Management Report of AUDI AG for the 2005 Financial Year. Annual Financial Statements of AUDI AG as at December 31, 2005

Transcription

1 Management Report of AUDI AG for the 2005 Financial Year Annual Financial Statements of AUDI AG as at December 31, 2005 Balance Sheet, Income Statement, Notes to Financial Statements The management report and the annual financial statements of AUDI AG for the 2005 financial year are published in the German Federal Gazette and filed with the commercial register of the Ingolstadt Local Court.

2 Management Report of AUDI AG for the 2005 financial year Business and underlying situation Company Audi is one of the world s leading automotive premium brands, and builds high-quality, innovative cars that are among the most admired on the world market. Its pioneering concepts in the domains of general company management and technological refinement constitute the basis of its success. The customers wishes are placed at the very heart of its unceasing quest to find ever better solutions. Audi s philosophy is reflected in the brand essence Vorsprung durch Technik and manifested by the brand values sportiness, sophistication and progressiveness. Customers are able to experience the brand claim in particular through the innovative range of models. AUDI AG was consequently yet again able to consolidate its position on car markets worldwide in The company headquarters, with the core areas Administration, Sales and Technical Development, are located in Ingolstadt, as are substantial parts of the production operations. Production at this location comprises the models A3, A3 Sportback, A4 saloon and Avant, and S4 saloon and Avant. The bodies for the TT Coupé and TT Roadster are also manufactured in Ingolstadt. The models A6 saloon and Avant, A8 and RS 4 are built at the second German location, Neckarsulm. Production of the S6 saloon, S6 Avant and S8 is due to commence there in Volkswagen AG currently holds around 99 percent of the share capital of AUDI AG. A profit transfer and control agreement exists with the former. Profit transfer agreements exist between AUDI AG and the principal fully consolidated companies Audi Vertriebsbetreuungsgesellschaft mbh and quattro GmbH. All shares in Audi Synko GmbH were transferred to Volkswagen Retail GmbH (formerly Volkswagen Synko GmbH) with effect from January 1, The profit transfer agreement between AUDI AG and Audi Synko GmbH was moreover terminated as a result of this transaction. Corporate steering Strategy The management and employees of AUDI AG continued to work intensively on the company s strategic direction last year, always with the vision of becoming the most successful premium brand in the world saw the implementation of specific measures which sought to underpin these strategic growth objectives. Audi s strategy provides answers to the major challenges of the future by tackling the following four target dimensions: attractiveness as an employer, further development of the brand, maximum customer delight, and an enhanced quality of financial results. These targets are closely interlinked and build on each other. Audi will only be able to develop and hold onto an expert, dedicated team of top performers if it is an attractive employer. Survey results are already indicating that Audi is regarded as one of the most attractive prospective employers, not just among university graduates. A very strong, desirable brand provides a sound basis for lasting success, particularly in times of intensive competition. Audi will consequently continue to build on its current image position, focusing above all on the facets of emotion and quality. Customer loyalty and the brand s ability to captivate new customers will thus be further strengthened. The growth of the brand is nevertheless fuelled not simply by more effective market exploitation, but also by tapping into new growth markets. The central success factor here is 3

3 exciting cars: new product families and derivatives are consequently gradually being added to the range. An intelligent vehicle architecture helps to bring about an appreciable improvement in the profitability of the entire company. Research and development Innovation and quality are important success factors. A company-wide programme with the aim of further improving core skills in the field of vehicle development was therefore launched in To this end, 5,685 (5,272) people were employed within the Research and Development area of AUDI AG at December 31, The 7.8 percent rise in the number of employees reflects the ever stronger claim of AUDI AG to the title of technology leader. Development spending in the past financial year amounted to EUR 1,126 (997) million. Technical innovations Audi Q7 hybrid The Audi Q7 hybrid concept study represents a logical step forward in the domain of innovative drive concepts. Audi has for the first time combined a 4.2-litre V8 FSI petrol engine with electric drive. The vehicle s performance is high, and average fuel consumption compared with the basic model is as much as 13 percent lower. Audi magnetic ride The innovative damping system Audi magnetic ride was unveiled in the Shooting Brake Concept design study. This system establishes the correct damping forces in every driving situation, thus optimising road behaviour and ride comfort. Audi drive select Audi exhibited a further innovation in the Roadjet Concept study vehicle at the Detroit Motor Show. Audi drive select allows several entirely independent vehicle characteristics to be preselected at the push of a button. Three modes directly modify the steering, damping and transmission response, as well as the engine characteristic. New engines The new S8, which is equipped with an evolutionary 450 bhp, 5.2-litre V10 FSI engine, combines sportiness with a high standard of comfort. The technical expertise gleaned from the engine of the Lamborghini Gallardo served as the basis for its development. The tencylinder engine in the Audi S8 is even more compact and light, as the number of components has been reduced. The special features of this power unit are low moving masses and reduced internal friction, in conjunction with an ultra-dynamic power flow. Highly innovative technology from Audi also features on the racetrack in the guise of the new R10. This is the first racing car in its class to feature a 5.5-litre, twelve-cylinder TDI twinturbo engine. With an output in excess of 650 bhp and over 1,100 Nm torque, Audi will be entering it in this year s Le Mans 24 Hours to challenge for yet another overall victory. Like TFSI technology before it, Audi is thus testing a new technology on the racetrack in order to demonstrate its high performance and reliability. 4

4 Innovations that bring greater safety Audi side assist, Audi lane assist Innovations in the area of safety likewise enjoy top priority at Audi. Active safety systems help to prevent accidents from occurring in the first place. Pioneering developments in this area are Audi side assist, which is available for the first time in the Audi Q7, and Audi lane assist, which was unveiled at the start of 2005 in the Audi allroad quattro concept. Audi side assist helps the driver when changing lanes and alerts them to the presence of other vehicles in their blind spot. Audi lane assist, on the other hand, alerts the driver as soon as they cross the lane markings without having set the indicator. The American Insurance Institute for Highway Safety (IIHS) awarded its highest possible rating of Double Best Pick to the passive safety of the new models launched in the USA in 2005, the A3, A4 and A6. No other manufacturer has ever achieved this triple top score, a fact which serves to highlight Audi s expertise in this area. Lightweight construction Audi fires neutrons at specimens of material in the Technical University of Munich s research reactor. This new technique now for the first time makes it possible to establish material strain and therefore deformations in a non-destructive manner. The research object is an innovative material mix of steel and aluminium, held together by punch rivets. The new measuring technique supplies valuable data on the crash behaviour of the punch-riveted connections. The aim is to refine lightweight construction and for example to use such punch rivets in the future in areas where they can actually enhance crash behaviour. Intelligent LED rear lights A further new development that boosts safety is LED rear lights, which Audi has used for the first time on the A6 Avant. They respond faster than conventional lights and memorably enhance the design. Audi s engineers are in addition working on the intelligent rear light. This type of light clearly signals an emergency brake application, thus reducing the risk of a nose-to-tail collision. With the aid of sensors, it moreover automatically adapts its intensity to the prevailing light and visibility conditions. Refined MMI The biggest challenge for future infotainment and safety systems is not to overburden the driver with information and cause them to be distracted from the road situation as a result. Audi therefore sends test candidates on a virtual drive in a new, elaborately equipped laboratory. A 250-degree screen transports the candidates into various traffic scenarios. The driver tries out the further-developed features of the Multi Media Interface (MMI) while driving. 5

5 Employee matters Workforce The following table shows the total number of employees of AUDI AG as an average for the year: Ingolstadt plant 31,236 31,150 Neckarsulm plant 13,666 13,768 AUDI AG employed an average of 44,902 (44,918) people in There were 2,236 (2,181) apprentices at Ingolstadt and Neckarsulm at the end of Of this total, 2,061 (2,011) were engaged in industrial activities and 175 (170) in the technical/clerical area. The proportion of people with severe disabilities in relation to the total workforce of AUDI AG was 5.1 (5.0) percent at the end of the year. Audi in addition awards contracts to Lebenshilfe workshops for disabled people in the Ingolstadt and Neckarsulm regions. AUDI AG was able to achieve a new record high of 97.0 percent attendance for 2005 and thus build on the welcome trend of recent years. This result was made possible by countless initiatives within the company and the dedication of all employees. Company agreement: Audi s Future Performance, Success, Sharing The management and General Works Council of AUDI AG, in consultation with the parties to pay agreements, reached consensus on the content of the new agreement entitled Audi s Future Performance, Success, Sharing on April 8, The conclusion of the agreement represents a clear affirmation of Germany s future as an industrial base with the goal of combining competitiveness with job security. From its position of strength, Audi is consequently taking precautionary measures for the future. Key aspects of the agreement: Job security There will be no redundancies for operational reasons before December 31, The Ingolstadt and Neckarsulm plants are to be integrated into a flexible production hub in order to assure a constant level of capacity utilisation. Industry-related services Separate negotiated working hours and pay arrangements have been agreed with employees performing industry-related service tasks, such as catering, office and security services, in a supplementary collective agreement in order to improve competitiveness compared with external service providers. More flexible working hours To increase the flexibility of working hours, so-called flexi-shifts have been introduced in conjunction with open-ended time accounts, which replace supplementary payments with time credits subject to certain conditions. 6

