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at a glance · after a loss in the first-half year carlo gavazzi achieves a break-even result in the second semester · group s revenue and operating profit influenced by unfavourable global market conditions · exchange rate developments impact negatively operating revenue · automation components copes well with adverse market environment enhances its market shares and achieves a marked increase in operating profit · for the second consecutive year electronic packaging is hard hit by the depressed demand from the us telecom infrastructure sector the business unit s largest market chf million bookings operating revenue ebit net income cash flow interest-bearing debt shareholders equity 2002/03 208.9 204.8 0.9 2.7 5.8 37.2 89.7 2001/02 252.8 263.3 6.1 2.1 8.1 33.0 96.8 17.4 22.2 28.4 12.7 7.3 operating revenue by business unit chf million 68 automation components 139 32 electronic packaging 66

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five-year financial summary 2002/03 208.9 42.4 204.8 74.7 5.5 0.9 3.2 2.7 5.8 6.4 4.7 59.9 31.0 49.7 110.2 32.6 33.5 37.2 82.7 22.9 0.5 89.7 195.8 1 033 2001/02 252.8 42.8 263.3 88.5 13.9 6.1 3.3 2.1 -40.4 8.1 7.8 4.7 68.9 41.3 62.8 128.1 38.5 35.9 33.0 80.8 27.0 0.6 96.8 205.2 1 198 24.8 11.2 12.6 150.9 57.3 48.0 105.1 322.9 53.1 32.5 41.6 225.2 50.7 6.6 130.0 412.5 2 708 17.8 12.2 11.5 156.3 54.3 31.6 116.5 288.3 50.5 31.0 52.7 203.5 40.0 9.0 121.1 373.6 2 503 9.1 11.5 9.7 131.6 53.4 37.9 136.5 251.1 53.2 35.5 96.2 168.4 61.9 10.3 104.9 345.5 2 488 2000/01 495.6 203.0 500.5 143.0 40.2 29.0 23.9 13.9 1999/00 418.0 225.0 449.2 130.7 39.3 27.1 21.2 10.6 1998/99 457.0 278.0 382.5 114.4 24.4 12.9 6.4 0.9 chf million bookings order backlog operating revenue gross profit ebitda ebit earnings before taxes and minorities net income from continuing operations net income including discontinued operations cash flow depreciation and amortisation additions to fixed assets accounts receivable inventories uncompleted contracts net net working capital current assets fixed assets net intangible assets net interest-bearing debt net current liabilities long-term liabilities minorities shareholders equity total liabilities and shareholders equity number of employees average not comparable with previous periods due to disposal of engineering and contracting business unit net income depreciation amortisation change in provisions gain loss on sale of investments or assets

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information for investors share price 1.4.2002 ­ 31.3.2003 90 80 70 60 50 40 30 20 10 0 31.03.02 30.04 31.05 30.06 31.07 31.08 30.09 31.10 30.11 31.12 31.01 28.02 31.03.03 carlo gavazzi bearer share vontobel small companies price index share volume 1.4.2002 ­ 31.3.2003 5000 4000 3000 2000 1000 0 apr may june july aug sept oct nov dec jan feb mar carlo gavazzi bearer share share price 1.4.1998 ­ 31.3.2003 400 350 300 250 200 150 100 50 0 31.03.98 31.03.99 31.03.00 31.03.01 31.03.02 31.03.03 carlo gavazzi bearer share vontobel small companies price index

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information for investors 2002/03 registered shares nominal value chf 10 shares issued share of capital share of voting rights share price bearer shares nominal value chf 50 shares issued share of capital share of voting rights share price as of march 31 share price high share price low average daily volume p/e ratio basic earnings per share book value per share stock market capitalisation in percentage of revenue in percentage of equity dividend per share dividend yield total pay-out pay-out ratio number chf chf chf number factor chf chf chf 1000 chf chf 1000 390 710 55.0 19.6 28 80 28 258 3.8 126 19 900 9.7 22.2 390 710 55.0 19.6 71 240 66 629 24.5 2.9 136 50 460 19.2 52.1 390 710 55.0 19.6 243 270 141 604 12.3 19.7 183 172 703 34.5 132.8 5.0 2.1 3 554 25.5 375 280 54.0 19.0 164 182 82 1090 10.7 15.3 174 114 026 25.4 94.2 4.0 2.4 2 781 26.1 363 000 53.1 18.5 95 175 76 550 68.9 1.4 154 64 885 17.0 61.9 number 1 600 000 45.0 80.4 1 600 000 45.0 80.4 1 600 000 45.0 80.4 1 600 000 46.0 81.0 1 600 000 46.9 81.5 2001/02 2000/01 1999/00 1998/99 the registered shares are not traded on the swiss exchange restriction of voting rights there are no limits on registration or voting rights conditional share capital as of march 31 2003 35 270 bearer shares chf 1763 000 future events shareholders meeting 2002/03 interim report 2003/04 press and financial analysts meeting 2003/04 shareholders meeting 2003/04 july 24 2003 at the congress center metalli zug november 28 2003 june 17 2004 at the hotel widder zurich july 22 2004 at the congress center metalli zug for issue to employees and members of the board of directors of the company or subsidiaries based on continuing operations only proposal of the board of directors

