ANNUAL REPORT 2002 THE GROUP AT A GLANCE

2001 2002 IAS IAS

Sales Total Euro million 975.2 977.5 Germany Euro million 330.7 296.3 Abroad Euro million 644.5 681.2 Foreign quota in per cent 66 70

Operating result (EBIT) Euro million 27.0 27.0 Results for the year Euro million 9.6 10.3

Investments in tangible and intangible fixed assets Euro million 54.3 66.1

Depreciation Euro million 58.9 58.7

Cash flow from operating activities Euro million 40.0 71.1

Employees (average) Germany 4,003 4,021 Abroad 6,830 6,913 Total 10,833 10,934

Dividends per individual preference-share certificate Euro 0.55 0.55 per individual ordinary-share certificate Euro 0.50 0.50

After converting the accounting to IAS we have reduced the overview to two years due to limited comparability of the figures up to the year 2000. Consolidated Sales Operating Result (EBIT)

(in Euro Million) (in Euro Million)

Germany Abroad

1,000 40

500 20

0 0 2001 2002 2001 2002

Investment and Average Number of

Depreciation (in Euro Million) Persons Employed (Group)

Depreciation Investment Germany Abroad

100 10,000

50 5,000

0 0 2001 2002 2001 2002

LIST OF CONTENTS

Supervisory Board Annual Report 02

Members of the Supervisory and Executive Boards 03

Executive Board Annual Report 04

Expanding Core and Content of the Villeroy & Boch Brand 08

Villeroy & Boch AG and Group Management Report 10

The Share 20

Employees 22

Bathroom, Kitchen and Tile Division 24

Tableware Division 30

Wellness Division 34

Project Business Division 38

Consolidated Financial Statements of Villeroy & Boch AG 41

Major Group Companies 82

Company Calendar 84 SUPERVISORY BOARD ANNUAL REPORT

and Audit Committee were newly formed by the Supervisory Board and their members elected. The Staff Committee convened twice in the year 2002. Subjects of discussion were the appointment of a new Executive Board member, the extension of an existing member's contract, and also bonus pay- ments made to the Executive Board. In September 2002, the Supervisory Board issued its audit assignment to KPMG Deutsche Treu- hand-Gesellschaft AG Wirtschaftsprüfungsgesell- schaft Ð the auditing company elected at the Share- holders' General Meeting. The Villeroy & Boch AG annual financial statements, the consolidated financial statements of 31.12.2002 and also the integrated Management Report have been audited by the statutory auditor and issued with an unqual- ified audit certificate. At the Supervisory Board Meeting in March 2003, the financial statements were discussed in the presence of the auditor. Based on the final result of our own audits, no grounds were found for objection. The annual Supervisory Board Chairman: financial statements of 31.12.2002 have, therefore, Peter Prinz Wittgenstein been approved. The Supervisory Board endorses the Executive Board's proposal regarding appro- During the financial year 2002, the Supervisory priation of the net retained profit. Board duly discharged those duties for which it is The Supervisory Board has made proposals for the responsible according to the law and the Memo- new election of Supervisory Board members and randum and Articles of Association. In the course the auditor in accordance with the criteria laid of four Supervisory Board meetings and monthly down in the Corporate Governance principles and reporting, it was regularly informed by the Exec- in doing so, obtained the statement of the proposed utive Board Ð in writing and verbally Ð about the auditor in compliance with subsection 7.2.1 of the development of business. In addition, all essential principles. The Supervisory Board will regularly matters relating to corporate policy and develop- monitor observance of the Corporate Governance ment were co-ordinated in mutual talks between principles and their efficiency. the Supervisory Board Chairman and the Exec- The Supervisory Board would like to thank both utive Board Chairman. the Executive Board and all employees for their Discussions in the year under review concentrated dedication and great commitment during the finan- in particular on the appointment of Mr Ralf Mock cial year 2002. as the new Executive Board member for the Tableware Division, the merger of the Tile Divi- Mettlach. March 2003 sion with that of Bathroom and Kitchen, formation of the new Project Business Division, adoption of the Corporate Governance principles and prepara- tion of the rules of internal procedure for the Ex- ecutive Board, the Supervisory Board and also the Audit, Investment and Staff Committees. Within the scope of implementing the Corporate Peter Prinz Wittgenstein Governance principles, an Investment Committee Supervisory Board Chairman

2 SUPERVISORY AND EXECUTIVE BOARD MEMBERS

The Supervisory Board The Executive Board

Karl Gustaf Ratjen, Königstein Wendelin von Boch-Galhau, Honorary member of the Supervisory Board Losheim-Britten Chairman Peter Prinz Wittgenstein, Düsseldorf Tableware Division (from 01.03. till 31.08.2002) Chairman a) Messe Frankfurt GmbH Management Consultant Gerling-Konzern Allgemeine Versicherungs-AG Former member of the Executive Board of Mannesmann AG, (since April 2002) Düsseldorf a) Mannesmann-Röhrenwerke AG Manfred Finger, Rehlingen b) Gottfried Schultz GmbH & Co. Finance and Personnel (Chairman of the Administrative Board) Peter von der Lippe, Rosemarie Gattuso*, Mettlach 1st Vice-Chairwoman Petite-Rosselle/France Chairwoman of Works Council at the Faiencerie Bathroom and Kitchen Division (until 30.06.2002) Mettlach/Merzig Bathroom, Kitchen and Tile Division (since 01.07.2002) b) within the Group: Villeroy & Boch Magyarország Rt. Luitwin Gisbert von Boch-Galhau, Mettlach 2nd ViceÐChairman Entrepreneur Ralf Mock, Königstein a) Deutsche Bank Saar AG (until 29.05.2002) Tableware Division (since 01.09.2002) Gerling-Konzern Globale Rückversicherungs-AG b) Groupe Jacques Parisot (until 30.04.2002) Philippe Schaus, Luxembourg within the Group: Tableware Division Villeroy & Boch Magyarország Rt. (Chairman) (Deputy Executive Board Member) (until 28.02.2002) Josef Balle*, Merzig Chairman of the Fliesenwerke Saar Works Council Dr. Bernard Wientjes, Ommen/The Netherlands Gisela Hannack*, Hanover Wellness Division Head of the Business Management Department of the b) Wientjes Kunststoffen Holding bv IG Bergbau, Chemie, Energie, Hanover Richard Zimmermann, Mettlach Walter Raber*, Nalbach Tile Division (until 30.06.2002) Head of Tableware Division Controlling Project Business Division (since 01.07.2002)

Ina Rauls*, Perl Deputy Chairwoman of the Sanitärfabrik Mettlach Works Council

Antoine de Schorlemer, Luxembourg Businessman b) Automobile Club du Grand Duché de Luxembourg SOS-Interfonds

Kilian von der Tann, Tann/Rhön Lawyer

Claude Villeroy de Galhau, Wallerfangen Bachelor of Commerce b) Japan Pacific Fund Luxembourg Japacic (SICAV)

Emmanuel Villeroy de Galhau, Paris Head of “Mergers and Acquisitions” at L’Oréal, Paris

Gerd Zibell*, Gau-Odernheim Land District Head of the Industrial Union, Bergbau, Chemie, Energie, for the Länder Rhineland Palatinate /Saarland, * Statutory employees' representative in Mainz a) membership in other supervisory boards to be legally formed in terms a) RAG Saarberg AG of ¤ 125 AktG b) membership of comparable domestic and foreign business enterprise BASF AG control councils in terms of ¤ 125 AktG

3 EXECUTIVE BOARD ANNUAL REPORT

Dear shareholders and business associates, ly lower than that in the previous financial year (Euro 15.2 million). We were, therefore, unable to In this report, we shall once again be informing achieve our original targets, but Ð given the ex- you of a financial year, whose course was so com- tremely negative economic environment Ð never- pletely different from that forecasted by trade and theless attained a good result. economic experts. The underlying economic con- The year under review saw a further increase in the ditions in the financial year 2002 consequently degree of diversification. Owing to the acquisition deteriorated even further than those already report- of Acomo in Belgium and Villeroy & Boch Well- ed for 2001. Growth forecasts in Germany were ness Italia, sales in the Wellness Division rose by repeatedly adjusted downwards during the course almost 48 % and currently total Euro 107.1 mil- of the year, but world-wide economic growth was lion. This relatively new Division, therefore, alread- also clearly below the level which had been ex- y accounts for 11 % of Group sales, a percentage pected at the start of the year. which should see a further clear increase in future Our company's direct industrial environment in years, owing to above-average structural growth particular experienced an extremely negative and Ð midterm Ð as a result of further acquisitions. trend. The propensity to consume in Germany Having accounted for more than 60 % at the start reached its lowest point for the last twenty years, of the eighties, the low-earning Tile Division's with the GFK [society for consumer research] sales share reported a backward trend in the year indicator registering almost 40 points below its 2002, when it secured a mere 27.5 %. Against the normal level. A similar decline was also reported background of difficult market conditions and an by the construction industry, which showed a intentionally maintained strategy of high and me- backward trend for the eighth year in succession. dium pricing, sales declined by 10 %, bringing the “Teuro” discussions [implying general price in- total to Euro 268.6 million and yielding yet again creases as a result of Euro introduction] during the an unsatisfactory result. The Tile Division's con- first quarter and the tiresome debate on taxes and siderably diminished share of total sales in recent increases in duty during the fourth quarter, follow- years has, however, led to an improved distribu- ing the Bundestag elections, proved to be factors tion of risk in the corporate portfolio. which dampened consumer demand. These facts, Reporting a slight drop in sales of 1.5 % to a total coupled with the state of insecurity on the employ- of Euro 305.3 million in the year 2002, the ment market, led to an increase in the propensity to Bathroom and Kitchen Division suffered a deteri- save, at the cost of consumption. oration in its operating result, which can essen- tially be attributed to the shift in product mix. The Systematic Continuation of Division thus accounted for 31.2 % of Group Strategic Reorientation sales. In contrast, the Tableware Division was able to Villeroy & Boch's longer-term plan for strategic assert itself extremely well. Reporting a distinct reorganisation continued to show good progress in improvement in performance, sales rose by 0.7 % the year 2002, despite the considerable economic to a total of Euro 296.5 million. Division sales handicap previously mentioned. This progress accounted for a 30.3 % share of total sales. applies particularly to the strongly promoted Tableware Division success is based, to a con- aspect of internationalisation, which has enabled siderable extent, on our concept: “The House of us to considerably reduce our former dependence Villeroy & Boch”. In 2002 we were able to on the domestic market. make further distinct increases here in our POS Group sales reported only a slight increase in the presence. By the end of 2002, 459 “Houses of financial year 2002, rising by Euro 2.3 million to a Villeroy & Boch” had been placed, 285 of which total of Euro 977.5 million, while the Euro were presentations in the Tableware Division and 13.6 million result before taxes (EBT) was slight- 174 in the Bathroom, Kitchen and Tile Division.

4 EXECUTIVE BOARD ANNUAL REPORT

The Executive Board of Villeroy & Boch AG: Manfred Finger, Peter von der Lippe, Wendelin von Boch- Galhau, Richard Zimmermann, Ralf Mock, Dr. Bernard Wientjes.

In this connection, “Villeroy & Boch” is increas- and improve efficiency. The first positive effects ingly regarded as a lifestyle brand, offering orien- will become apparent during the current year, with tation for a tastefully-furnished bathroom, com- measures starting to have an effect on net income pletely-laid table and stylish home ambience. from 2004. We furthermore see interesting growth perspec- We anticipate significant growth opportunities in tives in the systematic expansion of brand core and international project business. For this reason, we content. Our strategy for achieving these objec- have set up a new “Project Business Division”, in tives is presented on page 8 of this Annual Report. which the system business of construction-related sectors is bundled. This Division will essentially Divisional Restructuring Stepped Up offer full-range solutions for hotels, homes for the elderly, holiday homes, sports facilities and reha- Probably the most important decision made in the bilitation centres. The solutions are based on the year 2002 was that concerning Divisional restruc- single-source-bathroom concept and also include turing. In the course of becoming a full-range, ceramic tiles. “single-source-bathroom” supplier and under the umbrella of “The House of Villeroy & Boch”, the Further Strengthening of International Bathroom and Kitchen Division was amalgamated Competitive Position with that of Tiles, and subdivided below the Executive Board level into the three business Increasing internationalisation and globalisation of fields “Bathroom and Kitchen”, “Tiles” and also markets also represents a great challenge for our “Bathroom Furniture and Fittings”. company. Having recognised this fact, we have We expect this restructuring to help realise syner- successfully freed ourselves from our one-sided gies, streamline structures and business processes dependence on the domestic market, and in the last

5 EXECUTIVE BOARD ANNUAL REPORT

market shares in the international markets. We are among the top four suppliers in the major Euro- pean markets for bathroom and tableware ceramics and also for tiles and wellness products. Up to now, however, we have still not been able to a- chieve the most cost-effective forms of production in all cases. Investment budgets in the next three years will take these facts into account.

Successful Design and Innovation Campaign

Villeroy & Boch's current market strength can be attributed essentially to the innovative ability of its Product Development department and its moderni- sation of manufacturing technology. In this way, we were once again able to create exciting stimuli in the year under review, thanks to outstanding new product introductions, some of which only became possible as a result of applying innovative manufacturing techniques. Tableware Division success is, therefore, not only based on the unconventional design of The Old Abbey – headquarters of Villeroy & Boch AG – is located directly on the banks of the River Saar. the “NewWave” tableware series, but also on a new production technique developed by Villeroy & Boch, which enables the cost-effec- six years, distinctly increased our foreign business tive manufacture of products which are not rota- share from 46 % to 70 %. We aim to have increased tionally symmetrical. this share to 75 % by the year 2005. The many Among products in the Bathroom and Kitchen foreign production locations also reflect this pic- Division it was, above all, the “Oblic” spatial con- ture. Our 21 factories are distributed throughout 12 cept which, having been awarded the specialist European countries. trade prize for innovation and enabling solutions This trend towards increased production abroad for guest WCs which fulfil both aesthetic and will persist, at least in the near future. Increasing functional demands in the smallest possible spac- competitive pressure can, therefore, be expected es, was able to clearly exceed the already high from 1 May 2004, when the EU expands to include market expectations. eight of these low-wage eastern European markets. Our fittings business has also developed extreme- We shall only be able to counter this development ly positively. The range was expanded to include by high levels of automation and flexibility in the the new “HYPE” series. An innovative rail system central and northern European factories. In expec- can be fitted on both the shower rod and mirror, tation of greater growth impetus in the eastern allowing accessories to be positioned where de- markets, it is necessary to increase production in sired. Hungary, Romania and the Czech Republic. We were able to give ceramic a completely new Competitiveness is determined firstly by the in- form of beauty by introducing innovative metallic dustrial configuration, i.e. the most cost-effective glazes to the area of high-quality ceramic kitchen manufacture possible, and secondly, by significant sinks. In so doing, consideration was given to the

6 EXECUTIVE BOARD ANNUAL REPORT

current trend towards metal surfaces in kitchen fit- vision, so as to be able to secure a clear improve- tings and, at the same time, a new market sector ment in performance here too. was developed for ceramic kitchen sinks, which In view of the modest economic conditions expect- had previously been reserved exclusively for spe- ed for the year 2003, our short-term objective is to cial-steel products. conclude measures aimed at integrating the ac- Interesting novelties were also presented by the quired wellness companies and also implement the Tile Division. An exceptional kind of aesthetic consolidation measures already initiated in the ceramic solution is also shown by the development newly structured “Bathroom, Kitchen and Tile of the ceramic beading system, which provides Division”. The positive result trend and strong both a refined look for cove-base outside corners competitive position held by the Tableware Divi- and optimum edge protection Ð all in one. sion can, however, be developed further, irrespec- The Wellness Division enjoyed success with tive of market trend. various innovations and also won several prizes On the whole, we anticipate a slight increase in for product design. Contrary to all economic sales and an improved result for the financial year trends, demand for extremely quiet “whisper 2003, in as far as the currently uncertain, economic whirlpools” and high-comfort steam showers and political conditions do not noticeably deterio- increased in the year under review. Sales successes rate. On the strength of new product innovations were also reported for a series of models using and those already launched, as well as varied Quaryl¨ Ð the material developed by the company measures aimed at consolidation and improving itself Ð one such product being the free-standing performance, it is anticipated that the second half “Nexion” bathtub, which received the IF Design of the year in particular should show the results of Award. our preliminary work. We are also pursuing new paths by developing the We have just concluded an extremely difficult project-business sector into one of our company's year, with many challenges. May we take this major strategic axes. One of the ideal system solu- opportunity to thank our employees and employee tions which has been developed here is a modular, representatives for their commitment. prefabricated bathroom for the hotel project-sec- May we also express thanks to our shareholders tor, representing an important basis for our future and business associates for the confidence placed success. in us. We would be pleased to receive your con- In conclusion, we can say that Villeroy & Boch has tinued support. received a high degree of attention during the financial year, by way of developing and position- Mettlach. March 2003 ing its new innovative products.