6 New Audi remuneration system The general collective agreement on pay (ERA), which will be introduced from 2007, sets out a new Audi remuneration system. This redefines the performance-dependent component of the profit-sharing arrangements for employees. Vocational training The number of apprenticeships available has been increased by 40 percent in recent years. Audi furthermore handles the start of a person s career more flexibly: time spent as a journeyman including, as necessary, assignments to other group companies, suppliers or outside companies contributes towards professional qualifications and helps to broaden a person s specialist and personal horizons. Health and fitness The Audi Check-Up will act as a core element in promoting the health and fitness of all AUDI AG employees over the next few years. This scheme will gradually draw the entire workforce on a voluntary basis into a diagnosis and prevention programme tailored to the individual s age and representing the state of the art in medicine. Other components of the agreement include the promoting of the personal development of all employees, of equal opportunities and of the compatibility of work with family life. Audi in society Promoting culture Summer Concerts AUDI AG has long been involved in promoting art and culture. One major aspect of this involvement is the season of Summer Concerts, now renowned well beyond the region, that Audi has been organising at various venues in the Ingolstadt area since 1990 with a view to enriching cultural life in and around its home city. The Summer Concerts again took Vorsprung Experienced Live as their motto in The blend of different musical currents was aimed increasingly at a younger audience. The programme ranged from classical to pop, from jazz to hip hop, from musical to soul, with a liberal helping of crossover, too. European College of Arts The European College of Arts in Berlin, a unique development scheme for talented artists from seven European states, was initiated among others by AUDI AG. A high-ranking jury selected three students to spend nine months in Berlin creatively interpreting and developing their ideas on how Europe is changing. The artists also spent some time in Ingolstadt as part of this scheme. Audi thus built a bridge between industrial work, mobility, advanced technology and artistic reflection. Social involvement Fundraising campaigns The corporate social responsibility (CSR) of a company depends on its readiness to show steadfast, lasting involvement. A core component of Audi s corporate culture in the social and regional context is the Christmas appeal, first launched in 1977 by the Works Council and repeated every year since. In 2005, the workforce at Ingolstadt and Neckarsulm donated EUR 526,848. The management topped up this amount, with the result that EUR 686,848 in total was available at both locations for supporting local charities and organisations. 7

7 Audi s solidarity with the victims of the tsunami disaster made it possible to send money to aid reconstruction in the affected regions within a very short space of time. Many employees donate the spare cents from their monthly earnings to the appeal One Hour for the Future, which provides financial support for projects helping street children in Germany and at other international locations of the Volkswagen Group. The employees and management donated a total of around EUR 1.1 million to this cause in Public-private partnerships Around 45,000 men and women are employed at the Audi plants. AUDI AG consequently shares responsibility for the home towns and regions where its plants are based, Audi s response taking the form of various projects that promote a spirit of neighbourliness around the Four Rings. New partnership for Neckarsulm Technical Institute Through a university-level partnership between AUDI AG and the University of Stuttgart and the Technical University of Karlsruhe, an academic centre of expertise where research and practical work will go hand in hand has now also been established in Baden-Württemberg. As well as encouraging young scientific researchers, the resulting Neckarsulm Technical Institute (HIN) will in particular enhance innovative prowess and the attractiveness of the location. The existing university-level partnership between AUDI AG and the Technical University of Munich (INI.TUM) has already successfully established its reputation as a place of interdisciplinary cooperation. Exceptional, enduring technological expertise is being systematically built up in partnership with these universities. Highly qualified people will thus receive an opportunity to conduct scientific research at Audi s locations. Collaboration with the city of Ingolstadt AUDI AG cooperates with the city of Ingolstadt in many areas. One topical example is the school routes map presented to over 5,000 primary-school and pre-school children at the start of the school year last autumn. This map is based on the municipal Geoportal computer system and provides children and parents alike with a vivid, printed guide on how to get to school and back home safely. A further example of local patronage is the support we have lent to the establishment of the Endowed Chair of Tourism at the University of Eichstätt-Ingolstadt. The aims of this partnership are to communicate the specialist background to the organisation of tourism at Audi plants, to support the development of regional tourism and to develop Eichstätt- Ingolstadt as a centre of academic research. AUDI AG is in addition a founder member of the Citizens Foundation established by the city of Ingolstadt. By supporting social, ecological and cultural issues, this foundation seeks to give citizens and businesses the opportunity to have a long-term say in the shaping of their city and the way its inhabitants coexist. Environmental aspects Environmental management ISO standard calls for a system audit to be conducted within the context of environmental management systems and certifies the company s environmental performance by means of a corresponding certificate. A validation in accordance with EU regulation 761/2001 (EMAS II) includes the requirements of ISO as well as stipulating ongoing improvements and the compilation of a standardised environmental declaration. AUDI AG already meets these requirements in full at its Ingolstadt and Neckarsulm locations. 8

8 Environmental Pact for Bavaria III Audi is participating in the latest Environmental Pact for Bavaria, now in its third phase. Under a joint venture, Audi will support an integrated product policy at its supplier companies. As an expression of cooperation between the state and industry, working forums on focal topics such as emissions trading, integrated product policies, renewable energies and administrative simplifications have been set up. The purpose of these working forums is to promote incentives for environmentally compatible economic growth. Fall in environmental pollution at AUDI AG locations The satisfying rise in production to around 798,000 vehicles in 2005 went hand in hand with a reduction in environmental pollution at the AUDI AG s locations, thanks to the use of water-soluble paints, and intact water and waste cycles. Since 2000, for example, 97 additional heat recovery systems have been installed at Ingolstadt, bringing an annual saving of around 38.5 million cubic metres of natural gas and avoiding 76,400 tonnes of carbon dioxide emissions. Fresh water purchases were furthermore reduced by 3.7 percent in 2005 compared with the previous year. The water used for the production process was collected, purified and reused even more efficiently. The company likewise succeeded in reducing VOC (volatile organic compound) emissions by 4.3 percent. For further detailed notes on environmental aspects, please refer to the Audi Environmental Report and the environmental declarations at Energy consumption at the Ingolstadt and Neckarsulm locations Overall energy consumption MWh 1,782,949 1,812,628 1,774,221 1,796,952 1,815,295 VOC emissions* t 1,662 1,564 1,670 1,333 1,276 Direct CO 2 emissions** t 177, , , , ,529 Volume of waste water m³ 1,621,553 1,590,956 1,692,458 1,574,819 1,496,916 Fresh water purchased m³ 2,404,945 2,351,784 2,505,206 2,225,171 2,142,889 Total volume of waste t 35,274 34,357 33,658 33,963 32,236 of which recyclable waste t 26,428 24,039 23,836 23,261 24,311 of which disposable waste t 8,846 10,318 9,822 10,702 7,925 Metallic waste (scrap) t 235, , , , ,040 * VOC: volatile organic compounds. This figure comprises emissions from the paint shops, shipment preservative treatment for motor vehicles, test rigs and other facilities. ** CO 2 emissions from own power generation activities. This figure is made up of CO 2 emissions from own power generation activities and CO 2 emissions produced by the operation of test rigs. 9

9 Underlying economic situation Global economic situation In spite of the sharp rise in energy and raw materials prices, the global economy enjoyed stable growth in 2005, without achieving the vigour of the previous year. Low interest rates worldwide helped to cushion the impact of surging oil prices. The USA and China acted as the key driving forces of the global economy s expansion. By contrast, economic growth in Western Europe lagged behind the general trend. In the USA, the dynamic performance of the economy and incipient inflationary tendencies necessitated a tightening of monetary policy. The economy was underpinned above all by private consumption and capital equipment spending by companies. The economy in Western Europe developed at a restrained pace in 2005, with noticeable differences between the growth rates of individual countries. Weak internal demand in major national economies proved a major growth-inhibiting factor. Consumer restraint persisted in those countries as a result of high levels of unemployment and consumer unease. Economic development was much more positive in Central and Eastern Europe, and especially in Russia. With below-average economic growth, Germany found itself among Europe s tail enders. Whereas exports rose and yet again proved to be the mainstay of the economy, the slackness in consumption since 2002 persisted. This development was aggravated by the rising energy prices, which noticeably diminished the purchasing power of private households. Nor did the parliamentary elections and the new German government s political agenda, as set forth in its coalition agreement, provide any significant impetus to improve consumer confidence in the remainder of In the countries of South America, the vigorous economic upswing of the previous year lost some of its momentum though the positive trend continued. In addition to export growth for raw materials, certain countries also benefited from growing domestic demand. China remained the growth centre in the Far East economic region in Despite the rise in energy and raw materials prices, the Chinese economy expanded unchecked. In Japan, private consumption recovered, bolstering the country s increasingly stable economic growth. International car market The upward trend in worldwide demand for cars was sustained despite the sharp rise in fuel prices in the course of Global sales of passenger cars and light commercial vehicles amounted to 53.0 million units, representing an increase of 3.9 percent on the prior-year figure. This development derived its momentum principally from Asian and South American markets. In Western Europe and the USA, by contrast, car sales remained flat. Following a weak start to the year and a phase of recovery, the Western European car market (excluding Germany) yet again weakened and was 0.6 percent down on the prior-year figure with 11.2 million registrations of new cars. In Great Britain, the second-largest car market in Europe, the protracted period of growth finally came to an end in Registrations of new cars yielded by 5.0 percent there. In Italy, the figure was down 0.7 percent. In Spain, the high market growth of the previous year was not emulated and the rate of growth was only 0.8 percent. On the other hand, the French market provided positive news, with growth of 2.7 percent. In the USA, the car market in 2005 was dominated by drastic discounting campaigns launched by US manufacturers, though this had only a short-term effect. Following growth rates occasionally running into double figures in the summer months, car sales in the USA finished the year just 0.5 percent up on the prior-year figure, at 17.0 million passenger cars and light commercial vehicles. Particularly in the second half of the year, the sharp rises in fuel prices prompted a downturn in sales. As in the previous year, the positive development of the South American economy rubbed off on the car sector. In Brazil, the largest market in the region, sales of passenger 10