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annual report 2002/2003 carlo gavazzi group

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inside out the concept carlo gavazzi adopts in this issue presents two opposite and complementary ways to observe and capture the automation components and the electronic packaging product worlds x-rays and camera obscura the x-ray imaging technology is often used in the quality control tests on micro elements this visual record allows manufacturers to really see through the products and check on their inner state if scanned and optically inverted x-rays offer also an extremely vivid view of any detail of products from their internal structure with an unusual look to the observer faag studio associati conducted a successful experiment with carlo gavazzi products by the courtesy of stellario amato at the procol company the results of this innovative aesthetic use of technology can be appreciated in the business units sections of this annual report the camera obscura technique on the other hand dates back before the invention of photographic cameras and films sensitive paper is introduced in cylindrical boxes placed at a calculated distance from any picture set after a hole is opened into the box the paper is directly impressed by light which literally defines image without the aid of film or lens the themes usually treated by this technique are portraits or landscapes it is the first time photos so rich in atmosphere have been applied to technical products with a new blur effect noris lazzarini of exchange studio milan offered this rare know-how for the images of the divider presenting the financial section of this report simone kalt contributed to the layout and graphic solution framing this concept in a new way in classic style high-tech positive x-rays from the inside and traditional camera obscura for the outside in a complementary relationship to describe 2002/03 carlo gavazzi products inside out 2 carlo gavazzi group

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index carlo gavazzi group 4 6 8 10 14 18 letter to the shareholders review of operations group profile automation components electronic packaging corporate governance financial statements 25 consolidated financial statements of the carlo gavazzi group financial statements of carlo gavazzi holding ag 43 appendices 49 50 group companies credits

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letter to the shareholders review of operations group profile automation components electronic packaging corporate governance letter to the shareholders dear shareholders the conditions in the markets which your company serves remained difficult throughout the financial year 2002/03 the economic downturn caused by the bursting economic bubble of 2000 and the aftermath of improve operational efficiencies in the factories and distribution network leading to an improved leaner structure and higher operating margins and overall profitability operating profit and net profit before and after taxes all improved by approximately chf 2 million against the previous year an excellent base for significantly improved earnings has been laid once investments in capital goods resume werner s welti chairman of the board september 11 enhanced by uncertainties on an iraq war affected market demand negatively electronic packaging the business unit s performance in 2002 was most severely affected by two cumulative effects the worst down cycle of global telecommunication the company s main market coupled with a marked devaluation of the us dollar against the swiss franc the great telecom infrastructure collapse caused a substantial decline in revenues which adversely affected our results however management accepted the challenge and took the hard decision required to help ensure the long-term viability of this operation building on our core competencies unabated efforts were made to identify new customers new applications and new markets reducing dependency on the ailing telecommunication market though human resources had to be adjusted to the lower revenue the proven business strategy to offer our customers a one-stop shop with leading-edge technology for connectivity packaging and computing solutions remained unchanged after the shortfall in demand in 2001 global telecommunication markets addressed by the electronic packaging business unit declined by another 40 during 2002 the practical consequence of the downturn of this sector is evidenced by the shrinkage in turnover of the business unit s largest customer by almost chf 100 million over the past couple of years the damage resulting from this decline has been contained by the implementation of specific marketing and sales programmes addressing new markets and applications and with rigorous and continuous restructuring reducing workforce and operating expenses thanks to enhanced product innovation application focus a solid global sales network and a dedicated team the automation components business unit successfully expanded the turnover of its strategic products consequently the business unit succeeded in increasing its market share notably and in improving its profitability significantly over the previous year strategic direction last year s divestiture of the engineering and contracting business unit ecbu was beneficial for the group despite the high price paid the group freed itself from a business with a traditionally volatile performance and fluctuating earnings which were always difficult to forecast concentrating on two electronic businesses one headquartered in europe and one in the united states both with a meaningful market position will allow the group to expand continuously and achieve solid profitability once the present economic downturn ends earnings are expected to become more stable than in the past as there is a balancing effect in the results of the group due to the different industrial cycles of the business units after the divestiture of the ecbu the group organisation has recently been revised with the aim to further lighten the structure consequently the board of directors decided to shorten the line of command by absorbing the ceo position the ceos of the two autonomous business units will report directly to the parent company board both business units have reached the role of substantially independent companies and will be managed with broader autonomy and full responsibility for strategy and operations financial results as a result of the declining telecommunication sector and unfavourable currency developments bookings on a comparable basis expressed in chf declined by 17 and operating revenue by 22 against the previous year s level while operating profit decreased by chf 6 million and net earnings from continuous operations by chf 5 million renewed devaluations of all major currencies concentrating on two against the chf negatively impacted the electronic businesses will company s bookings and operating revenue allow the group to expand by more than 6 continuously automation components the worldwide demand for automation components was sluggish during 2002 in line with the contracting demand for machine tools and other capital goods in this highly competitive market environment the business unit management continued its commitment to application-oriented product innovation and concentrated its efforts to expand the customer base and enlarge the market share for strategic products vigorous programmes were enacted to 4 carlo gavazzi group

