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0 Pirelli & C. S.p.A. Milan Annual Report 2004 0 2 n a l i M . A . p . S . C & i l l e r i P A valle dell’assemblea, questa relazione di bilancio sarà consultabile sul sito www.pirelli.com Preliminary Information Directors’ Report Consolidated Financial Statements
Call to the AGM CALL TO THE ANNUAL GENERAL MEETING OF Contents THE SHAREHOLDERS Pirelli & C. S.p.A. Structure of Pirelli The shareholders of Pirelli & C. Società per Azioni are convened to the ordinary session of the Group at December 31, shareholders’ meeting to be held in Milan, Viale Sarca 214 2004 Pirelli & C. S.p.A. – at 3:00 P.M. on Wednesday April 27, 2005 in first call on the Stock Market – at 10:30 A.M. on Thursday April 28, 2005 in second call Selected Financial Data to pass resolutions on the following Chairman’s Letter ORDER OF BUSINESS
1. The Board of Directors’ Report on Operations, the Board of Statutory Auditors’ Report, the financial statements at December 31, 2004 and the appropriation of net income. 2. Appointment of the Board of Directors after establishing the number of its members; determination of the compensation of the directors. 3. Determination of the compensation to be assigned to the members of the Supervisory Panel appointed pursuant to Legislative Decree No. 231 dated June 8, 2001. 4. Appointment of the audit firm for the audit of the statutory financial statements, the consolidated financial statements and the six-month reports for the years ending December 31, 2005, 2006 and 2007. 5. Proposal for the purchase and disposition procedures of treasury shares, after canceling the resolution voted by the shareholders' meeting of May 11, 2004 for the portion not used. Inherent and consequent resolutions. Conferring of powers.
Pirelli & C. S.p.A. Via G. Negri, 10 20123 Milano Web site: http://www.pirelli.com E-mail: [email protected] 1 Preliminary Information Directors’ Report Consolidated Financial Statements
Call to the AGM CONTENTS Contents Pag. Pirelli & C. S.p.A. Information on operations 1 Structure of Pirelli Call to the Annual General Meeting of the Shareholders 1 Group at December 31, Pirelli & C. S.p.A. 3 2004 Structure of Pirelli Group at December 31, 2004 4 Pirelli & C. S.p.A. Pirelli & C. S.p.A. on the Stock Market 5 on the Stock Market Five-Year Summary of Selected Consolidated Financial Data 6 Selected Financial Data Chairman’s Letter 7 Chairman’s Letter Directors’ Report on Operations 9 The Group 10 Energy Cables and Systems Sector 29 Telecom Cables and Systems Sector 46 Tyres Sector 58 Real Estate Sector 69 Pirelli & C. Ambiente 73 Information Systems 74 Health, Safety and the Environment 78 Human Resources 80 Proforma Data 82 Related Party Disclosures 84 Equity Investments held by Directors, Statutory Auditors and General Managers 85 Stock Option Plans 86 Corporate Governance 90 International Accounting Standards 125 Pirelli & C. S.p.A. - Summary Data 130 Shareholders’ Resolutions 132
Consolidated financial statements at December 31, 2004 139 Consolidated Balance Sheets 140 Consolidated Statements of Income 144 Notes to the Consolidated Financial Statements 145 Supplementary Information 171 Independent Auditors’ Report 191
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Call to the AGM PIRELLI & C. S.P.A. Contents Pirelli & C. S.p.A. Board of Directors Structure of Pirelli Group at December 31, Honorary Chairman Leopoldo Pirelli 2004 Chairman Marco Tronchetti Provera Pirelli & C. S.p.A. Deputy Chairman Alberto Pirelli on the Stock Market Deputy Chairman Carlo Alessandro Puri Negri Selected Financial Data Managing Director and General Manager Carlo Buora Chairman’s Letter Directors Carlo Acutis * Gilberto Benetton Carlo De Benedetti * Gabriele Galateri di Genola Giuseppe Gazzoni-Frascara * Mario Greco Georg F. Krayer * Giulia Maria Ligresti Massimo Moratti Luigi Orlando Giovanni Perissinotto Giampiero Pesenti * Ennio Presutti * Carlo Secchi * Vincenzo Sozzani Frank Vischer * * Independent directors Secretary to the Board Carlo Montagna
Board of Statutory Auditors Chairman Luigi Guatri Standing members Roberto Bracchetti Paolo Francesco Lazzati Alternate members Franco Ghiringhelli Sebastiano Guido
General Managers Cables and Systems Sector Valerio Battista Tyres Sector Francesco Gori Administration and Control Claudio De Conto Finance Luciano Gobbi
Independent Auditors PricewaterhouseCoopers S.p.A.
Note: The nature of the powers delegated to the Chairman, Managing Directors and General Managers is described on page 90 under Corporate Governance.
Web site: http://www.pirelli.com E-mail: [email protected] 3 Preliminary Information Directors’ Report Consolidated Financial Statements
Call to the AGM STRUCTURE OF PIRELLI GROUP Contents AT DECEMBER 31, 2004 Pirelli & C. S.p.A. Structure of Pirelli Group at December 31, Pirelli & C. S.p.A. 2004 Pirelli & C. S.p.A. on the Stock Market 57.7% * Olimpia Selected Financial Data S.p.A. Chairman’s Letter
100% 100% 100% 100% 53.9% 100% 51%
Pirelli Cavi Pirelli Cavi Pirelli & C. Pirelli Pirelli Pirelli Tyres Pirelli Labs e Sistemi e Sistemi Real Estate Broadband Ambiente Holding N.V. S.p.A. Energia S.p.A. Telecom S.p.A. S.p.A. Solutions S.p.A. Holding S.p.A.
* 50.4% at December 31, 2004
Cable and Systems Tyres Argentina France Malaysia Tunisia Argentina Spain Australia Germany Portugal Turkey Brazil Turkey Brazil Hungary Romania United Kindom Egypt United Kindom Canada Indonesia Slovakia United States Germany United States China Italy Spain Italy Venezuela Finland Ivory Coast The Netherlands
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Call to the AGM PIRELLI & C. S.P.A. ON THE STOCK MARKET Contents Pirelli & C. S.p.A. Pirelli & C. S.p.A. share capital movements since December 31, 2000
Structure of Pirelli Date Capital (thousands) Transactions Group at December 31, 120 2004 December 2000 Euros 320,959 bond conversions 115 Pirelli & C. S.p.A. 110 on the Stock Market November 2001 Euros 325,409 bond conversions 105 100 Selected Financial Data December 2002 Euros 339,423 bond conversions 95 Chairman’s Letter J FMAMJ J ASOND May 2003 Euros 272,083 exercise of the right of share withdrawal following the change in the company type S&P MIB Index (monthly average) and the corporate business purpose Market price of ordinary shares (monthly average) June 2003 Euros 1,084,247 issue of shares cum warrants (1 warrant : 1 share) with rights offering (3 ordinary shares : 1 share of any class) at Û 0.52
August 2003 Euros 1,799,400 share capital increase as a result of the merger by exchange
December 2004 Euros 1,800,383 warrant conversion
February 2005 Euros 1,974,633 warrant conversion
March 2005 Euros 2,763,953 issue of shares with rights offering (2 ordinary shares : 5 shares of any class) at Û 0.70
April 2005 Euros 2,763,969 warrant conversion
Number of shares outstanding at December 31, at April 27, 2004 2005
Pirelli & C. S.p.A. - Ordinary shares 3,327,511,185 5,180,560,610
Pirelli & C. S.p.A. - Savings shares 134,764,429 134,764,429 35,000,000 30,000,000
25,000,000
20,000,000
15,000,000
Market Trading on the Milan Stock Exchange 10,000,000
Shares traded Amount 5,000,000 Volume (in millions of euros) 0 J FMAMJ J ASOND Pirelli & C. - Ordinary shares 4,414,428,555 3,398 2004 Trading volumes of Pirelli & C. S.p.A. Pirelli & C. - Savings shares 107,612,954 79 ordinary shares (monthly average)
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Call to the AGM FIVE-YEAR SUMMARY OF SELECTED Contents CONSOLIDATED FINANCIAL DATA Pirelli & C. S.p.A. Structure of Pirelli (in millions of euros) Group at December 31, 2004 2004 2003 2002 2001 2000 Pirelli & C. S.p.A. Net sales 7,114 6,671 6,718 7,762 7,697 on the Stock Market Gross operating profit 725 628 523 704 850 Selected Financial Data Operating profit 380 268 118 297 432 Net income (loss) 274 4 (405) 194 3,759 Chairman’s Letter Net income (loss) attributable to Pirelli & C. S.p.A. 217 (39) (58) 125 1,405 Earnings per share (in euros) 0.06 (0.01) (0.09) 0.20 2.28
Fixed assets 6,054 5,902 6,596 7,092 3,728 Net working capital 514 566 991 1,314 667 Net invested capital 6,568 6,468 7,587 8,406 4,395 Shareholders’ equity 4,088 3,678 4,626 5,407 5,844 Provisions 1,011 1,045 911 970 1,186 Net financial (liquidity)/debt position 1,469 1,745 2,050 2,029 (2,635) Net equity attributable to Pirelli & C. S.p.A. 3,736 3,429 1,933 2,119 2,171 Equity per share (in euros) 1.08 0.99 2.96 3.39 3.52
Free cash flow 498 564 476 26 176 Cash flow per share 0.14 0.16 0.73 0.04 0.29 R&D expenditures 198 204 219 237 213 Depreciation 265 278 315 326 342 Capital expenditures 281 273 337 646 570
Gross operating profit / Net sales 10.19% 9.41% 7.79% 9.07% 11.04% Operating profit / Net sales - ROS 5.34% 4.02% 1.76% 3.83% 5.61% Net income / Net equity * - ROE 7.06% 0.10% n.s. 3.59% n.s. Operating profit / Net invested capital * - ROI 5.83% 3.81% 1.56% 3.53% 9.83% Net financial position / Net equity - gearing ratio 0.36 0.47 0.44 0.38 (0.45) Capital expenditures / Depreciation 1.06 0.98 1.07 1.98 1.67 R&D expenditures/Net sales (industrial aggregate) 3.01% 3.38% 3.45% 3.12% 2.85% Net sales per employee (in thousands of euros) 192 182 174 189 186
Pirelli & C. S.p.A. ordinary shares (No. in millions) 3,327.5 3,325.6 618.2 591.4 582.8 Pirelli & C. S.p.A. saving shares (No. in millions) 134.8 134.8 34.4 34.4 34.4 Total Pirelli & C. S.p.A. shares (No. in millions) 3,462.3 3,460.4 652.6 625.8 617.2 Treasury shares (No. in millions) 2.6 2.6 2.6 2.6 2.6
Factories (number) 74 77 79 84 87 Employees (No. at year-end) 37,154 36,337 37,350 39,771 42,509 including employees under temporary contracts 3,513 2,417 2,257 2,672 2,976
* Average amounts
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Call to the AGM CHAIRMAN’S LETTER Contents Pirelli & C. S.p.A. Dear Shareholders, Structure of Pirelli Group at December 31, 2004 was a year of growth for the Pirelli & C. Group. Significant 2004 improvements were recorded in all economic indicators. Efforts to focus on segments with higher added value and advanced Pirelli & C. S.p.A. on the Stock Market technology generated positive results in every business sector, despite a context of stagnation in the European economies. Selected Financial Data With regard to industrial operations, performance was Chairman’s Letter particularly satisfactory in the Tyres Sector – which, in 2004, reported the best performance of the last ten years in terms of profitability – and in the Energy Cables & Systems Sector, where Pirelli confirmed its role of international leadership, both in terms of its level of technology and market share, with a marked increase in operating profit. In the Telecommunications Cables & Systems Sector, the Cables and Optical Fiber business achieved a breakeven at the operating level, whereas, thanks to the new broadband access operations of Pirelli Broadband Solutions, sales more than doubled: the result of innovative technology developed in conjunction with Pirelli Labs. In 2004, the Real Estate Sector confirmed the trend of strong growth and succeeded in achieving all the objectives established in the three-year plan for the period 2003-2005. The growing influence of minority-owned investments led to a 23% increase in the operating profit inclusive of the share of the earnings of these investments in comparison with 2003.
Such results, achieved during the reorganization of the Pirelli Group – culminating in the summer of 2003 with the mergers that had the effect of streamlining the corporate structure – now make it possible to continue the strategic line, established in 2001, of refocusing the operations of Pirelli & C. S.p.A., on a more solid basis. In fact, the Board of Directors has decided to enhance the value of the activities of Energy Cables and Systems and Telecommunications Cables – which, today, produce better results than all the leading competitors – in the conviction that, with new shareholders, such activities can pursue the positive path of growth and creation of value trodden in recent years. Pirelli is most grateful to all the company’s employees who have worked in these sectors at every level, demonstrating their high level of professional skills. As a result, they have not only improved the competitiveness of the various Sectors, but have helped them to achieve their current results, despite the difficult market situation.
In the Tyres Sector, the strategy of refocusing the activities of the Pirelli Group involves the expansion of production capacity in areas and on markets with the highest growth. In fact, the company has decided to build a state-of-the-art plant for steelcord and high-performance car tyres in Romania, to meet the growing demand from the European markets. In South
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Call to the AGM America, there are plans to expand the new car tyre plant at Bahia and to build a new plant to produce giant tyres with radial Contents technology in the Gravataì area. Furthermore, in China, Pirelli & C. S.p.A. negotiations are currently in progress to set up a joint venture to Structure of Pirelli produce radial tyres for both heavy trucks and cars, with the aim Group at December 31, of seizing market share on the Chinese Original Equipment and 2004 Replacements markets, both of which are growing dramatically. Pirelli & C. S.p.A. Finally, Pirelli plans to expand its MIRS™ plants in Germany, the on the Stock Market United States and the United Kingdom, and to give a further Selected Financial Data boost to the development of CCM™ (Continuous Compound Mixing) for the mass production of innovative materials. These Chairman’s Letter investments will cost the company more than Euros 400 million over the next three years, a figure already budgeted in the industrial plan presented in May last year. In keeping with its mission as an international management company, a leader in manufacturing activities and a supplier of services with a high degree of innovative technology, Pirelli & C. S.p.A. also intends to speed up development of new technologies for broadband access and second-generation photonics with the Pirelli Broadband Solutions start-up. These are sectors in which Pirelli Labs has already filed a series of important patents, ensuring technological leadership on a global scale and the marketing of products and applications developed by research at the most advanced level.
In the Real Estate Sector, the intention is to proceed with development of the innovative business model which, in the space of a few years, has enabled Pirelli & C. Real Estate to establish itself as one of the leading players in the sector. In 2004, the portfolio managed by Pirelli RE exceeded a market value of Euro 10 billion – with the company’s share equal to 24% – while expansion continues for seeded real estate investment funds which have activated an important new channel for the appreciation of savings in Italy. At the same time, the Franchising Network is being set up to distribute real estate services and associated financial and insurance products, which will allow the creation of important synergies with Pirelli’s corporate activities. The strategic line being followed by the Group is also reflected in the hub created in the sector of technologies for the Environment, which combines activities in the field of renewable energy from waste with others in the field of filters and fuels with a low environmental impact, such as GECAM-Il Gasolio Bianco™.
Thanks to these investments, in years to come, our competitive strength will be ever more firmly based on technological innovation and research, and on the quality and professional competence of the men and women who work for Pirelli. The solid equity and financial base, the transparency and correctness of our conduct, and the strong-felt will to create value are, and will always continue to be, the three convictions on which the trust of the shareholders must rest for the future of Pirelli.
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Introduction DIRECTORS’ REPORT ON OPERATIONS The Group Energy Cables and Dear Shareholders, Systems Sector In 2004, all economic indicators show a significant improvement. Telecom Cables and Systems Sector The year ends with a net income of Euros 274 million compared to a net income of Euros 4 million in 2003. Tyres Sector The net income attributable to Pirelli & C. S.p.A. is Euros 217 million compared to a net loss Real Estate Sector attributable of Euros 39 million in the prior year. Pirelli & C. Ambiente Information Systems Net sales amount to Euros 7,114 million, a growth of 6.6 percent compared to the prior year. Health, Safety and the Operating profit rose from Euros 268 million in 2003 (4 percent of net sales) to Euros 380 million Environment this year (5.3 percent of net sales). Human Resources Proforma data The net debt position decreased from Euros 1,745 million at December 31, 2003 to Euros 1,469 Related Party million at December 31, 2004. Disclosures Equity Investments Total shareholders’ equity of the Group rose from Euros 3,678 million at December 31, 2003 to Euros held by Directors, 4,088 million at December 31, 2004. Statutory Auditor and The shareholders’ equity attributable to Pirelli & C. S.p.A. went from Euros 3,429 million to Euros General Managers 3,736 million. Stock Option Plans Corporate Governance International Accounting Standards Pirelli & C. S.p.A. - Summary Data Shareholders’ Resolutions
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The Group THE GROUP 2004 economic and financial review 2004 ECONOMIC AND FINANCIAL REVIEW Major events in 2004 Pirelli Group: summary In 2004, the Pirelli & C. S.p.A. Group recorded a significant data improvement of all economic indicators in all activity sectors of the Group thanks to actions focusing on higher value-added Subsequent events segments. As a consequence, the net income of the Group for Outlook for the 2004 posted a decisive growth: Euros 274 million compared to current year Euros 4 million 2003.
Industrial activities doubled their net income in 2004 thanks to excellent performance by all activity Sectors. Specifically, 2004 saw a further growth in the profitability of the Tyres Sector, which is at the very top levels of the market of reference. The Energy Cables and Systems Sector bettered all indicators and its international leadership position was confirmed both at a technological and at a market level. In the Telecom Cables and Systems Sector, the Cables and Fibers business reached breakeven while new activities in broadband access and photonics by Pirelli Broadband Solutions more Sales of broadband solutions have doubled as a result of collaboration than doubled sales to over Euros 60 million thanks to with Pirelli Labs. innovations developed in collaboration with Pirelli Labs.
The real estate sector, in 2004, recorded a strong growth in all major economic and balance sheet figures. The Pirelli Real Estate Group’s new activities grew rapidly: fund management, with four seeded real estate funds and, at year end, the commission to manage a sub-portfolio of the FIP-Fondo Immobili Pubblici real estate fund, activities for the purchase and management of non-performing mortgage loans and Pirelli RE Franchising, which in just one year has become the third- largest real estate agency network in Italy.
As for the investment in Olimpia S.p.A., in 2004, the company benefited from cash dividends received from its associated company Telecom Italia S.p.A., reporting net income of Euros 16 million compared to a loss of Euros 330 million in 2003. Taking into account the Group’s interest and One of Pirelli Tyres' objectives is to capture market share in Original other adjustments, the consolidated statement of income was Equipment in China. a positive figure of Euros 5 million compared to negative impact of Euros 100 in 2003.
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The Group MAJOR EVENTS IN 2004 2004 economic and The major events which occurred in 2004 are described below: financial review Major events in 2004 Pirelli Group: summary Industrial activities data • In January 2004, Pirelli finalized the purchase of 10 percent of Pirelli Submarine Telecom Subsequent events Systems Holding B.V. from Cisco Systems, to which it had sold the stake in 2000 for an Outlook for the equivalent amount of approx. US$ 75 million. This transaction took place after Cisco Systems current year exercised its right – as stated in the agreements concluded on August 3, 2000 – to resell the above holding to Pirelli for the same amount. Pirelli, after this transaction, holds the entire share capital.
• In January 2004, Pirelli Cavi e Sistemi Telecom won two important contracts for the supply of 4,000 km of OPGW (Optical Ground Wire) cables and services to the Algerian utilities company Sonelgaz, through the system integrator TCIL (Telecommunications Consultants of India). These two projects will enable Sonelgaz to build a new broadband telecommunications network for voice and data transmission and multimedia services that will encourage development within Algeria.
• In March 2004, Pirelli Cables Ltd – a British affiliate of Pirelli Cavi e Sistemi Energia S.p.A. – and Draka Holding N.V. signed a long-term contract under which Pirelli will supply Draka with low-voltage cables for the British market to be used for the electrical cabling of non- industrial and industrial buildings.
• On April 5, 2004, Pirelli Cavi e Sistemi Energia was awarded the contract to build a high- voltage turnkey link on behalf of the Singapore national electricity company SP Power Assets Ltd. to expand the southeast Asian country’s electrical network. The contract is worth approx. Euros 50 million. The project – the most important to be assigned in Asia in 2004 – will help to tackle the increase in demand for electrical power in Singapore, ensuring considerable advantages in terms of compensating peaks of demand for electrical power.
• On May 6, 2004, Alcatel and Pirelli signed an agreement regarding their respective submarine telecommunications systems. The agreement calls for Alcatel to purchase certain activities of Pirelli in this area and to be granted certain intellectual property rights in the same sector. At the same time, Pirelli will purchase a 5 percent equity interest in Alcatel’s submarine telecommunications systems business with reciprocal put and call options. The deal was concluded on August 26, after obtaining authorization from the Italian antitrust authority.
• On July 14, 2004, Pirelli Cavi e Sistemi Energia sold its 50 percent non-controlling equity investment in Afcab Holdings (Proprietari) Ltd., the sole shareholder of the South African power cables manufacturer, African Cables Limited, to the parent company Reunert Limited for a sum of African rands 165.75 million (about Euros 22 million), realizing a gain of Euros 7 million. Afcab Holdings had initially been a joint venture between Siemens and Reunert, a South African electronics group. Pirelli had taken over the investment in 1998 as part of the An agreement was signed between Pirelli and Alcatel regarding the acquisition of the activities of Siemens in the power cables sector of submarine sector. telecommunications systems.
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The Group Pirelli decided to sell its share in the company, in which it did not exercise control, preferring to focus on more strategic markets. 2004 economic and The deal was executed on September 30, 2004 after approval was obtained from the relevant financial review authorities. Major events in 2004 Pirelli Group: summary • On October 29, 2004, a joint venture was set up for steel data cord manufacturing in Romania with Pirelli holding an 80 percent stake and Continental a 20 percent interest. Subsequent events The joint venture, named S.C. Cord Romania S.r.l., will be Outlook for the directly involved in the building of a new factory at Slatina, current year which will directly serve the East Europe markets with a high growth rate. The new factory is slated for rapid development, with investments of up to Euros 40 million A joint venture was set up with S.C. over the next three years which will make it possible to Cord Romania for the manufacture of steelcord at the end of October manufacture, when fully operational, about 30 thousand tons 2004. of steel cord per year, employing roughly 350 persons. S.C. Cord Romania will thus be able to meet the growing demand for this important tyre component, which today exceeds demand by almost two times the supply. Steel cord is used by tyre manufacturers as the chief material for reinforcing the radial structure. A scale model of the future Romanian steelcord facility to be built at Slatina. Real Estate activities
• March 1, 2004 marked the date of the conclusion of the public sale offer and listing of the Tecla Fondo Uffici, the first listed fund by private contribution in Italy, with more than 37,000 subscriptions and demand which exceeded the offer by 44 percent. Pirelli Real Estate S.g.r. S.p.A., as manager of the Fund, subscribed to 2 percent of the Fund for an investment of about Euros 6.5 million. The offer price was set at Euros 505 per share. Tecla Fondo Uffici consists of 65 properties, mainly for services-office use or can be reconverted to that use, with a market value of Euros 926 Real estate activities: the placement million (a book value of Euros 786.9 million), plus Euros 25 of the Tecla Fondo Uffici fund million in cash. ended in March 2004.
• On April 8, 2004, the purchase from Beni Stabili of four multi-use buildings situated in the center of Naples was finalized for a total of Euros 46.1 million. The buildings were purchased by the company Tau S.r.l., which was sold on June 29, 2004 to the specialized real estate trading company Orione Immobiliare Prima S.p.A., in which Pirelli RE has a qualified minority stake.
• On April 30, 2004, since Peabody, a long-standing partner in Retail & Entertainment has exhausted its purchasing potential, and while waiting to sign a strategic agreement with Deutsche Bank through Gromis, a new joint venture with Morgan Stanley Real Estate Funds (MSREF 67 percent, Pirelli RE 33 percent), Pirelli RE perfected the purchase of eight commercial buildings located in central and northern Italy for a sum of Euros 147.8 million. The buildings have a total space of more than 150,000 m2 and are leased to a leading large- scale retailer.
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The Group • On June 21, 2004, Generali Properties, Pirelli & C. Real Estate and Lehman Brothers purchased a portfolio of 36 properties located throughout Italy and making up part of the 2004 economic and assets of the Generali Group, for a sum of Euros 272 million. The transaction was concluded financial review through the company Solaris S.r.l., in which Generali Properties and Pirelli Re each have a 40 Major events in 2004 percent stake and Lehman Brothers holds a 20 percent interest. Pirelli Group: summary data • June 29, 2004 marked the start of Cloe Fondo Uffici, the first seeded real estate fund destined exclusively for qualified investors. The Cloe Fondo Uffici Fund consists of 39 service-office Subsequent events buildings with a market value of Euros 873 million as appraised by the independent valuers Outlook for the CB Richard Ellis. current year About 70 percent of the buildings are located in centralized or semicentralized positions in Milan and Rome with the remaining portfolio spread throughout other major Italian cities. Pirelli Real Estate S.g.r. S.p.A., as manager of the Fund, subscribed to 5 percent of the Fund for an investment of Euros 15 million.
• On September 30, 2004, Spazio Industriale 2 S.r.l., a joint venture between Pirelli Real Estate (25 percent) and Soros Real Estate Investors (75 percent), finalized the purchase of 26 formerly-owned Enel properties from New Real (the vehicle company controlled by the DB Real Estate Global Opportunities fund, managed by Deutsche Bank and by CDC-IXIS), for the sum of approx. Euros 93 million.
• November 15, 2004 marked the early closing of the public offer for Olinda Fondo Shops, the third seeded real estate fund specializing in stores and commercial and entertainment structures. Demand exceeded the offer by roughly 270 percent. The 42 properties in the new Fund were contributed by Ganimede Due, Gromis and Tiglio II, companies controlled by Morgan Stanley Real Estate Funds and Iniziative Retail, the latter controlled by the Peabody Funds. The properties were identified and selected from portfolios purchased The Bicocca Village multiplex center during the last few years from Sai – Fondiaria, UNIM, was purchased by Olinda Fondo Shops fund. Rinascente, RAS and Banca di Roma. Subscription by investors to the Olinda Fondo Shops also gave the Fund the financial resources necessary for the purchase, which took place on December 23, 2004, of two multiplex centers from the companies Moncalieri Center S.r.l. and Bicocca Center S.r.l. for a total value of approx. Euros 180 million. Pirelli RE SGR S.p.A., as manager of the fund, subscribed to 5 percent of the Fund for an investment of about Euros 13 million.
• On November 26, 2004, Cordusio Immobiliare (company in the Unicredit Group) and the companies MSMC Immobiliare 4 and Aida (joint ventures between Pirelli RE and Morgan Stanley Real Estate Funds), reached an agreement aimed at appreciating a part of the non-strategic real estate assets of the Unicredit Group held by Cordusio Immobiliare, a wholly-owned subsidiary of UniCredit. The real estate portfolio covered by the agreement is composed of properties which include fractional units and land and properties for office use, the latter located generally in northern Italy. Subsequently, on December 21, 2004 by contribution to the company Modus S.r.l., Cordusio Immobiliare became the owner of a 16 percent stake in the company which, in addition to the real estate assets of UniCredit worth Euros 327.1 million at market value, has 11 properties of the Morgan Stanley – Pirelli RE joint ventures which came from the acquisition of ex-RAS and ex-Toro real estate properties located in Milan, Rome and Genoa
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The Group for a market value of approx. Euros 750 million. The union of the portfolios, with Asset Management and specialist services activities provided by Pirelli RE, is directed toward 2004 economic and appreciating and monetizing the real estate assets in the short/medium term. financial review Major events in 2004 • On December 16, 2004, placement commenced for the Clarice Light Industrial Fund, Pirelli Group: summary a seeded real estate fund, reserved exclusively for qualified investors. data The Fund is specialized in service-industrial properties such as warehouses, archives and Subsequent events laboratories. The newly-established Fund includes the properties contributed by Tiglio I and Tiglio II, companies indirectly controlled by Morgan Stanley Real Estate Funds. Outlook for the current year • On December 22, 2004, Pirelli RE SGR S.p.A. signed a contract with Investire Immobiliare SGR to manage a real estate sub-portfolio set up by the “Fondo Comune d’investimento Immobiliare Riservato” called “FIP – Fondo Immobili Pubblici”.
• On December 22, 2004, the first phase of the deal was completed for setting up a joint venture between Pirelli RE and Morgan Stanley Real Estate Funds (MSREF) in the non- performing loan sector. The deal, the terms of which had been established in the binding agreement signed in August 2004, has continued through execution of the first phase.
