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Notes to the consolidated balance sheets10 Fixed assetsChanges in the Group's fixed assets are presented in the Consolidated Fixed Assets Schedule included herein. Intangible assetsIntangible assets of the Group by major classes are as follows: In addition to the above mentioned amortized intangible assets, the Group has an unamortized intangible asset resulting from a company name with a net book value of €9 million (2003: €9 million). The aggregate amortization expense related to the before mentioned intangible assets for the fiscal year ending September 30, 2004 was €94 million (2003: €90 million). Estimated amortization expense for the next five years is: €86 million in 2004/2005, €87 million in 2005/2006, €76 million in 2006/2007, €70 million in 2007/2008 and €70 million in 2008/2009. GoodwillThe change in the carrying amount of goodwill (excluding goodwill of equity method investments) is as follows: Furthermore, the intangible asset position in the balance sheet includes advance payments on intangible assets and intangible pension assets in the amount of €72 million (2003: €69 million). Property, plant and equipment and financial assetsProperty, plant and equipment include leased buildings, technical machinery and equipment and other equipment that have been capitalized, where the terms of the lease require the Group, as lessee, to assume substantially all of the benefits and risks of use of the leased asset.
In fiscal 2003/2004, the Group recognized impairments pursuant to SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" in the amount of €72 million of which €49 million was associated with assets held and used. This amount has been included in income from operations. The impairments were charged to the Steel segment (€13 million), Automotive segment (€8 million), Services segment (€3 million) and to Real Estate (€16 million) and Corporate (€9 million). The reminder of the impairment amounting to €23 million was associated with assets from discontinued operations. These assets were within the Steel (€21 million) and the Services (€2 million) segments. The fair market values for the calculation of the impairment have been determined as the present value of future cash flows and when available third party appraisals. In fiscal 2002/2003, the Group recorded impairments in the amount of €20 million. The impairments primarily relate to the property, plant and equipment held and used in which the fair market value has been determined to be below the book value and to assets that will be abandoned because they are no longer used in operations. All assets for which an impairment charge has been recorded have been classified as "held and used" and were located in the the Steel (€2 million), Automotive (€3 million), Technologies (€8 million), Services (€4 million) and Real Estate (€3 million) segments. For Associated Companies and non-consolidated subsidiaries accounted for under the equity method, the difference between the carrying amount and the amount of underlying equity in net assets totals €38 million (2003: €37 million) and is treated as embedded goodwill. During fiscal year 2002/2003, management revised its assessment concerning the Group's ability to exercise significant influence over the operating and financial policies of a significant investee, RAG Aktiengesellschaft, as a result of its inability to obtain timely reviewed US GAAP financial information on a quarterly basis. Accordingly, the Group has discontinued using the equity method of accounting to account for its investment in RAG Aktiengesellschaft. Beginning April 01, 2003, the Group accounts for its investment in RAG Aktiengesellschaft using the cost method under which the investment is recorded at its carrying amount as of the end of the second quarter. The effect of this change in estimate on the current and subsequent periods cannot be determined. The investment has been reclassified from the line item "Associated Companies valued at equity" to the line item "other investments". The aggregate cost of the Group's cost method investments totaled €529 million as of September 30, 2004. The Group determined, in accordance with paragraphs 14 and 15 of SFAS No. 107, "Disclosures about Fair Values of Financial Instruments" that it is not practicable to estimate the fair value of such investments. Therefore, these cost method investments were not evaluated for impairment because the Group did not estimate their respective fair values and the Group did not identify any events or changes in circumstances that may have had a significant adverse effect on the fair value of those investments. Table: Consolidated Fixed Assets Schedule 11 Operating lease as lessorThe Group is the lessor of various residential and commercial real estate under operating lease agreements. The gross value of the assets under lease is €2,362 million (2003: €2,298 million) and accumulated depreciation is €704 million (2002/2003: €638 million). As of September 30, 2004, the future minimum lease payments to be received on non-cancelable operating leases are as follows:
The amounts reflected as future minimum lease payments do not contain any contingent rentals. No contingent rentals have been recognized in the consolidated statements of income in 2003/2004 (2002/2003: less than €100,000; 2001/2002: €1 million). 12 Inventories
13 Trade accounts receivable
