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As filed with the Securities and Exchange Commission on November 13, 2014

Registration No. 333-197229

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

FIAT CHRYSLER AUTOMOBILES N.V.

(formerly Fiat Investments N.V.)

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

The Netherlands   3711   Not Applicable

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification Number)

 

 

Fiat House

240 Bath Road

Slough SL1 4DX

United Kingdom

Tel. No.: +44 (0) 1753 519581

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Richard K. Palmer

c/o Chrysler Group LLC

1000 Chrysler Drive

Auburn Hills, Michigan 48326

Tel. No.: (248) 512-2950

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Scott D. Miller, Esq.

Sullivan & Cromwell LLP

125 Broad Street

New York, NY 10004

Tel. No.: (212) 558-4000

 

Giorgio Fossati

c/o Fiat Chrysler Automobiles N.V.

25 St. James’ Street

London SW1A 1HG

United Kingdom

 

William V. Fogg, Esq.

Johnny G. Skumpija, Esq.

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, NY 10019

Tel. No.: (212) 474-1000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities

to be registered

  Proposed maximum
aggregate offering price(1)
  Amount of
registration fee(2)(3)

Common shares, nominal value €0.01

  $200,000,000   $23,240

Special voting shares, nominal value €0.01

   

Mandatory Convertible Securities(4)

   

 

 

(1)  Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act.
(2)  Calculated at a rate equal to 0.0001162 multiplied by the proposed maximum aggregate offering price.
(3)  $11,620 has been previously paid in connection with this offering.
(4)  In accordance with Rule 457(i) under the Securities Act, this Registration Statement also registers the common shares that are initially issuable upon conversion of the Mandatory Convertible Securities registered hereby.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.


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EXPLANATORY NOTE

This Registration Statement contains a prospectus relating to an offering of common shares of FCA (for purposes of this Explanatory Note, the “Common Shares Prospectus”), together with the additional and alternative prospectus pages described below relating to an offering of mandatory convertible securities by FCA (for purposes of this Explanatory Note, the “Mandatory Convertible Securities Prospectus”). The complete Common Shares Prospectus follows this Explanatory Note. Following the Common Shares Prospectus are the following alternative and additional pages for the Mandatory Convertible Securities Prospectus:

 

  Ÿ   front and back cover pages for the Mandatory Convertible Securities Prospectus, which will replace the front and back cover pages of the Common Shares Prospectus;

 

  Ÿ   pages for the “Prospectus Summary—The Offering” section of the Mandatory Convertible Securities Prospectus, which will replace the “Prospectus Summary—The Offering” section of the Common Shares Prospectus;

 

  Ÿ   pages for the “Risk Factors—Risks Related to this Offering and Ownership of Our Mandatory Convertible Securities” section, which will be added to the “Risk Factors—Risks Related to the Merger and the FCA Shares” section of the Common Shares Prospectus;

 

  Ÿ   pages for the “Ratio of Earnings to Fixed Charges” section, which will be added to the Mandatory Convertible Securities Prospectus;

 

  Ÿ   pages for the “Description of Mandatory Convertible Securities” section, which will be added to the Mandatory Convertible Securities Prospectus;

 

  Ÿ   pages for the “Tax Consequences” section, which will be added to the “Tax Consequences” section relating to our common shares in the Common Shares Prospectus; and

 

  Ÿ   pages for the “Underwriting” section of the Mandatory Convertible Securities Prospectus, which will replace the “Underwriting” section of the Common Shares Prospectus.


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The Information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS

SUBJECT TO AMENDMENT AND COMPLETION, DATED                     , 2014.

 

LOGO

Common Shares

This is a public offering of                      common shares of Fiat Chrysler Automobiles N.V. (“FCA”). Our common shares are listed on the New York Stock Exchange (“NYSE”) under the symbol FCAU and on the Mercato Telematico Azionario (“MTA”). On November 11, 2014, the last reported sale price of our common shares on the NYSE was $11.42 per share. We will make this offering of common shares from some or all of the 35 million of our common shares currently held by us as treasury shares of FCA.

Concurrently with this offering, we are making a public offering of $                     notional amount of our mandatory convertible securities (“Mandatory Convertible Securities”). We cannot assure you that the offering of Mandatory Convertible Securities will be completed or, if completed, on what terms it will be completed. The closing of this offering is not conditioned upon the closing of the offering of Mandatory Convertible Securities, but the closing of our offering of Mandatory Convertible Securities is conditioned upon the closing of this offering.

Holders of our common shares may elect to participate in our loyalty voting structure. See “The FCA Shares, the FCA Articles of Association and Terms and Conditions of our Special Voting Shares” for additional information for terms and conditions related to your ability to obtain our special voting shares.

Investing in our common shares involves risk. See Risk Factors beginning on page 15 to read about factors you should consider before buying our common shares.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Public offering price

     $                     $               

Underwriting discount and commissions

     $                     $               

Proceeds, before expenses, to us

     $                     $               

We have granted the underwriters the option to purchase up to an additional         common shares at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the common shares against payment in New York, New York on                     , 2014.

 

 

 

J.P. Morgan

      Goldman, Sachs & Co.

Barclays

      UBS Investment Bank

 

 

Prospectus dated                     , 2014.


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Through and including                     , 2014 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the information requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), and, in accordance therewith, are required to file with the SEC annual reports on Form 20-F within four months of our fiscal year-end, and provide to the SEC other material information on Form 6-K. These reports and other information may be inspected and copied at the public reference facilities maintained by the SEC or obtained from the SEC’s website as provided below.

As a foreign private issuer, we are exempt under the Exchange Act from, among other things, certain rules prescribing the furnishing and content of proxy statements, and our directors, executive officers and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies the securities of which are registered under the Exchange Act, including the filing of quarterly reports on Form 10-Q or current reports on Form 8-K. However, we furnish or make available to our shareholders annual reports containing our audited consolidated financial statements prepared in accordance with the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) and make available to our shareholders quarterly reports containing our unaudited interim financial information for the first three fiscal quarters of each fiscal year.

You may read and copy any document we file with or furnish to the SEC free of charge at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain documents we file with or furnish to the SEC on the SEC website at www.sec.gov. The address of the SEC’s website is provided solely for the information of prospective investors and is not intended to be an active link. Please visit the website or call the SEC at 1 (800) 732-0330 for further information about its public reference room. Reports and other information concerning the business of FCA may also be inspected at the offices of the New York Stock Exchange, 11 Wall Street, New York, New York 10005.

We also make our periodic reports as well as other information filed with or furnished to the SEC available, free of charge, through our website, at www.fcagroup.com, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. The information on or that can be accessed through our website is not part of this prospectus.

 

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TABLE OF CONTENTS

 

    Page

WHERE YOU CAN FIND MORE INFORMATION

    i  

CERTAIN DEFINED TERMS

    iii   

NOTE ON PRESENTATION

    iv   

MARKET AND INDUSTRY INFORMATION

    v   

CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS

    vi   

SUMMARY

    1  

RISK FACTORS

    15  

THE FCA MERGER

    36   

USE OF PROCEEDS

    38   

CAPITALIZATION

    39   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

    40  

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

    43   

CONCURRENT OFFERING OF MANDATORY CONVERTIBLE SECURITIES

    54   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE FIAT GROUP
    57   

MARKET PRICES

    152  

EXCHANGE RATES

    153  

BUSINESS

    154  

MANAGEMENT

    195   
REMUNERATION OF THE MEMBERS OF THE BOARD OF DIRECTORS AND THE GROUP EXECUTIVE COUNCIL OF FCA     207   

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

    212   
THE FCA SHARES, ARTICLES OF ASSOCIATION AND TERMS AND CONDITIONS OF THE SPECIAL VOTING SHARES     214   

SHARES ELIGIBLE FOR FUTURE SALE

    229   

TAX CONSEQUENCES

    230   

UNDERWRITING

    249   

LEGAL MATTERS

    255   

EXPERTS

    255   

ENFORCEMENT OF CIVIL LIABILITIES

    255   

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS OF FIAT S.P.A.

    F-1  

 

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CERTAIN DEFINED TERMS

In this prospectus, unless otherwise specified, the terms “we,” “our,” “us,” the “Group,” the “Fiat Group,” the “Company” and “FCA” refer to Fiat Chrysler Automobiles N.V., together with its subsidiaries, following completion of the merger of Fiat S.p.A. with and into the Company on October 12, 2014, the “Merger”, or to Fiat S.p.A. together with its subsidiaries, prior to the Merger, as the context may require. References to “Fiat” refer solely to Fiat S.p.A., the predecessor of FCA prior to the Merger. In each case, these references reflect the Demerger (as defined below) and include Chrysler Group LLC (together with its direct and indirect subsidiaries, “Chrysler”) following its inclusion in the scope of consolidation of Fiat beginning on June 1, 2011, unless the context otherwise requires. The term “Demerger” refers to the transaction pursuant to which Fiat transferred a portion of its assets and liabilities to Fiat Industrial S.p.A. (“Fiat Industrial”) in the form of a scissione parziale proporzionale (“partial proportionate demerger” in accordance with Article 2506 of the Italian Civil Code, with effect from January 1, 2011 (now known as CNH Industrial N.V. (“CNH Industrial” or the “CNHI Group”))).

See “Note on Presentation” below for additional information regarding the financial presentation.

 

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NOTE ON PRESENTATION

This prospectus includes the consolidated financial statements of the Fiat Group for the years ended December 31, 2013, 2012 and 2011 prepared in accordance with IFRS, which reflect the retrospective application of the amendments to IAS 19 – Employee Benefits (“IAS 19 revised”) and IAS 1 – Presentation of Financial Statements and IFRS 11 – Joint Arrangements (“IFRS 11”), which became effective from January 1, 2013. As allowed by the transition provisions in IFRS 11, this standard was not applied to the consolidated income statement, consolidated statement of comprehensive income/(loss), consolidated statement of cash flows and consolidated statement of changes in equity for the year ended December 31, 2011 which accordingly are not comparable with those for the years ended December 31, 2013 and 2012. We refer to these consolidated financial statements collectively as the “Annual Consolidated Financial Statements.”

This prospectus also includes the unaudited interim consolidated financial statements of the Fiat Group for the three and nine months ended September 30, 2014 prepared in accordance with IAS 34 Interim Financial Reporting. We refer to those interim consolidated financial statements as the “Interim Consolidated Financial Statements.”

On May 24, 2011, the Fiat Group acquired an additional 16 percent (on a fully-diluted basis) of Chrysler, increasing its interest to 46 percent (on a fully-diluted basis). As a result of the potential voting rights associated with options that became exercisable on that date, the Fiat Group was deemed to have obtained control of Chrysler for purposes of consolidation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group—Consolidation of Chrysler and Comparability of Information.” The operating activities from this acquisition date through May 31, 2011 were not material to the Fiat Group. As such, Chrysler was consolidated on a line-by-line basis by Fiat with effect from June 1, 2011. Therefore the results of operations and cash flows for the years ended December 31, 2013 and 2012 are not directly comparable with those for the year ended December 31, 2011. For additional information, see Note “Changes in the Scope of Consolidation” to the Annual Consolidated Financial Statements included elsewhere in this prospectus.

The Fiat Group’s financial information is presented in Euro except that, in some instances, information in U.S. dollars is provided in the Annual Consolidated Financial Statements and information included elsewhere in this prospectus. All references in the prospectus to “Euro” and “€” refer to the currency introduced at the start of the third stage of European Economic and Monetary Union pursuant to the Treaty on the Functioning of the European Union, as amended, and all references to “U.S. dollars,” “U.S.$” and “$” refer to the currency of the United States of America.

The language of the prospectus is English. Certain legislative references and technical terms have been cited in their original language in order that the correct technical meaning may be ascribed to them under applicable law.

Certain totals in the tables included in this prospectus may not add due to rounding.

 

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MARKET AND INDUSTRY INFORMATION

In this prospectus, we include and refer to industry and market data, including market share, ranking and other data, derived from or based upon a variety of official, non-official and internal sources, such as internal surveys and management estimates, market research, publicly available information and industry publications. Market share, ranking and other data contained in this prospectus may also be based on our good faith estimates, our own knowledge and experience and such other sources as may be available. Market share data may change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data-gathering process, different methods used by different sources to collect, assemble, analyze or compute market data, including different definitions of vehicle segments and descriptions and other limitations and uncertainties inherent in any statistical survey of market shares or size. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. Although we believe that this information is reliable, we have not independently verified the data from third-party sources. In addition we normally estimate our market share for automobiles and commercial vehicles based on registration data. In a limited number of markets where registration data are not available, we calculate our market share based on estimates relating to sales to final customers. Such data may differ from data relating to shipments to our dealers and distributors. While we believe our internal estimates with respect to our industry are reliable, our internal company surveys and management estimates have not been verified by an independent expert, and we cannot guarantee that a third party using different methods to assemble, analyze or compute market data would obtain or generate the same result. The market share data presented in this prospectus represents the best estimates available from the sources indicated as of the date hereof but, in particular as they relate to market share and our future expectations, involve risks and uncertainties and are subject to change based on various factors, including those discussed under the caption “Risk Factors.”

For an overview of the automotive industry, see “Business—Industry Overview—Our Industry.”

 

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CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS

Statements contained in this prospectus, particularly those regarding possible or assumed future performance, competitive strengths, costs, dividends, reserves and growth of FCA, industry growth and other trends and projections and estimated company earnings are “forward-looking statements” that contain risks and uncertainties. In some cases, words such as “may,” “will,” “expect,” “could,” “should,” “intend,” “estimate,” “anticipate,” “believe,” “outlook,” “continue,” “remain,” “on track,” “design,” “target,” “objective,” “goal,” “plan” and similar expressions are used to identify forward-looking statements. These forward-looking statements reflect the respective current views of the Group with respect to future events and involve significant risks and uncertainties that could cause actual results to differ materially. These factors include, without limitation:

 

  Ÿ   our ability to reach certain minimum vehicle sales volumes;

 

  Ÿ   changes in the general economic environment and changes in demand for automotive products, which is subject to cyclicality, in particular;

 

  Ÿ   our ability to enrich our product portfolio and offer innovative products;

 

  Ÿ   the high level of competition in the automotive industry;

 

  Ÿ   our ability to expand certain of our brands internationally;

 

  Ÿ   changes in our credit ratings;

 

  Ÿ   our ability to realize anticipated benefits from any acquisitions, joint venture arrangements and other strategic alliances;

 

  Ÿ   our ability to integrate the Group’s operations;

 

  Ÿ   exposure to shortfalls in the Group’s defined benefit pension plans, particularly those of Chrysler;

 

  Ÿ   our ability to provide or arrange for adequate access to financing for our dealers and retail customers, and associated risks associated with financial services companies;

 

  Ÿ   our ability to access funding to execute our business plan and improve our business, financial condition and results of operations;

 

  Ÿ   various types of claims, lawsuits and other contingent obligations against us, including product liability, warranty and environmental claims and lawsuits;

 

  Ÿ   disruptions arising from political, social and economic instability;

 

  Ÿ   material operating expenditures in relation to compliance with environmental, health and safety regulation;

 

  Ÿ   our timely development of hybrid propulsion and alternative fuel vehicles and other new technologies to enable compliance with increasingly stringent fuel economy and emission standards in each area in which we operate;

 

  Ÿ   developments in our labor and industrial relations and developments in applicable labor laws;

 

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  Ÿ   risks associated with our relationships with employees and suppliers;

 

  Ÿ   increases in costs, disruptions of supply or shortages of raw materials;

 

  Ÿ   exchange rate fluctuations, interest rate changes, credit risk and other market risks;

 

  Ÿ   our ability to achieve some or all of the financial and other benefits we expect will result from the separation of Ferrari; and

 

  Ÿ   other factors discussed elsewhere in this prospectus.

Furthermore, in light of ongoing difficult macroeconomic conditions, both globally and in the industries in which we operate, it is particularly difficult to forecast results, and any estimates or forecasts of particular periods that are provided in this prospectus are uncertain. We expressly disclaim and do not assume any liability in connection with any inaccuracies in any of the forward-looking statements in this prospectus or in connection with any use by any third party of such forward-looking statements. Actual results could differ materially from those anticipated in such forward-looking statements. We do not undertake an obligation to update or revise publicly any forward-looking statements.

Additional factors which could cause actual results and developments to differ from those expressed or implied by the forward-looking statements are included in the section “Risk Factors” of this prospectus.

 

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SUMMARY

This summary highlights selected information from this prospectus and might not contain all of the information that is important to you. You should read carefully the entire prospectus to fully understand the transactions.

Fiat Chrysler Automobiles

We are a global automotive group engaged in designing, engineering, manufacturing, distributing and selling vehicles and components and production systems. We are the seventh largest automaker in the world, based on total vehicle sales in 2013. With the combination of Fiat’s historical presence in Europe and leading position in Latin America as well as Chrysler’s strength in North America, we now have operations in approximately 40 countries and sell our vehicles directly or through distributors and dealers in more than 150 countries. We design, engineer, manufacture, distribute and sell vehicles for the mass market under the Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia and Ram brands and the SRT performance vehicle designation. We are also a leader in luxury vehicles through the Ferrari and Maserati brands. We support our vehicle sales with after-sales services and parts worldwide using the Mopar brand for mass market vehicles. We make available retail and dealer financing, leasing and rental services through our subsidiaries, joint ventures and commercial arrangements. We also operate in the components and production systems sectors through the Magneti Marelli, Teksid and Comau brands.

In 2013, we shipped 4.4 million vehicles, a 3 percent increase over 2012. For the year ended December 31, 2013, we reported net revenues of €86.6 billion, EBIT (earnings before interest and taxes) of €3.0 billion and net profit of €2.0 billion. At September 30, 2014, we had available liquidity of €21.7 billion (including €3.1 billion available under undrawn committed credit lines) and net industrial debt of €11.4 billion. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group—Non-GAAP Financial Measures—Net Industrial Debt.” Our activities are carried out through six reportable segments: four regional mass-market vehicle segments (NAFTA, LATAM, APAC and EMEA), a global Luxury Brands segment and a global Components segment (see “Business—Overview of Our Business”).

In NAFTA we are the fourth largest, and over the past four years we have been the fastest growing, automaker by annual vehicle sales volume, increasing our market share by approximately 1.5 percentage points from 2011 to the nine months ended September 30, 2014. Our primary vehicle brands in the region are Chrysler, Jeep, Dodge, Ram and Fiat as well as vehicles under the SRT performance designation. We sell our vehicles and service parts through a network of 3,204 dealers in NAFTA as of December 31, 2013. Chrysler’s operations, representing substantially all of our NAFTA operations, have been fundamentally transformed since the alliance between Fiat and Chrysler was commenced in 2009, through a transformed brand focus, a renewed, updated and more fuel efficient product lineup, a streamlined distribution network, an improved cost structure and new management. We believe our strong product offering in sport utility vehicles, or SUVs, and pick-up trucks through our Jeep and Ram brands has been a key factor in our recent growth, as they represent the fastest growing vehicle segments in NAFTA. Approximately 70 percent of our total U.S. sales in 2013 were minivans, utility vehicles and pick-up trucks (including van and medium duty trucks). Jeep, founded in 1941, is a globally recognized brand focused exclusively on the utility vehicles segment. The Jeep Grand Cherokee is the most awarded SUV ever. Ram, a standalone brand since 2009, offers light- and heavy-duty pick-up trucks such as the Ram 1500, which in 2013 became the first truck to be named Motor Trend’s “Truck of the Year” for two consecutive years, as well as chassis cabs and commercial vans. We believe our growth has been enhanced by our introduction of new vehicles in segments in which Chrysler historically did not compete in NAFTA and also by the successful renewals of existing vehicles.

Our operations in LATAM are focused on mass market vehicles, which we sell primarily under the Fiat brand along with the Chrysler, Jeep, Dodge and Ram brands. Brazil and Argentina are our largest markets in LATAM, representing approximately 95 percent of our vehicle sales in the region in 2013. In Brazil, the largest

 

 

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market in LATAM, we have significant manufacturing capacity and extensive distribution activities, which we believe has enabled us to obtain a market leading share of 21.7 percent in Brazil for the nine months ended September 30, 2014. We believe our scale in the region helps us to target vehicle offerings to local consumer preferences, reflected by our market leadership in the mini and small car segments, which together account for approximately 60 percent of Brazilian vehicle industry sales for the nine months ended September 30, 2014. We are constructing a new production facility at Pernambuco that we expect to open in 2015. We believe the new facility will position us for future growth in market share and profitability in the region by enabling us to expand our presence in other vehicle segments to maintain our leadership position and further enhance our margins in the region.

In APAC, we have a smaller presence focused on the five major markets of China, Japan, India, South Korea and Australia. Between 2009 and 2013, these markets were some of the fastest growing markets for vehicle sales globally. Recognizing the potential for continued growth, we have invested in joint ventures with local manufacturers and distributors in China and India, and formed relationships with third party distributors in other markets. In China, the fastest growing market globally between 2009 and 2013, we operate through a joint venture with Guangzhou Automobile Group Co. for the production of engines and vehicles for the Chinese market, as well as the exclusive distribution of Fiat brand vehicles. In light of customer demand and our growth expectations for Chinese utility vehicle sales, we also plan to introduce three locally-produced Jeep vehicles beginning in 2015. In APAC more generally, we sell a range of vehicles including small, mid-size and compact cars and utility vehicles, and we continuously assess opportunities to introduce new brands and vehicles from our global portfolio. We expect to increase our sales growth in APAC as we invest further in brand development, localized production, and the continued expansion of our regional dealer network.

In EMEA, our primary brands are Abarth, Alfa Romeo, Chrysler, Fiat, Fiat Professional, Jeep and Lancia. Europe (which includes the member countries of the European Union and the European Free Trade Association) is the largest market in the region. We are currently the seventh largest passenger car automaker in Europe and have a longstanding presence across all key vehicle segments for the industry. This is particularly the case in Italy, where 5 of our 8 EMEA-based vehicle production facilities are located (including facilities operated by our joint ventures) as of December 31, 2013. Across EMEA we have begun a substantial realignment of our vehicle portfolio offerings, manufacturing capacity, and distribution networks. We are repositioning our core Fiat brand by reducing the number of mass market vehicle models offered and focusing on the highly successful Fiat 500 model family, of which we have sold over 1.3 million vehicles in EMEA since 2007, and the Fiat Panda model family. We have already begun repositioning a significant portion of our European automotive capacity to produce higher value added vehicles, including those for export, including the Jeep Renegade and premium Alfa Romeo vehicles. We have also realigned our European dealer network to better match our vehicle offering, and we believe we are well-positioned to benefit from an expected recovery in European market conditions. In addition, we had an 11.6 percent market share of light commercial vehicles, or LCVs, in Europe in 2013, driven by sales of the Fiat Professional brand.

We sell Luxury Brand vehicles under the Ferrari and Maserati brands. Ferrari, the preeminent performance and luxury car brand, is a sports and racing car manufacturer. Ferrari was founded as a racing team in 1929 by Enzo Ferrari and began producing street cars in 1947. We acquired 50 percent of Ferrari in 1969, and over time expanded this stake to our current 90 percent ownership. Scuderia Ferrari, the brand’s successful racing team division, has won numerous Formula One titles, including 16 constructors’ championships and 15 drivers’ championships. Ferrari’s street car division currently produces vehicles ranging from sports cars (such as the 458 Italia, the 458 Spider and the California), to gran turismo models (such as the F12 Berlinetta and the FF), designed for long-distance, high-speed journeys. We believe that Ferrari enthusiasts seek state-of-the-art in luxury sports cars, with a special focus on Italian design and craftsmanship, along with unparalleled performance both on the track and on the road. Ferrari recently launched the California T, which brought turbocharging back to its street cars for the first time since 1992. Ferrari from time to time introduces exclusive limited editions,

 

 

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including most recently LaFerrari, which attracted orders far exceeding its limited vehicle production run before its debut at the 2013 Geneva Motor Show. We believe LaFerrari sets a new benchmark for the sector, incorporating the latest technological innovations that Ferrari will apply to future models.

In 2013, Ferrari sold 6,922 street cars, recording net revenues of €2.3 billion and EBIT of €364 million. In the first nine months of 2014, we sold approximately 5.2 thousand Ferrari street cars to retail customers, and Ferrari had net revenue of €2,011 million and EBIT of €274 million. While we carefully manage the supply of Ferrari cars to uphold the brand equity and scarcity value, we believe we can modestly increase volumes without compromising these principles in light of the strong growth globally in high net worth individuals, particularly in new and emerging markets. Our carefully controlled volume output, in combination with an increasing global demand, helps to preserve the exclusivity of the Ferrari brand. Ferrari drives further revenues and margins by offering its customers personalization programs.

Maserati, a luxury vehicle manufacturer founded in 1914, became part of the Group in 1993. Maserati’s current vehicles include the new Maserati Quattroporte and the Ghibli (luxury four door sedans), as well as the GranTurismo, the brand’s first modern two door, four seat coupe, also available in a convertible version. Further, we recently presented a sports car concept (the Maserati Alfieri) expected to be put into production in the coming years. We believe that Maserati customers typically seek a combination of style, both in high quality interiors and external styling, performance, sports handling and comfort. In 2013, launches of the Maserati Quattroporte and Ghibli helped Maserati significantly increase volumes and profitability. Approximately 11,600 Maserati vehicles were sold to retail customers in 2013, representing an 85 percent increase over 2012, while approximately 24,100 Maserati vehicles were sold to retail customers in the first nine months of 2014. We intend to launch the new Levante SUV in 2015, which will be the brand’s first entry into the rapidly growing luxury SUV market. The launch of the Levante SUV will extend the Maserati brand across the range of the luxury vehicle segment and is expected to assist in achieving further growth in luxury vehicle sales.

Recent Developments

On October 29, 2014 we announced our intention to enter into a series of transactions intended to strengthen our balance sheet and better manage our funding requirements through our 2014 – 2018 business plan, or the Business Plan. These transactions included an offering of common shares as well as a proposed concurrent offering of mandatory convertible securities. We also intend to eliminate existing contractual terms limiting the free flow of capital among Group companies including through the redemption of each series of Chrysler Group’s outstanding secured senior notes no later than their initial optional redemption dates in June 2015 and 2016, as well as the refinancing of outstanding Chrysler Group terms loans and revolving credit facilities at or before this time.

We also announced our intention to separate Ferrari from FCA through a combination of a public offering of 10 percent of Ferrari from our current shareholding and a distribution of our remaining 80 percent of Ferrari shares to our shareholders. We believe this will facilitate the long term success of both FCA and Ferrari by allowing each company to independently pursue its own growth strategy. In connection with the separation, we intend to receive a distribution from Ferrari. The separation of Ferrari is expected to occur during 2015, subject to final approvals and other customary requirements. The separation of Ferrari is also expected to highlight its inherent value as a premiere global luxury brand, and as the defining brand in the luxury sports car segment as evidenced by its technical, production, and distribution requirements and higher underlying margins relative to our mass market vehicles.

 

 

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Competitive Strengths

We believe the competitive strengths described below contribute to our ability to pursue growth and profitability, and achieve our strategic objectives:

Portfolio of clearly defined automotive brands.

We have a portfolio of clearly defined brands that range from mass market brands such as Chrysler, Dodge, Fiat, Fiat Professional, Lancia and Ram, to globally recognized category leaders such as Jeep, and premium brands such as Alfa Romeo. Our positioning across the spectrum of vehicles allows us to pursue a multi-brand strategy, matching brand attributes to consumer preferences within each vehicle segment and market. We believe this provides us with the ability to best position our vehicles to capture market share and significant growth opportunities in their respective vehicle segments. Within our broader portfolio, we are able to leverage our highly recognized brands and established distribution networks to generate growth through the introduction of new vehicles in segments where we do not have an existing presence.

We manage our portfolio of brands on a comprehensive basis. By focusing each brand on its core defining attributes we avoid brand overlap and look to grow the equity in each of our brands. In order to leverage our brand recognition and names in various regions, we rebadge certain vehicles manufactured and sold in a region under one brand for sale in another region under a different brand based on brand recognition and equity in the particular region. We believe this will allow us to optimize our brand portfolio globally while also pursuing growth.

Our Jeep brand is a global leader in the various utility vehicle segments, has a strong reputation for its versatility and each model is designed to offer best-in-class off-road capability. Jeep is the original utility vehicle, dating back to 1941, and focuses on an outdoor and adventure lifestyle. Further evidence of the strong brand value is found in its extensive history of both industry and consumer accolades, with the Jeep Grand Cherokee being the most awarded SUV ever. Our ongoing investment in the brand is intended to expand our vehicle portfolio by localizing production in the regions outside of NAFTA and capitalizing on the strong brand equity. Between 2009 and 2014, we launched five new Jeep brand vehicles, introduced eight significantly refreshed vehicles, and have undertaken cumulative investment of €2.9 billion. This has contributed to sales growth of over 117 percent from 2009 to 2013.

In the luxury segment our strategy at Maserati has resulted in significant growth, and we believe there are further growth opportunities for the brand. Maserati increased sales 85 percent from 2012 to 2013 through the introduction of new models such as the new Quattroporte and Ghibli, and increased investment in production and distribution. Maserati vehicles are sold through an exclusive distribution network of 310 dedicated dealerships worldwide as of December 31, 2013 (plus additional joint Ferrari/Maserati dealerships). In 2013 we sold approximately 11,600 vehicles to retail customers, and Maserati had net revenue of €1.7 billion and EBIT of €106 million. In the first nine months of 2014, we sold approximately 24,100 Maserati vehicles to retail customers, and Maserati had net revenue of €2.039 million and EBIT of €210 million. We believe Maserati will continue its strong pace of growth as we introduce new models such as the Levante SUV and the Alfieri Coupe and Cabrio that complete the brand portfolio as well as through further investment in production, distribution and marketing.

We intend to apply this strategy on a larger scale to reinvigorate Alfa Romeo as a premium mass market vehicle brand. Alfa Romeo, founded in 1910, has been part of the Group since 1986. Alfa Romeo has a well-known global image from its long, sporting tradition and Italian design. The Alfa Romeo brand is intended to appeal to drivers seeking high-level performance and handling combined with attractive and distinctive appearance. Based on our successful and proven growth strategy at Maserati, we intend to reintroduce Alfa Romeo vehicles globally beginning in 2015 with eight new models currently planned for production as part of an extensive product plan to grow our volumes in the global premium segment.

 

 

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Our Fiat 500 family of vehicles capitalizes on the history of the original Fiat 500 first introduced in 1936 and relaunched in 1957. At that time the Fiat 500 was one of the very first compact cars introduced that made mobility affordable to a wide market of potential consumers. We reintroduced the Fiat 500 in 2007. Following the reintroduction of the Fiat 500 model, we also introduced a range of product derivatives, mostly in new vehicle segments, such as the 500L and 500X and as of September 30, 2014 have sold more than 1.6 million units of the Fiat 500 family of vehicles globally since 2007.

Under the Mopar brand name, we sell a comprehensive line of aftermarket parts and provide service through our dealers and customer care, which we believe enhances customer loyalty. We also offer Mopar service contracts throughout North America, the Middle East, Southeast Asia, East Asia, South Africa, Australia and Europe. There are currently over 70 million Group vehicles on the road worldwide that provide a strong base for the demand of our Mopar parts and service contracts.

Our global presence.

We are the seventh largest global automaker by annual vehicle sales with a distribution network comprised of more than 6,625 independent dealers and distributors in over 150 countries as of December 31, 2013. We believe our global presence positions us well to capitalize on growth opportunities in both the developed and emerging markets. It also allows us to design vehicles based on global platforms to enhance the efficiency of our vehicle development investments. We believe our global scale and design integration will enable us to maintain a highly flexible manufacturing footprint to not only produce locally, but also to export vehicles when appropriate to optimize global capacity utilization.

