Annual Report 2002 Kolbenschmidt Pierburg AG · Pierburg AG, Rheinmetall Allee 1, 40476 Düsseldorf, Germany. K ol benschmidt Pierburg again making good progress De s pite a generally

Annual Repor t 2002

Kolbenschmidt Pierburg AG

The Kolbenschmidt Pierburg Group at a glance

Kolbenschmidt Pierburg AG (listed) Sales: €1.9 billion Employees: 11,500

As of March, 2003

Division Air Supply & Pumps Pistons Plain Bearings AluminumTechnology

Motor Service

Product groups

Major locations

Sales(€ million)

Systems and compo-

nents for air supply

and emission control

Oil and water pumps,

vacuum pumps

Germany

France

Italy

Spain

USA

Brazil

China (joint venture)

Germany

France

Great Britain

Turkey

Brazil

Germany

France

Czech Republic

USA

Canada

Brazil

Japan

China (joint venture)

Germany

USA

Brazil

Germany

Passenger car pistons

Piston modules

Commercial-vehicle

pistons

Large-bore pistons

Plain bearings

Bushings

Thrust washers

Dry bearings for low-

maintenance and main-

tenance-free operation

(Permaglide)

Continuous NF castings

Engine blocks Automotive parts

for engine repair and

workshops

885 595 145 150 145

Headcount 3,900 5,400 970 860 400

Kolbenschmidt Pierburg in figures

1998 1999 2000 2001 2002

HGB HGB IAS IAS IAS

Net sales € million 1,473.3 1,527.1 1,776.2 1,825.5 1,882.6

EBITDA € million 167.2 184.4 202.0 238.4 234.8

EBIT € million 68.3 69.2 54.5 90.5 97.4

EBT € million 61.9 61.1 21.6 49.5 60.1

Net income € million 54.0 26.6 7.4 31.8 36.7

Gross cash flow € million 161.0 150.3 160.8 174.1 170.0

Capital expenditures 3) 4)€ million 125.5 177.9 171.1 174.6 144.3

Amortization/depreciation 5)€ million 110.7 129.0 147.5 145.6 133.9

Accounting equity € million 327.3 263.2 313.7 341.1 332.9

Total assets € million 951.6 946.2 1,384.0 1,338.3 1,251.9

EBIT margin % 4.6 4.5 3.1 5.0 5.2

ROCE % 13.1 12.8 6.4 10.1 11.8

EpS (DVFA/SG) € 1.37 1.21

EpS (IAS) € 0.28 1.18 1.32

Total dividend € million 20.4 20.5 34.6 14.0 14.0

Dividend per share € 0.77 0.77 1.30 0.50 0.50

Headcount (Dec. 31) 11,443 11,789 12,164 11,662 11,535

1) After adjustment acc. to IAS 8; the adjustments are insignificant, both individually and in the aggregate. 2) German Commercial Code3) Excl. financial investments and excl. additions to goodwill4) In 2002, tooling grants/allowances were for the first time directly offset against capital expenditures5) As from 2001, excl. goodwill amortization

1)

2)

Report of the Supervisory Board

Letter to the stockholders

Report of the Executive Board

Management report on the Kolben-

schmidt Pierburg Group

General conditions

The situation of the Group

Prospects


The divisions

Annual financial statements 2002 *

Consolidated financial statements 2002

Notes

Supervisory and Executive Boards

Financial glossary

Financial diary

Addresses of division parent

companies

2

4

68

10

12

141420222426282828

3131

323438424650

5657

58596061

6266748691929398

100

102

106110

111

Kolbenschmidt Pierburg stockCorporate governanceCommunication and marketing

Major eventsSales and earnings trendsAsset and capital structure Capital expendituresResearch and developmentEmployeesEnvironmental managementDependency reportRisk management

Material subsequent eventsForecast report

Air Supply & PumpsPistonsPlain BearingsAluminum TechnologyMotor Service

Balance sheet as of December 31, 2002Income statement

Consolidated balance sheet as of December 31, 2002Consolidated income statementConsolidated statement of cash flowsStatement of changes in equity

Segment reportAccounting principlesNotes to the consolidated balance sheetNotes to the consolidated income statementNote to the consolidated statement of cash flowsNote to the segment reportSupplementary disclosuresAuditor’s opinion Group of consolidated companies

Membership in other supervisoryand comparable boards

* The full separate financial statements of Kolbenschmidt Pierburg AG (including notes) are downloadable from our home page at www.kolbenschmidt-pierburg.com

or may be obtained from us by writing to: Kolbenschmidt Pierburg AG, Rheinmetall Allee 1, 40476 Düsseldorf, Germany.

Kolbenschmidt Pierburg again making good progress

Despi te a genera l ly d i f f icu l t economic envi ronment , the Kol -

benschmidt Pierburg Group c losed f isca l 2002 successfu l ly

and achieved the targets i t had set i tse l f :

• EBIT advanced 8 percent to € 97 mi l l ion

• L iquid i ty improved by 36 percent

• Working capi ta l fe l l by 24 percent

• The f i rst rest ructur ing successes took ef fect

Fur ther successfu l steps in the s t rategic development of automobi le

business were the concentrat ion on core act iv i t ies through the

t ransfer o f the interest in Preh GmbH & Co. KG and the sa le o f the

fuel pump business as of Januar y 1 , 2003.

32

Repor t o f the Super visor y Board

Report of the Supervisory Board

In fiscal 2002, Kolbenschmidt PierburgAG’s Supervisory Board performed thefunctions and duties incumbent on itunder law and the bylaws. The Super-visory Board monitored the Company’smanagement and conduct of businessby the Executive Board.

The Executive Board reported regular-ly, timely and comprehensively to theSupervisory Board on the Company’sand the Group’s position and develop-ment, as well as on fundamental issuesof business policy, management andcorporate planning, including finance,capital expenditure and human resour-ces planning, the risk position and riskmanagement matters. In addition, theSupervisory Board was regularly briefedin writing on the Kolbenschmidt Pier-burg Group’s business position andtrend.

The Supervisory Board met twice in thefirst and three times in the second half-year periods of 2002. The SupervisoryBoard’s Personnel Committee membersconvened twice in fiscal 2002 (April 18and September 12, 2002) and took theactions considered necessary.

When the Finance Committee met onApril 8, 2002, it dealt with the prepar-atory deliberations about the 2001 an-nual accounts. There was no reasonfor the Slate Submittal Committee toconvene.

The full Supervisory Board was duly in-formed about its committees’ activities.At the full Supervisory Board meetings,the members discussed in detail thesituation and development of theGroup, the various divisions and allmajor subsidiaries in Germany andabroad, as well as all material trans-actions.

Furthermore, the Supervisory Boarddealt with issues of strategic and or-ganizational orientation and, at itsmeeting of November 22, 2002, delib-erated on the Group’s medium-termplan. All Executive Board actions re-quiring Supervisory Board approvalwere timely and fully submitted to theSupervisory Board for information anddecision. After scrutiny and detaileddiscussion, all issues were approved.In particular, the Supervisory Boarddealt with and approved

– the conversion of Pierburg AG (a stockcorporation) into Pierburg GmbH (a closely held private limited company),

– the conclusion of a P&L transfer anddirect-control agreement with KS Aluminium-Technologie AG,

– the restructuring program at Fort Wayne.

The Supervisory Board Chairman wasbriefed continuously and promptly onall major transactions involving theCompany and the Group. He had ma-jor matters and issues referred to theSupervisory Board for discussion andmet regularly with the Executive BoardChairman to review strategy, currentbusiness, and risk management issues.

The separate and consolidated finan-cial statements and the managementreports of Kolbenschmidt Pierburg AGand the Group for the fiscal year endedDecember 31, 2002, including the ac-counting system, were all audited byDüsseldorf-based PwC Deutsche Revi-sion AG, Wirtschaftsprüfungsgesell-schaft, which had been appointed asstatutory auditors by the annual stock-holders’ meeting of June 5, 2002. OnMarch 12, 2003, the statutory auditorsissued their unqualified opinion onboth sets of financial statements.

Klaus Eberhardt

Chairman of the Supervisory Board

In the scope of their engagement, thestatutory auditors also had to examinewhether the Executive Board duly im-plemented the legally required proce-dures, especially set up a monitoringsystem that would early on identifyany risks likely to jeopardize the Com-pany’s continued existence as a goingconcern. The auditors stated that theExecutive Board met the requirementsof Art. 91(2) German Stock CorporationAct (“AktG”). At a joint meeting heldon March 27, 2003, with the auditors(who reported on major audit conclu-sions and answered queries), the Su-pervisory Board’s Finance Committeediscussed the separate annual accountsof the Company and the consolidatedfinancial statements for the fiscal yearended December 31, 2002, on the ba-sis of the audit reports and findings.No objections were raised. All membersof the Supervisory Board received theircopies of both sets of financial state-ments, the management reports andaudit reports in due course prior to theSupervisory Board’s annual accountsmeeting on April 3, 2003. At this meet-ing, in which the statutory auditors alsoparticipated to the extent that the sep-arate and consolidated financial state-ments were discussed, the SupervisoryBoard carefully reviewed all of thesedocuments and concurs with the re-sults of the auditors’ examination afterits own review of the separate and con-solidated financial statements, themanagement reports on the Companyand the Group, and the profit appro-priation as proposed by the ExecutiveBoard. No objections were raised. Atits meeting of April 3, 2003, the Super-visory Board approved the separateand consolidated financial statementsfor fiscal 2002 as submitted by the Ex-ecutive Board, which are thus adopted.The Executive Board proposes for theappropriation of the net earnings forfiscal 2002 that an unchanged cashdividend of €0.50 per no-par share bedistributed. The Supervisory Board en-dorses the profit distribution as pro-

posed by the Executive Board. The Ex-ecutive Board’s report concerning af-filiations for fiscal 2001 according toArt. 312 AktG and the pertinent reportof the statutory auditors were submit-ted to the Supervisory Board, whichexamined the report of the ExecutiveBoard and concurs with it, as with theresults of the examination by the stat-utory auditors. The auditors issued thefollowing opinion on the dependencyreport of the Executive Board concern-ing affiliations:

“Based on our examination, which weperformed with due professional care,and on our evaluation we certify that

1. the facts stated in the report are valid;2. the Company’s consideration for the

legal transactions referred to in the report was not unreasonably high.”

After reviewing the final results of itsown examination, the Supervisory Boardhas found no reasons for objections tothe Executive Board’s concluding rep-resentation in the report on affiliationsfor fiscal 2002.

Versus the year before, KolbenschmidtPierburg AG’s Supervisory Boardchanged as follows: With effect as ofthe close of the annual stockholders’meeting on June 5, 2002, Dr. KlausKessler stepped down from this Board,and so did Dr. Siegfried Roth as of July31, 2002. The Supervisory Board thanksDr. Kessler and Dr. Roth for their dedi-cated work in the Company’s best in-terests. At the election of supplemen-tary Supervisory Board members, Dr. Herbert Müller (who had been ap-pointed Supervisory Board member bythe Local Court with effect as from March28, 2002) and Prof. Dr. Dirk Zumkellerwere elected as Supervisory Boardmembers. By order of September 2,2002, the Düsseldorf Local Court ofRegistration appointed Mr. Dietrich Ter-möhlen as Supervisory Board member.

Effective January 21, 2003, Dr. W. HansEngelskirchen and Mr. Georg Lieblerresigned from Kolbenschmidt PierburgAG’s Executive Board to go into retire-ment. Both served on the ExecutiveBoard since the Company’s incorpora-tion in January 1998. The SupervisoryBoard thanks both gentlemen for theirmeritorious and successful services onbehalf of Kolbenschmidt Pierburg AG.

Moreover, the Supervisory Board thanksall employees of the KolbenschmidtPierburg Group for their dedication andcommitment in the fiscal year 2002.

Düsseldorf, April 3, 2003

The Supervisory Board

Klaus EberhardtChairman

4

Repor t o f the Execut ive Board

Letter to the stockholders

Dear Stockholders: In 2002, the Kolbenschmidt PierburgGroup succeeded in upholding its po-sition amid a difficult overall economicenvironment. Sales, earnings and li-quidity clearly improved. Moreover, theGroup succeeded in sharpening itscompetitive edge in its areas of busi-ness, shedding marginal operations,and thrusting well ahead with the re-structuring projects initiated.

With an organic sales growth of 3.1 per-cent, the Kolbenschmidt PierburgGroup again managed to outpace theindustry. At 5.2 percent, the EBIT mar-gin improved over the previous year,approaching the target of a sustained6.3 percent.

As part of our policy of concentratingon core business, the 25-percent inter-est in Preh GmbH & Co. KG was sold atfair value to our sister Aditron AG. More-over, we sold the fuel pumps unit as ofJanuary 1, 2003, a marginal activity nolonger belonging to our core operations.This transaction has been a successfulstep, not only for our company as such,but for our employees at the Neuss lo-cation as well, these all having beentaken over.

And we have made headway in our re-structuring program. Clear successesare already evident in the earnings for2002, especially at Pierburg. The re-structuring of the US piston operationsis also almost finalized. All related bur-dens have been absorbed in the 2002figures.

The Group’s liquidity was much im-proved in 2002. A decisive factor wasthe extensive measures for reducingworking capital, thus slashing theGroup’s net financial debts by €70 mil-lion.

The forecasts for fiscal 2003 still re-flect the considerable uncertainty inthe political and overall economic en-vironment. We are facing these chal-lenges and exploiting the related op-portunities as far as possible for a sus-tained improvement in our market andcompetitive position, thus promotingorganic growth. On the basis of ourtechnological leadership and a soundfinancial footing, this year, too, we aimat a better-than-average corporate per-formance. In the continuation of thissuccessful path I ask you, dear stock-holders, also on behalf of my ExecutiveBoard colleagues, for your continuedconfidence.

Sincerely,

Dr. Gerd KleinertExecutive Board Chairman

ber of participants in these conferencesreflects the increasing interest beingshown in our company. At a specialevent held in the fourth quarter of 2002,we invited a number of fund managers

6 7


Kolbenschmidt Pierburg stock

Poor economic growth worldwide plusthe threat of war in Iraq inevitably im-pacted on stock markets during thepast fiscal period. As a consequence,prices in 2002 again fell, just as in 2000and 2001. America's most importantindex, the Dow Jones lost 18 percent,the foremost European, the Euro STOXX,35 percent.

In Germany, the DAX lost almost halfof its value in 2002, tumbling by 44 per-cent from 5,160 to 2,892 points andslumping to its absolute nadir of 2,519points in October. On an internationalcomparison, the DAX was thus one ofthe weakest indices of the stock mar-kets, this being reflected in the factthat none of the prices quoted thereinsucceeded in maintaining its year-ear-lier level.

Kolbenschmidt Pierburg AG was amongthe MDAX stocks, these plunging by30 percent from 4,326 to 3,025 points.Given this ailing market trend, Kolben-schmidt Pierburg AG shares were like-wise affected and tumbled, parallel tothe MDAX, from €12.65 at December31, 2001, to €8.80 at year-end 2002.

The topics dominating the stock mar-kets during 2002 will again have a ma-jor impact on events in the global capi-tal markets in 2003.

With share indexes being resegment-ed by the Deutsche Börse AG, the Ger-man Stock Exchange Corporation, asof March 24, 2003, KolbenschmidtPierburg AG is now listed under theSDAX. The main reasons for this deci-sion were a purely technical analysisof the stock’s liquidity and the free-floating stock’s market capitalization.

Stock price trend

Number of shares

Annual closing price

Annual high

Annual low

€

€

€

2001

28,003,395

12.65

16.18

9.00

2002

28,003,395

8.80

15.15

7.45

The past fiscal year was another periodin which we continued our extensiveinvestor relations activities. In additionto the many one-to-one talks with ana-lysts of leading banks, we staged quar-terly teleconferences. The growing num-

from Germany and France to attend ananalysts’ conference in Frankfurt/Main.Here, too, the response was highlypositive.

The feedback shown by financial ana-lysts, investors and banks to our 2001annual report, reflecting in particularthe extensive changes in the wake ofthe changeover from HGB accountingstandards to the IAS, was encouragingthroughout. The regular review con-ducted by Manager Magazin resultedin a “good” rating for our report on thecompleted fiscal year.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar02 02 02 02 02 02 02 02 02 02 02 02 03 03 03

Kolbenschmidt Pierburg AG MDAX

Stock price trend in comparison to the MDAX

Indexed to Kolbenschmidt Pierburg stock at January 2, 2002 (up to March 14, 2003)

16

14

12

10

8

6

€

Additionally, our quarterly reports un-derwent thorough revision in 2002 bothin terms of content and design. Thepublications addressing the changinginformation needs of the readers, metwith a broad and welcome response.

The rating agencies Moody’s and Stand-ard & Poor’s (S&P) endorsed our finan-cial policies during the past year andleft our long-term rating unchanged atBBB (S&P) and Baa2 (Moody’s). With-in a market environment currently over-shadowed by many downratings, this initself may be considered as a success.

However, on account of the changedassessment of pension obligations,normally in Germany not covered byan employer’s pension liability insur-ance, S&P awarded us a short-termrating down from A-2 to A-3 and ouroutlook from “stable” to “negative.”

Further share data

Market capitalization / EBIT (€ million)

Price-earnings ratio (PER)

Dividend per share (€)

Dividend yield (%)

2001

3.9

10.7

0.50

4.0

2002

2.5

6.3

0.50

5.7

Kolbenschmidt P ierburg

fol lowing market t rends

SDAX l is ted

98


Corporate governance

The Supervisory Board appoints andremoves Executive Board members,whose age is limited to 65 years.

The Supervisory Board has formed aFinance Committee and a PersonnelCommittee. The Finance Committee al-so performs the functions of an auditcommittee as specified in Clause 5.3.2of the Code. Both Committees arechaired by the Supervisory Board Chair-man.

No former Executive Board membersare on Kolbenschmidt Pierburg AG’sSupervisory Board.

The fees payable to Supervisory Boardmembers are stipulated in the articlesof association (bylaws) and include notonly a fixed but also a success-relatedcomponent. The fees take account ofthe responsibility and work of Supervi-sory Board members, as well as of theCompany’s business situation andbottom line. Supervisory Board (vice-)chairmanship is rewarded separately.The compensation for committee chair-manship and membership will be de-cided at a later date.

An inquiry among the Supervisory Boardmembers indicated that there were noconflicts of interests under the termsof Clauses 5.5.2 and 5.5.3 of the Code.

In the year under review, no loans oradvances were granted to Executive orSupervisory Board members.

Transparency

Kolbenschmidt Pierburg practices apolicy of timely and complete commu-nication of information to its stock-holders, high priority being attachedto having the same information com-municated at the same time to all tar-get groups.

Private investors, too, are promptly in-formed on the Kolbenschmidt Pierburg

website in English or German aboutthe Company’s latest developmentsand important dates, including throughad hoc notifications, press releases,and annual or interim reports.

Since July 1, 2002, upon enactment ofthe amended Art. 15a German Securi-ties Trading Act (“WpHG”), the Execu-tive and Supervisory Board membersof Kolbenschmidt Pierburg AG havebeen obligated to disclose their pur-chase or sale of any KolbenschmidtPierburg stock. By March 10, 2003, theCompany did not receive any suchnotice of purchase or sale, nor did anyreportable shareholdings exist underthe terms of Clause 6.6 of the Code atthat date (1-percent stake or more heldindividually or in the aggregate byboard members).

Accounting and statutory audit

Stockholders and third parties are keptabreast through the consolidated fi-nancial statements at year-end and in-terim reports during the year. All suchreports are prepared in conformity withinternationally accepted accountingprinciples.

Kolbenschmidt Pierburg AG endeavorsto publish its consolidated financialstatements and interim reports within90 and 45 days after the period-closingdate, respectively. The financial report-ing routines within the multitier Kolben-schmidt Pierburg Group are undergoingrevision for improved efficiency.

The Supervisory Board has agreed withthe statutory auditors, viz. PwC Deut-sche Revision Aktiengesellschaft Wirt-schaftsprüfungsgesellschaft, Düssel-dorf, that it will be promptly informedof any reasons for disqualification, biasor lack of independence which maysurface during the audit, as well as ofany findings, conclusions and circum-stances which were established dur-ing the audit and may be of relevance

to the Supervisory Board’s duties. Thestatutory auditors have further agreedto notify the Supervisory Board and/ordisclose in the audit report that theyhave found certain facts substantiatingthat the declaration of conformity is-sued by the Executive and SupervisoryBoard pursuant to Art. 161 AktG is in-correct.

The German Corporate GovernanceCode came into force and effect whenpublished on August 30, 2002, in theelectronic version of the Federal Ga-zette and thus subsequent to Kolben-schmidt Pierburg AG’s annual stock-holders’ meeting. The SupervisoryBoard Chairman therefore requestedthe statutory auditor, on the occasionof the annual audit of the separateand consolidated financial statementsas of December 31, 2002, to voluntarilyissue a declaration of independencepursuant to Clause 7.2.1 of the Code.This declaration by the auditor alsostated which other services were infiscal 2001 and 2002 rendered or con-tractually agreed on for KolbenschmidtPierburg in addition to the statutoryannual audit.

– The Company plans to observe the recommended publication deadlinesfor the consolidated financial state-ments and interim reports (Clause 7.1.2, subclause 2 of the Code).”

Stockholders and their meeting

The stockholders of KolbenschmidtPierburg AG exercise their rights at theirgeneral meeting. They may exercisetheir voting rights at the stockholders’meetings either personally, by a proxyappointed at their discretion, or by avoting proxy of the Company who isbound by specific instructions.

The statutory reports and documents(including the annual report) submit-table at the annual stockholders’ meet-ing will be provided to stockholders onrequest and are also available on theInternet at Kolbenschmidt Pierburg AG’shome page, together with the agenda.

Interaction of Executive and Super-

visory Board members

The two boards closely collaborate ina spirit of mutual trust and in the Com-pany’s best interests. The ExecutiveBoard consults the Supervisory Boardin matters regarding the Company’sstrategic orientation and discusses theprogress of strategy implementationwith the Supervisory Board at regularintervals.

The Executive Board informs the Super-visory Board periodically, timely andcomprehensively about all planning,business development, risk positionand risk management issues of rele-vance to Kolbenschmidt Pierburg.Moreover, the Executive Board dis-cusses and substantiates any variancesof actual business data from budget,plan or benchmark figures.

The Company has taken out a D&Opolicy (Directors’ & Officers’ liability

insurance) with a reasonable deducti-ble for their Executive and SupervisoryBoard members.

Executive Board

The Executive Board conducts andmanages the Company on its own re-sponsibility but in the Company’s bestinterests and with the increase in share-holder value in mind. Including its chair-man, the Executive Board had previous-ly consisted of five members; sinceJanuary 21, 2003, it has had three mem-bers.

The Executive Board members’ remu-neration covers both fixed and variablecomponents which are fixed by theSupervisory Board at a reasonable leveland on the basis of a personal per-formance assessment, with due regardto any other compensation paid by theGroup. Assessment criteria for defininga reasonable remuneration of ExecutiveBoard members mainly include eachmember’s responsibilities and personalperformance, as well as the economicsituation, success and future prospectsof the Company on industry comparison.

In the notes to the consolidated finan-cial statements herein, the remunera-tion of Executive Board members isbroken down into fixed, performance-related and long-term incentive portions.

Any additional or sideline activitiesperformed by Executive Board members(in particular, any nongroup supervisoryboard membership) require the Super-visory Board’s prior approval.

Supervisory Board

The Supervisory Board regularly coun-sels and oversees the conduct of theCompany’s business by the ExecutiveBoard, and is involved in fundamentaldecisions affecting the Company. Rulesof procedure govern Supervisory Boardactivity.

The Executive and Supervisory Boardsof Kolbenschmidt Pierburg AG have re-ported as follows on the Group’s cor-porate governance according to Clause3.10 of the German Corporate Gover-nance Code:

For Kolbenschmidt Pierburg AG, soundand responsible corporate governanceis an integral element in achieving cor-porate targets. Even prior to the publi-cation of the German Corporate Gover-nance Code (the “Code”), national andinternational standards of contempo-rary corporate governance had beenobserved.

In January 2003, the Executive andSupervisory Boards issued their firstdeclaration of conformity pursuant toArt. 161 AktG, which reads:

“The Executive and Supervisory Boardsof Kolbenschmidt Pierburg AG declarethat the Company complies with therecommendations of the German Cor-porate Governance Code GovernmentCommission as published by the Fed-eral Ministry of Justice in the officialsection of the electronic Federal Ga-zette version of November 26, 2002,subject to the following exceptions:

– The assignment of responsibilities and the interaction among members within the Executive Board have pres-ently not been laid down in rules ofprocedure. The Executive Board will deal with the preparation of suchrules (Clause 4.2.1 of the Code).

– Supervisory Board members have to date not been compensated for any chairmanship or membership in com-mittees (Clause 5.4.5, subclause 3 ofthe Code). Such compensation will be decided on at a later date.

– At its next meeting, the Supervisory Board will approve rules to report andrecord conflicts of interests (Clauses 5.5.2 and 5.5.3 of the Code).

10


Communication and marketing

The inherent purpose of CorporateCommunication is to convey informa-tion to the investor community at na-tional and international levels. In aglobally networked information society,it addresses the financial community’sneeds, while also acting as an impor-tant instrument for channeling infor-mation destined for all of a company’sstakeholders, since customers, em-ployees, stockholders, business asso-ciates, and the media justifiably expectcompanies to report comprehensivelyon strategy, financial performance, andtechnical innovations.