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during 2003/04 the automation components business unit will accelerate its long-term product innovation programme and plans to aggressively expand its turnover of core products leading to improved market shares in defined strategic territories ambitious profit improvement programmes are expected to lead to better manufacturing efficiency and to a higher return on the business unit s capital employed the electronic packaging business unit will expand the current portfolio by developing more profitable new products for new market segments with high value added capitalising on the natural synergies of each of its divisions to foster and enhance the growth of higher-level systems new challenges as we work to return to profitability which is clearly our first priority assuming no fundamental changes in the markets in which we operate group management is optimistic that thanks to an expanded product portfolio and a broadened customer base sales and profit figures for the current year will exceed those of the previous period our lean entrepreneurial structures and state-of-the-art product lines position us well to profit from an economic recovery expected to occur once the excessive capacity built in the late 1990s has worked its way out of the market acknowledgements as newly-elected chairman and on behalf of the board of directors i thank enzo urbani former ceo and chairman for his contributions over the last years and for his continued support as vice-chairman appreciation goes to all our employees who have dedicated their endeavours to the company in a difficult year and in particular to the ones of the electronic packaging business unit who have displayed courage and determination coping with a traumatic downturn last but not least i want to thank our shareholders for their continuous trust throughout this most difficult period corporate governance good corporate governance is intended to protect shareholders interests balancing entrepreneurial leadership with control and transparency mechanisms while supporting value creation and efficient decision making the carlo gavazzi group is committed to this and to meeting international standards and legislative requirements in the way the company organises its leadership structures and processes outlook it has become increasingly more difficult to predict how the economy will unfold in the coming quarters we do not anticipate any meaningful short-term recovery in the united states or in europe the year ahead will surely see many werner s welti chairman of the board carlo gavazzi group 5

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letter to the shareholders review of operations group profile automation components electronic packaging corporate governance review of operations structure the organisational structure of the group remained unchanged in the year under review it is composed of the two business units automation components with its operational head office in lainate milan italy and electronic packaging with its head office in brockton ma usa due to the decline of the operating revenue of electronic packaging during the financial year and to the depreciation of the us dollar versus the swiss franc automation components operational revenues are now more than double the ones of electronic packaging or 4.8 and reduced its workforce by 74 employees or 8 the average number of personnel declined by 165 employees or 14 to 1033 total personnel expenses decreased by chf 12.0 million or 15 to chf 68.5 million compared with chf 80.5 million in the previous year despite the efforts to reduce the fixed cost structure investments in research and development were kept at 4.7 of operating revenue as in the previous year this expenditure was charged in full to the income statement depreciation of tangible assets amounted to chf 6.4 million a decrease of chf 1.3 million compared with the previous year due to the implementation of statement of financial accounting standards no.142 as of april 1 2001 intangible assets with indefinite useful lives are no longer amortised but tested instead for impairment no impairment of goodwill was identified despite the very difficult market conditions the carlo gavazzi group showed an operational break-even situation the decrease in operating profit amounted to chf 7.0 million whereas automation components could increase the operating profit margin by 1.3 percentage points to 6.0 electronic packaging suffered a negative operating margin of 7.1 of sales mainly as a consequence of the lower sales volume bookings and backlog compared with the previous year consolidated bookings decreased by 17 to chf 209 million the book-to-bill rate however increased from 96 to 102 electronic packaging suffered from a decrease due to the enhanced decline of the demand in the us telecom supply industry in 2002 in particular the bookings from customers in the telecom industry decreased by 72 automation components despite adverse market conditions held its bookings at the same level but for the currency effect the order backlog at year-end for the group reached 21 of revenues as opposed to 16 in the previous year now corresponding to work on hand for approximately two and a half months income statement consolidated operating revenue decreased by 22 to chf 205 million electronic packaging was particularly hit with a decrease of 45 to chf 66 million whereas automation components showed stable revenues of chf 139 million but for the currency effect the different sales development in north america and in europe as well as the depreciation of the us dollar resulted in a higher share of the european activities the consolidated gross margin increased by 2.9 percentage points to 36.5 gross profit declined by chf 13.8 million due to the decrease in volume and the devaluation of the us dollar automation components with the higher gross profit margin of 45.1 outweighs electronic packaging with a gross profit margin of 18.5 electronic packaging has lost 2 percentage points of its gross margin mainly due to lower operating revenue automation components however resisted soft markets and increased its margin slightly by 0.3 percentage points cost reduction programs led to a reduction of selling general and administrative expenses of 8.2 to chf 74.7 million electronic packaging reacted to the market conditions by reducing its overhead structure by chf 5.1 million or 23 and by laying off 94 employees or one third of its workforce automation components reduced expenses by chf 2.8 million 6 carlo gavazzi group geographical revenue distribution 2002/2003 42 north america 35 europe without italy 19 italy 17 italy 4 rest of the world 4 rest of the world 2001/2002 53 north america 26 europe without italy

