a statement authorizing the U.S. Transfer 41 Agent to perform these procedures and agreeing that the German tax authorities may inform the IRS of any refunds of German taxes and (ii) a written authorization to remit the refund of withholding to an account other than that of the Qualified Holder. Qualified Holders must also submit to the U.S. Transfer Agent certification (IRS Form 6166) of their last filed United States federal income tax return. The U.S. Transfer Agent will attach the signed statement, the IRS Form 6166 and the documentation issued by the paying agency documenting the dividend paid and the tax withheld to the claim for refund form and file them with the German tax authorities. To the extent Qualified Holders own DaimlerChrysler Ordinary Shares registered with brokers participating in the Depository Trust Company, it is expected that such brokers will assist the U.S. Transfer Agent in performing the procedures described above and, in particular, prepare and forward the German claim for refund forms together with the required documentation to the U.S. Transfer Agent. The U.S. Transfer Agent will then file the German claim for refund forms and any attachments thereto with the German tax authorities. The German tax authorities will issue refunds denominated in marks (or Euros). In the case of DaimlerChrysler Ordinary Shares held by certain Qualified Holders, the refunds will be issued in the name of the U.S. Transfer Agent, which will convert the refunds to dollars and issue corresponding refund checks to the Qualified Holders of such DaimlerChrysler Ordinary Shares and brokers. Such brokers, in turn, will remit corresponding refund amounts to the Qualified Holders holding DaimlerChrysler Ordinary Shares registered with such brokers. Qualified Holders of DaimlerChrysler Ordinary Shares who receive a refund attributable to reduced withholding taxes under the Income Tax Treaty may be required to recognize foreign currency gain or loss, which will be treated as ordinary income or loss, to the extent that the dollar value of the refund received or treated as received by the Qualified Holder differs from the U.S. dollar equivalent of the refund on the date the dividend on which such withholding taxes were imposed was received or treated as received by the Qualified Holder. TAXATION OF CAPITAL GAINS Under the Income Tax Treaty, a Qualified Holder will not be liable for German tax on capital gains realized or accrued on the sale or other disposition of DaimlerChrysler Ordinary Shares. Upon a sale or other disposition of DaimlerChrysler Ordinary Shares, a Qualified Holder will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the amount realized and the Qualified Holder's aggregate tax basis in the DaimlerChrysler Ordinary Shares. In the case of an individual Qualified Holder of DaimlerChrysler ADSs or DaimlerChrysler Ordinary Shares, any such capital gain will be subject to a maximum United States federal income tax rate of 20%, if the individual Qualified Holder's holding period in such DaimlerChrysler Ordinary Shares is more than 12 months. GIFT AND INHERITANCE TAXES The United States-Germany estate tax treaty provides that an individual whose domicile is determined to be in the United States for purposes of such treaty will not be subject to German inheritance and gift tax (the equivalent of the United States federal estate and gift tax) on the individual's death or making of a gift unless the DaimlerChrysler Ordinary Shares (i) are part of the business property of a permanent establishment located in Germany or (ii) are part of the assets of a fixed base of an individual located in Germany and used for the performance of independent personal services. An individual's domicile in the United States, however, does not prevent imposition of German inheritance and gift tax with respect to an heir, donee or other beneficiary who is domiciled in Germany at the time the individual died or the gift was made. The United States-Germany estate tax treaty also provides a credit against United States federal estate and gift tax liability for the amount of inheritance and gift tax paid in Germany, subject to certain 42 limitations, in a case where the DaimlerChrysler Ordinary Shares are subject to German inheritance or gift tax and United States federal estate or gift tax. GERMAN CAPITAL TAX (VERMOGENSTEUER) The Income Tax Treaty provides that a Qualified Holder will not be subject to German capital tax (VERMOGENSTEUER) with respect to the DaimlerChrysler Ordinary Shares. As a result of a judicial decision, the German capital tax (VERMOGENSTEUER) presently is not imposed. OTHER GERMAN TAXES There are no German transfer, stamp or other similar taxes that would apply to Qualified Holders upon receipt (including pursuant to the Chrysler Exchange), purchase, holding or sale of DaimlerChrysler Ordinary Shares. UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING Distributions of dividends on DaimlerChrysler Ordinary Shares paid within the United States or through certain United States-related financial intermediaries are subject to information reporting and may be subject to backup withholding at a 31% rate unless the Qualified Holder (i) is a corporation or other exempt recipient or (ii) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. CERTAIN TAX CONSEQUENCES TO NON-U.S. HOLDERS CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES OF HOLDING CHRYSLER COMMON STOCK The following is a discussion of certain United States federal income and estate tax consequences to Non-U.S. Holders of holding Chrysler Common Stock. This discussion is based on existing United States federal income and estate tax law, including legislation, regulations, administrative rulings and court decisions, as in effect on the date of this Prospectus, all of which are subject to change, possibly with retroactive effect. For purposes of this discussion, a "Non-U.S. Holder" is a beneficial owner of Chrysler Common Stock, other than (i) an individual citizen or resident of the United States, (ii) a corporation created or organized in or under the laws of the United States, any state thereof or the District of Columbia, or (iii) a partnership, trust or estate treated, for United States federal income tax purposes, as a domestic partnership, trust or estate. This discussion does not discuss all aspects of United States federal income and estate taxation that may be relevant to a Non-U.S. Holder in light of its particular circumstances. This discussion also does not address any aspects of state, local or non-United States tax law. EACH PROSPECTIVE INVESTOR IS STRONGLY ADVISED TO CONSULT HIS OR HER OWN TAX ADVISORS AS TO THE UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES OF HOLDING CHRYSLER COMMON STOCK, INCLUDING THE PARTICULAR FACTS AND CIRCUMSTANCES THAT MAY BE UNIQUE TO SUCH INVESTOR, AND AS TO ANY OTHER TAX CONSEQUENCES OF HOLDING CHRYSLER COMMON STOCK. DIVIDENDS Generally, dividends paid on Chrysler Common Stock to a Non-U.S. Holder will be subject to United States federal income tax. Except for dividends that are effectively connected with a Non-U.S. Holder's conduct of a trade or business within the United States, this tax is imposed and collected by withholding at the rate of 30% of the amount of the dividend, unless reduced by an applicable tax treaty. Currently, dividends paid to an address in a country other than the United States generally are presumed to be paid to a resident of such country for purposes of determining the applicability of a treaty. 43 Under recently finalized Treasury Regulations relating to withholding of tax on non-United States persons, which apply to dividends paid after December 31, 1999 (the "Final Withholding Regulations"), a Non-U.S. Holder (or, in the case of a Non-U.S. Holder that is a fiscally transparent entity, the owner or owners of such entity) who wishes to claim the benefit of an applicable tax treaty generally is required to satisfy certain certification and documentation requirements. Except as may be otherwise provided in an applicable tax treaty, dividends paid on Chrysler Common Stock to a Non-U.S. Holder that are effectively connected with such Non-U.S. Holder's conduct of a trade or business within the United States are subject to United States federal income tax on a net income basis, rather than the 30% withholding tax mentioned above. Any effectively connected dividends received by a non-United States corporation may also, under certain circumstances, be subject to an additional "branch profits" tax at a 30% rate, or such lower rate as may be provided in an applicable tax treaty. A Non-U.S. Holder who wishes to claim an exemption from withholding for effectively connected dividends is generally required to satisfy certain certification and documentation requirements. SALE OR OTHER DISPOSITION OF CHRYSLER COMMON STOCK Generally, a Non-U.S. Holder will not be subject to United States federal income tax (including withholding thereof) on any gain recognized on a sale or other disposition of Chrysler Common Stock, including pursuant to the Transactions, unless (i) the gain is effectively connected with such Non-U.S. Holder's conduct of a trade or business within the United States (in which case the "branch profits" tax described above may also apply if such Non-U.S. Holder is a non-United States corporation); (ii) in the case of a Non-U.S. Holder who is a nonresident alien individual and holds Chrysler Common Stock as a capital asset, such Non-U.S. Holder is present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are met; (iii) Chrysler is or has been a "United States real property holding corporation" for United States federal income tax purposes at any time during the shorter of the five-year period preceding the disposition or such Non-U.S. Holder's holding period (which Chrysler does not believe it has been or is currently) and certain other conditions are met or (iv) such Non-U.S. Holder is subject to tax pursuant to United States federal income tax provisions applicable to certain United States expatriates. ESTATE TAX If an individual Non-U.S. Holder owns, or is treated as owning, Chrysler Common Stock at the time of his or her death, such stock would be subject to United States federal estate tax imposed on the estates of nonresident aliens, unless relief is available under an applicable tax treaty. BACKUP WITHHOLDING AND INFORMATION REPORTING United States backup withholding tax generally will not apply to dividends paid on Chrysler Common Stock that are subject to the 30% or reduced treaty rate of withholding previously discussed. Furthermore, under current law, dividends paid on Chrysler Common Stock to a Non-U.S. Holder at an address outside the United States are generally exempt from backup withholding tax (but not from 30% withholding tax, as discussed above). Chrysler must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with respect to, such Non-U.S. Holder, regardless of whether withholding tax was reduced by an applicable income tax treaty. Copies of these information returns may also be made available under the provisions of a specific income tax treaty or agreement to the tax authorities in the country in which the Non-U.S. Holder resides. Under the Final Withholding Regulations, for dividends paid after December 31, 1999, a non-United States person must generally provide proper documentation indicating non-United States status to a withholding agent in order to avoid backup withholding tax. However, dividends paid to certain exempt 44 recipients (not including individuals) will not be subject to backup withholding even if such documentation is not provided if the withholding agent is allowed to rely on certain presumptions concerning the recipient's non-United States status (including payment to an address outside the United States). Payments of proceeds from the sale of Chrysler Common Stock by a Non-U.S. Holder made to or through a non-United States office of a broker generally will not be subject to information reporting or backup withholding. However, payments made to or through (i) a non-United States office of a United States broker or (ii) a non-United States office of a non-United States broker that has certain specified connections with the United States, are generally subject to information reporting (but not backup withholding) unless the holder certifies its non-United States status under penalties of perjury or otherwise establishes its entitlement to an exemption. Payments of proceeds from the sale of Chrysler Common Stock by a Non-U.S. Holder made to or through a United States office of a broker are generally subject to both information reporting and backup withholding at a rate of 31% unless the holder certifies its non-United States status under penalties of perjury or otherwise establishes its entitlement to an exemption. Any amounts withheld under the backup withholding rules are not an additional tax and a Non-U.S. Holder may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS. CERTAIN GERMAN TAX CONSEQUENCES TO NON-GERMAN HOLDERS OF HOLDING DAIMLERCHRYSLER ORDINARY SHARES The following is a discussion of certain German tax consequences to Non-German Holders of holding DaimlerChrysler Ordinary Shares. This discussion is based upon German tax law, including legislation, regulations, administrative rulings and court decisions, and typical tax and other treaties between Germany and other countries, as in effect on the date of this Prospectus, all of which are subject to change, possibly with retroactive effect. For purposes of this discussion, a "Non-German Holder" is a beneficial owner of DaimlerChrysler Ordinary Shares that is not a German resident for German income tax purposes and does not hold DaimlerChrysler Ordinary Shares as part of a permanent establishment or a fixed base in Germany. This discussion does not discuss all aspects of German taxation that may be relevant to all Non-German Holders in light of their particular circumstances. This discussion also does not address any aspects of non-German tax law. EACH PROSPECTIVE INVESTOR IS STRONGLY ADVISED TO CONSULT HIS OR HER OWN TAX ADVISORS AS TO THE GERMAN TAX CONSEQUENCES OF HOLDING DAIMLERCHRYSLER ORDINARY SHARES, INCLUDING THE PARTICULAR FACTS AND CIRCUMSTANCES THAT MAY BE UNIQUE TO SUCH INVESTOR, AND AS TO ANY OTHER TAX CONSEQUENCES OF HOLDING DAIMLERCHRYSLER ORDINARY SHARES. DIVIDENDS Under German law, DaimlerChrysler is required to withhold tax on dividends in an amount equal to 25% of the gross amount paid to resident and non-resident stockholders. A surtax on the German withholding tax is currently levied on dividend distributions paid by a German resident company. Effective January 1, 1998, the rate of this surtax has been reduced from 7.5% to 5.5%. Based on the new rate, the surtax amounts to 1.375% (5.5% x 25%) of the gross dividend amount. The rate of German withholding tax on dividends paid by DaimlerChrysler to a Non-German Holder, together with the surtax thereon, may be reduced under the provisions of an applicable tax treaty. A shareholder entitled to the reduced rate of withholding tax and surtax under an applicable tax treaty must, however, make a claim to the German tax authorities for repayment of the amount by which the actual rate of such taxes exceeds the maximum rate of withholding tax permitted by such tax treaty. 45 CAPITAL GAINS Under German law, any gain derived by a Non-German Holder from the sale or other disposition of DaimlerChrysler Ordinary Shares is not subject to tax in Germany, provided such Non-German Holder has not held, directly or indirectly, more than 25% of the DaimlerChrysler Ordinary Shares at any time during the 5-year period immediately preceding the sale or other disposition. Under most German tax treaties, Non-German Holders would not be subject to German income or trade tax on such capital gains. GIFT AND INHERITANCE TAX Under German law, German gift or inheritance tax generally will be imposed on transfers of DaimlerChrysler Ordinary Shares by gift or upon the death of a Non-German Holder only if (i) the donor or transferor, or the heir, donee or the other beneficiary, was domiciled in Germany at the time of the transfer or, with respect to German citizens who are domiciled in Germany, if such donor, transferor or beneficiary has not been continuously outside of Germany for a period of more than 5 years, or (ii) the DaimlerChrysler Ordinary Shares subject to such transfer consist or form part of a portfolio held directly or indirectly by the donor or transferor himself or together with a related person consisting of 10% or more of the outstanding DaimlerChrysler Ordinary Shares. The few German estate tax treaties currently in force usually provide that German gift or inheritance tax may only be imposed if condition (i) above is met. GERMAN CAPITAL TAX (VERMOGENSTEUER) As a result of a judicial decision, the German capital tax (VERMOGENSTEUER) presently is not imposed. Under prior German law, a Non-German Holder would have been subject to German capital taxation with respect to DaimlerChrysler Ordinary Shares only if such Holder held, directly or indirectly, 10% or more of the DaimlerChrysler Ordinary Shares. Under many German tax treaties, Non-German Holders would not be subject to German capital tax (VERMOGENSTEUER) with respect to the DaimlerChrysler Ordinary Shares. OTHER TAXES There are no German transfer, stamp or other similar taxes that would apply to Non-German Holders upon receipt (including pursuant to the Transactions), purchase, holding, or sale of the DaimlerChrysler Ordinary Shares. ANTICIPATED ACCOUNTING TREATMENT The Transactions are expected to qualify as a pooling-of-interests under APB No. 16 for accounting and financial reporting purposes. AFFILIATES' RESTRICTIONS ON SALE OF DAIMLERCHRYSLER ORDINARY SHARES The DaimlerChrysler Ordinary Shares to be issued in the Chrysler Merger have been registered under the Securities Act, thereby allowing those shares to be traded without restriction by all former holders of Chrysler Common Stock who are not deemed to be "affiliates" of Chrysler at the time of the Chrysler Special Meeting (as "affiliates" is defined for purposes of Rule 145 under the Securities Act or for purposes of qualifying the Transactions for "pooling-of-interests" accounting treatment). In addition, the Combination Agreement requires each of Daimler-Benz and Chrysler to use its reasonable best efforts to cause its affiliates to enter into agreements that restrict the ability of such affiliates to sell Chrysler Common Stock, Daimler-Benz Ordinary Shares, Daimler-Benz ADSs and DaimlerChrysler Ordinary Shares received upon consummation of the Transactions, as the case may be. 46 CERTAIN LITIGATION On May 7 and 8, 1998, two purported class actions, respectively entitled MARYLAND LINOTYPE COMPOSITION CO., ET AL. V. ROBERT ANTHONY LUTZ, ET AL., C.A. 16363 NC and JULES BERNSTEIN V. ROBERT ANTHONY LUTZ, ET AL., C.A. 16369 NC, were filed in the Court of Chancery of the State of Delaware, New Castle County, naming Chrysler and its directors as defendants. Plaintiffs, purporting to represent the stockholders of Chrysler, allege that Chrysler and its directors breached their fiduciary duties to stockholders by failing to obtain the best price for the shares of Chrysler Common Stock in the Chrysler Merger. The complaints seek to enjoin preliminarily the Chrysler Merger or, in the alternative, damages in the amount of the difference between the value received for the shares of Chrysler Common Stock and the alleged "best price obtainable." Chrysler intends to defend against such allegations vigorously, if and when it is served with these actions. 47 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The pro forma information below does not purport to represent what the combined results of operations actually would have been if the Transactions had occurred as of the dates indicated or what those results will be for any future periods. The information below is presented in accordance with U.S. GAAP and is qualified in its entirety by, and should be read in conjunction with, (i) the Daimler-Benz consolidated financial statements as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997, including the notes thereto, included in this Prospectus, (ii) the Daimler-Benz unaudited consolidated financial statements as of June 30, 1998 and for each of the six-month periods ended June 30, 1998 and 1997, including the notes thereto, included in this Prospectus, (iii) the Chrysler consolidated financial statements as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997, including the notes thereto, included in this Prospectus, and (iv) the Chrysler unaudited consolidated financial statements as of June 30, 1998 and for each of the six-month periods ended June 30, 1998 and 1997, including the notes thereto, included in this Prospectus. In the Transactions, DaimlerChrysler will exchange DaimlerChrysler Ordinary Shares for all of the Daimler-Benz Ordinary Shares (including Daimler-Benz Ordinary Shares represented by Daimler-Benz ADSs) and shares of Chrysler Common Stock, including outstanding Chrysler Stock Options, Chrysler Performance Shares and other Chrysler equity awards. DaimlerChrysler has been formed for the sole purpose of effecting the Transactions and accordingly has no material assets or liabilities or revenues or expenses. Accordingly, no separate presentation of DaimlerChrysler has been made in the accompanying unaudited pro forma combined financial information. The unaudited pro forma combined financial information below assumes, as is provided in the Combination Agreement, a 100% exchange of the outstanding Daimler-Benz Ordinary Shares and shares of Chrysler Common Stock, including outstanding Chrysler Stock Options, Chrysler Performance Shares and other Chrysler equity awards, net of related withholding taxes, for DaimlerChrysler Ordinary Shares. The Combination Agreement also provides that the outstanding options, warrants and convertible notes of Daimler-Benz will be converted into options, warrants and convertible notes of DaimlerChrysler with substantially the same terms and conditions. The Combination Agreement provides that each outstanding Daimler-Benz Ordinary Share and Daimler-Benz ADS will be exchanged in the Daimler-Benz Exchange Offer and the Daimler-Benz Merger for DaimlerChrysler Ordinary Shares for one DaimlerChrysler Ordinary Share; PROVIDED that, if the 90% Minimum Condition is satisfied so that the Transactions can be accounted for as a pooling-of-interests, then each exchanging holder will receive 1.005 DaimlerChrysler Ordinary Shares for each share exchanged. The Combination Agreement includes a formula (the U.S. Exchange Ratio Formula) to determine the U.S. Exchange Ratio for the exchange of shares of Chrysler Common Stock into DaimlerChrysler Ordinary Shares in the Chrysler Merger. A U.S. Exchange Ratio of 0.6235 of a DaimlerChrysler Ordinary Share for each share of Chrysler Common Stock has been established. The precise number of outstanding Daimler-Benz Ordinary Shares and shares of Chrysler Common Stock to be exchanged in the Transactions cannot be determined until the Chrysler Effective Time. For all purposes in the unaudited pro forma combined financial information, the actual number of outstanding Daimler-Benz Ordinary Shares and shares of Chrysler Common Stock issued and outstanding at June 30, 1998 has been used to calculate the issuance of DaimlerChrysler Ordinary Shares pursuant to the Transactions. The following unaudited pro forma combined balance sheet at June 30, 1998, and the unaudited pro forma combined statements of income for the six months ended June 30, 1998 and 1997, the nine months ended September 30, 1998 and for the years ended December 31, 1997, 1996 and 1995 give effect to the proposed exchange of Daimler-Benz Ordinary Shares, Daimler-Benz ADSs and shares of Chrysler Common Stock for DaimlerChrysler Ordinary Shares under the pooling-of-interests method of accounting. The unaudited pro forma combined balance sheet at June 30, 1998 was prepared as if the Transactions and other related transactions were consummated as of such date. The unaudited pro forma combined statements of income for the six months ended June 30, 1998 and 1997 and years ended December 31, 48 1997, 1996 and 1995 were prepared as if the Transactions and other related transactions were consummated as of January 1, 1995. The unaudited pro forma combined financial information is based on the historical consolidated financial statements of Daimler-Benz and Chrysler giving effect to the Transactions under the assumptions and adjustments described in the accompanying Notes to Unaudited Pro Forma Combined Financial Information Accounted for Under the Pooling-of-Interests Method of Accounting. Additionally, the unaudited pro forma financial information gives effect to the issuance by Chrysler of shares of Chrysler Common Stock covered hereby and the deemed exercise and conversion of all of the outstanding Chrysler Stock Options, Chrysler Performance Shares and other Chrysler equity awards, net of related withholding taxes, into DaimlerChrysler Ordinary Shares determined in accordance with a formula set out in the Combination Agreement. 49 DAIMLERCHRYSLER UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET JUNE 30, 1998 (in millions) HISTORICAL ---------------------------- PRO FORMA PRO FORMA PRO FORMA DAIMLER-BENZ CHRYSLER(1) ADJUSTMENTS COMBINED COMBINED(7) ------------- ------------- ----------- ------------- ------------ ASSETS Intangible assets......................... DM 1,895 DM 2,758 DM DM 4,653 $ 2,580 Property, plant and equipment, net........ 21,528 36,031 57,559 31,919 Investments and long-term financial assets.................................. 3,996 1,803 5,799 3,216 Equipment on operating leases, net........ 16,461 10,932 27,393 15,190 ------------- ------------- ----------- ------------- ------------ FIXED ASSETS.............................. 43,880 51,524 95,404 52,905 ------------- ------------- ----------- ------------- ------------ Inventories............................... 15,940 6,241 22,181 12,300 RECEIVABLES Receivables from financial services....... 29,053 24,779 53,832 29,853 Trade and other receivables and other assets.................................. 21,099 11,471 32,570 18,061 Securities................................ 18,109 6,131 24,240 13,442 Cash and cash equivalents................. 4,199 12,659 3,425(2) 19,694 10,921 160 (4a (865) 4b) 856 (4c (550) 5a) (70) 5b) (120) 5c) ------------- ------------- ----------- ------------- ------------ CURRENT ASSETS............................ 88,400 61,281 2,836 152,517 84,577 ------------- ------------- ----------- ------------- ------------ DEFERRED TAXES AND PREPAID EXPENSES....... 9,714 9,827 19,541 10,836 ------------- ------------- ----------- ------------- ------------ TOTAL ASSETS.............................. 141,994 122,632 2,836 267,462 148,318 ------------- ------------- ----------- ------------- ------------ ------------- ------------- ----------- ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Capital stock............................. 2,847 1,490 (266)(3) -- -- (2,847) 4a) (1,224) 4b) Additional paid-in capital................ 12,597 9,440 1,767(2) 20,242 11,225 (7,850)(3) 2,847 (4a 1,224 (4b (782) 4b) 143 (4b 856 (4c Retained earnings......................... 17,356 21,956 (550) 5a) 38,342 21,262 (70) 5b) (350) 5c) Accumulated other comprehensive income.... 1,127 -- 1,127 625 Treasury stock............................ (160) (9,774) 1,658(2) -- -- 8,116(3) 160 (4a ------------- ------------- ----------- ------------- ------------ STOCKHOLDERS' EQUITY...................... 33,767 23,112 2,832 59,711 33,112 ------------- ------------- ----------- ------------- ------------ MINORITY INTEREST......................... 1,057 51 1,108 614 ------------- ------------- ----------- ------------- ------------ ACCRUED LIABILITIES....................... 37,873 35,505 (226) 4b) 73,382 40,693 230 (5c ------------- ------------- ------------- ------------ Financial liabilities..................... 41,563 37,780 79,343 43,999 Trade and other liabilities............... 24,282 16,799 41,081 22,781 ------------- ------------- ----------- ------------- ------------ LIABILITIES............................... 65,845 54,579 120,424 66,780 ------------- ------------- ----------- ------------- ------------ DEFERRED TAXES AND INCOME................. 3,452 9,385 12,837 7,119 ------------- ------------- ----------- ------------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. 141,994 122,632 2,836 267,462 148,318 ------------- ------------- ----------- ------------- ------------ ------------- ------------- ----------- ------------- ------------ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE PRO FORMA COMBINED FINANCIAL STATEMENTS 50 DAIMLERCHRYSLER UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) HISTORICAL ---------------------------- PRO FORMA PRO FORMA DAIMLER-BENZ CHRYSLER(1) COMBINED COMBINED(7) ------------- ------------- -------------- ------------- Revenues................................................... DM 67,714 DM 60,594 DM 128,308 $ 71,152 Cost of sales.............................................. (53,809) (48,672) (102,481) (56,830) ------------- ------------- -------------- ------------- GROSS MARGIN............................................... 13,905 11,922 25,827 14,322 Selling, administrative and other expenses................. (8,534) (4,520) (13,054) (7,239) Research and development................................... (3,123) (1,693) (4,816) (2,670) Other income............................................... 1,120 -- 1,120 621 ------------- ------------- -------------- ------------- INCOME BEFORE FINANCIAL INCOME AND INCOME TAXES............ 3,368 5,709 9,077 5,034 Financial income, net...................................... 542 204 746 414 ------------- ------------- -------------- ------------- INCOME BEFORE INCOME TAXES................................. 3,910 5,913 9,823 5,448 Income taxes............................................... (1,838) (2,202) (4,040) (2,240) Minority interest.......................................... (62) -- (62) (34) ------------- ------------- -------------- ------------- NET INCOME................................................. 2,010 3,711 5,721 3,174 ------------- ------------- -------------- ------------- ------------- ------------- -------------- ------------- PRO FORMA COMBINED EARNINGS PER SHARE (6) Pro forma combined basic earnings per ordinary share..... 5.96(a) 3.31 Pro forma combined diluted earnings per ordinary share... 5.83(a) 3.23 - ------------------------ (a) The assumed weighted average number of ordinary shares outstanding for basic and diluted earnings per share were 960.1 million and 985.2 million, respectively. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE PRO FORMA COMBINED FINANCIAL STATEMENTS. 51 DAIMLERCHRYSLER UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) HISTORICAL ------------------------------ PRO FORMA DAIMLER-BENZ CHRYSLER(1) COMBINED -------------- -------------- -------------- Revenues.......................................................... DM 55,892 DM 51,033 DM 106,925 Cost of sales..................................................... (44,919) (40,791) (85,710) -------------- -------------- -------------- GROSS MARGIN...................................................... 10,973 10,242 21,215 Selling, administrative and other expenses........................ (7,517) (4,610) (12,127) Research and development.......................................... (2,867) (1,514) (4,381) Other income...................................................... 733 -- 733 -------------- -------------- -------------- INCOME BEFORE FINANCIAL INCOME AND INCOME TAXES................... 1,322 4,118 5,440 Financial income (expense), net................................... (111) 123 12 -------------- -------------- -------------- INCOME BEFORE INCOME TAXES........................................ 1,211 4,241 5,452 Income taxes...................................................... (263) (1,691) (1,954) Minority interest................................................. 44 -- 44 -------------- -------------- -------------- NET INCOME........................................................ 992 2,550 3,542 -------------- -------------- -------------- -------------- -------------- -------------- PRO FORMA COMBINED EARNINGS PER SHARE(6) Pro forma combined basic earnings per ordinary share............ 3.62(a) Pro forma combined diluted earnings per ordinary share.......... 3.60(a) - ------------------------ (a) The assumed weighted average number of ordinary shares outstanding for basic and diluted earnings per share were 978.6 million and 987.5 million, respectively. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE PRO FORMA COMBINED FINANCIAL STATEMENTS. 52 DAIMLERCHRYSLER UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) HISTORICAL ---------------------------- PRO FORMA PRO FORMA DAIMLER-BENZ CHRYSLER(1) COMBINED COMBINED(7) ------------- ------------- ------------- ------------ Revenues....................................... DM124,050 DM105,205 DM229,255 $ 127,131 Cost of sales.................................. (98,943) (84,879) (183,822) (101,936) ------------- ------------- ------------- ------------ GROSS MARGIN................................... 25,107 20,326 45,433 25,195 Selling, administrative and other expenses..... (17,433) (9,703) (27,136) (15,048) Research and development....................... (5,663) (2,972) (8,635) (4,788) Other income................................... 1,620 1,620 898 ------------- ------------- ------------- ------------ INCOME BEFORE FINANCIAL INCOME AND INCOME TAXES........................................ 3,631 7,651 11,282 6,257 Financial income, net.......................... 618 251 869 482 ------------- ------------- ------------- ------------ INCOME BEFORE INCOME TAXES..................... 4,249 7,902 12,151 6,739 Tax benefit relating to a special distribution................................. 2,908 2,908(a) 1,613 Income taxes................................... 1,074 (3,038) (1,964 (b) (1,089) ------------- ------------- ------------- ------------ TOTAL INCOME TAXES............................. 3,982 (3,038) 944 524 Minority interest.............................. (189) (189) (105) ------------- ------------- ------------- ------------ NET INCOME..................................... 8,042 4,864 12,906(C) 7,158 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------ PRO FORMA COMBINED EARNINGS PER SHARE(6) Pro forma combined basic earnings per ordinary share............................. 13.29 )(d 7.37 Pro forma combined diluted earnings per ordinary share............................. 13.16 )(d 7.30 - ------------------------ (a) Reflects the nonrecurring tax benefit relating to the Special Distribution. (b) Includes nonrecurring tax benefits of DM 1,962 relating to the decrease in valuation allowance as of December 31, 1997, applied to the German operations that file a combined tax return. (c) Excluding the nonrecurring income tax benefits, net income and pro forma combined net income would have been DM 3,172 ($1,759) and DM 8,036 ($4,456) and pro forma combined basic and diluted earnings per share would have been DM 8.28 ($4.59) and DM 8.21 ($4.55), respectively. (d) The assumed weighted average number of ordinary shares outstanding for basic and diluted earnings per share were 970.8 million and 983.6 million, respectively. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE PRO FORMA COMBINED FINANCIAL STATEMENTS. 53 DAIMLERCHRYSLER UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) HISTORICAL ----------------------------- PRO FORMA DAIMLER-BENZ CHRYSLER(1) COMBINED -------------- ------------- -------------- Revenues.......................................................... DM 106,339 DM 91,743 DM 198,082 Cost of sales..................................................... (84,742) (72,262) (157,004) -------------- ------------- -------------- GROSS MARGIN...................................................... 21,597 19,481 41,078 Selling, administrative and other expenses........................ (15,955) (8,063) (24,018) Research and development.......................................... (5,579) (2,408) (7,987) Other income...................................................... 1,402 -- 1,402 -------------- ------------- -------------- INCOME BEFORE FINANCIAL INCOME AND INCOME TAXES................... 1,465 9,010 10,475 Financial income, net............................................. 496 156 652 -------------- ------------- -------------- INCOME BEFORE INCOME TAXES........................................ 1,961 9,166 11,127 Income taxes...................................................... 712 (3,569) (2,857) Minority interest................................................. 89 -- 89 -------------- ------------- -------------- INCOME BEFORE EXTRAORDINARY ITEM.................................. 2,762 5,597 8,359 -------------- ------------- -------------- -------------- ------------- -------------- PRO FORMA COMBINED EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM(6) Pro forma combined basic earnings per ordinary share.......... 8.44(a) Pro forma combined diluted earnings per ordinary share........ 8.41(a) - ------------------------ (a) The assumed weighted average number of ordinary shares outstanding for basic and diluted earnings per share were 990.1 and 994.2, respectively. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE PRO FORMA COMBINED FINANCIAL STATEMENTS. 54 DAIMLERCHRYSLER UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) HISTORICAL -------------------------------- PRO FORMA DAIMLER-BENZ CHRYSLER(1) COMBINED --------------- --------------- --------------- Revenues...................................................... DM 102,985 DM 75,566 DM 178,551 Cost of sales................................................. (86,686) (62,333) (149,019) --------------- --------------- --------------- GROSS MARGIN.................................................. 16,299 13,233 29,532 Selling, administrative and other expenses.................... (20,834) (6,538) (27,372) Research and development...................................... (5,369) (2,026) (7,395) Other income.................................................. 1,742 -- 1,742 --------------- --------------- --------------- INCOME (LOSS) BEFORE FINANCIAL INCOME AND INCOME TAXES............................................ (8,162) 4,669 (3,493) Financial income, net......................................... 929 274 1,203 --------------- --------------- --------------- INCOME (LOSS) BEFORE INCOME TAXES............................. (7,233) 4,943 (2,290) Income taxes.................................................. 1,620 (1,903) (283) MINORITY INTEREST............................................. (116) -- (116) --------------- --------------- --------------- INCOME (LOSS) BEFORE CHANGE IN ACCOUNTING PRINCIPLES.......... (5,729) 3,040 (2,689) --------------- --------------- --------------- --------------- --------------- --------------- PRO FORMA COMBINED EARNINGS PER SHARE BEFORE CHANGE IN ACCOUNTING PRINCIPLES(6).................................... Pro forma combined basic earnings (loss) per ordinary share... (2.64)(a) Pro forma combined diluted earnings (loss) per ordinary share....................................................... (2.64)(a) - ------------------------ (a) The assumed weighted average number of ordinary shares outstanding for basic and diluted earnings per share was 1,019.0 million. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE PRO FORMA COMBINED FINANCIAL STATEMENTS. 55 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (1) The Chrysler historical balance sheet information and related pro forma adjustments to the unaudited pro forma combined balance sheet as of June 30, 1998, have been translated into marks at the June 30, 1998 rate of exchange of $1.00 = DM 1.8087. The Chrysler historical statements of income information for the six months ended June 30, 1998 and 1997 and years ended December 31, 1997, 1996 and 1995, and related pro forma adjustments to the unaudited pro forma combined statements of income, have been translated into marks at the weighted-average rates of exchange for the six months ended June 30, 1998 and 1997 and the years ended December 31, 1997, 1996 and 1995 of $1.00 = DM 1.8064, DM 1.6862, DM 1.7340, DM 1.5048 and DM 1.4331, respectively. Certain of the Chrysler balance sheet and statement of income amounts have been reclassified to conform with the financial statement presentation of Daimler-Benz. (2) The adjustments reflect the estimated proceeds to be received from this offering based on an offering price of $65.71 per share (DM 117.09 per share) representing an assumed price per share of Chrysler Common Stock, and deducting estimated expenses of the offering of $49.3 million (DM 87.8 million). (3) The adjustments reflect the cancellation of 146.8 million shares of Chrysler Common Stock held in treasury, after giving effect to the issuance of the shares of Chrysler Common Stock covered hereby. (4) The adjustments reflect the issuance of DaimlerChrysler Ordinary Shares by DaimlerChrysler in exchange for the outstanding Daimler-Benz Ordinary Shares and Chrysler Common Stock and the conversion of Chrysler Series A Convertible Preferred Stock, Chrysler Stock Options, Chrysler Performance Shares and other Chrysler equity awards as set forth below: DAIMLER-BENZ CHRYSLER ------------- ----------- (IN MILLIONS) Daimler-Benz Ordinary Shares (nominal value DM5 per share) as of June 30, 1998......................................................................... 569.3 Chrysler Common Stock outstanding at June 30, 1998............................. 646.7 Assumed conversion of Chrysler Series A Convertible Preferred Stock............ 0.5 Shares of Chrysler Common Stock issued in connection with shares held in treasury (see Note 2 above).................................................. 30.0 ----------- 677.2 ------------- ----------- Exchange Ratios................................................................ 1.005 0.6235 ------------- ----------- 572.2 422.2 ------------- ----------- Conversion of Chrysler Stock Options, Chrysler Performance Shares and other Chrysler equity awards into DaimlerChrysler Ordinary Shares (net of related withholding taxes)........................................................... 8.8 ------------- ----------- Assumed DaimlerChrysler Ordinary Shares to be issued........................... 572.2 431.0 ------------- ----------- Assumed DaimlerChrysler Ordinary Shares outstanding after completion of the Transactions................................................................. 1,003.2 --------- --------- (4)(a) The adjustments reflect the issuance of DaimlerChrysler Ordinary Shares with no nominal value in exchange for Daimler-Benz DM 5 nominal value Ordinary Shares and the issuance by Daimler-Benz of its treasury stock. (4)(b) The adjustments reflect the cancellation and exchange of Chrysler Common Stock, Chrysler Stock Options, Chrysler Performance Shares and other Chrysler equity awards for DaimlerChrysler Ordinary Shares and payment of related withholding taxes. 56 (4)(c) The adjustments reflect the tax benefit to be received by Chrysler resulting from the deemed exercise of Chrysler Stock Options. (5)(a) The adjustments reflect estimated costs of the Transactions, which include, without limitation, fees and expenses of investment bankers, legal counsel, accountants and consultants incurred and to be incurred by Daimler-Benz, Chrysler and DaimlerChrysler in connection with or related to the authorization, preparation, negotiation and execution of the Combination Agreement and the preparation, printing, filing and mailing of proxy statements/prospectuses for Daimler-Benz and Chrysler, soliciting stockholder approvals and all other matters related to the closing of the Transactions. (5)(b) The adjustments reflect estimated German transfer taxes to be incurred in connection with the Daimler-Benz Merger, net of related tax benefits. (5)(c) The adjustments reflect additional compensation costs, net of tax, resulting from the deemed conversion of Incentive/Performance Awards and related costs as a result of the change of control. The foregoing expenses and German transfer taxes to be incurred to effect the Transactions have not been reflected in the Unaudited Pro Forma Combined Statements of Income as they are considered to be nonrecurring. (6) Pro forma combined basic earnings (loss) per DaimlerChrysler Ordinary Share for each period presented has been calculated by dividing pro forma combined net income by the weighted average number of DaimlerChrysler Ordinary Shares outstanding during each period presented, assuming that the Transactions occurred on January 1, 1995 and using the Exchange Ratios as discussed in Note 4 above. Pro forma combined diluted earnings (loss) per DaimlerChrysler Ordinary Share has been computed assuming the issuance by DaimlerChrysler of DaimlerChrysler Ordinary Shares for all stock options and other securities of Daimler-Benz which may be converted into Daimler-Benz Ordinary Shares. In addition, pro forma combined basic and diluted earnings (loss) per DaimlerChrysler Ordinary Share for each period presented has been adjusted to reflect the 20% discount to the market value at which the Daimler-Benz Ordinary Shares were sold in the Rights Offering. Assuming that the sale of 52.4 million Daimler-Benz Ordinary Shares in the Rights Offering had occurred as of January 1, 1998, the pro forma combined basic and diluted earnings per DaimlerChrysler ordinary Share for the six months ended June 30, 1998 would have been DM 5.71 and DM 5.60, respectively. Assuming that the sale of 52.4 million Daimler-Benz Ordinary Shares in the Rights Offering had occurred as of January 1, 1997, the pro forma combined basic and diluted earnings per DaimlerChrysler Ordinary Share for 1997 would have been DM 12.73 and DM 12.61, respectively, and, excluding nonrecurring tax benefits in 1997 of DM 4.9 billion relating to the Special Distribution and the decrease in valuation allowance, pro forma combined basic and diluted earnings per DaimlerChrysler Ordinary Share for 1997 would have been DM 7.93 and DM 7.87, respectively. (7) Represents translation of DaimlerChrysler combined financial information as of and for the six months ended June 30, 1998 and for the year ended December 31, 1997 solely for the convenience of the reader, at the rate of DM 1.8033 = $1.00, the Noon Buying Rate on June 30, 1998. 57 BUSINESS DESCRIPTION CHRYSLER Chrysler and its consolidated subsidiaries operate in two principal industry segments: Automotive Operations and Financial Services. Automotive Operations include the research, design, manufacture, assembly and sale of cars, trucks and related parts and accessories. Substantially all of Chrysler's automotive products are marketed through retail dealerships, most of which are privately owned and financed. Financial Services include the operations of CFC and its consolidated subsidiaries, which are engaged principally in providing consumer and dealer automotive financing for Chrysler's products. AUTOMOTIVE OPERATIONS. Chrysler manufactures, assembles and sells cars and trucks under the brand names Chrysler, Dodge, Jeep-Registered Trademark- and Plymouth, and related automotive parts and accessories, primarily in the United States, Canada and Mexico. Passenger cars are offered in various size classes and models. Chrysler produces trucks in pickup, sport-utility and van/wagon models, which constitute the largest segments of the truck market. Chrysler also purchases and distributes certain passenger cars manufactured in the United States by Mitsubishi Motor Manufacturing of America, a subsidiary of Mitsubishi Motors Corporation. Although Chrysler currently sells most of its vehicles in North America, Chrysler also participates in other international markets through its wholly owned subsidiaries in Argentina, Brazil, Venezuela, Taiwan, Korea, Japan, Thailand, Egypt, Austria, Italy, France, Belgium, the Netherlands and Germany, a joint venture in Austria, and through minority-owned affiliates located in China and Egypt. Chrysler sells vehicles and parts, and provides related services, to independent distributors and dealers in various other markets throughout the world. FINANCIAL SERVICES. Chrysler's wholly owned subsidiary CFC is a financial services organization that provides retail and lease financing for vehicles, dealer inventory and other financing needs, dealer property and casualty insurance and dealership facility development and management, primarily for Chrysler dealers and their customers. CFC is the major source of wholesale and retail financing for Chrysler vehicles throughout North America. CFC also offers dealers working capital loans, real estate and equipment financing and financing plans for fleet buyers, including daily rental car companies. The automotive financing operations of CFC are conducted through 29 zone offices in the United States and Canada (Chrysler Credit Canada Ltd.). CFC also provides automotive financial products and services in Europe and Asia. During 1997, CFC financed or leased approximately 870,000 new and used vehicles at retail in the United States, including approximately 611,000 new Chrysler passenger cars and light-duty trucks, representing 27 percent of Chrysler's U.S. retail and fleet deliveries. During 1997, CFC financed or leased approximately 114,000 vehicles at retail in Canada, including approximately 102,000 new Chrysler cars and trucks, representing 40 percent of Chrysler's Canadian retail and fleet deliveries. CFC also financed approximately 1,625,000 and 175,000 new Chrysler passenger cars and light-duty trucks at wholesale in the U.S. and Canada, respectively, representing 70 percent and 66 percent of Chrysler's U.S. and Canadian vehicle shipments, respectively, in 1997. Chrysler's principal executive offices are located at Chrysler World Headquarters, 1000 Chrysler Drive, Auburn Hills, Michigan 48326-2766, and its telephone number is (248) 576-5741. DAIMLER-BENZ Daimler-Benz operates in four business segments--Automotive (Passenger Cars and Commercial Vehicles), Aerospace, Services and Directly Managed Businesses. Daimler-Benz is primarily active in Europe, North and South America and Japan and is continuing to expand in markets such as Eastern Europe and East and Southeast Asia, which are also assuming strategic importance as production locations. In 1997, approximately 33% of Daimler-Benz' revenues was derived from sales in Germany, 25% 58 from sales in other member states of the European Union and 21% from sales in the United States and Canada. AUTOMOTIVE. Daimler-Benz is world renowned for its high quality luxury Mercedes-Benz passenger cars which reflect a long tradition of exceptional engineering, performance, service and safety. Daimler-Benz is also the world's leading manufacturer of trucks over 6t GVW and of buses over 8t GVW. It manufactures and assembles passenger cars and commercial vehicles in 46 manufacturing plants and assembly facilities on six continents reaching across all product lines and has a worldwide distribution and service network. The Automotive segment contributed approximately 71% of Daimler-Benz' revenues in 1997. The passenger car division has one of the world's strongest car brand names, and the number one position in the upper luxury segment of the passenger car market. It has added new innovative products which give Daimler-Benz access to new markets and customer segments. These products include the A-Class, the M-Class, the SLK, the CLK and, as a second brand, the smart, a two-seat eight foot long car designed for heavily congested city use. With the new S-Class, which will be introduced in the fall of 1998, the passenger car division expects to solidify its leading position in the upper luxury segment. The commercial vehicle division has updated the entire range of vans and trucks it offers in the European market. Following the introduction of three new van lines and the Actros truck line in the heavy weight category, the presentation in early 1998 of the Atego truck in the light and medium weight categories represents the most recent step in this innovation cycle. In the United States, Freightliner expects to strengthen its leading market position with the new Sterling product line derived from the heavy truck lines it has acquired from Ford Motor Company. AEROSPACE. Daimler-Benz Aerospace is one of the leading European aerospace companies and the German partner (with a 37.9% share) in Airbus. Principal Aerospace activities include civil aircraft and helicopters, military aircraft, space systems infrastructure, satellites, defense and civil systems and aeroengines. Aerospace contributed approximately 12% of Daimler-Benz' revenues in 1997. At Daimler-Benz Aerospace, comprehensive cost-cutting and restructuring measures markedly improved its competitive position. The pronounced increase of incoming orders for Airbus aircraft in 1997 and early 1998 will define the civilian aircraft business of Daimler-Benz during the next several years. The anticipated combination of the Airbus activities into a single corporate entity will form the basis for future efficiency and productivity gains, thereby further strengthening the competitive position of Airbus. SERVICES. debis engages in financial services supporting the sale of Mercedes-Benz cars and trucks and other Daimler-Benz products, insurance brokerage, information technology services, telecommunications and media services, trading and real estate management services. debis contributed approximately 11% of Daimler-Benz' revenues in 1997. debis is using the strong growth potential of the service industry to position itself to compete successfully in promising markets, primarily in the areas of financial services, information technology and telecommunications and media services. It also will continue to expand internationally and strive to open up new markets, primarily in Asia, Latin America and Northern Europe. DIRECTLY MANAGED BUSINESSES. This segment consists of rail systems, automotive electronics and diesel engines. The semiconductor activities which were part of this segment in 1997 were sold in March 1998. This segment contributed approximately 6% of Daimler-Benz' revenues in 1997. Within the Directly Managed Businesses, Adtranz, the rail systems joint venture between Daimler-Benz and ABB, has positioned itself as one of the leaders in the global rail transportation 59 market. It will continue to concentrate on its core competencies and use every opportunity to achieve greater economies of scale, for example through increased use of modularization in product development. Through these and other measures, Adtranz expects to lower its cost base in order to achieve positive results and continue to deliver competitive products and systems. Since the sale of the semiconductor activities, Daimler-Benz' microelectronics activities have focused exclusively on the fast growing automotive electronics market. MTU/Diesel Engines has introduced a series of new and innovative products and will work on expanding its market position, primarily in the area of diesel engines for civilian applications. Daimler-Benz' principal executive offices are located at Epplestrasse 225, 70567 Stuttgart, Germany, and its telephone number is 011-49-711-17-0. [SELLING SHAREHOLDER As of July 30, 1998, the Selling Shareholder held 71,753,992 shares of Chrysler Common Stock or approximately 11.11% of the outstanding shares of Chrysler Common Stock as of such date. After completion of the issuance of the shares covered hereby, the Selling Shareholder will own approximately shares of Chrysler Common Stock or % of the outstanding shares of Chrysler Common Stock. On February 8, 1996, Chrysler entered into a five-year standstill agreement with Mr. Kerkorian and Tracinda Corporation under which they have agreed (i) not to increase their beneficial ownership of voting securities beyond 13.75%, (ii) to sell voting securities pro rata, as required, in order not to exceed such percentage as a result of Chrysler repurchases, (iii) to vote on all matters submitted to shareholders in the same proportion as shares are voted by other shareholders not affiliated with them, (iv) to not solicit proxies or enter into any activity aimed at a change of control of Chrysler or its Board, and (v) that during the term of the agreement, so long as Tracinda or Mr. Kerkorian beneficially own more than 5% of the outstanding voting securities, Chrysler's Board of Directors will nominate Mr. James D. Aljian (or a successor) for election at each meeting of stockholders at which directors are to be elected.] DESCRIPTION OF CHRYSLER CAPITAL STOCK GENERAL Chrysler's authorized capital stock consists of 20 million shares of Preferred Stock, par value $1.00 per share ("Chrysler Preferred Stock") which is issuable in series, and one billion shares of Common Stock, par value $1.00 per share. At September 30, 1998, Chrysler had no shares of Preferred Stock and approximately 647 million shares of Common Stock outstanding. In addition, Chrysler held approximately 177 million shares of Common Stock in treasury and an aggregate of approximately 58.7 million additional shares of Common Stock were reserved for issuance under Chrysler's equity based compensation plans. The shares of Chrysler Common Stock will be converted into the right to receive DaimlerChrysler Ordinary Shares in connection with the Chrysler Merger. See "Description of DaimlerChrysler Ordinary Shares." Chrysler Common Stock does not have cumulative voting rights for the election of directors, which means that the holders of more than 50 percent of the shares voting for the election of directors can elect 100 percent of the directors if they choose to do so, and, in such event, the holders of the remaining shares voting for the election of directors will not be able to elect any person or persons to the Chrysler Board. Chrysler Common Stock has no pre-emptive rights. Dividends may be paid on Chrysler Common Stock, when, as and if declared by the Chrysler Board, out of surplus, as defined by the DGCL, or in case there is no such surplus, out of Chrysler's net profits for the fiscal year in which the dividend is declared, the preceding fiscal year or both. Dividends may not be paid on the Common Stock at a time when there are arrearages on Chrysler Preferred Stock. 