In fiscal 2002, Kolbenschmidt Pierburgmet the various information needs ofdefined target groups with press con-ferences held jointly with RheinmetallAG, press releases for the business andtrade press, interviews at Executive orManagement Board level, and with theGroup’s own automotive industry pressevents (trade press meetings, planttours and product presentations). Fur-thermore, a good deal of attention wasdevoted to constant contacts and aregular exchange of information withthe regional media at our various busi-ness locations.

The press highlights for the Kolben-schmidt Pierburg Group included aninformation event organized for some20 trade and daily press journalists atPierburg subsidiary Carbureibar S.A. inAbadiano in Spain’s Basque Province.The main theme of the colloquium heldthere was the latest technical develop-ments in emission control and an over-view of Kolbenschmidt Pierburg’s busi-ness prospects and strategies for thefuture.

Proactive press relations were an inte-gral feature of trade fair appearancesagain in 2002 with the aim of exploit-ing all communication channels underthe overall PR strategy together withmedia presence in the form of productand image ads. The clear goal is stayclose to customers, media and markets.In 2002, the companies of Kolben-schmidt Pierburg AG again attendedtrade fairs, technical symposia, andtrade events. Meriting special mentionin 2002 were automechanica in Frank-furt, the world’s leading forum for theparts market, and the annual WorldCongress of the SAE, with a concurrentexhibition held in Detroit by the Societyof Automotive Engineers International.

1312

Management repor t on the Kolbenschmidt P ie rburg Group

General conditions

According to present projections andcompared with the previous year, world

production of passenger cars and lightcommercial vehicles (LCV: <3.5 t) rose3.7 percent to 56.8 million units in 2002.Passenger cars accounted for 41.5 mil-lion units (up 2.3 percent) and LCVsfor 15.3 million units (up 7.6 percent).Regionally, trends were mixed. Espe-cially worth mentioning is the recoveryof the world's largest automotive mar-ket, the USA.

In the course of the year, production inthe NAFTA region developed favorably.In the USA in 2001, production of pas-senger cars and LCVs had been down-scaled by more than 10 percent due tothe lower demand as well as piled-upinventories; production in 2002, incontrast, climbed 7 percent to around12.3 million units, not least of all dueto higher production capacities ex-tended by foreign manufacturers. Alto-gether 5.0 million units were passengercars (up 3.3 percent) and around 7.3million LCVs (up 9.7 percent). In Canada,too, after a drop in 2001, productionfigures again climbed, by 3.7 percentto a good 2.6 million units, of whichpassenger cars accounted for 1.4 mil-lion units (up 7.8 percent) and LCVs for1.2 million units (unchanged).

In South America, the number of pas-senger cars and LCVs fell 5.8 percentto around 2.0 million vehicles. Produc-tion in Brazil dropped 4.1 percent to1.6 million units, while the figure forArgentina again plunged, this time by32.5 percent to 0.2 million units, dueto the strained economic situation.

In 2002, production of passenger carsand LCVs in Asia again progressed (up7.7 percent), following the setback in2001. Especially in the high-volumemarkets of Japan and South Korea, pas-senger car production surged to 8.4million units (up 3.3 percent) and 2.6million units (up 4.6 percent), respec-tively. Whereas LCV production in Japandropped 2.1 percent to 1.3 million ve-hicles, in South Korea the total climbed3.1 percent to 0.4 million units. Chinashowed the highest growth rate with arise in passenger car production of46.9 percent to 1.1 million vehicles, al-beit from a lower baseline. Includingthe LCVs, with a sizable slice of thisnation’s output, the total reachedaround 2.5 million units (up 33.3 per-cent).

In 2002 and after years of steadily ris-ing production figures, Western Europe

for the first time recorded a decline of

Production of passenger cars/LCVs

according to selected world regions

(million vehicles)

Western Europe

NAFTA

Asia incl. Japan

2001

2002

17.216.9

–2.0%

16.618.0

+7.7%

15.516.6

+7.1%

The Kolbenschmidt Pierburg AG

Executive Board

Dr. Gerd Kleinert

Chairman

Dr. Jörg-Martin Friedrich Dr. Peter Merten

2.0 percent to 16.9 million units forpassenger cars and LCVs. WhereasFrance and Great Britain managed toraise their production to around 3.6million vehicles (up 0.5 percent) andalmost 1.8 million vehicles (up 10.7percent), respectively, in Germany itfell to 5.3 million units (down 3.7 per-cent), in Italy to around 1.4 millionunits (down 9.3 percent), and in Spainto around 2.8 million units (down 2.2percent).

German exports slipped 1.0 percent in2002. With new car registrations inGermany sliding 2.6 percent, the do-mestic brands lost 4.7 percent and theforeign gained 1.7 percent.

In Western Europe, diesel engine vehi-cles are making headway, mainly dueto the mass producers VW, PSA, and

Renault, these offering a large percent-age of passenger cars with diesel en-gines. Whereas in Germany, the pro-portion of diesel vehicles in passengercar and station wagon production againclimbed around 2 percentage pointsto 40.0 percent, the corresponding fig-ure for France remained almost con-stant at 43.5 percent. Among new carregistrations, the diesels in Germanyinched up from 34.6 to 37.5 percentand in France much more, from 56.2 to62.9 percent.

World product ion rebounds

14



Sales and earnings trend

Despite the clouded economic scenar-io, the Kolbenschmidt Pierburg Groupclosed fiscal 2002 successfully. Groupsales mounted by 3.1 percent to€1,882.6 million over the previousyear. Adjusted for MotorEngineering,deconsolidated at the end of 2001, thegain is 5.3 percent. Indeed, this growthon the part of Kolbenschmidt Pierburgagain outpaced that of car productionworldwide. Three of the five divisionscontributed toward improved sales

over the previous year. Especially re-markable are the better-than-averagecontributions by Aluminum Technologyand Air Supply & Pumps. The growthregions of the year 2002 were NorthAmerica and Germany.

Just as one year earlier, the portion ofGroup sales to customers outside ofGermany was more than 66 percent.There were no major changes in the

regional breakdown in fiscal 2002.About one-third of total sales wentagain to customers in Germany. To-gether with the remaining Europeancountries, Europe accounts for morethan three-quarters of all sales. At analmost unchanged proportion of 17 per-cent, North America is still the mostimportant overseas market. The re-maining world markets accounted for6 percent of Group sales—just as oneyear earlier.

Sales by region

(in %)

16 34

231

44

17 33

231

44

2001 2002

Germany

Other Europe

North America

South America

Asia

Other regions

Major events

As of April 8, 2002, Pierburg AG wastransformed into a private limitedcompany (“GmbH”). Apart from thefavorable effects on overheads, thischange will enhance managementempowerment.

Karl Schmidt Unisia Inc., USA, raisedits capital in June 2002, by convertinga stockholder loan, a move not partici-pated in by the co-owner Hitachi UnisiaAutomotive Ltd., Japan. Hence, theminority interests held in this companyby Hitachi Unisia Automotive Ltd.shrank by around 12 percentage pointsto about 8 percent.

In July 2002, KUS Zollner Division Inc.,USA, was merged into Karl SchmidtUnisia Inc., USA. This step strives atsynergizing and streamlining the overallcorporate structures as well as uniformmanagement and control.

In Air Supply & Pumps, as of October1, 2002, Pierburg GmbH’s 24-percentinterest in Preh GmbH & Co. KG wassold at fair value to Aditron AG, anotherRheinmetall AG subsidiary. With thissale, Pierburg GmbH has spun off busi-ness that is marginal to KolbenschmidtPierburg.

Effective as of October 1, 2002, Kolben-schmidt Pierburg K.K., Japan, was soldto KS Kolbenschmidt GmbH by Kolben-schmidt Pierburg AG. This laid thegroundwork for the acquisition of thepistons business of Microtechno Corp.,Japan, by KS Kolbenschmidt GmbH infiscal 2003.

Following the approval by their extraor-dinary stockholders’ meetings held in Düsseldorf on November 14, 2002, KS Aluminium-Technologie AG and Kol-benschmidt Pierburg AG concluded adirect-control and profit & loss transferagreement, with retroactive effect asfrom January 1, 2002.

KS Aluminium-Technologie AG hasterminated a joint venture involvingthe net-machining of engine blocks.Together with the customer it wasagreed that the work will now be pro-vided exclusively by KS Aluminium-Technologie AG.

Business port fo l io

developments

Sales growth fueled by

innovat ion

1716



The North American customers contrib-uted high sales gains (up €32 million),hence more than compensating the pre-vious year’s decline as a consequenceof that region’s economic weakness.Business with customers in Germany(up €15 million) and the rest of Europe(up €10 million) also advanced. In fact,sales growth in these three regionsbucked local industry trends.

Air Supply & Pumps again showed sig-nificant sales successes, featuring thehighest sales in company history witha plus of €64.0 million to €883.8 mil-lion. The growth is exclusively ascriba-ble to the air supply product unit, whereapart from high call-offs for ongoingprojects, the start-up of new projects

impacted favorably. Mainly in the NorthAmerican companies and following theprevious year’s market-related salesslump, the Pistons division made goodheadway and, at €595.7 million, gen-erated sales €24.2 million above theyear before. With the start-up of newseries products, Aluminum Technologydelivered additional revenues of €13.0million, totaling €148.8 million. ThePlain Bearings business suffered froma number of start-up postponementsat the German company and the phase-out of individual products at the USsubsidiary. Hence, its sales droppedby €7.4 million to €145.8 million. Dueto partially weak demand in the after-markets, at €146.4 million, Motor Ser-vice did not quite achieve the previous

year’s revenue volume, the declineover the previous year amounting to€4.9 million.

The divisions’ respective shares in theGroup’s consolidated sales slightlychanged over the prior year. On theone hand, this is attributable to thedeconsolidation of MotorEngineeringin the previous year, on the other, tothe sales surge at Air Supply & Pumps,the latter again raising its share by 2percentage points, thus still being thetop-sales division.

The rising cost of materials as a shareof total operating performance reflectsKolbenschmidt Pierburg's focus oncore competencies. Production jobsnot among the Group's core compe-tencies are increasingly being farmedout. This was especially true of the pastyear with regard to work outsourcedby Aluminum Technology. The payroll

ratio moved in reverse direction. Byimproving productivity and again ex-tensive production outside of Germanyplus favorable exchange rates, it provedpossible within the Group to outweighthe eroding effect of increases at com-pany level in personnel expenses. Theaggregate ratio of the cost of materialsand personnel expenses to total oper-

ating performance fell by 0.4 percent-age points in a year-on-year compari-son.

Sales by divisions

(in %)

8

7

8

44

2

31

2001 2002

Air Supply & Pumps

Pistons

Plain Bearings

Aluminum Technology

Motor Service

MotorEngineering

46

31

The Kolbenschmidt Pierburg Group’sbusiness is mainly concentrated on thedevelopment, production, and market-ing of original equipment for the auto-motive industry, this accounting for 88percent of total sales, following around85 percent in 2002. Due to MotorEn-gineering’s deconsolidation, the pro-portion of sales to engine repair shopsand the workshop trade (spare partsand measuring equipment) slippedfrom 10 percent in 2001 to 8 percentone year later. Four percent of Group

sales was accounted for nonautomo-tive applications such as large-borepistons for stationary plant and con-tinuous casting products for the build-ing construction industry (down from 5 percent).

In fiscal 2002, the Kolbenschmidt Pier-burg Group delivered an EBT of €60.1million, hence €10.6 million higherthan the year-earlier €49.5 million.

Taking into account one-off structuraleffects, namely the deconsolidation ofthe MotorEngineering division in theprior year as well as the sale of the mi-nority interest in Preh GmbH & Co. KGin 2002, EBT is €3.0 million above theprevious year’s.

In 2002 and at €97.4 million, EBIT like-wise surpassed the previous year’sfigure of €90.5 million. Due to lowerdepreciation/amortization, the EBITDAof €234.8 million in 2002 slightly

missed the previous year’s €238.4 mil-lion. Accordingly, the EBT margin at3.2 percent (up from 2.7 percent) andthe EBIT margin at 5.2 percent (up from5.0 percent) were both higher.

In response to the sustained price pres-sure in the automotive vendor sectorplus the ongoing increases in the costof materials and personnel expenses,which all took their toll on the Group’searnings, we successful pushed aheadwith our rationalization, process im-provement, and purchase price reduc-tion efforts. The growth achieved alsoimproved the allocation of fixed costs.

The restructuring measures introducedat various locations of the Group the

year before were partly finalized orpushed forward to a large extent. The

projects at the German plants of Pier-burg GmbH have already led to clearimprovements in the results of opera-tions. The restructuring measures atthe US locations were accelerated, al-so showing favorable effects on per-formance in the second half of the year.Yet, 2002 as a whole was burdened bythe restructuring expenses.

Aluminum Technology only managedto cope with the high number of low-pressure casting start-ups by incurring

heavy additional expenses. Simulta-neous start-ups caused by customerpostponements as well as the products’inherent complexity led to higher-than-average reject rates. Tackling this chal-lenge was on the agenda for 2002 and,in the second half of the year, clearimprovements were evident. In the firstsix months, the emphasis had been ongetting the products shipped out in re-sponse to customer call-offs. Upgrad-ing productivity in this division is a keytask for the year 2003.

In 2002 and at €1,891.8 million, thetotal operating performance by theKolbenschmidt Pierburg Group was€58.5 million or 3.2 percent above2001.

Group expense structure

(in %)Total operating

performance

€1,891.8 million

Total operatingperformance

€1,833.3 million

3.2

51.6

26.9

7.3

11.0

2.7

50.4

28.5

8.1

10.3

EBT

Other

Depreciation/amortization

Personnel expenses

Cost of materials2001 2002

8

7

8

EBT much higher

In i t ia l restructur ing

successes

19

Divisionwise, Air Supply & Pumps inparticular contributed to the EBT im-provement. Compared with the prioryear, its EBT rose more than €40 mil-lion to €52.9 million. Even allowingfor the gains from the transfer of theinterest held in Preh GmbH & Co. KG in2002 and the disposal of the majoritystake in MotorEngineering in 2001, theprior-year EBT was still surpassed byover €30 million. This return to theprofit level of previous years was at-tributable to a repeated clear increasein sales, the successful restructuringat the German plants, ongoing veryhealthy profitability at the Spanishsubsidiary, and the successful turn-around orchestrated by the US sub-sidiary.

At €14.1 million, EBT at Pistons wasaround €6 million below the previousyear’s figure. One-off expenses in 2002for restructuring the US business re-stricted earnings, but did bring abouta sharply improved operating result inthe second half of 2002. Apart fromthis, the division’s earnings were fueledby the good performance again shownby the Brazilian subsidiary, better op-erating results and favorable currencyeffects being the contributors. Earn-ings at the German and French compa-nies were down from the 2001 level,mainly on account of shrinking sales.

For the Plain Bearings division, the €8.2million EBT of fiscal 2002 remaineddefinitely below that of 2001 (down by€6.9 million), this decline mainly be-ing due to slumping sales by the Ger-man company with, at the same time,reduced fixed-cost coverage from thecapital outlays necessary for theplanned sales growth. The first resultsof the restructuring efforts were evidentat the US company, but on balance, thestructural reorganization still clippedthe year’s bottom line.

In the past fiscal year, Aluminum Tech-nology again had to contend with apretax loss. Following a negative €3.6million one year earlier, EBT in 2002reached an equally red €17.8 million,parallel start-ups in the low-pressurecastings sector accompanied by an ex-cessive number of rejects hamperingearnings. In contrast, the pressure- andsqueeze-casting units again turned ina profit.

With an EBT of €13.1 million and de-spite declining sales revenues, MotorService managed to almost maintainthe previous year’s performance dueto the introduced cost-paring measures.

After taxes, the Kolbenschmidt PierburgGroup earned a net income of €36.7million for 2002 (up from €31.8 million).

The income tax load ratio of 38.9 per-cent thus exceeds the about 37-percentaverage income tax burden expectedby the Kolbenschmidt Pierburg Groupin the years ahead. At 1.9 percent, after-tax ROS for 2002 was ratcheted up fromthe prior-year level. Primary contributorto the higher net income was the im-proved EBT whereas capitalization ofdeferred tax assets in 2002 receded.Deferred tax assets were recognized in2002 for temporary differences betweenthe financial and the tax balance sheets,as well as for loss carryovers realizableshort term to reduce income taxes.

EBT by divisions 2001 2002

€ million € million

Air Supply & Pumps 12.6 52.9

Pistons 20.0 14.1

Plain Bearings 15.1 8.2

Aluminum Technology (3.6) (17.8)

MotorEngineering 7.5 0.0

Motor Service 13.4 13.1

Others/consolidation (15.5) (10.4)

Group 49.5 60.1

2120



Versus the prior year, ROCE was raisedby 1.7 percentage points to 11.8 percent.Apart from the EBIT improvement by 7.6percent to €97.4 million, this was main-ly due to the reduction in capital em-ployed by €112.2 million to €771.4 mil-lion (down 12.7 percent). This rewardis mainly the outcome of less workingcapital tied up (down €69.5 million)and downscaled capital expenditures(down €30.3 million).

The long-term EBT margin, EBIT marginand ROCE targets were not yet reachedin 2002. However, at 11.8 percent ROCE,the average cost of capital (WACC) wascovered. In 2003, all efforts will con-centrate on further approaching theambitious targets the Group set for it-self.

Asset and capital structure At €1,251.9 million, total assets in 2002were €86.4 million or 6.5 percent be-low the prior year’s €1,338.3 million,

despite the increased business volume.Balance sheet ratios were upgradedon both the asset and capital sides.

As of December 31, 2002, fixed assetsaccounted for 58.1 percent of total as-sets (virtually unchanged). In absoluteterms, fixed assets shrank by €53.7million. Apart from the lower total oftangibles, reduced due to downscaledcapital expenditures, financial assetsdeclined, too, mainly as the Preh inter-

est was disposed of at a book value of€24.0 million. In contrast, the capitalincrease in the United States raisedgoodwill by around €17 million.

As of December 31, 2002, depreciationof tangibles and amortization of intan-gibles (excluding goodwill) of the Kol-benschmidt Pierburg Group came to€133.9 million, thus clearly down fromthe year-earlier €145.6 million. Theloss on the scrapping of machines atthe US Fort Wayne location meant anadditional charge, their book valuetotaling €5.1 million. The capital ex-penditures of €144.3 million againclearly outnumber amortization anddepreciation, by 7.7 percent in 2002.

Capita l costs covered

Balance sheet rat ios

upgraded

Working capi ta l

consistent ly downsized

Goodwill amortization in 2002 amount-ed to €3.5 million.

The share of current in total assetsslipped from 36.2 to 34.9 percent. The€47.3 million decrease in current as-sets, achieved by downscaling invento-ries as well as receivables despite thehigher business volume, is proof of thesuccess of the working capital programinitiated back in 2001. Cash & cashequivalents rose by €20.4 million.

Target achievement progress Target Actual Actual

2001 2002

EBT margin 4.5% 2.7% 3.2%

EBIT margin 6.3% 5.0% 5.2%

ROCE 15.0% 10.1% 11.8%

Balance sheet structure

2001 vs. 2002 2002

total assets

€1,251.9

million

2001

total assets

€1,338.3

million

Assets Equity & liabilities Assets Equity & liabilities

fixed assets

current assets

income tax assets

cash & cash equivalents

equity

long-term debt

medium- and short-term debt

income tax liabilities

58.3%

25.5%

37.5%

34.6%

2.4%

36.2%

3.7%

1.8%

58.1%

26.6%

38.6%

32.8%

2.0%

34.9%

3.5%

3.5%

Summarized balance sheet 2001 2002 Change

€ million € million € million %

Intangible assets 54.0 74.1 +20.1 +37.2

Tangible assets 670.7 620.5 –50.2 –7.5

Financial assets 55.3 31.7 –23.6 –42.7

Fixed assets 780.0 726.3 –53.7 –6.9

Inventories 244.3 222.4 –21.9 –8.9

Trade receivables 203.6 183.1 –20.5 –10.1

Other current assets 36.4 31.5 –4.9 –13.5

Current assets 484.3 437.0 –47.3 –9.8

Income tax assets 50.1 44.3 –5.8 –11.6

Cash & cash equivalents and short-term securities 23.9 44.3 +20.4 +85.4

Assets 1,338.3 1,251.9 –86.4 –6.5

Stockholders’ equity 326.2 329.0 +2.8 +0.9

Minority interests 14.9 3.9 –11.0 –73.8

Total equity 341.1 332.9 –8.2 –2.4

Pension accruals 286.2 272.9 –13.3 –4.7

Long-term financial liabilities 202.1 188.0 –14.1 –7.0

Noncurrent other accruals 13.3 22.9 +9.6 +72.2

Long-term debt 501.6 483.8 –17.8 –3.6

Current other accruals 108.1 99.5 –8.6 –8.0

Short-term debt 78.0 21.9 –56.1 –71.9

Trade payables 152.6 177.0 +24.4 +16.0

All other liabilities 124.5 111.7 –12.8 –10.3

Medium- and short-term debt 463.2 410.1 –53.1 –11.5

Income tax liabilities 32.4 25.1 –7.3 –22.5

Equity & liabilities 1,338.3 1,251.9 –86.4 –6.5

2322



Finance and capital employed

The Group’s gross cash flow for theyear ended December 31, 2002, incheddown from €174.1 million to €170.0million. Adjusted for the €5.1 millionloss on the scrapping of machinery atFort Wayne, USA, the gross cash flowclimbed €1.0 million to €175.1 million.The capital expenditures of €144.3million in 2002 were thus again fullyfunded by the gross cash flow. How-ever, this comparison fails to accountfor the favorable effects of €69.5 mil-lion attributable to the slashed work-ing capital. The free cash flow was spi-

raled up to a remarkable €98.3 mil-lion (from a negative €36.9 million ayear ago).

In absolute terms, total equity moveddown €8.2 million from €341.1 millionto €332.9 million. The change wasmainly attributable to net income, whichraised equity by €37.1 million, whiledecreasing effects came from dividendpayments (€14.0 million), currencyadjustments (€9.4 million) and thelower reserve from fair valuation (€9.7million), which shrank upon the divest-ment of the interest in Preh. The over-all equity ratio within the Group im-proved from 25.5 percent in 2001 to26.6 percent as of year-end 2002.

Equity covers 45.8 percent of fixed as-sets, while equity plus long-term debtoutcover fixed assets by 112.4 percent.

The financial leverage (i.e., the ratio ofinterest-bearing debt to total equity)was pared from 0.82 to 0.63 since fi-nancial liabilities were pruned by aconsiderable €70.2 million, largelythanks to the successful 24.5-percentreduction in working capital (down from€284.2 million to €214.7 million).

Capital expenditures The Kolbenschmidt Pierburg Groupcompanies invested altogether €144.3million in 2002 (down from €174.6 mil-lion). The capital outlays comprisedadditions to intangible and tangibleassets, excluding goodwill. For the firsttime in fiscal 2002, the tooling grants/allowances were not shown as deferredincome but directly offset against theadditions to tangible assets. The com-parable year-earlier volume is €151.7million. As a ratio of sales, spendingin 2002 amounted to 7.7 percent, thus0.6 percentage points lower than thelike-for-like 2001 figure.

Capital expenditure reductions achievedto date are the first fruits of the programfor upgrading ROCE. The measures in-clude the outsourcing of productionstages if not core competencies of Kol-benschmidt Pierburg, the improved in-terplant coordination of free capacities

and production facilities, limiting ofplant interlinkage to the necessarylevel, as well as fewer specialty ma-chines. Kolbenschmidt Pierburg willaccelerate its efforts to further lowerits capital expenditure ratio.

As in the previous year, in 2002 capitaloutlays focused on widening capaci-ties at the Group’s domestic locations.Around 60 percent of spending wasabsorbed by the German plants, theforeign share being in the region of 40percent. In contrast to fiscal 2001, for-eign expenditures centered on NorthAmerica and not Europe. While in theprevious period, capital investmentsin North America had been reduceddue to the weak economy, the volumewas in 2002 boosted to €27.2 million,one of the reasons being the initiatedrestructuring projects. In Europe,spending totaled €23.6 million.

Expenditures for tangible assets in theAir Supply & Pumps division weremainly incurred in readiness for newstart-ups and for expanding availablecapacities. At home, preparations chief-ly concentrated on the series produc-tion of two intake manifold projectsfor 6- and 8-cylinder engines, a newgeneration of air-mass sensors, and afuel delivery module for diesel engines.Moreover, capacity was increased forproducing electric throttle bodies aswell as the required motors.

In Italy, the emphasis of spending atPierburg S.p.A. was on intake manifoldsand exhaust gas recirculating valves.In the USA, capital outlays concentrat-ed on extending a production line forelectric throttle bodies.

In the Pistons division, most of the ex-penditure incurred in Germany con-cerned the foundry and machiningcapacities in preparation for new high-duty diesel engine pistons. The outlaysat the US subsidiaries centered on re-structuring and widening productionfacilities for enhancing productivity onthe one hand, and on the other, for pro-ducing additional technical features.At the subsidiaries in France, the CzechRepublic and Brazil, the existing lineswere adapted and enlarged to accom-modate new projects.

In the Plain Bearings division, the Ger-man parent added plant for producingand machining upstream and inputmaterials. Moreover, it was necessaryto extend the production space and thecapacities of the galvanizing facilities,as well as to set up an eco-friendlycleaning line for bearing shells.