Over the last four years, NAFTA has been the fastest growing developed vehicle market in the world. Within this rapidly growing market, we have increased our market share by approximately 1.5 percentage points from 2011 to the nine months ended September 30, 2014, more than any other automaker in the region. Our vehicle lineup of new and significantly refreshed vehicles covers most key vehicle segments, such as compact and mid-size cars, minivans, SUVs, crossovers, pick-up trucks and light commercial vehicles, or LCVs.

Our leadership in Brazil and positioning in LATAM is due in part to our strong vehicle lineup in the mini and small segments, which represent a substantial majority of retail sales in the region, along with our longstanding presence and local production capabilities.

In APAC, we have a smaller but growing presence. Our APAC market share in the retail vehicle segment has increased 60 basis points from 2011 to the nine months ended September 30, 2014, as new vehicles from our global portfolio have been introduced to the region. We expect to continue to experience market share gains and sales volume growth in this key geographic region as we undertake brand development, localized production, and the continued expansion of our regional dealer networks particularly in China and India. The entry of Jeep, through both import and eventually localized production in China, is an important part of our growth strategy as we expect the utility vehicle segment to continue to be a leading growth segment.

In EMEA, we believe we are well-positioned to benefit from a recovery in the European market and given our extensive distribution and sales network. We are a leader in selected traditional core market segments, such as in mini cars, LCVs and small multi-purpose vehicles, or MPVs.

Broad-based product portfolio with a strong cadence of planned new vehicle offerings.

Our global vehicle lineup consists of vehicles in virtually every vehicle segment, from mini and small cars to MPVs, utility vehicles, trucks and LCVs. We believe our product offerings are particularly strong in the highest growth areas of the industry. Our mini and small cars are positioned in the highest volume segments in our key markets of Europe and Brazil, while generating meaningful new growth in NAFTA, as consumers are seeking, and regulations encouraging, the sale of more fuel efficient vehicles. We are the market leader in the

 

 

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mini and small car segments of the European and Brazilian markets, with market shares of 12.2 percent and 23 percent, respectively, for the nine months ended September 30, 2014. In NAFTA, our vehicle lineup is strongest in the SUV, pick-up truck and minivan categories, with SUVs representing the fastest growing segment in the region.

Since the 2009 commencement of the alliance between Fiat and Chrysler, we have launched 43 new and 36 significantly refreshed vehicles globally. Excluding Alfa Romeo, we are planning to launch 23 new or significantly refreshed vehicles in NAFTA, 7 new or significantly refreshed vehicles in LATAM, 11 new or significantly refreshed vehicles in APAC and 8 new or significantly refreshed vehicles in EMEA from 2016 through 2018. Our Alfa Romeo brand was re-introduced to the U.S. market in 2014 with the launch of the 4C. We are planning to launch a full range of compact, mid-size, full-size and UV models to capture market share in the premium segment under our Alfa Romeo brand. While our product cadence will require significant investment, we expect it to deliver substantial growth in sales and profitability. Many of our new vehicles are entering segments in which we have either not historically had any vehicle offering, or offered a vehicle that did not compete well in those segments. As a result, we believe we are well-positioned to increase market share in several vehicle segments. For example, in 2014, we launched the Jeep Renegade, our first offering in the small SUV segment. The Renegade is being manufactured in Italy on our global small-wide platform. In 2013 we introduced our first commercial van into the NAFTA market, the Ram ProMaster, a commercial van based on the Fiat Professional Ducato, which is the second best-selling LCV in Europe. In 2014 we enhanced our LCV offering in NAFTA with the introduction of the Ram ProMaster City, based on the Fiat Professional Doblo. In the luxury segment we have a strong pipeline as well, with four new Maserati vehicles being introduced through 2018, including our entry into the luxury SUV category with the Levante in 2015.

To support the success of the new vehicle launches, we are focused on developing and producing fuel-efficient vehicles, and we believe we have established ourselves as a global leader in powertrain technology with vehicles delivering high performance, greater fuel efficiency, low CO2 emissions and enhanced drivability. We have enhanced our leadership in the small engine technology with a new gasoline engine family that incorporates the latest innovations, including our proprietary MultiAir technology and direct fuel injection. Furthermore, we have optimized our powertrain portfolio. We introduced the award winning Pentastar family of engines to replace seven different engine variants. Over three million Pentastar engines have been produced since 2010. Additionally, we intend to increasingly roll out our diesel engine technology to markets outside of EMEA, as we believe the technology has a relatively attractive proposition considering incremental cost to develop and reduction in fuel consumption compared to other alternative engine technologies, including through sales of the diesel powered Jeep Grand Cherokee and Ram 1500 in NAFTA.

World class manufacturing capabilities, with access to low cost capacity for future growth.

We operate a global manufacturing footprint that we believe will enable us to execute on our product strategy. As of December 31, 2013, we operated 159 manufacturing facilities (including vehicle and light commercial vehicle assembly, powertrain and components facilities) principally in North America, Europe, Brazil and China. Approximately 38 percent of our total production capacity (including JVs) is located in relatively low cost countries, such as Brazil, Mexico and Poland. In 2006, we instituted World Class Manufacturing, or WCM, initiatives that allow us to continuously improve our manufacturing efficiency, productivity and quality. We currently have 44 facilities certified as Bronze-level or higher, of which four are certified Gold, 10 Silver and 30 Bronze.

Since the beginning of 2009 we have invested €10.8 billion in upgrading existing facilities and equipment and establishing new facilities (including for the period prior to our consolidation of Chrysler beginning on June 1, 2011). This includes initiatives such as the approximately €3 billion we invested in NAFTA assembly facilities over the past five years to equip our business to deliver new vehicles including all new versions of the Chrysler 200, Jeep Cherokee and Grand Cherokee, Ram Promaster and Dodge Dart as well as

 

 

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initiatives at our Windsor, Ontario assembly facility where we assemble minivans. We are also investing in our new Pernambuco facility in Brazil, which will locally produce Jeep brand vehicles for the Brazilian market for the first time in 2015.

Our development of common vehicle platforms, which are used across brands and vehicle segments, has given us the ability to manufacture several vehicle models on the same assembly line, which allows us to accelerate the development and production of new vehicle models. This is combined with significant gains in efficiency and increased flexibility derived from WCM initiatives. We believe these efforts will allow us to reduce our aggregate expenditures related to design and development, costs associated with manufacturing, production time and labor per vehicle unit.

Highly experienced management team and track record of execution.

We believe our senior management team has extensive experience in the automotive sector. Our leadership team was formed by drawing experience leaders from both Fiat and Chrysler. Our executives operate within a clearly defined efficient corporate structure that encourages innovation and growth with appropriate oversight and controls, including adherence to a common group strategy overseen by our Chief Executive Officer.

We are led by Sergio Marchionne, who serves as our Chief Executive Officer. Mr. Marchionne joined Fiat’s board of directors in 2003 and became the CEO of Fiat S.p.A. in 2004 and CEO of Fiat Group Automobiles S.p.A. in 2005, spearheading Fiat’s return to profitability in the first year of his leadership. During his time at FCA and its predecessors, Mr. Marchionne led a number of new vehicle launches, overseeing a leadership team that has improved vehicle quality, reduced the reliance on sales incentives, and improved manufacturing efficiency, while navigating through significant industry challenges, including the global recession, which resulted in dramatically lower global vehicle sales. He led the successful repositioning of Fiat from a local automaker focused on the European market into a global automaker competing across all major passenger vehicle segments and took management responsibility for Chrysler following the commencement of the alliance between Fiat and Chrysler, returning Chrysler to profitability within the first year of his leadership. Mr. Marchionne leads our Group Executive Council, or GEC, a team of 19 executives overseeing all aspects of our business. We believe that together with the GEC, Mr. Marchionne has transformed our corporate culture by reinforcing certain key leadership principles and behaviors, meaningfully enhanced the speed of decision-making and improved our customer focus as well as committing the Group to a transparent approach to its financial and operating targets. In addition, we believe we have implemented numerous management process improvements that have facilitated greater collaboration, both within the Group and with our dealers and suppliers globally.

Our Strategy

We announced our Business Plan in May 2014. The Business Plan includes a number of clearly defined strategic initiatives designed to capitalize on our position as a single integrated automaker to become a leading global automaker. Our strategy depends on focusing on the development of several brands with truly global appeal to drive growth, including Jeep, Alfa Romeo and Maserati. The key components of our Business Plan include:

Continue to develop the Jeep brand globally, with particular focus on LATAM and APAC.

We consider Jeep to be the leading global brand in the utility vehicle segment and intend to capitalize on our success in NAFTA by driving global expansion of the Jeep brand. In NAFTA, we have experienced 13 consecutive months of Jeep sales growth. While the NAFTA UV market continues to strengthen, we believe the UV segment in the rest of the world will grow more rapidly. We intend to leverage our existing global distribution network to sell Jeep vehicles, particularly in LATAM and APAC, as well as extending the Jeep brand

 

 

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into additional vehicle models. We have also recently introduced the new smaller Jeep Renegade in EMEA and are preparing it for launch in NAFTA and LATAM in 2015. A key element of our Jeep strategy is to increase sales in China through increased imports and localizing production. We currently intend to begin production of Jeep Cherokee vehicles in China for sale in China in 2015. A key element of our Jeep strategy also involves localization of production of Jeep brand vehicles in Brazil, beginning in 2015 at our new plant in Pernambuco. From the announcement of our Business Plan in May 2014 through 2018, we intend to grow the Jeep vehicle portfolio from five nameplates built in one country to six nameplates built in six countries.

Increase focus on the premium brands, Alfa Romeo and Maserati.

We intend to continue to execute on our premium brand strategy by developing the Alfa Romeo and Maserati brands to service global markets. We believe these efforts will help us continue to address our excess production capacity in the EMEA region, by leveraging the strong heritage and historical roots of these brands to grow the reach of these brands to all of the regions in which we operate, including by exporting vehicles manufactured in one region for sale in another region.

Recently, we successfully expanded in the premium end of the market through our introduction of two new Maserati vehicles. Our premium brand strategy is a continuation of our current strategy at Maserati, which has achieved a 148 percent increase in shipments and 120 percent revenue growth from 2012 to 2013. We intend to apply this strategy on a larger scale with Alfa Romeo by introducing several new vehicles being developed as part of an extensive product plan to address the premium market worldwide. Premium vehicles tend to generate higher margins than our mass market vehicles, and we expect increased volumes at Maserati and Alfa Romeo to favorably impact profitability by improving capacity utilization at our European facilities and improving our product mix. In addition, we intend to continue our development of the Maserati brand as a larger scale luxury vehicle brand capitalizing on the recent successful launches of the next generation Quattroporte and the all new Ghibli. We intend to introduce additional new vehicles that will allow Maserati to cover the full range of the luxury vehicle market and position it to substantially expand volumes.

Selective profitable expansion in the professional and mass market vehicle segments.

As part of our Business Plan, over the next five years, we intend to expand vehicle sales in key markets throughout the world. In order to achieve this objective, we intend to continue our efforts to localize production of Fiat brand vehicles through our joint ventures in China and India, while increasing sales of Jeep vehicles in LATAM and APAC by localizing production through our new facility in Brazil and the extension of the joint venture agreement in China to cover the production of Jeep vehicles. Local production will enable us to expand the product portfolio we can offer in these key markets and importantly position our vehicles to better address the local market demand by offering vehicles that are competitively priced within the largest segments of these markets without the cost of transportation and import duties.

We intend to increase our vehicle sales in the NAFTA region and continue to introduce new vehicles in segments where we either do not compete today or have not competed effectively, continuing to build U.S. market share by offering more competitive products under our distinctive brands.

Our strategy in the LATAM region seeks to leverage our existing vehicle offering and use new flexible manufacturing capacity and global platforms to renew our regional vehicle line up under the Fiat brand from 2017. We also intend to launch 7 Fiat models into the LATAM market between 2014 and 2018 as well as expand our lineup of Jeep branded vehicles.

Over the next five years, we believe the APAC region will be the fastest growing market for passenger cars and LCVs globally. We are primarily focused on growing our presence in China and India, where we believe our small car and SUV lineup are well positioned. We intend to substantially increase our sales from 163 thousand vehicles in 2013 by increasing our volume of locally produced vehicles, including Jeep and Fiat branded vehicles, as part of an existing joint venture. We also expect to significantly expand our dealer network, currently comprised of 423 dealerships in China and India as of December 31, 2013, to support our growth.

 

 

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We intend to leverage manufacturing capacity in the EMEA region to support growth in all regions in which we operate by producing vehicles for export from EMEA, including Jeep brand vehicles. In Europe, we expect to maintain our presence and share in traditional segments but with an increasing focus on shifting to higher margin vehicles with attractive growth prospects such as the Fiat 500 family of vehicles and the Fiat Panda family of vehicles.

In addition, we are a leading manufacturer of a full lineup of professional vehicles under the Fiat Professional and Ram brands. Our key priorities for Fiat Professional are to increase our market share in Europe, grow our presence in Eastern Europe, improve our market penetration in the Middle East and APAC and grow our presence in LATAM. With the Ram brand, we are aiming to enhance our product capabilities, grow our dealer network, expand our marketing effort and further leverage our Fiat Professional platform to bring LCVs to the NAFTA market.

Continue to standardize architectures and components.

We intend to continue to rationalize our vehicle architectures and standardize components, where practicable, to more efficiently deliver the range of products we believe necessary to increase sales volumes in each of the regions in which we operate. We seek to optimize the number of global vehicle architectures based on the range of flexibility of each architecture while ensuring that the products at each end of the range are not negatively impacted, taking into account our brand attributes and market requirements. We believe that continued architectural convergence within these guidelines will facilitate speed to market, quality improvement, optimize capital expenditures, and manufacturing flexibility. Together these will allow us to maximize product functionality and differentiation and to meet diversified market and customer needs. Over the course of the period covered by our Business Plan, we intend to reduce the number of architectures in our mass market brands by approximately 25 percent.

Continue to enhance our margins and strengthen our capital structure.

Through our numerous product and manufacturing initiatives we expect to increase our profitability, an effort on which we have made substantial progress in the past five years. We believe our product development and repositioning of our vehicle offerings, particularly entering new segments and reducing our reliance on incentives, along with increasing the number of vehicles manufactured on standardized global platforms provide an opportunity to further improve our margins.

We are committed to becoming well-capitalized with a balance sheet that will allow us to continue to invest in our business throughout economic cycles. We believe the capital raising actions we have announced, including these proposed transactions, combined with the proposed separation of Ferrari, represents a material step and substantial progress on our path to achieving investment grade metrics. We believe we have substantial liquidity to undertake our operations and implement our Business Plan. The proposed capital raising actions, along with our anticipated refinancing of certain Chrysler Group debt, which will give us the ability to more fully manage our cash resources globally, will allow us to further improve our liquidity and optimize our capital structure. Furthermore, we intend to reduce our outstanding indebtedness, which will provide us with greater financial flexibility and enhance earnings and cash flow through reducing our interest burden.

Corporate Information

FCA was incorporated as a public limited liability company (naamloze vennootschap) under the laws of the Netherlands on April 1, 2014 under the name Fiat Investments N.V. for the purposes of carrying out the reorganization of the Fiat Group, including the merger of Fiat with and into FCA (the “Merger”), following its January 2014 acquisition of the approximately 41.5 percent interest it did not already own in Chrysler. The Group’s redomiciliation to the Netherlands was to facilitate the combined Group’s listing on the New York Stock

 

 

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Exchange, or NYSE. Upon the effectiveness of the Merger, FCA was renamed Fiat Chrysler Automobiles N.V., as the successor entity to Fiat and the holding company of the combined Group. The principal executive offices of FCA are currently located at Fiat House, 240 Bath Road, Slough SL1 4DX, United Kingdom. Its telephone number is +44 (0)1753 519581.

Risk Factors

Investing in FCA shares involves risks. See “Risk Factors” beginning on page 15.

 

 

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The Offering

 

Common shares offered by us

             shares

 

Common shares subject to underwriters’ option to purchase additional common shares

             shares

 

Common shares to be outstanding after this offering if the underwriters’ option to purchase additional common shares is not exercised

             shares(1)

 

Common shares to be outstanding after this offering if the underwriters’ option to purchase additional common shares is exercised in full

             shares(1)

 

Use of proceeds

We intend to use the proceeds of this offering, together with the proceeds of the concurrent Mandatory Convertible Securities offering, for general corporate purposes. See “Use of Proceeds”.

 

Risk Factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common shares.

 

New York Stock Exchange (“NYSE”) symbol

FCAU

 

Concurrent Offering

Concurrently with this offering of common shares, we are offering $                     of our Mandatory Convertible Securities in a public offering. The completion of this offering is not conditioned upon the closing of the offering of the Mandatory Convertible Securities.

 

(1) Excludes the                    common shares registered and available for issuance pursuant to the Fiat S.p.A. 2012 Long-Term Incentive Plan and the Mandatory Convertible Securities. The obligations of the Fiat S.p.A. 2012 Long-Term Incentive Plan were assumed by FCA in the Merger.

 

 

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Summary Historical Financial Data

Fiat Group

The following sets forth selected historical consolidated financial data of the Fiat Group and has been derived from:

 

  Ÿ   the Interim Consolidated Financial Statements for the three and nine months ended September 30, 2014 and 2013, included elsewhere in this prospectus;

 

  Ÿ   the Annual Consolidated Financial Statements for the years ended December 31, 2013, 2012 and 2011, included elsewhere in this prospectus; and

 

  Ÿ   the annual consolidated financial statements of the Fiat Group for the years ended December 31, 2010 and 2009, which are not included in this prospectus.

The accompanying Interim Consolidated Financial Statements have been prepared on the same basis as the Annual Consolidated Financial Statements and include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the Interim Consolidated Financial Statements. Interim results are not necessarily indicative of results that may be expected for a full year or any future interim period.

The following information should be read in conjunction with “Note on Presentation,” “Selected Historical Consolidated Financial And Other Data,” “Risk Factors,” “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group,” the Interim Consolidated Financial Statements and the Annual Consolidated Financial Statements included elsewhere in this prospectus. Historical results for any period are not necessarily indicative of results to be expected for any future period.

Consolidated Income Statement Data

 

    For the three months ended September 30,     For the nine months ended September 30,  
        2014             2013             2014             2013      
    (€ million, except per share data)  

Net revenues

    23,553        20,693        69,006        62,681   

EBIT

    926        862        2,157        2,542   

Profit/(loss) before taxes

    415        369        647        1,089   

Profit/(loss) from continuing operations

    188        189        212        655   

Net profit/(loss)

    188        189        212        655   

Attributable to:

       

Owners of the parent

    174        (15)        160        44   

Non-controlling interest

    14        204        52        611   

Basic earnings/(loss) per ordinary share (in Euro)

    0.143        (0.013)        0.132        0.036   

Diluted earnings/(loss) per ordinary share (in Euro)

    0.142        (0.013)        0.130        0.036   

 

 

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Consolidated Statement of Financial Position Data

 

     At September 30, 2014      At December 31, 2013  
     (€ million)  

Cash and cash equivalents

     18,395         19,455   

Total assets

     94,396         87,214   

Debt

     32,933         30,283   

Total equity

     10,713         12,584   

Equity attributable to owners of the parent

     10,413         8,326   

Non-controlling interests

     300         4,258   

Consolidated Income Statement Data

 

     For the years ended December 31,  
         2013              2012              2011(1)              2010(2)              2009(2)      
     (€ million, except per share data)  

Net revenues

     86,624         83,765         59,559         35,880         32,684   

EBIT

     3,002         3,434         3,291         1,106         455   

Profit before taxes

     1,015         1,524         1,932         706         103   

Profit/(loss) from continuing operations

     1,951         896         1,398         222         (345

Net profit/(loss)

     1,951         896         1,398         600         (848

Attributable to:

              

Owners of the parent

     904         44         1,199         520         (838

Non-controlling interest

     1,047         852         199         80         (10

Basic earnings/(loss) per ordinary share (in Euro)

     0.744         0.036         0.962         0.410         (0.677

Diluted earnings/(loss) per ordinary share (in Euro)

     0.736         0.036         0.955         0.409         (0.677

 

(1) The amounts reported include seven months of operations for Chrysler.
(2) CNH Industrial was reported as discontinued operations in 2010 and 2009 as a result of the Demerger which was effective January 1, 2011. For additional information on the Demerger, see Note “Changes in the Scope of Consolidation” to the Annual Consolidated Financial Statements included elsewhere in this prospectus.

Consolidated Statement of Financial Position Data

 

     At December 31,  
         2013              2012              2011(1)(2)              2010             2009(3)      
     (€ million)  

Cash and cash equivalents

     19,455         17,666         17,526         11,967        12,226   

Total assets

     87,214         82,633         80,379         73,442 (3)      67,235   

Debt

     30,283         28,303         27,093         20,804        28,527   

Total equity

     12,584         8,369         9,711         12,461 (3)      11,115   

Equity attributable to owners of the parent

     8,326         6,187         7,358         11,544 (3)      10,301   

Non-controlling interests

     4,258         2,182         2,353         917 (3)      814   

 

(1) The amounts at December 31, 2011 are equivalent to those at January 1, 2012 derived from the Annual Consolidated Financial Statements included elsewhere in this prospectus.
(2) The amounts at December 31, 2011 include the consolidation of Chrysler.
(3) Includes assets and liabilities of CNH Industrial which was demerged from the Group at January 1, 2011.

 

 

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Per Share Data

The following tables present selected historical per share data of Fiat at and for the three and nine months ended September 30, 2014 and the year ended December 31, 2013. There are no pro forma effects of the Merger on the per share data of Fiat. The selected historical per share information of Fiat at and for the three and nine months ended September 30, 2014 and at and for the year ended December 31, 2013, set forth below has been derived from the Interim Consolidated Financial Statements and the Annual Consolidated Financial Statements respectively. You should read the information in this section together with the Interim Consolidated Financial Statements and the Annual Consolidated Financial Statements included elsewhere in this prospectus.

 

     At and for the
three months ended
September 30, 2014
     At and for the
nine months ended
September 30, 2014
 
     (in €)  

Basic earnings per ordinary share

     0.143         0.132   

Cash dividends per ordinary per share(1)

     -         -   

Book value per ordinary share (net of treasury shares)

     8.774         8.774   

 

(1) Dividends, if and when declared, are paid in Euro.

 

     At and for the
year ended
December 31, 2013
 
     (in €)  

Basic earnings per ordinary share

     0.744  

Cash dividends per ordinary per share(1)

     -  

Book value per ordinary share (net of treasury shares)

     6.846  

 

(1) Dividends, if and when declared, are paid in Euro.

Per Share Market Price

On November 11, 2014, the closing sale price of FCA common shares as reported by the NYSE was $11.42 and the MTA was €9.15.

 

 

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RISK FACTORS

Investing in FCA shares involves risks, including the following factors. You should carefully consider the following information about these risks, as well as the other information included in this prospectus. Our business, our financial condition or our results of operations could be materially adversely affected by any of these risks.

Risks Related to Our Business, Strategy and Operations

Our profitability depends on reaching certain minimum vehicle sales volumes. If our vehicle sales deteriorate, our results of operations and financial condition will suffer.

Our success requires us to achieve certain minimum vehicle sales volumes. As is typical for an automotive manufacturer, we have significant fixed costs and, therefore, changes in vehicle sales volume can have a disproportionately large effect on our profitability. For example, assuming constant pricing, mix and cost of sales per vehicle, that all results of operations were attributable to vehicle shipments and that all other variables remain constant, a ten percent decrease in our vehicle shipments would reduce our EBIT (earnings before interest and taxes) by approximately 40 percent, without accounting for actions and cost containment measures we may take in response to decreased vehicle sales. Further, a shift in demand away from our minivans, larger utility vehicles and pick-up trucks in the NAFTA region towards passenger cars, whether in response to higher fuel prices or other factors, could adversely affect our profitability in the NAFTA region. Our minivans, larger utility vehicles and pick-up trucks accounted for approximately 47 percent of our total U.S. retail vehicle sales in 2013 (not including vans and medium duty trucks) and the profitability of this portion of our portfolio is approximately 20 percent higher than that of our overall U.S. retail portfolio on a weighted average basis. A shift in consumer preferences in the U.S. vehicle market away from minivans, larger utility vehicles and pick-up trucks and towards passenger cars could adversely affect our profitability. For example, a shift in demand such that U.S. industry market share for minivans, larger utility vehicles and pick-up trucks deteriorated by 10 percentage points and U.S. industry market share for cars and smaller utility vehicles increased by 10 percentage points, whether in response to higher fuel prices or other factors, holding other variables constant, including our market share of each vehicle segment, would have reduced the Group’s EBIT by approximately four percent for 2013. This estimate does not take into account any other changes in market conditions or actions that the Group may take in response to shifting consumer preferences, including production and pricing changes. For additional information on factors affecting vehicle profitability, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group—Trends, Uncertainties and Opportunities.” Moreover, we tend to operate with negative working capital as we generally receive payments from vehicle sales to dealers within a few days of shipment, whereas there is a lag between the time when parts and materials are received from suppliers and when we pay for such parts and materials; therefore, if vehicle sales decline we will suffer a significant negative impact on cash flow and liquidity as we continue to pay suppliers during a period in which we receive reduced proceeds from vehicle sales. If vehicle sales do not increase, or if they were to fall short of our assumptions, due to financial crisis, renewed recessionary conditions, changes in consumer confidence, geopolitical events, inability to produce sufficient quantities of certain vehicles, limited access to financing or other factors, our financial condition and results of operations would be materially adversely affected.

Our businesses are affected by global financial markets and general economic and other conditions over which we have little or no control.

Our results of operations and financial position may be influenced by various macroeconomic factors—including changes in gross domestic product, the level of consumer and business confidence, changes in interest rates for or availability of consumer and business credit, energy prices, the cost of commodities or other raw materials, the rate of unemployment and foreign currency exchange rates—within the various countries in which we operate.

Beginning in 2008, global financial markets have experienced severe disruptions, resulting in a material deterioration of the global economy. The global economic recession in 2008 and 2009, which affected most

 

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regions and business sectors, resulted in a sharp decline in demand for automobiles. Although more recently we have seen signs of recovery in certain regions, the overall global economic outlook remains uncertain.

In Europe, in particular, despite measures taken by several governments and monetary authorities to provide financial assistance to certain Eurozone countries and to avoid default on sovereign debt obligations, concerns persist regarding the debt burden of several countries. These concerns, along with the significant fiscal adjustments carried out in several countries, intended to manage actual or perceived sovereign credit risk, have led to further pressure on economic growth and to new periods of recession. For instance, European automotive industry sales have declined over the past several years following a period in which sales were supported by government incentive schemes, particularly those designed to promote sales of more fuel efficient and low emission vehicles. Prior to the global financial crisis, industry-wide sales of passenger cars in Europe were 16 million units in 2007. In 2013, following six years of sales declines, sales in that region had fallen to 12.3 million passenger cars. Similarly, sales of light commercial vehicles in Europe fell from 2.4 million units in 2007 to 1.6 million units in 2013. From 2011 to 2013, our market share of the European passenger car market decreased from 7.0 percent to 6.0 percent, and we have reported losses and negative EBIT in each of the past three years in the Europe, Middle East and Africa, or EMEA, Segment. See “Business—Overview of Our Business” for a description of our reportable segments. These ongoing concerns could have a detrimental impact on the global economic recovery, as well as on the financial condition of European financial institutions, which could result in greater volatility, reduced liquidity, widening of credit spreads and lack of price transparency in credit markets. Widespread austerity measures in many countries in which we operate could continue to adversely affect consumer confidence, purchasing power and spending, which could adversely affect our financial condition and results of operations.

Following our consolidation of Chrysler from June 1, 2011, a majority of our revenues have been generated in the NAFTA segment. Although economic recovery in North America has been slower and less robust than many economic experts predicted, vehicle sales in North America have experienced significant growth from the low vehicle sales volumes in 2009-2010. However, this recovery may not be sustained or may be limited to certain classes of vehicles. Since the recovery may be partially attributable to the pent-up demand and average age of vehicles in North America following the extended economic downturn, there can be no assurances that improvements in general economic conditions or employment levels will lead to corresponding increases in vehicle sales. As a result, North America may experience limited growth or decline in vehicle sales in the future.

In addition, slower expansion or recessionary conditions are being experienced in major emerging countries, such as China, Brazil and India. In addition to weaker export business, lower domestic demand has also led to a slowing economy in these countries. These factors could adversely affect our financial condition and results of operations.

In general, the automotive sector has historically been subject to highly cyclical demand and tends to reflect the overall performance of the economy, often amplifying the effects of economic trends. Given the difficulty in predicting the magnitude and duration of economic cycles, there can be no assurances as to future trends in the demand for products sold by us in any of the markets in which we operate.

In addition to slow economic growth or recession, other economic circumstances—such as increases in energy prices and fluctuations in prices of raw materials or contractions in infrastructure spending—could have negative consequences for the industry in which we operate and, together with the other factors referred to previously, could have a material adverse effect on our financial condition and results of operations.

Our future performance depends on our ability to expand into new markets as well as enrich our product portfolio and offer innovative products in existing markets.

Our success depends, among other things, on our ability to maintain or increase our share in existing markets and/or to expand into new markets through the development of innovative, high-quality products that are attractive to customers and provide adequate profitability. Following our January 2014 acquisition of the approximately 41.5 percent interest in Chrysler that we did not already own, we announced our 2014-2018 Strategic Business Plan, or Business Plan, in May 2014. Our Business Plan includes a number of product

 

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initiatives designed to improve the quality of our product offerings and allows us to grow sales in existing markets and expand in new markets.

It generally takes two years or more to design and develop a new vehicle, and a number of factors may lengthen that schedule. Because of this product development cycle and the various elements that may contribute to consumers’ acceptance of new vehicle designs, including competitors’ product introductions, fuel prices, general economic conditions and changes in styling preferences, an initial product concept or design that we believe will be attractive may not result in a vehicle that will generate sales in sufficient quantities and at high enough prices to be profitable. A failure to develop and offer innovative products that compare favorably to those of our principal competitors, in terms of price, quality, functionality and features, with particular regard to the upper-end of the product range, or delays in bringing strategic new models to the market, could impair our strategy, which would have a material adverse effect on our financial condition and results of operations. Additionally, our high proportion of fixed costs, both due to our significant investment in property, plant and equipment as well as the requirements of our collective bargaining agreements, which limit our flexibility to adjust personnel costs to changes in demand for our products, may further exacerbate the risks associated with incorrectly assessing demand for our vehicles.

Further, if we determine that a safety or emissions defect, a mechanical defect or a non-compliance with regulation exists with respect to a vehicle model prior to the retail launch, the launch of such vehicle could be delayed until we remedy the defect or non-compliance. The costs associated with any protracted delay in new model launches necessary to remedy such defect, and the cost of providing a free remedy for such defects or non-compliance in vehicles that have been sold, could be substantial.

The automotive industry is highly competitive and cyclical and we may suffer from those factors more than some of our competitors.

Substantially all of our revenues are generated in the automotive industry, which is highly competitive, encompassing the production and distribution of passenger cars, light commercial vehicles and components and production systems. We face competition from other international passenger car and light commercial vehicle manufacturers and distributors and components suppliers in Europe, North America, Latin America and the Asia Pacific region. These markets are all highly competitive in terms of product quality, innovation, pricing, fuel economy, reliability, safety, customer service and financial services offered, and many of our competitors are better capitalized with larger market shares.