10 cars rose by 8.8 percent to 1.4 million vehicles. In Argentina, market growth reached 36.3 percent. The car market remained dynamic in the Asia-Pacific region. Unit sales totalled 12.4 million passenger cars, representing an increase of 8.6 percent. In the Chinese market, car sales picked up again appreciably following a period of stagnation at the start of the year. With 3.3 million vehicles sold, the market for 2005 as a whole was up 25.1 percent on the prior-year figure. On the other hand in Japan, the largest market in Asia, registrations of new passenger cars declined by 0.4 percent to 4.7 million units. The German car market After a weak start to the year, the German car market picked up considerably. Registrations of passenger cars were up 2.3 percent on the previous year, at 3.3 million in the year under review. The diesel share of total first-time registrations fell by 1.3 percentage points to 42.7 percent. In the early part of the year in particular, the debate concerning particulate filters unsettled consumers for an extended period, preventing a better figure for diesel models, which experienced a marked downturn in sales for part of the year. Domestic car production likewise benefited from the development of the car market in Germany. 5.3 million vehicles left the production lines, representing an increase of 3.0 percent on the previous year. The number of German-branded passenger cars built abroad was on a par with the previous year, at 4.2 million units. Exports by German manufacturers bettered the record level of the previous year. 3.8 million passenger cars, an increase of 3.5 percent, were exported. Of this total, just under 2.5 million passenger cars were exported to other Western European countries, representing an increase of 4.6 percent. Exports to the USA, on the other hand, stagnated at just under 547,000 cars due to the adverse exchange rate. Overall assessment by the management The mixed performance of the global economy and rapidly rising raw materials prices have placed key car markets increasingly under pressure and led to a further intensification of global competition between car manufacturers. AUDI AG initiated appropriate product, process and cost management measures at an early stage in order to defend its long-term competitiveness despite the underlying conditions described. New record figures for production, revenue and sales for the past financial year already serve to confirm the effectiveness of these measures. Business progress Procurement Procurement within AUDI AG has the task of acquiring the most efficient suppliers worldwide in terms of quality, service, innovativeness, reliability and economy. Strategic partnerships are of considerable interest in this respect. The cost of materials within AUDI AG amounted to EUR 14,759 (13,923) million in This comprises raw materials and consumables used as well as other purchased goods and services. The developments on raw materials markets represented a particular challenge in Audi counteracts rising prices in particular through intensive partnerships with its suppliers, as well as through long-term agreements. 11

11 China, India and Russia are of increasing interest as procurement markets. China in particular offers Audi valuable potential in view of the company s production operations there for the local market and its resulting knowledge of that supplier market. AUDI AG continued to build on its successful purchasing instruments in the past financial year. Global sourcing assessing the worldwide competitiveness of suppliers Global sourcing is an ongoing process which seeks to secure lasting improvements in terms of quality, service and price by scouring international markets. Audi operates with 18 local purchasing teams (LPT) spread all over the world. These purchasing teams are the central points of contact for local suppliers in each procurement market, and act as the interface with Audi. The task of the LPTs is to assess the potential of the suppliers in their respective countries, and to assist them throughout the enquiry and qualifying process, then develop them into suppliers for Audi s production operations. Online negotiations Online negotiations are used as an effective instrument alongside the classic negotiating format, and accelerate the process by boosting market transparency. Improving partner ties through supplier platform The supplier platform now provides over 24,000 potential suppliers with the opportunity to access numerous different applications from the Development, Procurement, Production and Logistics areas. All procurement processes are handled via the platform according to a web-based approach. The supplier platform furthermore allows project-relevant data to be exchanged by suppliers and AUDI AG. Production Vehicle production by model Audi A2 10,026 19,745 Audi A3 70, ,904 Audi A3 Sportback 150,091 52,846 Audi A4 saloon 157, ,621 Audi A4 Avant 155, ,402 Audi A4 Cabriolet 22,089 31,962 Audi A6 saloon 131, ,034 Audi A6 Avant 73,334 33,667 Audi allroad quattro 4,295 14,796 Audi Q7 1, Audi A8 21,515 22,429 Audi RS Audi RS 6 saloon 232 Audi RS 6 Avant 1,001 Total, AUDI AG 797, ,689 12

12 AUDI AG increased car production by 5.0 percent in the 2005 financial year to a new record total of 797,779 (759,689) vehicles. Production of the Audi A3 rose by 26.2 percent to 220,486 (174,750) vehicles above all as a result of high demand for the Audi A3 Sportback. Production of the Audi A4 was on a par with the previous year s high level, at 312,940 (313,023) units. A total of 22,089 (31,962) of the Audi A4 Cabriolet were built last year, this downturn being due to the advanced point of the model cycle. Production of the first vehicles of the new Audi A4 Cabriolet already started in autumn The new model features five different engine versions together with an array of new technical features, and has been on the market since the start of A total of 556 (4) of the Audi RS 4 were built. Like the saloon before it, the A6 Avant launched in the first half of 2005 is very much in demand. AUDI AG built 204,678 (181,701) vehicles of the A6 car line at the Neckarsulm plant. This represents a rise of 12.6 percent. Shortly after the Audi A6 Avant went into production, a very special milestone was reached the five millionth Audi A6 left the production line. Production of the Audi A8 totalled 21,515 (22,429) units in the past financial year. In addition, the new A8 4.2 TDI quattro, one of the most powerful diesel cars in the world, was launched. From mid-2006, a sporty version will be added to the A8 product family in the guise of the new S8. Production of the Audi A2 in Neckarsulm was terminated during the past financial year, and the first model generation of the allroad quattro likewise went out of production. The study Audi allroad quattro concept was exhibited at the motor show in Detroit at the start of This study vehicle earned Audi considerable positive feedback not just from American customers. The new Audi A6 allroad quattro will consequently go into production in Neckarsulm from the spring. Volume production of the new premium SUV, the Audi Q7, commenced at the end of As its market launch in Europe will take place in March, 1,194 (46) of this car had already been built by the end of AUDI AG shipped 42,329 (61,128) completely knocked down parts kits of the A4 and A6 car lines to China in In the year of the 25th anniversary of quattro, the proportion of Audi vehicles built with four-wheel drive amounted to 26.9 percent of total production, with 214,702 (197,736) such vehicles built. Vehicle sales Despite difficult market conditions, AUDI AG stepped up sales of Audi vehicles in the past financial year to 829,109 units, an increase of 6.4 percent, thus establishing a new sales record. In its home market of Germany, AUDI AG sold 247,125 Audi vehicles. Thanks to this disproportionately high rise compared with the growth of the market as a whole, the market share climbed from 7.2 to 7.4 percent. Vehicle sales in other Western European countries, one of Audi s most important sales regions, were very satisfactory. Whereas the market as a whole contracted slightly by 0.6 percent, sales of Audi vehicles rose by a substantial 8.4 percent. This was prompted in particular by the sharp rise in sales in Italy (up 10.0 percent), Spain (up 13.0 percent) and France (up 10.1 percent). The brand with the four rings was likewise successful in the intensely competitive US market thanks to its attractive model range, bettering the prior-year total by 6.6 percent, with vehicle sales of 83,066 (77,917). The market launch of the Audi Q7 mid-way through the current year will further improve the positioning of the Audi brand in the USA. 13