At the US subsidiary, most of the capi-tal spent went into the partial relocationof production facilities within the frame-work of a restructuring program.

In the Aluminum Technology division,new plant and equipment were againpurchased to broaden the low-pressurecasting production line for creating therequired capacities to achieve theplanned sales growth. The existing jointventure for net-machining engine blockswas terminated, the lines of the formerco-venturer were partly taken over forcontinuing production on an independ-ent basis.

At €0.7 million (down from €1.0 mil-lion) and in line with its trading activi-ties, expenditures by the Motor Service

division were at a comparably low vol-ume.

Financial investments amounted €1.2million in the fiscal year, following€21.6 million one year earlier. The prior

year’s figure was exceptionally high dueto the addition of Pierburg InstrumentsGmbH and Pierburg GmbH’s stake in aChinese joint venture.

Depreciation and amortization (exclud-ing goodwill) by the KolbenschmidtPierburg Group in fiscal 2002 amountedto €133.9 million (down from €145.6million). Besides the achieved reduc-tion in expenditures, this decline alsoreflects the changed procedure regard-ing tooling allowances. Goodwill amor-tization in 2002 reached €3.5 million.Capital expenditures in 2002 exceededamortization and depreciation by 7.7percent.

F inancia l debts again

whit t led down

Select ive investment

pol icy

Capital expenditures

by divisions

(in %)

8

13

39

1 1

38

2001 2002

Air Supply & Pumps

Pistons

Plain Bearings

Aluminum Technology

Motor Service

Others

10

15

39

1 2

33

24



Research and development

The dramatic decline in the number ofautomobile manufacturers due to re-cent years’ consolidation waves con-trasts with a sharp increase in brandsenjoying unremitting customer loyaltyplus a string of specific models ad-dressing certain trends and filling anumber of market niches. Coupled withthe carmakers’ concentration on corecapabilities, this leads to a shift of de-velopment and production functionsto the vendor industry, the critical suc-

cess factor for the automotive vendorcompanies still being an ability to addinnovative value to the final product,the car.

With its products “for every aspect ofthe engine,” Kolbenschmidt Pierburgeven now is a longstanding and suc-cessful partner of international car-makers. To secure this established po-sition and widen systems competence,

R&D expenditure was raised to €85.6million in fiscal 2002. This is equiva-lent to 4.5 percent of sales (up from€79.8 million or 4.4 percent). In all,the Kolbenschmidt Pierburg Groupemployed almost 6 percent of its totalworkforce on research and develop-ment tasks as of Dec. 31, 2002.

These activities by the divisions aremainly carried out by the respectiveparent companies.

Just as in the previous years, develop-ment work at Air Supply & Pumps con-centrated on products for emissioncontrol, performance enhancement,and weight reduction. A large share ofprojects involved demand-controlled,i.e. electric or motorized products. Com-pared with conventional mechanicalcomponents, which operate non-stopwhile the engine is on, even when un-necessary for the engine’s function—these products lead to fuel cuts throughdemand-controlled operation. Coolantand oil pumps are just some projectexamples. Megaprojects for magnesiumintake manifolds, remarkable for theirreduced weight over the gray-cast oraluminum varieties, were also imple-mented for passenger car applications.

With the start-up of series production,electric throttle body projects for die-sel applications were successfully fi-nalized. Started the previous year, de-velopment work went ahead on sensorsand valves used in fuel cell drive sys-tems.

Air Supply & Pumps spent €54.1 millionfor research and development, equiva-lent to 6.1 percent of sales. As of year-end 2002, altogether 406 employeeswere engaged in R&D worldwide.

For Pistons, too, increasing power den-sity, reducing fuel consumption andfurther cutting exhaust gas emissionswere the driving factors behind R&Dactivities.

Engines with a very high power densityas well as high-pressure injection gas-oline and diesel engines place excep-tional thermal and mechanical de-mands on the materials used. Basically,Kolbenschmidt Pierburg uses an estab-lished standard alloy. Further-refinedmaterials are under development andat defined places on the piston readyfor insertion next year. Another optionis to reduce the critical temperaturewith the aid of a cast-in oil passage.For pistons without any room for thissolution due to the combustion recessdimensions, oil passages with a varia-ble cross-section are a possibility. Thisis a technology presently under seriesdevelopment.

Innovat ive capabi l i ty

strengthened

R&D expenditure by divisions 2001 2002

€ million € million

Air Supply & Pumps 49.3 54.1

Pistons 19.9 25.3

Plain Bearings 2.4 2.8

Aluminum Technology 5.0 3.4

MotorEngineering 3.2 0.0

Group 79.8 85.6

2726



In the course of the past year, a newcasting technology was advanced tothe stage of series production, enablinga more cost-effective production ofcomplex surface geometries.

In recent years, articulated pistons forcommercial vehicles have been devel-oped for various customers and arenow being or about to be series-pro-duced. All-steel pistons for diesel-en-gine commercial vehicles with cylinderpressures of up to 250 bar are beingdeveloped for series production. Foruse in large engines, multiple- andsingle-part steel pistons are beingdeveloped for various customers. Inboth cases, the first prototypes for en-gine testing have been shipped out.

In 2002, expenditure for research anddevelopment activities amounted to€25.3 million in the Pistons division,or 4.3 percent of sales. At December31, 2002, a total of 190 employeesworked in R&D.

R&D activities at Plain Bearings in 2002focused on the continuation of materialdevelopment. Apart from new steel-aluminum composites for high-dutyapplications in direct-injection gasand diesel engines, lead-free bronzematerials were developed to meet the

rising demand for eco-friendly materialsand to cater for the EU car-scrappingregulations.

In product and process development,the focal points were connecting-rodbearings for direct-injection engines,balancer shaft bearings, piston pinbushings and assembled flange bear-ings for passenger car engines.

In the case of steel-plastic composites,efforts concentrated on zero-lead, main-tenance-free and low-maintenancematerials for use at high temperaturesof up to 180 °C. Besides compliancewith environmental requirements, re-search work is focused on tapping fu-ture fields of application.

In 2002, total R&D expenditure by PlainBearings amounted to €2.8 million or1.9 percent of sales. In this division andas of year-end 2002, 31 employees wereinvolved in development tasks at therespective competence centers.

Development activities at Aluminum

Technology centered on achievingconstant and reproducible casting andmachining processes, material devel-opments including technologies for lo-cal material strengthening and the ex-tension of the scope of machining.

Employees

As of December 31, 2002, Kolben-schmidt Pierburg AG along with its sub-sidiaries in Germany and abroad em-ployed a workforce of 11,535 (downfrom 11,662). The decline by 127 wasmainly due to restructuring programsin the USA and as a response to eco-nomic factors. With headcount downand sales nonetheless up, (rounded)sales per capita climbed 5.9 percentfrom €152,000 to €161,000.

During 2002, an average of 210 personswere on limited-term contracts. Thiscompares with 228 the year before.

The domestic companies of the Kolben-schmidt Pierburg Group had a workforceof 6,135 as of December 31, 2002 (downfrom 6,160). Of these, 4,479 were blue-and 1,656 white-collar. German opera-tions accounted for around 53 percentof the total headcount.

Personnel expenses incurred by Kolben-schmidt Pierburg AG and its subsidiariesin 2002 added up to €509.6 million.This total included in 2002 €411.8 mil-lion for wages and salaries, €73.7 mil-lion for social security taxes, and €24.1million for pension expenses.

Fiscal 2002 saw the signing of a collect-ively bargained new pay agreement forGermany's metalworking industry whichalso laid down the principles of a frame-work pay agreement (“ERA”) yet to be

Against the background of parallelstart-ups of complex projects in thelow-pressure casting sector, productand process development was intensi-fied. Apart from closely focused, con-tinuous work in production develop-ment, it was process technology thatreceived special emphasis. With thetakeover of further production stagesin the machining of engine blocks itproved necessary to reorganize andstrengthen project management.Closely examined were the practicabilityof modern machining techniques andnew in-house developed methods ofcylinder surface machining.

Expenditure by Aluminum Technologyamounted to €3.4 million in the pastfiscal year, equivalent to 2.3 percentof sales. At December 31, 2002, alto-gether 30 employees worked in thefield of research and development.

finalized. The new agreement runs fromMarch 1, 2002, through to December31, 2003. For the months of March, Apriland May 2002, employees received aflat €120. From June 1, 2002, a raise inwages, salaries and apprentice pay of3.1 percent was agreed and startingfrom June 1, 2003, another 2.6 percent.In preparation for the ERA agreement,so-called ERA structural componentswere established, the first of 0.9 per-cent being partly due in July 2002 andthe rest in April 2003. The second struc-tural component of 0.5 percent will bepaid in September 2003 while for theperiod June 1, 2003, to December 31,2003, a further structural componentof 0.9 percent has been agreed, whichhowever will not be paid out but de-posited in an ERA adjustment fund. Al-so, key constituents of the collectiveERA agreements were laid down. How-ever, such a new collective agreementhas not yet been submitted. A welcomeaspect is that this agreement for thefirst time includes a provision accord-ing to which the parties state their will-ingness to make exceptions for com-panies whose survival is threatened.

On the basis of a general works agree-ment, preretirement part-time arrange-ments were agreed also in 2002, tai-lored to the specific needs of the Kol-

benschmidt Pierburg Group’s Germanoperations. As in the previous years,further flexible working hour arrange-ments were introduced and group workexpanded at the various plants.

The stock appreciation rights (SAR)program lauched in 2001 for the sec-ond and third management tiers wascontinued in 2002.

A large number of training courses notonly in the field of modern workingtechniques but also in managementand communication were staged in or-der to further the skills of our employeesin and outside of Germany. This contin-uous refinement of employee skills andmotivation is essential in order to copewith changes due to new technologiesand the ongoing move toward state-of-the-art and efficient forms of businessorganization.

One ingredient of this is a continuousimprovement process in effect at allthe plants. The corporate suggestionsschemes with their continuously grow-ing improvement potential are alsohelping to fine-tune some of the internalwork flows. In submitting these sugges-

tions, employees are demonstratingtheir interest in improving the organi-zation of the operations at which theywork.

Apprentice training was again pursuedresolutely and is necessary to increasethe efficiency of our operations withinthe competitive environment. As ofDecember 31, 2002, we employed 364apprentices worldwide.

The employee representatives at allthe companies cooperated construc-tively in putting into effect our meas-ures. This constructive cooperationwith the Works Councils, the Spokes-person Committees of the ManagerialEmployees and the employee repre-sentatives on the Supervisory Boardwas and is an important foundationstone in the success of the Group as a whole.

We thank all the employees of theKolbenschmidt Pierburg AG companiesfor their dedicated efforts and com-mendable achievements in fiscal 2002.

Sales per capi ta up

Apprent ice and ongoing

tra in ing: success factors

Employees 12/31/2001 12/31/2002 Change

Air Supply & Pumps 4,010 3,872 –138

Pistons 5,416 5,400 –16

Plain Bearings 1,045 973 –72

Aluminum Technology 772 862 +90

Motor Service 381 391 +10

Others 38 37 –1

Total Group 11,662 11,535 –127

thereof

Germany 6,160 6,135 –25

abroad 5,502 5,400 –102

2928



Dependency report

Through Berlin-based RheinmetallBerlin Verwaltungsgesellschaft mbH,Rheinmetall AG, Düsseldorf, owns themajority of Kolbenschmidt Pierburg AG’sstock. No direct-control or P&L transferagreement exists between Kolben-schmidt Pierburg AG and RheinmetallBerlin Verwaltungsgesellschaft orRheinmetall AG.

Pursuant to Art. 312 AktG, a reportconcerning affiliations was preparedby the Executive Board and then ex-amined by PwC Deutsche Revision AG,Wirtschaftsprüfungsgesellschaft, theDüsseldorf-based statutory auditorswho issued their unqualified opinionthereon. This dependency report clos-es with the following representation:“Under the circumstances which wereknown to us at the time legal transac-

tions were entered into and actionstaken or omitted, our company has inall cases received an equitable con-sideration. No disadvantages for ourcompany have been involved in con-nection with such acts or omissions.”

Risk management

Doing business inevitably entails risksand rewards. At Kolbenschmidt Pier-burg, business opportunities are seizedand risks only accepted when theseare considered in all likelihood to becontrollable and conducive to the eco-nomic success of the Group. In orderto spot risks early on and adequatelycounteract them, risk management isan essential element of all processesand decisions within the KolbenschmidtPierburg Group.

Essential to the integration of the riskmanagement system in KolbenschmidtPierburg’s processes and proceduresare clear organizational and manage-ment structures at all level, a compre-hensive planning system, as well asefficient reporting and information sys-tems. These latter, both in their exter-nal and internal formats, enjoys a keyrole, since they make sure that busi-ness transactions are represented ac-cording to a uniform procedure. Thereporting and information systems arecontinuously being reviewed for their

effectiveness and, where necessary,fine-tuned.

The instruments for identifying, analyz-ing, controlling and monitoring riskswithin the framework of the risk man-agement are defined in the form ofgroupwide uniform guidelines adopt-ed by the Executive Board. The basisfor this is the annual update of the ex-isting risk landscape in the course ofwhich potential risks are recorded andcategorized regarding their likelihoodand loss potential. Embedded in the

Environmental management

Kolbenschmidt Pierburg is well awareof its duty toward people and the envi-ronment. Indeed, this corporate respon-sibility for the sustainability of our en-vironmental actions is mirrored in eco-political principles that apply to theGroup as a whole. The prime compo-nents are:

– Responsible and respectful treatmentof the environment as an integral component of decision-making and action structures (environmental responsibility);

– Making sure that production opera-tions have minimum impact on the environment above and beyondlegal requirements (pollution);

– Considering environmentally relevantfactors throughout the value-addingchain, in particular at the develop-ment stages (products and produc-tion);

– Implementing a management systemin order to adequately respond to technical and organizational devia-tions (environmental management system); and

– Informing, instructing, and inspiringthe employees (environmental aware-ness).

It is to the dedicated application ofthose of our employees entrusted withenvironment-relevant functions thatwe owe a broad-based positive envi-ronmental awareness throughout theGroup. The establishment of environ-

ment-protecting interests as a firmconstituent of the way we do businessleads to a continuous improvement ofenvironmental protection.

Despite the increasing awareness onthe part of employees, environmentalmanagement systems for securing en-vironmental goals at the German andforeign production companies havebeen implemented and approved ac-cording to the internationally acceptedenvironmental standard ISO 14001.There are two exceptions, companieswhose environmental managementsystems are currently being revisedand improved for certification by theend of 2003.

annual strategic and operative plansand accompanied by monthly control-ling reviews, risk reports and meetingsof the Risk Committee, the risk manage-ment system ensures that any poten-tial risks are identified in good time andtheir implications assessed. In this way,any necessary provisions or remedialaction can be initiated early on at the

individual companies, divisions, or atGroup level. Moreover, whenever a de-fined ceiling is exceeded, the Supervi-sory Board is alerted.

Verifying the risk management systemfor workability is also one of the dutiesperformed in the course of the annual

audit by the statutory auditors (elect-ed by the stockholders’ meeting).

The potential risks to which the Kolben-schmidt Pierburg Group is exposedsubdivide into general economic, in-dustry, performance, financial as wellas legal risks.

General economic and industry risks

Kolbenschmidt Pierburg AG and its sub-sidiaries develop and manufacturecomponents, modules and systems forthe international automotive industryand hence, the Group and its subsidi-aries are in their future business devel-opment largely dependent on how theautomotive climate develops world-wide.

Despite the fears at the start of the yeardue to the terrorist attacks of Septem-ber 11, 2001, the global automotive in-dustry in 2002 made good progress.According to provisional data, world-wide 3.7 percent more passenger carsand light commercial vehicles werebuilt than the year before. As to 2003,expectations with respect to world-wide production figures at the start ofthe period are if anything dampened.Analysts and institutes assume stag-

nation at best. Major influencing fac-tors are, in addition to the repercus-sions of any escalation of the Iraq con-flict, further rising crude oil prices. InGermany, there is additional uncer-tainty regarding the tax situation, andin particular company car taxation, aswell as the impact of a strong euro onexports by German automakers.

The impact of the individual marketson the economic situation at Kolben-schmidt Pierburg is abated by theGroup’s measured globalization froman economic point of view. Additional-ly, the diversified customer structureleads to a balancing of production fluc-tuations among individual carmakers.

The trend continues toward powerfulengines which, too, must comply withthe high requirements posed by emis-sion legislation. With the existing prod-uct range and new projects under de-

velopment, emissions by these en-gines are and will be controlled by re-ducing fuel consumption. Kolben-schmidt Pierburg expects that it willbe able to continue raising its share ofengine components. The ongoing die-sel engine boom contains further salespotential for the companies of theGroup.

Customer pressure to obtain furtherprice reductions persists. This risk iscontained by the creation of addition-al price/cost latitude and the realiza-tion of product and process innova-tions as well as the enactment of con-tinuous improvement processes (CIP)and the enforcement of strict cost man-agement. In the financial statements2002, the accrual for impending losseson uncompleted contracts adequatelyprovides for any losses related to indi-vidual products.

Performance risks Kolbenschmidt Pierburg intends to con-tinue outpacing the international auto-motive industry by generating better-than-average growth rates. The organ-ic growth budgeted in the sales plansfor fiscal 2003 calls for a large numberof complex and technologically ad-vanced new-product start-ups whichbecause of their number, extent andin some cases the limited availabilityof skilled labor, inherently involvesrisks. A comprehensive project man-

agement scheme is being appliedthroughout all the phases, from con-ceptualization, invitation to bid throughto series start-up and mass productionto ensure that these products trans-late into profitable growth. In the 2002annual accounts, the accrual for im-pending losses on individual onerousproduct start-ups adequately providesfor any losses.

3130


The situation of the Group Prospects

Financial risks Due to the international nature of theKolbenschmidt Pierburg Group’s busi-ness, certain currency and interest raterisks may arise which are profiled cen-trally by Kolbenschmidt Pierburg AG’sTreasury and hedged by means of cur-rency futures and forwards wherever itis deemed possible and economicallyrecommendable. It is a fact that theprogressing globalization of procure-ment, production and financing willgradually curb the effect of parities,especially between the dollar and theeuro. Because of the nature and themix of the customers, credit risks arevery low.

The auto assemblers will continue todownload value-adding and engineer-

ing development functions to the in-dustry vendors. For the latter, this inturn spells new challenges with respectto R&D, production as well as qualitystandards and along with this, a grow-ing reliance on the financial resourcesrequired to fund input and the neces-sary additions to tangible assets. Anyinvestment resources deployed by theKolbenschmidt Pierburg Group’s divi-sions are therefore subject to a partic-ularly strict scrutiny in terms of effi-ciency both during the budgeting andPIA approval stages in order thus torelieve cash flows. Further possibili-ties for reducing expenditures havebeen identified and are being exploited.

Legal risks Sufficient insurance contracts havebeen taken out to adequately coverrisks from loss or damage by naturalforces and the resulting business inter-ruption, as well as warranty, productliability, and callback risks. The exist-ing insurance cover is regularly re-viewed for adequacy and, where nec-essary, adapted. At the same time, ongoing projects for process reliabilityas well as extensive quality assuranceprograms aim at avoiding the occur-rence of such risks. In the 2002 bal-ance sheet, adequate accruals pro-vide for such risks where covered notat all or not fully (deductible loss).

A certain tax risk emanates from un-exercised option rights under the war-rant bond issue floated by Kolben-schmidt AG. However, KolbenschmidtPierburg AG assumes, supported bythe prevailing view of tax law punditsand in jurisprudence publications,that bond redemption is unlikely toentail any tax burden; however, the final judgment in a comparable casehas still not yet been passed.

Moreover, certain risks exist from pro-ceedings pending before the court ofcompetent jurisdiction which havebeen instituted by ten stockholdersfor review of the share exchange ratiounder the merger of KolbenschmidtPierburg (Rheinmetall shareholdings),as well as for additional cash compen-sation. Kolbenschmidt Pierburg con-tinues to believe in the underlyingshare exchange ratio fairly reflectingcorporate value relations and thattherefore the proceedings still under-way represent only a slight risk. An adequate amount provided in 1999(unchanged) covers the fees and charges associated with such courtproceedings.

From today’s vantage point, potentiallyruinous economic or legal risks do notexist for Kolbenschmidt Pierburg AG orits divisions, nor do any other risksthat might have a long-term significantadverse effect on either the Compa-ny’s or the Group’s net assets, finan-cial position or results of operations.

Material subsequent events Since the closing date for the annualaccounts, KS Kolbenschmidt GmbH,the parent company of the Pistons di-vision, has taken over from Mazda Mo-tor Corp., Japan, the pistons businessof Microtechno Corp., also Japan. Mi-crotechno has been producing pistonsand other precision parts for the auto-motive industry since 1972. Its pistonsbusiness accounts for sales of around€20 million and employs 120 people.For several years now, there has beencooperation in engineering mattersbetween the two companies. The ac-quisition of Microtechno is for Kolben-schmidt Pierburg another step in theexpansion of activities in Asia. More-over, as a technological center of Asiaand the largest market for advancedmotor vehicle pistons, Japan offers theopportunity of sharing in the R&D ofworld market business there and hencesecuring portions of the market.

In the Air Supply & Pumps division, theelectric fuel pump unit of PierburgGmbH was transferred to TI Automo-tive as of January 1, 2003. This unit ofPierburg GmbH employed 100 peopleand generated worldwide sales ofabout €46 million. The disposal is astep by Pierburg GmbH in its strategyof concentrating on core activities andaddresses the trend by the auto as-semblers to award contracts in thissegment to preferred suppliers ofcomplete fuel tank and fuel deliverysystems. The agreement concludedwith TI envisages a concentration andcontinuation of fuel pump productionat the Neuss location. A supplementa-ry agreement will detail the future sup-ply to TI Automotive of electric motorsby Pierburg’s Hartha, Saxony, plant.

Forecast report At the start of fiscal 2003, call-offs byour customers are at a steady level.Hence and from today’s vantage pointwe expect sales and satisfactory earn-ings at the year-earlier level for the firstquarter of 2003.

Our targets for all of fiscal 2003 are:– substantially improve earnings

through the restructuring of US operations;

– successfully handle the product start-ups of innovative engine blocks by Aluminum Technology and thus achieve a significant enhancement of this division’s earnings situation;

– a return to the sound profitability of the previous years by Plain Bearings on the basis of the meanwhile real-ized start-ups and;

– a stabilization of the working capital program on the sound level attainedand the optimized deployment of expenditures aimed at again reduc-ing financial debts.

Assuming stable political and generaleconomic conditions, the achievementof the aforementioned targets com-bined with the start-up and full capac-ity manufacture of new products willlead to profitable growth in 2003.

Düsseldorf, March 10, 2003

Kolbenschmidt Pierburg AGThe Executive Board

Dr. KleinertDr. MertenDr. Friedrich

32

Kolbenschmidt P ie rburg AG


As the Kolbenschmidt Pierburg Group’sparent, Kolbenschmidt Pierburg AG ex-ercises the related parental and ser-vice provider functions in the fields offinancing, accounting, taxation andcontrolling. In contrast to the consoli-dated financial statements, Kolben-schmidt Pierburg AG’s separate finan-cial statements are prepared accord-ing to German Commercial Code (HGB)regulations since they underlie divi-dend distribution.

As in previous years, the Company’sperformance was in 2002, too, chieflyinfluenced by investment income fromP&L transfer agreements, service feesand HQ allocations, personnel expens-es, cost of materials, and the net inter-est result.

Net investment income soared by€32.7 million, from a red €4.0 millionthe year before to a black €28.7 mil-lion in the year under review. Contri-butions improved in a year-on-yearcomparison were delivered by Pier-burg GmbH and KS KolbenschmidtGmbH, albeit the latter’s was still red.Lower contributions came from KSGleitlager GmbH, KS Aluminium-Tech-nologie AG, and MSI Motor Service In-ternational GmbH.

The net interest expense of €0.5 mil-lion (including all other financial ex-penses and income from Kol-benschmidt Pierburg AG’s central fi-nancing function) turned around in2002 from the year-earlier net interestincome of €4.3 million.

The other operating income for 2002inched up while personnel expensessank and depreciation/amortizationremained at the 2001 level. The otheroperating expenses were lower thanthe year before.

The Company reported a black EBT of€20.7 million, which compares with ared €9.2 million a year ago. Deductingincome taxes of €6.6 million resultedin a net income of €14.1 million for2002 (up from a net loss of €13.6 mil-lion). After transferring €0.1 million tothe reserves retained from earnings,net earnings total €14.0 million. TheExecutive and Supervisory Boards willpropose to the annual stockholders’meeting to distribute a cash dividendof €0.50 per Kolbenschmidt Pierburgshare for 2002, hence a total €14.0million.

As of December 31, 2002, Kolben-schmidt Pierburg AG employed a workforce of 37 (down from 38).

34

The d iv is ions

Air Supply & Pumps

Air Supply & Pumps comprises the se-ries production and aftermarket auto-motive business with its main productsectors of air supply, emission reduc-tion, fuel supply, and pumps. PierburgGmbH is the division’s parent company.

As of October 1, 2002, Pierburg GmbHsold its minority interest in Preh GmbH& Co. KG to Aditron AG, a same-tiersubsidiary of Rheinmetall AG. Presently,Air Supply & Pumps sources from Prehin particular sensors and electronicparts for automotive applications aswell as automation lines at terms as ifat arm’s length. In both business fields,Preh competes with alternative sourcesand hence is not a key supplier for thedivision to hold through a controllinginterest.