Receivables from the sales of goods and services in the amount of €49 million (2003: €40 million) have a remaining term of more than 1 year. The Group regularly sells receivables under securitization programs and other programs which are accounted for in accordance with SFAS 140. The amount of receivables and notes sold and still outstanding as of September 30, 2004, was €1,077 million (2003: €941 million), resulting in net proceeds in the amount of €1,042 million (2002/2003: €913 million). The risk of loss associated with discounted notes receivable is €13 million (2003: €34 million). In some cases, when the Group sells receivables it retains servicing provisions and retained interests in the sold receivables. Due to the nature of the receivables sold, the retained interests in those receivables approximates cost. The value of the retained interests in sold receivables was €126 million as of September 30, 2004 (2003: €79 million), mainly consisting of cash reserve accounts held by the buyer. Costs associated with the sale of receivables, net of servicing fees received, primarily for discounts and other expenses related to the receivables sold, was €28 million (2002/2003: €31 million; 2001/2002: €36 million), and are included in "Financial expenses, net" in the consolidated statements of income. The following table summarizes certain cash flow movements related to the securitization programs:
14 Other receivables and other assets
Other assets include tax refund claims in the amount of €189 million (2003: €255 million) as well as the positive fair market values of foreign currency derivatives including embedded derivatives, interest rate and commodity derivatives in the amount of €169 million (2003: €207 million) (see also Note (28)). Other receivables and other assets in the amount of €79 million (2003: €135 million) have a remaining term of more than 1 year. 15 Allowance for doubtful accounts
16 Marketable securities classified as financial and operating assetsAll securities presented in the consolidated balance sheet classified as either a component of financial assets or operating assets are available-for-sale securities:
The amortized cost, gross unrealized holding gain and fair value of available-for-sale securities by major security type and class of security were as follows:
The contractual maturities of debt securities available-for-sale as of September 30, 2004, regardless of their balance sheet classifications, are as follows:
Proceeds from the sale of available-for-sale securities amounted to €5 million (2002/2003: €7 million; 2001/2002: €226 million). Gains of €1 million (2002/2003: €1 million; 2001/2002: €75 million) were realized. These amounts were determined using the specific identification method. 17 Prepaid expenses and deferred charges
Prepaid expenses and deferred charges in the amount of €12 million (2003: €17 million) have a remaining term of more than 1 year. 18 Stockholders' EquityCapital stockThe capital stock of ThyssenKrupp AG consists of 514,489,044 no-par-value bearer shares of common stock, all of which have been issued, with 498,338,299, 497,546,991 and 514,468,024 outstanding as of September 30, 2004, 2003 and 2002, respectively. Each share of common stock has a stated value of €2.56. Principal ownerThe Alfried Krupp von Bohlen und Halbach Foundation holds 20.00% of the shares of ThyssenKrupp AG as of September 30, 2004. It is a "principal owner" according to SFAS 57 "Related Party Disclosures". Treasury stockIn March 2004, in connection with an employee share purchase program, the Group issued 790,498 treasury stock to its employees (see Note 19). In May 2003, ThyssenKrupp AG repurchased 16,921,243 of its own no-par-value bearer shares of common stock from IFIC Holding AG, which represents €43,318,382.08 or approximately 3.29% of the capital stock of ThyssenKrupp AG. The purchase price per share was €24, resulting in a total purchase price of approximately €406 million. The purpose of this share repurchase was to reduce IFIC Holding AG shareholding in ThyssenKrupp AG from 7.79% to less than 5%. IFIC Holding AG is indirectly owned by the Islamic Republic of Iran. The repurchase of shares from the government of Iran by ThyssenKrupp AG was necessary to avert severe and imminent damage to the Company (Art. 71 par. 1 no. 1 Stock Corporation Act (AktG)):
As no additional assets were acquired as part of the share purchase transaction and the minority shareholder did not enter into any further agreements with ThyssenKrupp AG, the cost of the shares acquired was accounted for as a reduction of Stockholders' Equity. Authorization to issue and to purchase treasury stockBy resolution of the Annual Stockholders' Meeting on January 23, 2004, the Executive Board is authorized, subject to the approval of the Supervisory Board, to issue bearer bonds with a total par value up to €500 million and to grant the bond holders the right to convert the bonds into bearer shares of the Company (convertible bonds). The authorization is valid until January 22, 2009. In addition, ThyssenKrupp is authorized through July 22, 2005, to purchase treasury stock for certain defined purposes up to a total of 10% of the current capital stock issued. Since authorization no treasury shares were repurchased. Other comprehensive incomeThe following table shows the components of "Other comprehensive income", net of tax effects: Table: The components of "Other comprehensive income", net of tax effects Dividend proposalThe Executive Board and Supervisory Board have agreed to propose to the stockholders' meeting a dividend in the amount of €0.60 per share entitled to dividend to be distributed from unappropriated net income of the stand-alone entity ThyssenKrupp AG for fiscal 2003/2004 as determined in conformity with the principles of the German Commercial Code (HGB). 