Competition, particularly in pricing, has increased significantly in the automotive industry in recent years. Global vehicle production capacity significantly exceeds current demand, partly as a result of lower growth in demand for vehicles. This overcapacity, combined with high levels of competition and weakness of major economies, has intensified and may further intensify pricing pressures.

Our competitors may respond to these conditions by attempting to make their vehicles more attractive or less expensive to customers by adding vehicle enhancements, providing subsidized financing or leasing programs, or by reducing vehicle prices whether directly or by offering option package discounts, price rebates or other sales incentives in certain markets. In addition, manufacturers in countries which have lower production costs have announced that they intend to export lower-cost automobiles to established markets. These actions have had, and could continue to have, a negative impact on our vehicle pricing, market share, and results of operations.

In the automotive business, sales to end-customers are cyclical and subject to changes in the general condition of the economy, the readiness of end-customers to buy and their ability to obtain financing, as well as the possible introduction of measures by governments to stimulate demand. The automotive industry is also subject to the constant renewal of product offerings through frequent launches of new models. A negative trend in the automotive business or our inability to adapt effectively to external market conditions coupled with more limited capital than many of our principal competitors could have a material adverse impact on our financial condition and results of operations.

 

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We may be unsuccessful in efforts to expand the international reach of some of our brands that we believe have global appeal and reach.

The growth strategies reflected in our Business Plan will require us to make significant investments, including to expand several brands that we believe to have global appeal into new markets. Such strategies include expanding sales of the Jeep brand globally, most notably through localized production in Asia and Latin America and reintroduction of the Alfa Romeo brand in North America and other markets throughout the world. Further, our efforts to increase our sales of Luxury Brand vehicles includes a significant expansion of our Maserati brand vehicles to cover all segments of the luxury vehicle market. This will require significant investments in our production facilities and in distribution networks in these markets. If we are unable to introduce vehicles that appeal to consumers in these markets and achieve our brand expansion strategies, we may be unable to earn a sufficient return on these investments and this could have a material adverse effect on our financial condition and results of operations.

Our current credit rating is below investment grade and any further deterioration may significantly affect our funding and prospects.

The ability to access the capital markets or other forms of financing and the related costs depend, among other things, on our credit ratings. Following downgrades by the major rating agencies, we are currently rated below investment grade. The rating agencies review these ratings regularly and, accordingly, new ratings may be assigned to us in the future. It is not currently possible to predict the timing or outcome of any ratings review. Any downgrade may increase our cost of capital and potentially limit our access to sources of financing, which may cause a material adverse effect on our business prospects, earnings and financial position. Since the ratings agencies may separately review and rate Chrysler on a stand-alone basis, it is possible that our credit ratings may not benefit from any improvements in Chrysler’s credit ratings or that a deterioration in Chrysler’s credit ratings could result in a negative rating review of us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group—Liquidity and Capital Resources” for more information on our financing arrangements.

We may not be able to realize anticipated benefits from any acquisitions and challenges associated with strategic alliances may have an adverse impact on our results of operations.

We may engage in acquisitions or enter into, expand or exit from strategic alliances which could involve risks that may prevent us from realizing the expected benefits of the transactions or achieving our strategic objectives. Such risks could include:

 

  Ÿ   technological and product synergies, economies of scale and cost reductions not occurring as expected;

 

  Ÿ   unexpected liabilities;

 

  Ÿ   incompatibility in processes or systems;

 

  Ÿ   unexpected changes in laws or regulations;

 

  Ÿ   inability to retain key employees;

 

  Ÿ   inability to source certain products;

 

  Ÿ   increased financing costs and inability to fund such costs;

 

  Ÿ   significant costs associated with terminating or modifying alliances; and

 

  Ÿ   problems in retaining customers and integrating operations, services, personnel, and customer bases.

 

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If problems or issues were to arise among the parties to one or more strategic alliances for managerial, financial or other reasons, or if such strategic alliances or other relationships were terminated, our product lines, businesses, financial position and results of operations could be adversely affected.

We may not achieve the expected benefits from our integration of the Group’s operations.

The January 2014 acquisition of the approximately 41.5 percent interest in Chrysler we did not already own and the related integration of the two businesses is intended to provide us with a number of long-term benefits, including allowing new vehicle platforms and powertrain technologies to be shared across a larger volume, as well as procurement benefits and global distribution opportunities, particularly the extension of brands into new markets. The integration is also intended to facilitate penetration of key brands in several international markets where we believe products would be attractive to consumers, but where we currently do not have significant market penetration.

The ability to realize the benefits of the integration is critical for us to compete with other automakers. If we are unable to convert the opportunities presented by the integration into long-term commercial benefits, either by improving sales of vehicles and service parts, reducing costs or both, our financial condition and results of operations may be materially adversely affected.

We may be exposed to shortfalls in our pension plans.

Our defined benefit pension plans are currently underfunded. As of December 31, 2013, our defined benefit pension plans were underfunded by approximately €4.2 billion (€4.0 billion of which relates to Chrysler’s defined benefit pension plans). Our pension funding obligations may increase significantly if the investment performance of plan assets does not keep pace with benefit payment obligations. Mandatory funding obligations may increase because of lower than anticipated returns on plan assets, whether as a result of overall weak market performance or particular investment decisions, changes in the level of interest rates used to determine required funding levels, changes in the level of benefits provided for by the plans, or any changes in applicable law related to funding requirements. Our defined benefit plans currently hold significant investments in equity and fixed income securities, as well as investments in less liquid instruments such as private equity, real estate and certain hedge funds. Due to the complexity and magnitude of certain investments, additional risks may exist, including significant changes in investment policy, insufficient market capacity to complete a particular investment strategy and an inherent divergence in objectives between the ability to manage risk in the short term and the ability to quickly rebalance illiquid and long-term investments.

To determine the appropriate level of funding and contributions to our defined benefit plans, as well as the investment strategy for the plans, we are required to make various assumptions, including an expected rate of return on plan assets and a discount rate used to measure the obligations under defined benefit pension plans. Interest rate increases generally will result in a decline in the value of investments in fixed income securities and the present value of the obligations. Conversely, interest rate decreases will generally increase the value of investments in fixed income securities and the present value of the obligations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group—Critical Accounting Estimates—Pension plans.”

Any reduction in the discount rate or the value of plan assets, or any increase in the present value of obligations, may increase our pension expenses and required contributions and, as a result, could constrain liquidity and materially adversely affect our financial condition and results of operations. If we fail to make required minimum funding contributions, we could be subject to reportable event disclosure to the U.S. Pension Benefit Guaranty Corporation, as well as interest and excise taxes calculated based upon the amount of any funding deficiency. With our ownership in Chrysler now equal to 100 percent, we may become subject to certain U.S. legal requirements making us secondarily responsible for a funding shortfall in certain of Chrysler’s pension plans in the event these pension plans were terminated and Chrysler were to become insolvent.

 

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We may not be able to provide adequate access to financing for our dealers and retail customers.

Our dealers enter into wholesale financing arrangements to purchase vehicles from us to hold in inventory and facilitate retail sales, and retail customers use a variety of finance and lease programs to acquire vehicles.

Unlike many of our competitors, we do not own and operate a controlled finance company dedicated solely to our mass-market operations in the U.S. and certain key markets in Europe. Instead we have elected to partner with specialized financial services providers through joint ventures and commercial agreements. Our lack of a controlled finance company in these key markets may increase the risk that our dealers and retail customers will not have access to sufficient financing on acceptable terms which may adversely affect our vehicle sales in the future. Furthermore, many of our competitors are better able to implement financing programs designed to maximize vehicle sales in a manner that optimizes profitability for them and their finance companies on an aggregate basis. Since our ability to compete depends on access to appropriate sources of financing for dealers and retail customers, our lack of a controlled finance company in those markets could adversely affect our results of operations.

In other markets, we rely on controlled finance companies, joint ventures and commercial relationships with third parties, including third party financial institutions, to provide financing to our dealers and retail customers. Finance companies are subject to various risks that could negatively affect their ability to provide financing services at competitive rates, including:

 

  Ÿ   the performance of loans and leases in their portfolio, which could be materially affected by delinquencies, defaults or prepayments;

 

  Ÿ   wholesale auction values of used vehicles;

 

  Ÿ   higher than expected vehicle return rates and the residual value performance of vehicles they lease; and

 

  Ÿ   fluctuations in interest rates and currency exchange rates.

Any financial services provider, including our joint ventures and controlled finance companies, will face other demands on its capital, including the need or desire to satisfy funding requirements for dealers or customers of our competitors as well as liquidity issues relating to other investments. Furthermore, they may be subject to regulatory changes that may increase their costs, which may impair their ability to provide competitive financing products to our dealers and retail customers.

To the extent that a financial services provider is unable or unwilling to provide sufficient financing at competitive rates to our dealers and retail customers, such dealers and retail customers may not have sufficient access to financing to purchase or lease our vehicles. As a result, our vehicle sales and market share may suffer, which would adversely affect our financial condition and results of operations.

Vehicle sales depend heavily on affordable interest rates for vehicle financing.

In certain regions, financing for new vehicle sales has been available at relatively low interest rates for several years due to, among other things, expansive government monetary policies. To the extent that interest rates rise generally, market rates for new vehicle financing are expected to rise as well, which may make our vehicles less affordable to retail customers or steer consumers to less expensive vehicles that tend to be less profitable for us, adversely affecting our financial condition and results of operations. Additionally, if consumer interest rates increase substantially or if financial service providers tighten lending standards or restrict their lending to certain classes of credit, our retail customers may not desire to or be able to obtain financing to purchase or lease our vehicles. Furthermore, because our customers may be relatively more sensitive to changes in the availability and adequacy of financing and macroeconomic conditions, our vehicle sales may be disproportionately affected by changes in financing conditions relative to the vehicle sales of our competitors.

 

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Limitations on our liquidity and access to funding may limit our ability to execute our business plan and improve our financial condition and results of operations.

Our future performance will depend on, among other things, our ability to finance debt repayment obligations and planned investments from operating cash flow, available liquidity, the renewal or refinancing of existing bank loans and/or facilities and possible access to capital markets or other sources of financing. Although we have measures in place that are designed to ensure that adequate levels of working capital and liquidity are maintained, declines in sales volumes could have a negative impact on the cash-generating capacity of our operating activities. For a discussion of these factors, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group—Liquidity and Capital Resources.” We could, therefore, find ourselves in the position of having to seek additional financing and/or having to refinance existing debt, including in unfavorable market conditions, with limited availability of funding and a general increase in funding costs. Any limitations on our liquidity, due to decreases in vehicle sales, the amount of or restrictions in our existing indebtedness, conditions in the credit markets, general economic conditions or otherwise, may adversely impact our ability to execute our business plan and impair our financial condition and results of operations. In addition, any actual or perceived limitations of our liquidity may limit the ability or willingness of counterparties, including dealers, customers, suppliers and financial service providers, to do business with us, which may adversely affect our financial condition and results of operations.

Our ability to achieve cost reductions and to realize production efficiencies is critical to maintaining our competitiveness and long-term profitability.

We are continuing to implement a number of cost reduction and productivity improvement initiatives in our operations, for example, by increasing the number of vehicles that are based on common platforms, reducing dependence on sales incentives offered to dealers and consumers, leveraging purchasing capacity and volumes and implementing World Class Manufacturing, or WCM, principles. WCM principles are intended to eliminate waste of all types, and improve worker efficiency, productivity, safety and vehicle quality as well as worker flexibility and focus on removing capacity bottlenecks to maximize output when market demand requires without having to resort to significant capital investments. As part of our Business Plan, we plan to continue our efforts to extend our WCM programs into all of our production facilities and benchmark across all of our facilities around the world, which is supported by Chrysler’s January 2014 memorandum of understanding with the UAW. Our future success depends upon our ability to implement these initiatives successfully throughout our operations. While some productivity improvements are within our control, others depend on external factors, such as commodity prices, supply capacity limitations, or trade regulation. These external factors may make it more difficult to reduce costs as planned, and we may sustain larger than expected production expenses, materially affecting our business and results of operations. Furthermore, reducing costs may prove difficult due to the need to introduce new and improved products in order to meet consumer expectations.

Our business operations may be impacted by various types of claims, lawsuits, and other contingent obligations.

We are involved in various product liability, warranty, product performance, asbestos, personal injury, environmental claims and lawsuits, governmental investigations, antitrust, intellectual property, tax and other legal proceedings including those that arise in the ordinary course of our business. We estimate such potential claims and contingent liabilities and, where appropriate, record provisions to address these contingent liabilities. The ultimate outcome of the legal matters pending against us is uncertain, and although such claims, lawsuits and other legal matters are not expected individually to have a material adverse effect on our financial condition or results of operations, such matters could have, in the aggregate, a material adverse effect on our financial condition or results of operations. Furthermore, we could, in the future, be subject to judgments or enter into settlements of lawsuits and claims that could have a material adverse effect on our results of operations in any particular period. While we maintain insurance coverage with respect to certain claims, we may not be able to obtain such insurance on acceptable terms in the future, if at all, and any such insurance may not provide adequate coverage against any such claims. See also Notes 26 and 33 to the Annual Consolidated Financial Statements included elsewhere in this prospectus for additional information.

 

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Product recalls and warranty obligations may result in direct costs, and loss of vehicle sales could have material adverse effects on our business.

From time to time, we have been required to recall vehicles to address performance, compliance or safety-related issues. The costs we incur to recall vehicles typically include the cost of replacement parts and labor to remove and replace parts, and may substantially depend on the nature of the remedy and the number of vehicles affected. Product recalls may also harm our reputation and may cause consumers to question the safety or reliability of our products.

Any costs incurred, or lost vehicle sales, resulting from product recalls could materially adversely affect our financial condition and results of operations. Moreover, if we face consumer complaints, or we receive information from vehicle rating services that calls into question the safety or reliability of one of our vehicles and we do not issue a recall, or if we do not do so on a timely basis, our reputation may also be harmed and we may lose future vehicle sales.

We are also obligated under the terms of our warranty agreements to make repairs or replace parts in our vehicles at our expense for a specified period of time. Therefore, any failure rate that exceeds our assumptions may result in unanticipated losses.

Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting, which could harm our business reputation.

We continuously monitor and evaluate changes in our internal controls over financial reporting. In support of our drive toward common global systems, we are extending the current finance, procurement, and capital project and investment management systems to new areas of operations. As appropriate, we continue to modify the design and documentation of internal control processes and procedures relating to the new systems to simplify and automate many of our previous processes. Our management believes that the implementation of these systems will continue to improve and enhance internal controls over financial reporting. Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting, which could harm our business reputation.

A disruption in our information technology could compromise confidential and sensitive information.

We depend on our information technology and data processing systems to operate our business, and a significant malfunction or disruption in the operation of our systems, or a security breach that compromises the confidential and sensitive information stored in those systems, could disrupt our business and adversely impact our ability to compete.

Our ability to keep our business operating effectively depends on the functional and efficient operation of our information, data processing and telecommunications systems, including our vehicle design, manufacturing, inventory tracking and billing and payment systems. We rely on these systems to make a variety of day-to-day business decisions as well as to track transactions, billings, payments and inventory. Such systems are susceptible to malfunctions and interruptions due to equipment damage, power outages, and a range of other hardware, software and network problems. Those systems are also susceptible to cybercrime, or threats of intentional disruption, which are increasing in terms of sophistication and frequency. For any of these reasons, we may experience systems malfunctions or interruptions. Although our systems are diversified, including multiple server locations and a range of software applications for different regions and functions, and we are currently undergoing an effort to assess and ameliorate risks to our systems, a significant or large-scale malfunction or interruption of any one of our computer or data processing systems could adversely affect our ability to manage and keep our operations running efficiently, and damage our reputation if we are unable to track transactions and deliver products to our dealers and customers. A malfunction that results in a wider or sustained disruption to our business could have a material adverse effect on our business, financial condition and results of operations.

 

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In addition to supporting our operations, we use our systems to collect and store confidential and sensitive data, including information about our business, our customers and our employees. As our technology continues to evolve, we anticipate that we will collect and store even more data in the future, and that our systems will increasingly use remote communication features that are sensitive to both willful and unintentional security breaches. Much of our value is derived from our confidential business information, including vehicle design, proprietary technology and trade secrets, and to the extent the confidentiality of such information is compromised, we may lose our competitive advantage and our vehicle sales may suffer. We also collect, retain and use personal information, including data we gather from customers for product development and marketing purposes, and data we obtain from employees. In the event of a breach in security that allows third parties access to this personal information, we are subject to a variety of ever-changing laws on a global basis that require us to provide notification to the data owners, and that subject us to lawsuits, fines and other means of regulatory enforcement. Our reputation could suffer in the event of such a data breach, which could cause consumers to purchase their vehicles from our competitors. Ultimately, any significant compromise in the integrity of our data security could have a material adverse effect on our business.

We may not be able to adequately protect our intellectual property rights, which may harm our business.

Our success depends, in part, on our ability to protect our intellectual property rights. If we fail to protect our intellectual property rights, others may be able to compete against us using intellectual property that is the same as or similar to our own. In addition, there can be no guarantee that our intellectual property rights are sufficient to provide us with a competitive advantage against others who offer products similar to ours. Despite our efforts, we may be unable to prevent third parties from infringing our intellectual property and using our technology for their competitive advantage. Any such infringement and use could adversely affect our business, financial condition or results of operations.

The laws of some countries in which we operate do not offer the same protection of our intellectual property rights as do the laws of the U.S. or Europe. In addition, effective intellectual property enforcement may be unavailable or limited in certain countries, making it difficult for us to protect our intellectual property from misuse or infringement there. Our inability to protect our intellectual property rights in some countries may harm our business, financial condition or results of operations.

We are subject to risks relating to international markets and exposure to changes in local conditions.

We are subject to risks inherent to operating globally, including those related to:

 

  Ÿ   exposure to local economic and political conditions;

 

  Ÿ   import and/or export restrictions;

 

  Ÿ   multiple tax regimes, including regulations relating to transfer pricing and withholding and other taxes on remittances and other payments to or from subsidiaries;

 

  Ÿ  

foreign investment and/or trade restrictions or requirements, foreign exchange controls and restrictions on the repatriation of funds. In particular, current regulations limit our ability to access and transfer liquidity out of Venezuela to meet demands in other countries and also subject us to increased risk of devaluation or other foreign exchange losses. In December 2010 and February 2013, the Venezuelan government announced devaluations of the official Venezuelan Bolivar (VEF) to U.S. dollar exchange rate, which resulted in devaluation of our VEF denominated balances. In March 2014, the Venezuelan government introduced an additional auction-based foreign exchange system, referred to as the SICAD II rate. The SICAD II rate has ranged from 49 to 51.9 VEF to U.S. dollar in the period since its introduction until October 31, 2014. The SICAD II rate is expected to be used primarily for imports and has been limited to amounts of VEF that can be exchanged into other currencies, such as the U.S. dollar. As a result of the recent exchange agreement between the Central Bank of Venezuela and the Venezuelan government and the

 

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limitations of the SICAD II rate, the Group believes any future remittances of dividends would be transacted at the SICAD I rate. As a result, the Group determined that the SICAD I rate, and not the SICAD II rate, is the most appropriate rate to use, which was 12.0 VEF to U.S. dollar at September 30, 2014; and

 

  Ÿ   the introduction of more stringent laws and regulations.

Unfavorable developments in any one or a combination of these areas (which may vary from country to country) could have a material adverse effect on our financial condition and results of operations.

Our success largely depends on the ability of our current management team to operate and manage effectively.

Our success largely depends on the ability of our senior executives and other members of management to effectively manage the Group and individual areas of the business. In particular, our Chief Executive Officer, Sergio Marchionne, is critical to the execution of our new strategic direction and implementation of the 2014-2018 Business Plan. Although Mr. Marchionne has indicated his intention to remain as our Chief Executive Officer through the period of our 2014-2018 Business Plan, if we were to lose his services or those of any of our other senior executives or other key employees this could have a material adverse effect on our business prospects, earnings and financial position. We have developed succession plans that we believe are appropriate in the circumstances, although it is difficult to predict with any certainty that we will replace these individuals with persons of equivalent experience and capabilities. If we are unable to find adequate replacements or to attract, retain and incentivize senior executives, other key employees or new qualified personnel our business, financial condition and results of operations may suffer.

Developments in emerging market countries may adversely affect our business.

We operate in a number of emerging markets, both directly (e.g., Brazil and Argentina) and through joint ventures and other cooperation agreements (e.g., Turkey, India, China and Russia). Our Business Plan provides for expansion of our existing sales and manufacturing presence in our LATAM and APAC regions. In recent years we have been the market leader in Brazil, which has provided a key contribution to our financial performance. Our exposure to other emerging countries has increased in recent years, as have the number and importance of such joint ventures and cooperation agreements. Economic and political developments in Brazil and other emerging markets, including economic crises or political instability, have had and could have in the future material adverse effects on our financial condition and results of operations. Further, in certain markets in which we or our joint ventures operate, government approval may be required for certain activities, which may limit our ability to act quickly in making decisions on our operations in those markets.

Maintaining and strengthening our position in these emerging markets is a key component of our global growth strategy in our Business Plan. However, with competition from many of the largest global manufacturers as well as numerous smaller domestic manufacturers, the automotive market in these emerging markets is highly competitive. As these markets continue to grow, we anticipate that additional competitors, both international and domestic, will seek to enter these markets and that existing market participants will try to aggressively protect or increase their market share. Increased competition may result in price reductions, reduced margins and our inability to gain or hold market share, which could have a material adverse effect on our financial condition and results of operations.

Our reliance on joint ventures in certain emerging markets may adversely affect the development of our business in those regions.

We intend to expand our presence in emerging markets, including China and India, through partnerships and joint ventures. For instance, in 2010, we entered into a joint venture with Guangzhou Automobile Group Co., Ltd (GAC Group) for the production of engines and vehicles in China for the Chinese market, as well as securing exclusive distribution of our Fiat brand vehicles in China. We have also entered into a joint venture with TATA Motors Limited for the production of certain of our vehicles, engines and transmissions in India.

 

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Our reliance on joint ventures to enter or expand our presence in these markets may expose us to risk of conflict with our joint venture partners and the need to divert management resources to overseeing these shareholder arrangements. Further, as these arrangements require cooperation with third party partners, these joint ventures may not be able to make decisions as quickly as we would if we were operating on our own or may take actions that are different from what we would do on a standalone basis in light of the need to consider our partners’ interests. As a result, we may be less able to respond timely to changes in market dynamics, which could have an adverse effect on our financial condition and results of operations.

Laws, regulations and governmental policies, including those regarding increased fuel economy requirements and reduced greenhouse gas emissions, may have a significant effect on how we do business and may adversely affect our results of operations.

In order to comply with government regulations related to fuel economy and emissions standards, we must devote significant financial and management resources, as well as vehicle engineering and design attention, to these legal requirements. We expect the number and scope of these regulatory requirements, along with the costs associated with compliance, to increase significantly in the future and these costs could be difficult to pass through to customers. As a result, we may face limitations on the types of vehicles we produce and sell and where we can sell them, which could have a material adverse impact on our financial condition and results of operations. For a discussion of these regulations, see “Business—Environmental and Other Regulatory Matters.”

Government initiatives to stimulate consumer demand for products sold by us, such as changes in tax treatment or purchase incentives for new vehicles, can substantially influence the timing and level of revenues. The size and duration of such government measures are unpredictable and outside of our control. Any adverse change in government policy relating to those measures could have material adverse effects on our business prospects, financial condition and results of operations.

The financial resources required to develop and commercialize vehicles incorporating sustainable technologies for the future are significant, as are the barriers that limit the mass-market potential of such vehicles.

Our product strategy is driven by the objective of achieving sustainable mobility by reducing the environmental impact of vehicles over their entire life cycle. We therefore intend to continue investing capital resources to develop new sustainable technology. We aim to increase the use of alternative fuels, such as natural gas, by continuing to offer a complete range of dual-fuel passenger cars and commercial vehicles. Additionally, we plan to continue developing alternative propulsion systems, particularly for vehicles driven in urban areas (such as the zero-emission Fiat 500e).

In many cases, technological and cost barriers limit the mass-market potential of sustainable natural gas and electric vehicles. In certain other cases the technologies that we plan to employ are not yet commercially practical and depend on significant future technological advances by us and by suppliers. There can be no assurance that these advances will occur in a timely or feasible manner, that the funds we have budgeted or expended for these purposes will be adequate, or that we will be able to obtain rights to use these technologies. Further, our competitors and others are pursuing similar technologies and other competing technologies and there can be no assurance that they will not acquire similar or superior technologies sooner than we will or on an exclusive basis or at a significant price advantage.

Labor laws and collective bargaining agreements with our labor unions could impact our ability to increase the efficiency of our operations.

Substantially all of our production employees are represented by trade unions, are covered by collective bargaining agreements and/or are protected by applicable labor relations regulations that may restrict our ability to modify operations and reduce costs quickly in response to changes in market conditions. See “Business—Employees” for a description of these arrangements. These and other provisions in our collective bargaining agreements may impede our ability to restructure our business successfully to compete more effectively,

 

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especially with those automakers whose employees are not represented by trade unions or are subject to less stringent regulations, which could have a material adverse effect on our financial condition and results of operations.

We depend on our relationships with suppliers.

We purchase raw materials and components from a large number of suppliers and depend on services and products provided by companies outside the Group. Close collaboration between an original equipment manufacturer, or OEM, and its suppliers is common in the automotive industry, and although this offers economic benefits in terms of cost reduction, it also means that we depend on our suppliers and are exposed to the possibility that difficulties, including those of a financial nature, experienced by those suppliers (whether caused by internal or external factors) could have a material adverse effect on our financial condition and/or results of operations.

We face risks associated with increases in costs, disruptions of supply or shortages of raw materials.

We use a variety of raw materials in our business including steel, aluminum, lead, resin and copper, and precious metals such as platinum, palladium and rhodium, as well as energy. The prices for these raw materials fluctuate, and market conditions can affect our ability to manage our cost of sales over the short term. We seek to manage this exposure, but we may not be successful in managing our exposure to these risks. Substantial increases in the prices for raw materials would increase our operating costs and could reduce profitability if the increased costs cannot be offset by changes in vehicle prices or countered by productivity gains. In particular, certain raw materials are sourced from a limited number of suppliers and from a limited number of countries. We cannot guarantee that we will be able to maintain arrangements with these suppliers that assure access to these raw materials, and in some cases this access may be affected by factors outside of our control and the control of our suppliers. For instance, natural or man-made disasters or civil unrest may have severe and unpredictable effects on the price of certain raw materials in the future.

As with raw materials, we are also at risk for supply disruption and shortages in parts and components for use in our vehicles for many reasons including, but not limited to, tight credit markets or other financial distress, natural or man-made disasters, or production difficulties. We will continue to work with suppliers to monitor potential disruptions and shortages and to mitigate the effects of any emerging shortages on our production volumes and revenues. However, there can be no assurances that these events will not have an adverse effect on our production in the future, and any such effect may be material.

Any interruption in the supply or any increase in the cost of raw materials, parts, components and systems could negatively impact our ability to achieve our vehicle sales objectives and profitability. Long-term interruptions in supply of raw materials, parts, components and systems may result in a material impact on vehicle production, vehicle sales objectives, and profitability. Cost increases which cannot be recouped through increases in vehicle prices, or countered by productivity gains, may result in a material impact on our financial condition and/or results of operations.

We are subject to risks associated with exchange rate fluctuations, interest rate changes, credit risk and other market risks.

We operate in numerous markets worldwide and are exposed to market risks stemming from fluctuations in currency and interest rates. The exposure to currency risk is mainly linked to the differences in geographic distribution of our manufacturing activities and commercial activities, resulting in cash flows from sales being denominated in currencies different from those connected to purchases or production activities.

We use various forms of financing to cover funding requirements for our industrial activities and for providing financing to our dealers and customers. Moreover, liquidity for industrial activities is also principally invested in variable-rate or short-term financial instruments. Our financial services businesses normally operate a matching policy to offset the impact of differences in rates of interest on the financed portfolio and related liabilities. Nevertheless, changes in interest rates can affect net revenues, finance costs and margins.

 

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We seek to manage risks associated with fluctuations in currency and interest rates through financial hedging instruments. Despite such hedges being in place, fluctuations in currency or interest rates could have a material adverse effect on our financial condition and results of operations. For example, the weakening of the Brazilian Real against the Euro in 2013 impacted the results of operations of our LATAM segment. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group—Results of Operations.”

Our financial services activities are also subject to the risk of insolvency of dealers and retail customers, as well as unfavorable economic conditions in markets where these activities are carried out. Despite our efforts to mitigate such risks through the credit approval policies applied to dealers and retail customers, there can be no assurances that we will be able to successfully mitigate such risks, particularly with respect to a general change in economic conditions.

It may be difficult to enforce U.S. judgments against us.

We are organized under the laws of the Netherlands, and a substantial portion of our assets are outside of the U.S. Most of our directors and senior management and our independent auditors are resident outside the U.S., and all or a substantial portion of their respective assets may be located outside the U.S. As a result, it may be difficult for U.S. investors to effect service of process within the U.S. upon these persons. It may also be difficult for U.S. investors to enforce within the U.S. judgments predicated upon the civil liability provisions of the securities laws of the U.S. or any state thereof. In addition, there is uncertainty as to whether the courts outside the U.S. would recognize or enforce judgments of U.S. courts obtained against us or our directors and officers predicated upon the civil liability provisions of the securities laws of the U.S. or any state thereof. Therefore, it may be difficult to enforce U.S. judgments against us, our directors and officers and our independent auditors.

There may be potential “Passive Foreign Investment Company” tax considerations for U.S. Shareholders.

FCA would be a “passive foreign investment company”, or a PFIC, for U.S. federal income tax purposes with respect to a U.S. Shareholder (as defined in “Tax Consequences—Material U.S. Federal Income Tax Consequences” below) if for any taxable year in which such U.S. Shareholder held FCA common shares, after the application of applicable “look-through rules” (i) 75 percent or more of FCA’s gross income for the taxable year consists of “passive income” (including dividends, interest, gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business, as defined in applicable Treasury Regulations), or (ii) at least 50 percent of its assets for the taxable year (averaged over the year and determined based upon value) produce or are held for the production of “passive income.” U.S. persons who own shares of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the dividends they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC. In addition, if Fiat were or had been in the past a PFIC, the exchange of Fiat ordinary shares for FCA common shares could be taxable to U.S. Shareholders.

While FCA believes that its shares are not, and will not become as a result of its receipt of the net proceeds from this offering of common shares and/or the concurrent offering of Mandatory Convertible Securities, stock of a PFIC for U.S. federal income tax purposes, this conclusion is a factual determination made annually and thus may be subject to change. Moreover, FCA may become a PFIC in future taxable years if there were to be changes in FCA’s assets, income or operations. In addition, if Fiat were or had been in the past a PFIC, the treatment of the exchange of Fiat ordinary shares for FCA common shares would be uncertain. See “Tax Consequences—Material U.S. Federal Income Tax Consequences—U.S. Shareholders—PFIC Considerations—Consequences of Holding FCA Stock” and “—Consequences of the Merger” for a further discussion.

 

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Tax consequences of the loyalty voting structure are uncertain.

No statutory, judicial or administrative authority directly discusses how the receipt, ownership, or disposition of special voting shares should be treated for Italian, U.K. or U.S. tax purposes and as a result, the tax consequences in those jurisdictions are uncertain.

The fair market value of the FCA special voting shares, which may be relevant to the tax consequences, is a factual determination and is not governed by any guidance that directly addresses such a situation. Because, among other things, the special voting shares are not transferrable (other than, in very limited circumstances, together with the associated FCA common shares) and a shareholder will receive amounts in respect of the special voting shares only if FCA is liquidated, FCA believes and intends to take the position that the fair market value of each special voting share is minimal. However, the relevant tax authorities could assert that the value of the special voting shares as determined by FCA is incorrect.