In 2002, Air Supply & Pumps againachieved notable sales successes.Sales were boosted around 8 percent,by €64.0 million to €883.8 million,hence even surpassing the previousyear’s record figure. Solid growth bythe air supply unit contrasted withslightly lower pump sales.

The air supply unit raised its sales byaround 13.3 percent, all product groupsgaining. The highest sales increasesresulted from the start-ups in intakemanifolds and exhaust gas recirculat-ing valves, for the first time fully im-pacting on the entire fiscal year, aswell as from higher customer call-offsfor throttle bodies.

Pump sales were around 1 percentdown. Whereas vacuum pumps andmechanical water pumps postedclearly rising sales, the other productgroups did not quite achieve the prioryear’s figures.

Pierburg GmbH’s sales were up by 9 percent. This hike resulted solelyfrom air supply products, with intakemanifolds, throttle bodies, exhaustgas recirculating valves, and solen-oids all showing double-digit salesgrowth.

Streamlined business

portfol io

Sales c lear ly up

Indicators 2001 2002 Change

Air Supply & Pumps € milli0n € milli0n € milli0n

Net sales 819.8 883.8 +64.0

EBIT 25.1 64.9 +39.8

EBT 12.6 52.9 +40.3

Net income 14.2 44.5 +30.3

Capital expenditures 1) 80.4 56.7 –23.7

Headcount at Dec. 31 4,010 3,872 –138

EBIT margin (in %) 3.1 7.3

ROCE (in %) 8.9 25.3

1) For the first time in 2002 tooling allowances were deducted from capital expenditures.

37

The non-German European companieslikewise shared to a considerable de-gree in the division’s added sales, Car-bureibar, Spain, and Pierburg S.a.r.l.,France, showing the steepest gains.The Italian company Pierburg S.p.A. also contributed a sizable proportionof the increase while Pierburg do Brasilonly slightly topped its year-earlierrevenues and, in the United States,Pierburg Inc. did not quite repeat itsprior-period performance due to re-duced call-offs.

This division’s EBT totaled €52.9 mil-lion, thus clearly topping the previousyear’s €12.6 million. Included in thisfigure is the one-off €15.1-million gainfrom the transfer of the minority inter-est in Preh GmbH & Co. KG.

Earnings of Pierburg GmbH’s subsidi-aries all showed good progress. Withsales up, Carbureibar S.A., Spain,achieved a strong increase in EBT andthis year, too, inputted largely to thedivision’s earnings. Despite reducedsales, Pierburg Inc., USA, closed theyear with a profit. The year before, pro-duction start-ups were still causing apretax loss. At Pierburg S.à.r.l., France,boosted sales together with a favora-

ble sales mix led to a better EBT. Re-structuring expenses plus start-uplosses largely eroded the effects ofadded sales at Pierburg S.p.A., Italy,thus still preventing a positive EBT.Pierburg do Brasil, Brazil, managed toincrease its positive EBT, althoughsales revenues remained constant forparity reasons.

In its second year of operation, theChinese joint venture KolbenschmidtPierburg Shanghai Nonferrous Compo-nents, owned by Pierburg GmbH at 50 percent and carried at equity, againshowed sound sales and earningsgrowth.

Division expenditures in 2002 came to €56.7 million (down from a like-for-like €59.0 million) and needed onlyhalf of the year’s gross cash flow of€112.9 million, however, without off-setting customer tooling grants/allow-ances against the additions. Total divi-sion assets as of December 31, 2002,sank €11.1 million to €537.2 million.Given the almost unchanged account-ing equity of €140.4 million, the equi-ty ratio crept up from 25.6 percent in2001 to 26.1 as of December 31, 2002.Both the higher EBIT and the upgradedaverage capital employed boosted ROCE from the previous year’s 8.9 per-cent to 25.3 in 2002.

Targets for 2003

To consolidate and further improve thesound earnings level, the division willin 2003

– continue with the restructuring pro-grams successfully enacted last yearand aimed especially at enhancing productivity in the various product groups;

– fine-tune its project management;– return loss-making projects to prof-

itability;– reduce indirect costs; and– make best possible use of capital

expenditures to achieve another rise in ROCE and continue with the working capital program.

Air Supply & Pumps

Earnings improved

Gross cash f low up

38

The d iv is ions

Pistons

The Pistons division develops, manu-factures and markets pistons for gaso-line and diesel engines used in pas-senger and commercial vehicles. It also develops and manufactures pis-tons for 2-stroke and compressor en-gines plus large-bore pistons for sta-tionary engines, marine diesels, andlocomotives. KS Kolbenschmidt GmbHis the parent company of the Pistonsdivision.

At the end of fiscal 2002 an agreementwas signed for the takeover of the pis-tons business of the Japanese compa-ny Microtechno Corp., a subsidiary ofMazda Motor Corp., Japan. Effective asfrom February 2003, the agreement willserve as a basis for further expandingbusiness within Asia. Another purposeis to consolidate the position on theworld market.

In all, the Pistons division achievedsales of €595.7 million in fiscal 2002,an increase of €24.2 million or around4 percent, mostly from the North Ameri-can market.

The hostile European environment,the chief sales market of KS Kolben-schmidt GmbH, is reflected in the salesrevenues which declined slightly overthe previous year’s.

Sales of small pistons in 2002 matchedthose of the year before. In line withgeneral market trends, diesel enginepistons sales once more gained to thedebit of gasoline engine pistons. Rev-enues from the sale of plant and equip-ment/licenses as well as merchandisewere slightly down. A weak marketmeant that large-bore piston salesslumped.

Among the European subsidiaries itwas Société Mosellane de Pistons S.A.,Thionville, whose main market isFrance, that had to absorb a sharp de-cline in sales compared with the previ-ous period. This was chiefly becauseof shrinking volumes in the wake ofengine range sales remixes and pricereductions. The Czech company Metala.s., Ústí, in contrast, easily toppedyear-earlier sales, with a number ofstart-ups further helping to expandcapacities.

The previous year had been a poor period for the North American marketand 2002 showed a definite recovery.Sales by the North American compa-nies bounced back to the level of 2000.Alongside the general market trend, itwas the start-up of new projects thatfueled this rebound. With the US loca-tions in the throes of restructuring,sales by the various plants differedwidely. The Marinette, Wisconsin, fa-cility achieved a considerable rise fromthe previous year while sales at FortWayne, Indiana, inched down. The Ca-nadian production plant KUS ZollnerCanada Ltd., Leamington, Ontario,failed to quite repeat the good year-earlier business level due to the sched-uled downscaling of a major program.Another subsidiary, KS Large Bore Pis-tons Inc., Marinette, Wisconsin, suc-ceeded in generating sales only mar-ginally short of the 2001 magnitude.

The Brazilian subsidiary KS PistõesLtda., Nova Odessa, had to contendwith declining sales; extra shareswithin a generally frail local marketfailed to outweigh weaker demand,especially for exports to Western Eu-rope while the sharp fall in parity be-tween the Brazilian real, the euro,and the US dollar also meant recedingrevenues.

Acquis i t ion in Asia

North Amer ican business

boost ing sales


Pistons € milli0n € milli0n € milli0n

Net sales 571.5 595.7 +24.2

EBIT 40.0 28.2 –11.8

EBT 20.0 14.1 –5.9

Net income 9.2 0.7 –8.5

Capital expenditures 1) 57.7 47.1 –10.4

Headcount at Dec. 31 5,416 5,400 –16


ROCE (in %) 11.1 8.0


41

Overall, the Pistons division generatedan EBT of €14.1 million in fiscal 2002,well below the preceding period’s€20.0 million. Adjusted for the US restructuring expenses, the outcome,however, is an improved operating result.

KS Kolbenschmidt GmbH’s EBT in fiscal2002 was a negative €13.0 million,compared with an also red €43.0 mil-lion the year before. Both years’ figureslargely reflect the write-down of invest-ments; in 2001 the investment bookvalue of the intermediate holding com-pany for the North American operationsof Pistons and Plain Bearings had re-quired write-down for impairment. In2002, the investment book value ofthe intermediate holding company forthe French Pistons and aftermarketoperations was written down, albeit a much lesser amount. These write-downs did not impact on the Pistonsdivision‘s EBT. KS Kolbenschmidt GmbHfailed to repeat in 2002 its year-earliergood operating result due to poorersales, the severe price squeeze, and a number of nonrecurring burdensshouldered during the period.

All the non-German operating subsidi-aries in Europe and South Americagenerated a positive EBT during thefiscal year. Deserving special mentionis the Brazilian KS Pistões, where thechanged parity, combined with highproductivity, helped produce soundearnings. The Czech subsidiary Metala.s. again turned in a good profit whilethe French Société Mosellane de Pis-tons S.A. had to absorb lower earningsdue to reduced sales.

Since 2002, the US company KarlSchmidt Unisia Inc. has merged its operations at the Marinette and FortWayne locations. At the start of the fiscal year, a decision was made tofurther restructure the Fort Wayne plantand focus here on high-volume series.The related restructuring expenses im-pacted on 2002 earnings to such anextent that despite the favorable ef-fects toward year-end the companystill posted a loss. In contrast, ZollnerCanada Ltd., Leamington, again gener-ated highly commendable earnings.KS Large Bore Pistons Inc., Marinette,too, managed to close the year in theblack.

The Chinese joint venture Kolben-schmidt Shanghai Piston Co. Ltd., inwhich KS Kolbenschmidt GmbH holdsa 35-percent stake and which is includ-ed at equity, showed improved salesand earnings compared with 2001.

Additions to tangible and intangibleassets by the Pistons division duringthe period reached €47.1 million, downfrom €57.7 million in 2001, or €57.5million like-for-like since for the firsttime in 2002, tooling allowances re-ceived from customers have been de-ducted from the capital expenditures.

Gross cash flow amounted to €40.5million (down from €56.3 million).

Total division assets of €454.0 millioninclude equity of €152.5 million, equiv-alent to an equity ratio of 33.6 percent(slightly up from 31.3 percent). ROCE,in contrast, fell from 11.1 to 8.0 percentdue to the dip in EBIT and despite im-proved working capital management.

Targets for 2003

To much improve its profitability thedivision will in 2003

– raise earnings at the US companies once the restructuring measures have been successfully completed;

– push ahead with the successful integration and further expansion of the pistons operation acquired in Japan; and

– make even better use of its capital expenditures and continue with its working capital management.

Pistons

Restructur ing e f for ts

burden earnings

42

The d iv is ions

Plain Bearings

The Plain Bearings division developsand produces bearings for engines andother applications as well as mainte-nance-free sliding elements for the au-tomotive and mechanical engineeringsector (bi- and tri-material bearings,Sputter and Permaglide bearings).Moreover, continuous casting productson a copper basis such as tubes, barsand profiles are also manufactured.The division is parented by KS Gleitla-ger GmbH.

In fiscal 2002 and at €145.8 million,sales of Plain Bearings failed to re-achieve the previous year’s level (down€7.4 million). At KS Gleitlager GmbHas division parent, business declinedmainly due to the postponement bycustomers of series start-ups for cam-shaft bearings and assembled flangebearings, with, at the same time, few-er call-offs for series metal bearings.Business in maintenance-free slidingelements, on the other hand, was sta-ble.

In fiscal 2002, sales at the North Ameri-can shareholding KS Bearings Inc. werehurt by product phase-outs. Businessin plain bearings for both commercialvehicles and passenger cars had tocontend with receding demand com-pared with the previous year. Furthersales reductions were caused by thepartial shutdown and relocation of theproduction lines. Sales were downcompared with 2001. The South Ameri-can company KS Bronzinas Ltda., Bra-zil, repeated the previous year’s salesvolume amid a tough market.Business decl in ing


Plain Bearings € milli0n € milli0n € milli0n

Net sales 153.2 145.8 –7.4

EBIT 17.7 10.1 –7.6

EBT 15.1 8.2 –6.9

Net income 6.0 2.1 –3.9

Capital expenditures1) 12.7 14.6 +1.9

Headcount at Dec. 31 1,045 973 –72


ROCE (in %) 37.1 20.2


With an EBT of €8.2 million, Plain Bear-ings failed to re-achieve the good year-earlier level (down by €6.9 million) in2002. The pretax profit of the division’s

largest company, KS Gleitlager GmbH,declined mainly for reasons of shrink-ing sales and higher fixed costs. Thanksto successful restructuring measures,earnings by the American company KS Bearings Inc. were better in fiscal2002 than in the previous year, how-ever, still clearly red due to expensesfrom partial shutdowns and relocation.Just as the year before, the BrazilianCompany KS Bronzinas Ltda. delivereda positive EBT.

In fiscal 2002, the division’s capitalexpenditures of €14.6 million toppedthose of the previous year (up €1.9 mil-lion) despite the first-time offset oftooling grants/allowances. The year-earlier like-for-like figure had been€12.6 million, the difference beingtherefore an increase of €2.0 million.Due to the drop in earnings and slightlylower depreciation/amortization, grosscash flow, on the other hand, declinedand, at €11.9 million, failed to fullycover the cash outflow for fixed-assetadditions. The balance sheet ratios asof December 31, 2002, slightly wor-sened over the prior year, are howeverstill acceptable. With total division as-sets of €83.1 million (up over the pre-vious year) and equity of €8.0 million,the equity ratio was 9.8 percent. ROCEdropped from 37.1 percent in 2001 to a still good 20.2 percent for the yearunder review. Initial progress in improv-ing working capital failed to outweighthe slump in EBIT.

Targets for 2003

To return to its erstwhile profitabilitythe division will in 2003

– successfully complete the restruc-turing programs at KS Bearings Inc. combined with a sharp improvement in productivity and product quality;

– restore KS Gleitlager GmbH to healthy profitability, especially through the full capacity production of the new projects and the turnaround of loss-makers;

– strongly expand sales at KS Bronzinas Ltda.; and

– push ahead with the measures for reducing working capital and for selective capital expenditures.

45

Plain Bearings

Earnings suf fer ing

46

The d iv is ions

Aluminum Technology

Aluminum Technology develops, manu-factures and machines cylinder crank-cases (engine blocks) from aluminumand aluminum-silicon alloys. Theseproduct groups represent the pressure-die, low-pressure and squeeze-castingprocesses used in production. Theparent company is KS Aluminium-Tech-nologie AG. The division’s cooperationwithin the framework of a joint venturefor further machining and partial as-sembly of engine blocks was terminat-ed. Together with the customer, it wasagreed that the work originally plannedfor supply in teamwork with the otherventurer, will now be provided exclu-sively by KS Aluminium-Technologie AG.

In fiscal 2002, Aluminum Technologyramped up sales by 9.6 percent to€148.8 million. Apart from volume increases for existing products, thisgrowth was due to the start-up of newproducts. The resulting gains weremainly achieved by the division parentand derived from series business in

pressure-die and low-pressure cast-ings. Sales of squeeze castings re-mained as in 2001. Due to the prepa-ration for the planned sales growth,revenues from development and tool-ing were almost at the high year-earlierlevel.

Aluminum Technology closed fiscal2002 deep in the red. Following a neg-ative EBT of €3.6 million one year ear-lier, EBT for the past year amounted toa red €17.8 million. The sharp rise inlosses is ascribable to KS Aluminium-Technologie AG, specifically its low-pressure castings unit where projectpostponements led to several simulta-neous start-ups which, due to the pro-ducts’ high degree of complexity andthe limited resources, inevitably en-tailed higher-than-average rejects com-bined with heavy start-up losses. Pro-ductivity improvements not achievedas planned due to start-up delays alsodepressed earnings, as did the neces-sary provisions for impending losses.

Sales growth cont inued

Steep star t -up losses


Aluminum Technology € milli0n € milli0n € milli0n

Sales 135.8 148.8 +13.0

EBIT 0.7 (13.3) –14.0

EBT (3.6) (17.8) –14.2

Net loss (3.1) (11.2) –8.1

Capital expenditures1) 21.2 21.6 +0.4

Headcount at Dec. 31 772 862 +90

EBIT margin (in %) 0.5 (8.9)

ROCE (in %) 0.8 (15.7)


In the first months of 2002, making surethat the new low-pressure castings werebeing shipped out was of utmost prior-ity; the process optimization measuresintroduced in the second half of 2002have already shown marked improve-ments in the results of operations.

After deducting customer allowances,capital expenditures in this divisionamounted to €21.6 million, up by€0.4 million or, like-for-like, €1.5 mil-lion. This capital outlay was chieflynecessary to facilitate the low-pressurecasting start-ups. Gross cash flowamounted to a negative €7.4 million.

With current assets improved, total assets slipped from €129.7 millionthe previous year to €128.5 million atthe close of 2002. With equity as ofDecember 31, 2002, at €25.2 million,the equity ratio climbed to 19.1 per-cent (up from 15.9). Due to the redEBIT, ROCE plummeted from a black0.8 percent to a negative 15.7 percent,despite the successes scored by work-ing capital management.

Targets for 2003

To achieve a sustained improvementin earnings the division will in 2003

– further optimize its production pro-cesses and reduce the reject rates;

– continue to enhance productivity; and

– make sure that product start-ups are carried out successfully.

49

Aluminum Technology

50

The d iv is ions

Motor Service

The Motor Service division subsumesKolbenschmidt Pierburg’s worldwideaftermarket activities for engine repairshops and the workshop trade. MSIMotor Service International GmbH isthe division’s parent company.

In fiscal 2002, the Motor Service divi-sion generated sales revenues of€146.4 million (down from €151.3 mil-lion). Sales gains at KS Istanbul A.S.,Turkey, and at MTS Motorenteile Ser-vice GmbH, Germany, were unable tocompensate for shrinking sales by thedivision’s other companies, especiallydue to slacker business at MSI MotorService International GmbH in the lat-ter half of the period.

Except for filters and valves, the salesshrinkage affected all product groups.Whereas the markets of Western Eu-rope stagnated, sales to customers in

Eastern Europe and the Near Eastbroadened. In all, sales shortfalls inWestern Europe were not offset by additions elsewhere.

At €13.1 million, the division’s EBT wasstabilized at the year-earlier level of€13.4 million. MSI Motor Service Inter-national GmbH failed to repeat the EBTof 2002, although sales-related bur-dens were mostly outweighed by ra-tionalization effects. The drop in earn-ings was especially caused by thewrite-down of a loan to a subsidiary.

The structural reorganization carriedout at MTS Motorenteile-Service GmbHled to an improved yet still slightlynegative EBT. For 2003, further restruc-turing in the form of cost savings andsales boosts is on the agenda.

Due to the restructuring measures in2001, mainly aimed at concentratingat a single warehouse location, theFrench company KS Motorac S.A. man-aged in fiscal 2002 to clearly reducethe loss sustained the previous period.

Sl ight revenue losses

Earnings stable at a h igh

level


Motor Service € milli0n € milli0n € milli0n

Net sales 151.3 146.4 –4.9

EBIT 16.8 15.9 –0.9

EBT 13.4 13.1 –0.3

Net income 7.9 8.3 +0.4

Capital expenditures 1.0 0.7 –0.3

Headcount at Dec. 31 381 391 +10


ROCE (in %) 20.0 20.0

Targets for 2003

To attain further profitable growth thedivision will in 2003

– solidify the existing product range through relaunches and ongoing additions;

– step up the customer loyalty program consisting of seminars and training courses; and

– reduce working capital through further improvements to A/R and inventories management.

In 2002, the British KS Winston Ltd.again showed a loss due to insuffi-cient sales. In the first half of fiscal2003, a program will be mapped out,with the purpose of serving the Britishmarket more effectively and, especial-ly, more profitably.

As in the year before, the Czech distri-bution company KS Motor Servis CZ sr.o. generated a slightly positive EBT,from a sales volume a little less thanin 2002.

In fiscal 2002, the Turkish companyKS Istanbul A.S. turned in a profit. De-mand, which the year before had suf-fered severely from currency rate tur-bulences, recovered in 2002. More-over, the opening of a subsidiary inthe preferential-tax free-trade zone ofIstanbul also upped earnings.

Due to the devaluation of the Braziliancurrency over the US dollar, this coun-try’s distribution company KS Produ-tos Automotivos S.A. also had to con-tend with lower sales and earnings.Through a higher share of exports intoother South American countries, the

losses in Argentina were partly com-pensated. At the start of 2003, thatpart of the Latin American businesswhich was previously handled fromGermany, was reassigned to KS Pro-dutos Automotivos S.A. in order to en-duringly strengthen the company’smarket position and enable moreclosely focused marketing activities.

In 2002 and at €0.7 million, capitalexpenditures within the Motor Servicedivision were slightly below the year-earlier €1.0 million, hence only utiliz-ing a minor portion of the gross cashflow of €9.8 million.

With division equity of €16.8 millionand the corresponding equity ratio of17.8 percent as of December 31, 2002(up from 16.5 percent), the divisionhas plenty of growth-fueling funds atits disposal. During the past period,working capital was sharply reducedby 18 percent (around €14,5 million)to €65,9 million, this being reflectedin the ROCE which despite the shrink-ing EBIT (down €0.9 million) wasagain 20.0 percent.

53

Motor Service

Balance sheet and income sta tement for f i scal 2002Consol idated f inancia l s ta tements 2002Kolbenschmidt P ierburg AG

5756


Balance sheet of Kolbenschmidt Pierburg AGas of December 31, 2002 (based on HGB)

Income statement of Kolbenschmidt Pierburg AGfor the year ended December 31, 2002 (based on HGB)

€ million 12/31/2001 12/31/2002

Fixed assets

Intangible assets 0.0 0.0

Tangible assets 0.3 0.2

Financial assets 313.4 313.2

313.7 313.4Current assets

Receivables and sundry assets

Trade receivables 0.6 0.0

Due from group companies 126.9 105.0

Sundry assets 3.3 6.3

Cash & cash equivalents 7.5 20.6

138.3 131.9

Prepaid expenses & deferred charges 0.0 0.1

452.0 445.4

ASSETS

€ million 12/31/2001 12/31/2002

Stockholders’ equity

Capital stock 71.7 71.7

Additional paid-in capital 174.0 174.0

Reserves retained from earnings 22.3 22.4

Net earnings 14.0 14.0

282.0 282.1

Untaxed/special reserves 4.1 2.0

Accruals

Accruals for pensions and similar obligations 11.3 11.7

All other accruals 13.4 12.7

24.7 24.4

Liabilities

Due to banks 82.9 55.5

Trade payables 0.7 0.2

Due to group companies 57.5 81.1

Sundry liabilities 0.1 0.1

141.2 136.9

452.0 445.4

EQUITY & L IABIL IT IES

€ million 2001 2002

Income from investments (4.0) 28.7

Net interest income 4.3 (0.5)

Net financial result 0.3 28.2

Other operating income 13.5 13.7

Personnel expenses (7.4) (6.6)

Amortization/depreciation/write-down (0.1) (0.1)

Other operating expenses (15.5) (14.5)

Earnings before taxes (EBT) (9.2) 20.7

Income taxes (4.4) (6.6)

(Net loss)/Net income (13.6) 14.1

Transfer from reserves retained from earnings 27.6 0.0

Transfer to reserves retained from earnings 0.0 (0.1)

Net earnings 14.0 14.0

5958

Consol idated f inancia l s ta tements 2002 o f Kolbenschmidt P ie rburg AG

Kolbenschmidt Pierburg GroupConsolidated balance sheet as of December 31, 2002

Kolbenschmidt Pierburg GroupConsolidated income statement for fiscal 2002

€ million Note 2001 2002

Net sales (20) 1,825.5 1,882.6

Net inventory changes, other work and material capitalized (21) 7.8 9.2

Total operating performance 1,833.3 1,891.8

Other operating income (22) 57.1 46.3

Cost of materials (23) (924.0) (975.9)

Personnel expenses (24) (522.3) (509.6)

Amortization/depreciation/write-down (25) (147.9) (137.4)

Other operating expenses (26) (209.7) (234.0)

Operating result 86.5 81.2

Net interest expense (27) (41.0) (37.3)

Net investment income and other financial results (28) 4.0 16.2

thereof profit shares of investees stated at equity 0.7 1.6

Net financial result (37.0) (21.1)

Earnings before taxes (EBT) 49.5 60.1

Income taxes (29) (17.7) (23.4)

Group net income 31.8 36.7

Minority interests (30) 0.4 0.4

Group earnings (after minority interests) 32.2 37.1

EBIT * 90.5 97.4

EBITDA ** 238.4 234.8

Earnings per share (EpS), common stock *** (31) €1.18 €1.32

€ million Note 12/31/2001 12/31/2002

Fixed assets (6)