60 Holders of Chrysler Common Stock are entitled to receive, upon any liquidation of Chrysler, all remaining assets available for distribution to shareholders after satisfaction of Chrysler's liabilities and the preferential rights of any Chrysler Preferred Stock which may then be issued and outstanding. The outstanding shares of Chrysler Common Stock are fully paid and nonassessable, and the holders thereof are not or will not be subject to any personal liability as shareholders. Chrysler's Certificate of Incorporation expressly authorizes the Chrysler Board to fix, by resolution providing for the issue of shares of Chrysler Preferred Stock, the number of shares to be issued and the designations, relative powers, preferences and rights, and the qualifications, limitations or restrictions of such shares. In exercising such authority, the rights of holders of Chrysler Common Stock may be modified by the Chrysler Board. PREFERRED SHARE PURCHASE RIGHTS In February 1998, Chrysler's Board of Directors declared and distributed a dividend of one Preferred Share Purchase Right (a "Right") for each outstanding share of Chrysler Common Stock. Each Right entitles the registered holder to purchase one two-hundredth of a share of Junior Participating Cumulative Preferred Stock, par value $1.00 per share, of Chrysler, at a price of $145, subject to certain adjustments. Initially, the Rights are attached to Chrysler Common Stock and are not represented by separate certificates or exercisable until the earlier to occur of (a) ten days after a public announcement that, or Chrysler receives notice that, a person or group of persons acquires or obtains the right to acquire fifteen percent or more of the outstanding Chrysler Common Stock, and (b) ten business days (or, if determined by the Board of Directors with the concurrence of a majority of the continuing directors, a specified or unspecified later date) after a person or group announces or commences a tender or exchange offer which would result, if successful, in the bidder owning fifteen percent or more of the outstanding Chrysler Common Stock. If the acquiring person acquires more than ten percent of the Chrysler Common Stock (except pursuant to a tender or exchange offer made for all of the Chrysler Common Stock, and determined by a majority of Chrysler's independent directors to be fair and in the best interests of Chrysler and its stockholders) each Right (other than those held by the acquiror) will entitle its holder to purchase for $145 a number of shares of Chrysler Common Stock having a market value of $290 (or to purchase for an adjusted purchase price such number of shares as have a market value of twice such adjusted price). Similarly, if after the Rights become exercisable, Chrysler is acquired in a merger or other business combination and is not the surviving corporation, Chrysler is the surviving corporation in a merger or other business combination and the Chrysler Common Stock is exchanged, or 50 percent or more of Chrysler's assets, cash flow or earning power is sold, each Right (other than those held by the surviving or acquiring company, other than Chrysler) will entitle its holder to purchase for $145 shares of the surviving or acquiring company (other than Chrysler) having a market value of $290 (or to purchase for an adjusted purchase price such number of shares as have a market value of twice such adjusted price). Chrysler's directors may, subject to certain limitations, amend the Rights and may redeem all but not less than all of the Rights at $0.01 per Right or extend the time during which the Rights may be redeemed until ten business days following the date the Rights first become exercisable. Additionally, at any time after a person or group acquires 10 percent or more, but less than 50 percent, of the Chrysler Common Stock, Chrysler's directors may exchange the Rights (other than those held by the acquiror), in whole or in part, at an exchange ratio of one share of Chrysler Common Stock per Right. The Rights will expire on February 22, 2008. The existence of Chrysler's Rights plan might discourage unsolicited merger proposals and unfriendly tender offers and may therefore deprive stockholders of an opportunity to sell their shares at a premium over prevailing market prices. Chrysler has amended its preferred stock purchase rights plan to provide that the Rights will not become exercisable as a result of the signing of the Combination Agreement or the consummation of the Transactions. 61 DESCRIPTION OF DAIMLERCHRYSLER ORDINARY SHARES The share capital of DaimlerChrysler consists of DaimlerChrysler Ordinary Shares issued in registered form. Record holders of DaimlerChrysler Ordinary Shares will be registered in the share register (AKTIENBUCH) administered on behalf of DaimlerChrysler by the U.S. Transfer Agent and Deutsche Bank, DaimlerChrysler's transfer agent and registrar in Germany (the "German Transfer Agent" and together with the U.S. Transfer Agent, the "Transfer Agents"), pursuant to a Transfer Agency Agreement (the "Transfer Agent Agreement"). The Transfer Agents will together maintain the register of stockholders of DaimlerChrysler. At July 31, 1998, there were 20,000 issued and outstanding DaimlerChrysler Ordinary Shares of no par value. Generally, the share capital of DaimlerChrysler may be increased (other than by contingent capital or authorized capital) in consideration of contributions in cash or in property by a resolution passed at a general meeting of the stockholders of DaimlerChrysler by a majority of the votes cast and at least a majority of the issued shares represented at the meeting of the stockholders at which the resolutions are passed. In advance of each such meeting, the U.S. Transfer Agent will forward material prepared by DaimlerChrysler relating to such meeting to holders of DaimlerChrysler Ordinary Shares with addresses in the United States ("U.S. Registered Persons"). Section 21(2) of the Articles of Association (SATZUNG) of DaimlerChrysler (the "DaimlerChrysler Articles of Association") permits the DaimlerChrysler Management Board, with the approval of the DaimlerChrysler Supervisory Board, to issue new shares at any time during the year bearing the right to the entire per DaimlerChrysler Ordinary Share annual dividend for the year in which they are issued. VOTING RIGHTS Each DaimlerChrysler Ordinary Share entitles the holder thereof to one vote at general meetings of the stockholders of DaimlerChrysler. Resolutions are passed at a general meeting of the stockholders of DaimlerChrysler by a majority of the votes cast, unless a higher vote is required by law. The German Stock Corporation Law (AKTIENGESETZ) and the DaimlerChrysler Articles of Association require that, among other things, the following significant resolutions be passed by a majority of the votes cast and at least 75% of the issued shares represented in connection with the vote taken on such resolution -- certain capital increases (contingent capital and authorized capital), capital decreases, the exclusion of the preemptive rights (BEZUGSRECHT) of the stockholders to subscribe for newly issued shares, a dissolution of DaimlerChrysler, a merger of DaimlerChrysler into or a consolidation of DaimlerChrysler with another stock corporation or another transformation, a transfer of all or virtually all of DaimlerChrysler's assets and a change of DaimlerChrysler's corporate form. A general meeting of the stockholders of DaimlerChrysler may be called by the DaimlerChrysler Management Board, the DaimlerChrysler Supervisory Board or by stockholders holding in the aggregate at least 5% of the issued shares. The right to attend and vote at a stockholders' meeting is accorded only to those stockholders who are holders of record of DaimlerChrysler Ordinary Shares on the date of the meeting and who have notified DaimlerChrysler that they wish to attend the meeting no later than on the third day immediately preceding the meeting date. Notice of stockholder meetings must be published in the Federal Gazette (BUNDESANZEIGER) at least one month prior to the last day on which stockholders may notify DaimlerChrysler that they wish to attend the meeting, which is required to be not later than the third day prior to the date of the stockholders meeting. Although notice of each stockholder meeting (whether the annual general meeting or a special meeting) is required to be given as described above, neither the German Stock Corporation Law (AKTIENGESETZ) nor the DaimlerChrysler Articles of Association have any minimum quorum requirement applicable to such meetings. Amendments to the DaimlerChrysler Articles of Association may be proposed either by the DaimlerChrysler Supervisory Board and the DaimlerChrysler Management Board or by a stockholder or group of 62 stockholders holding a minimum of either 5% of the issued shares or at least 200,000 shares (assuming stated value of DM 5 per share). A resolution amending the DaimlerChrysler Articles of Association must be passed by a majority of the votes cast and at least a majority of the nominal capital represented at the meeting of stockholders at which the resolution is considered unless the German Stock Corporation Law (AKTIENGESETZ) requires that the resolution be passed by at least three-quarters of the nominal capital represented at the meeting. DIVIDENDS AND OTHER DISTRIBUTIONS Dividends are declared at the annual general meeting of stockholders, which must be held within eight months from the end of a fiscal year, and are paid once a year. For each fiscal year, the DaimlerChrysler Supervisory Board and the DaimlerChrysler Management Board ratify the financial statements and recommend the disposition of all unappropriated profits, including the amount of net profits of DaimlerChrysler which will be distributed by way of dividend among the holders of DaimlerChrysler Ordinary Shares to the extent that stockholders, by action at the annual general meeting, do not specify any other use. Pursuant to the DaimlerChrysler Articles of Association the DaimlerChrysler Management Board also has the authority, with the approval of the DaimlerChrysler Supervisory Board, to make a preliminary dividend payment to the stockholders of DaimlerChrysler on the basis of the anticipated unappropriated profit of DaimlerChrysler if the preliminary financial statements of DaimlerChrysler show a profit for the fiscal year for which payment of a dividend is being proposed. The preliminary payment may not exceed 50% of the anticipated unappropriated profit, after deducting any amounts which pursuant to the DaimlerChrysler Articles of Association must be added to disclosed reserves, and may not exceed 50% of the unappropriated profits of the fiscal year preceding the one for which such preliminary dividend is paid. U.S. Registered Persons will be entitled to elect whether to receive payments of dividends in marks (or, as the case may be, Euros) or dollars. For those U.S. Registered Persons who elect to receive payments of dividends in dollars, the U.S. Transfer Agent will be required, on behalf of such U.S. Registered Persons, to convert all cash dividends and other cash distributions which it receives with respect to the DaimlerChrysler Ordinary Shares held by such U.S. Registered Persons into dollars, prior to payment to such U.S. Registered Persons. The amount distributed will be reduced by any amounts required to be withheld by DaimlerChrysler or the U.S. Transfer Agent on account of taxes or other governmental charges. If the U.S. Transfer Agent determines, following consultation with DaimlerChrysler, that in its judgment any foreign currency received by it cannot be so converted and transferred, the U.S. Transfer Agent may distribute the foreign currency (or an appropriate document evidencing the right to receive such currency) received by it or in its discretion hold such foreign currency for the account of the U.S. Registered Person entitled to receive the same. If a distribution by DaimlerChrysler consists of a dividend in, or distribution without consideration of, DaimlerChrysler Ordinary Shares, the Transfer Agents shall distribute to the holders of outstanding DaimlerChrysler Ordinary Shares, in proportion to their holdings, the DaimlerChrysler Ordinary Shares received by the Transfer Agents from DaimlerChrysler for distribution to holders of DaimlerChrysler Ordinary Shares. In lieu of delivering fractional DaimlerChrysler Ordinary Shares, the Transfer Agents shall sell the number of DaimlerChrysler Ordinary Shares represented by the aggregate of such fractions and distribute the net proceeds. Whenever the Transfer Agents receive any distribution other than cash, DaimlerChrysler Ordinary Shares or rights, the Transfer Agents will cause such securities or property to be distributed to holders of DaimlerChrysler Ordinary Shares in proportion to their holdings. If the Transfer Agents determine that any such distribution cannot be made proportionately among the holders of DaimlerChrysler Ordinary Shares entitled thereto or if for any other reason (including any withholding on account of taxes or other governmental charges or securities law requirements) the Transfer Agents determine that such distribution 63 is not feasible or may not be legally made, the Transfer Agents may, following consultation with DaimlerChrysler, adopt such method as they deem equitable and practicable for the purpose of effecting such distribution, including the public or private sale of all or a portion of such securities or property and the distribution by the Transfer Agents of the net proceeds from any such sale as in the case of a distribution of cash. In the event that the Transfer Agents determine that any distribution in cash or property (including DaimlerChrysler Ordinary Shares or rights to subscribe therefor) is subject to any tax or governmental charges which the Transfer Agents are obligated to withhold, the Transfer Agents may use such cash or dispose, including by public or private sale, of all or a portion of such property in such amounts and in such manner as the Transfer Agents deem necessary and practicable to pay such taxes or governmental charges, and the Transfer Agents shall distribute the net proceeds of any such sale or the balance of any such cash or property after deduction of such taxes or governmental charges to the DaimlerChrysler Ordinary Share holders entitled thereto in proportion to their holdings. See "The Transactions--Certain Tax Consequences to U.S. Holders--Certain Tax Consequences of Holding DaimlerChrysler Ordinary Shares" and "--Certain Tax Consequences to Non-U.S. Holders--Certain German Tax Consequences to Non-German Holders of Holding DaimlerChrysler Ordinary Shares." RECORD DATES In accordance with the German Stock Corporation Law (AKTIENGESETZ), the record date to determine the holders of DaimlerChrysler Ordinary Shares entitled to the payment of dividends or other distributions (whether in cash, stock or property) will be the date of the general meeting of stockholders at which such dividends or other distributions are declared. The record date to determine the holders of DaimlerChrysler Ordinary Shares entitled to vote at a general meeting will be the date of such general meeting. However, holders of DaimlerChrysler Ordinary Shares who are registered in the share register (AKTIENBUCH) on the date of the meeting will be entitled to attend and vote at the meeting only if such holders have given DaimlerChrysler notice of their desire to attend such meeting no later than the third day immediately preceding the date of such meeting. LIQUIDATION RIGHTS In accordance with the German Stock Corporation Law (AKTIENGESETZ), upon a liquidation of DaimlerChrysler, any liquidation proceeds remaining after paying off all of DaimlerChrysler's liabilities would be distributed among the holders of DaimlerChrysler Ordinary Shares in proportion to their holdings. PREEMPTIVE RIGHTS Under the German Stock Corporation Law (AKTIENGESETZ), an existing stockholder in a stock corporation has a preferential right to subscribe (BEZUGSRECHT) for any issue by such corporation of shares, debt instruments convertible into shares and participating debt instruments in proportion to the shares held by such stockholder in the existing capital of such corporation. The German Stock Corporation Law (AKTIENGESETZ) provides that this preferential right can be excluded only by a stockholder resolution passed at the same time as the resolution authorizing the capital increase. A majority of at least three quarters of the issued shares represented at the meeting is required for such exclusion. The exclusion of preemptive rights is permitted if it is objectively justified, in particular if a capital increase against contributions in cash does not exceed 10% of the Company's capital stock and the issue price is not materially below the market price. NOTICES AND REPORTS Upon the giving of notice by DaimlerChrysler, by publication or otherwise, of any meeting of holders of DaimlerChrysler Ordinary Shares or any adjourned meeting of such holders, or of the taking of any 64 action in respect of any cash or other distributions or the offering of any rights, DaimlerChrysler will transmit to the U.S. Transfer Agent a copy of the notice thereof in the form given or to be given to holders of DaimlerChrysler Ordinary Shares. The U.S. Transfer Agent will, depending on the nature of the communication, arrange for the prompt mailing of copies of such notices and other reports and communications which are received by the U.S. Transfer Agent to all U.S. Registered Persons to the extent not previously mailed. The Transfer Agents will make available for inspection by the holders of DaimlerChrysler Ordinary Shares at their principal offices any notices, reports and communications, including any proxy soliciting materials, received from DaimlerChrysler which are both (a) received by the Transfer Agents or their nominees and (b) made generally available to the holders of DaimlerChrysler Ordinary Shares by DaimlerChrysler. The U.S. Transfer Agent will also send to U.S. Registered Persons copies of such notices, reports and communications when furnished by DaimlerChrysler. INSPECTION OF SHARE REGISTER The share register (AKTIENBUCH) of DaimlerChrysler will be maintained, on behalf and under the responsibility of the DaimlerChrysler Management Board, by the German Transfer Agent and the U.S. Transfer Agent, for registration of any holder of DaimlerChrysler Ordinary Shares, upon his request, as a shareholder of DaimlerChrysler. The share register will be open for inspection by the stockholders of DaimlerChrysler during normal business hours at the principal offices of DaimlerChrysler in Stuttgart, Germany, and in Auburn Hills, Michigan. CHARGES OF TRANSFER AGENTS The Transfer Agents will be paid customary fees for their services under the Transfer Agent Agreement. Holders of DaimlerChrysler Ordinary Shares will not be required to pay any fees or charges incident to the transfer and registration of their shares on the share register of DaimlerChrysler, nor will such holders be required to pay any fees or charges incident to the conversion of dividends from marks to dollars. GENERAL Neither the Transfer Agents nor DaimlerChrysler will be liable to the holders of DaimlerChrysler Ordinary Shares if prevented or delayed by law or by reason of any provision of the DaimlerChrysler Articles of Association or by any circumstances beyond their control from performing their obligations. 65 COMPARISON OF CERTAIN RIGHTS OF STOCKHOLDERS OF CHRYSLER AND DAIMLERCHRYSLER GENERAL The rights of stockholders of Chrysler and DaimlerChrysler are governed by and subject to the provisions of Delaware law, including the DGCL, and German law including the German Stock Corporation Law (AKTIENGESETZ), respectively. If the Chrysler Merger is consummated, the stockholders of Chrysler will become stockholders of DaimlerChrysler, and their rights will be governed by German law and the provisions of the DaimlerChrysler Articles of Association (SATZUNG), rather than the DGCL and the provisions of the Chrysler Certificate and the Chrysler By-Laws. The following is a brief summary of certain material differences between the rights of Chrysler stockholders and the rights of DaimlerChrysler stockholders, and is qualified in its entirety by reference to the relevant provisions of the DGCL, the Chrysler Certificate, the Chrysler By-Laws, German law and the DaimlerChrysler Articles of Association (SATZUNG). Copies of the Chrysler Certificate and Chrysler By-Laws have been filed as exhibits to the Registration Statement. For further information as to where these and other exhibits to the Registration Statement may be obtained, see "Available Information" and "Incorporation of Certain Documents by Reference." DUTIES OF DIRECTORS CHRYSLER Delaware law provides that the board of directors has the ultimate responsibility for managing the business and affairs of a corporation. In discharging this function, directors of Delaware corporations owe fiduciary duties of care and loyalty to the corporations for which they serve as directors. Directors of Delaware corporations also owe fiduciary duties of care and loyalty to stockholders. Delaware courts have held that the directors of a Delaware corporation are required to exercise an informed business judgment in the performance of their duties. An informed business judgment means that the directors have informed themselves of all material information reasonably available to them. Delaware courts have imposed a heightened standard of conduct upon directors of a Delaware corporation who take any action designed to defeat a threatened change in control of the corporation. The heightened standard has two elements. First, it must be demonstrated that there is a threat to corporate policy or effectiveness, and, second, the action must be found to be reasonable in relation to the perceived threat posed. In addition, under Delaware law, when the board of directors of a Delaware corporation approves the sale or break-up of the corporation, the board of directors may, in certain circumstances, have a duty to obtain the highest value reasonably available to the stockholders. A director of a Delaware corporation, in the performance of such director's duties, is fully protected in relying, in good faith, upon the records of the corporation and upon such information, opinions, reports or statements presented to the corporation by any of the corporation's officers or employees, or committees of the board of directors, or by any other person as to matters the director reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the corporation. The DGCL does not contain any statutory provision permitting the board of directors, committees of the board and individual directors, when discharging the duties of their respective positions, to consider the interests of any constituencies other than the corporation or its stockholders. It is unclear under the current state of development of the Delaware law the extent to which the board of directors, committees of the board and individual directors of a Delaware corporation may, in considering what is in the corporation's best interests or the effects of any action on the corporation, take into account the interests of any constituency other than the stockholders of the corporation. In addition, the duty of the board of directors, committees of the board and individual directors of a Delaware corporation may be enforced 66 directly by the corporation or may be enforced by a stockholder, as such, by an action in the right of the corporation, or may, in certain circumstances, be enforced directly by a stockholder or by any other person or group. Under Delaware law, it is presumed that the directors of a Delaware corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the corporation. This presumption may be overcome, however, if it is shown by a preponderance of the evidence that the directors' decision involved a breach of fiduciary duty such as fraud, overreaching, lack of good faith, failure of the board to inform itself properly or actions by the board to entrench itself in office. DAIMLERCHRYSLER As required by the German Stock Corporation Law (AKTIENGESETZ), DaimlerChrysler has a two-tier board system consisting of the DaimlerChrysler Management Board (VORSTAND) and the DaimlerChrysler Supervisory Board (AUFSICHTSRAT). The DaimlerChrysler Management Board is responsible for managing DaimlerChrysler and representing DaimlerChrysler in its dealings with third parties, while the DaimlerChrysler Supervisory Board appoints and removes the members of the DaimlerChrysler Management Board and oversees the management of DaimlerChrysler. The German Stock Corporation Law (AKTIENGESETZ) prohibits the DaimlerChrysler Supervisory Board from making management decisions. The DaimlerChrysler Supervisory Board may determine that certain actions and business measures require its prior approval. The DaimlerChrysler Management Board must submit regular reports on the operations of DaimlerChrysler to the DaimlerChrysler Supervisory Board, and the DaimlerChrysler Supervisory Board is also entitled to request special reports at any time. The German Stock Corporation Law (AKTIENGESETZ) prohibits simultaneous membership on the board of management and the supervisory board of a company. The members of the DaimlerChrysler Management Board and the members of the DaimlerChrysler Supervisory Board owe a duty of loyalty and care to DaimlerChrysler. In carrying out their duties, members of the DaimlerChrysler Management Board and the DaimlerChrysler Supervisory Board must exercise the standard of care of a prudent and diligent businessman and have the burden of proving that they did so if it is ever contested. The interests of DaimlerChrysler are deemed to include the interests of the stockholders, the interests of the work force and, to some extent, the common interest, and both the DaimlerChrysler Management Board and the DaimlerChrysler Supervisory Board must take all these interests into account when taking actions or decisions. The DaimlerChrysler Management Board is required to respect the rights of all stockholders to equal treatment and equal information. The DaimlerChrysler Management Board also has a duty to maintain the confidentiality of corporate information. Members of the DaimlerChrysler Management Board who violate their duties may be held jointly and severally liable by the corporation for any resulting damages, unless their actions were validly approved by resolution at a stockholders' meeting. The members of the DaimlerChrysler Supervisory Board have similar liabilities in respect of the corporation if they violate their duties. Claims of the corporation against the members of the DaimlerChrysler Management Board and of the DaimlerChrysler Supervisory Board will be asserted if the stockholders' meeting so resolves by simple majority or upon request of stockholders holding in the aggregate at least 10% of the issued shares. The stockholders' meeting or a court of competent jurisdiction, upon request by stockholders holding in the aggregate at least 10% (under special circumstances 5%) of the issued shares or at least 400,000 shares (under special circumstances 200,000 shares, in each case, assuming stated value of DM 5 per share) shall appoint a special representative to assert such a claim. For limitations on the liability of directors, see "--Limitation on Directors' Liability--DaimlerChrysler" and "--Stockholder Suits--DaimlerChrysler." No statutory law or case law exists with respect to the standard of conduct applicable to the members of the management board and of the supervisory board of a German AKTIENGESELLSCHAFT in the context of a threatened change in control. The voluntary German Takeover Code provides that the management board 67 of the target company may not take any measures that run counter to the interest of the stockholders in taking advantage of the tender offer. This recommendation is based on the principle that the target company's management board has a duty VIS-A-VIS the stockholders to remain neutral. SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS CHRYSLER The Chrysler By-Laws provide that the Chrysler Board shall consist of one or more members. Such number may be increased by the board of directors. The Chrysler Certificate provides that the By-Laws may be adopted by a vote of stockholders to allow for the Chrysler Board to be divided into three classes and for directors to be elected to serve staggered three-year terms. No such By-Law has been adopted by the Chrysler stockholders. DAIMLERCHRYSLER Following the Chrysler Effective Time, the DaimlerChrysler Supervisory Board will consist of 20 members, 10 of whom will be elected by the holders of DaimlerChrysler Ordinary Shares, and, in accordance with the Co-determination Law of 1976, 10 of whom will be elected by the employees of DaimlerChrysler. The Chairman of the Supervisory Board is selected from the members elected by the stockholders and will have a casting (tie-breaking) vote. The Combination Agreement provides that for a period of not less than two years following the Chrysler Effective Time, Mr. Hilmar Kopper, the current Chairman of the Daimler-Benz Supervisory Board (AUFSICHTSRAT) will continue to be the Chairman of the DaimlerChrysler Supervisory Board. The Combination Agreement provides that the DaimlerChrysler Management Board will consist of 18 members, 50% of which will be designated by Chrysler and 50% of which will be designated by Daimler-Benz. In addition, there will be two additional members with responsibility for the non-automotive businesses of Daimler-Benz. The Combination Agreement also requires that, for a three-year period following the Chrysler Effective Time, Jurgen E. Schrempp and Robert J. Eaton will be the Co-CEOs and Co-Chairmen (VORSTANDSVORSITZENDE) of the DaimlerChrysler Management Board. The maximum term of office for members of the DaimlerChrysler Management Board is limited to five years according to the German Stock Corporation Law (AKTIENGESETZ). According to the DaimlerChrysler Articles of Association, the term of office for members of the DaimlerChrysler Supervisory Board is limited to four fiscal years, PROVIDED, HOWEVER, that the general meeting of stockholders may determine that a shorter term of office applies to those members of the DaimlerChrysler Supervisory Board elected by the holders of DaimlerChrysler Ordinary Shares. The German Stock Corporation Law (AKTIENGESETZ) disregards the fiscal year in which the term of office begins and extends the term until the stockholders' meeting in the year following the fourth fiscal year. Accordingly, members of the DaimlerChrysler Supervisory Board will have a term of nearly five years. Members of both the DaimlerChrysler Management Board and the DaimlerChrysler Supervisory Board may be re-elected for additional terms, and there is no limit on the number of such additional terms. REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS CHRYSLER The stockholders of Chrysler may remove any director and fill the vacancy created by such removal at any special meeting called for that purpose. In the case of vacancies not created by such removals, or where a vacancy created by a stockholder removal is not filled by the stockholders at the special meeting called for such removal, the Chrysler By-Laws provide that the vacancy may be filled by the vote of a majority of the directors remaining in office, although less than a quorum. Any vacancy in the Chrysler Board resulting 68 from an increase in the number of directors may be filled by a vote of directors constituting a majority of the directors in office at the time such increase becomes effective. DAIMLERCHRYSLER The members of the DaimlerChrysler Management Board may be removed prior to the expiration of their terms by the DaimlerChrysler Supervisory Board only for reasons amounting to good cause, such as gross breach of duty, inability to duly fulfill their responsibilities or revocation of confidence by the stockholders' meeting. In the case of vacancies, the DaimlerChrysler Supervisory Board may fill the vacancy by appointing a new member of the DaimlerChrysler Management Board. Members of the DaimlerChrysler Supervisory Board elected by the stockholders at the general meeting may be removed upon the affirmative vote of a majority of at least 75% of all votes cast at a stockholders' meeting. Any member of the DaimlerChrysler Supervisory Board can be removed for good cause, including gross breach of duty, by a court decision upon request of the DaimlerChrysler Supervisory Board. In such case, the DaimlerChrysler Supervisory Board's determination to take such action requires a simple majority vote with the member affected having no voting power. In the case of vacancies, the competent court upon a motion by the management board, by a member of the supervisory board, by a stockholder, by a certain number of employees or by certain employee representatives, may fill the vacancy for the interim period until the next election by the stockholders or the employees, as the case may be. STOCKHOLDER NOMINATIONS CHRYSLER The Chrysler By-Laws establish procedures that must be followed for stockholders to nominate individuals for election to the Chrysler Board. Nominations by stockholders of individuals for election to the Chrysler Board must be made by delivering written notice of such nomination to the Secretary of Chrysler not less than 60 days nor more than 90 days prior to the annual meeting at which directors will be elected, unless less than 70 days notice or prior public disclosure of the date of the annual meeting is given or made to stockholders, in which case notice by a stockholder to be timely must be so received not later than the close of business on the 10th day following the date on which notice of the date of the meeting was mailed or such public disclosure was made. The nomination notice must set forth certain information about the stockholder making the nomination, including name and address and class and number of shares of capital stock of Chrysler beneficially owned by such stockholder. The nomination notice must set forth certain information about the persons to be nominated, including information concerning the nominees' principal occupations or employment and the class and number of shares of Chrysler that are beneficially owned by each such person. If the presiding officer at the stockholders' meeting determines that a nomination was not made in accordance with these procedures, the presiding officer may so declare at the meeting and the nomination will not be acted upon. DAIMLERCHRYSLER If a stockholder wants to nominate individuals for election to the DaimlerChrysler Supervisory Board other than those recommended by the existing DaimlerChrysler Supervisory Board, such stockholder can communicate this motion to DaimlerChrysler within one week after the publication of the call of the stockholders' meeting in the German Federal Gazette (BUNDESANZEIGER). The nomination must contain the name, the profession, the domicile and memberships in other supervisory boards or other comparable domestic or foreign supervising constituencies of the individual to be nominated. If such communication is given to DaimlerChrysler, the DaimlerChrysler Management Board must, within 12 days after the publication of the calling of the stockholders' meeting in the Federal Gazette (BUNDESANZEIGER), notify the banks and the stockholders' associations which at the last stockholders' meeting exercised voting rights for stockholders or who have requested such notification, of the applications and proposals for elections by 69 stockholders, including the names of such stockholders and a possible response by the DaimlerChrysler Management Board. The same notification has to be submitted by the DaimlerChrysler Management Board to stockholders who have deposited their shares with DaimlerChrysler or who have, after the publication of the call of the stockholders' meeting in the Federal Gazette (BUNDESANZEIGER), requested such notification or who are registered in the share register of DaimlerChrysler and whose votes have not been exercised by a bank at the last stockholders' meeting. In addition, any stockholder entitled to attend and vote at the stockholders' meeting can nominate individuals for the DaimlerChrysler Supervisory Board at the stockholders' meeting. ACTION BY WRITTEN CONSENT CHRYSLER The DGCL provides that unless otherwise specified in the certificate of incorporation stockholders may take action by written consent in lieu of a meeting; PROVIDED that consents in writing are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize such action at a meeting and the other requirements of Section 228 of the DGCL are complied with. The Chrysler Certificate does not restrict stockholder action by written consent. DAIMLERCHRYSLER The German Stock Corporation Law (AKTIENGESETZ) does not permit stockholders to act by written consent outside of the general stockholders' meeting. STOCKHOLDER MEETINGS CHRYSLER Under the DGCL, if the annual meeting for the election of directors is not held on a designated date, the directors are required to cause such meeting to be held as soon thereafter as may be convenient. If they fail to do so for a period of 30 days after the designated date, or if no date has been designated for a period of 13 months after the organization of the corporation or after its last annual meeting, the Court of Chancery may summarily order a meeting to be held upon application of any stockholder or director. A special meeting of stockholders of Chrysler may be called only by the Chrysler Board, the Chairman of the Board or a Vice Chairman of the Board. A quorum for a meeting of the stockholders of Chrysler generally consists of the holders of shares constituting a majority of the voting power of the outstanding shares of Chrysler entitled to vote. A majority of the votes cast is generally required for an action by the stockholders of Chrysler. DAIMLERCHRYSLER The DaimlerChrysler Articles of Association provide that the annual general meeting to ratify the actions of the DaimlerChrysler Management Board and the DaimlerChrysler Supervisory Board, and to approve the disposition of unappropriated profit, the appointment of the auditor and, if applicable, the audited financial statements, must take place within the first 8 months of each fiscal year. A special meeting of stockholders of DaimlerChrysler may be called by the DaimlerChrysler Management Board or the DaimlerChrysler Supervisory Board. A special meeting of stockholders must be called by the DaimlerChrysler Management Board upon request of stockholders holding in the aggregate shares representing at least 5% of the issued shares. The written request stating the purpose and reasons for the special meeting must be forwarded to the DaimlerChrysler Management Board. There are no quorum requirements for stockholder meetings of DaimlerChrysler. Additionally, resolutions are passed at a general meeting of the stockholders of DaimlerChrysler by a majority of the 70 votes cast, unless a higher vote or a majority of the shares represented at the meeting is required by law or the DaimlerChrysler Articles of Association. STOCKHOLDER PROPOSALS CHRYSLER The Chrysler By-Laws establish procedures that must be followed for a stockholder to submit a proposal at an annual meeting of stockholders (other than a proposal submitted under the Commission's stockholder proposal rules). No proposal for a vote may be submitted to the stockholders by a stockholder unless such submitting stockholder has timely filed with the Secretary of Chrysler a written statement setting forth specified information, including a brief description of the proposal and the reasons for bringing such business before the annual meeting, the name and address of the person making the proposal, the class and number of shares of capital stock of Chrysler beneficially owned by such person, and any material interest of the stockholder in such business. If the presiding officer at any stockholders' meeting determines that any such proposal was not made in accordance with these procedures or is otherwise not in accordance with the law, he or she will so declare at the meeting and such defective proposal will not be acted upon. DAIMLERCHRYSLER According to the German Stock Corporation Law (AKTIENGESETZ), stockholders holding in the aggregate shares representing at least 5% of the issued shares or holding in the aggregate 200,000 shares (assuming stated value of DM 5 per share) are entitled to require that a matter is put on the agenda for resolution and that the board of management submit a proposal at the respective stockholders' meeting and to publish this proposal in the German Federal Gazette (BUNDESANZEIGER). The request must be made in writing stating the purpose and the reasons therefor. Proposals duly published may be submitted to the general stockholders' meeting for decision. In addition, if the agenda for the meeting is duly published, then stockholders may nominate individuals for election at the general stockholder meeting, even if they have not availed themselves of the procedures to make such nominations in advance of the general stockholders' meeting and to have the board of management notify stockholders of such nominations in advance of the general stockholders' meeting. Each stockholder may also submit at the stockholders' meeting counterproposals to the proposals submitted by the management board and the supervisory board. See "--Stockholder Nominations--DaimlerChrysler." REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS CHRYSLER Under the DGCL, fundamental corporate transactions (such as mergers, sales of all or substantially all of the corporation's assets and dissolutions) require the approval of the holders of a majority of the shares entitled to vote. The DGCL permits a corporation to increase the minimum percentage vote required. The Chrysler Certificate does not contain any supermajority vote requirements to approve any fundamental transaction. DAIMLERCHRYSLER According to German law, the following resolutions may be passed only by a majority of at least 75% of the issued shares represented at the passing of the resolution and a simple majority of the votes cast at the stockholders meeting: certain capital increases (contingent capital; authorized capital), capital decreases, a dissolution of DaimlerChrysler, a merger of DaimlerChrysler or any other form of transformation (UMWANDLUNG) of DaimlerChrysler, including, without limitation, spin-offs (SPALTUNGEN), a transfer of all or virtually all of DaimlerChrysler's assets, a change of DaimlerChrysler's corporate form, and the exclusion of preemptive rights (BEZUGSRECHT). 71 AMENDMENT OF CORPORATE CHARTER AND BY-LAWS CHRYSLER Under the DGCL, amendment of the certificate of incorporation requires the approval of the holders of a majority of each class of shares entitled to vote. Except as prohibited by the DGCL, the Chrysler Certificate provides that the Chrysler Board may adopt, amend or repeal the Chrysler By-Laws without the assent or vote of the stockholders. Under the DGCL, a corporation's by-laws may also be amended by the stockholders. DAIMLERCHRYSLER Amendments of the DaimlerChrysler Articles of Association may be proposed either jointly by the DaimlerChrysler Supervisory Board and the DaimlerChrysler Management Board or by a stockholder or group of stockholders holding a minimum of 5% of the issued shares or 200,000 shares (assuming stated value of DM 5 per share). A resolution amending the DaimlerChrysler Articles of Association must be passed by a majority of the votes cast and a majority of the shares issued represented at the meeting of stockholders at which the resolution is considered unless the German Stock Corporation Law (AKTIENGESETZ) requires that the resolution be passed by at least three-quarters of the shares issued represented at the meeting. APPRAISAL RIGHTS CHRYSLER The rights of stockholders to demand payment in cash by a corporation of the fair value of their shares under certain circumstances are called appraisal rights under the DGCL. The DGCL does not afford appraisal rights to holders of shares which are either listed on a national securities exchange, quoted on The Nasdaq National Market or held of record by more than 2,000 stockholders when the plan of merger or consolidation converts such shares solely into stock of the surviving corporation or stock of another corporation (or cash in lieu of fractional shares) which is either listed on a national securities exchange, quoted on The Nasdaq National Market or held of record by more than 2,000 stockholders. In addition, Delaware law denies appraisal rights to the stockholders of the surviving corporation in a merger if such merger did not require for its approval the vote of the stockholders of such surviving corporation. In determining fair value, any valuation methods may be used which are generally acceptable in the financial community. DAIMLERCHRYSLER A valuation proceeding (SPRUCHVERFAHREN) is available to DaimlerChrysler's stockholders under the German Stock Corporation Law (AKTIENGESETZ) and the German Transformation Act (UMWANDLUNGSGESETZ) to determine the adequacy of the consideration to be paid in certain corporate transactions. These transactions include (a) a merger; (b) a control and profit transfer agreement between a controlling stockholder and its dependent company; and (c) the forced withdrawal of minority stockholders from a corporation upon the corporation's integration with its parent corporation holding shares representing at least 95% of the nominal capital of the corporation to be integrated; PROVIDED, in each case the stockholder complies with the procedural requirements specified in the respective statutory provisions. PREEMPTIVE RIGHTS CHRYSLER Under the DGCL, stockholders have no preemptive rights to subscribe to additional issues of stock or to any security convertible into such stock unless, and except to the extent that, such rights are expressly 72 provided for in the certificate of incorporation. The Chrysler Certificate does not provide for preemptive rights. DAIMLERCHRYSLER Under the German Stock Corporation Law (AKTIENGESETZ), in general, an existing stockholder in a stock corporation has a preemptive right (BEZUGSRECHT) to subscribe for any issue by such corporation of shares, debt instruments convertible into shares and participating debt instruments in proportion to the shares held by such stockholder in the existing capital of such corporation. The German Stock Corporation Law (AKTIENGESETZ) provides that this preemptive right can be excluded only by a stockholder resolution. A majority of at least three-quarters of the issued shares represented at the meeting is required for the exclusion. See "Description of DaimlerChrysler Ordinary Shares--Preemptive Rights." STOCK REPURCHASES CHRYSLER Under DGCL, a corporation may purchase or redeem its own shares unless the capital of the corporation is impaired or when such purchase or redemption would cause an impairment of the capital of the corporation. A Delaware corporation may, however, purchase or redeem out of capital any of its preferred shares if such shares will be retired upon acquisition, thereby reducing the capital of the corporation. DAIMLERCHRYSLER Under the German Stock Corporation Law (AKTIENGESETZ), a stock corporation (AKTIENGESELLSCHAFT) like DaimlerChrysler may acquire its own shares, (i) only upon authorization by a stockholders' meeting, PROVIDED, that it acquires no more than 10% of its issued shares, or (ii) for certain defined purposes (E.G.,for transfer to employees). ANTI-TAKEOVER STATUTES CHRYSLER Section 203 of the DGCL contains certain "anti-takeover" provisions that apply to a Delaware corporation, unless the corporation elects not to be governed by such provision in its certificate of incorporation or by-laws. Neither the Chrysler Charter nor the Chrysler By-Laws contain such an election. Thus, Chrysler is governed by Section 203 of the DGCL, which precludes a corporation from engaging in any "business combination" (i.e., mergers, consolidations, sales of substantially all assets, etc.) with any person (other than the corporation and any direct or indirect majority-owned subsidiary of the corporation) that owns 15% or more of the outstanding voting stock of the corporation (except for any such person whose ownership of shares in excess of the 15% limitation is the result of action taken solely by the corporation) for a period of three years following the time that such stockholder obtained ownership of more than 15% of the outstanding voting stock of the corporation. The three-year waiting period does not apply, however, if (i) prior to the time such person obtained ownership of more than 15% of the outstanding voting stock of the corporation, the board of directors of the corporation approved either the business combination or the transaction which resulted in such stockholder owning in excess of 15% of such stock, (ii) upon consummation of the transaction which resulted in the stockholder owning in excess of 15% of the outstanding voting stock of the corporation, such stockholder owned at least 85% of the voting stock of the corporation outstanding at the time that the transaction commenced, or (iii) at or subsequent to such time as the stockholder obtained more than 15% of the outstanding voting stock of the corporation, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the acquiring stockholder. 73 DAIMLERCHRYSLER German law does not specifically regulate business combinations with interested stockholders. However, certain general principles of German law may restrict business combinations under certain circumstances. LIMITATION ON DIRECTORS' LIABILITY CHRYSLER The DGCL permits a corporation to limit a director's personal liability, with certain specified exemptions. Such a limitation must be set forth in the corporation's certificate of incorporation. The Chrysler Certificate currently eliminates a director's personal liability for monetary damages to the fullest extent permitted by Delaware law. As a result, a Chrysler director presently has no monetary liability except for liability for (i) breach of the duty of loyalty, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) declaration of an improper dividend or an improper redemption of stock or (iv) any transaction from which the director derived an improper personal benefit. DAIMLERCHRYSLER Under compulsory provisions of the German Stock Corporation Law (AKTIENGESETZ), a stock corporation is not allowed to limit or eliminate the personal liability of the members of either the board of management or the supervisory board for damages due to breach of duty in their official capacity. For a discussion of the standard of conduct of the DaimlerChrysler Management Board and the DaimlerChrysler Supervisory Board, see "--Duties of Directors--DaimlerChrysler." DaimlerChrysler may, however, waive its claims for damages due to a breach of duty or reach a settlement with regard to such claims if more than three years have passed after such claims have arisen, but only with the approval of the general stockholders' meeting, PROVIDED that such waiver may not be granted and such settlement may not be reached if stockholders holding in the aggregate at least 10% of the issued shares file an objection to the protocol. INDEMNIFICATION OF OFFICERS AND DIRECTORS CHRYSLER The Chrysler Certificate and the Chrysler By-Laws require indemnification of its directors and officers to the fullest extent permitted under Delaware law. The DGCL permits a corporation to indemnify any person involved in a third party action by reason of his agreeing to serve, serving or formerly serving as an officer or director of the corporation, against expenses, judgments, fines and settlement amounts paid in such third party action (and against expenses incurred in any derivative action), if such person acted in good faith and reasonably believed that his actions were in, or not opposed to, the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe that his conduct was unlawful. Furthermore, the DGCL provides that a corporation may advance expenses incurred by officers and directors in defending any action upon receipt of an undertaking by the person to repay the amount advanced if it is ultimately determined that such person is not entitled to indemnification. In general, no indemnification for expenses in derivative actions is permitted under the DGCL where the person has been adjudged liable to the corporation, unless a court finds him entitled to such indemnification. If, however, the person has been successful in defending a third party or derivative action, indemnification for expenses incurred is mandatory under the DGCL. 74 Under the DGCL, the statutory provisions for indemnification are nonexclusive with respect to any other rights, such as contractual rights, to which a person seeking indemnification may be entitled. Delaware law does not expressly permit such contractual or other rights to provide for indemnification against judgments and settlements paid in a derivative action. Delaware case law has not made clear whether and to what extent Delaware courts will enforce such a broad right of indemnification, which is included in the Chrysler Certificate. DAIMLERCHRYSLER Under German law, DaimlerChrysler may indemnify its officers (LTD. ANGESTELLTE), and, under certain circumstances, German labor law requires a stock corporation to do so. However, DaimlerChrysler may not, as a general matter, indemnify members of the DaimlerChrysler Management Board or the DaimlerChrysler Supervisory Board. A German stock corporation (AKTIENGESELLSCHAFT) may, however, purchase directors and officers insurance. Such insurance may be subject to any mandatory restrictions imposed by German law. In addition, German law may permit a corporation to indemnify a member of the board of management or the supervisory board for attorneys' fees incurred if such member is the successful party in a suit in a country, such as the U.S., where winning parties are required to bear their own costs, if German law would have required the losing party to pay such member's attorneys' fees had the suit been brought in Germany. Members of the DaimlerChrysler Supervisory Board and the DaimlerChrysler Management Board and officers of DaimlerChrysler will be covered by customary liability insurance, including insurance against liabilities under the Securities Act. CUMULATIVE VOTING CHRYSLER Under the DGCL, each stockholder is entitled to one vote per share of stock, unless the certificate of incorporation provides otherwise. In addition, under the DGCL, cumulative voting in the election of directors is only permitted if expressly authorized in a corporation's charter. The Chrysler Certificate does not expressly authorize cumulative voting. DAIMLERCHRYSLER The German Stock Corporation Law (AKTIENGESETZ) does not allow cumulative voting. CONFLICT-OF-INTEREST TRANSACTIONS CHRYSLER The DGCL generally permits transactions involving a Delaware corporation and an interested director of that corporation if (a) the material facts as to his relationship or interest are disclosed and a majority of disinterested directors consents, (b) the material facts are disclosed as to his relationship or interest and holders of a majority of shares entitled to vote thereon consent, or (c) the transaction is fair to the corporation at the time it is authorized by the board of directors, a committee of the board of directors or the stockholders. DAIMLERCHRYSLER In any transaction or contract between DaimlerChrysler and any member of the DaimlerChrysler Management Board, DaimlerChrysler is represented by the DaimlerChrysler Supervisory Board. See "-- Duties of Directors--DaimlerChrysler." 