The agreement signed by the parties provide for the The Olinda Fondo Shops fund specializes in shops, shopping following transactions that have already been completed in centers and entertainment centers. December 2004: – purchase of a 15 percent stake by Pirelli RE in the non-performing loan portfolio owned by Morgan Stanley Real Estate Funds (gross book value at December 31, 2004 of approx. Euros 1.8 billion). This took place through the acquisition of 15 percent of the shares of the companies Mirandia and Tronador for some Euros 33 million; – purchase by Morgan Stanley Real Estate Funds of 2.1 percent of Pirelli RE treasury shares at a price, fixed in August 2004, of Euros 28.9 per share.
Besides providing for the continuation of purchasing activities for new medium-/large-size non-performing loan portfolios under the joint venture, the agreement also envisages the following transactions that are in the process of being finalized since the start of 2005: – sale of 100 percent of Pirelli RE Credit Servicing S.p.A. to SIB – Servizi Immobiliari Banche S.p.A. (MSREF) and sale of 47 percent of SIB to Pirelli RE by MSREF. A merger by incorporation of the two companies specialized in the management of non-performing loans is later anticipated which will give life to one of the leading non-performing loan operators in Italy. Shareholders in this new company resulting from the merger will be MSREF, indirectly (mainly through FONSPA - Istituto di Credito Fondiario e Industriale S.p.A.), with a 53 percent holding, and Pirelli RE with a 47 percent holding and a call option for Pirelli RE on the 53 percent stake starting January 2007 and put option for MSREF that can be exercised starting January 2008; – creation of a company jointly owned by Pirelli RE and MSREF (75 percent - 25 percent) for Asset Management of the non-performing loan portfolios, managing the portfolios currently owned by the two groups and devoting itself to the development of new deals.
• On December 23, 2004, Spazio Industriale 3, a joint venture between Pirelli RE (25 percent) and Soros Real Estate Investors (75 percent), signed a definitive agreement for the purchase of seven industrial properties from the Prada Group for approx. Euros 77 million. It also acquired the option to purchase another two industrial properties exercisable within three months of the closing date. The closing took place on January 19, 2005.
Web site: http://www.pirelli.com E-mail: [email protected] 14 Preliminary Information Directors’ Report Consolidated Financial Statements
The Group • On December 30, 2004, in implementing the aforementioned agreements, Morgan Stanley Real Estate Funds (MSREF) 2004 economic and and Pirelli RE along with the Special Situations group of financial review Morgan Stanley, specialized in the purchase and Major events in 2004 management of corporate credits, executed an agreement Pirelli Group: summary for the purchase of a portfolio of mortgage loans and data corporate credits from BNL. The gross asset value of the portfolio acquired is approx. Euros 430 million and consists Subsequent events of receivables for loans, more than half of which are Outlook for the guaranteed by industrial properties. This portfolio, in 2005, The first phase of a project for a current year will be the subject of a securitization transaction carried out joint venture between Pirelli & C. Real Estate and Morgan Stanley through the vehicle company ICR 8. Real Estate Funds in the non- performing loans sector was finalized in December. Corporate
• In 2004, 1,345,657,952 Pirelli & C. S.p.A. 2003-2006 warrants were exercised (equal to 86.2 percent of those issued). Accordingly, 336,414,488 ordinary shares were issued for cash proceeds of Euros 174.9 million. There are 216,197,374 warrants remaining at December 31, 2004 which, if exercised, correspond to 54,049,343 Pirelli & C. S.p.A. ordinary shares.
• On April 6, 2004, Pirelli, through the subsidiary Pirelli Finance Luxembourg S.A., exercised the right to purchase 47,155,300 Telecom Italia ordinary shares (equal to 0.46 percent of ordinary share capital) at an exercise price per share of Euros 2.12 for an equivalent amount of approx. Euros 100 million, as established in the call option contract regarding Telecom Italia shares signed in November 2001 with JP Morgan.
• On April 28, 2004, the Pirelli & C. S.p.A.’s “Shareholders’ Manual” was presented at Borsa Italiana headquarters. The manual was conceived with the intent of keeping readers updated on the corporate governance of the Company: from the full adoption of the recommendations contained in the “Self-Regulatory Code of listed companies” to the rationalization of the corporate structure which transferred all the main activities to one single operating holding company: from the adoption of the Code of Ethics to improvements for a rigorous and modern Internal Control System and to an environmental management system and corporate social responsibility that are among the most advanced, up to the decision to propose a series of amendments to the bylaws to the shareholders’ meeting in order to further boost the participation of all the shareholders Pirelli & C. S.p.A.’s “Shareholders’ in the life of the company. These amendments include, in Manual”: a guide to the corporate particular, the introduction of slates for the nomination of the governance of the company. Board of Directors.
• On April 29, 2004, Pirelli & C. S.p.A. subscribed to Eurostazioni S.p.A.’s share capital increase for Euros 33.3 million. At the same time, Eurostazioni repaid the outstanding loan from the shareholders for Euros 33.4 million.
• On July 8, 2004, RCSMediaGroup S.p.A. sold, prorata to the other participants in the Pirelli & C. S.p.A. Voting Trust (with the exception of Sinpar S.A. which did not exercise the right to purchase its share of the stock), 84,060,667 Pirelli & C. S.p.A. ordinary shares and 63,045,500
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The Group Pirelli & C. S.p.A. ordinary share warrants 2003-2006 which had been contributed to the shareholders voting trust. The per share price, equal – in accordance with the clauses of the 2004 economic and agreement – to the average market price recorded over the last three months, was Euros 0.825 financial review per share and Euros 0.090 per warrant. Major events in 2004 Pirelli Group: summary • On July 9, 2004, Pirelli & C. S.p.A. purchased 7,413,341 RCSMediaGroup S.p.A. shares placed on data sale by Gemina S.p.A., equal to 1.01 percent of share capital, for a total equivalent amount of approx. Euros 33 million. Following this transaction, Pirelli & C. S.p.A. holds 2.92 percent of Subsequent events RCSMediaGroup S.p.A. ordinary share capital, which is entirely pledged to the Shareholders’ Outlook for the Agreement. The average per share price of the RCSMediaGroup S.p.A. shares in Pirelli & C. current year S.p.A.’s portfolio is equal to Euros 2.74 compared to a per share market price of Euros 4.25 at December 31, 2004.
• On July 28, 2004, the placement was successfully concluded for 3,400,000 Pirelli & C. Real Estate S.p.A. shares (equal to 8.37 percent of share capital) with Italian and foreign institutional investors. Deutsche Bank AG London, in charge of the placement, informed Pirelli & C. S.p.A. that the demand for Pirelli & C. Real Estate shares far exceeded supply and that the placement price was equal to Euros 27.25 per share. The gross gain realized by the Group in the consolidated financial statements amounts to approx. Euros 57 million; settlement took place on August 3, 2004.
• The Board of Directors’ Meeting held November 11, 2005 authorized a project to enhance the value of the Energy and Telecom Cables and Systems Sectors with the involvement of institutional investors, starting a procedure that will enable the Group to specifically assess the various options available and the various indications of interest. The sale of the two sectors will make it possible for the Group to acquire fresh resources to devote to the development of strategic areas. The excellent results produced by Pirelli management is a guarantee of continuity and growth for the company. Pirelli will avail itself of the support of leading international financial institutions for this project.
• On December 7, 2004, the Pirelli & C. S.p.A. Board of Directors voted to put a motion before the extraordinary shareholders’ meeting (which met on January 21, 2005) to increase share capital up to a maximum of Euros 1,080 million through the issue of about 1.5 billion ordinary shares to offer as option rights to the ordinary and savings shareholders in a ratio of 2 new ordinary shares for every 5 shares of whatsoever class of shares held at a per unit price of Euros 0.70 per share, including a share premium of Euros 0.18. The issue price of the new shares was determined by taking into account the performance of the share price on the market in the last three months and the size of the transaction. Therefore, the capital increase ended with the subscription of all 1,517,672,178 new ordinary shares at the price of Euros 0.70 each, for a total equivalent amount of Euros 1,062,370,524,60, without the need for the intervention of the underwriting syndicate promoted, arranged and conducted by Banca Caboto S.p.A. (Intesa Group), JPMorgan, MCC S.p.A. – Capitalia Group Bancario, Mediobanca S.p.A. and UBM. Pirelli & C. S.p.A.’s new share capital now totals (taking into account a further increase for requests to exercise Pirelli & C. ordinary share warrants 2003-2006 last February) to Euros 2,763,953,496,20 and is represented by 5,315,295,185 shares of par value Euros 0.52 each, of which 5,180,530,756 are ordinary shares and 134,764,429 are savings shares. The resources raised from the capital increase are designated for the subscription of the Euros 2 billion capital increase by Olimpia S.p.A., with the objective being both to raise the investment in Telecom Italia S.p.A. and to neutralize the diluting effect consequent to the announced Telecom Italia merger. Pirelli & C. specifically subscribed to its share of the increase (50.4 percent) and the share of increase that was not subscribed to by the banks (16.8 percent). At the end of the subscription period (with Pirelli & C.’s investment totaling Euros 1,344 million), Olimpia’s
Web site: http://www.pirelli.com E-mail: [email protected] 16 Preliminary Information Directors’ Report Consolidated Financial Statements
The Group shareholder base is the following: Pirelli & C. S.p.A. (57.66 percent), Edizione Finance International SA (16.80 percent), 2004 economic and Hopa S.p.A. (16.00 percent), Banca Intesa S.p.A. (4.77 percent) financial review and Unicredito Italiano S.p.A. (4.77 percent). Major events in 2004 Pirelli Group: summary • At the end of December, with a view toward strengthening data the Group’s presence in the environmental segment, the following companies were merged in Pirelli & C. Ambiente Subsequent events Holding S.p.A. (Pirelli & C. 51 percent, Camfin 45.3 percent Outlook for the and Centrobanca Sviluppo Impresa SGR 3.7 percent): current year Pirelli & C. Ambiente S.p.A., a company active in renewable energy from waste and environmental redevelopment, and Cam Tecnologie S.p.A. (now Pirelli & C. Ambiente Tecnologie S.p.A.), a company already controlled by Camfin and a Pirelli Ambiente Tecnologie’s plants for producing white diesel, the producer of fuel with a low environmental impact Gecam™- innovative fuel with low The White Diesel. environmental impact.
PIRELLI GROUP: SUMMARY DATA The highlights of the consolidated financial statements can be summarized as follows: (in millions of euros) 2004 2003 • Net sales 7,114 6,671 • Gross operating profit 725 628 % of net sales 10.2% 9.4% • Operating profit 380 268 % of net sales 5.3% 4.0% • Share of earnings (losses) of equity investments 76 (51) • Operating profit (loss) incl. share of earnings (losses) of equity invest. 456 217 • Financial income (expenses) (108) (134) • Extraordinary items 20 (9) • Income taxes (94) (70) • Net income 274 4 % of net sales 3.9% 0.1% • Net income (loss) attributable to Pirelli & C. S.p.A. 217 (39) • Earnings per share (in euros) 0.06 (0.01) • Shareholders’ equity 4,088 3,678 • Net equity attributable to Pirelli & C. S.p.A. 3,736 3,429 • Equity per share (in euros) 1.08 0.99 • Net financial (liquidity)/debt position 1,469 1,745 • Capital expenditures 281 273 • R&D expenditures 198 204 • Employees (No. at year-end) 37,154 36,337 • Factories (number) 74 77 • Pirelli & C. S.p.A. ordinary shares (No. in millions) 3,327.5 3,325.6 • Pirelli & C. S.p.A. savings shares (No. in millions) 134.8 134.8 • Total Pirelli & C. S.p.A. shares (No. in millions) 3,462.3 3,460.4
For a more meaningful understanding of the performance of the Group in its various sectors of business, the following economic data and the net financial position is provided according to business sector.
Web site: http://www.pirelli.com E-mail: [email protected] 17 Preliminary Information Directors’ Report Consolidated Financial Statements
The Group By “industrial aggregate” is meant the sum of the data of the industrial sectors (energy cables, telecom cables and tyres). 2004 economic and (in millions of euros) financial review Energy Cables & Systems Telecom Cables & Systems Tyres Industr. Aggreg. 2004 2003 2004 2003 2004 2003 2004 2003 Major events in 2004 • Net sales 2,888 2,637 430 427 3,255 2,970 6,573 6,034 Pirelli Group: summary • Gross operating profit (loss) 199 169 9 (1) 454 399 662 567 data % of net sales 6.9% 6.4% 2.1% n.s. 13.9% 13.4% 10.1% 9.4% Subsequent events • Operating profit (loss) 119 83 (15) (39) 276 220 380 264 % of net sales 4.1% 3.1% n.s. n.s. 8.5% 7.4% 5.8% 4.4% Outlook for the • Share of earnings (losses) of equity investments - - (3) (2) (2) - (5) (2) current year • Op. profit (loss) incl. share of earnings (losses) of equity investments 119 83 (18) (41) 274 220 375 262 • Financial income (expenses) (29) (23) (14) (18) (31) (45) (74) (86) • Extraordinary items - (5) 11 4 (1) (1) 10 (2) • Income taxes (12) (16) 3 (1) (73) (45) (82) (62) • Net income (loss) 78 39 (18) (56) 169 129 229 112 % of net sales 2.7% 1.5% n.s. n.s. 5.2% 4.3% 3.5% 1.9% • Net financial (liquidity)/debt position 183 354 301 302 215 317 699 973
(in millions of euros) Industrial Aggregate Pirelli & C. Real Estate Other Total 2004 2003 2004 2003 2004 2003 2004 2003 • Net sales 6,573 6,034 570 645 (29) (8) 7,114 6,671 • Gross operating profit (loss) 662 567 83 79 (20) (18) 725 628 % of net sales 10.1% 9.4% - - - - 10.2% 9.4% • Operating profit (loss) 380 264 61 61 (61)* (57) 380 268 % of net sales 5.8% 4.4% - - - - 5.3% 4.0% • Share of earnings (losses) of equity investments (5) (2) 97 67 (16)** (116) 76 (51) • Op. profit (loss) incl. share of earnings (losses) of equity investments 375 262 158 128 (77) (173) 456 217 • Financial income (expenses) (74) (86) 5 1 (39) (49) (108) (134) • Extraordinary items 10 (2) (4) (6) 14 (1) 20 (9) • Income taxes (82) (62) (31) (21) 19 13 (94) (70) • Net income (loss) 229 112 128 102 (83) (210) 274 4 % of net sales 3.5% 1.9% - - - - 3.9% 0.1% • Net financial (liquidity)/debt position 699 973 35 9 735 763 1,469 1,745
* of which, goodwill amortization on purchases of Pirelli S.p.A. shares, Euros 25 million (Euros 25 million in 2003) ** accounting for Olimpia S.p.A. using the equity method, earnings of Euros 5 million (losses of Euros 100 million in 2003)
Net sales Net sales amount to Euros 7,114 million and record an increase of 6.6 percent compared to the prior year (Euros 6,671 million). Excluding the foreign exchange effect (-1.4 percent), the offsetting of metal prices in the Energy business (+5 percent) and the change in the scope of consolidation due to the sale of the Enameled Wires business (-0.2 percent), the effective change is equal to +3.2 percent. Sales in the Tyres Sector increased from Euros 2.9 billion to Euros 3.2 billion in 2004.
Web site: http://www.pirelli.com E-mail: [email protected] 18 Preliminary Information Directors’ Report Consolidated Financial Statements
The Group The distribution of net sales by sector and geographical area is Real Estate Energy Cables as follows: and Systems 2004 economic and financial review Sector 2004 2003 Major events in 2004 Energy Cables and Systems 40% 40% Pirelli Group: summary Telecom Cables and Systems 6% 6% data Tyres 46% 44% Real Estate 8% 10% Subsequent events Telecom Outlook for the Geographical area 2004 2003 Cables and current year Italy 21.4% 22.3% Tyres Systems Other European countries 43.8% 43.1% Group sales in 2004 North America 9.7% 9.4% by Sector and geographical area. Central and South America 14.0% 12.3% Italy Australia, Africa and Asia 11.1% 12.9% Other European countries
Operating profit Operating profit is equal to Euros 380 million compared to Euros 268 million in 2003. The percentage of operating profit to net sales is 5.3 percent (4 percent in 2003). North America The aggregate of the industrial businesses recorded an Central and South America operating profit of Euros 380 million equal to 5.8 percent of Australia, Africa and Asia net sales, compared to Euros 264 million in 2003 (4.4 percent of net sales).
Real estate activities show an operating profit of Euros 61 million which is in line with that reported in 2003. However, it should be borne in mind that, considering the type of business model, a better indicator of activities is the operating profit including the earnings generated by equity investments, which is equal to Euros 158 million, up 23 percent from last year.
Operating profit in 2003 had also comprised the positive effects of the settlement of the dispute with Ciena over its use of patents (Euros 10 million) and, in the Energy Cables and Systems Sector, the change in the valuation criteria for strategic metals inventories from the LIFO to the FIFO method (Euros 6 million) and the loss caused by the bankruptcy of a distributor (Euros 4 million).
Web site: http://www.pirelli.com E-mail: [email protected] 19 Preliminary Information Directors’ Report Consolidated Financial Statements
The Group The change can be summarized as follows: (in millions of euros) 2004 economic and Operating profit 2003 268 financial review • Foreign exchange effect (12) Major events in 2004 • Prices (excluding metals)/Mix 17 Pirelli Group: summary • Volumes 124 data • Production factors per unit cost (97) Subsequent events • Efficiencies 76 Outlook for the current year • Depreciation 17 • Other (13) 112 Operating profit 2004 380
Share of earnings (losses) of equity investments The share of the earnings (losses) of equity investments is a positive balance of Euros 76 million compared to a negative balance of Euros 51 million in 2003 and includes the effect of the earnings (losses) of the companies accounted for using the equity method. It specifically includes the share of earnings of Olimpia S.p.A. for Euros 5 million (losses of Euros 100 million in 2003) whereas the results of the companies in the Real Estate Sector (Pirelli & C. Real Estate Group) show earnings of Euros 97 million (Euros 67 million in 2003). The figure also include the writedown of the investments in F.C. Internazionale Milano S.p.A. (Euros 10 million), Euroqube S.A. (Euros 3 million), Alloptic Inc. (Euros 3 million) and in some companies of Pirelli Real Estate S.p.A. (Euros 7 million).
Extraordinary items Extraordinary items show an income balance of Euros 20 million, compared to an expense balance of Euros 9 million last year.
The most important amount in extraordinary items refers to the gain realized on the placement of 3,400,000 Pirelli & C. Real Estate S.p.A. shares (equal to 8.37 percent of share capital) with Italian and foreign institutional investors for Euros 57 million. Extraordinary items also include the accrual of Euros 40 million set aside by Pirelli & C. S.p.A. in the provision for liabilities and expenses in respect of the risks on the options granted to the shareholder banks of Olimpia and Hopa under the shareholders agreements, the net gains on the sale of non-strategic assets for Euros 53 million, layoff expenses for Euros 35 million and the costs for the replacement of a high-voltage cable in Singapore for Euros 9 million.
Last year, extraordinary items had included expenses connected with the merger of the parent company for Euros 16 million, income connected with the “High-speed Train” project at the tyre factories in the Turin area for Euros 10 million, the costs to take advantage of the tax amnesty by some Italian companies for Euros 14 million and gains on the sale of properties for Euros 17 million.
Web site: http://www.pirelli.com E-mail: [email protected] 20 Preliminary Information Directors’ Report Consolidated Financial Statements
The Group Net income 2004 economic and Net income amounts to Euros 274 million (after income tax expenses of Euros 94 million) financial review compared to net income of Euros 4 million in 2003 (after income tax expenses of Euros 70 Major events in 2004 million). Pirelli Group: summary The net income attributable to Pirelli & C. S.p.A. is Euros 217 million compared to a net loss of data Euros 39 million in 2003. Subsequent events Outlook for the current year Shareholders’ equity Total shareholders’ equity went from Euros 3,678 million at December 31, 2003 to Euros 4,088 million at December 31, 2004.
Such increase is detailed below: (in millions of euros) • Translation adjustments 1 • Change in the scope of consolidation 9 • Net income for the year 274 • Dividends to third parties paid by: (132) - Pirelli & C. S.p.A. (109) - Pirelli & C. Real Estate S.p.A. (19) - Other Group companies (4) • Sale of Pirelli & C. Real Estate treasury shares 17 • Sale of 8.37% of Pirelli & C. Real Estate S.p.A. shares 36 • Exercise of Pirelli & C. S.p.A. warrants 175 • Exercise of Pirelli & C. Real Estate S.p.A. stock options 15 • Goodwill of companies purchased 11 • Other changes 4 410
Shareholders’ equity attributable to Pirelli & C. S.p.A. at December 31, 2004 is equal to Euros 3,736 million (Euros 1.08 per share). This in an increase from Euros 3,429 million at December 31, 2003 (Euros 0.99 per share).
Net financial position The net financial position is a net debt position of Euros 1,469 million compared to Euros 1,745 million at December 31, 2003, with a reduction of Euros 276 million.
The net financial position takes into account the effects of the distribution of dividends (Euros 132 million), the options rights exercised by Pirelli to purchase more than 47 million Telecom Italia S.p.A. shares (for a total of Euros 110 million), the subscription to the capital increase by Eurostazioni S.p.A. (Euros 33 million) and the purchase of RCSMediaGroup shares (Euros 33 million), countered by the cash provided by ordinary operating activities of approx. Euros 230 million and by the proceeds from the placement by Deutsche Bank of Pirelli & C. Real Estate S.p.A. (Euros 93 million), the sale of non-strategic industrial assets (about Euros 90 million) and the subscription of Pirelli & C. 2003-2006 warrants (Euros 175 million).
Web site: http://www.pirelli.com E-mail: [email protected] 21 Preliminary Information Directors’ Report Consolidated Financial Statements
The Group The change in the net financial position can be explained by the following detailed analysis of cash flows: 2004 economic and (in millions of euros) financial review • Operating profit 380 Major events in 2004 • Depreciation and amortization 345 Pirelli Group: summary • Net investments: (303) data - intangible assets and property, plant and equipment (309) Subsequent events - financial assets 6 • Change in working capital 69 Outlook for the current year • Change in provisions and other 7 • Free cash flow 498 • Purchase of Telecom Italia shares (110) • Purchase of other equity investments (66) • Sale of 8.37% of Pirelli & C. Real Estate S.p.A. shares 93 • Financial income (expenses) (132) • Extraordinary items 20 • Income taxes (94) • Dividends paid (132) • Other (2) • Net cash flows 75 • Changes in shareholder’s equity 204 • Total changes in shareholder’s equity 204 • Translation adjustments (3) • Change in net financial position 276
Employees Headcount of employees at December 31, 2004 is 37,154 (including 3,513 persons with temporary contracts) compared to 36,337 at December 31, 2003 (including 2,417 persons with temporary contracts). This is a total increase of 817 persons but with a reduction of 279 permanent employees and an increase of 1,096 of employees with temporary contracts.
Factories The number of factories decreased from 77 at December 31, 2003 to 74 at December 31, 2004. The reduction is in the Cables and Systems Sector as a result of the closing of San Giuliano Milanese (Italy), the sale of the plant for the enameled wires business in Brazil (Cerquilho) and the closing of Paderno Dugnano (Italy).
Capital expenditures Capital expenditures total Euros 281 million compared to Euros 273 million in 2003. The ratio of capital expenditures to depreciation is 1.06 (0.98 in 2003).
Web site: http://www.pirelli.com E-mail: [email protected] 22 Preliminary Information Directors’ Report Consolidated Financial Statements
The Group R&D expenditures 2004 economic and R&D expenditures sustained by the Group and completely financial review expensed in the statement of income went from Euros 204 Major events in 2004 million in 2003 to Euros 198 million in 2004. R&D as a Pirelli Group: summary percentage of the industrial aggregate of net sales is 3 percent data (3.4 percent in the prior year). Subsequent events Outlook for the current year Pirelli Labs Pirelli Labs, the Group’s technological research center par excellence, commenced numerous projects, partly in collaboration with qualified international partners such as, for instance, the Massachusetts Institute of Technology, CNR and the Milan Politecnico University, focusing on the following specific fields of activity: • new-generation optical components and chips based on nanotechnologies; • new materials for tyres and cables; • fuel cells.
A silicon “wafer” used at Pirelli Pirelli Labs and Telecom Italia Lab, the research hub of the Labs, the Group’s technology Telecom Italia group, have developed active, intensive and center. fruitful collaboration in the conduct of joint projects.
Pirelli Labs Materials Innovation
In research projects with a short-term impact it has been demonstrated that the use of compounds obtained with the CCM (Continuous Compound Mixing) process for manufacturing tyres destined for sports applications makes it possible to achieve excellent performances, a factor confirmed by the number of successes on the race track. Use of this technology has also led to the manufacture of nanocomposite- based compounds with an elastomeric matrix which have already found some interesting fields of application.
With regard to the activities of Pirelli Energy Cables and Excellent performance also Systems, some industrial trial have been successfully carried achieved by racing tyres thanks to out with the aim of producing medium-voltage cables with compounds obtained with the automatic CCM-Continuous sheaths obtained by using recycled polymers. Compound Mixing process. Another short-term project refers to research work being conducted with Telecom Italia. The most important projects were Telemedicine and the Distributed Sensor Network (DSN). In particular, with regard to the first project, it has proved possible to record an electrocardiogram and make it available for remote interpretation through the TIM network.
Web site: http://www.pirelli.com E-mail: [email protected] 23 Preliminary Information Directors’ Report Consolidated Financial Statements
The Group With regard to DSN, the aim of the project is to develop a new generation of remote monitoring systems which exploit 2004 economic and innovative miniaturized sensors integrated with hi-tech financial review telecommunications and data-processing systems. Major events in 2004 This will make it possible to obtain information with high Pirelli Group: summary value-added through in-depth, far-reaching, continuous data monitoring in real time that is highly reliable and flexible at a low cost. Subsequent events A DSN sensor for the new Possible fields of application include: generation of remote monitoring Outlook for the • Traffic monitoring systems. current year • Air-pollution monitoring • Weather monitoring
The Fuel Cells project, which is a medium-term project, continued both with regard to Solid Oxide Fuel Cells (SOFC) for power applications and the Polymer Electrolyte Membrane (PEM) for portable electronics. Collaboration activities were set up and commenced with various companies in the field worldwide and cooperation agreements are currently being discussed with leading international scientific institutions.
Longer-term projects were mainly concerned with the study of neutrino transmission. The Fuel Cells project is part of Pirelli Labs’ medium-term range of activities.
Pirelli Labs Optical Innovation
Laboratory activities concentrated on three main lines of research, all of which are of great importance for telecommunications: photonics nanotechnologies, optical systems and devices for access networks.
In the field of photonics nanotechnologies, R&D was strongly focused on three innovative devices which, in the space of two years, will lead to products that have important selling potential. Nanotechnologies are becoming one of the main areas of activity at the Pirelli Labs laboratories. The first product, which will be marketed by Pirelli Broadband Solutions during the course of 2005, is a tunable laser for long-distance and regional fiber optic network applications, and is highly competitive in terms of performance and cost. The development and engineering of this product were completed in 2004, whereas the transfer to production is planned for 2005. Prototypes of this laser have already been given a positive assessment by some of Pirelli’s customers.
The development of the other two products based on optical nanotechnologies will be completed in 2005. One is an optical device for routing traffic, known as the OADM. The other, called the Triplexer, is an integrated optical chip designed for
Web site: http://www.pirelli.com E-mail: [email protected] 24 Preliminary Information Directors’ Report Consolidated Financial Statements
The Group optical applications such as Fiber To The Home. Both have been designed with the aim of combining efficiency with 2004 economic and competitive costs. financial review Major events in 2004 As far as optical systems are concerned, Pirelli Labs Pirelli Group: summary completed development of the optical equipment for “coarse” data wavelength multiplation used in the low-cost transport of data and video traffic in regional networks. This system is in the Subsequent events process of being qualified by Telecom Italia and will be Outlook for the installed on the network during the first half of 2005. current year Furthermore, work began to develop a broadband optical The DTL tunable laser for fiber optic telecommunications networks will distribution system for corporate and residential LANs. be marketed by Pirelli Broadband The main feature of the new system is that it will be very Solutions. easy to connect between the optical fibers and the optical receiver-transmitters.
In the field of devices for access networks, the development of ADSL “modular” terminals for residential applications was completed in 2004. Thanks to this modular concept, the customer will be able to add extra functions to a basic terminal by inserting special modules for various functions at a later stage. In particular, the first phase involved the introduction of modules for the “Voice Over IP” function, using both DECT and Wi-Fi technology. Telecom Italia began to install these devices on its network at the end of 2004 and will continue to do so in 2005. Development continues of a set-top box for video distribution applications on IP and videocommunication networks.