Intangible assets (7) 54.0 74.1

Tangible assets (8) 670.7 620.5

Investments stated at equity (9) 27.5 28.3

Other financial assets (9) 27.8 3.4

780.0 726.3

Current assets

Inventories (10) 244.3 222.4

Trade receivables (11) 203.6 183.1

All other receivables and sundry assets (11) 35.5 29.4

Cash & cash equivalents (12) 21.2 44.3

504.6 479.2

Income tax assets (13) 50.1 44.3

Prepaid expenses & deferred charges 3.6 2.1

1,338.3 1,251.9

ASSETS

EQUITY & L IABIL IT IES

Total equity (14) 12/31/2001 12/31/2002

Kolbenschmidt Pierburg AG stockholders’ equity

Capital stock 71.7 71.7

Additional paid-in capital 174.0 174.0

Other reserves 48.3 46.2

Group net income proratable to Kolbenschmidt Pierburg AG stockholders 32.2 37.1

326.2 329.0

Minority interests 14.9 3.9

341.1 332.9

Accruals

Accruals for pensions (15) 286.2 272.9

Other accruals (16) 121.4 122.4

407.6 395.3

Liabilities

Noncurrent financial debts (17) 202.1 188.0

Current financial debts (17) 78.0 21.9

Trade payables (17) 152.6 177.0

All other liabilities (17) 101.3 98.7

534.0 485.6

Income tax liabilities (18) 32.3 25.1

Deferred income (19) 23.3 13.0

1,338.3 1,251.9

* EBT plus net interest expense

** EBT plus net interest expense and amortization/depreciation/write-down

***No diluting effects in the current year

6160


€ million Note (32) 2001 2002

Cash & cash equivalents at Jan. 1 (BoP) 54.8 21.2

Group net income 31.8 36.7

Amortization/depreciation/write-down of fixed assets 147.9 137.4

Change in pension accruals (5.6) (4.1)

Cash flow 174.1 170.0

Net result from fixed-asset disposal 0.1 0.6

Change in other accruals (23.3) 6.8

Change in inventories 9.5 21.8

Change in receivables, liabilities

(excl. financial debts) and prepaid & deferred items (24.4) 39.9

Gain from deconsolidation (5.4) 0.0

Other noncash expenses and income, net (3.2) (23.7)

Net cash provided by operating activities 127.4 215.4

Cash outflow for additions to tangible and intangible assets (174.6) (144.3)

Cash inflow from the disposal of tangible and intangible assets 1.2 2.4

Cash outflow for additions to consolidated subsidiaries and financial assets (11.9) 0.0

Cash inflow from the disposal of consolidated subsidiaries and financial assets 21.0 24.8

Net cash used in investing activities (164.3) (117.1)

Capital paid in 15.4 0.0

Dividends paid out (34.6) (14.0)

Financial debts raised 38.0 0.0

Financial debts redeemed (15.7) (60.3)

Net cash provided by/(used in) financing activities 3.1 (74.3)

Cash-based change in cash & cash equivalents (33.8) 24.0

Parity-related change in cash & cash equivalents 0.2 (0.9)

Total net change in cash & cash equivalents (33.6) 23.1

Cash & cash equivalents at Dec. 31 (EoP) 21.2 44.3

Kolbenschmidt Pierburg Group Consolidated statement of cash flows for fiscal 2002

Kolbenschmidt Pierburg GroupStatement of changes in equity

€ million Note (15) Groupnet income Stock-proratable holders’

Reserves to Kolben- equity ofReserves from schmidt Kolben-

Additional retained Currency fair and Pierburg AG schmidtCapital paid-in from translation and other All other stock- Pierburg Minority Total

stock capital earnings differences valuation reserves holders AG interests equity

Balance at January 1, 2001 68.1 162.1 60.0 8.2 12.9 81.1 7.6 318.9 13.9 332.8as stated in prior year

Adjustment (0.6) (3.4) (4.0) (4.0) (4.0)

Adjusted balance

at January 1, 2001 68.1 162.1 59.4 8.2 9.5 77.1 7.6 314.9 13.9 328.8

Capital contributions 3.6 11.9 0.0 15.5 15.5

Dividend payments (34.6) (34.6) (34.6) (34.6)

Currency adjustments 0.5 0.5 0.5 1.3 1.8

Differences from consolidation group changes (1.9) (1.9) (1.9) (1.9)

Other comprehensive income 7.6 (0.3) 7.3 (7.6) (0.3) (0.3)

Group net income 0.0 32.2 32.2 (0.3) 31.9

Balance

at January 1, 2002 71.7 174.0 30.5 8.7 9.2 48.4 32.2 326.3 14.9 341.2

Capital contributions 0.0 0.0 0.0

Dividend payments (14.0) (14.0) (14.0) (14.0)

Currency adjustments 20.7 (43.2) 0.1 (10.5) (10.5) 1.1 (9.4)

Differences from consolidation group changes 11.7 11.7 11.7 (11.7) 0.0

Other comprehensive income 32.2 (9.7) 10.6 (32.2) (21.6) (21.6)

Group net income 0.0 37.1 37.1 (0.4) 36.7

Balance

at December 31, 2002 71.7 174.0 81.1 (34.5) (0.4) 46.2 37.1 329.0 3.9 332.9

6362


NotesSegment report by divisions (primary segments)

Balance sheet

Segment assets 488.2 440.8 461.2 423.5 74.7 79.7 125.8 123.1 105.2 88.3 1,255.0 1,155.4 9.3 7.9 1,264.3 1,163.2

thereof book values at equity 19.9 20.3 7.6 8.0 0.0 0.0 0.0 0.0 0.0 0.0 27.5 28.3 0.0 0.0 27.5 28.3

Segment liabilities 332.1 341.4 220.4 207.8 49.7 47.2 46.8 57.1 23.0 21.7 672.1 675.2 12.7 8.7 684.8 684.0

Total equity (1) 140.6 140.4 153.4 152.5 16.9 8.0 20.6 25.2 18.2 16.8 349.8 342.8 (8.7) (9.9) 341.1 332.9

Pension accruals (2) 125.3 127.1 116.0 99.3 19.5 19.8 9.0 9.8 3.0 3.1 272.7 259.2 13.5 13.7 286.2 272.9

Net financial debts (3) 13.1 (33.4) 111.1 76.5 10.2 26.0 60.6 44.6 65.8 51.8 260.8 165.4 (4.7) 0.2 256.1 165.6

Capital employed (1) + (2) + (3) 279.0 234.1 380.5 328.3 46.5 53.8 90.3 79.6 87.0 71.7 883.3 767.5 0.1 3.8 883.5 771.3

Average capital employed 282.1 256.6 360.5 354.4 47.6 50.2 88.7 85.0 83.8 79.3 862.6 825.4 31.2 2.0 893.8 827.4

Income statement

Net external sales 813.6 872.5 551.2 579.9 138.5 135.7 135.2 148.2 150.9 146.0 1,789.5 1,882.2 36.0 0.4 1,825.5 1,882.6

Intersegment transfers 6.1 11.3 20.3 15.8 14.7 10.1 0.5 0.6 0.3 0.4 42.0 38.3 (42.0) (38.3) 0.0 0.0

Total segment sales 819.8 883.8 571.5 595.7 153.2 145.8 135.8 148.8 151.3 146.4 1,831.5 1,920.5 (6.0) (37.9) 1,825.5 1,882.6

thereof Germany (%) 40.9 40.6 19.9 19.4 58.3 55.5 56.2 61.7 9.8 10.3 0.0 0.0 0.0 0.0 33.7 33.5

thereof abroad (%) 59.1 59.4 80.1 80.6 41.7 44.5 43.8 38.3 90.2 89.7 0.0 0.0 0.0 0.0 66.3 66.5

EBITDA 1) 93.1 131.5 93.8 75.9 28.0 19.5 11.9 (3.5) 18.2 17.3 245.0 240.6 (6.6) (5.8) 238.4 234.8

thereof P/L at equity 0.5 1.1 3.1 1.1 0.0 0.0 0.0 0.0 0.0 0.0 3.6 2.2 0.0 0.0 3.6 2.2

thereof write-up 0.0 0.0 2.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.5 0.0 0.0 0.0 2.5 0.0

Amortization/depreciation/write-down (68.0) (66.6) (53.8) (47.7) (10.3) (9.4) (11.2) (9.8) (1.4) (1.4) (144.6) (134.9) (3.3) (2.5) (147.9) (137.4)

thereof write-down 0.0 0.0 0.0 0.0 (1.3) 0.0 0.0 0.0 0.0 0.0 (1.3) 0.0 0.0 0.0 (1.3) 0.0

Segment EBIT 25.1 64.9 40.0 28.2 17.7 10.1 0.7 (13.3) 16.8 15.9 100.3 105.7 (9.8) (8.4) 90.5 97.4

Net interest expense (12.5) (12.0) (20.0) (14.1) (2.6) (1.9) (4.3) (4.5) (3.4) (2.8) (42.8) (35.3) 1.8 (2.0) (41.0) (37.3)

EBT 12.6 52.9 20.0 14.1 15.1 8.2 (3.6) (17.8) 13.4 13.1 57.5 70.5 (8.0) (10.4) 49.5 60.1

Income taxes 1.6 (8.4) (10.8) (13.4) (9.1) (6.1) 0.5 6.6 (5.4) (4.8) (23.2) (26.1) 5.5 2.7 (17.7) (23.4)

Net income/(Net loss) 14.2 44.5 9.2 0.7 6.0 2.1 (3.1) (11.2) 7.9 8.3 34.3 44.4 (2.5) (7.7) 31.8 36.7

Other data

EBIT margin (%) 3.1 7.3 7.0 4.7 11.6 6.9 0.5 (8.9) 11.1 10.9 -- -- (0.5) (0.3) 5.0 5.2

ROCE (%) 8.9 25.3 11.1 8.0 37.1 20.2 0.8 (15.7) 20.0 20.0 -- -- (1.5) (1.0) 10.1 11.8

Capital expenditures 80.4 56.7 57.7 47.1 12.7 14.6 21.2 21.6 1.0 0.7 173.0 140.7 1.6 3.6 174.6 144.3

Order intake 818.6 886.0 587.8 612.0 165.0 156.3 129.7 154.1 149.1 149.6 1,850.2 1,958.0 (7.2) (41.3) 1,843.0 1,916.7

Order backlog at Dec. 31 147.8 154.3 94.9 110.2 29.3 28.0 19.9 26.1 24.6 23.8 316.5 342.4 (12.0) (3.7) 304.5 338.7

Headcount at Dec. 31 4,009.5 3,872.0 5,416.0 5,400.0 1,045.0 972.5 772.0 861.5 381.5 391.5 11,624.0 11,497.5 38.0 37.0 11,662.0 11,534.5

Segments Note (33)

Divisions

€ million

1) Operating result + net investment income + net other financial expenses/income + amortization/depreciation/write-down

Pumps, air & fuel supply

Large- and small-borepistons

Plain bearings Engine blocks Aftermarket

2001 2002 2001 2002 2001 2002

Air Supply & Pumps Pistons Plain Bearings

2001 2002 2001 2002 2001 2002 2001 2002 2001 2002

Aluminum Technology

Motor Service Aggregated total ofsegments

Others/Consolidation/Holding Company

Group

6564


NotesSegment report by regions (secondary segments)

Germany

Net external sales by customer location 329.4 350.3 97.7 102.3 75.1 71.2 75.7 91.2 14.9 15.1 592.8 630.1

Segment assets 292.8 258.9 156.4 146.1 52.1 59.5 125.8 123.1 84.2 70.3 711.3 657.9

Capital expenditures 52.3 37.9 22.1 14.3 10.3 9.7 21.2 21.6 0.3 0.3 106.2 83.8

Other Europe


Segment assets 168.9 160.7 59.8 59.3 0.0 0.0 0.0 0.0 14.2 13.1 242.9 233.1


North America


Segment assets 23.4 19.2 186.1 183.5 18.8 16.6 0.0 0.0 0.0 0.0 228.3 219.3


South America


Segment assets 3.1 2.0 58.9 34.5 3.8 3.6 0.0 0.0 6.8 4.9 72.5 45.0


Other regions


Segment assets 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1


Segments Note (33)

Divisions

€ million

Pumps, air & fuel supply

Large- and small-borepistons

Plain bearings Engine blocks

2001 2002 2001 2002 2001 2002

Air Supply & Pumps Pistons Plain Bearings

2001 2002 2001 2002 2001 2002

Aluminum Technology

Aftermarket

Motor Service Aggregated total ofsegments

6766


NotesAccounting principles

(1) General

The consolidated financial statementsof Kolbenschmidt Pierburg AG and itssubsidiaries for the fiscal year 2002have been prepared in accordance withthe International Accounting Standards(IAS) of the International AccountingStandards Board (IASB) and comprisebalance sheet, income statement, cashflow statement, and statement ofchanges in equity.

All IAS effective at balance sheet datehave been applied, as have the Inter-pretations of the Standing Interpreta-tions Committee (SIC).

For enhanced transparency of presen-tation, certain items of the consolidat-ed income statement and balancesheet have been subsumed in captions,however, which are broken down anddetailed further below in these foot-notes. The consolidated income state-ment has been prepared in the total-cost format.

The consolidated financial statementsare presented in euro (€), current- andprior-year amounts being indicated in€million unless expressly otherwisestated.

With its voluntarily prepared IAS-basedconsolidated financial statements,Kolbenschmidt Pierburg AG has againexercised the exemption option underthe terms of Art. 292 a German Com-

mercial Code (“HGB”), viz. to draw upthe consolidated accounts in accor-dance with internationally acceptedaccounting principles in lieu of consol-idated financial statements accordingto German commercial accounting reg-ulations. The assessment of whetherthe consolidated financial statementsand group management report meetthe prerequisites of Art. 292a HGB hasbeen made in conformity with the DRSCinterpretation in German AccountingStandard DRS-1. The present consoli-dated statements substantially reflectthe following accounting and valuationmethods in derogation of the GermanCommercial Code (HGB):

– capitalization of internally created intangible assets

– recognition at fair value of certain primary (original) and derivative financial instruments

– translation of non-euro receivables and payables at the current closing rate and recognition in net income of the resulting translation differences

– capitalization of the asset and recognition of the residual liability under capital leases according to the definition criteria of IAS 17

– measurement of pension accruals according to the projected unit credit (PUC) method with due regardto future pay trends and the corridor rule of IAS 19

– waiver of providing for accrued lia-bilities if the probability of accrual utilization is below 50 percent

– discounting of noncurrent accruals – accounting for deferred taxes

according to the liability method– recognition of certain financial

instruments at their fair values

The fiscal year of Kolbenschmidt Pier-burg AG and its subsidiaries equalsthe calendar year. Kolbenschmidt Pier-burg AG prepares consolidated financialstatements on a voluntary basis, waiv-ing for the last time the optional exemp-tion under the terms of Art. 291(1) HGB.As from fiscal 2003, KolbenschmidtPierburg AG as an officially listed com-pany will be obligated pursuant to Art.291(3)(1) HGB to prepare statutory con-solidated financial statements. Kolben-schmidt Pierburg AG’s consolidatedaccounts will be included through thestatutory group accounts of Düssel-dorf-based Rheinmetall AG in the stat-utory consolidated financial state-ments of Röchling Industrie VerwaltungGmbH, Mannheim, as the great grand-parent and highest tier of consolida-tion. Rheinmetall AG’s consolidatedfinancial statements will be depositedwith the Commercial Register of theLocal Court of Düsseldorf under numberHRB 39401, and those of Röchling In-dustrie Verwaltung GmbH with theCommercial Register of the Local Courtof Mannheim under number HRB 3594.

(2) Group of consolidated companies Besides Kolbenschmidt Pierburg AG,the consolidated financial statementsinclude all German and foreign sub-sidiaries in which either KolbenschmidtPierburg AG holds the majority of vot-ing rights (whether directly or indirectly)or where the Group is otherwise able

to control the financial and businesspolicies. Principally, companies are initially consolidated or deconsolidatedwhen control is transferred. Associatedaffiliates and joint ventures are statedat equity.

12/31/2001 Additions Disposals 12/31/2002

Fully consolidated companies 43 -- (3) 40

thereof German 19 -- (2) 17

thereof foreign 24 -- (1) 23

Investees stated at equity 3 -- -- 3

thereof German 1 -- -- 1

thereof foreign 2 -- -- 2

The disposals from the consolidationgroup refer to the mergers of (i) KarlSchmidt Unisia, Zollner Division, Inc.,Fort Wayne, into Karl Schmidt UnisiaInc., Marinette, WI, USA, and (ii) KS Air-bag AG and KS Auto- und MotorenteileAG into KS Kolbenschmidt GmbH (allthree based in Neckarsulm). These

mergers have no effect on the assetsand liabilities as of December 31, 2002,or any major lines of the consolidatedincome statement for 2002.

The subsidiaries and the investeesstated at equity which are included inthe consolidated financial statements

of Kolbenschmidt Pierburg AG are listedon pages 100/101. A comprehensivelisting of the shareholdings of Kolben-schmidt Pierburg AG will be depositedwith the Commercial Register of theLocal Court of Düsseldorf (HRB 34883).

(3) Consolidation principles The financial statements of consolidat-ed German and foreign companies areprepared in accordance with groupwideuniform accounting and valuationmethods.

Companies in which a direct or indirectmajority stake is held or where the fi-nancial and business policies canotherwise be influenced and thus con-trolled are subsidiaries. Subsidiariesincluded for the first time are consoli-dated according to the purchase meth-od, specifically the book value methodunder the terms of IAS 22, by offsettingthe cost of shares acquired againstthe subsidiaries’ prorated equity. Anydifference between cost and proratedequity is, if based on hidden reservesor burdens, allocated at the Group’spercentage shareholding in such hidden

reserves or burdens to the subsidiaries’assets and liabilities. Any net equityover cost is allocated to the assets ofcompanies acquired and released overthe assets’ average useful lives. Anyresidual net equity under or over costis capitalized as goodwill or badwillwithin intangible assets. Goodwill isamortized over its estimated usefullife, badwill being allocated to theassets of companies acquired andamortized to income over such assets’useful lives. Any residual net equityunder cost from pre-1995 acquisitionshas been offset against the Group’sreserves retained from earnings. Upondeconsolidation the residual bookvalues of goodwill and badwill areaccounted for accordingly when measu-ring the net gain or loss on disposal.

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(4) Currency translation

The functional currency concept hasbeen adopted to translate the annualfinancial statements of non-Germangroup companies into € (where appli-cable), one Turkish subsidiary except-ed. As a rule, their functional currencyequals the local currency. Therefore,assets and liabilities are translated atthe mean current rates and the incomestatements at the annual average rates.

The translation differences resultingherefrom, as well as those from trans-lating prior-year carryovers are recog-nized in, and only in, equity. Goodwillcreated from the capital consolidationof non-German companies is carriedat amortized historical cost.

After in 2001 the functional currency of the Turkish subsidiary had beendeemed the euro, the financial state-ments were now prepared in accor-

dance with the historical-cost conceptand adjusted in line with the IAS 29rules governing hyperinflationary econ-omies. Due to changes in the generalprice level (GPL), the current financialstatements and the 2001 comparativeswere adjusted in the local currency byapplying an inflation index of 31 percent(down from 89), and then translatedinto euro (also in accordance with IAS29).

Variations in the year of major currencies versus the €:

In the local-currency financial state-ments of consolidated companies,currency receivables and payables as

well as cash & cash equivalents are all translated at the current spot rate.Currency translation differences are

duly recognized in the net financialresult.

12/31/2001 12/31/2002 2001 2002

1 Brazilian real 0.4852 0.2709 0.4823 0.3570

1 pound sterling 1.6418 1.5378 1.6139 1.5929

1 Canadian dollar 0.7092 0.6100 0.7221 0.6741

100 Czech koruna 0.0312 0.0318 0.0294 0.0324

1 US dollar 1.1334 0.9601 1.1176 1.0581

1,000,000 Turkish lira 0.7429 0.5612 0.9330 0.6629

1 Chinese yuan 0.1371 0.1160 0.1355 0.1279

1 Japanese yen 0.0086 0.0081 0.0092 0.0085

Mean rate in € at Annual average rate in €

(5) Accounting and valuation

methods

Intangible assets

Purchased intangible assets are capi-talized at (acquisition) cost, internallycreated intangibles from which theGroup is believed to derive future eco-nomic benefits and which can reliablybe measured are recognized at pro-duction cost, either type of intangibleasset being amortized by straight-linecharges over the estimated useful life.Production cost covers all costs directlyallocable to the production process,including any proratable production-related overheads. The cost of financeis not capitalized. R&D costs are prin-cipally expensed. Development costsare exceptionally capitalized and amor-

tized on a straight-line basis if a newlydeveloped product or process can beclearly defined, technologically real-ized and used either internally or isdestined for marketing (IAS 38), andif there is a reasonable assurancethat its costs will be recovered byfuture cash inflows. If certain factorshint at an impairment and the recover-able amount is below amortized cost,an intangible asset is written down.Wherever the reason for write-downhas ceased to exist, the charge isreversed and the asset written upaccordingly.

Concessions, franchises, industrial property rights 2-20 years

Development costs 5 years

The following unchanged useful livesunderlie amortization:

Shares of nongroup shareholders aredisclosed as minority interests in theconsolidatable capital of subsidiaries,including the profit or loss proratableto such minority interests.

Expenses and income from intragrouptransactions, as well as intercompanyreceivables and payables are eliminat-ed in consolidation. Intercompanyprofits and losses are eliminated unless

insignificant. Deferred taxes are recog-nized for temporary differences fromconsolidation, as required by IAS 12.

Companies in which stakes between20 and 49 percent are held and overwhich a controlling influence is exer-cised (so-called associated affiliates)are stated at equity. To determine theirgoodwill (if any), principles analogousto consolidation are adopted, goodwill

amortization being recognized in netinvestment income. Joint ventures(jointly controlled companies in whicha 50-percent stake is owned) are alsocarried at equity.

Due to the overall secondary signif-icance, further companies are notstated at equity.

Goodwill from either consolidation orthe statement at equity is amortizedover its estimated period of benefit,as a rule 15 to 20 years. The period isestimated with due regard to the ex-

pected benefits from the market posi-tion achieved through the acquisitionand from the acquiree’s value-addingpotential.

Tangible assets Tangible assets are carried at depre-ciated cost less any write-down. Theproduction cost of internally made tan-gible assets comprises all costs directlyallocable to the production or manu-facturing process, including the pro-ratable production-related overheads.

Borrowing costs are not capitalized aspart of cost. Tangible assets are prin-cipally depreciated on a straight-linebasis over their estimated useful livesunless in exceptional cases anothermethod better reflects the pattern ofuse.

Changes in market conditions have im-plied that the tooling grants or allow-ances of several key customers mustfor the first time be regarded and treat-ed as investment grants while, the yearbefore, the concept that future seriesmanufacture would make up for theprice deficit had prevailed. Therefore,commencing in the year under review,these private-sector grants are directlyoffset against the period’s additions.In fiscal 2001, these grants and allow-ances had been recognized as deferredincome.

Investment properties are carried atamortized cost.

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Tangible assets obtained under capi-tal leases are capitalized at the lowerof their fair values or the present valueof minimum rents and depreciatedover the shorter of their estimated

useful lives or underlying lease terms(IAS 17). If certain factors hint at an im-pairment and the recoverable amountis below depreciated cost, the tangibleasset is written down. Wherever the

reason for write-down has ceased toexist, the charge is reversed and theasset written up accordingly.

Financial assets

The shares in nonconsolidated groupcompanies and in associated affiliatesnot stated at equity, as well as theother long-term securities, all shownas financial assets and throughoutbelonging in the category availablefor sale, are carried at their fair values.The price as of settlement date under-lies the recognition of such assets,which are all fair-valued. Unrealized

gains and losses are accounted for inthe reserve from fair valuation. Upondisposal, such gains or losses are dulyrecognized in the income statement.However, if a value has been impairedand fallen below cost, even unrealizedlosses are recognized in net income.

In accordance with IAS 39, long-termloans bearing interest at fair marketrates are carried at amortized cost,whereas non- or low-interest loans arediscounted.

The shares in associated affiliatesand joint ventures disclosed as suchare stated at equity. Based on the costat share acquisition date, the invest-ment book value is increased or de-creased to reflect the changes in equityof the associated affiliates or jointventures to the extent such changesare allocable to the shares held bythe Kolbenschmidt Pierburg Group.

Inventories

Inventories are recognized at cost, asa rule applying the average-pricemethod to acquisition cost whereasproduction cost comprises all costsdirectly allocable to the production ormanufacturing process, including pro-ratable production-related overheads.

The latter include indirect materials,indirect manufacturing costs (labor,etc.), as well as production-relateddepreciation and pension expenses,but excludes any borrowing costs(IAS 23). Risks inherent in inventoriesdue to reduced utility or to obsoles-cence are adequately allowed for. Ifthe net realizable value (NRV) of any

inventories at balance sheet date isbelow their carrying value, such inven-tories are written down to NRV. If theNRV of inventories previously writtendown has risen, the ensuing write-upis offset against cost of materials (rawmaterials and supplies) or shown asincrease in inventories of finishedproducts and work in process (WIP).

Receivables and sundry assets Receivables and sundry assets are capi-talized at cost. Adequate allowances

provide for bad debts and doubtfulaccounts.

Minority interests Minority interests represent those por-tions of a subsidiary’s net income andequity which are allocable to sharesnot held by Kolbenschmidt PierburgAG, whether directly, or indirectly via

other subsidiaries. Minority interestsare shown in separate lines, in addi-tion to debt and stockholders’ equityas well as to Group net income.

Deferred taxes Under the terms of IAS 12, deferredtaxes are duly recognized on differenc-es between the values of assets andliabilities in the consolidated balancesheet and those in the individual com-panies’ tax accounts. Deferred tax as-sets also include tax reduction claimsfrom the expected future utilization oftax loss carryovers, always providedthat their realization is reasonably cer-tain. If the recent history of a companyshows a series of losses, deferred taxassets from unutilized tax losses orcredits are only recognized to the extentthat the company reports sufficienttaxable temporary differences or thatconclusive substantive evidence existswhich suggests with reasonable assur-ance that sufficient taxable incomewill be earned by the company to uti-lize the hitherto unused tax losses orcredits. Deferred taxes are determinedby applying the local tax rates currentor announced in each country at bal-ance sheet date.