Short-Term Objective

In the extremely difficult economic and competi- Wendelin von Boch-Galhau tive environment, the three Divisions Ð Bathroom Executive Board Chairman and Kitchen, Wellness and Tableware Ð were able to maintain and, in some cases, distinctly increase their market share. This allows us to deduce that in an improved economic environment, these three Divisions will once again achieve substantial in- creases in growth and result. It is, however, crucial that we consistently step up implementation of the existing restructuring measures in the Tile Di-

7 VILLEROY & BOCH

Expanding Core and Content of the vant target groups, we have carried out market Villeroy & Boch Brand analyses on perception, image and positioning of our brand. Villeroy & Boch's fundamental transformation from a production-orientated ceramics Group to a What does Villeroy & Boch represent? lifestyle brand, has consequently led to brand Where does the brand have potential? repositioning. What are the success factors? The integral approach presented in “The House of Which target groups are of interest? Villeroy & Boch” was the first important step towards achieving a new brand content. An essential influence is exerted on the brand core Much has been written and said in recent years by the Tableware Division, which closely relates to about “The House of Villeroy & Boch”: the house consumer needs. Attributes such as exclusivity, in which it is not only possible to see ceramic wall elegance, quality, class/style, tradition, continuity and floor tiles, items of ceramic sanitary ware, and versatility, form the essence of the brand's wellness products and tableware, but also a har- core, i.e. moniously matching, completely-furnished bath- regarded rationally: competence in the area of room, or stylishly-laid dining table. ceramics, functional quality and durability; Whereas design, price and function previously regarded emotionally: tradition (= experience), represented the sole purchasing criteria, a leading competence in the areas of design and style, enjoy- role is also played today by taste and emotion. ment and harmony. We have consequently created four lifestyle Areas for optimising brand-core potential are seen segments, namely “Classic”, “Country”, “Metro- in relation to modernness, innovation and in bring- politan” and “Easy”, which correspond with the ing the brand closer to the consumer. The lifestyle various trends in taste. concept aims to use the “Villeroy & Boch” um- The Villeroy & Boch brand is our major asset. brella brand to appeal to various target groups and Commanding a 70 % degree of awareness in Ger- in so doing, develop new potential. A uniform many, Villeroy & Boch is one of central Europe's brand presentation is only credible, however, if outstanding brands. One of the brand's remarkable lifestyle segmentation is easily comprehensible, features is its high desirability value: of those who convincingly communicated and aids orientation. know the brand, 63 % state that they would also An exact knowledge of the target groups to be like to buy Villeroy & Boch products. developed is, therefore, indispensable. In an effort to gear brand content to the changing Consumers who purchase Villeroy & Boch's clas- needs of end consumers and also define the rele- sical product range are concentrated mainly in the

People express their lifestyle in clothes, way of life and especially within their own four walls – VILLEROY & BOCH

Orientation Towards Potential Target Groups (according to Sinus)

Upper Class Social Situation Established Milieu Intellectual Milieu Post- Upper Middle class Modern Bourgeois Modern Milieu Milieu

Adaptive Milieu Middle Class Traditional Statusoriented Bourgeois Milieu Milieu Hedonistic Milieu Lower Middle Class Traditional Workers' Milieu Consume-Materialistic Milieu Lower Class Basic Orientation

Conservative Status/Ownership Consumption Hedonism Postmaterialism Postmodernism “to conserve” “to have” “to consume” “to enjoy” “to be” “to experience”

“traditional”, “middle-class” and “status-orientated” 60 year-old age categories. target groups (according to Sinus). These target - In comparison, the milieus preferring our groups, however, only represent around 42 % of “Easy” and “Metropolitan” segments are the market. It is possible to develop a further 40 % considerably younger. of market potential, if brand presentation, product range and price scale additionally take the needs of Villeroy & Boch will develop further market “modern-oriented” target groups into consideration. potential, not only by way of consistent product For this reason, we have expanded our brand development and clear positioning in the “Metro- spectrum and created new, innovative products in politan” and “Easy” lifestyle segments, but also by the “Easy” and “Metropolitan” lifestyle segments, way of the stronger orientation linked with this which appeal to the aforementioned milieus. towards modernness and closeness to the end con- sumer (regarding price structure). - The population is developing an Our company's lifestyle portfolio has been revised “enjoy/exist/experience” attitude with this in mind, in the hope that our brand will -Consumers who prefer our “Classic” and become younger and cover a broader consumer “Country” lifestyles are located in the 50 to spectrum.

Villeroy & Boch has analysed the various target groups and developed a range for four different lifestyles. MANAGEMENT REPORT

- Sales of Euro 977.5 million at prior-year General Economic Environment level Unexpectedly weak economic development - EBIT of Euro 27.0 million achieves prior-year value The international economic situation in the year 2002 was characterised by a high degree of uncer- - Dividends of Euro 0.50 per individual tainty. In some cases, stock exchanges experienced ordinary-share certificate and Euro 0.55 dramatic sudden price falls, as a result of an extreme- per individual preference-share certificate ly marked confidence crisis and overall company unchanged in comparison with prior year results which mostly indicated strong declines. In -Moderate sales rise and increase in addition to this, political uncertainty Ð particularly re- operating result planned for 2003 garding a possible military conflict in Iraq Ð exerted negative influences not only on economic activ- ity, but also on the expectations of consumers and Reorganisation of Divisions investors. Against this background, a clear upturn was seen in quotations for precious metals and oil on The “single-source bathroom”, “completely laid the raw commodities markets. These developments, table” and “tile for home and project sector” are of- combined with rises in the numbers of unemployed fered as a problem-solving concept and integral system and a marked increase in business insolvency, further under the name: “The House of Villeroy & Boch”. strengthened the already noticeable consumer Following the systematic acquisitions of prior restraint existing as a result of the Euro intro- years, attention in the business year 2002 was there- duction. Yet a decline was not only recorded in the fore focussed on consistently transferring this propensity to consume, but also in the willingness external representation of the company to the to invest, in almost every major industrial nation. internal organisation. Accordingly, the two Divi- While a low level of economic growth was a- sions “Bathroom and Kitchen” and “Tiles” have chieved in the USA and South-East Asia, and Japan been operated jointly since July 2002. Profit re- overcame the recession experienced in recent years, sponsibility in this connection remains in three economic activity in the Euro-region remained business segments: “Tiles”, “Ceramic Sanitary Ware restrained. On the whole, consumers showed a and Kitchens” and “Bathroom Furniture and distinct purchasing restraint. Economic growth Fittings”. On the whole, Villeroy & Boch expects also slowed down in the ten countries which are this reorganisation to facilitate a faster implemen- due to join the EU in May 2004, though here it was tation of “The House of Villeroy & Boch” concept, much more prominent than in the EU countries. a uniform brand appearance, an improvement in The domestic upturn generally expected for the the competitive situation, the consistent use of syner- second half of 2002 failed to materialise. The gross gies, the reduction of structural costs and the sus- domestic product rose by a mere 0.2 % compared tained profitability of the “Tile” business segment. to prior year figures, thus indicating the lowest rate Also new since the start of July 2002 is the new of growth since the 1993 recession. “Teuro” dis- Villeroy & Boch Project Business Division, whose cussions [implying general price increases as a products include complete system solutions for result of the Euro introduction] also clearly damp- bathrooms in the project business sector (e.g. ened demand in the domestic market during the hotels, holiday homes and homes for senior citi- course of the year. This situation was aggravated by zens, sport and recreational facilities, as well as well- growing unemployment which reduced available ness areas). We feel there is great potential in this income and, in turn, dampened consumption. sector, potential which has so far been confirmed Announcements of tax increases in the fourth by an extremely positive market response. The quarter of 2002 made a further contribution Division's initial projects are already in progress. towards restraining consumer spending.

10 MANAGEMENT REPORT

Remaining slightly positive, macroeconomic Consumption of Tiles in Germany 1999-2002 development was essentially stimulated by a further (million m2) increase in exports, which however reported a lower rate of growth than in prior years. According 200 to results of the business opinion poll carried out by the ifo Institute in Munich at the end of 150 December 2002, the business climate for trade and industry has now suffered negative influences for 100 the seventh time in succession.

50 Further Decline in Overall Construction Activity in Germany 0 1999 2000 2001 2002 Having already been prevalent for many years, the Tiles 186 177 166 153 construction-industry recession also continued throughout the business year 2002. As in 2001, building investments fell by roughly 6 %. In the year under review, the number of single/two family and multiple dwelling units completed decreased Consumption of Sanitary Ware in Germany by 16.8 %. Even the renovation sector, which had 1999-2002 (1,000 units) shown positive trends in recent years, reported its first slight decline again. This weak market environ- 10,000 ment resulted in a distinct fall in demand. Tile consumption fell by 7.5 % and that of sanitary- 8,000 ware products by 9.6 %. 6,000

Further Marked Reduction in Consumer Demand 4,000

2,000 Demand for porcelain and glassware likewise diminished in the maelstrom of general restrained 0 buying. When compared with the previous year, 1999 2000 2001 2002 the German porcelain industry reported a 3.3 % Sanitary 9,500 8,636 7,800 7,051 decline. In view of this environment, the German Ware specialised retail trade continued its process of deconglomeration. Similar developments were also observed in other major foreign markets. sales of Euro 977.5 million (+0.2 %) were roughly When compared with the previous year, only the on prior-year level. Had contributions from com- US market showed a slight improvement. panies acquired at the end of 2001 been excluded from the calculation, prior-year sales would have ex- Sales and Orders Received ceeded those in the year under review by 3.1 %. US dollar exchange influences led to a sales reduction in Consolidated Sales on Prior-Year Level; Further the value of Euro 3.4 million. Villeroy & Boch AG Increase in Foreign Sales sales fell by Euro 22.6 million in the business year 2002, bringing the total to Euro 539.1 million. While Despite the difficult underlying conditions, the negative prior-year development intensified in Villeroy & Boch was able to maintain a good mar- the domestic market during the year under review, ket hold in the business year 2002. Consolidated reporting a 10.4 % sales decline (2001: -7.5 %) to

11 MANAGEMENT REPORT

Euro 296.3 million, the Villeroy & Boch Group was 2001/2002 Consolidated Sales able to record increases in foreign sales and in so Distribution According to Division (in Euro million) doing compensate for the sales losses incurred in the 1,000 domestic market. Sales in France, Villeroy & Boch's second most important market, rose by 7.5 % and 800 positive developments were also reported through- 27.5% 30.6% out the rest of Europe. A distinct sales increase of 12.7 % was achieved overseas, while the decline 600

of 11.0 % recorded in the USA as a result of closing 31.2% 31.8% unprofitable Tile Division branches in 2001, was 400 within the bounds we had expected. Villeroy & Boch 200 thus successfully increased its foreign share of 30.3% 30.2% consolidated sales from 46 % in 1996, to 70 % in 7.4% 11.0 % the year 2002. The related clear reduction in de- 0

pendence on the domestic economy has already 2001 2002 Change had a positive effect on the overall corporate result. Tiles 298.6 268.6 -30.0 -10.0 % Bathroom and Kitchen 309.9 305.3 -4.6 -1.5 % Tableware 294.3 296.5 2.2 0.7 % Wellness 72.4 107.1 34.7 47.9 % Group Sales for the Year 2002 Total 975.2 977.5 2.3 0.2 % Regional Distribution (Previous year’s figures in brackets)

Germany 30.3 % (33.9 %) Sales Trend in the Divisions France 18.2 % (17.0 %) The Tile Division was unable to evade the sus- tained weak market and extreme price competition

Rest of the World experienced in the business year 2002. Sales total- 11.0 % (11.4 %) Rest of Europe ling Euro 268.6 million fell short of the prior-year 40.5 % (37.7 %) level by Euro 30.0 million, or 10.0 %. The Division therefore failed to compensate for reductions in the domestic market with increases in foreign sales. The 13.2 % decline in the domestic market was particularly marked. With the exception of France Slight Drop in Volume of Orders Ð where it was possible to maintain the prior-year level Ð sales declines were recorded in all foreign On the balance sheet date of 31.12.2002, the markets. Compared with prior-year figures, Bath- volume of orders in the Villeroy & Boch Group room and Kitchen Division sales declined minimal- totalled Euro 43.3 million, a slight reduction of ly in 2002, falling from Euro 309.9 million to Euro Euro 1.6 million on prior-year figures. This 305.3 million. Although a 5.3 % sales increase was reduction concerns the Bathroom and Kitchen achieved in foreign markets, this was insufficient Division (Euro -3.9 million) and also that of Tiles to compensate for the 14.3 % decline recorded in (Euro -1.1 million). The volume of orders in the the domestic market. An extremely varied trend was Tableware Division (+ Euro 0.9 million) and experienced in the various foreign markets. Sales Wellness Division (+ Euro 2.5 million) exceeded declines in Austria and the Netherlands were there- prior-year values. fore contrasted by increases in Great Britain, Scan-

12 MANAGEMENT REPORT

Structure of the Consolidated Profit and Loss Statement (IAS) Euro million 2002 % of 2001 % of sales sales

Sales 977.5 100.0 975.2 100.0 Costs of goods sold - 591.1 - 60.5 - 576.8 - 59.1

Gross profit 386.4 39.5 398.4 40.9

Selling expenses, marketing and development costs - 298.0 - 30.4 - 306.0 - 31.4 General and administrative costs - 53.6 - 5.5 - 53.0 - 5.4 Other expense /income - 7.8 - 0.8 - 12.4 - 1.3

EBIT 27.0 2.8 27.0 2.8 Financial results - 13.4 - 1.4 -11.8-1.2

Result from ordinary operations / EBT 13.6 1.4 15.2 1.6

Taxes on income - 3.3 - 0.3 -5.6 -0.6

Net income 10.3 1.1 9.6 1.0

dinavia and eastern Europe. Achieving a plus of the Villeroy & Boch brand. As a result of purchas- 9.7 %, the trend in France was extremely pleasing. ing complementary subsidiaries it was possible to Securing sales of Euro 296.5 million in the busi- attractively extend and round-off the product ness year 2002, the Tableware Division was able to range. slightly exceed its prior-year level. A 4 % decline in domestic sales was contrasted by an increase in Result Trend foreign sales. In the shrinking German market, Villeroy & Boch was therefore able to develop Conversion to IAS considerably better than the competition and strengthen its market share. High sales increases As a result of converting Group accounting to were achieved in Italy, France, the Netherlands, in the international accounting standards, IAS, in eastern Europe and overseas. the year under review, the comparative amounts Wellness Division sales were characterised firstly for the year 2001 also had to be adjusted in the by acquisitions made at the end of 2001 and Profit and Loss Statement. This led to a Euro secondly, by market gains. When compared with 40.8 million reduction in EBIT (according to the previous year, sales recorded a distinct increase HGB) to a total of Euro 27.0 million (according of 48.0 %, bringing the total to Euro 107.1 million. to IAS) for the year 2001 in the consolidated Aminimal decline was noted only in Scandinavia, financial statements. Essential items which while a slight sales increase was actually achieved required adaptation concerned the amortisation in Germany, despite the negative economic situa- of goodwill arising from company acquisitions, tion. Sales in France more than doubled and gains the discontinuation of depreciation for tax pur- made in eastern Europe were equally satisfying. poses and income from the reversal of special This outstanding trend confirms that the Wellness reserves, as well as the elimination of investment products have been successfully positioned under fund distribution.

13 MANAGEMENT REPORT

EBIT on Prior-Year Level Result Trend in the Divisions

The operating result (EBIT) of Euro 27.0 million Reporting a result of Euro -10.5 million as com- was on exactly the same level as in the previous pared with Euro -11.9 million in the previous business year. Owing to the poorer financial result business year, the Tile Division result trend was than in the previous year, however, the result from once again unsatisfactory in the year under review. ordinary operations (EBT) decreased from Euro Villeroy & Boch was unable to evade the extreme 15.2 million to Euro 13.6 million. pricing pressure in the markets, but intentionally Although sales remained virtually identical to the continued its orientation towards the medium and previous business year, the costs for products sold luxury tile segments to increase average net pro- increased by Euro 14.3 million. The high expense ceeds, whilst accepting the inevitable declining for personnel, energy and raw materials made a quantities. In addition, the result was considerably particular contribution towards this rise. In addition, burdened by expenses in the sum of Euro 3.1 mil- the Bathroom and Kitchen Division in particular lion for capacity adjustments and measures initiat- incurred higher expenses which were brought ed to adjust structural costs. about by the shift towards products with higher Although sales were only minimally lower, the unit costs and production not optimised as a result Bathroom and Kitchen Division clearly failed to of these product-mix shifts. achieve the prior-year result level. In view of the Selling expenses, marketing and development costs difficult market environment, the total sum of were reduced by Euro 8.0 million, this essentially sales was satisfactory; what was unsatisfactory, brought about by economising in the area of adver- however, was the quality of sales. The Division's tising expense. It is also to be taken into account earning power was burdened by the cyclical shift that selling expenses were reduced in the Tile Di- in mix towards lower-priced Ð and thus lower mar- vision as a result of closing branches in the USA. gin - products. Having reached Euro 24.9 million A clear reduction can be seen in the balance of in the previous business year, the operating result other expenses and income. This includes amorti- fell to Euro 15.6 million in 2002. sation of goodwill arising from the purchase of In the year 2002, the Tableware Division successful- complementary companies and also the result from ly increased its operating result from Euro 15.1 mil- investments. Totalling Euro 4.4 million, amortisa- lion to Euro 21.7 million. Despite stagnating sales, tion of goodwill was only minimally higher than in a considerable contribution was made towards this the previous business year (Euro 4.2 million). success by intensified market cultivation, continu- When considering other expenses and income, it ation of the effective product policy, the distinct must be noted that in the year under review these reduction of manufacturing costs as a result of include restructuring expense of Euro 6.8 million, rationalising production, and also by strict cost income from the sale of land, in the sum of Euro management. 1.5 million, as well as Euro 3.0 million from the EBIT in the Wellness Division improved from Euro sale of a foreign minority. -1.1 million in the previous year, to Euro 0.2 mil- The financial results Ð totalling Euro -13.4 million lion in 2002. Continuation of measures aimed at in- Ð are made up of the interest share resulting from tegrating the new companies for the purpose of us- the allocation of Euro 10.3 million (previous year: ing synergy effects was given high priority in 2002. Euro 9.9 million) to pension provisions and also from a negative net interest income of Euro 3.1 Rise in Consolidated Net Income million (previous year: Euro 1.9 million). Net in- terest income fell as a result of the lower level of net Despite a decline in earnings before tax (EBT), net liquid assets in connection with prior-year acquisi- income in the Villeroy & Boch Group rose from tions and also due to amortisation of paper losses Euro 9.6 million in the previous year, to Euro 10.3 mil- totalling Euro 2.0 million in the case of securities. lion in 2002, owing to the lower income-tax ratio.

14 MANAGEMENT REPORT

EBIT 2001/2002 Dividend Proposal According to Division (in Euro million) As in the previous business year, both the Manage- 30 ment Board and Supervisory Board will propose

25 an unchanged dividend of

20 Euro 0.55 per individual preference-share 15 certificate and Euro 0.50 per individual ordinary-share 10 certificate 5

0 to the General Meeting of Shareholders.

-5 A total of Euro 14.7 million of Villeroy & Boch

-10 AG retained earnings is, therefore, to be distribut- ed and Euro 8.3 million carried forward to a new -15 account. These amounts will be changed by the Bathroom & Table- Tiles Kitchen ware Wellness Total share of the dividend apportioned to the com- pany's own holding of individual preference- 2001 -11.9 24.9 15.1 -1.1 27.0 share certificates at the time dividends are dis- 2002 -10.5 15.6 21.7 0.2 27.0 tributed.