Laser
Silicon Substrate Electronics
Monolithic Optical Photodiodes Integration Optical Fiber
Optical Innovation: drawing of the Triplexer for Fiber To The Home application.
Web site: http://www.pirelli.com E-mail: [email protected] 25 Preliminary Information Directors’ Report Consolidated Financial Statements
The Group SUBSEQUENT EVENTS 2004 economic and • On January 28, 2005, an agreement was signed by the shareholders of Olimpia S.p.A. (Pirelli & financial review C. S.p.A., Edizione Finance International S.A., Hopa S.p.A., Banca Intesa S.p.A. and Unicredito Major events in 2004 Italiano S.p.A.) amending and integrating the pacts stipulated by them in 2003. Pirelli Group: summary The integration to the agreement, in particular, gives the shareholders the right – always data to the extent that the total does not exceed, taking into account also the shares already held by Olimpia and its shareholders, the ownership threshold of 30 percent of Telecom Italia Subsequent events S.p.A. share capital – to purchase Telecom Italia S.p.A. ordinary shares in the quantities Outlook for the described: current year Pirelli & C. S.p.A. 300 million shares Ediz. Finance International SA/Ediz. Holding S.p.A. 100 million shares Hopa S.p.A. 100 million shares Banca Intesa S.p.A. 100 million shares Unicredito Italiano S.p.A. 100 million shares
The Olimpia shareholders also agreed to amend certain understandings concerning the increase premium to which Hopa S.p.A. would be entitled in the event of the spin-off of Olimpia. In particular, the parties have established an all-inclusive amount of Euros 208 million in the event the spin-off occurs as a result of a deadlock or the pact is not renewed at its expiration date of May 8, 2006.
• On February 2, 2005, Pirelli Telecomunicações Cabos e Sistemas do Brasil S.A. – a Brazilian subsidiary of Pirelli Cavi e Sistemi Telecom S.p.A. – and Furukawa Industrial Produtos Elétricos signed an agreement to set up a joint venture for the manufacture of optical fibers in Brazil. The new company, named SPF - Socieda de Produtora de Fibras Ópticas S.A. is owned 51 percent by Pirelli and 49 percent by Furukawa; headquarters are in Sorocaba (San Paolo) at the current production site of Pirelli. An agreement has been signed in Brazil between Pirelli and Furukawa Pirelli and Furukawa have decided to unite their activities in to produce optical fibers at the the manufacture of optical fibers in Brazil to take advantage Sorocaba facility. of the opportunities that could arise from the recovery of the Brazilian telecommunications market: after the slowdown of the last few years, in fact, SPF aims to become the benchmark operator for the market while at the same conferring momentum to its growth for the future. The transaction is subject to the approval of the competent authorities.
• In March 2005, Pirelli Cavi e Sistemi Energia, through the subsidiary Comergy Ltd, won an approx. Euros 25 million contract from Singapore SP PowerAssets Ltd (Singapore Power group) for a high-voltage turnkey connection to increase the power of the electrical grid of the Asian country. This is the second contract in one year awarded to Comergy in Singapore and a further confirmation of Pirelli’s world leadership position in the power cables sector. The projects entrusted to Pirelli in the country in the last year are worth approx. Euros 75 million.
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The Group The contract provides for Comergy to supply and install oil-filled insulated 400 kV cables, auxiliary cables and 2004 economic and accessories, with the aim of expanding the power network financial review in the southeast of the country. The project also includes the Major events in 2004 installation of cables inside a undersea tunnel being built by Pirelli Group: summary Comergy and commissioned by SP PowerAssets under a data separate contract. The 400 kV cables and accessories will be manufactured in Subsequent events the Pirelli plants at Eastleigh and Bishopstoke (United Outlook for the Kingdom), whereas the auxiliary cables will be produced in current year Pirelli cable plants in Turkey and Indonesia.
• On March 9, 2005, Pirelli Cavi e Sistemi Energia S.p.A. won Pirelli Energy Cables & Systems will the contract for the supply of a very high-voltage cable be responsible for expanding under the project for the new 380 kV connection between Singapore’s electricity grid. Turbigo and Rho, in the suburbs of Milan. Designed by Terna S.p.A., owner of more than 90 percent of the high and very high-voltage electrical energy transmission grid, the new interconnection project, worth Euros 21 million, is part of the program for the expansion of the national power transmission grid drawn up by GRTN (National Transmission Grid Operator) and approved by the Ministry of Production Activities last year.
• On March 13, 2005, the Pirelli & C. Real Estate S.p.A. – Deutsche Bank Real Estate Global Opportunities joint venture grouped together with the Borletti family and Investitori Associati and signed the contract for the purchase of Rinascente S.p.A. from Eurofind Textile S.A. for Euros 888 million. Tamerice S.r.l. is the lead company of the group: a 20 percent stake is held by Pirelli & C. Real Estate S.p.A., 30 percent by DB, 46 percent by Investitori Associati and 4 percent by the Borletti family. Closing of the transaction, which is subject to approval by the competent antitrust authorities, is set to take place by the end of June 2005.
OUTLOOK FOR THE CURRENT YEAR Actions focusing on the segments with higher value-added will continue into 2005. With regard to industrial activities, a further increase in profitability is forecast for the three sectors in which the Group operates, unless external extraordinary events occur which cannot be foreseen at the time. However, during the year it is expected that the process to enhance the value of the Energy Cables and Systems Sector and Telecom Cables and System Sector may come to a conclusion through the involvement of institutional investors.
In the growing market of the Tyres Sector, Pirelli expects to further improve its results by focusing on the high-performance tyre range, the continuation of product delocation and the growth of the American market.
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The Group As for the Energy Cables and Systems Sector, in anticipation of a resumption of investments in power transmission infrastructures, Pirelli is directing its attention toward increasing 2004 economic and profitability by concentrating on higher-margin products. financial review In the Telecom Cables and Systems Sector, where fierce price competition still dominates the Major events in 2004 market, Pirelli will try to improve the result in 2004 as a consequence of the recovery of the Pirelli Group: summary North American market mentioned earlier. data Pirelli BroadBand Solutions should carry on its trend of growth in the sale of broadband access products. As for second-generation photonics, still in the start-up phase, R&D continues for Subsequent events innovative products which should be brought to market during the course of the year. Outlook for the current year Real Estate activities, after reporting a 54 percent increase in operating profit, including the earnings of equity investments in the two years 2003-2204, expects to see growth in 2005 in line with the average annual growth target set in the 2003-2005 three-year plan.
Olimpia, thanks to the operations undertaken in 2004 and 2005, should increase its result.
Accordingly, for 2005, the Group expects to report a further growth in profitability in all activity sectors.
The Pirelli Tyres Sector expects a further improvement in 2005 by focusing on its high performance line.
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Energy Cables and ENERGY CABLES AND SYSTEMS SECTOR Systems Sector The highlights of the consolidated financial statements at December 31, 2004 of the Energy Energy sector holding Cables and Systems Sector can be summarized as follows: company in millions of euros Performance by 2004 2003 geographical area • Net sales 2,888 2,637 • Gross operating profit 199 169 Markets % of net sales 6.9% 6.4% Performance of • Operating profit 119 83 the main companies % of net sales 4.1% 3.1% in the energy sector • Financial income (expenses) (29) (23) • Extraordinary items - (5) Outlook for the • Income taxes (12) (16) current year • Net income 78 39 % of net sales 2.7% 1.5% • Net financial (liquidity)/debt position 183 354 • Capital expenditures 57 68 • R&D expenditures 32 33 • Employees (No. at year-end) 10,385 10,746 • Factories (number) 46* 48 * three of these are shared with the Telecom Cables and Systems Sector
Net sales Net sales amount to Euros 2,888 million, with an increase of 9.5 percent from the prior year. On a comparable basis (excluding the effects of foreign exchange, metal prices and the change in the scope of consolidation), the effective change is a decrease of 0.6 percent.
Europe North America The change in net sales is the result of the following: South America • Volumes - 0.5% • Prices/mix - 0.1% Change on a comparable basis - 0.6% • Foreign exchange effect - 1.2% • Change in scope of consolidation (Brazil enameled wires) - 0.5% • Metal prices + 11.8% Total change + 9.5% Oceania Asia The distribution of net sales is as follows: Africa Geographical area 2004 2003 Energy Cables and Systems: 2004 sales by geographical area Europe (of which Italy 9%) 67% 66% and product category. North America 12% 12% Others South America 8% 8% General Oceania 5% 5% Market Asia 7% 8% Africa 1% 1%
Product category 2004 2003 General Market 36% 32% Utilities 37% 42% Industrial Market 17% 18% Others 10% 8% Industrial Market Utilities
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Energy Cables and Operating profit Net income Systems Sector Operating profit is Euros 119 million (4.1 percent of net sales). Net income is Euros 78 million Energy sector holding This a marked improvement compared to Euros 83 million in compared to Euros 39 million company the prior year (3.1 percent of net sales). in the prior year. The increase Performance by is due to higher operating geographical area The change can be summarized as follows: profit and lower extraordinary (in millions of euros) expenses. Markets Operating profit 2003 83 Performance of • Foreign exchange effect (3) the main companies • Prices (excluding metals)/mix 30 in the energy sector • Volumes (1) Outlook for the • Production factors per unit cost (23) current year • Efficiencies 24 • Depreciation 7 • Other 2 36 A marked increase in operating profit was reported by Pirelli Energy Operating profit 2004 119 Cables & Systems in 2004.
Net financial position The net financial position is a net debt position of Euros 183 million compared to Euros 354 million at December 31, 2003. The improvement of Euros 171 million is attributable to higher net income, measures taken with regard to working capital, the policy to reduce investments and proceeds from the sale of properties and equity investments.
Employees Headcount of employees of the Energy Sector at December 31, 2004 is 10,385 (including 666 employees with temporary contracts). Compared to December 31, 2003, this is a reduction of 361 persons, including an increase of 164 employees with temporary contracts. During 2004, the sale of the enameled wires plant in Brazil at Cerquilho led to a decrease in the headcount of 244 (29 management and staff and 215 blue-collar). In 2004, the project commenced to strengthen the sales function in order to achieve the following objectives: • building-up the team by improving the mix of resources; • redirecting the corporate culture from the product to the customer in terms of services rendered; • planning and implementation of a standard model for the process of managing orders; • professional training to develop technical and managerial expertise. The project started in Europe and is expected to be extended to the rest of the world during 2005 beginning with an assessment of all the sales resources whose results were the basis for the changeover in resources. In the meantime, an extensive training program was introduced for all functions in order to develop an approached oriented toward the customer and service.
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Energy Cables and Factories Systems Sector At year-end 2004, there are 46 factories operating in the Energy sector holding Energy Cables and Systems Sector (3 of which are shared with company the Telecom Cables and Systems Sector), compared to 48 at Performance by December 31, 2003. geographical area At the end of the first quarter, the reorganization of the Submarine Cables manufacturing activities was completed and Markets operations were concentrated in the Arco Felice (Italy) factory Performance of where production capacity was increased for Paper Cables the main companies and production capacity was installed for Extrusion Cables. in the energy sector At mid-year, in Italy, the San Giuliano Milanese plant was closed and, at the same time, the production capacity was Outlook for the increased at the Merlino factory. The new Cavinova Pirelli Energy current year Cables & Systems plant at In the second half of the year, in Spain, the machinery of the Villanueva y La Geltrù (Spain). Cavimar factory began to be moved to the new Cavinova plant site which will be in full operation by the end of the first quarter of 2005. On September 30, 2004, the Enameled Wires activities in Brazil were sold, together with the related factory at Cerquilho. Geographically, the factories are distributed as follows: 32 in Europe, 3 in North America, 5 in South America and 6 in Australia, Asia and Africa.
Capital expenditures New capital expenditures amount to Euros 57 million. The ratio of capital expenditures to depreciation is 0.8 percent. The main projects include: - increased production capacity for Submarine Paper and Extrusion Cables (Arco Felice); - increased production capacity for Special Cables in Italy (Merlino) and China (Tianjin); - completion of the relocation of the Cavimar factory to the Production capacity for paper and new Cavinova plant site (Spain); extrusion submarine Cables at Arco - first phase of the relocation of the new factory to Bratislava Felice was increased in 2004. (Slovakia); - installation of the first line for the manufacture of MV cables using "Plaser" technology at the Pignataro (Italy) factory; - machinery upgrading to meet production and technological requirements (new products) and actions to improve production efficiency.
Capital expenditures can be analyzed by geographical area as follows:
Geographical Area 2004 2003 Europe 77% 75% South America 10% 6% North America 7% 11% Rest of the world 6% 8%
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Energy Cables and R&D expenditures Systems Sector In 2004, R&D activities involved 296 people and expenditures totaled Euros 32 million, Energy sector holding representing 1 percent of total sales. company Performance by The costs of the Milan area, equal to approximately Euros 6 million, refer mainly to personnel geographical area and, to a marginal extent, instrumentation, equipment and technological and know-how consultancy services. Markets Performance of Energy Cables R&D continues to operate with two main objectives: to reduce product costs and the main companies introduce breakthrough technologies in segments with high value-added (HV, EHV, Submarine in the energy sector and Special & Industry applications). Collaboration continued on some research topics with both University Outlook for the Organizations/Consortiums (the Milan Politecnico University, the Universities of Bologna, current year Naples and Stuttgart), and with the various Group R&D centers.
Significant achievements in 2004 include the following projects conducted by the P-Networking Center: 1. Optopower: this refers to the development of systems to monitor and manage transmission networks for projects such as: Barajas, Basslink, China Light & Power and Wienstrom. 2. Pit-Stop-EMC cable system: development of a screening system for magnetic fields produced by underground cables. The SSAB (Self Shielding AirBag) cable has a screening system incorporated in the actual cable, under the sheath of the AirBag. 3. Network Technologies: activities conducted in collaboration with the operating company of the National Transport Network, with the aim of producing guidelines for the technical and economic analysis of installing underground cable systems in the National Transport Network. 4. Network components: ongoing construction of cables, joints Terrestrial Systems R&D: post- cable-laying tests were conducted and terminations for the 400 kV class, with application in on the Barajas cable. Vienna’s Wienstrom system, where cross-city links have been built using highly reliable underground CompactTM Cable Systems.
For the Experimental Electric Laboratories at Eastleigh (U.K.), the main business support activities - qualifications, homologations and certifications - included, in the case of Submarine Systems, the qualification of the 500 kV d.c. system for the Neptune project and the completion of the qualification of the 400 kV d.c. system for the Basslink project. Furthermore, the Electric Laboratories completed the qualification of the 200 kV extruded insulator HVDC system.
In Land Systems, activities included: for the Barajas project, Submarine Power Systems R&D: its post-cable-laying tests carried out both by Pirelli and ABB, support activities include qualification of the 400 kV d.c. qualification of the 400 kV XLPE system for the Wienstrom system for the Basslink project. project (tests were conducted at the Gron laboratories in France), qualification of the 150 kV XLPE system for small sections (400 mm2) and qualification was started of the 400 kV XLPE system with a 2,500 mm2 enameled wire conductor for the ADWEA project.
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Energy Cables and In Accessories, the qualification for the IEEE standard was carried out on the Sixty-speed joints. Systems Sector At the Experimental Electric Laboratories, the main R&D Energy sector holding projects involving new technologies regarded the following: company • monitoring and condition assessment techniques for HV and Performance by EHV circuits by measuring electric parameters; geographical area • the study of new data transmission techniques for Markets monitoring electric parameters to make diagnostic systems totally flexible and capable of responding to different Tests for the Wienstrom project Performance of were conducted at the Gron logistical and geographical requirements; laboratories in France. the main companies in the energy sector • definition of new testing and set-up technologies with the aim of optimizing the time-to-market of new products. Outlook for the current year At the Multifunctional Modules center, the most important projects involved all the Energy Cables markets. In particular: • Building Wire Italia, the new technology that makes cables fire-resistant which, once it has received IMQ approval, will be extended to the other affiliates; • military and transportation markets, development of compounds for high-temperature cables. The first prototypes will be manufactured in 2005.
With regard to the work conducted by Extruded Systems In Accessories, too, R&D was Technologies, achievements were made in the following areas intensive in 2004. of application: • development of cables with composite Airbag/Polilam (Airguard) protection systems, able to withstand mechanical stresses in chemically aggressive environments; currently awaiting international certification so that the product can be introduced to distributors on the North American market; • application of special Airbag technology to cables for the Industrial and General market, with complete extension to insulated LV systems; • implementation of Compact insulation technology for the production of HV and EHV cables in China; • development of an electric connection system for industrial automation, using cables with non-conventional geometry and dedicated accessories of derivation (Roundflat); • study of the rheology of extruding systems to produce very The Extruded Systems Technologies center achieved high-performance LSOH cables with highly charged important results in the materials. development of Airbag cables.
Web site: http://www.pirelli.com E-mail: [email protected] 33 Preliminary Information Directors’ Report Consolidated Financial Statements At the Stratified and Submarine Technology center, the Energy Cables and McGaurans following main development projects were completed: Systems Sector • start and qualification of the new production lines for Energy sector holding medium-and high-voltage submarine cables using XLPE and company EPR at the Arco Felice factory; Performance by • qualification and preparation of the HVDC and MVDC cables geographical area for the Basslink contract; Markets • development of a new dieletric for stratified insulation cables (PPL); Four Miles Bluff Performance of • preparation and qualification of the OF 400 kV cable the main companies The Australian Basslink project for prototype at Eastleigh (U.K.) for the Singapore contract; the interconnection system between in the energy sector Tasmania and the State of Victoria • development of new submarine technologies for AT cables; continues to be one of the Stratified Outlook for the • qualification of materials suppliers for the construction of and Submarine Technology center’s current year main projects. the OF cable for the Spain-Morocco contract.
Industrial operations Production in 2004 was 3.5 percent higher than in 2003 and featured a mix with higher margins: increased production of Flexible Building Wire Cables (+14 percent), Special Cables (+15 percent), High/Medium-Voltage Cables (+3 percent) and a reduction in the operations of product lines with lower margins (Rigid BW and Low-voltage Cables).
In the meantime, as far as efficiencies are concerned, an important reduction was achieved in transformation costs (-8 percent) as a result of a specific plan to improve labor efficiency (a 5 percent reduction in the average number of persons) and in material usage efficiency (an 8 percent reduction in scrape, usage and overusage). These programs will continue with the same intensity also in 2005.
Materials As far as the trend of raw materials prices for power cables is concerned, in 2004, the following took place: • the average prices of commodities recorded sharp increases compared to 2003 due to both the significant rise in basic raw materials, driven by the record prices of oil, and strong demand, especially in China. A further increase in prices is expected in 2005 confirming the staying power of demand in North America, higher growth rates in the Far East and the price of oil which will nevertheless remain at elevated levels; • after a six-month period of relative stability, the prices of raw material specialties recorded the first increases which are forecast to continue for all of the first half of 2005. These increases are driven by the strong growth of demand in the Far East and insufficient production capacity as a result of the rationalization of plant and the cutbacks in investments made by the major producers in the last few years; • non-ferrous metals quoted on the LME registered strong price increases compared to 2003: 45 percent for copper, 57 percent for lead and 9 percent for aluminum. The price hikes during the first quarter of 2004 stabilized during the course of year, confirming the strong demand coming from China, the Far East and North America, while there was no such corresponding growth in supply (refined copper, in particular), causing a constant erosion of the inventory levels worldwide.
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Energy Cables and ENERGY SECTOR HOLDING COMPANY Systems Sector Energy sector holding The statutory financial statements of Pirelli Cavi e Sistemi Energia S.p.A. for the year ended company December 31, 2004 are summarized in the following balance sheet and statement of income:
Performance by (in millions of euros) geographical area Balance sheet 2004 2003 Markets Intangible assets 3.7 3.0 Performance of Property, plant and equipment 5.6 7.4 the main companies Financial assets 766.7 766.6 in the energy sector Net working capital (45.1) (21.4) Outlook for the 730.9 755.6 current year Shareholders’ equity 369.9 361.7 Provisions 8.9 13.4 Net financial position 352.1 380.5 730.9 755.6
(in millions of euros) Statement of income 2004 2003 Production value 201.9 149.4 Production costs: - raw materials and services (168.4) (123.7) - personnel (27.5) (25.7) - depreciation and amortization (4.2) (4.2) - other (3.0) (5.2) Operating loss (1.2) (9.4) Financial income (expenses) 14.0 (10.3) Share of earnings (losses) of equity investments - (18.5) Income (loss) before extraordinary items and income taxes 12.8 (38.2) Extraordinary items 0.8 8.1 Income taxes (5.4) (7.3) Net income (loss) 8.2 (37.4)
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Energy Cables and PERFORMANCE BY GEOGRAPHICAL AREA Systems Sector
Energy sector holding Italy company Performance by Pirelli Cavi e Sistemi Energia Italy S.p.A. operates geographical area in Italy. In general, the year 2004 was marked by price increases due Markets mostly to non-ferrous metals. Net of the effect of metal Performance of increases, prices generally fell, with reductions in Utilities the main companies (Low- and Medium-Voltage) that were not balanced by in the energy sector increases in Trade & Installers and OEM & Contractors. The weakness of the U.S. dollar exchange rate against the Outlook for the euro continues to penalize competitiveness and margins in the current year Middle and Far East. As for the trend in the costs of the major raw materials, Volumes increased in the high- compared to the prior year there was an increase in the per margin market of land installations for Pirelli Cavi e Sistemi Energia unit costs of ferrous metals and other important direct Italia. materials such as compounds and ingredients connected with the increase in the price of oil. Care paid to the quality of service led to greater volumes and operating efficiencies; fixed overheads are down even net of nonrecurring components. In particular, the Company recorded the following business trends compared to the previous year: • in the General Market, action to increase coverage of the market for the distribution of electrical material has continued by stepping up promotional activities and a broader presence on the market. The introduction of the Afumex range was consolidated for all applications, from low to medium-voltage; • in terms of volumes and prices, the market for Medium- and Low-Voltage Power Cables reported a significant reduction due to a slump in demand from important customers. Improvements in operating costs and the level of service have partly offset this reduction; • High Tension cables registered lower volumes; • Land installations reported higher business volumes by taking advantage of the high-margin opportunities of this market; • the Accessories market, in the first half of 2004, was impacted by the drop in High-voltage cable volumes, yet regaining profitability through industrial and operating efficiencies. In the second half, there was a recovery thanks to the positive outcome of sales actions n the Middle and Far East, in particular in Egypt, Thailand and Malaysia, where 400 kV cables were delivered. All this led to a better mix and higher contribution margins. As for Medium-Voltage cables, domestic market volumes were continuing high and in line with expectations; • in OEM & Contractors, volumes contracted as expected due to the simultaneous closing of the S. Giuliano Milanese factory and the expansion of those at Merlino and Ascoli Piceno. Once the transition phase was completed, production volumes and sales increased in the second half of 2004 with higher industrial and operating efficiencies. Prices increased, even net of the effect of metals, while exports remain at 40 percent for the Oil & Gas sector (cables for submerged pumps and off-shore platforms), petrochemical and railway plants dedicated to new technologies (also in Italy). On the domestic market, while investments in infrastructures are stable, industrial investments (machine tooling, industrial automation, industrial electronics) and telecommunications investments remained quite depressed. The phenomenon of production delocalization reduces the available market.
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Energy Cables and France Systems Sector Pirelli Energie Cables et Systemes S.A., despite the unfavorable market conditions in which Energy sector holding it was forced to operate, reached its budgeted results thanks to actions to improve efficiency company and achieve a better management over the production mix. Performance by In General Market, raw material price increases were offset by an improvement in the mix, geographical area allowing a growth in the results compared to the prior year. In Special Cables, the market remained stable and results improved compared to 2003, thanks Markets to measures to improve industrial efficiency. Performance of Sales volumes generated by Power Cables are substantially stable with an improvement in the main companies results. in the energy sector In High-Voltage, deliveries under the STEG contract in Tunisia continued with a 30 percent increase in sales volumes and results that more than doubled compared to 2003. Outlook for the Automotive activities, despite market conditions that were anything but simple, registered current year volumes and results in line with those of the prior year.
Spain In 2004, Pirelli Cables y Sistemas S.A. achieved good results Lanzarote
thanks to the opportunities on a growing and increasingly La Palma competitive local market. In fact, there has been a recovery in Tenerife Fuerte Ventura the building sector and strong demand for Afumex cables. Gomera
The market for wind installations has grown considerably and Hierro Gran Canaria investments in the Utilities business increased as a result of the improvement in the distribution network. The company also obtained authorization for the The Spanish subsidiary Pirelli Cables y Sistemas obtained Fuerteventura-Lanzarote (Canary Islands) submarine authorization for the Fuerteventura connection. Lanzarote (Canary Islands) The move from the old Cavimar factory, sold in 2001, to the submarine connection. new Cavinova factory, both at Vilanova y la Geltrú, was completed during the year. The sale of the enameled wire operations was concluded with the absorption of Pirelli Esmar S.A. and the sale of the related land.
United Kingdom The market conditions in which Pirelli Cables Limited operated during 2004 were notably different from those of past years. The market grew for the first time in the last four years but was affected by an increase in the prices of raw materials. The company nevertheless managed to achieve efficiency and profitability despite these increases. The General Market displayed an improvement in results The U.K. Eastleigh plant is to produce the 400-kV Oil Filled cable thanks to a better strategy and new supply contract with one for the Singapore contract. its principal competitors. In High-Voltage Cables, notwithstanding a slow start at the beginning of the year, the business reached excellent production levels during the last six months thanks to the 400 kV Oil Filled cable contract won in Singapore. As a result of an efficient cost cutting program, the Power Distribution business produced significant results. The company continues to have its best customers on the domestic market.
Web site: http://www.pirelli.com E-mail: [email protected] 37 Preliminary Information Directors’ Report Consolidated Financial Statements
Energy Cables and Germany Systems Sector Pirelli Kabel und Systeme Holding GmbH successfully Energy sector holding managed to overcome the crisis which characterized the company market in which it operates, partly by sharply reducing fixed Performance by overheads. geographical area The General Market had to tackle a market heavily influenced by pressure over prices. Markets Utilities displayed a decline in sales and results, while OEM Performance of & Contractors abandoned unprofitable sales segments and the main companies increased exports. in the energy sector 2004 put the operations of the Outlook for the German affiliate Pirelli Kabel und current year Systeme Holding back on target.
The Netherlands Owing to a reduction in volumes on the domestic market, Pirelli Cables and Systems N.V. was not able to reached its budget figures. The High-Voltage area featured very modest domestic volumes. Some projects were postponed until 2005 and only one important contract for a 400 kV cable (Rotterdam) began toward the end of the year. With regard to export markets, a start began on the delivery of The Dutch subsidiary Pirelli Cables part of the 132 kV cable to Abu Dhabi. and Systems N.V. began an In Power Distribution, the domestic market remained stable important contract for high-voltage and in line with economic developments. cables at the end of 2004. The international market registered a notable increase in the net sales of the High-Voltage accessories segment, especially in Europe and the United States. The Industrial Market did not produce positive results owing to the sharp reduction in industrial investments.
Finland The Finnish affiliate, Pirelli Cables and Systems OY, operates in the field of energy in Finland and, through its affiliates, also in Sweden and Norway. Compared to the prior year, sales volumes increased especially on the domestic market. The profitability of the company, however, decreased on account of the strong decline in prices and the sharp increase in raw material costs, which were only partly offset by the reduction in fixed overheads. In the Utilities market, demand for High-Voltage cables remained stable on the two main markets of South Europe and North America which represent 70 percent of net sales. Efforts continued in the strategy to penetrate new market segments. In Power Distribution, the company maintained its market position in Finland and the Baltic States, despite a higher number of competitors. The General Market strengthened its opportunities in both Finland and the Scandinavian countries, seeking new outlets in the Baltic States, whereas the Industrial and Special Cables operations recorded a decline in demand with negative results.
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Energy Cables and Austria Systems Sector In Austria, Pirelli-OEKW GmbH managed to achieve a significant increase in results especially Energy sector holding as a consequence of an improvement in General Market activities, despite the critical market company scenario carried forward from last year. Performance by The company won a large contract in the Utilities area with the entity supplying electricity in geographical area Austria. This contract will also involve other affiliates in the Pirelli Group and will end in October 2005. Markets The less-than-satisfactory results reported by Installations and Accessories were partly Performance of caused by the lower prices of competitors. the main companies in the energy sector Outlook for the current year Slovakia The positive trend of KABLO Bratislava Spol. S.R.O. was confirmed on both the domestic and international market. The market displayed a decline in prices due to production overcapacity in the Czech Republic. This unexpected factor and the rise in raw material prices were nevertheless compensated by the production of quality products and by an optimum mix. Having been awarded important contracts by West Slovak Utilities, Linde and Segelec proved decisive for maintaining market share on both the Slovakian and the Czech Republic markets. The investment plan was approved for the construction of the new factory near Bratislava. The new factory will allow production efficiencies and increase the company’s competitive position in the regions along the Danube.