In September 2002, the German govern-ment enacted certain flood victim soli-darity legislation, thereby raising thecorporate income tax rate for the onefiscal year 2003 from 25 to 26.5 per-cent. Related to the average tax rate of 40 percent (rounded) applied tocalculate deferred taxes (includingsolidarity surtax and municipal tradetax on income), the effect entailed bysuch legislation is marginal and, there-fore, this tax rate is also applied todeferred taxes which will reverse in2003. Deferred taxation rates outsideof Germany ranged between 30 and 39 percent, comparing with the year-earlier range of 32.5 to 38 percent.Deferred tax netting is based on therules of IAS 12.

See Note (8) for the fair value of invest-ment properties. Generally acceptedvaluation techniques are used for fairvalue measurement. The following

unchanged asset depreciation ranges(ADRs) apply to property, plant &equipment within tangible assets:

Buildings 20-77 years

Other structures 8-20 years

Production plant and machinery 3-20 years

Other plant, factory and office equipment 2-23 years

7372


Accruals Accruals for pensions and similar ob-ligations are measured according tothe internationally accepted projectedunit credit (PUC) method, which is pred-icated not only on biometrical as-sumptions (life expectancy/mortality),expected future pay and pensiontrends, the variation in retiree assump-tion rates, interest rate trends, butalso further actuarial and other param-eters. The actuarial gains and lossesensuing from differences between ac-tuarial assumptions and actual trendsof the underlying parameters give riseto a gap between the present value ofthe defined benefit obligation (DBO)and the pension liabilities accrued inthe balance sheet. Actuarial gains andlosses outside a 10-percent corridor ofthe DBO are distributed over the aver-age residual service years of employ-ees. The fair market value of any exist-ing plan or pension fund assets is de-ducted from pension accruals. Servicecost is treated as personnel expense

while the interest portion of pensionprovisions in the fiscal year is shownwithin the net financial result. Contri-butions to defined contribution plans(DCPs), under which the company in-curs no obligation other than the pay-ment of contributions to earmarkedpension funds or appropriated plans,are expensed in the year of their in-currence.

The remaining accruals according toIAS 37 provide at balance sheet datefor all identifiable legal and construc-tive commitments and obligations tothird parties if based on past transac-tions or events and if their amount,due date or maturity is uncertain. If theprobability of their utilization exceeds50 percent, accruals are measured atthe best estimate of settlement amount.Noncurrent accruals are shown, if theeffect of discounting is significant, atthe settlement amount discounted asof balance sheet date.

Liabilities Pursuant to IAS 39, liabilities are statedat amortized cost, which as a ruleequals their settlement or repayment

amounts. Liabilities under capitalleases are recognized at the presentvalue of future rents.

Prepaid and deferred items Such items are disclosed to appropri-ately recognize pro rata temporis (p.r.t.)any rents, interest, insurance premi-ums, private-sector investment grantsor allowances, etc. that have been pre-paid or received in advance.

Public grants and subsidies for capitalexpenditures are recognized as deferr-ed income in line with IAS 20.

Beginning from fiscal 2002 and due to changed market conditions, theprivate-sector investment grants/allow-ances recognized the year before indeferred income are henceforth offsetdirectly against the additions to tan-gible assets.

Income and expenses Net sales (revenues) and other oper-ating income are recognized upon per-formance of the contract for goods/ser-vices or upon passage of risk to thecustomer.

Operating expenses are recognizedwhen caused or when the underlyingservice, etc. is used. The accrual basis

of accounting is applied to interestincome and expenses. Income andexpenses from P&L transfer agree-ments are realized at the close of thefiscal year. Dividends are principallyrecognized as and when distributed.

Derivative financial instruments Within the Kolbenschmidt PierburgGroup, financial derivatives are solelyused to hedge against currency andinterest rate risks from operations.

Since the first-time application of IAS 39Financial Instruments as of January 1,2001, all financial derivatives are recog-nized at cost and thereafter fair-valuedas of the balance sheet date. Financialderivatives with a positive or negativefair value are disclosed as sundry as-sets or sundry liabilities, respectively.Principally, any changes in the fair val-ue of financial derivatives are imme-diately recognized in net income un-less an effective hedge exists thatsatisfies the criteria of IAS 39. If thederivative is a cash flow hedge (CFH)and hence used to effectively hedge

expected future cash flows, changesin the financial derivative’s fair valueare recognized in equity only, underthe other reserves. In this case, thechanges in the derivative’s value wouldnot impact on net income until afterthe hedged underlying transaction hasfallen due or been settled.

Changes in the value of financial de-rivatives used in fair value hedges(FVHs) to effectively hedge the fair valueof recognized assets and liabilitiesare posted to net income as are anychanges in the hedged assets or liabil-ities (where appropriate, by adjustingtheir book values), with the result thatthe compensatory effects are all reflect-ed in the income statement.


7574


Notesto the consolidated balance sheet

(6) Fixed-asset analysis

Intangible assets

Development costs

and other internally created intangibles 13.0 4.5 0.0 0.0 0.0 0.0 17.5 5.5 2.3 0.0 0.0 0.0 0.0 0.0 7.8 7.5 9.7

Concessions, franchises, industrial property rights and licenses 15.0 2.0 0.2 2.2 0.0 (0.5) 18.5 10.4 2.0 0.1 0.0 0.0 0.0 (0.5) 11.8 4.6 6.7

Goodwill 60.8 16.8 1.3 0.0 0.0 (1.8) 74.5 21.1 3.5 1.3 (0.4) 0.0 0.0 (1.4) 21.5 39.7 53.0

Badwill from consolidation (6.6) 0.0 (0.6) 0.0 0.0 0.0 (6.0) (5.4) 0.0 (0.6) (1.2) 0.0 0.0 0.0 (6.0) (1.2) 0.0

Prepayments on intangibles 3.4 4.0 0.4 (2.2) 0.0 (0.1) 4.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.4 4.7

85.6 27.3 1.3 0.0 0.0 (2.4) 109.2 31.6 7.8 0.8 (1.6) 0.0 0.0 (1.9) 35.1 54.0 74.1

Tangible assets

Land, equivalent titles, and buildings

(incl. buildings on leased land) 320.4 2.9 0.4 3.4 0.0 (10.0) 316.3 128.5 10.8 0.3 0.0 0.0 0.0 (4.0) 135.0 191.9 181.3

Investment properties 3.0 0.0 0.0 2.1 0.0 (0.5) 4.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.0 4.6

Production plant and machinery 1,098.0 45.5 30.2 33.2 0.0 (60.9) 1,085.6 768.4 87.0 29.6 (0.1) (1.5) 0.0 (43.0) 781.2 329.6 304.4

Other plant, factory and office equipment 265.3 25.0 12.8 11.1 0.0 (12.0) 276.6 189.6 31.8 9.5 0.0 1.5 0.0 (10.2) 203.2 75.7 73.4

Prepayments on tangibles 6.9 7.0 0.0 (5.8) 0.0 (0.1) 8.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.9 8.0

Construction in progress 63.6 53.4 17.0 (44.0) 0.0 (7.2) 48.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 63.6 48.8

1,757.2 133.8 60.4 0.0 0.0 (90.7) 1,739.9 1,086.5 129.6 39.4 (1.0) 0.0 0.0 (57.2) 1,119.4 670.7 620.5

Financial assets

Shares in joint ventures 12.0 0.7 0.0 0.0 0.0 0.0 12.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.0 12.7

Shares in associated affiliates 15.5 0.1 0.0 0.0 0.0 0.0 15.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 15.5 15.6

Other long-term securities 25.3 0.0 24.1 0.0 0.0 0.0 1.2 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.3 25.0 0.9

Sundry long-term loans 2.9 0.4 0.7 0.0 0.0 0.0 2.6 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.1 2.8 2.5

55.7 1.2 24.8 0.0 0.0 0.0 32.1 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.4 55.3 31.7

Total 1,898.5 162.3 86.5 0.0 0.0 (93.1) 1,881.2 1,118.5 137.4 40.2 (1.7) 0.0 0.0 (59.1) 1,154.9 780.0 726.3

€ million

1/1/2002Book

transfers

Consoli-dationgroup

changes

Consoli-dationgroup

changes

Currencytranslationdifferences

12/31/2002 1/1/2002 Additions DisposalsAdditions Disposals Write-up

Booktransfers

Currencytranslationdifferences

12/31/2002

12/31/2002

12/31/2001

Gross values Net valuesAmortization/depreciation/write-down

(7) Intangible assets The intangible assets mainly comprisegoodwill from consolidation, as well ascapitalized development costs. SinceKarl Schmidt Unisia Inc., Marinette, WI,USA, increased its capital as of June 30,2002, while the minority stockholderdid not participate therein, the resul-ting acquisition of an additional 12.1-percent stake created in 2002 good-will of €16.8 million.

In the year under review, R&D costs of€90.9 million were incurred (up from€84.1 million), €5.3 million of which(up from €4.3 million) met the capital-ization criteria as defined in the IAS.

The following amounts were chargedto other operating expenses:

€ million 2001 2002

Research costs and noncapitalized development costs 78.1 83.3

Amortization of capitalized development costs 1.7 2.3

R&D costs expensed 79.8 85.6

The total amortization of intangibleassets of €7.8 million (up from €5.8

million) included no write-down (downfrom €0.1 million). The badwill was

amortized to other operating income at€1.6 million (virtually unchanged).

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(8) Tangible assets Depreciation in the period totaled€129.6 million (down from €142.1million) and included no write-down(down from €1.3 million). The differentaccounting treatment in 2002 of pri-vate-sector investment grants/allow-ances decreased depreciation (seealso the explanations in the Tangibleassets section under Accounting prin-ciples.

Self-explanatory, investment proper-ties represent real estate that is heldto earn rental income or long-termgains in value and is used neither forproduction nor administration pur-poses. Such properties are valued atamortized cost. The KolbenschmidtPierburg Group’s investment proper-ties basically cover one undevelopedplot of land outside of Germany. Itsfair value, determined on the basis of selling prices of comparable land,amounted to €4.3 million as of Decem-ber 31, 2002 (up from €3.3 million). In the year under review, only marginalrental income was earned, the operat-ing expenses incurred in connectionwith investment properties being like-wise nominal.

Encumbrances of €15.5 million (downfrom €20.2 million) rest on land andbuildings to collateralize long-term in-vestment loans. Moreover, productionplant and machinery of €10.2 million(up from €9.7 million) and future fixed-asset additions of €3.5 million (downfrom €4.0 million) were assigned assecurity for an investment loan.

The property, plant & equipment capi-talized under capital leases total €41.8million (down from €54.2 million), ofwhich €9.2 million (down from €9.7million) is allocable to a long-term prop-erty lease; another €32.6 million(down from €44.8 million) refers ex-clusively to capital leases for produc-tion plant and machinery used in cur-rent production. Lease terms vary be-tween 4 and 10 years. Depending onthe local market and the contractingdate, the interest rates underlyingthese leases range from 5.9 to 8.0 per-cent. The future rents payable undercapital leases, the interest portionstherein included, as well as the pres-ent values of future rents (recognized at equal amounts as financial debts)are all shown in the table below:

€ million 2002 2003-2006 after 2006 2003 2004-2007 after 2007

Rents 10.1 32.4 19.6 4.8 30.4 20.3

Discount 0.9 6.7 5.6 0.4 6.8 5.9

Present values 9.2 25.7 14.0 4.4 23.6 14.4

No subleases exist.

(9) Financial assets Analysis of shares in joint venturesand associated affiliates:

Joint venture

Kolbenschmidt Pierburg Shanghai

Nonferrous Components Co. Ltd. 12.0 0.0 1.4 0.6 0.0 0.1 12.7

Associated affiliates

Kolbenschmidt Shanghai Piston Co. Ltd. 7.6 0.0 1.0 0.6 0.0 0.0 8.0

Pierburg Instruments GmbH 7.9 0.0 (0.3) 0.0 0.0 0.0 7.6

15.5 0.0 0.7 0.6 0.0 0.0 15.6

€ million

P/L shareDividend

payments Write-up

Goodwillamorti-zation

Book value

12/31/2002

Book value1/1/2002 Additions

€ million 12/31/ 12/31/2001 2002

Book value 25.0 0.9

Fair value 25.0 0.9

Unrealized gain 15.9 0.0

Other long-term securities

All these securities are available for sale.

In the year under review, one investee(which had been carried under otherlong-term securities) was sold and pro-

duced a cash inflow of €23.0 million;the pertinent amounts hitherto recog-nized within equity under reserves fromfair valuation were released to the in-come statement.

The remaining other long-term securi-ties at a total book value of €0.9 mil-lion for which no quoted market priceis available and whose fair value can-not reliably be determined are statedat amortized cost.

The sundry long-term loans are carried at amortized cost pursuant to IAS 39.

(10) Inventories

The book value of inventories statedat the lower NRV totals €61.7 million(down from €68.9 million). In the

year under review, €1.7 million (downfrom €2.8 million) of inventories pre-viously written down was written up

€ million 2001 2002

Raw materials and supplies 81.0 77.5

Work in process 54.9 50.5

Finished products and merchandise 107.1 94.1

Prepayments made 1.3 0.3

244.3 222.4

2001 2002

as their NRV had risen. Inventories donot collateralize any liabilities.

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(11) Receivables and sundry assets

The disclosed book values of the mon-etary assets covered by these itemsapproximate their fair values.

Under an ABT program, the Kolben-schmidt Pierburg Group sells trade re-ceivables on a revolving basis up to a maximum volume of €129 million.Since IAS 39 requires these receiv-

ables to be treated as sold, they havenot been shown on the face of theconsolidated balance sheet. As of De-cember 31, 2002, the receivables soldhad a par value of €101.7 million (upfrom €99.0 million).

€ million thereof thereof31.1212/31/. due after 12/31/ due after

2001 1 year 2002 1 year

Trade receivables 203.6 0.1 183.1 1.7

thereof due from

group companies 3.4 0.0 0.1 0.0

joint ventures and associated affiliates 1.2 0.0 1.2 0.0

All other receivables and sundry assets 35.5 3.4 29.4 3.5

239.1 3.5 212.5 5.2

Breakdown of sundry assets:

Allowances for doubtful receivables andsundry assets were charged in 2002 at€1.3 million (down from €1.8 million).

€ million 12/31/ 12/31/2001 2002

Accounts due for/from

non-income taxes 11.2 9.9

financing 7.8 9.1

prepayments made 6.2 0.4

guaranty fund 1.3 1.4

investment grants/allowances 0.9 0.3

other 8.1 8.3

35.5 29.4

(12) Cash & cash equivalents€ million 12/31/ 12/31/

2001 2002

Cash on hand and in bank (incl. checks) 21,2 44,3

(13) Income tax assets

€ million 12/31/ 12/31/ thereof thereof not2001 2002 recognized in recognized in

Deferred taxes net income net income

from temporary differences 23.2 22.5 21.9 0.6

from loss carryovers 22.4 16.2 16.2 0.0

45.6 38.7 38.1 0.6

Income tax refundable by the tax office 4.5 5.6 5.6 0.0

50.1 44.3 43.7 0.6

The deferred taxes include tax reduc-tion claims of €16.2 million (downfrom €22.4 million) derived from losscarryovers utilizable in future periods.Loss carryovers are stated on the basisof corporate planning data at theamount of budgeted future taxableincome.

Over and above the deferred tax assetsfrom loss carryovers and tax credits,German and foreign tax loss carryoversexist at a total €166.2 million (up from€131.7 million) which was not recog-nizable, €57.8 million thereof (virtuallyunchanged) being allocable to Germanyand another €108.4 million (up from€73.9 million) existing abroad. The

German loss carryovers are not subjectto expiration whereas the foreign onesas a rule are. Pursuant to IAS 12, furtherdeferred tax assets from temporary dif-ferences at a total €80.0 million (downfrom €104.6 million) were not recog-nized. Deferred taxes adjusted in priorperiods were written up at €0.3 million(down from €0.6 million).

(14) Total equity

Kolbenschmidt Pierburg AG’s capitalstock amounts to €71.7 million and isdivided into 28,003,395 no-par bearershares of fully voting common stock.There is no unpaid capital subscribed.

The Executive Board is authorized toraise the capital stock on or beforeJune 30, 2003, after first obtaining theSupervisory Board's approval, by issu-ing once or several times new stockagainst cash contributions for an ag-gregate maximum of €25.6 million,duly granting the stockholders theirsubscription rights. However, the Execu-tive Board is authorized with the Super-visory Board’s prior approval to excludesubscription rights to fractions and,moreover, also to the extent requiredto grant the holders of option or con-version rights under bonds (whetheralready floated or yet to be issued)the same statutory subscription rightof Kolbenschmidt Pierburg AG stock-holders as if such stock options or con-

version rights had already been exer-cised (authorized capital I). In the yearunder review, no new no-par shareswere issued.

Furthermore, the Executive Board isauthorized to raise the capital stockon or before June 30, 2003, after firstobtaining the Supervisory Board’sapproval, by issuing once or severaltimes new stock against cash contri-butions for an aggregate maximum of€6.6 million. With the SupervisoryBoard’s prior approval, the ExecutiveBoard may generally exclude the sub-scription rights if issuing the new stockat a price that is not significantly belowthe market price. If the Executive Boarddoes not exercise its authority to ex-clude subscription rights, such sub-scription may with the SupervisoryBoard’s approval nonetheless be ex-cluded for fractions and to the extentrequired to grant the holders of optionor conversion rights under bonds(whether already floated or yet to beissued) the same statutory subscriptionright of Kolbenschmidt Pierburg AG

stockholders as if such stock optionsor conversion rights had already beenexercised (authorized capital II).

Moreover, the Executive Board hasbeen authorized to acquire on or beforeDecember 5, 2003, treasury stock equiv-alent to an aggregate maximum of 10 percent of the current capital stock.The authority to repurchase any of theCompany’s stock has to date not beenexercised.

The additional paid-in capital amountsto an unchanged €174.0 million.

Equity-only adjustments which hadbeen waived the year before in the con-solidated balance sheet (basically cer-tain intercompany profits not eliminat-ed within tangible assets) were mean-time implemented by deducting €4million from the other reserves as ofJanuary 1, 2001, and adjusting the assetlines affected accordingly (includingthe corresponding prior-period data).This accounting transaction produceda €0.1 million expense in 2001.


See Note (18) to income tax liabilitiesfor background details.

8180


The other reserves include, besides thereserves retained by KolbenschmidtPierburg AG from earnings, also theother comprehensive income (OCI),

which breaks down into the reservefor adjustments due to the first-timeapplication of the IAS (which are recog-nized in equity only), differences from

currency translation, as well as reservesfrom fair valuation. The 2002 analysisof such reserves presents the follow-ing picture:

Balance at January 1, 2002 (0.3) 9.5 9.2

Gain realized from the disposal of securities available for sale 0.0 (15.9) (15.9)

Deferred taxes on the disposal of securities available for sale 0.0 6.4 6.4

Changes in fair values (0.3) 0.0 (0.3)

Deferred taxes 0.2 0.0 0.2

Balance at December 31, 2002 (0.4) 0.0 (0.4)

€ millionHedge

reserve

Securitiesavailable

for sale

Reserves from fair

valuation

The differences from the fair valua-tion of interest rate swaps (whichmature in 2005) were posted to thehedge reserve.

The separate financial statements ofKolbenschmidt Pierburg AG close thefiscal year with net earnings of €14.0

(15) Accruals for pensions

and similar obligations

These accruals provide for obligationsunder vested rights and current pen-sions payable to eligible active andformer employees and their survivingdependants. Such commitments pri-marily encompass pensions, both basicand supplementary. The individual con-firmed pension entitlements are basedon benefits that vary according to coun-try and company and, as a rule, are

measured according to service yearsand employee pay. Being a noncurrentprovision for the accumulated post-retirement benefit obligation, the ac-crued health care obligations to theretirees of some US group companiesare also included in the pension accru-als recognized hereunder.

The company pension system consistsof both defined-contribution and de-fined-benefit plans. Under a DCP, thecompany incurs no obligations otherthan the payment of contributions to

earmarked funds or appropriated plans.These pension expenses are shownwithin personnel expenses. In the yearunder review, a total €25.9 million(down from €27.4 million) was paid toDCPs.

Under defined benefit plans, a companyis obligated to meet its confirmed com-mitments to active and former employ-ees.

The following parameters underlay theactuarial calculation:

in % 12/31/2001 12/31/2002Germany USA Germany USA

Discount rate 5.75 6.50 5.50 6.50

General pay rise 3.00 4.00 3.00 4.00

Pay rise (firm commitments) 3.00 -- 1.25 --

Pension rise 1.25 -- 1.25 --

Health care cost rise -- 12.0-5.0 -- 12.0-5.0

Expected return on plan assets -- 9.00 -- 9.00

Since the relevant capital market rateshad drifted down from the 2001 year-end level, the German discount ratewas adjusted accordingly.

Pension accruals are derived from the DBO’s present value and the plan

assets as shown in this table:

Pension accruals developed in 2002as follows:

million, proposed to be distributed infull to pay a cash dividend of €0.50per no-par share of stock.

Pension accruals 286.2 (23.4) (12.8) 11.0 16.7 (0.1) (4.7) 272.9

Prior year [289.5] [(28.1)] [(1.9)] [5.7] [17.0] [0.1] [3.9] [286.2]

€million

Added/newly

providedCom-

poundedReleasedBook

transfer

Currencytransl.

differences/other

12/31/2002

1/1/2002 Utilized

Pension accrual analysis

€million 2001 2002

Analysis of the DBO’s present value Germany Abroad Total Germany Abroad Total

Present value of DBO at Jan. 1 203.4 166.4 369.8 216.8 189.3 406.1

Consolidation group changes (2.2) 0.0 (2.2) 0.0 0.0 0.0

Currency translation differences 0.0 8.5 8.5 0.0 (26.8) (26.8)

Service cost 2.5 2.2 4.7 3.8 2.9 6.7

Interest cost 12.2 11.7 23.9 12.1 10.8 22.9

Pension payments (9.6) (15.3) (24.9) (10.9) (14.9) (25.8)

Plan settlements and curtailments 2.8 0.3 3.1 (0.1) 8.3 8.2

Past service cost/revenue 0.0 0.0 0.0 0.0 (25.4) (25.4)

Actuarial (gains)/losses 7.7 15.5 23.2 (3.8) 7.3 3.5

Present value of DBO at Dec. 31 216.8 189.3 406.1 217.9 151.5 369.4

Analysis of plan assets

Plan assets at fair value as of Jan. 1 0.0 77.7 77.7 0.0 80.7 80.7

Currency translation differences 0.0 4.4 4.4 0.0 (10.9) (10.9)

Expected return on plan assets 0.0 6.9 6.9 0.0 6.2 6.2

Contributions paid to plan 0.0 11.2 11.2 0.0 11.3 11.3

Pensions paid by plan 0.0 (7.9) (7.9) 0.0 (13.7) (13.7)

Actuarial gains/(losses) 0.0 (11.6) (11.6) 0.0 (19.7) (19.7)

Plan assets at fair value as of Dec. 31 0.0 80.7 80.7 0.0 53.9 53.9

Unfunded pension obligations at 12/31

Unrecognized actuarial gains/(losses) (7.7) (31.5) (39.2) (3.9) (42.6) (46.5)

Unrecognized past service cost 0.0 0.0 0.0 0.0 3.9 3.9

Pension accrual at 12/31 209.1 77.1 286.2 214.0 58.9 272.9


8382


The present value of funded pensionobligations as of December 31, 2002,came to €121.1 million (down from€133.7 million). The unrecognizedactuarial losses of €46.5 million (upfrom €39.2 million) are substantially

the result of adjusted discount ratesand of the deviating actual vs. expectedreturn on plan assets. In 2002, planassets again returned a loss, this timeone of €12.2 million (up from €4.6million). Actuarial losses are expensed

over the average residual service yearsif outside a corridor of 10 percent oftotal DBO, those proratable to the yearunder review amounting to €4.3 million.

Known specific warranty risks are ac-crued at the anticipated amount of theobligation. Accruals for identified lossesprovide for binding purchasing obliga-tions. Any economic risks beyond arealso adequately provided for.

Accruals for obligations to personnelbasically provide for accrued vacation,residual annual leave, overtime andflextime at a total €19.3 million (downfrom €20.0 million), for preretirementpart-time work at €5.7 million (down

from €10.6 million), and for termina-tion benefits at €8.5 million (up from€8.4 million).

An amount of €12.5 million is at issuein a litigious claim for damages stillpending. Since the subsidiary is notthe originator of the damage and theassertion of such damages is not ex-pected to be successful at this amount,€1.2 million has been provided for onthe basis of estimates. Should higherdamages be awarded, it is believed

that a portion not yet determinable atpresent is covered by insurance.

The remaining accruals refer to environ-mental risks, bonuses, discounts andrebates, as well as legal, consultancyand audit fees.

Unchanged versus the year before, norefunds are expected from accruals.The following cash outflows are predict-ed for each category of the discountednoncurrent accruals:

Breakdown of plan assets:

Breakdown of pension expense:

(16) Other accruals

(17) LiabilitiesThe interest portion in the 2002 pensionprovision, as well as the expected re-turn on plan assets, are shown withinnet interest expense, the remainingitems being included in personnel ex-penses.

The effects of the past service cost/revenue ensue from subsequentlyrenegotiated pension and postemploy-ment health care obligations, whilethe impact from plan curtailments/settlements is attributable to restruc-turing programs.