The tax treatment of the loyalty voting structure is unclear and shareholders are urged to consult their tax advisors in respect of the consequences of acquiring, owning and disposing of special voting shares. See “Tax Consequences” for a further discussion.

FCA intends to operate so as to be treated as exclusively resident in the United Kingdom for tax purposes, but the relevant tax authorities may treat it as also being tax resident elsewhere.

FCA is not a company incorporated in the U.K. Therefore, whether it is resident in the U.K. for tax purposes will depend on whether its “central management and control” is located (in whole or in part) in the U.K. The test of “central management and control” is largely a question of fact and degree based on all the circumstances, rather than a question of law. Nevertheless, the decisions of the U.K. courts and the published practice of Her Majesty’s Revenue & Customs, or HMRC, suggest that FCA, a group holding company, is likely to be regarded as having become U.K.-resident on this basis from incorporation and remaining so if, as FCA intends, (i) at least half of the meetings of its Board of Directors are held in the U.K. with a majority of directors present in the U.K. for those meetings; (ii) at those meetings there are full discussions of, and decisions are made regarding, the key strategic issues affecting FCA and its subsidiaries; (iii) those meetings are properly minuted; (iv) at least some of the directors of FCA, together with supporting staff, are based in the U.K.; and (v) FCA has permanent staffed office premises in the U.K.

Even if FCA is resident in the U.K. for tax purposes on this basis, as expected, it would nevertheless not be treated as U.K.-resident if (a) it were concurrently resident in another jurisdiction (applying the tax residence rules of that jurisdiction) that has a double tax treaty with the U.K. and (b) there is a tie-breaker provision in that tax treaty which allocates exclusive residence to that other jurisdiction.

Residence of FCA for Italian tax purposes is largely a question of fact based on all circumstances. A rebuttable presumption of residence in Italy may apply under Article 73(5-bis) of the Italian Consolidated Tax Act, or CTA. However, FCA intends to set up its management and organizational structure in such a manner that it should be deemed resident in the U.K. from its incorporation for the purposes of the Italy-U.K. tax treaty. Because this analysis is highly factual and may depend on future changes in FCA’s management and organizational structure, there can be no assurance regarding the final determination of FCA’s tax residence. Should FCA be treated as an Italian tax resident, it would be subject to taxation in Italy on its worldwide income and may be required to comply with withholding tax and/or reporting obligations provided under Italian tax law, which could result in additional costs and expenses.

Even if its “central management and control” is in the U.K. as expected, FCA will be resident in the Netherlands for Dutch corporate income tax and Dutch dividend withholding tax purposes on the basis that it is incorporated there. Nonetheless, FCA will be regarded as solely resident in either the U.K. or the Netherlands under the Netherlands-U.K. tax treaty if the U.K. and Dutch competent authorities agree that this is the case. FCA intends to seek a ruling on this question from the U.K. and Dutch competent authorities. FCA anticipates

 

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that, so long as the factors listed in the third preceding paragraph are present at all material times, it is unlikely that the U.K. and Dutch competent authorities will rule that FCA should be treated as solely resident in the Netherlands. The outcome of that ruling, however, cannot be guaranteed. If there is a change over time to the facts upon which a ruling issued by the competent authorities is based, the ruling may be withdrawn.

Unless and until the U.K. and the Dutch competent authorities rule that FCA should be treated as solely resident in the U.K. for the purposes of the Netherlands-U.K. double tax treaty, the Netherlands will be allowed to levy tax on FCA as a Dutch-tax-resident taxpayer. Furthermore, in these circumstances, dividends distributed by FCA will be subject to Dutch dividend withholding tax.

Should Dutch or Italian withholding taxes be imposed on future dividends or distributions with respect to FCA common shares, whether such withholding taxes are creditable against a tax liability to which a shareholder is otherwise subject depends on the laws of such shareholder’s jurisdiction and such shareholder’s particular circumstances. Shareholders are urged to consult their tax advisors in respect of the consequences of the potential imposition of Dutch and/or Italian withholding taxes.

The U.K.’s controlled foreign company taxation rules may reduce net returns to shareholders.

On the assumption that FCA is resident for tax purposes in the U.K., FCA will be subject to the U.K. controlled foreign company, or CFC, rules. The CFC rules can subject U.K.-tax-resident companies (in this case FCA) to U.K. tax on the profits of certain companies not resident for tax purposes in the U.K. in which they have at least a 25 percent direct or indirect interest. Interests of connected or associated persons may be aggregated with those of the U.K.-tax-resident company when applying this 25 percent threshold. For a company to be a CFC, it must be treated as directly or indirectly controlled by persons resident for tax purposes in the U.K. The definition of control is broad (it includes economic rights) and captures some joint ventures.

Various exemptions are available. One of these is that a CFC must be subject to tax in its territory of residence at an effective rate not less than 75 percent of the rate to which it would be subject in the U.K., after making specified adjustments. Another of the exemptions (the “excluded territories exemption”) is that the CFC is resident in a jurisdiction specified by HMRC in regulations (several jurisdictions in which the Fiat group has significant operations, including Brazil, Italy and the United States, are so specified). For this exemption to be available, the CFC must not be involved in an arrangement with a main purpose of avoiding U.K. tax and the CFC’s income falling within certain categories (often referred to as the CFC’s “bad income”) must not exceed a set limit. In the case of the United States and certain other countries, the “bad income” test need not be met if the CFC does not have a permanent establishment in any other territory and the CFC or persons with an interest in it are subject to tax in its home jurisdiction on all its income (other than non-deductible distributions). FCA expects that its principal operating activities should fall within one or more of the exemptions from the CFC rules, in particular the excluded territories exemption.

Where the entity exemptions are not available, profits from activities other than finance or insurance will only be subject to apportionment under the CFC rules where:

 

  Ÿ   some of the CFC’s assets or risks are acquired, managed or controlled to any significant extent in the U.K. (a) other than by a U.K. permanent establishment of the CFC and (b) other than under arm’s length arrangements;

 

  Ÿ   the CFC could not manage the assets or risks itself; and

 

  Ÿ   the CFC is party to arrangements which increase its profits while reducing tax payable in the U.K. and the arrangements would not have been made if they were not expected to reduce tax in some jurisdiction.

 

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Profits from finance activities (whether considered trading or non-trading profits for U.K. tax purposes) or from insurance may be subject to apportionment under the CFC rules if they meet the tests set out above or specific tests for those activities. A full or 75 percent exemption may also be available for some non-trading finance profits.

Although FCA does not expect the U.K.’s CFC rules to have a material adverse impact on its financial position, the effect of the new CFC rules is not yet certain. FCA will continue to monitor developments in this regard and seek to mitigate any adverse U.K. tax implications which may arise. However, the possibility cannot be excluded that the reform of the CFC rules may have a material adverse impact on the financial position of FCA, reducing net returns to FCA shareholders.

The existence of a permanent establishment in Italy for FCA after the Merger is a question of fact based on

all the circumstances.

Whether FCA has maintained a permanent establishment in Italy after the Merger (an “Italian P.E.”) is largely a question of fact based on all the circumstances. FCA believes that, on the understanding that it should be a U.K.-resident company under the Italy-U.K. tax treaty, it is likely to be treated as maintaining an Italian P.E. because it intends to maintain sufficient employees, facilities and activities in Italy to qualify as maintaining an Italian P.E. Should this be the case (i) the embedded gains on FCA’s assets connected with the Italian P.E. will not be taxed as a result of the Merger; (ii) Fiat’s tax-deferred reserves will not be taxed, inasmuch as they are booked in the Italian P.E.’s financial accounts; and (iii) an Italian fiscal unit, or Fiscal Unit, could be maintained with respect to Fiat’s Italian subsidiaries whose shareholdings are part of the Italian P.E.’s net worth. Because this analysis is highly factual, there can be no assurance regarding FCA’s maintaining an Italian P.E. after the Merger.

The Merger will likely result in the immediate charge of an Italian Exit Tax with respect to capital gains on

assets that are expected to be transferred out of the Italian P.E. in connection with the Merger.

The Merger should qualify as a cross-border merger transaction for Italian tax purposes. Italian tax laws provide that such a cross-border merger is tax-neutral with respect to those Fiat assets that remain connected with the Italian P.E., but will result in the realization of capital gains or losses on those Fiat assets that will not be connected with the Italian P.E. (giving rise to an “Italian Exit Tax”).

Under a recently enacted Italian law (Article 166 (2-quater) of the CTA), companies which cease to be Italian-resident and become tax-resident in another EU Member State may apply to suspend any Italian Exit Tax under the principles of the Court of Justice of the European Union case C-371/10, National Grid Indus BV. Italian rules implementing Article 166 (2-quater), issued in August 2013, excluded cross-border merger transactions from the suspension of the Italian Exit Tax. As a result, the Merger will result in the immediate charge of an Italian Exit Tax in relation to those Fiat assets that will not be connected with the Italian P.E. Whether or not the Italian implementing rules are deemed compatible with EU law is unlikely to be determined before the payment of the Italian Exit Tax is due. Capital gains on certain assets of the Group that are expected to be transferred out of the Italian P.E. in connection with the Merger will be realized for Italian tax purposes. However, Fiat expects that such gains may be largely offset by tax losses available to the Group.

The continuation of the Fiscal Unit in the hands of the Italian P.E. and the tax treatment of the carried-forward tax losses of such Fiscal Unit is uncertain and subject to a mandatory ruling request.

According to Article 124(5) of the CTA, a mandatory ruling request should be submitted to the Italian tax authorities, in order to ensure the continuity, via the Italian P.E., of the Fiscal Unit currently in place between Fiat and Fiat’s Italian subsidiaries. Fiat has filed a ruling request with the Italian tax authorities in respect of the Merger. Depending on the outcome of the ruling, it is possible that the carried-forward tax losses generated by the Fiscal Unit would become restricted losses and they could not be used to offset the future taxable income of the Fiscal Unit. It is also possible that FCA would not be able to offset the Fiscal Unit’s carried-forward tax

 

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losses against any capital gains on Fiat’s assets that are not connected with the Italian P.E., despite the continuity of the Fiscal Unit. In the case that the carried-forward tax losses become restricted losses and are not able to be used to offset the future taxable income of the Fiscal Unit or in the case that the carried-forward tax losses would not be able to offset any capital gains on Fiat’s assets, the recoverability of such carried-forward tax losses may be reassessed. The outcome of any reassessment could result in a derecognition of such carried-forward tax losses, which may adversely affect our financial condition or results of operations.

Risks Related to Our Indebtedness

We have significant outstanding indebtedness, which may limit our ability to obtain additional funding on competitive terms and limit our financial and operating flexibility.

The extent of our indebtedness could have important consequences on our operations and financial results, including:

 

  Ÿ   we may not be able to secure additional funds for working capital, capital expenditures, debt service requirements or general corporate purposes;

 

  Ÿ   we may need to use a portion of our projected future cash flow from operations to pay principal and interest on our indebtedness, which may reduce the amount of funds available to us for other purposes;

 

  Ÿ   we may be more financially leveraged than some of our competitors, which may put us at a competitive disadvantage; and

 

  Ÿ   we may not be able to adjust rapidly to changing market conditions, which may make us more vulnerable to a downturn in general economic conditions or our business.

These risks may be exacerbated by volatility in the financial markets, particularly those resulting from perceived strains on the finances and creditworthiness of several governments and financial institutions, particularly in the Eurozone.

Among the anticipated benefits of the corporate reorganization announced in January 2014 is the expected reduction in funding costs over time due to anticipated improved debt capital markets positioning of the combined entity. However, we may not recognize these benefits for some time as we expect to maintain our existing capital structure until it becomes cost effective to modify this structure in light of our existing long-term obligations. However, certain of the circumstances and risks described may delay or reduce the expected cost savings from the future funding structures and the expected cost savings may not be achieved in full or at all. See “The FCA Merger.”

Even after the January 2014 acquisition of the approximately 41.5 percent interest in Chrysler that we did not already own, Chrysler continues to manage financial matters, including funding and cash management, separately. Additionally, Fiat has not provided guarantees or security or undertaken any other similar commitment in relation to any financial obligation of Chrysler, nor does it have any commitment to provide funding to Chrysler in the future.

Furthermore, certain bonds issued by Fiat and its subsidiaries include covenants that may be affected by circumstances related to Chrysler. In particular, these bonds include cross-default clauses which may accelerate the relevant issuer’s obligation to repay its bonds in the event that Chrysler fails to pay certain debt obligations on maturity or is otherwise subject to an acceleration in the maturity of any of those obligations. Therefore, these cross-default provisions could require early repayment of those bonds in the event Chrysler’s debt obligations are accelerated or are not repaid at maturity. There can be no assurance that the obligation to accelerate the repayment by Chrysler of its debts will not arise or that it will be able to pay its debt obligations when due at maturity.

In addition, one of Fiat’s existing revolving credit facilities, expiring in July 2016, provides some limits on Fiat’s ability to provide financial support to Chrysler.

 

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Restrictive covenants in our debt agreements could limit our financial and operating flexibility.

The indentures governing certain of our outstanding public indebtedness, and other credit agreements to which companies in the Group are a party, contain covenants that restrict the ability of companies in the Group to, among other things:

 

  Ÿ   incur additional debt;

 

  Ÿ   make certain investments;

 

  Ÿ   enter into certain types of transactions with affiliates;

 

  Ÿ   sell certain assets or merge with or into other companies;

 

  Ÿ   use assets as security in other transactions; and

 

  Ÿ   enter into sale and leaseback transactions.

For more information regarding our credit facilities and debt, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group—Liquidity and Capital Resources.”

Restrictions arising out of Chrysler’s debt instruments may hinder our ability to manage our operations on a consolidated, global basis.

Chrysler is party to credit agreements for certain senior credit facilities and an indenture for two series of secured senior notes. These debt instruments include covenants that restrict Chrysler’s ability to pay dividends or enter into sale and leaseback transactions, make certain distributions or purchase or redeem capital stock, prepay other debt, encumber assets, incur or guarantee additional indebtedness, incur liens, transfer and sell assets or engage in certain business combinations, enter into certain transactions with affiliates or undertake various other business activities.

In particular, in January 2014, Chrysler paid a distribution of U.S.$1.9 billion (€1.4 billion) to its members. With certain exceptions, further distributions will be limited to 50 percent of Chrysler’s cumulative consolidated net income (as defined in the agreements) from the period from January 1, 2012 until the end of the most recent fiscal quarter, less the amount of the January 2014 distribution. See “Management’s Discussion and Analysis of Financial Condition and the Results of Operations of the Fiat Group—Liquidity and Capital Resources.”

These restrictive covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, mergers and acquisitions, joint ventures or other corporate opportunities. In particular, the senior credit facilities contain, and future indebtedness may contain, other and more restrictive covenants. These agreements also restrict Chrysler from prepaying certain of its indebtedness or imposing limitations that make prepayment impractical. The senior credit facilities require Chrysler to maintain borrowing base collateral coverage and a minimum liquidity threshold. A breach of any of these covenants or restrictions could result in an event of default on the indebtedness and the other indebtedness of Chrysler or result in cross-default under certain of its indebtedness.

If Chrysler is unable to comply with these covenants, its outstanding indebtedness may become due and payable and creditors may foreclose on pledged properties. In this case, Chrysler may not be able to repay its debt and it is unlikely that it would be able to borrow sufficient additional funds. Even if new financing is made available to Chrysler in such circumstances, it may not be available on acceptable terms.

Compliance with certain of these covenants could also restrict Chrysler’s ability to take certain actions that its management believes are in Chrysler’s and our best long-term interests.

 

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Should Chrysler be unable to undertake strategic initiatives due to the covenants provided for by the above instruments, our business prospects, financial condition and results of operations could be impacted.

Substantially all of the assets of Chrysler and its U.S. subsidiary guarantors are unconditionally pledged as security under its senior credit facilities and secured senior notes and could become subject to lenders’ contractual rights if an event of default were to occur.

Chrysler and several of its U.S. subsidiaries are obligors or guarantors under Chrysler’s senior credit facilities and secured senior notes. The obligations under the senior credit facilities and secured senior notes are secured by senior and junior priority, respectively, security interests in substantially all of the assets of Chrysler and its U.S. subsidiary guarantors. The collateral includes 100 percent of the equity interests in Chrysler’s U.S. subsidiaries, 65 percent of the equity interests in its non-U.S. subsidiaries held directly by Chrysler and its U.S. subsidiary guarantors, all personal property and substantially all of Chrysler’s U.S. real property other than its Auburn Hills, Michigan headquarters. An event of default under Chrysler’s senior credit facilities and/or secured senior notes could trigger its lenders’ or noteholders’ contractual rights to enforce their security interest in these assets.

Risks Relating to the Proposed Separation of Ferrari

No assurance can be given that the separation will occur.

No assurance can be given as to whether and when the separation of Ferrari will occur. FCA may determine to delay or abandon the separation at any time for any reason or for no reason.

The terms of the proposed separation of Ferrari and Ferrari’s stand-alone capital structure have not been determined.

The terms of the proposed separation of Ferrari and Ferrari’s stand-alone capital structure have not yet been determined. Our preliminary plans are described under the caption “Summary—Recent Developments.” However, the final structure and terms of the separation may not coincide with the terms set forth in this prospectus. No assurance can be given as to the terms of your prospective interest in Ferrari or the terms of the method how it will be distributed to you. Further, the pro forma financial statements included in this prospectus give effect to the carve-out of Ferrari on a standalone basis but do not give effect to any capital structure reorganization of Ferrari to operate on a standalone basis. Consequently, the pro forma financial statements may not represent the standalone financial statements of Ferrari following completion of the spin-off.

We may be unable to achieve some or all of the benefits that we expect to achieve from our separation from Ferrari.

We may not be able to achieve the financial and other benefits that we expect will result from the separation of Ferrari. The anticipated benefits of the separation are based on a number of assumptions, some of which may prove incorrect. For example, there can be no assurance that the separation of Ferrari will enable us to strengthen our capital base sufficiently to offset the loss of the earnings power and potential of Ferrari.

Following the separation, the price of FCA common shares may fluctuate significantly.

We cannot predict the prices at which our common shares may trade after the separation, the effect of the separation on the trading prices of our common shares or whether the market value of our common shares and the common shares of Ferrari held by a shareholder after the separation will be less than, equal to or greater than the market value of the common shares of FCA held by such shareholder prior to the separation.

 

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We intend that the separation will not be taxable to our shareholders, but no assurance can be given that the separation will receive tax-free treatment.

It is our intention to structure the separation and any distribution to FCA shareholders in a tax efficient manner, taking appropriate account of the potential impact on shareholders, but no assurance can be given that the intended tax treatment will be achieved, or that shareholders (and/or persons that receive the benefit of Ferrari shares) will not incur substantial tax liabilities in connection with the separation and distribution. In particular, the requirements for favorable treatment differ (and may conflict) from jurisdiction to jurisdiction and the relevant requirements are often complex, and no assurance can be given that any ruling (or similar guidance) from any taxing authority would be sought (or, if sought, granted).

Risks Related to the Merger and the FCA shares

Prior to the effectiveness of the Merger, there was no trading market for our common shares, and there can be no assurance that a liquid trading market on the NYSE will develop or be sustained.

Prior to the Merger, there was no market for our common shares although Fiat ordinary shares were traded on the MTA until completion of the Merger. Concurrently with the completion of the Merger, we listed our common shares on the NYSE. However, there can be no assurance that an active market for our common shares will develop on the NYSE, or that if it develops, the market will be sustained.

Our maintenance of two exchange listings may adversely affect liquidity in the market for our common shares and could result in pricing differentials of our common shares between the two exchanges.

Shortly following the closing of the Merger and the listing of our common shares on the NYSE, we listed our common shares on the MTA. It is not possible to predict how trading will develop in these two markets. The dual listing of our common shares may split trading between the two markets and adversely affect the liquidity of the shares in one or both markets and the development of an active trading market for our common shares on the NYSE and may result in price differentials between the exchanges. Differences in the trading schedules, as well as volatility in the exchange rate of the two trading currencies, among other factors, may result in different trading prices for our common shares on the two exchanges.

The market price of our common shares may decline following the listing of our common shares on the NYSE and the MTA, particularly if the expected benefits of our reorganization fail to materialize.

The market prices of our common shares may decline following the listing of our common shares on the NYSE and the MTA, if, among other reasons, we do not achieve the expected benefits from the full integration with Chrysler and the other benefits of our reorganization as rapidly or to the extent anticipated by us. Any of these situations may cause our shareholders to sell a significant number of our common shares, which may negatively affect the market price of our common shares.

The loyalty voting structure may affect the liquidity of our common shares and reduce our common share price.

The implementation of the loyalty voting structure could reduce the liquidity of our common shares and adversely affect the trading prices of the FCA common shares. The loyalty voting structure was intended to reward Fiat shareholders for maintaining long-term share ownership by granting initial shareholders and persons holding our common shares continuously for at least three years at any time following the effectiveness of the Merger the option to elect to receive FCA special voting shares. FCA special voting shares cannot be traded and, immediately prior to the deregistration of our common shares from the FCA Loyalty Register, any corresponding FCA special voting shares shall be transferred to FCA for no consideration (om niet). This loyalty voting structure is designed to encourage a stable shareholder base for FCA and, conversely, it may deter trading by those shareholders who are interested in gaining or retaining FCA special voting shares. Therefore, the loyalty voting structure may reduce liquidity in FCA common shares and adversely affect their trading price.

 

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The loyalty voting structure may make it more difficult for our shareholders to change our management or acquire a controlling interest in us, and the market price of our common shares may be lower as a result.

The provisions of our articles of association which establish the loyalty voting structure may make it more difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change of control were considered favorably by shareholders holding a majority of our common shares. As a result of the loyalty voting structure, a relatively large proportion of the voting power of FCA could be concentrated in a relatively small number of shareholders who would have significant influence over us. Exor has a voting interest in FCA of 46.65 percent due to its participation in the loyalty voting structure and as a result will have the ability to exercise significant influence on matters involving our shareholders. Such shareholders participating in the loyalty voting structure could effectively prevent change of control transactions that may otherwise benefit our shareholders.

The loyalty voting structure may also prevent or discourage shareholders’ initiatives aimed at changes in our management.

The Merger is not expected to result in any significant operational cost savings or synergies.

As part of the Merger, the business and operations of Fiat were assumed by FCA, but they remained substantially unchanged. Therefore, FCA and Fiat do not expect that the Merger will result in any significant operational cost savings or synergies. For a discussion of the anticipated organizational and capital markets impacts, see “The FCA Merger.”

 

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THE FCA MERGER

Background to the Merger

Over the past several years, we and our management, with the support of Fiat’s largest shareholder, have been pursuing a process of transformation in order to meet the challenges of a changing marketplace characterized by global overcapacity in automobile production and the consequences of economic recession in the European markets on which we have historically depended. The transformation process to date has included several steps.

In 2009, the Fiat Group and Chrysler entered into a global strategic alliance in which the Group contributed rights in various vehicle platforms and technologies to Chrysler and agreed to take on management responsibility for Chrysler, in return for which the Fiat Group received ownership interests in Chrysler and rights to increase that ownership interest and take a controlling interest in Chrysler over time. That alliance grew in strength and scope over the following years, as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group—The Fiat-Chrysler Alliance,” and Fiat obtained additional interests in Chrysler, leading to consolidation of Chrysler’s results into the Fiat Group’s financial statements from June 1, 2011. By January 2012, following achievement of three performance events by Chrysler and the acquisition of interests held by the U.S. Department of the Treasury and Canadian government, the Group’s ownership interest in Chrysler reached 58.5 percent.

In 2010, the capital goods businesses, including the agricultural and construction equipment and commercial vehicles businesses previously integrated within the Group, were demerged into a separate publicly traded entity, now CNH Industrial, so that the different investment cycles, financing needs and investment profiles of those businesses and the remaining Group businesses, respectively, could be addressed more effectively and with greater strategic flexibility. The Demerger was completed on January 1, 2011.

In late 2011, the Fiat Group commenced a process to streamline its capital structure and simplify its governance structure through the conversion of Fiat’s then-outstanding preference shares and savings shares into ordinary shares to create a single, more liquid class of securities. The preference and savings shares had long traded at significant discounts to the ordinary shares and with sustained low trading volumes. The conversion was approved by the required vote of Fiat shareholders in April 2012 and became effective in May 2012.

During 2012 and 2013, while negotiations relating to further steps of the acquisition of the remaining shares in Chrysler were continuing, the Group’s management initiated a review of the most suitable corporate and governance structures for the combined Group, concluding that following the acquisition of the approximately 41.5 percent interest in Chrysler we did not already own, the character of our businesses and capital needs would change significantly. As a majority of our revenues and a substantial majority of our profitability would become attributable to operations in North America, the Group’s management recognized that we would have growing needs for low-cost capital to fund the investments required to secure the assets driving our growth prospects and to make necessary investments in new growth opportunities. In that process, we began to form the view that an Italian headquarters, Italian legal incorporation and sole Italian listing were no longer an adequate reflection of the nature and geographical footprint of the business and did not best serve our capital markets and financing objectives. The Group has continued to be viewed by investors largely as an Italian company, and the trading price of Fiat’s shares has been closely correlated with the Italian stock market index, notwithstanding that a majority of its revenues and profits are derived from North America.

In January 2014, the Fiat Group agreed to purchase from the UAW Retiree Medical Benefits Trust, or the VEBA Trust, all of the VEBA Trust’s equity interests in Chrysler, representing the approximately 41.5 percent interest in Chrysler that it did not already own. The transaction was completed on January 21, 2014, resulting in Chrysler becoming an indirect wholly-owned subsidiary of Fiat. Immediately following that development, Fiat accelerated its plans to reorganize the Group’s structure and governance. Fiat’s management reviewed the experience of Fiat Industrial and CNH Global N.V. (“CNH”), which in 2013 successfully

 

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completed a merger resulting in a new combined company, CNH Industrial, organized in the Netherlands, with shares listed in New York and Milan.

Having reviewed various proposals from Fiat’s financial and legal advisors, Fiat determined that, similarly, a redomiciliation into the Netherlands with a listing on the NYSE and an additional listing on the MTA would be the structure most suitable to Fiat’s current and anticipated profile and its strategic and financial objectives. In order to foster the development and continued involvement of a core base of long-term shareholders, Fiat also decided to propose that the redomiciled company would adopt a loyalty voting structure. Other potential options were considered, including a redomiciliation effected by means of an exchange offer by a newly formed entity organized in the Netherlands for shares of Fiat instead of a merger, or a sole listing on the NYSE, but such alternatives were not pursued either because the execution risks were perceived to be higher or the outcome was expected to be less attractive than the Merger.

On January 29, 2014, the Board of Directors of Fiat approved the corporate reorganization of which the Merger forms a part and the formation of FCA as a fully integrated global automaker. On June 15, 2014, the Board of Directors of Fiat unanimously approved the merger plan governing the Merger, including the articles of association that will be adopted by FCA in connection with the Merger. Certain members of the Board of Directors of Fiat, including the Chairman of the Board and the Chief Executive Officer of Fiat, are also directors of Exor, our largest shareholder.

At the extraordinary general meeting held on August 1, 2014, the shareholders of Fiat approved the Merger. On October 12, 2014, the Merger became effective.

Plans for FCA After the Merger

After the Merger, the business of FCA is the same business as that of Fiat prior to the Merger.

 

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USE OF PROCEEDS

We estimate that our gross proceeds from the sale of              shares by us in this offering will be approximately $         (approximately $         if the underwriters fully exercise their option to purchase additional common shares), assuming an offering price of $         per common share, the closing price of our common shares on the New York Stock Exchange on                     , 2014. After deducting the underwriting discounts and commissions of this offering, we expect to receive net proceeds of approximately $         (approximately $         if the underwriters fully exercise their option to purchase additional common shares).

We intend to use the proceeds of this offering, together with the proceeds of the concurrent issuance of the Mandatory Convertible Securities, for general corporate purposes.

 

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CAPITALIZATION

The following table sets forth (1) our historical capitalization at September 30, 2014 and (2) our pro forma capitalization which gives effect to (a) the Merger, (b) the Merger and the Common Shares Offering and (c) the Merger, the Common Shares Offering and the Mandatory Convertible Securities Offering. This table assumes the sale of              common shares in this offering at an assumed public offering price of $         per share, which is the closing price of our shares on the New York Stock Exchange on                     , 2014, and an offering of $         of our Mandatory Convertible Securities, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the use of proceeds thereof. You should read this table together with “Use of Proceeds,” “Selected Financial Data,” “Unaudited Pro Forma Condensed Combined Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group.”

 

     At September 30, 2014
(€ million)    Actual      As Adjusted
For the Merger(3)
     As Adjusted For the
Merger and the
Common Shares
Offering
   As Adjusted For the
Merger, the Common
Shares Offering
and the
Mandatory Convertible
Securities Offering
     (Unaudited)      (Unaudited)      (Unaudited)    (Unaudited)

Cash and cash equivalents

     18,395         17,978         
  

 

 

    

 

 

    

 

  

 

Debt:

           

Existing debt

     32,933         32,933         

Coupon component of Mandatory Convertible Securities

                     
  

 

 

    

 

 

    

 

  

 

Total Debt

     32,933         32,933         
  

 

 

    

 

 

    

 

  

 

Equity(1)

     10,713         10,296         
  

 

 

    

 

 

    

 

  

 

Total Capitalization(2)

            43,646                43,229         
  

 

 

    

 

 

    

 

  

 

 

(1) Equity includes the equity conversion component of the Mandatory Convertible Securities.

 

(2) Total Capitalization represents the sum of Debt and Equity.

 

(3) In connection with the Merger, a net aggregate cash disbursement of €417 million was made consisting of payment to Fiat shareholders who exercised cash exit rights under Article 2437 - quotes of the Italian Civil Code (the “Cash Exit Rights”), net of proceeds from the offering of shares purchased upon the exercise of the Cash Exit Rights by Fiat shareholders who did not exercise such right.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth selected historical consolidated financial and other data of the Fiat Group and has been derived from:

 

  Ÿ   the Interim Consolidated Financial Statements for the three and nine months ended September 30, 2014 and 2013, included elsewhere in this prospectus;

 

  Ÿ   the Annual Consolidated Financial Statements for the years ended December 31, 2013, 2012 and 2011, included elsewhere in this prospectus; and

 

  Ÿ   the annual consolidated financial statements of the Fiat Group for the years ended December 31, 2010 and 2009, which are not included in this prospectus.

The accompanying Interim Consolidated Financial Statements have been prepared on the same basis as the Annual Consolidated Financial Statements and include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the Interim Consolidated Financial Statements. Interim results are not necessarily indicative of results that may be expected for a full year or any future interim period.

The following information should be read in conjunction with “Note on Presentation,” “Risk Factors,” “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group,” the Interim Consolidated Financial Statements and the Annual Consolidated Financial Statements included elsewhere in this prospectus. Historical results for any period are not necessarily indicative of results to be expected for any future period.