Hungary Regardless of the entry of new competitors, especially Turkish and Romanian rivals, MKM Magyar Kabel Muvek RT, the company with which Pirelli operates in Hungary, managed to maintain its market share in the General Market area. In Utilities, sales volumes were good and there was greater efficiency as a result of the relocation of production from the The Hungarian affiliate MKM Budapest to the Balassagyarmat factory. Magyar Kabel Muvek reported a good year in 2004, maintaining its market share despite fierce competition.
Romania In Romania, where S.C. Pirelli Romania Cabluri si Sisteme S.A. operates, the economy exhibited signs of expansion over the prior year. The main clients, Electrica S.A., for the energy business, and RomTelecom, for the telecommunications business, continued the restructuring and privatization of their operations begun in previous years. The company gained market share in the Power business on the domestic market thanks to a very aggressive pricing policy, whereas margins in the Telecommunications sector declined considerably.
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Energy Cables and Turkey Systems Sector The important reforms in the macroeconomic policy of the country over the last three years Energy sector holding have allowed Turkey to achieve a certain degree of economic and financial stability. company During 2004, inflation stabilized at 14 percent (exactly like last year) while the weakness of the Performance by Turkish lira against the euro was 4.7 percent (2.4 percent in 2003). geographical area Turk Pirelli Kablo ve Sistemleri A.S. continued to improve its results both from a financial and commercial point of view. Sales volumes increased, reaching the highest levels recorded in Markets the last 40 years. Performance of the main companies in the energy sector North America Outlook for the current year The North American area, operated by Pirelli Power Cables and Systems USA LLC and by Pirelli Power Cables and Systems Canada Ltd, improved both its results and liquidity, despite having to operate in a market characterized by a sharp increase in raw material prices. The transfer of production activities from Colusa to the Abbeville (Canada), St. Jean (Canada) and Prescott (U.S.A.) factories has been completed, resulting in efficiency and a reduction in variable overheads. Installations achieved positive results thanks to various contracts, including those with TXU, Oncor and PG&E, and supply and installation activities begun in the last few months of 2004 which will be completed in 2005.
Brazil 2004 was a year of consolidation for the policy of the new government, which allowed it to control inflationary pressure in spite of the increase in raw material prices. From a macroeconomic standpoint, the gross domestic product and the balance of trade grew with a consequent reduction in the country risk. In September, Pirelli Energia Cabos e Sistemas do Brasil S.A. sold the enameled wires activity, thus completing the restructuring of its product portfolio. The result, net of this sale, remains in line with last year’s result, while a strong improvement is registered in the financial position.
Argentina
In 2004, the economic situation in Argentina improved Choele-Choel considerably thanks to low inflation (6.1 percent) and a stable exchange rate. Pirelli Energía Cables y Sistemas de Argentina S.A. posted an increase in volumes in all areas. Puerto Madryn General Market ended the year with a positive result, even after taking into account the fierce competition in this segment. In Utilities, companies resumed investments after a long period of crisis. The company won the contract for Pirelli Energia Cables y Sistemas de Argentina won the contract to the manufacture of ACSR cables (about 4,000 km) for the manufacture cables for Argentina’s CHOELE-CHOEL-Puerto Madryn transmission line. most important power transmission This is the most important transmission project for electrical project. energy in the country.
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Energy Cables and Australia Systems Sector In 2004, Pirelli Power Cables & Systems Australia Pty Ltd. reported a significant growth Energy sector holding in volumes in the Power Distribution and OEM & Contractors areas thanks to substantial company investments by the companies that had to expand their electrical grids. Performance by This improvement was partly offset by strong competition and the increase in raw material geographical area prices, copper in particular. Markets Performance of the main companies Indonesia in the energy sector 2004 was a difficult year for P.T. Pirelli Cable Indonesia because of a sharp decline in Outlook for the margins compared to the prior year. In spite of the fact that sales volumes remained stable, current year the results were eroded by an overall increase in costs (particularly raw material prices). The Energy area benefited from higher investments by national companies while some difficulties were recorded in the Telecom area.
China Tianjin Pirelli Power Cables Co. Ltd. maintained excellent volume levels, exceeding expectations, in an extremely dynamic market like the Utilities market partly on account of a specific investment program for Special Cables.
Pirelli Baosheng Cable Co. Ltd is the most important company in China operating in the High-Voltage business. Here again, in 2004, results were satisfactory despite difficult The Chinese Tianjin plant benefited from a special investment program market conditions. for Special Cables.
MARKETS
General Market Sales in 2004 increased significantly compared to the prior year (+23 percent), both in terms of volumes and prices. In all areas, with the exception of North America and the Asia Pacific markets, volumes increased by an average of 5 percent in the face of world demand that was generally stable or showed signs of a slight upturn. The increase in prices is strictly linked to the increase in the prices of strategic metals and, in the second half of the year, to the rise in the prices of other raw materials. In 2004, action was taken to improve the mix and the sales channels, which made it possible to focus sales on segments with higher value-added.
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Energy Cables and Utilities Systems Sector Net sales were lower than in 2003 (-3 percent). In particular: Energy sector holding - in High-Voltage Systems, in 2004, certain important projects in the high-voltage sector failed to company materialize, since the Utilities concerned postponed some investment projects. In general, Performance by volumes remained stable, with demand oriented towards low-voltage products; geographical area - in Power Distribution, sales increased by 7 percent, despite the fact that the market in Europe was either stationary or depressed and increased slightly in other areas. Markets The increase in the prices of strategic metals led to a rise in the prices of products but, at the Performance of same time, orientated demand towards lower voltage segments. This situation was tackled by the main companies increasing the coverage of customers and volumes (+2 percent); in the energy sector - sales of Accessories decreased compared to the prior year, both on account of the late delivery of some important High-Voltage projects, and because of the lower demand in the Outlook for the Medium- and Low-Voltage segments. current year This situation was met by making a careful selection of the products offered in the range, giving priority to those with higher value-added.
Industrial Markets Sales increased compared to the prior year as a result of the combined effect of an improvement in the mix and the increase in prices linked also to the trend in prices of strategic metals. In particular: - OEMs & Contractors remained virtually unchanged at the level of volumes in 2003, in the face of a slight upturn in the demand and despite the planned measures of industrial restructuring. Furthermore, commercial penetration projects were initiated in areas with a high rate of growth, such as South America, North America and the Asia Pacific market for products with high value-added; - Enameled wires, which was concentrated in South America in 2004, contributed to the Group’s volume of business for only nine months, since it was then definitively sold to third parties; - Automotive sales increased by 20 percent compared to the prior year, thanks particularly to the dramatic rise in volumes requested in South America and the penetration of newly developing markets; - Branchement was affected by a considerable contraction of demand compared to the prior year.
Submarine Power Systems In 2004, the operations of the Submarine Power System area focused on development of Basslink (the interconnection system between Australia and Tasmania). The project involves the production of 295 km of paper-insulated cable and 195 km of extruded cable at the Arco Felice (Naples) factory. Installation operations will be conducted by the Pirelli cable-laying vessel “Giulio Verne”. The overall value of the contract is approximately Euros 186 million. In 2004, the Arco Felice factory produced approximately 160 km of paper-insulated cable and 170 km of extruded cable. The cable-laying vessel “Giulio Verne” installed the first 98 km of the system.
The interconnection system between Spain and Morocco will make it possible to transmit approximately 700 MW between the two countries.
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Energy Cables and In 2004, work began on the Spain-Morocco II contract, which involves the supply and installation of an Systems Sector interconnection system between Spain and Morocco. Energy sector holding The system will enable power transmission of approximately company 700MW. The project involves the production of two submarine power cables for a total length of 57 km of 400 kV oil filled Performance by paper-insulated power cables at the Arco Felice factory geographical area and an optical cable, as well as installation. The cables Markets will be installed in 2005 and 2006 by the cable-laying vessel Performance of “Giulio Verne”. For Pirelli, the overall value of the contract the main companies is approximately Euros 58 million. In 2004, Pirelli conducted the on-site investigation of the sea-floor, the manufacture in the energy sector The supply of offshore cables for of the fiber optical cable and the initial phases of the deep-sea oil platforms from the Outlook for the manufacture of the power cable. Persian Gulf to Africa to China continued to be an important activity current year in 2004. Pirelli also began development of the 38/66 kV tripolar power link and optical telecommunications link between the islands of Lanzarote and Fuerteventura (Spain). The contract is worth approximately Euros 7 million. The cable was produced in 2004 and the project is scheduled for completion in the first half of 2005. Finally, in 2004, activities included the supply of a total of 90 km of offshore cables for the Persian Gulf market (the Ras Gas WH4/WH7 and Al Futaisy offshore fields), the African market (the Shell Nigeria and ENI Congo offshore fields) and the Chinese market (Hyundai Heavy Industries for Agip).
In 2004, the cable-laying vessel “Giulio Verne” continued on-site investigation of the sea-floor in view of the installation of the Spain-Morocco cable in 2005 and 2006.
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Energy Cables and PERFORMANCE OF THE MAIN COMPANIES IN THE ENERGY SECTOR Systems Sector Key data as they appear in the financial statements prepared by the boards of directors and Energy sector holding approved or in the process of being approved by the respective shareholders' meetings is given company below. Performance by All amounts are expressed in local currency and compared to the prior year. geographical area 2004 2003 Markets Pirelli Cavi e Sistemi Energia S.p.A. - Italy (in thousands of euros) Performance of • Net sales 361,859 313,704 the main companies • Net income (17,313) (20,210) in the energy sector • Net financial (liquidity)/debt position 47,754 41,294 • Shareholders’ equity 58,625 75,938 Outlook for the Pirelli Energie Cables et Systèmes France S.A. - France (in thousands of euros) current year • Net sales 354,057 318,880 • Net income 2,842 20 • Net financial (liquidity)/debt position (51,169) (38,441) • Shareholders’ equity 138,138 136,571 Pirelli Cables y Systemas S.A. (consolidated) - Spain (in thousands of euros) • Net sales 251,933 209,979 • Net income 11,753 8,794 • Net financial (liquidity)/debt position (4,387) 7,206 • Shareholders’ equity 46,888 42,234 Pirelli General plc - U.K. - "B1" - United Kingdom (in thousands of British pounds) • Net sales 421,178 353,455 • Net income 19,260 (1,694) • Net financial (liquidity)/debt position 1,197 24,734 • Shareholders’ equity 111,786 92,853 Pirelli Kabel und Systeme Holding Gmbh (consolidated) - Germany (in thousands of euros) • Net sales 275,890 259,893 • Net income 3,289 (4,466) • Net financial (liquidity)/debt position (77,744) (46,115) • Shareholders’ equity 119,601 116,312 Pirelli Power Cables and Systems USA LLC - United States (in thousands of U.S. $) • Net sales 317,152 277,178 • Net income 17,031 8,383 • Net financial (liquidity)/debt position (98,592) (53,631) • Shareholders’ equity 2,950 77,820 Pirelli Power Cables and Systems Canada Ltd - Canada ( in thousands of Canadian $) • Net sales 222,473 189,890 • Net income 6,300 10,561 • Net financial (liquidity)/debt position 19,890 (18,349) • Shareholders’ equity 10,276 53,476 Pirelli Energia Cables y Sistemas de Argentina S.A. (consolidated) - Argentina (in thousands of Argentine pesos) • Net sales 232,906 124,997 • Net income 1,737 (15,827) • Net financial (liquidity)/debt position (20,201) (8,529) • Shareholders’ equity 71,878 70,865
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Energy Cables and 2004 2003 Systems Sector Pirelli Energia Cabos e Sistemas do Brasil S.A. (consolidated) - Brazil (in thousands of Brazilian real) • Net sales 662,822 554,470 Energy sector holding • Net income 33,063 16,601 company • Net financial (liquidity)/debt position (47,714) 18,019 Performance by • Shareholders’ equity 205,654 178,285 geographical area Pirelli Power Cables & Systems Australia PTY Ltd (consolidated) - Australia (in thousands of Australian $) • Net sales 234,385 205,100 Markets • Net income (2,371) 1,783 Performance of • Net financial (liquidity)/debt position 26,562 41,852 the main companies • Shareholders’ equity 6,234 8,601 in the energy sector Outlook for the current year
OUTLOOK FOR THE CURRENT YEAR For the current year, market conditions are expected to be substantially stable in Europe and South America, with signs of recovery in North America and in the Asia Pacific area, especially in terms of volumes and partly for prices. In this year, too, continuing actions will be undertaken, on the one hand, to improve production costs with particular emphasis on the recovery of efficiencies on materials, and in terms of both a reduction in production scrap and the introduction of alternative materials and, on the other hand, the focus on higher-margin segments. All of these measures should lead to an improvement in results in line with the targets fixed in the three-year plan.
The Energy Cables & Systems Sector plans to introduce alternative materials and concentrate on the segments with the highest profit margins in 2005.
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Telecom Cables TELECOM CABLES AND SYSTEMS SECTOR and Systems Sector Telecom sector holding The highlights of the consolidated financial statements at December 31, 2004 of the Telecom company Cables and Systems Sector can be summarized as follows: (in millions of euros) Performance by 2004 2003 geographical area • Net sales 430 427 Operations • Gross operating profit (loss) 9 (1) % of net sales 2.1% n.s. Performance of • Operating loss (15) (39) the main companies % of net sales n.s. n.s. in the telecom sector • Financial income (expenses) (17) (20) Outlook for the • Extraordinary items 11 4 current year • Income taxes 3 (1) • Net loss (18) (56) % of net sales n.s. n.s. • Net financial (liquidity)/debt position 301 302 • Capital expenditures 28 22 • R&D expenditures 25 34 • Employees (No. at year-end) 2,058 2,218 • Factories (number) 9* 11
* three of these are shared with the Energy Cables and Systems Sector
Net sales North America Europe Net sales amount to Euros 430 million, with a slight increase of South America 0.7 percent over the prior year.
The change is due to:
• Volumes + 16.4% • Prices/mix – 16.7% Change on a comparable basis – 0.3% Oceania • Foreign exchange effect – 1.6% • Metal prices + 2.6% Asia Total change + 0.7% Africa The distribution of net sales is as follows: Telecom Cables and Systems: 2004 sales by geographical area and product category. Geographical area 2004 2003 Europe (of which Italy 20%) 50% 50% Optical and North America 20% 18% fiber cables South America 8% 10% Oceania 12% 12% Asia 9% 8% Africa 1% 2%
Product category 2004 2003 Copper cables 26% 24% Optical and fiber cables 56% 53% Submarine cables - 13% Broadband Broadband access 15% 7% Copper access cables Connectivity and other 3% 3% Connectivity and other
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Telecom Cables Operating loss and Systems Sector The operating loss is Euros 15 million compared to an operating loss of Euros 39 million in the Telecom sector holding prior year. company The result includes costs of Euros 6 million referring to the submarine activities which are the Performance by subject of the agreement with Alcatel and Euros 10 million connected with the start-up of geographical area broadband and second-generation photonics activities. Cables and Fibers activities reported a breakeven in 2004 principally on account of efficiency measures put into place by management Operations of the company. Performance of Details of the change in the operating loss are as follows: the main companies (in millions of euros) in the telecom sector Operating loss 2003 (39) Outlook for the • Foreign exchange effect 1 current year • Prices (excluding metals)/mix (62) • Volumes 28 • Production factors per unit cost 6 • Efficiencies 26 • Depreciation 14 • Other 11 24 Operating loss 2004 (15)
Net loss The net loss is Euros 18 million compared to a net loss of Euros 56 million in 2003.
Net financial position The net financial position is a net debt position of Euros 301 million, in line with Euros 302 million at December 31, 2003.
Employees Headcount of employees of the sector at December 31, 2004 is 2,058 (including 126 employees with temporary contracts). The change from December 31, 2003 is a decrease of 160 persons including an increase of 80 persons with temporary contracts.
In 2004, a project was instituted to renovate the sales function with the following objectives: • strengthen the team by a changeover in resources; • provide support to the sales function through specific training; • renew the sales structure; Operations began on January 1, 2005 for Pirelli Broadband Solutions, the company operating in The main activities particularly focused on mapping the the broadband access and second- resources, analyses and organizational redesign with the generation photonics businesses. implementation phase to take place during 2005.
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Telecom Cables Beginning January 1, 2005, Pirelli Broadband Solutions became operational. This company is engaged in access and second-generation photonics activities. Significant projects are underway and Systems Sector to build up technical and commercial skills so as to support the important objectives of Telecom sector holding business development.Organizational and detailed procedures have been defined between Pirelli company Broadband Solutions and Pirelli Labs for purposes of allowing an effective and rapid operational flow in order to meet the time-to-market anticipated for products and technologies. Performance by geographical area Operations Performance of Factories the main companies At year-end 2004, there are 9 factories (3 of which are shared with the Energy Cables and in the telecom sector Systems Sector), compared to 11 at December 31, 2003. The reduction is due to the closing of Outlook for the the Arco Felice and Paderno Dugnano plants. current year Geographically, the factories are distributed as follows: 5 in Europe, 1 in North America, 1 in South America, 1 in Australia and 1 Asia.
Capital expenditures New capital expenditures in property, plant and equipment amount to Euros 28 million. The ratio of capital expenditures to depreciation is 1.24.
Capital expenditures can be analyzed by geographical area as follows:
Geographical Area 2004 2003 Europe 90% 91% South America 2% 2% Rest of the world 8% 7%
R&D expenditures R&D is conducted by an integrated structure of research centers and development and engineering units in various countries. A total of 110 persons are engaged in R&D, and expenditures totaled Euros 25 million, equal to 6 percent of net sales.
In the Fiber Optics field During 2004, R&D activities in the sphere of fiber optics focused on the development of products associated with the BBA (Broad Band Access) distribution network, particularly FTTx (Fiber-to-the-curb, Fiber-to-the-home, etc.) and “Metropolitan Area”.
One example of the research activities is a product which is able to support “Triple Play” (Voice, Cable TV and Internet) distribution. Because of a gain of more than 3dB on the threshold of a non-linear phenomenon called Stimulated Brillouin Scattering (SBS), this product is also particularly Production phase of optical fiber. In this field, research focuses on the suitable for transmitting analog signals. development of Broad Band Access products.
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Telecom Cables As a result, it is also suitable for the transmission of analog TV via cable. and Systems Sector The product has passed the experimental feasibility phase and has begun the industrial Telecom sector holding feasibility phase. Particular attention is being paid to ensure that it is compatible with Single company Mode Standard (ITU-T G.652) fibers. Performance by A second example of development aimed at distribution network applications is the fiber with a geographical area lower coating diameter than normal (200 mm instead of 250 mm). The fiber has passed the Operations experimental feasibility stage and is now being tested on the cable itself. Multi-loose-tube cables Performance of are usually used for the applications mentioned. In the cables of the latest generation each tube the main companies can accommodate 16 fibers of the type with the smaller diameter of coating compared to 12 in the telecom sector fibers with coating of the normal thickness. This is equivalent to an increase of 33 percent. Outlook for the Once testing of the cable has been completed, industrial feasibility tests will be conducted early current year in 2005.
A third product currently being developed is the MagniLight‘ fiber. In this case, work is continuing to try to improve the performance of both the product (optical properties) and the process (production efficiency) of the fiber.
In the Technical Cable field • development of compact single jacket microsheath cables for the Northern European access networks, with a fiber count of between 2 and 48 fibers and a diameter of between 2 and 6 mm; • development of a range of double-jacket microsheath cables with a fiber count of up to 144, particularly resistant to tensile stresses, crush and water propagation, suitable for the European and North American optical networks; • development and supply of multi-loose tube cables with a fiber count between 12 and 84 fibers for the German With the MagniLight™ optical fiber, Deutsche Telecom optical network; both product and process • continuation of the industrialization and mass production performance continued to improve. of different versions OPGWs with a central plastic tube inside an aluminum sheath of up to 48 fibers which, thanks to their small diameter and their competitive cost, have made it possible for various countries around the world to build high-voltage overhead power lines; • development and supply of 12-fiber “Breakout” type cables for interiors of buildings for the British market and 24-fiber “Multitight” cables for the European market in general; • development of a new 6-fiber optical cable for antenna feeders to connect the actual antenna to the “base station” which is connected in turn to the optical network. The new cables are required to replace the old, heavy coaxial cables (which have high attenuation values) in the mobile network with the new generation of optical cables. Thanks to their low level of attenuation, the new cables will In the sphere of optical cables, provide an economical way of reducing the number and products were developed that are improving the position of expensive base stations; particularly resistant to tensile stresses, crushing and water propagation.
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Telecom Cables • development and supply of a new type of 24-fiber aerial cable for installation on ground wires or phase conductors of high-voltage overhead power lines by means of multiple lashing. and Systems Sector The supply includes the installation system and equipment, which were also developed Telecom sector holding by Pirelli; company • development and supply of a range of cables with up to 96 pairs for ADSL (Asymmetrical Digital Subscriber Loop) for use in telephone exchanges, consisting of armored units with 24 Performance by pairs with frequencies of up to 10 Mbit/s. geographical area Operations Performance of the main companies Industrial operations in the telecom sector In 2004, factories manufacturing telecommunications cables Outlook for the produced higher volumes than in the prior year. Volumes of current year copper cables increased by 9 percent, whereas optical fiber cables increased dramatically (+50 percent), due mainly to demand by the North American market.
Optical fiber cable production increased by 50% in 2004.
Materials In 2004, prices of raw materials for optical fibers fell by an average of 10 percent as a result of the persisting excess of production capacity which will continue into 2005. With regard to other raw materials, having remained fairly stable in the first half of the year, prices began to rise. This phenomenon, which is expected to continue in 2005, was driven by the high cost of basic raw materials, the dramatic rise in demand, particularly in the Far East, and the scarcity of certain raw materials, particularly steel. To counter-balance these price rises, efficiency measures were implemented in 2004 and will continue in 2005, with the aim of reducing the total cost of materials.
Research on optical materials continues with the aim of optimizing the cost.
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Telecom Cables TELECOM SECTOR HOLDING COMPANY and Systems Sector The statutory financial statements of Pirelli Cavi e Sistemi Telecom S.p.A. for the year ended Telecom sector holding December 31, 2004 are summarized in the following balance sheet and statement of income: company (in millions of euros) Performance by Balance sheet 2004 2003 geographical area Intangible assets 4.8 6.2 Operations Property, plant and equipment 13.2 13.8 Performance of Financial assets 232.8 199.1 the main companies Net working capital 0.7 (40.0) in the telecom sector 251.5 179.1 Shareholders’ equity 44.9 74.9 Outlook for the Provisions 9.7 46.8 current year Net financial position 196.9 57.4 251.5 179.1
(in millions of euros) Statement of income 2004 2003 Production value 93.1 65.0 Production costs: - raw materials and services (89.5) (63.5) - personnel (12.7) (12.2) - depreciation and amortization (6.9) (6.8) - other (1.8) (2.8) Operating loss (17.8) (20.3) Financial income (expenses) (5.2) (4.5) Share of earnings (losses) of equity investments (24.6) (125.8) Loss before extraordinary items and income taxes (47.6) (150.6) Extraordinary items (18.3) (4.8) Income taxes (0.7) (2.2) Net loss (30.0) (157.6)
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Telecom Cables PERFORMANCE BY GEOGRAPHICAL AREA and Systems Sector Telecom sector holding company Italy Performance by Due to the persisting negative economic situation of the Italian geographical area market, 2004 was again a difficult year for Pirelli Cavi e Operations Sistemi Telecom Italia S.p.A., which operates in the sector of telecommunications cables, produced at the factory in Performance of Livorno Ferraris (Vercelli). the main companies In the face of a further considerable fall in domestic volumes in the telecom sector of optical cables, due especially to a change in strategy on the Outlook for the part of the two main domestic operators, and the persisting lack of investments in landline networks, the company reacted current year Sales volumes in 2004 are up 40% by developing completely new product and market segments. for FOS-Fibre Ottiche Sud. Furthermore, the Group’s decision to make the Livorno Ferraris factory the European production center generated an increase in production volumes for the affiliates. The reduction in terms of volumes compared to the prior year, despite everything, was considerable. The effect of the price and the mix also had a negative impact on overall sales, to the extent that it reported a negative profitability figure, despite the radical cuts made to fixed overheads. The subsidiary Fibre Ottiche Sud S.p.A. - (FOS), which manufactures optical fibers, reported sales that were slightly down compared to the prior year, despite an increase in sales volumes of approximately 40 percent. This factor compensated the further fall in prices resulting from persisting global production overcapacity and the impoverishment of the mix. Work continued to expand the factory and another section of new plants came on line. The statement of income benefited, in terms of lower depreciation, from the income on the partial receipt of the grants under the Program Contract stipulated with the Campania Region on investments made, and thus shows an The European optical fiber improvement compared to 2003. production center in Italy, at Livorno Ferraris.
France For the affiliate Pirelli Télécom Câbles et Systèmes France S.A., 2004 was another difficult year. The continuous fall in volumes, particularly in exports, persisted, and had a negative impact on sales of optical cables and connectivity, whereas sales of copper cables remained in line with those of the prior year. During the period, further restructuring was carried out at the Trégastel factory and, in general, throughout the company. The restructuring was already generating positive results in the last quarter of the year.
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Telecom Cables Spain and Systems Sector Export sales of the affiliate Pirelli Telecom Cables y Sistemas España S.L. represent more Telecom sector holding than 80 percent of total sales. The marked weakness of the U.S. dollar against the euro in 2004, company combined with a further fall in sales prices, led to a loss of competitiveness, especially in Performance by countries where the economy is linked to the dollar, and a negative economic result. Sales geographical area consisted almost exclusively of overhead cables (OPGW) and related accessories required for their installation. Operations The OPGW is an optical fiber cable which is installed in HV area networks as part of the Performance of infrastructures of electricity companies. the main companies In 2004, OPGW cables were installed for the following companies: in the telecom sector • Transeletrica in Romania, in collaboration with the Spanish cable installation company Inabensa. NZD FreeLight fibers were used for the project; Outlook for the • Sonelgaz in Algeria, with the installation of optical cables under live line conditions; current year • Comisión Federal de Electricidad in Mexico.
The move from the old Cavimar factory, sold in 2001, to the new Cavinova factory, both located in Vilanova y la Geltrú, was successfully completed. The new factory constitutes a pool of excellence for the production of OPGW cables.
United Kingdom In 2004, Pirelli Telecom Cables & Systems UK Ltd. recorded growth in all sectors compared to 2003. Sales of optical cables continued the positive trend begun in the second half of the prior year. In particular the affiliate worked closely with British Telecom on their objectives for the 21st century – the local production unit near Bishopstoke is well-placed for seizing the opportunities offered by the main PTTs. Profitability improved compared to the prior year and business benefited from the restructuring carried out in 2002 and from the positive sales mix of products with high profit margins, particularly in connectivity and the Sirocco products. In 2004, important contracts were acquired from the main OEMs in the infrastructures market with Molex and Panduit. Network Rail’s FTN project, for which Pirelli is to be the exclusive copper cable supplier until 2007, continued, albeit at a slower pace than in the second half of 2003. However, this situation was predicted by Network Rail together with an upturn in the supply of copper cables in 2005.
Germany In 2004, Pirelli Telekom Kabel und Systeme Deutschland GmbH, the company responsible for the marketing of copper and fiber optical cables on the German and Dutch markets and on the area along the Danube and in Eastern Europe, maintained the level of performance begun in 2003. By increasing its sales volumes compared to the prior year and operating on the mix, the company was able to achieve a profit of more than 8 percent of net sales.
North America In 2004, the size of the North American “Outside Plant” optical cables market increased by 79 percent compared to the prior year in terms of km of fiber sold, achieving a total of 14.0 M Fkm. The renewed demand for optical cables was led principally by investments made by Regional Bell Operating Companies (RBOCs) in the new fiber optic network services.
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Telecom Cables Verizon announced upgrades in optical fiber networks and is proceeding with the job of laying fiber-to-the-premises (FTTP) and Systems Sector or fiber-to-the-node (FTTN) networks, especially with regard to Telecom sector holding the new developments in legislation about unbundling. company The positive demand for cables was counter-balanced by strong pressure, leading to significant reductions in average sales Performance by prices caused by an imbalance between supply and demand. geographical area Pirelli was able to improve its position by increasing the sales Operations The North American market for volumes of fiber kilometers to a level that was higher than “Outside Plant” optical cables market growth, and successfully winning new contracts with increased by 79% in terms of Performance of kilometers of cable in 2004. the main companies the leading RBOCs, thus improving its general position in this in the telecom sector market segment. In addition, it supplied optical cables to the CATV companies which requested higher levels of Outlook for the expenditure to upgrade their networks in 2004. Such diversified sales enabled our American current year affiliate to achieve a general market share of 26 percent, the highest share in the entire history of Pirelli’s presence in North America, positioning the Group as the second-largest supplier of fiber optic cables in the North American market for the second consecutive year.