€ million 12/31/ 12/31/2001 2002

Equities 38.8 33.3

Government and corporate bonds 18.3 18.8

Cash & cash equivalents 23.6 1.8

Plan assets 80.7 53.9

€ million 12/31/ 12/31/2001 2002

Current service cost 4.7 6.7

Amortized actuarial gains and losses 0.1 4.3

Past service cost/(revenue) 0.1 (21.0)

Effects of plan curtailments/settlements 0.1 8.2

Expected return on plan assets (6.9) (6.2)

Compounding of expected pension obligations 23.9 22.9

22.0 14.9

Warranties 19.0 (4.8) (1.3) 6.7 0.2 0.0 (0.1) 19.7

Identifiable losses 15.4 (9.5) 0.0 10.8 0.0 0.0 (1.1) 15.6

Yet unbilled costs 6.3 (5.9) (0.2) 9.1 0.0 0.0 0.0 9.3

Restructuring 3.0 (1.0) (0.2) 0.2 0.0 0.0 (0.2) 1.8

Personnel 53.4 (35.8) (1.7) 36.8 0.0 0.0 (3.2) 49.5

Remaining 24.3 (9.8) (5.8) 19.3 (0.1) 0.0 (1.4) 26.5

121.4 (66.8) (9.2) 82.9 0.1 0.0 (6.0) 122.4

€ million

Added/newly

providedCom-

poundedReleased

Consoli-dationgroup

changes

Currencytranslation

differences/other

12/31/2002

01/01/2002 Utilized

Warranties 15.4 4.3 0.0 19.7

Identifiable losses 13.5 2.1 0.0 15.6

Yet unbilled costs 8.7 0.6 0.0 9.3

Restructuring 1.5 0.3 0.0 1.8

Personnel 39.8 7.8 1.9 49.5

Remaining 20.6 5.4 0.5 26.5

99.5 20.5 2.4 122.4

€ million Totalafter 5 years1–5 yearswithin 1 year

Financial debts

due to banks 168.9 45.9 30.5 129.4 9.7 26.7

due to nonconsolidated group companies 18.5 18.5 0.0 0.0 0.0 0.0

under leases 91.6 12.9 34.8 78.9 11.4 38.1

other 1.1 0.7 0.4 1.6 0.8 0.3

280.1 78.0 65.7 209.9 21.9 65.1

Trade payables 152.6 152.6 0.0 177.0 177.0 0.0

All other liabilities

prepayments received on orders 3.4 3.4 0.0 6.5 6.5 0.0

notes payable (trade) 5.2 5.2 0.0 6.6 6.6 0.0

sundry liabilities 92.7 91.2 0.0 85.6 83.3 0.0

101.3 99.8 0.0 98.7 96.4 0.0

534.0 330.4 65.7 485.6 295.3 65.1

€ million

12/31/2001

thereof due

within <1 year

thereofdue

after 5 years

12/31/2002

thereof due

within <1 year

thereof due

after 5 years

8584


The financial debts under leases in-clude accounts payable by the special-purpose leasing firms to banks at €36.5million (down from €37.4 million).

Out of the accounts due to banks,€15.5 million (down from €15.7million) is collateralized by landcharges and similar encumbrances,

another €10.2 million (up from €9.7 million) being secured by similar rights and interests.

The sundry liabilities break down as follows:

The liabilities to joint ventures andassociated affiliates totaled €0.2million (down from €0.3 million). Thecarrying values of trade payables andall other liabilities approximate theirfair values.

The fair values indicated below arebased on such interest rates as werecurrent at balance sheet date andapplicable to equivalent remainingterms and redemption schedules.

The analysis below reflects the termsand book and fair values of financialdebts:

Due to banks

Due under capital leases

Due to the banks of special-purpose leasing firms

(19) Deferred income

The deferred tax assets and liabilities refer to the following:

(18) Income tax liabilities


€ million 12/31/ 12/31/2001 2002

Monies in transit 37.7 49.3

Non-income taxes 16.9 13.6

Social security 16.1 15.6

Due to employees 5.2 3.6

Remaining liabilities 16.8 3.5

92.7 85.6

Fixed 4.5 € 44.9 44.9 2002 0.0 0.0

Fixed 3.5 € 0.0 0.0 2003 6.2 6.2

Fixed 4.9 € 46.0 45.8 2004 46.0 47.5

Fixed 7.9 € 52.4 58.0 2005 42.0 48.1

Fixed 5.2 € 0.0 0.0 2007 9.5 11.0

Fixed 5.4 € 25.6 19.8 2020 25.7 24.7

Book value12/31/2001

€ million

Terms Weightedaveragerate (%) Currency

Fair value12/31/2001

€ million


€ million


€ millionRates fixed

up to

Fixed 5.96 € 37.4 37.6 2008 36.5 38.1


€ million



€ million


€ million



up to

Fixed 6.5 € 0.8 0.9 2003 1.1 1.1

Fixed 5.9 € 3.3 3.5 2004 5.3 6.8

Fixed 5.9 € 3.1 3.2 2005 5.1 5.3

Fixed 5.9 € 6.8 7.3 2006 7.6 7.7

Fixed 6.5 € 15.6 18.6 2008 5.6 6.1

Fixed 6.5 € 4.9 5.3 2010 4.0 4.0

Fixed 6.5 € 2.0 2.1 2011 0.6 0.6

Fixed 6.5 € 0.0 0.0 2012 1.9 2.0

Fixed 8.0 € 10.7 12.4 2020 11.2 13.1


€ million



€ million


€ million



up to

€ million 12/31/ 12/31/2001 2002

Deferred taxes 15.6 7.3

Current income taxes 16.7 17.8

32.3 25.1

Loss carryovers and tax credits 22.4 0.0 16.2 0.0

Tangible assets 19.0 (67.0) 13.6 (43.9)

Pension accruals 21.8 0.0 19.4 0.0

Other accruals 9.8 0.0 10.2 0.0

Liabilities 89.3 (75.8) 68.6 (86.7)

Sundry 31.5 (21.0) 63.9 (29.9)

Subtotal 193.8 (163.8) 191.9 (160.5)

Offset (148.2) 148.2 (153.2) 153.2

Consolidated balance sheet 45.6 (15.6) 38.7 (7.3)

€ million 12/31/2002liabil.

12/31/2002

assets

12/31/2001liabil.

12/31/2001

assets

€ million 12/31/ 12/31/2001 2002

Deferred grants by customers 19.7 9.5

Deferred public grants and subsidies 3.6 3.5

23.3 13.0

8786


Notesto the consolidated income statement

(20) Net sales For a breakdown of the net sales of€1,882.6 million (up from €1,825.5

million) by divisions and regions, seethe segment reports.

(21) Net inventory changes, other

work and material capitalized

(22) Other operating income

The Group’s cost of materials decreasedin 2002 as inventories were written up at€1.7 million (down from €2.8 million).

(23) Cost of materials

(25) Amortization/depreciation/

write-down

For a breakdown by amortization ofintangible assets (including goodwill)and depreciation of tangible assets,see the notes to the respective fixed-asset lines. No write-down was chargedin 2002 to tangible or intangible assets

Pension expense primarily reflects theannual provision for accrued pensionliabilities—cf. Note (15)—and the DCPcontributions.

(24) Personnel expenses

(down from €1.3 million), the prior-yearamount largely accounting for impair-ment losses of production plant andmachinery which, due to restructuring,could no longer be used in the future.

€ million 2001 2002

Change in inventories of finished products and work in process (11.3) (2.9)

Other work and material capitalized 19.1 12.1

7.8 9.2

€ million 2001 2002

Income from the release of accruals 7.8 9.2

Income from investment grants 1.6 6.5

Income from credit notes for prior periods 2.7 4.0

Income from the release of accrued non-German tax liabilities 0.0 2.4

Income from the payment of bad debts charged off

and the reversal of bad-debt allowances 3.0 2.1

Rental income 1.5 2.1

Income from damages/claims 6.8 0.7

Income from the release of badwill 1.6 1.6

Gain from the deconsolidation of subsidiaries 4.8 0.0

All other 27.3 17.7

57.1 46.3

€ million 2001 2002

Cost of raw materials, supplies, and merchandise purchased 841.7 885.5

Cost of services purchased 82.3 90.4

924.0 975.9

€ million 2001 2002

Wages and salaries 414.4 411.8

Social security taxes 70.1 73.7

Expenses for pensions and related employee benefits 37.8 24.1

522.3 509.6

Annual average headcount 2001 2002

Air Supply & Pumps 4,058 3,961

Pistons 5,563 5,461

Plain Bearings 1,069 1,009

Aluminum Technology 725 823

MotorEngineering 193 0

Motor Service 390 393

Other 42 38

12,040 11,685

8988


(26) Other operating expenses

Income from the release of accrualswas offset at €13.3 million (downfrom €20.6 million) against otheroperating expenses.

The other financial results from foreignexchange includes €0.9 million beingthe loss from accounting for the Turkishsubsidiary’s annual accounts accord-ing to the hyperinflationary economiesrules.

(27) Net interest expense

(28) Net investment income and

other financial results

(29) Income taxes


€ million 2001 2002

Maintenance and repair (M&R) 55.1 43.9

Selling, promotion and advertising 25.7 25.8

Rheinmetall Group allocations and service fees 16.9 20.0

Other general administration 19.5 13.4

Legal, consultancy and audit fees 10.9 12.2

Rents 9.9 11.3

Data processing 11.1 10.8

Other payroll incidentals 9.0 8.9

Travel 6.7 8.8

Insurances 5.6 7.3

Severance packages, termination benefits, preretirement part-time work 5.8 6.9

Non-income taxes 6.6 6.5

Losses on fixed-asset disposal 0.5 6.1

Warranties 2.2 4.8

Outsourced support services 2.7 4.6

R&D 1.2 3.7

Commissions 1.4 2.6

Provision of labor 0.5 2.2

Buildings cleaning 2.1 2.0

Vigilance/facility security 1.7 1.7

Write-down of current assets 1.8 1.3

Losses from damaging events 5.9 0.4

All other 6.9 28.8

209.7 234.0

€ million 2001 2002

Interest income

return on plan assets 6.9 6.2

from long-term loans and financial receivables 0.2 0.3

other interest and similar income 0.9 1.4

8.0 7.9Interest expense

from capital leases (3.0) (3.8)

compounding of pensions (23.9) (22.9)

compounding of other noncurrent accruals (0.4) (0.1)

other interest and similar expenses (21.7) (18.4)

(49.0) (45.2)

(41.0) (37.3)

€ million 2001 2002

Net investment income

from joint ventures 0.4 1.4

from associated affiliates 2.8 0.8

3.2 2.2Other financial results

from foreign exchange 0.3 (1.2)

from financial derivatives (0.3) 1.5

from the disposal

of other long-term securities 0.8 14.8

all other financial expenses/income, net 0.0 (1.1)

0.8 14.0

4.0 16.2

€ million 2001 2002

Current income tax expenses 18.1 32.1

Refunds for prior years (4.0) (7.4)

Deferred taxes 3.6 (1.3)

17.7 23.4

9190


The table below reconciles the expect-ed to the recognized tax expense,which is determined by multiplyingEBT by an unchanged tax rate of 40

percent. This tax expense comprisesGerman corporate income tax, thesolidarity surtax thereon, and munici-pal trade tax. Expected tax expenses

are matched against the effective in-come tax burden.

Note to the consolidated statement of cash flows

(30) Minority interests Minority interests in profit came to€0.6 million (down from €0.8 million)

and in loss to €1.0 million (downfrom €1.2 million).

(31) Earnings per share (EPS)

EPS is obtained by dividing the weight-ed average number of shares issuedand outstanding in the fiscal year intothe Group’s earnings. Neither as ofDecember 31, 2002 nor 2001, were anyshares outstanding that could dilute

earnings per share. Therefore, both inthe year under review and the previous

year, the undiluted EPS equals thediluted EPS.

Analysis of the number of shares

The weighted average number ofshares is determined as follows:

(32) Cash flow statement The cash flow statement conforms withIAS 7 and breaks down into the cashflows generated by operating, investingand financing activities. The effects ofchanges in the consolidation group areeliminated but they and parity changes,if impacting on cash & cash equiva-lents, are shown in separate lines.

Starting from the beginning of period(BoP) balance of cash & cash equiva-lents, this statement shows a slightlylower cash flow of €170.0 million,contrasting with net cash provided byoperating activities of €215.4 millionwhich includes a cash inflow from in-terest of €1.6 million (up from €1.1million) and a cash outflow for interestof €19.6 million (down from €21.3million). Income taxes paid came to€31.2 million (down from €37.6 mil-lion), those refunded totaling €6.4 mil-lion (up from €1.5 million). The divi-dends received from associated affili-ates and investees amounted to €1.2million (up from €0.7 million).

The net cash used in investing activi-ties sank €47.2 million to €117.1 mil-lion. The disposal of the interest inPreh GmbH & Co KG produced a cashinflow of €23.0 million. In 2001, thecash outflow for acquisitions totaled

€11.9 million and represented the pur-chase price of Kolbenschmidt PierburgShanghai Nonferrous Components CoLtd., an investee carried at equity, whilethe divestment of Pierburg InstrumentsInc. generated in 2001 a cash inflow of€6.0 million. When the stake in Pier-burg Instruments GmbH had beentransferred in the previous year, a€14.4 million loan was repaid, too. All acquisitions and disposals werethroughout settled in cash.

By redeeming financial debts and pay-ing dividends, the net cash used infinancing activities came to €74.3 mil-lion. The remaining cash inflow isshown in the change in cash & cashequivalents. Cash & cash equivalentsare identical in the cash flow state-ment and balance sheet.


€ million 2001 2002

EBT 49.5 60.1

Expected tax expense 19.8 24.0

Differences from German tax rates (1.0) (0.3)

Differences from foreign tax rates (1.3) (2.5)

Losses of subsidiaries not subjected to deferred taxation 11.1 10.2

Tax-exempt income and nondeductible expenses (3.5) (10.1)

Nondeductible goodwill amortization 1.2 0.7

Adjustment for nonperiod income taxes (0.5) 1.9

Reduction of deferred taxes due to tax rate change* 0.0 (0.6)

Tax privileges for capital expenditures (2.4) 0.0

Tax changes from accounting for the tax burden on next-year distribution (4.9) 0.0

Other (0.8) 0.1

Effective tax expense 17.7 23.4

Effective tax rate in % 36% 39%

Expected tax rate in % 40% 40%

* This reduction is attributable to tax rate changes in Italy and France.

2001 2002

Group earnings (after minority interests) (€) 32,161,747 37,092,377

Weighted average number of shares 27,244,953 28,003,395

Earnings per share (EPS) (€) 1.18 1.32

2001 2002

Number at Jan. 1 26,603,195 28,003,395

Addition 1,400,200 0

Number at Dec. 31 28,003,395 28,003,395

9392


Noteto the segment reports Supplementary disclosures

(33) Segment reports In accordance with the KolbenschmidtPierburg Group’s internal controllingorganization, the Group breaks downinto five divisions, viz.

– Air Supply & Pumps – Pistons– Plain Bearings– Aluminum Technology– Motor Service

as primary segments.

The Others/Consolidation column in-cludes, apart from the Group’s parent(Kolbenschmidt Pierburg AG), furthercompanies not allocable to any definedsegment, the MotorEngineering divisiondeconsolidated in 2001, as well as con-solidation transactions.

In comparison to 2001, segment assetsand segment liabilities have been re-defined, which has also changed seg-ment indicators. Prior-year data hasbeen restated accordingly.

Responsibilities are clearly separatedbetween the segments and Kolben-schmidt Pierburg AG, which performsthe functions of a strategic manage-ment holding company. Both corporategovernance and internal reporting havebeen structured accordingly. The com-panies belonging in each segment/division result from the listing on pages100/101. In line with the KolbenschmidtPierburg Group’s shareholder valueconcept, segment assets comprise theessential assets excluding cash & cashequivalents and income tax assets,while segment liabilities exclude finan-cial debts and income tax liabilities.The year before, segment assets had

excluded cash & cash equivalents,and segment liabilities were reportedexclusive of pension accruals and fi-nancial debts. Capital employed (CE),which is used to generate EBIT, is de-termined as the sum total of equity,pension accruals and financial debts,less cash & cash equivalents. The re-turn on capital employed (ROCE) equalsEBIT divided into average capital em-ployed (average of the balances at De-cember 31, 2001 and 2002). Net finan-cial debts reflect the sum total of finan-cial debts (current and noncurrent) lesscash & cash equivalents.

The intersegment transfers principallyindicate sales among divisions and arepriced as if at arm’s length.

EBITDA means earnings before interest,income taxes, depreciation and amor-tization (and extraordinary items).Write-up of badwill has consistentlybeen included in EBITDA. The (seg-ment) EBIT margin equals EBIT dividedinto total segment sales.

Capital expenditures and amortization/depreciation refer to tangible and in-tangible assets (including goodwill).

Due to its hardly probable utilization,the provision for an accrued potentialtax liability outside of Germany had tobe waived.

As of December 31, 2002, a contingentasset existed at €0.7 million from aclaim for damages.

(34) Contingent liabilities/assets

(35) Other financial obligations As of December 31, 2002, the commit-ments to purchase tangible assets to-taled €17.6 million (down from €36.6million). Additional purchase price ob-ligations from the envisaged acquisitionof the pistons operations of Micro-techno Corp., Japan, account for an-other €13.6 million.

The rents for land and buildings chieflyrefer to a long-term property lease that

neither includes a purchase option nora firmly agreed passage of title and,therefore, is an operating lease.

In the year under review, €10.8 millionwas paid under operating leases andrecognized in net income. No sub-leases existed.

Rents due in succeeding years underoperating leases:

(36) Subsequent events After closing the fiscal year, KS Kolben-schmidt GmbH (which parents the Pis-tons division) acquired via its Japanesesubsidiary, Kolbenschmidt PierburgK.K., the pistons operations of Micro-techno Corp. from Mazda Motor Corp.(both in Japan). Microtechno has since1972 manufactured pistons and other

precision parts for the automotive indus-try. The 120 employees of the pistonsoperations generate annual sales ofaround €20 million. For several years,the two companies have already co-operated in the engineering field. Theacquisition by Kolbenschmidt Pierburgof Microtechno’s pistons business rep-

€ million 2002 2003-2006 after 2006 2003 2004-2007 after 2007

Buildings 2.0 5.5 23.1 2.3 4.8 22.9

Production plant

and machinery 1.6 1.9 0.0 2.0 3.7 0.0

Other leases 0.6 1.4 0.0 1.7 2.2 0.0

4.2 8.8 23.1 6.0 10.7 22.9

2001 2002

9594


NotesSupplementary disclosures

(37) Stock appreciation rights (SARs)

Since 1999, the Kolbenschmidt Pier-burg Group has granted qualifyingmanagerial staff SARs for them toparticipate in any stock appreciation.SAR programs are basically phantomstock option plans under which par-ticipants receive a cash compensationupon exercise that equals the differ-ence between the stock price at exer-cise date and the base (reference)price. There are two different programs.

For managerial staff, this base pricehas been fixed at the arithmetic meanof the closing prices quoted on the 10 market days preceding plan com-mencement; for executive board mem-bers, the base price is determined at50 percent from the arithmetic meanof the closing prices of KolbenschmidtPierburg common stock and, at 25 per-cent each, from the arithmetic meanof Rheinmetall preferred and commonstock. Either SAR program has an over-all term of 7 years: after a 3-year quali-

fying period, SARs may be exercisedduring defined time windows duringthe residual 4-year term. If not exer-cised during such period or when eli-gible staff leave Kolbenschmidt Pier-burg for any reason other than retire-ment or death, the SARs become for-feited and lapse. SARs cannot be exer-cised unless and until the base pricehas been exceeded by 25 percent ormore on the day of exercise.

Key parameters of the SAR programslaunched to date:

Obligations under SARs are fair-valuedpro rata temporis by using an optionprice model. An accrual of €0.4 million

(up from €0.3 million) provides for theobligations incurred up to December31, 2002.

Interest rate hedges such as caps/floors/collars and interest rate swapscontain the risks ensuing from marketrate changes. These interest rate op-tions are used to redesign variable-rate into fixed-rate agreements. Thesehedges are contracted centrally byKolbenschmidt Pierburg AG. Volumesand maturities of the interest rateswaps exactly match the underlyingbank loans and redemption schedulesand are denominated in US dollar.They are embedded in a cash flowhedge with loan arrangements and,therefore, the differences from fairvalue remeasurement are recognizedin equity only (reserves retained fromearnings).

As of December 31, 2002, the currencyand interest rate hedges tabled belowexisted, their notional volumes beingshown non-netted and thus reflectingthe total amounts of all individual con-tracts. Being marked to the market atDecember 31, the fair values of finan-cial derivatives correspond to prices in arm’s length transactions.

(38) Hedging policy and financial

derivatives

The operations and financial transac-tions of Kolbenschmidt Pierburg as an international group are exposed tofinancial risks, mainly from exchangerate volatility and interest rate changes.In accordance with the groupwide im-plemented risk management systemof Kolbenschmidt Pierburg AG, suchrisks are not only identified, analyzedand measured but also managedthrough derivative financial instru-ments. No such derivatives may beacquired for speculation. Counterpar-ties of Kolbenschmidt Pierburg Groupcompanies for contracting financialderivatives are exclusively Germanand foreign banks of prime standing.By setting these high standards oncounterparties, the risk of uncollectibledebts is minimized. All transactionsinvolving financial derivatives are sub-ject to stringent monitoring, which isparticularly ensured by the strict segre-gation of the contracting, settlementand control functions.

Liquidity riskThe Kolbenschmidt Pierburg Group en-sures sufficient liquidity at all timesmainly through a liquidity forecastbased on a fixed planning horizon, aswell as through existing, yet unutilizedcredit facilities.

Default riskThe Kolbenschmidt Pierburg Groupprimarily supplies customers of topstanding and is hence hardly affectedby any bad debts or uncollectibles,and even these are covered by ade-quate allowances according to whatthe Group is aware of presently. More-over, the Kolbenschmidt Pierburg hasnot materially concentrated its creditfacilities in one or only few lenders.The default risk emanating from finan-cial derivatives consists in a failure ofthe counterparty and is therefore limit-ed to the instrument’s positive fairvalue to the counterparty. Kolben-schmidt Pierburg companies contractfinancial derivatives solely with Germanand foreign banks of impeccable stand-ing, thus minimizing default risks.

Currency riskDue to the international nature of theKolbenschmidt Pierburg Group’s busi-ness, certain operational currencyrisks arise from the fluctuating parityof the euro to other currencies. Openpositions exposed to a currency riskare principally hedged through finan-cial derivatives, generally currency for-wards or futures.

Interest rate riskThe Kolbenschmidt Pierburg Group’sfinancing activities also use such fund-ing tools as floating-rate facilities.

resents another step toward theGroup’s expansion in Asia. Moreover,as a technological center of Asia andthe largest market for advanced motorvehicle pistons, Japan offers the oppor-tunity of sharing in the R&D of worldmarket business there and hence se-curing portions of the market.

In the Air Supply & Pumps division, theelectric fuel pump unit of PierburgGmbH was transferred to TI Automotiveas of January 1, 2003. This unit of Pier-burg GmbH employs 100 people andgenerates sales of about €46 million.The disposal is a step by PierburgGmbH in its strategy of concentratingon core activities and addresses thetrend by the auto assemblers to award

contracts in this segment to preferredsuppliers of complete fuel tank andfuel delivery systems. The agreementconcluded with TI envisages a concen-tration and continuation of fuel pumpproduction at the Neuss location. Asupplementary agreement will detailthe future supply to TI Automotive ofelectric motors by Pierburg’s Hartha,Saxony, plant.

Executive board

1998 end-2001 18.09 70,000 30,000 0 40,000

1999 end-2002 12.95 60,000 30,000 0 30,000

2000 end-2003 9.24 60,000 30,000 0 30,000

2001 end-2004 16.50 50,000 0 0 50,000

150,000Managerial staff

1999 end-2002 15.07 247,500 12,500 43,000 192,000

2000 end-2003 13.20 247,500 2,500 50,000 195,000

2001 end-2004 11.88 222,500 0 10,000 212,500

599,500

thereofforfeited

after 12/31/

2001

thereofforfeited

in2002

SARs as of 12/31/

2002SARprogram

Baseprice

€

Exercisable after

Numberissued

Swaps 15.2 12.2 30 (1.5) (1.5)

Other derivatives 25.0 25.0 23 0.0 0.0

Currency forwards/futures 40.6 63.0 3 (0.5) 1.0

Currency hedges

€ million 12/31/2001 12/31/2002

Notional volume Maturing after

(months) 12/31/2001 12/31/2002

Fair market values

Interest rate hedges

€ million 12/31/2001 12/31/2002

Notional volume Maturing after

(months) 12/31/2001 12/31/2002

Fair market values

9796


NotesSupplementary disclosures

(39) Related-party transactions The subsidiaries consolidated by Kol-benschmidt Pierburg AG directly orindirectly maintain ordinary businessrelations with many nonconsolidatedgroup companies, as well as associ-ated affiliates and joint ventures. Anyand all trade transactions conductedin the scope of ordinary day-to-daybusiness with unconsolidated relatedcompanies conform with the arm’slength principle.

In addition, Rheinmetall AG as Kolben-schmidt Pierburg AG’s majority stock-holder as well as Rheinmetall service

companies provide extensive servicesto companies of the KolbenschmidtPierburg Group, including (withoutbeing limited to) legal, tax and PR con-sultancy and support, data processingand insurance services.

