outlook

economic downturn negatively impacts mechanical and plant engineering industry

World economy in recession.

The outlook for world economic growth in the next two years is dominated by the current economic decline. The trough of the slump may be reached during the current year. All key industrial countries are currently in a recession. Deutsche Bank economists are expecting a drop in gdp in the United States and in the Eurozone of 2.2 percent and 2.0 percent respectively 2009. Last year gdp growth was 1.3 percent in the United States and 0.9 percent in the Eurozone. Even in the emerging markets, economic growth could fall by nearly 50 percent, sliding from 7.9 percent in 2007 to 4 percent during the current year. Overall, world economic growth in 2009 will be – 0.7 percent, the first time the economy has stopped growing. Last year it grew 2.0 percent. Experts expect that the economy will begin to pick up again in 2010, provided the international financial market crisis does not expand further.

Asian clients very interested in kuka robots.

In Germany, the economy has been regressing since the second quarter of 2008. But according to the federal government, the downturn in gross domestic product could be even worse and reach – 2.25 percent this year, compared to 1.3 percent growth last year. It would be the most serious downturn since the end of the Second World War. Because it is an exporting nation, the German economy is particularly vulnerable to a weak world economy. This applies especially to the car industry, but also the mechanical and plant engineering sector. According to the German Engineering Federation, vdma, this industry could see a drop in manufacturing of 7 percent in 2009. The trough of the slump in the mechanical and plant engineering industry is not likely to be reached until 2010 according to a study by Westlb, after the international infrastructure programs now being rolled out start to have a positive impact and again generate demand for German capital goods.

automotive industry sales continue to decline

After a drop in sales of 18 percent in 2008, General Motors in the United States is expecting a further decline of 20 percent in 2009. Only 10.5 million vehicles will be sold (source: January 8, 2009 issue of Handelsblatt). After a decline of only 2 percent last year, Germany too is expecting a sharper drop of 6 percent, with 2.9 million vehicles being registered. Overall, worldwide car production could drop further, from 56 million vehicles in 2008 to 53 million vehicles in 2010.

opportunities and risks for new product development and new market penetration

kuka ag will continue to implement its strategy in the coming two fiscal years and will accelerate its initiatives in response to the economic difficulties. The strategy rests on three pillars:

Robot-based automation increasingly replaces manual and less flexible assembly processes.

In general industry, i. e., all sectors other than the automotive industry, investments to streamline operations and cut costs will continue to play an important role, particularly in times of weak earnings. Here robot-based automation is increasingly being used to replace manual and less flexible automated manufacturing processes. In Europe, kuka is the technology leader and has the largest market share in both the robotics and plant engineering sectors. The industrial regions in America and Asia therefore offer excellent growth opportunities. The launch pad for this regional expansion is the strong market position of kuka Systems in North America and Brazil, as well as China and India. All of these regions represent the largest local markets. At the same time, the reputation of the kuka brand in the automotive industry serves as a “door opener” for general industry. This applies equally to Robotics and Systems.

new markets for assembly robots and omnimove

The development of new products is primarily driven by the Robotics division. A relatively high r&d ratio of 6 to 7 percent of sales revenues ensures a continuous flow of new products and applications. Together with other well-known manufacturers, kuka Robotics has developed such things as new robot-based treatment systems in the medical technology field, e. g., for particle and cancer radiation therapy. kuka Robotics has also developed an innovative lightweight robot to support manual labor-intensive workstations, which is particularly easy to program and operate. It is intended to be used soon as a “worker’s third hand” in small and medium-size operations. This new assembly robot is controlled by sensors and is currently being field tested. In addition, this robot, equipped with a smaller version of the omniMove platform, is designed to navigate independently while transporting light materials in workshops and factories.

The omniMove platform is known for its ability to move precisely in all directions and on the spot. It is able to manipulate heavy, bulky parts weighing up to 60 tons within a very compact envelope. On December 10, 2008, kuka signed a blanket agreement with Airbus for the supply of 41 omniMove platforms, which will be delivered over the next five years to help assemble the A 350 in all of the aircraft manufacturer’s European factories.

core business: automotive industry

kuka is an established bric nations business partner.

