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Alstom – ‘20-F’ for 3/31/03

On:  Wednesday, 10/15/03, at 10:20pm ET   ·   As of:  10/16/03   ·   For:  3/31/03   ·   Accession #:  1193125-3-62461   ·   File #:  1-14836

Previous ‘20-F’:  ‘20-F’ on 5/24/02 for 3/31/02   ·   Next & Latest:  ‘20-F’ on 6/17/04 for 3/31/04

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

10/16/03  Alstom                            20-F        3/31/03   18:71M                                    RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Alstom Annual Report on Form 20-F                   HTML   3.31M 
 2: EX-1        Bylaws (Statuts), as Amended, of the Company        HTML     67K 
                          (Unofficial English Translation)                       
 8: EX-4.10     Amended and Restated Eur 976,300,000 Multicurrency  HTML    636K 
                          Revolving Credit Agreement                             
 9: EX-4.11     Terms of Offer Relating to the Sale of Alstom's     HTML   6.31M 
                          Small Gas Turbines Business                            
10: EX-4.12     Agreement Re Sale and Purchase of Alstom's          HTML   1.87M 
                          Industrial Gas Turbines Business                       
11: EX-4.13     Financing Package Agreement Dated 2 August 2003     HTML     29K 
12: EX-4.14     Amendment to the Financing Package Agreement Dated  HTML     66K 
                          20 September 2003                                      
13: EX-4.15     Share Purchase Agreement With Respect to the Sale   HTML  44.48M 
                          of the T&D Sector                                      
14: EX-4.16     Eur 3,500,000,000 Bonding Guarantee Facility        HTML   1.15M 
                          Agreement Dated 29 August 2003                         
15: EX-4.17     Deed of Amendment No.1 Re Eur 3,500,000,000         HTML    203K 
                          Bonding Guarantee Facility Agreement                   
16: EX-4.18     Subordinated Debt Facility Agreement Dated 30       HTML    629K 
                          September 2003                                         
 3: EX-4.5      Eur 600,000,000 Revolving Credit Facility           HTML    895K 
                          Agreement Dated 25 March, 2003                         
 4: EX-4.6      Amended and Restated Eur 400,000,000 Revolving      HTML    641K 
                          Credit Facility Agreement                              
 5: EX-4.7      Eur 50,000,000 Amended and Restated Revolving       HTML    420K 
                          Credit Agreement, 25 March 2003                        
 6: EX-4.8      Eur 25,000,000 Amended and Restated Credit          HTML    434K 
                          Agreement, 25 March 2003                               
 7: EX-4.9      Amended and Restated Eur 1,250,000,000              HTML    625K 
                          Multicurrency Credit Agreement                         
17: EX-12.1     Certifications of CEO and CFO                       HTML     26K 
18: EX-13.1     Certifications of CEO and CFO                       HTML     15K 

Table of Contents

As filed with the Securities and Exchange Commission on 15 October 2003

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

Commission file number: 1-14836

ALSTOM

(Exact name of Registrant as specified in its charter)

THE REPUBLIC OF FRANCE

(Jurisdiction of incorporation or organization)

25, AVENUE KLÉBER, 75116 PARIS, FRANCE

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Common Shares, nominal value €1.25 per share: 281,660,523

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes            ¨ No

Indicate by check mark which financial statement item the registrant has elected to follow.

¨ Item 17            x Item 18

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Société Anonyme with share capital of €352,075,653.75

Head office: 25, avenue Kléber – 75116 Paris – France

R.C.S.: 389 058 447 Paris

Internet address: www.alstom.com

ANNUAL REPORT

FOR THE FISCAL YEAR ENDED

31 MARCH 2003

ON FORM 20-F

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PRESENTATION OF INFORMATION

Unless the context otherwise requires, references in this Annual Report on Form 20-F to “ALSTOM”, the “Company” or the “Group” are to ALSTOM and its consolidated subsidiaries.

ALSTOM’s fiscal year ends on 31 March.

Unless otherwise indicated, numerical references to employees are to full-time equivalent employees.

The consolidated financial statements for the fiscal years ended 31 March 2003, 2002 and 2001 and the notes thereto included elsewhere in this Annual Report on Form 20-F are referred to herein as the “Consolidated Financial Statements”. ALSTOM has prepared the Consolidated Financial Statements in accordance with accounting principles generally accepted in France (“French GAAP”), which differ in certain significant respects from accounting principles generally accepted in the US (“US GAAP”). Differences between accounting principles adopted by ALSTOM and US GAAP as they apply to the Company are summarised in Note 33 to the Consolidated Financial Statements.

The Consolidated Financial Statements prepared in accordance with French GAAP included in this Annual Report on Form 20-F differ from our consolidated financial statements published in France and approved at our General Shareholders’ Meeting on 2 July 2003. These differences relate to the accounting for the effects of €94 million of increased provisions, accrued contract costs and other payables recorded as a result of changes in estimates of costs to complete on contracts in our Transport Sector. See “Operating and Financial Review and Prospects—Recent Developments—Results of Fiscal Year 2004 to date.” Under French rules, because these increased costs were identified and recognised following the approval of the consolidated financial statements, they will be recorded in the financial statements published in France for the year ending 31 March 2004. Under US rules, because these differences were identified and recognised prior to the completion of the preparation of the accounts for this Annual Report on Form 20-F, we are required to adjust our consolidated financial statements for the year ended 31 March 2003 to reflect these increased costs. The principal adjustments to our French GAAP published accounts are an increase in cost of sales of €94 million, a corresponding increase in operating loss, and a partially offsetting increase in income tax credit of €38 million. As a result, net income decreased by €56 million compared to the consolidated financial statements published in France and approved at the General Shareholders’ Meeting on 2 July 2003. See Note 1(c) to the Consolidated Financial Statements.

All references herein to “France” are to the Republic of France. All references to the “United Kingdom” or the “UK” are to the United Kingdom of Great Britain and Northern Ireland. All references to “Euros”, “Euro” or “€” are to the common currency adopted by the twelve member states of the European Monetary Union (“EMU”). All references to the “United States” or the “US” are to the United States of America and all references to “dollars”, “$” or “US $” are to the lawful currency of the United States.

Recently, French Law No. 2003-706 dated 1 August 2003 relating to financial security was passed. This law provides for the merger of the Commission des opérations de bourse (“COB”) and the Conseil des marchés financiers (“CMF”) into a new authority to be named the Autorité des marchés financiers (“AMF”), an independent French governmental authority that will be responsible for the protection of investors, investor information and the proper operation of the securities market. This merger has not yet been implemented, but should be consummated in the weeks to come. This Annual Report on Form 20-F will discuss, when necessary, the French regulatory organizations as they exist on the date hereof.

Various amounts and percentages set forth herein have been rounded and, accordingly, may not total.

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 20-F contains, and other written or oral reports and communications of ALSTOM may from time to time contain, forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements appear, without limitation, in the information referred to herein entitled “Description of Activities” and in “Operating and Financial Review and Prospects.” Examples of such forward-looking statements include, but are not limited to (i) projections or expectations of sales, income, operating margins, dividends, provisions, cash flow, debt or other financial items or ratios; (ii) statements of plans, objectives or goals of the Group or its management; (iii) statements of future product or economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “aims”, “plans” and “will” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

By their very nature, forward-looking statements involve risks and uncertainties that the forecasts, projections and other forward-looking statements will not be achieved. Such statements are based on our current plans and expectations and are subject to a number of important factors that could cause actual results to differ materially from the plans, objectives and expectations expressed in such forward-looking statements. These factors include the factors listed below as well as those described under “Key Information—Risk Factors”:

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We caution you that this list of important factors is not exhaustive; when relying on forward-looking statements to make decisions with respect to us, you should carefully consider the foregoing factors and other uncertainties and events, as well as other factors described in other documents we file with or submit to, from time to time, the SEC, including reports submitted on Form 6-K. Such forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

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PART I

ITEM 1—IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2—OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

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ITEM 3—KEY INFORMATION

A.    Selected Financial Data

The following tables set forth selected consolidated financial data for ALSTOM for the periods and dates indicated and are qualified by reference to, and should be read in conjunction with “Operating and Financial Review and Prospects” and the Consolidated Financial Statements and Notes thereto contained herein.

The Consolidated Financial Statements and the Notes thereto have been prepared in accordance with French GAAP, which differ in certain significant respects from US GAAP. For a discussion of the principal differences between French GAAP and US GAAP as they relate to ALSTOM, and a reconciliation of net income and shareholders’ equity to US GAAP, see Note 33 to the Consolidated Financial Statements.

The Consolidated Financial Statements prepared in accordance with French GAAP included in this Annual Report on Form 20-F differ from our consolidated financial statements published in France and approved at our General Shareholders’ Meeting on 2 July 2003. These differences relate to the accounting for the effects of €94 million of increased provisions, accrued contract costs and other payables recorded as a result of changes in estimates of costs to complete on contracts in our Transport Sector. See “Operating and Financial Review and Prospects—Recent Developments—Results of Fiscal Year 2004 to date.” Under French rules, because these increased costs were identified and recognised following the approval of the consolidated financial statements, they will be recorded in the financial statements published in France for the year ending 31 March 2004. Under US rules, because these differences were identified and recognised prior to the completion of the preparation of the accounts for this Annual Report on Form 20-F, we are required to adjust our consolidated financial statements for the year ended 31 March 2003 to reflect these increased costs. The principal adjustments to our French GAAP published accounts are an increase in cost of sales of €94 million, a corresponding increase in operating loss, and a partially offsetting increase in income tax credit of €38 million. As a result, net income decreased by €56 million compared to the consolidated financial statements published in France and approved at the General Shareholders’ Meeting on 2 July 2003. See Note 1(c) to the Consolidated Financial Statements.