Capital Expenditure

Volume of Capital Expenditure Distinctly Greater Net Income of Villeroy & Boch AG Below Than in Previous Year Prior-Year Value Compared to the prior-year figures, Villeroy & Boch In the business year 2002, the earnings before distinctly increased its volume of capital expen- income tax of Villeroy & Boch AG fell by Euro diture for property, plant and equipment and 14.0 million to a total of Euro 16.0 million. This intangible fixed assets in the business year 2002 trend reflected the distinct sales decline of Euro by 22 %, bringing the total to Euro 66.1 million. 22.6 million, brought about as a result of the This strong rise results from larger-scale capital weak market environment. Costs could not, in the expenditure plans in both the Tile and Tableware short-term, be cut equivalent to this sales decline. Divisions in Germany. 51 % of total capital expen- An additional burden on result in the sum of Euro diture was allocated to domestic locations. Depreci- 3.8 million was caused by non-recurring expenses ation in the year 2002 totalled Euro 58.7 million, as for capacity adjustments in the Tile, Bathroom compared to Euro 58.9 million in the previous busi- and Kitchen and also Tableware Divisions. Con- ness year. Capital expenditure in the sum of Euro versely, results for the year include Euro 5.6 mil- 33.2 million was carried out in Villeroy & Boch lion profit from the contribution of land to AG (prior year: Euro 21.8 million). Villeroy & Boch AG real estate companies. As Capital expenditure in the Tile Division rose from the considerably higher foreign dividends are 95 % Euro 13.5 million to Euro 20.3 million, 52 % of tax free, Villeroy & Boch AG does not report any which being invested in Germany. A large part of income tax for the year under review. Net income these funds flowed into the new body-preparation therefore fell from Euro 27.9 million to Euro 16.0 system at the Merzig factory and into a new sort- million. ing belt.

15 MANAGEMENT REPORT

Investments in Tangible and Intangible Group Financing Fixed Assets 2001/2002 (in Euro million) Villeroy & Boch Group Ð Abridged Cash Flow Statement (in Euro million)

70 2002 2001 60 Net income 10.3 9.6 50

40 Depreciation of fixed assets 60.9 59.9 30 Change in 20 long-term provisions 1.4 2.0

10 Result from disposal 0 of fixed assets -1.5 -1.2

Remaining Other deposits not AG Group Total affecting operating result - 0.5 3.6

2001 21.8 32.5 54.3 2002 33.2 32.9 66.1 Changes in inventories, accounts receivable, liabilities and short-term provisions, as well as other assets and liabilities 0.5 -33.9

Capital expenditure in the Bathroom and Kitchen Cash flow from Division was 10 % lower than in the previous operating activities 71.1 40.0 business year and totalled Euro 16.1 million. 66 % Cash flow from of this total Ð and thus the majority Ð was carried investing activities -33.4 -76.9 out abroad. The Bathroom and Kitchen Division made investments in Germany in die-casting tech- Cash flow from nology at its Mettlach location. Modernisation was financing - 9.3 -21.3 also carried out at the fittings factory in Sweden. Change Alarge part of the Tableware Division's Euro 21.1 mil- in balance of funds 28.4 -58.2 lion capital expenditure (prior year: Euro 15.8 mil- lion) flowed into new die-casting technology at the Changes ensuing from Mettlach and Torgau locations and also into con- consolidated companies 0 8.6 verting production facilities in Merzig. The largest part of the Wellness Division's funds, in Balance of funds on 1.1. 25.3 74.9 the sum of Euro 8.6 million (prior year: Euro 7.2 mil- Balance of funds on 31.12. 53.7 25.3 lion), was invested in tools and machinery for producing acrylic and Quaryl¨ bathtubs at the Netherlands' factory and also in new buildings at various subsidiaries. year, the inflow of funds from operating activities Rise in Cash Flow From Operating Activities in 2002 rose clearly by Euro 31.1 million to Euro 71.1 million. Changes to the relevant assets and As can be seen in detail in the Cash Flow State- liabilities counterbalanced each other to a large ment, when compared with the previous business extent in 2002, while in the previous year, short-

16 MANAGEMENT REPORT

term provisions and liabilities were distinctly Comparison of Group Balance Sheet reduced. Structure 2001/2002 (in Euro million) Despite the Euro 11.8 million increase in capital expenditure in intangible fixed assets and property, Assets Liabilities plant and equipment, the negative cash flow from 1,000 investing activities fell from Euro -76.9 million to

Euro -33.4 million as a result of returns from the Fixed Share- 750 sale of bonds and fewer acquisitions of equity assets holders' equity holdings. 500 Other Long-term current debts Balance Sheet Structure in 2002 assets

250 The balance sheet total of Euro 879.0 million as of Short-term debts 31.12.2002 is roughly on prior-year level (Euro Liquid assets 880.9 million). Compared with the previous year, 0 2001 2002 2001 2002 the shareholders' equity ratio of 43 % remained unchanged. Fixed assets decreased by Euro 27.7 million, Assets 2001 2002 resulting in a drop in balance-sheet total share Fixed assets 390.9 363.2 Other current assets 464.7 462.1 from 44.4 % to 41.3 %. Conversely, current assets, Liquid assets 25.3 53.7 including liquid assets, increased from 55.6 % to Balance sheet total 880.9 879.0 58.7 %. The decline in fixed assets was caused by the sale of bonds in connection with unlocking an Liabilities investment fund, thus resulting in the rise in liquid Shareholders' equity 381.1 379.6 assets. Long-term debts 199.7 202.3 The long-term fixed-assets-to-net-worth ratio Short-term debts 300.1 297.1 improved in the year 2002, owing to the decrease Balance sheet total 880.9 879.0 in fixed assets. Long-term assets are once again fully (prior-year: 97.5 %) covered by shareholders' equity. Excess shareholders' equity additionally covers a further 3.5 % of current assets. When long-term debts are taken into account, this cover Employees ratio increases to 47.3 % (prior-year: 40.9 %). Acquisitions Cause Slight Increase in Average Increase in Net Liquid Assets Number of Persons Employed

Liquid assets, including marketable securities, in- As a result of acquisitions, the average number of creased by Euro 28.4 million to Euro 53.7 million persons employed in the Villeroy & Boch Group in the Villeroy & Boch Group, as of 31.12.2002. rose from 10,833 to 10,934. This rise resulted from Liabilities to banks and notes payable of Euro the first complete inclusion of personnel at the 35.3 million are on prior-year level (Euro 35.0 mil- acquired companies Acomo (+110 employees) and lion). As of 31.12.2002, net liquid assets corre- Villeroy & Boch Wellness Italia (+99 employees), spondingly rose from Euro -9.7 million to Euro which were only taken into account proportionally 18.4 million. This rise is mainly attributable to in the year 2001. The number of employees the fact that liquid assets in 2002 include returns occupied abroad consequently increased, while the from the sale of bonds, which were reported in level of employees in Germany remained the same financial assets in 2001. as in the previous year. When adjusted to exclude

17 MANAGEMENT REPORT

personnel at acquisitions, the average number of can jeopardise the company's existence, and also employees decreased by 108. towards making fundamental risks for the com- As a result of restructuring measures in the Tile pany controllable. In recent years, the Group's Division, the number of employees was cut by organised risk management system has been further 166, these being predominantly in the area of pro- developed into an integral element of manage- duction. The average number of persons employed ment, planning and controlling processes. Its inte- in the Bathroom and Kitchen Division, however, gration in Group reporting ensures high-speed increased slightly by 55 persons, owing to new reactions. Above and beyond operational report- labour taken on in Germany, as well as in Romania ing, all risks relevant for the Group are reviewed and Sweden in the summer months. Reporting within the scope of the organised risk management 3,174 persons, the number of employees in the system. This includes a systematic review and Tableware Division remained on the same level as assessment of all internal and external individual in the previous year. An average of 870 persons risks, giving details of measures initiated or to be were employed in the Wellness Division in 2002, initiated. 211 more than in 2001. The number of employees As the environment is exposed to constant change in other sectors stagnated at 427 (prior-year: 423). and infinite new risks occur, we at Villeroy & Boch have installed a permanent process to adapt our Development Costs risk management system to current requirements. For this reason, investment controlling was inte- In view of the fact that competitive conditions are grated in the risk management system in the year becoming constantly tougher, innovative power is 2002. The essential goal is to eliminate potential becoming increasingly important. In 2002 trouble spots still existing in risk recognition and Villeroy & Boch concentrated chiefly on develop- risk reporting carried out by foreign subsidiaries. ing new products, in particular for the 2003 spring trade fairs, and also on improving production Business Risks techniques, such as the use of die-casting in both sanitary ware and tableware production. A general risk exists for Villeroy & Boch in the A total of Euro 13.2 million was spent on research development of business activity. Specific risks for and development in the Villeroy & Boch Group in the company are found in the current negative 2002 (as compared to Euro 14.0 million in 2001). situation within the industry. A situation of declin- The largest share of research and development ing economic activity in the building sector has costs Ð roughly 44 % Ð was once again expended remained unchanged for years. The German porce- in the Bathroom and Kitchen Division. This was lain industry also had to report a decline in 2002 followed by a share of roughly 30 % which was due to the low propensity to consume. As a result expended in the Tile Division. Of the remaining of its strategically good positioning, however, costs, 17 % was expended in the Tableware Villeroy & Boch actually increases its market Division and 9 % in the Wellness Division. share in this difficult environment. The strategy we have been pursuing since 1998 has proved to be Further Development of Risk Management the right one in this situation. We have, therefore, constantly promoted internationalisation and now Corporate trading has always been inseparably make 70 % of our sales abroad, as compared to 46 linked with risks, but also with opportunities. Risk % in the year 1996. In this way we have become management occupies an extremely high status for less dependent on the difficult German market and Villeroy & Boch. Corporate planning and decision- reduced the risk involved, by our presence in a making processes are geared towards consistently variety of markets. We have also gained consider- using opportunities and recognising risks which able competitive advantages as a result of our

18 MANAGEMENT REPORT

diversification to a full-range supplier. Last, but cult market environment, only minimal sales not least, the name of Villeroy & Boch signifies a increases will probably be attainable in the year strong brand internationally, one which creates a 2003. In addition, we aim to ensure compensation high demand for our products and makes it easier for the continued weak German market by way of for us to gain a foothold in new markets. systematic capital expenditure in foreign markets, which will create a further increase in our export Events Subsequent to the End of the business. Business Year 2002 We expect an improvement in the prior-year operating result. Cost-cutting will be achieved by There are no events of essential importance which using the synergies of companies newly-acquired occurred subsequent to the end of the business in recent years and also by way of reorganisation year 2002. carried out within the Divisions. The year 2003 will see a continuation of the capacity-adjustment Outlook measures introduced in 2002, with positive effects on operating result expected above all in the No Fundamental Economic Changes Expected second half of the year. In order to compensate for the sustained weak market in Germany, internation- We do not expect any fundamental changes to the al business will be stepped up further by way of underlying global economic conditions for the capital expenditure in foreign markets. business year 2003. The international political ten- sion, high prices for crude oil and increasing num- bers of unemployed constitute a great burden for the economy. Developments in the USA in particular continue to be important, as does consumer behaviour there. The economic climate in Germany saw a further deterioration at the start of 2003 as a result of increased social security contributions and the Federal Government's announcement that it intended to raise taxes on a large scale. A slight recovery is not anticipated until later on in the year. In addition, the sharp rise in unemployment figures at the start of 2003 gives reason to expect that average unemployment figures for the year as a whole will be distinctly higher than in the pre- vious year. Against this background, therefore, we assume there will be no growth in the domestic market. It is, however, not possible to estimate the consequences of the many existing risks Ð both political and economic Ð nor of the high Euro exchange rate.

General Outlook for the Year 2003

The year 2003 will be a year of consolidation for Villeroy & Boch. Owing to the consistently diffi-

19 THE SHARE

General Meeting of Villeroy & Boch AG Shareholders on 31 May 2002 in the Stadthalle Merzig.

Further Sudden Price Falls Villeroy & Boch Share Trend

On Stock Exchanges Villeroy & Boch SDAX DAX

Extremely negative trends have been reported by 110 % stock markets worldwide since April 2000. The year under review was also accompanied by 100 % further distinct price losses. Regarded internation-

ally, shareholders once again saw their greatest 80 % losses in the area of technology equities, with the

NEMAX all shares losing roughly 63 %. Yet 60 % shares of the large-scale industrial undertakings also suffered considerably, with the leading 40 % German index Ð the DAX Ð slipping back 44 %. 01.01.02 30.04.02 31.08.02 31.12.02 28.02.03

Villeroy & Boch Share Followed Following this trend, the Villeroy & Boch share Trend During Course of Year price rose once again to Euro 8.00 within a few days at the start of January 2003. Our share was able to evade the negative stock- exchange trend during the first half of the year. At Clearly Improved Position within Indices the start of 2002 it was quoted at Euro 9.80. It peaked at Euro 11.50 and on 30 June, was quoted During the course of the year under review, the at Euro 10.45. The share, however, suffered distinct Villeroy & Boch share was able to increasingly losses from the start of October and, in particular, improve its position within the SDAX. As regards during the last two weeks of the year. Given the the two decisive criteria, share trading and market closing price of Euro 6.60, a price decline of 33 % capitalisation, we were valuated at positions 46 was experienced during the course of the year. and 24 respectively at the start of 2002. By the end

20 THE SHARE

of the year Villeroy & Boch occupied rank 21 for Reference Figures for Villeroy & Boch share trading and rank 4 for market capitalisation. Preference Share (in Euro)

Decision Made in Favour of Prime Standard CUSIP Numbers: 765723 Class: no-par value bearer Since the start of 2003, the Villeroy & Boch share preference shares has been registered in the new Prime Standard, Shareholder structure: 92.9 % free float Quotations: official trading Frankfurt/Main where it is listed in the “Household, Appliances & (Prime Standard), XETRA and Housewares” Industry Group of the “Consumer” also OTC market in Stuttgart, sector. Düsseldorf, Berlin, Hamburg, Following indices restructuring, the Arbeitskreis Munich, Bremen Indizes [indices working party] and Deutsche Selection index: SDAX Börse AG announced on 11 February 2003 that Designated Sponsor: Landesbank Hessen-Thüringen Villeroy & Boch continues to belong to the SDAX. Dividend: 0.55 (proposal to the General Meeting of Shareholders) Net earnings per share: 0.36 Stock Options / Acquisition of Treasury Stock Cash flow per share: 2.53 Shareholder equity per share: 13.41 2002 saw the issue of the third tranche of the Yearly high/low: 11.50 / 6.50 Villeroy & Boch stock option programme. The Closing price 31.12.02: 6.60 authorised persons subscribed for a total of 16,810 Market capitalisation shares and thus acquired 145,368 stock purchase as of 31.12.02: 86.1 million (free float) PER H/L 32/18 warrants. Villeroy & Boch AG holds roughly one million treasury stocks for the stock option programme. tivities. We conducted one-to-one talks with Ger- man and foreign fund managers, financial analysts Extremely High Dividend Yield and representatives of the media. In April and November we furthermore held extremely well An unchanged dividend of Euro 0.55 per prefer- attended conferences for financial analysts and ence share and Euro 0.50 per ordinary share was presented ourselves to institutional and private declared by the extremely well-attended General investors in the scope of investor conferences with Meeting of Shareholders on 31 May 2002. The the Landesbank Hessen-Thüringen in Frankfurt Management Board also emphasised its desire to and together with other renowned companies in continue the result-related, shareholder-friendly Hamburg. We continued to record a pleasingly dividend policy in future. high access frequency on the Investor Relations For this reason, the administration will again pro- Internet pages. pose an unchanged dividend of Euro 0.55 per prefer- We intend to further strengthen our Investor ence share and Euro 0.50 per ordinary share to the Relations activities during the business year 2003. General Meeting of Shareholders for the business Road shows and investor conferences with various year 2002. Based on the most recent market price of banks are already being planned. roughly Euro 7.50 per preference share, this gives Our message for the capital market is as follows: rise to an above average dividend yield of 7.3 %. after successfully changing to a leading lifestyle company in the area of interior design, we are Ð Further Development of Investor Relations despite the currently uncertain economic situation Activities Ð not only able to offer investors a high dividend yield, but also the incentives of committing them- In the year under review, there continued to be a selves to an income-oriented company of sub- constant strengthening of Investor Relations ac- stance: Villeroy & Boch.

21 EMPLOYEES

Innovative thinking is not only requested at Villeroy & Boch, but also promoted. As a result a staggering 75% of all suggestions for improvement submitted by employees within the scope of idea management, have been implemented since 1998.

Employees Are Our Strength schemes, which are sometimes presented in asso- ciation with public or private companies and The support of competent, motivated and commit- institutions. We regard the training of specialist ted employees is crucial, if processes of change are and executive competence as a permanent pro- to be successful. Following the initiated merger of cess. certain Divisions and the ongoing restructuring measures, as well as development of the new Personnel Marketing in Cooperation with Project Business Division, it is the employees at Universities and Colleges Villeroy & Boch who once again stand for corpo- rate success both at home and abroad. We attract interested new job applicants with a systematically-structured personnel marketing Personnel Development as a plan. In the year 2002, we made numerous appear- Permanent Process ances at many important university and college fairs throughout Germany, within the scope of For many years Villeroy & Boch has continually our personnel marketing strategy. On these occa- developed competence and systematically trained sions, Villeroy & Boch presented itself as an in- junior staff from its own ranks, in order to assert teresting and future-orientated employer. itself against the competition. It is for this reason Cooperation with regional universities and col- that we promote specialised qualification and leges was stepped up. Lively exchanges of ideas commitment, technical know-how and a customer- were experienced at events staged jointly by pro- orientated way of thinking, as well as corporate fessors and representatives of Villeroy & Boch thinking and acting and the personality of our AG. Discussion concentrated on such points as employees. the content of future study courses and their In addition, Villeroy & Boch invests considerable development. A central point was always the funds in training its senior executives and offers comparison with business requirements and them comprehensive, coordinated management necessities.