In the scope of the cash managementsystem of majority stockholder Rhein-metall AG, the Kolbenschmidt Pier-burg Group invests and/or borrowscash & cash equivalents within theRheinmetall Group. All cash manage-ment business is transacted as if atarm’s length.

Volume of services provided toand/or by related companies:

Executive Board For their duties performed on behalf ofthe parent and its subsidiaries, Execu-tive Board members received a total€2.2 million in the year under review(up from €1.9 million), breaking downinto €1.3 million of fixed remuneration,€0.8 million of profit shares, and €0.1million as compensation in kind. Thelatter was substantially paid in the formof company car use and grants for so-cial security insurance. In addition, theExecutive Board members receivedphantom stock under the SAR programs,viz. 40,000 for 1998, 30,000 for 1999,30,000 for 2000, and 50,000 for 2001.For further details of the SAR programs,turn to page 94 of this annual report.

€0.4 million (up from €0.3 million) waspaid to former Executive Board mem-bers or their surviving dependants.

Moreover, for the accrued pension ob-ligations to former Executive Boardmembers and their surviving depen-dants, a total €3.8 million has beenprovided (virtually unchanged).

Supervisory Board Supervisory Board fees amounted to€0.2 million in fiscal 2002 (virtuallyunchanged). Neither was any furthercompensation paid, nor were any bene-fits granted, to Supervisory Boardmembers for personally rendered ad-visory or agency services in the yearunder review.

ShareholdingsAs of December 31, 2002, none ofKolbenschmidt Pierburg AG’s Super-visory or Executive Board membersheld any shares in the Company.

Stockholders qualifying as related par-ties are any individuals (including theirdirect family members) who directly or

indirectly own a stake in the reportingentity’s voting capital and thus gain asignificant influence over such entity.

(40) Supervisory and Executive

Boards

(41) Corporate Governance Code Since early 2003, Kolbenschmidt Pier-burg AG has published on the Internetat www.kolbenschmidt-pierburg.com,and thus made available to its stock-holders, the declaration of conformityto the German Corporate GovernanceCode pursuant to Art. 161 AktG.

Regarding the consolidated financialstatements of Rheinmetall AG, the dec-laration of conformity under the termsof Art. 161 AktG has been publishedsince December 2002 on the Internetat www.rheinmetall.de.

Düsseldorf, February 20, 2003

The Executive Board Dr. Kleinert Dr. Merten Dr. Friedrich

2001 2002 2001 2002

Rheinmetall AG 0.2 0.2 4.9 7.7

Rheinmetall Service Gesellschaft mbH 0.0 0.1 1.2 1.3

Rheinmetall Informationssysteme GmbH 1.6 0.1 22.6 22.4

Jagenberg London Ltd. 0.0 0.0 0.2 0.0

€ million Volume of services rendered

Volume of services utilized

9998

Auditor’s report and opinion

We have audited the consolidated fi-nancial statements prepared by Kolben-schmidt Pierburg AG and consisting ofbalance sheet, income statement,statement of changes in equity, cashflow statement and the notes thereto,for the fiscal year ended December 31,2002. The consolidated financial state-ments in accordance with the Inter-national Accounting Standards (IAS)and their preparation are the responsi-bility and assertions of the Company’sExecutive Board. Our responsibility is,based on our audit, to express an opin-ion on whether the consolidated finan-cial statements conform with the IAS.

We have conducted our audit of theconsolidated financial statements inaccordance with German auditing reg-ulations and with due regard to gener-ally accepted standards on the auditof financial statements as establishedby IDW, the Institute of Sworn PublicAccountants & Auditors in Germany.Those standards require that we planand perform the audit to obtain rea-sonable assurance about whether theconsolidated financial statements arefree of any material misstatement. Anaudit includes examining, on a testbasis, the evidence supporting theamounts and disclosures in the consol-idated financial statements. The audithas also involved assessing the ac-counting principles used, and signif-icant estimates made, by the Execu-tive Board, as well as evaluating theoverall presentation of the consolidat-ed financial statements. We believethat our audit provides a reasonablebasis for our opinion. Based on ouraudit, it is our opinion that the consoli-dated financial statements, in accor-dance with the IAS, present a true andfair view of the Group's net assets,financial position and results of opera-tions as well as of its cash flows in thefiscal year under review.

Our audit, which in accordance withGerman auditing regulations also cov-ered the group management report asprepared by the Executive Board for thefiscal year ended December 31, 2002,has not resulted in any objections orexceptions.

It is our opinion that the group manage-ment report presents fairly, in all ma-terial respects, both the Group’s over-all position and the risks inherent inits future development. In addition, weconfirm that the consolidated financialstatements and group managementreport for the fiscal year ended Decem-ber 31, 2002, satisfy the requirementsfor exempting the Company from pre-paring consolidated financial state-ments and a group management reportin accordance with German law.

Düsseldorf, March 12, 2003

PwC Deutsche RevisionAktiengesellschaftWirtschaftsprüfungsgesellschaft

Bovensiepen pp. AdamaszekWirtschaftsprüfer Wirtschaftsprüfer

Kolbenschmidt Pierburg AG,

Düsseldorf

Independent group auditor’s report

and opinion

101100


Group of consolidated companies as of December 31, 2002

indirect

Kolbenschmidt Pierburg AG, Düsseldorf € 281,958,992

Air Supply & Pumps

Pierburg GmbH, Neuss 1)€ 111,158,822 100

Carbureibar S.A., Abadiano, Spain € 32,621,015 100

Pierburg S.à r.l., Basse-Ham (Thionville), France € 25,620,220 100

Pierburg Inc., Fountain Inn (Greenville), SC, USA US$ 10,278,360 100

Pierburg do Brasil Ind. e Comércio Ltda., Nova Odessa, Brazil Rs 7,563,729 100

Pierburg S.p.A., Lanciano, Italy € 9,220,428 100

Société Mosellane de Services Holding S.A., Basse-Ham (Thionville), France € 3,331,209 100

Société Mosellane de Services S.C.I., Basse-Ham (Thionville), France € 10,161,310 100

Kolbenschmidt Pierburg Shanghai Nonferrous Components Co. Ltd., Shanghai, China 2) Yuan 167,264,066 50

Calor Grundstücksverwaltungsgesellschaft mbH & Co KG, Grünwald € (2,004,427) 95

Pierburg Instruments GmbH, Neuss 2)€ 17,945,444 49

Pistons

KS Kolbenschmidt GmbH, Neckarsulm 1)€ 172,279,782 100

KS Pistões Ltda., Nova Odessa, Brazil Rs 131,109,411 100

KS International Investment Corp., Southfield, MI, USA US$ 156,347,917 100

Karl Schmidt Unisia Inc., Marinette, WI, USA US$ (1,002,448) 92

KS Large Bore Pistons Inc., Marinette, WI, USA US$ 6,213,121 100

Zollner Canada Inc., Leamington, Canada Can$ 9,082,996 92

KS France S.A., Paris, France € 17,651,621 100

Société Mosellane de Pistons S.A., Basse-Ham (Thionville), France € 20,396,872 100

Metal a.s., Usti, Czech Republic Ck 444,053,587 89

Kolbenschmidt Shanghai Piston Co., Ltd., Shanghai, China 2) Yuan 197,757,889 35

Tiro Grundstücks-Verwaltungsgesellschaft mbH & Co KG, Grünwald 3)€ (285,520) 0

Kolbenschmidt Pierburg K.K., Yokohama, Japan ¥ 8,121,009 100

Plain Bearings

KS Gleitlager GmbH, St. Leon-Rot 1)€ 13,329,785 100

KS Bearings Inc., Greensburg, USA US$ (7,378,682) 100

KS Bronzinas Ltda., Nova Odessa, Brazil Rs 13,665,881 100

Aluminum Technology

KS Aluminium-Technologie AG, Neckarsulm 1)€ 20,697,533 100

Werkzeugbau Walldürn Gesellschaft mit beschränkter Haftung, Walldürn € 615,439 100

KS Doehler-Jarvis GmbH, Neckarsulm € 1,548,244 65

KS Aluminium Beteiligungs-GmbH, Neckarsulm € (91,060) 100

Group of consolidated companies as of December 31, 2002

Equity (IAS) direct

Interest held (%)

Motor Service

MSI Motor Service International GmbH, Neckarsulm 1)€ 16,194,786 100

G. Krull Gesellschaft mit beschränkter Haftung, Neckarsulm € 40,430 100

MTS Motorenteile-Service GmbH, Neuenstadt € (483,628) 100

KS Motorac S.A., Le Blanc Mesnil, France € 1,024,174 100

KS Winston Ltd., Purfleet, UK £ (437,958) 100

Kolbenschmidt Istanbul Dis Ticaret ve Pazarlama A.S., Istanbul, Turkey TL 4,231,678,720,000 51

KS Produtos Automotivos Ltda., São Paulo, Brazil Rs 10,008,816 92

KS Motor Servis CZ s.r.o., Trmice, Czech Republic Ck 16,165,148 66

Litos Grundstücks-Verwaltungsgesellschaft mbH & Co KG, Grünwald 3)€ (714,788) 0

Other

Kolbenschmidt Liegenschaftsverwaltung GmbH Berlin, Berlin € 7,116,867 100

KS Grundstücksverwaltung Beteiligungs-GmbH, Neckarsulm € 30,424 100

KS Grundstücksverwaltung GmbH & Co. KG, Neckarsulm € 8,996,006 100

IDEKO Industrie Einkauf- und Koordination GmbH, Neckarsulm € 118,091 100

Equity (IAS) direct indirect

Interest held (%)

1) P&L transfer agreement with Kolbenschmidt Pierburg AG2) Included at equity3) Special-purpose entity

˘

˘

103102


Supervisory and Executive Boards Membership in other supervisory and comparable boards

Dipl.-Math. Klaus Eberhardt

GerlingenExecutive Board Chairman of Rheinmetall AG, DüsseldorfChairman

Member of further supervisory boards:

- Rheinmetall DeTec AG, Ratingen

chairman

- STN ATLAS Elektronik GmbH, Bremen

chairman (up to April 10, 2002)

- ADITRON AG, Düsseldorf

chairman (as from April 5, 2002)

- Jagenberg AG, Neuss

chairman

- Rheinmetall Elektronik AG, Düsseldorf

chairman (up to August 12, 2002)

- Pierburg AG, Neuss

chairman (up to April 8, 2002)

Member of comparable German

or foreign boards:

- Preh Group, Bad Neustadt/Saale

chairman of the shareholder committee

- Shareholder Committee EMG, Hamburg

chairman

Dr. rer. soc. Rudolf Luz *)Weinsberg1st Delegate of the GermanMetalworkers Union (“IG Metall”),Heilbronn/Neckarsulm office,NeckarsulmVice-Chairman


or foreign boards:

- Aesculap AG & Co. KG, Tuttlingen

advisory board member (up to July 25, 2002)

- Wirtschaftsfördergesellschaft Raum Heilbronn

GmbH, Heilbronn

supervisory board member

Dr.-Ing. Ludwig Dammer *)DüsseldorfStrategic Production Scheduling,Pierburg AG, Neuss

Member of a further supervisory board:

- Rheinmetall AG, Düsseldorf

Rolf Dollmann *)NeckarsulmChairman of the General WorksCouncil of KS Kolbenschmidt GmbH,Neckarsulm(up to March 31, 2002)

Dipl. rer. pol. Werner Engelhardt

KarlsruheAdditional Vice-Chairman(up to January 14, 2002)



chairman (up to January 14, 2002)


chairman (up to January 14, 2002)


(up to January 14, 2002)



- STN Atlas Elektronik GmbH, Bremen


- Pierburg AG, Neuss (up to Jan. 14, 2002)

- Jagenberg AG, Neuss (up to January 14, 2002)


or foreign boards:

- WKP Württembergische Kunststoffplattenwerke

GmbH & Co KG, Unterensingen


- Depalor S.A.S., Phalsburg, France


Georg Hadlaczki *)MühlhausenController St. Leon-Rot plant ofKS Gleitlager GmbH, St. Leon-Rot

Dr. jur. Martin Hirsch

Frankfurt/MainLawyerLaw firm of Gleiss Lutz Hootz Hirsch, Frankfurt/Main





- BARTEC Barlian Holding AG, Bad Mergentheim

chairman (up to July 31, 2002)

- Bestfoods Deutschland GmbH & Co. OHG,

Heilbronn (up to April 30, 2002)

- CD Cartondruck AG, Obersulm-Willsbach,

chairman

Dr. Bernd M. Hönle

Weisenheim a.S.Management Board member ofRöchling Industrie Verwaltung GmbH,Mannheim




- Pierburg AG, Neuss (up to April 8, 2002)

- STN ATLAS Elektronik GmbH, Bremen

(up to February 18, 2002)

- Jagenberg AG, Neuss (up to May 23, 2002)


- BEA Holding AG, Düsseldorf

- DeTeWe - Deutsche Telephonwerke

Beteiligungs AG, Berlin

- Francotyp-Postalia Beteiligungs AG,

Birkenwerder

- PFEIFFER & MAY Grosshandel AG, Karlsruhe

- Seeber Beteiligungs AG, Mannheim

Superv isory Board

Erich Hüskes *)NettetalMember of the Works Council of the Nettetal plant of Pierburg AG,Neuss

Dr. jur. Klaus Kessler

StuttgartLawyerDr. Schelling & Partner GbRDeutsche Schutzvereinigung für Wertpapierbesitz e.V., Stuttgart (up to March 31, 2002)(up to June 5, 2002)


- Schleicher & Co. International AG, Markdorf

Heinrich Kmett *)Fahrenbach/RobernWorks Council Vice-Chairman of KS Kolbenschmidt GmbH, Neckarsulm (as from April 1, 2002)


- KS Kolbenschmidt GmbH, Neckarsulm

(up to March 31, 2002)


(as from November 14, 2002)

Dipl.-Vwt. Jürgen Lemmer

Bad Homburg


- Buderus AG, Wetzlar

- Clearing Bank Hannover AG, Hannover

vice-chairman

- GKN Automotive International GmbH, Lohmar

chairman


or foreign boards:

- ARGOR-HERAEUS S.A., Mendrisio, Switzerland

Director

- Banque Marocaine du Commerce Extérieur,

Casablanca, Morocco

Director

- Korea Exchange Bank, Seoul, Korea

Non-Standing Director

- Majan International Bank SAOC, Ruwi,

Sultanate of Oman

Director (up to December 31, 2002)

- Verlagsbeteiligungs- und

Verwaltungsgesellschaft mbH, Frankfurt/Main

advisory board member

- ADIG-Investment Luxemburg S.A., Luxembourg,

Luxembourg

chairman of the board of directors

- Commerzbank Europe (Ireland) Unltd., Dublin,

Ireland


- Commerzbank International (Ireland) Unltd.,

Duplin, Ireland


Dr. rer. oec. Herbert Müller

EssenExecutive Board member ofRheinmetall AG, Düsseldorf(as from March 28, 2002)


- Pierburg AG, Neuss (up to April 8, 2002)




- Jagenberg AG, Neuss

Dr. Siegfried Roth *)RüsselsheimUnion Secretary at the GeneralSecretariat of IG Metall, Frankfurt (up to July 31, 2002)


- Ford-Werke AG, Cologne

- Ford Deutschland Holding GmbH, Cologne

Dietrich Termöhlen *)Hinte1st Delegate of the GermanMetalworkers Union (“IG Metall”),Neuss office, Neuss(as from September 2, 2002)


- Aluminium Norf GmbH, Neuss

Prof. Dr. Dirk Zumkeller

Munich,Full Professor of Transport & TrafficTechnical University of Karlsruhe(as from June 5, 2002)



*) employee representative

105104


Supervisory and Executive Boards Membership in other supervisory and comparable boards

Dr. Gerd Kleinert

GottmadingenChairmanStrategy, Operations

Supervisory board memberships:


- KS Gleitlager GmbH, St. Leon-Rot

(chairman)

- Pierburg GmbH, Neuss

(chairman)


or foreign boards:

- Karl Schmidt Unisia Inc., Marinette, USA

(chairman)

- Pierburg S.p.A., Lanciano, Italy

- Carbureibar S.A., Abadiano, Spain

Dr.-Ing. W. Hans Engelskirchen

KaarstProduction(up to January 21, 2003)




- KS Aluminium-Technologie AG, Neckarsulm

(chairman)


Dr. jur. Jörg-Martin Friedrich

LudwigsburgHuman Resources





Member of comparable

German or foreign boards:

- Kolbenschmidt Istanbul Dis Ticaret ve

Pazarlama A.S., Istanbul, Turkey

- KS International Investment Corp.,

Southfield, USA

- KS France S.A., Paris, France

Dipl.-Kfm. Heinz-Ludger Heuberg

WülfrathFinance/Controlling (up to February 28, 2002)





Dipl.-Betriebswirt Georg Liebler

DüsseldorfMarketing(up to January 21, 2003)



(chairman)


- KS France S.A., Paris, France


Member of comparable

German or foreign boards:

- Karl Schmidt Unisia Inc., Marinette, USA

- Carbureibar S.A., Abadiano, Spain

(up to July 23, 2002)

- Pierburg Inc., Fountain Inn (Greenville), USA

- Märkisches Werk Halver GmbH, Halver

advisory board chairman

- Preh Group, Bad Neustadt/Saale

Member of the shareholder committee

- Grammer AG, Amberg

Dr. Peter P. Merten

HerrschingFinance/Controlling (as from March 1, 2002)






Execut ive Board

107106

Financial glossary

Financia l g lossar y o f Kolbenschmidt P ie rburg AG

ABT (asset-backed transactions) Self-explanatory. Attractive source of cash for companies which sell, forinstance, their trade receivables under ABTs.

Actuarial gains and losses The actuarial computation of pension accruals is largely based on forecastedparameters (such as pay and pension trends). If these assumptions are changed on the basis of actual developments, actuarial gains or losses result.

EBIT margin Percentage obtained by dividing EBIT into net sales x 100 and used to com-pare the profitability of companies of different size. EBIT margins typicallyvary by type of business.

EBITDA Earnings before interest, taxes, depreciation and amortization; being a pretax performance indicator that disregards the corporate financing structure and all noncash expenses, EBITDA reflects the gross cash inflowgenerated by a company.

EBIT Earnings before interest and taxes; used to assess a company’s performanceirrespective of its financing structure. Key indicator for the Rheinmetall Group’smanagement to control group (company) performance.

Cash flow (gross, but after taxes) Net income/net loss plus amortization/depreciation and changes in pensionaccruals. This indicator shows a company’s ability to internally fund its ex-penditures and processes and to distribute cash dividends.

Capital employed (CE) CE provided by stockholders, creditors, employees, etc. and comprising netfinancial debts, pension accruals and equity. The meaningful interpretationof this indicator requires –>EBIT to calculate –>ROCE: EBIT should ensure a suf-ficient return on CE to satisfy the stakeholders concerned. Depending on theemployment of the capital (on the assets side), CE is determined as the netof –>(segment) assets less –>(segment) liabilities plus pension accruals.

Corporate Governance Code A code that a company commits itself to comply with, regulating internal andexternal practices and procedures and enhancing the company’s transparencyin the interests of stakeholders.

Deferred taxes Roughly, deferred tax assets and liabilities are recognized for temporary differ-ences between the values of assets and liabilities in the tax accounts and theIAS-based financial statements. Deferred taxes thus reflect the expected futuretax effects of transactions.

Defined benefit obligation (DBO) The present value of the DBO (determined according to the–>projected unit credit method) equals the value discounted as of balance sheet date, withoutdeducting any plan assets, of expected future payments required of a companyto settle the obligation from its workforce’s service in the current and prior years.The PUC method requires certain assumptions of future pay, pension and in-terest rate trends to be accounted for.

EBT Earnings before taxes: the pretax profit/loss after financing expenses is bettersuited to inform stockholders about the year’s performance than net income/loss since tax payments may distort the picture due to past events or specialfactors. In IAS-based accounts, EBT is synonymous with the result from ordi-nary operations.

Financial derivatives Financial instruments (e.g., options, futures) derived from original instruments(such as equities, bonds, foreign currency) and used, inter alia, to hedgeagainst currency and interest rate risks. The prices of derivatives hinge directlyor indirectly on the value of the underlying transaction.

Financial leverage Financial instruments (e.g., options, futures) derived from original instruments(such as equities, bonds, foreign currency) and used, inter alia, to hedgeagainst currency and interest rate risks. The prices of derivatives hinge directlyor indirectly on the value of the underlying transaction.

Fair value The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in a transaction at arm’s length.

Free float Self-explanatory, the freely exchange-tradable shares available to the generalpublic as opposed to stakes owned long term by major investors.

EpS before/after goodwill

amortization

Earnings (net income after –>goodwill amortization) related to the number ofshares issued and outstanding; not identical with the dividend and primarilyused to assess a company’s results of operations. To compare several com-panies, the investor calculates the price-earnings ratio (PER) by relating EpSto the stock price. Since goodwill amortization neither reduces cash nor de-creases value and, moreover, is not obligatory in all accounting systems, EpSbefore goodwill amortization is computed alternatively.

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Financial glossary

Financia l g lossar y o f Kolbenschmidt P ie rburg AG

Segment assets All assets less cash & cash equivalents and less other assets that bear interestin any form (but not involved in EBIT generation). This total is part of –>capitalemployed for segment reporting.

Segment liabilities All liabilities less financial debts (which require EBIT service). This totalis part of –>capital employed for segment reporting.

Standing Interpretations Committee

(SIC)

The SIC interprets potentially contentious accounting issues. The Inter-pretations are approved by the International Accounting Standards Board(IASB) and, from the effective date, are binding on all IAS users.

Projected unit credit (PUC) method The PUC method (under IAS 19) is used to provide for pensions and similarobligations. Based on the present value of the DBO, not only the pensionsand vested rights (entitlements) as of the balance sheet date are taken intoaccount but also future pay and pension rises.

ROCE

(return on capital employed)

Kolbenschmidt Pierburg defines this performance ratio before taxes. It is ob-tained by dividing –>EBIT into the annual average –>capital employed. The stake-holders concerned can thus rate the profitability of the capital employed withinthe company. To add value, ROCE should exceed the percentage cost of capital.If defined identically, ROCE permits a comparison of the profitability of differentcompanies. The ratio is used by management within the Rheinmetall Group forcontrolling purposes in line with the shareholder value concept.

MDAX This German mid-cap index covers 50 companies of the prime standard fromclassical sectors. These equities rank directly after the 30 DAX® companiesin terms of order book sales and market capitalization.

SDAX This German small-cap index covers 50 small companies that rank directlyafter the 50 MDAX® companies in terms of order book sales and market capitalization.

Net financial debts All interest-bearing liabilities (such as those due to banks) less cash & cash equiv-alents. This figure provides information about a company’s net indebtedness.

International Accounting Standard

(IAS)

These standards—developed by international associations of accountantsand auditors, preparers of financial statements and scientists—represent an internationally harmonized accounting and reporting system extendingbeyond the European Union and meant to provide high-quality, meaningfulfinancial information, thus improving international comparability. The IASprovide a standard basis for both companies and investors and presentlyinclude 34 standards.

Goodwill In company acquisitions, net equity under cost (or prorated net assets overcost); requires capitalization as an intangible.

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Addresses of division parent companies

Air Supply & Pumps

Pierburg GmbH

Alfred-Pierburg-Strasse 141460 Neuss, GermanyPhone (+49-21 31) 52 00Fax (+49-21 31) 52 06 [email protected]@kolbenschmidt-pierburg.com

Pistons

KS Kolbenschmidt GmbH

Karl-Schmidt-Strasse74172 Neckarsulm, GermanyPhone (+49-71 32) 33 0Fax (+49-71 32) 33 27 [email protected]

Plain Bearings

KS Gleitlager GmbH

Am-Bahnhof 1468789 St. Leon-Rot, GermanyPhone (+49-62 27) 56 0Fax (+49-62 27) 56 [email protected]

Aluminum Technology

KS Aluminium-Technologie AG

Hafenstrasse 2574172 Neckarsulm, GermanyPhone (+49-71 32) 33 1Fax (+49-71 32) 33 43 [email protected]

Motor Service

MSI Motor-Service International GmbH

Untere Neckarstrasse74172 Neckarsulm, GermanyPhone (+49-71 32) 33 33 33Fax (+49-71 32) 33 28 [email protected]

Financial diary

April 10, 2003 Annual accounts press conference, DüsseldorfMeeting with financial analysts, Frankfurt/Main

May 19, 2003 Report on Q1/2003

May 20, 2003 Teleconference with financial analysts

May 21, 2003 Annual stockholders’ meetingof Kolbenschmidt Pierburg AG, Heilbronn

May 27, 2003 Annual stockholders’ meetingof Rheinmetall AG, Berlin

August 20, 2003 Report on Q2/2003

August 21, 2003 Teleconference with financial analysts

November 20, 2003 Report on Q3/2003

November 21, 2003 Teleconference with financial analysts


Rheinmetall Allee 1

40476 Düsseldorf, Germany

Phone (+49-211) 473-4718

Fax (+49-211) 473-4157

www.kolbenschmidt-pierburg.com

Documents

Annual Report 2002 Kolbenschmidt Pierburg AG · Pierburg AG, Rheinmetall Allee 1, 40476 Düsseldorf, Germany. K ol benschmidt Pierburg again making good progress De s pite a generally