Brazil 2004 was a year of consolidation for the Lula government, with tight control of inflation, which was fueled by price increases of commodities worldwide. With regard to economic data, GDP rose by approximately 5 percent and there was a record balance of trade, bringing greater stability to the economy and reducing the country risk. The affiliate Pirelli Telecomunicações Cabos e Sistemas do Brasil S.A. reported an increase in sales of approximately 8 percent in local currency, caused by an increase in the demand for copper cables and paralysis in the optical cables market which lasted throughout the year. The net result is in line with that of 2003, despite the gain in value of the euro against the local currency.
Australia For the affiliate Pirelli Telecom Cables & Systems Australia PTY Limited, the year 2004 was marked by a significant growth in the demand for both optical and copper cables compared with the prior year. The spread of DSL connections sparked off a rise in the demand for copper cables while the optical cable support infrastructure was expanded further. Continuous reductions in the cost of materials, together with measures to improve efficiency made it possible for the affiliate The Pirelli Telecom Cables and Systems Australia PTY Limited to report significant growth in profitability compared to the plant at Dee Why, in New South prior year. Wales.
China In 2004, Pirelli Telecom Cables Co. Ltd Wuxi improved its result compared to the prior year despite the persistence of difficult market conditions. The prices of cables continued to fall amid a generalized increase in the prices of materials (especially those associated with oil). Export markets were also subjected to fierce competition generated by Chinese, Korean and Vietnamese producers which entered the markets of countries in southeast Asia. The drive towards promoting new products and careful cash-flow management helped to control the impact of maintaining the affiliate’s position in the standard cables market.
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Telecom Cables OPERATIONS and Systems Sector
Telecom sector holding Telecommunications cables and fibers company Performance by The cables market – both optical and copper cables – continues to be affected by the negative geographical area economic situation. In terms of total sales, in 2004, there was a slight improvement as a result of pressure on prices and an increase in volumes. However, it should be emphasized that there Operations were some positive signs. Although, on the one hand, North America is still affected by a sharp Performance of fall in prices, it is also true that there was a certain growth in volumes, especially as a result of the main companies the resumption of investments on the part of large telecommunications operators. On the other in the telecom sector hand, in Europe, there were signs of a certain amount of movement in the market for copper cables for ADSL as a result of greater investments on the part of long-established telephone Outlook for the operating companies. current year The supply of optical fibers was affected by the trend in demand for telecommunications cables, resulting in an increase in volumes and pressure on the mix and on prices.
Broadband Access (BBA) Throughout 2004, the expansion of activities in new business areas (Broad Band Access) doubled sales compared to the prior year partly as a result of a complete repositioning of BBA activities. The introduction of products for access (Gateways) achieved significant volumes, particularly for Telecom Italia and Fastweb: - ADSL router for Telecom Italia; - gateways with both ADSL and fiber VOIP technology for Fastweb residential use. New Gateway products were Consequently, sales volumes in 2004 also doubled compared to introduced in 2004 which effectively doubled sales compared to the prior those of the prior year. In 2005, sales are expected to increase year. significantly thanks to sales of photonics products, the fruit of research efforts over the last few years.
Submarine cables and systems During 2004, the market confirmed the negative situation on a world scale, the typical features of which were the absence of infrastructure connections of any significant size, the demand for which has not resumed. During the year, Alcatel and Pirelli signed an agreement involving their respective sectors of submarine systems for telecommunications. Alcatel acquired some of Pirelli’s activities in this business and was granted certain intellectual property rights in the same sector. At the same time, Pirelli acquired a 5 percent stake in Alcatel’s Submarine optical cables being laid submarine systems for telecommunications business with on the sea-floor. reciprocal put and call options.
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Telecom Cables The transaction enabled Alcatel to benefit from new commercial opportunities and acquire additional intellectual property rights, thus further strengthening its position as world leader in and Systems Sector the sector. Telecom sector holding For Pirelli the transaction described above is a further step towards focusing on cables and company optical fibers, and on innovative products for broadband access and second-generation photonics while maintaining a holding in the field of submarine systems for Performance by telecommunications. geographical area Operations Performance of the main companies in the telecom sector PERFORMANCE OF THE MAIN COMPANIES IN THE TELECOM SECTOR Outlook for the Key data as they appear in the financial statements prepared by the boards of Directors and current year approved or in the process being approved by the respective shareholders’ meetings is given below. All amounts are expressed in local currency and compared to the prior year.
2004 2003 Pirelli Cavi e Sistemi Telecom Italia S.p.A. - Italy (in thousands of euros) • Net sales 67,568 78,958 • Net loss (35,773) (12,047) • Net financial (liquidity)/debt position 17,166 22,288 • Shareholders’ equity 7, 339 33,112 Pirelli Telecom Câbles et Systèmes France S.A. - France (in thousands of euros) • Net sales 27,416 23,385 • Net loss (4,524) (5,958) • Net financial (liquidity)/debt position 1,906 5,834 • Shareholders’ equity 5,937 2,955 Pirelli Telecom Cables Y Systemas Espana S.L. - Spain (in thousands of euros) • Net sales 43,026 45,736 • Net loss (3,450) (887) • Net financial (liquidity)/debt position 11,494 6,295 • Shareholders’ equity 17,146 20,596 Pirelli Telecom Cables & Systems UK Ltd - United Kingdom (in thousands of British pounds) • Net sales 38,519 34,303 • Net loss 3,561 143 • Net financial (liquidity)/debt position (3,265) 2,172 • Shareholders’ equity 14,538 10,977 Pirelli Telekom Kabel und Systeme Deutschland Gmbh - Germany (in thousands of euros) • Net sales 15,627 12,362 • Net loss 624 456 • Net financial (liquidity)/debt position (1,885) (522) • Shareholders’ equity 2,151 1,527 Pirelli Communications Cable and Systems USA LLC - United States (in thousands of U.S. $) • Net sales 106,648 75,778 • Net loss 3,919 (4,941) • Net financial (liquidity)/debt position (4,857) 16,983 • Shareholders’ equity 11,724 7,805
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Telecom Cables 2004 2003 and Systems Sector Pirelli Telecomunicações Cabos e Sistemas do Brasil S.A. - Brazil (in thousands of Brazilian real) • Net sales 126,152 117,724 Telecom sector holding company • Net loss (9,081) (14,824) • Net financial (liquidity)/debt position 4,299 25,815 Performance by • Shareholders’ equity 49,864 58,945 geographical area Pirelli Telecom Cables & Systems Australia PTY Ltd (consolidated) - Australia (in thousands of Australian $) Operations • Net sales 84,444 77,682 Performance of • Net loss 6,582 2,973 the main companies • Net financial (liquidity)/debt position (7,776) (3,345) in the telecom sector • Shareholders’ equity 33,372 23,835 Outlook for the current year
OUTLOOK FOR THE CURRENT YEAR Although the telecommunications sector has not displayed any substantial signs of recovery, there are some areas in which the Group is focusing its attention in order to overcome this negative moment in time. The fibers market, in particular, is still sheathed in fierce competition over prices. This has a negative effect on the related cables market, especially since important infrastructure investments by public and private entities have not been forthcoming for some time. In response to Verizon’s announced expansion of its network, the most important fiber-network customer in the American market, the affiliate Pirelli Communications Cables and Systems USA LLc has investments planned that will allow it to promptly seize advantages improving its market share. The Access Network, on the other hand, is showing strong potential for development on which the company is directing its efforts with the acquisition of contracts and orders both inside A Set-Top Box: one of Pirelli Broadband Solutions’ many new and outside Italy. products in the field of systems for Pirelli Cavi e Sistemi Telecom S.p.A.’s business in modules gateway access communication. dedicated to broadband connections and also second-generation photonics has grown significantly during the three years 2002-2004: this is all due to the continuing interest and pressing demand by the national and international market for increasingly faster and technically capable gateway access communication systems. The activities dedicated to the above-described areas by Pirelli Cavi e Sistemi Telecom S.p.A.’s have positively responded to the growing market demand by global actors devoted specifically to these product lines by always continually proposing new personalized and technologically innovative solutions. Therefore, a start has been made in the process to reorganize and separate the activities: on one side, the part purely concerned with telecommunications cabling and fibers and, on the other, both those dedicated to the development of broadband access systems and those geared to the development, manufacture and marketing of new photonics products created and developed in the laboratories of Pirelli Labs S.p.A., with the latter activities being transferred to Pirelli Broadband Solutions S.p.A..
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Tyres Sector TYRES SECTOR Tyres sector holding company The highlights of the consolidated financial statements at December 31, 2004 of the Tyres Sector can be summarized as follows:: Consumer markets (in millions of euros) Industrial market 2004 2003 • Net sales 3,255 2,970 Performance of • Gross operating profit 454 399 the main companies in the tyres sector % of net sales 13.9% 13.4% • Operating profit 276 220 Outlook for the % of net sales 8.5% 7.4% current year • Financial income (expenses) (33) (45) • Extraordinary items (1) (1) • Income taxes (73) (45) • Net income 169 129 % of net sales 5.2% 4.3% • Net financial (liquidity)/debt position 215 317 • Capital expenditures 190 173 • R&D expenditures 124 123 • Employees (No. at year-end) 21,513 20,437 • Factories (number) 22 22
Africa, Asia, Oceania Italy Other European Net sales countries Net sales for the year 2004 amount to Euros 3,255 million, with an increase of 9.6 percent compared to the prior year. The growth in volumes (+8.1 percent) is significant and covers all geographical areas, the price/mix (+3.4 percent) displayed good performance whereas the foreign exchange effect is negative (-1.9 percent).
The distribution of net sales is as follows: North America South America Geographical Area 2004 2003 Tyres: 2004 sales by Italy 13% 14% geographical area and product Other European countries 43% 45% category. North America 8% 7% Car tyres Truck South America 23% 21% tyres Africa\Asia\Oceania 13% 13%
Product category 2004 2003 Car tyres 62% 62% Truck tyres 28% 27% Motorcycle tyres 7% 8% Steelcord/Other tyres 3% 3% Motorcycle Steelcord/ tyres Other tyres
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Tyres Sector Operating profit Tyres sector holding Operating profit is Euros 276 million (8.5 percent of net sales) compared to Euros 220 million in company the prior year (7.4 percent of net sales). The positive contribution by volumes, prices and mix Consumer markets along with steps taken to reduce costs, have more than offset the negative foreign exchange effect and the increase in both raw material costs and labor costs. Industrial market Details of the positive change of Euros 56 million in the operating profit compared to 2003 can Performance of be summarized as follows: the main companies (in millions of euros) in the tyres sector Operating profit 2003 220 Outlook for the • Foreign exchange effect (10) current year • Prices/mix 49 • Volumes 97 • Production factors per unit cost (74) • Efficiencies 21 • Depreciation (4) • Other (23) 56 Operating profit 2004 276
Net income Net financial position The net income is Euros 169 million after: The net financial position is a net debt - financial expenses of Euros 33 million, position of Euros 215 million. This is a compared to Euros 45 million in 2003; reduction of Euros 102 million compared - extraordinary expenses of Euros 1 million, to the prior year, after paying dividends to in line with the prior year; the parent company of Euros 85 million. - income tax expenses of Euros 73 million, The decrease in the debt position is due to compared to Euros 45 million in 2003. the net income for the year and the continuing improvement in working capital management.
Sales of Pirelli Tyres increased by approximately 10% in 2004 and volumes rose in all geographical areas of operation.
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Tyres Sector Employees Tyres sector holding Headcount of employees at December 31, 2004 is 21,513 (including 1,666 employees with company temporary contracts and 910 temp employees). Consumer markets Compared to December 31, 2003, there was a decrease of 46 management and permanent Industrial market staff, due to the continuation of rationalization activities and fixed overhead efficiencies, and an increase of 24 employees under temporary contracts and 91 temp employees to support Performance of the business activities with a view toward augmenting labor flexibility. the main companies in the tyres sector With regard to the number of blue-collar workers, there was an increase of 1,007 persons (including 757 with temporary contracts and temps) due to an increase in volumes in Brazil Outlook for the and Venezuela and the “7 day” project in Venezuela. current year The first persons were also hired for the Steelcord company in Slatina (Romania). Other persons will continue to be hired during 2005 consistent with the operation plan of the factory. At December 31, 2004, the headcount (excluding employees with temporary contracts) may be analyzed as follows:
2004 2003 Senior executives 0.9% 0.9% Staff 22.4% 22.9% Blue-collar 76.7% 76.2%
As far as organizational development is concerned, a strong impetus was given to the theme of career building in the Research and Industrial professional families. With regard to R&D, the professional development structure divided between technical and managerial careers by instituting development and resource evaluation committees became fully operational. In the Industrial area, a start was given to the “Living the Factory” project which involves various areas of resources management including Internal Communication, Training and the addition of young people with high potential to be trained as future factory managers. In reference to the development of human resources, in 2004, strong emphasis was given to the topic of variable compensation. The population involved in incentives was expanded and the economic and financial parameters for the measurement of performance was defined at all levels in order to guarantee an immediate correlation between the trend in company results and the global compensation of key persons. On the front of industrial relations, in 2004, labor contracts were renewed in Italy, Brazil, Germany, Turkey and the United Kingdom.
Capital expenditures Capital expenditures amount to Euros 190 million in 2004, with a ratio of 1.06 to depreciation and equal to 5.8 percent of net sales of the Tyres Sector. Capital expenditures in factories represent 80 percent of the total. This is in line with the Group’s strategy and market demand. The capital investments were employed in the development of innovative process, expansion of The tyre production plant at Feira de Santana, in Brazil. 80% of production capacity in the high-performance segment and investments in the Sector are the introduction of new products. devoted to developing new processes and increasing production capacity.
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Tyres Sector R&D expenditures Tyres sector holding R&D expenditures incurred in 2004 total Euros 124 million, equal to 3.8 percent of company net sales. This activity is traditionally focused on the development of new products Consumer markets in the high-performance tyre range (UHP and runflat, SUV, motorcycle and Radial Truck tyres). It exploits state-of-the-art technological components and know-how coming from intensive Industrial market research in materials, also in collaboration with Pirelli Labs, model making, structures Performance of and tread patterns. the main companies in the tyres sector Outlook for the TYRES SECTOR HOLDING COMPANY current year The unconsolidated financial statements of Pirelli Tyre Holding N.V. for the year ended December 31, 2004 are summarized in the following balance sheet and statement of income:
(in millions of euros) Balance sheet 2004 2003 Intangible assets 1.0 1.5 Financial assets 732.6 673.8 Net working capital 6.3 7.7 739.9 683.0 Shareholders’ equity 770.2 694.8 Provisions – 1.5 Net financial position (30.3) (13.3) 739.9 683.0
(in millions of euros) Statement of income 2004 2003 Net earnings of affiliates 161.0 118.1 Other income (expenses) (2.8) (1.7) Net income 158.2 116.4
Pirelli Tyres R&D operates in the area of materials, modeling, tread structure and design, focusing on high performance products.
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Tyres Sector CONSUMER MARKETS Tyres sector holding company Car Tyres Consumer markets In 2004, new products were launched to renew the top-of-the- Industrial market range product portfolio to support the Pirelli brand, which is Performance of ever-more complete and provides a reliable benchmark for the the main companies market in terms of performance, quality and durability. in the tyres sector In May, the new range of “Planet Zero” tyres was presented to Outlook for the the Press and dealers in Rome. This is the most prestigious and current year highly diversified portfolio of UHP tyres for high-performance cars and SUVs. Pirelli’s innovative portfolio of products such as PZero Giallo, Rosso, Nero and Corsa, which are continuing the trend of leadership in technological innovation presented as far back as 1994 by Pirelli with P Zero System, all have hi-tech characteristics in terms of performance and safety which are also the fruit of years of experience in racing. The new range In the new Planet Zero range, Scorpion Zero Asimmetrico is the has been enhanced by the addition of the P Zero Corsa System, tyre destined to be used as Original for high-performance cars and with a truly sporting character, Equipment on the more powerful and also the Scorpion Zero Asimmetrico, used as original SUV models. equipment on the more powerful SUVs. In June, Thailand hosted the world presentation of the new UHP Dragon tyre, which is oriented towards the consumer requirements in the Far East and the Pacific area. In Patagonia, the world Press was able to test the new Winter Sottozero tyre in the most extreme winter conditions. The new tyre, which is designed for high-performance cars, is being presented as the first true two-season tyre, since it gives maximum performance on snow and ice, on dry roads and also in less extreme weather conditions. Winter Sottozero is a demonstration of the excellent results achieved by Pirelli’s R&D The Winter Sottozero launched in team in using new technologies such as nanocomposite 2004: maximum performance on materials for sub-stratum compounds. both snow and dry road surfaces. Pirelli’s leadership in terms of technological expertise and performance was again confirmed by numerous successes in comparisons made by the specialized press in the UHP segment, only some of which are mentioned here. The PZero Nero won the test organized by the specialist German magazine “Auto Motor und Sport”, achieving performance of a level that far surpassed the best products of the competition. The same recognition went to the Winter Sottozero at the end of tests in winter conditions organized by the German Press. In the HP segment, Pirelli Eufori@ passed a difficult test on Run Flat tyres published by the specialist monthly “Quattro Ruote” with flying colors, achieving excellent results in the areas of safety and reliability under extreme conditions. On the wave of success achieved in 2003 with the J.D. Power Award in the United States, in 2004, Pirelli was honored with the Best Innovator 2004 Award, organized by A.T. Kearney in Important increase for Pirelli Tyres collaboration with Confindustria, for excellence in the Original Equipment on the North integration of various dimensions of innovation. The award American market.
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Tyres Sector constitutes a prestigious recognition of Pirelli as a Knowledge Company which is capable of generating value through hi-tech Tyres sector holding management, product and process technologies. company Consumer markets In 2004, the trend of the Replacements channel differed in the various geographical areas. Industrial market The Replacements channel closed 2004 on a global scale with a Performance of marked increase (+7 percent) in volumes compared to the prior the main companies year. The figure rises to 9 percent if the Pirelli brand alone is in the tyres sector considered, which represents more than 90 percent of the net sales of Replacements. Outlook for the There was particularly significant growth worldwide in the current year highly marginal segments, such as SUV and Ultra-High- Performance. The Pirelli P Zero range was once again the protagonist in homologations on the most Sales of Original Equipment reported a significant increase prestigious car models in 2004. during the year. This was particularly accentuated in the United States where the expansion of Pirelli’s presence continued with rising success in the segment of the more prestigious models of tyres, both in the car and light truck segments. Sales were steady on the European market, and the leadership position acquired in recent years with the foremost car manufacturers was strengthened. The success achieved with car makers is confirmed by the continued growth of the penetration of Pirelli products, both in terms of quality and quantity. In the year of the launch of the range of Planet Zero products, yet again, the P Zero Rosso confirmed its excellent performance by obtaining homologations with Alfa Romeo, Audi, Bentley, Ferrari, Maserati, Mercedes, Peugeot, Porsche, Saab and VW. The P6 The Pirelli P Zero Nero is supplied and the P7 (selected for the new models of Alfa Romeo, Ford, as Original Equipment on an American legend: the Ford Mustang Lancia, Mercedes, Opel, Peugeot and VW), the P Zero Nero GT. (for Alfa Romeo, Ford, Mercedes), the P Zero Corsa (for Ferrari, Maserati and Subaru) and the Scorpion STR (for Alfa Romeo and Ford) again contributed considerably to increasing the number of homologations obtained. The run-flat segment was also highly successful and was confirmed as a benchmark in the market, thanks to the prestigious homologations obtained during the year from all the leading car manufacturers which adopted this technology. On the North American market, the success of the P6 Four Season continued, obtaining homologation with Audi, Ford and Saab for the models destined for this particular market. Excellent results were also achieved by the P Zero Nero, which is supplied on the legendary Ford Mustang GT.
The 2004 Motorsport season once more saw Pirelli involved at the highest level, both in competitions on the race track and with important partners such as Subaru (an agreement which has endured more than 10 years and which has proved to be highly successful) in the World Rally Championship, and with Five victories and second-place Ferrari and the new competitor Maserati in the International overall champion in the 2004 World FIA GT Series. Rally Championship for the time- tested Subaru/Pirelli team.
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Tyres Sector In the World Rally Championship, the Norwegian driver Petter Solberg finished in second place, having driven to victory in five Tyres sector holding races (New Zealand, Greece, Japan, Italy and Great Britain) company making the Subaru-Pirelli combination the undisputed master Consumer markets on dirt roads. Pirelli also won 14 national rally titles, confirming its enviable Industrial market reputation in this specialist category. This message was received by leading world contenders and, in the second half of Performance of Equipped with Pirelli tyres, the the main companies the year, agreements were signed with Peugeot and Mitsubishi, Maserati MC12 is the new star of the Fia-GT Championship. in the tyres sector who will be our partners in this year’s World Championships. In the FIA GT Championship, Pirelli was involved on various Outlook for the fronts with Ferrari and the Saleen S7. Together with Ferrari, Pirelli won titles and the fastest laps, current year and the Saleen S7 was the undisputed winner at Magny Cours (France), Brno (Czech Republic) and Imola (Italy). The Maserati MC12 debuted in the latter race, immediately gaining a place on the winners’ podium and winning 2 out of the 3 following races: Oschersleben (Germany) and Zhuhai (China). The long list of successes on the race track in 2004 also includes the victory in the LMP2 Class of the 24-Hour Le Mans. Successful and exclusive partnerships continue with the Ferrari Challenge and the Maserati Trophy, both on a world scale. In 2004, Pirelli also participated in the GT Championships held in Italy, France and the United States.
Motorcycle tyres In 2004, Motorcycle Tyres activities again achieved results that were better from the point of view of volumes and mix, as well as from the industrial and logistical point of view. These results were achieved in the presence of markets that showed lower growth than the prior year and were influenced by the negative effect of exchange rates against the U.S. dollar. The Replacements channel reported the most significant growth in the United States, Canada, Brazil, Italy and Great Britain, whereas, in terms of the market share, there were The homologation for the Aprilia improvements in both North and South America and Europe, RSV 1000 was one of the most prestigious for the Pirelli Diablo both in the Pirelli and Metzeler brands. Furthermore, the fact Corsa. that sales of radial tyres were double the sales of conventional tyres proves that the mix is more than positive. In the Scooter segment, Pirelli succeeded in maintaining volumes despite a downturn in the market. The trend of net sales in the Original Equipment channel exceeded expectations, recording gains in market share in Europe and Japan and obtaining the first homologation in the United States with the Pirelli Sync on the Buell XB9 Lightning City X. The excellent sales results were also due to new products such as the Pirelli Diablo Corsa (supersport), Sync (radial touring) and Scorpion Pro (off-road) as well as the Metzeler Racetec (supersport racing) and Roadtec Z6 (radial sport touring). Then, towards the end of the year, Pirelli introduced new models: the Dragon Supercorsa Pro (supersport racing), the Diablo Strada (radial sport touring) and the new Metzeler Pirelli, the 2004 World Endurance Champion: Pirelli Motorcycle’s Lasertec (touring), all products which will contribute to racing activities range from the results in the future. Superbike and Supersport World Championships, the World Cross In the racing sphere, Pirelli won the World Endurance Championships to classics such as Championship, the World MX1 Championship (which it won the Tourist Trophy.
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Tyres Sector for the 44th consecutive time), the World Sidecar Cross Championship and the European Supersport 600 Tyres sector holding Championship. Pirelli also took many national titles both in company Road and Off-Road Racing, in addition to classics such as the Consumer markets Tourist Trophy and the North West 200. Pirelli also achieved excellent results in its capacity as Official Industrial market Tyre Supplier for the World Superbike and Supersport Championships, both from the point of view of the Performance of Racetec, Roadtec, Lasertec: 2004 the main companies increasingly high level of the quality of our products, the level was a year full of new models for in the tyres sector of service provided to the teams and actual performance. Metzeler. Pirelli’s commitment has helped to relaunch these Outlook for the championships which, next year, will see the participation of current year all the leading motorcycle manufacturers, thus ensuring first- class visibility for the Pirelli brand. Whereas, in 2003, Pirelli obtained the first MIRS homologation with the Pirelli Diablo Corsa on the Honda CBR 1000 RR, 2004 produced the first victories for MIRS with the Metzeler Racetec in the Italian SSP and SST 600 Championships, the Danish SSP 600 Championship and the French Endurance 600 Championship, results which all express the potential of the new process.
INDUSTRIAL MARKET
Truck tyres In 2004, the market for Truck Tyres was positive for the Original Equipment business. In Replacements, favorable results were recorded in South America, the Far East, the Middle East and Africa, whereas there was a slight contraction of the market in Europe. Prices were repositioned on all the markets to counter-balance the significant increase in the costs of raw materials. Within the framework of its commercial scenario, Pirelli succeeded in maintaining its share on strategic markets by continuing to pursue a policy based on profitability rather than volume. The Pirelli Amaranto tyre line, for buses and trucks, used The commercial product range was accompanied by a growing technologies derived from MIRS™ selection of operational service activities to support both to enhance product performance. dealers and the fleets. Pirelli’s investment policy continued to focus on the factories located in markets with highest growth, such as Brazil, Turkey and Egypt. Product innovation led to four new product lines being introduced to the European market including the PS 22, the new tyre for transport on dirt roads, the TQ for building sites, mines and rocky surfaces, the CT 85 for city use and the high performance Amaranto line. The latter product, in particular, was the focus of R&D and process activities during the year. The Amaranto line, which can be applied to both the Bus and Truck segments, uses a phase of “cross-fertilization” of the technology of the MIRS™ process and constitutes an important step forward in the standard of product performance.
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Tyres Sector Steelcord tyres Tyres sector holding The positive economic and financial performance of the company Steelcord area in 2004 fits into a world market scenario Consumer markets dominated by pressure on volumes, especially in the second half of the year. Market growth settled at 6 percent on an Industrial market annual basis (in tons) due mainly to strong demand by the Performance of Chinese, Eastern European and South American markets. the main companies Mature markets such as North America, Western Europe and in the tyres sector Japan remained fairly constant. The increase in production capacity was achieved slightly too Outlook for the late for the market demand and combined with a reduction current year of installed capacity in the United States. This situation made it possible to transfer the marked increases in the prices of raw materials to the finished product. The price of steel The progressive evolution of high increased by approximately 40 percent during the year and as performance tyres has also necessitated improvements in the much as +90 percent in the first quarter of 2005 compared to technology used to produce the first quarter of 2004. steelcord. The gradual technological evolution of the top-of-the-range product has resulted in the introduction of new, lighter cords and has helped to improve the mix of sales and value-added products. Results in the industrial sector were also positive, with higher productivity in all four manufacturing facilities. Production capacity continued to be increased in Brazil and Turkey. Well over half the total production of steelcord in 2004 took place in low-cost areas and the percentage is destined to increase further with the start-up of the fifth production facility at Slatina in Romania, scheduled for May 2005. Cord Romania, in which Continental has an investment, constitutes not only an opportunity to develop the production capacity in Europe at highly competitive costs, but also the consolidation of an industrial and commercial partnership with Drathcord Saar in Germany which began in 1972.