Consolidated Income Statement Data

 

     For the three months ended September 30,      For the nine months ended September 30,  
                 2014                              2013                              2014                              2013              
     (€ million, except per share data)  

Net revenues

     23,553         20,693         69,006         62,681   

EBIT

     926         862         2,157         2,542   

Profit/(loss) before taxes

     415         369         647         1,089   

Profit/(loss) from continuing operations

     188         189         212         655   

Net profit/(loss)

     188         189         212         655   

Attributable to:

           

Owners of the parent

     174         (15)         160         44   

Non-controlling interest

     14         204         52         611   

Basic earnings/(loss) from continuing operations per ordinary share (in Euro)

     0.143         (0.013)         0.132         0.036   

Diluted earnings/(loss) from continuing operations per ordinary share (in Euro)

     0.142         (0.013)        
0.130
  
     0.036   

Basic earnings/(loss) per ordinary share (in Euro)

     0.143         (0.013)         0.132         0.036   

Diluted earnings/(loss) per ordinary share (in Euro)

     0.142         (0.013)         0.130         0.036   

Dividends paid per ordinary share (in Euro)(1)

     -         -         -         -   

Other Statistical Information:

           

Shipments (in thousands of units)

     1,099         1,002         3,393         3,181   

Number of employees at period end

     228,987         227,162         228,987         227,162   

 

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Consolidated Statement of Financial Position Data

 

     At September 30, 2014      At December 31, 2013  
     (€ million, except share data)  

Cash and cash equivalents

     18,395         19,455   

Total assets

     94,396         87,214   

Debt

     32,933         30,283   

Total equity

     10,713         12,584   

Equity attributable to owners of the parent

     10,413         8,326   

Non-controlling interests

     300         4,258   

Share capital

     4,479         4,477   

Ordinary shares issued (in thousands of shares)(1):

     1,250,964         1,250,688   

 

(1)  Treasury shares at September 30, 2014 were 29,911 thousand. Book value per ordinary share (net of treasury shares) at September 30, 2014 amounted to €8.774.

Consolidated Income Statement Data

 

    For the years ended December 31,  
    2013     2012     2011(1)     2010(2)     2009(2)  
    (€ million, except per share data)  

Net revenues

    86,624        83,765        59,559        35,880        32,684   

EBIT

    3,002        3,434        3,291        1,106        455   

Profit before taxes

    1,015        1,524        1,932        706        103   

Profit/(loss) from continuing operations

    1,951        896        1,398        222        (345)   

Profit/(loss) from discontinued operations

    -        -        -        378        (503)   

Net profit/(loss)

    1,951        896        1,398        600        (848)   

Attributable to:

         

Owners of the parent

    904        44        1,199        520        (838)   

Non-controlling interest

    1,047        852        199        80        (10)   

Earnings/(loss) from continuing operations (in Euro)

         

Basic per ordinary share

    0.744        0.036        0.962        0.130        (0.302)   

Diluted per ordinary share

    0.736        0.036        0.955        0.130        (0.302)   

Basic per preference share

    -        -        0.962        0.217        (0.302)   

Diluted per preference share

    -        -        0.955        0.217        (0.302)   

Basic per savings share

    -        -        1.071        0.239        (0.302)   

Diluted per savings share

    -        -        1.063        0.238        (0.302)   

Earnings/(loss) per share (in Euro)

         

Basic per ordinary share

    0.744        0.036        0.962        0.410        (0.677)   

Diluted per ordinary share

    0.736        0.036        0.955        0.409        (0.677)   

Basic per preference share

    -        -        0.962        0.410        (0.677)   

Diluted per preference share

    -        -        0.955        0.409        (0.677)   

Basic per savings share

    -        -        1.071        0.565        (0.677)   

Diluted per savings share

    -        -        1.063        0.564        (0.677)   

Dividends paid per share (in Euro)(3)

         

Ordinary share

    -        -        0.090        0.170        -   

Preference share(4)

    -        0.217        0.310        0.310        -   

Savings share(4)

    -        0.217        0.310        0.325        0.310   

Other Statistical Information (unaudited):

         

Shipments (in thousands of units)

    4,352        4,223        3,175        2,094        2,161   

Number of employees at period end

    229,053        218,311        197,021        137,801        128,771   

 

(1)  The amounts reported include seven months of operations for Chrysler.
(2)  CNH Industrial was reported as discontinued operations in 2010 and 2009 as a result of the Demerger. For additional information on the Demerger, see Note Changes in the Scope of Consolidation to the Annual Consolidated Financial Statements included elsewhere in this prospectus.

 

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(3)  Dividends paid represent cash payments in the applicable year that generally relates to earnings of the previous year.
(4)  In accordance with the resolution adopted by the shareholders’ meeting on April 4, 2012, Fiat’s preference and savings shares were mandatorily converted into ordinary shares. For additional information on the shareholders’ resolution on the mandatory conversion, see Notes 12 and 23 to the Annual Consolidated Financial Statements included elsewhere in this prospectus.

Consolidated Statement of Financial Position Data

 

    At December 31,  
    2013     2012     2011(1)(2)     2010     2009(3)  
    (€ million, except share data)  

Cash and cash equivalents

    19,455        17,666        17,526        11,967        12,226   

Total assets

    87,214        82,633        80,379        73,442(2)        67,235   

Debt

    30,283        28,303        27,093        20,804        28,527   

Total equity

    12,584        8,369        9,711        12,461(2)        11,115   

Equity attributable to owners of the parent

    8,326        6,187        7,358        11,544(2)        10,301   

Non-controlling interests

    4,258        2,182        2,353        917(2)        814   

Share capital

    4,477        4,476        4,466        6,377        6,377   

Shares issued (in thousands of shares):

         

Ordinary(4)

    1,250,688        1,250,403        1,092,681        1,092,247        1,092,247   

Preference(5)

    -        -        103,292        103,292        103,292   

Savings(5)

    -        -        79,913        79,913        79,913   

 

  (1)  The amounts at December 31, 2011 are equivalent to those at January 1, 2012 derived from the Annual Consolidated Financial Statements.
  (2)  The amounts at December 31, 2011 include the consolidation of Chrysler.
  (3)  Includes assets and liabilities of CNH Industrial which was demerged from the Group at January 1, 2011. For additional information on the Demerger, see Note “Changes in the Scope of Consolidation” to the Annual Consolidated Financial Statements included elsewhere in this prospectus.
  (4)  Treasury shares at December 31, 2013 were 34,578 thousand. Book value per ordinary share (net of treasury shares) at December 31, 2013 amounted to €6.846.
  (5)  In accordance with the resolution adopted by the shareholders’ meeting on April 4, 2012, Fiat’s preference and savings shares were mandatorily converted into ordinary shares. For additional information on the shareholders’ resolution on the mandatory conversion, see Notes 12 and 23 to the Annual Consolidated Financial Statements included elsewhere in this prospectus.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma condensed consolidated financial information (the “Unaudited Pro Forma Condensed Consolidated Financial Information”) at and for the nine months ended September 30, 2014 and for the years ended December 31, 2013, 2012 and 2011 has been prepared by applying unaudited pro forma adjustments to (i) the historical interim consolidated statement of financial position and the historical interim consolidated income statement at and for the nine months ended September 30, 2014 included in the Interim Consolidated Financial Statements and (ii) the historical consolidated income statements for the years ended December 31, 2013, 2012 and 2011 included in the Annual Consolidated Financial Statements. The Interim Consolidated Financial Statements and the Annual Consolidated Financial Statements are included elsewhere in this prospectus. Unless otherwise specified, the terms “Fiat Group” and “FCA” refer to FCA, together with its subsidiaries, following completion of the Merger or to Fiat S.p.A. together with its subsidiaries, prior to the Merger, as the context may require.

The Unaudited Pro Forma Condensed Consolidated Financial information has been prepared to reflect the following transactions (together the “Transactions”):

 

  i. the agreement with the VEBA Trust pursuant to which Fiat North America LLC (“FNA”) acquired the remaining approximately 41.5 percent interest in Chrysler held by the VEBA Trust (the “VEBA Transaction”), inclusive of approximately 10 percent of previously exercised options, the interpretation of which was subject to ongoing litigation, which closed on January 21, 2014. Concurrent with the closing of the VEBA Transaction, Chrysler and the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) entered into a contractually binding and legally enforceable Memorandum of Understanding (“MOU”) to supplement Chrysler’s existing collective bargaining agreement. Under the MOU, the UAW committed to (i) use its best efforts to cooperate in the continued roll-out of Chrysler’s World Class Manufacturing (“WCM”) programs, (ii) actively participate in benchmarking efforts associated with implementation of WCM programs across all Fiat-Chrysler manufacturing sites to ensure objective competitive assessments of operational performance and provide a framework for the proper application of WCM principles, and (iii) actively assist in the achievement of Chrysler’s long-term business plan. In exchange for these legally binding commitments, Chrysler agreed to make payments to a UAW-organized, independent VEBA Trust totaling U.S.$700 million (€518 million at the transaction date) to be paid in four equal annual installments. The first installment was paid on January 21, 2014. As the VEBA Transaction and the MOU were executed contemporaneously among related parties, they are accounted for as a single commercial transaction with multiple elements;

 

  ii. the subsequent prepayment by Chrysler of amounts outstanding under the senior unsecured note issued June 10, 2009 to the VEBA Trust, with an original face amount of U.S.$4,587 million, or VEBA Trust Note, with proceeds from the issuance of new debt on February 7, 2014 (the “Chrysler Refinancing”); and

 

  iii. the proposed spin-off of Ferrari from FCA. In particular, on October 29, 2014 we announced our intention to separate Ferrari from FCA through a combination of a public offering of 10 percent of Ferrari from our current shareholding and a distribution of our remaining 80 percent of Ferrari shares to our shareholders (the “Separation”). These transactions are expected to occur in 2015. Prior to the Separation we also intend to enter into certain other transactions including distributions and transfers of cash from Ferrari to FCA currently estimated at €2.25 billion (the “Distributions”).

In accordance with the requirements of Regulation S-X Article 11, as Ferrari will be accounted for as a discontinued operation in FCA’s consolidated financial statements in connection with the Separation, the effects of the Separation have been presented for income statement purposes for the last three fiscal years and the latest interim period.

 

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The adjustments relating to the Separation do not reflect the receipt of any proceeds in connection with any proposed public offering of Ferrari shares, nor does it reflect any potential pre-separation internal reorganization other than as described herein, as the effects from any such transactions are not ascertainable at this time. The pro forma adjustments included in the Unaudited Pro Forma Condensed Consolidated Financial Information are not necessarily indicative of the transaction structure of any separation that may occur. As announced on October 29, 2014, the final approval of the transaction structure from the FCA Board of Directors has not yet been received, and there can be no assurances on the form of the transactions constituting the Separation. Further, if the structure of the Separation requires shareholder approval, such approval has not yet been obtained and there can be no guarantee that such approval will be obtained. See “Risk Factors—Risks Related to the Proposed Separation of Ferrari.”

The unaudited pro forma condensed consolidated income statements have been prepared assuming that (i) the VEBA Transaction, MOU and Chrysler Refinancing had occurred on January 1, 2013, and (ii) the Separation had occurred on January 1, 2011. The Distributions have no effects on the unaudited pro forma condensed income statements. The unaudited pro forma interim condensed consolidated statement of financial position has been prepared assuming that the Separation and the Distributions had taken place on September 30, 2014. The effects of the VEBA Transaction, the MOU and the Chrysler Refinancing are fully reflected in the Group’s interim consolidated statement of financial position at September 30, 2014. Therefore there are no pro forma adjustments to the unaudited pro forma interim condensed consolidated statement of financial position for such transactions.

The Unaudited Pro Forma Condensed Consolidated Financial Information does not purport to represent what our actual results of operations would have been if the Transactions had actually occurred on the dates assumed, nor is it necessarily indicative of future consolidated results of operations or financial condition. The Unaudited Pro Forma Condensed Consolidated Financial Information is presented for informational purposes only. The historical consolidated income statement, interim consolidated income statement and interim consolidated statement of financial position have been adjusted in the Unaudited Pro Forma Condensed Consolidated Financial Information to give effect to pro forma events that are (1) directly attributable to the Transactions, (2) factually supportable, and (3) expected to have a continuing impact on the consolidated financial results.

The Unaudited Pro Forma Condensed Consolidated Financial Information should be read in conjunction with the information contained in “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group,” the Annual Consolidated Financial Statements and the Interim Consolidated Financial Statements appearing elsewhere in this prospectus. All unaudited pro forma adjustments and their underlying assumptions are described more fully in the footnotes to our Unaudited Pro Forma Condensed Consolidated Financial Information.

 

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Unaudited Pro Forma Condensed Consolidated Income Statement

for the year ended December 31, 2011

 

     Fiat Group
Historical
     Unaudited Pro forma
adjustments
     Unaudited Pro Forma
year ended
December 31, 2011
 
(€ million)       Separation     
     (A)      (B)         

Net revenues

     59,559         (1,954)         57,605   

Cost of sales

     51,047         (1,362)         49,685   

Selling, general and administrative costs

     5,082         (127)         4,955   

Research and development costs

     1,385         (163)         1,222   

Other income/(expenses)

     (49)         10         (39)   

Result from investments

     131         -         131   

Gains and (losses) on the disposal of investments

     21         (6)         15   

Restructuring costs

     102         -         102   

Other unusual income/(expenses)

     1,245         -         1,245   
  

 

 

    

 

 

    

 

 

 

EBIT

     3,291         (298)         2,993   

Net financial income/(expenses)

     (1,359)         (3)         (1,362)   
  

 

 

    

 

 

    

 

 

 

Profit before taxes

     1,932         (301)         1,631   

Tax (income)/expenses

     534         (106)         428   
  

 

 

    

 

 

    

 

 

 

Profit from continuing operations

     1,398         (195)         1,203   
  

 

 

    

 

 

    

 

 

 

Net profit

     1,398         (195)         1,203   
  

 

 

    

 

 

    

 

 

 

Net profit attributable to:

        

Owners of the parent

     1,199         (167)         1,032   

Non-controlling interests

     199         (28)         171   

Basic earnings per ordinary share (in €)

     0.962            0.827   

Basic earnings per preference share (in €)

     0.962            0.827   

Basic earnings per savings share (in €)

     1.071            0.935   

Diluted earnings per ordinary share (in €)

     0.955            0.821   

Diluted earnings per preference share (in €)

     0.955            0.821   

Diluted earnings per savings share (in €)

     1.063            0.929   

Weighted average number of shares outstanding - ordinary

     1,054,007            1,054,007   

Weighted average number of shares outstanding - preference

     103,292            103,292   

Weighted average number of shares outstanding - savings

     79,913            79,913   

Weighted average number of shares for diluted earnings per share - ordinary

     1,063,684            1,063,684   

Weighted average number of shares for diluted earnings per share - preference

     103,292            103,292   

Weighted average number of shares for diluted earnings per share - savings

     79,913            79,913   

See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information

 

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Unaudited Pro Forma Condensed Consolidated Income Statement

for the year ended December 31, 2012

 

     Fiat Group
Historical
     Unaudited Pro forma
adjustments
     Unaudited Pro Forma
year ended
December 31, 2012
 
(€ million)       Separation     
     (A)      (B)         

Net revenues

     83,765         (2,100)         81,665   

Cost of sales

     71,473         (1,460)         70,013   

Selling, general and administrative costs

     6,775         (129)         6,646   

Research and development costs

     1,858         (163)         1,695   

Other income/(expenses)

     (68)         13         (55)   

Result from investments

     87         -         87   

Gains and (losses) on the disposal of investments

     (91)         -         (91)   

Restructuring costs

     15         -         15   

Other unusual income/(expenses)

     (138)         -         (138)   
  

 

 

    

 

 

    

 

 

 

EBIT

     3,434         (335)         3,099   

Net financial income/(expenses)

     (1,910)         1         (1,909)   
  

 

 

    

 

 

    

 

 

 

Profit before taxes

     1,524         (334)         1,190   

Tax (income)/expenses

     628         (101)         527   
  

 

 

    

 

 

    

 

 

 

Profit from continuing operations

     896         (233)         663   
  

 

 

    

 

 

    

 

 

 

Net profit

     896         (233)         663   
  

 

 

    

 

 

    

 

 

 

Net profit/(loss) attributable to:

        

Owners of the parent

     44         (202)         (158)   

Non-controlling interests

     852         (31)         821   

Basic earnings/(losses) per ordinary share (in €)

     0.036            (0.130)   

Diluted earnings/(losses) per ordinary share (in €)

     0.036            (0.130)   

Weighted average number of shares outstanding

     1,215,828            1,215,828   

Weighted average number of shares for diluted earnings per share

     1,225,868            1,225,868   

See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information

 

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Unaudited Pro Forma Condensed Consolidated Income Statement

for the year ended December 31, 2013

 

            Unaudited Pro forma adjustments      Unaudited
Pro Forma
year ended
December 31,
2013
 
(€ million)    Fiat Group
Historical
     Separation      VEBA
Transaction
    Chrysler
Refinancing
    
     (A)      (B)      (C.1)     (D.1)         

Net revenues

     86,624         (2,094)         -        -         84,530   

Cost of sales

     74,326         (1,401)         -        -         72,925   

Selling, general and administrative costs

     6,702         (140)         -        -         6,562   

Research and development costs

     2,236         (187)         -        -         2,049   

Other income/(expenses)

     77         2         -        -         79   

Result from investments

     84         -         -        -         84   

Gains and (losses) on the disposal of investments

     8         -         -        -         8   

Restructuring costs

     28         -         -        -         28   

Other unusual income/(expenses)

     (499)         -         56 (a)      -         (443)   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

EBIT

     3,002         (364)         56        -         2,694   

Net financial income/(expenses)

     (1,987)         (2)         -        123         (1,866)   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Profit before taxes

     1,015         (366)         56        123         828   

Tax (income)/expenses

     (936)         (120)         17 (a)      45         (994)   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Profit from continuing operations

     1,951         (246)         39        78         1,822   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net profit

     1,951         (246)         39        78         1,822   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net profit attributable to:

             

Owners of the parent

     904         (217)         1,031 (b)      78         1,796   

Non-controlling interests

     1,047         (29)         (992) (b)      -         26   

Basic earnings per ordinary share (in €)

     0.744                 1.477   

Diluted earnings per ordinary share (in €)

     0.736                 1.461   

Weighted average number of shares outstanding

     1,215,921                 1,215,921   

Weighted average number of shares for diluted earnings per share

     1,228,926                 1,228,926   

See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information

 

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Unaudited Pro Forma Interim Condensed Consolidated Income Statement

for the nine months ended September 30, 2014

 

            Unaudited Pro forma adjustments      Unaudited
Pro Forma
nine months
ended
September 30,
2014
 
(€ million)    Fiat Group
Historical
     Separation      VEBA
Transaction
& MOU
     Chrysler
Refinancing
    
     (A)      (B)      (C.2)      (D.2)         

Net revenues

     69,006         (1,785)         -         -         67,221   

Cost of sales

     59,694         (1,238)         -         -         58,456   

Selling, general and administrative costs

     5,151         (102)         -         -         5,049   

Research and development costs

     1,825         (141)         -         -         1,684   

Other income/(expenses)

     133         15         -         -         148   

Result from investments

     105         -         -         -         105   

Gains and (losses) on the disposal of investments

     11         -         -         -         11   

Restructuring costs

     23         -         -         -         23   

Other unusual income/(expenses)

     (405)         15         272         -         (118)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBIT

     2,157         (274)         272         -         2,155   

Net financial income/(expenses)

     (1,510)         (2)         -         13         (1,499)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Profit before taxes

     647         (276)         272         13         656   

Tax (income)/expenses

     435         (87)         183         5         536   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Profit from continuing operations

     212         (189)         89         8         120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net profit

     212         (189)         89         8         120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net profit attributable to:

              

Owners of the parent

     160         (167)         89         8         90   

Non-controlling interests

     52         (22)         -         -         30   

Basic earnings per ordinary share (in €)

     0.132                  0.074   

Diluted earnings per ordinary share (in €)

     0.130                  0.073   

Weighted average number of shares outstanding

     1,216,815                  1,216,815   

Weighted average number of shares for diluted earnings per share

     1,230,169                  1,230,169   

See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information

 

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Unaudited Pro Forma Interim Condensed Consolidated Statement of Financial Position

At September 30, 2014

 

     Fiat Group
Historical
     Unaudited Pro forma
adjustments
     Unaudited
Pro Forma at
September 30,
2014
 
(€ million)       Separation      Distributions     
     (A)      (B)      (C)         

Assets

           

Intangible assets

     21,813         (1,042)         -         20,771   

Property, plant and equipment

     25,321         (585)         -         24,736   

Investments and other financial assets

     2,079         (12)         -         2,067   

Defined benefit plan assets

     72         -         -         72   

Deferred tax assets

     3,365         (115)         -         3,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-current assets

     52,650         (1,754)         -         50,896   
  

 

 

    

 

 

    

 

 

    

 

 

 

Inventories

     12,978         (285)         -         12,693   

Trade receivables

     3,030         (108)         -         2,922   

Receivables from financing activities

     3,689         (1,016)         -         2,673   

Current tax receivables

     341         183         -         524   

Other current assets

     2,683         48         -         2,731   

Current financial assets

     604         -         -         604   

Cash and cash equivalents

     18,395         (652)         2,250         19,993   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Current assets

     41,720         (1,830)         2,250         42,140   
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets held for sale

     26         -         -         26   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

     94,396         (3,584)         2,250         93,062   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity and liabilities

           

Equity:

     10,713         (2,430)         2,250         10,533   

Equity attributable to owners of the parent

     10,413         (2,243)         2,250         10,420   

Non-controlling interest

     300         (187)         -         113   

Provisions

     19,212         (296)         -         18,916   

Deferred tax liabilities

     202         (17)         -         185   

Debt

     32,933         (133)         -         32,800   

Other financial liabilities

     551         -         -         551   

Other current liabilities

     11,611         (282)         -         11,329   

Current tax payables

     328         (28)         -         300   

Trade payables

     18,846         (398)         -         18,448   

Liabilities held for sale

     -         -         -         -   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Equity and liabilities

     94,396         (3,584)         2,250         93,062   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information

 

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Notes to the Unaudited Pro Forma Consolidated Financial Information

Notes to the Unaudited Pro Forma Condensed Consolidated Income Statement

(A) Fiat Group historical consolidated income statement

This column includes the Fiat Group historical consolidated income statement for the years ended December 31, 2013, 2012 and 2011 and for the nine months ended September 30, 2014, as derived from the Annual Consolidated Financial Statements and the Interim Consolidated Financial Statements, respectively.

(B) Separation

This column reflects the elimination of the results of operations of Ferrari as a result of the Separation. This column has been derived from FCA accounting records as adjusted to reflect the intercompany transactions between FCA and Ferrari which will become third party transactions following the Separation. Tax expenses are calculated based on the effective tax rate of Ferrari on a standalone basis.

(C) VEBA Transaction and MOU

(C.1) VEBA Transaction

(C.1) includes the following adjustments:

 

(a) The elimination of the write-off related to the equity recapture agreement right. This adjustment reflects the elimination of the write-off related to the equity recapture agreement right for an amount of €56 million recorded within other unusual expenses in the year ended December 31, 2013 that would not have been recognized if the VEBA Transaction had occurred on January 1, 2013 (see Note 8 to the Annual Consolidated Financial Statements included elsewhere in this prospectus), as the write-off was directly attributable to the VEBA Transaction and was non-recurring in nature. The tax effect on such adjustment amounted to €17 million calculated using the effective tax rate applicable to FNA (to which the pro forma adjustments relate) of 36.98 percent, comprising U.S. federal income tax rate of 35.00 percent and state income tax rate of 1.98 percent.

 

(b) This adjustment reflects the following eliminations:

 

  Ÿ   the elimination of the amount attributable to the non-controlling interests related to Chrysler of €992 million (which is calculated as approximately 41.5 percent of Chrysler’s net profit of €2,392 million) that had been recorded in the historical consolidated income statement for the year ended December 31, 2013 (see Note “Scope of Consolidation—Non-controlling interests” to the Annual Consolidated Financial Statements included elsewhere in this prospectus); and

 

  Ÿ   expenses related to the Equity Recapture Agreement net of tax effect as described in footnote (a) above.

If the VEBA Transaction and the MOU which are accounted for as a single commercial transaction had occurred on January 1, 2013 the Group would have recorded a non-recurring expense of €495 million in connection with the execution of the MOU and a non-recurring, non-taxable gain of €223 million in connection with the remeasurement to fair value of the previously exercised options on approximately 10 percent of Chrysler’s membership interests in connection with the equity purchase agreement. These items have not been adjusted in the unaudited pro forma condensed consolidated income statement for the year ended December 31, 2013 as they are non-recurring items which are directly attributable to the transactions referred to above and will not have a continuing impact on the consolidated financial results of the Group. See Note 7 to the Interim Consolidated Financial Statements and Note C2 below for further details of these items.

 

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(C.2) VEBA Transaction & MOU

(C.2) includes the following adjustments:

 

  Ÿ   the elimination of the non-taxable €223 million gain recorded in the interim consolidated income statement for the nine months ended September 30, 2014, which we recognized in connection with the remeasurement to fair value of the previously exercised options on approximately 10 percent of Chrysler’s membership interests in connection with the equity purchase agreement (See Note 7 to the Interim Consolidated Financial Statements included elsewhere in this prospectus). The gain from the fair value remeasurement has been eliminated as it is a non-recurring item which is directly attributable to the VEBA Transaction and therefore will not have a continuing impact on the consolidated financial results of the Group; and

 

  Ÿ   the elimination of the €495 million expense recorded in the interim consolidated income statement for the nine months ended September 30, 2014 which were recognized in connection with the execution of the MOU and recorded within other unusual expense (see Note 7 to the Interim Consolidated Financial Statements included elsewhere in this prospectus). The expenses under the MOU were fully recorded in the interim consolidated income statement for the nine months ended September 30, 2014 and have been eliminated as they represent material non-recurring charges which are directly attributable to the VEBA Transaction as the equity purchase agreement and the MOU are accounted for as a single commercial transaction with multiple elements and as execution of the MOU was a condition precedent to the consummation of the VEBA Transaction. The interest to be accreted over the payment period is considered to be immaterial. The tax effect on such adjustment amounted to €183 million calculated using the effective tax rate applicable to FNA (to which the pro forma adjustments relate) of 36.98 percent, comprising U.S. federal income tax rate of 35.00 percent and state income tax rate of 1.98 percent.

(D) Chrysler Refinancing

(D.1) Chrysler Refinancing

D.1 reflects the following adjustments:

 

  Ÿ   a net reduction of €123 million of interest expense due to the Chrysler Refinancing that was completed on February 7, 2014. In particular:

€326 million relates to the elimination of interest expense recognized by the Group in the consolidated income statement for the year ended December 31, 2013 on the VEBA Trust Note which was calculated using the weighted average principal amount outstanding throughout the year amounting to approximately U.S.$4.8 billion, the effective interest rate of 9.0 percent, translated into Euro using the average exchange rate of U.S.$1.328; and

€206 million relates to the interest expense on the new financing transactions calculated as follows:

 

    New Senior Credit Facilities—U.S.$250 million (€181 million) incremental term loan under Chrysler’s existing tranche B term loan facility that matures on May 24, 2017 using an assumed interest rate of 3.50 percent and a new U.S.$1.75 billion (€1.3 billion) term loan credit facility that matures on December 31, 2018 using an assumed interest rate of 3.25 percent;

 

    Secured Senior Notes due 2019—issuance of an additional U.S.$1.375 billion (€1.0 billion) aggregate principal amount of 8.0 percent secured senior notes due June 15, 2019, at an issue price of 108.25 percent of the aggregate principal amount; and

 

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    Secured Senior Notes due 2021—issuance of an additional U.S.$1.380 billion (€1.0 billion) aggregate principal amount of 8.25 percent secured senior notes due June 15, 2021 at an issue price of 110.50 percent of the aggregate principal amount, which along with the Secured Senior Notes due 2019, we refer to as the Secured Senior Notes.

The principal amounts set forth above have been translated into Euro using the applicable exchange rate at December 31, 2013 for illustrative purposes only whilst the interest expense has been translated into Euro using the applicable average exchange rate of U.S.$1.328 per €1 for the year ended December 31, 2013.

 

  Ÿ   The tax effect on such adjustment which has been calculated using the effective tax rate applicable to FNA (to which the pro forma adjustments relate) of 36.98 percent, comprising U.S. federal income tax rate of 35.00 percent and state income tax rate of 1.98 percent.

(D.2) Chrysler Refinancing for the nine months ended September 30, 2014

D.2 reflects the following adjustments:

 

  Ÿ   a net reduction of €13 million of interest expense due to the Chrysler Refinancing that was completed on February 7, 2014. In particular:

€33 million relates to the elimination of interest expense recognized by the Group in the consolidated income statement for the nine months ended September 30, 2014 on the VEBA Trust Note which was calculated using the weighted average principal amount outstanding during the period of 37 days (from January 1, 2014 to February 7, 2014) amounting to approximately U.S.$4.7 billion, the effective interest rate of 9.0 percent, translated into Euro using the average exchange rate of U.S.$1.355 per €1 for the nine months ended September 30, 2014; and

€20 million relates to the interest expense for the period of 37 days on the new financing transactions calculated as follows:

 

    New Senior Credit Facilities—U.S.$250 million (€199 million) incremental term loan under Chrysler’s existing tranche B term loan facility that matures on May 24, 2017 using an assumed interest rate of 3.50 percent and a new U.S.$1.75 billion (€1.4 billion) term loan credit facility that matures on December 31, 2018 using an assumed interest rate of 3.25 percent;

 

    Secured Senior Notes due 2019—issuance of an additional U.S.$1.375 billion (€1.1 billion) aggregate principal amount of 8.0 percent secured senior notes due June 15, 2019, at an issue price of 108.25 percent of the aggregate principal amount; and

 

    Secured Senior Notes due 2021—issuance of an additional U.S.$1.38 billion (€1.1 billion) aggregate principal amount of 8.25 percent secured senior notes due June 15, 2021 at an issue price of 110.50 percent of the aggregate principal amount, which along with the Secured Senior Notes due 2019, we refer to as the Secured Senior Notes.

The principal amounts set forth above have been translated into Euro using the applicable exchange rate of U.S.$1.258 per €1 at September 30, 2014 for illustrative purposes only whilst the interest expense has been translated into Euro using the applicable average exchange rate of U.S.$1.355 per €1 for the nine months ended September 30, 2014.

 

  Ÿ   The tax effect on such adjustment which has been calculated using the effective tax rate applicable to FNA (to which the pro forma adjustments relate) of 36.98 percent, comprising U.S. federal income tax rate of 35.00 percent and state income tax rate of 1.98 percent.

 

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Notes to the Unaudited Pro Forma Interim Condensed Consolidated Statement of Financial Position

(A) Fiat Group historical interim consolidated statement of financial position at September 30, 2014

This column includes the Fiat Group’s interim consolidated statement of financial position at September 30, 2014 derived from the Interim Consolidated Financial Statements.

(B) Separation

This column reflects the elimination of the assets and liabilities of Ferrari which will be spun off as a result of the Separation. This column has been derived from FCA accounting records as adjusted to reflect the consolidation adjustments and intercompany transactions between FCA and Ferrari which will become third party transactions following the Separation.

(C) Distributions

This column represents the distributions and transfers of cash from Ferrari to FCA of approximately €2.25 billion which we intend to enter into prior to the Separation.

 

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CONCURRENT OFFERING OF MANDATORY CONVERTIBLE SECURITIES

Concurrently with this offering of our common shares, we are also making an offering of $             aggregate amount (or $             aggregate amount if the underwriters of that offering exercise their over-allotment option with respect to that offering in full) of our Mandatory Convertible Securities. The closing of this offering is not conditioned upon the closing of the offering of Mandatory Convertible Securities, but the closing of our offering of the Mandatory Convertible Securities is conditioned upon the closing of this offering.

Subject to any mandatory exemptions under Dutch law, the Mandatory Convertible Securities will be general, unsecured and subordinated obligations of FCA.