22 EMPLOYEES

Creativity Gives Us the Competitive Edge Constructive Cooperation with Statutory Employees' Representatives Creativity continues to be one of the outstanding qualities of Villeroy & Boch employees. Particu- Cooperation with the statutory employees' repre- larly in difficult times, imaginativeness and moti- sentatives was characterised not only by mutual vation represent an important requirement for trust and an openness towards innovation, but also competitiveness and stability. We continue to re- by constructive criticism. In the course of regular gard it as our obligation to guarantee such an envi- meetings, the works council committees were ronment. informed in particular, about the merger of the Roughly 1,400 suggestions for improvement, re- Bathroom, Kitchen and Tile Division as well as ceived from the ranks of our employees in the year about the formation of the new Project Business 2002, led to savings of several hundred thousand Division and were included in the decision making Euro and also increased awareness for company process. operations and possible areas of improvement. The Euroforum Ð the codetermination body at European level Ð met once again in Luxembourg for its annual meeting. Submitted Suggestions for Improvement The Executive Board thanks all employees for (throughout the Group) their great commitment. It is, to a great extent, due to the dedication and motivation of each individu- 1600 al employee that, despite an increasingly difficult 1200 economic environment, Villeroy & Boch has been 800 able to maintain its position and even report dis-

400 tinct growth in some sectors.

0 1998 1999 2000 2001 2002 Development of the Average Number of Persons Employed Roughly 4,700 suggestions for improvement have within the Group been submitted since the concept of idea manage- Change ment was revived in 1998. Approximately 75 % of 2002 2001 01/02 this considerable quantity have been implemented, bringing about savings of roughly Euro 2.7 mil- Divisions lion. Tiles 2,314 2,480 -166 Bathroom and Kitchen 4,150 4,095 54 Special Demands on Group Personnel Tableware 3,174 3,177 -3 Management Due to Internationalisation Wellness 870 658 212

As Villeroy & Boch has become increasingly Other 426 423 4 internationalised, the process of grouping together Group as a whole 10,934 10,833 101 tasks of international personnel development has been stepped up. The aim is to also clearly orien- Countries tate top-management towards the Villeroy & Boch Germany 4,021 4,003 18 strategy with respect to personnel policy. France 1,292 1,369 -77 Professional support during the post-merger phase Luxembourg 718 742 -24 ensures synergies in the personnel sector. The inte- Other 4,903 4,719 184 grated companies should combine with existing Group structures to form a homogeneous unit. Group as a whole 10,934 10,833 101

23 Above: Peppy design, wide-range of accessories: ARENA linear meets exacting demands in the modern kitchen. Below: Beauty needs light to be appreciated. One captivating feature of CITY LIFE is its innovative lighting concept. BATHROOM, KITCHEN AND TILE

The second generation of “The House of Villeroy & Boch” in its new brand presentation displays the homely ambience of the Villeroy & Boch brand in its entirety – complete bathroom furnishings with tiles and stylishly arranged living rooms.

Villeroy & Boch established a milestone in market structures, establishing efficient processes and cultivation in the middle of 2002, as a result of its pursuing an integrated market cultivation policy in decision to amalgamate the Tile Division with that respect of sales. of Bathroom and Kitchen. This decision was After five years marked by positive experience warmly welcomed by customers both nationally with partners Ð now totalling more than 170 world- and internationally and regarded as an important wide – we have further developed “The House of step for the closed marketing strategy of “The Villeroy & Boch” marketing concept, so as to be House of Villeroy & Boch”. able to appeal even more directly to all target The second half of 2002 was, therefore, marked by groups with their various furnishing tastes. By intensive reorganisation and restructuring work, concentrating on the lifestyle concept, we are able which was concluded, for the most part, by to cover the leading contemporary trends and December. An extended management team, inspire the end consumer with an atmosphere, answerable to the Executive Board, is responsible which not only offers assured good taste, but also for this new organisation, which has been be divid- prompts him to purchase complete furnishing ed into the three business segments – “Tiles”, arrangements. “Ceramic Sanitary Ware and Kitchens” and also At the same time, we are adapting “The House of “Bathroom Furniture and Fittings” – since the start Villeroy & Boch” to our new brand presentation: of 2003. by conveying a universal image in all our commu- In this connection, a considerable cost reduction nication media (advertising, brochures, direct mar- will already be seen during the course of the cur- keting etc.) we are making the brand more tangible rent financial year, 2003, as a result of combining and discernible for our customers.

25 BATHROOM, KITCHEN AND TILE

tive trend in the remaining international business, it was still not possible to completely compensate for the decline in Germany. Sales quality was unsatisfactory. Economically- determined shifts in the product mix towards more low-priced products and thus, automatically, towards lower margins, burdened the Division's earning power. Totalling Euro 15.6 million in 2002, the operating result fell short of the good Euro 24.9 million result reported in the previous financial year.

Further Increase in Foreign Business

A sustained intensification of international busi- ness was successfully continued. The year 2002 again saw a further improvement in the share of for- eign trade, reporting a rise from 65.4 % to 69.9 %. This trend's supporting pillars were not only in Great Britain and France, but once again in the Scandinavian and eastern European countries. HYPE. Form and function unite to create Here, for the second year in succession the market- a dynamic interplay with the water. ing organisation of AB Gustavsberg Ð which was taken over in the year 2000 Ð realised extremely pleasing sales increases for the Villeroy & Boch Bathroom and Kitchen Division brand.

The continued, extremely negative level of eco- Product Range Extended nomic activity in the building sector, coupled with sustained consumer restraint in the area of renova- Having commenced in the year 2001, the sale of tion, caused the Bathroom and Kitchen Division to fittings under the Villeroy & Boch brand name suffer losses in domestic market sales and earn- also proved to be extraordinarily successful in the ings, which could not be completely compensated year 2002. With the introduction of the new for by foreign business. “Hype” series in autumn, the range was extended to include an extremely innovative design, while Sales Maintained, Result Under Pressure the three new product lines “Viva Classic”, “Classini” and “Sloop” expanded the range of fur- Although sales in the year under review declined niture. only minimally, falling by 1.5 % to a total of Euro 305.3 million, the result level reported in the pre- First Decline in Kitchen Market vious financial year was quite clearly not a- chieved. Despite a distinct decline in domestic Following many years of constant growth, which sales, Villeroy & Boch was able to maintain a high at times reached double figures, Villeroy & Boch level of market share in Germany, as the entire had to report a decline in the sale of kitchen ceram- sanitary-ware market underwent an extremely ics for the first time in the year 2002. The kitch- negative trend. In spite of very good sales growth en branch recorded enormous sales losses of of almost 10 % in France and the continued posi- 13.0 %. Despite the successful launch of our new,

26 BATHROOM, KITCHEN AND TILE

innovative metallic glazes Ð with which we tapped Outlook for Ceramic-Sanitary-Ware / an additional market sector for ceramic kitchen Kitchen and Bathroom Furniture / Fittings sinks, previously reserved solely for special-steel Business Segments: Increased Result products Ð sales of kitchen ceramics nevertheless Anticipated, Despite Sales Stagnation reported a backward trend, falling from Euro 14.7 million to a total of Euro 14.2 million. Despite the extremely poor economic conditions already prevailing in Germany in the year under Main Areas of Investment Abroad review, we are anticipating demand to decline even further in 2003. Although international busi- Investment in the Scandinavian and eastern ness will continue to be developed, the business European factories concentrated primarily on segments are, nevertheless, preparing themselves developing die-casting systems. A considerable on the whole for a sales stagnation. On the other proportion of the Euro 16.1 million investment hand, the clear success achieved in the area of resources employed at western European locations rationalising production, as well as the reduction in the year 2002 aimed to achieve flexibility of in structural costs brought about as a result of manufacturing operations and rationalise produc- merging Divisions, will not only cushion the tion. Modernisation programmes continued to be impact of general cost increases, but also lead once implemented at the fittings works in Sweden. again to an increase in earnings.

SUBWAY is convincingly uncomplicated. The ideal requirement for bathrooms that are perfectly suited to everyday use and radiate freshness.

27 Above: LIVING PLANET by Stefan Szczesny makes everyday life in the bathroom an artistic delight. Below: ALT METTLACH designed with the pattern ST. PETERSBURG combines graphic and floral elements in a harmonious way. BATHROOM, KITCHEN AND TILE

Tile Division operation at the end of 2002. The Tile Division invested a total of Euro 20.3 million in 2002, as The situation in the branch was characterised by a compared with Euro 13.5 million in the previous persistently weak market and extremely tough financial year. price competition as a result of high inventory levels. It was additionally aggravated by the con- New Product Campaign Successful tinued, consistent development of further produc- tion capacity, both in Germany and abroad. “Vilbostone” is a term for high-quality tiles made of glazed and unglazed fine stoneware, covering a Distinct Decline in Sales and Result wide spectrum of natural colours. Additional series which were launched at the important trade fair, Influenced by these negative underlying condi- “Cersaie”, roused the attention of our international tions, Villeroy & Boch had to accept severe sales customers. losses. Tile Division sales fell by 10 % to Euro We converted the ceramic pictures from the 268.6 million. Even though the Division had “Living Planet” project – which originated as a calculated a moderate sales decline, sales fell result of cooperation between the artist, Stefan much more drastically than originally anticipated. Szczesny, and the World Wide Fund For Nature on The Euro -10.5 million operating result (previous the occasion of EXPO 2000 Ð into a smaller tile year: Euro -11.9 million) was extremely unsatis- format and also presented them in three different factory. motifs at “Cersaie”. Both these product launches and additional new Result Burdened by High Expense of introductions made at the trade fair, “Bau”, at the Restructuring Measures start of January 2003 in Munich, give us reason for a confident approach to the new financial year. Expenditure for restructuring schemes consider- ably burdened the result. Extraordinary expenses Outlook for Tile Business Segment: were incurred in the sum of Euro 3.1 million as a Improved Performance as a Result of result of both the rationalisation measures initiated Rationalisation Measures during the first half of the year in the area of pro- duction, and measures to reduce structural costs, Given the continued negative expectations for the which were passed in the second half of the year in construction industry in Germany, the Tile business the course of merging with the Bathroom and segment sees positive stimuli in foreign markets. Kitchen Division. Strains on the result will already The market synergies existing with the business be noticeably relieved, therefore, during the course segments Ceramic Sanitary Ware and Kitchen, as of the current financial year, 2003. well as Furniture and Fittings will facilitate an increase in international sales, making it quite real- Investments to Achieve Flexibility of istic to anticipate sales on a level with those se- Production Procedures cured in the previous financial year. The measures adopted to rationalise production Measures to improve technical configuration have and the schemes initiated to reduce structural costs been stepped up, as the flexibility of production will enable the first positive results to be reported procedures is extremely important, given the grow- again in the second half of 2003. A negative result ing complexity of the product range. must still, however, be anticipated for the year as a This is the area in which investments were essen- whole, as the expenses incurred for cost-cutting tially made, as well as in the construction of the measures and restructuring the Division as a new, raw-materials processing plant in Merzig, whole, will continue to exert a heavy burden on which was successfully completed and put into the Tile Business Segment in the year 2003.

29 Above: NewWave Glass: the new, short series of crystal products and NewWave Cutlery – both beautifully complement the tableware concept. Below: DUNE LINES, the feminine counterpart to NewWave: flowing softly and organically . T ABLEWARE

Preparation and arrangement, serving and enjoyment, that's the new HOME ELEMENTS concept, e.g. parmesan grater.

Sales Increase in Difficult Market sion's percentage return on sales rose from Environment 5 %, to 7 % in the year 2002. In addition to inten- sified market cultivation and a continuation of the The Tableware Division was able to successfully successful product policy, essential factors for this assert itself in the extremely difficult market success can be found in a further reduction of environment in 2002 and strengthen its market manufacturing costs as a result of rationalising position. Once again on this occasion, essential production and also in the stringent cost manage- growth stimuli came from the international ment of the Division's functions. markets, whereas the domestic market clearly receded. Tableware Division sales saw a slight Market Success Due to a rise of 1 % in the year 2002, bringing the total to Consistent Marketing Policy Euro 296.5 million. Foreign sales accounted for 70 % of total sales in the year under review, It would not have been possible to develop the having risen from 68 % in the previous financial Division's market position so successfully, without year. support from its powerful international marketing team, from the highly-motivated employees in Sustained Increase in Operating Result well-positioned marketing companies and sales agencies in all major markets and without a high An above-average improvement was seen in the degree of customer orientation. This not only operating result, which increased by 44 % to a to- applies to retail sector business, but in particular to tal of Euro 21.7 million. Consequently, the Divi- hotel business.

31 T ABLEWARE

For many years, Villeroy & Boch has viewed the The expansion course in the hotel increasingly difficult situation in the industry's and catering business and the systematic retail sector in many major markets with concern. We are meeting this challenge by systematically improvement of market competence in developing new points of sale. This is being effect- the area of gift articles and accessories ed by opening concession shops (shop in shop) and own stores, as well as by securing franchisees. In has developed these two segments into this way, it was again possible to counteract retail- important, high-yielding pillars of the sector erosion in the year 2002. Tableware Division. Hotel and Catering Business Continues Expansion Course series were extended further in the year 2002, creating innovative features and enjoying great A continuation of Villeroy & Boch's positive hotel demand in the hotel and catering sectors. and catering business trend was also recorded in the year under review. Having already achieved an Competence in the Market for Gift Articles 8 % sales increase in 2001, the hotel and catering team was able to secure a remarkable 9 % in the By extending its range, Villeroy & Boch was able year 2002, bringing the total to Euro 39.3 million. to further increase its competence in the area of These high-quality Villeroy & Boch products, gift articles and accessories. Particularly outstand- which were specially designed for this circle of ing sales successes were achieved by the Division customers, enjoyed a high level of market accept- with such products as, “Christmas around the ance throughout the world. world”, “Treats” and “Basilica”, which were spe- cially developed for Christmas trade. Innovation in Product Development Once again this year, the Division will focus its attentions on systematically strengthening this The Division-spanning concept of segmenting the product segment. market into “Classic”, “Metropolitan”, “Country” and “Easy” lifestyles was also consistently imple- Supply Chain Management and mented in the Tableware Division and provided Rationalisation: Important Success inspiration for product development in all product Factors for Logistics and Production fields. It was even possible to increase the success of the new launches for the urbane, puristic taste in The fulfilment of market requirements and custom- the “Metropolitan” segment, by introducing the er needs has absolute priority for the Tableware “NewWave”, “Dune” and “Palm” shapes to the Division. This principle has, therefore, resulted in ceramic sector and complementing them with chains of production processes at Villeroy & Boch, tastefully coordinated products in the glass and which are systematically customer oriented. cutlery sectors. Consequently, in the year 2002, the Division in- In order to build up its market position in the vested a total of Euro 1.9 million in IT systems for area of wedding-list business, important for the logistic planning and control processes and goods US market, Villeroy & Boch developed a “bridal management to improve supply-chain manage- range”, which was specially geared to American ment. taste and reported successful initial sales. Process improvement continues in the production The hotel and catering business also profited from sector. The very latest production plants ensure the innovative abilities of Villeroy & Boch's Prod- quality and competitiveness at central-European uct Development department. Following their suc- locations and increase the flexibility of production cessful launch, the “HotWave” and “HotPalm” processes.

32 T ABLEWARE

BLUE MEADOW; meadow grasses and flowers rendered with a delicate lightness in indigo blue; excellent matches for this series are KENSINGTON polished and the BLUE MEADOW glass series with its touch of romantic charm.

In 2002, the Division successfully concluded in- Using constant innovative ability in the vestment in the latest die-casting production plant development of new, marketable products, at its Torgau location (Saxony). As a result, jobs were secured for the long term at this location, as well as the latest manufacturing technolo- which is in a structurally-weak region. The new gy and methods of dealing with customers, technology makes it possible for Villeroy & Boch to automatically manufacture large production- the Division aims to achieve further growth runs of parts which are not rotationally symmetri- and increased earning power. cal, both cost-effectively and in excellent quality. As a result of its new ability to carry out serial production of these fashionable, superior designs and shapes, Villeroy & Boch has gained a clear cultivate major target markets. Our activities in competitive advantage. 2003 will again concentrate on optimising produc- tion processes by extending IT usage and on con- Increase in Earning Power tinuing product innovation to further strengthen Anticipated Once Again Villeroy & Boch's position as one of the world's leading lifestyle brands. Growth potential will be developed during the Despite the insecure general economic situation, financial year 2003, not only by rounding off the our primary goal is therefore to once again increase product range, but also by intensifying measures to the Division's earning power.

33 Steam cubicles are becoming increasingly fashionable and, as far as wellness products are concerned, it's simply impossible to think of a bathroom without them. Top: STEAM'IN, bottom: EyeLook. WELLNESS

After two years of development work, character- A further increase in the range of Villeroy & Boch ised by rapid growth, the financial year 2002 was products was seen in March at the “ISH” trade fair intentionally marked by measures to integrate pre- in Frankfurt, when steam showers, whirlpools and viously acquired companies. As a result of this shower partitions were presented, which similarly systematic consolidation, the Division has created contribute towards the growth of our market share. a sound basis for continued growth, both internal- ly and externally. Coverage of Wide Market Range Achieved

Growth Despite Unfavourable Today, Villeroy & Boch's Wellness Division is one Conditions of Europe's major suppliers of sanitary wellness products. In order to improve this position even The poor market situation in the construction in- further, we intend to be active in all market dustry in 2002 also led to a decline in sales figures segments. For this reason, we have launched a in the market for wellness products. second brand, in a market segment below that of The Division was, nevertheless, still able to achieve Villeroy & Boch, which offers a complete range real growth of 2.9 % and in so doing, able to of wellness products. This “Vita Viva” brand prove that its increased market share in major sales (Ucosan in the Benelux region) enables us to sectors was achieved at the competition's expense. supply products in a broader market spectrum, A distinct sales increase was also reported. Sales without having an adverse effect on the top- growth of almost 48 % was achieved, particularly quality Villeroy & Boch brand. as a result of acquiring “Acomo” in Belgium and “Villeroy & Boch Wellness Italia”, thus increasing Factory Specialisation to sales to a total of Euro 107.1 million. In the year Increase Productivity 2002 the operating result was increased to Euro 0.2 million, as compared with Euro -1.1 million in Owing to its numerous acquisitions, the Wellness the previous year. Division now has six production locations, in the Netherlands, Belgium, Italy, the Czech Republic, Acquisitions Increase Product Slovakia and Sweden. Measures initiated during Range Appeal the year under review to specialise these factories will be concluded during the current year, 2003. Effects arising from the integration of acquired As a result, productivity will be considerably im- companies made a considerable contribution to- proved. wards the Wellness Division's positive trend. In this case, the realised surge in growth can Increase in Investment Volume be attributed to a combination of the strong Villeroy & Boch brand and the numerous attrac- Investments in the sum of Euro 8.6 million (Euro tive wellness products obtained from our acquired 7.2 million in 2001) were made in the year 2002. companies, with which we have extended our These concentrated in particular on new products range. and on further increases in productivity and flexi- bility.