ALSTOM has prepared the Consolidated Financial Statements assuming that it will continue as a going concern, however, ALSTOM’s independent auditors, Ernst & Young and Deloitte Touche Tohmatsu, have issued a modified opinion that indicates there is a substantial doubt about ALSTOM’s ability to continue as a going concern as a result of concerns set forth in their report. The Consolidated Financial Statements do not include any adjustments that might result from the resolution of this uncertainty.

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Exchange Rate Information

Under the provisions of the Treaty on European Union negotiated at Maastricht in 1991 and signed by the then 12 member states of the European Union in early 1992, a European Monetary Union, known as EMU, was implemented on 1 January 1999 and a single European currency, known as the Euro, was introduced. The following 12 member states participate in EMU and have adopted the Euro as their national currency: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain. The legal rate of conversion between French francs and the Euro was fixed on 31 December 1998 at €1.00 = FRF 6.55957. Beginning 1 January 2002, the participating member states have issued new Euro-denominated bills and coins for use in cash transactions. On 17 February 2002, France withdrew the bills and coins denominated in local currency from circulation, and these bills and coins are no longer the legal currency for any transactions. For your convenience, this Annual Report on Form 20-F contains translations of certain French franc and Euro amounts into US dollars.

Unless otherwise indicated, dollar amounts have been translated from Euro at the rate of €1.00 = $ 1.09, the noon buying rate in New York City for cable transfers in Euro as announced by the Federal Reserve Bank of New York for customs purposes (the “Noon Buying Rate”) on 31 March 2003.

Our shares are denominated in Euro. Fluctuations in the exchange rate between the Euro and the US dollar will affect the US dollar price of our American Depositary Shares, or ADSs, on the New York Stock Exchange. In addition, since any cash dividends that we pay will be denominated in Euro, exchange rate fluctuations will affect the US dollar amounts that owners of ADSs will receive on conversion of dividends.

The following table sets forth, for the calendar periods indicated, certain information concerning the exchange rates based on the Noon Buying Rate expressed as US dollar per Euro. Such rates are provided solely for the convenience of the reader and are not necessarily the rates used by us in the preparation of our Consolidated Financial Statements:

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B.    Capitalization and Indebtedness

Not applicable.

C.    Reasons for the Offer and Use of Proceeds

Not applicable.

D.    Risk Factors

Our orders received have declined due to the significant downturn in many of our markets and the uncertainty resulting from our financial condition. This decline is likely to have an adverse impact on our results of operations, and our orders might not return to prior levels

Our orders in fiscal year 2003 were substantially below the levels of recent years, and we anticipate that our orders in fiscal year 2004 will be even lower, with those for the first half of fiscal year 2004 expected to be significantly lower than for the first half of fiscal year 2003. This decline is due in part to severe market downturns in two of our three principal markets, power generation and marine, and in part to the uncertainty resulting from our financial condition.

Our orders and sales depend on the level of infrastructure spending, which has historically been significantly impacted by the rate of growth in gross domestic product. Poor economic and political conditions or downturns in broad economic trends in our markets therefore have a negative effect on our orders, sales, results of operations and financial condition. The level of infrastructure spending is also significantly affected by customers’ expectations about a variety of other factors, such as their ability to raise financing for their businesses and changes in applicable laws, including the deregulation and liberalization of infrastructure services. Although short-term changes in gross domestic product may affect our orders received, in the past such changes have had less of an impact on our sales due to the length of our product delivery cycles and the size of our order backlog.

In addition to difficult market conditions, the uncertainty resulting from our financial condition may have led to some customers delaying or not placing orders with us. Improvement in our results of operations, cash flow and financial condition depends on our ability to restore our level of orders, but we may not be successful in doing so. Even if our orders recover relatively quickly, our sales and operating income in subsequent years may be lower than has been the case in recent periods. If our orders and sales do not recover we may have to undertake additional restructuring and bear additional costs in order to achieve acceptable operating margins.

If the implementation of our financing package is delayed or prevented, we could face severe liquidity problems

Our recently renegotiated financing package, described under “Operating and Financial Review and Prospects—Recent Developments”, is essential to restoring our financial viability. The financing package is designed to provide us with the resources to meet our short-term and medium-term financial obligations, to reduce our overall debt levels over time, to obtain additional performance bonds necessary for us to obtain new orders and to receive deposits and progress payments from customers and to finance our day-to-day operations. At our Shareholders’ Meeting scheduled for 18 November 2003 (on second call), our shareholders will be asked to approve critical parts of the financing package. If we fail to achieve a quorum at the Shareholders’ Meeting, or if our shareholders vote against any part of this financing package, we could fail to satisfy conditions under a number of agreements we signed as part of the financing package and the agreement for the sale of our Transmission and Distribution (“T&D”) Sector, which could trigger early repayment or drawstop conditions. We would therefore be required to renegotiate these agreements, and could be unable to do so on acceptable terms. In such case, it is probable that we would be unable to meet our financial obligations.

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The European Commission may find that elements of our recently negotiated financing package or other transactions we have entered into constitute State aid that may not be compatible with European Community law

The European Commission has opened a formal investigation to determine whether the financing package, the sale of our T&D Sector to Areva and certain other transactions entered into with entities controlled by the French State contain elements of State aid that is incompatible with the common market. Under European Community law, the French State may not provide aid to us unless the European Commission first finds that the aid is compatible with the common market. Virtually all of the transactions in question are likely to be completed before the European Commission finishes its investigation. For a more detailed description of the European Commission investigation, see “Financial Information—Legal Proceedings—European Commission Review of Financing Package and Other Transactions”.

If all or any part of the financing package or the other transactions is found to contain State aid that is incompatible with the common market, the European Commission could require the French State to demand the reimbursement of some or all of the financing or to comply with specific conditions. Further, it could prohibit us from delivering shares to the French State in reimbursement of the subordinated bonds to be issued to the French State. The European Commission could also condition approval on our selling additional businesses or undertaking further restructuring, or, in the extreme and highly improbable case, even cancel the relevant transaction.

A negative decision of the European Commission could increase our costs or trigger clauses in our financing agreements that would restrict our ability to obtain performance bonds under the Bonding Facility (as defined below) or to draw under our credit facilities, or that would require us to repay amounts outstanding under our financing agreements. This would require us to renegotiate our financing agreements in order to meet our financial obligations, which we might be unable to do on commercially reasonable terms or at all. In addition, a negative decision by the European Commission could significantly affect our share price and the confidence of our customers, which in turn could adversely affect our business.

We expect to issue a significant number of shares in connection with the financing package, which could allow the French State for a certain period to exert a controlling influence at our shareholders’ meetings. If current shareholders do not exercise their warrants or preferential rights, their ownership interests will be significantly diluted

As of 30 September 2003, there were 281,660,523 shares of ALSTOM outstanding. In connection with our new financing package, we plan to issue new shares and debt instruments reimbursable with shares. Up to 1,194,400,000 new shares may be issued, as follows:

We will distribute free warrants to existing shareholders, allowing them to purchase directly from the banks the shares to be issued in the capital increase reserved to the bank syndicate, and will grant preferential rights to shareholders to subscribe for ORAs. Upon the issuance of new shares, current shareholders will experience substantial dilution, particularly those who do not exercise their free warrants or subscribe to ORAs. Assuming completion of the capital increase and reimbursement of the French State’s subordinated bonds with shares, assuming no ORAs have been reimbursed with shares and assuming that none of the current shareholders

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exercise their free warrants, current shareholders would own approximately 37% of our share capital, the French State would own approximately 31.5%, and purchasers in the capital increase would own approximately 31.5%. Based on these same assumptions, but assuming that €1 billion of ORAs are reimbursed with shares at maturity in 2008, current shareholders would own approximately 19.1% of our share capital, the French State would own approximately 16.25%, purchasers in the capital increase would own approximately 16.25% and purchasers of the ORAs would own approximately 48.4%. These calculations assume no further issuances of shares, whether upon the exercise of stock options or otherwise. Additional dilution would occur upon such issuances, if any.

Under applicable French law, so long as the French State owns at least 10% of our share capital, it will have the right to propose the appointment of one or several directors to our Board of Directors in compliance with French law. Further, in light of historic patterns of attendance and voting at our general shareholders’ meeting, we expect that the French State’s initial potential holding of 31.5% of our shares would effectively allow it to control decisions of our annual general shareholders’ meeting, including the election of directors, payment of dividends and significant corporate transactions. The French State’s ownership interest could also have the effect of delaying or preventing a change of control of the company. In light of the significant changes to our share capital expected as a result of the implementation of the financing package, it is not possible to predict attendance and voting patterns at future general shareholders’ meetings.

If the offering of shares (through free warrants) and ORAs to the public is not fully subscribed by investors, the members of the syndicates underwriting these offerings could hold a significant amount of such securities. If the subscription rate by outside investors is low, then each of the underwriters with the largest commitments could, assuming full reimbursement of such underwriters’ ORAs with shares, have significant influence at our general shareholders’ meetings. Each of the syndicate members (or one of their affiliates) is a lender under our credit facilities and, as a creditor, could have interests that differ from those of our general shareholders.

The French State has agreed not to sell any shares it may receive upon reimbursement of the subordinated bonds reserved for the French State reimbursable with shares (“TSDDRA” or titres subordonnés à durée determinée remboursables en actions) upon the approval of the reimbursement by the European Commission, or the TSDDRA themselves, until our business is substantially improved. Apart from this, we do not expect there to be significant restrictions on the right of the French State or the banks to sell shares. No prediction can be made as to the level or timing of any such sales of shares by the French State or the banks, or the effect of such sales on the market price of our shares. Sales of substantial amounts of shares, or the perception that such sales could occur, could adversely affect the market price of our shares.