The recession in the major industrial nations has led to considerable sales difficulties in the automotive sector. International manufacturers are responding with shortened workweeks in their factories and postponement or adjustment of order volumes in cases of capital spending on new vehicle models and assembly systems. In contrast, the bric countries could continue to benefit from the increasing demand for vehicles in those countries and the opportunities to export to the industrialized regions.

kuka has had successful business relationships with all European and North American carmakers for many years. At the same time, the company has been an established business partner with a strong market position in the bric countries, Russia, China and Brazil, for almost 20 years. Due to this broad-based global presence, kuka is able to offset capital spending cutbacks and structural shifts in the automotive industries of the developed industrial regions by capital spending increases in the emerging countries.

capital spending at last year’s level

Capital spending is a key requirement for surviving in a worsening market environment. In past years, kuka ag has made about € 30 million per annum available to the operating business units. From now until 2010, the same amount is being budgeted as in past years, but is subject to review if dictated by the economic situation.

dividend policy

The kuka Group follows an investor-oriented dividend policy that corresponds to the earnings trend of the company. Free cash flow is decisive for our dividend policy for this reason. In the future, 30 – 40 percent of the free cash flow generated in the fiscal year ended will be designated for the distribution of dividends. The significant cash outflow burdened the free cash flow in the 2008 business year. The Executive Board and Supervisory Board of kuka ag therefore recommend the Annual General Meeting on April 29, 2009 in Augsburg not to distribute a dividend for the 2008 business year.

overall summary regarding group development

Measures to secure earnings.

The two-year outlook is strongly affected by the high degree of uncertainty regarding the economy. All key industrial countries are currently in a recession. However, experts expect that the world economy will start to grow again in the next year, when the international aid packages start to bear fruit in the major industrial nations. The demand from general industry could revive accordingly in the medium term. Because of the automotive sector’s sales-related profit problems, which are expected to continue over the period being considered, spending on new models and assembly systems will be sluggish at best. With the current economic difficulties, projected business development, including the company’s financial and profit situation, is expected to be negative overall between now and 2010. kuka ag’s Executive Board has therefore resolved to implement the following steps to safeguard the company’s earnings position:

disclosure according to article 315 paragraph 4 of the german commercial code (hgb) (group management report) and explanation thereof according to article 120, paragraph 3, clause 2 of the german corporation act (aktg).

The information required by article 315, paragraph 4 of the German Commercial Code (hgb) is disclosed and explained in the following. The Executive Board is of the opinion that according to article 120, paragraph 3, clause 2 of the German Corporation Act (AktG) further information has to be disclosed.

The total share capital of kuka Aktiengesellschaft is valued at € 69,160,000 consisting of 26,600,000 bearer shares. Each bearer share represents a notional holding of € 2.60 of the share capital. All shares have equal rights and each share guarantees its holder one vote at the Annual General Meeting.

The Executive Board is not aware of any restrictions that would affect voting rights or the transfer of shares. The company did not receive any notification regarding direct or indirect equity shareholdings that exceed ten percent of the voting rights. Shares with special rights that would impart controlling authority do not exist. Neither is there any participation by employees in the sense of article 315, paragraph 4, item 5, of the German Commercial Code (hgb).

The Executive Board consists of at least two persons as per article 6, para. 1 of the company’s articles of association. The Supervisory Board decides upon the number of Executive Board members as per article 6, para. 2 of the company’s articles of association. The appointment and dismissal of members of the Executive Board follows the rules of articles 84 and 85 of the Stock Corporation Act (AktG) and article 31 of the German Act on Company Co-Determination (MitbestG).

Article 119, para. 1, clause 5 and article 179 para. 1 of the Stock Corporation Act (AktG) stipulates that any changes to the company’s articles of association require a resolution by the shareholders at the Annual General Meeting. Article 22, para. 1 of the company’s articles of association states that a simple majority of the holders of total share capital attending the Annual General Meeting is sufficient, provided that the articles of association do not make a greater majority mandatory. The latter is required especially for resolutions concerning changes to the company’s business purpose, reduction in capital stock and changes to the form of incorporation. Article 11, para. 3 of the company’s articles of association states that the Supervisory Board is authorized to make changes to the company’s articles of association that only affect the version. Furthermore, according to article 4, para. 5 of the company’s articles of association, the Supervisory Board is authorized to change the company’s articles of association, provided it makes use of its authority to increase capitalization in accordance with article 4, para. 5 of the company’s articles of association (see below) or the authorization is unnecessary.

kuka robots work hand-in-hand to weld a car body.