75 DIVIDENDS CHRYSLER The DGCL permits dividends to be paid out of (i) surplus (the excess of net assets of the corporation over capital), or (ii) if the corporation does not have adequate surplus, net profits for the current or immediately preceding fiscal year, unless the net assets are less than the capital of any outstanding preferred stock. In determining the amount of surplus of a Delaware corporation, the assets of the corporation, including stock of subsidiaries owned by the corporation, must be valued at their fair market value as determined by the board of directors, without regard to their historical book value. DAIMLERCHRYSLER According to the German Stock Corporation Law (AKTIENGESETZ), dividends may be paid out of the corporation's distributable profits as determined by resolution of the stockholders general meeting for the preceding fiscal year. LOANS TO DIRECTORS CHRYSLER Under the DGCL, loans can generally be made to officers and directors upon approval by the board of directors. DAIMLERCHRYSLER The German Stock Corporation Law (AKTIENGESETZ) requires that any loan made by DaimlerChrysler exceeding a month's salary to any director or general manager or to their spouses or minor children must be authorized by a resolution of the DaimlerChrysler Supervisory Board. Loans made by DaimlerChrysler to a member of the DaimlerChrysler Supervisory Board require an affirmative vote of the DaimlerChrysler Supervisory Board. For purposes of this resolution, the member of the DaimlerChrysler Supervisory Board who would be the borrower is not entitled to vote. STOCKHOLDER SUITS CHRYSLER Under the DGCL, a stockholder may bring a derivative action on behalf of the corporation to enforce the rights of the corporation. An individual also may commence a class action suit on behalf of himself and other similarly situated stockholders where the requirements for maintaining a class action under Delaware law have been met. A person may institute and maintain such a suit only if such person was a stockholder at the time of the transaction which is the subject of the suit or his or her stock thereafter dissolved upon him or her by operation of law. Additionally, under Delaware case law, the plaintiff generally must be a stockholder not only at the time of the transaction which is the subject of the suit, but also through the duration of the derivative suit. Delaware law also requires that the derivative plaintiff make a demand on the directors of the corporation to assert the corporate claim before the suit may be prosecuted by the derivative plaintiff, unless such demand would be futile. DAIMLERCHRYSLER The German Stock Corporation Law (AKTIENGESETZ) does not provide for class actions, and does not generally permit stockholder derivative suits, even in the case of breach of duty by the members of the board of management or the supervisory board. The stockholders' meeting, acting by a simple majority of the votes cast, or a minority of the stockholders holding in the aggregate at least 10% of the issued shares, are entitled to request DaimlerChrysler to claim damages, but are not entitled to assert any rights on 76 behalf of DaimlerChrysler. Upon request, the corporation will prosecute such claim. If such request is not complied with, the court will appoint a special representative upon a motion of stockholders with either shares representing at least 10% (under special circumstances 5%) of the issued shares or 400,000 shares (under special circumstances 200,000 shares, in each case, assuming stated value of DM 5 per share). The general stockholders' meeting may appoint any disinterested party as a special representative for these proceedings. To avoid abuse, stockholders exercising the minority right described above must establish that they have held their shares for at least three months prior to the general stockholders' meeting in which they make the request. The stockholder group must reimburse DaimlerChrysler for all costs of litigation if such proceedings are unsuccessful or only partially successful, but only in the latter case to the extent that such costs exceed any amounts awarded to DaimlerChrysler in such a proceeding. Each stockholder who was present at the stockholders' meeting and has objected to the resolution in the minutes may within one month after adoption of the respective resolution of stockholders' meeting take action against the company to contest the resolution (ANFECHTUNGSKLAGE). RIGHTS OF INSPECTION CHRYSLER Under the DGCL, every stockholder, upon proper written demand stating the purpose thereof, may inspect the corporate books and records during normal business hours as long as such inspection is for a proper purpose. Under the statute, a proper purpose is any purpose reasonably related to the interests of the inspecting person as a stockholder. DAIMLERCHRYSLER The German Stock Corporation Law (AKTIENGESETZ) does not permit stockholders to inspect corporate books and records. Section 67(5) of the German Stock Corporation Law (AKTIENGESETZ), however, does permit stockholders to inspect the share register upon request, and Section 131 provides each stockholder with a right to information at the stockholders' meeting, to the extent that such information is necessary to permit a proper evaluation of the relevant item on the agenda. The right to information is a right only to oral information at a stockholders meeting. Information may be given in writing to stockholders, but they are neither entitled to receive written information nor to inspect any documents of the corporation. As a practical matter, stockholders may receive certain written information about DaimlerChrysler through its public filings with the commercial register (HANDELSREGISTER) and the Federal Gazette (BUNDESANZEIGER) and other places for publication of the company. 77 PLAN OF DISTRIBUTION Chrysler [and the Selling Shareholder] will sell the Chrysler Common Stock to or through Credit Suisse First Boston Corporation, Goldman, Sachs & Co. and Deutsche Bank Securities, Inc. as sole underwriters or representatives of a syndicate of underwriters (in either such case, the "Representatives"). The Representatives may, on behalf of the underwriters, distribute shares of Chrysler Common Stock and, following the closing of the Transactions, the DaimlerChrysler Ordinary Shares (collectively, the "Offered Shares") from time to time in one or more transactions (which may include block transactions), in negotiated transactions or otherwise, or a combination of such methods of sale, at (i) a fixed price or prices, which may change, (ii) at market prices prevailing at the time of sale, (iii) at prices related to such prevailing market prices or (iv) at negotiated prices. Such transactions may be effected on the NYSE or on other national or international exchanges on which the Offered Shares are traded or otherwise. The supplement to this Prospectus will describe the method of distribution of any Offered Shares. The underwriters may effect such transactions by selling the Offered Shares to or through dealers, and such dealers may receive compensation in the form of underwriting discounts, concessions or commissions from the underwriters and/or the purchasers of the Offered Shares for whom they may act as agents. The underwriters and any dealers that participate with the underwriters in the distribution of the Offered Shares may be deemed to be underwriters, and any discounts or commissions received by them and any profit on the resale of the Offered Shares by them may be deemed to be underwriting compensation. The underwriters may also receive commissions from the purchasers of the Offered Shares for whom they may act as agents. The supplement to this Prospectus will describe any such compensation. Under agreements which may be entered into by Chrysler [and the Selling Shareholder], underwriters who participate in the distribution of Offered Shares may be entitled to indemnification by Chrysler against certain liabilities, including civil liabilities under the Securities Act, or contribute to payments which the underwriters may be required to make in respect thereof. The supplement to this Propectus will describe the terms of any agreement between the Representatives and Chrysler, DaimlerChrysler and any other party restricting the ability of Chrysler, DaimlerChrysler or any such party to dispose of additional shares of Chrysler or DaimlerChrysler for a period of time following the sale of the Chrysler Common Stock to the Representatives. Certain of the Representatives and their affiliates have from time to time performed, and expect to continue to perform, financial advisory, investment banking and commercial banking services for Chrysler and Daimler-Benz, for which customary compensation has been received. Deutsche Bank Aktiengesellschaft, an affiliate of Deutsche Bank Securities, Inc., is at present the largest shareholder of Daimler-Benz and expects to be the largest shareholder of DaimlerChrysler following consummation of the Transactions. The Representatives, on behalf of the underwriters, may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the Offered Shares in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the Representative to reclaim a selling concession from a syndicate member when the Offered Shares originally sold by such syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. Such stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the Offered Shares to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on the NYSE or otherwise and, if commenced, may be discontinued at any time. 78 LEGAL MATTERS The validity of the Chrysler Common Stock covered hereby will be passed upon for Chrysler by William J. O'Brien, Esq., Vice President, General Counsel and Secretary of Chrysler, and by Debevoise & Plimpton, special counsel to Chrysler, and for the Underwriters by Cleary, Gottlieb, Steen & Hamilton. The validity of the DaimlerChrysler Ordinary Shares to be received in connection with the Transactions will be passed upon by the Daimler-Benz legal department. Mr. O'Brien owns and holds options to purchase shares of Chrysler Common Stock. EXPERTS The consolidated financial statements of Chrysler as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report which is included in this Prospectus, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. With respect to the unaudited interim financial information of Chrysler for the periods ended March 31, 1998 and June 30, 1998 which is incorporated by reference in this Prospectus and for the period ended September 30, 1998 which is included in this Prospectus, Deloitte & Touche LLP have applied limited procedures in accordance with professional standards for a review of such information. However, as stated in their report included in Chrysler's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998 and incorporated by reference in this Prospectus and for the period ended September 30, 1998 and included in this Prospectus, they did not audit and they do not express an opinion on that interim financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. Deloitte & Touche LLP are not subject to the liability provisions of Section 11 of the Securities Act for their report on the unaudited interim financial information because such report is not a "report" or a "part" of a registration statement prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Securities Act. The consolidated financial statements of Daimler-Benz as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997, included in this Prospectus, have been audited by KPMG Deutsche-Treuhand Gesellschaft AG, independent auditors, as set forth in their report included in this Prospectus, and are included herein upon the authority of such firm as experts in accounting and auditing. The report of KPMG Deutsche Treuhand-Gesellschaft AG on the Daimler-Benz consolidated financial statements, as of and for each of the years in the three year period ended December 31, 1997, contains a qualification as a result of a departure from U.S. GAAP for Daimler-Benz' accounting for certain joint ventures in accordance with the proportionate method of consolidation. Under U.S. GAAP, joint ventures would be accounted for using the equity method of accounting. 79 INDEX TO FINANCIAL INFORMATION PAGES --------- CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS: Independent Auditors' Report........................................................................... F-2 Audited Annual Financial Statements: Consolidated Statement of Earnings for each of the years in the three-year period ended December 31, 1997.................................................................................................. F-3 Consolidated Balance Sheet as of December 31, 1997 and 1996............................................ F-4 Consolidated Statement of Cash Flows for each of the years in the three-year period ended December 31, 1997.................................................................................................. F-5 Notes to Consolidated Financial Statements............................................................. F-6 Independent Accountants' Report........................................................................ F-36 Unaudited Quarterly Financial Statements: Consolidated Statements of Earnings for each of the three- and nine-month periods ended September 30, 1998 and 1997......................................................................................... F-37 Consolidated Balance Sheet as of September 30, 1998 and 1997 and December 31, 1997..................... F-38 Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 1998 and 1997.................................................................................................. F-39 Notes to the Consolidated Financial Statements......................................................... F-40 DAIMLER-BENZ AKTIENGESELLSCHAFT AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS: Independent Auditors' Report........................................................................... F-43 Consolidated Statements of Income for the years ended December 31 , 1997, 1996 and 1995.................................................................... F-44 Consolidated Balance Sheets at December 31, 1997 and 1996.............................................. F-45 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995..................................................................... F-46 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995.................................................................... F-47 Notes to the Consolidated Financial Statements......................................................... F-50 Condensed Consolidated Statements of Income for the six months ended June 30, 1998 and 1997............................................................................................. F-87 Condensed Consolidated Balance Sheets at June 30, 1998 and December 31, 1997........................... F-88 Condensed Consolidated Statements of Cash Flows for the six-months ended June 30, 1998 and 1997........ F-89 Notes to Unaudited Interim Condensed Consolidated Financial Statements................................. F-90 F-1 INDEPENDENT AUDITORS' REPORT Shareholders and Board of Directors Chrysler Corporation Auburn Hills, Michigan We have audited the accompanying consolidated balance sheet of Chrysler Corporation and consolidated subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Chrysler Corporation and consolidated subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in the notes to the financial statements, in 1995 the Company changed its method of accounting for the sales of vehicles for which it has guaranteed a minimum resale value. Deloitte & Touche LLP Detroit, Michigan January 22, 1998 F-2 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- (IN MILLIONS OF DOLLARS) Sales of manufactured products................................................... $ 56,986 $ 57,587 $ 49,601 Finance and insurance revenues................................................... 1,636 1,746 1,589 Other revenues................................................................... 2,525 2,064 2,005 --------- --------- --------- TOTAL REVENUES............................................................... 61,147 61,397 53,195 --------- --------- --------- Costs, other than items below (Notes 13 and 14).................................. 46,743 45,842 41,304 Depreciation and special tools amortization (Notes 1 and 5)...................... 2,696 2,312 2,220 Selling and administrative expenses.............................................. 4,957 4,730 4,064 Employee retirement benefits (Note 12)........................................... 1,188 1,414 1,163 Interest expense................................................................. 1,006 1,007 995 --------- --------- --------- TOTAL EXPENSES............................................................... 56,590 55,305 49,746 --------- --------- --------- EARNINGS BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE............................................. 4,557 6,092 3,449 Provision for income taxes (Note 8).............................................. 1,752 2,372 1,328 --------- --------- --------- EARNINGS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE....................................................... 2,805 3,720 2,121 Extraordinary item--Loss on early extinguishment of debt, net of taxes (Note 7)............................................................................. -- (191) -- Cumulative effect of a change in accounting principle, net of taxes (Note 1)..... -- -- (96) --------- --------- --------- NET EARNINGS................................................................. $ 2,805 $ 3,529 $ 2,025 Preferred stock dividends (Note 11).............................................. 1 3 21 --------- --------- --------- NET EARNINGS ON COMMON STOCK................................................. $ 2,804 $ 3,526 $ 2,004 --------- --------- --------- --------- --------- --------- (IN DOLLARS OR MILLIONS OF BASIC EARNINGS PER COMMON SHARE (NOTES 1, 7, 11, 17): SHARES) Earnings before extraordinary item and cumulative effect of a change in accounting principle......................................................... $ 4.15 $ 5.09 $ 2.81 Extraordinary item............................................................. -- (0.26) -- Cumulative effect of a change in accounting principle.......................... -- -- (0.13) --------- --------- --------- Net earnings per common share.................................................. $ 4.15 $ 4.83 $ 2.68 --------- --------- --------- --------- --------- --------- Average common shares outstanding.............................................. 675.5 730.3 748.4 DILUTED EARNINGS PER COMMON SHARE (NOTES 1, 7, 11, 17): Earnings before extraordinary item and cumulative effect of a change in accounting principle......................................................... $ 4.09 $ 5.00 $ 2.68 Extraordinary item............................................................. -- (0.26) -- Cumulative effect of a change in accounting principle.......................... -- -- (0.12) --------- --------- --------- Net earnings per common share.................................................. $ 4.09 $ 4.74 $ 2.56 --------- --------- --------- --------- --------- --------- Average common and dilutive equivalent shares outstanding...................... 685.3 743.8 791.7 DIVIDENDS DECLARED PER COMMON SHARE.............................................. $ 1.60 $ 1.40 $ 1.00 See notes to consolidated financial statements. F-3 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31 -------------------- 1997 1996 --------- --------- (IN MILLIONS OF DOLLARS) ASSETS: Cash and cash equivalents (Note 1)........................................................ $ 4,898 $ 5,158 Marketable securities (Note 2)............................................................ 2,950 2,594 --------- --------- Total cash, cash equivalents and marketable securities.................................. 7,848 7,752 Accounts receivable--trade and other (less allowance for doubtful accounts: 1997 and 1996--$52 million and $44 million, respectively)............................... 1,646 2,126 Inventories (Notes 1 and 3)............................................................... 4,738 5,195 Prepaid employee benefits, taxes and other expenses (Note 12)............................. 2,193 1,929 Finance receivables and retained interests in sold receivables (Note 4)................... 13,518 12,339 Property and equipment (Note 5)........................................................... 17,968 14,905 Special tools (Note 1).................................................................... 4,572 3,924 Intangible assets (Note 1)................................................................ 1,573 1,995 Other noncurrent assets (Note 12)......................................................... 6,362 6,019 --------- --------- TOTAL ASSETS.......................................................................... $ 60,418 $ 56,184 --------- --------- --------- --------- LIABILITIES: Accounts payable.......................................................................... $ 9,512 $ 8,981 Accrued liabilities and expenses (Note 6)................................................. 9,717 8,864 Short-term debt (Note 7).................................................................. 3,841 3,214 Payments due within one year on long-term debt (Note 7)................................... 2,638 2,998 Long-term debt (Note 7)................................................................... 9,006 7,184 Accrued noncurrent employee benefits (Note 12)............................................ 9,841 9,431 Other noncurrent liabilities.............................................................. 4,501 3,941 --------- --------- TOTAL LIABILITIES..................................................................... 49,056 44,613 --------- --------- SHAREHOLDERS' EQUITY (Note 11): (shares in millions) Preferred stock--$1 per share par value; authorized 20.0 shares; Series A Convertible Preferred Stock; issued and outstanding: 1997 and 1996--0.02 and 0.04 shares, respectively (aggregate liquidation preference $8 million and $21 million, respectively)........................................................................... * * Common stock--$1 per share par value; authorized 1,000.0 shares; issued: 1997 and 1996--823.1 and 821.6 shares, respectively..................................... 823 822 Additional paid-in capital................................................................ 5,231 5,129 Retained earnings......................................................................... 10,605 8,829 Treasury stock--at cost: 1997 and 1996--174.7 and 119.1 shares, respectively.............. (5,297) (3,209) --------- --------- TOTAL SHAREHOLDERS' EQUITY............................................................ 11,362 11,571 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................................ $ 60,418 $ 56,184 --------- --------- --------- --------- - ------------------------ * Less than $1 million See notes to consolidated financial statements. F-4 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- (IN MILLIONS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings...................................................................... $ 2,805 $ 3,529 $ 2,025 Adjustments to reconcile to net cash provided by operating activities: Depreciation and special tools amortization................................... 2,696 2,312 2,220 Provision for credit losses................................................... 444 373 372 Deferred income taxes......................................................... 279 1,120 186 Extraordinary item--Loss on early extinguishment of debt (Note 7)............. -- 191 -- Cumulative effect of a change in accounting principle (Note 1)................ -- -- 96 Change in receivables......................................................... (364) (224) 848 Change in inventories......................................................... (706) (691) (435) Change in prepaid expenses and other assets................................... (1,249) (1,394) (681) Change in accounts payable and accrued and other liabilities.................. 2,119 2,143 2,092 Other......................................................................... 404 (58) 231 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES................................... 6,428 7,301 6,954 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities............................................ (2,778) (4,346) (5,160) Sales and maturities of marketable securities................................. 3,350 5,294 6,122 Finance receivables acquired.................................................. (28,335) (19,906) (24,437) Finance receivables collected................................................. 9,089 3,062 3,795 Proceeds from sales of finance receivables.................................... 18,967 16,809 17,602 Proceeds from sales of nonautomotive assets................................... -- 701 94 Expenditures for property and equipment....................................... (3,419) (3,271) (2,597) Expenditures for special tools................................................ (1,703) (1,364) (1,049) Purchases of vehicle operating leases......................................... (2,028) (794) (460) Other......................................................................... 652 248 179 --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES....................................... (6,205) (3,567) (5,911) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in short-term debt..................................................... 627 410 (1,971) Proceeds under long-term borrowings and revolving lines of credit............. 5,868 1,390 4,731 Payments on long-term borrowings and revolving lines of credit................ (3,897) (2,167) (1,687) Payment for early extinguishment of debt...................................... -- (853) -- Repurchases of common stock (Note 11)......................................... (2,130) (2,041) (1,047) Dividends paid................................................................ (1,096) (963) (710) Other......................................................................... 145 105 39 --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES....................................... (483) (4,119) (645) --------- --------- --------- Change in cash and cash equivalents............................................... (260) (385) 398 Cash and cash equivalents at beginning of year.................................... 5,158 5,543 5,145 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR.......................................... $ 4,898 $ 5,158 $ 5,543 --------- --------- --------- --------- --------- --------- See notes to consolidated financial statements. F-5 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION The consolidated financial statements of Chrysler Corporation and its consolidated subsidiaries ("Chrysler") include the accounts of all significant majority-owned subsidiaries and entities. Affiliates that are 20 percent to 50 percent owned and subsidiaries where control is expected to be temporary, primarily investments in certain dealerships, are generally accounted for on an equity basis. Intercompany accounts and transactions have been eliminated in consolidation. Certain amounts for 1996 and 1995 have been reclassified to conform with current period classifications. ESTIMATES The preparation of Chrysler's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION Vehicle and parts sales are generally recognized when such products are shipped to dealers, except for sales under which Chrysler conditionally guarantees the minimum resale value of the vehicles. Provisions for sales incentives, returns and allowances are recognized at the time the related sale is recognized and are treated as revenue reductions. In 1995, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") reached a consensus on EITF Issue 95-1, "Revenue Recognition on Sales with a Guaranteed Minimum Resale Value." The consensus on EITF Issue 95-1 (the "consensus") affects Chrysler's accounting treatment for vehicle sales (principally to non-affiliated rental car companies) for which Chrysler conditionally guarantees the minimum resale value of the vehicles. In accordance with the consensus, these vehicle sales are accounted for as operating leases with the related revenues and costs deferred at the time of shipment. A portion of the deferred revenues and costs is recognized over the corresponding guarantee period, with the remainder recognized at the end of the guarantee period. The average guarantee period for these vehicles is approximately nine months. Chrysler changed its accounting treatment in accordance with the consensus effective January 1, 1995, which resulted in the recognition of an after-tax charge of $96 million (net of income tax benefit of $59 million), or $0.13 per common share, for the cumulative effect of this change in accounting principle. Finance revenue from finance receivables of Chrysler Financial Corporation ("CFC"), a wholly owned subsidiary, is recognized using the interest method. Finance revenue from operating leases of vehicles is recognized on a straight-line basis. Certain loan and lease origination costs are deferred and amortized to finance revenue over the contractual terms. Recognition of finance revenue is generally suspended when a loan or lease becomes contractually delinquent for periods ranging from 60 to 90 days. Finance revenue recognition is resumed when the loan or lease becomes contractually current, at which time all past due finance revenue is recognized. CFC sells significant amounts of automotive retail and wholesale receivables in transactions subject to limited credit risk. CFC generally sells its receivables to a trust and remains as servicer, for which it is paid a servicing fee. Servicing fees are earned on a level yield basis over the remaining terms of the related sold F-6 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) receivables. In a subordinated capacity, CFC retains residual cash flows, a limited interest in the principal balances of the sold receivables and certain cash deposits provided as credit enhancements for investors. Gains or losses from the sales of finance receivables are recognized in the period in which such 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 on their relative fair values. Effective January 1, 1997, Chrysler adopted Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which requires retail and wholesale receivable sales occurring after December 31, 1996, to be accounted for as sales when legal and effective control over transferred receivables is surrendered. The adoption of this new accounting standard did not have a material impact on Chrysler's consolidated financial statements. DEPRECIATION AND SPECIAL TOOLS AMORTIZATION Property and equipment are stated at cost less accumulated depreciation. Depreciation is generally provided on a straight-line basis. Special tooling costs are amortized over the years that a model using that tooling is expected to be produced and within each year based on the units produced. Amortization is deducted directly from the asset account and totaled $3.7 billion and $3.4 billion at December 31, 1997 and 1996, respectively. During any given model year, special tools will contain tooling with varying useful lives. PRODUCT-RELATED COSTS Expenditures for research and development, advertising, sales promotion and other product-related costs are expensed as incurred. Provisions for product warranty are recognized at the time the related sale is recognized. Research and development costs were $1.7 billion, $1.6 billion and $1.4 billion in 1997, 1996 and 1995, respectively. Advertising expense was $1.5 billion, $1.5 billion and $1.2 billion in 1997, 1996 and 1995, respectively. EARNINGS PER COMMON SHARE Effective for Chrysler's consolidated financial statements for the year ended December 31, 1997, Chrysler adopted SFAS No. 128, "Earnings per Share," which replaces the presentation of primary earnings per share ("EPS") and fully diluted EPS with a presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Similar to fully diluted EPS, diluted EPS assumes conversion of the convertible preferred stock, the elimination of the related preferred stock dividend requirement, and the issuance of common stock for all other potentially dilutive equivalent shares outstanding. All prior-period EPS data have been restated. The adoption of this new accounting standard did not have a material effect on Chrysler's reported EPS amounts. CASH AND CASH EQUIVALENTS Highly liquid investments with a maturity of three months or less at the date of purchase are classified as cash equivalents. F-7 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ALLOWANCE FOR CREDIT LOSSES An allowance for credit losses is generally established during the period in which retail receivables or vehicles leased are acquired. The allowance for credit losses is maintained at a level deemed appropriate, based primarily on loss experience. Other factors affecting collectibility are also evaluated, and appropriate adjustments are recorded. Retail automotive receivables and vehicles leased are charged to the allowance for credit losses net of the estimated value of repossessed collateral at the time of repossession. Nonautomotive finance receivables are reduced to the estimated fair value of the collateral when such loans are deemed to be impaired. INVENTORIES Inventories are valued at the lower of cost or market. The cost of approximately 43 percent and 39 percent of inventories at December 31, 1997 and 1996, respectively, was determined on a Last-In, First-Out ("LIFO") basis. The balance of inventory cost was determined primarily on a specific identification basis. INTANGIBLE ASSETS The purchase price of companies in excess of the fair value of net identifiable assets acquired ("goodwill") is amortized on a straight-line basis over periods of up to 40 years, with a weighted-average period of 38 years. The amount reported is net of accumulated amortization totaling $642 million and $778 million at December 31, 1997 and 1996, respectively. Chrysler periodically evaluates the carrying value of goodwill for impairment. Such evaluations are based principally on the projected, undiscounted cash flows of the operations to which the goodwill relates. Intangible assets also include intangible pension assets of $147 million and $161 million at December 31, 1997 and 1996, respectively. LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF Effective January 1, 1996, Chrysler adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used, and long-lived assets and certain identifiable intangibles to be disposed of. The Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, the Statement requires that certain long-lived assets and identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. The initial adoption of this new accounting standard did not have a material effect on Chrysler's consolidated operating results or financial position. See also Note 13. FOREIGN CURRENCY TRANSLATION The financial statements of foreign subsidiaries are translated to U.S. dollars using the period-end exchange rate for assets and liabilities and a weighted-average exchange rate for each period for revenues and expenses. The U.S. dollar is the functional currency for most of Chrysler's foreign subsidiaries. Translation gains and losses are included in earnings for those foreign subsidiaries whose functional currency is the U.S. dollar. Where the local currency is the functional currency, translation adjustments are F-8 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) recorded as a separate component of shareholders' equity. Also, transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency, except those transactions which hedge purchase or sale commitments, are recorded in earnings as incurred. DERIVATIVE FINANCIAL INSTRUMENTS Chrysler manages risk arising from fluctuations in interest rates and currency exchange rates by using derivative financial instruments. Chrysler manages exposure to counterparty credit risk by entering into derivative financial instruments with highly rated institutions that can be expected to fully perform under the terms of such agreements. Chrysler does not use derivative financial instruments for trading purposes. When Chrysler (excluding CFC) sells vehicles outside the United States or purchases components from suppliers outside the United States, transactions are frequently denominated in currencies other than U.S. dollars. Periodically, Chrysler initiates hedging activities by entering into currency exchange agreements, consisting principally of currency forward contracts, to minimize revenue and cost variations which could result from fluctuations in currency exchange rates. These instruments, consistent with the underlying purchase or sale commitments, typically mature within three years of origination. The currency exchange agreements are treated as off-balance-sheet financial instruments, with the related gains and losses recognized in earnings upon the settlement of the underlying transactions. In the event of an early termination of a currency exchange agreement designated as a hedge, the gain or loss continues to be deferred and is included in the settlement of the underlying transaction. Forward contracts are used to manage exposure to fluctuations in funding costs for the anticipated issuance of debt. Gains or losses on forward contracts that qualify for hedge accounting treatment are deferred and recorded as an adjustment to interest expense over the term of the new debt. In the event of an early termination of a forward contract designated as a hedge, the gain or loss is deferred and recorded as an adjustment to interest expense over the remaining term of the underlying debt. CFC uses derivative financial instruments to reduce the sensitivity of earnings to various market risks and manage funding costs. CFC's primary market risks include: fluctuations in interest rates, variability in spread relationships (i.e., Prime to LIBOR spreads), mismatches of repricing intervals between finance receivables and related funding obligations, and variability in currency exchange rates. The derivative financial instruments consist primarily of interest rate swap agreements. Interest differentials resulting from interest rate swap agreements used to change the interest rate characteristics of CFC's debt are recorded on an accrual basis as an adjustment to interest expense. Interest rate swaps related to debt are either matched with specific term debt obligations or with groups of commercial paper on a layered basis. In the event of an early termination of an interest rate swap agreement designated as a hedge, the gain or loss is deferred, recorded in Other noncurrent assets, and recognized as an adjustment to interest expense over the remaining term of the underlying debt. In addition, CFC enters into currency exchange agreements, consisting primarily of currency swaps, to manage its exposure to fluctuations in currency exchange rates related to specific borrowings denominated in currencies other than the local currency of the borrowing entity. As a result, such borrowings are translated in the consolidated balance sheet at the rates of exchange established under the related currency exchange agreement. Cash flows related to currency swaps are reflected in financing activities and cash flows related to all other derivative financial instruments are reflected in operating activities in the consolidated statement of cash flows. F-9 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. MARKETABLE AND OTHER SECURITIES Available-for-sale securities are carried at their fair values. Changes in the fair values of available-for-sale securities are recognized as a component of shareholders' equity until such securities are sold. Held-to-maturity securities are carried at cost adjusted for amortized premium or discount. Chrysler does not hold securities for trading purposes. Investments in marketable securities were as follows: AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES -------------------- ------------ ------------ DECEMBER 31 ---------------------------------------------------------------------- 1997 1996 1997 1996 1997 1996 --------- --------- ----- ----- ----- --------- (IN MILLIONS OF DOLLARS) AVAILABLE-FOR-SALE SECURITIES: U.S. and Canadian government and agency securities.... $ 1,056 $ 1,454 $ 6 $ 6 $ (4) $ (11) Corporate debt securities............................. 1,787 965 11 8 (2) (5) Other marketable securities........................... 77 162 7 2 (1) -- --------- --------- --- --- --- --- Total available-for-sale securities................. 2,920 2,581 24 16 (7) (16) --------- --------- --- --- --- --- HELD-TO-MATURITY SECURITIES: Corporate debt securities............................. 1 -- -- -- -- -- Other marketable securities........................... 12 13 -- -- -- -- --------- --------- --- --- --- --- Total held-to-maturity securities................... 13 13 -- -- -- -- --------- --------- --- --- --- --- Total........................................... $ 2,933 $ 2,594 $ 24 $ 16 $ (7) $ (16) --------- --------- --- --- --- --- --------- --------- --- --- --- --- FAIR VALUE -------------------- 1997 1996 --------- --------- AVAILABLE-FOR-SALE SECURITIES: U.S. and Canadian government and agency securities.... $ 1,058 $ 1,449 Corporate debt securities............................. 1,796 968 Other marketable securities........................... 83 164 --------- --------- Total available-for-sale securities................. 2,937 2,581 --------- --------- HELD-TO-MATURITY SECURITIES: Corporate debt securities............................. 1 -- Other marketable securities........................... 12 13 --------- --------- Total held-to-maturity securities................... 13 13 --------- --------- Total........................................... $ 2,950 $ 2,594 --------- --------- --------- --------- At December 31, 1997, contractual maturities of marketable debt securities were as follows (in millions of dollars): within one year--$254; after one year through five years--$1,692; after five years through ten years--$388; and after ten years--$535. Proceeds from sales of available-for-sale securities were $648 million, $860 million and $757 million in 1997, 1996 and 1995, respectively. The gross gains and losses realized related to these sales were immaterial. Chrysler uses the specific identification method as a basis for determining cost and calculating realized gains or losses. Other securities classified as cash equivalents were $4.3 billion at December 31, 1997 and 1996, and consisted primarily of repurchase agreements, commercial paper, and certificates of deposit. F-10 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. INVENTORIES AND COST OF SALES Inventories, summarized by major classification, were as follows: DECEMBER 31 -------------------- 1997 1996 --------- --------- (IN MILLIONS OF DOLLARS) Finished products, including service parts..................................................... $ 1,883 $ 1,569 Raw materials, finished production parts and supplies.......................................... 1,445 1,540 Vehicles held for short-term lease............................................................. 1,410 2,086 --------- --------- Total...................................................................................... $ 4,738 $ 5,195 --------- --------- --------- --------- Inventories valued on the LIFO basis would have been $415 million and $439 million higher than reported had they been valued on the FIFO basis at December 31, 1997 and 1996, respectively. Vehicles held for short-term lease include the carrying value of vehicles (principally sold to non-affiliated rental car companies) for which Chrysler conditionally guarantees the minimum resale value of the vehicles. The carrying value of these vehicles was $1,003 million and $900 million at December 31, 1997 and 1996, respectively. Total manufacturing cost of sales aggregated $47.1 billion, $46.5 billion and $41.7 billion for 1997, 1996 and 1995, respectively. NOTE 4. FINANCE RECEIVABLES AND RETAINED INTERESTS IN SOLD RECEIVABLES Finance receivables and retained interests in sold receivables were as follows: DECEMBER 31 -------------------- 1997 1996 --------- --------- (IN MILLIONS OF DOLLARS) Automotive financing........................................................................ $ 6,369 $ 6,517 Nonautomotive financing..................................................................... 2,715 2,204 Retained senior interests in wholesale receivables held in trusts........................... 1,511 677 --------- --------- Total finance receivables............................................................... 10,595 9,398 Retained interests in sold receivables...................................................... 3,488 3,488 Allowance for credit losses................................................................. (565) (547) --------- --------- Total................................................................................... $ 13,518 $ 12,339 --------- --------- --------- --------- Retained interests in sold receivables are generally restricted and subject to credit risk. Contractual maturities of total finance receivables as of December 31, 1997, were as follows (in millions of dollars): 1998--$5,001; 1999--$954; 2000--$1,151; 2001--$516; 2002--$455; and 2003 and thereafter--$2,518. Actual cash flows will vary from contractual maturities due to future sales of finance receivables, prepayments and charge-offs. F-11 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4. FINANCE RECEIVABLES AND RETAINED INTERESTS IN SOLD RECEIVABLES (CONTINUED) Changes in the allowance for credit losses were as follows: YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- (IN MILLIONS OF DOLLARS) Balance at beginning of year......................................................... $ 547 $ 617 $ 522 Provision for credit losses.......................................................... 444 373 372 Net credit losses.................................................................... (415) (398) (252) Other adjustments.................................................................... (11) (45) (25) --------- --------- --------- Balance at end of year............................................................... $ 565 $ 547 $ 617 --------- --------- --------- --------- --------- --------- Nonearning finance receivables, including receivables sold subject to credit risk, totaled $248 million and $278 million at December 31, 1997 and 1996, respectively, which represented 0.7 percent and 0.8 percent of such receivables outstanding, respectively. NOTE 5. PROPERTY AND EQUIPMENT Property and equipment, summarized by major classification, were as follows: DECEMBER 31 -------------------- 1997 1996 --------- --------- WEIGHTED-AVERAGE SERVICE LIVES --------------------- (YEARS) (IN MILLIONS OF DOLLARS) Land................................................................... -- $ 358 $ 405 Buildings.............................................................. 31 5,973 5,467 Machinery and equipment................................................ 14 14,538 12,364 Furniture and fixtures................................................. 9 624 630 Vehicles under purchased operating leases.............................. 3 3,053 1,311 Construction in progress............................................... -- 2,536 2,875 --------- --------- 27,082 23,052 Accumulated depreciation............................................... (9,114) (8,147) --------- --------- Total.............................................................. $ 17,968 $ 14,905 --------- --------- --------- --------- Depreciation of property and equipment was $1,657 million, $1,317 million and $1,100 million in 1997, 1996 and 1995, respectively. F-12 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. ACCRUED LIABILITIES AND EXPENSES Accrued liabilities and expenses consisted of the following: DECEMBER 31 -------------------- 1997 1996 --------- --------- (IN MILLIONS OF DOLLARS) Customer and dealer allowances and claims...................................................... $ 2,865 $ 2,660 Employee compensation and benefits............................................................. 2,158 2,477 Deferred revenue related to vehicles sold with guaranteed minimum resale values................ 1,375 1,190 Other.......................................................................................... 3,319 2,537 --------- --------- Total...................................................................................... $ 9,717 $ 8,864 --------- --------- --------- --------- NOTE 7. DEBT Debt consisted of the following: DECEMBER 31 --------------------------------------------------------- WEIGHTED- AVERAGE MATURITY INTEREST RATE (1) ------------- -------------------- 1997 1997 1996 1997 1996 ------------- --------- --------- --------- --------- (IN MILLIONS OF DOLLARS) Chrysler, excluding CFC: Short-term debt.......................................... 8.0% 6.8% $ 490 $ 419 Long-term debt payable within one year................... 19 23 --------- --------- Total debt payable within one year................... 509 442 --------- --------- Debentures............................................... 2027--2097 7.4% 11.0% 1,588 265 Notes and other debt..................................... 1999--2020 10.9% 9.2% 670 1,444 --------- --------- Total long-term debt................................. 2,258 1,709 --------- --------- Total.............................................. 2,767 2,151 --------- --------- CFC: Short-term debt (primarily commercial paper)............. 5.6% 5.1% 3,351 2,795 Long-term debt payable within one year................... 2,619 2,975 --------- --------- Total debt payable within one year................... 5,970 5,770 --------- --------- Senior notes and debentures.............................. 1999--2018 6.7% 6.9% 6,716 5,462 Mortgage notes, capital leases and other................. 32 13 --------- --------- Total long-term debt................................. 6,748 5,475 --------- --------- Total.............................................. 12,718 11,245 --------- --------- Total Chrysler: Total long-term debt................................... $ 9,006 $ 7,184 --------- --------- --------- --------- Total debt............................................. $ 15,485 $ 13,396 --------- --------- --------- --------- - ------------------------ (1) The weighted-average interest rates include the effects of interest rate swap agreements. F-13 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. DEBT (CONTINUED) At December 31, 1997, aggregate annual maturities of consolidated debt were as follows (in millions of dollars): 1998--$6,479; 1999--$3,423; 2000--$2,363; 2001--$431; and 2002--$470. In December 1996, Chrysler extinguished $550 million, or 50 percent, of the outstanding principal amount of its Auburn Hills Trust Guaranteed Exchangeable Certificates Due 2020 (the "Certificates") at a cost of $859 million. The extinguishment of the Certificates resulted in an extraordinary after-tax loss of $191 million (net of income tax benefit of $118 million), or $0.26 per common share. At December 31, 1997, $550 million of the Certificates remained outstanding. The remaining Certificates outstanding are not redeemable prior to maturity and carry a current interest rate of 12 percent. Prior to 1997, CFC entered into currency exchange agreements to manage its exposure to fluctuations in currency exchange rates related to specific borrowings denominated in currencies other than the local currency of the borrowing entity. As a result, such borrowings were translated in the consolidated balance sheet at the rates of exchange established under the related currency exchange agreement. The reported amount of such borrowings was $105 million at December 31, 1996. If CFC had not entered into currency exchange agreements, the amount would have been $52 million higher at December 31, 1996. To mitigate risks associated with changing interest rates on certain of its debt, CFC has entered into interest rate swap agreements. CFC manages exposure to counterparty credit risk by entering into such agreements only with highly rated institutions that are expected to fully perform under the terms of such agreements. The notional amounts are used to measure the volume of these agreements and do not represent exposure to credit loss. The impact of interest rate swap agreements on interest expense was immaterial in 1997, 1996 and 1995. The following table summarizes CFC's interest rate derivatives related to its debt and securitizations: NOTIONAL AMOUNTS OUTSTANDING AND WEIGHTED-AVERAGE RATES -------------------- DECEMBER 31 VARIABLE MATURING -------------------- UNDERLYING FINANCIAL INSTRUMENTS RATE INDICES THROUGH 1997 1996 - -------------------------------------------------------------- ---------------- ----------- --------- --------- (IN MILLIONS OF DOLLARS) PAY FIXED INTEREST RATE SWAPS Short-term notes............................................ 1998 $ 250 $ 250 Weighted-average pay rate................................. 9.1% 9.1% Weighted-average receive rate............................. Money Market 5.7% 5.6% Senior notes and debentures................................. 2000 $ 1,055 $ 369 Weighted-average pay rate................................. 5.9% 5.4% Weighted-average receive rate............................. LIBOR 5.9% 4.4% RECEIVE FIXED INTEREST RATE SWAPS Senior notes and debentures................................. 2012 $ 508 $ 1,436 Weighted-average pay rate................................. LIBOR 6.0% 8.1% Weighted-average receive rate............................. 7.0% 9.0% VARIABLE INTEREST RATE SWAPS Senior notes and debentures/ securitizations................ 2000 $ 1,616 $ 1,611 Weighted-average pay rate................................. LIBOR 5.8% 5.5% Weighted-average receive rate............................. Federal Funds 5.8% 5.6% F-14 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. DEBT (CONTINUED) CFC's U.S. and Canadian revolving credit facilities, which total $8 billion, consist of a $2 billion facility expiring in April 1998 and a $6 billion facility expiring in April 2002. Neither of the revolving credit facilities was drawn upon at December 31, 1997. At December 31, 1997, Chrysler (excluding CFC) had a $2.6 billion revolving credit agreement which expires in April 2002. The revolving credit agreement was not drawn upon at December 31, 1997. NOTE 8. INCOME TAXES Earnings before income taxes, extraordinary item and the cumulative effect of a change in accounting principle were attributable to the following sources: YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- (IN MILLIONS OF DOLLARS) United States........................................................................ $ 3,853 $ 5,631 $ 3,179 Foreign.............................................................................. 704 461 270 --------- --------- --------- Total............................................................................ $ 4,557 $ 6,092 $ 3,449 --------- --------- --------- --------- --------- --------- F-15 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. INCOME TAXES (CONTINUED) The provision for income taxes included in the consolidated statement of earnings was as follows: YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- (IN MILLIONS OF DOLLARS) Provision for income taxes before extraordinary item and the cumulative effect of a change in accounting principle..................................................... $ 1,752 $ 2,372 $ 1,328 Income tax benefit of the extraordinary item......................................... -- (118) -- Income tax benefit of the cumulative effect of a change in accounting principle...... -- -- (59) --------- --------- --------- Total.......................................................................... $ 1,752 $ 2,254 $ 1,269 --------- --------- --------- --------- --------- --------- Currently payable: United States...................................................................... $ 1,134 $ 963 $ 879 Foreign............................................................................ 167 52 63 State and local.................................................................... 172 119 200 --------- --------- --------- 1,473 1,134 1,142 --------- --------- --------- Deferred: United States...................................................................... 187 883 116 Foreign............................................................................ 48 76 48 State and local.................................................................... 44 161 (37) --------- --------- --------- 279 1,120 127 --------- --------- --------- Total.......................................................................... $ 1,752 $ 2,254 $ 1,269 --------- --------- --------- --------- --------- --------- Chrysler does not provide for U.S. income taxes or foreign withholding taxes on $2.6 billion in cumulative undistributed earnings of foreign subsidiaries because these earnings are intended to be permanently reinvested in those operations. It is not practicable to estimate the amount of unrecognized deferred tax liability for these undistributed foreign earnings. A reconciliation of income taxes determined using the statutory U.S. rate of 35 percent to actual income taxes provided was as follows: YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- (IN MILLIONS OF DOLLARS) Tax at U.S. statutory rate........................................................... $ 1,595 $ 2,132 $ 1,207 State and local taxes, net of federal tax benefit.................................... 150 197 116 Adjustments to reflect assessment of realizability of deferred tax assets............ -- -- (29) Other................................................................................ 7 43 34 --------- --------- --------- Provision for income taxes before extraordinary item and the cumulative effect of a change in accounting principle................................................... $ 1,752 $ 2,372 $ 1,328 --------- --------- --------- --------- --------- --------- Effective income tax rate........................................................ 38.4% 38.9% 38.5% --------- --------- --------- --------- --------- --------- F-16 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. INCOME TAXES (CONTINUED) The tax-effected temporary differences and carryforwards which comprised deferred tax assets and liabilities were as follows: DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------------- -------------------------- DEFERRED DEFERRED DEFERRED TAX DEFERRED TAX TAX ASSETS LIABILITIES TAX ASSETS LIABILITIES ----------- ------------- ----------- ------------- (IN MILLIONS OF DOLLARS) Nonpension postretirement benefits......................... $ 3,386 $ -- $ 3,251 $ -- Pensions................................................... 10 1,810 14 1,911 Accrued expenses........................................... 3,283 -- 2,692 2 Lease transactions......................................... -- 1,980 -- 1,828 Depreciation............................................... -- 2,323 -- 2,056 Prepaid employee benefits.................................. -- 762 -- 394 Tax credit carryforwards................................... 181 -- 211 -- Alternative minimum tax credit carryforwards............... 101 -- 107 -- State and local taxes...................................... 105 141 105 129 Net operating loss ("NOL") carryforwards................... 16 -- 42 -- Other...................................................... 120 996 160 845 ----------- ------ ----------- ------ 7,202 8,012 6,582 7,165 Valuation allowance........................................ (8) -- (8) -- ----------- ------ ----------- ------ Total.................................................. $ 7,194 $ 8,012 $ 6,574 $ 7,165 ----------- ------ ----------- ------ ----------- ------ ----------- ------ Chrysler's tax credit carryforwards expire at various dates through the year 2011 and alternative minimum tax credit carryforwards have no expiration dates. NOL carryforwards totaled $52 million at December 31, 1997, of which $25 million may be used through the year 2002, and $27 million of which have no expiration date. The valuation allowance was principally related to subsidiaries' NOL carryforwards. Changes in the valuation allowance were as follows: F-17 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. INCOME TAXES (CONTINUED) YEAR ENDED DECEMBER 31 ----------------------------------- 1997 1996 1995 ----- ----- --------- (IN MILLIONS OF DOLLARS) Balance at beginning of year.............................................................. $ 8 $ 3 $ 77 Utilization of NOL carryforwards.......................................................... -- -- (45) Adjustments to reflect assessment of realizability of deferred tax assets................. -- -- (29) Other..................................................................................... -- 5 -- -- -- --- Balance at end of year.................................................................... $ 8 $ 8 $ 3 -- -- -- -- --- --- NOTE 9. COMMITMENTS AND CONTINGENCIES LITIGATION Various claims and legal proceedings have been asserted or instituted against Chrysler, including some purporting to be class actions, and some which demand large monetary damages or other relief which could result in significant expenditures. 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 Chrysler 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 Chrysler's consolidated operating results for the particular reporting period in which an adjustment of the estimated reserve is recorded, Chrysler believes that any resulting adjustment should not materially affect its consolidated financial position. ENVIRONMENTAL MATTERS Chrysler is subject to potential liability under government regulations and various claims and legal actions which are pending or may be asserted against Chrysler concerning environmental matters. Estimates of future costs of such 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 Chrysler may have remediation responsibility and the apportionment and collectibility of remediation costs among responsible parties. Chrysler establishes reserves for these environmental matters when a loss is probable and reasonably estimable. Chrysler's reserves for these environmental matters totaled $231 million and $238 million as of December 31, 1997 and 1996, respectively. It is reasonably possible that the final resolution of some of these matters may require Chrysler 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. Although the final resolution of any such matters could have a material effect on Chrysler's consolidated operating results for the particular reporting period in which an adjustment of the estimated reserve is recorded, Chrysler believes that any resulting adjustment should not materially affect its consolidated financial position. F-18 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED) VOLUNTARY SERVICE ACTIONS AND RECALL ACTIONS Chrysler periodically initiates voluntary service actions and recall actions to address various customer satisfaction, safety and emissions issues related to vehicles it sells. Chrysler establishes reserves for product warranty, including the estimated cost of these service and recall actions, when the related sale is recognized. The estimated future costs of these actions is based primarily on prior experience. Estimates of the future costs of these actions are inevitably imprecise due to numerous uncertainties, including the enactment of new laws and regulations, the number of vehicles affected by a service or recall action, and the nature of the corrective action which may result in adjustments to the established reserves. It is reasonably possible that the ultimate cost of these service and recall actions may require Chrysler 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. Although the ultimate cost of these service and recall actions could have a material effect on Chrysler's consolidated operating results for the particular reporting period in which an adjustment of the estimated reserve is recorded, Chrysler believes that any such adjustment should not materially affect its consolidated financial position. OTHER MATTERS The majority of Chrysler's lease payments are for operating leases. At December 31, 1997, Chrysler had the following minimum rental commitments under operating leases with noncancelable lease terms in excess of one year (in millions of dollars): 1998--$225; 1999--$165; 2000--$125; 2001--$65; 2002--$51; and 2003 and thereafter--$184. Future minimum lease commitments have not been reduced by minimum sublease rentals of $180 million due in the future under noncancelable subleases. Rental expense under operating leases was $469 million, $470 million and $436 million in 1997, 1996 and 1995, respectively. Sublease rentals of $54 million, $58 million and $58 million were received in 1997, 1996 and 1995, respectively. At December 31, 1997, Chrysler had commitments for capital expenditures, including commitments for assets currently under construction, totaling approximately $1.3 billion. At December 31, 1997, Chrysler had guaranteed obligations of others in the amount of $113 million, none of which were secured by collateral. NOTE 10. STOCK-BASED AND PROFIT-BASED COMPENSATION STOCK-BASED COMPENSATION Effective January 1, 1996, Chrysler adopted SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement defines a FAIR VALUE BASED METHOD of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the INTRINSIC VALUE BASED METHOD of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. F-19 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. STOCK-BASED AND PROFIT-BASED COMPENSATION (CONTINUED) Chrysler accounts for stock option grants and awards under its two stock-based compensation plans in accordance with APB Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for fixed stock option grants since the options have exercise prices of not less than the market value of Chrysler common stock at the date of grant. However, compensation cost was recognized for performance-based stock unit awards ("Performance Shares") since the awards have no exercise price. Compensation cost recognized for Performance Share awards was $20 million, $30 million and $19 million for 1997, 1996 and 1995, respectively. If compensation cost for stock option grants and Performance Share awards had been determined based on fair value at the grant dates for 1997, 1996 and 1995 in accordance with SFAS No. 123, the pro forma effects on Chrysler's consolidated net earnings and earnings per share would not have been material. As required by SFAS No. 123, the pro forma amounts were determined based on stock option grants and Performance Share awards beginning in 1995. Since Chrysler's fixed stock option grants do not vest, except upon retirement from Chrysler, compensation cost is recognized over the expected life of the option (i.e., five years). In addition, Performance Share awards are recognized over performance cycles of two to three years. Therefore, the pro forma amounts for compensation cost may not be indicative of the effects on net earnings and earnings per share for future years. FIXED STOCK OPTION COMPENSATION PLANS In accordance with Chrysler's stock-based compensation plans, Chrysler may grant stock options, stock appreciation rights and other stock-related incentives to officers, executives and nonemployee directors of Chrysler. Outstanding options, consisting of ten-year nonqualified stock options, become exercisable on up to 40 percent, 70 percent and 100 percent of the shares after one year, two years and three years, respectively, from the date of grant. The outstanding options do not vest, except upon retirement from Chrysler, and are contingent upon continued employment during the applicable ten-year period. Shares available for granting options at the end of 1997, 1996 and 1995 were 30.9 million, 11.6 million and 22.4 million, respectively. Under SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995: 1997 1996 1995 ----- ----- ----- Dividend yield........................................................................ 4.7% 4.8% 4.8% Expected volatility................................................................... 26% 31% 36% Risk-free interest rate............................................................... 6.2% 6.7% 5.8% Expected lives (in years)............................................................. 5 5 5 F-20 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. STOCK-BASED AND PROFIT-BASED COMPENSATION (CONTINUED) A summary of the status of fixed stock option grants under Chrysler's stock-based compensation plans as of December 31, 1997, 1996 and 1995, and changes during the years ending on those dates is presented below (shares in millions): 1997 1996 1995 -------------------------- -------------------------- ----------- SHARES WEIGHTED-AVG. SHARES WEIGHTED-AVG. SHARES UNDER EXERCISE UNDER EXERCISE UNDER OPTION PRICE OPTION PRICE OPTION ----------- ------------- ----------- ------------- ----------- Outstanding at beginning of year.................. 28.5 $ 23.68 29.4 $ 19.40 26.2 Granted........................................... 10.1 33.72 9.2 28.66 7.3 Exercised......................................... (7.8) 20.92 (7.2) 16.11 (3.7) Forfeited......................................... (0.1) 26.70 (2.9) 14.79 (0.4) ----- ----- ----- Outstanding at end of year........................ 30.7 27.71 28.5 23.68 29.4 ----- ----- ----- ----- ----- ----- Options exercisable at year end................... 13.4 $ 23.43 13.3 $ 20.12 17.0 Weighted-average fair value of options granted during the year................................. $ 6.79 $ 6.87 $ 6.49 WEIGHTED-AVG. EXERCISE PRICE ------------- Outstanding at beginning of year.................. $ 15.61 Granted........................................... 24.42 Exercised......................................... 10.58 Forfeited......................................... 14.56 Outstanding at end of year........................ 19.40 Options exercisable at year end................... $ 17.20 Weighted-average fair value of options granted during the year................................. The following table summarizes information about fixed stock options outstanding at December 31, 1997 (shares in millions): OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------ -------------------------- SHARES WEIGHTED-AVG. SHARES WEIGHTED-AVG. UNDER WEIGHTED-AVG. EXERCISE UNDER EXERCISE RANGE OF EXERCISE PRICES OPTION REMAINING LIFE PRICE OPTION PRICE - ------------------------------------------------- ----------- -------------- ------------- ----------- ------------- $ 5.87 to $20.00................................. 1.8 3.1 years $ 10.16 1.8 $ 10.16 20.01 to 25.00................................. 10.2 6.3 23.99 8.1 23.88 25.01 to 30.00................................. 8.1 7.9 28.48 2.9 28.45 30.01 to 35.00................................. 10.2 8.8 33.56 0.5 32.38 35.01 to 37.25................................. 0.4 4.7 35.70 0.1 35.35 --- --- $ 5.87 to $37.25................................. 30.7 7.3 27.71 13.4 23.43 --- --- --- --- PERFORMANCE-BASED STOCK COMPENSATION PLAN Chrysler's stock-based compensation plans also provide for the awarding of Performance Shares, which reward attainment of performance objectives. Performance Shares are awarded at the commencement of a performance cycle (two to three years) to each eligible executive (officers and a limited number of senior executives). At the end of each cycle, participants may earn no Performance Shares or a number of Performance Shares, ranging from a set minimum to a maximum of 150 percent of the award for that cycle, as determined by a committee of the Board of Directors based on Chrysler's performance in relation to the performance goals established at the beginning of the performance cycle. Under SFAS No. 123, the fair value of each Performance Share award is estimated at the date of grant based on the market value of a share of Chrysler common stock on the date of grant. F-21 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. STOCK-BASED AND PROFIT-BASED COMPENSATION (CONTINUED) Unearned Performance Share awards outstanding as of December 31, 1997, 1996 and 1995 were 0.9 million, 0.8 million and 1.1 million, respectively. As of December 31, 1997, the 0.9 million Performance Share awards outstanding have a weighted-average remaining life of 1.6 years. PROFIT-BASED COMPENSATION Chrysler has programs under which additional incentive compensation and profit sharing is paid to certain hourly and salaried employees based primarily on Chrysler's profitability. NOTE 11. SHAREHOLDERS' EQUITY Information with respect to shareholders' equity was as follows (shares in millions): YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- (IN MILLIONS OF DOLLARS) PREFERRED STOCK: Balance at beginning of year................................................... $ * $ * $ 2 Conversions into common stock................................................ * * (2) --------- --------- --------- Balance at end of year......................................................... $ * $ * $ * --------- --------- --------- --------- --------- --------- COMMON STOCK: Balance at beginning of year................................................... $ 822 $ 408 $ 364 Effect of two-for-one stock split............................................ -- 410 -- Conversions of preferred stock............................................... 1 4 44 --------- --------- --------- Balance at end of year......................................................... $ 823 $ 822 $ 408 --------- --------- --------- --------- --------- --------- ADDITIONAL PAID-IN CAPITAL: Balance at beginning of year................................................... $ 5,129 $ 5,506 $ 5,536 Effect of two-for-one stock split............................................ -- (410) -- Conversions of preferred stock............................................... (1) (4) (42) Shares issued under employee benefit plans................................... 103 37 12 --------- --------- --------- Balance at end of year......................................................... $ 5,231 $ 5,129 $ 5,506 --------- --------- --------- --------- --------- --------- RETAINED EARNINGS: Balance at beginning of year................................................... $ 8,829 $ 6,280 $ 5,006 Net earnings................................................................. 2,805 3,529 2,025 Dividends declared........................................................... (1,076) (1,016) (777) Adjustment of additional minimum pension liability........................... 3 24 (42) Net unrealized gains (losses) on investments in certain debt and equity securities................................................................. 11 (23) 44 Other adjustments............................................................ 33 35 24 --------- --------- --------- Balance at end of year......................................................... $ 10,605 $ 8,829 $ 6,280 --------- --------- --------- --------- --------- --------- F-22 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11. SHAREHOLDERS' EQUITY (CONTINUED) YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- (IN MILLIONS OF DOLLARS) TREASURY STOCK: Balance at beginning of year................................................... $ (3,209) $ (1,235) $ (214) Shares of common stock repurchased (1997--63; 1996--66 and 1995--23 (on a pre-split basis)).......................................................... (2,130) (2,041) (1,047) Shares issued under employee benefit plans (1997--8; 1996--7 and 1995--2 (on a pre-split basis))........................................................ 42 67 26 --------- --------- --------- Balance at end of year......................................................... $ (5,297) $ (3,209) $ (1,235) --------- --------- --------- --------- --------- --------- - ------------------------ * Less than $1 million In May 1996, Chrysler declared a two-for-one stock split in the form of a 100 percent stock dividend. All per-share data and the average common and dilutive equivalent shares outstanding have been adjusted to reflect this stock split for all periods presented. The number of common shares issued, outstanding and held in treasury for 1996 has been adjusted to reflect this stock split. In addition, the par value of the new shares issued as a result of the two-for-one stock split has been transferred from additional paid-in capital to common stock. Additional paid-in capital, common stock balances and common shares issued, outstanding and held in treasury for 1995 have not been restated for the two-for-one stock split. During 1997, Chrysler repurchased 63 million shares of its common stock at a cost of $2.1 billion. Chrysler plans to repurchase an additional $1.8 billion of its common stock in 1998 as part of a $2 billion repurchase plan which began in November 1997. The planned 1998 common stock repurchases are subject to market and general economic conditions. Since beginning its common stock repurchase program in 1995, Chrysler has repurchased 175 million shares of its common stock at a cost of $5.2 billion. As of December 31, 1997, 15,336 shares of Series A Convertible Preferred Stock ("Preferred Stock") were outstanding and convertible into 0.9 million shares of Chrysler common stock. The annual dividend on the Preferred Stock is $46.25 per share. The Preferred Stock is convertible at a rate (subject to adjustment in certain events) of 55.56 shares of common stock for each share of Preferred Stock. The Preferred Stock is redeemable at Chrysler's option, in whole or in part, at $518.50 per share of Preferred Stock for the period ending December 31, 1998, and thereafter declining ratably annually to $500.00 per share after December 31, 2001, plus accrued and unpaid dividends. In February 1988, the Board of Directors declared and distributed a dividend of one Preferred Share Purchase Right (a "Right") for each then outstanding share of Chrysler's common stock and authorized the distribution of one Right with respect to each subsequently issued share of common stock. Each Right, as most recently amended and as adjusted to reflect the May 1996 two-for-one stock split, entitles a shareholder to purchase one two-hundredth of a share of Junior Participating Cumulative Preferred Stock of Chrysler at a price of $60. The Rights are attached to the common stock and are not represented by separate certificates or exercisable until the earliest to occur of (i) 10 days following the time (the "Stock Acquisition Time") of a public announcement or communication to Chrysler that a person or group of persons has acquired or obtained the right to acquire 15 percent or more of Chrysler's outstanding common stock, other than as a result of a "Qualifying Offer"--an all-cash, fully-financed tender offer for F-23 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11. SHAREHOLDERS' EQUITY (CONTINUED) all shares of Chrysler's common stock that is held open for at least 60 business days and is accompanied by an investment banker's fairness opinion--and (ii) 10 business days after a person or group of persons announces or commences a tender offer that would result, if successful, in the bidder owning 15 percent or more of Chrysler's outstanding common stock, other than as a result of a Qualifying Offer. If the acquiring person or group acquires 15 percent or more of the common stock (except pursuant to a tender offer made for all of Chrysler's common stock, and determined by Chrysler's independent directors to be fair and in the best interests of Chrysler and its shareholders), then each Right (other than those held by the acquiror) will entitle its holder to buy, for $60, a number of shares of Chrysler's common stock having a market value of $120. Similarly, if after the Stock Acquisition Time, Chrysler is acquired in a merger or other business combination and is not the surviving corporation, or 50 percent or more of its assets, cash flow or earning power is sold, each Right (other than those held by the surviving or acquiring company) will entitle its holder to purchase, for $60, shares of the surviving or acquiring company having a market value of $120. Chrysler's directors may redeem the Rights at $0.025 per Right, and may amend the Rights or extend the time during which the Rights may be redeemed, only prior to the Stock Acquisition Time. Additionally, at any time after a person or group acquires 15 percent or more, but less than 50 percent, of Chrysler's common stock, Chrysler's directors may exchange the Rights (other than those held by the acquiror), in whole or in part, at an exchange ratio of one share of common stock (or a fractional share of preferred stock with equivalent voting rights) per Right. The Rights will expire on February 22, 1998. Of the 1.0 billion shares of authorized common stock at December 31, 1997, 64 million shares were reserved for issuance under Chrysler's various employee benefit plans and the conversion of the Preferred Stock. NOTE 12. EMPLOYEE RETIREMENT AND OTHER BENEFITS PENSION PLANS Chrysler's pension plans provide noncontributory and contributory benefits. The noncontributory pension plans cover substantially all of the hourly and salaried employees of Chrysler and certain of its consolidated subsidiaries. Benefits are based on a fixed rate for each year of service. Additionally, contributory benefits are provided to substantially all salaried employees of Chrysler and certain of its consolidated subsidiaries under the Salaried Employees' Retirement Plan. This plan provides benefits based on the employee's cumulative contributions, years of service during which employee contributions were made, and the employee's average salary during the consecutive five years in which salary was highest in the 15 years preceding retirement. Contributions to the pension trust fund for U.S. plans are in compliance with the Employee Retirement Income Security Act of 1974, as amended. All pension trust fund assets and income accruing thereon are used solely to pay pension benefits and administer the plans. Chrysler contributed $74 million, $941 million and $838 million to the pension funds during 1997, 1996 and 1995, respectively. At December 31, 1997, plan assets were invested in a diversified portfolio that consisted primarily of debt and equity securities, including 2.1 million shares of Chrysler common stock with a market value of $73 million. During 1997, dividends of $6 million were received on Chrysler common stock. F-24 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12. EMPLOYEE RETIREMENT AND OTHER BENEFITS (CONTINUED) The components of pension expense were as follows: YEAR ENDED DECEMBER 31 -------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------- ------------------------------- -------------------- NON- NON- NON- U.S. U.S. U.S. U.S. U.S. U.S. PLANS PLANS TOTAL PLANS PLANS TOTAL PLANS PLANS --------- --------- --------- --------- --------- --------- --------- --------- (IN MILLIONS OF DOLLARS) Service cost--benefits earned during the year............................ $ 278 $ 33 $ 311 $ 305 $ 29 $ 334 $ 233 $ 20 Interest on projected benefit obligation.......................... 991 102 1,093 915 99 1,014 903 90 Return on plan assets: Actual return....................... (2,677) (271) (2,948) (1,953) (249) (2,202) (2,572) (168) Deferred gain....................... 1,288 155 1,443 687 139 826 1,465 67 --------- --------- --------- --------- --------- --------- --------- --------- Expected return..................... (1,389) (116) (1,505) (1,266) (110) (1,376) (1,107) (101) Net amortization and other............ 387 67 454 523 62 585 328 39 --------- --------- --------- --------- --------- --------- --------- --------- Total........................... $ 267 $ 86 $ 353 $ 477 $ 80 $ 557 $ 357 $ 48 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- TOTAL --------- Service cost--benefits earned during the year............................ $ 253 Interest on projected benefit obligation.......................... 993 Return on plan assets: Actual return....................... (2,740) Deferred gain....................... 1,532 --------- Expected return..................... (1,208) Net amortization and other............ 367 --------- Total........................... $ 405 --------- --------- Pension expense is determined using assumptions at the beginning of the year. The projected benefit obligation ("PBO") is determined using the assumptions at the end of the year. Assumptions used to determine pension expense and the PBO were: DECEMBER 31 --------------------------------------------------------------------------- U.S. PLANS NON-U.S. PLANS ------------------------------------------ ------------------------------- 1997 1996 1995 1994 1997 1996 1995 --------- --------- --------- --------- --------- --------- --------- Discount rate....................................... 6.75% 7.25% 7.00% 8.63% 6.50% 7.50% 8.25% Rate of increase in future compensation levels...... 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% Long-term rate of return on plan assets............. 10.00% 10.00% 10.00% 10.00% 9.00% 9.00% 9.00% 1994 --------- Discount rate....................................... 9.75% Rate of increase in future compensation levels...... 6.00% Long-term rate of return on plan assets............. 9.00% The decrease in the discount rate for U.S. Plans from 7.25 percent as of December 31, 1996, to 6.75 percent as of December 31, 1997, resulted in a $708 million increase in the PBO at December 31, 1997, and is expected to result in a $38 million increase in 1998 pension expense. F-25 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12. EMPLOYEE RETIREMENT AND OTHER BENEFITS (CONTINUED) The following table presents a reconciliation of the funded status of the plans with amounts recognized in the consolidated balance sheet: DECEMBER 31, 1997 ------------------------------------------------------------------------ U.S. PLANS NON-U.S. PLANS --------------------------------- ------------------------------------- ASSETS ACCUM. ASSETS ACCUM. EXCEED BENEFITS EXCEED BENEFITS ACCUM. EXCEED U.S. ACCUM. EXCEED NON-U.S. BENEFITS ASSETS TOTAL BENEFITS ASSETS TOTAL --------- ----------- --------- ----------- ----------- ----------- (IN MILLIONS OF DOLLARS) Actuarial present value of benefits: Vested........................................... $ 11,967 $ 395 $ 12,362 $ 1,506 $ 1 $ 1,507 Nonvested........................................ 2,352 81 2,433 31 1 32 -- --------- ----- --------- ----------- ----------- Accumulated benefit obligation..................... 14,319 476 14,795 1,537 2 1,539 Effect of projected future salary increases........ 387 6 393 22 4 26 -- --------- ----- --------- ----------- ----------- PBO................................................ 14,706 482 15,188 1,559 6 1,565 Plan assets at fair value.......................... 16,850 328 17,178 1,665 2 1,667 -- --------- ----- --------- ----------- ----------- PBO less than/(in excess of) plan assets........... 2,144 (154) 1,990 106 (4) 102 Unrecognized net loss/(gain)....................... (80) 38 (42) 430 1 431 Unrecognized prior service cost.................... 1,695 147 1,842 137 -- 137 Unamortized net obligation at date of adoption..... 570 1 571 5 -- 5 Adjustment required to recognize minimum liability........................................ -- (183) (183) -- -- -- -- --------- ----- --------- ----------- ----------- Net prepaid pension asset/(liability) recognized in the consolidated balance sheet................... $ 4,329 $ (151) $ 4,178 $ 678 $ (3) $ 675 -- -- --------- ----- --------- ----------- ----------- --------- ----- --------- ----------- ----------- TOTAL --------- Actuarial present value of benefits: Vested........................................... $ 13,869 Nonvested........................................ 2,465 --------- Accumulated benefit obligation..................... 16,334 Effect of projected future salary increases........ 419 --------- PBO................................................ 16,753 Plan assets at fair value.......................... 18,845 --------- PBO less than/(in excess of) plan assets........... 2,092 Unrecognized net loss/(gain)....................... 389 Unrecognized prior service cost.................... 1,979 Unamortized net obligation at date of adoption..... 576 Adjustment required to recognize minimum liability........................................ (183) --------- Net prepaid pension asset/(liability) recognized in the consolidated balance sheet................... $ 4,853 --------- --------- F-26 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12. EMPLOYEE RETIREMENT AND OTHER BENEFITS (CONTINUED) DECEMBER 31, 1996 ------------------------------------------------------------------------ U.S. PLANS NON-U.S. PLANS --------------------------------- ------------------------------------- ASSETS ACCUM. ASSETS ACCUM. EXCEED BENEFITS EXCEED BENEFITS ACCUM. EXCEED U.S. ACCUM. EXCEED NON-U.S. BENEFITS ASSETS TOTAL BENEFITS ASSETS TOTAL --------- ----------- --------- ----------- ----------- ----------- (IN MILLIONS OF DOLLARS) Actuarial present value of benefits: Vested........................................... $ 11,055 $ 336 $ 11,391 $ 1,363 $ -- $ 1,363 Nonvested........................................ 2,270 91 2,361 28 -- 28 --------- ----- --------- ----------- ----- ----------- Accumulated benefit obligation..................... 13,325 427 13,752 1,391 -- 1,391 Effect of projected future salary increases........ 319 6 325 19 -- 19 --------- ----- --------- ----------- ----- ----------- PBO................................................ 13,644 433 14,077 1,410 -- 1,410 Plan assets at fair value.......................... 15,107 279 15,386 1,481 -- 1,481 --------- ----- --------- ----------- ----- ----------- PBO less than/(in excess of) plan assets........... 1,463 (154) 1,309 71 -- 71 Unrecognized net loss.............................. 489 41 530 492 -- 492 Unrecognized prior service cost.................... 1,847 160 2,007 166 -- 166 Unamortized net obligation at date of adoption..... 713 1 714 6 -- 6 Adjustment required to recognize minimum liability........................................ -- (200) (200) -- -- -- --------- ----- --------- ----------- ----- ----------- Net prepaid pension asset/(liability) recognized in the consolidated balance sheet................... $ 4,512 $ (152) $ 4,360 $ 735 $ -- $ 735 --------- ----- --------- ----------- ----- ----------- --------- ----- --------- ----------- ----- ----------- TOTAL --------- Actuarial present value of benefits: Vested........................................... $ 12,754 Nonvested........................................ 2,389 --------- Accumulated benefit obligation..................... 15,143 Effect of projected future salary increases........ 344 --------- PBO................................................ 15,487 Plan assets at fair value.......................... 16,867 --------- PBO less than/(in excess of) plan assets........... 1,380 Unrecognized net loss.............................. 1,022 Unrecognized prior service cost.................... 2,173 Unamortized net obligation at date of adoption..... 720 Adjustment required to recognize minimum liability........................................ (200) --------- Net prepaid pension asset/(liability) recognized in the consolidated balance sheet................... $ 5,095 --------- --------- F-27 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12. EMPLOYEE RETIREMENT AND OTHER BENEFITS (CONTINUED) Included in Other noncurrent assets on the consolidated balance sheet as of December 31, 1997 and 1996, was noncurrent prepaid pension expense of $4.8 billion and $4.9 billion, respectively. NONPENSION POSTRETIREMENT BENEFITS Chrysler provides health and life insurance benefits to substantially all of its hourly and salaried employees and those of certain of its consolidated subsidiaries. Upon retirement from Chrysler, employees may become eligible for continuation of these benefits. However, benefits and eligibility rules may be modified periodically. The components of nonpension postretirement benefit expense were as follows: YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- (IN MILLIONS OF DOLLARS) Benefits attributed to employees' service.............................................. $ 175 $ 191 $ 136 Interest on accumulated nonpension postretirement benefit obligation................... 654 671 670 Net amortization....................................................................... 6 (5) (48) --------- --------- --------- Total.............................................................................. $ 835 $ 857 $ 758 --------- --------- --------- --------- --------- --------- The following table reconciles the components of the accumulated nonpension postretirement benefit obligation with amounts recognized in the consolidated balance sheet: DECEMBER 31 -------------------- 1997 1996 --------- --------- (IN MILLIONS OF DOLLARS) Accumulated nonpension postretirement benefit obligation ("ANPBO") attributable to: Retirees................................................................................... $ 5,102 $ 4,976 Active employees fully eligible for benefits............................................... 2,101 1,935 Other active employees..................................................................... 3,131 3,010 --------- --------- Total ANPBO.............................................................................. 10,334 9,921 Unrecognized prior service cost............................................................ (43) (36) Unrecognized net loss...................................................................... (819) (760) --------- --------- Net Postretirement Benefit Obligation.................................................. $ 9,472 $ 9,125 --------- --------- --------- --------- F-28 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12. EMPLOYEE RETIREMENT AND OTHER BENEFITS (CONTINUED) Nonpension postretirement benefit expense is determined using assumptions at the beginning of the year. The ANPBO is determined using the assumptions at the end of the year. Assumptions used to determine nonpension postretirement benefit expense and the ANPBO for U.S. Plans were: DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- Discount rate........................................................................ 6.75% 7.25% 7.00% Health care inflation rate in following (or "base") year............................. 6.50% 7.00% 7.52% Ultimate health care inflation rate (2002) (1)....................................... 5.00% 5.00% 5.35% Average health care inflation rate (base year through 2002).......................... 5.67% 5.36% 5.82% - ------------------------ (1) Rate decreases annually through the year 2002 The decrease in the discount rate for U.S. Plans from 7.25 percent as of December 31, 1996, to 6.75 percent as of December 31, 1997, resulted in a $568 million increase in the ANPBO in 1997, and is expected to result in a $18 million increase in nonpension postretirement benefit expense in 1998. A one percentage point increase in the assumed health care inflation rate in each year would have increased the ANPBO at December 31, 1997, by $1.2 billion and would have increased the aggregate of the service and interest cost components of nonpension postretirement benefit expense in 1997 by $115 million. VOLUNTARY EARLY RETIREMENT PROGRAMS During 1997, 1996 and 1995, the cost of voluntary early retirement programs, which are periodically offered to certain salaried and hourly employees, was $13 million, $97 million and $22 million, respectively, and is included in employee retirement benefit expense. PREPAID EMPLOYEE BENEFITS In December 1997, Chrysler prepaid certain 1998 nonpension employee benefits by contributing $1.1 billion to a Voluntary Employees' Beneficiary Association ("VEBA") trust and other employee benefit plans. In December 1996, Chrysler prepaid certain 1997 nonpension employee benefits by contributing $1.1 billion to a VEBA trust and other employee benefit plans. NOTE 13. DISPOSITION OF ASSETS During December 1997, Chrysler completed an initial public offering ("IPO") of its common stock interest in Dollar Thrifty Automotive Group, Inc. ("DTAG", formerly Pentastar Transportation Group, Inc.) for net proceeds of $387 million. The IPO of the common stock interest resulted in a pretax and after-tax gain of $73 million. The gain was deferred and will be recognized over the remaining term of the vehicle supply agreements with DTAG, which end in 2001. The tax effect on this transaction reflects the difference between the book and tax basis of Chrysler's stock interest in DTAG for which deferred taxes were not provided, in accordance with SFAS No. 109, "Accounting for Income Taxes." In addition, fourth-quarter 1997 earnings include the recognition of $97 million ($60 million after taxes) of previously deferred profits from the sale of vehicles from Chrysler to DTAG. F-29 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13. DISPOSITION OF ASSETS (CONTINUED) In 1996, Chrysler committed to a plan of disposal for Thrifty, a subsidiary of DTAG, and recognized a $65 million pretax loss ($100 million after taxes) to write down Thrifty's carrying value to estimated fair value less cost to sell. The pretax loss is included in Costs, other than items below in the consolidated statement of earnings for 1996. The after-tax loss includes the effect of not being able to claim a tax deduction for the capital loss on Chrysler's investment in Thrifty. In 1996, Chrysler sold Electrospace Systems, Inc. ("ESI") and Chrysler Technologies Airborne Systems, Inc. ("CTAS") for net proceeds of $476 million. ESI and CTAS were engaged principally in the manufacture of defense electronics and aircraft modification, respectively, and represented substantially all of the operations of Chrysler Technologies Corporation ("CTC"), a wholly owned subsidiary of Chrysler. The sale resulted in a pretax gain of $101 million ($87 million after taxes). In the fourth quarter of 1996, Chrysler signed an agreement to sell Pentastar Electronics, Inc. ("PEI") for net proceeds of $17 million, which resulted in the recognition of a pretax loss of $77 million ($51 million after taxes) to write down PEI's carrying value to estimated fair value less cost to sell. PEI represented the remaining operations of CTC. The sale of PEI was completed on January 10, 1997. The pretax gain on the sale of ESI and CTAS and the pretax loss on the write-down of PEI are included in Costs, other than items below in the consolidated statement of earnings for 1996. Also in 1996, CFC sold certain nonautomotive assets for net proceeds of $225 million, which approximated the net book value of the assets. NOTE 14. SPECIAL PLANT PROVISION In 1995, Chrysler recorded a $263 million provision ($162 million after taxes) for costs associated with production changes at its Newark assembly plant. Production of the all-new sport-utility vehicle, the Dodge Durango, began at the Newark assembly plant in the fall of 1997. The provision reflects the recognition of supplemental unemployment benefits, job security benefits and other related employee costs, and the write-down of certain equipment and tooling. The provision is included in Costs, other than items below in the consolidated statement of earnings for 1995. NOTE 15. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental disclosures to the consolidated statement of cash flows were as follows: YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- (IN MILLIONS OF DOLLARS) Interest paid (net of amounts capitalized): Chrysler, excluding CFC.............................................................. $ 164 $ 227 $ 105 CFC.................................................................................. 791 788 847 Interest capitalized................................................................... 194 156 204 Income taxes paid, net of refunds received............................................. 1,230 1,206 944 CFC acquired $1.0 billion and $250 million of asset-backed securities in non-cash transactions relating to the securitization of retail receivables during 1996 and 1995, respectively. F-30 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16. FINANCIAL INSTRUMENTS The estimated fair values of financial instruments have been determined by Chrysler using available market information and the valuation methodologies described below. However, judgment is often required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts that Chrysler could realize in a current market exchange. The use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. Amounts related to Chrysler's financial instruments were as follows: DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------- -------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------- --------- --------- --------- (IN MILLIONS OF DOLLARS) BALANCE SHEET FINANCIAL INSTRUMENTS Marketable securities............................................... $ 2,950 $ 2,950 $ 2,594 $ 2,594 Finance receivables and retained interests (1)...................... 10,948 10,941 10,353 10,315 Debt................................................................ 15,485 16,020 13,448 13,929 Currency exchange agreements (2).................................... -- -- 52 57 - ------------------------ (1) The carrying value of finance receivables and retained interests excludes $2,570 million and $1,986 million of direct finance and leveraged leases classified as finance receivables in the consolidated balance sheet at December 31, 1997 and 1996, respectively. (2) Currency exchange agreements are recorded on the consolidated balance sheet as a net reduction to the carrying value of debt. DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------------- -------------------------- CONTRACT OR UNREALIZED CONTRACT OR UNREALIZED NOTIONAL GAINS/ NOTIONAL GAINS/ AMOUNT (LOSSES) AMOUNT (LOSSES) ----------- ------------- ----------- ------------- (IN MILLIONS OF DOLLARS) OTHER FINANCIAL INSTRUMENTS Interest rate swaps With unrealized gains...................................... $ 840 $ 9 $ 1,246 $ 14 With unrealized losses..................................... 2,589 (13) 2,420 (22) Forward contracts............................................ -- -- 520 (3) Currency forward contracts With unrealized gains...................................... 1,824 121 2,028 90 With unrealized losses..................................... 720 (10) 680 (47) The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximated fair values due to the short-term maturities of these instruments. The methods and assumptions used to estimate the fair values of balance sheet and other financial instruments are summarized as follows: MARKETABLE SECURITIES The fair values of marketable securities were estimated using quoted market prices. F-31 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16. FINANCIAL INSTRUMENTS (CONTINUED) FINANCE RECEIVABLES AND RETAINED INTERESTS IN SOLD RECEIVABLES The carrying value of variable-rate finance receivables was assumed to approximate fair value since they are priced at current market rates. The fair value of fixed-rate finance receivables was estimated by discounting expected cash flows using rates at which loans of similar maturities would be made as of the date of the consolidated balance sheet. The fair values of residual cash flows and other subordinated amounts due CFC arising from receivable sale transactions were estimated by discounting expected cash flows at current market rates. DEBT The fair value of public debt was estimated using quoted market prices. The fair value of other long-term debt was estimated by discounting future cash flows using rates currently available for debt with similar terms and remaining maturities. CURRENCY EXCHANGE AGREEMENTS The fair values of currency exchange agreements were estimated by discounting the expected cash flows using market exchange rates and relative market interest rates over the remaining terms of the agreements. Currency exchange agreements are more fully described in Notes 1 and 7. INTEREST RATE SWAPS The fair values of interest rate swaps were estimated by discounting expected cash flows using quoted market interest rates. Interest rate swaps are more fully described in Notes 1 and 7. FORWARD CONTRACTS The fair values of forward contracts were estimated by discounting expected cash flows using quoted market interest rates. Forward contracts are more fully described in Note 1. CURRENCY FORWARD CONTRACTS The fair values of currency forward contracts were estimated based on quoted market prices for contracts of similar terms. Currency forward contracts are more fully described in Note 1. The fair value estimates presented herein were based on information available as of the date of the consolidated balance sheet. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been revalued since the date of the consolidated balance sheet and, therefore, current estimates of fair value may differ from the amounts presented herein. F-32 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17. EARNINGS PER COMMON SHARE AND CAPITAL STRUCTURE INFORMATION Earnings per common share ("EPS") data were computed as follows: YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- (IN MILLIONS OF DOLLARS AND SHARES, EXCEPT PER-COMMON-SHARE AMOUNTS) Earnings before extraordinary item and cumulative effect of a change in accounting principle...................................................... $ 2,805 $ 3,720 $ 2,121 Less: Preferred stock dividends............................................. (1) (3) (21) --------- --------- --------- Earnings before extraordinary item and cumulative effect of a change in accounting principle, net of preferred stock dividends.................... $ 2,804 $ 3,717 $ 2,100 --------- --------- --------- --------- --------- --------- BASIC EPS: Weighted-average common shares outstanding.................................. 675.5 730.3 748.4 --------- --------- --------- --------- --------- --------- Earnings before extraordinary item and cumulative effect of a change in accounting principle, net of preferred stock dividends.................... $ 4.15 $ 5.09 $ 2.81 --------- --------- --------- --------- --------- --------- DILUTED EPS: Weighted-average common shares outstanding.................................. 675.5 730.3 748.4 Shares issued on exercise of dilutive options............................... 28.4 26.5 21.1 Shares purchased with proceeds of options................................... (21.6) (19.1) (14.0) Shares applicable to convertible preferred stock............................ 1.3 4.4 34.7 Shares contingently issuable................................................ 1.7 1.7 1.5 --------- --------- --------- Shares applicable to diluted earnings....................................... 685.3 743.8 791.7 --------- --------- --------- --------- --------- --------- Earnings before extraordinary item and cumulative effect of a change in accounting principle...................................................... $ 4.09 $ 5.00 $ 2.68 --------- --------- --------- --------- --------- --------- Unexercised employee stock options to purchase 0.3 million, 0.1 million and 0.2 million shares of Chrysler common stock as of December 31, 1997, 1996 and 1995, respectively, were not included in the computations of diluted EPS because the options' exercise prices were greater than the average market price of Chrysler common stock during the respective periods. NOTE 18. INDUSTRY SEGMENT AND GEOGRAPHIC AREA DATA INDUSTRY SEGMENT DATA Chrysler operates in two principal industry segments: Automotive Operations and Financial Services. The Automotive Operations of Chrysler includes the research, design, manufacture, assembly and sale of cars, trucks and related parts and accessories. Based on assets, revenues and earnings, Automotive Operations represent the majority of Chrysler's business activities. The Financial Services segment is comprised primarily of CFC, which is engaged principally in retail and lease financing for vehicles, dealer inventory and other financing needs, dealer property and casualty insurance, and dealership facility development and management. Prior to December 23, 1997, Chrysler participated in short-term vehicle rental activities through DTAG (the "Car Rental Operations"). See Note 13. Disposition of Assets. The Car Rental Operations represent less than 10 percent of revenues, operating profits and identifiable assets, and have been included in the Automotive segment. Chrysler's operations are conducted primarily in North America, including the United States, Canada and Mexico. F-33 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 18. INDUSTRY SEGMENT AND GEOGRAPHIC AREA DATA (CONTINUED) Information concerning operations by industry segment was as follows: AUTOMOTIVE FINANCIAL OPERATIONS SERVICES CONSOLIDATED ----------- ----------- ------------ (IN MILLIONS OF DOLLARS) DECEMBER 31, 1997 Revenues: Unaffiliated customers.................................................... $ 58,656 $ 2,491 $ 61,147 Intersegment.............................................................. 6 226 -- ----------- ----------- ------------ Total revenues.............................................................. 58,662 2,717 61,147 Operating earnings.......................................................... 4,238 661 4,723 Interest expense............................................................ 342 -- 166 Earnings before income taxes, extraordinary item and cumulative effect of a change in accounting principle............................................ 3,896 661 4,557 Depreciation and special tools amortization................................. 2,506 190 2,696 Capital expenditures........................................................ 5,659 1,491 7,150 Identifiable assets......................................................... 44,483 19,599 60,418 Liabilities................................................................. 36,485 16,235 49,056 DECEMBER 31, 1996 Revenues: Unaffiliated customers.................................................... $ 59,006 $ 2,391 $ 61,397 Intersegment.............................................................. 15 160 -- ----------- ----------- ------------ Total revenues.............................................................. 59,021 2,551 61,397 Operating earnings.......................................................... 5,767 613 6,269 Interest expense............................................................ 288 -- 177 Earnings before income taxes, extraordinary item and cumulative effect of a change in accounting principle............................................ 5,479 613 6,092 Depreciation and special tools amortization................................. 2,194 118 2,312 Capital expenditures........................................................ 5,035 394 5,429 Identifiable assets......................................................... 41,251 17,721 56,184 Liabilities................................................................. 33,028 14,373 44,613 DECEMBER 31, 1995 Revenues: Unaffiliated customers.................................................... $ 50,966 $ 2,229 $ 53,195 Intersegment.............................................................. 13 210 -- ----------- ----------- ------------ Total revenues.............................................................. 50,979 2,439 53,195 Operating earnings.......................................................... 3,202 522 3,550 Interest expense............................................................ 275 -- 101 Earnings before income taxes, extraordinary item and cumulative effect of a change in accounting principle............................................ 2,927 522 3,449 Depreciation and special tools amortization................................. 2,139 81 2,220 Capital expenditures........................................................ 3,774 332 4,106 Identifiable assets......................................................... 38,358 17,835 53,756 Liabilities................................................................. 30,701 14,533 42,797 F-34 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 18. INDUSTRY SEGMENT AND GEOGRAPHIC AREA DATA (CONTINUED) Interest expense of the Financial Services segment has been netted against operating earnings, which is consistent with industry practice. Certain line items do not add to the consolidated amounts due to the elimination of intersegment transactions. GEOGRAPHIC AREA DATA Information concerning operations by principal geographic area was as follows: UNITED ADJMTS. STATES CANADA OTHER & ELIMS. CONSOLIDATED --------- --------- --------- ---------- ------------ (IN MILLIONS OF DOLLARS) DECEMBER 31, 1997 Revenues: Unaffiliated customers............................... $ 52,006 $ 4,950 $ 4,191 $ -- $ 61,147 Transfers between geographic areas................... 10,210 7,150 4,923 (22,283) -- --------- --------- --------- ---------- ------------ Total revenues......................................... 62,216 12,100 9,114 (22,283) 61,147 Earnings before income taxes, extraordinary item and cumulative effect of a change in accounting principle............................................ 3,853 264 440 -- 4,557 Identifiable assets.................................... 50,401 6,754 3,263 -- 60,418 Net assets............................................. 8,080 1,613 1,669 -- 11,362 DECEMBER 31, 1996 Revenues: Unaffiliated customers............................... $ 53,171 $ 4,446 $ 3,780 $ -- $ 61,397 Transfers between geographic areas................... 10,540 7,999 5,121 (23,660) -- --------- --------- --------- ---------- ------------ Total revenues......................................... 63,711 12,445 8,901 (23,660) 61,397 Earnings before income taxes, extraordinary item and cumulative effect of a change in accounting principle............................................ 5,631 224 237 -- 6,092 Identifiable assets.................................... 47,843 5,497 2,844 -- 56,184 Net assets............................................. 8,847 1,435 1,289 -- 11,571 DECEMBER 31, 1995 Revenues: Unaffiliated customers............................... $ 47,289 $ 3,834 $ 2,072 $ -- $ 53,195 Transfers between geographic areas................... 6,888 5,913 2,919 (15,720) -- --------- --------- --------- ---------- ------------ Total revenues......................................... 54,177 9,747 4,991 (15,720) 53,195 Earnings before income taxes, extraordinary item and cumulative effect of a change in accounting principle............................................ 3,179 78 192 -- 3,449 Identifiable assets.................................... 46,794 4,531 2,431 -- 53,756 Net assets............................................. 