Difficulties in securing bonds beyond those currently available under our new Bonding Facility may jeopardise our ability to obtain new orders and to receive advances and progress payments from customers

It is customary in the energy and transport industry for suppliers such as us to post bid bonds, advance payment bonds, performance bonds, warranty bonds and surety bonds. In posting such bonds, we are required to seek out third parties, such as banks and insurance companies, to issue bonds as a condition to entering into commercial contracts with our clients or to our receiving advances and progress payments from them. The amount of such bonds is often significant, averaging in total 20% of the price of the contracts signed.

Bond providers have reduced or stopped further bond issuances in order to maintain their credit ratings. Simultaneously, new regulatory constraints affecting banks and the deterioration of our credit profile have resulted in reduced available capacity and a higher pricing for these instruments. In fiscal year 2003, we faced a significant decrease of the bonding capacity of the market generally.

In such a difficult environment, it has become more difficult for us to obtain bonds in amounts or on terms which had previously been customary. Since the end of fiscal year 2003, we have had difficulty obtaining bonds, as financial institutions have been reluctant to increase their financial exposure to our Group in light of our financial situation. However, as part of our recently negotiated financing package described under “Operating and

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Financial Review and Prospects—Recent Developments”, on 29 August 2003 we signed a €3.5 billion Bonding Facility (the “Bonding Facility”), which has again enabled us to obtain bonds in sufficient quantities. This Bonding Facility was negotiated as part of our original financing package announced on 6 August 2003, and was subsequently amended on 1 October 2003.

The banks’ obligations to provide us with new bonds under this agreement will terminate on 28 February 2005 and no bonds issued under this facility may have a maturity date after 28 February 2012. We estimate that this facility will be sufficient to cover our bonding needs through the third quarter of fiscal year 2005, after which we will be required to find other sources of bonds. These other sources of bonds may not be available on commercially reasonable terms, if at all. Our inability to secure alternative sources of bonding could have a material adverse impact on our results of operations and financial condition.

Our existing lines of credit and certain of our other financing agreements contain financial covenants that we may be unable to meet

Our ability to maintain and obtain financing depends largely upon our financial performance. Our Bonding Facility, our new Subordinated Debt Facility and certain of our other financing agreements contain covenants requiring us to maintain compliance with pre-established financial ratios.

In the fourth quarter of fiscal year 2003, we renegotiated our lines of credit in order to amend their financial covenants. We also obtained agreements from our creditors to amend on the same basis the financial covenants contained in certain other financing agreements. Our financial covenants as then amended are described in Note 22 to the Consolidated Financial Statements. As of 31 March 2003, we were in compliance with all these amended financial covenants and had obtained waivers from our creditors with respect to those financial covenants which have not been amended.

We recently have failed to comply with the financial covenants described in Note 22 of the Consolidated Financial Statements, but each of the lenders under our new Subordinated Debt Facility has provided an undertaking not to take any action or accelerate any amount owing as a result of our inability to comply with our other financing agreements to which it is a party. However, any actual or potential default or event of default shall cease to be covered by this provision if any entitled person declares due and payable or puts on demand any indebtedness of ALSTOM or any member of the Group, or cancels or suspends any commitment under any agreement to which ALSTOM or any member of the Group is a party.

On 30 September 2003, we entered into a Subordinated Debt Facility with a syndicate of banks and the Caisse Française de Développement Industriel (a French State-controlled entity) which provides for a new set of financial covenants (described below). These covenants will also apply to our new Bonding Facility. This new set of covenants will take effect from December 2003 in relation to total debt, from 31 March 2004 in relation to consolidated net worth and minimum EBITDA, and from March 2005 in relation to interest cover and total net debt leverage. We intend to amend our €976,300,000 Multicurrency Revolving Credit Agreement to incorporate these covenants in due course.

Our new financial covenants require that we maintain: (i) a required ratio of EBITDA to “consolidated net financial expense”, to be tested by reference to the audited consolidated accounts and interim six month consolidated financial statements; (ii) a minimum amount of “consolidated net worth” to be tested by reference to the audited consolidated accounts and interim six month consolidated financial statements (although this covenant will not apply if and for so long as our long term unsecured, unsubordinated debt has been assigned a credit rating of at least Baa3 by Moody’s or BBB- by Standard & Poor’s); (iii) a maximum amount of “total debt”, to be tested at the end of each quarter until maturity by reference to the audited consolidated accounts and interim six month consolidated financial statements (although this covenant will not apply if and for so long as our long term unsecured, unsubordinated debt has been assigned a credit rating of at least Baa3 by Moody’s or BBB- by Standard & Poor’s); (iv) a required ratio of “total net debt” to “EBITDA”, to be tested by reference to

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the audited consolidated accounts and interim six month consolidated financial statements; and (v) a minimum EBITDA, to be tested by reference to the audited consolidated accounts and interim six month consolidated financial statements, for the periods ending 31 March 2004 and 30 September 2004, respectively. For more information regarding these financial covenants, see “Additional Information—Material Contracts— Subordinated Debt Facility Agreement”.

Our ability to maintain these financial covenants depends in part on our ability to implement our new financing package, restore our levels of activity and margins, reduce our indebtedness and maintain our net worth, each of which could be adversely affected by events beyond our control. In the event of a default under any of these agreements, the lenders could elect to declare all of the amounts outstanding under the agreements to be immediately due and payable. Although we would attempt to negotiate with our lenders to seek a waiver of such default or an amendment to the relevant agreement, such negotiations might not be successful.

Most of our financing agreements and our outstanding securities include cross-default and cross-acceleration provisions pursuant to which a payment default, an acceleration, or a failure to respect financial covenants or other undertakings under one agreement, may result in all or a significant part of our other debt becoming immediately repayable. Such an event may also prevent us from drawing upon our credit lines. If the debt under our financial agreements were to be accelerated, we might not have the funds required to immediately repay this debt.

We have unfunded liabilities with respect to our pension plans and other post-retirement benefits

We have obligations to our employees and former employees relating to retirement and other end of contract indemnities in the majority of the countries where we operate.

In France, retirement indemnities arise pursuant to labour agreements, internal conventions and applicable local legal requirements. Retirement indemnities in France are funded from current cash flows, and there is no legal requirement to maintain assets to fund these liabilities. As of 31 March 2003, we had projected benefit obligations of €191 million and assets of €37 million with respect to our French retirement indemnities.

In the United States, the United Kingdom and elsewhere, liabilities arise pursuant to labour agreements, pension schemes and plans and other employee benefit plans, some of which are required to maintain assets to fund their liabilities. As a result of stock market declines in fiscal year 2003, the market value of the assets in our funded pension plans has declined. During fiscal year 2003, the pension plan assets for certain of these pension plans fell below required levels with respect to their related projected benefit obligation. Applicable laws and regulations allow us to spread costs and contributions to cover the shortfall over the average working life of the relevant employees. With respect to these plans, we had projected benefit obligations of €3,352 million and plan assets of €1,975 million as of 31 March 2003.

As of 31 March 2003, we have recognised €575 million of net liabilities in respect of our pension plans and other post retirement benefit arrangements. The unrecognised liabilities, which amounted to €956 million, will be recognised over the average working lives of the employees involved.

Our projected benefit obligations are based on certain actuarial assumptions that vary from country to country, including discount rates, long-term rates of return on invested plan assets and rates of increase in compensation levels. If actual results, especially discount rates and/or rates of return on plan assets, were to differ from these assumptions, our pension, retirement and other post-employment costs would be higher or lower, and our cash flows would be unfavourably or favourably impacted from the funding of these obligations.

Further details on the methodology used to assess pension assets and liabilities together with the annual pension costs are included in “Operating and Financial Review and Prospects—Pension accounting“ and Note 21 to the Consolidated Financial Statements.

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We will be obliged to adopt new accounting standards for our fiscal year beginning 1 April 2005 that will materially impact our financial statements and our financial reporting

We currently prepare our financial statements in accordance with French GAAP and prepare a reconciliation of stockholders’ equity, net income and certain other disclosures to US GAAP. In June 2002, the Council of Ministers of the European Union approved a new regulation proposed by the European Commission requiring all EU-listed companies, including us, to apply International Financial Reporting Standards (“IFRS”) in preparing their financial statements for fiscal years beginning on or after 1 January 2005. Because IFRS emphasises the measure of the fair value of a company’s assets and liabilities, applying these standards to our financial statements may have a considerable impact on a number of important areas, including, among others, accounting for share-based compensation, goodwill and intangible assets, asset depreciation, employee benefit plans, marketable securities and derivative financial instruments and classification of balance sheet positions as debt or equity. Because our financial statements prepared in accordance with IFRS would differ, perhaps materially, from our financial statements prepared in accordance with French GAAP, the methods used by the financial community to assess our financial performance and value our publicly-traded securities, such as price-to-earnings ratios and debts-to-equity ratios, could be affected.

Our results, cash flows and the price of our listed securities are exposed to currency exchange rate movements

A significant percentage of our sales and expenditures is realised and incurred in currencies other than the euro. The principal currencies to which we had significant exposure in fiscal year 2003 were US dollars, Pounds sterling, Swiss francs, Mexican peso and Brazilian real. Our policy is to manage transaction exposure as follows:

We do not specifically hedge our net assets invested in foreign operations. We monitor our market position closely and regularly analyse market valuations. In addition, our central corporate treasury department designs and executes almost all derivatives, except in countries where, due to legal restrictions, forward currency exchange contracts are dealt with locally by our affiliates with local banks.