The Mandatory Convertible Securities will mature on                 , 2016, subject to (the “Maturity Date”). Unless previously converted, the Mandatory Convertible Securities will automatically convert on the Maturity date into a number of our common shares equal to the conversion rate described in the table below. The Mandatory Convertible Securities will have an annual coupon of         %, calculated by reference to the notional amount of the Mandatory Convertible Securities from                     , 2014, based on a 360-day year of twelve 30-day months. Coupon payments will be made semi-annually in arrears on                      and                      of each year, commencing on                     , 2015. FCA has the right to defer interest payments on the Mandatory Convertible Securities and to extend any deferral period at any time or from time to time up to the Maturity Date. FCA will be subject to agreed limitations on its ability to make distributions and service debt ranking pari passu with or junior to the Mandatory Convertible Securities during such deferral period. At our option we may elect to pay deferred coupon due on the Maturity Date by issuing additional common shares, instead of cash, equal to the amount of such deferred coupon payments divided by the average of the daily VWAP of a share of our common shares on each of the 20 consecutive trading days ending on and including the 3rd scheduled trading day immediately preceding the Maturity Date.

The conversion rate will be calculated as follows:

 

  Ÿ   if the Applicable Market Value (as defined below) of our common shares is equal to or greater than $            , which we call the “Threshold Appreciation Price,” then the conversion rate will be              of our common shares per Mandatory Convertible Security (the “Minimum Conversion Rate”);

 

  Ÿ   if the Applicable Market Value of our common shares is less than the Threshold Appreciation Price but greater than $            , which we call the “Initial Price,” then the conversion rate will be equal to the Stated Amount (as defined below) divided by the Applicable Market Value of our common shares; or

 

  Ÿ   if the Applicable Market Value of our common shares is less than or equal to the Initial Price, then the conversion rate will be              of our common shares per Mandatory Convertible Security (the “Maximum Conversion Rate”).

The Minimum Conversion Rate, Maximum Conversion Rate, Threshold Appreciation Price and Initial Price are subject to standard anti-dilution adjustments.

The “daily VWAP” of our common shares (or other security for which a daily VWAP must be determined), in respect of any Trading Day, means the per share volume-weighted average price of our common shares on the New York Stock Exchange as displayed on Bloomberg page “FCAU US <equity> HP” (or any successor page, and in each case setting Weighted Average Line, or any other successor setting and using values not adjusted for any event occurring after such Trading Day and for the avoidance of doubt, all values will be determined with all adjustment settings on the DPDF Page, or any successor or similar setting, switched off) or, if our common shares are not traded on the New York Stock Exchange, the volume weighted average price (prezzo ufficiale) on such Trading Day on the Mercato Telematico Azionario, in respect of the period from the scheduled open of trading until the scheduled close of trading of the primary trading session on such Trading Day (or if such volume-weighted average price is unavailable, the market value of one of our common shares (or

 

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other security) on such Trading Day as an internationally recognized investment bank retained for this purpose by FCA determines in good faith using a volume-weighted average method, which determination shall be conclusive). To the extent that the daily VWAP for our common shares are reported in a currency other than U.S. Dollars, the daily VWAP for our common shares for each Trading Day will be translated into U.S. Dollars at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank in New York.

“Trading Day” means a day on which (i) there is no “Market Disruption Event” (as defined below) and (ii) trading in our common shares generally occurs on The New York Stock Exchange or, if our common shares are not then listed on The New York Stock Exchange, on the Mercato Telematico Azionario or, if our common shares are not then listed on a securities exchange, on the primary other market on which our common shares are then listed or admitted for trading. If the common shares (or other security for which a daily VWAP must be determined) are not so listed or admitted for trading, “Trading Day” means a “Business Day.”

“Scheduled Trading Day” means a day that is scheduled to be a Trading Day on the primary United States or European securities exchange or other market on which our common shares listed or admitted for trading. If our common shares are not so listed or admitted for trading, “Scheduled Trading Day” means a “Business Day.”

“Market Disruption Event” means (i) a failure by the primary securities exchange or other market on which the common shares are listed or admitted to trading to open for trading during its regular trading session or (ii) the occurrence or existence prior to 1:00 p.m., New York City time (or, if our common shares are not listed on The New York Stock Exchange but are listed on the Mercato Telematico Azionario or another European securities exchange, 1:00 pm Central European time), on any Trading Day for our common shares for more than one half-hour period in the aggregate during regular trading hours of any suspension or limitation imposed on trading (by reason of movements in price exceeding limits permitted by the relevant securities exchange or otherwise) in our common shares or in any options, contracts or futures contracts relating to our common shares.

Subject to certain limitations and adjustments, holders of the Mandatory Convertible Securities have the right to convert each of their Mandatory Convertible Securities at any time until the 25th Scheduled Trading Day immediately preceding the Maturity Date at the Minimum Conversion Rate.

Subject to certain limitations and adjustments, FCA has the right to convert the Mandatory Convertible Securities at its option, in whole but not in part, at any time from the issue date of the Mandatory Convertible Securities until the 25th Scheduled Trading Day immediately preceding the Maturity Date at the Maximum Conversion Rate.

Upon the occurrence of certain specified events constituting a “fundamental change” at any time after the initial issuance of the Mandatory Convertible Securities up to, and including, the 25th Scheduled Trading Day immediately preceding the Maturity Date, then holders will be permitted to convert their Mandatory Convertible Securities at any time (subject to certain limitations) during the period beginning on, and including, the effective date of such fundamental change (the “Fundamental Change Effective Date”) and ending on, and including, the earlier of (i) the 25th Scheduled Trading Day immediately preceding the Maturity Date and (ii) the date that is 20 calendar days after the Fundamental Change Effective Date at an agreed conversion rate.

If an Accelerated Mandatory Conversion Event occurs at any time prior to the 25th Scheduled Trading Day immediately preceding the Maturity Date, FCA will give notice thereof to holders and the trustee in accordance with the indenture.

In this case, the Mandatory Convertible Securities will be mandatorily converted on the Accelerated Mandatory Conversion Date at the early conversion rate used in the event of a fundamental change. In addition to the number of our common shares issuable upon an early conversion upon an Accelerated Conversion Event, each holder will have the right to receive an amount payable in cash equal to any deferred coupon payments to,

 

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but excluding, the coupon payment date preceding the date of the early conversion, accrued and unpaid coupon payments from such preceding coupon payment date to, but excluding, the date of the early conversion, and the present value of all remaining coupon payments on the Mandatory Convertible Securities, including the coupon payment due on the Maturity Date (but excluding any accrued and unpaid coupon payments to the relevant conversion date), payable in cash and calculated using a discount rate equal to the Treasury Yield plus 50 basis points. Holders will not be entitled to any further coupon payments in respect of the Mandatory Convertible Securities for any period after such conversion.

“Accelerated Mandatory Conversion Date” means the sixth Scheduled Trading Day following the date on which the notice in connection with the Accelerated Mandatory Conversion Event is sent to holders pursuant to the Indenture.

An “Accelerated Mandatory Conversion Event” will occur if:

 

  Ÿ   FCA fails to pay an amount or deliver any of our common shares under the Mandatory Convertible Securities within 30 days from the relevant due date (without prejudice to FCA’s right to defer coupon payments) after receipt of written notice of such failure given by the trustee or the holders of not less 30% in notional amount of the Mandatory Convertible Securities; or

 

  Ÿ   FCA fails for 60 days after receipt of written notice of such failure given by the trustee or the holders of not less 30% in notional amount of the Mandatory Convertible Securities to comply with any of its obligations, covenants or agreements (other than a default referred to in the bullet point above) contained in the indenture or the Mandatory Convertible Securities.

In the event of FCA’s bankruptcy, dissolution or liquidation, the Mandatory Convertible Securities will convert at the Maximum Conversion Rate, subject to adjustment. In addition to the number of our common shares issuable upon such conversion, each holder will have the right to receive an amount payable in cash equal to any deferred coupon payments to, but excluding, the coupon payment date preceding the date of the conversion, but will not be entitled to receive any accrued and unpaid coupon payments from such coupon payment date or any present value amount in respect of remaining coupon payments on the Mandatory Convertible Securities.

However, if in the context of any bankruptcy, insolvency or reorganization procedure FCA is prevented, pursuant to applicable law and/or court order or judgement, from delivering our common shares, then a holder will have, in the context and subject to the relevant procedure, an unsecured and subordinated claim against FCA in respect of such common shares that FCA is unable to deliver. Any such claim shall equal the amount, if any, as would have been payable to such holder if, throughout such bankruptcy, insolvency or reorganization, such holder were the holder of a number of our common shares equal to the Maximum Conversion Rate in effect immediately prior to the relevant acceleration and so ranks pari passu with the holders of our common shares. Therefore, to the extent that FCA fails to deliver our common shares to holders of Mandatory Convertible Securities upon FCA’s bankruptcy, dissolution or liquidation, holders will only receive a payment to the extent holders of our common shares make any recovery.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE FIAT GROUP

The following discussion of our financial condition and results of operations should be read together with the information included under “Business,” “Selected Historical Consolidated Financial and Other Data, the Annual Consolidated Financial Statements included elsewhere in this prospectus. This discussion includes forward-looking statements, and involves numerous risks and uncertainties, including, but not limited to, those described under “Cautionary Statements Concerning Forward-Looking Statements” and “Risk Factors.” Actual results may differ materially from those contained in any forward looking statements. Unless otherwise indicated or the context otherwise requires, references to “we,” “our,” “us,” “the Group” and the “Company” in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group” refer to Fiat, which is the predecessor of FCA for accounting purposes prior to the Merger. All references to “the Group” in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group” refer to the Fiat Group.

Overview

We were founded as Fabbrica Italiana Automobili Torino on July 11, 1899 in Turin, Italy as an automobile manufacturer. We are an international automotive group engaged in designing, engineering, manufacturing, distributing and selling vehicles and components. We are the seventh largest automaker in the world, based on total vehicle sales in 2013. We have operations in approximately 40 countries and our products are sold directly or through distributors and dealers in more than 150 countries. We design, engineer, manufacture, distribute and sell vehicles for the mass market under the Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia and Ram brands and the SRT performance vehicle designation. We support our vehicle sales by after-sales services and products worldwide under the Mopar brand and, in certain markets, by retail and dealer financing, leasing and rental services, which we make available through our subsidiaries, joint ventures and other commercial arrangements. We also design, engineer, manufacture, distribute and sell luxury vehicles under the Ferrari and Maserati brands, which we support with financial services provided to our dealers and retail customers. We operate in the components and production systems sectors through Magneti Marelli, Teksid and Comau.

Our activities are carried out through six reportable segments: four regional mass-market vehicle segments (NAFTA, LATAM, APAC and EMEA), a global Luxury Brands segment and a global Components segment.

In 2013, we shipped 4.4 million vehicles. For the year ended December 31, 2013, we reported net revenues of €86.6 billion, EBIT of €3.0 billion and net profit of €2.0 billion. At September 30, 2014 we had available liquidity of €21.7 billion (including €3.1 billion available under undrawn committed credit lines) and had 228,987 employees. At September 30, 2014 we had net industrial debt of €11.4 billion. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Fiat Group—Non-GAAP Financial Measures—Net Industrial Debt”.

The Fiat-Chrysler Alliance

In April 2009, Old Carco and Fiat entered into a master transaction agreement, or the Master Transaction Agreement, pursuant to which New Carco Acquisition LLC, an entity formed by Fiat and now known as Chrysler Group LLC, agreed to purchase the principal operating assets of Old Carco and to assume certain of Old Carco’s liabilities. Following the closing of the transaction in June 2009, we held a 20 percent ownership interest in Chrysler, with the VEBA Trust, the U.S. Treasury and the Canadian governments holding the remaining interests. We also held rights pursuant to which our ownership interests in Chrysler would increase in 5 percent increments to 35 percent upon the achievement of three performance events by Chrysler with no cash consideration. Fiat and Chrysler entered into a master industrial agreement and certain related ancillary agreements (the Master Industrial Agreement), pursuant to which we formed an alliance, which we refer to as the Fiat-Chrysler Alliance.

 

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In January and April of 2011, respectively, Chrysler achieved the first two performance events automatically increasing our ownership interest in Chrysler to 30 percent. On May 24, 2011, we acquired an additional 16 percent ownership interest in Chrysler, increasing our interest to 46 percent on a fully diluted basis. As a result of the potential voting rights associated with options that became exercisable on that date, we were deemed to have obtained control of Chrysler for purposes of consolidation. Accordingly, Chrysler has been consolidated on a line-by-line basis by Fiat from June 1, 2011. Subsequently, on July 21, 2011 we completed the purchase of the approximately 7.5 percent fully-diluted ownership interests in Chrysler held aggregately by the U.S. Treasury and the Canadian governments. Upon the occurrence of the third and final performance event in January 2012, our ownership in Chrysler increased to 58.5 percent. In January 2014, we acquired the remaining equity interests in Chrysler from the VEBA Trust. Following this acquisition, we expect to be able to fully execute on our plans of creating a fully integrated global automaker.

Through the Fiat-Chrysler Alliance, the companies began collaborating on a number of fronts, including product and platform sharing and development, global distribution, procurement, information technology infrastructure, management services and process improvement. In addition, we applied the principles of WCM to Chrysler’s manufacturing operations. WCM principles were developed by the WCM Association, a non-profit organization dedicated to developing superior manufacturing standards. We are the only automotive OEM that is a member of the WCM Association. WCM fosters a manufacturing culture that targets improved performance, safety and efficiency, as well as the elimination of all types of waste. Unlike some other advanced manufacturing programs, WCM is designed to prioritize issues to focus on those initiatives believed likely to yield the most significant savings and improvements, and to direct resources to those initiatives.

In addition, as a result of the developments in the Fiat-Chrysler Alliance and the integration of operations since 2009, we have in some instances altered previous business decisions, which have had financial reporting implications for us. For example, in 2011, we wrote down certain development costs related to vehicle platforms by €165 million following an assessment of the effects of our integration towards fewer common vehicle platforms. This decision was accelerated following the consolidation of Chrysler.

In connection with the Merger described in “The FCA Merger”, Fiat S.p.A. was merged with and into Fiat Investments N.V., and renamed Fiat Chrysler Automobiles N.V. upon effectiveness of the Merger. Fiat shareholders received in the Merger one (1) FCA common share for each Fiat ordinary share that they held. Moreover, under the Articles of Association of FCA, FCA shareholders received, if they so elected and were otherwise eligible to participate in the loyalty voting structure one (1) FCA special voting share for each FCA common share received in the Merger. The loyalty voting structure is designed to provide eligible long-term FCA shareholders with two votes for each FCA common share held. For additional information regarding the FCA special voting shares, see “The FCA Shares, Articles of Association and Terms and Conditions of the Special Voting Shares—Loyalty Voting Structure.”

Consolidation of Chrysler and Comparability of Information

Upon obtaining control of Chrysler on May 24, 2011, Chrysler’s financial results were consolidated with ours beginning June 1, 2011. Consequently, our results of operations and cash flows for 2011 include Chrysler’s results of operations from June 1, 2011 to December 31, 2011, and therefore our results of operations and cash flows for 2012 are not directly comparable to our results of operation and cash flows in 2011 because Chrysler results and cash flows were consolidated for the entirety of 2012 but for only seven months in 2011. Further, our discussion of cash flows under the heading “—Liquidity and Capital Resources—Cash Flows” for the year ended December 31, 2011 includes seven months of Chrysler’s cash flows.

Our discussion of the results of operations for 2012 compared to 2011 under the heading “—Results of Operations” below includes a discussion of changes in our results excluding for both periods the contribution from Chrysler’s results. We believe that such information provides relevant information to enhance year-on-year comparability.

 

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Our Strategic Business Plan

Following our January 2014 acquisition of the approximately 41.5 percent interest in Chrysler we did not already own, in May 2014, we announced our 2014–2018 Strategic Business Plan, or Business Plan. Our Business Plan sets forth a number of clearly defined strategic initiatives designed to capitalize on our position as a single integrated automaker to become a leading global automaker, including:

 

  Ÿ   Premium Brand Strategy. We intend to continue to execute on our premium brand strategy by developing the Alfa Romeo and Maserati brands to service global markets. We believe these efforts will help us address the issue of industry overcapacity in the European market, as well as our own excess production capacity in the EMEA region, by leveraging the strong heritage and historical roots of these brands to grow the reach of these brands in all of the regions in which we operate.

Recently, we have successfully expanded in the premium end of the market through our introduction of two new Maserati vehicles. We intend to replicate this on a larger scale with Alfa Romeo by introducing several new vehicles being developed as part of an extensive product plan to address the premium market worldwide. In addition, we intend to continue our development of the Maserati brand as a larger scale luxury vehicle brand capitalizing on the recent successful launches of the next generation Quattroporte and the all new Ghibli. We intend to introduce additional new vehicles that will allow Maserati to cover the full range of the luxury vehicle market and position it to substantially expand volumes.

 

  Ÿ   Building Brand Equity. As part of our Business Plan, we intend to further develop our brands to expand sales in markets throughout the world with particular focus on our Jeep and Alfa Romeo brands, which we believe have global appeal and are best positioned to increase volumes substantially in the regions in which we operate.

In particular, our Business Plan highlights our intention to leverage the global recognition of the Jeep brand and extend the range of Jeep vehicles to meet global demand through localized production, particularly in APAC and LATAM. We are also developing a range of vehicles that are expected to re-establish the Alfa Romeo brand, particularly in NAFTA, APAC and EMEA, as a premier driver-focused automotive brand with distinctive Italian styling and performance.

In addition, we expect to take further steps to strengthen and differentiate our brand identities in order to address differing market and customer preferences in each of the regions in which we operate. We believe that we can increase sales and improve pricing by ensuring that all of our vehicles are more closely aligned with a brand identity established in the relevant regional markets. For example, we announced as part of the Business Plan that Chrysler would be our mainstream North American brand, with a wider range of models, including crossovers and our primary minivan offering. Dodge will be restored to its performance heritage, which is expected to enhance brand identity and minimize overlapping product offerings which tend to cause consumer confusion. We also intend to continue our repositioning strategy of the Fiat brand in the EMEA region, leveraging the image of the Fiat 500 family, while positioning Lancia as an Italy-focused brand. We will also continue to develop our pick-up truck and light commercial vehicle brands, leveraging our wide range of product offerings to expand further in the EMEA region as Fiat Professional, in LATAM as Fiat and in NAFTA as Ram. For a description of our vehicle brands, see “Business—Overview of Our Business—Mass Market Vehicles—Mass Market Vehicle Brands.”

 

  Ÿ  

Global Growth. As part of our Business Plan, over the next five years, we intend to expand vehicle sales in key markets throughout the world. In order to achieve this objective, we intend to continue our efforts to localize production of Fiat brand vehicles through our joint ventures in China and India, while increasing sales of Jeep vehicles in LATAM and APAC by localizing production through our new facility in Brazil and the extension of the joint venture agreement in China to cover the production of Jeep vehicles. Local production will enable us to expand the product portfolio we can offer in these important markets and importantly position our vehicles to better

 

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address the local market demand by offering vehicles that are competitively priced within the largest segments of these markets without the cost of transportation and import duties. We also intend to increase our vehicle sales in the NAFTA region, continuing to build U.S. market share by offering more competitive products under our distinctive brands. Further, we intend to leverage manufacturing capacity in the EMEA region to support growth in all regions in which we operate by producing vehicles for export from EMEA, including Jeep brand vehicles.

 

  Ÿ   Continue convergence of platforms. We intend to continue to rationalize our vehicle architectures and standardize components, where practicable, to more efficiently deliver the range of products we believe necessary to increase sales volumes in each of the regions in which we operate. We seek to optimize the number of global vehicle architectures based on the range of flexibility of each architecture while ensuring that the products at each end of the range are not negatively impacted, taking into account unique brand attributes and market requirements. We believe that continued architectural convergence within these guidelines will facilitate speed to market, quality improvement and manufacturing flexibility allowing us to maximize product functionality and differentiation and to meet diversified market and customer needs. Over the course of the period covered by our Business Plan, we intend to reduce the number of architectures in our mass market brands by approximately 25 percent.

 

  Ÿ   Continue focus on cost efficiencies. An important part of our Business Plan is our continued commitment to maintain cost efficiencies necessary to compete as a global automaker in the regions we operate. We intend to continue to leverage our increased combined annual purchasing power to drive savings. Further, our efforts on powertrain and engine research are intended to achieve the greatest cost-to-environmental impact return, with a focus on new global engine families and an increase in use of the 8- and 9-speed transmissions to drive increased efficiency and performance and refinement. We also plan to continue our efforts to extend WCM principles into all of our production facilities and benchmark our efforts across all facilities around the world, which is supported by Chrysler’s January 2014 legally binding memorandum of understanding with the UAW. We believe that the continued extension of our WCM principles will lead to further meaningful progress to eliminate waste of all types in the manufacturing process, which will improve worker efficiency, productivity, safety and vehicle quality. Finally, we intend to drive growth in our components and production systems businesses by designing and producing innovative systems and components for the automotive sector and innovative automation products, each of which will help us focus on cost efficiencies in the manufacturing of our vehicles.

Trends, Uncertainties and Opportunities

Shipments. Vehicle shipments are generally driven by our plans to meet consumer demand. Vehicle shipments occur shortly after production. We generally recognize revenue when the risks and rewards of ownership of a vehicle are transferred to our dealers or distributors. This usually occurs upon the release of the vehicle to the carrier responsible for transporting the vehicle to the dealer or distributor. Our shipments of passenger cars are driven by consumer demand which in turn is affected by economic conditions, availability and cost of dealer and customer financing and incentives offered to retail customers. Shipments, which correlate with net revenues, are not necessarily directly correlated with retail sales from dealers, which may be affected by other factors including dealer inventory levels.

Economic Conditions. Demand for new vehicles tends to reflect economic conditions in the various markets in which we operate because retail sales depend on individual purchasing decisions, which in turn are affected by levels of disposable income. Fleet sales and sales of light commercial vehicles are also influenced by economic conditions, which drives vehicle utilization and investment activity. Therefore, our performance has been impacted by the macroeconomic trends in the markets in which we operate. For example, the severe global credit crisis that peaked in 2008 and 2009 resulted in a significant and sudden reduction in new vehicle sales in the U.S. While the U.S. economy has not fully recovered from the crisis, U.S. vehicles sales have recovered markedly beginning in 2011. This recovery may have been partially due to pent-up demand and the age of the

 

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vehicles on the road following the extended economic downturn. U.S. vehicle sales in 2013, including medium- and heavy-duty vehicles, of 15.9 million, have remained below the 16.5 million vehicles sold in 2007. In Brazil, our largest market in Latin America, despite recent periods of growth, economic conditions slowed beginning in mid-2011, with some gradual recovery since that time. However, industry-wide vehicle sales increased in 2012, due largely to government tax incentives (see “—Government Incentives”). In Asia, the automotive industry has shown strong year-on-year growth, although the pace of growth is slowing. In Europe, the economic crisis of 2008-2009 has been followed by periods of tentative recovery, particularly in some countries, but also continued uncertainty and financial stress. Widespread concerns over sovereign credit risk that prevailed in 2011 and 2012 have been partly addressed by concerted monetary and fiscal consolidation efforts; however, the lingering uncertainty over the region’s financial sector together with various austerity measures have led to further pressure on economic growth and to new periods of recession or stagnation. From 2007, the year before the financial crisis began, to 2013, annual vehicle sales (including sales of passenger cars and light commercial vehicles) in Europe have fallen by over 4 million vehicles. In Italy, our historical home market, both macroeconomic and industry performance were even worse than in Europe as a whole over the same period, which has resulted in significant sustained declines in vehicle sales.

Dealer and Customer Financing. Because dealers and retail customers finance their purchases of a large percentage of the vehicles we sell worldwide, the availability and cost of financing is a significant factor affecting our sales volumes and revenues. Availability of customer financing affects the vehicle mix, as customers who have access to greater financing are able to purchase higher priced vehicles, whereas when customer financing is constrained, vehicle mix shifts towards less expensive vehicles. The low interest rate environment in recent years has had the effect of reducing the effective cost of vehicle ownership. However, during the global financial crisis, access to financing, particularly for subprime borrowers, in the U.S., was significantly limited, which led directly to a sharp decline in U.S. vehicle sales. Further, the relative unavailability of dealer inventory financing negatively impacted the profitability and financial health of our dealership network which adversely affected the network’s ability to drive vehicle sales to retail customers. While availability of credit following the 2008-2009 crisis has improved significantly and interest rates in the U.S. and Europe are at historically low levels, the availability and terms of financing will continue to change over time impacting our results. We operate in many regions without a controlled finance company, as we provide access to financing through joint ventures and third party arrangements in several of our key markets. Therefore, we may be less able to ensure availability of financing for our dealers and retail customers in those markets than our competitors that own and operate affiliated finance companies.

Government incentives. In the short- to medium-term, our results may be affected in certain countries or regions by government incentives for the purchase of vehicles. Government incentives tend to increase the number of vehicles sold during the periods in which the incentives are in place, but also tend to distort the development of demand from period to period because they affect the timing of purchases. For example, decisions to purchase may be accelerated if the incentive is scheduled or expected to terminate, which could dampen vehicle sales in future periods. Our sales volumes benefited in Brazil during 2012 when the government introduced tax incentives to promote sales of smaller vehicles. These incentives, which are being phased out, were a contributing factor to the performance of the LATAM segment, which in 2012 recorded a 7.6 percent increase in shipments, from 910 thousand vehicles for 2011 to 979 thousand vehicles for 2012.

Pricing. Our profitability depends in part on our ability to maintain or improve pricing on the sale of our vehicles, notwithstanding that the automotive industry continues to experience intense price competition resulting from the variety of available competitive vehicles and excess global manufacturing capacity. We have been able to maintain or increase prices of current year models in the NAFTA segment reflecting the enhancements we have made to vehicle content, while the competitive trading environment in Europe, Brazil, China and Australia has reduced pricing and affected our results of operations in these markets. Historically, manufacturers have driven short-term vehicle sales by offering dealer, retail and fleet incentives, including cash rebates, option package discounts, guaranteed depreciation programs, and subsidized financing or leasing programs, all of which constrain margins on vehicle sales. Although we will continue to use such incentives from time to time, we are focusing on achieving higher sales volumes by building brand value, balancing our product

 

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portfolio by offering a wider range of vehicle models, and improving the content, quality, fuel economy and performance of our vehicles.

Vehicle Profitability. Our results of operations depend on the profitability of the vehicles we sell, which tends to vary based upon a number of factors, including vehicle size, content of those vehicles, brand positioning and the customer base purchasing our vehicles. Vehicle profitability also depends on sales prices, net of sales incentives, costs of materials and components, as well as transportation and warranty costs. In the NAFTA segment, our larger vehicles such as our minivans, larger utility vehicles and pick-up trucks have historically been more profitable than other vehicles; however, these vehicles have lower fuel economy and consumer preferences tend to shift away from larger vehicles in periods of rising fuel prices, which affects their profitability on a per unit and aggregate basis. Our minivans, larger utility vehicles and pick-up trucks accounted for approximately 47 percent of our total U.S. retail vehicle sales in 2013 and the profitability of this portion of our portfolio is approximately 20 percent higher than that of our overall U.S. retail portfolio on a weighted-average basis. A shift in consumer preferences in the U.S. vehicle market away from minivans, larger utility vehicles and pick-up trucks and towards passenger cars could adversely affect our profitability. For example, a shift in demand such that U.S. industry market share for minivans, larger utility vehicles and pick-up trucks deteriorated by 10 percentage points and U.S. industry market share for cars and smaller utility vehicles increased by 10 percentage points, whether in response to higher fuel prices or other factors, holding other variables constant, including our market share of each vehicle segment, would have reduced the Group’s EBIT by approximately four percent for 2013. This estimate does not take into account any other changes in market conditions or actions that the Group may take in response to shifting consumer preferences, including production and pricing changes. In all mass-market segments throughout the world, vehicles equipped with additional options are generally more profitable for us. As a result, our ability to offer attractive vehicle options and upgrades is critical to our ability to increase our profitability on these vehicles. Our vehicles sold under certain brand and model names, for instance, are generally more profitable given the strong brand recognition of those vehicles tied in many cases to a long history and in other cases to customers identifying these vehicles as being more modern and responsive to customer needs. For instance, in the EMEA region, our vehicles in the Fiat 500 family tend to be more profitable than older model vehicles of similar size. In addition, in the U.S. and Europe, our vehicle sales through dealers to retail customers are normally more profitable than our fleet sales, as the retail customers typically request additional optional features while fleet customers increasingly tend to concentrate purchases on smaller, more fuel-efficient vehicles with fewer optional features, which have historically had a lower profitability per unit. Nevertheless, our fleet sales have been an important source of stable revenue and can also be an effective means for marketing our vehicles. Our fleet sales also help to normalize our plant production through the delivery of a large, pre-determined quantity of vehicles over several months.

Effects of Foreign Exchange Rates. We are affected by fluctuations in foreign exchange rates (i) through translation of foreign currency financial statements into Euro for consolidation, which we refer to as the translation impact, and (ii) through transactions by entities in the Group in currencies other than their own functional currencies, which we refer to as the transaction impact.

Translation impacts arise in preparation of the consolidated financial statements; in particular, we prepare our consolidated financial statements in Euro, while the financial statements of each of our subsidiaries are prepared in the functional currency of that entity. In preparing consolidated financial statements, we translate assets and liabilities measured in the functional currency of the subsidiaries into Euro using the exchange rate prevailing at the balance sheet date, while we translate income and expenses using the average exchange rates for the period covered. Accordingly, fluctuations in the exchange rate of the functional currencies of our entities against the Euro impacts our results of operations.

Transaction impacts arise when our entities conduct transactions in currencies other than their own functional currency. We are therefore exposed to foreign currency risks in connection with scheduled payments and receipts in multiple currencies. For example, foreign currency denominated purchases by LATAM segment companies have been affected by the weakening of the Brazilian Real, which has had the effect of making such purchases more expensive in Brazilian Real terms.

 

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Service Parts, Accessories and Service Contracts Revenues. Revenues from aftermarket service parts and accessories through our Mopar brand are less volatile and generate higher margins than average vehicle sales. In addition, we sell vehicle service contracts. With over 70 million of our branded vehicles on the road, we have an extensive network of potential customers for our service parts and accessories.

Cost of Sales. Cost of sales includes purchases, certain warranty and product-related costs, labor costs, depreciation, amortization and logistic costs. We purchase a variety of components (including mechanical, steel, electrical and electronic, plastic components as well as castings and tires), raw materials (steel, rubber, aluminum, resin, copper, lead, and precious metals including platinum, palladium and rhodium), supplies, utilities, logistics and other services from numerous suppliers which we use to manufacture our vehicles, parts and accessories. These purchases accounted for approximately 80 percent of total cost of sales for each of the years ended December 31, 2013, 2012 and 2011. Fluctuations in cost of sales are primarily related to the number of vehicles we produce and sell along with shifts in vehicle mix, as newer models of vehicles generally have more technologically advanced components and enhancements and therefore additional costs per unit. The cost of sales could also be affected, to a lesser extent, by fluctuations of certain raw material prices. The cost of raw materials comprised approximately 15 percent of the previously described total purchases for each of the years ended December 31, 2013, 2012 and 2011, respectively, while the remaining portion of purchases is made of components, transformation and overhead costs. We typically seek to manage these costs and minimize their volatility through the use of fixed price purchase contracts and the use of commercial negotiations and technical efficiencies. Because of these effects and relatively more stable commodities markets, for the periods reported, changes in component and raw material costs generally have not had a material effect on the period to period comparisons of our cost of sales. Nevertheless, our cost of sales related to materials and components has increased, as we have significantly enhanced the quality and content of our vehicles as we renew and refresh our product offerings. Over time, technological advancements and improved material sourcing can reduce the cost to us of the additional enhancements. In addition, we seek to recover higher costs through pricing actions, but even when competitive conditions permit this, there may be a time lag between the increase in our costs and our ability to realize improved pricing. Accordingly, our results are typically adversely affected, at least in the short term, until price increases are accepted in the market.