8,411 1,310 1,238 -- 10,959 Transfers between geographic areas are based on prices negotiated between the buying and selling locations. F-35 INDEPENDENT ACCOUNTANTS' REPORT Shareholders and Board of Directors Chrysler Corporation Auburn Hills, Michigan We have reviewed the accompanying condensed consolidated balance sheet of Chrysler Corporation and consolidated subsidiaries as of September 30, 1998 and 1997 and the related condensed consolidated statements of earnings for the three-month and nine-month periods and of cash flows for the nine-month periods ended September 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previous audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Chrysler Corporation and consolidated subsidiaries as of December 31, 1997, and the related consolidated statements of earnings and cash flows for the year then ended (not presented herein); and in our report dated January 22, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1997 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Deloitte & Touche LLP Detroit, Michigan October 9, 1998 F-36 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (IN MILLIONS OF DOLLARS) THREE MONTHS ENDED NINE MONTHS ENDED -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Sales of manufactured products........................................ $ 13,910 $ 12,101 $ 45,805 $ 40,650 Finance and insurance revenues........................................ 572 394 1,517 1,204 Other revenues........................................................ 475 681 1,436 1,826 --------- --------- --------- --------- TOTAL REVENUES.................................................... 14,957 13,176 48,758 43,680 --------- --------- --------- --------- Costs, other than items below......................................... 11,283 10,145 36,642 33,205 Depreciation and special tools amortization........................... 817 590 2,539 1,974 Selling and administrative expenses................................... 1,106 1,139 3,330 3,560 Employee retirement benefits.......................................... 326 325 952 961 Interest expense...................................................... 346 251 942 739 --------- --------- --------- --------- TOTAL EXPENSES.................................................... 13,878 12,450 44,405 40,439 --------- --------- --------- --------- EARNINGS BEFORE INCOME TAXES...................................... 1,079 726 4,353 3,241 Provision for income taxes............................................ 397 285 1,616 1,288 --------- --------- --------- --------- NET EARNINGS...................................................... $ 682 $ 441 $ 2,737 $ 1,953 --------- --------- --------- --------- --------- --------- --------- --------- (IN DOLLARS OR MILLIONS OF SHARES) BASIC EARNINGS PER COMMON SHARE....................................... $ 1.05 $ 0.66 $ 4.23 $ 2.86 --------- --------- --------- --------- --------- --------- --------- --------- Average common shares outstanding..................................... 647.3 671.0 646.5 682.5 DILUTED EARNINGS PER COMMON SHARE..................................... $ 1.02 $ 0.65 $ 4.14 $ 2.82 --------- --------- --------- --------- --------- --------- --------- --------- Average common and dilutive equivalent shares outstanding............. 665.5 681.0 661.5 692.7 DIVIDENDS DECLARED PER COMMON SHARE................................... $ 0.40 $ 0.40 $ 1.20 $ 1.20 See notes to consolidated financial statements. F-37 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN MILLIONS OF DOLLARS) 1998 1997 ----------- ---------------------- SEPT. 30 DEC. 31 SEPT. 30 ----------- --------- ----------- (UNAUDITED) (UNAUDITED) ASSETS: Cash and cash equivalents.................................................... $ 6,963 $ 4,898 $ 5,347 Marketable securities........................................................ 3,665 2,950 2,252 ----------- --------- ----------- Total cash, cash equivalents and marketable securities................... 10,628 7,848 7,599 Accounts receivable--trade and other......................................... 1,548 1,646 1,837 Inventories.................................................................. 5,979 4,738 6,419 Prepaid employee benefits, taxes and other expenses.......................... 1,010 2,193 1,670 Finance receivables and retained interests in sold receivables............... 16,292 13,518 13,161 Property and equipment....................................................... 19,820 17,968 16,924 Special tools................................................................ 4,540 4,572 4,358 Intangible assets............................................................ 1,511 1,573 1,950 Other noncurrent assets...................................................... 6,408 6,362 6,201 ----------- --------- ----------- TOTAL ASSETS............................................................. $ 67,736 $ 60,418 $ 60,119 ----------- --------- ----------- ----------- --------- ----------- LIABILITIES: Accounts payable............................................................. $ 10,697 $ 9,512 $ 9,614 Accrued liabilities and expenses............................................. 11,114 9,717 9,456 Short-term debt.............................................................. 3,708 3,841 3,145 Payments due within one year on long-term debt............................... 3,081 2,638 2,692 Long-term debt............................................................... 11,344 9,006 10,097 Accrued noncurrent employee benefits......................................... 10,126 9,841 9,865 Other noncurrent liabilities................................................. 4,464 4,501 3,983 ----------- --------- ----------- TOTAL LIABILITIES........................................................ 54,534 49,056 48,852 ----------- --------- ----------- SHAREHOLDERS' EQUITY: (shares in millions) Preferred stock--$1 per share par value; authorized 20.0 shares; Series A Convertible Preferred Stock; issued and outstanding: 1997--0.02 and 0.02 shares, respectively (aggregate liquidation preference 1997--$8 million and $8 million, respectively).................................................. -- * * Common stock--$1 per share par value; authorized 1,000.0 shares; issued: 1998--824.0 shares; 1997--823.1 and 823.1 shares, respectively............. 824 823 823 Additional paid-in capital................................................... 5,219 5,231 5,232 Retained earnings............................................................ 12,557 10,605 9,996 Treasury stock--at cost: 1998--176.6 shares; 1997--174.7 and 160.6 shares, respectively............................................................... (5,398) (5,297) (4,784) ----------- --------- ----------- TOTAL SHAREHOLDERS' EQUITY................................................... 13,202 11,362 11,267 ----------- --------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $ 67,736 $ 60,418 $ 60,119 ----------- --------- ----------- ----------- --------- ----------- - ------------------------ * Less than $50 thousand See notes to consolidated financial statements. F-38 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (IN MILLIONS OF DOLLARS) 1998 1997 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES.................................................... $ 6,720 $ 5,884 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities......................................................... (2,719) (1,983) Sales and maturities of marketable securities.............................................. 2,869 2,343 Finance receivables acquired............................................................... (22,731) (21,165) Finance receivables collected.............................................................. 7,515 6,659 Proceeds from sales of finance receivables................................................. 13,351 14,082 Expenditures for property and equipment.................................................... (2,092) (2,359) Expenditures for special tools............................................................. (941) (1,208) Purchases of vehicle operating leases...................................................... (2,255) (1,427) Proceeds from sales of vehicles under purchased operating leases........................... 273 129 Change in cash and investments held by securitization trusts............................... 151 (1,164) Other...................................................................................... 215 156 --------- --------- NET CASH USED IN INVESTING ACTIVITIES.................................................... (6,364) (5,937) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in short-term debt.................................................................. (133) (69) Proceeds from long-term borrowings......................................................... 4,983 5,550 Payments on long-term borrowings........................................................... (2,252) (2,938) Repurchases of common stock................................................................ (197) (1,593) Dividends paid............................................................................. (777) (830) Other...................................................................................... 85 122 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES................................................ 1,709 242 --------- --------- Change in cash and cash equivalents.......................................................... 2,065 189 Cash and cash equivalents at beginning of period............................................. 4,898 5,158 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD................................................... $ 6,963 $ 5,347 --------- --------- --------- --------- See notes to consolidated financial statements. F-39 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION The unaudited consolidated financial statements of Chrysler Corporation and its consolidated subsidiaries ("Chrysler") include the accounts of all significant majority-owned subsidiaries that are controlled by Chrysler. Affiliates that are 20 percent to 50 percent owned and subsidiaries where control is expected to be temporary or does not reside with Chrysler are generally accounted for on an equity basis. Intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements of Chrysler for the three and nine months ended September 30, 1998 and 1997 reflect all adjustments, consisting of only normal and recurring items, which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods. The operating results for the three and nine months ended September 30, 1998 are not necessarily indicative of the results of operations for the entire year. Reference should be made to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 1997. Certain amounts for 1997 have been reclassified to conform with current period classifications. NOTE 2. INVENTORIES Inventories, summarized by major classification, were as follows: 1998 1997 ----------- ---------------------- SEPT. 30 DEC. 31 SEPT. 30 ----------- --------- ----------- (IN MILLIONS OF DOLLARS) Finished products, including service parts........................................... $ 1,904 $ 1,883 $ 1,865 Raw materials, finished production parts and supplies................................ 1,598 1,445 1,495 Vehicles held for short-term lease................................................... 2,477 1,410 3,059 ----------- --------- ----------- TOTAL............................................................................ $ 5,979 $ 4,738 $ 6,419 ----------- --------- ----------- ----------- --------- ----------- NOTE 3. CHANGES IN ACCOUNTING PRINCIPLES Effective January 1, 1998, Chrysler adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. This Statement also requires that an entity classify items of other comprehensive earnings by their nature in an annual financial statement. For example, other comprehensive earnings may include foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains and losses on marketable securities classified as available-for-sale. Annual financial statements for prior periods will be reclassified, as required. Chrysler's total comprehensive earnings were as follows: THREE MONTHS ENDED NINE MONTHS ENDED SEPT. 30 SEPT. 30 -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- (IN MILLIONS OF DOLLARS) Net earnings................................................................ $ 682 $ 441 $ 2,737 $ 1,953 Other comprehensive earnings (loss)......................................... (11) 9 (28) 1 --------- --------- --------- --------- Total comprehensive earnings............................................ $ 671 $ 450 $ 2,709 $ 1,954 --------- --------- --------- --------- --------- --------- --------- --------- Effective January 1, 1998, Chrysler adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP provides guidance on accounting for the costs of computer software developed or obtained for internal use. This SOP requires F-40 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED) that entities capitalize certain internal-use software costs once certain criteria are met. Historically, Chrysler generally expensed the costs of developing or obtaining internal-use software as incurred. Adoption of the standard did not have a material effect on Chrysler's consolidated financial statements. NOTE 4. PROPOSED BUSINESS COMBINATION Chrysler, Daimler-Benz Aktiengesellschaft ("Daimler-Benz") and DaimlerChrysler AG ("DaimlerChrysler") have entered into a Business Combination Agreement dated as of May 7, 1998 (as amended and restated) providing for (i) the merger of a newly created Delaware corporation with and into Chrysler ("the Chrysler Merger"); (ii) an offer by DaimlerChrysler to exchange one DaimlerChrysler ordinary share for each Daimler-Benz ordinary share (or 1.005 DaimlerChrysler shares for each Daimler-Benz ordinary share if greater than 90 percent of shares are exchanged); and (iii) the merger of Daimler-Benz with and into DaimlerChrysler. In the Chrysler merger, each share of outstanding Chrysler common stock will be converted into the right to receive 0.6235 of a DaimlerChrysler share. As a result of these transactions, DaimlerChrysler will be owned by the former shareholders of Chrysler and Daimler-Benz, and Chrysler will be a wholly owned subsidiary of DaimlerChrysler. On May 7, 1998, Chrysler entered into a Stockholder Agreement with Kirk Kerkorian and Tracinda Corporation (together, "Tracinda"), the owner of approximately 11 percent of the common stock of Chrysler, pursuant to which Tracinda agreed to vote its shares in favor of the transactions contemplated by the Business Combination Agreement. Also on May 7, 1998, Chrysler amended its Rights Agreement, dated as of February 5, 1998, with First Chicago Trust Company of New York. The amendment renders the Rights Agreement inapplicable to the transactions contemplated by the Business Combination Agreement. The transaction is expected to close in November 1998, subject to the satisfaction or waiver of various conditions as more fully described in the Business Combination Agreement. These conditions include completion of the exchange of at least 75 percent of the outstanding shares of Daimler-Benz for DaimlerChrysler shares and the receipt of opinions from the respective tax counsel of Chrysler and Daimler-Benz regarding certain United States federal income and German tax consequences of the transactions. Additionally, the transaction is conditioned upon the receipt by Chrysler of a private letter ruling from the United States Internal Revenue Service (the "IRS"), which was received from the IRS on September 4, 1998. Chrysler's and Daimler-Benz' shareholders approved the proposed business combination at separate Special Shareholders' Meetings held on September 18, 1998. The initial period for the exchange of Daimler-Benz shares for DaimlerChrysler shares extends from September 24, 1998 through October 23, 1998. In September 1998, Chrysler filed a preliminary Form S-3 with the Securities and Exchange Commission to register the offering of up to 30 million shares of Chrysler common stock. This offering of Chrysler common stock is conditioned on the exchange of at least 90 percent of the outstanding shares of Daimler-Benz for DaimlerChrysler shares. NOTE 5. PREFERRED STOCK REDEMPTION On July 24, 1998, Chrysler redeemed all of the outstanding Depositary Shares representing its Series A Convertible Preferred Stock. F-41 CHRYSLER CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. EARNINGS PER COMMON SHARE Earnings per common share ("EPS") data were computed as follows: THREE MONTHS ENDED NINE MONTHS ENDED SEPT. 30 SEPT. 30 -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- (IN MILLIONS OF DOLLARS AND SHARES, EXCEPT PER-COMMON-SHARE AMOUNTS) Net earnings................................................................. $ 682 $ 441 $ 2,737 $ 1,953 --------- --------- --------- --------- --------- --------- --------- --------- BASIC EPS: Weighted-average common shares outstanding................................... 647.3 671.0 646.5 682.5 --------- --------- --------- --------- --------- --------- --------- --------- Basic EPS.................................................................... $ 1.05 $ 0.66 $ 4.23 $ 2.86 --------- --------- --------- --------- --------- --------- --------- --------- DILUTED EPS: Weighted-average common shares outstanding................................... 647.3 671.0 646.5 682.5 Shares issued on exercise of dilutive options................................ 36.1 31.1 33.5 27.8 Shares purchased with proceeds of options.................................... (20.5) (23.8) (21.4) (20.8) Shares applicable to convertible preferred stock............................. 0.1 0.9 0.5 1.5 Shares contingently issuable................................................. 2.5 1.8 2.4 1.7 --------- --------- --------- --------- Shares applicable to diluted earnings........................................ 665.5 681.0 661.5 692.7 --------- --------- --------- --------- --------- --------- --------- --------- Diluted EPS.................................................................. $ 1.02 $ 0.65 $ 4.14 $ 2.82 --------- --------- --------- --------- --------- --------- --------- --------- F-42 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Daimler-Benz Aktiengesellschaft We have audited the accompanying consolidated balance sheets of Daimler-Benz Aktiengesellschaft and subsidiaries ("Daimler-Benz") as of December 31, 1997 and 1996, and the related consolidated statements of income, cash flows, and changes in stockholders' equity for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of Daimler-Benz' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in Germany and the United States. 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 provide a reasonable basis for our opinion. Daimler-Benz has accounted for certain joint ventures in accordance with the proportionate method of consolidation as is permitted under the Seventh Directive of the European Community and the Standards of the International Accounting Standards Committee. In our opinion, United States generally accepted accounting principles require that such joint ventures be accounted for using the equity method of accounting. The United States Securities and Exchange Commission has stated that it would not object to Daimler-Benz' use of the proportionate method of consolidation as supplemented by the disclosures in Note 2. In our opinion, except for the effects of the use of the proportionate method of accounting, as discussed in the preceding paragraph, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Daimler-Benz as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with United States generally accepted accounting principles. KPMG DEUTSCHE TREUHAND-GESELLSCHAFT AG Frankfurt am Main March 17, 1998, except note 28 which is as of June 25, 1998 F-43 DAIMLER-BENZ AG CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED YEAR ENDED DECEMBER 31, FINANCIAL SERVICES ------------------------------------------------------ YEAR ENDED DECEMBER 31, 1997 ------------------------------------ NOTE (NOTE 1) 1997 1996 1995 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Revenues 24 $ 68,791 DM124,050 DM106,339 DM102,985 DM9,499 DM8,379 DM7,661 - --------------------------------------------------------------------------------------------------------------------------------- Cost of sales 4 (54,868) (98,943) (84,742) (86,686) (8,650) (7,752) (7,239) - --------------------------------------------------------------------------------------------------------------------------------- GROSS MARGIN 13,923 25,107 21,597 16,299 849 627 422 - --------------------------------------------------------------------------------------------------------------------------------- Selling, administrative and other expenses 4 (9,667) (17,433) (15,955) (20,834) (608) (476) (366) - --------------------------------------------------------------------------------------------------------------------------------- Research and development (3,140) (5,663) (5,579) (5,369) 0 0 0 - --------------------------------------------------------------------------------------------------------------------------------- Other income 898 1,620 1,402 1,742 161 113 89 - --------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE FINANCIAL INCOME AND INCOME TAXES 2,014 3,631 1,465 (8,162) 402(1) 264(1) 145(1) - --------------------------------------------------------------------------------------------------------------------------------- Financial income, net 5 343 618 496 929 7 . 8 - --------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES 2,357 4,249 1,961 (7,233) 409 264 153 - --------------------------------------------------------------------------------------------------------------------------------- Tax benefit relating to a special distribution 1,613 2,908(2) Income taxes 595 1,074(3) - --------------------------------------------------------------------------------------------------------------------------------- TOTAL INCOME TAXES 6 2,208 3,982 712 1,620 (210) (127) (82) - --------------------------------------------------------------------------------------------------------------------------------- Minority interest (105) (189) 89 (116) (1) (4) 2 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) 4,460 8,042(4) 2,762 (5,729) 198 133 73 - --------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE - --------------------------------------------------------------------------------------------------------------------------------- Basic earnings (loss) per share 25 8.48 15.30(4) 5.27 (10.96) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Diluted earnings (loss) per share 25 8.32 15.01(4) 5.25 (10.96) -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- (1) Equal to the operating profit of the Group's Financial Services. (2) Reflects the tax benefit relating to a special distribution of DM 19.63 per share. (3) Includes non-recurring tax benefits of DM 1,962 relating to the decrease in valuation allowance as of December 31, 1997, applied to the domestic operations that file a combined tax return. (4) Excluding the non-recurring benefits, 1997 net income would have been DM 3,172 and basic and diluted earnings per share would have been DM 6.04 and DM 5.96, respectively. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-44 DAIMLER-BENZ AG CONSOLIDATED BALANCE SHEETS (IN MILLIONS) CONSOLIDATED FINANCIAL SERVICES AT DECEMBER 31, AT DECEMBER 31, ---------------------------------- ---------------------- 1997 NOTE (NOTE 1) 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Intangible assets 7 $ 1,062 DM 1,915 DM 1,951 DM 100 DM 80 - ---------------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 7 11,455 20,656 18,225 76 57 - ---------------------------------------------------------------------------------------------------------------------------------- Investments and long-term financial assets 13 1,915 3,453 3,536 205 60 - ---------------------------------------------------------------------------------------------------------------------------------- Equipment on operating leases, net 8 8,280 14,931 11,941 15,055 12,748 - ---------------------------------------------------------------------------------------------------------------------------------- FIXED ASSETS 22,712 40,955 35,653 15,436 12,945 - ---------------------------------------------------------------------------------------------------------------------------------- Inventories 9 7,980 14,390 13,602 988 645 - ---------------------------------------------------------------------------------------------------------------------------------- Trade receivables 10 6,658 12,006 10,864 373 382 - ---------------------------------------------------------------------------------------------------------------------------------- Receivables from financial services 11 14,376 25,924 19,052 25,953 19,073 - ---------------------------------------------------------------------------------------------------------------------------------- Other receivables 12 6,794 12,251(1) 8,959 897 826 - ---------------------------------------------------------------------------------------------------------------------------------- Securities 13 8,144 14,687 9,783 91 92 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 14 3,235 5,833 4,557 684 269 - ---------------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS 47,187 85,091 66,817 28,986 21,287 - ---------------------------------------------------------------------------------------------------------------------------------- DEFERRED TAXES 6 5,801 10,462 9,603 27 162 - ---------------------------------------------------------------------------------------------------------------------------------- PREPAID EXPENSES 327 591 388 81 65 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 76,027 137,099 112,461 44,530 34,459 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------------------------------------------- Capital stock $ 1,433 DM 2,584 DM 2,577 DM DM - ---------------------------------------------------------------------------------------------------------------------------------- Additional paid-in capital 2,910 5,247 5,080 - ---------------------------------------------------------------------------------------------------------------------------------- Retained earnings 14,700 26,508(1) 19,033 - ---------------------------------------------------------------------------------------------------------------------------------- Other equity 413 746 (297) - ---------------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY 16 19,456 35,085 26,393 2,642 2,094 - ---------------------------------------------------------------------------------------------------------------------------------- MINORITY INTEREST 649 1,170 936 55 52 - ---------------------------------------------------------------------------------------------------------------------------------- ACCRUED LIABILITIES 17 20,306 36,618 34,886 576 523 - ---------------------------------------------------------------------------------------------------------------------------------- Financial liabilities 18 21,794 39,302 28,850 38,383 29,171 - ---------------------------------------------------------------------------------------------------------------------------------- Trade liabilities 19 6,144 11,079 9,027 176 132 - ---------------------------------------------------------------------------------------------------------------------------------- Other liabilities 20 5,610 10,116 8,792 901 800 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES 33,548 60,497 46,669 39,460 30,103 - ---------------------------------------------------------------------------------------------------------------------------------- DEFERRED TAXES 6 1,111 2,003 2,253 1,345 1,244 - ---------------------------------------------------------------------------------------------------------------------------------- DEFERRED INCOME 957 1,726 1,324 452 443 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 76,027 137,099 112,461 44,530 34,459 - ---------------------------------------------------------------------------------------------------------------------------------- (1) Includes a tax receivable/tax benefit of approximately DM 2.9 billion relating to the special distribution of DM 19.63 per share. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-45 DAIMLER-BENZ AG CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) CONSOLIDATED FINANCIAL SERVICES ------------------------------------------ -------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER ------------------------------------------ 31, 1997 -------------------- (NOTE 1) 1997 1996 1995 1997 1996 - --------------------------------------------------------------------------------------------------------------- Net income (loss) $ 4,460 DM 8,042 DM 2,762 DM (5,729) DM 198 DM 133 - --------------------------------------------------------------------------------------------------------------- Income (Loss) applicable to minority interest 105 189 (89) 116 1 4 - --------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: - --------------------------------------------------------------------------------------------------------------- Tax benefit relating to a special distribution (1,613) (2,908) -- -- -- -- - --------------------------------------------------------------------------------------------------------------- Gain on disposal of businesses (617) (1,113) (217) -- -- -- - --------------------------------------------------------------------------------------------------------------- Depreciation and amortization of equipment on operating leases 1,288 2,323 2,018 2,444 2,467 2,198 - --------------------------------------------------------------------------------------------------------------- Depreciation and amortization of fixed assets 2,882 5,198 4,908 8,661 52 45 - --------------------------------------------------------------------------------------------------------------- Change in deferred taxes (991) (1,787) (1,572) (2,566) 167 (24) - --------------------------------------------------------------------------------------------------------------- Change in financial instruments 252 455 392 (77) -- 3 - --------------------------------------------------------------------------------------------------------------- (Gain) loss on disposal of fixed assets/securities (380) (685) (315) 28 25 . - --------------------------------------------------------------------------------------------------------------- Change in trading securities (419) (756) (335) 44 -- -- - --------------------------------------------------------------------------------------------------------------- Change in accrued liabilities 959 1,730 876 3,417 26 39 - --------------------------------------------------------------------------------------------------------------- Change in current assets and liabilities: - --------------------------------------------------------------------------------------------------------------- - inventories, net (213) (385) (13) (1,505) (274) (96) - --------------------------------------------------------------------------------------------------------------- - trade receivables (496) (894) 35 (262) 47 7 - --------------------------------------------------------------------------------------------------------------- - trade payables 938 1,691 967 728 45 (59) - --------------------------------------------------------------------------------------------------------------- - other assets and liabilities 79 142 786 156 (73) (279) - --------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES 6,234 11,242 10,203 5,455 2,681 1,971 - --------------------------------------------------------------------------------------------------------------- Purchase of fixed assets: - --------------------------------------------------------------------------------------------------------------- - -Increase in equipment on operating leases (4,219) (7,608) (6,101) (5,205) (6,977) (6,171) - --------------------------------------------------------------------------------------------------------------- - -Purchase of property, plant and equipment (3,850) (6,942) (6,212) (4,850) (47) (24) - --------------------------------------------------------------------------------------------------------------- - -Purchase of other fixed assets (286) (516) (421) (544) (74) (26) - --------------------------------------------------------------------------------------------------------------- Proceeds from disposal of equipment on operating leases 2,129 3,840 2,537 2,369 3,401 3,339 - --------------------------------------------------------------------------------------------------------------- Proceeds from disposal of fixed assets 552 996 976 1,086 41 11 - --------------------------------------------------------------------------------------------------------------- Payment for acquisition of businesses (658) (1,187) (462) (2,162) (125) (162) - --------------------------------------------------------------------------------------------------------------- Proceeds from disposal of businesses 1,449 2,613 1,107 15 -- 215 - --------------------------------------------------------------------------------------------------------------- Acquisitions of securities (other than trading) (2,951) (5,322) (1,319) (928) . (9) - --------------------------------------------------------------------------------------------------------------- Proceeds from sales of securities (other than trading) 930 1,677 1,126 337 2 . - --------------------------------------------------------------------------------------------------------------- Additions to receivables from financial services (8,740) (15,761) (10,697) (7,880) (15,755) (10,718) - --------------------------------------------------------------------------------------------------------------- Repayments of receivables from financial services 5,697 10,273 7,572 5,778 10,273 7,572 - --------------------------------------------------------------------------------------------------------------- Change in other cash 744 1,342 (260) 1,242 24 9 - --------------------------------------------------------------------------------------------------------------- CASH USED FOR INVESTING ACTIVITIES (9,203) (16,595) (12,154) (10,742) (9,237) (5,964) - --------------------------------------------------------------------------------------------------------------- Change in commercial paper borrowings and short-term financial liabilities 1,330 2,399 4,915 2,932 2,208 2,221 - --------------------------------------------------------------------------------------------------------------- Additions to long-term financial liabilities 4,199 7,572 2,678 1,521 6,668 4,322 - --------------------------------------------------------------------------------------------------------------- Repayment of financial liabilities (1,254) (2,262) (5,675) (1,687) (2,013) (2,838) - --------------------------------------------------------------------------------------------------------------- Dividends paid (Financial Services: including profit transferred from subsidiaries) (321) (579) (10) (580) (240) (362) - --------------------------------------------------------------------------------------------------------------- Proceeds from capital increases 111 201 294 97 344 486 - --------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY FINANCING ACTIVITIES 4,065 7,331 2,202 2,283 6,967 3,829 - --------------------------------------------------------------------------------------------------------------- Effect of foreign exchange rate changes on cash and cash equivalents up to 3 months 163 293 101 (143) 7 4 - --------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents up to 3 months 1,259 2,271 352 (3,147) 418 (160) - --------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS (UP TO 3 MONTHS): - --------------------------------------------------------------------------------------------------------------- AT BEGINNING OF PERIOD 1,786 3,220 2,868 6,015 262 422 - --------------------------------------------------------------------------------------------------------------- AT END OF PERIOD 3,045 5,491 3,220 2,868 680 262 - --------------------------------------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-46 DAIMLER-BENZ AG CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN MILLIONS OF DM, EXCEPT PER SHARE AMOUNTS) OTHER EQUITY -------------------------- ADDITIONAL CUMULATIVE AVAILABLE- CAPITAL PAID-IN RETAINED TRANSLATION FOR-SALE STOCK CAPITAL EARNINGS ADJUSTMENT SECURITIES - ---------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1995 2,565 4,904 22,564 (590) (8) Dividends paid (DM 1.08 per share) -- -- (564) -- -- Net loss -- -- (5,729) -- -- Issuance of capital stock 3 44 -- -- -- Currency translation -- -- -- (449) -- Unrealized gain on available-for-sale securities -- -- -- -- 120 - ---------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 2,568 4,948 16,271 (1,039) 112 - ---------------------------------------------------------------------------------------------------------------------------- Net income -- -- 2,762 -- -- Issuance of capital stock 9 132 -- -- -- Currency translation -- -- -- 523 -- Unrealized gain on available-for-sale securities -- -- -- -- 107 - ---------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 2,577 5,080 19,033 (516) 219 - ---------------------------------------------------------------------------------------------------------------------------- Dividends paid (DM 1.08 per share) -- -- (567) -- -- Net income -- -- 8,042 -- -- Issuance of capital stock 7 167 -- -- -- Currency translation -- -- -- 752 -- Unrealized gain on available-for-sale securities -- -- -- -- 291 - ---------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 2,584 5,247 26,508 236 510 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL - --------------------------------------------------------- BALANCE AT JANUARY 1, 1995 29,435 Dividends paid (DM 1.08 per share) (564) Net loss (5,729) Issuance of capital stock 47 Currency translation (449) Unrealized gain on available-for-sale securities 120 - --------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 22,860 - --------------------------------------------------------- Net income 2,762 Issuance of capital stock 141 Currency translation 523 Unrealized gain on available-for-sale securities 107 - --------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 26,393 - --------------------------------------------------------- Dividends paid (DM 1.08 per share) (567) Net income 8,042 Issuance of capital stock 174 Currency translation 752 Unrealized gain on available-for-sale securities 291 - --------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 35,085 - --------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-47 DAIMLER-BENZ AG CONSOLIDATED FIXED ASSETS SCHEDULE (IN MILLIONS OF DM) ACQUISITION OR MANUFACTURING COSTS -------------------------------------------------------------------------------- BALANCE AT ACQUISITIONS/ JANUARY 1, CURRENCY DISPOSALS OF RECLASSI- 1997 CHANGE BUSINESSES ADDITIONS FICATIONS DISPOSALS - -------------------------------------------------------------------------------------------------------------------------------- Other intangible assets 899 25 7 247 11 153 Goodwill 2,328 25 (281) 397 ' 58 - -------------------------------------------------------------------------------------------------------------------------------- INTANGIBLE ASSETS 3,227 50 (274) 644 11 211 - -------------------------------------------------------------------------------------------------------------------------------- Land, leasehold improvements and buildings including buildings on land owned by others 20,960 187 44 972 804 516 Technical equipment and machinery 25,535 99 159 2,331 1,097 1,660 Other equipment, factory and office equipment 15,625 137 (15) 1,888 300 1,495 Advance payments relating to plant and equipment and construction in progress 3,111 108 (4) 2,081 (2,220) 152 - -------------------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT 65,231 531 184 7,272 (19) 3,823 - -------------------------------------------------------------------------------------------------------------------------------- Investments in affiliated companies 898 4 (16) 311 (7) 381 Loans to associated and affiliated companies 23 . 0 138 1 160 Investments in associated companies 1,319 2 22 48 0 1,134 Investments in related companies 1,037 26 2 466 7 154 Loans to associated and related companies 180 0 ' 1 ' 81 Long-term securities 752 3 ' 384 0 116 Other loans 730 1 ' 125 ' 124 - -------------------------------------------------------------------------------------------------------------------------------- INVESTMENTS AND LONG-TERM FINANCIAL ASSETS 4,939 36 8 1,473 1 2,150 - -------------------------------------------------------------------------------------------------------------------------------- 73,397 617 (82) 9,389 (7) 6,184 - -------------------------------------------------------------------------------------------------------------------------------- LEASED EQUIPMENT(2) 15,201 1,560 5 7,608 7 5,426 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 - ---------------------------------------------- Other intangible assets 1,036 Goodwill 2,411 - ---------------------------------------------- INTANGIBLE ASSETS 3,447 - ---------------------------------------------- Land, leasehold improvements and buildings including buildings on land owned by others 22,451 Technical equipment and machinery 27,561 Other equipment, factory and office equipment 16,440 Advance payments relating to plant and equipment and construction in progress 2,924 - ---------------------------------------------- PROPERTY, PLANT AND EQUIPMENT 69,376 - ---------------------------------------------- Investments in affiliated companies 809 Loans to associated and affiliated companies 2 Investments in associated companies 257 Investments in related companies 1,384 Loans to associated and related companies 100 Long-term securities 1,023 Other loans 732 - ---------------------------------------------- INVESTMENTS AND LONG-TERM FINANCIAL ASSETS 4,307 - ---------------------------------------------- 77,130 - ---------------------------------------------- LEASED EQUIPMENT(2) 18,955 - ---------------------------------------------- (1) Currency translation changes with period end rates. (2) Excluding initial direct costs. See Note 8. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-48 DAIMLER-BENZ AG CONSOLIDATED FIXED ASSETS SCHEDULE (CONTINUED) (IN MILLIONS OF DM) DEPRECIATION/AMORTIZATION BOOK VALUE(1) - --------------------------------------------------------------------------------------------------- ---------------------------- BALANCE AT ACQUISITIONS/ BALANCE AT BALANCE AT BALANCE AT JANUARY 1, CURRENCY DISPOSALS OF RECLASSI- DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 CHANGE BUSINESSES ADDITIONS FICATIONS DISPOSALS 1997 1997 1996 - --------------------------------------------------------------------------------------------------- ---------------------------- 560 12 7 160 8 80 667 369 339 716 8 (125) 299 ' 33 865 1,546 1,612 - --------------------------------------------------------------------------------------------------- ---------------------------- 1,276 20 (118) 459 8 113 1,532 1,915 1,951 - --------------------------------------------------------------------------------------------------- ---------------------------- 12,407 61 30 780 (47) 270 12,961 9,490 8,553 21,591 48 144 2,104 38 1,578 22,347 5,214 3,944 13,000 86 (9) 1,698 (5) 1,360 13,410 3,030 2,625 8 ' 0 2 (1) 7 2 2,922 3,103 - --------------------------------------------------------------------------------------------------- ---------------------------- 47,006 195 165 4,584 (15) 3,215 48,720 20,656 18,225 - --------------------------------------------------------------------------------------------------- ---------------------------- 186 1 0 29 0 54 162 647 712 2 ' 0 4 . 6 ' 2 21 602 ' 0 15 ' 617 ' 257 717 395 1 2 104 0 5 497 887 642 74 0 ' ' ' 2 72 28 106 11 ' ' 0 0 6 5 1,018 741 133 (1) 0 3 ' 17 118 614 597 - --------------------------------------------------------------------------------------------------- ---------------------------- 1,403 1 2 155 ' 707 854 3,453 3,536 - --------------------------------------------------------------------------------------------------- ---------------------------- 49,685 216 49 5,198 (7) 4,035 51,106 26,024 23,712 - --------------------------------------------------------------------------------------------------- ---------------------------- 3,378 445 ' 2,323 7 1,976 4,177 14,778 11,823 - --------------------------------------------------------------------------------------------------- ---------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-49 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) BASIS OF PRESENTATION 1. SUMMARY OF ACCOUNTING POLICIES GENERAL -- The consolidated financial statements of Daimler-Benz Aktiengesellschaft and subsidiaries ("Daimler-Benz" or the "Group") have been prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP"), except that the Group has accounted for certain joint ventures in accordance with the proportionate method of consolidation (see Note 2). All amounts herein are shown in millions of Deutsche Marks ("DM" or "marks") and for the year 1997 are also presented in U.S. dollars ("dollars" or "$"), the latter being unaudited and presented solely for the convenience of the reader at the rate of DM 1.8033, the Noon Buying Rate of the Federal Reserve Bank of New York on June 30, 1998. Certain prior year amounts have been reclassified to conform to the 1997 presentation. Liabilities to affiliated companies and liabilities from capital lease and residual value guarantees have been reclassified to financial liabilities in the consolidated balance sheets. The consolidated statements of income have been reclassified to better conform to the Fourth and Seventh Directives of the European Community and in anticipation of the changes in German legal reporting requirements (KAPITALAUFNAHMEERLEICHTERUNGSGESETZ). These changes had no impact on reported results of operations or stockholders' equity. Commercial practices with respect to certain of the products manufactured by Daimler-Benz necessitate that sales financing, including leasing alternatives, be made available to the Group's customers. Accordingly, the Group's consolidated financial statements are significantly influenced by activities of a number of "captive" financing entities. To enhance the readers' understanding of the Group's consolidated financial statements, the accompanying financial statements present, in addition to the consolidated financial statements, information with respect to the financial position, results of operations and cash flows of the Group's 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 financial services business activities. Amounts with respect to the financial services business are presented prior to intercompany eliminations of transactions with other Group companies. CONSOLIDATION -- All material companies in which Daimler-Benz has legal or effective control are consolidated. Significant investments in which Daimler-Benz has an ownership interest in the range of 20% to 50% ("associated companies") are generally included using the equity method of accounting. For certain investments in joint ventures, Daimler-Benz uses the proportionate method of consolidation (see Note 2). Other investments are accounted for at cost ("affiliated companies"). The Group accounts for its business combinations under the purchase accounting method. As such, all assets acquired and liabilities assumed are recorded at fair value. An excess of the purchase price over the fair value of net assets acquired is capitalized as goodwill and amortized over the estimated period of benefit on a straight-line basis. The effects of intercompany transactions have been eliminated. FOREIGN CURRENCIES -- Currency translation is based upon the Statement of Financial Accounting Standards (SFAS) 52 "Foreign Currency Translation," whereby the assets and liabilities of foreign subsidiaries where the functional currency is the local currency are generally translated using period end exchange rates while the income statements are translated using average exchange rates during the period. F-50 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) Differences arising from the translation of assets and liabilities in comparison with the translation of the previous periods are included as a separate component of stockholders' equity. The assets and liabilities of foreign subsidiaries operating in highly inflationary economies are remeasured into DM 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 being recognized in income. Further, in such economies, depreciation and gains and losses from the disposal of non-monetary assets are determined using historical rates. The exchange rates of the more important currencies used in preparation of the consolidated financial statements were as follows: EXCHANGE RATE(1) AT ANNUAL AVERAGE EXCHANGE RATE DECEMBER 31, DECEMBER 31, 1997 1996 1997 1996 1995 CURRENCY: DM DM DM DM DM - ------------------------------------------------------------------------------------------------------------------- Brazil 1 BRL 1.61 1.49 1.61 1.50 1.56 - ------------------------------------------------------------------------------------------------------------------- France 1FRF 0.30 0.30 0.30 0.29 0.29 - ------------------------------------------------------------------------------------------------------------------- Great Britain 1 GBP 2.98 2.63 2.84 2.35 2.26 - ------------------------------------------------------------------------------------------------------------------- Italy 1000 ITL 1.02 1.02 1.02 0.98 0.88 - ------------------------------------------------------------------------------------------------------------------- Japan 100 JPY 1.38 1.34 1.44 1.38 1.53 - ------------------------------------------------------------------------------------------------------------------- Spain 100 ESP 1.18 1.19 1.18 1.18 1.15 - ------------------------------------------------------------------------------------------------------------------- USA 1 USD 1.79 1.55 1.73 1.50 1.43 - ------------------------------------------------------------------------------------------------------------------- (1) Official rates fixed at the Frankfurt Currency Exchange. REVENUE RECOGNITION -- Revenue is recognized when title passes or services are rendered net of discounts, customer bonuses and rebates granted. Revenue on long-term contracts is generally recognized under the percentage-of-completion method based upon contractual milestones or performance. Revenue from finance receivables is recorded on the interest method. Operating lease income is recorded when earned. Revenues also include proceeds from the sale of leased equipment. PRODUCT-RELATED EXPENSES -- Expenditures for advertising and sales promotion and for other sales-related expenses are charged to expense as incurred. Provisions for estimated costs related to product warranty are made at the time the products are sold. Research and development costs are expensed as incurred. EARNINGS PER SHARE -- Effective December 31, 1997, the Company adopted SFAS 128 "Earnings per Share". Accordingly, basic and diluted earnings (loss) per share for each year presented have been determined in accordance with the provisions of SFAS 128. Basic earnings (loss) per share has been calculated by dividing net income (loss) by the weighted average number of shares outstanding. Diluted earnings (loss) per share reflects the potential dilution that would occur if all securities and other contracts to issue common stock were exercised or converted (see Note 25). Net income (loss) represents the earnings (loss) of the Group after minority interests. INTANGIBLE ASSETS -- Purchased intangible assets are valued at acquisition cost and are amortized over their respective useful lives (3 to 10 years). Goodwill derived from acquisitions is capitalized and amortized over 3 to 20 years. The Group periodically assesses the recoverability of its goodwill based upon projected future cash flows. F-51 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is valued at acquisition or manufacturing costs less accumulated depreciation. Depreciation expense is recognized using the declining balance method until the straight-line method yields larger expenses. Depreciation expense based exclusively on fiscal (tax) regulations is not recognized. The costs of internally produced equipment and facilities includes 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 -- 17 to 50 years; site improvements -- 8 to 20 years; technical equipment and machinery -- 3 to 20 years; and other equipment, factory and office equipment -- 2 to 10 years. LEASING -- The Group is a lessee of property, plant and equipment and lessor of equipment, principally passenger cars and commercial vehicles. All leases that meet certain specified criteria 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. Equipment on operating lease, where the Group is lessor, is valued at acquisition cost and generally depreciated over the assets' useful lives, generally three to seven years, using the straight-line method. CURRENT ASSETS -- Current assets represent the Group's inventories, receivables, securities and cash, including amounts due in excess of one year. MARKETABLE SECURITIES AND INVESTMENTS -- Securities are accounted for at fair values, if readily determinable. Unrealized gains and losses on trading securities, that is, securities bought principally for the purposes of selling them in the near term, are included in income. Unrealized gains and losses on available-for-sale securities are included in stockholders' equity, net of applicable deferred income 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. INVENTORIES -- Inventory is 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. businesses' 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. FINANCIAL INSTRUMENTS -- Daimler-Benz uses derivative financial instruments for hedging purposes. Financial instruments, including derivatives (especially currency futures and currency options, security options, interest and currency swaps), which are not designated as hedges of specific assets, liabilities, or firm commitments are marked to market and any resulting unrealized gains or losses are recognized in income. If there is a direct connection between a derivative financial instrument and an underlying transaction and a derivative is so designated, a valuation unit is formed. Once allocated, gains and losses from these valuation units, which are used to manage interest rate and currency risks of identifiable assets, liabilities, or firm commitments, do not affect income until the underlying transaction is realized (see Note 23 d). ACCRUED LIABILITIES -- The valuation of pension liabilities is based upon the projected unit credit method in accordance with SFAS 87 "Employers' Accounting for Pensions." An accrued liability for taxes and other contingencies is recorded when an obligation to a third party has been incurred, the payment is probable and the amount can be reasonably estimated. In determining other accrued liabilities -- including warranties, contract costs and estimated future losses on open contracts -- all applicable costs F-52 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) are taken into consideration including price increases. The effects of accrued liabilities relating to personnel and social costs are valued at their net present value where appropriate. USE OF ESTIMATES -- The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent amounts at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ACCOUNTING PRONOUNCEMENTS NOT YET APPLIED -- In June 1997, the Financial Accounting Standards Board issued SFAS 130 "Reporting Comprehensive Income" which is effective for fiscal years beginning after December 15, 1997. SFAS 130 requires that changes in the amounts of certain items, including foreign currency translation adjustments and gains and losses on certain securities be shown in the financial statements. SFAS 130 does not require a specific format for the financial statement in which comprehensive income is reported, but does require that an amount representing total comprehensive income be reported in that statement. Also in June 1997, the Financial Accounting Standards Board issued SFAS 131 "Disclosures about Segments of an Enterprise and Related Information" which is effective for fiscal years beginning after December 15, 1997. The Statement provides guidance in the reporting of information about segments of an entity's business in annual and interim financial statements and also requires entity-wide disclosures about products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. The Company is in the process of determining the impact of SFAS 131 on its reported segments. In February 1998, the Financial Accounting Standards Board issued SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS 132 amends the disclosure requirements of SFAS 87, SFAS 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pensions Plans and for Termination Benefits," and SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS 132 standardizes the disclosure requirements of SFAS 87 and SFAS 106 to the extent practicable and recommends a parallel format for presenting information about pensions and other postretirement benefits. The Group will adopt the provisions of SFAS 132 in its 1998 consolidated financial statements. 2. SCOPE OF CONSOLIDATION SCOPE OF CONSOLIDATION -- Daimler-Benz comprises 300 foreign and domestic subsidiaries (1996: 297) and 92 joint ventures (1996: 82); the latter are generally accounted for on a pro rata basis. 