For consolidation purposes, the balance sheets of our consolidated foreign subsidiaries are translated into euro at the period-end exchange rate, and their income statements and cash flow statements are converted at the average exchange rate for the period. The balance sheet impact of such translation may be material. Period-to-period changes in the average exchange rate for a particular currency can significantly affect reported sales and operating and other expenses incurred in such currency as reflected in our income statement, and therefore can significantly affect our financial condition or results of operations.

Currency exchange rate fluctuations in those currencies in which we incur our principal manufacturing expenses (the euro, the US dollar, the Pound sterling, Swiss franc, Mexican peso and Brazilian real) may have the effect of distorting competition between us and those competitors whose costs are incurred in other currencies. To the extent that our principal currencies appreciate in value against such other currencies, our competitiveness against our competitors may be eroded. Detailed information on currency exchange risk is provided in “Operating and Financial Review and Prospects—Impact of Exchange Rate and Interest Rate Fluctuations” and Note 29 to the Consolidated Financial Statements.

Our shares trade in euro on the Premier marché of Euronext Paris, our ADSs trade in US dollars on the NYSE and our UKDSs trade in Pounds sterling on the LSE. We have initiated procedures to delist our UKDRs from the London Stock Exchange. See “The Offer and Listing—Markets”. The value of the shares, ADSs and UKDSs could fluctuate as the euro, US dollar and Pound sterling exchange rates fluctuate. Since any dividends we may declare are denominated in euro, exchange rate fluctuations will affect the US dollar equivalent of dividends received by ADS holders and the Pound sterling equivalent of dividends received by UKDS holders.

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We might experience difficulties in implementing the restructuring initiatives of the action plan announced in March 2003, which would inhibit our ability to reduce indebtedness and to strengthen our financial structure

On 12 March 2003, we announced an action plan with a goal, among others, of significantly reducing our indebtedness in the short- and medium-term. For a discussion of this plan and related transactions, see “Operating and Financial Results and Prospects—Main Events of Fiscal Year 2003” and “—Recent Developments”. We intend to accelerate all existing cost-reduction and operational improvement initiatives and have assigned new overhead reduction targets at corporate and Sector level as well as in our international network. We have, in particular, announced some of the corresponding industrial restructuring plans and overhead reduction programmes in the Sectors, functions and countries affected, and would expect to announce further plans in the future. As a result of accelerating our restructuring plans we expect to accrue significantly more related charges in fiscal year 2004 than in fiscal year 2003. Our restructuring initiatives are subject to employee consultation in each Sector, function and country affected.

We can give no assurance that we will be successful in achieving the restructuring targets that we have fixed in our new action plan. Part of our restructuring plans include the closures of facilities and the reduction of workforce in efforts to cut costs and rationalise our operations. Restructurings, closures and layoffs may harm our employee and public relations and have led, and could lead to further work stoppages and/or demonstrations. These events would in turn adversely affect our operations and results. Furthermore, if we experience significant difficulties in implementing our overhead reduction initiatives and our reorganisation plan, our business and operating results could be adversely affected and we might not achieve our annual savings targets according to our planned timetables.

If we are unable to manage our working capital effectively, negotiate appropriate payment terms with our customers and suppliers and receive products from our suppliers on credit, or if we apply existing provisions more quickly than expected, we may be required to seek new sources of financing in the future

The structure of customer deposits and advances is particularly important in our long-term project activity, which represents approximately 40% of our sales. Customer deposits and advances include preliminary cash advances  paid by customers as well as customers’ progress payments during the execution of the project as contractually agreed. Taking customer advances serves in part to provide us with working capital to finance the execution of our projects. Our ability to negotiate and collect customer advances is in large part linked to the confidence that our customers place in us. The current market downturns and our recent financial difficulties have materially adversely affected our ability to obtain customer advances, and reestablishing customer confidence will be an essential element of our business plan going forward. For more information regarding customer deposits and advances, see “Operating and Financial Review and Prospects—Financial Statements for the years ending 31 March 2001, 2002, 2003—Balance Sheet—Customer deposits and advances”, and Note 24 to the Consolidated Financial Statements.

Long-term projects experience a disbursement of expenses over the life of the project, which can typically take two to five years to complete, depending upon the nature of the contract. The cash disbursement pattern for a project usually starts slowly through the design and mobilisation stages, then accelerates through project execution tailing off at the end of the project during the installation and/or commissioning stages. In this scenario, in the early stages of our projects we are often left with deposit and advance amounts which exceed the immediate project related costs to which these may be attributed.

We may be required to accept less favourable payment conditions than those received in the past and may not be able to reflect these more difficult terms in contracts with our suppliers. Our ability to obtain favorable payment terms from our suppliers is limited in large part by their views of our financial solidity. Our recent financial difficulties have had a material adverse effect on the payment terms extended to us by our suppliers and on the willingness of suppliers to provide us with products under existing arrangements. Also, a reduction in order intake could cause a reduction in customer deposits and advances.

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At 31 March 2003, we had €3,738⁽¹⁾ million of provisions for risks and charges. If the provisioned risks materialise, if the application of these provisions is accelerated or if we are required to increase them due to unforeseen events or contingencies, we could be required to dedicate significant amounts of cash to such risks and charges. Given the financial covenants we are obliged to adhere to and our current financial situation, it is unlikely that we could obtain significant amounts of cash through borrowings in the short term.

All these factors may cause our cash requirements to grow and our net cash position to deteriorate and may require us to find alternative sources of financing. In the short term, it is unlikely that alternative means of financing will be available to us on commercially reasonable terms, if at all. Reference should also be made to “—Difficulties in securing bonds beyond those currently available under our new Bonding Facility may jeopardise our ability to obtain new orders and to receive advances and progress payments from customers”.

Our products often incorporate advanced and complex technologies and sometimes require modifications after they have been delivered

We design, manufacture and sell several products of large individual value that are used in major infrastructure projects. We are sometimes required to introduce new, highly sophisticated and technologically complex products on increasingly short timetables. This necessarily limits the time available for testing and increases the risk of product defects and their financial consequences. We occasionally discover the need to fine tune or modify products after we begin manufacturing them or after our customers begin operating them. Because we produce some of our products in series, we may need to make such modifications to a large number of products. At the same time, when we sell our products or enter into maintenance contracts, we are increasingly required to accept onerous contractual after-sales warranties and penalties related to performance, availability and delay. Our contracts also occasionally include clauses allowing the customer to terminate the contract or reject the equipment if performance specifications or delivery schedules are not met. As a result of these contractual provisions and the pressures of accelerated new product development, design and manufacturing, problems encountered with our products may result in material unanticipated expenditures.

The GT24/GT26 problems, described in detail in “Operating and Financial Review and Prospects—Main events of fiscal year 2003”, “ —Power—Update on GT24/GT26 gas turbines issues” and in Note 20 to the Consolidated Financial Statements, the UK Train issues described in detail in “Operating and Financial Review and Prospects—Main Events of Fiscal Year 2003”, “ —Transport—UK Trains” and in Note 20 to the Consolidated Financial Statements are major examples of this risk.

We cannot guarantee that the total costs that we ultimately incur in connection with the GT24/GT26 turbines, the UK Trains and other of our products or maintenance contracts will not exceed the estimates that we have provisioned, nor can we guarantee that the rate of spending will be in line with our current estimates. In addition, where we have instituted mitigation programmes to reduce our expected costs (for example, with respect to our GT24/GT26 gas turbines), we cannot ensure that we will attain the full extent of the cost reductions envisaged by these programmes. The total amount and timing of actual expenditures, including penalties and damages, as well as the actual savings obtained through implementation of mitigation programmes, may vary as a result of a number of factors, including the following:

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Given the technical sophistication of some of our products, we can give no assurance that we will not encounter new problems or delays with the GT24/GT26 turbines, the UK Trains or with our other products. Any such problems or delays could be costly, could harm our business reputation or affect our ability to sell other products and could have a material adverse impact on our financial condition or results of operations or cause our products to be less competitive than those of our competitors.

We have given financial assistance in connection with the purchase of some of our products by our customers which exposes us to longer-term risks of customer defaults or bankruptcy

In the energy and transport infrastructure markets, customers have occasionally required suppliers such as us to assist in financing purchases or projects. This has been particularly true in the Marine Sector, and to a lesser extent in Power, Transport and Transmission & Distribution. This assistance may take the form of guarantees of indebtedness or taking partial equity ownership of entities operating the projects on a long-term basis. This financial assistance exposes us to longer-term risks of customer defaults or bankruptcy resulting in our guarantees being called or the value of our equity investment being reduced. We have not made commitments to provide guarantees of our customers’ indebtedness during fiscal year 2003 and intend not to do so in the future.

At 31 March 2003, our vendor financing exposure amounted to €1,259 million, of which €933 million related to our Marine Sector (€368 million relating to Renaissance Cruises, which entered into bankruptcy proceedings in September 2001) and €317 million related to our Transport Sector. We describe our vendor financing exposure in greater detail in “Operating and Financial Review and Prospects—Off balance sheet commitments” and Note 27 to the Consolidated Financial Statements.

We have retained €140 million of provisions at 31 March 2003 to cover risks associated with Marine vendor financing, compared to €144 million at 31 March 2002. There can be no assurance that such provisions will be satisfactory to cover all future exposures relating to Marine vendor financing. Moreover, a further deterioration in the cruise ship holiday market may expose us to an increased risk of customers’ defaults or bankruptcy. These exposures and events could result in losses in excess of the provisions we have established, which could have a material adverse impact on our financial condition and results of operations.