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Tyres Sector PERFORMANCE OF THE MAIN COMPANIES IN THE TYRES SECTOR Tyres sector holding Key data as they appear in the financial statements prepared by the boards of Directors and company approved or in the process of being approved by the respective shareholders’ meetings are Consumer markets given below. Industrial market All amounts are expressed in local currency and compared to the prior year. Performance of the main companies 2004 2003 in the tyres sector Pirelli Pneumatici S.p.A. - Italy (in thousands of euros) Outlook for the • Net sales 1,369,347 1,211,998 current year • Net income 15,720 12,460 • Net financial (liquidity)/debt position 271,515 334,658 • Shareholders’ equity 258,432 238,211 Pirelli Deutschland A.G. - Germany (in thousands of euros) • Net sales 703,274 643,723 • Net income 50,709 78,038 • Net financial (liquidity)/debt position 9,984 (86,567) • Shareholders’ equity 77,043 176,813 Pirelli UK Tyres Ltd United Kingdom (consolidated) - United Kingdom - (in thousands of £) • Net sales 281,589 269,139 • Net income 10,795 7,360 • Net financial (liquidity)/debt position (32,290) (15,386) • Shareholders’ equity 124,030 100,204 Pirelli Neumaticos S.A. - Spain (in thousands of euros) • Net sales 291,279 287,015 • Net income 1,845 2,377 • Net financial (liquidity)/debt position (29,796) (23,299) • Shareholders’ equity 68,246 72,778 Turk Pirelli Lastikleri A.S. - Turkey (in thousands of euros) • Net sales 256,737 242,683 • Net income 2,689 6,857 • Net financial (liquidity)/debt position (33,709) (19,593) • Shareholders’ equity 120,573 108,361 Pirelli Pneus S.A. - Brazil (in thousands of Brazilian real) • Net sales 2,723,854 2,292,292 • Net income 220,065 159,929 • Net financial (liquidity)/debt position (251,183) (138,997) • Shareholders’ equity 860,888 741,430 Pirelli Tire Llc - United States (in thousands of U.S. $) • Net sales 278,107 196,124 • Net income 24,874 13,369 • Net financial (liquidity)/debt position 43,419 37,907 • Shareholders’ equity 19,497 (5,412)
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Tyres Sector 2004 2003 Tyres sector holding Pirelli Neumaticos S.A.I.C. - Argentina (in thousands of U.S. $) company • Net sales 168,951 146,942 • Net income 14,874 11,901 Consumer markets • Net financial (liquidity)/debt position (2,902) (3,255) Industrial market • Shareholders’ equity 52,435 38,377 Performance of Pirelli de Venezuela C.A. - Venezuela (in thousands of U.S. $) the main companies • Net sales 100,077 77,860 in the tyres sector • Net income 12,522 7,671 Outlook for the • Net financial (liquidity)/debt position (8,940) (18,703) current year • Shareholders’ equity 44,170 44,482
OUTLOOK FOR THE CURRENT YEAR On the basis of the growth forecasts of the world tyre market, and, in particular, the premium segments, the Tyres Sector expects to report an increase in net sales and in operating profit in line with the Three-year Plan.
A further growth in sales is expected in the Tyres Sector, particularly in the high performance line.
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Real Estate Sector REAL ESTATE SECTOR Major events in 2004 Pirelli RE is a management company which manages real Economic review estate companies and investment funds and non-performing Outlook for the loans in which it participates by investing in minority stakes; current year these are the asset management and fund management businesses. It also provides these and other clients with every type of specialist real estate service; this is the service provider business.
Pirelli RE has developed a distinctive and innovative business model, thanks to its internal specialist expertise gained over the years and a management team of proven experience. In short, the business model allows the company to bring together diverse competitive advantages: - attract the most qualified investors and international Pirelli RE boasts assets under operators which can entrust one single party with the management of Euros 10.7 billion at December 31, 2004. management of all phases of their investments; over the last few years specialized investors have directed investment flows which have increased the real estate portfolio managed by the Group; - reduce the overall risk of investments, thanks to minority-owned investments in several companies specialized by type and use; - spread out investment opportunities, by investing in a greater number of operations with the same invested capital; - manage asset values that are significantly higher than the direct investment holding, thanks to asset management and service provider activities; - raise the profitability of the operations carried out thanks to asset management and the specialized service companies.
The Group boasts assets managed at December 31, 2004, at market value, of Euros 10.7 billion, of which real estate loans total Euros 1.3 billion, and offers its services to a portfolio worth Euros 35.1 billion, including the management component of the FIP Fund which the Group manages on behalf of third parties. With operating headquarters in the most important domestic real estate markets, in Milan, Rome and Naples, and a qualified network of agents, the Group is able to operate efficiently throughout Italy, employing a total of over 1,500 resources. The ability to offer itself as the one source for the entire real estate cycle (from purchas to management, up to the disposal of the property) and the high degree of know-how in various areas of real estate operations, have led the Group to consolidate trusting relationships with the largest entities and business groups in Italy, as well as attract the most important international investment funds, which have identified Pirelli RE as the ideal and strategic partner for seizing investment opportunities offered by the Italian market.
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Real Estate Sector MAJOR EVENTS IN 2004 Major events in 2004 A new series of important transactions was carried out by the Pirelli RE Group: Economic review • important purchases of luxury real estate portfolios for about Euros 1,120 million for Outlook for the subsequent appreciation; current year • efforts to appreciate the portfolio making it possible to generate sales to third parties and contributions to real estate funds for approx. Euros 4,120 million; • complete success of fund management activities conducted by Pirelli Real Estate SGR S.p.A. through the placement on the retail market of Tecla Fondo Uffici and Olinda Fondo Shops, listed real estate funds seeded by private contributions which closed before the end of offer period because of oversubscription. Besides the ones mentioned above, another two funds were placed on the market, reserved for qualified investors, called Cloe Fondo Uffici and Clarice Light Industrial; • stepping up of activities carried out by Pirelli Real Estate Franchising S.p.A. begun during 2003 aimed at providing real estate and financial services to the retail market; at December 31, 2004, there were 525 agencies under contract; • increase in the sales and operating profit of the service companies; • structuring of the sector for the management of and investment in non-performing loans and purchases of mortgage loan portfolios during the year for roughly Euros 1,005 million at book value.
ECONOMIC REVIEW
The highlights of the statement of income are presented below. In reading these figures, it should be pointed out that the aggregate production value, net of acquisitions, and the operating profit including the share of earnings (losses) of equity investments, because of the type of business conducted by the group, are the most important indicators expressing, respectively, the business volumes managed and the trend in Pirelli RE Franchising received a results at the operating level. further boost in 2004: at year-end, agencies under contract totaled 525. (in millions of euros) 2004 2003 Aggregate production value, net of acquisitions 1,973.2 1,525.5 29% Consolidated production value 559.9 649.0 Operating profit including the share of earnings (losses) of equity investments 157.5 (*) 128.1 23% Income before extraordinary items 162.4 128.9 Net income - attributable 128.0 102.1 25%
(*) includes Euros 0.2 million of income from real estate funds
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Real Estate Sector Aggregate production value Major events in 2004 Aggregate production value, net of acquisitions, amounts to Euros 1,973.2 million with Economic review a growth of 29 percent compared to Euros 1,525.5 million in 2003. Consolidated production value alone for the year ending December 31, 2004 is Euros 559.9 million, compared to Outlook for the Euros 649 million in 2003. current year The decrease is due, in keeping with the Group’s business model, to the growing impact of initiatives in minority-owned investments rather than consolidated investments.
Operating profit including the share of earnings (losses) of equity investments The operating profit including the share of earnings (losses) of equity investments is Euros 157.5 million, compared to Euros 128.1 million in 2003 (+23 percent). The increase over the two- year period is 54 percent.
Net income - attributable The attributable consolidated net income is Euros 128 million, compared to Euros 102.1 million, with a growth of 25 percent. The increase over the two-year period is 55 percent.
Balance sheet review
(in millions of euros) December 31, 2004 December 31, 2003 Fixed assets 372.1 313.4 including investments in real estate funds and investment companies 225.1 149.7 Net working capital 231.6 162.3 including inventories 274.8 325.0 Net invested capital 603.6 475.7 Shareholders’ equity 520.0 424.8 including minority interest 9.6 3.2 Provisions and contributions 48.2 41.7 Net financial (liquidity)/debt position 35.4 9.2 Total net invested capital financed 603.6 475.7 Free cash flow 47.2 42.1 Net cash flow (26.2) (21.5)
Shareholders’ equity - attributable Attributable shareholders’ equity at December 31, 2004 is Euros 510.4 million compared to Euros 421.6 million at the end of 2003. The increase of Euros 88.8 million is mainly due to the difference between dividends paid (Euros 53.8 million) and the net income for the year (Euros 128 million), and a capital increase with share premium (Euros 14.6 million) due to the exercise of stock options.
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Real Estate Sector Net financial position Major events in 2004 The net financial position is a net debt position of Euros 35.4 million, an improvement Economic review compared to Euros 40.9 million at September 30, 2004 (Euros 9.2 million at December 31, 2003). The change from Euros 9.2 million at the end of 2003 is due to investment activities. Outlook for the The net financial position expressed before financing by the shareholders to minority-owned current year companies is a net debt position of Euros 245.2 million compared to a net debt position of Euros 295.3 million at September 30, 2004 (Euros 223.7 million at December 31, 2003). The gearing ratio shows an improvement compared to last year and is equal to 0.47 compared to 0.53 at December 31, 2003.
Fixed assets Fixed assets total Euros 372,1 million, compared to Euros 313.4 million recorded at the end of 2003, with an increase of Euros 58.7 million. The increase in net fixed assets is due to the value of equity investments relating both to Asset Management and to the area of Fund Management. With regard to Fund Management, Euros 34.6 million refers to the purchase by Pirelli Real Estate SGR S.p.A. of 2 percent of the shares of Tecla Fondo Uffici, 5 percent of the shares of Cloe Fondo Uffici and 5 percent of the shares of Olinda Fondo Shops.
Net working capital Net working capital is equal to Euros 231.6 million, compared to Euros 162.3 million at the end of 2003 (+43 percent). The increase is mainly due to the payment of suppliers for properties for an amount of Euros 66.9 million.
OUTLOOK FOR THE CURRENT YEAR
As regards the outlook for the current year, the target for the growth of operating profit, including the share of the earnings of equity investments, is confirmed to be line with that set in the Three-year Plan 2003-2005.
For additional information on the performance of the real estate group, please refer to the annual report of Pirelli & C. Real Estate S.p.A..
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Introduction PIRELLI & C. AMBIENTE The Group Energy Cables and At the end of 2004, the Group’s presence in the environmental Systems Sector sector was bolstered by integrating, the activities of Pirelli & Telecom Cables and C. Ambiente S.p.A. and Cam Tecnologie S.p.A. (now Pirelli & Systems Sector C. Ambiente Tecnologie S.p.A.), a company already controlled AMBIENTE Tyres Sector by Camfin S.p.A., in the newly-formed company Pirelli & C. Pirelli & C. Ambiente Holding S.p.A. Ambiente Holding S.p.A. (51 percent-owned by Pirelli & C., was set up at the end of 2004, thus Real Estate Sector reinforcing the Group’s presence in 45.3 percent by Camfin and 3.7 percent by Centrobanca the environmental sector. Pirelli & C. Ambiente Sviluppo Impresa SGR). Information Systems Health, Safety and the With regard to the company Pirelli & C. Ambiente S.p.A. a loss Environment of Euros 2.2 million was reported for the year ending December 31, 2004 compared to a loss of Euros 2.1 million in 2003. Human Resources During the year, the company continued its activities in the Proforma data field of renewable energy sources through the production of a Related Party quality fuel derived from waste (CDR-P) for the start of Disclosures renewable energy development through the replacement of Equity Investments primary fossil fuels and in the sector of environmental held by Directors, redevelopment. Statutory Auditor and General Managers 2004 marked the completion of the start-up phase of the first Stock Option Plans production plant for CDR-P through the 49 percent-owned Corporate Governance project consortium IDEA Granda S. Consortile r.l.: CDR-P will be used as fuel in a cement factory. International Pirelli Ambiente’s business Accounting Standards continued with the production of From the commercial standpoint, negotiations are underway CDR-P, a quality fuel derived from Pirelli & C. S.p.A. - with cement factories and electrical energy producers to start waste. Summary Data CDR-P direct co-combustion projects. Shareholders’ Resolutions
Feeding CDR-P into the furnace of the Buzzi cement plant at Roccavione (Cuneo).
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Introduction INFORMATION SYSTEMS The Group Energy Cables and The most far-reaching reorganization to date of the Systems Sector information systems of Pirelli & C. S.p.A., Telecom Italia S.p.A. Telecom Cables and and Olivetti Tecnost S.p.A. has been completed in 2004. The Systems Sector reorganization had the aim of achieving more efficient and Tyres Sector effective management of the solutions and systems associated with the information technology areas of the Pirelli-Telecom Real Estate Sector Italia Group, such as ERP, institutional legacy, e-business and Pirelli & C. Ambiente internal portals and had begun last year with the setting up of Pirelli Internet sites in 2004 were visited by 2.5 million people more Information Systems the Shared Service Center consortium company. than in 2003. Health, Safety and the Environment Activities Human Resources Proforma data • Development of portals and e-business Related Party There was a considerable increase in the number of visitors to the Pirelli Internet sites: Disclosures 2,500,000 more than in 2003 This was partly due to the strong development of Real Estate, Equity Investments upgrades to the Motorcycle sections, Local Sites and the Cal 2005 site. held by Directors, In the Intranet area, efforts were focused on the rollout of the Pirelli Group Portal (PGP). Statutory Auditor and General Managers PGP came on line in the first half of 2004 and covers a population of approximately 12,000 users. Stock Option Plans The rollout of Noi.portal was more gradual, beginning at the end of the first half of 2004 and ending in December, reaching a population of approximately 72,000 users. Corporate Governance International In Pirelli’s e-commerce area, investments continued with the aim of improving the level its use Accounting Standards and the performance of self-service applications on the Internet. This made it possible to achieve Pirelli & C. S.p.A. - an increase both in the percentage of orders received and the number of hits on the sites devoted Summary Data to trading. Shareholders’ In Pirelli’s e-procurement area, migration continued towards the new Requisite catalogue and Resolutions the platform release upgrades. This involved a massive training program, both in Italy and abroad, subdivided into 36 sessions attended by a total of approximately 350 participants.
• Architectures & Infrastructures Activities went forward for coordinating and integrating the data transmission network. In particular, the analysis of the network rationalization of the networks in Spain, France and the U.K. was completed with the support of local facilities. In keeping with the new network architecture designed for the backbone in South America, the service associated with the backbone was assigned. The set-up of the new solution is scheduled for the first quarter of 2005. The dissemination of the new e-APIS 2000 architecture continued and reached a total of approximately 12,300 XP clients in 22 countries. As far as the e-mail service is concerned, in parallel, 30 Exchange 2000 servers became operational out of a total of 44 servers throughout the world at Pirelli facilities. In 2004, the APIS infrastructure platform had approximately 16,000 users. The existing Network Station Management service in Italy was extended to France and Spain. The set-up of the Spanish service is scheduled for January 2005.
• Institutional systems (Corporate) In the Administration and Finance area, activities mainly involved the alignment of Group’s accounting systems with new international principles (IBAN and IAS), the transfer of the consolidated financial statements to the HFM Hyperion release and functional extensions to the support systems for the Treasury.
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Introduction Furthermore, support was guaranteed for the Administrative functions of the Real Estate, Cables and Tyres sectors. The Group Energy Cables and In the area of Human Resources, the upgrade of the SAP system to the 4.7 Enterprise version was Systems Sector completed and a start was made on the insourcing process of the CSK consolidation system. Telecom Cables and Systems Sector • Pirelli Tyres Tyres Sector Activities focused on aspects concerning the consolidation and the extension to other Real Estate Sector geographical areas of the One-Client platform and the start-up of new initiatives which are now possible with the new platform. Work also continued to enhance Sell-Side solutions and to extend Pirelli & C. Ambiente the geographical and functional Datawarehouse solution. Information Systems In particular: Health, Safety and the - with regard to the One-Business initiative, the work of harmonizing data and processes for Environment Brazil was completed, together with the technological and infrastructural organization cloned Human Resources from the European environment. The initiative will conclude with the rollout of the Proforma data One-Business platform in Latin America during 2005; Related Party - order management based on the “Card” system with the release of the customer order Disclosures procedure to the “Export Management” area based on the European one-client environment; Equity Investments - implementation of the new SAP procedure for Complaints management. The new procedure held by Directors, was released in most European countries; Statutory Auditor and - under SCVT (Supply Chain Value Targeting) and PVT (Purchasing Value Targeting) initiatives General Managers for the review of the processes and systems of the Logistics and Purchasing functions, activities Stock Option Plans were focused as follows: with regard to PVT, its release to support the centralized management Corporate Governance of purchasing and integration with the R&D and Quality systems and processes and, with regard to SCVT, focus on improving the systems supporting the processes such as Statistical International Accounting Standards Forecasting, Demand Planning and the release of the new management system for International Transportation. Additionally, work was focused on the extension to Latin America of the Pirelli & C. S.p.A. - Netplanner system to the Motorcycle BU and integration with the new third-party Logistics in Summary Data USA Car; Shareholders’ - with reference to activities in the Sell-side area, initiatives associated with the CRM platform Resolutions have made it possible to standardize and disseminate the procedures to all the European contact centers to manage outbound marketing campaigns. The broadband service has been activated for the sales force and the complaints procedure has been integrated with the SFA vendors’ portal; - with regard to e-CRM (Customer Relationship Management), the solution supporting initiatives such as promotions and “loyalty programs” on a European scale was enhanced. On the B2B Dealer platform, attention focused on an architectural review to improve performance and services offered to clients while, in the case of B2Fleet, tool improvements were geared to support the new demands (asset management and replacements management policy) of leasing companies. The “Sector Product Range” was completely renovated both in terms of technology and function. Finally, the new NETPOTS (Cars and Motorcycles) procedure to collect POTS orders from importers of institutional markets was released; - with regard to Industrial systems, the geographical and functional coverage of the PCS (Production Control System) system was extended for IT (completion) and UK, ES (Production Planning and Kanban). In the case of the SMS (Specification Management System) the extension focused on DE car and in Latin America. With regard to Top Sporting Activities, a traceability system was implemented to monitor tyres from production to the racetrack; - for R&D and Quality Control systems, the main releases involved One-R&D with the release of the PCM (Project Cost Management) system and the system for managing TTM (Tyre Test Management) orchestrated tests. In the case of One-Lab, the Raw Material Quality (RMQ) system was completed on a European scale and integrated with the LIMS and SAP systems.
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Introduction • Pirelli Cables and Systems Sector The Group In Pirelli’s Telecom Cables & Systems Sector, the SAP models previously implemented on the Energy Cables and Systems businesses for Broadband Access and Fiber optic systems (FOS) were re-engineered so Systems Sector that they correspond better to the business processes which have changed radically over the last few years. In addition, a new model was implemented to support the New Photonics business, so Telecom Cables and Systems Sector that it adheres both to the classic functions of the sales and purchases cycle and to those which support the production process. Towards the end of the year, following the announcement that Tyres Sector the Systems Business would be separated from the Cables and Fibers Business, resulting in the Real Estate Sector setting up of a new operating company (Pirelli Broadband Solutions), measures were taken to Pirelli & C. Ambiente segregate the activities of the two areas of business on the SAP system. Information Systems In detail, these activities involved the following areas: - SAP Area: improvements to the interface with the Cable Design tool, automation of the Health, Safety and the process for receiving goods among EMEA affiliates, implementation of product identification Environment by using labels with barcodes (UK Connectivity), implementation of functions to manage Human Resources and archive documentation regarding product specifications (SAP PLM Systems Business), Proforma data tracing flows of buying and selling and calculating profit margins (SAP Batch Management); Related Party - reporting: rollout and refinement of the implementation of the UPM tool for collecting and Disclosures monitoring the purchasing prices of raw materials; Equity Investments - other applications: Web tool for raw materials industrialization (RMI), creation of a tool for held by Directors, project management (Portal Web Tool, document management and project tracing). Statutory Auditor and General Managers In the Energy Cables and Systems Sector, initiatives involving IT were guided by the need of Stock Option Plans the business area to consolidate its ERP environments on a European scale, with a view to containing the maintenance and development costs of its information systems, with the principle Corporate Governance aim of improving process governance and speeding up the adoption of solutions led by the central International business area. Accounting Standards The feasibility study has been completed for the implementation of a single ERP system on a Pirelli & C. S.p.A. - European scale (One-Client). Summary Data Work continued to consolidate the reporting and centralized planning system, particularly for Shareholders’ monitoring the purchase prices of raw materials (UPM), selling prices, commercial backorders Resolutions and controlling costs and contribution margins. The centralized planning system for sales and the logistics allocation of volumes (SEM) was extended and a tool was created for presenting factory Profit & Loss. With regard to Manufacturing, a data collection system was implemented (for Italy) with the aim of moving the production phases forward, generating statistics about industrial efficiency and supporting inventory activities for semifinished and finished products. With the aim of improving coordination between local and sector Logistics with regard to planning activities, particularly in planning the production of cables for inventory purposes (MTS), a new application (Demand Solution) was introduced. As far as logistics is concerned, the Steadynet system for intercompany flows of compounds and bare conductors was extended. With regard to Controlling, the procedures used in valuing inventories were consolidated by implementing the model applied by the Dutch and Finnish affiliates. At the same time, there were new developments for the planning of the report by nature of expense.
• Pirelli Real Estate The Pirelli Real Estate information systems have provided support for the expansion of business in the sectors of Franchising and Fund Management and have extended their coverage in the other Group companies. In 2004, the main projects completed were as follows: - input of economic, financial and operating data of the various Group companies to the DataWareHouse of the PRE Group and automatic production of all the Tableau de Bord; - Management of the Business Plan for the Tiglio portfolio for services Asset Management department; - Internet Portal and Workflow for the Administration and Control department;
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Introduction - a tool for tracking and controlling activities associated with the closing of the financial statements for SARE; The Group - unification of the business systems of the Residential and Commercial Agencies; Energy Cables and - release of a CRM system for PRE Franchising; there will be further developments to the system Systems Sector in 2005; Telecom Cables and - automatic management of all the flows of correspondence (Input and Output) of PRE Property; Systems Sector - integration of the Residential SAP-RE and SdB systems to improve the sharing of data between Tyres Sector Property and Residential Agency; Real Estate Sector - new version of Client/Investor Reporting managed by Property based on the corporate DWH system; - release of the PRE Facility business system based on SAP PM-CS integrated with the Call Pirelli & C. Ambiente Center application; Information Systems - implementation of the system for management of the Tecla, Cloe and Olinda real estate funds. Health, Safety and the Environment Human Resources Proforma data Related Party Disclosures Equity Investments held by Directors, Statutory Auditor and General Managers Stock Option Plans Corporate Governance International Accounting Standards Pirelli & C. S.p.A. - Summary Data Shareholders’ Resolutions
Information systems associated with the real estate business recorded a strong growth in 2004.
Safeguarding of privacy and protection of data In 2004, the Pirelli Group put into place important measures to ensure observance of the existing law on the protection of personal data. A specific privacy office, dedicated to the application of that law at Group level continues to operate under the Security Department. It should be pointed out, in particular, that the work for the implementation of the procedures aimed at the planning and execution of the actions to perfect the correct application of the provisions introduced by Legislative Decree No. 196 dated June 30, 2003 are in the process of being completed. Note should also be taken, in compliance with the provision of Legislative Decree No. 196 dated June 30, 2003, Attachment B, paragraph 26, that Pirelli & C. has proceeded to update the Programming Document on Security for the year 2004.
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Introduction HEALTH, SAFETY AND THE ENVIRONMENT The Group Energy Cables and In 2004, Pirelli again devoted considerable time and energy to Systems Sector Safety and the Environment by collaborating with about 150 Telecom Cables and experts on this subject. Systems Sector Pirelli is well aware that “sustainability”, meant as the Tyres Sector management of a company in a way that combines the achieving of its objectives with respect for the environmental, Real Estate Sector economic and social implications of future generations, is an Pirelli & C. Ambiente enormous opportunity to develop its activities in all the Information Systems countries in which it operates. In the environmental field, almost all Health, Safety and the the Operating Units have now Environment In consideration of this systematic approach, Pirelli has obtained ISO 14001 certification. reviewed and published a new policy with regard to Health Human Resources and Safety at Work, Safeguarding the Environment and Proforma data Corporate Social Responsibility. Related Party Disclosures With regard to the environment, nearly 100 percent of Equity Investments Pirelli’s operating units have received ISO 14001 certification held by Directors, and the results show a constantly improving trend in specific Statutory Auditor and consumption, despite local variations which do not alter the General Managers overall result, as the following tables show: Stock Option Plans Corporate Governance International Accounting Standards Water: specific consumption Energy: specific consumption Pirelli & C. S.p.A. - 20 10 n n o o i i t Summary Data 18 t 9 c c u u d d o o r Shareholders’ 16 r 8 p p f f o
Resolutions o s 14 s 7 n n o o t t / / J 3 12 6 G m 10 5 1999 2000 2001 2002 2003 2004 1999 2000 2001 2002 2003 2004
Organic solvents - specific consumption Dangerous waste - specific consumption 35 35 n n o o i i
t 30 30 t c c u u d d o 25 o 25 r r p p f f o 20 o 20 s s n n o o t t / /
g 15 15 g k k 10 10 1999 2000 2001 2002 2003 2004 1999 2000 2001 2002 2003 2004
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Introduction With regard to Health and Safety at Work, OHSAS18001 site certification situation three years ago, Pirelli started an ambitious 25 The Group program of health and safety at work, to be Energy Cables and implemented in all the operating units, in 20 Systems Sector compliance with the measures contained in s e i Telecom Cables and the international OHSAS 18001 standard. r 15 o t c
Systems Sector a f
The aim of the program, which is coordinated f o
Tyres Sector . 10 by ad hoc committees, is, on the one hand, to o N Real Estate Sector obtain certification of a proper Management Pirelli & C. Ambiente System at the Operating Units and, on the 5 Information Systems other hand, principally, to define the objectives for annual improvements and assess the results 0 Health, Safety and the achieved. 2001 2002 2003 2004 Environment No. of factories certified / Year Total factories certified Human Resources One of the parameters which has led Pirelli to Proforma data regard the future development of these actions with a certain amount of optimism is the Related Party general trend of accidents in the workplace. Disclosures
Equity Investments Number of accidents held by Directors, 5 2,000 Statutory Auditor and General Managers 4 Stock Option Plans 1,500 Corporate Governance 3 International 1,000 Accounting Standards 2
Pirelli & C. S.p.A. - 500 Summary Data 1 Shareholders’ Resolutions 0 0 2001 2002 2003 2004 2001 2002 2003 2004 IF IG
[The data for 2003 and 2004 includes Pirelli Real Estate] With regard to Corporate social responsibility, Pirelli has tackled the subject in a basic way, bearing in mind the organizational complexity and the geographical locations of the various plants. In 2004, efforts concentrated on the organization of a central governing structure (CSR Steering Committee – comprised of the management of the Administration and Control, Public and Economic Affairs, Human Resources and Health and Safety & Environment departments) which has the task of directing operational developments and assessing new initiatives inspired by international standards with regard to CSRs. Effectively, by following the guidelines contained in the SA 8000 international standard (concerning respect for human rights, the protection of minors from exploitation, respect for workers’ rights and guarantees of health and safety in the workplace), the Pirelli Group is moving towards an internal self-evaluation with the aim of highlighting potential areas of improvement. Furthermore, with the aim of increasingly orienting and uniforming professional behavior and action within the company, a document has been produced and distributed entitled “The Values and Code of Ethics of the Pirelli Group”. Finally, both “Progetto Donna”, geared to ensuring equal opportunities of professional growth for men and women alike, and the fact that, since June 2003, the Pirelli Group has been a No Smoking Company, are in line with the policies of the Group.
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Introduction HUMAN RESOURCES The Group Energy Cables and Headcount of the Group at December 31, 2004 is 37,154. This is an increase of 817 compared to Systems Sector the end of the prior year (with a reduction of 279 in the permanent workforce and an increase Telecom Cables and in the temporary workforce of 1,096). Systems Sector Tyres Sector Headcount at December 31, 2004 can be summarized as follows: Real Estate Sector Sector Pirelli & C. Ambiente Energy Cables and Systems 10,385 28.0% Information Systems Telecom Cables and Systems 2,058 5.5% Health, Safety and the Tyres 21,513 57.9% Environment Real Estate 1,569 4.2% Human Resources Other 1,629 4.4% Proforma data Related Party Geographical area Disclosures Europe 59.2% (of which Italy 24.8%) Equity Investments North America 3.6% held by Directors, South America 25.4% Statutory Auditor and Other 11.8% General Managers
Stock Option Plans Composition Corporate Governance Senior executives 632 1.7% International Staff 9,855 26.5% Accounting Standards Blue-collar 23,154 62.3% Pirelli & C. S.p.A. - Temporary workers 3,513 9.5% Summary Data Shareholders’ Resolutions Personnel costs during the year were Euro 1,444 million, with an increase of 5.3 percent compared to the prior year. Personnel costs as a percentage of net sales are 20.3 percent, compared to 20.5 percent in the prior year.
With regard to the training and development of human resources, in 2004, a number of projects involved the various business areas of the organization at different levels:
• Internal communication The new version of the Intranet Portal came online. The fact that every user has his/her own profile allows more specific, effective communication, since work tools are supplied along with key information for the activities of individual employees or the professional family to which they belong.
• Corporate Social Responsibility In 2004, the fundamental importance of Corporate Social Responsibility which the Group intends to place at the center of its business dealings involved two main projects: - early in 2004, Pirelli became an entirely “No Smoking Translated into 13 languages and Company” with a complete ban on smoking, except in distributed to all Group employees, the Pirelli Code of Ethics orients designated smoking areas; and uniforms the corporate life.