12 subsidiaries are accounted for in the consolidated financial statements using the equity method of accounting. During 1997, 44 subsidiaries and 15 joint ventures were included in the consolidated financial statements for the first time. A total of 41 subsidiaries and 5 joint ventures left the consolidated group. Significant effects of changes in the consolidated group on the consolidated balance sheets and the consolidated statements of income are explained further in the notes to the consolidated financial statements. A total of 285 subsidiaries (1996: 315) are not consolidated as their combined influence on the financial position, results of operations, and cash flows of the Group is not material. The effect of such non-consolidated subsidiaries on the 1997 consolidated assets, revenues and net earnings of Daimler-Benz was less than 2%. In addition, 6 (1996: 10) companies administering pension funds whose assets are subject to restrictions have not been included in the consolidated financial statements. The consolidated financial statements include 122 F-53 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) associated companies. At December 31, 1997, 11 associated companies are accounted for in the consolidated financial statements using the equity method of accounting. The remaining associated companies are recorded under investments in related companies in as much as these companies are not material for the respective presentation of the financial position, results of operations and cash flows of the Group. INVESTMENT IN ADTRANZ -- In December 1995, the Group and Asea Brown Boveri Ltd. ("ABB") completed formation of a joint venture of their rail systems businesses to be known as Adtranz. As part of the formation of Adtranz, the Group and ABB entered into an option agreement whereby, for certain periods during 1998 through 2005, the Group has the right (call option) to purchase ABB's 50% interest in Adtranz for U.S. $1,800 plus a premium calculated on the basis of Adtranz' meeting or exceeding certain future earnings thresholds. In addition, for certain periods during 1998 through 2005, ABB has the right (put option) to require the Group to purchase ABB's 50% interest in Adtranz at prices calculated in accordance with the same criteria except that the price for the put option is lower than the price for the call option assuming the same future earnings. Since January 1, 1996 the Group accounts for its investment in Adtranz, including its 63 (1997: 71) subsidiaries, using the proportionate method of consolidation. Accordingly, Daimler-Benz reports its 50% interest of the assets and liabilities, revenues and expenses and cash flows in Adtranz. The Group believes that such method of financial statement presentation, which is permitted by the regulations of the Seventh Directive of the European Community and the Standards of the International Accounting Standards Committee, better illustrates its consolidated financial position, results of operations and cash flows to the reader of the Group's consolidated financial statements. Under U.S. GAAP, Daimler-Benz' investment in Adtranz is required to be accounted for using the equity method of accounting. The differences in accounting treatment between the proportionate and equity methods would not affect reported stockholders' equity or net income of Daimler-Benz. Under the equity method of accounting, Daimler-Benz' net investment in Adtranz would be included within investments in the balance sheet and its share of the net income or loss of Adtranz together with the amortization of the excess of the cost of its investment over its share of the investment's net assets would be reported as a net amount in financial income, net in the Group's statement of income. Additionally, Adtranz would have an impact on the Group's reported cash flows only to the extent the Group received cash dividends. For purposes of its United States financial reporting obligation, Daimler-Benz has requested and received permission from the United States Securities and Exchange Commission ("SEC") to prepare its consolidated financial statements with this departure from U.S. GAAP. F-54 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) Summarized consolidated financial information of Adtranz follows. The amounts represent those used in the Daimler-Benz consolidation, including goodwill resulting from the formation of Adtranz. Other companies included in the consolidation according to the proportionate method are not material. AT BALANCE SHEET INFORMATION DECEMBER 31, 1997 1996 - --------------------------------------------------------------------------------------------------- Fixed assets(1) 1,581 1,766 - --------------------------------------------------------------------------------------------------- Current assets 1,840 1,429 - --------------------------------------------------------------------------------------------------- Total assets 3,421 3,195 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- Stockholders' equity 1,393 1,374 - --------------------------------------------------------------------------------------------------- Minority interest 12 13 - --------------------------------------------------------------------------------------------------- Accrued liabilities 970 886 - --------------------------------------------------------------------------------------------------- Liabilities 1,046 922 - --------------------------------------------------------------------------------------------------- Stockholders' equity and liabilities 3,421 3,195 - --------------------------------------------------------------------------------------------------- (1) Includes net goodwill resulting from the formation of Adtranz of DM 850 and 1,039 in 1997 and 1996, respectively. YEAR ENDED DECEMBER STATEMENT OF OPERATIONS INFORMATION 1997 31, 1996 - --------------------------------------------------------------------------------------------------- Revenues 3,190 2,835 - --------------------------------------------------------------------------------------------------- Operating loss(1) (330) (16) - --------------------------------------------------------------------------------------------------- Net loss (302) (95) - --------------------------------------------------------------------------------------------------- (1) The operating loss for 1997 includes an impairment charge on goodwill (DM 120); includes interest on advance payments received on long-term contracts (1997: DM 111; 1996: DM 122). F-55 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) CASH FLOW INFORMATION YEAR ENDED DECEMBER 31, 1997 1996 - ----------------------------------------------------------------------------------------------------- Cash flow from: - -- Operating activities 141 (452) - ----------------------------------------------------------------------------------------------------- - -- Investing activities (24) 125 - ----------------------------------------------------------------------------------------------------- - -- Financing activities (98) 81 - ----------------------------------------------------------------------------------------------------- Effect of foreign exchange on cash . 7 - ----------------------------------------------------------------------------------------------------- Change in cash (up to 3 months) 19 (239) - ----------------------------------------------------------------------------------------------------- Cash (up to 3 months) at beginning of period 285 524 - ----------------------------------------------------------------------------------------------------- Cash (up to 3 months) at end of period 304 285 - ----------------------------------------------------------------------------------------------------- Cash up to 3 months includes DM 99 (1996: DM 116) held by Daimler-Benz AG in connection with internal cash concentration procedures. 3. BUSINESS REORGANIZATION MEASURES During 1995 and extending into 1996, the Group implemented certain measures designed to increase the Group's competitiveness and earnings. Such measures consisted principally of: (a) Beginning in 1995 and continuing in 1996, the Group spun off certain non-core businesses and other net assets of AEG Aktiengesellschaft ("AEG") into EHG Elektro Holding GmbH, closed the AEG corporate headquarters and merged AEG with Daimler-Benz AG. Thereafter the divestitures of the Energy Systems Technology and Automation Divisions were completed. In June 1996, the shareholders of AEG approved the merger of AEG with Daimler-Benz AG and in September 1996, effective January 1, 1996, such merger was formally registered in the commercial register. As part of the merger, the Group purchased the outstanding minority interest of AEG. In connection with the foregoing transactions, the Group recorded charges to 1996 operations of approximately DM 300 (1995: DM 1,600). (b) In January 1996, Daimler-Benz announced that, effective immediately, it would discontinue financial support for NV Koninklijke Nederlandse Vliegtuigenfabriek ("Fokker"), a Dutch aircraft manufacturer. Subsequent to the announcement Fokker requested and received, in accordance with Dutch law, protection from its creditors. In connection therewith, control of Fokker was placed with a third-party administrator. On March 15, 1996, Fokker formally filed for bankruptcy under the laws of The Netherlands. The Group recorded a charge in the 1995 statement of income of DM 2,158 for discontinuing such investment. During 1996 the Group realized gains of approximately DM 100 from the proceeds of sales of certain inventories in excess of the inventories' previously written-down value. (c) Beginning in 1994 and accelerating in 1995, the DM appreciated significantly against the U.S. dollar, the currency in which a significant percentage of Aerospace revenues are denominated. An appreciation of the DM relative to the U.S. dollar results in the Group receiving, when converted to DM, less revenue (and cash proceeds) from the sales of its products. In addition, Aerospace continued to suffer significant operating losses as a result of continued low levels of demand in the aircraft market and shrinking government budgets in the space and defense sectors. As a result of the foregoing the Group instituted comprehensive cost-cutting and restructuring measures, including personnel reductions of approximately 4,000 employees in Germany and the sale of three German production facilities. The Group recorded a charge of DM 878 in the 1995 statement of income to F-56 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) cover the cost of such measures. In addition, Daimler-Benz also recorded a charge of DM 2,558 in 1995 to write off goodwill relating to the acquisition of certain businesses included within Aerospace and to write down certain long-term assets. During 1996, the aerospace industry experienced a significant increase in demand. As a consequence, higher production requirements resulted, especially for Daimler-Benz Aerospace Airbus GmbH, in a reduction of the provision made in 1995 for restructuring measures by approximately DM 300. (d) During 1996, the Group contributed its Dornier aircraft business into a newly formed holding company 80% owned by Fairchild Industries Corporation, an American aircraft manufacturer. In connection therewith, the Group recorded charges in 1996 of approximately DM 435, of which a portion included the businesses' loss from operations up to the date of contribution. The Group is accounting for its 20% investment in the holding company using the equity method of accounting. In January 1997, Daimler-Benz sold its interests in AEG Electrocom GmbH and AEG ElectroCom International, Inc. (recognition and sorting systems) to Siemens AG resulting in a gain of DM 216. In July 1997, debis AG, a subsidiary of Daimler-Benz AG, terminated its strategic relationship with Cap Gemini Sogeti S.A. through the sale of its 24.4% interest resulting in a gain of DM 822. NOTES TO THE CONSOLIDATED STATEMENTS OF INCOME 4. FUNCTIONAL COSTS AND OTHER EXPENSES Cost of sales includes materials expenses as follows: YEAR ENDED DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Cost of raw materials, supplies, and resale products 58,245 51,028 48,440 - -------------------------------------------------------------------------------------------------- Cost of purchased services 12,263 9,844 11,770 - -------------------------------------------------------------------------------------------------- 70,508 60,872 60,210 - -------------------------------------------------------------------------------------------------- Selling, administrative and other expenses are comprised of the following: YEAR ENDED DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Selling expenses 11,867 10,401 10,507 - -------------------------------------------------------------------------------------------------- Administration expenses 3,567 3,345 3,494 - -------------------------------------------------------------------------------------------------- Expenses from reorganization of the Group -- 319 3,755 - -------------------------------------------------------------------------------------------------- Goodwill amortization and writedowns 299 142 1,999 - -------------------------------------------------------------------------------------------------- Other expenses 1,700 1,748 1,079 - -------------------------------------------------------------------------------------------------- 17,433 15,955 20,834 - -------------------------------------------------------------------------------------------------- Cost of sales and functional costs include other taxes of DM 198 (1996: DM 280; 1995: DM 241). Expenses arising in 1996 and 1995 from the reorganization of the Group relate exclusively to Fokker and the restructuring of the former AEG-DBI (see Note 3). Other expenses primarily include charges not allocated to cost of sales, selling expenses, and administration expenses. In addition, expenses amounting F-57 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) to DM 721 related to the repayment of development cost subsidies were recorded under other expenses in 1997 (see Note 22). Personnel expenses included in the statement of income are comprised of: YEAR ENDED DECEMBER 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------- Wages and salaries 24,021 22,064 24,265 - ---------------------------------------------------------------------------------------------- Social levies 4,530 4,003 4,493 - ---------------------------------------------------------------------------------------------- Pensions cost (see Note 17 a) 1,493 1,564 1,613 - ---------------------------------------------------------------------------------------------- Other expenses for pensions and retirements 157 178 201 - ---------------------------------------------------------------------------------------------- 30,201 27,809 30,572 - ---------------------------------------------------------------------------------------------- Number of employees (weighted annual average): YEAR ENDED DECEMBER 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------- Hourly employees 165,104 164,523 173,510 - ---------------------------------------------------------------------------------------------- Salaried employees 118,057 115,041 135,217 - ---------------------------------------------------------------------------------------------- Trainess/apprentices 12,353 11,704 12,495 - ---------------------------------------------------------------------------------------------- 295,514 291,268 321,222 - ---------------------------------------------------------------------------------------------- In 1997, 34,448 people (1996: 34,655 people; 1995: 12,365 people) were employed in joint venture companies. In 1997, the total remuneration paid by Group companies to the members of the Board of Management of Daimler-Benz AG amounted to DM 20, and the remuneration paid to the members of the Supervisory Board of Daimler-Benz AG totaled DM 2. Additionally, the board subscribed for convertible bonds within the 1997 Stock Option Plan at a notional amount of DM 1.2. To determine the fair value of the option rights of convertible bonds, option pricing models may be used. As such, the resulting fair values can fluctuate significantly based upon the underlying assumptions. Accordingly, generally uniform and consistent values are not available. See Note 16 in respect for the valuation of the option rights including the underlying assumptions and conditions of converting the option rights in accordance with SFAS 123 "Accounting for Stock-Based Compensation." Disbursements to former members of the Board of Management of Daimler-Benz AG and their survivors amounted to DM 18. An amount of DM 123 has been accrued in the financial statements of Daimler-Benz AG for pension obligations to former members of the Board of Management and their survivors. Beginning in 1997, Daimler-Benz AG also recognizes pension obligations in accordance with U.S. GAAP in its German Statutory Financial Statements. As of December 31, 1997, there existed no advances and loans to members of the Board of Management of Daimler-Benz AG. F-58 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) 5. FINANCIAL INCOME, NET YEAR ENDED DECEMBER 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Income from investments of which from affiliated companies DM 33 125 419 518 (1996: DM 39; 1995: DM 36) - --------------------------------------------------------------------------------------------------------------------- Gains (losses), net from disposals of investments and shares in affiliated and 897 (18) (4) associated companies - --------------------------------------------------------------------------------------------------------------------- Write-down of investments and shares in affiliated companies (148) (107) (121) - --------------------------------------------------------------------------------------------------------------------- Income (loss) from companies included at equity 68 (128) (665) - --------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENTS, NET 942 166 (272) - --------------------------------------------------------------------------------------------------------------------- Other interest and similar income of which from affiliated companies DM 20 (1996: DM 2,289 1,641 1,729 24; 1995 DM 5) - --------------------------------------------------------------------------------------------------------------------- Interest and similar expenses (971) (872) (1,184) - --------------------------------------------------------------------------------------------------------------------- INTEREST INCOME, NET 1,318 769 545 - --------------------------------------------------------------------------------------------------------------------- Income from securities and long-term receivables 31 17 65 - --------------------------------------------------------------------------------------------------------------------- Gains from sales of securities 166 111 246 - --------------------------------------------------------------------------------------------------------------------- Write-down of securities and long-term receivables (19) (6) (130) - --------------------------------------------------------------------------------------------------------------------- Realized and unrealized gains (losses) on financial instruments (1,723) (763) 286 - --------------------------------------------------------------------------------------------------------------------- Other, net (97) 202 189 - --------------------------------------------------------------------------------------------------------------------- OTHER FINANCIAL INCOME (LOSS), NET (1,642) (439) 656 - --------------------------------------------------------------------------------------------------------------------- 618 496 929 - --------------------------------------------------------------------------------------------------------------------- The Group capitalized interest expenses related to qualifying construction projects of DM 69 (1996: DM 49; 1995: DM 29). F-59 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) 6. INCOME TAXES Income (loss) before income taxes and minority shares amounted to DM 4,249 (1996: DM 1,961; 1995: DM (7,233)), of which DM 2,936 was generated by the Group's operations in Germany (1996: DM 1,200; 1995: DM (6,874)). The provisions for income taxes (credit) follow: YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------- Current taxes: - ------------------------------------------------------------------------------------------------- Germany (2,881) 404 231 - ------------------------------------------------------------------------------------------------- Foreign 686 456 715 - ------------------------------------------------------------------------------------------------- Deferred taxes: - ------------------------------------------------------------------------------------------------- Germany (1,780) (1,448) (2,258) - ------------------------------------------------------------------------------------------------- Foreign (7) (124) (308) - ------------------------------------------------------------------------------------------------- (3,982) (712) (1,620) - ------------------------------------------------------------------------------------------------- German corporate tax law applies a split-rate imputation with regard to the taxation of the income of a corporation and its shareholders. In accordance with the tax law in effect for fiscal 1997, retained corporate income is initially subject to a federal corporation tax of 45% plus a solidarity surcharge of 7.5% on the federal corporate tax payable. Including the impact of the surcharge, the federal corporate tax rate amounts to 48.375%. Upon distribution of retained earnings to stockholders, the corporate income tax rate on the earnings is adjusted to 30%, plus a solidarity surcharge of 7.5% on the distribution corporate tax, for a total of 32.25%, by means of a refund for taxes previously paid. Upon distribution of retained earnings in the form of a dividend, stockholders who are taxpayers in Germany are entitled to a tax credit in the amount of federal income taxes previously paid by the corporation. While the current taxes are calculated on the basis of the tax rate in effect for 1997, calculation of the deferred taxes is based on the rate in effect as of January 1, 1998. Effective January 1, 1998, the solidarity surcharge on the federal corporate tax payable is reduced from 7.5% to 5.5%. As a result, for German companies, the deferred taxes are calculated on an effective corporate income tax rate of 47.475% plus the after federal tax benefit rate for trade tax of 8.525%. Temporary differences at December 31, 1997 of the Group's German operations have been tax effected at the reduced rate. The effect of the tax rate reduction on year-end deferred tax balances is reflected in the reconciliation presented below. F-60 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) A reconciliation of income taxes determined using the German corporate tax rate of 48.375% plus the after federal tax benefit rate for trade taxes of 8.625% for a combined statutory rate of 57% is as follows: YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Expected provision (benefit) for income taxes 2,422 1,118 (4,123) - ------------------------------------------------------------------------------------------------ Change in tax rate for deferred taxes, domestic 133 -- -- - ------------------------------------------------------------------------------------------------ Credit for dividend distributions (3,176) (167) (6) - ------------------------------------------------------------------------------------------------ Foreign tax rate differential (73) (260) (218) - ------------------------------------------------------------------------------------------------ Non-deductible expenses 19 84 129 - ------------------------------------------------------------------------------------------------ Tax free income (36) (166) (227) - ------------------------------------------------------------------------------------------------ Release of valuation allowances on Group's German deferred tax assets as of December 31, 1997 (1,962) -- -- - ------------------------------------------------------------------------------------------------ Changes in valuation allowances on deferred tax assets (909) (1,043) 1,381 - ------------------------------------------------------------------------------------------------ Losses for which benefits were not recognizable -- -- 260 - ------------------------------------------------------------------------------------------------ Write-downs of investments for which benefits were not previously recognized (469) (207) -- - ------------------------------------------------------------------------------------------------ Write-off of goodwill, not tax-deductible 107 57 1,143 - ------------------------------------------------------------------------------------------------ Other (38) (128) 41 - ------------------------------------------------------------------------------------------------ Actual benefit for income taxes (3,982) (712) (1,620) - ------------------------------------------------------------------------------------------------ The 1997 income tax credit from dividend distributions amounts to DM 3,176 and reflects primarily a tax benefit of DM 2,908 from the special distribution of DM 20 per Ordinary Share/ADS. This benefit results from the refund for taxes previously paid on undistributed profits at a rate of 50% in excess of the effective tax rate of 30% on distributed profits. In 1997, the Group's consolidated valuation allowances decreased by DM 2,855. Of this amount, a reduction of DM 2,871 applied to domestic operations and a slight increase of DM 16 to foreign operations which is included in the foreign tax rate differential. The decrease in the consolidated domestic valuation allowances is due in part to DM 909 utilization of tax loss carryforwards during 1997. Additionally, DM 1,962 is due to the reversal of the remaining valuation allowances as of December 31, 1997 for the German companies which are included in the filing of a combined tax return ("Organschaft") on the basis that the current and the expected results of operations support a conclusion that it is more likely than not that the deferred tax assets will be realized. The valuation allowances which remain at December 31, 1997 apply primarily to the Group's foreign operations. During 1997 the Group sold its investment in Cap Gemini Sogeti S.A. and realized a gain of DM 822 in its consolidated financial statements which was not taxable since write-downs were previously not recognized for tax purposes. During 1996 the Group's consolidated valuation allowances decreased by DM 1,052. In 1996 the Group realized income tax benefits from the utilization of loss carryforwards of DM 673 relating to entities in the Aerospace division. The tax benefits of such loss carryforwards had been fully reserved as of December 31, 1995 since the entities had a history of operating losses prior to 1996 and such losses were limited as to their use. Tax benefits recognized from other changes to the valuation allowances in 1996 included the merger of the former AEG Aktiengesellschaft into Daimler-Benz AG during 1996, after which the German loss carryforwards of AEG Aktiengesellschaft could be utilized by the Group's German F-61 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) "Organschaft". Prior to the merger such net operating losses ("NOLs") were limited as to their use, and accordingly were fully reserved for in the amount of DM 231. In addition, during 1996 the Group realized tax benefits related to investments written down in previous years. During 1995 the Group was unable to recognize the tax benefits of DM 260 resulting from losses incurred by Fokker, after the decision was made in January 1996 to discontinue financial support for that company. The amount of the Group's deferred tax valuation allowances is based upon management's belief that it is more likely than not that not all of the deferred tax assets will be realized. In future periods, depending upon the Group's 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. Deferred income tax assets and liabilities are summarized as follows: DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------------------------- Intangible assets 628 917 - ------------------------------------------------------------------------------------------------- Property, plant and equipment 946 889 - ------------------------------------------------------------------------------------------------- Equipment on operating leases 1,941 1,694 - ------------------------------------------------------------------------------------------------- Inventories 2,132 1,473 - ------------------------------------------------------------------------------------------------- Receivables 882 311 - ------------------------------------------------------------------------------------------------- Net operating loss and credit carryforwards 6,556 9,498 - ------------------------------------------------------------------------------------------------- Retirement plans 2,233 2,019 - ------------------------------------------------------------------------------------------------- Other accrued liabilities 2,374 1,178 - ------------------------------------------------------------------------------------------------- Liabilities 1,242 962 - ------------------------------------------------------------------------------------------------- Deferred income 435 311 - ------------------------------------------------------------------------------------------------- Other 413 459 - ------------------------------------------------------------------------------------------------- 19,782 19,711 - ------------------------------------------------------------------------------------------------- Valuation allowances (509) (3,364) - ------------------------------------------------------------------------------------------------- Deferred tax assets 19,273 16,347 - ------------------------------------------------------------------------------------------------- Property, plant and equipment 492 521 - ------------------------------------------------------------------------------------------------- Equipment on operating leases 2,608 2,016 - ------------------------------------------------------------------------------------------------- Financial assets 269 793 - ------------------------------------------------------------------------------------------------- Inventories 890 640 - ------------------------------------------------------------------------------------------------- Receivables 4,877 3,090 - ------------------------------------------------------------------------------------------------- Securities 389 222 - ------------------------------------------------------------------------------------------------- Other accrued liabilities 803 1,595 - ------------------------------------------------------------------------------------------------- Other 486 120 - ------------------------------------------------------------------------------------------------- Deferred tax liabilities 10,814 8,997 - ------------------------------------------------------------------------------------------------- Deferred tax assets, net 8,459 7,350 - ------------------------------------------------------------------------------------------------- F-62 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) At December 31, 1997, the Group had net operating losses ("NOLs") and corporate tax credit carryforwards amounting to DM 11,918 (1996: DM 16,551). The majority of the NOLs relate to the German group of companies which are included in the "Organschaft" and have an unlimited carryforward period under German tax law. The remainder of the NOLs relate to losses of domestic and foreign non- "Organschaft" companies and are partly limited in their use to the Group. Net deferred income tax assets and liabilities in the consolidated balance sheets are as follows: DECEMBER 31, 1997 DECEMBER 31, 1996 ---------------------- ---------------------- THEREOF THEREOF TOTAL NON-CURRENT TOTAL NON-CURRENT - ------------------------------------------------------------------------------------------------ Deferred tax assets 10,462 8,242 9,603 7,913 - ------------------------------------------------------------------------------------------------ Deferred tax liabilities (2,003) (1,710) (2,253) (1,519) - ------------------------------------------------------------------------------------------------ 8,459 6,532 7,350 6,394 - ------------------------------------------------------------------------------------------------ Deferred tax liabilities of DM 4,064 (1996: DM 2,527) have not been recognized on unremitted earnings of non-German subsidiaries intended to be indefinitely reinvested. Determination of the amount of unrecognized deferred tax liabilities is not practicable. NOTES TO CONSOLIDATED BALANCE SHEETS 7. INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT, NET Information with respect to changes to the Group's intangible assets and property, plant and equipment is presented in the Consolidated Fixed Assets Schedule included herein. Intangible assets represent principally the goodwill from the formation of Adtranz. Property, plant and equipment include buildings, technical equipment and other equipment capitalized under capital lease agreements of DM 735 (1996: DM 498). Depreciation expense on assets under capital lease arrangements was DM 57 (1996: DM 86; 1995: DM 121). 8. EQUIPMENT ON OPERATING LEASES, NET Information with respect to changes to the Group's equipment on operating leases is presented in the Consolidated Fixed Assets Schedule included herein. Of the total equipment on operating leases, DM 14,318 represent automobiles and commercial vehicles (1996: DM 11,402). The amount for equipment on operating leases includes initial direct costs of contracts of DM 153 (1996: DM 118). Noncancellable future lease payments due from customers for equipment on operating leases at December 31, 1997 amounted to DM 8,451 and are due as follows: 1998 3,331 - -------------------------------------------------------------------------------- 1999 2,516 - -------------------------------------------------------------------------------- 2000 1,619 - -------------------------------------------------------------------------------- 2001 517 - -------------------------------------------------------------------------------- 2002 175 - -------------------------------------------------------------------------------- thereafter 293 - -------------------------------------------------------------------------------- F-63 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) 9. INVENTORIES AT DECEMBER 31, 1997 1996 - ---------------------------------------------------------------------------------------------- Raw materials and manufacturing supplies 3,233 2,960 - ---------------------------------------------------------------------------------------------- Work in process 6,515 6,883 thereof relating to long-term contracts and programs in process DM 1,378 (1996: DM 1,485) - ---------------------------------------------------------------------------------------------- Finished goods, parts and products held for resale 8,978 7,989 - ---------------------------------------------------------------------------------------------- Advance payments to suppliers 659 734 - ---------------------------------------------------------------------------------------------- 19,385 18,566 - ---------------------------------------------------------------------------------------------- Less: Advance payments received thereof relating to long-term contracts and programs in process DM 1,505 (1996: DM 582) (4,995) (4,964) - ---------------------------------------------------------------------------------------------- 14,390 13,602 - ---------------------------------------------------------------------------------------------- Certain of the Group's U.S. businesses' inventories are valued using the last-in, first-out method. If the FIFO method had been used instead of the LIFO method, inventories would have been higher by DM 325 (1996: DM 299). 10. TRADE RECEIVABLES AT DECEMBER 31, 1997 1996 - ----------------------------------------------------------------------------------------------- Receivables from sales of goods and services 13,042 11,971 - ----------------------------------------------------------------------------------------------- Long-term contracts and programs, unbilled, net of advance payments received 476 305 - ----------------------------------------------------------------------------------------------- 13,518 12,276 - ----------------------------------------------------------------------------------------------- Allowance for doubtful accounts (1,512) (1,412) - ----------------------------------------------------------------------------------------------- 12,006 10,864 - ----------------------------------------------------------------------------------------------- As of December 31, 1997, DM 852 of the total financing receivables mature after more than one year (1996: DM 483). F-64 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) 11. RECEIVABLES FROM FINANCIAL SERVICES AT DECEMBER 31, 1997 1996 - ----------------------------------------------------------------------------------------------- Receivables from: Sales financing 20,659 14,550 Finance leases 9,808 7,542 - ----------------------------------------------------------------------------------------------- 30,467 22,092 - ----------------------------------------------------------------------------------------------- Initial direct costs 167 98 - ----------------------------------------------------------------------------------------------- Unearned income (4,316) (2,908) - ----------------------------------------------------------------------------------------------- Unguaranteed residual value of leased assets 80 105 - ----------------------------------------------------------------------------------------------- 26,398 19,387 - ----------------------------------------------------------------------------------------------- Allowance for doubtful accounts (474) (335) - ----------------------------------------------------------------------------------------------- 25,924 19,052 - ----------------------------------------------------------------------------------------------- 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 maturing in each of the years following December 31, 1997 are as follows: 1998 12,046 - ------------------------------------------------------------------------------ 1999 7,368 - ------------------------------------------------------------------------------ 2000 5,535 - ------------------------------------------------------------------------------ 2001 2,989 - ------------------------------------------------------------------------------ 2002 1,549 - ------------------------------------------------------------------------------ thereafter 980 - ------------------------------------------------------------------------------ 30,467 - ------------------------------------------------------------------------------ As of December 31, 1997, DM 15,226 of the total financing receivables mature after more than one year (1996: DM 11,098). 12. OTHER RECEIVABLES AT DECEMBER 31, 1997 1996 - ----------------------------------------------------------------------------------------------- Receivables from affiliated companies 733 1,787 - ----------------------------------------------------------------------------------------------- Receivables from related companies(1) 1,385 908 - ----------------------------------------------------------------------------------------------- Other receivables and other assets 11,812 8,296 - ----------------------------------------------------------------------------------------------- 13,930 10,991 - ----------------------------------------------------------------------------------------------- Allowance for doubtful accounts (1,679) (2,032) - ----------------------------------------------------------------------------------------------- 12,251 8,959 - ----------------------------------------------------------------------------------------------- (1) Related companies include entities which have a significant ownership in Daimler-Benz or entities in which the Group holds a significant investment. F-65 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) As well as the tax reduction relating to the distribution of DM 1.60 per share, the tax reduction of approximately DM 2.9 billion relating to a special distribution of DM 20 per share is included in other receivables and other assets. As of December 31, 1997, DM 2,111 of the total other receivables mature after more than one year (1996: DM 1,904). 13. 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 current assets are comprised of the following: AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------------------------ Debt securities 3,229 1,827 - ------------------------------------------------------------------------------------------------ Equity securities 2,089 773 - ------------------------------------------------------------------------------------------------ Equity based funds 2,031 1,432 - ------------------------------------------------------------------------------------------------ Debt based funds 7,338 5,751 - ------------------------------------------------------------------------------------------------ 14,687 9,783 - ------------------------------------------------------------------------------------------------ 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: AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 ------------------------------------------ ---------------------------------------------- UNREALIZED UNREALIZED FAIR -------------------- FAIR ----------- COST VALUE GAIN LOSS COST VALUE GAIN LOSS - --------------------------------------------------------------------------------------------------------------------------------- Available-for-sale 11,631 12,285 654 -- 7,714 8,137 429 6 - --------------------------------------------------------------------------------------------------------------------------------- Trading 2,382 2,402 20 -- 1,618 1,646 30 2 - --------------------------------------------------------------------------------------------------------------------------------- Securities 14,013 14,687 674 -- 9,332 9,783 459 8 - --------------------------------------------------------------------------------------------------------------------------------- Investments and long-term financial assets available-for-sale 552 1,018 466 -- 667 741 80 6 - --------------------------------------------------------------------------------------------------------------------------------- 14,565 15,705 1,140 -- 9,999 10,524 539 14 - --------------------------------------------------------------------------------------------------------------------------------- F-66 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) Aggregate cost, fair values and gross unrealized holding gains or losses per security class are the following: AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 ------------------------------------------ ---------------------------------------------- UNREALIZED UNREALIZED FAIR -------------------- FAIR ----------- COST VALUE GAIN LOSS COST VALUE GAIN LOSS - --------------------------------------------------------------------------------------------------------------------------------- Equity securities 1,240 1,956 716 -- 1,410 1,545 147 12 - --------------------------------------------------------------------------------------------------------------------------------- Municipal securities 116 116 -- -- 93 94 1 -- - --------------------------------------------------------------------------------------------------------------------------------- Debt securities issued by foreign governments 804 804 -- -- 48 48 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Corporate securities 1,058 1,058 -- -- 8 8 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Equity based funds 1,631 2,031 400 -- 1,183 1,432 249 -- - --------------------------------------------------------------------------------------------------------------------------------- Debt based funds 7,334 7,338 4 -- 5,639 5,751 112 -- - --------------------------------------------------------------------------------------------------------------------------------- Available-for-sale 12,183 13,303 1,120 -- 8,381 8,878 509 12 - --------------------------------------------------------------------------------------------------------------------------------- Trading 2,382 2,402 20 -- 1,618 1,646 30 2 - --------------------------------------------------------------------------------------------------------------------------------- 14,565 15,705 1,140 -- 9,999 10,524 539 14 - --------------------------------------------------------------------------------------------------------------------------------- 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. AT DECEMBER 31, Available-for-sale: 1997 1996 - ---------------------------------------------------------------------------------------------------- Due within one year 1,373 47 - ---------------------------------------------------------------------------------------------------- Due after one year through five years 605 103 - ---------------------------------------------------------------------------------------------------- 1,978 150 - ---------------------------------------------------------------------------------------------------- Proceeds from sales of available-for-sale securities were DM 1,677 (1996: DM 1,126; 1995: DM 337). Gross realized gains from sales of available-for-sale securities on a specific identification basis were DM 180 (1996: DM 22; 1995: DM 6), while gross realized losses were DM 2 (1996: DM 6; 1995: DM 1). 14. CASH AND CASH EQUIVALENTS Cash and cash equivalents include DM 342 (1996: DM 1,337) of deposits with original maturities of more than three months. Cash and cash equivalents include DM 1,519 (1996: DM 174) of amounts on deposit with a related party. F-67 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) 15. ADDITIONAL CASH FLOW INFORMATION Liquid assets recorded under various balance sheet captions are as follows: AT DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Cash and cash equivalents available within 3 months 5,491 3,220 2,868 - -------------------------------------------------------------------------------------------------- Cash and cash equivalents which mature after 3 months 342 1,337 283 - -------------------------------------------------------------------------------------------------- Securities 14,687 9,783 9,025 - -------------------------------------------------------------------------------------------------- Other 657 505 124 - -------------------------------------------------------------------------------------------------- 21,177 14,845 12,300 - -------------------------------------------------------------------------------------------------- The following information with respect to cash flows are as follows: YEAR ENDED DECEMBER 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------- Interest paid 1,828 1,705 1,055 - --------------------------------------------------------------------------------------------------- Income taxes paid 1,189 553 570 - --------------------------------------------------------------------------------------------------- 16. STOCKHOLDERS' EQUITY At December 31, 1995, the Group had issued and outstanding 51,368,736 Ordinary Shares with a nominal (par) value of DM 50 per share. On May 22, 1996 the Group, upon the approval of its shareholders, reduced the nominal value of its Ordinary Shares from DM 50 per share to DM 5 per share effective July 1, 1996. This resulted in an increase in the number of Ordinary Shares outstanding from 51,368,736 shares to 513,687,360 shares. Per share information for the year 1995 has been adjusted to reflect per share amounts based upon a DM 5 per share nominal value. Due to the issuance of shares to employees and the conversion of options into shares the number of issued and outstanding Ordinary Shares increased to 516,748,337 as of December 31, 1997 (1996: 515,396,396). Daimler-Benz stockholders on June 26, 1991 authorized through June 30, 1996 the issuance of Ordinary Shares of up to DM 600 nominal value of which the remaining unutilized portion of DM 367 expired in 1996. On May 22, 1996, the stockholders approved the issuance of Ordinary Shares up to an aggregate amount of DM 500 nominal value through April 30, 2001. Through December 31, 1997, there was no utilization of the latter amount. At the annual general meeting held on May 18, 1994, Daimler-Benz was authorized by its stockholders to issue Ordinary Shares of DM 20 nominal value to employees of which DM 3 are unissued and expire on April 30, 1999. In 1997, 1996 and 1995, 1,250,000, 1,050,000 and 700,000 Ordinary Shares, respectively, were issued to employees leading to increases of capital stock and additional paid-in capital of DM 6, DM 6 and DM 3, and DM 159, DM 80 and DM 44, respectively. Subject to preemptive rights of existing stockholders, Daimler-Benz in the stockholders' meetings held on May 18, 1994 and May 22, 1996, has received the authority for future issuances of Ordinary Shares up to DM 300 in connection with convertible bonds and bonds with warrants. This authority, which limits the total nominal value of such convertible bonds and bonds with warrants to be issued to DM 2,000 and which expires on April 30, 1999, was used during 1996 for the issuance of convertible notes by Daimler-Benz Capital (Luxembourg) AG, a subsidiary of the Company. 4.125% convertible notes in the amount of DM F-68 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) 750 were issued with a nominal value of DM 1,000 each, including a total of 7,690,500 options which, on the basis of the option agreement, entitle the bearer of the option to subscribe for Ordinary Shares of Daimler-Benz AG. The option price per share is DM 95.07 in consideration of exchange of the notes or DM 98.65 in cash. Subject to excluded preemptive rights of the subordinated mandatory convertible notes described below, those prices were reduced DM .20 each beginning on May 14, 1997. During 1997, options for the subscription of 1,785 (1996: 36) newly issued shares have been exercised. Proceeds from issuance of the notes, net of expenses, were DM 711. In June 1997, the Company issued 5.75% subordinated mandatory convertible notes due June 14, 2002 with a nominal amount of DM 130.70 per note. These convertible notes represent a nominal amount of DM 993 including 7,600,000 notes which may be converted into 0.862 newly issuable shares before June 4, 2002. Notes not converted by this date will be mandatorily converted at a conversion rate between 0.862 and 1.25 Ordinary Shares per note to be determined on the basis of the average market price for the shares during the last 20 trading days before June 8, 2002. During 1997, 156 shares have been issued upon exercise. During May 1996, the stockholders of Daimler-Benz AG approved the 1996 Stock Option Plan for certain members of management. During May 1997, the stockholders approved the 1997 Stock Option Plan which extended to additional levels of management. In conjunction therewith in 1996 the stockholders reserved up to DM 40 of contingent authorized capital which was subsequently increased in 1997 to DM 110. The Plans provide for the granting of options for the purchase of Daimler-Benz Ordinary Shares. As evidenced by non-transferable convertible bonds issued with a nominal value of DM 1,000 each due ten years after issuance with stated interest rates of 5.3% and 5.9% for the bonds issued in 1997 and 1996, respectively. Each convertible bond entitles the holder thereof to convert the bond into Ordinary Shares with an aggregate nominal value of DM 1,000 (equaling 200 shares with a nominal value of DM 5 per share). Every year the conversion privilege under each bond can be exercised only within four periods of three weeks each, if the stock exchange price per Ordinary Share is at least 115% of the predetermined conversion price. For convertible bonds sold in 1996 the conversion price per share was DM 83.77 (the stock exchange price as of May 23, 1996), of which the remaining DM 78.77 must be paid in cash. DM 5 per share have been paid already with the purchase of the convertible bond. Effective July 23, 1997, Daimler-Benz AG issued convertible bonds of DM 37.1 (equaling 7,429,600 shares with a nominal value of DM 5 per share) subject to the 1997 Stock Option Plan. The conversion price of these convertible bonds, which may only be converted in certain periods between July 23, 1999 and July 23, 2007, is DM 132 per share (the stock exchange price as of May 30, 1997). On June 30, 1997, a stockholder challenged the approval of the 1997 Stock Option Plan at the stockholders meeting of May 28, 1997. On October 30, 1997, a regional court in Stuttgart dismissed this case in the first instance, however the stockholder has subsequently appealed this decision. The conversion right is exercisable only upon successful resolution of the stockholder legal action. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock compensation plans. Had compensation cost for the Company's stock compensation plans been determined based upon the fair value at the grant date, consistent with the methodology prescribed under SFAS 123 the Company's net income and basic and diluted earnings per share would have been reduced by approximately DM 26 and DM .05 per share in 1997. The fair value of the options granted in 1997 was calculated at the grant date at F-69 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) DM 23 per share based on a trinomial tree option pricing model which considers the terms of the issuance. The underlying assumptions are as follows: 1997 - ----------------------------------------------------------------------------------------------- Expected dividend yield 0.83% - ----------------------------------------------------------------------------------------------- Expected volatility 26.2% - ----------------------------------------------------------------------------------------------- Risk-free interest rate 3.65% - ----------------------------------------------------------------------------------------------- Expected life 2 years - ----------------------------------------------------------------------------------------------- Analysis of the Stock Options issued to management is as follows: 1997 1996 -------------------------------------- -------------------------------------- NOMINAL AVERAGE NOMINAL AVERAGE VALUE OF NUMBER CONVERSION VALUE OF NUMBER CONVERSION CONVERTIBLE OF STOCK PRICE PER CONVERTIBLE OF STOCK PRICE PER BONDS OPTIONS SHARE BONDS OPTIONS SHARE - ------------------------------------------------------------------------------------------------------------- Balance at beginning of year 1.0 198,000 83.77 -- -- -- - ------------------------------------------------------------------------------------------------------------- Bonds sold 37.1 7,429,600 132.00 4.4 889,000 83.77 - ------------------------------------------------------------------------------------------------------------- Converted (0.5) (100,000) 83.77 (3.2) (659,000) 83.77 - ------------------------------------------------------------------------------------------------------------- Repayment (0.1) (18,000) 132.00 (0.2) (32,000) 83.77 - ------------------------------------------------------------------------------------------------------------- Outstanding at year-end 37.5 7,509,600 131.37 1.0 198,000 83.77 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- Exercisable at year-end 0.5 98,000 83.77 1.0 198,000 83.77 - ------------------------------------------------------------------------------------------------------------- At December 31, 1997 no additional convertible bonds may be subscribed under the 1997 and 1996 plans. The minority stockholders of Dornier GmbH have the right to exchange their interest in Dornier for holdings of equal value in Daimler-Benz Luft- und Raumfahrt Holding AG or Ordinary Shares of Daimler-Benz AG and such options are exercisable at any time. Under the German corporation law (Aktiengesetz), the amount of dividends available for distribution to shareholders is based upon the earnings of Daimler-Benz 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, 1997, Daimler-Benz management has proposed to distribute DM 827 (DM 1.57 per share) of the 1997 earnings of Daimler-Benz AG as a dividend to the stockholders. In addition, a special distribution of DM 19.63 per share with an aggregate amount of approximately DM 10,300 will be proposed to the Annual General Meeting of stockholders scheduled for May 27, 1998. Subsequent to the special distribution, the Company plans to increase Ordinary Shares and additional paid-in capital by approximately DM 7,400. This amount approximates the special distribution less the tax refund generated by the special distribution of approximately DM 2,900 (see Note 6). F-70 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) 17. ACCRUED LIABILITIES Accrued liabilities are comprised of the following: AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 ---------------------- ---------------------- DUE AFTER DUE AFTER TOTAL ONE YEAR TOTAL ONE YEAR - ---------------------------------------------------------------------------------------------------- Retirement plans (see Note 17a) 17,200 16,493 16,232 15,555 - ---------------------------------------------------------------------------------------------------- Income and other taxes 1,476 590 2,327 1,163 - ---------------------------------------------------------------------------------------------------- Other accrued liabilities (see Note 17b) 17,942 8,771 16,327 8,289 - ---------------------------------------------------------------------------------------------------- 36,618 25,854 34,886 25,007 - ---------------------------------------------------------------------------------------------------- A) RETIREMENT PLANS Pension plans and similar obligations are comprised of the following components: AT DECEMBER 31, 1997 1996 - ----------------------------------------------------------------------------------------------- Pension liabilities 16,760 15,847 - ----------------------------------------------------------------------------------------------- Accrued postretirement medical benefits 273 220 - ----------------------------------------------------------------------------------------------- Other plans 167 165 - ----------------------------------------------------------------------------------------------- 17,200 16,232 - ----------------------------------------------------------------------------------------------- The Group operates various defined benefit pension plans, all based upon years of service. Some pension plans are based on salary earned in the last year of employment and some are fixed DM-amount plans depending on ranking (both wage level and position). The funded status of the Group's major retirement plans is as follows: AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 ---------------------------------- ---------------------------------- PLAN ASSETS ACCUMULATED PLAN ASSETS EX- ACCUMULATED EXCEED ACCUMU- BENEFITS EXCEED CEED ACCUMU- BENEFITS EXCEED LATED BENEFITS PLAN ASSETS LATED BENEFITS PLAN ASSETS - -------------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefits: - -------------------------------------------------------------------------------------------------------------------------- Vested 422 19,982 317 18,530 - -------------------------------------------------------------------------------------------------------------------------- Nonvested 71 624 39 572 - -------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligations 493 20,606 356 19,102 - -------------------------------------------------------------------------------------------------------------------------- Effect of projected future salary increases 149 2,082 137 1,921 - -------------------------------------------------------------------------------------------------------------------------- Projected benefit obligations 642 22,688 493 21,023 - -------------------------------------------------------------------------------------------------------------------------- Plan assets at fair value (979) (5,829) (758) (5,398) - -------------------------------------------------------------------------------------------------------------------------- Projected benefit obligations in excess of (less than) plan assets (337) 16,859 (265) 15,625 - -------------------------------------------------------------------------------------------------------------------------- Unrecognized net gains (losses) 183 (98) 144 222 - -------------------------------------------------------------------------------------------------------------------------- Prior service cost not yet recognized 8 (1) 16 -- - -------------------------------------------------------------------------------------------------------------------------- Pension liabilities (prepaid pension costs) (146) 16,760 (105) 15,847 - -------------------------------------------------------------------------------------------------------------------------- F-71 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) Plan assets consist primarily of investments in equity and fixed interest securities and real estate. 