We are exposed to credit risk with respect to some of our customers

To the extent our customers do not advance us sufficient funds to finance our expenses during the execution phase of our contracts, we are exposed to the risk that they will be unable to accept delivery or that they will be unable to make payment at the time of delivery. In these circumstances, we could be unable to recoup the expenses we incur in a project and could be unable to obtain the operating margins we expected upon entering the contract. We currently mitigate this risk by endeavouring to negotiate with our customers in order to have them make more timely progress payments, and through our risk management procedures.

In fiscal year 2003, our ten largest customers accounted for 17.6% of our sales. If one of our largest customers were unable to meet its commitments, due to bankruptcy or any other reason, we could be unable to recover some or all of the costs we incur on these projects, which could have a material adverse effect on our financial condition or results of operations.

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Our financial performance could be adversely impacted by a limited number of high value contracts and significant fixed price contracts

Each year, approximately one-third of our business is conducted under a limited number of major long-term contracts. Variations in activity levels under these contracts can result in significant variations in our sales and operating income from year to year. At 31 March 2003, our ten largest projects in terms of order backlog represented approximately 22.6% of our total order backlog. The revenue that we recognise on a major project will vary significantly from period to period in accordance with the progress of that project. As a result of this variability, the profitability of a small number of major contracts may significantly impact our operating income in any given period. In addition, the profitability of any contract and/or our overall sales, operating results and cash flow may be affected by the following:

In addition to the general factors listed above, the profit margins realised on such fixed price contracts may vary from our original estimates as a result of changes in costs and productivity over their term.

We have established stricter risk management procedures for tenders and contracts with a view to improving and better formalising processes within the Sectors. However, we can give no assurance that these and our other initiatives will be sufficient to avoid problems in the future and certain of our projects may be subject to delays and penalties. There can be no assurance that we can profitably complete all of our fixed price contracts.

We operate in competitive markets

We face strong competition in our markets, both from large international competitors and, in a number of markets, from smaller niche players. Industry consolidation is increasing globally and the main players are adopting a strategy of global expansion. This competition has generally resulted in lower selling prices and a deterioration of terms of payment in favour of our customers. In response, we have adopted several ongoing programmes to cut costs and improve efficiency and have adopted other strategic initiatives.

Although we believe we compete effectively in most of our major markets, there can be no assurance that we will be able to continue to do so.

ALSTOM is currently being investigated by the SEC

The SEC is conducting a formal investigation, and we are conducting our own internal review, into certain matters relating to ALSTOM Transportation Inc. (“ATI”), one of our US subsidiaries. These actions followed receipt of anonymous letters alleging accounting improprieties on a railcar contract being executed at ATI’s New

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York facility. Following receipt of these letters, the United States Federal Bureau of Investigation (the “FBI”) also began an informal inquiry, which we believe is currently dormant. We have fully cooperated with the SEC and the FBI in this matter and intend to continue to do so.

The SEC investigation is ongoing and we cannot predict when it will be completed or its outcome. Any adverse developments in connection with this matter, including, but not limited to, any enforcement action against us or any of our personnel, could result in civil or criminal sanctions against us, which could limit our ability to obtain governmentally-funded transportation contracts in the United States, or could otherwise materially negatively impact us and our business. Our management has spent, and may in future be required to spend, considerable time and effort dealing with the internal and external actions relating to ATI.

We have been named as a defendant in various putative class actions in the United States

We and certain of our current and former officers have been named as defendants in a number of putative class action lawsuits in the United States that allege violations of the United States federal securities laws. See “Financial Information—Legal Proceedings—United States Putative Class Action Lawsuits”. The allegations in these putative class actions relate to certain alleged misstatements and omissions in our disclosure and public statements. Our management may in the future be required to spend considerable time and effort dealing with these putative class actions. While we intend to vigorously defend against these actions, any adverse outcome could have a material adverse effect on our business, results of operations and financial condition.

Preferential rights or warrants may not be exercisable by ADS holders and US shareholders

Under French law, shareholders have preferential rights (which may be waived) to subscribe on a pro rata basis for cash issuances of new shares or other securities giving rights, directly or indirectly, to subscribe for additional shares. In addition, the capital increase contemplated by our new financing plan provides for the free distribution of warrants to our shareholders for the purchase of shares and the offering of bonds mandatorily reimbursable with shares contemplated by our new financing plan provides for the free distribution of rights to our shareholders for the purchase of bonds. US holders of ADSs may not be able to exercise any preferential rights or warrants derived from the shares underlying their ADSs, and US holders of shares may not be able to exercise any preferential rights or warrants derived from such shares, in each case unless a registration statement under the Securities Act is effective for such preferential rights or warrants or an exemption from such registration requirements is available. We do not intend to file any registration statement in connection with these transactions. If an ADS holder cannot exercise its preferential rights or warrants, the depositary of our American depositary receipt facility will, if possible, sell such ADS holder’s preferential rights or warrants and distribute the net proceeds of the sale to the holder. If the depositary determines, in its discretion, that such rights or warrants cannot be sold, the depositary may allow such rights or warrants to lapse. In either case the ADS holder’s interest in ALSTOM will be diluted and, if the depositary allows rights or warrants to lapse, the ADS holder will not realise any value from preferential rights or warrants available to shareholders. This would also be the case for a US holder of shares whose rights or warrants cannot be exercised or sold.

We are subject to laws which prohibit certain payments to foreign governmental officials, political parties and others

Some of our subsidiaries operate in countries known to experience corruption, which creates the risk of prohibited payments by our employees or agents. A limited number of our companies, former employees and agents of our group have been or are currently being investigated with respect to alleged illegal payments. See “Financial Information—Legal Proceedings”. Any determination that ALSTOM or its subsidiaries violated such laws could have a material adverse impact on our results of operations or financial condition.

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We are subject to a broad range of environmental laws and regulations in each of the jurisdictions in which we operate

These laws and regulations impose increasingly stringent environmental protection standards on us regarding, among other things, air emissions, wastewater discharges, the use and handling of hazardous waste or materials, waste disposal practices and the remediation of environmental contamination. These standards expose us to the risk of substantial environmental costs and liabilities, including liabilities associated with divested assets and past activities. In most of the jurisdictions in which we operate, our industrial activities are subject to obtaining permits, licences or/and authorisations, or to prior notification. Most of our facilities must comply with these permits, licences or authorisations and are subject to regular administrative inspections.

We invest significant amounts to ensure that we conduct our activities in order to reduce the risks of impacting the environment and regularly incur capital expenditures in connection with environmental compliance requirements. Although we are involved in the remediation of contamination of certain properties and other sites, we believe that our facilities are in compliance with their operating permits and that our operations are generally in compliance with environmental laws and regulations.

We have put in place a global policy covering the management of environmental, health and safety risks. Detailed information regarding this policy is provided in “Information About ALSTOM—Business Overview—Environment, Health & Safety Management Policy (E.H.S.)”.

The procedures ensuring compliance with environmental, health and safety regulations are decentralised and monitored at each plant level. The costs linked to environmental health and safety issues are budgeted at plant or unit level and included in the profit and loss accounts of our local subsidiaries. We have retained €8.2 million of provisions to cover environmental risks in our consolidated financial statements at 31 March 2003.

The outcome of environmental, health and safety matters cannot be predicted with certainty and there can be no assurance that we will not incur any environmental, health and safety liabilities in the future and we cannot guarantee that the amount that we have budgeted or provided for remediation and capital expenditures for environmental or health and safety related projects will be sufficient to cover the intended loss or expenditure. In addition, the discovery of new facts or conditions or future changes in environmental laws, regulations or case law may result in increased liabilities that could have a material effect on our financial condition or results of operations.

ITEM 4—INFORMATION ABOUT ALSTOM

A.    History and Development of ALSTOM

ALSTOM is a société anonyme à conseil d’administration, a form of limited liability company, incorporated under the laws of France. ALSTOM was incorporated under the name “JOTELEC” on 17 November 1992 for a duration of 99 years (unless it is dissolved earlier or its life is extended) and is governed with respect to corporate matters by the French Code de commerce, or Commercial Code. We changed our name to ALSTOM on 14 May 1998. The registered office is located at 25, avenue Kléber, 75116 Paris, France and the telephone number there is: 33 (0)1 47 55 20 00. ALSTOM is registered under No. 389 058 447 Paris.

The ALSTOM group began in 1989 as GEC ALSTHOM N.V., a 50/50 joint venture company between The General Electric Company (now known as Marconi) of the United Kingdom and Alcatel of France. On 22 June 1998, as part of our initial public offering on the Paris, New York and London stock exchanges, all the activities previously carried out by GEC ALSTHOM were transferred to ALSTOM. For a list of our main acquisitions and joint ventures during the last three fiscal years, see the information set forth under “Operating and Financial Review and Prospects—Change in Business Composition and Presentation of our Accounts, Non-GAAP Measures—Changes in business composition”. For additional information regarding the reorganisation of our business units, including the reorganisation of our Power Sectors, see the information set forth under “Operating and Financial Review and Prospects—Power—New Organisation”.

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On 30 April 2003, we announced the closing of the sale of our small gas turbines business and on 1 August 2003 we announced that we had completed the major part of the disposal of the medium-sized gas turbines and industrial steam turbines, in each case to Siemens AG. On 25 September 2003 we signed an agreement to sell our T&D Sector, excluding the Power Conversion business, to Areva. This transaction is expected to close in January 2004.

For more information regarding these disposals and regarding the financing package that we recently negotiated with our key lenders and the French State, see “Operating and Financial Review and Prospects—Recent Developments”.

For information regarding capital expenditures generally for the last three fiscal years, see the information set forth under “Operating and Financial Review and Prospects”. There are no additional principal capital expenditures currently in progress.