13 Vehicle sales largest markets Vehicle sales 2005 Year-on-year percentage change 2005 market share, percent Year-on-year percentage change in overall market Audi worldwide 829, Germany 247, USA 83, Great Britain 81, China (incl. Hong Kong) 58,878 * Italy 55, Spain (incl. Canary Islands) 49, France 41, Belgium 24, Austria 17, Netherlands 16, Japan 15, Switzerland 12, Sweden 12, South Africa 11, Portugal 7, * Change in the method used for counting vehicle sales in the 2005 financial year. Consequently, no direct comparison with the previous year is possible. Application of the new method of counting vehicle sales for the previous year results in an increase of 9.6 percent in Vehicle sales by model Audi A2 13,321 21,452 Audi A3 75, ,276 Audi A3 Sportback 139,496 37,690 Audi TT Coupé 10,633 15,876 Audi TT Roadster 5,635 9,326 Audi A4 saloon 170, ,232 Audi A4 Avant 154, ,237 Audi A4 Cabriolet 23,560 30,541 Audi A6 saloon 141, ,305 Audi A6 Avant 64,878 35,660 Audi allroad quattro 7,431 14,840 Audi Q7 674 Audi A8 21,417 22,773 Audi RS Audi RS 6 saloon 232 Audi RS 6 Avant 1,001 Total, AUDI AG 829, ,441 14

14 Market and trend research at Audi Intensive exchanges with customers are the focus of attention of Audi s research into markets and trends. Every year, 2.3 million interviews are conducted with car customers and trendsetters on Audi s behalf, through international studies. Feedback on Audi products and services is an elementary component of product development. The indisputable objective of this is to demonstrate customer centricity and identify customer requirements. Trend and future studies analyse the factors that will shape customer satisfaction and customer behaviour in the future, and translate them into new products and innovations. Financial performance AUDI AG boosted its revenue by 9.1 percent in the past financial year. With revenue reaching EUR 21,694 (19,877) million, a new record level was again achieved. The outstanding market reception of the Audi A3 is particularly satisfying. The launch of the A3 Sportback in autumn 2004 and the changeover to the single-frame radiator grille for the three-door version helped to boost revenue by 16.3 percent. The revenue generated by the A4 line was also up on the previous year, accounting for 35.0 percent of total revenue. The A6 car line enjoyed strong demand in the past financial year and played a significant part in boosting total revenue, bringing in 21.5 percent more. The A8 achieved approximately the revenue level of the previous year, despite the downturn in the European market for luxury saloons last year. The rise in cost of sales of 6.7 percent in the past financial year is primarily due to the increased volume of direct materials as a result of higher unit sales. The positive development in revenue and the modest rise in cost of sales also show through in the gross profit, which rose substantially by 34.0 percent to EUR 2,339 (1,745) million. Distribution costs rose by 3.8 percent in the 2005 financial year and totalled EUR 1,391 (1,340) million at year end. Administrative expenses amounted to EUR 137 (132) million. The other operating result was EUR 351 (622) million. This reduction stemmed predominantly from lower income from foreign currency transactions. AUDI AG posted a very satisfactory result from ordinary activities, which was a healthy 28.0 percent up on the previous year at EUR 1,135 (887) million. This clearly reflects the success of the improved processes and cost-cutting measures implemented. The balance remaining after deduction of taxes rose by 14.1 percent in the 2005 financial year to EUR 462 (405) million and was transferred in full to Volkswagen AG. Net worth The balance sheet total of AUDI AG in the past financial year was well above the prior-year figure, at EUR 10,935 (9,727) million. Whereas non-current assets fell by 1.7 percent to EUR 5,100 (5,186) million, current assets (including deferrals) rose by EUR 1,294 million to EUR 5,835 (4,541) million. This change is largely due to the rise in receivables from affiliated companies. Capital investments by AUDI AG over the past year totalled EUR 982 (1,161) million. Of this total, investments in property, plant and equipment amounted to EUR 875 (945) million. The EUR 179 million downturn in capital investments is substantially attributable to systematic investment management, without the extent, quality and timescale of the envisaged product and investment plans being impaired in any way. 15

15 The equity of AUDI AG rose by 12.3 percent to EUR 1,779 (1,584) million following an injection of capital by Volkswagen AG to the tune of EUR 195 million. The equity ratio remained on a par with the previous year, at 16.3 (16.3) percent. Liabilities rose above all as a result of higher other provisions and liabilities to affiliated companies. Financial position The cash flow from operating activities rose sharply by 52.0 percent in 2005, to EUR 2,275 (1,497) million. This welcome development is principally due to the reduction in working capital. The cash flow thus once again covered the entire investment spending of the past financial year, underlining the impressive financial strength of AUDI AG. The outflow for investing activities amounted to EUR 877 (1,102) million. At December 31, 2005 AUDI AG had generated net liquidity of EUR 2,150 (962) million, up EUR 1,188 million on the prior-year figure. Cash flow statement EUR million Cash flow from operating activities 2,275 1,497 Cash flow from investing activities 877 1,102 Net cash flow 1, Cash flow from financing activities 28 Net liquidity 2, Cash pooling within the Audi Group is centralised at AUDI AG. Surpluses and shortages of cover are equalised via the cash pool at Volkswagen AG. All transactions are handled on market terms. There furthermore exists a credit line for EUR 100 million with Volkswagen AG. This had not been drawn upon at the balance sheet date. Report on post-balance sheet date events No events of particular significance occurred after December 31, Risk report The risk management system of AUDI AG In accordance with the risk management strategy of AUDI AG, the wide-ranging risks that are inseparably associated with the business activities of the company are minimised or if possible avoided in order to prevent potential losses to the company. Risks are consciously taken only where they are calculable and this course of action is unavoidable within the context of seizing favourable business opportunities to enhance the value of the company. Over and above AUDI AG, the risk management and early warning system covers all subsidiaries from which potential existence-threatening developments could spread to AUDI AG. The tasks of risk management at AUDI AG are reflected non-centrally by organisational processes at the level of the individual corporate divisions and subsidiaries. Risk management is thus an integral aspect of the existing business processes of AUDI AG. 16

16 Clearly defined task areas as well as reporting and recording obligations are laid down for the corporate divisions and subsidiaries. In the context of the defined spheres of responsibility within the risk management system, potential risks are identified, appropriate measures are elaborated and implemented for their management and monitoring, and the success of the measures taken is constantly monitored. The effectiveness of the management and monitoring system is constantly examined. Within the process of identifying and evaluating risks, the probability of individual risks materialising is estimated and the potential extent of the loss in each individual case quantified. The lost profit contribution serves as the measure for this purpose. Reports on key risks are submitted to the Board of Management and Supervisory Board on a regular basis. In the context of its business activities, AUDI AG encounters the following key risk areas: Risks from the economic context and the car industry In view of its business activities, AUDI AG is highly dependent on the general underlying state of the economy. This affects the major sales markets of the company in particular measure. These include above all Western Europe, the USA, Japan and China. A stagnating or even recessive economy in these markets can have a direct impact on consumer behaviour in the car sector. Protracted high prices or further price rises for oil and steel on the one hand harbour financial risks for production and on the other hand lead to consumer reticence, thus hampering vehicle sales. The premium segment, in which the models of the Audi brand are positioned, is fundamentally less exposed to the negative impact of cyclical fluctuations. The possibility of sales risks from a deterioration in the general economy and the consequent downturn in the market can, however, not be excluded even in that segment. As an international player, AUDI AG generates a significant portion of its revenue in foreign currency. This revenue is exposed to risks from exchange rate movements. In particular, unanticipated changes in the exchange rate between the US dollar and the euro can severely diminish revenues and the consolidated net profit. The intensive competition in the car trade as a result of the increasing use of sales promotion measures, not least in the important Audi markets of USA and China, but also in Germany and other European countries, is leading to price erosion and higher marketing costs, with a correspondingly negative impact on revenue and earnings. In launching the Audi Q7, the company has ventured into a vehicle segment that is new to Audi. In spite of meticulous market studies that have accompanied the product decisionmaking process, not every detail of the market s response to the new product can be anticipated. Changes to the legal context, such as tougher statutory requirements for vehicle safety, fuel consumption and exhaust emissions, remain a risk factor for the car industry. 17