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lower interest rates helped net interest decrease by chf 0.6 million to chf 1.7 million or 0.8 of operating revenue whereas the carlo gavazzi group posted a positive cash flow of chf 5.8 million the loss before income taxes and minorities amounted to chf 3.2 million income taxes show a credit of chf 0.5 million it is due to the income tax refund which electronic packaging received as a result of its prior year loss the second year of a severe decline in the market conditions caused pre tax profit return on equity and return on capital employed for the gavazzi group to be negative balance sheet net working capital decreased by chf 13.1 million to chf 49.7 million capital employed in accounts receivable decreased by chf 9.0 million to chf 59.9 million inventory levels were reduced by chf 10.3 million to chf 31.0 million a reduction of 25 inventory turns calculated on the basis of cost of goods sold reached 4.8 accounts payable decreased by chf 1.8 million to chf 28.0 million therefore the ratio accounts payable-to-accounts receivable remained almost stable at 42 goodwill is not impaired its value decreased solely due to the devaluation of the usd against chf by 20 on a year-end to year-end basis cash of chf 3.4 million was used by operating activities whereas cash provided from the income statement was positive by chf 5.8 million capital expenditure in fixed assets of chf 4.7 million and retirement of fixed assets of chf 1.4 million netted out to chf 3.3 million of investing activities net interest-bearing debt increased by chf 4.3 million to chf 37.2 million the debt-to-equity ratio remained good at 1:2.4 total equity decreased by chf 7.1 million to chf 89.7 million mainly due to translation differences caused by the substantial devaluation of the usd and the loss of electronic packaging with an almost unchanged equity ratio of 46 the financing position of the carlo gavazzi group continues to be strong key figures chf million bookings operating revenue gross profit sg&a expense ebit net income cash flow 2002/03 208.9 204.8 74.7 74.6 -0.9 -2.7 5.8 2001/02 252.8 263.3 88.4 81.3 6.1 2.1 8.1 -17.4 -22.2 -15.5 -8.2 28.4 carlo gavazzi group 7

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letter to the shareholders review of operations group profile automation components electronic packaging corporate governance group profile our mission carlo gavazzi group is an international electronics group with activities in the design manufacture and marketing of electronic equipment targeted at the global markets of industrial automation and information processing our objectives for customers to provide them with technologically innovative and competitive solutions in compliance with their requirements and expectations for employees to create an environment conducive to their professional and personal development for shareholders to obtain a fair and equitable return on their investments through sustained development of our core activities our structure carlo gavazzi is a diversified internationally active industrial group organised in business units under the umbrella of a holding company it is the function of the holding company to ensure planning and development of the group s business portfolio to choose a coherent set of strategies and objectives to monitor their implementation and the efficiency of the corresponding management tools and processes to select the upper-level management to directly manage corporate finance controlling tax planning management information systems communication and investor relations the business units operate separately within the framework of defined strategies and objectives they are responsible for research and development manufacturing quality assurance marketing and sales human resources logistics finance and control group executives lead their business units as autonomous businessmen with strong entrepreneurial drive and full profit and loss and balance sheet responsibility our principles customer focus to create added value for our customers by identifying and meeting their requirements and establishing long-term partnerships organisation to adapt structures and processes to market needs and delegate responsibility corporate culture to promote an environment conducive to mutual respect and cooperation management style to mark clear leadership and integrity by doing what we say 8 carlo gavazzi group