In accordance with article 4, paragraph 5 of the company’s articles of association, the Executive board is authorized to increase the company’s share capital, subject to approval by the Supervisory Board, until May 31, 2011 up to a total of € 34,500,000 by issuing on one or several occasions new shares in the name of the bearer against cash contributions or contributions in kind. In the event this authorization is exercised, the shareholders shall unconditionally be granted subscription rights; however, subject to approval by the Supervisory Board, the Executive Board is authorized to exclude the shareholder subscription rights prescribed by law (i) for fractional amounts (ii) to the extent this is required in order to grant the holders subscription rights to new shares, as per the resolution passed at the Annual General Meeting on July 4, 2003, in the quantities to which they would be entitled by exercising their conversion or option rights related to convertible bond and / or warrants issued by kuka Aktiengesellschaft or its companies (iii) for increases in equity against cash contributions if the offering price of the new share does not fall considerably short of the market price, and to the extent the number of shares issued under exclusion of subscription rights in accordance with article 186, paragraph 3, sentence 4 AktG (German Corporation Act) does not exceed 10 percent of the total share capital, neither at the point in time the authorization becomes effective nor at the time of exercising the authorization. In doing so, the company’s own shares, if sold under exclusion of subscription rights, and shares issued or to be issued for the satisfaction of bonds with conversion and option rights issued pursuant to the resolution of the Annual General Meeting on July 4, 2003, in case the bonds were issued during the term of the authorization under exclusion of subscription rights in corresponding application of article 186 paragraph 3 sentence 4 AktG (German Corporation Act), have to be counted under this restriction. This also applies (iv) for capital increases against contributions in kind for the purpose of acquiring companies or parts of companies.

According to article 4 paragraph 6 of the articles of association, the total share capital is conditionally increased by up to € 19,500,000 by issuing up to 7.5 million new shares. The conditional capital increase is only carried out to the extent that option and / or conversion rights are exercised by the holders of option and / or conversion rights issued by the company or its directly or indirectly majority owned companies in Germany or abroad on or before July 4, 2008.

On May 9, 2006, kuka Aktiengesellschaft partially exercised the respective authorization to issue options and / or convertible bonds and the previously described conditional capital by privately placing a convertible bond issue guaranteed by kuka Aktiengesellschaft with a nominal value of € 69,000,000 through its 100-percent-owned Dutch subsidiary kuka Finance b. v. Under the terms of the placement, the company is obliged to completely but not partially convert every bondholder’s bond valued at a nominal € 50,000 in accordance with their conversion rights at any time during the exercise period (July 8, 2006 to October 18, 2011) and at the conversion price of € 25.3833 per share to value shares of kuka Aktiengesellschaft issued to the bearer with a pro rata amount of the share capital of € 2.60 each (due to the distribution of dividends in May 2008 for the 2007 fiscal year, the conversion price needed to be adjusted to the bond terms and conditions). The company’s capital would be increased by € 7.1 million by issuing currently about 2,718,000 new shares with a pro rata amount of the share capital of € 2.60 each, subject to the antidilution provisions of the bond terms, should all bearers of convertible bonds use their conversion right. The bond was subsequently listed on the Euromtf market of the Luxembourg stock exchange.

The conditions of the bonds contain a change of control rule typical of the industry, according to which the bond issuer (kuka Finance b. v.) and the guarantor (kuka Aktiengesellschaft) must publish the change of control as soon as it becomes known in a leading newspaper with general readership in Luxembourg, probably Luxemburger Wort, and must publish the record of the change of control in a similar manner. Every bondholder then has the right to demand repayment of one or all of his bonds at face value plus interest thereon, on the said record date of the change of control from the bond issuer. In other respects, the conversion ratio will be aligned as further required by the conditions of the bonds. Control in the aforementioned sense means direct or indirect (in the sense of article 22 wphg) legal or economic interest in shares, which together guarantee more than 30 percent of the voting rights of kuka Aktiengesellschaft or in the case of an offer to purchase shares, circumstances in which the shares which are already under the control of the offerer (and or persons working with the offerer) plus the shares for which the offer has already been accepted, together guarantee more than 50 percent of the voting rights of kuka Aktiengesellschaft at the same time the offer became unconditional.

As per the resolution passed at the Annual General Meeting of kuka Aktiengesellschaft on May 16, 2007, which was withdrawn effective the close of August 29, 2008 as per the resolution passed at the Annual General Meeting of kuka Aktiengesellschaft on May 15, 2008, the company was authorized to buy back its own shares up to a total of 10 percent of the total share capital at the time the resolution was passed through the stock market or in form of a public purchase offer by the company to all shareholders. The company took advantage of this authorization by buying back 1,327,340 of its own shares (4.99 percent of total share capital) between March 25, 2008 and August 29, 2008.