There has been no credible indication of any public takeover offer by any third party in respect of our shares or by us in respect of other companies’ shares that has occurred during the last and current fiscal years.

B.    Business Overview

OVERVIEW

We serve the energy market through our activities in the field of power generation and power transmission and distribution, as well as the transport market through our activities in rail transport and marine. We design, supply and service a complete range of technologically advanced products and systems for our customers, and possess a unique expertise in systems integration and through-life maintenance and service.

In fiscal year 2003, we had sales of approximately €21 billion. At 31 March 2003 we employed approximately 110,000 people in over 70 countries.

The nature of our business is such that we are not exposed to seasonal fluctuations in revenue. The products we manufacture and the services we provide are not dependent on any raw materials for which the disruption of supply from any particular source would have a material adverse effect on ALSTOM and its subsidiaries as a whole.

POWER

We are one of the world’s leading suppliers to the power generation industry. Our Power Sector represented over 50% of ALSTOM’s sales in fiscal year 2003, and offers a comprehensive range of power generation solutions from turnkey power plants to all types of turbines (gas, steam, hydro), generators, boilers, emissions reduction systems and control systems, as well as a full range of services including plant modernisation, maintenance and long-term operation.

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The following chart sets out the breakdown of sales by each of the Power Sector’s Segments for fiscal year 2003:

The following table sets out the geographic breakdown of Power Sector sales for the periods indicated:

Industry Characteristics

The world’s installed power generation capacity, as of 31 March 2003, was estimated at around 3,790 GW. The chart below sets out the breakdown of this installed base by technology in calendar year 2002, based on data from the Utility Data Institute in the US (“UDI”).

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Based on internal estimates, we believe the average annual value of the overall world power generation market to have been approximately $135 billion during the last 3-year period ending 31 December 2002. The chart below illustrates how we believe this market value breaks down.

Demand for power generation equipment tends to be driven by a variety of complex and inter-related factors, notably:

Economic growth

Responding to growth in demand for electricity, global demand for power generation equipment has tended to be strongest in those regions where economic growth is high.

Historically, there has been a strong correlation between growth in the installed base of power plants and world-wide GDP growth, although on a short-term basis demand for power generation equipment may fluctuate significantly. We believe that demand for power generation equipment is also driven by changing consumption patterns that favour electricity as a power source.

Following a period of intense growth in investment in power infrastructure in the US from the late 1990s until 2002, referred to as the “gas bubble” since investment was focused mainly in gas turbine combined cycle power plants, fiscal year 2003 saw a sharp drop in the level of new orders. This decline in the US equipment market resulted from increasing power generation capacity due to ongoing power plant construction coupled with an economic slowdown.

In addition, power plant developers cut capital investment to strengthen their balance sheets, following the impact of various events in 2001 including the collapse of Enron (which was the power generation industry’s largest trader), the events of September 11th, and changes in power pricing, which heightened investors and developers’ aversion to risk. We believe that some opportunities for the building of new infrastructure may still exist in the US, due to gridlock in the country’s transmission and distribution infrastructure, while in Europe, the Middle East and Asia demand remains generally stable.

Environmental concerns

Moves to introduce stricter environmental legislation in response to pressure to reduce greenhouse gas emissions drives demand for cleaner power generation technologies. In Eastern Europe, Asia and in the US in particular, environmental concerns have created increased demand for clean-coal technologies, which allow inexpensive, low-grade coal to be used as fuel while minimising pollutant emissions. Higher fossil fuel prices and government subsidies in some countries make renewable energy a potentially viable option for small-scale power generation, notably in wind and in biomass generation. Demand for mini-hydro is also growing.

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Replacement and refurbishment of aging plants

We believe that the service market is growing rapidly. In recent years, demand for maintenance and refurbishment has been strengthened by a general trend among power producers to seek to increase efficiency, lower operating costs and extend the life cycles of their existing plants. This increase in demand to upgrade facilities has particularly benefited original equipment manufacturers (OEM), such as ALSTOM, and we believe it will be a significant source of future growth for our power service activities due to our large installed base.

Deregulation and liberalisation

The deregulation and liberalisation of electricity markets have transformed our customer base and also impacted demand, especially in the US, where demand in recent years came principally from merchant developers, which are private power plant operators that sell their electricity independently. However, as a result of high price volatility of fuels and electricity in the US, merchant developers’ assets abruptly lost value in 2002, as power generation over-capacity became apparent, forcing re-deployment of power generation assets to larger energy companies.

Besides driving new investment, liberalisation also caused considerable price pressure on power plant costs over the last decade and increased the demand for more efficient and environmentally-friendly plants with higher operating profitability. Initially, in deregulated markets, the allocation of technical and financial risks changes, with more risks being supported by suppliers such as ALSTOM.

Globalisation

Suppliers with global capabilities, such as ALSTOM, are well placed to serve customers who are themselves becoming more global. This globalisation has also helped suppliers to cope with major shifts in regional demand.

Fuel and generation security

In the past, determination of power plant type was mainly driven by medium and long-term anticipation of future fuel prices. Improved plant economics, technological advances, environmental concerns and reasonable natural gas prices favoured gas powered stations over coal-fired in recent years. However, increasing concerns about the security of energy supplies and lower and more predictable coal prices make the construction of new coal-fired plants a viable option in specific cases.

Competitive Position

The power generation equipment market has been characterised in recent years by industry consolidation among the main suppliers. We are a world leader in many of our power activities such as large steam turbines, boilers and hydro power (based on data released by McCoy in 2003). As at 31 December 2002, ALSTOM had installed major equipment in more than 25% of the world’s power plants according to UDI. We believe this installed base will be key in securing customer service contracts and supporting sales in the future.

In gas and steam turbines, we compete mainly against two other major groups: General Electric and Siemens, and to a lesser extent the Japanese groups Mitsubishi, Hitachi and Toshiba. In utility boilers, our main competitors are Babcock & Wilcox, Babcock Hitachi, Foster Wheeler and IHI. In emissions control systems for the power industry, our main competitors are Babcock Borsig companies (Babcock Fisia, Babcock Power and Austria Energy & Environment), Babcock & Wilcox, Lurgi and its affiliates, Mitsubishi Heavy Industries (MHI) and Hamon. In emissions control for industry we compete with Proceedair, Lurgi, Hamon and FLS Airtech. In the hydro power market our main competitors are Voith-Siemens, VA-Tech and General Electric Hydro.

The success factors in the power generation industry are principally technology, quality, cost, size and international presence. Our competitive strengths include:

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Activities—Segments

As of 31 March 2003, Power had 50 manufacturing sites and major service centres worldwide, with main locations in Brazil, Canada, China, the Czech Republic, France, Germany, India, UK, Poland, Spain, Switzerland, Sweden and the US.

During fiscal year 2003, our power generation activities were organised into the following six Segments:

New organisation from 1 April 2003

To implement a more balanced structure and to reduce organisational layers, the Power Sector was split into three Sectors on 1 April 2003: Power Turbo-Systems (the former Gas Turbine and Steam Power Plant Segments); Power Environment (the former Boilers & Environment and Hydro Power Segments); and Power Service (the former Customer Service Segment). The Industrial Turbine Segment remained separate until its disposal.

Gas Turbine

Power’s Gas Turbine Segment supplies the following products and services:

The Segment’s main markets are Asia, Latin America and Europe. In fiscal year 2003, the Gas Turbine Segment represented 9% of the Power Sector’s orders.

Major turnkey contracts were awarded to the Segment during fiscal year 2003, notably for a 450 MW gas-fired combined cycle power plant in Vietnam (€240 million). Several significant upgrade contracts were also awarded, including for the modernisation of a gas-fired plant in Angola and for the upgrading of a gas turbine block for a combined-cycle plant in Austria. An order was also registered for a 650 MW combined cycle plant in Bahrain shortly after year-end.

Our gas turbine product range includes various products, with output from 58MW for the GT8C2 unit to 268 MW for the GT26, our largest unit. A central focus this year was to continue to address problems with our GT24/GT26 heavy-duty gas turbines, and work continued to re-design certain components and obtain performance improvements. For further information regarding the GT24/GT26 issue, please see “Operating and Financial Review and Prospects—Power—Update on GT24/GT26 gas turbine issues”. Because of technological and developmental problems associated with these machines, we did not benefit greatly from the gas bubble in the US. As a result, we believe we have limited exposure to project cancellations as a result of the end of the gas

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bubble and the current poor economic conditions in the US. Nevertheless, we are exposed to the soft market conditions experienced since the end of 2001 worldwide.

As part of our strategy for fiscal year 2003, we continued work to strengthen the whole of our heavy-duty gas turbine range, through access to Rolls-Royce aero-engine technology under an agreement signed in February 2002. The agreement provides us with access to Rolls-Royce’s technology base, notably very high temperature technologies, advanced aero and thermo dynamics and very high strength, high temperature materials. The agreement is also expected to accelerate over the medium-term the introduction of new products in this area. In addition to technology access, Rolls-Royce also provides engineers to assist us in the application of technology on specific development projects.

Steam Power Plant

The Steam Power Plant Segment supplies the following products and services:

The Segment’s main markets are the US and Europe. In fiscal year 2003, the Steam Power Plant Segment represented 15% of the Power Sector’s orders.

Until the recent weakening of the market, this Segment benefited from the gas bubble in the US through the supply of steam turbines and generators for gas-fired combined cycle plants.

During the past year, the turnkey market has declined further, and we have launched restructuring plans in order to reduce our power plant engineering and construction capacity substantially and adapt to market conditions.