Web site: http://www.pirelli.com E-mail: [email protected] 80 Preliminary Information Directors’ Report Consolidated Financial Statements
Introduction - the Group Code of Ethics (translated into 13 languages) was drawn up and is in the process of being distributed to all the Group’s employees. The aim is to orient behavior and professional The Group action within the Group even more decisively and uniformly. In addition, for the Italian Energy Cables and companies, days of training were conducted on the spread of the Organizational Model in Systems Sector compliance with Law No. 231/2001. Telecom Cables and Systems Sector • Projects to support the Business areas Tyres Sector 2004 saw the implementation of numerous training and development projects to support the Real Estate Sector various needs of the Pirelli Businesses: Pirelli & C. Ambiente - expansion of the Commercial function of the Energy Cables business through measures Information Systems designed to organize, train and improve the mix of resources; - expansion of the Industrial area of the Tyres business, through internal communication, training Health, Safety and the and development in factories and the introduction of young talent for whom an international Environment course has been charted, enabling them to develop their skills and become the middle Human Resources management of the future; Proforma data - the creation of training courses aimed at the professional employees working in the Related Party Administration & Control and Finance functions of the various Group business areas; Disclosures - the organization of training sessions focusing on the economic and social development taking Equity Investments place in China, with the aim of supporting the start of Pirelli’s activities in this area held by Directors, Statutory Auditor and • Development and training of talented resources General Managers The “Talent Development Portal” was designed and implemented so that, in 2005, Management Stock Option Plans will be able to benefit from having access to real-time information online about the status of Corporate Governance turnover of management and the profiles of resources regarded as having high development International potential in all the affiliates. Accounting Standards Finally, in 2004, institutional development and training programs were created especially for Pirelli & C. S.p.A. - Talented resources. During the year, overall, approximately 150 people from all the countries in Summary Data which the Group companies operate were involved in a structured course of development and support for resources with high potential that has been running for the last 8 years. Shareholders’ Resolutions
In 2004, about 150 people from all the countries took part in training and development projects created specially for talented resources.
Web site: http://www.pirelli.com E-mail: [email protected] 81 Preliminary Information Directors’ Report Consolidated Financial Statements
Introduction PROFORMA DATA The Group Energy Cables and Proforma consolidated financial data assuming the line-by-line consolidation Systems Sector of Olimpia S.p.A. and the use of the equity method to value the investment in Telecom Cables and Telecom Italia S.p.A.. Systems Sector Proforma consolidated financial data at December 31, 2004 of Pirelli & C. S.p.A. is presented Tyres Sector below, assuming the consolidation line-by-line of Olimpia S.p.A. and the use of the equity Real Estate Sector method to value the investment in Telecom Italia S.p.A.. Pirelli & C. Ambiente (in millions of euros) Information Systems Proforma adjustments Consolidated Elimination of Olimpia S.p.A Adjustments to Consolidation Total Proforma Health, Safety and the financial Olimpia S.p.A. line-by-line Olimpia financial adjustments and proforma consolidated Environment statements 2004 net result consolidation statements to take valuation of adjustments financial data Pirelli & C. attributable to into account the investment in 2004 Human Resources S.p.A. (1) Pirelli & C. valuat. made by Pirelli Telecom Italia S.p.A. Pirelli Proforma data S.p.A. (50.4%) when the merger using the equity & C. S.p.A. surplus was allocated method (2) Related Party Condensed statement of income Disclosures • Net sales 7,114 - - - - - 7,114 Equity Investments • Operating profit 380 - (1) - - (1) 379 held by Directors, • Financial income (expenses)/valuat. Statutory Auditor and adjustments to financial assets (32) (8) 17 - (292) (283) (315) General Managers • Extraordinary items 20 - - - --20 Stock Option Plans • Income taxes (94) - - - - - (94) • Net income (loss) 274 (8) 16 - (292) (284) (10) Corporate Governance • Net income (loss) - attributable to International Pirelli & C. S.p.A. 217 (8) 8 - (147) (147) 70 Accounting Standards Goodwill amortization effect 3 - - - 337 337 340 Net income (excluding goodwill Pirelli & C. S.p.A. - amortization) 277 (8) 16 - 45 53 330 Summary Data Net income (loss) - attributable to Shareholders’ Pirelli & C. S.p.A. Resolutions (excluding goodwill amortization) 220 (8) 8 - 23 23 243 Reclassified balance sheet • Fixed assets 6,112 (8) 9,561 (1,245) (5,528) 2,780 8,892 • Net working capital 456 - 30 - - 30 486 • Total net invested capital 6,568 (8) 9,591 (1,245) (5,528) 2,810 9,378 Financed by: • Shareholders’ equity 4,088 (8) 6,340 (1,245) (5,528) (441) 3,647 – of which shareholders’ equity - – attributable to Pirelli & C. S.p.A. 3,736 (8) 3,195 (627) (4,049) (1,489) 2,247 • Provisions 1,011 - - - - - 1,011 • Net financial (liquidity)/ debt position 1,469 - 3,251 - - 3,251 4,720
(1) Pirelli & C. S.p.A. consolidated financial statements (investment in Olimpia S.p.A. accounted for using the equity method) (2) proforma data (line-by-line consolidation of Olimpia S.p.A. and equity method valuation of Telecom Italia S.p.A.)
The proforma consolidated financial data has been prepared using the statutory financial statements of Olimpia S.p.A. at December 31, 2004 and the consolidated financial statements of the Telecom Italia Group at the same date. The principal proforma adjustments included in the above table are as follows: • in the column “Elimination of Olimpia S.p.A. net result attributable to Pirelli & C. S.p.A. (50.4%)”: elimination of the statement of income and balance sheet effects of valuing Olimpia S.p.A. with the equity method in the Pirelli & C. S.p.A. consolidated financial statements at December 31, 2004;
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Introduction • in the column “Olimpia S.p.A. line-by-line consolidation”: inclusion of the assets, liabilities, revenues and costs resulting from the financial statements for the year ended December 31, The Group 2004 of Olimpia S.p.A., attributing the share of net equity and results of operations to the Energy Cables and minority interest; Systems Sector • in the column “Adjustments to Olimpia financial statements to take into account the valuation Telecom Cables and made by Pirelli when the merger surplus was allocated”: reversal of the writedown made by Systems Sector Olimpia in Holinvest (Euros 143 million). Also considered was the effect of the allocation of Tyres Sector the Pirelli & C. S.p.A. merger surplus (Euros 1,388 million). The net impact of the two Real Estate Sector adjustments (Euros 1,245 million) was booked as a deduction of the goodwill posted by Pirelli & C. Ambiente Olimpia on the investment in Telecom Italia S.p.A.; Information Systems • ∑ in the column “Consolidation adjustments and valuation of investment in Telecom Italia S.p.A. using the equity method”: inclusion of the effect of accounting for Telecom Italia S.p.A. Health, Safety and the using the equity method, giving rise to a negative valuation adjustment of Euros 292 million, Environment of which Euros 195 million relates to the amortization of implicit goodwill for twelve months Human Resources out of a total twenty-year period, Euros 85 million to Olimpia S.p.A.’s share of the 2004 net Proforma data income of the Telecom Italia Group and Euros 182 million to the reversal of Telecom Italia Related Party S.p.A. dividends collected by Olimpia. Disclosures In order to represent the diluting effect of Euros 2,250 million deriving from the reduction of Equity Investments Olimpia S.p.A.’s percentage holding in Telecom Italia S.p.A. following the merger of Olivetti held by Directors, S.p.A. and Telecom Italia S.p.A., from 28.5 percent at December 31, 2002 to 7.4 percent Statutory Auditor and (referring to the total capital issued) at December 31, 2003, the amount was directly deducted General Managers from shareholders’ equity. Stock Option Plans The “goodwill amortization effect” on the net result is detailed as follows: Corporate Governance • in the column “Consolidated financial statements at December 31, 2004 Pirelli & C. S.p.A.”, International the amount of Euros 3 million refers to the amortization charge for the year on the goodwill Accounting Standards booked by Pirelli & C. S.p.A. in respect of Olimpia S.p.A.; Pirelli & C. S.p.A. - Summary Data • in the column “Consolidation adjustments and valuation of investment in Telecom Italia S.p.A. using the equity method”, the amount of Euros 337 million includes Euros 195 million for the Shareholders’ goodwill booked by Olimpia S.p.A. in respect of Telecom Italia S.p.A. and Euros 142 million for Resolutions the original goodwill booked by Olivetti S.p.A. in 1999 in respect of Telecom Italia S.p.A..
A comparison of shareholders’ equity and net debt between the consolidated financial statements of Pirelli & C. S.p.A. and the proforma consolidated financial data of Pirelli & C. S.p.A. at December 31, 2004 and December 31, 2003 is presented below, assuming: • the line-by-line consolidation of Olimpia S.p.A. and the valuation of the investment in Telecom Italia S.p.A. using the equity method; • the line-by-line consolidation of both Olimpia S.p.A. and the Telecom Italia Group. (in millions of euros) Shareholders’ Net debt Net debt/ Shareholders’ equity Shareholders’ equity -Pirelli equity & C. S.p.A. 2004 2003 2004 2003 2004 2003 2004 2003 Pirelli & C. S.p.A. Group: consolidated financial statements 4,088 3,678 1,469 1,745 0.36 0.47 3,736 3,429 Pirelli & C. S.p.A. Group: proforma consolidated data with Olimpia S.p.A. consolidated line-by-line and Telecom Italia S.p.A. valued using the equity method 3,647 3,524 4,720 5,023 1.29 1.43 2,247 2,089 Pirelli & C. S.p.A. Group: proforma consolidated data with Olimpia S.p.A. and Telecom Group consolidated line-by-line 21,857 22,362 34,245 38,369 1.57 1.72 2,247 2,089
Web site: http://www.pirelli.com E-mail: [email protected] 83 Preliminary Information Directors’ Report Consolidated Financial Statements
Introduction RELATED PARTY DISCLOSURES The Group Energy Cables and Related party transactions, including intragroup transactions, are neither unusual nor Systems Sector exceptional but fall under the normal business operations of the companies of the Group. Such Telecom Cables and transactions, when not concluded at standard conditions or dictated by specific laws, are in any Systems Sector case conducted at arm’s length. Tyres Sector The effects deriving from the transactions between Pirelli & C. S.p.A. and its subsidiaries are Real Estate Sector disclosed in the financial statements of the parent company and in the notes, and, as with the Pirelli & C. Ambiente intragroup transactions among subsidiaries, are eliminated upon the preparation of the Information Systems consolidated financial statements. Health, Safety and the Environment For purposes of complete disclosure, transactions in 2004 refer to the following: Human Resources Proforma data 1. Pirelli & C. S.p.A. Group and Telecom Italia S.p.A. Group: Related Party • revenues for goods and services, relating to the supply of telecommunications cables Disclosures and services rendered by Pirelli Cavi e Sistemi Telecom Italia S.p.A., Pirelli & C. S.p.A., Equity Investments Shared Service Center s.c.r.l. and Pirelli & C. Real Estate S.p.A. (Euros 238 million); held by Directors, Statutory Auditor and • costs for goods and services, mainly relating to telephone and computer services and the General Managers supply of electrical energy (Euros 43 million); Stock Option Plans • trade receivables, relating to the supply of the goods and services described above Corporate Governance (Euros 89 million); International • trade payables, relating to telephone and computer services and the supply of electrical Accounting Standards energy described above (Euros 10 million); Pirelli & C. S.p.A. - Summary Data 2. Pirelli & C. S.p.A. Group and Camfin S.p.A. Group: Shareholders’ Resolutions • revenues for goods and services, relating to services rendered by companies of Pirelli & C. Real Estate S.p.A. group (Euros 1.2 million); • costs for goods and services, mainly relating to the supply of natural gas (Euros 14.5 million); • trade receivables, relating to the supply of the goods and services described above (Euros 2.1 million); • trade payables, relating to the supply of natural gas described above (Euros 8.3 million).
3. Pirelli & C. S.p.A. Group and the company FC Internazionale Milano S.p.A.: • revenues for goods and services, relating to services rendered by Polo Viaggi S.p.A. (Euro 1.2 million); • costs for goods and services, mainly relating to sponsorship costs by Pirelli & C. S.p.A. (Euro 6.7 million); • trade receivables, relating to the supply of the goods and services described above (Euro 1.1 million); • trade payables, relating to the supply of services described above (Euro 1.1 million).
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Introduction EQUITY INVESTMENTS HELD BY DIRECTORS, The Group STATUTORY AUDITORS AND GENERAL MANAGERS Energy Cables and Systems Sector Pursuant to article 79 of Consob Regulation approved by resolution No. 11971 dated May 14, 1999, Telecom Cables and the following information is provided as regards the equity investments held in the company Systems Sector Pirelli & C. S.p.A., and its subsidiaries, by the Directors, Statutory Auditors and General Managers, Tyres Sector as well as spouses, not legally separated, and minor children, either directly or through Real Estate Sector subsidiaries, trustee companies or individual persons, resulting from the shareholders’ register at December 31, 2004, from notices received or other information acquired from the same Directors, Pirelli & C. Ambiente Statutory Auditors and General Managers. Information Systems Name Company in which No. of shares held No. of shares No. of shares No. of shares held Health, Safety and the investment held at prior year-end purchased / sold / at current year-end Environment subscribed / subscribed / Human Resources exchanged exchanged Proforma data Tronchetti Provera Pirelli & C. 8,280 - - 8,280 Marco Pirelli & C. Related Party (indirect ownership) 790,824,664 (1) 104,646,507 10,950,000 884,521,171 Disclosures Pirelli Ambiente (indirect ownership) - 10,478,800 (1) - 10,478,800 Equity Investments held by Directors, Pirelli Alberto Pirelli & C. 18,000 3,375 - 21,375 Statutory Auditor and Puri Negri Carlo General Managers Alessandro Pirelli & C. 40,000 - - 40,000 Stock Option Plans Pirelli & C. Real Estate S.p.A. 605,710 - 605,710 - Corporate Governance Pirelli & C. Real Estate S.p.A. International (indirect ownership) 579,411 (2) - 579,411 - Accounting Standards Buora Carlo Pirelli & C. 68,688 - - 68,688 Pirelli & C. S.p.A. - Summary Data Ligresti Giulia Maria Pirelli & C. Real Estate S.p.A. 10 (3) -- 10 Shareholders’ Resolutions Moratti Massimo Pirelli & C. 5,314,284 2,226,181 7,540,465 Pirelli & C. (indirect ownership) 31,381,091 (4) - 4,208,009 27,173,082 Orlando Luigi Pirelli & C. 17,416 - - 17,416 Presutti Ennio Pirelli & C. 40,000 - - 40,000 Sozzani Vincenzo Pirelli & C. - ordinary 87,106 - - 87,106 Pirelli & C. - savings 598 - - 598 Battista Valerio Pirelli & C. 10,089 - - 10,089 De Conto Claudio Pirelli & C. 53,916 - - 53,916 Gori Francesco Pirelli & C. 15,072 - 15,072 - Guatri Luigi Pirelli & C. 133,332 (3) - - 133,332
(1) Shares held through Camfin S.p.A. (2) Shares held through Partecipazioni Finanziarie S.r.l. (3) Shares held through spouse (4) Shares held through CMC
Web site: http://www.pirelli.com E-mail: [email protected] 85 Preliminary Information Directors’ Report Consolidated Financial Statements
Introduction STOCK OPTION PLANS The Group Energy Cables and No new stock option plans were introduced in 2004. Systems Sector Telecom Cables and Pirelli & C. S.p.A. has two stock option plans outstanding destined for the senior executives and Systems Sector staff of the same company and other companies in the Group which were granted option rights, Tyres Sector not transferable to third parties, for the subscription/purchase of Pirelli & C. S.p.A. ordinary shares. Real Estate Sector Pirelli & C. Ambiente The following disclosure is provided on the change in the above plans called Pirelli to People Information Systems and Group Senior Executives. Health, Safety and the Environment Pirelli to People Group Senior Executives Human Resources Features of the plan Option rights granted, non-transferable Option rights granted, non-transferable to third Proforma data to third parties, for the subscription of parties, for the subscription of future new issues Related Party future new issues of Pirelli & C. of Pirelli & C. ordinary shares or, as decided by Disclosures ordinary shares or, as decided by the the latter, for the purchase of treasury shares of latter, for the purchase of treasury Pirelli & C.. Equity Investments shares of Pirelli & C.. held by Directors, Statutory Auditor and Beneficiaries at December 530 employees (senior executives, 40 senior executives of the companies of the General Managers 31, 2004 cadres, employees with a high potential) Group. Stock Option Plans of the companies of the Group. Originally 725 persons at the date of Originally 51 persons at the date of approval of Corporate Governance approval of the plan. the plan. International Conditions for exercising Continuance of employment. (a) continuance of employment, and (b) the Accounting Standards options reaching, in the two-year period 2001-2002, of Pirelli & C. S.p.A. - specific targets, assigned to each beneficiary. Summary Data
Shareholders’ Subscription/purchase Each option right granted gives the Each option right granted gives the right to Resolutions price per share right to subscribe/purchase one Pirelli subscribe/purchase one Pirelli & C. ordinary & C. ordinary share at the price of share at the price of Euros 1.150 (1). Euros 1.150 (1).
Period for exercising Up to nine years from the date the As regards the options granted on November 5, options options are granted (which took place 2001, up to nine years from the date the options on November 5, 2001), but not before are granted, but not before one year has passed one year has passed from that date for from that date for 50 percent of the options, two 50 percent of the options granted, two years for another 25 percent and three years for years for another 25 percent and three the remaining 25 percent. For the options years for the remaining 25 percent. granted definitively on May 10, 2002, up to May 31, 2009 but not before June 1, 2002 for 50 percent of the options and not before January 1, 2003 for the remaining 50 percent.
Maximum number of 39,112,407, options equal to about 1.19 17,853,283 options equal to about 0.52 percent of options for which the offer percent of outstanding ordinary shares outstanding ordinary shares destined for 41 was open at December 31, destined for 570 beneficiaries. beneficiaries. 2003
1) This amount was changed (from Euros 1.284) on the basis of the adjustment factor established by AIAF on February 7, 2005 following the capital increase voted by the extraordinary shareholders' meeting of January 21, 2005, in accordance with the provisions of the Regulations for these Stock Option Plans in the event of transactions involving share capital.
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Introduction Pirelli to People Group Senior Executives The Group Maximum number of 36,826,541, options equal to about 1.11 17,399,309, options equal to about 0.52 percent Energy Cables and options for which the offer percent of outstanding ordinary shares of outstanding ordinary shares destined for 40 Systems Sector was open at December 31, destined for 530 beneficiaries. beneficiaries. Telecom Cables and 2004 Systems Sector Options expiring during the 2,285,866 453,974 Tyres Sector year as a result of persons leaving the Group Real Estate Sector Pirelli & C. Ambiente Shares issued during the None None year Information Systems Health, Safety and the Environment Human Resources The following tables show the changes in the above plans, the number of option rights and the Proforma data exercise price. Related Party Disclosures Equity Investments Pirelli to People held by Directors, Statutory Auditor and Table 1 Year 2004 Year 2003 General Managers Numbers Annual average Market price Numbers Annual average Market price Stock Option Plans of shares exer. price in Û in Û of shares exer. price in Û in Û Corporate Governance Options existing at 1/1/2004 39,112,407 1.284 0.82 43,084,400 (1) 1.284 0.67 International Options granted during the period ------Accounting Standards (Options exercised during Pirelli & C. S.p.A. - the period) ------Summary Data (Options forfeited during the period due toperson Shareholders’ leaving group) 2,285,866 - - 3,971,993 - - Resolutions Options existing at 12/31/2004 36,826,541 1.284 (1) 0.99 39,112,407 1.284 0.81
(1) Balance at August 4, 2003 post-merger
Table 2 Options granted - existing at 12/31/2004 Exercise prices Residual contractual life Of which exercisable > 2 years * Total from November 5, 2004 Û 1.284 (1) 36,826,541 36,826,541 36,826,541
* up to November 5, 2010. (1) This amount was changed to Euros 1.150 on the basis of the adjustment factor established by AIAF on February 7, 2005 following the capital increase voted by the extraordinary shareholders' meeting of January 21, 2005, in accordance with the provisions of the Regulations for these Stock Option Plans in the event of transactions involving share capital.
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Introduction Group Senior Executives The Group Table 1 Year 2004 Year 2003 Energy Cables and Numbers Annual average Market price Numbers Annual average Market price Systems Sector of shares exer. price in Û in Û of shares exer. price in Û in Û Telecom Cables and Options existing at 1/1/2004 17,853,283 1.284 0.82 19,355,190 (1) 1.284 0.67 Systems Sector Options granted during the period ------(Options exercised during Tyres Sector the period) ------Real Estate Sector (Options forfeited during the period due toperson Pirelli & C. Ambiente leaving group) 453,974 - - 1,501,907 - - Information Systems Options existing at 12/31/2004 17,399,309 1.284 (1) 0.99 17,853,283 1.284 0.81 Health, Safety and the Environment (1) Balance at August 4, 2003 post-merger Human Resources Proforma data Table 2 Options granted - existing at 12/31/2004 Related Party Exercise prices Residual contractual life Of which exercisable Disclosures > 2 years * Total from November 5, 2004 Equity Investments Û 1.284 (1) 17,399,309 17,399,309 17,399,309 held by Directors, Statutory Auditor and General Managers * up to May 31, 2009 (1) This amount was changed to Euros 1.150 on the basis of the adjustment factor established by AIAF on February 7, 2005 Stock Option Plans following the capital increase voted by the extraordinary shareholders' meeting of January 21, 2005, in accordance with the provisions of the Regulations for these Stock Option Plans in the event of transactions involving share capital. Corporate Governance International Accounting Standards Pirelli & C. S.p.A. - Summary Data The following table indicates the number of option rights granted under the aforementioned Shareholders’ incentive plans, held at December 31, 2004, directly and indirectly, by the members of the Board Resolutions of Directors, the Board of Statutory Auditors and the General Managers.
Options held Options granted Options exercised Options held at 1/1/2004 in 2004 in 2004 at 12/31/2004 Name Numbers Average Numbers Average Numbers Average Numbers Average of options exercise of options exercise of options exercise of options exercise price price price price Carlo Buora 1,333,334 (1) 1.284 - - - - 1,333,334 (1) 1.284 (3) Valerio Battista 983,467 (1) 1.284 - - - - 983,467 (1) 1.284 (3) 666,667 (2) 1.284 - - - - 666,667 (2) 1.284 (3) Claudio De Conto 778,77 (1) 1.284 - - - - 778,774 (1) 1.284 (3) 410,667 (2) 1.284 - - - - 410,667 (2) 1.284 (3) Luciano Gobbi 778,774 (1) 1.284 - - - - 778,774 (1) 1.284 (3) 360,000 (2) 1.284 - - - - 360,000 (2) 1.284 (3) Francesco Gori 533,334 (1) 1.284 - - - - 533,334 (1) 1.284 (3) 666,667 (2) 1.284 - - - - 666,667 (2) 1.284 (3)
(1) Group Senior Executives incentive plan. (2) Pirelli to People incentive plan. (3) This amount was changed to Euros 1.150 on the basis of the adjustment factor established by AIAF on February 7, 2005 following the capital increase voted by the extraordinary shareholders' meeting of January 21, 2005, in accordance with the provisions of the Regulations for these Stock Option Plans in the event of transactions involving share capital.
Web site: http://www.pirelli.com E-mail: [email protected] 88 Preliminary Information Directors’ Report Consolidated Financial Statements
Introduction Giovanni Ferrario (General Manager of the Company until December 2004) holds 1,333,334 options granting the right to the subscription and purchase of the same number of Pirelli & C. The Group S.p.A. ordinary shares at the price of Euros 1.284 (the adjusted price is now Euros 1.150) each. Energy Cables and The number of options granted to Giovanni Ferrario has remained unchanged during 2004. Systems Sector Telecom Cables and In 2001, Pirelli & C. granted the Managing Director-General Manager of Pirelli & C. Ambiente Systems Sector S.p.A., Nicolò Dubini, an option to purchase 183,600 shares of said company (equal to 6 percent Tyres Sector of share capital), at Euros 1.15 per share on the basis of an appraisal specifically performed for Real Estate Sector that purpose. Pirelli & C. Ambiente In 2002, a new stock option plan was put into place for the same company and options were Information Systems granted to four employees for the purchase of a total of 91,800 Pirelli & C. Ambiente S.p.A. Health, Safety and the shares, equal to 3 percent of share capital, at the same price per share of Euros 1.15, again on Environment the basis of an appraisal specifically performed for that purpose. Human Resources Proforma data All the above options may be exercised starting from the date of the approval of the financial statements at December 31, 2003 of Pirelli & C. Ambiente S.p.A. and the shares from the options Related Party can be sold by the beneficiaries to Pirelli & C. within two years after having exercised the Disclosures option rights at a price that will take into account the net asset revaluation of the company Equity Investments during that time. held by Directors, Statutory Auditor and As regards the separate stock option plans put into place by Pirelli & C. Real Estate S.p.A., General Managers a listed subsidiary of Pirelli & C. S.p.A., and companies which it controls, please refer to the Stock Option Plans annual report of that company. Corporate Governance International Accounting Standards Pirelli & C. S.p.A. - Summary Data Shareholders’ Resolutions
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Introduction CORPORATE GOVERNANCE The Group Energy Cables and Introduction Systems Sector Telecom Cables and As already indicated in previous annual reports, the Company’s corporate governance system is Systems Sector based on the central role of the Board of Directors in providing strategic guidance, complete Tyres Sector transparency of operational decisions, both internal and in relation to the market, efficient and effective internal controls, and rigorous rules governing conflicts of interest. The building Real Estate Sector blocks of the system consist of a series of codes, rules and procedures. Pirelli & C. Ambiente In 2004 these documents were carefully reviewed and, where necessary, updated to take into Information Systems account legislative and regulatory innovations, changes in the international best practices, and Health, Safety and the developments in the Company’s operations. In addition, amendments were made to the bylaws, Environment partly in response to the changes in the company law introduced by the “Vietti reform”. In particular, with a view to further improving the Company’s corporate governance system and Human Resources fostering increased participation by all shareholders in the life of the Company and in decisions Proforma data likely to influence the success of the business, on May 11, 2004 the shareholders’ meeting Related Party decided to: Disclosures Equity Investments • amend Article 10 of the bylaws to introduce the slate system for the election of the Board of held by Directors, Directors, to ensure - if shareholders avail themselves of the possibility by presenting at least Statutory Auditor and two slates - that a fifth of the directors are chosen from among persons nominated by the General Managers minority shareholders; Stock Option Plans • to amend Article 12 of the bylaws by extending the circumstances for convening meetings of Corporate Governance the Board of Directors to include the case in which this is requested by a fifth of the directors International in office. The aim of this change is to increase the possibility for directors nominated by the Accounting Standards minority shareholders (a fifth of the total as specified above) to influence the life of the Pirelli & C. S.p.A. - Company by convening meetings of the Board of Directors; Summary Data • to adopt the Rules of Proceeding for the Shareholders’ Meeting, a document intended to Shareholders’ promote, as recommended by the Self-Regulatory Code of Conduct for listed companies Resolutions (hereinafter the “Code”), the orderly and effective conduct of the ordinary and extraordinary shareholders’ meetings and to guarantee the right of every shareholder to discuss the matters on the agenda.
During the Board meeting held on March 22, 2005 all the directors resigned as of the shareholders’ meeting called for April 27-28 2005, one year early with respect to the normal termination of their appointments. This decision is intended to permit the immediate application of the slate system introduced in the bylaws last year to encourage - in line with international best practice - increased participation by all shareholders in the life of the Company and in decisions likely to influence the success of the business.
In compliance with the Instructions accompanying the Rules of the markets operated by Borsa Italiana and taking into account the indications contained in the Guidelines for the Preparation of the Report on Corporate Governance published by Borsa Italiana and in the Handbook on Corporate Governance Reports published by Assonime, the remainder of this report describes the main features of the Company’s corporate governance system and how it functioned during the year.