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 retirement plans are situated. The assumptions used in calculating the actuarial values for the principal retirement plans were as follows: 1997 IN % 1996 IN % 1995 IN % - -------------------------------------------------------------------------------------------------- Discount rate 6.5-8.0 6.75-8.0 7.0-8.0 - -------------------------------------------------------------------------------------------------- Long-term rate of increased remuneration 3.0-5.0 3.5-5.0 3.0-6.0 - -------------------------------------------------------------------------------------------------- Expected long-term rate of return on assets 6.0-8.0 7.0-8.0 7.0-9.0 - -------------------------------------------------------------------------------------------------- The net periodic pension costs for the major retirement plans comprised of the following: 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Service cost (present value of benefits earned during the year) 512 546 563 - -------------------------------------------------------------------------------------------------- Interest cost on projected benefit obligations 1,461 1,451 1,441 - -------------------------------------------------------------------------------------------------- Actual return on assets (668) (443) (442) - -------------------------------------------------------------------------------------------------- Net amortization and deferral 188 10 51 - -------------------------------------------------------------------------------------------------- Net periodic pension costs 1,493 1,564 1,613 - -------------------------------------------------------------------------------------------------- Certain of the Group's U.S. operations provide postretirement medical benefits to their employees. The net post retirement costs for the years were DM 29 (1996: DM 26; 1995: DM 25). B) OTHER ACCRUED LIABILITIES Other accrued liabilities consisted of the following: AT DECEMBER 31, 1997 1996 - ---------------------------------------------------------------------------------------------- Accrued warranty costs and price risks 6,342 5,284 - ---------------------------------------------------------------------------------------------- Accrued losses on uncompleted contracts 1,264 1,931 - ---------------------------------------------------------------------------------------------- Restructuring 1,424 1,825 - ---------------------------------------------------------------------------------------------- Accrued personnel and social costs 1,645 1,572 - ---------------------------------------------------------------------------------------------- Other 7,267 5,715 - ---------------------------------------------------------------------------------------------- 17,942 16,327 - ---------------------------------------------------------------------------------------------- F-72 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) 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: TERMINATION EXIT TOTAL BENEFITS COSTS LIABILITIES - ----------------------------------------------------------------------------------------------------- Balance at January 1, 1995 2,189 344 2,533 - ----------------------------------------------------------------------------------------------------- Utilizations and transfers (1,132) (226) (1,358) - ----------------------------------------------------------------------------------------------------- Reductions (272) (12) (284) - ----------------------------------------------------------------------------------------------------- Additions 842 336 1,178 - ----------------------------------------------------------------------------------------------------- Balance at December 31, 1995 1,627 442 2,069 - ----------------------------------------------------------------------------------------------------- Utilizations and transfers (556) (50) (606) - ----------------------------------------------------------------------------------------------------- Reductions (380) (34) (414) - ----------------------------------------------------------------------------------------------------- Additions 423 353 776 - ----------------------------------------------------------------------------------------------------- Balance at December 31, 1996 1,114 711 1,825 - ----------------------------------------------------------------------------------------------------- Utilizations and transfers (525) (367) (892) - ----------------------------------------------------------------------------------------------------- Reductions (88) (72) (160) - ----------------------------------------------------------------------------------------------------- Additions 585 66 651 - ----------------------------------------------------------------------------------------------------- Balance at December 31, 1997 1,086 338 1,424 - ----------------------------------------------------------------------------------------------------- In connection with the Group's restructuring the Group recorded provisions for termination benefits of DM 585 (1996: DM 423; 1995: DM 842), in 1997 principally within Automotive, in 1996 and 1995 principally within Automotive, AEG-DBI and Daimler-Benz Aerospace. In connection with these restructuring efforts, the Group effected workforce reductions of approximately 6,600 employees (1996: 11,800; 1995: 14,800) and paid termination benefits of DM 983 (1996: DM 745; 1995 DM 1,489), of which DM 525 (1996: DM 556; 1995: DM 1,132) were charged against previously established liabilities. At December 31, 1997 the Group had liabilities for estimated future terminations for approximately 8,000 employees. Exit costs in 1997 primarily result from the restructuring of directly managed businesses. In 1996, they relate exclusively to businesses of the former AEG-DBI and in 1995 mainly result from plans to reduce the production capacity of AEG-DBI and Daimler-Benz Aerospace. F-73 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) 18. FINANCIAL LIABILITIES WEIGHTED AVERAGE AT DECEMBER 31, INTEREST RATE MATURITIES 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Notes 6.9 1998 1,199 486 - ----------------------------------------------------------------------------------------------------------------------- Commercial paper 5.3 1998 11,579 7,841 - ----------------------------------------------------------------------------------------------------------------------- Liabilities to financial institutions 5.5 1998 8,023 6,784 - ----------------------------------------------------------------------------------------------------------------------- Liabilities to affiliated companies 5.8 1998 56 152 - ----------------------------------------------------------------------------------------------------------------------- Loans, other financial liabilities 1998 319 186 - ----------------------------------------------------------------------------------------------------------------------- Liabilities from capital lease and residual value guarantees 1998 910 562 - ----------------------------------------------------------------------------------------------------------------------- Short-term financial liabilities 22,086 16,011 - ----------------------------------------------------------------------------------------------------------------------- Bonds 6.0 1999-2007 8,859 6,830 of which due in more than five years: DM 2,725 (1996: DM 3,236) - ----------------------------------------------------------------------------------------------------------------------- Liabilities to financial institutions 5.6 1999-2019 6,735 5,015 of which due in more than five years: DM 2,896 (1996: DM 2,523) - ----------------------------------------------------------------------------------------------------------------------- Liabilities to affiliated companies 5.8 1999-2004 554 380 of which due in more than five years: DM 170 (1996: DM 217) - ----------------------------------------------------------------------------------------------------------------------- Loans, other financial liabilities 12 40 of which due in more than five years: DM 2 (1996: DM 2) - ----------------------------------------------------------------------------------------------------------------------- Liabilities from capital lease and residual value guarantees 1,056 574 of which due in more than five years: DM 601 (1996: DM 160) - ----------------------------------------------------------------------------------------------------------------------- Long-term financial liabilities 17,216 12,839 - ----------------------------------------------------------------------------------------------------------------------- 39,302 28,850 - ----------------------------------------------------------------------------------------------------------------------- Liabilities to financial institutions include approximately DM 851 (1996: DM 721) owed to related parties. Commercial paper is denominated in DM 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 DM 2,249 (1996: DM 2,381). Aggregate amounts of financial liabilities maturing during the next five years and thereafter are as follows: 1998 1999 2000 2001 2002 - ----------------------------------------------------------------------------------------------------------------------------- Financial liabilities 22,086 2,354 3,134 2,781 2,553 - ----------------------------------------------------------------------------------------------------------------------------- THERE- - ---------------------------------------------------------------------- Financial liabilities 6,394 - ---------------------------------------------------------------------- At December 31, 1997, the Group had unused short-term credit lines of DM 17,982 (1996: DM 14,225), and unused long-term credit lines of DM 6,194 (1996: DM 5,672). F-74 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) 19. TRADE LIABILITIES AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 ----------------------------------------- ------------------------ DUE AFTER DUE AFTER DUE AFTER TOTAL ONE YEAR FIVE YEARS TOTAL ONE YEAR - --------------------------------------------------------------------------------------------------------------------------------- Accounts payable 10,928 63 3 8,890 508 - --------------------------------------------------------------------------------------------------------------------------------- Accrued liabilities from long-term contracts and programs 151 -- -- 137 21 - --------------------------------------------------------------------------------------------------------------------------------- 11,079 63 3 9,027 529 - --------------------------------------------------------------------------------------------------------------------------------- DUE AFTER FIVE YEARS - ------------------------------------------------------------ Accounts payable 67 - ------------------------------------------------------------ Accrued liabilities from long-term contracts and programs -- - ------------------------------------------------------------ 67 - ------------------------------------------------------------ 20. OTHER LIABILITIES AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 --------------------------------------- ------------------------ DUE AFTER DUE AFTER DUE AFTER TOTAL ONE YEAR FIVE YEARS TOTAL ONE YEAR - ------------------------------------------------------------------------------------------------------------------------------- Liabilities to affiliated companies 1,082 . . 1,255 3 - ------------------------------------------------------------------------------------------------------------------------------- Liabilities to related companies 1,869 38 24 1,192 25 - ------------------------------------------------------------------------------------------------------------------------------- Other liabilities 7,165 557 31 6,345 123 - ------------------------------------------------------------------------------------------------------------------------------- 10,116 595 55 8,792 151 - ------------------------------------------------------------------------------------------------------------------------------- DUE AFTER FIVE YEARS - ------------------------------------------------------------ Liabilities to affiliated companies 1 - ------------------------------------------------------------ Liabilities to related companies 24 - ------------------------------------------------------------ Other liabilities 4 - ------------------------------------------------------------ 29 - ------------------------------------------------------------ Liabilities to related companies are primarily obligations of Daimler-Benz Aerospace Airbus GmbH to Airbus Industrie G.I.E., Toulouse. Other liabilities mainly relate to payroll obligations of the month of December and related tax liabilities. As of December 31, 1997 tax liabilities include withheld employee taxes of DM 1,318 (1996: DM 972), and social benefits due of DM 1,143 (1996: DM 906). OTHER NOTES 21. LITIGATION AND CLAIMS Various legal actions, governmental investigations, proceedings and claims are pending or may be instituted or asserted in the future against the Group. Litigation is subject to many uncertainties; the outcome of individual litigated matters is not predictable with assurance, and it is reasonably possible that some of the matters could be decided unfavorably to the Group. Although the amount of liability at December 31, 1997 with respect to these matters cannot be ascertained, the Group believes that the resulting liability, if any, should not materially affect the consolidated financial position of the Group at December 31, 1997. 22. COMMITMENTS AND CONTINGENCIES Commitments and contingencies are presented at their contractual values. F-75 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) Commitments and contingencies include the following: AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------------------------ Guarantees 3,918 3,932 - ------------------------------------------------------------------------------------------------ Notes payable 195 257 - ------------------------------------------------------------------------------------------------ Contractual guarantees 1,622 1,932 - ------------------------------------------------------------------------------------------------ Pledges of indebtedness of others 363 487 - ------------------------------------------------------------------------------------------------ 6,098 6,608 - ------------------------------------------------------------------------------------------------ Contingent liabilities represent principally guarantees of indebtedness of non-consolidated affiliated companies and third parties and commitments by Group companies as to contractual performance by joint venture companies. Daimler-Benz Aerospace is also obligated to make certain guaranteed dividend payments to minority shareholders. In connection with the development of aircraft, Daimler-Benz Aerospace Airbus GmbH is committed to Airbus Industrie to incur future development costs. At December 31, 1997, the remaining commitment not recorded in the financial statements aggregated DM 948. In addition, the Group has pledged the assets of Daimler-Benz Aerospace Airbus GmbH ("DA") acquired with development funds, to the Federal Republic of Germany. Airbus Industries G.I.E. ("Airbus consortium") has given a performance guarantee to Agence Executive, the French government agency overseeing Airbus; such performance guarantee has been assumed by DA to the extent of its 37.9 % participation in the Airbus consortium. At December 31, 1997, in connection with DA's participation in the Airbus consortium, the Group was contingently liable related to the consortium's irrevocable financing commitments in respect of aircraft on order, including options, for delivery in the future. In addition, the Group was also contingently liable related to credit guarantees and participations in financing receivables of Airbus consortium under customer finance programs. When entering into such customer financing commitments Airbus consortium has generally established a secured position in the aircraft being financed. Airbus consortium and the Group believe that the estimated fair value of the aircraft securing such commitments would substantially offset any potential losses from the commitments. Based on experience, the probability of material losses from such customer financing commitments is considered remote. The Group's obligations under the foregoing financing commitments of Airbus consortium are joint and several with its other partners in the consortium. In the event that Airbus, despite the underlying collateral, should be unable to honor its obligations, the Group is confident that each of its other consortium partners would be responsible for their proportionate share of Airbus' obligations. In 1989, the Group acquired Messerschmitt-Bolkow-Blohm GmbH ("MBB") and thereby indirectly acquired Daimler-Benz Aerospace Airbus (then known as Deutsche Airbus) which was and continues to be the German participant in Airbus Industrie. As part of the acquisition and in order to facilitate the complete privatization of MBB and the German participation in Airbus Industrie, the Government of the Federal Republic of Germany undertook responsibility for certain financial obligations of MBB and Daimler-Benz Aerospace Airbus and agreed to provide certain ongoing limited financial assistance for development programs and other items. Such undertakings, advances and assistance were to be repaid on a contingent basis by Daimler-Benz Aerospace Airbus' making annual payments equal to 40% of its pretax profits (as defined), if any, beginning with the fiscal year 2001 (subject to advance to the year 2000 under F-76 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) certain conditions). Each annual payment is contingent on Daimler-Benz Aerospace Airbus' having earned pretax profits in the prior year. Pretax profits are subject to reduction by application of prior years' cumulative loss carryforwards. Daimler-Benz Aerospace Airbus also agreed to make certain payments in the nature of a royalty with respect to the various Airbus aircraft programs. Prior to specified dates between 2001 and 2004, these royalty payments, if earned, are accrued on a per aircraft basis and added to the amount to be discharged through the 40% profit-sharing obligation. Thereafter, they are to be made on a per aircraft basis on terms keyed to the delivery date for each aircraft. The amount of the annual 40% profit-sharing obligation, if any, will depend upon the profitability of Daimler-Benz Aerospace Airbus in 2001 and beyond, which will be subject to a variety of unpredictable factors. Accordingly, the Group is unable to predict with certainty how long Daimler-Benz Aerospace Airbus will remain subject to the contingent 40% profit-sharing obligation, but it is likely to be a period of decades. Daimler-Benz Aerospace Airbus may not pay dividends prior to 2001, unless at the same time it commences making the 40% profit-sharing payments. The Group may not sell or transfer a majority of the capital stock of Daimler-Benz Aerospace Airbus without the consent of the German Federal Government. During 1997, Daimler-Benz Aerospace Airbus paid the German Federal Government DM 1,400 in complete discharge of its obligations relating to the Airbus A320 and its derivatives. Of this amount, DM 721 was expensed in 1997 and the remainder will be amortized over those A320 aircraft and derivatives to be delivered in the future. In connection with certain production programs the Group has committed to certain levels of outsourced manufactured parts and components over extended periods at market prices. The Group is subject to compensations in the case the committed volumes are not purchased. In the normal course of business, the Group sells to third parties certain of its financial services assets. During the year ended December 31, 1997 the Group sold assets for proceeds of DM 1,457 (1996: DM 1,774). In connection with such sales, the Group remained liable under recourse provisions for DM 314 (1996: DM 341). The Group is jointly and severally liable for certain non-incorporated companies, partnerships, and project groups. The total rentals under operating leases, charged as an expense in the statement of income, amounted to DM 940 (1996: DM 885; 1995: DM 878). The future minimum lease payments under rental and lease agreements which have initial or remaining terms in excess of one year at December 31, 1997 are as follows: OPERATING LEASES - ------------------------------------------------------------------------------------------------ 1998 750 - ------------------------------------------------------------------------------------------------ 1999 515 - ------------------------------------------------------------------------------------------------ 2000 459 - ------------------------------------------------------------------------------------------------ 2001 379 - ------------------------------------------------------------------------------------------------ 2002 336 - ------------------------------------------------------------------------------------------------ thereafter 1,758 - ------------------------------------------------------------------------------------------------ F-77 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) 23. INFORMATION ABOUT FINANCIAL INSTRUMENTS A) USE OF FINANCIAL INSTRUMENTS In the course of day-to-day financial management, Daimler-Benz uses financial instruments, e.g. financial investments, fixed-interest bearing securities and stock, forward exchange transactions and currency options, and, as a consequence, may be exposed to risks from changes in interest and currency exchange rates as well as share prices. Daimler-Benz uses derivative financial instruments to reduce such risks. Without the use of these instruments the Group's market risks would be higher. Based on regulations issued by regulatory authorities for financial institutions, the Group has established guidelines for risk assessment procedures and controls for the use of financial instruments. They include a clear segregation of duties with regard to operating financial activities on one side and settlement, accounting and controlling on the other. Market risk in portfolio management is quantified according to the "value-at-risk" method which is commonly used among banks. Using historical variability of market values, potential changes in value resulting from changes of market prices is calculated on the basis of statistical methods. The maximum acceptable market risk has been fixed by senior management in the form of a risk capital which has been approved for one year. The adherence to the risk capital is regularly monitored. B) NOTIONAL AMOUNTS AND CREDIT RISK The contract or notional amounts shown below do not always represent amounts exchanged by the parties and, thus, are not necessarily a measure for the exposure of Daimler-Benz through its use of derivatives. The notional amounts of off-balance sheet financial instruments are as follows: AT DECEMBER 31, 1997 1996 - ---------------------------------------------------------------------------------------------- Currency contracts 40,252 34,140 - ---------------------------------------------------------------------------------------------- Interest rate contracts 42,903 27,205 - ---------------------------------------------------------------------------------------------- Currency contracts include foreign exchange forward and option contracts which are mainly utilized to hedge existing assets and liabilities, firm commitments and anticipated transactions denominated in foreign currencies (principally U.S. dollars, Japanese Yen and major Euro-currencies). The objective of the Group's hedging transactions is to reduce the market risk of its foreign denominated future cash flows to exchange rate fluctuations. The Group has entered into currency contracts for a period of one to five years. The Group enters into interest and interest rate cross-currency swaps, interest rate forward and futures contracts and interest rate options in order to reduce funding costs, to diversify sources of funding, or to alter interest rate exposures arising from mismatches between assets and liabilities. The Group may be exposed to credit-related losses in the event of non-performance by counterparties to financial instruments. Counterparties to the Group's financial instruments represent, in general, international financial institutions. Daimler-Benz does not have a significant exposure to any individual counterparty, based on the rating of the counterparties performed by established rating agencies. The Group believes the overall credit risk related to utilized derivatives is insignificant. F-78 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) C) 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 may not be indicative of the amounts that the Group could realize in a current market exchange. The carrying amounts and fair values of the Group's financial instruments are as follows: AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 -------------------- -------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------- BALANCE SHEET FINANCIAL INSTRUMENTS: - ---------------------------------------------------------------------------------------------------------- Assets: - ---------------------------------------------------------------------------------------------------------- Financial assets 1,662 1,662 1,465 1,465 - ---------------------------------------------------------------------------------------------------------- Receivables from financial services 25,924 26,143 19,052 18,909 - ---------------------------------------------------------------------------------------------------------- Securities 14,687 14,687 9,783 9,783 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents 5,833 5,833 4,557 4,557 - ---------------------------------------------------------------------------------------------------------- Other 657 657 505 505 - ---------------------------------------------------------------------------------------------------------- Liabilities: - ---------------------------------------------------------------------------------------------------------- Financial liabilities (39,302) (40,027) (28,850) (29,019) - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: - ---------------------------------------------------------------------------------------------------------- Assets: - ---------------------------------------------------------------------------------------------------------- Currency contracts 172 501 630 1,227 - ---------------------------------------------------------------------------------------------------------- Interest rate contracts 104 211 104 258 - ---------------------------------------------------------------------------------------------------------- Liabilities: - ---------------------------------------------------------------------------------------------------------- Currency contracts (1,047) (1,884) (539) (639) - ---------------------------------------------------------------------------------------------------------- Interest rate contracts (93) (461) (78) (341) - ---------------------------------------------------------------------------------------------------------- In determining the fair values of derivative financial instruments certain compensating effects from underlying transactions (e.g. firm commitments and anticipated transactions) are not taken into consideration. At December 31, 1997 and 1996, the Group had deferred net unrealized gains (losses) on forward currency exchange contracts and options of DM (508) and DM 462, respectively, purchased against firm foreign currency denominated sales commitments extending for varying periods between three and twenty-four months. The carrying amounts of cash, other receivables and accounts payable approximate fair values due to the short-term maturities of these instruments. The methods and assumptions used to determine the fair values of other financial instruments are summarized below: FINANCIAL ASSETS AND SECURITIES -- Fair value of securities in the portfolio was estimated using quoted market prices. The Group has certain equity investments in related and affiliated companies not presented F-79 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) in the table, as certain of these investments are not publicly traded and determination of fair values is impracticable. RECEIVABLES FROM FINANCIAL SERVICES -- The carrying amount of variable rate finance receivables was estimated to approximate fair value since they are priced at current market rates. The fair value of fixed rate finance receivables was estimated by discounting expected cash flows using the current rates at which comparable loans of similar maturity would be obtained made as of December 31, 1997 and 1996. The carrying amounts of receivables from finance lease equal their fair values. FINANCIAL LIABILITIES -- Fair value of publicly traded debt was estimated using quoted market prices. The fair value of other long-term notes and bonds was estimated by discounting future cash flows using rates currently available for debt of similar terms and remaining maturities. The carrying amounts of commercial paper and borrowings under revolving credit facilities were assumed to approximate fair value due to their short maturities. INTEREST RATE CONTRACTS -- The fair values of existing 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 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. CURRENCY CONTRACTS -- The fair value of forward foreign exchange contracts is based on average spot exchange rates that consider forward premiums or discounts. Currency options are valued on the basis of quoted market prices or on estimates based on option pricing models. D) ACCOUNTING FOR AND REPORTING EARNINGS OF FINANCIAL INSTRUMENTS The earnings of the Group's on-balance sheet financial instruments, with the exception of receivables from financial services, are recognized in financial income, net. Income on receivables from financial services are recognized as revenues. The carrying amounts of the on-balance sheet financial instruments are included in the consolidated balance sheets under their related captions. The carrying amounts of off-balance sheet financial instruments are included under other assets and accrued liabilities. Financial instruments, including derivatives, purchased to offset the Group's exposure to identifiable and committed transactions with price, interest or currency risks are accounted for together with the underlying business transactions ("hedge accounting"). Gains and losses on forward contracts and options hedging firm foreign currency commitments are deferred off-balance sheet and are recognized as a component of the related transactions, when recorded (the "deferral method"). However, a loss is not deferred if deferral would lead to the recognition of a loss in future periods. Interest differentials paid or received under interest rate swaps purchased to hedge interest risks on debt are recorded as adjustments to the effective yields of the underlying debt ("accrual method"). All other financial instruments, including derivatives, purchased to offset the Group's net exposure to price, interest or currency risks, but which are not designated as hedges of specific assets, liabilities or firm commitments are marked to market and any resulting unrealized gains and losses are recognized currently in financial income, net. Derivatives purchased by the Group under macro-hedging techniques, as well as those purchased to offset the Group's exposure to anticipated cash flows, do not generally meet the requirements for applying F-80 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) hedge accounting and are, accordingly marked to market at each reporting period with unrealized gains and losses recognized in financial income, net. At such time that the Group meets the requirements for hedge accounting and designates the derivative financial instrument as a hedge of a committed transaction, subsequent unrealized gains and losses would be deferred and recognized along with the effects of the underlying transaction. 24. SEGMENT REPORTING Daimler-Benz operates in four divisions; a description of the products and services from which each segment derives its revenues follows: - AUTOMOTIVE -- development, manufacture and sale of passenger cars and commercial vehicles principally under the trade mark Mercedes-Benz as well as related parts and accessories. - AEROSPACE -- development, manufacture and sale of commercial and military aircraft and helicopters, of satellites and related space transportation systems, defense-related products, including radar and radio systems and propulsion systems. - SERVICES -- services related to information technology, financial services, insurance brokerage, trading, telecommunications and media and real estate management. - DIRECTLY MANAGED BUSINESSES (DMB) -- In 1997 and 1996 represents 50% interest in Adtranz and microelectronics and automation processing products (up to December 31, 1996) and diesel engines. In 1995 represented the AEG-DBI corporate unit which included each of the foregoing business activities plus other businesses including products for the transmission and distribution of electricity. Sales and revenues related to transactions between segments are generally recorded at values that approximate third party selling prices. F-81 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) Information with respect to the Group's industry segments follows: AUTOMOTIVE AEROSPACE SERVICES DMB(1) CORPORATE ELIMINATIONS CONSOLIDATED - ------------------------------------------------------------------------------------------------------------------------------------ 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues 88,707 15,158 13,066 7,082 37 -- 124,050 - ------------------------------------------------------------------------------------------------------------------------------------ Intersegment sales 2,925(2) 128 2,432 473 28 (5,986) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues 91,632 15,286 15,498 7,555 65 (5,986) 124,050 - ------------------------------------------------------------------------------------------------------------------------------------ Operating profit (loss) 3,501 432 457 (129) (51) 118 4,328 - ------------------------------------------------------------------------------------------------------------------------------------ Identifiable assets 46,955 20,556 19,410 11,871 38,307 -- 137,099 - ------------------------------------------------------------------------------------------------------------------------------------ Depreciation and amortization 3,612 559 2,576 540 79 -- 7,366 - ------------------------------------------------------------------------------------------------------------------------------------ Capital expenditures 4,862 495 367 512 706 -- 6,942 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues 74,958 12,979 10,798 7,604 -- -- 106,339 - ------------------------------------------------------------------------------------------------------------------------------------ Intersegment sales 2,666(2) 74 2,345 411 -- (5,496) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues 77,624 13,053 13,143 8,015 -- (5,496) 106,339 - ------------------------------------------------------------------------------------------------------------------------------------ Operating profit (loss) 2,707 (196)(3) 288 (585) (57) 266 2,423 - ------------------------------------------------------------------------------------------------------------------------------------ Identifiable assets 34,686 20,415 16,984 12,203 28,173 -- 112,461 - ------------------------------------------------------------------------------------------------------------------------------------ Depreciation and amortization 3,015 522 2,342 771 80 -- 6,730 - ------------------------------------------------------------------------------------------------------------------------------------ Capital expenditures 4,451 584 225 502 450 -- 6,212 - ------------------------------------------------------------------------------------------------------------------------------------ 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues 69,585 14,261 9,426 9,713 -- -- 102,985 - ------------------------------------------------------------------------------------------------------------------------------------ Intersegment sales 2,515 832 2,288 438 -- (6,073) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues 72,100 15,093 11,714 10,151 -- (6,073) 102,985 - ------------------------------------------------------------------------------------------------------------------------------------ Operating profit (loss) 2,142 (7,220)(4) 112 (2,216 (4) (30) 15 (7,197) - ------------------------------------------------------------------------------------------------------------------------------------ Identifiable assets 33,800 22,504 13,400 8,917 23,477 -- 102,098 - ------------------------------------------------------------------------------------------------------------------------------------ Depreciation and amortization(5) 2,989 4,173 2,774 973 108 -- 11,017 - ------------------------------------------------------------------------------------------------------------------------------------ Capital expenditures 3,331 564 231 601 123 -- 4,850 - ------------------------------------------------------------------------------------------------------------------------------------ (1) In 1997 and 1996 includes Adtranz accounted for using the proportionate method of consolidation (see Note 2). (2) Includes DM 2,801 and DM 2,443 for 1997 and 1996, respectively, of automobiles leased to customers under operating leases that have been sold to Group leasing and sales financing entities with guarantees as to the residual value of the products at the end of such leases. (3) Aerospace operating loss includes charges of DM 435 in 1996 related to the aircraft business of Dornier offset by approximately DM 300 of reductions in provisions for restructuring measures (see Note 3). (4) In 1995 the Aerospace operating loss includes DM 5,594 of charges related to restructuring measures, goodwill and other write-offs and the decision to discontinue financial support for Fokker. In 1995, the DMB operating loss includes DM 1,596 of charges related to restructuring of AEG and write-downs to fixed assets of DM 331 (see Note 3). (5) Includes Aerospace write-downs to fixed assets, including goodwill, of DM 2,558 and DMB DM 331. F-82 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) A reconciliation of income (loss) before financial income and income taxes to operating profit follows: 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Income (loss) before financial income and income taxes 3,631 1,465 (8,162) - ----------------------------------------------------------------------------------------------------- Interest on advance payments received on long-term contracts 270 303 205 - ----------------------------------------------------------------------------------------------------- Earnings from Airbus Industrie 109 267 331 - ----------------------------------------------------------------------------------------------------- Corporate research of Daimler-Benz AG 316 407 397 - ----------------------------------------------------------------------------------------------------- Items not allocable to segments 2 (19) 32 - ----------------------------------------------------------------------------------------------------- Operating profit (loss)(1) 4,328 2,423 (7,197) - ----------------------------------------------------------------------------------------------------- (1) Operating profit in 1996 includes charges of DM 435 related to the aircraft business of Dornier offset by approximately DM 300 of reductions in provisions for restructuring measures. Operating loss in 1995 includes DM 7,190 of charges related to restructuring measures, goodwill and other write-offs, the decision to discontinue financial support for Fokker and the restructuring of AEG (see Note 3). F-83 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM, EXCEPT SHARE AMOUNTS) Geographic information with respect to the Group's revenues, operating profit (loss) and identifiable assets follows: OTHER EUROPEAN NORTH LATIN OTHER ELIMINA- GERMANY COUNTRIES AMERICA AMERICA ASIA COUNTRIES TIONS - --------------------------------------------------------------------------------------------------------------------------------- 1997 - --------------------------------------------------------------------------------------------------------------------------------- Revenues (by destination) 41,055 37,105 26,608 5,322 9,513 4,447 -- - --------------------------------------------------------------------------------------------------------------------------------- Revenues (by operation): - --------------------------------------------------------------------------------------------------------------------------------- To unaffiliated customers 62,301 25,090 24,183 5,192 4,252 3,032 -- - --------------------------------------------------------------------------------------------------------------------------------- Transfers between geographic areas 31,318 2,878 1,382 241 743 182 (36,744) - --------------------------------------------------------------------------------------------------------------------------------- Total revenues 93,619 27,968 25,565 5,433 4,995 3,214 (36,744) - --------------------------------------------------------------------------------------------------------------------------------- Export sales from Germany -- 13,173 2,824 755 4,137 560 -- - --------------------------------------------------------------------------------------------------------------------------------- Operating profit 3,139 75 638 195 254 27 -- - --------------------------------------------------------------------------------------------------------------------------------- Identifiable assets 81,429 17,291 28,137 6,032 2,852 1,358 -- - --------------------------------------------------------------------------------------------------------------------------------- 1996 - --------------------------------------------------------------------------------------------------------------------------------- Revenues (by destination) 39,165 30,360 20,472 3,922 8,309 4,111 -- - --------------------------------------------------------------------------------------------------------------------------------- Revenues (by operation): - --------------------------------------------------------------------------------------------------------------------------------- To unaffiliated customers 56,584 20,908 18,383 3,757 3,881 2,826 -- - --------------------------------------------------------------------------------------------------------------------------------- Transfers between geographic areas 24,054 1,813 221 83 222 -- (26,393) - --------------------------------------------------------------------------------------------------------------------------------- Total revenues 80,638 22,721 18,604 3,840 4,103 2,826 (26,393) - --------------------------------------------------------------------------------------------------------------------------------- Export sales from Germany -- 7,967 1,962 535 4,178 2,351 -- - --------------------------------------------------------------------------------------------------------------------------------- Operating profit (loss) 1,755 123 440 12 95 (2) -- - --------------------------------------------------------------------------------------------------------------------------------- Identifiable assets 67,283 16,769 21,187 3,839 2,316 1,067 -- - --------------------------------------------------------------------------------------------------------------------------------- 1995 - --------------------------------------------------------------------------------------------------------------------------------- Revenues (by destination) 37,684 28,299 19,533 5,083 8,727 3,659 -- - --------------------------------------------------------------------------------------------------------------------------------- Revenues (by operation): - --------------------------------------------------------------------------------------------------------------------------------- To unaffiliated customers 56,580 18,893 17,672 4,224 2,893 2,723 -- - --------------------------------------------------------------------------------------------------------------------------------- Transfers between geographic areas 19,787 1,273 1,052 68 135 117 (22,432) - --------------------------------------------------------------------------------------------------------------------------------- Total revenues 76,367 20,166 18,724 4,292 3,028 2,840 (22,432) - --------------------------------------------------------------------------------------------------------------------------------- Export sales from Germany -- 9,223 1,724 395 5,070 1,209 -- - --------------------------------------------------------------------------------------------------------------------------------- Operating profit (loss) (7,326) (776) 645 9 65 186 -- - --------------------------------------------------------------------------------------------------------------------------------- Identifiable assets 65,523 12,677 16,675 3,631 2,723 869 -- - --------------------------------------------------------------------------------------------------------------------------------- CONSO- LIDATED - ------------------------------------------ 1997 - ------------------------------------------ Revenues (by destination) 124,050 - ------------------------------------------ Revenues (by operation): - ------------------------------------------ To unaffiliated customers 124,050 - ------------------------------------------ Transfers between geographic areas -- - ------------------------------------------ Total revenues 124,050 - ------------------------------------------ Export sales from Germany 21,449 - ------------------------------------------ Operating profit 4,328 - ------------------------------------------ Identifiable assets 137,099 - ------------------------------------------ 1996 - ------------------------------------------ Revenues (by destination) 106,339 - ------------------------------------------ Revenues (by operation): - ------------------------------------------ To unaffiliated customers 106,339 - ------------------------------------------ Transfers between geographic areas -- - ------------------------------------------ Total revenues 106,339 - ------------------------------------------ Export sales from Germany 16,993 - ------------------------------------------ Operating profit (loss) 2,423 - ------------------------------------------ Identifiable assets 112,461 - ------------------------------------------ 1995 - ------------------------------------------ Revenues (by destination) 102,985 - ------------------------------------------ Revenues (by operation): - ------------------------------------------ To unaffiliated customers 102,985 - ------------------------------------------ Transfers between geographic areas -- - ------------------------------------------ Total revenues 102,985 - ------------------------------------------ Export sales from Germany 17,621 - ------------------------------------------ Operating profit (loss) (7,197) - ------------------------------------------ Identifiable assets 102,098 - ------------------------------------------ F-84 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF DM OR MILLIONS OF SHARES EXCEPT EARNINGS (LOSS) PER SHARE) 25. EARNINGS PER SHARE The earnings (loss) per share are determined as follows: AT DECEMBER 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Basic earnings (loss) per share: - ----------------------------------------------------------------------------------------------------- Net income (loss) 8,042 2,762 (5,729) - ----------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 525.5 523.7 522.7 - ----------------------------------------------------------------------------------------------------- 15.30 5.27 (10.96) - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- Diluted earnings (loss) per share: - ----------------------------------------------------------------------------------------------------- Net income (loss) 8,042 2,762 (5,729) - ----------------------------------------------------------------------------------------------------- Interest expense on convertible bonds and notes (net of tax) 38 7 -- - ----------------------------------------------------------------------------------------------------- 8,080 2,769 (5,729) - ----------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 525.5 523.7 522.7 - ----------------------------------------------------------------------------------------------------- Dilutive convertible bonds and notes 12.7 4.0 -- - ----------------------------------------------------------------------------------------------------- 538.2 527.7 522.7 - ----------------------------------------------------------------------------------------------------- 15.01 5.25 (10.96) - ----------------------------------------------------------------------------------------------------- The convertible bonds of the 1997 Stock Option Plan are not included in the computations of diluted earnings per share because the options' underlying target stock price was above market price of Daimler-Benz AG common stock on December 31, 1997. F-85 DAIMLER-BENZ AG NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN MILLIONS OF U.S. $) 26. SUMMARIZED FINANCIAL INFORMATION -- DAIMLER BENZ NORTH AMERICA Summarized financial information for Daimler-Benz North America, wholly-owned subsidiary of Daimler-Benz AG, is set forth below: 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- Daimler-Benz North America Receivables, net 7,070 5,271 4,208 - ---------------------------------------------------------------------------------------------------------------------- Equipment on operating leases, net 5,075 4,534 4,235 - ---------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 1,363 1,213 977 - ---------------------------------------------------------------------------------------------------------------------- Other assets 2,447 2,267 2,056 - ---------------------------------------------------------------------------------------------------------------------- Total assets 15,955 13,285 11,476 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Current liabilities 8,597 6,421 6,100 - ---------------------------------------------------------------------------------------------------------------------- Non-current liabilities 4,299 4,013 2,699 - ---------------------------------------------------------------------------------------------------------------------- Stockholders' equity 3,059 2,851 2,677 - ---------------------------------------------------------------------------------------------------------------------- Revenues: - ---------------------------------------------------------------------------------------------------------------------- Net sales of products 12,595 9,759 9,575 - ---------------------------------------------------------------------------------------------------------------------- Finance and lease income 1,687 1,492 1,468 - ---------------------------------------------------------------------------------------------------------------------- Operating costs 13,338 10,560 10,268 - ---------------------------------------------------------------------------------------------------------------------- Net income 305 177 231 - ---------------------------------------------------------------------------------------------------------------------- 27. SUBSEQUENT EVENTS Following the decision to concentrate on core activities, the Group's semiconductor business was sold to the American company Vishay Intertechnology, Inc. in March 1998. In January 1998 the Group sold two real-estate-project-companies to Berliner Volksbank. In May 1997, the Company entered into an agreement to acquire the Heavy Truck Business of Ford Motor Company. The transaction included: tooling, machinery and equipment used to manufacture the product; spare parts inventory to support the product line, and other minor assets. In addition, Ford Motor Company will provide assistance in the product launch and cost reduction efforts for this business as well as engineering and systems services during 1998. All material aspects of the acquisition will be consummated during 1998. 28. SUBSEQUENT EVENT - RIGHTS OFFERING In June, 1998, Daimler-Benz issued to holders of Daimler-Benz Ordinary Shares and ADS's and convertible debt securities, rights to acquire up to an aggregate of 52.4 million newly issued Daimler-Benz Ordinary Shares and on June 25, 1998 Daimler-Benz issued and sold 52.4 million Ordinary Shares for net proceeds of DM 7,485 million. The rights issued by Daimler-Benz entitled the holders to purchase Daimler-Benz Ordinary Shares at an approximately 20% discount to the market price of Daimler-Benz Ordinary Shares. Basic and diluted earnings per Ordinary Share have been restated to reflect the dilutive effect resulting from the discount to market value at which the Daimler-Benz Ordinary Shares were sold in the rights offering. F-86 DAIMLER-BENZ AG CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED AND IN MILLIONS, EXCEPT PER SHARE AMOUNTS) SIX MONTHS ENDED JUNE 30, ---------------------------------------- 1998 (NOTE 1) 1998 1997 ---------- ------------- ------------- Revenues................................................................ $ 37,550 DM 67,714 DM 55,892 Cost of sales........................................................... (29,839) (53,809) (44,919) ---------- ------------- ------------- GROSS MARGIN............................................................ 7,711 13,905 10,973 Selling, administrative and other expenses............................ (4,732) (8,534) (7,517) Research and development.............................................. (1,732) (3,123) (2,867) Other income.......................................................... 621 1,120 733 ---------- ------------- ------------- INCOME BEFORE FINANCIAL INCOME AND INCOME TAXES.......................................................... 1,868 3,368 1,322 Financial income (expense), net....................................... 300 542 (111) ---------- ------------- ------------- INCOME BEFORE INCOME TAXES.............................................. 2,168 3,910 1,211 Income taxes.......................................................... (1,019) (1,838) (263) Minority interest..................................................... (34) (62) 44 ---------- ------------- ------------- NET INCOME.............................................................. 1,115 2,010 992 ---------- ------------- ------------- ---------- ------------- ------------- EARNINGS PER SHARE Basic earnings per share.............................................. 2.11 3.81 1.89 ---------- ------------- ------------- ---------- ------------- ------------- Diluted earnings per share............................................ 2.04 3.68 1.88 ---------- ------------- ------------- ---------- ------------- ------------- The Accompanying Notes are an Integral Part of these Unaudited Interim Condensed Consolidated Financial Statements F-87 DAIMLER-BENZ AG CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED AND IN MILLIONS) AT AT JUNE 30, DECEMBER 31, ------------------------- -------------- 1998 (NOTE 1) 1998 1997 --------- -------------- -------------- ASSETS Intangible assets.................................................... $ 1,051 DM 1,895 DM 1,915 Property, plant and equipment........................................ 11,938 21,528 20,656 Investments and long term financial assets........................... 2,216 3,996 3,453 Equipment on operating leases........................................ 9,128 16,461 14,931 --------- -------------- -------------- FIXED ASSETS........................................................... 24,333 43,880 40,955 --------- -------------- -------------- Inventories.......................................................... 8,839 15,940 14,390 Receivables Receivables from financial services................................ 16,111 29,053 25,924 Trade and other receivables and other assets....................... 11,700 21,099 24,257 Securities........................................................... 10,042 18,109 14,687 Cash and cash equivalents............................................ 2,329 4,199 5,833 --------- -------------- -------------- CURRENT ASSETS......................................................... 49,021 88,400 85,091 --------- -------------- -------------- DEFERRED TAXES AND PREPAID EXPENSES.................................... 5,387 9,714 11,053 --------- -------------- -------------- TOTAL ASSETS..................................................... 78,741 141,994 137,099 --------- -------------- -------------- --------- -------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY STOCKHOLDERS' EQUITY................................................... $ 18,725 DM 33,767 DM 35,085 --------- -------------- -------------- MINORITY INTEREST...................................................... 586 1,057 1,170 --------- -------------- -------------- Accrued liabilities for retirement plans............................. 9,803 17,677 17,200 Other accrued liabilities............................................ 11,199 20,196 19,418 --------- -------------- -------------- ACCRUED LIABILITIES.................................................... 21,002 37,873 36,618 --------- -------------- -------------- Financial liabilities................................................ 23,048 41,563 39,302 Trade and other liabilities.......................................... 13,466 24,282 21,195 --------- -------------- -------------- LIABILITIES............................................................ 36,514 65,845 60,497 --------- -------------- -------------- DEFERRED TAXES AND INCOME.............................................. 1,914 3,452 3,729 --------- -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................... 78,741 141,994 137,099 --------- -------------- -------------- --------- -------------- -------------- The Accompanying Notes are an Integral Part of these Unaudited Interim Condensed Consolidated Financial Statements F-88 DAIMLER-BENZ AG CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN MILLIONS) SIX MONTHS ENDED JUNE 30, ------------------------------------------ 1998 (NOTE 1) 1998 1997 ----------- -------------- ------------- Net income............................................................... $ 1,115 DM 2,010 DM 992 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of fixed assets (including amounts related to equipment on operating leases of DM 1,169 ($648) and DM 1,178 in 1998 and 1997, respectively)................................ 2,076 3,744 3,309 Increase (decrease) in accrued liabilities............................. 728 1,312 838 Changes in other operating assets and liabilities...................... 879 1,586 118 Other.................................................................. (79) (142) (576) ----------- -------------- ------------- CASH PROVIDED BY OPERATING ACTIVITIES.................................... 4,719 8,510 4,681 ----------- -------------- ------------- Purchase of fixed assets............................................... (2,294) (4,136) (2,747) Increase in equipment on operating leases.............................. (2,489) (4,488) (3,513) Proceeds from disposal of fixed assets (including equipment on operating leases of DM 2,169 ($1,203) and DM 1,661 in 1998 and 1997, respectively)........................................................ 1,326 2,391 2,212 Acquisition of businesses.............................................. (377) (680) (269) Proceeds from disposal of businesses................................... 613 1,106 1,017 Increase in receivables from financial services, net................... (1,825) (3,291) (2,519) Sales (Acquisitions) of securities (other than trading), net........... (1,315) (2,372) (707) Change in other cash................................................... (880) (1,587) 404 ----------- -------------- ------------- CASH USED FOR INVESTING ACTIVITIES....................................... (7,241) (13,057) (6,122) ----------- -------------- ------------- Change in commercial paper borrowings, net............................. (308) (556) 25 Change in financial liabilities (including amounts for financial services, net of DM 2,320 ($1,287) and DM 2,392 in 1998 and 1997, respectively)........................................................ 1,519 2,739 3,042 Dividends paid......................................................... (6,260) (11,288) (591) Proceeds from capital increases........................................ 4,222 7,613 37 Proceeds from special distribution tax refund.......................... 1,613 2,908 -- Other.................................................................. (89) (160) -- ----------- -------------- ------------- CASH PROVIDED BY FINANCING ACTIVITIES.................................... 697 1,256 2,513 ----------- -------------- ------------- Effect of foreign exchange rate changes on cash and cash equivalents (up to 3 months)..................................................... 93 167 229 Net increase (decrease) in cash and cash equivalents (up to 3 months).............................................................. (1,732) (3,124) 1,301 Cash and cash equivalents (up to 3 months) at beginning of period...... 3,045 5,491 3,220 ----------- -------------- ------------- CASH AND CASH EQUIVALENTS (UP TO 3 MONTHS) AT END OF PERIOD.............. 1,313 2,367 4,521 ----------- -------------- ------------- ----------- -------------- ------------- The Accompanying Notes are an Integral Part of these Unaudited Interim Condensed Consolidated Financial Statements F-89 DAIMLER-BENZ AG NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED AND IN MILLIONS) 1. PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated financial statements of Daimler-Benz Aktiengesellschaft and subsidiaries ("Daimler-Benz" or the "Group") are unaudited and have been prepared in accordance with United States generally accepted accounting principles, except that the Group has accounted for certain joint ventures in accordance with the proportionate method of accounting (see Note 3). All amounts herein are shown in millions of Deutsche Marks ("DM") and for the six months ended June 30, 1998 are also presented in U.S. dollars, the latter solely for the convenience of the reader, at the rate of DM 1.8033 = U.S. $1, the Noon Buying Rate of the Federal Reserve Bank of New York on June 30, 1998. The information included in the condensed consolidated financial statements is unaudited but reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The condensed consolidated financial statements should be read in conjunction with the December 31, 1997 consolidated financial statements and notes included in the Group's 1997 Annual Report on Form 20-F. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME, effective January 1, 1998. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. In connection with the adoption of SFAS 130 for these interim condensed financial statements, the "other equity" component of stockholders' equity (see Note 6) was renamed "accumulated other comprehensive income." Total comprehensive income of the Company for the six-month periods ended June 30, 1998 and 1997 (consisting of net income, changes in foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities) was DM 2,391 and DM 2,053, respectively. 2. MERGER WITH CHRYSLER CORPORATION On May 7, 1998 the Company and Chrysler Corporation entered into a Business Combination Agreement to merge their respective businesses. In connection with the business combination, holders of Daimler-Benz AG Ordinary Shares will be offered to exchange their Ordinary Shares for Ordinary Shares of a newly formed company, DaimlerChrysler Aktiengesellschaft ("DaimlerChrysler AG") and holders of Chrysler common stock will be offered to convert into Ordinary Shares of DaimlerChrysler AG at the exchange ratio of 0.6235 of an Ordinary Share of DaimlerChrysler AG for each share of common stock of Chrysler Corporation. Consummation of the merger is subject to various conditions, including among others, approval of the U.S. antitrust authority and the receipt of Chrysler Corporation and Daimler-Benz AG stockholder approval. In July, 1998 the European antitrust authority approved of the merger. The companies anticipate the merger to be completed prior to December 31, 1998. 3. JOINT VENTURE Daimler-Benz accounts for its investment in Adtranz using the proportionate method of consolidation. Accordingly, the consolidated financial statements of Daimler-Benz include as of June 30, 1998 and December 31, 1997 and for the six months ended June 30, 1998 and 1997 Daimler-Benz' 50% proportionate interest in the assets and liabilities and results of operations and cash flows of Adtranz. Under U.S. GAAP, Daimler-Benz' investment in Adtranz is required to be accounted for using the equity method of accounting. The differences in accounting treatment between the proportionate and equity methods would not effect reported shareholders' equity or net income of Daimler-Benz. Under the equity method of F-90 DAIMLER-BENZ AG NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AND IN MILLIONS) 3. JOINT VENTURE (CONTINUED) accounting, Daimler-Benz' net investment in Adtranz would be included within investments in the balance sheet and its share of the net loss of Adtranz together with the amortization of the excess of the cost of its investment over its share of the investment's net assets would be reported as a net amount in financial income, net in the Group's income statement. Additionally, under the equity method, Adtranz' only impact on the Group's cash flow statement would have been an investing cash outflow of approximately DM 300 in 1998 resulting from a capital contribution by Daimler-Benz. F-91 DAIMLER-BENZ AG NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AND IN MILLIONS) 3. JOINT VENTURE (CONTINUED) Summarized financial information for Adtranz follows: AT JUNE 30, AT DECEMBER 31, 1998 1997 ----------- --------------- BALANCE SHEET INFORMATION Fixed assets*)............................................... DM1,465 DM1,581 Current assets............................................... 1,874 1,840 ----------- --------------- TOTAL ASSETS................................................... 3,339 3,421 ----------- --------------- ----------- --------------- Stockholders' equity......................................... DM1,265 DM1,393 Minority interest............................................ 12 12 Accrued liabilities.......................................... 967 970 Liabilities.................................................. 1,095 1,046 ----------- --------------- STOCKHOLDERS' EQUITY AND LIABILITIES........................... 3,339 3,421 ----------- --------------- ----------- --------------- - ------------------------ (*) Includes net goodwill resulting from the formation of Adtranz of DM 701 and DM 850 at June 30, 1998 and December 31, 1997, respectively. SIX MONTHS ENDED JUNE 30, ------------------------ 1998 1997 ----------- ----------- STATEMENT OF OPERATIONS INFORMATION Revenues............................................................................. DM1,499 DM1,317 Operating loss*)..................................................................... (134) (27) Net loss............................................................................. (128) (38) - ------------------------ (*) The operating loss includes an impairment charge on goodwill (1998: DM 125) and interest on advance payments received on long-term contracts (1998: DM 57; 1997: DM 43). CASH FLOW INFORMATION Cash flows from: Operating activities............................................... DM(160) DM(89) Investing activities............................................... (232) 30 Financing activities............................................... 450 49 Effect of foreign exchange rate changes on cash...................... -- -- --------- --------- Change in cash (up to three months).................................. 58 (10) Cash (up to three months) at beginning of period..................... 304 285 --------- --------- Cash (up to three months) at end of period........................... 362 275 --------- --------- --------- --------- F-92 DAIMLER-BENZ AG NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AND IN MILLIONS) 4. INVENTORIES AT JUNE 30, AT DECEMBER 31, 1998 1997 ------------- --------------- Raw materials and manufacturing supplies.......................................... DM 3,577 DM 3,233 Work in process................................................................... 7,369 6,515 Finished goods, parts and products held for resale................................ 10,174 8,978 Advance payments to suppliers..................................................... 661 659 ------------- --------------- 21,781 19,385 Less: Advance payments received................................................... (5,841) (4,995) ------------- --------------- 15,940 14,390 ------------- --------------- ------------- --------------- 5. CASH AND CASH EQUIVALENTS As of June 30, 1998 and December 31, 1997 cash and cash equivalents include DM 1,832 and DM 342, respectively, of deposits with original maturities of more than three months. 6. STOCKHOLDERS' EQUITY The changes in stockholders' equity for the six-months ended June 30, 1998 follow: ACCUMULATED OTHER COMPREHENSIVE INCOME ------------------------------ ADDITIONAL CUMULATIVE AVAILABLE- CAPITAL PAID-IN RETAINED TRANSLATION FOR-SALE TREASURY STOCK CAPITAL EARNINGS ADJUSTMENT SECURITIES STOCK ----------- ----------- --------- --------------- ------------- ----------- IN MILLIONS OF DM BALANCE AT JANUARY 1, 1998..................... 2,584 5,247 26,508 236 510 -- Comprehensive income: Net income................................... -- -- 2,010 -- -- -- Other comprehensive income................... -- -- -- (70) 451 -- Total comprehensive income................... Dividends paid................................. -- -- (827) -- -- -- Special distribution........................... -- -- (10,335) -- -- -- Issuance of capital stock...................... 263 7,350 -- -- -- -- Treasury stock................................. -- -- -- -- -- (160) ----- ----------- --------- --- --- --- BALANCE AT JUNE 30, 1998....................... 2,847 12,597 17,356 166 961 (160) ----- ----------- --------- --- --- --- ----- ----------- --------- --- --- --- TOTAL --------- BALANCE AT JANUARY 1, 1998..................... 35,085 Comprehensive income: Net income................................... 2,010 Other comprehensive income................... 381 --------- Total comprehensive income................... 2,391 Dividends paid................................. (827) Special distribution........................... (10,335) Issuance of capital stock...................... 7,613 Treasury stock................................. (160) --------- BALANCE AT JUNE 30, 1998....................... 33,767 --------- --------- On May 27, 1998 the Daimler-Benz shareholders approved, and on June 15, 1998 Daimler-Benz paid, a special distribution of DM 20.00 (DM 19.63 after adjustment to reflect the approximately 20% discount to market value at which the Daimler-Benz Ordinary Shares and ADS were sold in the rights offering) per Ordinary Share/ADS. In June, 1998, Daimler-Benz issued to holders of Daimler-Benz Ordinary Shares and ADS's and convertible debt securities, rights to acquire up to an aggregate of 52.4 million newly issued Daimler-Benz F-93 DAIMLER-BENZ AG NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AND IN MILLIONS) 6. STOCKHOLDERS' EQUITY (CONTINUED) Ordinary Shares and on June 25, 1998 Daimler-Benz issued and sold 52.4 million Ordinary Shares for net proceeds of DM 7,485 million. The rights issued by Daimler-Benz entitled the holders to purchase Daimler-Benz Ordinary Shares at an approximately 20% discount to the market price of Daimler-Benz Ordinary Shares. Basic and diluted earnings per Ordinary Share have been restated to reflect the dilutive effect resulting from the discount to market value at which the Daimler-Benz Ordinary Shares were sold in the rights offering. During the six months ended June 30, 1998 Daimler-Benz purchased approximately 1.0 million of its Ordinary Shares for resale to its employees in October, 1998. Based on the shareholders' approvals of 1996 and 1997, Daimler-Benz established the Stock Option Plan 1998 of the Daimler-Benz Group (the "Plan") which provides for the granting to certain members of management of options for the purchase of Daimler-Benz Ordinary Shares. The options granted under the Plan will be evidenced by non-transferable 4.4% convertible bonds due in July 2008 with a principal amount of DM 1,000 per bond (the "Convertible Bonds"). Daimler-Benz has reserved up to DM 110 of contingent authorized nominal capital for the issuance of new Ordinary Shares under the Plan. Each Convertible Bond entitles the holder thereof to convert the bond into Ordinary Shares with an aggregate nominal value of DM 1,000, after a 24 month waiting period, during certain specified periods each year, if the market price per Ordinary Share on the day of conversion is at least 15% higher than the predetermined conversion price (the "Conversion Price"). Daimler-Benz offered, beginning June 22, 1998, to certain members of management the right to subscribe to these Convertible Bonds. The Conversion Price equals to DM 183.90/share, the market price of Daimler-Benz shares on May 28, 1998. The subscription period ended July 10, 1998. Effective July 24, 1998 the Group issued Convertible Bonds in the amount of DM 41. 7. OPERATING PROFIT A reconciliation of income before financial income and taxes to operating profit for the six-month periods ended June 30, 1998 and 1997 follows: 1998 1997 ----------- ----------- Income before financial income and taxes........................... DM3,368 DM1,322 Interest on advance payments received on long-term contracts....... 145 126 Earnings from Airbus Industrie..................................... -- 173 Corporate research of Daimler-Benz AG.............................. 260 220 Items not allocable to segments.................................... (10) 8 ----------- ----------- Operating profit................................................... 3,763 1,849 ----------- ----------- ----------- ----------- During the first half of 1998 the Group`s semiconductor business was sold to the American company Vishay Intertechnology, Inc. for a gain of approximately DM 300 and the Group sold two real-estate-project-companies to Berliner Volksbank for a gain of approximately DM 100; during the first half of 1997 F-94 DAIMLER-BENZ AG NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AND IN MILLIONS) 7. OPERATING PROFIT (CONTINUED) the Group sold its interests in AEG Electrocom GmbH and AEG/ElectroCom International, Inc., the Group`s recognition and sorting systems business, to Siemens for a gain of approximately DM 200. 8. EARNINGS PER SHARE The earnings per share are determined as follows: JUNE 30, JUNE 30, 1998 1997 ----------- ----------- IN MILLIONS OF DM OR MILLIONS OF SHARES EXCEPT EARNINGS PER SHARE Basic earnings per share: Net income.............................................................. 2,010 992 ----- ----- Weighted average number of shares outstanding........................... 527.5 525.2 ----- ----- 3.81 1.89 ----- ----- ----- ----- Diluted earnings per share: Net income.............................................................. 2,010 992 Interest expense on convertible bonds and notes (net of tax)............ 24 14 ----- ----- 2,034 1,006 ----- ----- Weighted average number of shares outstanding............................. 527.5 525.2 Dilutive convertible bonds and notes...................................... 24.9 8.8 ----- ----- 552.4 534.0 ----- ----- 3.68 1.88 ----- ----- ----- ----- The weighted average number of shares outstanding have been retroactively adjusted to give effect to the rights offering (see Note 6). F-95 DAIMLER-BENZ AG NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AND IN MILLIONS) 9. SUMMARIZED FINANCIAL INFORMATION--DAIMLER-BENZ NORTH AMERICA Summarized financial information for Daimler-Benz North America, a wholly-owned subsidiary of Daimler-Benz AG, prepared under U.S. GAAP, is set forth below: JUNE 30, DECEMBER 31, 1998 1997 --------- ------------ Receivables.......................................................... $ 8,416 $ 7,070 Equipment on operating leases........................................ 5,589 5,075 Property, plant and equipment........................................ 1,537 1,363 Other assets......................................................... 2,631 2,447 --------- ------------ TOTAL ASSETS......................................................... 18,173 15,955 --------- ------------ --------- ------------ Current liabilities.................................................. 9,541 8,597 Non-current liabilities.............................................. 5,319 4,299 Stockholders' equity................................................. 3,313 3,059 --------- ------------ STOCKHOLDERS' EQUITY AND LIABILITIES................................. 18,173 15,955 --------- ------------ --------- ------------ JUNE 30, JUNE 30, 1998 1997 ----------- ----------- Revenues: Net sales of products....................................................................... $ 7,696 $ 5,547 Finance and lease income.................................................................... 956 808 Operating costs............................................................................... 7,779 5,889 Net income.................................................................................... 348 138 F-96 - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CHRYSLER, DAIMLER-BENZ OR DAIMLERCHRYSLER SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. -------------- TABLE OF CONTENTS PAGE --------- Available Information........................... i Incorporation of Certain Documents by Reference..................................... i Enforceability of Civil Liabilities............. iii Currency Presentation and Exchange Rates........ iii Forward-Looking Information..................... iv Summary......................................... 1 Selected Historical and Pro Forma Combined Financial Data................................ 13 Unaudited Comparative Per Share Data............ 19 Risk Factors.................................... 21 Use of Proceeds................................. 24 Purpose of Offering............................. 24 Market Prices................................... 25 Capitalization.................................. 29 Dividends....................................... 30 The Transactions................................ 31 Unaudited Pro Forma Combined Financial Information................................... 48 Business Description............................ 58 [Selling Shareholder............................ 60 Description of Chrysler Capital Stock........... 60 Description of DaimlerChrysler Ordinary Shares........................................ 62 Comparison of Certain Rights of Stockholders of Chrysler and DaimlerChrysler.................. 66 Plan of Distribution............................ 78 Legal Matters................................... 79 Experts......................................... 79 Index to Financial Information.................. F-1 [LOGO] Shares Common Stock ($1.00 par value) PROSPECTUS JOINT LEAD MANAGERS AND JOINT BOOKRUNNERS CREDIT SUISSE FIRST BOSTON GOLDMAN, SACHS & CO. --------- DEUTSCHE BANK SECURITIES - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED OCTOBER , 1998 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SHARES [LOGO] ($1.00 PAR VALUE) TO BE CONTRIBUTED TO THE CHRYSLER CORPORATION MASTER RETIREMENT TRUST AND THE CHRYSLER CANADA LTD. PENSION FUND -------------- This Prospectus may be used in connection with the contribution or sale (the "Pension Contribution") of up to [ ] shares of Common Stock, par value $1.00 per share (the "Chrysler Common Stock"), of Chrysler Corporation ("Chrysler") to the Chrysler Corporation Master Retirement Trust and the Chrysler Canada Ltd. Pension Fund (collectively, the "Trust"), which serves as a funding medium for and holds the assets of various pension and retirement plans maintained by Chrysler and its subsidiaries (the "Plans"). The Chrysler Common Stock is traded on The New York Stock Exchange ("NYSE") under the symbol "C." Chrysler has entered into a Business Combination Agreement, dated as of May 7, 1998 (as amended and restated, the "Combination Agreement"), with Daimler-Benz Aktiengesellschaft, a stock corporation (AKTIENGESELLSCHAFT) organized and existing under the laws of the Federal Republic of Germany ("Daimler-Benz"), and DaimlerChrysler AG, a stock corporation (AKTIENGESELLSCHAFT) organized and existing under the laws of the Federal Republic of Germany ("DaimlerChrysler"). The Combination Agreement provides for the business combination of Chrysler and Daimler-Benz in a series of transactions which will result in Chrysler becoming a wholly owned subsidiary of DaimlerChrysler and Daimler-Benz merging with and into DaimlerChrysler, with DaimlerChrysler remaining as the surviving entity. At the effective time of the Chrysler Merger (as hereinafter defined), each share of Chrysler Common Stock offered hereby will be converted into the right to receive 0.6235 of an Ordinary Share, no par value, of DaimlerChrysler (a "DaimlerChrysler Ordinary Share") in connection with the transactions. See "The Transactions." Immediately after the consummation of the transactions, the former stockholders of Chrysler, including the persons who acquire the shares of Chrysler Common Stock in any offering for which this Prospectus is delivered, and the former stockholders of Daimler-Benz will own all of the issued and outstanding DaimlerChrysler Ordinary Shares. This Prospectus contemplates the reissuance of Chrysler Common Stock presently held as treasury shares to enable the transactions to qualify for "pooling-of-interests" accounting treatment. See "Purpose of Offering." Although prior to the completion of any offering for which this Prospectus is delivered, Chrysler and Daimler-Benz will confirm that certain of the conditions to the consummation of the transactions have been met, there can be no assurance that the transactions will be consummated following the completion of any such offering. Chrysler also plans to offer through underwriters (the "Offering"), prior to consummation of the transactions, up to [ ] shares of Chrysler Common Stock. If the transactions are not consummated, purchasers of shares of Chrysler Common Stock covered hereby will remain holders of Chrysler Common Stock, a security with investment characteristics that are significantly different from those of the DaimlerChrysler Ordinary Shares expected to be received in connection with the Chrysler Merger. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN CHRYSLER COMMON STOCK OR DAIMLERCHRYSLER ORDINARY SHARES, SEE "RISK FACTORS" BEGINNING ON PAGE 21 HEREIN. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Chrysler will not receive any proceeds from the contribution of the shares of Chrysler Common Stock covered hereby. The expenses of this registration are estimated to be approximately $[ ] and will be paid by Chrysler. The date of this Prospectus is [ ], 1998. As used in this Prospectus, unless the context otherwise requires: "Chrysler" refers to Chrysler Corporation and its consolidated subsidiaries, and "Daimler-Benz" refers to Daimler-Benz Aktiengesellschaft and its consolidated subsidiaries, in each case prior to the consummation of any of the Transactions (as hereinafter defined). As used in this Prospectus, unless the context otherwise requires, the term "DaimlerChrysler" refers to DaimlerChrysler and its consolidated subsidiaries which is to be the owner of all outstanding shares of the surviving corporation following the Chrysler Merger as a result of the Chrysler Exchange (as hereinafter defined) and the successor corporation to Daimler-Benz as a result of the consummation of the Daimler-Benz Exchange Offer and the Daimler-Benz Merger (as hereinafter defined). ------------------------ AVAILABLE INFORMATION Chrysler is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information concerning Chrysler can be inspected and copied at the Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's Regional Offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, New York, New York 10048. Copies of such material can be obtained from the Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Information on the operation of the Commission's Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Certain reports, proxy statements and other information concerning Chrysler may also be obtained at the Commission's World Wide Web site, located at http://www.sec.gov. In addition, material filed by Chrysler can be inspected at the offices of the NYSE at 20 Broad Street, New York, New York 10005. This Prospectus constitutes part of a registration statement on Form S-3 (together with all amendments and exhibits thereto, the "Registration Statement") filed by Chrysler with the Commission under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto. Such information may be obtained from the Commission's principal office in Washington, D.C. at the address set forth above upon payment of the fees prescribed by the Commission. Statements contained in this Prospectus, or in any document incorporated by reference or deemed to be incorporated by reference into this Prospectus with respect to the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each case reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. ------------------------ INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents previously filed by Chrysler with the Commission under the Exchange Act are incorporated herein by reference: i THE OFFERING Securities Offered........................... Chrysler Common Stock, par value $1.00 per share. See "Description of Chrysler Capital Stock." If the Chrysler Merger is consummated, each share of Chrysler Common Stock covered hereby will be converted into the right to receive 0.6235 of a DaimlerChrysler Ordinary Share. See "The Transactions---General." Chrysler also plans to offer through underwriters (the "Offering") up to [ ] shares of Chrysler Common Stock. Chrysler Common Stock Issued and Outstanding as of August 31, 1998...................... Approximately 647 million shares Chrysler Common Stock of Chrysler Covered Hereby..................................... [ ] million shares Total Shares Outstanding After Pension Contribution and Offering.................. [ ] million shares Use of Proceeds.............................. Chrysler will not receive any proceeds from any sale of the shares contributed to the Trust. The proceeds of any such sales will be for the benefit of the Trust and used to meet its obligations with respect to providing retirement benefits to participating employees and retirees and their beneficiaries. The net proceeds of any sale of shares to the Trust will be used by Chrysler for general corporate purposes, including working capital. See "Pension Contribution." New York Stock Exchange Symbol............... C (DaimlerChrysler Ordinary Shares will be listed on the NYSE under the symbol "DCX." It is expected that the DaimlerChrysler Ordinary Shares will be approved for listing on the Frankfurt Stock Exchange and are expected to be traded on the Chicago, Pacific, Philadelphia, London, Paris, Montreal, Toronto, Swiss, Vienna and Tokyo stock exchanges, as well as on all other German stock exchanges.) PURPOSE OF OFFERING Chrysler's purpose in issuing the shares covered hereby is to enable the Transactions to qualify for pooling-of-interests accounting treatment. See "Purpose of Offering." RISK FACTORS In considering an investment in Chrysler Common Stock and the DaimlerChrysler Ordinary Shares to be received in connection with the Transactions, prospective investors should carefully review and consider the following: the issuance of the shares of Chrysler Common Stock covered hereby is not conditioned on consummation of the Transactions; such issuance is conditioned on the satisfaction of the 90% Minimum Condition; the value of the DaimlerChrysler Ordinary Shares to be received by holders of Chrysler Common Stock is subject to fluctuation; risks relating to the integration of the companies; and risks relating to the valuation proceeding available under German law (SPRUCHVERFAHREN). See "Risk Factors." 12 of these evaluations, each of Daimler-Benz and Chrysler is engaged in the process of upgrading, replacing and testing certain of its information and other computer systems so as to be able to operate without disruption due to Year 2000 issues. Chrysler's remedial actions are scheduled to be completed during the third quarter of 1999 and, based upon information currently available, Chrysler does not anticipate that the costs of its remedial actions will be material to DaimlerChrysler's results of operations or financial condition. Daimler-Benz' remedial actions are scheduled to be completed during the third quarter of 1999 and, based upon information currently available, Daimler-Benz does not anticipate that the costs of its remedial actions will be material to DaimlerChrysler's results of operations or financial condition. However, there can be no assurance that the remedial actions being implemented by Daimler-Benz and Chrysler will be able to be completed by the time necessary to avoid dating systems problems or that the cost of doing so will not be material. If each of Daimler-Benz and Chrysler is unable to complete its remedial actions in the planned time frame, in each case, contingency plans will be developed to address those business critical systems which may not be Year 2000 compliant. In addition, disruptions with respect to the computer systems of suppliers or dealers, which systems are outside the control of Daimler-Benz and Chrysler, could impair the ability of Daimler-Benz and Chrysler (and, therefore, DaimlerChrysler) to obtain necessary materials or products or to sell to or service their dealers. Disruptions of DaimlerChrysler's computer systems, or the computer systems of DaimlerChrysler's suppliers or dealers, as well as the cost of avoiding such disruption, could have a material adverse effect upon DaimlerChrysler's financial condition and results of operations. Each of Daimler-Benz and Chrysler has a process in place to assess the Year 2000 readiness of its business critical suppliers and of its dealers. Each of Daimler-Benz and Chrysler believes that the most reasonably likely worst case scenario is that a small number of suppliers will be unable to supply components for a short time after January 1, 2000. As part of the assessment process, Daimler-Benz and Chrysler will develop contingency plans for those business critical suppliers who are either unable or unwilling to develop remediation plans to become Year 2000 compliant. Although these plans are yet to be developed, both Daimler-Benz and Chrysler expect that these plans will include a combination of actions including stockpiling of components and selective resourcing of materials to Year 2000 compliant suppliers. Each of Daimler-Benz and Chrysler expects that suppliers in this category will represent an insignificant part of DaimlerChrysler's total supply base. In each case, it is expected that these plans will be in place by the third quarter of 1999. USE OF PROCEEDS Chrysler will not receive any proceeds from any sale of the shares contributed to the Trust. The proceeds of any such sales will be for the benefit of the Trust and used to meet its obligations with respect to providing retirement benefits to participating employees and retirees and their beneficiaries. See "Pension Contribution." PURPOSE OF OFFERING Chrysler's purpose in issuing the shares covered hereby and being issued in the Offering is to enable the Transactions to qualify for pooling-of-interests accounting treatment. Under United States generally accepted accounting principles ("U.S. GAAP"), it is a condition for qualification for pooling-of-interests accounting treatment that no more than 10% of the shares of stock to be exchanged in a business combination may be so-called "tainted shares." To the extent that any shares of Chrysler Common Stock have been reacquired and held by Chrysler as treasury stock ("Chrysler Treasury Stock") within the two years prior to initiation of the Transactions, such shares must have been acquired for certain specific purposes unrelated to a business combination in order for them not to be considered to be tainted shares. To the extent that shares of Chrysler Treasury Stock have been reacquired for other than such specified purposes, such shares of Chrysler Treasury Stock must be reissued prior to the consummation of the Chrysler Merger to "cure" the taint associated with the shares. During the two-year period prior to the initiation of the Transactions, Chrysler reacquired approximately 109.9 million shares of Chrysler Common Stock presently held as Chrysler Treasury Stock, of which approximately 89.6 million shares were not 24 market. It will continue to concentrate on its core competencies and use every opportunity to achieve greater economies of scale, for example through increased use of modularization in product development. Through these and other measures, Adtranz expects to lower its cost base in order to achieve positive results and continue to deliver competitive products and systems. Since the sale of the semiconductor activities, Daimler-Benz' microelectronics activities have focused exclusively on the fast growing automotive electronics market. MTU/Diesel Engines has introduced a series of new and innovative products and will work on expanding its market position, primarily in the area of diesel engines for civilian applications. Daimler-Benz' principal executive offices are located at Epplestrasse 225, 70567 Stuttgart, Germany, and its telephone number is 011-49-711-17-0. PENSION CONTRIBUTION The shares covered hereby are being contributed or sold to the Trust to improve the funded status of the Plans. In connection with the contemplated contribution, Chrysler has appointed several investment managers (the "Investment Managers"), within the meaning of Section 3(38) of the Employee Retirement Income and Security Act of 1974, as amended, each of whom will assume absolute discretion over whether the Trust continues to hold (or disposes of) some or all of that portion of the shares covered hereby placed under its management. The Trust will not be charged a fee or incur any expenses with respect to the contribution or sale of the shares covered hereby, although it will be responsible for paying the fees of the Investment Managers. On October 15, 1998, prior to the Effective Date, the Trust owned approximately 1.9 million shares of Chrysler Common Stock, which shares are under separate management and are unrelated to the shares covered hereby. DESCRIPTION OF CHRYSLER CAPITAL STOCK GENERAL Chrysler's authorized capital stock consists of 20 million shares of Preferred Stock, par value $1.00 per share ("Chrysler Preferred Stock") which is issuable in series, and one billion shares of Common Stock, par value $1.00 per share. At September 30, 1998, Chrysler had no shares of Preferred Stock and approximately 647 million shares of Common Stock outstanding. In addition, Chrysler held approximately 177 million shares of Common Stock in treasury and an aggregate of approximately 58.7 million additional shares of Common Stock were reserved for issuance under Chrysler's equity based compensation plans. The shares of Chrysler Common Stock will be converted into the right to receive DaimlerChrysler Ordinary Shares in connection with the Chrysler Merger. See "Description of DaimlerChrysler Ordinary Shares." Chrysler Common Stock does not have cumulative voting rights for the election of directors, which means that the holders of more than 50 percent of the shares voting for the election of directors can elect 100 percent of the directors if they choose to do so, and, in such event, the holders of the remaining shares voting for the election of directors will not be able to elect any person or persons to the Chrysler Board. Chrysler Common Stock has no pre-emptive rights. Dividends may be paid on Chrysler Common Stock, when, as and if declared by the Chrysler Board, out of surplus, as defined by the DGCL, or in case there is no such surplus, out of Chrysler's net profits for the fiscal year in which the dividend is declared, the preceding fiscal year or both. Dividends may not be paid on the Common Stock at a time when there are arrearages on Chrysler Preferred Stock. 60 - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CHRYSLER, DAIMLER-BENZ OR DAIMLERCHRYSLER SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. -------------- TABLE OF CONTENTS PAGE --------- Available Information......................... i Incorporation of Certain Documents by Reference................................... i Enforceability of Civil Liabilities........... ii Currency Presentation and Exchange Rates...... iii Forward-Looking Information................... iv Summary....................................... 1 Selected Historical and Pro Forma Combined Financial Data.............................. 13 Unaudited Comparative Per Share Data.......... 19 Risk Factors.................................. 21 Use of Proceeds............................... 24 Purpose of Offering........................... 24 Market Prices................................. 25 Capitalization................................ 30 Dividends..................................... 31 The Transactions.............................. 32 Unaudited Pro Forma Combined Financial Information................................. 49 Business Description.......................... 59 Pension Contribution.......................... 60 Description of Chrysler Capital Stock......... 60 Description of DaimlerChrysler Ordinary Shares...................................... 63 Comparison of Certain Rights of Stockholders of Chrysler and DaimlerChrysler............. 67 Legal Matters................................. 79 Experts....................................... 80 Index to Financial Information................ F-1 [LOGO] Shares Common Stock ($1.00 par value) PROSPECTUS - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses expected to be incurred in connection with the offering described in this Registration Statement. Registration Fee............................................... $441,703.50 Printing Fees and Expenses..................................... Legal Fees and Expenses........................................ Accounting Fees and Expenses................................... Blue Sky Fees and Expenses..................................... Miscellaneous.................................................. Total.......................................................... $ - ------------------------ All amounts are estimated except the Registration Fee. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Chrysler is incorporated under the laws of the State of Delaware. Section 145 of the Delaware General Corporation Law, as amended, and Section B of Article VIII of Chrysler's Certificate of Incorporation provide for the indemnification, except in certain circumstances set forth below, of officers, directors, employees and agents of Chrysler for certain expenses incurred in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and for the purchase and maintenance of insurance by Chrysler on behalf of officers, directors, employees and agents of Chrysler against any liability asserted against, and incurred by, any such officer, director, employee or agent in such capacity. Set forth below is the text of Section 145 and the text of Section B of Article VIII of Chrysler's Certificate of Incorporation. Section 145 of the Delaware General Corporation Law, as amended, provides as follows: "145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS; INSURANCE. -- (a) A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the II-1 defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made (1) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this section. (h) For purposes of this section, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. II-2 (i) For purposes of this section, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this section. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person." Section B of Article VIII of the Certificate of Incorporation of Chrysler, as amended, provides as follows: "B. (1) Each person who is or was made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director, officer, employee or agent of the Corporation or any of its subsidiaries or is or was serving at the request of the Corporation or any of its subsidiaries, as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; PROVIDED, HOWEVER, that, except as provided in paragraph (2) hereof with respect to proceedings seeking to enforce rights to indemnification, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; PROVIDED, HOWEVER, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. (2) If a claim under paragraph (1) of this Section is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be twenty days, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to II-3 any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden or proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (3) The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of this Certificate of Incorporation or by-law, agreement, vote of stockholders or disinterested directors or otherwise. (4) The Corporation may maintain insurance, at its expense, to protect itself and any of its subsidiaries and any director, officer, employee or agent of the Corporation and any of its subsidiaries or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. (5) The Corporation may enter into contracts with any director, officer, employee or agent of the Corporation or any of its subsidiaries providing indemnification to the full extent authorized or permitted by the Delaware General Corporation Law and may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and other similar arrangements to ensure the payment of such amounts as may become necessary to effect indemnification pursuant to such contracts or otherwise. (6) The Corporation's indemnity of any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall be reduced to by amounts such person may collect as indemnification from such other corporation, partnership, joint venture, trust or other enterprise. (7) Any repeal or modification of the foregoing paragraphs by the stockholders of the Corporation shall not adversely affect any right or protection of a person with respect to any act or omission occurring prior to the time of such repeal or modification." As permitted by Section 145 of the Delaware General Corporation Law, as amended, and as authorized by the Board of Directors of Chrysler pursuant to Section B of Article VIII of the Certificate of Incorporation, as amended, Chrysler has purchased and maintains insurance providing for reimbursement to elected directors and officers, subject to certain exceptions, of amounts they may be legally obligated to pay, including but not limited to damages, judgments, settlements, costs and attorneys' fees (but not including fines, penalties or matters not insurable under the law), as a result of claims and legal actions instituted against them to recover for their acts while serving as directors or officers. II-4 ITEM 16. EXHIBITS. EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- --------------------------------------------------------------------------------------------------- 1-A -- Form of Underwriting Agreement.* 2-A -- Amended and Restated Business Combination Agreement, dated as of May 7, 1998, by and among Chrysler, Daimler-Benz and DaimlerChrysler. Filed as Annex A to the Joint Proxy Statement/Prospectus of Chrysler and Daimler-Benz on Form F-4, dated August 6, 1998 (File No. 333-60767) and incorporated herein by reference. 3-A-1 -- Copy of Certificate of Incorporation of Chrysler Corporation, as amended and restated and in effect on May 21, 1987. Filed as Exhibit 3-A to Registration Statement No. 33-15544 on Form S-4 of Chrysler Corporation and incorporated herein by reference. 3-A-2 -- Copy of By-Laws of Chrysler Corporation, as amended as of February 8, 1996. Filed as Exhibit 3-B to Chrysler Corporation Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996 and incorporated herein by reference. 5-A -- Opinion of William J. O'Brien, Esq., Vice President, General Counsel and Secretary of Chrysler, as to the legality of the securities being registered.* 5-B -- Opinion of Debevoise & Plimpton, special counsel for Chrysler, as to the legality of the securities being registered.* 5-C -- Opinion of the legal department of Daimler-Benz as to the validity of the DaimlerChrysler Ordinary Shares.* 8-A -- Opinion of Debevoise & Plimpton as to certain tax matters.* 11-A -- Statement regarding computation of per share earnings. 15-A -- Letter regarding unaudited interim financial information. 23-A -- Consent of William J. O'Brien, Esq. (included in opinion filed as Exhibit 5-A). 23-B -- Consent of Debevoise & Plimpton (included in opinion filed as Exhibit 5-B). 23-C -- Consent of the legal department of Daimler-Benz (included in opinion filed as Exhibit 5-C). 23-D -- Consent of Deloitte & Touche LLP. 23-E -- Consent of KPMG Deutsche Treuhand-Gesellschaft AG. 24-A -- Powers of Attorney executed by certain officers and directors who signed this Amendment to the Registration Statement by an attorney-in-fact.** - ------------------------ * To be filed by amendment. ** Previously filed. ITEM 17. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes that, for the purpose of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the II-5 registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; provided, however, that paragraphs (i) and (ii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (d) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed a part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Chrysler certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment to the Registration Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Auburn Hills, and State of Michigan, on the 16th day of October, 1998. CHRYSLER CORPORATION BY /S/ GARY C. VALADE ----------------------------------------- Gary C. Valade EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated. PRINCIPAL EXECUTIVE OFFICER: /s/ ROBERT J. EATON* - ------------------------------ Chairman of the Board October 16, 1998 Robert J. Eaton PRINCIPAL FINANCIAL OFFICER: /s/ GARY C. VALADE Executive Vice President - ------------------------------ and Chief Financial October 16, 1998 Gary C. Valade Officer PRINCIPAL ACCOUNTING OFFICER: JAMES D. DONLON III* - ------------------------------ Controller October 16, 1998 James D. Donlon III /s/ H.E. LEESE - ------------------------------ H.E. Leese October 16, 1998 ATTORNEY-IN-FACT DIRECTORS: LILYAN H. AFFINITO* - ------------------------------ Director October 16, 1998 Lilyan H. Affinito JAMES D. ALJIAN* - ------------------------------ Director October 16, 1998 James D. Aljian II-7 DIRECTORS: ROBERT E. ALLEN* - ------------------------------ Director October 16, 1998 Robert E. Allen JOSEPH A. CALIFANO, JR.* - ------------------------------ Director October 16, 1998 Joseph A. Califano, Jr. ROBERT J. EATON* - ------------------------------ Director October 16, 1998 Robert J. Eaton EARL G. GRAVES* - ------------------------------ Director October 16, 1998 Earl G. Graves KENT KRESA* - ------------------------------ Director October 16, 1998 Kent Kresa ROBERT J. LANIGAN* - ------------------------------ Director October 16, 1998 Robert J. Lanigan PETER A. MAGOWAN* - ------------------------------ Director October 16, 1998 Peter A. Magowan JOHN B. NEFF* - ------------------------------ Director October 16, 1998 John B. Neff G. RICHARD THOMAN* - ------------------------------ Director October 16, 1998 G. Richard Thoman LYNTON R. WILSON* - ------------------------------ Director October 16, 1998 Lynton R. Wilson *By: /s/ H.E. LEESE ------------------------- H.E. Leese October 16, 1998 ATTORNEY-IN-FACT II-8 INDEX TO EXHIBITS EXHIBIT NUMBER EXHIBITS - --------- --------------------------------------------------------------------------------------- 1-A -- Form of Underwriting Agreement.* 2-A -- Amended and Restated Business Combination Agreement, dated as of May 7, 1998, by and among Chrysler, Daimler-Benz and DaimlerChrysler. Filed as Annex A to the Joint Proxy Statement/Prospectus of Chrysler and Daimler-Benz on Form F-4, dated August 6, 1998 (File No. 333-60767) and incorporated herein by reference. 3-A-1 -- Copy of Certificate of Incorporation of Chrysler Corporation, as amended and restated and in effect on May 21, 1987. Filed as Exhibit 3-A to Registration Statement No. 33-15544 on Form S-4 of Chrysler Corporation and incorporated herein by reference. 3-A-2 -- Copy of By-Laws of Chrysler Corporation, as amended as of February 8, 1996. Filed as Exhibit 3-B to Chrysler Corporation Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996 and incorporated herein by reference. 5-A -- Opinion of William J. O'Brien, Esq., Vice President, General Counsel and Secretary of Chrysler, as to the legality of the securities being registered.* 5-B -- Opinion of Debevoise & Plimpton, special counsel for Chrysler, as to the legality of the securities being registered.* 5-C -- Opinion of the legal department of Daimler-Benz as to the validity of the DaimlerChrysler Ordinary Shares.* 8-A -- Opinion of Debevoise & Plimpton as to certain tax matters.* 11-A -- Statement regarding computation of pro forma combined per share earnings. 15-A -- Letter regarding unaudited interim financial information. 23-A -- Consent of William J. O'Brien, Esq. (included in opinion filed as Exhibit 5-A). 23-B -- Consent of Debevoise & Plimpton (included in opinion filed as Exhibit 5-B). 23-C -- Consent of the legal department of Daimler-Benz (included in opinion filed as Exhibit 5-C). 23-D -- Consent of Deloitte & Touche LLP. 23-E -- Consent of KPMG Deutsche Treuhand-Gesellschaft AG. 24-A -- Powers of Attorney executed by certain officers and directors who signed this Amendment to the Registration Statement by an attorney-in-fact.** - ------------------------ * To be filed by amendment. ** Previously filed.