2002 was an especially difficult year for Fiat, which was weighed down by the negative performance of Fiat Auto, which could not be completely offset by the positive contributions of the other Sectors and, more importantly, the extremely high costs incurred to jump-start the Company’s recovery.

Revenues were down about 4%, declining from 58 billion euros to 55.6 billion euros. The drop in Fiat Auto’s revenues was offset by an improvement at Iveco. At the same time, the gain reported by CNH in U.S. dollars was reduced by the revaluation of the euro.

The operating result was a loss of 762 million euros (1.4% of revenues) against an operating income of 318 million euros (0.5% of revenues) in the previous year.

This loss was the result of the particularly difficult situation encountered by the Automobile Sector, combined with that of Comau and Magneti Marelli. The loss was reduced by the positive contributions of other Sectors, which, however, did not perform as well as in 2001. The exceptions were Ferrari, Teksid, FiatAvio, Toro and Itedi.

The large net loss incurred in 2002 – equal to 4,263 million euros, of which 3,948 million euros attributable to the Group - while due primarily to a negative operating result, was also caused by these other factors:

- The significant costs incurred to restructure the Group’s industrial operations, especially those of Fiat Auto; 
- The extraordinary provisions booked to adjust the value of the Group’s assets to reflect changing market conditions; 
- The losses incurred on some of the divestitures, particularly on the sale at market values of the Group’s General Motors shares; 
- The negative results reported by companies in which the Group holds equity investments and the writedowns required to mark to market the equity securities held by the insurance companies; 
- High net financial expenses, which, however, were less than those incurred in 2001. 
- The negative impact of these factors was partly offset by the substantial gains earned on the divestitures of other assets.

At the end of 2002, the net financial position showed that Group indebtedness was lower by about 2.2 billion euros compared with December 31, 2001.

The main reasons for this improvement are:

- Sales of several businesses (including Teksid’s Aluminum operations and Magneti Marelli’s Aftermarket and Electronic Systems units) and equity investments (the General Motors shares and interests of 34% in Ferrari and 14% in Italenergia Bis); 
- The capital increases carried out at Fiat SpA and CNH; 
- A decrease in working capital requirements made possible by a reduction in the inventories carried by Fiat Auto and CNH and a drop in Fiat Auto’s trade receivables, which, in turn, reflects lower unit sales and a decline in the inventories held by the distribution network. 
- The various transactions carried out in 2002 helped strengthen the overall structure of the Group’s net financial position, producing a better mix of short-term and long-term debt. 

The Group was successful in attaining the debt reduction objectives set forth in the banking agreements it signed, which call for pro-forma net borrowings to decrease to 3 billion euros. They expressly allow the proceeds expected from binding sales contracts that have not yet been finalized and the financing secured by an agreement with EDF within the context of the Italenergia Bis transaction (1,150 million euros) to be counted in determining whether the net debt reduction objective has been reached. 

First Quarter of 2003

Group’s results for the first quarter of this year were affected by the same problems that hampered its profitability in 2002 and by a generalized deterioration of market conditions, which had an impact not only on Fiat Auto but on the other Sectors as well.

In the first quarter of 2003, the Group had revenues of 12.3 billion euros, down about 10% on a comparable consolidation basis from the same period last year. The reasons for this shortfall are:

Lower unit sales by Fiat Auto and CNH;  Non-operating factors, including the significant impact of the conversion into euros of CNH’s dollar-denominated revenues (which reduced revenues by about 500 million euros) and, of lesser magnitude, the divestitures of certain Group businesses in 2002 and at the beginning of 2003. 

The operating result for the quarter was a loss of 342 million euros, as against 299 million euros in the same period last year.

The widening of the loss compared with a year ago is due to a decrease in the gains earned on the sale of real estate assets, especially by Toro Assicurazioni, which were about 50 million euros less than in the first three months of 2002.

Moreover: The loss reported by Fiat Auto decreased, falling from 429 million euros to 334 million euros; The Group’s other businesses saw their operating profits fall, but, on the aggregate, operated close to breakeven. 

The net consolidated loss came to 699 million euros, little changed from the first quarter of 2002.

Two main factors are responsible for this loss: The costs and lost profits resulting from flooding that blocked all production at the Termoli engine plant this past January; And the following charges of a temporary nature: An entry booked to mark to market the equity securities held by Toro Assicurazioni; 
The adjustment of the equity swap on the General Motors shares, which was booked to reflect the market price of these shares at March 31, 2003. 

With regard to these two items, it is important to keep in mind that: 

- The losses recognized in the securities held by Toro have no impact on Toro’s sales price, which has been set at 2.4 billion euros, and, therefore, will produce a gain when the sales price is collected. 
- The equity swap on the GM shares is beneficial for the Group, but, because it is affected by market fluctuations, it injects an element of volatility in the results that we report each quarter. To illustrate this point, most of the loss reported for the first quarter would disappear if the shares were valued at today’s market prices. 

Without these two items, the loss for the first quarter would have been significantly smaller than it was in the first three months of 2002.

There were also some positive factors, including the extraordinary income earned on the sale of the Brazilian retail financing activities.

At March 31, 2003, the net financial position showed net borrowings of 5.2 billion euros. This amount is about 1.4 billion euros higher than at the beginning of the year, but is down from the 6.6 billion euros recorded at March 31, 2002.

The increase that occurred in the first quarter was due mainly to a rise in working capital caused by:

- higher inventories held by CNH (due to seasonal factors) and Iveco (due to seasonal factors and the launch of new products); 
- a drop in the amount of trade receivables held by Fiat Auto; 
- an increase in receivables owed by the tax authorities. 