17 Risks from operating activities There are diverse risks within the context of AUDI AG s operating activities which can substantially undermine its financial position and financial performance. These include potential disruptions to the energy supply, technical disruptions, in particular to electronic data processing, fires, explosions and similar occurrences which could potentially lead to high losses, but the likelihood of which is relatively low. AUDI AG counteracts such risks on the one hand through preventive measures such as fire protection, and on the other hand by taking out adequate insurance cover. The close, economically advantageous collaboration between car manufacturers and suppliers that is customary in this industry and the resulting dependency inflate the risk of production hitches as a result of delivery delays, non-delivery and quality defects. The possibility of the commercial failure of suppliers represents an added risk. The potential loss of income from such risks is held in check by AUDI AG and its subsidiaries through appropriate contractual arrangements, the use of suitable methods of selecting and monitoring suppliers and by taking out appropriate insurance cover. The complex product development process for new vehicles and components goes hand in hand with risks from delays, from changes to the product at short notice and from the loss of expertise as a result of the involvement of third-party service providers in the development process. Despite the presence of an efficient, systematic quality management approach within the company, potential product liability risks cannot be entirely excluded. These can both result in financial losses to AUDI AG and also harm its image. Financial risks The financial risks to which AUDI AG is exposed as a result of its business activities, whether directly or indirectly via subsidiaries, comprise market price risks (exchange-rate, interestrate and price risks from commodities), creditworthiness risks and liquidity risks. As a result of its worldwide sales markets, AUDI AG is exposed to particular risks from exchange-rate movements, above all of the US dollar and the pound sterling. AUDI AG actively steers financial risks by intensively observing the market and implementing appropriate hedging instruments. Derivative financial instruments are employed for hedging purposes. The hedging transactions are concluded via Volkswagen AG with national and international banks of top-grade creditworthiness. AUDI AG draws up a regularly updated liquidity projection with a daily, weekly and monthly horizon in order to steer the liquidity risk. Overall assessment of the risk situation Compared with the previous year, there is no substantial change in the risk situation of AUDI AG. The risks described harbour the potential to undermine the financial performance, net worth and financial position of the company to a significant degree. However, on the basis of all known particulars and circumstances, there are currently no risks that can endanger AUDI AG s survival for the foreseeable future. Report on expected developments Anticipated development in the underlying economic situation General economic situation The global economy will lose momentum slightly in 2006, as the higher energy prices are having a delayed impact. On top of this comes a tightening of monetary policy, which will temporarily dampen the economy. In the USA, economic growth will weaken slightly as a result of lower growth in private consumer spending. The protracted inflationary pressures and rising interest rates in particular are likely to more than outweigh the positive influences of stable trends in employment and income. Investment spending, which will rise substantially as a result of growing corporate profits, will provide a further impetus. 18

18 In Western Europe, there are early indications of a mild recovery in the economy, resulting in the main from growth in investment activity and a continuation in the positive trend in exports. Any growth trend in private consumer spending, on the other hand, is expected to remain weak. Germany s continuing export successes will increasingly have a knock-on effect on the domestic economy and lend momentum to corporate investment. Broadly stagnant real wages, the continuing high rate of unemployment and the rise in the cost of living that will result from the new ruling coalition s policies are, however, likely to prevent any sustained recovery in private consumption. Compared with other European countries, Germany s economic development will therefore remain mixed. In Asia, lower demand from the USA will cause the economy to weaken somewhat in The higher rate of expansion of private consumption in China will help to keep economic growth high despite a slight loss of momentum from investment spending. In Japan, the moderate course of growth is expected to hold up. The car industry Global demand for cars is expected to rise in 2006, although this trend will lose some of its vigour. The centre of growth will be the Asia-Pacific region, for which a steady rise in unit sales is still expected. By contrast, new-car registrations will remain flat or slip back in the major Western European markets and the USA. For 2006 as a whole, the Audi Group anticipates worldwide unit sales to grow by 1.1 percent to 53.6 million vehicles (passenger cars and light commercial vehicles). The rejuvenation of the vehicle population that has been prompted in the US car market in recent years through discounting campaigns will have the consequence of damping the development of the market in Various manufacturers perseverance with sales promotion measures will not have any impact to speak of, and merely serve to stabilise their sales volumes. Car sales in the USA will consequently stagnate at a level of just under 17.0 million vehicles (cars and light commercial vehicles). The Audi Group expects registrations of new cars in Western Europe (excluding Germany) to remain flat at around 11.1 million vehicles. Continuing consumer reticence in many countries throughout the region, in particular, will prove to be a negative factor. Of the key high-volume markets, only France will witness a rise in first-time registrations. The volume of registrations of new vehicles is expected to fall in the Italian, UK and Spanish car markets. In China, demand from private car buyers will continue to rise and maintain a high level of dynamism in the market in With growth of approx. 4.7 percent to almost 3.5 million passenger cars, the Chinese market is set to become the world s third-biggest car market, behind the USA and Japan. The announced rise in value-added tax will dominate the German car market in The Association of the German Automotive Industry (VDA) expects up to 80,000 new-vehicle registrations to be brought forward to the fourth quarter of The volume forecast for the market as a whole is 3.4 million vehicles, which would represent growth of 1.7 percent. 19

19 Anticipated developments at AUDI AG The underlying economic situation and the market context again confront AUDI AG with major challenges for the coming financial year. At the same time, the good results of the past year have established a very high benchmark against which the company success will be gauged. The management is nevertheless convinced that AUDI AG will be able to present a positive overall record of its business activities for the 2006 financial year, building on the achievements of Anticipated development in vehicle sales AUDI AG has set itself the goal of maintaining its course of growth in 2006, and is planning to better last year s sales record. A large number of new models and derivative versions will help by increasing the choice for customers in the premium segment, as well as enhancing the brand s appeal. In the highly competitive Western European car market, Audi is well equipped to record further successes in 2006 and achieve growth in the face of the stagnating market trend. For 2006, vehicle sales in Western Europe will probably be up on the prior-year figure. In Germany too, the highest-volume market for Audi vehicles, AUDI AG is targeting increased vehicle sales. Audi believes it is moreover equipped to withstand the intensive competition in the USA in The market launch of the Audi Q7 in particular will provide a vital impetus, with the result that a renewed rise in volume is expected. In China, Audi will share in the growth of the market and consolidate its market lead in the premium segment. The locally built long-wheelbase version of the Audi A6 will play an important part in boosting vehicle sales. In Japan, Audi likewise expects a positive trend in sales of its vehicles in Anticipated financial performance AUDI AG s revenue is likely to exceed the 2005 level in the 2006 financial year. The result from ordinary activities will emulate the level of the 2005 financial year, despite anticipated pressure from persistently high raw materials prices and adverse exchange rate factors. Anticipated financial position The priority aim for 2006 remains to finance growth from the positive cash flow generated. Once again, no external sources of financing will be used. The cash flow from operating activities will remain at a high level. Against the backdrop of the model initiative s longer-term perspective, higher cash outflows for investing activities are expected for the 2006 financial year. The cash outflow for financing activities will be up on the level of the 2005 financial year. The net liquidity of AUDI AG is expected to surpass the high level of the past financial year at the end of Capital investments Capital investments scheduled for the medium term are intended predominantly for customer-oriented additions to the model and engine range, the essential expansion of development and production structures, improving the productivity and quality of process chains, and strengthening customer loyalty. Capital investments principally concern direct product activities and will for the most part be earmarked for the production areas at Ingolstadt and Neckarsulm. Capital investments at suppliers represent a further focal area. 20

20 Anticipated development in the workforce The employee total of AUDI AG is likely to show a slight decrease at the end of 2006 compared with the 2005 balance sheet date. Opportunities for future development The main determining factors behind the positive future development of AUDI AG consist primarily in forward-looking strategies and measures designed to assure the steady qualitative and quantitative growth of the company in the long term. The process of rejuvenating and expanding the model range that is already under way will be pursued methodically. The 2006 financial year will see further new models such as the Audi Q7, the Audi A6 allroad quattro, the RS 4 Avant and the TT Coupé appear on the market. Under the derivative models strategy, the Audi S3, Audi S6 saloon and Avant and the Audi S8 will be launched. Audi s new sports car, the Audi R8 based on the Le Mans quattro study, will follow in AUDI AG will operate even more successfully in its existing markets. The establishment of fully-owned sales subsidiaries in important sales regions will provide the basis for this success. Audi will in addition actively open up new growth markets. AUDI AG expects the aforementioned measures to provide lasting prospects of growth that will determine the development of the company s volume figures as well as its financial performance data over the coming years. Over and above the strategy-related determining factors listed above, external factors may provide additional opportunities. A slackening-off or reversal of the current upward price trend in raw materials markets, but above all of oil, could for instance have a positive impact on the financial performance. Overall assessment of anticipated future developments AUDI AG is striving for sustained, qualitative and quantitative growth in 2006 and indeed in subsequent financial years. This objective will moreover be evident from the business figures for Disclaimer The management report contains statements relating to anticipated future developments. These statements are based on current assessments and are by their very nature expose to risks and uncertainty. Actual outcomes may differ from those predicted in these statements. 21

21 Balance sheet of AUDI AG at December 31, 2005 ASSETS in EUR 000 Notes 31 Dec Dec FIXED ASSETS Intangible assets 1 145, ,617 Property, plant and equipment 2 3,416,955 3,461,148 Long-term investments 3 1,537,764 1,536,880 5,099,986 5,185,645 CURRENT ASSETS Inventories 4 1,065,653 1,039,127 Receivables and other assets 5 4,384,118 3,095,060 Other securities 6 371, ,672 Cash on hand, cash in banks 6,108 30,151 5,827,447 4,536,010 DEFERRED CHARGES 7,153 5,500 10,934,586 9,727,155 EQUITY AND LIABILITIES in EUR 000 Notes 31 Dec Dec EQUITY Issued capital 7 110, ,080 Capital reserve 8 251,730 56,730 Retained earnings 9 1,417,089 1,417,089 1,778,899 1,583,899 SPECIAL ITEMS WITH AN EQUITY PORTION 10 12,499 13,050 PROVISIONS 11 4,927,560 4,265,637 LIABILITIES 12 4,215,628 3,864,569 10,934,586 9,727,155 22