Since the technology's introduction in Innovation as a Decisive Factor for Success combination with "Quaryl® Unique", Innovation is, and remains, one of the decisive fac- a clear increase has been determined in tors for success, and the Wellness Division is no the sale of whirlpool systems. exception in this respect. As a result of take-overs,

35 WELLNESS

it was possible to considerably increase special- By offering its new, full-range collection ised knowledge, particularly in the areas of shower under the brand name Vita Viva (Ucosan partitions and steam showers. On the strength of this know-how and due to the extraordinary quali- in the Netherlands and Belgium), the ties of Quaryl¨ Ð the unique raw material for baths Wellness Division covers the great and shower trays Ð as well as unsurpassed whirl- pool technology, the Wellness Division secures the demand for products with an excellent position of an innovative leader on the wellness price-performance ratio in the market. medium-priced segment. Rise in Earnings Anticipated

No positive signs for market growth can be derived from the economic prospects for 2003. We are, aim to increase productivity by further measures to however, convinced that we shall succeed in specialise works, with the effect that an improve- increasing both sales and result by our own efforts, ment in performance can be expected. Following a owing to the many new, innovative products we consolidation phase, further acquisitions are to have launched onto the market. In addition, we promote the Wellness Division in future years.

Below is the Quaryl® bathtub, NEXUS. Villeroy & Boch's Wellness Division is the only manufacturer to develop a unique material which unites all the special comfort qualities of synthetic: Quaryl®.

36 As a result of using Quaryl® material, the transition between the free-standing AVEO bath and its egg-shaped panel is imperceptible. Where whirlpool systems are concerned, their mechanisms are located beneath this panel. A modular bathroom system with high-quality detailed solutions redefines rooms. Both round and straight elements can be arranged as desired, thus allowing a wide variety of different designs. PROJECT BUSINESS

Recognition After Only a Few Months

Initiated in the financial year 2002, the reorienta- tion of project business in an independent Project Business Division can now record its first concrete implementation successes. The path already cho- sen Ð namely that of offering the project business sector complete solutions for bathroom concepts, right through to the turn-key hand-over of property to the investor Ð is proving successful. A decisive factor here is the opportunity, created by establishment of the new Division, to use syn- ergy potential ensuing from the effective diversifi- cation strategy of the “single-source bathroom” and spanning all Villeroy & Boch Divisions. The strategy of grouping together products and serv- ices to provide an all-round range and convincing system solutions has been well received by deci- With its highly specialised team the Project Business Division sion makers in project business, such as architects, is directly addressing project-business decision-makers: investors, project developers, architects … planners, investors, project developers and oper- ators. Solutions exist, for example, for hotel bath- rooms, obstacle-free bathrooms in care homes, residential property meeting special demands for Villeroy & Boch supplying complete bathroom holidaymakers and senior citizens, high-quality concepts and tiled surfaces for the flats, apart- sport and leisure facilities, wellness areas etc. The ments and villas on this site, ready for turn-key structures and processes in international project hand-over to the investor. This project is being business are often extremely complex and repre- carried out on a conventional basis, using the serv- sent a great challenge for the newly-established ices of a qualified, specialised company as a sub- Project Business Division. On the other hand, contractor. The complex consists of approximately however, they provide the marketing opportunities 1,200 residential units, two hotels, wellness areas necessary for securing new orders. and appropriate infrastructure facilities. Prepara- tion work is also currently being carried out on First Important Projects Abroad in Progress other hotel projects, which are to be fitted with the new, modular prefabricated bathroom system. In “System business” – referring to full-range solu- these cases too, the prefabricated hotel bathrooms tions for large-scale projects, which are complete will be assembled and installed by qualified part- for turn-key hand-over Ð is based not only on ners from specialised companies. projects carried out conventionally with qualified subcontractors, but also on a newly-developed, System Business Provides New Potential prefabricated bathroom concept, with a modular structure. Both variants are designed in such a The response so far shows that system business is way that they can be used equally well in the new- opening up new potential for Villeroy & Boch. building sector and for renovation work in the Incoming orders totalling roughly Euro 10 million high-value project business sector. Initial projects are projected for the first year, but the result will are now being realised. A golf complex, for exam- be slightly negative, owing to investments made in ple, is currently being produced in Spain, with the new organisation.

39

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements

of Villeroy & Boch AG

41 CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2002

Assets

Appendix 31.12.2002 31.12.2001 Euro '000 Euro '000

Fixed assets 1

Goodwill 53,782 57,406

Other intangible assets 6,888 7,323

Property, plant and equipment 292,696 285,013

Financial assets 9,844 41,207

363,210 390,949

Current assets

Inventories 2 250,080 246,557

Accounts receivable from trading 3 131,420 135,970

Remaining accounts receivable and other assets 3 37,557 41,814

Marketable securities 4 65 385

Liquid assets 5 53,629 24,956

472,751 449,682

Deferred taxes 6 39,552 36,735

Deferred charges and prepaid expenses 7 3,469 3,513

878,982 880,879

42 CONSOLIDATED BALANCE SHEET AS OF 31 DECEMBER 2002

Liabilities and shareholders' equity

Appendix 31.12.2002 31.12.2001 Euro '000 Euro '000

Shareholders' equity 8

Capital subscribed 71,909 71,909

Capital surplus 193,587 193,587

Earnings reserves 101,267 103,465

Consolidated profit 10,031 9,446

376,794 378,407

Minority interests 9 2,750 2,650

Provisions and accrued liabilities

Provisions for pensions and similar obligations 10 193,954 192,444

Other provisions and accrued liabilities 11 53,140 59,043

247,094 251,487

Liabilities 12

Financial debts 40,198 37,383

Trade accounts payable 76,474 66,760

Other liabilities 105,440 116,237

222,112 220,380

Deferred taxes 6 26,837 27,392

Deferred charges 13 3,395 563

878,982 880,879

43 CONSOLIDATED PROFIT AND LOSS STATEMENT

1 January to 31 December 2002

Appendix 2002 2001 Euro '000 Euro '000

Sales 14 977,452 975,192

Costs of goods sold 15 - 591,029 - 576,765

Gross profit 386,423 398,427

Selling expenses, marketing and development costs 16 - 298,034 - 305,960

General and administrative expenses 17 - 53,636 - 53,029

Amortisation of goodwill 18 - 4,393 - 4,222

Other operating expense/income 19 - 6,465 - 8,851

Result from equity investment 20 3,152 617

Operating result (EBIT) 27,047 26,982

Net interest income 21 - 13,418 - 11,804

Result before taxes 13,629 15,178

Taxes on income 22 - 3,345 - 5,586

Net income 10,284 9,592

Minority interests 23 - 253 - 146

Consolidated result 10,031 9,446

Net earnings per ordinary share in Euro 24 0.35 0.32

Net earnings per preference share in Euro 24 0.40 0.37

44 CASH FLOW STATEMENT

2002 2001 in Euro '000 in Euro '000

Net income 10,284 9,592

Depreciation of fixed assets 60,872 59,885

Change in long-term provisions 1,412 2,023

Result from disposal of fixed assets - 1,549 - 1,208

Change in inventories, accounts receivable and other assets 9,837 5,772

Change in liabilities, short-term provisions and other liabilities 2,399 - 26,508

Taxes paid in business year - 10,582 - 12,547

Interest paid/collected in business year - 1,164 - 667

Other income/expense without effect on liquid assets - 473 3,651

Cash flow from operating activities 71,036 39,993

Investment in intangible and tangible fixed assets - 66,064 - 54,329

Investment in financial assets and payments for the acquisition of consolidated companies - 580 - 24,543

Deposits from disposals of fixed assets 33,253 2,003

Cash flow from investing activities - 33,391 - 76,869

Change in financial liability 5,567 - 6,385

Deposits from sale/payment for the acquisition of treasury stocks 159 244

Withholding tax paid - 819 - 689

Dividend payments - 14,199 - 14,503

Cash flow from financing - 9,292 - 21,333

Change in balance of funds 28,353 - 58,209

Balance of funds as of 1.1. 25,341 74,935

Changes ensuing from consolidated companies - 8,615

Change in balance of funds 28,353 - 58,209

Balance of funds as of 31.12. 53,694 25,341

The balance of funds includes liquid assets and short-term security investments.

45 STATEMENT OF SHAREHOLDERS’ EQUITY

Capital Capital Earnings Consolidat- Total share- Minority subscribed surplus reserve ed result holders’ equity interests in Euro ‘000 in Euro ‘000 in Euro ‘000 in Euro ‘000 in Euro ‘000 in Euro ‘000

As per 1.1.2001 71,909 193,587 106,619 14,185 386,300 4,473

Dividend -14,185 -14,185

Net income 9,446 9,446 146

Subsequent valuation IAS 39 -1,821 -1,821

Currency change -2,271 -2,271 6

Change in consolidated companies 904 904 -1,922

Other changes 34 34 -53

As per 31.12.2001/01.01.2002 71,909 193,587 103,465 9,446 378,407 2,650

Dividend -14,199 -14,199

Reclassification of prior-year result -4,753 4,753 0

Net income 10,031 10,031 253

Subsequent valuation IAS 39 -974 -974

Currency change 4,496 4,496 -85

Change in consolidated companies 0

Other changes 0 0 -967 0 -967 -68

As per 31.12.2002 71,909 193,587 101,267 10,031 376,794 2,750

46 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

General

The consolidated financial statements of Villeroy & Boch AG, Mettlach, have been prepared for the first time in accordance with the valid regulations of the International Accounting Standards Board (IASB), London, applying the interpretations of the Standard Interpretations Committee (SIC). In so doing, all IFRS accounting principles which are to be applied for the business year commencing 01.01.2002, have been considered. Furthermore, all requirements stipulated under ¤ 292a HGB (German Commercial Code) have been ful- filled. In this respect, the consolidated financial statements prepared in accordance with International Accounting Standards have a discharging effect. The requirements for fulfilling the discharging effect, which are defined under ¤ 292a HGB, are based on the German Accounting Standard No. 1 (DRS 1), published by the Deutscher Standardisierungsrat DRSC e.V. [German Standardisation Council]. The relief accorded under ¤ 264 subsection 3 HGB as regards auditing and disclosure has been made use of for Villeroy & Boch Creation GmbH, Mettlach. If attention is not drawn to the contrary, all amounts shown are in units of a thousand Euro (Euro '000).

Transition from HGB to IAS

Initial application of the regulations stipulated by the IASB was carried out in accordance with SIC-8, i.e. conversion was undertaken retroactively. Accordingly, adjustments to the accounting and valuation methods, which are necessary for initial application of IAS, are to be undertaken retroactively, as though balance sheets had always been prepared in accordance with IAS. Revaluation resulting from this adjust- ment on 1 January 2001 takes place without affecting operating result, being credited or charged to earn- ings reserves. When compared with the commercial accounting standards of 31.12.2000, shareholders' equity changed as follows (in Euro '000) as a consequence of the transition to IAS on 1 January 2001:

in Euro ‘000

Shareholders' equity according to HGB on 31.12.2000 335,680

Changes arising from differences in accounting and valuation:

goodwill 49,737

difference between straight-line/declining-balance method of depreciation 20,122

deferred taxes -15,150

valuation of financial instruments 1,921

valuation of inventories -5,825

special reserves for the year 42,815

valuation of pension provisions -29,969

reclassification of treasury stock shares -9,676

other adjustments 1,118

Shareholders' equity according to IAS on 1.1.2001 390,773

47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The essential differences listed are justified as follows:

-Capital consolidation ensues by setting off participation book values against the prorated shareholders' equity of the subsidiaries, revaluated in accordance with IAS principles. Initial consolidation was undertaken at the date of acquiring the respective participation. - The scheduled depreciation of tangible fixed assets was converted from the declining-balance to the straight-line method of depreciation. -Assets and liabilities arising from future income-tax relief and burdens are to be calculated in accord- ance with the balance-sheet oriented liabilities method, as stipulated under IAS 12 (Income Taxes), applying the tax rates relevant for future distributions. This also includes the duty to report deferred tax claims which ensue from offsetting tax loss carry forwards with expected future profits, in so far as their realisation is guaranteed with adequate certainty. -Leased tangible fixed assets are to be capitalised and the resulting liabilities set up as liabilities, in so far as the beneficial ownership of the assets is to be allocated to the respective company, in accordance with the allocation criteria stipulated under IAS 17 (Leases). - Pension provisions and similar obligations, formerly balanced in accordance with the going-concern- value procedure for tax purposes pursuant to ¤ 6a EStG [Income Tax Law], will be calculated in accord- ance with the pension rights present value method (Projected Unit Credit Method) in accordance with IAS 19 (Employee Benefits), taking into account future salary and pension increases. The interest share of the transfers will be shown in the financial result. - In accordance with IAS 39 (Financial Instruments: Recognition and Measurement) the derivative financial instruments employed, as well as the self-generated financial instruments are reported in the balance sheet as assets and debts. Depending on how the individual instruments are qualified, they will either be valuated at net original cost or fair value. In the event of there being any qualified security/ hedging arrangements, the fluctuation in value will be entered in shareholders’ equity without affecting operating result, if the necessary conditions are fulfilled.

In the Consolidated Profit and Loss Statement for the year ended 31 December 2001, conversion to IAS is essentially shown as follows:

in Euro ‘000

Net income according to HGB 22,469

Changes arising from differences in accounting and valuation:

amortisation of goodwill -4,222

special reserves for the year -9,297

other changes 642

Net income according to IAS 9,592

48 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

“Other changes” include effects arising from the change in depreciation of fixed assets, from other assets, pension provisions and other provisions, as well as changes in deferred taxes.

Consolidated Companies

In addition to Villeroy & Boch AG, the consolidated financial statements include 15 domestic (previous business year: 11) and 57 (previous business year: 54) foreign subsidiaries, in which Ð directly or indirect- ly Ð majority voting rights are held. Four real estate companies formed towards the end of the year, as well as four newly-formed companies Ð three of which in France (three file companies) and one in Spain (start-up activities in the project business sector) Ð have been included in the Consolidated Financial Statements for the first time. On the date of reporting, there are only insignificant influences on the structure of the Consolidated Balance Sheet and the Consolidated Profit and Loss Statement. One foreign subsidiary has been liquidated (final consolidation result Euro -0.175 million) and has thus been excluded from the consolidated companies. With the exception of a company in Spain, which was acquired towards the end of the year and whose annual financial statement documents had not been submitted by the time consolidated financial state- ments were prepared, all subsidiary companies have been included in the consolidated financial statements of Villeroy & Boch AG. The shares in this company will be reported in the balance sheet at net original cost. The effect of non-consolidation on the consolidated financial statements is insignificant. One (previous business year: two) company is reported in the balance sheet in accordance with the equity method. The shares in the voting rights of this company amount to 50 %. All shares in the Hungarian participation were sold in the business year 2002. A complete list of share ownership will follow separately and be deposited with the Commercial Register at Amtsgericht Saarbrücken, Franz-Josef-Röder-Str. 13, 66619 Saarbrücken, under HRB 3610, Reg. Merzig.

The following companies have been consolidated for the first time:

Reporting date Shares Cost value in Euro '000

V&B Asset Management Verwaltungsgesellschaft mbH 19.12.2002 100 % 25

Erste V&B Asset Management GmbH & Co. KG 19.12.2002 100 % 4

Zweite V&B Asset Management GmbH & Co. KG 19.12.2002 100 % 4

Dritte V&B Asset Management GmbH & Co.KG 19.12.2002 100 % 4

Proiberian S.r.L 17.10.2002 100 % 50

Villeroy & Boch Carreaux S.A.S 24.12.2001 100 % 8

Villeroy & Boch Sanitaire S.A.S. 24.12.2001 100 % 8

Villeroy & Boch Ventes S.A.S 24.12.2001 100 % 8

49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Consolidation Principles

The annual financial statements of the companies included in the Villeroy & Boch Group Consolidated Financial Statements are consolidated in accordance with the methods of accounting and valuation stipulated under IAS 27 (Consolidated Financial Statements and Accounting for Investments in Subsidiaries), which are uniform throughout the Group. The consolidated companies' balance sheet date corresponds to that of the parent company. Participations reported in the balance sheet using the equity method maintain their own principles of valuation; revaluation is dispensed with owing to the insignifi- cant influence of revaluation measures. Capital consolidation for the included companies is carried out in accordance with IAS 22 (Business Combinations). In this respect, the participation book values of the subsidiary companies at the time of their acquisition are offset against the newly-evaluated equity ratio allotted to them. Following the allocation of existing, hidden reserves and hidden burdens, the goodwill thus resulting is capitalised, and amortised with an effect on net income, using the straight-line method. In so doing, the period of amortisation relates to the economic life in each case. Sales, expenses and income, as well as accounts receivable and liabilities between the included companies are eliminated. Intermediate results in fixed assets and also inventories are eliminated, if they are not of secondary importance. Deferred taxation in accordance with IAS 12 (Income Taxes) is carried out on consolidation measures affecting net income, provided the varying tax expense is expected to balance itself in later business years.

Currency Translation

Taking individual company financial statements as a basis, all business transacted in foreign currency is reported at the rate applicable at the time of its initial entry. Valuation on the respective balance sheet date is carried out at the current rate. In accordance with IAS 21, the individual company balance sheets of the consolidated companies, which are prepared in foreign currency, are translated to Euro following the concept of functional currency. Companies which transact business independently as regards finance, commerce and organisation, are defined as a “foreign entity”. This applies to all companies of the Villeroy & Boch Group with the excep- tion of S.C. Mondial S.A, Lugoj Ð Romania. In the case of the aforementioned company group, assets and debts are translated to the spot rate on the balance sheet date and all items of the Profit and Loss Statement to average rates. Differences arising as a result of translating the financial statements of foreign subsidiary companies are treated as not affecting operating result and reported within the earnings reserves. If com- panies which were formerly consolidated leave the circle of consolidated companies, the translation differences which have been treated as not affecting operating result, are then reversed with an effect on result. If translation differences exist in comparison with the previous business year, these are offset against the earnings reserves. Owing to the great loss of purchasing power, the annual financial statements of the Romanian company S.C. Mondial S.A., Lugoj Ð which is included in the consolidation Ð are prepared giving due consideration to IAS 29 (Financial Reporting in Hyperinflationary Economies). In this case, valuation of non-monetary items is based on historical costs and historical production costs, while the currency of monetary items is translated at the spot rate valid on the balance sheet date.