Major orders won during fiscal year 2003 included a major turnkey order to supply an 800 MW combined cycle power plant to be built at Dunkerque, France; retrofitting of four steam turbines (2x822 MW & 2x944 MW) for a nuclear power plant in the US, and an order for a steam-tail add-on (2x130 MW) for a project in Israel.

Boilers & Environment

The Boilers & Environment Segment supplies the following products and services:

The Segment’s main markets are North America, China, India and Europe. In fiscal year 2003, the Boilers & Environment Segment represented 20% of the Power Sector’s orders.

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The market for boiler plant enhancement continues to develop, while demand for emissions control systems should benefit from increased environmental legislation. The market for coal-fired plants in the US was low in fiscal year 2003. Nonetheless, the Segment was awarded a contract worth more than €160 million by Santee Cooper, South Carolina’s state-owned electric & water utility, to supply a sub-critical pulverised coal-fired utility boiler. For the second consecutive year, ALSTOM coal-fired boilers were ranked amongst the US’s lowest emitters of nitrogen oxide (NOx) emissions in the US by the US Environmental Protection Agency.

The new ALSTOM-supplied 965 MW Niederaussem lignite-fired supercritical power station in Germany—one of the world’s largest, most advanced low-emission plants of its kind—entered commercial operation in September 2002. The Segment notably won orders to carry out dual-fuel boiler conversion in Jordan and for biomass cogeneration plants in Germany and Thailand.

Hydro Power

The Hydro Power Segment supplies the following products and services:

The Segment’s main markets are Canada, Brazil and China. In fiscal year 2003, the Hydro Power Segment represented 8% of the Power Sector’s orders.

Market demand for hydro power was stable compared with last year. In small hydro, our Mini-Aqua^™ product range, launched last year, is gaining acceptance in the market and demand continues to grow. A major order was won worth approximately €130 million to supply the 4x300 MW hydro power plant to Malaysia. Other significant orders included large new hydro plants in Canada, China, Uganda and India. We also registered major hydro refurbishment orders, notably for the complete refurbishment of a 4x415 MW hydro power plant in Mozambique, and generator rehabilitation of a 6x150 MW hydro power plant in Zambia.

Customer Service

The Customer Service Segment promotes the service activities relating to the Gas Turbine, Steam Power Plant and Boilers & Environment Segments and services to customers in all geographic markets. The Segment supplies the following products and services:

The Segment’s main markets are the US, Europe and Asia. In fiscal year 2003, global demand for service continued to be strong. In fiscal year 2003, the Customer Service Segment represented 35% of the Power Sector’s orders.

Major service contracts awarded during the year included a 10-year operation, support and maintenance contract for the Nova Piratininga power plant in Brazil; award of a six-year extension to the existing operations and

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maintenance contract for a gas-fired combined cycle plant at Sengkang, Indonesia; a 10-year service agreement for a combined cycle plant in Anyang, Korea, and a 12-year operation and support maintenance contract for a 1,000 MW combined cycle plant in Mexico. We also reinforced our local workshop network by upgrading or expanding the capabilities of our facilities in Italy (Milan), Portugal (Porto), Hungary (Budapest), Romania (Bucharest) and in the US (Richmond).

Our Customer Service Internet Portal (www.service.power.alstom.com), set up and running in the US last year, was expanded this year to support service business opportunities. Additional functionalities include the electronic handling of parts and service orders.

We continued to market our ECORAM (ECO—Economic, RAM—Reliability, Availability and Maintainability) software-based consultancy tool used to assess overall power plant efficiency and then to identify measures needed to achieve operators’ goals. ECORAM is able to demonstrate significant plant improvement potential for our customers.

Industrial Turbine

The Industrial Turbine Segment supplies the following products and services:

The Segment’s main markets are Europe, the Middle East and North America. In fiscal year 2003, this Segment continued to perform well in the oil & gas market, selling more than 50 small gas turbines during the year. The first 8 MW Tempest turbine for Germany was sold, bringing the total number of these machines delivered to 50.

A new industrial gas turbine, the 29 MW GT10C, was commercially launched in June 2002, and the first order was received in November for a project in Egypt. This machine is considered the best in its class in terms of NOx emissions (15 ppm on gas).

Sale of Industrial Turbines (excluding pre-insulated pipe systems and networks)

We announced on 28 April 2003 that we had signed binding agreements to sell our small gas turbines business and our medium-sized gas turbines and industrial steam turbines businesses in two transactions to Siemens AG. On 30 April 2003 we announced the closing of the sale of the small gas turbines business and on 1 August 2003 we announced that we had completed the major part of the disposal of the medium gas turbines and industrial steam turbines. Certain minor sites of our Industrial Turbines business have yet to be transferred to Siemens pending completion of legal procedures relating to anti-competition laws in certain jurisdictions.

For more details, see “Operating and Financial Review and Prospects—Recent Developments—Disposal of our Industrial Turbine businesses”.

Strategy

In the context of the decline in the global power market, we plan to accelerate our industrial restructuring and overhead reduction initiatives in order to adapt our capacity to market conditions and to increase our profitability. In all Sectors, we will continue to focus on measures to improve operational efficiency, enhance cash management and drive quality and process improvements. Implementation of our cross-Sector Quality Focus 6 Sigma programme continues, with the aim of enhancing the quality of our products and services to customers.

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New Power Turbo-Systems Sector

We aim to consolidate our leading position in steam turbines, generators and power plant engineering and construction and enhance our strong position in mid-range gas turbines. We plan to optimise our industrial base to adapt to difficult market conditions by substantially reducing our power plant engineering and construction capacity and the number of execution centres. This should allow us to be more selective in the projects we follow and to improve our execution competencies and thereby reduce our risk profile.

Completion of the GT24/GT26 heavy-duty gas turbine recovery programme, including commercial resolution, will be a top priority.

New Power Environment Sector

Power Environment will focus on the growing segments within its markets. These include emissions control equipment in the power generation, petrochemical and industrial markets; demand for upgrades and modernisation of existing power plants; hydro power plant refurbishment; small-scale hydro plants; and large-scale irrigation projects. We aim to strengthen our position in Asian markets, where demand for new coal-fired plants is expected to grow.

New Power Service Sector

With a full service offering and extensive global and regional market coverage, we are in a strong position to grow our Power Service business in the future; our large installed base of equipment and the potential in service and retrofit of equipment supplied by other equipment manufacturers offer attractive opportunities. With the aim of further developing recurring service revenues, we will continue to focus efforts on securing long-term operations and maintenance contracts.

Research & Development

R&D continues to be a strategic priority in our power generation activities. Our R&D programmes focus particularly on gas turbines and more generally on anticipating customer requirements for low life-cycle cost, environmentally-friendly solutions and shorter delivery times. Our emphasis for new product and technology developments continues to be price competitiveness (notably through design standardisation), enhanced product efficiency and performance, and reduced adverse environmental consequences.

In fiscal year 2003, work continued on developing common control systems and on development and enhancement initiatives in the field of gas turbines. More particularly, R&D in the Power Sector focused on the following:

For customer service, our R&D focus has been on developing differentiating products and services in anticipation of, or in response to, customers’ key drivers, including improvement packages, advanced repair solutions, upgrade packages, component life-time optimisation, retrofit products, on-site repair capabilities and monitoring and diagnostics.

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In addition, we continue to work on new technologies in cooperation with a number of universities. These technologies are concentrated on four main areas:

Significant Orders

In fiscal year 2003, Power booked the following significant orders:

Gas Turbine Segment

Steam Power Plant Segment

Boilers & Environment Segment

Customer Service Segment

Industrial Turbine Segment

Hydro Power Segment

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TRANSMISSION & DISTRIBUTION (T&D)

Our Transmission & Distribution (T&D) Sector provides products, systems and services for the medium- and high-voltage markets. Its products are used to transmit and distribute electricity from the generator to the large end-user, to ensure the reliability, quality and safety of energy flows and to operate efficient networks through information management.

The following table sets out the geographic breakdown of T&D’s sales for the periods indicated:

Industry Characteristics

Demand in the transmission and distribution industry is driven by numerous factors, namely:

Economic growth

Demand is linked to increases in gross domestic product and related investment in the power generation industry.

Deregulation

The process of deregulation is now well advanced. Ten years ago, only three countries were deregulated. Today, more than 60% of global energy is produced in a deregulated environment. Traditional integrated and regulated utilities have been replaced by independent, specialised and privatised companies in these countries. The new population of global customers own and operate electrical networks in more than one geographical zone. The process of deregulation and privatisation has enforced optimisation of operational costs and has led to the creation of regional electricity markets. The necessity to interconnect local transmission and distribution networks creates new markets and increases demands.

Environmental concerns

Concerns over the visual impact of new transmission lines require new technologies to permit greater energy flows through existing infrastructure, thus avoiding the construction of new lines. Likewise, certain insulating materials traditionally used in the industry are no longer considered appropriate, leading to a need to replace installed equipment.

These new concerns are enhancing demand for systems and service offerings, areas where T&D is developing new technologies in technical consulting, network planning and energy management.

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As a result of these industry characteristics, customers have become more cost conscious, while competitive pressures increase. There are, however, new market opportunities, such as:

Based on internal estimates, we believe the overall T&D market (including traditional sectors as well as energy management systems, distributed generation, protection and control systems, network planning and field services) had sales of approximately €35 billion world-wide in calendar year 2002. We also believe that the overall transmission and distribution market (including Businesses such as Energy Automation and Information and Service) will grow steadily. We anticipate the growth rates will vary between the markets in which our Businesses operate, as higher rates of growth are expected in the energy management markets and service and protection and control. We anticipate lower growth rates in the high-voltage switchgear, medium-voltage switchgear and power transformers markets. We also estimate uneven growth rates in different geographic markets, with growth in the Americas and the Asia/Pacific region probably stronger than in the more mature European market. We currently estimate that the African and Middle-Eastern markets will match average world-wide growth rates.