Further, in many markets where our vehicles are sold, we are required to pay import duties on those vehicles, which are included in our cost of sales. Although we can typically pass these costs along with our higher priced vehicles, for many of our vehicles, particularly in the mass market segments, we cannot always pass along increases in those duties to our dealers and distributors and remain competitive. Our ability to price our vehicles to recover those increased costs has impacted, and will continue to impact, our profitability. Alternatively, we can try to eliminate or reduce the impact of these import duties by increasing local manufacturing of vehicles, as we have done in China and we plan to do in Brazil with a new plant opening in 2015. However, operating conditions, including labor regulations, in certain markets, have produced industry overcapacity which may make it hard for us to shift to more local production in other markets. As a result, we may experience lower plant utilization rates, which we will be unable to recover, if we are unable to reallocate production easily. These factors as well as the long capital investment cycles associated with building local production infrastructure may necessitate that we continue to produce a large proportion of our vehicles in existing facilities and satisfy most of our demand from emerging markets through exports.

Product Development. An integral part of our business plan has been the continued refresh and growth of our vehicle portfolio, and we have committed significant capital and resources toward an aggressive launch program of completely new vehicles on all new platforms, with additions of new powertrain and transmission technology. In order to realize a return on the significant investments we have made, in order to sustain market share, and to achieve competitive operating margins, we will have to continue this accelerated pace of new vehicle launches. We believe efforts in developing common vehicle platforms and powertrains through the Fiat-Chrysler Alliance has accelerated the time-to-market for many of our new vehicle launches and resulted in cost savings.

 

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Our efforts to develop our product offerings and the costs associated with vehicle improvements and launches can impact our EBIT. Refer to “Significant Accounting Policies—Format of the Financial Statements” included in the Annual Consolidated Financial Statements included elsewhere in this prospectus for a description of EBIT. During the development and launch of these new or refreshed offerings, despite the pace, we must also maintain our commitment to quality improvements. Moreover, our ability to continue to make the necessary investments in product development to achieve these plans depends in large part on the market acceptance and success of the new or significantly refreshed vehicles we introduce, as well as our ability to timely complete the aggressive launch schedule we have planned without sacrificing quality.

Costs we incur in the initial research phase for new projects (which may relate to vehicle models, vehicle platforms or powertrains) are expensed as incurred and reported as research and development costs. Costs we incur for product development are capitalized and recognized as development cost intangible assets if and when the following two conditions are both satisfied: (i) development costs can be measured reliably and (ii) the technical feasibility of the project, and the anticipated volumes and pricing, corroborate that the development expenditures will generate future economic benefits. Capitalized development costs include all direct and indirect costs that may be directly attributed to the development process. Such capitalized development costs are amortized on a straight line basis commencing from production over the expected economic useful life of the product developed, and such amortization is recognized and reported as research and development costs in our consolidated income statement. During a new vehicle launch and introduction to the market, we typically incur increased selling, general and advertising expenses associated with the advertising campaigns and related promotional activity. If vehicle production is terminated prior to the expected date, any unamortized capitalized development costs are expensed during that period.

We did not recognize any intangible assets relating to in-process research and development in connection with our consolidation of Chrysler in 2011 as all of Chrysler’s development efforts related to the commercialization of modification of existing technology. Upon obtaining control, we began capitalizing development costs related to Chrysler’s development projects until their production phase and subsequently began amortizing them over their expected useful economic lives, which typically ranges between 5 and 12 years. In 2011, we capitalized €371 million, while no amortization was recognized for that period, as the related projects had not yet reached production phase. In 2012 and 2013, we capitalized €994 million and €862 million respectively, and recognized amortization of development costs of €25 million and €188 million respectively. The increase in the amortization of development costs from 2011 as compared to 2012 and to 2013 is a result of the related projects progressively entering their production phase.

Other than the inclusion of Chrysler’s development projects as a result of consolidation, there has been no major peak of development activity in 2011, 2012 and 2013 that resulted in a significant year-over-year increase in capitalization of development costs. Amortization of non-Chrysler projects has remained relatively consistent.

Future developments in our product portfolio to support certain of our brands’ growth strategy and their related development expenditures could lead to significant capitalization of development costs. Our time to market is approximately 21 months, but varies, depending on product, after which, the project goes into production, resulting in an increase in amortization. Therefore our operating results, which are measured through EBIT, are impacted by the cyclicality of our research and development expenditures based on our product portfolio strategies and our product plans.

Regulation. We face a regulatory environment in markets throughout the world where vehicle emission and fuel economy regulations are increasingly becoming more stringent which will affect our vehicle sales and profitability. We must comply with these regulations in order to continue operations in those markets, including a number of markets where we derive substantial revenue, such as the U.S., Brazil and Europe. Further, developments in regulatory requirements in China, the largest single market in the world in 2013, limit in some respects the product offerings we can pursue as we seek to expand the scope of our operations in that country. Developing, engineering and manufacturing vehicles that meet these requirements and therefore may be sold in those markets requires a significant expenditure of resources.

 

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Critical Accounting Estimates

The Annual Consolidated Financial Statements are prepared in accordance with IFRS which require the use of estimates, judgments and assumptions that affect the carrying amount of assets and liabilities, the disclosure of contingent assets and liabilities and the amounts of income and expenses recognized. The estimates and associated assumptions are based on elements that are known when the financial statements are prepared, on historical experience and on any other factors that are considered to be relevant.

The estimates and underlying assumptions are reviewed periodically and continuously by the Group. If the items subject to estimates do not perform as assumed, then the actual results could differ from the estimates, which would require adjustment accordingly. The effects of any changes in estimate are recognized in the consolidated income statement in the period in which the adjustment is made, or in future periods.

The items requiring estimates for which there is a risk that a material difference may arise in respect of the carrying amounts of assets and liabilities in the future are discussed below.

Pension plans

Group companies, primarily in the U.S. and Canada, sponsor both non-contributory and contributory defined benefit pension plans. The majority of the plans are funded plans. The non-contributory pension plans cover certain hourly and salaried employees. Benefits are based on a fixed rate for each year of service. Additionally, contributory benefits are provided to certain salaried employees under the salaried employees’ retirement plans. These plans provide benefits based on the employee’s cumulative contributions, years of service during which the employee contributions were made and the employee’s average salary during the five consecutive years in which the employee’s salary was highest in the 15 years preceding retirement.

The Group’s defined benefit pension plans are accounted for on an actuarial basis, which requires the use of estimates and assumptions to determine the net liability or net asset. The Group estimates the present value of the projected future payments to all participants taking into consideration parameters of a financial nature such as discount rate, the rates of salary increases and the likelihood of potential future events estimated by using demographic assumptions such as mortality, dismissal and retirement rates. These assumptions may have an effect on the amount and timing of future contributions.

Plan obligations and costs are based on existing retirement plan provisions, which include plan amendments with certain provisions taking effect in future periods.

During the second quarter of 2013, the Group amended its U.S. and Canadian salaried defined benefit pension plans. The U.S. plans were amended in order to comply with Internal Revenue Service regulations, cease the accrual of future benefits effective December 31, 2013, and enhance the retirement factors. The Canada amendment ceases the accrual of future benefits effective December 31, 2014, enhances the retirement factors and continues to consider future salary increases for the affected employees. The U.S. and Canadian plan amendments resulted in an interim remeasurement of the plans and a corresponding curtailment gain. As a result, the Group recognized a €509 million net reduction to its pension obligation, a €7 million reduction to defined benefit plan assets, and a corresponding €502 million increase in other comprehensive income/(loss).

Assumptions regarding any potential future changes to benefit provisions beyond those to which the Group is presently committed are not made.

The assumptions used in developing the required estimates include the following key factors:

 

  Ÿ   Discount rates. The Group selects discount rates on the basis of the rate of return on high-quality (AA-rated) fixed income investments for which the timing and amounts of payments match the timing and amounts of the projected pension payments.

 

  Ÿ   Salary growth. The salary growth assumption reflects the Group’s long-term actual experience, outlook and assumed inflation.

 

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  Ÿ   Inflation. The inflation assumption is based on an evaluation of external market indicators.

 

  Ÿ   Expected contributions. The expected amount and timing of contributions is based on an assessment of minimum funding requirements. From time to time contributions are made beyond those that are legally required.

 

  Ÿ   Retirement rates. Retirement rates are developed to reflect actual and projected plan experience.

 

  Ÿ   Mortality rates. Mortality rates are developed to reflect actual and projected plan experience.

 

  Ÿ   Plan assets measured at net asset value. Plan assets are recognized and measured at fair value in accordance with IFRS 13 — Fair Value Measurement. At December 31, 2013, plan assets for which the fair value is represented by the net asset value (“NAV”) since there are no active markets for these assets, amounted to €2,780 million. These investments include private equity, real estate and hedge fund investments.

Significant differences in actual experience or significant changes in assumptions may affect the pension obligations and pension expense. The effects of actual results differing from assumptions and of changing assumptions are included in Other comprehensive income/(loss).

At December 31, 2013 the effect of the indicated decrease or increase in selected factors, holding all other assumptions constant, is shown below:

 

    Effect on pension
defined benefit
obligation
 
    (€ million)  

10 basis point decrease in discount rate

    265   

10 basis point increase in discount rate

    (261

At December 31, 2013 net liabilities and net assets for pension benefits amounted to €4,253 million and to €95 million, respectively (€7,008 million and €83 million, respectively at December 31, 2012). Refer to Note 25 of the Annual Consolidated Financial Statements included elsewhere in this prospectus for a detailed discussion of the Group’s pension plans.

Other post-retirement benefits

The Group provides health care, legal, severance indemnity and life insurance benefits to certain hourly and salaried employees. Upon retirement these employees may become eligible for continuation of certain benefits. Benefits and eligibility rules may be modified periodically.

Health care, life insurance plans and other employment benefits are accounted for on an actuarial basis, which requires the selection of various assumptions. The estimation of the Group’s obligations, costs and liabilities associated with these plans requires the use of estimates of the present value of the projected future payments to all participants, taking into consideration parameters of a financial nature such as discount rate, the rates of salary increases and the likelihood of potential future events estimated by using demographic assumptions such as mortality, dismissal and retirement rates.

Plan obligations and costs are based on existing plan provisions. Assumptions regarding any potential future changes to benefit provisions beyond those to which the Group is presently committed are not made.

The assumptions used in developing the required estimates include the following key factors:

 

  Ÿ   Discount rates. The Group selects discount rates on the basis of the rate of return on high-quality (AA-rated) fixed income investments for which the timing and amounts of payments match the timing and amounts of the projected pension payments.

 

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  Ÿ   Health care cost trends. The Group’s health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends.

 

  Ÿ   Salary growth. The salary growth assumptions reflect the Group’s long-term actual experience, outlook and assumed inflation.

 

  Ÿ   Retirement and employee leaving rates. Retirement and employee leaving rates are developed to reflect actual and projected plan experience, as well as the legal requirements for retirement in Italy.

 

  Ÿ   Mortality rates. Mortality rates are developed to reflect actual and projected plan experience.

At December 31, 2013 the effect of the indicated decreases or increases in the key factors affecting the health care, life insurance plans and severance indemnity in Italy (“TFR”), holding all other assumptions constant, is shown below:

 

    Effect on health
care and life
insurance defined

benefit obligation
    Effect on the TFR
obligation
 
    (€ million)  

10 basis point / 100 basis point (respectively) decrease in discount rate

    24        52   

10 basis point / 100 basis point (respectively) increase in discount rate

    (23     (43

100 basis point decrease in health care cost trend rate

    (40     n/a   

100 basis point increase in health care cost trend rate

    48        n/a   

Recoverability of non-current assets with definite useful lives

Non-current assets with definite useful lives include property, plant and equipment, intangible assets and assets held for sale. Intangible assets with definite useful lives mainly consist of capitalized development costs related to the EMEA and NAFTA segments.

The Group periodically reviews the carrying amount of non-current assets with definite useful lives when events and circumstances indicate that an asset may be impaired. Impairment tests are performed by comparing the carrying amount and the recoverable amount of the cash-generating unit (“CGU”). The recoverable amount is the higher of the CGU’s fair value less costs of disposal and its value in use. In assessing the value in use, the pre-tax estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the CGU.

During the years ended December 31, 2013 and 2012, due to the decline in the demand for vehicles in the European market (primarily in Italy) and to the streamlining of architectures and related production platforms associated with the region’s refocused product strategy, impairment tests relating to EMEA net assets were performed.

As a result of the new product strategy, the operations to which specific capitalized development costs belonged was redesigned. For example, certain models were switched to new platforms considered technologically more appropriate. As no future economic benefits were expected from these specific capitalized development costs, they were derecognized in accordance with IAS 38 paragraph 112(b) and characterized by the Group as an impairment. For the year ended December 31, 2013, capitalized development costs relating to EMEA were impaired by approximately €90 million as a result.

Also as a result of the new product strategy, certain models were identified for reduced production going forward. The cash-generating units (comprising tangible assets and capitalized development costs) related to such models were tested for impairment by comparing the carrying amount of the assets allocated to the cash-generating unit (“CGU”) to its value in use. In assessing the value in use, the pre-tax estimated future cash flows

 

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are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the CGU. In testing these CGUs, cash flows for the remaining useful life of the related products were discounted using a pre-tax weighted average cost of capital of 12.2 percent. For the year ended December 31, 2013, total impairments of approximately €116 million relating to EMEA were recorded as a result of this testing (of which €61 million related to development costs and €55 million related to Property, plant and equipment).

Additionally, specific CGUs in the Components reportable segment were tested following the identification of impairment indicators. Lastly, the Group wrote off specific development costs within the Maserati operating segment due to changes in the platform to be used for a new model, and wrote off €32 million of development costs within the LATAM segment.

During the year ended December 31, 2011, the process for the strategic realignment of the manufacturing and commercial activities of Fiat with those of Chrysler led to the write off of certain development costs and property, plant and equipment, mainly as a result of an assessment of the effects of convergence towards the use of a reduced number of common platforms, a process which was accelerated after obtaining control of Chrysler.

The following tables set forth all impairment charges recognized for non-current assets with definite useful lives during the years ended December 31, 2013, 2012 and 2011.

 

Impairments to Property, plant and equipment:

        
     For the years ended December 31,  
     2013      2012      2011  
     (€ million)  

EMEA:

     55         40         204   

Components:

     31         8         103   

LATAM:

     -         1         -   

Other:

     -         1         16   
  

 

 

    

 

 

    

 

 

 
     86         50         323   
  

 

 

    

 

 

    

 

 

 

Recorded in the Consolidated income statement within:

        

Cost of sales

     -         50         16   

Other unusual expenses

     86         -         307   
  

 

 

    

 

 

    

 

 

 
     86         50         323   
  

 

 

    

 

 

    

 

 

 

Impairments to Other intangible assets:

        
     For the years ended December 31,  
     2013      2012      2011  
     (€ million)  

Development costs

        

EMEA:

     151         33         161   

Components:

     2         21         4   

Luxury Brands (Maserati operating segment):

     65         -         -   

LATAM:

     32         2         -   

APAC:

     -         1         -   
  

 

 

    

 

 

    

 

 

 
     250         57         165   
  

 

 

    

 

 

    

 

 

 

Other intangible assets

     -         1         1   
  

 

 

    

 

 

    

 

 

 
     250         58         166   
  

 

 

    

 

 

    

 

 

 

Recorded in the Consolidated income statement within:

        

Cost of sales

     -         1         1   

Research and development costs

     24         57         4   

Other unusual expenses

     226         -         161   
  

 

 

    

 

 

    

 

 

 
     250         58         166   
  

 

 

    

 

 

    

 

 

 

 

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In addition, following the downward trend in the demand for vehicles in Europe, the Group considered it necessary to test the recoverable amount of the EMEA segment (which is mainly composed of property plant and equipment and capitalized development costs) at December 31, 2013 and 2012. The recoverable amount of the EMEA segment was its value in use determined with the following assumptions:

 

  Ÿ   the reference scenario for each year was based on the following year’s budget, the expected trading conditions and the automotive market trends for the following five year period;

 

  Ÿ   the six year period has been deemed necessary to take into account the full cycle of new vehicles introduced reflecting the benefits arising from the capital expenditure devoted to the product portfolio enrichment and renewal, largely concentrated in 2015-2016;

 

  Ÿ   the expected future cash flows, represented by the projected EBIT before result from investments, gains on the disposal of investments, restructuring costs, other unusual income/(expenses) and depreciation and amortization and reduced by expected capital expenditure, include a normalized terminal value used to estimate the future results beyond the time period explicitly considered. This terminal value was assumed substantially in line with 2017-2019 amounts. The long-term growth rate was set at zero;

 

  Ÿ   the expected future cash flows have been discounted using a pre-tax Weighted Average Cost of Capital (“WACC”) of 12.2 percent (13.1 percent in 2012). This WACC reflects the current market assessment of the time value of money for the period being considered and the risks specific to the EMEA region. The WACC was calculated by referring among other factors to the yield curve of 10 year European government bonds and to Fiat’s cost of debt.

In 2013, the recoverable amount of the EMEA segment was higher than the corresponding carrying amount. In addition, sensitivity analysis was performed by simulating two different scenarios:

a) WACC was increased by 1.0 percent for 2017, 2.0 percent for 2018 and 3.0 percent for 2019 and for Terminal Value;

b) Cash-flows were reduced by estimating the impact of a 5.0 percent decrease in the European car market demand for 2015, 7.5 percent for 2016 and 10.0 percent for 2017-2019 as compared to the base assumptions.

In all cases the recoverable amount was higher than the carrying amount.

In 2012, the recoverable amount of the EMEA operating segment was higher than the corresponding carrying amount. In addition, sensitivities analysis were performed simulating two different scenarios:

a) WACC was increased by 1.0 percent for 2017 and 2.0 percent for 2018 and for Terminal Value;

b) Cash-flows were reduced by estimating the impact of a 10.0 percent decrease in the European car market demand for 2016-2018 as compared to the base assumptions.

In all cases the recoverable amount was higher than the carrying amount.

The estimates and assumptions described reflect the Group’s current available knowledge as to the expected future development of the businesses and are based on an assessment of the future development of the markets and the car industry, which remain subject to a high degree of uncertainty due to the continuation of the economic difficulties in most countries of the Eurozone and its effects on the industry. More specifically, considering the uncertainty, a future worsening in the economic environment in the Eurozone that is not reflected in these Group assumptions, could result in actual performance that differs from the original estimates, and might therefore require adjustments to the carrying amounts of certain non-current assets in future periods.

 

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Recoverability of Goodwill and intangible assets with indefinite useful lives

In accordance with IAS 36 – Impairment of Assets, Goodwill and intangible assets with indefinite useful lives are not amortized and are tested for impairment annually or more frequently if facts or circumstances indicate that the asset may be impaired.

Goodwill and intangible assets with indefinite useful lives are allocated to operating segments or to CGUs within the operating segments, which represent the lowest level within the Group at which goodwill is monitored for internal management purposes in accordance with IAS 36. The impairment test is performed by comparing the carrying amount (which mainly comprises property, plant and equipment, goodwill, brands and capitalized development costs) and the recoverable amount of each CGU of group of CGUs to which Goodwill has been allocated. The recoverable amount of a CGU is the higher of its fair value less costs to sell and its value in use.

Goodwill and intangible assets with indefinite useful lives at December 31, 2013 include €8,967 million and €2,600 million respectively resulting from the acquisition of Chrysler (€9,372 million and €2,717 million respectively at December 31, 2012), and €786 million from the acquisition of interests in Ferrari (€786 million at December 31, 2012).

The following table sets forth the impairment charges recognized for Goodwill and intangible assets with indefinite useful lives during the years ended December 31, 2013, 2012 and 2011.

 

     For the years ended December 31,  
     2013      2012      2011  
     (€ million)  

Goodwill

        

EMEA

     -         -         17   

Components

     -         -         193   

Other

     -         -         14   
  

 

 

    

 

 

    

 

 

 

Goodwill and intangible assets with indefinite useful lives

     -         -         224   
  

 

 

    

 

 

    

 

 

 

These amounts were fully recognized in the Consolidated income statement in 2011 under Other unusual expenses.

For a discussion on impairment testing of Goodwill and intangible assets with indefinite useful lives, reference should be made to Note 13 to the Annual Consolidated Financial Statements included elsewhere in this prospectus.

Recoverability of deferred tax assets

The carrying amount of deferred tax assets is reduced to the extent that it is not probable that sufficient taxable profit will be available to allow the benefit of part or all of the deferred tax assets to be utilized.

At December 31, 2013, the Group had deferred tax assets on deductible temporary differences of €6,183 million (€6,363 million at December 31, 2012), of which €435 million was not recognized (€2,445 million at December 31, 2012). At the same date the Group had also theoretical tax benefit on losses carried forward of €3,810 million (€3,399 million at December 31, 2012), of which €2,891 million was unrecognized (€2,473 million at December 31, 2012).

In addition, at December 31, 2013, in view of the results achieved by Chrysler, of the continuous improvement of its product mix, its trends in international sales and its implementation of new vehicles, together with the consolidation of the alliance between Fiat and Chrysler, following Fiat’s acquisition of the remaining shareholding at the beginning of 2014, the Group recorded previously unrecognized deferred tax assets for a total of €1,734 million, of which €1,500 million was recognized in Income taxes and €234 million in Other comprehensive income/(loss).

 

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The recoverability of deferred tax assets is dependent on the Group’s ability to generate sufficient future taxable income in the period in which it is assumed that the deductible temporary differences reverse and tax losses carried forward can be utilized. In making this assessment, the Group considers future taxable income arising on the most recent budgets and plans, prepared by using the same criteria described for testing the impairment of assets and goodwill moreover, it estimates the impact of the reversal of taxable temporary differences on earnings and it also considers the period over which these assets could be recovered.

These estimates and assumptions are subject to a high degree of uncertainty, in particular with regard to the future performance in the Eurozone; therefore changes in current estimates due to unanticipated events could have a significant impact on the Group’s consolidated financial statements.

Sales incentives

The Group records the estimated cost of sales incentive programs offered to dealers and consumers as a reduction to revenue at the time of sale to the dealer. This estimated cost represents the incentive programs offered to dealers and consumers, as well as the expected modifications to these programs in order to facilitate sales of the dealer inventory. Subsequent adjustments to incentive programs related to vehicles previously sold to dealers are recognized as an adjustment to revenue in the period the adjustment is determinable.

The Group uses price discounts to adjust vehicle pricing in response to a number of market and product factors, including: pricing actions and incentives offered by competitors, economic conditions, the amount of excess industry production capacity, the intensity of market competition, consumer demand for the product and the desire to support promotional campaigns. The Group may offer a variety of sales incentive programs at any given point in time, including: cash offers to dealers and consumers and subvention programs offered to customers, or lease subsidies, which reduce the retail customer’s monthly lease payment or cash due at the inception of the financing arrangement, or both. Incentive programs are generally brand, model and region specific for a defined period of time, which may be extended.

Multiple factors are used in estimating the future incentive expense by vehicle line including the current incentive programs in the market, planned promotional programs and the normal incentive escalation incurred as the model year ages. The estimated incentive rates are reviewed monthly and changes to the planned rates are adjusted accordingly, thus impacting revenues. As discussed previously, there are a multitude of inputs affecting the calculation of the estimate for sales incentives, and an increase or decrease of any of these variables could have a significant effect on recorded revenues.

Product warranties and liabilities

The Group establishes reserves for product warranties at the time the sale is recognized. The Group issues various types of product warranties under which the performance of products delivered is generally guaranteed for a certain period or term. The reserve for product warranties includes the expected costs of warranty obligations imposed by law or contract, as well as the expected costs for policy coverage, recall actions and buyback commitments. The estimated future costs of these actions are principally based on assumptions regarding the lifetime warranty costs of each vehicle line and each model year of that vehicle line, as well as historical claims experience for the Group’s vehicles. In addition, the number and magnitude of additional service actions expected to be approved, and policies related to additional service actions, are taken into consideration. Due to the uncertainty and potential volatility of these estimated factors, changes in the assumptions used could materially affect the results of operations.

The Group periodically initiates voluntary service and recall actions to address various customer satisfaction, safety and emissions issues related to vehicles sold. Included in the reserve is the estimated cost of these service and recall actions. The estimated future costs of these actions are based primarily on historical claims experience for the Group’s vehicles. Estimates of the future costs of these actions are inevitably imprecise due to some uncertainties, including the number of vehicles affected by a service or recall action. It is reasonably possible that the ultimate cost of these service and recall actions may require the Group to make expenditures in

 

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excess (or less than) of established reserves over an extended period of time. The estimate of warranty and additional service and recall action obligations is periodically reviewed during the year. Experience has shown that initial data for any given model year can be volatile; therefore, the process relies upon long-term historical averages until actual data is available. As actual experience becomes available, it is used to modify the historical averages to ensure that the forecast is within the range of likely outcomes. Resulting accruals are then compared with current spending rates to ensure that the balances are adequate to meet expected future obligations.

Warranty costs incurred are generally recorded in the Consolidated income statement as Cost of sales. However, depending on the specific nature of the recall, including the significance and magnitude, the Group reports certain of these costs as Unusual expenses. As such, for comparability purposes, the Group believes that separate identification allows users of the Group’s Consolidated financial statements to take them into appropriate consideration when analyzing the performance of the Group and assists them in understanding the Group’s financial performance year on year.

In addition, the Group makes provisions for estimated product liability costs arising from property damage and personal injuries including wrongful death, and potential exemplary or punitive damages alleged to be the result of product defects. By nature, these costs can be infrequent, difficult to predict and have the potential to vary significantly in amount. The valuation of the reserve is actuarially determined on an annual basis based on, among other factors, the number of vehicles sold and product liability claims incurred. Costs associated with these provisions are recorded in the income statement and any subsequent adjustments are recorded in the period in which the adjustment is determined.

Other Contingent liabilities

The Group makes provisions in connection with pending or threatened disputes or legal proceedings when it is considered probable that there will be an outflow of funds and when the amount can be reasonably estimated. If an outflow of funds becomes possible but the amount cannot be estimated, the matter is disclosed in the notes to the financial statements. The Group is the subject of legal and tax proceedings covering a wide range of matters in various jurisdictions. Due to the uncertainty inherent in such matters, it is difficult to predict the outflow of funds that could result from such disputes with any certainty. Moreover, the cases and claims against the Group often derive from complex legal issues which are subject to a differing degree of uncertainty, including the facts and circumstances of each particular case and the manner in which applicable law is likely to be interpreted and applied to such fact and circumstances, and the jurisdiction and the different laws involved. The Group monitors the status of pending legal procedures and consults with experts on legal and tax matters on a regular basis. It is therefore possible that the provisions for the Group’s legal proceedings and litigation may vary as the result of future developments in pending matters.

Litigation

Various legal proceedings, claims and governmental investigations are pending against the Group on a wide range of topics, including vehicle safety; emissions and fuel economy; dealer, supplier and other contractual relationships; intellectual property rights; product warranties and environmental matters. Some of these proceedings allege defects in specific component parts or systems (including airbags, seats, seat belts, brakes, ball joints, transmissions, engines and fuel systems) in various vehicle models or allege general design defects relating to vehicle handling and stability, sudden unintended movement or crashworthiness. These proceedings seek recovery for damage to property, personal injuries or wrongful death and in some cases include a claim for exemplary or punitive damages. Adverse decisions in one or more of these proceedings could require the Group to pay substantial damages, or undertake service actions, recall campaigns or other costly actions.

Litigation is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. An accrual is established in connection with pending or threatened litigation if a loss is probable and a reliable estimate can be made. Since these accruals represent estimates, it is reasonably possible that the resolution of some of these matters could require the Group to make payments in excess of the amounts accrued. It is also reasonably possible that the resolution of some of the matters for which accruals could not be made may require the Group to make payments in an amount or range of amounts that could not be reasonably estimated.

 

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The term “reasonably possible” is used herein to mean that the chance of a future transaction or event occurring is more than remote but less than probable. Although the final resolution of any such matters could have a material effect on the Group’s operating results for the particular reporting period in which an adjustment of the estimated reserve is recorded, it is believed that any resulting adjustment would not materially affect the consolidated financial position or cash flows.

Environmental Matters

The Group is subject to potential liability under government regulations and various claims and legal actions that are pending or may be asserted against the Group concerning environmental matters. Estimates of future costs of such environmental matters are inevitably imprecise due to numerous uncertainties, including the enactment of new laws and regulations, the development and application of new technologies, the identification of new sites for which the Group may have remediation responsibility and the apportionment and collectability of remediation costs among responsible parties. The Group establishes provisions for these environmental matters when a loss is probable and a reliable estimate can be made. It is reasonably possible that the final resolution of some of these matters may require the Group to make expenditures, in excess of established provisions, over an extended period of time and in a range of amounts that cannot be reliably estimated. Although the final resolution of any such matters could have a material effect on the Group’s operating results for the particular reporting period in which an adjustment to the estimated provision is recorded, it is believed that any resulting adjustment would not materially affect the consolidated financial position or cash flows.

Business combinations

The consolidation of Chrysler was accounted for as a business combination achieved in stages using the acquisition method of accounting required under IFRS 3. In accordance with the acquisition method, the Group remeasured its previously held equity interest in Chrysler at fair value. The non-controlling interest in Chrysler was also recognized at its acquisition date fair value. Additionally, the Group recognized the acquired assets and assumed liabilities at their acquisition date fair values, except for deferred income taxes and certain liabilities associated with employee benefits, which were recorded according to other accounting guidance. These values were based on market participant assumptions, which were based on market information available at the date control was obtained and which affected the value at which the assets, liabilities, non-controlling interests and goodwill were recognized as well as the amount of income and expense for the period. See “Accounting for the Chrysler business combination” in the Annual Consolidated Financial Statements, included elsewhere in this prospectus.

Share-based compensation

The Group accounts for share-based compensation plans in accordance with IFRS 2 - Share-based payments, which requires measuring share-based compensation expense based on fair value. As described in Note 24 to the Annual Consolidated Financial Statements included elsewhere in this prospectus, within the Group, Fiat and Chrysler granted share-based payments for the years ended December 31, 2013, 2012 and 2011 to certain employees and directors.

The fair value of Fiat share-based payments is measured based on market prices of Fiat shares at the grant date taking into account the terms and conditions upon which the instruments were granted. The fair value of Chrysler awards is measured by using a discounted cash flow methodology to estimate the price of the awards at the grant date and subsequently for liability-classified awards at each balance sheet date, until they are settled.

For Chrysler’s awards, since there are no publicly observable market prices for Chrysler’s membership interests, the fair value was determined contemporaneously with each measurement using a discounted cash flow methodology. The Group uses this approach, which is based on projected cash flows, to estimate Chrysler’s enterprise value. Then the Group deducts the fair value of Chrysler’s outstanding interest bearing debt as of the measurement date from the enterprise value to arrive at the fair value of Chrysler’s equity.

 

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The significant assumptions used in the measurement of the fair value of these awards at each measurement date include different assumptions, for example, four years of annual projections that reflect the estimated after-tax cash flows a market participant would expect to generate from Chrysler’s operating business, an estimated after-tax weighted average cost of capital and projected worldwide factory shipments.