22 Income statement of AUDI AG for the 2005 financial year EUR 000 Notes Revenues 13 21,693,562 19,876,729 Cost of sales 14 19,354,362 18,132,104 Gross profit 2,339,200 1,744,625 Distribution costs 15 1,391,100 1,339,596 Administrative expenses 136, ,374 Other operating income , ,171 Other operating expenses , ,451 Result from participating interests , ,940 Net interest 19 51,978 15,241 Write-down of long-term investments and current securities 20 46,032 30,917 Profit from ordinary activities 1,135, ,157 Income tax expense of which charged by the parent company EUR 673,227 (482,021) thousand , ,157 Profit transferred as a result of profit transfer agreement , ,000 Net profit for the year 23

23 Notes to the financial statements of AUDI AG for the 2005 financial year Development of fixed assets EUR 000 Gross carrying amounts Intangible assets Costs Additions Transfers Disposals Costs 01/01/ /12/2005 Concessions, industrial property rights and similar rights and values, as well as licences thereto 298,885 17,916 5,343 14, ,411 Payments on account 298,885 17,916 5,343 14, ,411 Property, plant and equipment Land, land rights and buildings, incl. buildings on land owned by others 2,710,437 46,606 34,416 4,045 2,787,414 Plant and machinery 2,918,686 84,586 76, ,023 2,872,165 Furniture, fixtures and office equipment 6,817, ,851 86, ,536 7,199,469 Payments on account and assets in course of construction 228, , ,599 1, ,136 12,674, ,782 5, ,194 13,080,184 Long-term investments Investments in affiliated companies 1,347,901 30, ,068 1,267,177 Loans advanced to affiliated companies 1, ,437 Participating interests 77, ,140 Loans to companies linked through participation Long-term securities 185,299 58,597 4, ,325 Other loans advanced 1, ,473 1,613,590 89, ,051 1,586,552 Total fixed assets 14,587, , ,978 14,974,147 24

24 Reduction in gross carrying amounts Carrying amounts Accumulated depreciation and amortisation Depreciation and amortisation for current year Transfers Disposals Write-ups Accumulated depreciation and amortisation 01/01/ /12/ /12/ /12/ ,268 63, , , , , ,268 63, , , , ,617 1,562,630 89, ,651,134 1,136,280 1,147,807 2,509, ,385 1, ,754 3,285 2,476, , ,949 5,141, ,913 1, ,673 5,535,818 1,663,651 1,675, , ,586 9,213, , ,002 3,285 9,663,229 3,416,955 3,461,148 73,800 46,000 73,800 46,000 1,221,177 1,274, ,106 1,198 2,002 2,002 75,138 75, , , ,018 1,182 76,710 46,002 73, ,788 1,537,764 1,536,880 9,401,769 1,012, ,745 3,409 9,874,161 5,099,986 5,185,645 25

25 General comments on the balance sheet and the income statement For the sake of greater clarity and visibility, certain individual items in the balance sheet and income statement have been combined. These items are shown separately in the Notes to the financial statements. The income statement has been prepared according to the function of expense method. The accounting principles and currency translation methods used in 2004 have in essence been retained. A list of all companies in which shares are held is filed with the Ingolstadt Commercial Register, HR B 1, and published on the Audi website at This list can in addition be requested directly from AUDI AG, Finance Analysis and Publications I/FF-12, Ingolstadt, Germany. Notes to the balance sheet 1 Intangible assets Intangible assets comprise purchased development services, computer software and licences in such rights and values, as well as subsidies paid. Measurement principles Intangible assets are recognised at cost of purchase and amortised pro rata temporis in accordance with useful life. 2 Property, plant and equipment EUR Dec Dec Land, land rights and buildings, incl. buildings on land owned by others 1,136,280 1,147,807 Plant and machinery 395, ,949 Furniture, fixtures and office equipment 1,663,651 1,675,806 Payments on account and assets in course of construction 221, ,586 3,416,955 3,461,148 Measurement principles Property, plant and equipment are measured at cost of purchase or cost of construction, less depreciation. Cost of purchase comprises purchase price, ancillary costs and cost reductions. Property, plant and equipment invoiced in foreign currencies are measured through translation at the mean of the buying and selling rate applicable on the date of invoicing. In the case of self constructed fixed assets, in addition to the directly attributable cost of materials and personnel costs, cost of construction also comprises the material overheads and production overheads that must be capitalised for tax purposes, including proportionate depreciation. Borrowing costs are not taken into account. Depreciation on property, plant and equipment is charged using either the straight-line method or to the extent permissible under tax law the deminishing balance method. A scheduled changeover is made from the deminishing balance method to the straight-line 26

26 method as soon as the latter produces higher levels of depreciation. Depreciation of depreciable assets is dated from their acquisition or completion. Our depreciation plan is based on the following estimates of useful lives permissible under tax laws: Useful life Buildings (excluding plant fixtures) Plant fixtures Production machinery Other equipment, factory and office equipment, including special tools, jigs and fixtures years 8 30 years 5 14 years 3 10 years Minor assets are fully depreciated in the year of acquisition. Write-backs amounting to EUR 3 million result from the obligation to perform reversals. Opportunities for special depreciation for tax purposes are utilised to the full. Differences in comparison with depreciation according to commercial law resulting from increased deductions under Section 7 d of the Income Tax Act (environmental protection) as well as from special depreciation under Section 82 d of the Income Tax Directive (research and development) and pursuant to Section 6 b of the Income Tax Act (transfer of capital gains) are shown under special items with an equity portion. 3 Long-term investments EUR Dec Dec Investments in affiliated companies 1,221,177 1,274,101 Loans advanced to affiliated companies 1,106 1,198 Participating interests 75,138 75,100 Long-term securities 239, ,299 Other loans advanced 1,018 1,182 1,537,764 1,536,880 The change in shares in affiliated companies stems mainly from a reduction for impairment on the carrying amount of one foreign company amounting to EUR 46 million, and from the sale of COSWORTH TECHNOLOGY LIMITED. The long-term securities are resources which are invested in pension funds and time credit funds on the basis of the contractual trust agreement with Volkswagen Pension Trust e.v. AUDI AG invests pension contributions for retirement benefits in the pension fund and contributions by employees under the scheme which provides for the conversion of gross pay into pension contributions. The time credit funds are substantially made up of components of the employees pay which they have contributed to these funds. Measurement principles Investments in affiliated companies, participating interests and long-term securities are fundamentally measured at cost of purchase. Where impairment is likely to be permanent, a write-down is performed to the lower fair value at the balance sheet date. 27

27 Additions to long-term investments in foreign currencies are translated at the mean of the buying and selling rate on the day of the transaction. Interest-free and low-interest loans advanced are stated in present value on the basis of an annual interest rate of 7 percent. 4 Inventories EUR Dec Dec Raw materials and supplies 199, ,493 Work in progress 233, ,237 Finished goods and merchandise 632, ,397 1,065,653 1,039,127 Measurement principles Raw materials and supplies are stated at the updated average cost of purchase or at the lower replacement value. Materials invoiced in foreign currencies are measured on the day of the transaction using regularly adjusted fixed exchange rates. Ancillary costs of purchase and cost reductions are taken into account as appropriate. In the case of work in progress and finished goods, which are measured at cost of conversion, direct materials are likewise included on the basis of average cost of purchase. The amounts given also comprise direct personnel costs, together with other costs which must be capitalised under tax law. Borrowing costs are not included. Company cars are written down to the amounts permissible under tax regulations on the basis of their anticipated useful life. Merchandise is measured at cost of purchase. Provision has been made for all discernible storage and inventory risks by way of value adjustments. In this, work in progress and finished goods, as well as merchandise, are measured loss-free as soon as the values derived from the sales market are lower than the cost of purchase or cost of conversion. 5 Receivables and other assets EUR Dec Dec Trade receivables of which amounts due in more than one year EUR 287 (415) thousand 447, ,861 Receivables from affiliated companies of which trade receivables EUR 386,554 (444,042) thousand 3,641,445 2,301,877 Receivables from enterprises in which the company has participating interests of which trade receivables EUR 72,031 (97,484) thousand 72,031 97,530 Other assets of which amounts due in more than one year EUR 45,523 (55,046) thousand of which from affiliated companies EUR 71,299 (86,537) thousand 223, ,792 4,384,118 3,095,060 28