Competitive Position

T&D ranks among the top suppliers world-wide in the field of power transmission and distribution, with leading positions in the field of high-voltage, or HV, switchgear, protection and control and energy management systems. Our main competitors currently include ABB, Siemens, Schneider, VA Tech and a number of Japanese groups (Hitachi, Mitsubishi and Toshiba).

T&D’s competitive strengths include:

Barriers to market entry remain high in the T&D Sector. These barriers include the necessity for products to be qualified by the user, the need to demonstrate operational experience, and the conservative attitude of power operators towards innovation. The final barrier is due mainly to the strategic nature of the reliability of power transmission for national economies and concerns for safety. As a result, the T&D market is concentrated, with the largest five players currently accounting for approximately 50% of sales. The market has also experienced increasing consolidation in recent years.

Activities – Businesses

The T&D Sector is organised around 14 regions of the International Sales and Country Organisation, and 86 industrial sites world-wide managed under the eight Businesses described below.

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The Sector comprises three Product Businesses, four Systems Businesses and a Service Business:

High-Voltage Switchgear

High-voltage switchgear equipment regulates electricity flows within a transmission grid and is used in the transmission of power from power plants to the distribution network before the voltage is stepped down for distribution to end users. The High-Voltage Switchgear Business offers a complete range of:

In High-Voltage, a new joint-venture was entered into in November 2002 with Suzhou Chang Yuang Group, in which ALSTOM holds an 80% share, to produce live tanks from 36 kV to 550 kV. China is the largest high voltage equipment market in the world, and the joint venture should give T&D greater access to this market. The Business also gained a foothold in Japan during fiscal year 2003, with the opening of a new unit at Kobe, which should increase sales of high voltage equipment in the country.

Medium-Voltage Switchgear

This Business focuses essentially on medium-voltage switchgear and distribution transformers. Medium-voltage switchgear regulates the flow of power on the distribution network before it is stepped down to a low voltage level for the end-user. Distribution transformers are used at the end of the distribution process to step down power from high voltage to lower voltage levels for the end-user. Medium-Voltage Switchgear provides low- and medium-voltage products, pre-engineered and industrialised solutions featuring:

In fiscal year 2003, Medium-Voltage Switchgear extended its PIX product range with the launch of medium-voltage switchgear up to 24 kV that can be used for a wide range of applications in any country in the world. The new and completed air-insulated switchgear range can now be used for configurations between 3 kV and 25 kV and incorporates the latest internal arc containment technology.

Power Transformer

Power transformers are used to step up the voltage of the power generated by power plants to a voltage that can be carried efficiently on the power network and subsequently to step down voltages to the levels of end-users.

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Power Transformer provides a technology covering the complete range of power transformers, including all types up to 800kV, including High-Voltage Direct Current (HVDC), transformers and special transformers such as phase-shifters, reactors and traction transformers.

In fiscal year 2003, Power Transformer expanded its presence in China, with the inauguration of a new transformer plant in Shanghai, the Shanghai Transformer Co. Ltd. This is the only facility in China able to produce special transformers, and the objective is that this facility will become an advanced manufacturing centre for the Asia-Pacific region.

Transmission Projects

Transmission Projects’ range of products, systems and services concentrates on turnkey solutions and packages for high-voltage substations, conversion substations and transmission lines, featuring:

In fiscal year 2003, the Transmission Projects Business notably won a turnkey contract to supply the Mexican state electricity utility, Comision Federal de Electricidad, with six new substations and the extension of twelve others, as part of a programme to upgrade the Mexican power supply grid.

A major contract was signed with Transelec, the main Chilean high-voltage transmission operator to supply substations and series capacitor systems.

The Transmission Projects Business was also awarded a contract to increase the capacity of the Konti-Skan high-voltage direct current (HVDC) undersea transmission system between Sweden and Denmark. The existing 275 MW link, which allows the two countries to exchange power, is nearing the end of its design lifetime and ALSTOM will replace the 1960s mercury arc scheme with the latest thyristor-based technology, increasing the power to 380 MW.

Distribution Systems

The Distribution Systems Business was created in fiscal year 2001. This Business provides an organisation for delivering extended value solutions to industrial and commercial customers. Distribution Systems Business offers systems and solutions in the electricity distribution and distributed energy markets featuring:

In fiscal year 2003, a significant contract was awarded to upgrade the electricity distribution network and provide all necessary hardware, software and telecoms equipment for BCC Sonelgaz in Algeria.

Energy Automation and Information

T&D’s new Energy Automation & Information Business was created in April 2002 by merging its former “Protection & Control” and “Energy Management and Markets” Businesses, in response to demand for fully integrated energy management networks. The Energy Automation and Information Business is built around three main activities: automation and information systems, automation products and application and support services.

The Energy Automation and Information Business supplies equipment and information technology systems, including computerised power management systems used to operate power transmission networks, determine customer needs and regulate the flow of power from power plants to the distribution network. In particular,

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Energy Automation and Information provides information system solutions for deregulated energy industry applications, SCADA systems (large information technology control systems) and telecommunications equipment for power lines featuring:

Energy Automation and Information also provides equipment for power networks and substation protection, control and monitoring featuring:

During fiscal year 2003, T&D acquired the Energy Information Systems activity of ABB Ltd at Farnham in the UK. This acquisition should enhance the Business’ product range, in particular for retail energy and wholesale markets, and should also strengthen key application software and industry expertise in electricity and gas markets. In energy management, the Power Grid Corporation of India awarded the Business a turnkey contract to establish communication links between 11 new control centres and 200 remote terminal units in the eastern region of India, and an order was registered for protection and control products for the National Grid Group in the United Kingdom.

Power Conversion

Power Conversion’s expertise is the conversion of electrical energy into productive plant and machine performance. This includes electrical engineering, system integration and services for industrial processes and the manufacturing of electrical equipment such as motors, generators, propulsion systems and drives.

During fiscal year 2003, the Business won an order for an electrical propulsion and control system for the NASSCO for the US Navy.

Power Conversion will not be sold as part of the sale of our T&D Sector described in “Operating and Financial Results and Prospects—Recent Developments”.

Service

Service provides a global approach to service, built on network consulting, product service and field service, featuring:

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In view of the growing “outsourcing market”, developing as a result of the deregulation of markets worldwide, Service (created in April 2001), consolidates all existing T&D service resources worldwide from erection, commissioning and maintenance, to modernisation, rehabilitation, renovation, asset management and consulting. Service is focused on developing a fully-fledged service approach to the market, with a country-based organisation providing us with a presence in numerous locations world-wide.

Strategy

In line with its market positioning as a leading solutions provider, T&D Sector continues to implement a three-fold strategy, as follows:

The process to dispose of the T&D Sector (other than Power Conversion) was launched on 12 March 2003. On 28 July 2003 our Board of Directors was advised of indicative offers received to that date, in particular one received from Areva SA on 1 July 2003. On that date, we announced that the Board of Directors agreed that we should actively pursue negotiations for the disposal of the T&D Sector with Areva on the basis of the offer received. On 25 September we signed an agreement to sell our T&D Sector to Areva. This transaction is expected to close in January 2004. For more information regarding this disposal, see “Operating and Financial Review and Prospects — Recent Developments”.

Research & Development

R&D efforts in the T&D Sector concentrated on the following main challenges:

Significant Orders

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TRANSPORT

Transport designs, manufactures and supplies a broad range of products, systems and services to rail customers world-wide. This range includes fully integrated transport systems, rolling stock of all types, signaling and infrastructure as well as customer services in the fields of maintenance, renovation, customer training and technical consultancy.

The following table sets out the geographic breakdown of Transport’s sales for the periods indicated:

Industry Characteristics

We estimate that the overall size of the existing market for rolling stock, signaling and service was approximately €28 billion in fiscal year 2003. Additionally, the non-outsourced portion of the maintenance and renovation market had an estimated value of €15 billion, which presents further potential for future growth.

We expect growth, which has been at a sustained level in the Transport market, to continue as a result of fundamental changes in the rail industry in recent years in terms of customer base, customer behaviour and product and/or service requirements. The main trends currently affecting the industry include:

Urbanisation

Urbanisation in many parts of the developed and developing regions of the world is affecting the structure of the rail supply industry. Within the rolling stock market, for example, demand for mass transit systems and local integrated solutions is increasing, as local operators seek solutions to ease automobile traffic congestion and address environmental concerns in urban and suburban areas.

Urbanisation also leads to demand for high-speed trains to link major urban centres and this market is currently experiencing a turn-around following a period of decline in the 1990s. Previously focused in Western Europe, the high-speed rail market today increasingly depends upon the progress of large projects outside Europe – in Korea, China and Taiwan, for example:

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Government support and local manufacturing presence

Railway operators have been characterised by their need for local, state/regional and central government funding in order to maintain their financial equilibrium. As a result, rolling stock orders can depend on the level of government support to railways, and order selection may favour suppliers with local manufacturing bases, thus creating and/or sustaining local employment.

Replacement needs

The main European networks that had delayed major procurement of rail equipment during the industry slow-down in the mid-1990s are now replacing old equipment and expanding their networks. In some cases, needs are driven by pressure on operators to improve their level of service and in others by safety concerns.

Growing emphasis on security, reliability and efficiency

Traditional and new operators around the world are showing growing interest in the proven benefits of new train control and train management systems, including increased safety, higher rail traffic density, lower maintenance costs and greater international harmonisation. As a result, the signaling market still continues to benefit from annual volume growth above the railway supply industry average.

Environmental concerns