50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Notes to Balance Sheet

1. Fixed Assets

Movement of fixed assets in the business year was as follows:

Intangible Property, Financial Total assets plant and assets equipment in Euro '000 in Euro '000 in Euro '000 in Euro '000

Accumulated cost values on 1.1.2002 (IAS) 80,554 921,069 42,520 1,044,143

Currency adjustment 18 -43 -14 -39

Adjustment of financial assets to market values, without affecting operating result 0 0 -1,368 -1,368

Changes in consolidated companies 0 0 -23 -23

Additions 2,588 63,476 580 66,644

Disposals -563 -29,706 -28,414 -58,683

Transfers 50 -50 0 0

Accumulated cost values on 31.12.2002 82,647 954,746 13,281 1,050,674

Accumulated depreciation on 1.1.2002 15,825 636,056 1,313 653,194

Currency adjustment 13 -125 0 -112

Changes in consolidated companies 0 0 0 0

Scheduled depreciation 6,414 52,334 152 58,900

Non-scheduled depreciation 0 0 1,972 1,972

Disposals -294 -26,196 0 -26,490

Write-up 0 0 0 0

Transfer 19 -19 0 0

Accumulated depreciation on 31.12.2002 21,977 662,050 3,437 687,464

Net book value on 31.12.2002 60,670 292,696 9,844 363,210

Net book value on 31.12.2001 64,729 285,013 41,207 390,949

51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.1. Intangible Assets Franchises, Goodwill Advances paid Total patents, licences on intangible and similar rights assets in Euro '000 in Euro '000 in Euro '000 in Euro '000

Accumulated cost values on 1.1.2002 14,419 65,891 244 80,554

Currency adjustment 18 0 0 18

Changes in consolidated companies 0 0 0 0

Additions 1,819 769 0 2,588

Disposals -319 0 -244 -563

Transfers 50 0 0 50

Accumulated cost values on 31.12.2002 15,987 66,660 0 82,647

Accumulated depreciation on 1.1.2002 7,340 8,485 0 15,825

Currency adjustment 13 0 0 13

Changes in consolidated companies 0 0 0 0

Scheduled amortisation 2,021 4,393 0 6,414

Disposals -294 0 0 -294

Write-ups 0 0 0 0

Transfers 19 0 0 19

Accumulated depreciation on 31.12.2002 9,099 12,878 0 21,977

Net book value on 31.12.2002 6,888 53,782 0 60,670

Net book value on 31.12.2001 7,079 57,406 244 64,729

Acquired intangible assets are calculated at original cost. They are reduced by scheduled amortisation carried out using the straight-line method, in accordance with their course of useful life. With the excep- tion of goodwill, useful life is mainly between three and five years Non-scheduled amortisation is carried out when the recoverable amount is below the net original cost or net cost of production. This was neither necessary in the business year under review, nor in the previous business year. Should the grounds for impairment amortisation undertaken in previous business years cease to exist on a permanent basis, an appropriate write-up will be undertaken. Goodwill is amortised as stipulated under IAS 22 on the basis of a useful life of 15 years. Negative good- will does not exist. The value of goodwill is regularly reviewed. In the event of a sustained reduction in value being ascertained, a corresponding amortisation will be undertaken. Amortisation on intangible assets is included in the Profit and Loss Statement, essentially under general and administrative expenses. As in the previous business year, no fundamental restraints exist on ownership or disposal of intangible assets. Intangible assets constructed by the company for its own use are not capitalised.

52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.2. Property, plant and equipment

Movement of property, plant and equipment in the business year was as follows:

Land and Technical Other Advance pay- Total buildings equipment, equipment, ments and plant plant and fixtures, and machinery machinery fittings and in process of equipment construction in Euro '000 in Euro '000 in Euro '000 in Euro '000 in Euro '000

Accumulated cost values on 1.1.2002 328,040 437,969 145,686 9,374 921,069

Currency adjustment 706 1,595 -2,394 50 -43

Changes in consolidated companies 0 0 0 0 0

Additions 7,726 19,854 10,684 25,212 63,476

Disposals -4,615 -16,399 -8,246 -446 -29,706

Transfers 314 4,517 788 -5,669 -50

Accumulated cost values on 31.12.2002 332,171 447,536 146,518 28,521 954,746

Accumulated depreciation on 1.1.2002 199,684 328,167 108,205 0 636,056

Currency adjustment 154 1,511 -1,790 0 -125

Changes in consolidated companies 0 0 0 0 0

Scheduled depreciation 8,432 29,753 14,149 0 52,334

Disposals -3,782 -15,219 -7,195 0 -26,196

Write-ups 0 0 0 0 0

Transfers -63 152 -108 0 -19

Accumulated depreciation on 31.12.2002 204,425 344,364 113,261 0 662,050

Net book value on 31.12.2002 127,746 103,172 33,257 28,521 292,696

Net book value on 31.12.2001 128,356 109,802 37,481 9,374 285,013

Property, plant and equipment are reported in the balance sheet at original cost or cost of production, minus scheduled depreciation. Subsequent original costs are capitalised. There are no restraints on rights of disposal for property, plant and equipment. Neither are there any forms of security negotiated for obligations on property, plant and equipment. Where public grants and subsidies for acquiring or producing assets (investment grants/subsidies) are concerned, original costs and cost of production are reduced by the amount of the grant, in accordance with IAS 20, in so far as they can be allocated to the individual assets. If this is not possible, they are accrued and then appropriated with effect on the current-period result, depending on the degree to which they have been performed.

53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Tangible fixed assets are depreciated using the straight-line method, in accordance with their course of useful life. The following periods of useful life are used as a uniform basis throughout the Group:

Useful life Class of asset (in years)

Buildings (predominantly 20 years) 20 - 50

Plant facilities 10 - 20

Kilns 5 - 10

Technical equipment and machinery 6 - 12

Vehicles 4 - 8

EDP systems 3 - 5

Other fixtures, fittings and equipment 3 - 10

Low-value capital assets are written-off completely in the year of acquisition. If necessary, non-scheduled depreciation, as stipulated under IAS 36, will take place, which will be reversed should the grounds for depreciation cease to exist on a permanent basis at a later date. In the year under review, as in the previous business year, no non-scheduled depreciation (Impairment) of property, plant and equipment took place. If fixed assets are rented or leased, and if beneficial ownership – as stated under IAS 17 (“finance lease”) Ð is held by the respective Group company, the aforementioned fixed assets are allocated to the lessee and in consequence, capitalised at their fair value or lower cash value. Depreciation is carried out on the basis of the appropriate useful life or, if shorter, the term of the leasing agreement. The appropriate financial obligations arising from the future leasing instalments are set up as a liability.

54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Capitalised leased assets have a total value of Euro 6.650 million (previous business year: Euro 4.479 mil- lion) and can be subdivided as follows:

31.12.2002 31.12.2001

Land 4,162 3,408

Buildings 1,804 -

Machinery 684 1,071

Total 6,650 4,479

Obligations arising from finance leasing and operating leasing relationships are due for payment in the subsequent years as follows:

Up to 1 year 1 to 5 years More than 5 years in Euro '000 in Euro '000 in Euro '000

Finance Leasing

Leasing payments to be paid in future 2,558 1,482 2,100

Discounting -230 -242 -763

Cash value 2,328 1,240 1,337

Operating Leasing

Leasing payments to be paid in future 13,053 24,345 3,989

55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.3. Financial Assets

Movement in financial assets in the business year was as follows:

Shares in: affiliated associated other Security Loans Total companies undertakings investments investments in Euro '000 in Euro '000 in Euro '000 in Euro '000 in Euro '000 in Euro '000

Accumulated cost values on 1.1.2002 23 1,409 8 37,864 3,216 42,520

Currency adjustment 0 44 0 0 -58 -14

Adjustment of financial assets to market values, without affecting operating result 0 0 0 -1,368 0 -1,368

Changes in consolidated companies -23 0 0 0 0 -23

Additions 107 0 0 21 452 580

Disposals 0 -1,185 0 -26,944 -285 -28,414

Transfers 0 0 6 0 -6 0

Accumulated cost values on 31.12.2002 107 268 14 9,573 3,319 13,281

Accumulated depreciation on 1.1.2002 000879 434 1,313

Currency adjustment 0 0 0 0 0 0

Changes in consolidated companies 0 0 0 0 0 0

Scheduled depreciation 0 0 0 0 152 152

Non-scheduled depreciation 0 0 0 1,972 0 1,972

Disposals 0 0 0 0 0 0

Write-ups 0 0 0 0 0 0

Accumulated depreciation on 31.12.2002 0002,851 586 3,437

Net book value on 31.12.2002 107 268 14 6,722 2,733 9,844

Net book value on 31.12.2001 23 1,409 8 36,985 2,782 41,207

Depending on how they are qualified, financial assets are to be valuated at net original cost or market value. Financial assets qualified as available for sale are always to be calculated at market value. As the financial assets concerned here are essentially shares in listed companies, the market value is the equivalent of stock-exchange value. Changes in market value are taken into account in shareholders' equity without affecting result. Permanent impairments determined by means of an impairment test in accordance with IAS 39 are taken into account with an effect on result.

56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

In so far as a market value cannot be reliably determined, valuation is carried out on the basis of original cost and, if necessary, reduced by the required valuation reserves. This is the case for shares in non-con- solidated affiliated companies and participations. If not of secondary importance, shares in associated undertakings are balanced in accordance with the equity method. Owing to their qualification as credits extended by the company, loans are valuated at net original cost. At the start of the year the bonds, shares and investment fund certificates held in a security-based invest- ment fund (special purpose entity - SPE) set up by Villeroy & Boch AG within security investments, were balanced. The bonds contained in this fund were sold in the second half of the year, after the reversal of the fund. This essentially resulted in the clear reduction of Euro 30.263 million in the “Security Investments” item. In the net interest income, a special depreciation of the shares held at the end of the year (IAS 39.117 Ð Impairment), in the sum of Euro 1.972 million, is taken into account with an effect on net income (previous year: Euro 0.85 million). Moreover, changes in market value not affecting net income, totalling Euro -1.368 million, are accounted for in the earnings reserves.

2. Inventories

31.12.2002 31.12.2001 in Euro '000 in Euro '000

Raw materials and supplies 40,045 40,044

Work-in-process 33,427 33,301

Finished goods 176,536 173,041

Advance payments 72 171

250,080 246,557

In the case of inventories, raw materials and supplies, as well as merchandise are valuated at original cost. Goods are valuated at cost of production. In this connection, the lowest of the amounts on the balance sheet date for either original cost or net value on sale is the one which is taken into account. Net value on sale is calculated as the sales revenues which are expected to be recovered, minus any costs incurred up to the time of sale. In accordance with IAS 2, cost of production includes the directly allocable unit costs (direct material and labour) and the overhead expenses which are to be allocated to the production process. Costs of financing are not taken into account. Write-downs are undertaken to an appropriate and adequate extent for inven- tory risks ensuing from the period of storage and diminished usability. Inventories existing on the balance sheet date are reported at the lower net value on sale.

57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Inventories are divided between the individual business segments as follows: 31.12.2002 31.12.2001 in Euro '000 in Euro '000

Tiles 88,455 92,807

Bathroom and Kitchen 66,309 62,373

Tableware 76,597 75,300

Wellness 18,719 16,077

250,080 246,557

There are no restraints on ownership or disposal.

3. Accounts receivable and other assets of which due of which due after more after more 31.12.2002 than 1 year 31.12.2001 than 1 year in Euro '000 in Euro '000 in Euro '000 in Euro '000

Accounts receivable from trading 131,420 - 135,970 -

Remaining accounts

accounts due from associated undertakings and other Group companies 500 - 206 -

Other assets: 37,057 2,137 41,608 556

accounts due from tax refunds 18,782 417 23,400 - - thereof income tax (9,657) (417) (13,453) (-) - thereof other taxes (9,125) (-) (9,947) (-)

Remaining other assets 18,275 1,720 18,208 556

37,557 2,137 41,814 556

168,977 2,137 177,784 556

Accounts receivable from trading are balanced at par value. Where default or transfer risks exist, debts are calculated at the lower realisable amount. This is reflected in the form of implemented individual valuation reserves and bad-debt allowances. In the business year under review, valuation reserves were formed in the sum of Euro 2.843 million (previous business year: Euro 2.574 million). The remaining accounts are balanced at par value. In so far as default risks or other risks exist, adequate valuation reserves have been formed. As in the previous business year, no restraints exist on ownership or disposal. Included in the item “Remaining Other Assets” are accounts receivable from the sale of the participation in Burton-Apta Kft, Hungary, accounts receivable from the market valuation of the derivative financial instruments, accounts receivable due from suppliers, creditors with debit balances and also a multitude of individual cases involving a value of less than Euro 0.5 million.

58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4. Marketable Securities

The market values of the reported marketable securities, in the sum of Euro 0.65 million (previous business year: Euro 0.385 million), are equivalent to the reported book values. The securities concerned are market- able and short-term and are allocated to the “available for sale” category.

5. Liquid Assets 31.12.2002 31.12.2001 in Euro '000 in Euro '000

Cheques and cash on hand 1,892 6,415

Cash at banks 51,737 18,541

53,629 24,956

Cash on hand and at banks is balanced at par value. The change in cash at banks is essentially marked by the sale of bonds in the former security-based investment fund and low level of netting out. Accounts receivable due from banks and liabilities due to banks are reported as having been netted out in the sum of Euro 6.864 million (previous business year: Euro 29.401 million), for which there are offsetting terms or the intention of net settlement (IAS 32.70).

6. Deferred Taxes

Deferred tax assets and liabilities are balanced in accordance with IAS 12 (Income Taxes). Deferred taxes consequently result from various valuations of the book values reported in the consolidated balance sheet and the valuations of assets and debts calculated for tax purposes, which will be offset again in the future. Deferred taxes concern the following balance sheet items:

Deferred tax assets Deferred tax liabilities 31.12.2002 31.12.2001 31.12.2002 31.12.2001 in Euro '000 in Euro '000 in Euro '000 in Euro '000

Intangible fixed assets 253 0 75 24

Property, plant and equipment 3,556 267 13,254 12,832

Financial assets 1,581 762 0 93

Inventories 8,406 7,897 89 184

Remaining accounts receivable, other assets, short-term security investments 865 -538 971 -83

Special tax items 0 0 12,299 14,027

Accruals/provisions 18,719 20,012 149 243

Liabilities 950 994 0 72

Accumulated deficits 5,222 7,341 0 0

Balance sheet items 39,552 36,735 26,837 27,392

59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Deferred taxes in the sum of Euro -0.366 million (previous business year: Euro 1.042 million) have been absorbed in shareholders' equity without affecting operating result. While the accumulated domestic deficits can be carried forward without limitation, time limitations, specific to the respective country often apply to accumulated foreign deficits. The latter have been appropriately taken into account in the valuation. Potential tax savings owing to as yet unused tax losses totalling Euro 16.659 million (previous business year: Euro 16.482 million ) have not been capitalised.

7. Deferred Charges and Prepaid Expenses

Deferred charges and prepaid expenses include the usual deferrals.

8. Shareholders' Equity

The movement of shareholders' equity is presented separately in the transition to shareholders' equity. Consolidated shareholders' equity includes: - capital subscribed, Villeroy & Boch AG capital surplus and earnings reserves - earnings reserves of consolidated companies, provided since belonging to the Group - reduction of shareholders' equity by Villeroy & Boch AG's treasury stock and - effects of consolidation measures.

8.1. Capital Subscribed

Share capital is divided into 14,044,800 individual ordinary-share certificates and 14,044,800 nonvoting individual preference-share certificates, each having a calculated share in the share capital of Euro 2.56. The ordinary shares and preference shares are in the name of the holder and share capital is divided into equal numbers of each share. The company's share capital amounts to Euro 71,909,376 (previous business year: Euro 71,909,376)

8.2. Capital Surplus

As in the previous business year, capital surplus amounts to Euro 193.587 million.

8.3. Earnings Reserves

Other Group earnings reserves, in the sum of Euro 101.267 million (previous business year: Euro 103.465 million), include those of Villeroy & Boch AG and the proportional profits of the consolidated subsidiaries Ð produced since belonging to the Group. In 2002 there was no appropriation of earnings to the earnings reserve at Villeroy & Boch AG. In addition, this item includes consolidation measures, currency influences and also treasury stock held by Villeroy & Boch AG in the sum of Euro 9.273 million (previous business year: Euro 9.432 million). Treasury stock totalling a sum of Euro 0.159 million was sold to executive staff within the scope of a stock option programme.

60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

8.4. Stock Option Plan:

In accordance with a resolution passed at the General Meeting of Shareholders on 25 June 1999, a total of 1,058,023 (3.77 % of share capital) no-par individual preference-share certificates were acquired in the business year 2000. They represent a proportionate share capital of Euro 2,708,539.00. A total of 78,113 shares have been sold to executive staff of Villeroy & Boch AG and its subsidiary com- panies during the last three years, within the scope of a stock option programme. The following table shows the tranches issued in the respective years.

Share options Proportion of share capital Business year Persons Options Shares in % in Euro Strike price

2000 36 304,029 35,548 0.13 91,003 10.25

2001 22 224,080 25,755 0.10 65,933 12.23

2002 17 145,368 16,810 0.06 43,034 10.58

673,477 78,113

Revenue from the sale in 2002 totalled Euro 0.178 million (previous business year: Euro 0.315 million). Management Board members had to acquire one share from the Villeroy & Boch portfolio for every nine warrants, and other executive staff had to acquire one share for every eight warrants. The shares are to be kept for the entire term of the option. Share options cannot be exercised until at least three years after their issue. A condition is that the share price has increased by at least 20 % since the time of issue and is valued at more than Euro 12.00. When options are exercised, the purchase price for the total share options issued to date in the sum of Euro 10.25/share (1st tranche 2000), Euro 12.23/share (2nd tranche 2001) and Euro 10.58/share (3rd tranche 2002) will exceed the original costs (Euro 9.46) for the shares, with the effect that Villeroy & Boch AG will not incur any expense. The total shares required when the share option is exercised can be covered by the company’s own portfolio.

