Performance Wins. Annual Report 2005. As an Official Partner of the 2006 FIFA World Cup GermanyTM, we called to life a world- wide corporate football tournament at the end of 2004 – the ContiTeamCup – and invited all employees to participate. Under the motto “Uniting Goals”, this competition aims to bring together employees from various countries, cultures, and areas, and more than 150 women’s and men’s teams from 75 locations and 26 countries regis- tered to take part. We are looking forward to the final matches in May 2006 in Hanover and cannot wait to find out which two teams will be crowned Conti World Champions. On the cover Nadja A. Friederici and Dörte Niemeyer of the “High-Heel-Warriors” from Hanover, Germany, are overjoyed after winning the women’s national championship title. Performance Wins. Annual Report 2005. Continental Corporation in € millions 2005 2004 Sales 13,837.2 12,597.4 EBIT 1,507.1 1,157.4 Net income attributable to the shareholders of the parent 929.6 716.2 Free cash flow 656.0 679.7 Capital expenditure 871.8 703.0 Depreciation and amortization¹ 741.8 667.2 Total equity 3,795.0 2,937.2 Equity ratio in % 36.0 30.3 Employees at the end of the year² 79,849 80,586 Dividend in € 1.00³ 0.80 Share price (high) in € 75.60 47.26 Share price (low) in € 47.70 28.87 ¹ Excluding write-downs of investments. ² Excluding trainees. ³ Subject to the approval of the Annual Shareholders’ Meeting on May 5, 2006. Continental Divisions Sales in € millions 2005 2004 Automotive Systems 5,230.6 5,007.7 Passenger and Light Truck Tires 4,444.6 4,104.2 Commercial Vehicle Tires 1,379.2 1,500.7 ContiTech 2,894.2 2,063.4 EBIT in € millions 2005 2004 Automotive Systems 570.1 498.9 Passenger and Light Truck Tires 669.0 424.8 Commercial Vehicle Tires 153.0 104.0 ContiTech 160.4 151.0 2 3 C3 Key Figures for the Continental Corporation C4 Continental Divisions 6 Letter to Our Shareholders 10 Report of the Supervisory Board 12 Capital Market Information To OurTo Shareholders Management Report for Continental AG and the Corporation 18 Corporate Strategy 23 Employees 26 Environment 30 Market Environment 34 Earnings and Financial Situation 46 Automotive Systems Management Report 50 Passenger and Light Truck Tires 54 Commercial Vehicle Tires 57 ContiTech 61 Assets, Earnings and Financial Situation of the Parent Company 64 Risks and Risk Management 68 Developments in 2006 and Outlook 74 Statement of the Executive Board 75 Independent Auditors’ Report 76 Consolidated Income Statements 77 Consolidated Balance Sheets 78 Consolidated Cash Flow Statements 79 Consolidated Statements of Changes in Total Equity 80 Segment Reporting 82 Notes to the Consolidated Financial Statements Consolidated Financial Statements 146 Corporate Governance 150 The Supervisory Board 152 The Executive Board 154 Continental Corporation – Ten-Year Review 155 Glossary C5 Financial Calendar Further Information C5 Contact Details and Acknowledgements 3 w The team is the star. Forwards, midfielders and defenders – specialists with individual qualifications are grouped together to form a cohesive unit. Working toward one common goal, that unit becomes a team. Versatility, commitment and teamwork make us successful. We bring together different disciplines, cultures and characters. In the past eight years we have accomplished the effective and successful integration of three major acquisitions into our corporation. 4 w In a pre-match huddle, the captain of the Japanese team motivates his players for their game against China, which ended in a draw. ContiTeamCup, November 19, 2005, Tokyo, Japan. 5 Letter to Our Shareholders Dear Shareholders, In fiscal year 2005, we were again able to exceed our an agreement with IG Bergbau, Chemie, Energie (the sales and earnings over the prior year. This was not easy German Mining, Chemical, and Energy Industrial Union) in a difficult economic environment and required a high and employee representatives to discontinue production degree of innovation, flexibility, and cost discipline from of passenger tires in Stöcken in the course of 2007, and our employees. On behalf of myself and my colleagues to gradually adjust staff levels and production capacity. on the Executive Board, I warmly thank all our staff for this outstanding achievement, of which we are all proud. We signed an agreement at the beginning of February 2006 covering the purchase of the Danish Roulunds Consolidated sales increased 9.8% to €13.8 billion, while Rubber Group, a manufacturer of power transmission the consolidated operating result rose by an exceptional belts. The company employs 1,100 people at locations 30.2% to €1.5 billion. We reduced our net indebtedness in Europe and Asia. The deal, which is pending the ap- by €387.9 million to €493.2 million and achieved a gear- proval of the antitrust authorities, will