19 Share-based compensation programsManagement incentive plansIn 1999, ThyssenKrupp introduced a performance-based long-term management incentive plan (the "incentive plan") of which Executive Board members as well as selected managerial employees in Germany and foreign countries are eligible to participate. In accordance with the incentive plan, over a period of five years, beneficiaries are granted appreciation rights ("phantom stocks") annually with a performance period of approximately three years. These appreciation rights will be remunerated in cash at the end of each performance period if certain performance hurdles are met. These performance hurdles require that either the market price of ThyssenKrupp stock must have increased at least 15% or that the market price of ThyssenKrupp stock has outperformed the DJ STOXX index during the performance period. If at least one of the two performance hurdles is met, then remuneration is calculated based on the difference between the current market price and the base price of stock. The current market price is calculated based on the average of the first five trading days after the regular stockholders' meeting with which the respective installment of the incentive plan occurs. The base price is derived from the current market price decreased by a market price/index performance deduction and a price change deduction. The market price/index performance deduction is determined by multiplying the percentage of over or underperformance of the ThyssenKrupp stock in relation to the DJ STOXX by the current stock price during the particular performance period. The price change deduction is equal to one-half of the absolute change in ThyssenKrupp stock price during a particular performance period. The two deductions are combined and then deducted from the current stock price to obtain the base price. The remuneration per appreciation right during any performance period is limited to €25. If the performance hurdles are not met at the end of the performance period, no payment or expense is recorded by the Group. To exclude measurement-date influences, the ThyssenKrupp stock price as well as the DJ STOXX is based on averages both for the start and the end of the reference period of the performance period. For the fourth installment, at the start of the reference period, the average ThyssenKrupp stock price was €17.89 and the average value of the DJ STOXX was 393.03. For the fifth installment, at the start of the reference period, the average ThyssenKrupp stock price was €8.06 and the average value of the DJ STOXX was 239.51. The comparable values as of September 30, 2004, are €16.55 for ThyssenKrupp's stock price applicable to the fourth installment (adjusted by the dividend payments for the 2001/2002 and 2002/2003 fiscal years) and €16.15 for the fifth installment (adjusted by the dividend payment for the 2002/2003 fiscal year). The comparable value of the DJ STOXX as of September 30, 2004, was 334.22. As of September 30, 2004, 2.7 million appreciation rights were granted to 549 beneficiaries in the fourth installment and 2.7 million appreciation rights were granted to 554 beneficiaries in the fifth installment. The performance periods for the fourth and fifth installments are from March 04, 2002 through the regular stockholders' meeting in 2005 and from February 24, 2003 through the regular stockholders' meeting in 2006, respectively. The first and second installments expired in 2001/2002 and 2002/2003 without any payment because none of the performance hurdles were met at the end of the respective performance periods. The 2.8 million appreciation rights granted in the third installment of the incentive plan were settled in the 2nd quarter of 2003/2004 with payment of €11.1 million as result of the performance hurdles being met at the end of the performance period. As of September 30, 2004, the performance hurdles for the fourth and fifth installments of the long-term management incentive plan were met. In total in 2003/2004, the Group recorded compensation expense for the long term management incentive plan in the amount of €27.7 million (2002/2003: €3.9 million). In 2003, ThyssenKrupp implemented a performance based mid-term incentive plan which issues stock rights to eligible participants. All Executive Board members of ThyssenKrupp AG are eligible to participate. In the second installment which was issued in 2004, the group of beneficiaries was expanded to include the segment lead companies as well as several other selected executive employees. The number of stock rights issued will be adjusted at the end of each performance period based on the average economic value added (EVA) over the three-year performance period, beginning October 01 of the year the stock rights were granted, compared to the average EVA over the previous three fiscal year period. At the end of the performance period the stock rights will be settled in cash based on the average price of ThyssenKrupp stock during the three month period immediately following the performance period. As of September 30, 2004, 123,381 stocks rights were issued in the first installment and 252,068 stock rights in the second installment including the expanded group of beneficiaries. ThyssenKrupp recorded compensation expense of €2.1 million during fiscal year 2003/2004 (2002/2003: €0.5 million) for obligations under the mid-term incentive plan. Employee share purchase programIn March 2004, the Group offered eligible members of its domestic workforce the right to purchase up to €270 in ThyssenKrupp shares at a 50% discount as part of an employee share purchase program. The issuance of 790,498 treasury shares for this program resulted in the Group recording compensation expense of €7 million. 20 Accrued pension and similar obligations