28 Measurement principles Receivables and other assets are stated at their nominal value or at cost of purchase. Provision is made for discernible one-off risks and general credit risks in the form of appropriate value adjustments. Reiceivables in foreign currencies are measured at the mean of the buying and selling rate on the day of the transaction. Lower exchange rates on the balance sheet date are taken into account. 6 Other securities This item comprises capital-market instruments and shares in securities funds. Measurement principles Other securities are recognised at cost of purchase or the lower fair value on the balance sheet date. 7 Issued capital The issued capital remained unchanged at EUR 110,080,000 on December 31, It is divided into 43,000,000 bearer individual share certificates. 8 Capital reserve The capital reserves contain shareholder contributions from the issue of shares in the company, as well as a cash injection by Volkswagen AG in the current financial year amounting to EUR 195 million. 9 Retained earnings EUR Dec Dec Legal reserve Other retained earnings 1,416,959 1,416,959 1,417,089 1,417,089 There is no change in retained earnings as a result of the transfer of the entire profit for 2005 to Volkswagen AG. 10 Special items with an equity portion EUR Dec Dec Adjustment to value of fixed assets in accordance with: Section 7 d of Income Tax Act (environmental protection) 1,153 1,274 Section 82 d of Income Tax Directive (research and development) 2,328 2,542 Section 6 b of Income Tax Act (transfer of capital gains) 9,018 9,234 12,499 13,050 29

29 11 Provisions EUR Dec Dec Provisions for pensions and similar obligations 1,392,693 1,295,978 Tax provisions Other provisions 3,534,727 2,969,459 4,927,560 4,265,637 Other provisions relate for the most part to warranty claims cover, distribution expenses and workforce-related costs, as well as legal-expenses and product-liability risks. Provisions also exist for risks arising on pending transactions and from purchasing and development commitments. Measurement principles Provisions have been set up according to sound commercial judgement and cover all risks from anticipated claims within this context. The defined benefit liabilities are determined on the basis of Section 6 a of German Income Tax Law according to the discount value method, applying actuarial principles (calculated with an interest rate of 6 percent) and using the 2005 G reference tables by Professor Klaus Heubeck. Provisions for long-service awards have been discounted at a rate of 5.5 percent applying actuarial principles. Provisions for warranty claims cover have been created on the basis of previous claims and future risks incurred by vehicles sold. 12 Liabilities EUR 000 Due in up to 31 Dec Dec year 5 years Total Advances received for orders from customers 5,749 5,749 2,692 Trade payables 724, , ,947 Liabilities to affiliated companies 2,750, ,742 3,197,624 2,794,467 of which trade payables (258,205) ( ) (258,205) (288,447) Liabilities to enterprises in which the company has participating interests 10,723 10,723 23,308 of which trade payables (5,719) ( ) (5,719) (10,487) Other liabilities 222,171 26, , ,155 of which taxes (93,289) ( ) (93,289) (95,617) of which in respect of social insurance (65,861) (168) (68,918) (71,541) 3,714, ,073 4,215,628 3,864,569 The medium-term liabilities amount to EUR 28,454 thousand and relate to other liabilities. The include liabilities from payroll accounting of EUR 25,565 thousand and liabilities in respect of social insurance of EUR 2,889 thousand. 30

30 The liabilities to employees from the pre-retirement part-time block model of EUR 36 million that are included in other liabilities are appropriately secured by assignment of the company car fleet as security. Measurement principles Liabilities are shown at settlement value. Liabilities in foreign currencies are measured at the mean of the buying and selling rate on the day of the transaction. Losses resulting from higher exchange rates on the balance sheet date are taken into account. Notes to the income statement 13 Revenue EUR Share in % 2004 Share in % Domestic sales 8,134, ,007, Europe excluding Germany 9,485, ,866, North America 2,206, ,148, Asia / Oceania 1,552, ,576, Africa 206, , South America 109, , Sales outside Germany 13,559, ,869, Total 21,693, ,876, Vehicle sales accounted for 90 (89) percent of total revenue. The rise in revenue is a result of higher unit sales and the higher-grade equipment specifications being ordered. The share of vehicle export business is 65 (67) percent. The Audi A4 and Audi A6 are the highest-revenue models. The remaining revenue, which accounted for 10 (11) percent of the total, is above all for trade receivables from affiliated companies and miscellaneous sales to third parties. 14 Cost of sales The cost of sales include expenses relating to the manufacturing sector and to merchandise. This item also comprises research and development costs, warranty costs and changes in adjustments to the value of inventories. 15 Distribution costs Distribution costs essentially comprise expenses relating to marketing, sales promotion, advertising, public relations and outgoing freight. 31

31 16 Other operating income EUR Income from the reversal of special items with an equity portion Income from the reversal of provisions 133, ,242 Other operating income 629, , , ,171 Other operating income primarily comprises income from passed-on costs, income from recourse claims and from transactions in foreign currencies. 17 Other operating expenses Other operating expenses largely comprise expenses for transactions in foreign currencies. This item also includes allocations to the special item with an equity portion from the transfer of capital gains (Section 6 b of German Income Tax Law) amounting to EUR 72 (0) thousand. 18 Result from participating interests EUR Income from profit transfer agreements 32,085 14,445 Income from participating interests of which from affiliated companies EUR 22,374 (19,442) thousand 39,232 27,007 Expenses from the transfer of losses 718 2,512 Net result + 70, ,940 The income from profit transfer agreements (relating substantially to quattro GmbH and to Audi Vertriebsbetreuungsgesellschaft mbh) includes taxes passed on, which are dependent on profit. The income from participating interests relates to Volkswagen Transport GmbH & Co. KG and FAW-Volkswagen Automotive Company, Ltd. The expenses from the transfer of losses result from the profit transfer agreement with Audi Synko GmbH. 19 Net interest EUR Income from loans advanced Other interest and similar income of which from affiliated companies EUR 70,271 (56,422) thousand 90,079 79,056 Interest and similar expenses of which to affiliated companies EUR 139,162 (92,357) thousand 142,089 94,338 Net expense 51,978 15,241 32

32 20 Write-down of long-term investments and current securities Write-down of long-term investments and of securities classified as current assets results from the lower fair values on the balance sheet date. 21 Income tax expense Income tax expense includes taxes passed on by Volkswagen AG on the basis of the singleentity relationship between the two companies for tax purposes, along with taxes owed by AUDI AG. Other taxes Operating taxes totalling EUR 16 (10) million are allocated to manufacturing costs, distribution expenses and general administration expenses; they are not shown under other taxes. 22 Profit transferred as a result of Profit transfer agreement Persuant to the profit transfer agreement, an amount of EUR 462 (405) million is to be transferred to Volkswagen AG. Factors influencing net profit for the year and future charges The expenses to be allocated to other financial years total EUR 114 (145) million, of which EUR 73 (67) million represent aperiodic allocations to provisions. This compares with aperiodic income totalling EUR 208 (181) million. The latter amount includes income from the reversal of provisions totalling EUR 133 (144) million. The application of tax regulations has had only a minor impact on the results for Other particulars Cost of materials EUR Raw materials and supplies as well as purchased goods 13,401,214 12,808,609 Purchased services 1,357,922 1,114,050 14,759,136 13,922,659 Personnel costs EUR Wages and salaries 2,384,024 2,273,212 Social insurance and expenses for retirement benefits and maintenance payment of which in respect of retirement benefits EUR 167,151 (183,756) thousand 600, ,170 2,984,681 2,879,382 33

33 Total average employees for the year Ingolstadt 31,236 31,150 Neckarsulm 13,666 13,768 Total 44,902 44,918 of which apprentices 2,019 1,986 Derivative financial instruments Nature and extent EUR Dec Dec Dec Dec Nominal volumes Fair values Foreign exchange contracts 5,492,692 1,265, ,381 51,305 of which positive fair values 12,234 79,690 of which negative fair values 140,615 28,385 Currency option transactions 2,901, ,767 of which positive fair values 33,969 54,410 Currency swaps 321 of which positive fair values 3 Cost formulas The fair values of derivatives are determined from the market data confirmed by banks. Balance sheet items and carrying amounts The derivative financial instruments are included in the following balance sheet items: EUR Dec Dec Nature Balance sheet item Carrying amount Option premiums Impending losses from pending foreign exchange contracts Receivables from affiliated companies 33,969 Liabilities to affiliated companies 179,250 26,897 Other provisions 1,488 The currency hedging transactions are fundamentally carried out by Volkswagen AG on behalf of AUDI AG on the basis of an agency agreement. 34

34 Contingencies EUR Dec Dec Liabilities from guarantees 3,940 4,262 Liabilities from guarantee bonds 950 Obligations from factoring operations 1,542,953 3,940 1,548,165 There exist no obligations from factoring operations at the balance sheet date, as the credit risk was transferred to the factoring companies. Other financial obligations Obligations not shown in the balance sheet and arising from rental and leasing contracts with terms of several years amount to EUR 50 (50) million. Of this amount, EUR 2 (1) million relate to affiliated companies. Total obligations resulting from rental and leasing agreements with a term of severeal years are made up as follows: short-term obligations EUR 22 (22) million, medium-term obligations EUR 22 (22) million and long-term obligations EUR 6 (6) million. There are further financial commitments totalling EUR 36 (36) million from loans promised. AUDI AG bears liability for its investments in commercial partnerships. There exist buy-back obligations from buy-back transactions with car hire companies amounting to EUR 181 (0) million. Commitments arising from capital investment projects are well within the bounds of standard business practice. Parent company About 99 percent of the share capital of AUDI AG is held by Volkswagen AG, Wolfsburg; a control and profit transfer agreement exists beween the two companies. The consolidated financial statements of the parent company are available from Volkswagen AG. Auditor s fees EUR Auditing of the financial statements 522 Other certification or mearsurement services 130 Tax consultancy services Details of the Board of Management and Supervisory Board The members of the Board of Management and Supervisory Board, together with details of their membership of other supervisory boards and regulatory bodies, are indicated on the following pages. The remuneration of members of the Board of Management for the 2005 financial year came to EUR 4,496 (4,264) thousand. This amount was made up of EUR 2,151 (2,069) thousand in fixed payments and EUR 2,345 (2,195) thousand in variable remuneration components. 35