9. Minority Interests

Third-party shares in the shareholders' equity of consolidated subsidiary companies is shown under the item “Minority Interests”. On the balance sheet date the latter total Euro 2.750 million (previous business year: Euro 2.650 million) and originate essentially from Wellness Division companies. Minority interests are calculated on the basis of the shareholders’ equity reported in the balance sheets of the companies concerned.

61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

10. Provisions for Pensions and Similar Obligations

The provisions for pensions and similar obligations include old-age protection for Villeroy & Boch Group employees, the overwhelming majority of whom are resident in the European Economic Area. Depending on the legal, economic and fiscal conditions which apply in the respective country, provision valuation is carried out using IAS 19 and the Projected Unit Credit Method. The various old-age protection systems are based, as a rule, on the employee's length of employment and remuneration. The schemes concerned are predominantly performance-oriented pension organisations. Valuation of pension obligations is carried out using an interest rate for accounting purposes in the sum of 6.0 % and a wage and salary trend of 2.0 %, 3.0 % and 3.5 %. In the case of employee pension-scheme settlements, calculations are carried out on the basis of a retirement pension trend of 1.5 %, 2.0 % and 3.0 % and an employee turnover specific to the company. Valuation is carried out on the basis of mortali- ty tables which are specific to the country. The actuarial profits/losses are entered using the 10 % margin- of-fluctuation rule. An expected yield of 4 % was assumed when determining the targeted assets. Provisions for pensions and similar obligations are made up as follows on the balance sheet date:

31.12.2002 31.12.2001 in Euro '000 in Euro '000

Provisions for pensions 183,648 182,822

Provisions for similar obligations 10,306 9,622

As per 31.12. 193,954 192,444

The provisions for similar obligations take into account future expenses for anniversaries and for part-time employment before retirement age.

In the business year under review, pension expenses were made up as follows:

31.12.2002 31.12.2001 in Euro '000 in Euro '000

Expense for period of service 3,782 3,884

Yield from targeted assets -375 -360

Interest expense 10,007 9,768

Sum of entered amounts affecting operating result 13,414 13,292

The pension expenses shown are included in the cost of sales, selling expenses and general and adminis- trative expenses Ð the proportionate interest expense is appropriately shown in the financial results.

62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The movement and structure of the pension-right present values and also of the targeted assets are as follows: 31.12.2002 31.12.2001 in Euro '000 in Euro '000

Present value of pension rights

As per 01.01. 192,558 190,368

Interest expense 10,007 9,768

Expense for period of service 3,782 3,884

Annuity payments -11,468 -11,462

Actuarial losses/profits 0 0

As per 31.12. 194,879 192,558

Change in targeted assets

As per 01.01. 9,736 8,995

Yield from targeted assets 375 360

Employer contributions 1,120 381

As per 31.12. 11,231 9,736

Financing situation

As per 31.12. 186,554 185,699

Actuarial losses not yet taken into account -2,906 -2,877

Provision as per 31.12. 183,648 182,822

63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

11. Other Provisions

Provisions for: Tax Personnel Guarantee Restruc- Other Total commitments sector obligations turing in Euro '000 in Euro '000 in Euro '000 in Euro '000 in Euro '000 in Euro '000

As per 01.01.2002 11,264 6,850 8,669 8,572 23,688 59,043

Currency -45 -42 -27 45 -69

Consumption -7,954 -4,577 -1,422 -3,770 -6,468 -24,191

Reversal -452 -346 -902 -968 -1,848 -4,516

Allocation 2,055 7,517 3,199 1,473 8,629 22,873

Transfer 0 0 0 0 0 0

Change in consolidated companies 0 0 0 0 0 0

As per 31.12.2002 4,868 9,402 9,517 5,307 24,046 53,140

Of which due within 1 year 4,868 7,314 6,645 459 8,140 27,426

Provisions are set up in accordance with IAS 37 for legal or de facto commitments to third parties, where the outflow of funds for settling the existing commitment must be probable and reliably estimable. Valuation is carried out at the future settlement amount. Discounting is undertaken where necessary. In addition to severance payments owing to personnel layoffs, provisions for the personnel sector also show outstanding management-bonus payments. Provisions for restructuring take into account measures for restructuring the Tile Division and that of Bathroom and Kitchen. Other provisions essentially include provisions for environmental protection and re-cultivation, the risks of lost lawsuits and also a multitude of individual cases.

64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

12. Liabilities

Liabilities are always calculated at the amount repayable. Interest in arrears has been accounted for in this connection. As in the previous business year, liabilities are mainly due within a period of one year.

Total Thereof with a remaining term of Total Thereof with a remaining up to 1 1 to 5 more than term of 31.12.2002 year years 5 years 31.12.2001 up to 1 year in Euro '000 in Euro '000 in Euro '000 in Euro '000 in Euro '000 in Euro '000

Liabilities

Financial Debts

Liabilities due to banks 31,361 22,570 8,712 79 31,081 31,081

Notes payable 3,932 3,932 - - 3,899 3,899

Liabilities from finance leasing 4,905 2,328 1,240 1,337 2,403 787

40,198 28,830 9,952 1,416 37,383 35,767

Trade accounts payable 76,474 76,474 - - 66,760 66,760

Other liabilities:

Advances received on purchase orders 693 693 - - 793 793

Payroll accounting 33,293 33,293 - - 38,732 38,732

Bonuses and rebates 40,442 40,442 - - 40,358 40,358

Tax liabilities 10,799 10,477 322 - 10,199 10,199 - thereof for income taxes (1,351) (1,029) (322) (-) (2,296) (2,296) - thereof for other taxes (9,448) (9,448) (-) (-) (7,903) (7,903)

Other liabilities 20,213 13,266 3,379 3,568 26,155 24,831

105,440 98,171 3,701 3,568 116,237 114,913

222,112 203,475 13,653 4,984 220,380 217,440

65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Other liabilities essentially include liabilities due to shareholders, liabilities ensuing from the acquisition of shareholders’ shares, as well as customers with credit balances and also a multitude of individual items involving a value of less than Euro 0.5 million. In the case of liabilities due to banks, collateral is provided in the form of a mortgage lien in the sum of Euro 0.213 million (previous business year: Euro 0.292 million). There are no provisions of collateral by way of other liens.

13. Deferred Charges and Prepaid Expenses

The deferred charges essentially include investment subsidies in Romania, Italy and Germany, which will be appropriated according to the degree of performance.

Notes to Profit and Loss Statement

14. Sales

Sales are entered when deliveries or services that are due have been performed and the price risk has been passed to the purchaser. Sales (net) are made up as follows:

2002 2002 2002 Domestic Foreign Total Euro million Euro million Euro million

Tiles 102.7 165.9 268.6

Bathroom and Kitchen 91.8 213.5 305.3

Tableware 89.2 207.3 296.5

Wellness 12.6 94.5 107.1

296.3 681.2 977.5

2001 2001 2001 Domestic Foreign Total Euro million Euro million Euro million

Tiles 118.3 180.3 298.6

Bathroom and Kitchen 107.1 202.8 309.9

Tableware 92.9 201.4 294.3

Wellness 12.4 60.0 72.4

330.7 644.5 975.2

The movement in regional sales is presented within the scope of segment reporting.

66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

15. Costs of Goods Sold

Costs of goods sold include the costs of products sold, as well as the costs of merchandise sold. In accord- ance with IAS 2, not only directly allocable costs such as material, personnel and energy costs are taken into account in this connection, but also overhead expenses and allocable depreciation on production plant.

16. Selling Expenses, Marketing and Development Costs

This item includes the costs of marketing and distribution, of the field sales force, advertising and logistic costs, license expenses and the costs of research and development. Expenses in the sum of Euro 13.238 million (previous business year: Euro 14.007 million) are included for research and development.

The latter are divided as follows between the individual Divisions:

2002 2001 in Euro '000 in Euro '000

Tiles 3,919 4,021

Bathroom and Kitchen 5,848 5,982

Tableware 2,310 1,861

Wellness 1,161 2,143

13,238 14,007

Development costs are not capitalised.

17. General and Administrative Expenses

General and administrative expenses include the personnel costs and cost of materials incurred in the management and administrative offices.

67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

18. Amortisation of Goodwill

Amortisation of goodwill is made up as follows for each Division:

2002 2001 in Euro '000 in Euro '000

Tiles 844 844

Bathroom and Kitchen 2,189 2,189

Tableware --

Wellness 1,360 1,189

4,393 4,222

The amortisation of goodwill resulting from the acquisition of consolidated companies is carried out regu- larly over a period of 15 years. When assessing useful life, strategic criteria were decisive, as were others which specifically take into account the cash flow attained by the acquired companies. In the case of addi- tions arriving during the course of the year, amortisation is taken into account pro rata temporis. As in the previous business year, it was not necessary to carry out amortisation due to an impairment test.

19. Other Operating Income/Expenses

Other operating income and other operating expenses are presented netted out in this item. Included in the other operating income are essentially exchange profits and income ensuing from the disposal of assets. Also included are income from the reversal of allowances and income from the reversal of provisions no longer required. Included in the other operating expenses are essentially exchange losses, expenses for the current restruc- turing of the Bathroom and Kitchen and Tile Divisions, expenses ensuing from the transfer of allowances for doubtful accounts and expenses ensuing from the disposal of fixed assets.

20. Equity Investments Result

The equity investments result in the Villeroy & Boch Group includes income from equity investments in associated undertakings in the sum of Euro 3.152 million (previous business year: Euro 0.617 million). This includes revenue from the sale of the participation in Burton-Apta Kft., Hungary, in the sum of Euro 2.967 million, including a dividend of Euro 0.152 million.

68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

21. Net Interest Income

2002 2001 in Euro '000 in Euro '000

Other interest and similar income 3,562 7,441

Interest and similar expenses -6,698 -9,344

Interest share in the change in provisions for pensions and similar obligations -10,282 -9,901

-13,418 -11,804

Cost of debt is entered with an effect on expenses in the year of its origin. Included in the interest expense is Euro 0.516 million (previous business year: Euro 0.327 million) as a proportionate interest share of the leasing instalments arising from the finance leasing agreements, entered in accordance with IAS 17 (Leases).

22. Taxes on Income

Taxes on income which are paid and due in the individual countries, as well as deferred taxation are shown as taxes on income and earnings. German companies in the Villeroy & Boch Group are subject to an aver- age municipal trade tax on income, amounting to roughly 15 % of the trading profit, which is deductible when determining corporate income tax. The rate of corporate income tax is 25 %, plus a reunification charge of 5.5 % on corporate income tax. The determination of deferred taxes is based on tax rates expected in the individual countries at the time of realisation. These tax rates are always based on the legal regulations applying or passed on the balance sheet date.

69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Foreign income taxes are calculated on the basis of valid laws and orders in the individual countries. The applied income-tax rates for foreign companies vary from 10.8 % to 41.0 %.

2002 2001 in Euro '000 in Euro '000

Taxes paid or due +7,083 +8,803

thereof domestic (-21) (+3,070) thereof foreign (+7,105) (+5,735)

Deferred taxes -3,738 -3,217

Taxes on income +3,345 +5,586

The effective rate of tax is 24.54 %. The transition to the German rate of income tax, which totalled 37.7 % in the year 2002, is as follows:

Transition from the expected to the actual tax expense: 2002 2001 in Euro '000 in Euro '000

Result before tax on income 13,629 15,178

Expected tax on income (EBT x tax rate of 37.7 %) 5,138 5,722

Differences arising from foreign tax rates -3,717 -2,675

Tax effects arising from:

Non-taxable earnings -162 -120

Expenses disallowable against tax 869 1,114

Amortisation of goodwill 1,656 1,592

Tax effect owing to companies with a negative consolidated contribution 273 325

Other variances -712 -372

Actual expense of taxes on income 3,345 5,586

Actual tax rate in % 24.54 % 36.80 %

70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The transition of deferred tax assets and liabilities in the balance sheet to the deferred taxes shown in the Profit and Loss Statement is presented as follows:

2002 2001 in Euro '000 in Euro '000

Change in deferred tax assets in accordance with balance sheet 2,817 1,063

Change in deferred tax liabilities in accordance with balance sheet 555 3,196

Change in deferred tax assets and liabilities formed without affecting operating result 366 -1,042

Deferred taxes in accordance with Profit and Loss Statement 3,738 3,217

23. Minority Interests

Third-party shares in the result, in the sum of Euro -0.253 million (previous business year: Euro -0.146 mil- lion), essentially include the minority interests in the Czech company Vagnerplast spol. s.r.o., Unhost and in the Belgian company Acomo Belgium N.V..

24. Net Earnings per Share

Net earnings per share result from dividing the consolidated net income by a weighted number of issued shares, and must be stated for each class of share.

Ordinary shares 2002 2001

Number of individual share certificates issued 14,044,800 14,044,800

Proportionate consolidated net income (in Euro '000) 4,858 4,559

Net earnings per share (in Euro) 0.35 0.32

Preference shares

Number of individual share certificates issued 13,064,890 13,048,080

Proportionate consolidated net income (in Euro '000) 5,173 4,887

Net earnings per share (in Euro) 0.40 0.37

These net earnings per share relate to a ratio determined in accordance with IAS 33 (Earnings per Share). A share dilution effect did not exist either in the year under review, or in the previous business year. For the ordinary shares a weighted number of 14,044,800 shares was taken as a basis for the calculation. The treasury stock portfolio was not taken into consideration for the preference shares.

71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

25. Depreciation and Amortisation

Depreciation and amortisation in the business year was made up as follows:

2002 2001 in Euro '000 in Euro '000

Scheduled depreciation of property, plant, equipment and amortisation of intangible assets, including goodwill 58,748 58,887

Depreciation of financial assets 2,124 998

60,872 59,885

In connection with valuating the shares held, depreciation was carried out in the business years 2001 and 2002, in accordance with IAS 39, on the lower recoverable value in the sum of Euro 1.972 million (previous business year: Euro 0.850 million). The expense is included in net interest income.

26. Cost of Materials

The following costs of materials are included in the costs of goods sold:

2002 2001 in Euro '000 in Euro '000

Cost of raw materials and supplies (including primary products) 167,588 148,190

Cost of purchased goods 138,126 139,153

305,714 287,343

Cost of purchased services 42,177 46,766

347,891 334,109

27. Personnel Expenses

Personnel expenses are made up as follows:

2002 2001 in Euro '000 in Euro '000

Wages and salaries 286,944 271,935

Social security, pension and other benefit costs 71,259 70,087

thereof for pensions (7,839) (6,904)

358,203 342,022

The interest share, in the sum of Euro 10.007 million (previous business year: Euro 9.768 million), included in the allocation to pension provisions, is shown in the net interest income; the costs of retire- ment benefits are reduced by these amounts.

72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Average number of persons employed:

Number of employees 2002 2001

Wage earners 6,648 6,523

Salaried employees 4,286 4,310

10,934 10,833

Of the entire workforce, 4,021 persons (previous business year: 4,003) are employed in Germany and 6,913 (previous business year: 6,830) abroad.

Employees According to Division: 2002 2001

Tiles 2,314 2,480

Bathroom and Kitchen 4,150 4,095

Tableware 3,174 3,177

Wellness 870 658

Other 426 423

10,934 10,833

28. Other Taxes

Other taxes total Euro 6.548 million (previous business year: Euro 6.218 million). These are essentially taxes dependent on assets.

29. Notes to Cash Flow Statement

In accordance with IAS 7 (Cash Flow Statement) the Cash Flow Statement shows changes in the financial resources of the Villeroy & Boch Group in the course of the year under review. In so doing, the effects of acquisitions have been eliminated. Adifference is made between cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. The balance of funds includes liquid assets and short-term security investments.

73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

30. Notes to Segment Reporting

Segment reporting is prepared in accordance with IAS 14 (Segment Reporting). The latter states that segmentation can follow the Group's internal control and reporting. This is reflected in the product groups and regions presented. The product-oriented delimitation of these segments also ensues from the different production processes, sales/distribution channels and methods, which are in turn sub-divided into the four divisions: Tile, Bathroom and Kitchen, Tableware and Wellness. The segments produce and/or market the following products:

Tiles

Non-vitreous and glazed/unglazed vitreous wall and floor tiles; tiles and natural stone purchased from external companies.

Bathroom and Kitchen

Ceramic sanitary ware, ceramic kitchen sinks, bathroom furniture, fittings and technical accessories; bathroom furniture, bathroom accessories, kitchen fittings and technical accessories purchased from external companies

Tableware

Tableware services made of faience, vitreous porcelain, fine Vilbo china and bone china, gift articles made of ceramic and glass, as well as lead-crystal drinking glasses; tableware, cutlery and silverware, gift articles made of ceramic and glass, lead-crystal drinking glasses, table linen, accessories for the well-laid table and home furniture purchased from external companies

Wellness

Baths, shower trays, whirlpools. shower partitions, shower cubicles and steam cubicles

The segment data is determined in accordance with the balance-sheet valuations and methods of valuation in the underlying consolidated financial statements. The asset and debt items reported for the segments correspond with the expenses and income. Asset and debt items, expenses and earnings are always directly allocated to the segments. The assets and debts, expenses and earnings of the central administrative and service sphere are allocated to the operating segments with the aid of keys. Segment-spanning business is of secondary importance and is dealt with as for outside third parties. The segments' external sales are added to consolidated sales. Internal sales between the segments are to be ignored due to the segments' vertical definition and product diversity. The segments' EBIT (operating result) is defined as earnings before interest, extraordinary result and taxes on income.