Another factor affecting the net financial position was the negative cash flow experienced during this period. The resources absorbed by these factors were replaced in part by the proceeds generated by divestitures, which totaled about 400 million euros.

Based on the rules set by the banks, which I outlined earlier, the value of assets for which the Group has reached a definitive sales agreement (such as Toro Assicurazioni) can be deducted from net borrowings. As a result, the Group is in full compliance with its debt reduction objectives. 

The Group’s indebtedness will continue to decrease in the coming months as other divestitures are completed. These include the sale of Toro and the disposal of a 51% interest in the European operations of Fidis Retail Italia, which requires only the final approval of the regulatory authorities.

The sale of Fidis will enable the Group to comply with the second requirement for the reduction of total debt stipulated in the terms of the mandatory convertible facility provided by the banks.

The Group’s Action Guidelines

The priorities we are focusing on are, on the one hand, the structural strengthening of the Group’s balance sheet and, on the other hand, the program to relaunch the industrial operations of all the Sectors.

The absolute pre-requisite for the success of this program is the development of a strategy that clearly defines the scope of our operations. We have decided to concentrate all of our efforts on Automobiles, Agricultural and Construction Equipment, Commercial Vehicles, and Automotive Components. This means that the Group’s traditional core businesses will be the core businesses of its future.

Given these objectives, we can announce that the divestiture program has been completed. We are now defining the industrial action guidelines of our relaunch program. This process is essential in determining the Group’s financial requirements. We are also determining what additional resources may be necessary, if any, and we plan to present the results of this ongoing study by the end of June.

We trust that the confidentiality with which we treat the plans that we intend to implement will not be viewed as a lack of confidence in our stockholders, but as a necessary part of our responsibility, namely to enhance the Group’s credibility and reliability in the marketplace, which must be provided with clear and detailed programs and initiatives.

In any case, these programs and initiatives will be consistent with three main avenues of action along which the Group must strive to travel as quickly as possible. The first avenue of action is the pursuit of technological innovation.

A portfolio of innovative products and the use of proprietary technologies, coupled with a continuous improvement of quality levels in all phases of the business, from design to production and customer care, are essential to sustain the relaunch of the Group.

Starting in the second half of the year, Fiat Auto will begin to reap the benefits of its new product launches. Next year, these new products, which mark the beginning of a complete renewal of the Sector’s product line, are expected to make a significant contribution to Fiat Auto’s profitability.

CNH will continue to implement a plan launched last year to almost completely renew its line of agricultural equipment in 2003 and 2004. The Sector’s construction equipment line will follow. The Sector will introduce new products based on common platforms for New Holland and Case and, in 2003 alone, CNH will launch 60 new agricultural equipment models and 50 new construction equipment products.

Iveco has already developed engines that are highly innovative in terms of performance, efficiency and compliance with environmental regulations. In addition, it has just introduced two new models that round out its line of heavy on-road trucks. Iveco is presenting this very day to the press its new EuroCargo intermediate vehicle and is working on a new line of off-road heavy vehicles.

In pursuing innovation over the medium and long term, the Group can count on two leading-edge organizations: the Fiat Research Center and Elasis. We intend to strengthen these organizations and enhance their value, as well as the components area.

The second avenue of action is the pursuit of a competitive cost structure. In this area, there is plenty of room for improvement and major potential for rationalization. We will work to optimize all components, expand the use of common platforms and increase the efficiency of the internal structures and the distribution network.

The third avenue of action we are focusing on is customer care — before, during and after a sale is made. To do this, we will strengthen and enhance the marketing organizations of all Sectors, adapting them to a marketplace that is becoming increasingly dynamic and diversified and enabling them to understand and satisfy with increasing effectiveness the needs of an ever growing number of customers and market segments.

The relaunch program we have undertaken will require the cooperation of forces outside the Fiat Group.

A determining factor will be the contribution of professionals, whose presence is particularly strong in Turin. In this area, we look forward to working with suppliers, engineering center staff and designers, with whom we wish to establish even stronger partner relationships.

Our relationship with the banks will be equally important. We have already established a fruitful and supportive relationship with them as we pursue the relaunch of our Group.

We also expect General Motors to play a major role.

At the manufacturing level, the alliance with our American partner is producing very significant mutual advantages. We also plan to pursue other collaborative relationships. An example of this approach is the recent agreement between Fiat Auto and Suzuki (also a GM partner) to produce an SUV. More importantly, we are in the process of finalizing an agreement to develop another common architecture for cars, this time in the "C" segment, which is the most important in Europe.

In our relationship with General Motors, we will focus on all those areas that can help increase the development of industrial synergies and generate value for both partners.

Discussions on how to achieve these goals are ongoing, and a further in-depth review is scheduled for the coming days.

Outlook for 2003

While postponing until June a discussion of our industrial action guidelines, an overview of the Group’s expected performance for all of 2003 can now be given. The results for the first quarter show that 2003 will be a tough and challenging transition year.

In view of the low and uncertain growth that is expected to characterize the economy at least until the latter part of 2003, we do not expect the Group’s principal target markets to show signs of improvement. 

In Europe, demand for automobiles will be lower than in 2002. The market for agricultural equipment should hold relatively steady, but sales of construction equipment are expected to decline further. Demand for commercial vehicles will be down across the board. Despite such a clearly unfavorable environment, all Group Sectors will be required to show significant improvements in operating results and cash flow.

For the full year we expect:

- An operating result that will remain negative but less so than in 2002; 
- A net financial position and gross indebtedness below the parameters agreed upon with the lending banks. 
- We are aware that the job of restoring the health of an industrial group such as ours can be accomplished only over the medium to long term. 

We also know that in all Sectors and at all levels we can count on the competencies, technical skills and desire for success of our people to carry out this difficult task.