35 Payments to former members of the Board of Management or their surviving dependants amounted to EUR 5,344 (1,795) thousand. Pension commitments to former members of the Board of Management and their surviving dependats are covered by provisions totalling EUR 15,165 (15,180) thousand. The remuneration of the Supervisory Board amounted to EUR 382 (382) thousand, including EUR 210 thousand in variable payments. Declaration of compliance Pursuant to Section 161 of German Stock Corporation Law, the Board of Management and Supervisory Board of AUDI AG submitted a declaration on the recommendations of the Government Commission on the German Corporate Governance Code on December 7, The declaration was placed on the AUDI AG homepage. The English translation of the Declaration of Compliance is to be found at Ingolstadt, February 8, 2006 The Board of Management 36

36 Mandates of the Board of Management All data as at: December 31, 2005 Prof. Dr. rer. nat. Martin Winterkorn (58) Chairman of the Board of Management Technical Development Mandates: FC Bayern München AG, Munich Infineon Technologies AG, Munich Salzgitter AG, Salzgitter TÜV Süddeutschland Holding AG, Munich Dr. rer. pol. Jochem Heizmann (53) Production Mandate: Lufthansa Technik AG, Hamburg Dr. rer. pol. Horst Neumann (56) Human Resources, until December 7, 2005 Dr. h.c. Andreas Schleef (62) Chairman of the Board of Management of SEAT S.A. Mandate: Verwaltungsrat Sparkasse Ingolstadt, Ingolstadt Erich Schmitt (59) Purchasing Rupert Stadler (42) Finance and Organisation Ralph Weyler (53) Marketing and sales Dr. rer. pol. Werner Widuckel (47) Human Resources, since December 8, 2005 In connection with their duties of group steering and governance, the members of the Board of Management in addition hold supervisory board seats at group companies and significant associated companies. Membership of statutorily constituted domestic supervisory boards 37

37 Mandates of the Supervisory Board All data as at: December 31, 2005 Dr.-Ing. e.h. Bernd Pischetsrieder (57)* Chairman Chairman of the Board of Management of Volkswagen AG Mandates: Dresdner Bank AG, Frankfurt am Main Metro AG, Dusseldorf Münchener Rückversicherungs-Gesellschaft AG, Munich Tetra Laval Group, Pully (Board Member) Xaver Meier (60) Deputy Chairman Chairman of the General Works Council of AUDI AG Mandates: BRG-Jahreswagenvermittlung eg, Ingolstadt (Chairman) Volkswagen AG, Wolfsburg Volkswagen Pension Trust e.v., Wolfsburg Dr. rer. pol. h.c. Bruno Adelt (66) Former Member of the Board of Management of Volkswagen AG Mandate: Gerling-Konzern Allgemeine Versicherungs-AG, Cologne Senator h.c. Helmut Aurenz (68) ASB Group Mandate: Automobili Lamborghini Holding S.p.A., Sant Agata Bolognese Joachim Dilger (58) Authorised signatury of AUDI AG Heinz Eyer (48) Member of the Works Council of AUDI AG, Neckarsulm plant Dr. rer. pol. Thomas R. Fischer (58) Chairman of the Board of Management of WestLB AG Mandates: AXA Konzern AG, Cologne Deutscher Sparkassen Verlag GmbH, Stuttgart Hapag-Lloyd AG, Hamburg HSH Nordbank AG, Hamburg RWE AG, Essen (Chairman) Weberbank Actiengesellschaft, Berlin (Chairman) Amvescap Plc, London DekaBank Deutsche Girozentrale, Frankfurt Kreditanstalt für Wiederaufbau (KfW), Frankfurt WestLB Akademie Schloß Krickenbeck GmbH, Nettetal (Chairman) 38

38 Wolfgang Förster (54) Deputy Chairman of the Works Council of AUDI AG, Ingolstadt plant Mandate: BRG-Jahreswagenvermittlung eg, Ingolstadt Francisco Javier Garcia Sanz (48)* Member of the Board of Management of Volkswagen AG, since January 1, 2005 Dr. jur. Claus Helbig (64) Solicitor Mandates: Bankhaus August Lenz & Co. AG, Munich (Chairman) CLAAS KG aa, Harsewinkel Deutsche Asset Management Investmentgesellschaft mbh, Frankfurt GLL Real Estate Partners GmbH, Munich (Chairman) HCM Capital Management AG, Munich (Deputy Chairman) Johann Horn (47) Chief Executive of the IG Metall trade union, Ingolstadt office Mandate: Conti Temic microelectronic GmbH, Nuremberg Berthold Huber (55) 2 nd Chairman of the IG Metall trade union Mandates: Heidelberger Druckmaschinen AG, Heidelberg RWE AG, Essen Siemens AG, Munich Peter Mosch (33) Member of the Works Council of AUDI AG, Ingolstadt plant Dr. rer. pol. Horst Neumann (56)* Member of the Board of Management of Volkswagen AG, since December 20, 2005 Dr.-Ing. Franz-Josef Paefgen (59) Chairman and Chief Executive Bentley Motors Ltd., Crewe Mandates: THYSSEN KRUPP Automotive AG, Bochum Automobili Lamborghini Holding S.p.A., Sant Agata Bolognese SEAT Sport S.A., Barcelona Hans Dieter Pötsch (54)* Member of the Board of Management of Volkswagen AG Mandates: Allianz Versicherungs-AG, Munich BASF AG, Ludwigshafen Bizerba GmbH & Co. KG, Balingen 39

39 Richard Polzmacher (58) Regional Secretary of the IG Metall trade union, Bavaria Mandate: ZF Sachs AG, Schweinfurt Norbert Rank (50) Chairman of Works Council of AUDI AG, Neckarsulm plant Dr. rer. pol. Axel Freiherr von Ruedorffer (64) Diplom-Kaufmann Mandates: Allgemeine Kreditversicherung Coface AG, Mainz (Deputy Chairman) Allgemeine Kredit Coface Holding AG, Mainz (Deputy Chairman) Commerz Unternehmensbeteiligungs-AG, Frankfurt (Chairman) Avis Europe plc, Bracknell, Berkshire Erste Europäische Pfandbrief- und Kommunalkreditbank AG, Luxembourg (Chairman) HANNOVER Finanz GmbH Beteiligungen und Kapitalanlagen, Hanover Manuport, group of companies, Antwerpen Stiebel Eltron-Gruppe, Holzminden (Chairman) Max Wäcker (51) Member of the Works Council of AUDI AG, Ingolstadt plant Retired from the Supervisory Board: Dr. rer. pol. h.c. Peter Hartz (64), since August 4, 2005 Dr. jur. Jens Neumann (60), since January 1, 2005 * In connection with his duty of group steering and governance within the Volkswagen Group, the member of the Supervisory Board in addition holds further supervisory board seats at group companies and significant associated companies. Membership of statutorily constituted domestic supervisory boards Group mandates to statutorily constituted supervisory boards Membership of comparable domestic and foreign regulatory bodies 40

40 Independent Auditor s Report This report was originally prepared in German. In case of ambiguities the German version shall prevail: Independent Auditor s Report We have audited the annual financial statements consisting of balance sheet, income statement and notes, together with the bookkeeping system, and the management report of the of AUDI AG, Ingolstadt, for the business year from January 1 to December 31, The maintenance of the books and records and the preparation of the annual financial statements and management report in accordance with German commercial law and supplementary provisions in the articles of incorporation are the responsibility of the Company s Board of Management. Our responsibility is to express an opinion on the annual financial statements, together with the bookkeeping system, and the management report based on our audit. We conducted our audit of the annual financial statements in accordance with 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer in Deutschland e.v. (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the annual financial statements in accordance with German principles of proper accounting and in the management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Company and expectations of possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the books and records, the annual financial statements and the management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the accounting principles used and significant estimates made by the Company s Board of Management, as well as evaluating the overall presentation of the annual financial statements and management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion based on the result of our audit, the annual financial statements are in compliance with the legal regulations and the supplementary provisions in the articles of incorporation and give a true and fair view of the net assets, financial position and results of operations of the Company in accordance with German principles of proper accounting. The management report is in accordance with the annual financial statements and provides on the whole a suitable understanding of the Company s position and suitably presents the opportunities and risks of future development. Hannover, February 8, 2006 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Gadesmann Wirtschaftsprüfer ppa. Schröder Wirtschaftsprüfer 41

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