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our activities automation components business unit this unit designs and manufactures in its factories located in denmark italy and malta electronic control components for the global industrial automation markets the products sensors monitoring relays timers solid-state relays electronic motor controllers safety devices and fieldbus systems provide automation solutions for machinery equipment plants and buildings typical customers are original equipment manufacturers of packaging machines plastic-injection moulding machines conveying and material handling equipment door and entrance controls systems and lifts value added resellers and distributors are other effective channels to the market for the unit the products are marketed across europe north america and asia through a network of 17 wholly-owned carlo gavazzi sales companies and in other countries by more than 40 independent national distributors electronic packaging business unit this unit designs manufactures and markets in the usa standard and custom products supporting open architecture bus structures such as vme compactpci and advancedtca the products include enclosures and high-speed backplanes switch fabric and high-performance i/o solutions as well as compactpci single board computers the unit s system integration expertise provides customers with complete and fully tested level 5 system solutions electronic packaging operates manufacturing facilities both on the east and west coasts of the usa the unit s main customers are manufacturers of commercial and military telecommunications equipment mass-storage units for data processing speciality computers medical equipment and systems for industrial automation carlo gavazzi group 9

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letter to the shareholders review of operations group profile automation components electronic packaging corporate governance automation components a hesitant recovery the year under review has been difficult since april 2002 the served markets remained fragile and exposed to unexpected developments a risk of a continuing downturn remained it proved difficult to judge how quickly confidence automation components also started to execute clearly defined actions so as to improve under-performing sales units product innovation the automation components business unit progressed in the development of new products to complete its core product ranges aiming to satisfy the requirements of the target market segments in the sensor field a new laser sensor family featuring the world s smallest unit with teach in function was launched the design of additional sensor products for automated industrial doors and for the lift and elevator markets was completed the range of solid-state relays was broadened by additional low-noise series and by a new hybrid relay dedicated to the heating ventilation and air conditioning market new highpower models and units for installation on printed circuit boards enhanced the range of soft starters safety products satisfy the growing demand for safety applications in factory automation to meet such demand a completely new line of safety devices including mats modules magnetic sensors light curtains and switches was launched the dupline® field and installationbus product-line was enlarged with new modules focusing on specific applications such as building automation dupline has become even more flexible and powerful as a new central unit has been introduced to the market thanks to the modbus protocol and its built-in gsm modem this unit enables dupline to manage thousands of signals simultaneously interfacing directly with personal computers and/or programmable logic controllers dino masili group executive would return and markets rebound significant internal changes were required to address a further potential deterioration of market demand financial performance the business unit s results for the reporting year were in line with management s expectations as anticipated in last year s annual report markets remained weak while sales declined during the first half-year bookings and operating revenue recovered during the second semester for the full-year the low demand and the unfavourable currency development resulted in a modest revenue decline of 2 versus last year as a result of the reduction of operating expenses and the improved focus operating profit increased by 27 to reach chf 8.4 million improved efficiencies the sale of the electromechanical relays manufacturing facility was completed and the organisation and strategy refocused as a result the business unit is now positioned to deliver better results while the operating revenue remained flat the unit significantly improved the performance of its manufacturing facilities unified approaches to lean manufacturing and research and development processes were developed application engineering teams located in each factory worked closely with oem customers to develop innovative and customised solutions initiatives to further enhance quality integrated logistics and customer support were implemented and are progressing well each manufacturing unit is a centre of during the recent years of competence focusing on a dedicated sluggish market demand we have core product line including product repositioned and strengthened management research and development manufacturing and product sales support our business unit each factory is committed to permanently upgrade its expertise and skills to satisfy the requirements of the selected market segments within the sales and marketing organisations a shift to a consistent customer-oriented approach took place efforts to exploit internal marketing skills and product support were intensified and led to market share gains in the difficult north american and european markets 10 carlo gavazzi group strategy and focus at the heart of the ongoing activities is a strategy focusing on core product lines underpinned by three principal initiatives product innovation market expansion and a constant pursuit of further efficiency improvements in the manufacturing operations implementing this strategy a number of key factors for success kfs were identified first kfs focus on products the strong commitment to innovation and product development allows automation components to further enhance its market position four manufacturing units in three countries are committed to work towards these objectives second kfs focus on markets the selection of priority markets and the application of country-specific strategies are prerequisites for the profitable extension of market shares a wide range of

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