The assumptions noted above used in the contemporaneous estimation of fair value at each measurement date have not changed significantly during the three years ended December 31, 2013, 2012 and 2011 with the exception of the weighted average cost of capital, which is directly influenced by external market conditions.

The Group updates the measurement of the fair value of these awards on a regular basis. It is therefore possible that the amount of share-based payments reserve and liabilities for share-based payments may vary as the result of a significant change in the above mentioned assumptions.

Non-GAAP Financial Measures

We monitor our operations through the use of several non-GAAP financial measures: Net Debt, Net Industrial Debt and certain information provided on a constant currency basis. We believe that these non-GAAP financial measures provide useful and relevant information regarding our operating results and enhance the overall ability to assess our financial performance and financial position. They provide us with comparable measures which facilitate management’s ability to identify operational trends, as well as make decisions regarding future spending, resource allocations and other operational decisions. These and similar measures are widely used in the industry in which we operate.

These financial measures may not be comparable to other similarly titled measures of other companies and are not intended to be substitutes for measures of financial performance and financial position as prepared in accordance with IFRS.

Net Industrial Debt

The following table details our Net Debt at September 30, 2014, December 31, 2013 and December 31, 2012, and provides a reconciliation of this non-GAAP measure to debt, the most directly comparable measure included in our consolidated statement of financial position.

Due to different sources of cash flows used for the repayment of the financial debt between industrial activities and financial services (by cash from operations for industrial activities and by collection of financial receivables for financial services) and the different business structure and leverage implications, we provide a separate analysis of Net Debt between Industrial Activities and Financial Services.

The division between Industrial Activities and Financial Services represents a sub-consolidation based on the core business activities (industrial or financial services) of each Group company. The sub-consolidation for Industrial Activities also includes companies that perform centralized treasury activities (i.e., raising funding in the market and financing Group companies), but do not, however, provide financing to third parties. Financial Services includes companies that provide retail and dealer finance, leasing and rental services in support of the mass-market brands in certain geographical segments, and for the luxury brands.

 

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Net Industrial Debt (i.e., Net Debt of Industrial Activities) is management’s primary measure for analyzing our financial leverage and capital structure and is one of the key targets used to measure our performance.

 

    At September 30, 2014          At December 31, 2013          At December 31, 2012  

(€ million)

 

 

 

Industrial
Activities

 

   

 

Financial
Services

 

    Consolidated

 

 

         Industrial
Activities

 

    Financial
Services

 

    Consolidated

 

 

         Industrial
Activities

 

    Financial
Services

 

    Consolidated

 

 

 

Debt with third parties

    (30,908)        (2,025)        (32,933)           (28,250)        (2,033)        (30,283)           (26,256)        (2,047)        (28,303)   

Net intercompany financial receivables/payables and current financial receivables from jointly-controlled financial services companies

    1,537        (1,466)        71           1,363        (1,336)        27           1,392        (1,334)        58   

Other financial assets/(liabilities) (net)

    (194)        (2)        (196)           399        (3)        396           321        (3)        318   

Current securities

    183        30        213           219        28        247           173        83        256   

Cash and cash equivalents

    18,010        385        18,395           19,255        200        19,455           17,420        246        17,666   
 

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 

Net Debt

    (11,372)        (3,078)        (14,450)           (7,014)        (3,144)        (10,158)           (6,950)        (3,055)        (10,005)   
 

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

      

 

 

   

 

 

   

 

 

 

Constant Currency Information

The “Results of Operations” discussion below includes information about our net revenues and EBIT at constant currency. We calculate constant currency by applying the prior-year average exchange rates to current financial data expressed in local currency in which the relevant financial statements are denominated in order to eliminate the impact of foreign exchange rate fluctuations (see “Significant Accounting Policies” in the Annual Consolidated Financial Statements included in this prospectus for information on the exchange rates applied). These constant currency measures are non-GAAP measures. Although we do not believe that these measures are a substitute for GAAP measures, we do believe that such results excluding the impact of currency fluctuations year-on-year provide additional useful information to investors regarding the operating performance on a local currency basis.

For example, if a U.S. entity with U.S. dollar functional currency recorded net revenues of U.S.$100 million for 2013 and 2012, we would report €75 million in net revenues for 2013 (using the 2013 average exchange rate of 1.328) compared to €78 million for 2012 (using the average exchange rate of 1.285). The constant currency presentation would translate the 2013 net revenues using the 2012 exchange rates, and indicate that the underlying net revenues on a constant currency basis were unchanged year-on-year. We present such information in order to assess how the underlying business has performed prior to the impact of fluctuations in foreign currency exchange rates.

Shipment Information

As discussed in “Business—Overview of Our Business” our activities are carried out through six reportable segments: four regional mass market vehicle segments (NAFTA, LATAM, APAC and EMEA), a global Luxury Brands segment and a global Components segment. The following table sets forth our vehicle shipment information by segment (excluding the Components segment). Vehicle shipments are generally aligned with current period production which is driven by our plans to meet consumer demand. Revenue is generally recognized when the risks and rewards of ownership of a vehicle have been transferred to our dealers or distributors, which usually occurs upon the release of the vehicle to the carrier responsible for transporting the vehicle to our dealer or distributor. Revenues related to new vehicle sales with a buy-back commitment, or through the Guaranteed Depreciation Program (“GDP”), under which the Group guarantees the residual value or otherwise assumes responsibility for the minimum resale value of the vehicle, are not recognized at the time of delivery but are accounted for similar to an operating lease and rental income is recognized over the contractual term of the lease on a straight line basis. For a description of our dealers and distributors see “Business—Mass

 

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Market Vehicles”. Accordingly, the number of vehicles shipped does not necessarily correspond to the number of vehicles sold for which revenues are recorded in any given period.

 

  (In thousands of units)        Shipments  
         For the nine months ended September 30,          For the years ended December 31,  
         2014      2013          2013      2012      2011  

  NAFTA

       1,825           1,587             2,238           2,115           1,033     

  LATAM

       610           723             950           979           910     

  APAC

       163           115             163           103           53     

  EMEA

       763           743             979           1,012           1,166     

  Luxury Brands

       32           13             22           14           13     
    

 

 

      

 

 

 

  Total

       3,393           3,181             4,352           4,223           3,175     
    

 

 

      

 

 

 

Results of Operations

Three months ended September 30, 2014 compared to the three months ended September 30, 2013

The following is a discussion of the results of operations for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The discussion of certain line items (cost of sales, selling, general and administrative costs and research and development costs) includes a presentation of such line items as a percentage of net revenues for the respective periods presented, to facilitate period-on-period comparisons.

 

        

 

 
         For the three months ended September 30,  
(€ million)        2014      2013  

Net revenues

       23,553           20,693     

Cost of sales

       20,356           17,747     

Selling, general and administrative costs

       1,717           1,580     

Research and development costs

       598           556     

Other income/(expenses)

       44           24     

Result from investments

       36           29     

Gains/(losses) on the disposal of investments

       3           6     

Restucturing costs

       15           14     

Other unusual income/(expenses)

       (24)           7     
    

 

 

    

 

 

 

EBIT

       926           862     

Net financial income/(expenses)

       (511)           (493)     
    

 

 

    

 

 

 

Profit before taxes

       415           369     

Tax income/(expenses)

       227           180     
    

 

 

    

 

 

 

Net profit

       188           189     
    

 

 

    

 

 

 

Net profit attributable to:

       

Owners of the parent

       174           (15)     

Non-controlling interests

       14           204     

Net revenues

 

   

 

       

 

 
    For the three months ended September 30,         Increase/(decrease)  

  (€ million, except
  percentages)

  2014      2013         2014 vs. 2013  
           

Net revenues

    23,553           20,693            2,860             13.8%     

Net revenues for the three months ended September 30, 2014 were €23.6 billion, an increase of €2.9 billion, or 13.8 percent, from €20.7 billion for the three months ended September 30, 2013.

 

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The increase in net revenues was primarily attributable to (i) a €2.2 billion increase in NAFTA net revenues, primarily attributable to an increase in shipments, (ii) a €0.4 billion increase in APAC net revenues attributable to an increase in shipments and a favorable vehicle mix, (iii) a €0.3 billion increase in Luxury Brands net revenues primarily attributable to an increase in Maserati shipments, (iv) a €0.2 billion increase in EMEA net revenues, primarily attributable to a favorable vehicle mix and an increase in volumes which were partially offset by (v) a decrease of €0.3 billion in LATAM net revenues mainly attributable to the effect of lower vehicle shipments, partially offset by positive net pricing.

See “Results by Segments” for a detailed discussion of net revenues by segment.

Cost of sales

 

    For the three months ended September 30,          Increase/(decrease)

  (€ million, except

  percentages)                             

  2014      Percentage of net
revenues
     2013      Percentage of net
revenues
         2014 vs. 2013
                  

Cost of sales

    20,356           86.4%           17,747           85.8%           2,609          14.7%  

Cost of sales includes purchases, certain warranty and product-related costs, labor costs, depreciation, amortization and logistic costs. We purchase a variety of components (including mechanical, steel, electrical and electronic, plastic components as well as castings and tires), raw materials (steel, rubber, aluminum, resin, copper, lead, and precious metals including platinum, palladium and rhodium), supplies, utilities, logistics and other services from numerous suppliers which we use to manufacture our vehicles, parts and accessories. These purchases generally account for approximately 80 percent of total cost of sales. Fluctuations in cost of sales are primarily related to the number of our vehicles we produce and ship, along with changes in vehicle mix, as newer models of vehicles generally have more technologically advanced components and enhancements and therefore additional costs per unit. The cost of sales could also be affected, to a lesser extent, by fluctuations in certain raw material prices.

Cost of sales for the three months ended September 30, 2014 was €20.4 billion, an increase of €2.6 billion, or 14.7 percent, from €17.7 billion for the three months ended September 30, 2013. As a percentage of net revenues, cost of sales was 86.4 percent in the three months ended September 30, 2014 compared to 85.8 percent in the three months ended September 30, 2013.

The increase in cost of sales was due to the combination of (i) €1.9 billion related to increased vehicle shipments, primarily in the NAFTA, Luxury Brands and APAC segments, partially offset by a reduction in LATAM, (ii) €0.4 billion mainly related to vehicle mix primarily attributable to the EMEA segment.

Cost of sales for the three months ended September 30, 2014 was impacted by €0.2 billion in increased warranty expenses, which included the effects of recently approved recall campaigns in the NAFTA segment.

Selling, general and administrative costs

 

    For the three months ended September 30,          Increase/(decrease)

  (€ million, except percentages)

  2014      Percentage of net
revenues
     2013      Percentage of net
revenues
         2014 vs. 2013
               
  Selling, general and
  administrative costs
    1,717           7.3%           1,580           7.6%           137                8.7%  

Selling, general and administrative costs include advertising, personnel, and other costs. Advertising costs accounted for approximately 44 percent and 40 percent of total selling, general and administrative costs for the three months ended September 30, 2014 and 2013, respectively.

 

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Selling, general and administrative costs for the three months ended September 30, 2014 were €1,717 million, an increase of €137 million, or 8.7 percent, from €1,580 million for the three months ended September 30, 2013. As a percentage of net revenues, selling, general and administrative costs were 7.3 percent for the three months ended September 30, 2014 compared to 7.6 percent for the three months ended September 30, 2013.

The increase in selling, general and administrative costs was almost entirely attributable to a €122 million increase in advertising expenses primarily driven by the NAFTA and APAC segments and, to a lesser extent, the Luxury Brands and EMEA segments. In particular, increased advertising expenses have been incurred in order to support the launches of new vehicles in NAFTA including the all-new 2014 Jeep Cherokee and the all-new 2015 Chrysler 200 as well as the growth of the business in the APAC and Luxury Brands segments. Additionally, advertising expenses increased in EMEA to support vehicle launches, primarily the all-new 2014 Jeep Renegade.

The increase in other selling, general and administrative costs was mainly attributable to the LATAM segment, primarily related to start-up costs of the Pernambuco plant.

Research and development costs

 

       

 

       

 

 
        For the three months ended September 30,         Increase/(decrease)  

  (€ million, except percentages)

      2014      Percentage of net
revenues
     2013      Percentage of net
revenues
        2014 vs. 2013  
  Research and development costs
  expensed during the year
      321           1.4%           336           1.6%            (15)           (4.5%)     
  Amortization of capitalized
  development costs
      275           1.2%           220           1.1%            55           25.0%     
  Write-down of costs previously
  capitalized
      2           0.0%           -           0.0%            2           n.m.     
   

 

 

    

 

 

    

 

 

    

 

 

     

 

 

 
  Research and development costs       598           2.5%           556           2.7%            42           7.6%     
   

 

 

    

 

 

    

 

 

    

 

 

     

 

 

 

We conduct research and development for new vehicles and technology to improve the performance, safety, fuel efficiency, reliability, consumer perception and environmental impact (i.e. reduced emissions) of our vehicles. Research and development costs consist primarily of material costs and personnel related expenses that support the development of new and existing vehicles with powertrain technologies. For further details of research and development costs, see “—Trends, Uncertainties and Opportunities—Product Development.” For details of our research and development activities, see “Business—Research and Development.”

Research and development costs for the three months ended September 30, 2014 were €598 million, an increase of €42 million, or 7.6 percent, from €556 million for the three months ended September 30, 2013. As a percentage of net revenues, research and development costs were 2.5 percent and 2.7 percent in the three months ended September 30, 2014 and 2013, respectively.

The increase in research and development costs was attributable to the combined effects of (i) an increase in the amortization of previously capitalized development costs of €55 million and (ii) an increase in write-down of costs previously capitalized of €2 million, which were partially offset by (iii) a decrease in research and development costs expensed during the period of €15 million.

As a result of the nature of the projects the Group is currently investing in, the research and development costs capitalized as a percentage of total spending on research and development increased for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, and as such, even though spending on research and development increased from €805 million for the three months ended September 30, 2013 to €857 million for the three months ended September 30, 2014, research and development costs expensed decreased by €15 million, largely attributable to the NAFTA segment.

 

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The increase in amortization of capitalized development costs was attributable to the launch of new products, and in particular related to the NAFTA segment, driven by the all-new 2014 Jeep Cherokee, which began shipping to dealers in late October 2013, and the all-new 2015 Chrysler 200, which was launched in the first quarter of 2014, and began arriving in dealerships in May 2014.

Other income/(expenses)

 

         

 

       

 

          For the three months ended September 30,         Increase/(decrease)

  (€ million, except percentages)

       

2014

  

2013

       

2014 vs. 2013

  Other income/(expenses)

      44      24         20      83.3%  

Other income/(expenses) for the three months ended September 30, 2014 amounted to a net income of €44 million, an increase of €20 million, from net income of €24 million for the three months ended September 30, 2013.

For both the three months ended September 30, 2014 and September 30, 2013, there were no items that either individually or in aggregate were considered material.

Result from investments

The largest contributors to result from investments for the three months ended September 30, 2014 and September 30, 2013 were FGA Capital S.p.A. or FGAC (a jointly-controlled finance company that manages activities in retail automotive financing, dealership financing, long-term car rental and fleet management in 14 European countries) and Tofas-Turk Otomobil Fabrikasi A.S. (a jointly-controlled) Turkish automaker.

 

        

 

       

 

         For the three months ended September 30,         Increase/(decrease)

(€ million, except percentages)

      

2014

  

2013

       

2014 vs. 2013

Result from investments

     36      29         7      24.1%  

Result from investments for the three months ended September 30, 2014 was €36 million, an increase of €7 million, or 24.1 percent, from €29 million for the three months ended September 30, 2013. The increase in result from investments was primarily attributable to improved results from investments in the EMEA segment, partially offset by a decrease in results from investments in the APAC segment.

Gains on the disposal of investments

 

        

 

       

 

         For the three months ended September 30,         Increase/(decrease)

(€ million, except percentages)

      

2014

  

2013

       

2014 vs. 2013

Gains on the disposal of investments

     3      6         (3)      (50.0%)  

Gains on the disposal of investments for the three months ended September 30, 2014 were € 3 million, a decrease of €3 million, from €6 million for the three months ended September 30, 2013.

For both the three months ended September 30, 2014 and September 30, 2013, there were no items that either individually or in aggregate were considered material.

Restructuring costs

 

        

 

       

 

         For the three months ended September 30,         Increase/(decrease)

(€ million, except percentages)

      

2014

  

2013

       

2014 vs. 2013

Restructuring costs

     15      14         1      7.1%  

 

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Restructuring costs for the three months ended September 30, 2014 were €15 million, an increase of €1 million, or 7.1 percent, from €14 million for the three months ended September 30, 2013.

Net restructuring costs of €15 million recognized in the three months ended September 30, 2014, primarily related to restructuring in the LATAM and Components segments.

Net restructuring costs of €14 million recognized in the three months ended September 30, 2013, mainly related to Other activities.

Other unusual income/(expenses)

 

        

 

       

 

         For the three months ended September 30,         Increase/(decrease)

(€ million, except percentages)

      

2014

  

2013

       

2014 vs. 2013

Other unusual income/(expenses)

     (24)      7         (31)      n.m.  

Other unusual expenses for the three months ended September 30, 2014 were €24 million, an increase of €31 million from other unusual income of €7 million for the three months ended September 30, 2013.

For the three months ended September 30, 2014, other unusual expenses included €15 million of compensation costs deriving from the resignation of the former Ferrari chairman.

EBIT

 

        

 

       

 

         For the three months ended September 30,         Increase/(decrease)

(€ million, except percentages)

      

2014

  

2013

       

2014 vs. 2013

EBIT

     926      862         64      7.4%  

EBIT for the three months ended September 30, 2014 was €926 million, an increase of €64 million, or 7.4 percent (9.7 percent on a constant currency basis), from €862 million for the three months ended September 30, 2013.

The increase in EBIT was primarily attributable to the combined effect of (i) a €70 million increase in APAC EBIT, (ii) a €48 million increase in Luxury Brands EBIT, (iii) a €53 million decrease in EMEA EBIT loss and (iv) a €13 million increase in NAFTA EBIT, which were partially offset by (v) a €118 million decrease in LATAM EBIT.

See “Results by Segments” for a detailed discussion of EBIT by segment.

Net financial (expenses)

 

        

 

       

 

         For the three months ended September 30,         Increase/(decrease)

(€ million, except percentages)

      

2014

  

2013

       

2014 vs. 2013

Net financial (expenses)

     (511)      (493)         (18)      (3.7%)  

Net financial expenses for the three months ended September 30, 2014 were €511 million, an increase of €18 million, or 3.7 percent, from €493 million for the three months ended September 30, 2013. Excluding the gain on the stock option-related equity swaps of €24 million recognized in the three months ended September 30, 2013, net financial expenses were substantially unchanged period on period, primarily as a result of the benefits from the recent Chrysler refinancing transaction completed in February which offset the impact of a higher average debt level.

 

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Tax expenses 

 

        

 

  

 

       

 

  

 

         For the three months ended September 30,         Increase/(decrease)

(€ million, except percentages)

      

2014

  

2013

       

2014 vs. 2013

Tax expenses

     227      180         47      26.1%  

Tax expenses for the three months ended September 30, 2014 were €227 million, an increase of €47 million, or 26.1 percent, from €180 million for the three months ended September 30, 2013, principally due to higher deferred tax expenses compared to the prior year. At December 31, 2013, previously unrecognized deferred tax assets of €1,500 million were recognized, principally related to tax loss carry forwards and temporary differences in the NAFTA operations. In the three months ended September 30, 2014, the utilization of a part of these temporary differences resulted in a higher deferred tax expense as compared to the prior year.

Segments

The following is a discussion of net revenues, EBIT and shipments for each segment.

 

  

 

 

    

 

 

    

 

 

 

(€ millions, except shipments

which are in thousands of units)

  

Net revenues

  For the three months  

ended September 31,

    

EBIT

  For the three months  

ended September 31,

    

Shipments

  For the three months  

ended September 31,

 
       2014          2013          2014          2013          2014          2013  

 

  

 

 

    

 

 

    

 

 

 

NAFTA

     13,134         10,965         549         536         613         505     

LATAM

     2,162         2,446         51         169         202         235     

APAC

     1,578         1,215         169         99         55         45     

EMEA

     4,080         3,843         (63)         (116)         218         211     

Luxury Brands

     1,248         922         179         131         11         6     

Components

     2,086         1,877         48         37         n.m.         n.m.     

Other activities

     200         216         (4)         (23)         n.m.         n.m.     

Unallocated items & adjustments

     (935)         (791)         (3)         29         n.m.         n.m.     
  

 

 

    

 

 

    

 

 

 

Total

     23,553         20,693         926         862         1,099         1,002     
  

 

 

    

 

 

    

 

 

 

NAFTA

 

   

 

       

 

 
    For the three months ended September 30,         Increase/(decrease)  

(€ millions, except shipments which are

in thousands of units)

  2014     % of segment
net revenues
        2013     % of segment
net revenues
        2014 vs. 2013  

 

 

 

 

     

 

 

     

 

 

 

Net revenues

    13,134          100.0%            10,965          100.0%            2,169           19.8%     

EBIT

    549          4.2%            536          4.9%            13           2.4%     

Shipments

    613          n.m.            505          n.m.            108           21.4%     

Net revenues

NAFTA net revenues for the three months ended September 30, 2014 were €13.1 billion, an increase of €2.2 billion, or 19.8 percent, from €11.0 billion for the three months ended September 30, 2013. The increase was primarily attributable to an increase in shipments of €2.0 billion.

In particular, the 21.4 percent increase in vehicle shipments from 505 thousand units for the three months ended September 30, 2013, to 613 thousand units for the three months ended September 30, 2014, was largely driven by increased demand for the Group’s vehicles, including the all-new 2014 Jeep Cherokee, the Jeep Grand Cherokee and the all-new 2015 Chrysler 200. These increases were partially offset by a reduction in the prior model year Chrysler 200 and Dodge Avenger shipments due to their discontinued production in the first quarter of 2014 in preparation for the launch and changeover to the all-new 2015 Chrysler 200. NAFTA net revenues were also impacted by improved net pricing of €0.1 billion which was due to favorable pricing and pricing for enhanced content, partially offset by incentive spending on certain vehicles in portfolio.

 

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EBIT

NAFTA EBIT for the three months ended September 30, 2014 was €549 million, an increase of €13 million, or 2.4 percent (3.9 percent on a constant currency basis) from €536 million for the three months ended September 30, 2013.

The increase in NAFTA EBIT was primarily attributable to the combination of the (i) favorable volume/mix impact of €405 million, driven by the previously described increase in shipments and (ii) favorable net pricing of €126 million which was due to favorable pricing and pricing for enhanced content, partially offset by incentive spending on certain vehicles in portfolio. These positive impacts were partially offset by (iii) increased industrial costs of €466 million due to an increase in warranty expenses of €282 million which included the effects of recently approved recall campaigns and, increased base material costs of €165 million, mainly consisting of higher base material costs associated with vehicles and components and content enhancements on new models, and (iv) a €27 million increase in selling, general and administrative costs largely attributable to higher advertising costs to support new vehicle launches, including the all-new 2014 Jeep Cherokee and the all-new 2015 Chrysler 200.

LATAM

 

          For the three months ended September 30,           Increase/(decrease)  

  (€ millions, except shipments

  which are in thousands of units)    

        2014      % of segment
net revenues
          2013      % of segment
net revenues
          2014 vs. 2013  

  Net revenues

        2,162           100.0%            2,446         100.0%            (284)           (11.6%)   

  EBIT

        51           2.36%            169         6.9%            (118)           (69.8%)   

  Shipments

        202           n.m.            235         n.m.            (33)           (14.0%)   

Net revenues

LATAM net revenues for the three months ended September 30, 2014 were €2.2 billion, a decrease of €0.3 billion, or 11.6 percent (12.3 percent on a constant currency basis), from €2.4 billion for the three months ended September 30, 2013. The total decrease of €0.3 billion was primarily attributable to (i) lower shipments of €0.4 billion, partially offset by (ii) net pricing of €0.1 billion.

The 14.0 percent decrease in vehicle shipments from 235 thousand units for the three months ended September 30, 2013, to 202 thousand units for the three months ended September 30, 2014, was largely a result of weaker trading conditions.

EBIT

LATAM EBIT for the three months ended September 30, 2014 was €51 million, a decrease of €118 million, or 69.8 percent (66.3 percent on a constant currency basis), from €169 million for the three months ended September 30, 2013.

The decrease in LATAM EBIT was primarily attributable to the combination of (i) unfavorable volume/mix impact of €94 million attributable to a decrease in shipments, partially offset by improved vehicle mix, (ii) increased industrial costs of €83 million, including start-up costs of the Pernambuco plant, partially offset by (iii) favorable pricing of €98 million driven by pricing actions in Brazil and Argentina.

APAC

 

          For the three months ended September 30,           Increase/(decrease)  

  (€ millions, except shipments

  which are in thousands of units)    

        2014      % of segment
net revenues
          2013      % of segment
net revenues
          2014 vs. 2013  

  Net revenues

        1,578           100.0%            1,215         100.0%            363         29.9%   

  EBIT

        169           10.7%            99         8.1%            70         70.7%   

  Shipments

        55           n.m            45         n.m            10         22.2%   

 

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Net revenues

APAC net revenues for the three months ended September 30,2014 were €1.6 billion, an increase of €0.4 billion, or 29.9 percent, from €1.2 billion for the three months ended September 30, 2013.

The total increase of €0.4 billion was primarily attributable to an increase in shipments and improved mix.

The 22.2 percent increase in vehicle shipments, from 45 thousand units for the three months ended September 30, 2013, to 55 thousand units for the three months ended September 30, 2014, was largely supported by shipments to China and Australia, and in particular, driven by the Jeep Grand Cherokee and Jeep Cherokee, as well as the continuing development of Fiat brand in Australia.

EBIT

APAC EBIT for the three months ended September 30, 2014 was €169 million, an increase of €70 million, or 70.7 percent (71.7 percent on a constant currency basis), from €99 million for the three months ended September 30, 2013.

The increase in APAC EBIT was primarily attributable to (i) positive volume/mix impact of €89 million as a result of the previously described increase in shipments, partially offset by (ii) an increase in selling, general and administrative costs of €31 million to support the growth of APAC operations and (iii) unfavorable pricing of €19 million due to the increasingly competitive trading environment, particularly in China.

EMEA

 

          For the three months ended September 30,           Increase/(decrease)  

  (€ millions, except shipments

  which are in thousands of units)

        2014      % of segment    
net revenues    
          2013      % of segment    
net revenues    
          2014 vs. 2013  

  Net revenues

        4,080         100.0%            3,843         100.0%            237         6.2%   

  EBIT

        (63)         (1.54%)            (116)         (3.02%)            53         45.7%   

  Shipments

        218         n.m.            211         n.m.            7         3.3%   

Net revenues

EMEA net revenues for the three months ended September 30, 2014 were €4.1 billion, an increase of €0.2 billion, or 6.2 percent, from €3.8 billion for the three months ended September 30, 2013. The total increase was primarily attributable to an improved vehicle mix and an increase in shipments.

The 3.3 percent increase in shipments from 211 thousand units for the three months ended September, 30, 2013 to 218 thousand units for the three months ended September 30, 2014 was driven by a 1 percent increase in passenger car shipments and a 13 percent increase in LCV (Light Commercial Vehicles) shipments, while the improved vehicle mix was driven by LCVs and Jeep brand.

EBIT

EMEA EBIT loss for the three months ended September 30, 2014 was €63 million, an improvement of €53 million, or 45.7 percent from an EBIT loss of €116 million for the three months ended September 30, 2013.

The decrease in EMEA EBIT loss was primarily attributable to the combination of (i) a favorable volume/mix impact of €66 million driven by the performance of the Fiat 500 family, new Fiat Ducato and the Jeep brand, and (ii) a decrease in net industrial costs of €19 million mainly driven by industrial efficiencies which were partially offset by (iii) unfavorable pricing of €20 million as a result of competition in the passenger cars segment, and (iv) an increase in selling, general and administrative costs of €11 million mainly related to advertising expenses to support Jeep growth and the Jeep Renegade launch.

 

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Luxury Brands

 

                           
          For the three months ended September 30,           Increase/(decrease)  

(€ millions, except shipments which

are in units)

        2014        % of segment
net revenues
          2013        % of segment
net revenues
          2014 vs. 2013      

 

     

 

 

       

 

 

       

 

 

 

Ferrari

                          

Net revenues

        662               534               128         24.0%   

EBIT

        89               88               1         1.1%   

Shipments

        1,612               1,499               113.0         7.5%   

Maserati

                          

Net revenues

        652               444               208         46.8%   

EBIT

        90               43               47         109.3%   

Shipments

        8,896               3,953               4,943         n.m.   

Intrasegment eliminations

                          

Net revenues

        (66)               (56)               (10)         17.9%   

Luxury Brands

                          

Net revenues

        1,248         100.0%            922         100.0%            326         35.4%   

EBIT

        179         14.3%            131         14.2%            48         36.6%   

Shipments

        10,508         n.m.            5,452         n.m.            5,056         92.7%   

Net revenues

Luxury Brands net revenues for the three months ended September 30, 2014 were €1.2 billion, an increase of €0.3 billion, or 35.4 percent (35.9 percent on a constant currency basis), from €0.9 billion for the three months ended September 30, 2013.

Ferrari

Ferrari net revenues for the three months ended September 30, 2014 were €662 million, an increase of €128 million, or 24.0 percent, from €534 million for the three months ended September 30, 2013.

The €128 million increase was mainly attributable to an increase in shipments, from 1,499 units for the three months ended September 30, 2013, to 1,612 units for the three months ended September 30, 2014, and improved vehicle mix driven by the contribution of the LaFerrari model.

Maserati

Maserati net revenues for the three months ended September 30, 2014 were €652 million, an increase of €208 million, or 46.8 percent, from €444 million for the three months ended September 30, 2013. The increase was primarily attributable to the increase in vehicle shipments, from 4.0 thousand units for the three months ended September 30, 2013, to 8.9 thousand units for the three months ended September 30, 2014, driven by the continued strong performance of the Quattroporte and Ghibli.

EBIT

Luxury Brands EBIT for the three months ended September 30, 2014 was €179 million, an increase of €48 million, or 36.6 percent, from €131 million for the three months ended September 30, 2013.

Ferrari

Ferrari EBIT for the three months ended September 30, 2014 was €89 million, an increase of €1 million, or 1.1 percent, from €88 million for the three months ended September 30, 2014. Ferrari EBIT for the three

 

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months ended September 30, 2014 was affected by the €15 million compensation costs deriving from the resignation of the former Ferrari chairman. Net of this item, Ferrari EBIT increased by €16 million driven by improved sales mix, benefiting from the contribution of LaFerrari.

Maserati

Maserati EBIT for the three months ended September 30, 2014 was €90 million, an increase of €47 million, from €43 million for the three months ended September 30, 2014, primarily driven by the growth in shipments, as previously discussed.

Components

 

         For the three months ended September 30,          Increase/(decrease)  
  (€ millions)        2014      % of
segment
net
revenues
         2013      % of
segment
net
revenues
         2014 vs. 2013  

 

    

 

 

      

 

 

      

 

 

 

  Magneti Marelli

                       

  Net revenues

       1,604              1,399              205         14.7%   

  EBIT

       37              28              9         32.1%   

  Teksid

                       

  Net revenues

       152              169              (17)         (10.1%)   

  EBIT

       2              (2)              4         n.m.   

  Comau

                       

  Net revenues

       335              323              12         3.7%   

  EBIT

       9              11              (2)         (18.2%)   

  Intrasegment eliminations

                       

  Net revenues

       (5)              (14)              9         (64.3%)   

  Component

                       

  Net revenues

       2,086         100.0        1,877         100.0        209         11.1%   

  EBIT