74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Operating assets comprise intangible fixed assets and property, plant and equipment, shares in associated undertakings, inventories, accounts receivable from trade, accounts due from associated undertakings, contingent liabilities from notes discounted, other assets (excluding claims for refund of taxes on income) as well as deferred charges and prepaid expenses. Items included in the transition from operating assets to the balance-sheet total are those which are to be allocated to financial, tax and other non-operating sectors. There essentially concern; financial assets with- out shares in associated undertakings, securities, liquid assets, deferred taxes and accounts due from affiliated companies. Operating debts comprise other provisions, trade accounts payable, accounts due to associated undertak- ings, other liabilities (without liabilities for taxes on income) and deferred charges. Items included in the transition from operating debts to outside capital are those which are to be allocated to the financial, tax and other non-operative sectors. These are essentially: provisions for taxation, liabili- ties due to banks, notes payable, accounts due to affiliated companies, pension provisions and the part of other provisions not allocated to the segments. The segmental capital expenditure relates to intangible fixed assets and property, plant and equipment. Depreciation concerns assets allocated to the individual segments. Details of employees are based on an annual average.

75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Segmentation according to Division

Tiles Bathroom Table- Wellness Transition Villeroy & Boch 2002 & Kitchen ware Group

External sales 268.6 305.3 296.5 107.1 977.5

Depreciation 17.7 18.8 14.7 7.5 58.7

Other expenses without effect on liquid assets -11.2 -11.2

Income from equity investments 0.2

EBIT -10.5 15.6 21.7 0.2 27.0

Net interest income -13.4 -13.4

Expense for tax on income -3.3 -3.3

Net income 10.3

Operating assets 237.2 237.3 215.7 93.7 95.1 879.0

Operating debts 79.8 79.4 57.6 26.3 256.4 499.5

Net operating assets 157.4 157.9 158.1 67.4 -161.3 379.5

Capital expenditure 20.3 16.1 21.1 8.6 66.1

Number of employees 2,314 4,150 3,174 870 4261) 10,934

2001

External sales 298.6 309.9 294.3 72.4 975.2

Depreciation 19.7 19.1 14.5 5.6 58.9

Other expenses without effect on liquid assets -11.9 -11.9

Income from equity investments 0.6

EBIT -11.9 24.9 15.1 -1.1 27.0

Net interest income -11.8 -11.8

Expense for tax on income -5.6

Net income 9.6

Operating assets 254.6 233.8 214.3 92.7 85.5 880.9

Operating debts 86.1 72.3 49.3 24.7 267.4 499.8

Net operating assets 168.4 161.6 165.0 68.0 -181.9 381.1

Capital expenditure 13.5 17.8 15.8 7.2 54.3

Number of employees 2,480 4,095 3,177 658 4231) 10,833

(Values in Euro million; number of employees: annual average) 1) Employees from the central administrative sector; in particular internal services

76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Segmentation according to Regions

Germany France Rest of Rest of Transition Villeroy & Boch 2002 Europe the World Group

External sales 296.3 178.0 395.2 108.0 977.5

Net operating assets 206.3 54.1 248.9 31.5 -161.3 379.5

Capital expenditure 33.9 7.1 24.6 0.5 66.1

2001

External sales 330.7 165.5 368.3 110.7 975.2

Net operating assets 214.0 61.0 252.6 35.4 -181.9 381.1

Capital expenditure 22.2 4.8 25.7 1.6 54.3

(Values in Euro million)

Other Notes

31. Contingent Liabilities and Commitments 31.12.2002 31.12.2001 in Euro '000 in Euro '000

Contingent liabilities from notes discounted 19,836 17,468

Guarantee and endorsement obligations 573 164

Trustee obligations 368 322

Euro sub-frontloading ( - ) 821

There are no obligations due to associated undertakings.

32. Other Financial Obligations

31.12.2002 31.12.2001 in Euro '000 in Euro '000

Obligations arising from orders placed for capital expenditure 10,152 6,694

Rental and leasing obligations are presented in detail under Point 1.2..

77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

33. Financial Instruments

Financial instruments are contract-based commercial operations which include a claim to money. In accord- ance with IAS 32 these cover self-generated financial instruments, such as accounts receivable from trad- ing and trade accounts payable or financial claims and debts, yet they also include derivative instruments which are used as covering transactions to secure against risks arising from exchange rates and interest rates.

Risk management and controlling

From the point of view of risk management, performance of these derivative transactions is subject to a strict functional division with regard to business, processing, control and the accounting treatment. Observance of principles stipulated by a uniform guideline and the processing of accounting events are also continuously monitored.

Self-generated financial instruments

These include the individual items that can be seen directly from the balance sheet. Please refer to expla- nations of the relevant items for their accounting and evaluation.

Derivative financial instruments

We employ derivative financial instruments to secure currency and interest items, in order to minimise or eliminate the exchange risks and financing costs caused as a result of fluctuations in exchange and inter- est rates. For this purpose we use marketable forward exchange contracts and interest rate swaps Ð so- called OTC products. Transactions are only concluded with banks that have a perfect credit rating. They are employed according to uniform guidelines, and their use is subject to strict monitoring and limited to covering operational trans- actions as well as the financial operations connected with such. “Usual” purchases and sales of financial assets in accordance with IAS 39 are reported in the balance sheet according to the method of accounting on the due date. The derivative financial instruments are valuated at fair value, in accordance with IAS 39. They are dis- closed in other assets and other liabilities. Cash flow hedges are used to secure against the risk of deposits and payments from an existing assets or liabilities item, a contractually agreed obligation and planned transactions, i.e. payments which fluctuate in the future. Forward exchange contracts are concluded to provide security against the exchange risks arising from future sales and purchase volumes in the individual divisions. Recognised valuation methods are used to calculate the fair values of the forward exchange contracts on a monthly basis. In this respect, valuation is based on spot rates. The fair values of interest rate swaps, used to minimise the risks of interest rate changes in existing liabil- ities due to banks, are determined by means of the market valuation provided by a bank.

78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The market value changes of forward exchange contracts included in a cash flow hedge are reported in shareholders’ equity. The valuation of the derivative financial instruments contained in shareholders’ equi- ty is transferred to the operating result when the mainstay business secured against is realised. Market value changes in derivative interest-rate tools, which have been concluded to secure against floating in- terest payments, are likewise recorded in shareholders’ equity without effect on the operating result. In so far as the derivative financial instruments are not providing security, valuation is carried out with effect on result. In the year under review, Euro 0.759 million from the market valuation of the derivative financial instru- ments was recorded in shareholders’ equity, without affecting operating result, and Euro 1.643 million was recorded with effect on result. On the balance sheet date, the following derivative financial instruments are employed to minimise risks:

Fair Value Financial Financial Nominal volume assets obligations in Euro ‘000 in Euro ‘000 in Euro ‘000

Interest rate swaps 26,884 - 3,681

Forward exchange contracts 35,236 2,447 101

The contracts concluded to secure against interest rate risks have a remaining term of over 5 years. The forward exchange contracts concluded to guard against exchange risks always have a remaining term of up to one year.

Credit or loss risks

The executed, categorically derivative financial contracts are only concluded with banks that have a perfect credit rating, meaning that there is only a very slight risk of loss. In addition, the maximum risk of loss can be regarded as the sum of the positive market values of the derivative financial instruments from which there are claims vis-à-vis contractual partners. A limit is thus set for contracts with the individual contractual partners, in order to minimise these risks.

34. Supervisory Board and Management Board Remuneration

Supervisory Board remuneration totals Euro 0.220 million (previous business year: Euro 0.225 million), the remuneration of Management Board members totals Euro 2.446 million (previous business year: Euro 2.855 million). Pension provisions exist in the sum of Euro 9.279 million (previous business year: Euro 8.345 million) for former Management Board members, remuneration in the business year totals Euro 0.920 million (previous business year: Euro 0.867 million). In the business year 2002, a total of 97,992 stock purchase warrants (previous business year: 162,360) were issued to Villeroy & Boch AG Management Board members for the acquisition of individual pref- erence-share certificates. The portfolio of stock purchase warrants issued on 31.12.2002 totals 437,157 (previous business year: 339,165). The stock option plan is explained in point 8.4. “Stock Option Plan”.

79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

35. Relationships to Affiliated Companies and Persons

Business requiring disclosure does not exist with affiliated persons, nor is there any further performance agreed with other affiliated persons.

36. Events Subsequent to the Balance Sheet Date

There are no essential events to report subsequent to the balance sheet date.

37. Proposed Appropriation of Villeroy & Boch AG Retained Earnings

Supervisory Board and Management Board propose using the retained earnings of Euro 23,020,521.86 to distribute a dividend of Euro 0.50 per individual ordinary-share certificate and Euro 0.55 per individual preference-share certificate. The proposed appropriation of retained earnings corresponds with a dividend of

Euro 7,022,400.00 for the ordinary share capital 7,724,640.00 for the preference share capital

14,747,040.00

The remaining amount of retained earnings in the sum of Euro 8,273,481.86 will be carried forward to new account.

If treasury stock in the sum of Euro 979,910 is still in the possession of the company at the time of the resolution on the appropriation of retained earnings, the dividend payment for preference share capital is reduced by the sum of Euro 538,950.50, allotted to the treasury stock. Retained earnings brought forward increase accordingly for the year 2003.

38. Corporate Governance Codex

The Supervisory Board and Management Board of Villeroy & Boch AG laid down the Corporate Governance principles for the company in September 2002. The declaration stipulated under ¤ 161 AktG [German Public Limited Company Law] has been made and is permanently accessible to the shareholders (www.villeroy-boch.de / Investor Relations).

Mettlach. February 2003

Wendelin von Boch-Galhau Manfred Finger Peter von der Lippe

Ralf Mock Dr. Bernard Wientjes Richard Zimmermann

80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Audit Report

We have audited the consolidated financial statements prepared by Villeroy & Boch Aktien- gesellschaft, Mettlach, consisting of balance sheet, profit and loss statement, statement of shareholders’ equity, cash flow statement and notes to the consolidated financial statements, for the business year from 1 January to 31 December 2002. Preparation and content of the consolidated financial statements in accord- ance with the International Financial Reporting Standards (IFRS) are the responsibility of the company's Executive Board. Our task is to submit an appraisal of the consolidated financial statements, on the basis of the audit we have carried out. We have carried out our statutory Group audit in accordance with the German audit regulations, and observing the generally accepted auditing standards determined by the Institute of German Certified Public Accountants (IDW). In accordance with these standards, the audit is to be planned and executed in such a way that it is possible to estimate with sufficient certainty whether the consolidated financial state- ments are free from fundamentally wrong information. When determining the audit activities, knowledge of the business activity and of the economic and legal environment of the Group and the expectation of possible errors are taken into account. Within the scope of the audit, the evidence of the valuations and details given in the consolidated financial statements is assessed on the basis of spot checks. The audit includes assessment of the accounting principles applied and the essential assessments of the legal rep- resentatives, as well as the appraisal of the overall presentation of the consolidated financial statements. We are of the opinion that our audit provides a sufficiently sound basis for our assessment. It is our conviction that, in accordance with the International Financial Reporting Standards, the consolidat- ed financial statements convey a picture of the net worth, financial and earnings position of the Group and payment flows during the business year that corresponds with the actual circumstances. Our audit, which also includes the Group management report prepared by the Executive Board for the business year from 1 January to 31 December 2002, has not resulted in any objections. It is our conviction that, as a whole, the Group management report gives an appropriate presentation of the situation of the Group and presents the risks of future development correctly. Moreover, we certify that the consolidated financial statements and Group management report for the business year from 1 January to 31 December 2002 fulfil the requirements for the company to be exempted from preparing consolidated financial statements and a Group management report in accordance with German law

Cologne. 28 February 2003

KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft

(Reinke) (Kohns) Qualified auditor Qualified auditor

81 MAJOR GROUP COMPANIES

Tile/Bathroom and Kitchen Germany Fliesenhandel an der Cristallerie GmbH, Wadgassen Divisions Fliesenhandel Merzig GmbH, Merzig France Villeroy & Boch S.A.S., Paris Boch Frères S.A.S., Pantin Comar S.A., Lambersart Socatra S.A., Trans en Provence Italy Ceramica Ligure S.r.l., Ponzano Magra Hungary Villeroy & Boch Magyarország Rt., Hódmezövásárhely Netherlands Villeroy & Boch Nederland B.V., Amsterdam Poland Villeroy & Boch Polska Sp.z o.o., Warszawa Austria Villeroy & Boch Badmöbel GmbH, Salzburg-Plainfeld Romania S.C. Mondial S.A., Lugoj Sweden AB Gustavsberg, Gustavsberg Tableware Divisions Germany Villeroy & Boch Creation GmbH, Mettlach Luxembourg Villeroy & Boch S.à r.l., Luxembourg France Villeroy & Boch Arts de la Table S.A., Garges-les-Gonesse Italy Villeroy & Boch Arti della Tavola S.r.l, Milano Switzerland Villeroy & Boch CreaTable AG, Lenzburg Sweden Villeroy & Boch Sverige AB, Stockholm Norway Villeroy & Boch Norge AS, Oslo Netherlands Villeroy & Boch Wooncultuur B.V., Nijkerk Canada Villeroy & Boch Tableware Ltd., Aurora Australia Villeroy & Boch Australia Pty. Ltd., Frenchs Forest Hong Kong Villeroy & Boch Tableware (Far East) Ltd., Hong Kong Japan Villeroy & Boch Tableware Japan K.K., Tokyo Wellness Divisions Netherlands Villeroy and Boch Wellness Holding B.V., Roden Sweden AB Gustavsberg, Gustavsberg Villeroy & Boch Wellness AB, Växjö (formerly: Svenska Badkar AB) Belgium Acomo Belgium N.V., Roeselare Italy Villeroy & Boch Wellness Italia S.r.l., Castelraimondo Czech Republic Vagnerplast spol. s r.o., Unhost Slovak Republic Vagnerplast Slovensko s r.o., Partizánske Central and division- France S.D.P.C. S.A., Paris spanning Companies England Villeroy & Boch United Kingdom Ltd., London Spain Villeroy & Boch Hogar S.L., Barcelona Austria Villeroy & Boch Austria Handelsgesellschaft m.b.H., Salzburg Denmark Villeroy & Boch Denmark A/S. Roedovre Belgium Villeroy & Boch Belgium S.A., Bruxelles USA Villeroy & Boch USA Inc., Princeton

82 MAJOR GROUP COMPANIES

Share Capital Villeroy & Boch AG Participation Currency Million direct indirect total %%% EUR 0.26 100.00 - 100.00 EUR 0.36 100.00 - 100.00 EUR 9.27 100.00 - 100.00 EUR 0.69 - 100.00 100.00 EUR 0.25 - 100.00 100.00 EUR 0.16 - 100.00 100.00 EUR 11.60 100.00 - 100.00 HUF 2,202.37 99.59 - 99.59 EUR 0.05 100.00 - 100.00 PLN 0.05 - 100.00 100.00 EUR 2.20 - 100.00 100.00 ROL 170,195.21 99.04 - 99.04 SEK 20.00 100.00 - 100.00 EUR 0.05 100.00 - 100.00 EUR 15.00 100.00 - 100.00 EUR 4.06 - 100.00 100.00 EUR 0.03 0.20 99.80 100.00 CHF 0.50 - 100.00 100.00 SEK 2.00 - 100.00 100.00 NOK 0.10 - 100.00 100.00 EUR 0.10 100.00 - 100.00 CAD 2.20 - 100.00 100.00 AUD 0.52 - 100.00 100.00 HKD 7.00 - 100.00 100.00 JPY 97.50 - 100.00 100.00 EUR 1.62 100.00 - 100.00 SEK 20.00 100.00 - 100.00 SEK 0.10 - 100.00 100.00 EUR 7.56 75.10 - 75.10 EUR 8.00 - 100.00 100.00

CZK 92.93 - 67.00 67.00

SKK 0.20 - 67.00 67.00 EUR 2.13 97.15 2.85 100.00 GBP 1.10 - 100.00 100.00 EUR 0.27 44.44 55.56 100.00 EUR 1.24 100.00 - 100.00 DKK 1.50 33.33 66.67 100.00 EUR 0.06 99.90 0.10 100.00 USD 3.80 - 100.00 100.00

The complete list of share ownership, in accordance with ¤ 313 section 2 HGB, will be deposited at the Commercial Registry of Merzig Local Court.

83 COMPANY CALENDAR

General Meeting of Shareholders

23 May 2003 3 p.m. Stadthalle Merzig

Villeroy & Boch will report on the first three months of the year, with the quarterly report on

30 April 2003,

on the first six months of the current business year, with the semi-annual financial statements on

30 July 2003

and on the first nine months of the year on

29 October 2003.

Dear Shareholders

If you are interested in further information, or in the German version of the Annual Report for the year 2002, please contact:

Villeroy & Boch AG - Public Relations Postfach 11 20 - D-66688 Mettlach Phone: (+49 6864) - 81 1293 - Fax: (+49 6864) - 81 2692 Internet: http//www.villeroy-boch.com

Concept and design: Klötzner Company Werbeagentur GmbH, Hamburg

84 VILLEROY & BOCH WORLD-WIDE

Continued Success of Internationalisation Strategy

Villeroy & Boch continued to step up its international orientation in the year under review, increasing, as a result, its share of foreign sales, which for the first time exceeded 70 % of total sales.

France remains the major foreign market, accounting for an 18.2 % share of sales. It is regarded by Villeroy & Boch as a “home market” alongside Germany and Luxembourg and in the year under review recorded a pleasing 7.5 % increase in sales. Following the acquisition of Gustavsberg in the year 2000, Scandinavia has moved up into second position, recording a 9 % sales share. Owing to the closure of tile branches, there has been a sales decline in the USA Ð the company's third major market.

In contrast, Villeroy & Boch recorded sales increases in double figures in Great Britain, Italy, the rest of western Europe and overseas. Villeroy & Boch will also continue to develop its strategy of internationali- sation in the year 2003, not only increasing the penetration of existing markets, but also opening up new ones.

85 VILLEROY & BOCH WORLD-WIDE

40%

20%

10% 9%

5%

0% Scandinavian Sales (in % of total sales)

40%

40% 30% 20% 20% 41% 40% 10% 9% 10% 20% 5% 5% 10% 0% 0% Eastern European Sales 5% German Sales (in % of total sales) (in % of total sales)

0% Western European Sales (in % of total sales)

86 VILLEROY & BOCH WORLD-WIDE

40% 31 20% 32

10%

33 6%

5%

0% USA Sales (in % of total sales)

40%

20%

10%

5% 5%

0% Sales, Others (in % of total sales)

87