Defined benefit plan for pensions

Some Group companies in Austria, USA, Finland, Germany and Sweden provide defined benefit pension plans for some classes of employees. Provisions for pension obligations are established for benefits payable in the form of retirement, disability and surviving dependant pensions. The benefits offered vary according to the legal, fiscal and economic conditions of each country. Benefits are dependent on years of service and in some cases on the respective employee’s compensation.

The following table reconciles the funded status of defined benefit plans to the amounts recognised in the balance sheet:

(in TEUR)	2004	2003
Present value of funded defined benefit obligations	19,637	22,087
Fair value of plan assets	(10,891)	(8,266)
	8,746	13,821
Present value of unfunded defined benefit obligations	19,145	16,516
Unrecognised actuarial gains/losses	(711)	(1,744)
Net liability in balance sheet	27,180	28,593

employeebo.htm

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Pension expense is comprised of the following:

(in TEUR)	2004	2003
Current service costs	1,240	965
Interest expense on obligations	1,591	886
Expected return on plan assets	(79)	(7)
Net actuarial gains/losses recognised	4,085	(143)
Past service costs	0	7,720
Effect of any curtailment or settlement	(8,672)	(10)
	(1,835)	9,411
Payments to defined contribution plans	12,334	12,755
	10,499	22,166

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Past service costs result from recognition of the risk relating to general social insurance (mainly disability insurance) in Finland as a defined benefit obligation in 2003.

Principal actuarial assumptions used to determine pension obligations as of 31 December were as follows:

(in per cent)	2004	2003
Discount rate	5.00%	5.75%
Wage and salary increases	3.00%	3.00%
Retirement benefit increases	2.50%	2.50%

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Severance payments

(in TEUR)	2004	2003
Present value of unfunded defined benefit obligations	29,351	25,221
Net liability in balance sheet	29,351	25,221

employeebo3.htm

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Severance expense is comprised of the following:

(in TEUR)	2004	2003
Current service costs	1,392	1,473
Interest expense on obligations	1,358	1,466
Net actuarial gains/losses recognised	2,728	(2,354)
	5,478	585
Payments to defined contribution plans	73	21
	5,551	606

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Principal actuarial assumptions used to determine severance obligations as of 31 December were the same as used for pension obligations.

Management share option plan

A selected group of executives employed by the Group as at 1 June 2001 were eligible to participate in a Management Share Option Plan in connection with the Initial Public Offering. Each eligible executive who has subscribed shares having an aggregate subscription value calculated at the Offer Price (21 EUR per share) of at least 20,000 EUR (each such subscription a "Private Investment”) is eligible for a special remuneration in the form of option rights. These option rights can be exercised provided that the average price of the shares during two separate assessment periods exceeds a certain percentage of the Offer Price. The first assessment period will run for a period of three months preceding the second anniversary of the initial listing of the shares on the Vienna Stock Exchange, whereas the second assessment period will run for a period of three months preceding the third anniversary of the initial listing of the shares on the Vienna Stock Exchange. If the average market value of the shares exceeds the Offer Price by 15% in the first assessment period (Option 1) or by 20% in the second assessment period (Option 2), the eligible executive will be entitled to purchase up to a maximum of 1,500, 2,500 and 5,000 shares with respect to Option 1 or Option 2 at the Offer Price depending on the seniority of the relevant executive, provided that the relevant executive can prove uninterrupted ownership of his Private Investment until the end of the assessment period. The options can be exercised only once and are not transferable. Option 1 could not be exercised, however exercise of Option 2 was possible, as the average market value of the shares in the second assessment period exceeded the Offer Price by more than 20%. The options can only be exercised at given times. Each participant may subscribe up to 50% of the number of shares stated in the Average Price Notice immediately after exercise of the option and payment of the pro-rata subscription price, the relevant participant can subscribe up to the remaining 25% of the shares set out in the notice on the exercise of the option. At the end of a six-month term from the exercise of the option and payment of the remaining subscription price, the relevant participant can subscribe up to the remaining 25% of the shares set out in the notice on the exercise of the option.

Due to legal requirements, executives in the United States were not allowed to make a Private Investment but were granted option rights. Out of 105,500 options outstanding on 31 December 2003 66,750 options have been exercised in 2004; the weighted, average market share price at the time of exercise amounted to 40,70 EUR. 22,250 options were useable on 31 December 2004 and have been exercised in January 2005. The 16,500 remaining options have lapsed in 2004. Andritz provided these shares by using the repurchased own shares.

The 97^th Annual General Meeting of Shareholders on 30 March 2004 resolved a Share Option Program for Managers and Members of the Managing Board. The number of options granted to the different Manager varies, depending on the area of responsibility, between 1,500, 2,500 and 5,000 shares for Managers, to 10,000 for Board Members and 12,500 for the CEO. The options are to be drawn from the pool of shares bought back under the corporate share buy-back program. One share option entitles to the purchase of one share. In order to exercise a share option, eligible persons must be in active employment of Andritz AG or one of its affiliates from 1 May 2004 until before each date of exercise an option. Another requirement is that Managers must have invested at least 20,000 EUR  in  Andritz shares from their own resources , and the Members of the Managing Board at least 40,000 EUR.

The exercise price of the option is unweighted average closing price of Andritz shares in the four calendar weeks following the 97^th Annual General Meeting of Shareholders on 30 March 2004 and amounts to 37,53 EUR. Option can be exercised between 1 May 2006 and 30 April 2008 (=period of exercise) provided that

the average unweighted closing price of the Andritz share over twenty consecutive trading days within the period from 1 May 2006 and 30 April 2007 is at least 15% above the exercise price and the earnings per share in business year 2005 (based on the total number of shares listed) or the earnings per share in business year 2006 (based on the total number of shares listed) are at least 15 % above the earnings per share in business year 2003 (based on the total number of shares listed) or that

the average unweighted closing price of the Andritz share over twenty consecutive trading days within the period from 1 May 2007 and 30 April 2008 is at least 20% above the exercise price and the earnings per share in business year 2006 (based on the total number of shares listed) or the earnings per share in business year 2007 (based on the total number of shares listed) are at least 20 % above the earnings per share in business year 2003 (based on the total number of shares listed).

If the conditions of exercise are met, 50% of the options can be exercised immediately, 25% after three months and the remaining 25% after a further three months. Share options can only be exercised by way of written notification to the company. The share options are not transferable. The shares purchased under the Share Option Program are not subject to a ban on sales over a certain period.

The total auf options granted in 2004 amounts to 174,500, which is equal to the total of outstanding options on 31 December 2004. The fair value of the options at the time of granting amounts to EUR 1,220 thousand, thereof EUR 356 thousand has been reported as proportionate expense in 2004. The calculation of the fair value is based on the Black-Scholes Option Pricing Model. The share price at the time of granting the options is the closing price of the Andritz share on 17 May 2004 and amounts to EUR 37,05. The exercise price of EUR 37,53 was calculated in accordance to the rules of the option program. For the lifetime of the options a period of two years was assumed. The expected dividend yield was fixed with 3%, a discount rate of 5% was used. The expected volatility was calculated on the basis of the historical development of the share price of the Andritz share during the 30 months preceding the granting date of the options. Further parameters of granting the options were not used.