Pensions and similar obligations in the amount of €6,706 million (2003: €6,922 million) have a remaining term of more than 1 year. Pension plansThe Group maintains defined benefit pension plans and defined contribution plans that cover the majority of the employees in Germany, the USA, Canada and the United Kingdom. In some other countries, eligible employees receive benefits in accordance with the respective local requirements. In Germany, benefits generally take the form of pension payments that are indexed to inflation. Benefits for some senior staff are based on years of service and salary during a reference period, which is generally three years prior to retirement. Other employees receive benefits based on years of service. In addition, ThyssenKrupp offers certain German employees the opportunity to participate in a defined benefit program which allows for the deferral of compensation which earns interest at a rate of 6.00% per year. In the USA and Canada, hourly paid employees receive benefits based on years of service. Salaried employee benefits are typically based on years of service and salary history. In the United Kingdom, employee benefits are based on years of service and an employee's final salary before retirement. Projected benefit obligations and funded statusThe Group differentiates between its unfunded and funded pension obligations. The obligations presented in the unfunded category relate primarily to pension obligations in Germany and to a lesser extent, the benefit obligations in Italy and similar pension obligations in other countries. The obligations presented in the funded plan category primarily are associated with plans located in the USA, Canada, the United Kingdom and the Netherlands. In October 2003, the Group also funded a portion of the pension obligations in Germany which have been included in the funded plan category. The reconciliation of the changes in the projected benefit obligations and the fair value of plan assets are as follows: Changes in the projected benefit obligations and the fair value of plan assets The following represents the funded status of these plans: Accumulated benefit obligationsThe accumulated benefit obligation for all defined benefit pension plans was €7,828 million (2003: €7,800 million). Pension plans for which the aggregated projected benefit obligation exceeds the fair value of plan assets relate to projected benefit obligations in the amount of €2,009 million (2003: €1,929 million) versus plan assets in the amount of €1,519 million (2003: €1,326 million). Pension plans for which the aggregated accumulated benefit obligation exceeds the fair value of plan assets relate to accumulated benefit obligations in the amount of €1,924 million (2003: €1,841 million) versus plan assets in the amount of €1,506 million (2003: €1,320 million). Net periodic pension costThe net periodic pension cost for the defined benefit plans were as follows: The net periodic pension cost for the defined benefit plans AssumptionsThe measurement date for the Group's pension plans is June 30. The assumptions for discount rates and the rates of compensation increase on which the calculation of the obligations are based were derived in accordance with standard principles and established for each country as a function of their respective economic conditions. The expected return on plan assets is determined based on detailed studies conducted by the plans' third party investment and actuarial advisors. The studies take into consideration the long-term historical returns and the future estimates of long-term investment returns based on the target asset allocation. In fiscal years 2001/2002 and 2002/2003, the German retirement benefits were based on the Heubeck Table 1998. Since the issuance of the Heubeck Table 1998, the estimated life expectancy of participants receiving retirement benefits has increased. It is expected that the updated Heubeck Table will be issued subsequent to the issuance of the consolidated financial statements. In anticipation of this issuance, in fiscal year 2003/2004, the measurement of the retirement benefits has been based on the longer life expectancy resulting in an additional PBO of €180 million as well as an increase of the accrued pension liability of €66 million. The Group applied the following weighted average assumptions to determine benefit obligations:
The Group applied the following weighted average assumptions to determine net periodic pension cost:
Plan assetsIn the Group, the majority of reported plan assets associated with the funded pension plans are located in the USA, Canada, the United Kingdom and to a lesser extent in the Netherlands and Germany. The Group invests in diversified portfolios consisting of an array of asset classes that attempt to maximize returns while minimizing volatility. The asset classes include national and international stocks, fixed income government and non-government securities and real estate. Plan assets do not include any direct investments in ThyssenKrupp debt or equity securities. The Group uses professional investment managers to invest plan assets based on specific investment guidelines developed by the plans Investment Committees. The Investment Committees consist of senior financial management especially from treasury and other appropriate executives. The Investment Committees meet regularly to approve the target asset allocations, and review the risks and performance of the major pension funds and approve the selection and retention of external managers. The Group's target portfolio structure has been developed based on asset-liability studies that were performed for the major pension funds within the Group. The pension plan asset allocation and target allocation are as follows:
Pension plan fundingIn general, the Group's funding policy is to contribute amounts to the plans sufficient to meet the minimum statutory funding requirements relevant in the country in which the plan is located. In the USA and Canada, certain plans require minimum funding based on collective bargaining agreements. The Group may from time to time make additional contributions at its own discretion. ThyssenKrupp's expected contribution in fiscal year 2004/2005 is €85 million related to its funded plans, all of which is expected to be as cash contributions. Pension benefit paymentsIn fiscal year 2003/2004, pension benefit payments to the Group's funded and unfunded plans were €132 million (2002/2003: €112 million) and €434 million (2002/2003: €435 million) respectively. The estimated future pension benefits to be paid by the Group's defined benefit pension plans are as follows:
Defined Contribution PlansThe Group also maintains domestic and foreign defined contribution plans. Amounts contributed by the Group under such plans are based upon percentage of the employees' salary or the amount of contributions made by the employees. The total cost of such contributions in the current fiscal year was €30 million (2002/2003: €31 million; 2001/2002: €24 million). Postretirement obligations other than pensionsThe Group provides certain postretirement health care and life insurance benefits to retired employees in the USA and Canada who meet certain minimum requirements regarding age and length of service. The plans primarily relate to the ThyssenKrupp Budd Company and are mainly unfunded. In December 2003, the US government signed into law the Medicare Prescription Drug, Improvement and Modernization Act. This law provides for a federal subsidy to sponsors of retiree health care benefit plans that provide benefit that is a least actuarially equivalent to the benefit established by the law. As allowed by FASB Staff Position (FSP) No. 106-2, the Group elected to retroactively apply the effects of the Act, including impact of the prescription drug subsidy to be received. The outcome of applying the guidance in the FSP resulted in a reduction of €68 million of the Group's accumulated postretirement benefit obligation and a reduction of its net periodic post retirement benefit cost of approximately €6 million, both of which have been recognized in the 4th quarter ending September 30, 2004. The changes in accumulated postretirement benefit obligations are as follows:
The following represents the unfunded status of these plans:
AssumptionsThe Group uses a measurement date of June 30 for all the plans. The determination of the accumulated postretirement benefit obligations is based on the following weighted average assumptions:
The determination of the net periodic postretirement benefit cost is based on the following weighted average assumptions:
Net periodic postretirement benefit costThe net periodic postretirement benefit cost for health care obligations is as follows:
The effects of a one-percentage-point increase or decrease in the assumed health care cost trend rates are as follows:
Postretirement benefit paymentsPostretirement benefit payments of the Group amounted to €51 million in fiscal year 2003/2004 (€51 million in 2002/2003). The estimated future postretirement benefits to be paid by the Group's postretirement benefit plans and the subsidy related to Medicare Act received, are as follows:
Other pension related obligationsSome companies of the Steel segment and Corporate grant termination benefits to employees on a contractual basis. The termination benefits comprise severance payments that vest based on a formula that considers years of service and certain allowances that are paid to older employees between termination of employment and retirement age. The majority of the obligations relate to the closing of the Dortmund steel plants. The measurement of the plans was determined on an actuarial basis. The liability reflects benefits earned by the employees from the inception of employment. Future service cost is allocated to the periods in which it is incurred. The discount rate is 3.0% as of September 30, 2004 and 2003. A rate of compensation increase of 2.6% has been assumed. The accured liability of the plans has developed as follows:
Some German companies have obligations resulting from partial retirement agreements. Under these agreements, employees work additional time prior to retirement, which is subsequently paid for in installments after retirement. For these obligations, accruals in the amount of €169 million (2003: €119 million) were recognized in accordance with SFAS 112 "Employers' Accounting for Postemployment Benefits". Other pension-related obligations also include the obligations for existing employees of French companies in the amount of €23 million (2003: €27 million). 21 Other accrued liabilities
Accrued income taxes and other taxes in the amount of €15 million (2003: €13 million) and other provisions in the amount of €475 million (2003: €445 million) have a remaining term of more than 1 year. Product warranties and product defects represent the Group's responsibility for the proper functioning of the goods sold (product warranty) as well as the obligation that arise from the use of the products sold (product defect). The change in the accrued liability for product warranties and product defects is as follows:
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