strengthen the ing ratio of 13.0%. We would like to allow you, our share- Power Transmission Group of the ContiTech division. holders, to share in this success too. As a result, the Ex- ecutive Board and the Supervisory Board will propose We intend to further expand our activities within the to the Annual Shareholders’ Meeting on May 5, 2006 to Electronics unit of the Automotive Systems division and increase the dividend by 25% to €1.00 per share. Con- are in the process of seeking an appropriate partner or a tinental’s share price rose by 60.5% during 2005 and suitable acquisition. outperformed the DAX by 33.4 percentage points. The integration of Phoenix into the ContiTech division Our North American Passenger and Light Truck Tires is progressing well and is ahead of schedule. In recent business nearly managed to break even in the fourth months, we have been working at all levels to enable a quarter of 2005. The main reasons for this significant successful future together. The merger increases our improvement in the second half of 2005 were the con- technological expertise and improves our market pres- siderable growth in the winter tires business, new prod- ence, as well as strengthening our activities in Eastern uct launches and the stabilization of our internal proc- Europe and Asia. The integration, which will be complet- esses. We initiated a range of measures in 2005 that ed at the end of 2006, already yielded initial synergies contributed to this success and expanded business with in 2005. our customers in key regions. For example, we launched six new product lines under the Continental and General We launched a special type of integration and team brands. In the original equipment business, we became building event at the end of 2004: the ContiTeamCup, one of the top three tire suppliers to automobile manu- a worldwide football tournament for our employees, facturers in North America for the first time in 2005. We kicked off with the slogan “Uniting Goals” to bring cut production capacity by 30% in Charlotte, our most together employees from all our locations around the expensive plant in North America. Now we must main- world. More than 150 women’s and men’s teams from tain and expand what we have achieved. In 2006, we 75 locations in 26 countries are taking part. We cannot have initiated activities to enhance the competitiveness wait to find out which two teams will be crowned Conti of our Mount Vernon plant, including investments in new World Champions in spring 2006. production facilities and processes on the one hand, and reduction of labor costs on the other. In Charlotte we are As an Official Partner of the FIFA World Cup 2006TM, we also working to improve the competitive position of the are particularly looking forward to the tournament in Ger- plant. In addition, we will initiate new marketing activities many. Our activities as a sponsor are already paying off: for the replacement business in key markets. our international visibility increased measurably in the past year due to the qualifying games for the World Cup We were able to settle the dispute over the shut-down of and the FIFA Confederations Cup held in Germany in the Hanover-Stöcken passenger tire plant and the shed- 2005. This experience convinced us to become a spon- ding of 320 jobs. In mid-February 2006, we reached sor of the European Football Championships in 2008. 6 What are the foundations for our success? of our products: for example, our development work fo- cuses among other things on shortening braking dis- A consistently implemented corporate strategy tances, achieving optimum traction on dry and wet road with the following key goals: surfaces, as well as cost-effectiveness – which means – Our activities focus on innovations for greater safety, reducing rolling resistance and increasing tire life. Conti- comfort, and eco-friendly mobility on the road. Tech meets the growing requirements of the market with – Depending on our customers’ needs, we act as a sys- sophisticated solutions; these include products both for tems provider, module manufacturer, component sup- the automotive industry, such as environmentally-friendly plier, and development partner. hoses and hose lines, or for other branches of industry, – A cost-conscientious approach – right down to the such as air suspension systems for greater comfort in smallest unit. high-speed trains. – In the long term, we will only continue to operate busi- ness units that have leading positions in their relevant To continue strengthening our capabilities for the future, markets. we increased expenditure on research and development – To limit the dependence on the cyclical automotive by a total of €65.6 million in 2005 to €589.4 million. manufacturing sector, we aim to generate around 40% of our sales outside this industry.