Furthermore, as per the resolution passed at the Annual General Meeting of kuka Aktiengesellschaft on May 16, 2007 and subject to approval by the Supervisory Board, the Executive Board is authorized under exclusion of subscription rights to sell the treasury shares thus acquired (i) within the scope of company mergers or the acquisition of companies, parts of companies, or investments in companies to third parties, (ii) in other ways than through the stock exchange or through an offer to all shareholders if these shares are sold for cash at a price not considerably less than the market price of company shares of same endowment at the moment of the sale, if and as far as the shares sold under exclusion of subscription rights in total do not exceed 10 percent of the stock capital, namely neither at the time of the effective date nor at the time of the execution of the authorization – this limitation includes such shares that were issued under exclusion of subscription rights for the service of bonds with conversion or option rights and / or taking advantage of an authorization to issue new shares from approved capital according to article 186 paragraph 3 sentence 4 AktG (German Corporation Act) – and (iii) for the purposes of listing on foreign stock exchanges on which the company shares had previously not been approved for trading. Moreover, subject to approval by the Supervisory Board, the Executive Board is authorized to withdraw the treasury shares. The purchase and the disposal authorization can be executed once or several times as well as in parts. This authorization as per the Annual General Meeting to use the treasury shares acquired as per the resolution of the Annual General Meeting of May 16, 2007 was not withdrawn as a result of the resolution of the Annual General Meeting of kuka Aktiengesellschaft dated May 15, 2008, which became effective as of the close of August 29, 2008.

As per the resolution passed at the Annual General Meeting of kuka Aktiengesellschaft on May 16, 2007, the company is authorized to buy back its own shares up to a total of 10 percent of the total share capital at the time the resolution was passed through the stock market or in form of a public purchase offer by the company to all shareholders, whereby the treasury shares already reacquired (4.99 percent of total share capital) must be taken into consideration. In doing so, the purchase price (without acquisition costs) cannot be more than 10 percent higher or lower than the market price to be established according to the resolution. The authorization for the use of reacquired own shares as per this resolution is essentially the same as the aforementioned authorization for the use of reacquired treasury shares as per the resolution of the Annual General Meeting of kuka Aktiengesellschaft on May 16, 2007.

Furthermore, subject to approval by the Supervisory Board, the Executive Board is authorized under exclusion of subscription rights to sell the treasury shares thus acquired (i) within the scope of company mergers or the acquisition of companies, parts of companies, or investments in companies to third parties, (ii) in other ways than through the stock exchange or through an offer to all shareholders if these shares are sold for cash at a price not considerably less than the market price of company shares of same endowment at the moment of the sale, if and as far as the shares sold under exclusion of subscription rights in total do not exceed 10 percent of the stock capital, namely neither at the time of the effective date nor at the time of the execution of the authorization – this limitation includes such shares that were issued under exclusion of subscription rights for the service of bonds with conversion or option rights and / or taking advantage of an authorization to issue new shares from approved capital according to article 186 paragraph 3 sentence 4 AktG (German Corporation Act) – and (iii) for the purposes of listing on foreign stock exchanges on which the company shares had previously not been approved for trading. Moreover, subject to approval by the Supervisory Board, the Executive Board is authorized to withdraw the treasury shares. The purchase and the disposal authorization can be executed once or several times as well as in parts.

kuka Aktiengesellschaft and its material consolidated companies signed a syndicated loan agreement with a bank consortium led by Bayerische Hypo- und Vereinsbank ag, Dresdner Bank ag, and Landesbank Baden-Württemberg under which the lenders make an amount of up to € 305 million available. This covers the material debt requirements of the kuka Group (including filing of bank guarantees). The contract includes a change of control clause that is typical in the industry under the terms of which the syndicated banks can demand repayment of the loan in the event that a shareholder (or several shareholders working together) acquire(s) control of at least 30 percent of the voting rights of kuka Aktiengesellschaft. If kuka Aktiengesellschaft were unable to immediately secure refinancing from the market in such a case, it could cause the company to be unable to pay its creditors and thereby could lead to the insolvency of kuka Aktiengesellschaft.

No compensation agreements exist on the part of the company for the scenario of a take-over bid with members of the Executive Board or employees.

compensation report

The Compensation Report explains the basis for the establishment of the compensation for the Executive Board and the Supervisory Board as well as its amount and structure. Additionally, it contains disclosures regarding the ownership of shares by the Executive Board and Supervisory Board and transactions with kuka Aktiengesellschaft. The report follows the recommendations of the German Corporate Governance Code and contains disclosures, which are necessary according to the regulations of the commercial code, including the disclosure of Executive Board compensation pursuant to articles 314, 315 of the German Commercial Code (hgb). The audited Compensation Report is part of the consolidated report. It is included in the Corporate Governance Report.