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Introduction Governance Structure The Group 1. Board of Directors Energy Cables and Systems Sector 1.1 The role of the Board of Directors Telecom Cables and The Company is led by a Board consisting of a number of directors between seven and Systems Sector twenty-three who remain in office for a three year- term (unless a shorter period is Tyres Sector established by the shareholders’ meeting when they are appointed) and may be re-elected Real Estate Sector (Article 10 of the bylaws). Pursuant to Article 11 of the bylaws, the Board is responsible for the operation of the Pirelli & C. Ambiente business and to this end has the broadest possible management powers, except for matters Information Systems that are reserved to the shareholders’ meeting by law or the bylaws. Health, Safety and the In practice the Board of Directors exercises its powers in accordance with Article 1.2 of the Environment Code, that is, it: Human Resources - examines and approves the strategic, organizational, business and financial plans of the Proforma data Company and the corporate structure of the group it heads; - delegates powers to the managing directors and the executive committee (if established) Related Party and revokes them; it specifies the limits to such delegated powers, the manner of Disclosures exercising them and the frequency, as a general rule not less than once every three Equity Investments months, with which such bodies must report to the Board on the activity performed in held by Directors, the exercise of the powers delegated to them; Statutory Auditor and General Managers - determines, after examining the proposals of the remuneration committee and consulting the Board of Auditors, the remuneration of the managing directors and of those directors Stock Option Plans who are entrusted with particular duties and, where the shareholders’ meeting has not Corporate Governance already done so, allocates among the members of the Board of Directors and the International executive committee (if established) the total amount to which the directors are entitled; Accounting Standards - supervises the general performance of the company, with special reference to conflicts of Pirelli & C. S.p.A. - interest, paying particular attention to the information received from the executive Summary Data committee (if established), the managing directors and the internal control and corporate governance committee and periodically comparing the results achieved with those planned; Shareholders’ Resolutions - examines and approves transactions having a significant impact on the company’s profitability, assets and liabilities or financial position, with special reference to transactions with related parties; - checks the adequacy of the general organisational and administrative structure established by the managing directors for the Company and the group; - reports to the shareholders at shareholders’ meetings.
1.2 The functioning of the Board of Directors The Board of Directors elects a Chairman (unless the shareholders’ meeting has already appointed one) and possibly one or more Deputy Chairmen. In the absence of the Chairman, meetings are chaired, in the following order, by a Deputy Chairman or a Managing Director; if there are two or more Deputy Chairmen or Managing Directors, meetings are chaired by the senior in age. The Board appoints a Secretary, who does not have to be a director. Meetings of the Board of Directors are called at the initiative of the Chairman or his substitute and held at the Company’s registered office or such other place as is specified in the letter convening the meeting whenever the Chairman or his substitute deems this to be desirable in the interests of the Company; they are also called whenever a request is made by one of the Managing Directors or by a fifth of the directors in office or by at least two members of the Board of Auditors. The bylaws do not provide for a minimum frequency for the Board meetings; however, the practice is for at least six meetings to be held every year (to examine the preliminary data at June 30 and December 31, the draft annual financial statements and the quarterly and half- yearly reports). Normally, at the end of the last Board meeting each year the calendar of the
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Introduction main corporate events for the following year (i.e. Board and shareholders’ meetings) is announced to the market. Changes to the calendar are promptly made known to the market. The Group Board meetings may be held by means of telecommunication techniques that permit Energy Cables and participation in the discussion and equality of information for all participants. Systems Sector Notice of Board meetings is given by letter, telegram, fax or e-mail, sent at least five days Telecom Cables and prior the date of the meeting (or, in urgent cases, with at least six hours’ notice) to each Systems Sector director and member of the Board of Auditors. Tyres Sector The Board may nonetheless decide validly in the absence of a formal convocation if all the Real Estate Sector directors and all the members of the Board of Auditors in office are present. Decisions of the Board are valid if the majority of the directors are present and the majority Pirelli & C. Ambiente of the votes casted are favourable. The Chairman has the casting vote. Information Systems The minutes of Board meetings, even if held by means of telecommunication techniques, are Health, Safety and the recorded in a register and signed by the Chairman and the Secretary. Environment Human Resources 1.3 The composition of the Board of Directors Proforma data The current Board of Directors was appointed by the shareholders’ meeting of May 7, 2003, which fixed the number of directors at twenty-two. Related Party Following the resignations during 2004 of Giovanni Ferrario and Maurizio Romiti, the Disclosures shareholders’ meeting of January 21, 2005 decided to reduce the number of directors from Equity Investments 22 to 20. held by Directors, Accordingly, the members of the Board are at present: Statutory Auditor and General Managers Marco Tronchetti Provera Chairman Stock Option Plans Alberto Pirelli Deputy Chairman Corporate Governance Carlo Alessandro Puri Negri Deputy Chairman International Carlo Buora Managing Director Accounting Standards Carlo Acutis Pirelli & C. S.p.A. - Gilberto Benetton Summary Data Carlo De Benedetti Gabriele Galateri di Genola Shareholders’ Giuseppe Gazzoni Frascara Chairman of the Internal Control and Corporate Resolutions Governance Committee Mario Greco Georg F. Krayer Giulia Maria Ligresti Massimo Moratti Luigi Orlando Member of the Remuneration Committee Giovanni Perissinotto Giampiero Pesenti Member of the Remuneration Committee Ennio Presutti Member of the Internal Control and Corporate Governance Committee and Chairman of the Remuneration Committee Carlo Secchi Member of the Internal Control and Corporate Governance Committee Vincenzo Sozzani Frank Vischer Leopoldo Pirelli is Honorary Chairman of the Company.
Pursuant to Article 10 of the bylaws, the Board of Directors is renewed by using the slate system, which, if more than one slate is presented, allows minority shareholders to elect a fifth of the directors (see below). Two of the members of the Board are executive directors as defined in Article 2.1 of the Code: the Chairman, Marco Tronchetti Provera, and the Managing Director/General Manager, Carlo Buora.
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Introduction Article 3.1 of the Code defines independent directors as those who: a) do not entertain, directly or indirectly or on behalf of third parties, nor have recently The Group entertained business relationships with the company, its subsidiaries, the executive Energy Cables and directors or the shareholder or group of shareholders who controls the company in a Systems Sector significant manner able to influence their indipendent judgement; Telecom Cables and b) neither own, directly or indirectly or on behalf of third parties, a quantity of shares Systems Sector enabling them to control the company or exercise a significant influence over it nor Tyres Sector participate in shareholders’ agreements to control the company; Real Estate Sector c) are not close relatives of executive directors of the company or of persons in the situations referred to in points a) and b). Pirelli & C. Ambiente On the basis of the above definition, the Board has agreed that 8 of the remaining 18 Information Systems directors (Carlo De Benedetti, Carlo Acutis, Giuseppe Gazzoni Frascara, Georg F. Krayer, Health, Safety and the Giampiero Pesenti, Ennio Presutti, Carlo Secchi and Frank Vischer) can be considered Environment independent, while the other 7 (Gilberto Benetton, Gabriele Galateri di Genola, Mario Human Resources Greco, Giulia Maria Ligresti, Massimo Moratti, Giovanni Perissinotto and Luigi Orlando) Proforma data represent companies that are part of the blocking agreement among shareholders of Pirelli & C. (see Section 4). Related Party The last 3 directors are considered not to be independent: Alberto Pirelli and Carlo Disclosures Alessandro Puri Negri, in view of the executive positions they hold in respectively Pirelli Equity Investments Pneumatici S.p.A. and Pirelli & C. Real Estate S.p.A., and Vincenzo Sozzani, exclusively in held by Directors, view of the long period in which he held such positions in the group. Statutory Auditor and A table at the end of this chapter of the report shows the positions of director or member General Managers of the board of auditors held by the Company’s directors in other listed companies in Italy Stock Option Plans and abroad, in financial, banking and insurance companies, and in other large companies. Corporate Governance International As mentioned in the Introduction, during the Board meeting held on March 22, 2005 all the Accounting Standards directors resigned, as of the shareholders’ meeting called for April 27-28, 2005, one year Pirelli & C. S.p.A. - early with respect to the normal termination of their appointments. Summary Data Shareholders’ 2. Shareholders’ meetings Resolutions How shareholders’ meetings work The calling of shareholders’ meetings, which may be held in Italy in places other than the Company’s registered office, the right to attend and the right to be represented by proxies are governed by law and the bylaws. The annual meeting must be called within 120 days, or in special circumstances within 180 days, of the close of the fiscal year; if the meeting is called within 180 days, the directors must give the reason for the delay in their report on operations. In addition to the law and the bylaws, business in meetings is governed by the Rules of Proceeding for Shareholders’ Meetings, which were approved by the shareholders’ meeting held on May 11, 2004 and are attached hereto; they are also available on the Internet at www.pirelli.com. Shareholders’ meeting are chaired, in the following order, by the Chairman of the Board of Directors, a Deputy Chairman or a Managing Director; if there are two or more Deputy Chairmen or Managing Directors, they are chaired by the senior in age. In the absence of such persons, shareholders’ meetings are chaired by another person chosen by the shareholders with the favourable vote of the majority of the capital represented at the meeting. The Chairman of the meeting is assisted by a Secretary appointed by the meeting; this is not necessary if a notary public is appointed to prepare the minutes of the meeting. The Chairman of the meeting decides how to proceed, in accordance with the law and the bylaws. To this end, the Chairman: verifies that the meeting has been duly convened;
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Introduction checks the identity of the persons present and their right to attend, including by way of proxies; verifies that there is a quorum; and directs the proceedings, with the faculty to The Group change the order of the items on the agenda indicated in the notice convening the meeting. Energy Cables and The Chairman also takes appropriate action to ensure orderly discussion and voting, Systems Sector defining the procedures and verifying the results. Telecom Cables and The decisions of the meeting are recorded in minutes signed by the Chairman and the Systems Sector Secretary or the notary public. Tyres Sector The minutes of extraordinary shareholders’ meetings must be prepared by a notary public Real Estate Sector nominated by the Chairman of the meeting. Pirelli & C. Ambiente Information Systems 3. The Board of Auditors Health, Safety and the Environment The Company’s bylaws provide that the Board of Auditors consist of three auditors and for Human Resources there to be two alternates. In order to allow minority shareholders to elect one auditor and Proforma data one alternate, Article 16 of the bylaws provides for use of the slate system, with one auditor and one alternate elected from the slate that obtains the second largest number of Related Party votes (the minority slate). The other two auditors and the other alternate are elected from Disclosures the slate that obtains the largest number of votes (the majority slate). Equity Investments Shareholders may present slates who, alone or together with others, hold at least 2 per held by Directors, cent of the share capital entitled to vote at the ordinary shareholders’ meeting, subject to Statutory Auditor and them proving their ownership of the necessary number of shares not later than two days General Managers before the date set for the shareholders’ meeting at the first call. Each shareholder may Stock Option Plans present or participate in the presentation of only one slate. Corporate Governance In accordance with Article 14.1 of the Code, Article 16 of the bylaws requires that the International slates, signed by the persons who present them, be deposited at the Company’s registered Accounting Standards office at least ten days before the date set for the shareholders’ meeting at the first call and Pirelli & C. S.p.A. - made available to anyone who requests a copy. The slates must be accompanied by a Summary Data curriculum vitae for each candidate and the declarations in which the candidates individually accept their candidacy and attest, on their own responsibility, that there are no Shareholders’ grounds for ineligibility or incompatibility, and that they meet the requirements prescribed Resolutions by law and the bylaws. Slates presented in violation of the above rule are considered null. Subject to ineligibility each candidate may appear only on one slate In addition, persons may not be elected if they do not satisfy the legal requirements for membership of a board of auditors or are already auditors of more than five companies listed on the Italian regulated markets other than subsidiaries of Pirelli & C. S.p.A. Slates must be divided into two sections: one for candidates for the position of auditor and the other for candidates for the position of alternate. The first candidate in each section must be selected from among persons entered in the register of auditors who have worked on statutory audits for a period of not less than three years. Each person entitled to vote may vote for only one slate. The Chairman of the Board of Auditors is the auditor at the top of the slate which obtains the largest number of votes. In the event of death, resignation or disqualification of an auditor, he is replaced by the alternate elected on the same slate. If the Chairman of the Board of Auditors is replaced, the other auditor elected on the same slate takes the Chair. If it is not possible to proceed in the manner described above, a shareholders’ meeting is called to fill the vacancy or vacancies by means of a resolution approved by a relative majority of the votes cast. When the shareholders’ meeting has to appoint auditors and/or alternates to bring the board up to full complement as provided for above or in conformity with applicable law, it proceeds as follows: if auditors elected from the majority slate are to be replaced, the appointment is made with the favourable votes of a relative majority without being tied to
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Introduction a slate; if instead auditors elected from the minority slate are to be replaced, the shareholders’ meeting replaces them with the favourable votes of a relative The Group majority, choosing where possible from among the candidates on the slate from which Energy Cables and the auditor to be replaced was elected. Systems Sector In appointing auditors who for any reason are not appointed pursuant to the Telecom Cables and procedure specified above, the shareholders’ meeting votes according to the majorities Systems Sector required by law. Tyres Sector Auditors whose term of office has expired may be re-elected. Real Estate Sector Participation in meetings of the Board of Auditors may – if the Chairman or his substitute verifies the necessity – be by means of telecommunication techniques Pirelli & C. Ambiente that permit participation in the discussion and equality of information for all those Information Systems taking part. Health, Safety and the Environment The Board of Auditors is charged with checking: Human Resources - compliance with applicable law and the bylaws; Proforma data - conformity with the principles of correct management; Related Party - the adequacy of the organizational structure for the matters falling within its sphere of Disclosures competence, the adequacy of the internal control system and that of the administrative Equity Investments and accounting system and the latter’s reliability in correctly representing transactions; held by Directors, - the adequacy of the instructions the Company imparts to subsidiaries on the obligations Statutory Auditor and concerning the communication of price-sensitive information. General Managers Stock Option Plans The Board of Auditors performs its duties by exercising all the powers authorized by law Corporate Governance and by being able to count on a constant flow of detailed information from the Company, in addition to that obtained during the meetings of the Board of Directors. International In carrying out its tasks the Board of Auditors, besides attending all the meetings of the Accounting Standards Board of Directors and shareholders’ meetings, participates to the meetings of the Pirelli & C. S.p.A. - Remuneration Committee and to the Internal Control and Corporate Governance Summary Data Committee. Shareholders’ Resolutions 4. Composition of the share capital
On March 22, 2005 the share capital of Pirelli & C. S.p.A. was equal to Euros 2,763,953,496.20, divided into 5,315,295,185 shares with a par value of Euros 0.52 each, of which 5,180,530,756 ordinary shares and 134,764,429 non-convertible savings shares.
The share capital may be increased up to Euros 2,819,827,565.88 through the issue of up to 107,450,134 ordinary shares for: - the possible exercise of 212,897,138 Pirelli & C. 2003-2006 warrants issuance pursuant to the resolution approved by the shareholders’ meeting of May 7, 2003 on the basis of 4 warrants for one Pirelli & C. ordinary share at a price per share of Euros 0.52 (equal to the par value). The share capital indicated above already takes account of the exercise of 1,348,958,188 warrants; - the issuance of up to 54,225,850 ordinary shares with a par value of Euros 0.52 each at a price of Euros 1.15 per share, with a premium of Euros 0.63 per share, for the possible exercise of options granted to senior and junior managers of the Company and its subsidiaries and their subsidiaries as part of the “Pirelli to People” and “Group Senior Executives” stock-option plans set up by Pirelli S.p.A. in 2001.
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Introduction To the best of the Company’s knowledge, no legal or natural person can exercise control pursuant to Article 93 of the Legislative Decree 58/1998. The Group It is nonetheless worth noting the existence of the Pirelli & C. S.p.A. blocking shareholders’ Energy Cables and agreement aimed at ensuring the stability of the shareholder structure and the unitary Systems Sector governance of the business. Extracts from this agreement are included at the end of this Telecom Cables and section and are also available on the Company’s website www.pirelli.com. Systems Sector Tyres Sector Real Estate Sector Pirelli & C. Ambiente Information on the Implementation of the Code Information Systems 1. Board of Directors Health, Safety and the Environment 1.1 Election of directors Human Resources Pursuant to Article 7 of the Code and Article 10 of the bylaws, the Board of Directors is Proforma data renewed using the slate system, which, if more than one slate is presented, allows minority shareholders to elect a fifth of the directors. Related Party Disclosures The slates presented by shareholders, signed by the persons who introduced them, must be deposited at the Company’s registered office at least ten days prior the date Equity Investments set for the shareholders’ meeting at the first call and made available to anyone who held by Directors, Statutory Auditor and requests a copy. General Managers Each shareholder may present or participate in the presentation of only one slate and each candidate may appear on only one slate by pain of ineligibility. Stock Option Plans Only shareholders who, alone or together with others, hold at least 2 per cent of the share Corporate Governance capital entitled to vote at the ordinary shareholders’ meeting may present slates, subject to International them proving their ownership of the necessary number of shares not later than two days Accounting Standards prior the date set for the shareholders’ meeting at the first call. Pirelli & C. S.p.A. - Declarations in which the candidates individually accept their candidacy and attest, Summary Data on their own responsibility, that there are no grounds for ineligibility or incompatibility, Shareholders’ and that they meet the requirements prescribed by law and the bylaws must be deposited Resolutions together with the slates within the time limit specified above. The declarations must be accompanied by a curriculum vitae for each candidate, with an indication, where appropriate, of the fact that the candidate qualifies as independent.
1.2 Meetings of the Board of Directors In 2004 the Board of Directors met seven times. More than 75% of all the directors attended on average and more than 73% of the independent directors. Apart from exceptional cases, the directors were provided with the documentation needed to express an informed opinion on the items on the agenda reasonably in advance of meetings. Two Board meetings have already been held in 2005 and another four are planned.
1.3 Directors’ remuneration In addition to the reimbursement of expenses incurred in performing their duties, directors receive annual fees determined by the shareholders’ meeting (Article 14 of the bylaws). The shareholders’ meeting of May 7, 2003 fixed the annual fee payable to each director at Euros 50,000. The remuneration of directors entrusted with special powers is determined by the Board of Directors after consulting the Board of Auditors. Currentlythere is only one director with such powers on a permanent basis. Further information on the remuneration
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Introduction of the directors entrusted with special powers can be found in a chart in the notes to the financial statements for 2004. The Group Lastly, it should be noted that there are no stock-option plans for either the executive or Energy Cables and the non-executive directors (1). Systems Sector Telecom Cables and Systems Sector 1.4 Delegated powers Tyres Sector In the meeting held on May 7, 2003 the Board of Directors reserved the following matters Real Estate Sector to the Chairman, Marco Tronchetti Provera: - relations with shareholders and the information provided to them; Pirelli & C. Ambiente - coordination of the activities of the Managing Directors; Information Systems - formulation, in agreement with the Managing Directors, of the general strategies and Health, Safety and the development policy for the Company and the Group, to be submitted to the Board of Environment Directors together with extraordinary corporate actions; Human Resources - proposals, to be submitted to the Board of Directors in agreement with the Managing Proforma data Directors, for the appointment of members of the General Managers’ Departments and, after consulting the Remuneration Committee, for their compensation; Related Party - chairmanship of the committees with strategic functions; Disclosures - appointment of consultants and members of the professions after consulting the Equity Investments Managing Directors, with the authority to delegate these powers to the latter; held by Directors, - all forms of external communications, with the authority to delegate these powers to the Statutory Auditor and Managing Directors; General Managers - the right to acquire from the Managing Directors and the management of the Group all Stock Option Plans the data and information considered necessary to carry out the above-mentioned Corporate Governance functions. International Furthermore, in order to allow the Chairman to represent the Company fully in dealings Accounting Standards with third parties, the Board has granted him the powers necessary to execute any act Pirelli & C. S.p.A. - concerning the various aspects of the business apart from the power to issue guarantees Summary Data for obligations of the Company or its subsidiaries where the individual amount exceeds ¤ Euros 25 million and guarantees in favour of third parties for obligations where the Shareholders’ individual amount exceeds Euros 10 million. In such cases the Chairman must sign jointly Resolutions with a Managing Director.
Managing Director Carlo Buora - who, in addition to the position of General Manager, has been entrusted with all the finance and administration activities and those concerning the industrial sectors, which were the responsibility of Giovanni Ferrario until December 7, 2004 - has been granted broad powers, subject to the limits for major transactions (Euros 50 million for acquisitions and disposals of equity interests, subscriptions for new shares or bonds, execution of contracts involving the purchase, sale or exchange of fixed assets or financial instruments). The above-mentioned thresholds refer to a single transaction, taken to include a set of transactions which, although individually below the relevant thresholds, are interconnected within the same strategic or executive structure. Powers pertinent to their positions have been granted, subject to certain limits, to Claudio De Conto, General Manager of Administration and Control, Luciano Gobbi, General Manager of Finance, Valerio Battista, General Manager of the Cables Sector, and Francesco Gori, General Manager of the Tyres Sector.
Less broad powers have been granted to other managers of the Company to be used in their individual spheres of competence.
(1) Deputy Chairman Carlo Alessandro Puri Negri and Managing Director Carlo Buora are exceptions in this respect. The former has stock options as the General Manager of Pirelli & C. Real Estate S.p.A. and the latter as General Manager of Pirelli & C. S.p.A.
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Introduction As in the past, in 2004 the Chairman and the Managing Directors used their delegated powers only for the ordinary management of the Company’s activities (with regard to The Group which the directors were periodically informed) and waived them for the more important Energy Cables and transactions from an operational or financial perspective, which they submitted to the Systems Sector Board of Directors. Telecom Cables and In fact, delegation does not mean the assignment of exclusive powers but is rather the Systems Sector solution adopted by the Company to ensure, in terms of the Board’s organization, a high Tyres Sector degree of operational flexibility, both within the Company and in relation to third parties. Real Estate Sector Pirelli & C. Ambiente 1.5 Provision of information to the Board of Directors Information Systems Pursuant to Article 11 of the bylaws (which incorporates the prescriptions of Article 150.1 Health, Safety and the of Legislative Decree 58/1998), the Board of Directors and the Board of Auditors are kept Environment informed, inter alia by the persons with delegated powers, about the performance of the Human Resources Company, its prospects and the transactions of greatest significance for its profitability, Proforma data financial position or assets and liabilities effected by the Company or its subsidiaries; in particular, such persons report any transactions in which they have an interest, for their Related Party own account or on behalf of third parties, or that are influenced by the person, if any, who Disclosures performs management and coordination activities. Such reports are made promptly and at Equity Investments least once every three months, in occasion of the meetings of the Board of Directors (and held by Directors, the Executive Committee, if established) or by means of a written communication. Statutory Auditor and In order to foster the orderly organization of the flow of information, in July 2002 the General Managers Company adopted a procedure (included at the end of this section and available on the Stock Option Plans Company’s website www.pirelli.com) with the rules to be followed to ensure compliance Corporate Governance with the above-mentioned Article 150 with regard to the activities of the executive International directors, both in exercising their delegated powers and in carrying out the transactions Accounting Standards approved by the Board of Directors. Pirelli & C. S.p.A. - Summary Data 1.6 Rules of conduct for transactions with related parties Shareholders’ The Company has also laid down the rules of conduct (included at the end of this section Resolutions and available on the Company’s website www.pirelli.com) for transactions with related parties, including intra-group business. The aim of the rules is to guarantee substantial and procedural fairness and transparency by involving the Board of Directors in the related decisions. In fact, under the rules, the Board of Directors is required to give advance approval to transactions with related parties, including intra-group transactions, apart from those of a customary nature and those to be concluded at arms-length conditions. To this end, a provision is made for the Board to be adequately informed of all the relevant aspects: the nature of the relationship, the manner of carrying out the transaction, the economic and other conditions, the evaluation procedures used, the rationale for the transaction and the Company’s interest in its implementation and the associated risks. If the related party is a director or a party related via a director, the director in question may only provide clarifications and must leave the meeting when the motion is examined and put to a vote. Depending on the nature, value and other aspects of related-party transactions, the Board may be assisted by one or more outside experts in order to prevent contracts being concluded at inappropriate conditions. According to the circumstances, such experts express an opinion on the economic and/or legal and/or technical aspects of the transaction.
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Introduction 2. Committees The Group 2.1 The Remuneration Committee Energy Cables and The Board has established the Remuneration Committee from among its members, charged Systems Sector with fact-finding and advisory functions. In particular, this committee: Telecom Cables and a) formulates proposals for the remuneration of the Managing Directors and the directors Systems Sector who are entrusted with particular duties and, on the basis of indications provided by Tyres Sector the Managing Directors, proposals for determining the remuneration of the Company’s Real Estate Sector senior management; b) conducts preliminary examinations of proposals for the adoption of stock-option plans. Pirelli & C. Ambiente The Remuneration Committee meets whenever its chairman deems it to be desirable or a Information Systems meeting has been requested by another member of the committee or by a Managing Health, Safety and the Director. The rules for calling meetings, for their due constitution and for decision-making Environment are the same as those laid down in the bylaws for the meetings of the Board of Directors. Human Resources In accordance with Article 8.1 of the Code, the Remuneration Committee is composed Proforma data entirely of non-executive directors (Ennio Presutti, chairman, Luigi Orlando and Giampiero Pesenti), the majority of whom are independent (Ennio Presutti and Giampiero Pesenti). Related Party In 2004 the Remuneration Committee held two meetings. Disclosures Equity Investments held by Directors, 2.2 The Internal Control and Corporate Governance Committee Statutory Auditor and The Board has established the Internal Control and Corporate Governance Committee General Managers from among its members, charged with fact-finding and advisory functions. In particular, Stock Option Plans this committee: Corporate Governance a) assists the Board of Directors in establishing the guidelines for the internal control International system and periodically verifying its adequacy and effective working, so as to ensure Accounting Standards that the risks facing the Company are managed appropriately; Pirelli & C. S.p.A. - b) evaluates the work plan prepared by the persons responsible for internal control, Summary Data from whom it receives periodic reports; Shareholders’ c) assesses, together with the Company’s financial officers and the external auditors, Resolutions the appropriateness of the accounting standards applied and their homogeneousness for the purpose of preparing the consolidated financial statements; d) evaluates the proposals made by external auditors in order to be awarded the appointment, the audit plan and the results set out in the letter of suggestions; e) reports to the Board of Directors at least once every half year, on the occasion of the approval of the draft annual financial statements and the half-yearly report, on the activity performed and the adequacy of the internal control system; f) performs the additional tasks that may be assigned to it by the Board of Directors, particularly in regards to relations with the external auditors; and g) monitors compliance with the rules of corporate governance and their periodic updating and compliance with the rules of conduct adopted by the Company and its subsidiaries. This committee normally meets before the meetings of the Board of Directors are called to approve the draft annual financial statements, the half-yearly report and the quarterly reports; it also meets whenever its chairman deems it to be desirable or a meeting has been requested by another member of the committee or by a Managing Director. The rules for calling meetings, for their due constitution and for decision-making are the same as those laid down in the bylaws for the meetings of the Board of Directors. The members of the Board of Auditors and the Managing Directors participate in the meetings of the committee; the head of the Internal Audit Department and one or more General Managers may be invited to attend.
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Introduction In accordance with Article 10 of the Code, the Internal Control and Corporate Governance Committee is composed entirely of independent directors (Giuseppe Gazzoni Frascara, The Group chairman, Ennio Presutti and Carlo Secchi). Energy Cables and In 2004 the committee contributed significantly to implement the Company’s corporate Systems Sector governance mechanisms, take part in the related analyses and in the drafting and updating Telecom Cables and of the relevant documents. In particular, the committee agreed with the amendments to the Systems Sector Code of Ethics. It also agreed with the text of the Rules of Proceeding for the Tyres Sector Shareholders’ Meeting and the amendments to the bylaws to take into account changes in Real Estate Sector the company law introduced by the “Vietti reform”. The committee also took part in the revision of the internal rules on transactions with related parties and was kept constantly Pirelli & C. Ambiente informed of the steps taken in implementing the 231 Organizational Model. Information Systems The committee also examined the underlying approach and some specific aspects of the Health, Safety and the Company’s periodic financial reports (the parent company and consolidated annual Environment financial statements, the half-yearly report and the annual report) and agreed with the Human Resources Company’s decision to opt to pay income tax on a consolidated basis. Proforma data The committee also monitored the work of the Internal Audit Department and in particular reviewed the report on the implementation of the 2004 Audit Plan and the progress made in Related Party implementing the group’s Control Risk Self-Assessment project. The committee also Disclosures examined and approved the audit plan for 2005 prepared by the Internal Audit Department Equity Investments and discussed the plan for the 2005 statutory audit with the external auditors, held by Directors, PricewaterhouseCoopers S.p.A.. Statutory Auditor and General Managers Lastly, the Committee for Internal Control and Corporate Governance and the Board of Stock Option Plans Directors, taking into account the comments of the Board of Auditors, judged the internal Corporate Governance control system to be adequate. International Accounting Standards Pirelli & C. S.p.A. - 2.3 Committee for the Nomination of Directors Summary Data The Board of Directors has decided not to establish a nomination committee charged with putting forward proposals for the position of director since at present the conditions Shareholders’ envisaged by the Code for its establishment do not exist, taking into account the current Resolutions ownership structure. The need for such a committee was further reduced by the adoption, with the approval of the shareholders’ meeting of May 11, 2004, of the slate system for the election of the directors, in view of the transparency this mechanism ensures the selection of candidates.
3. Handling of confidential information
3.1 Disclosure of documents and information In compliance with Article 6 of the Code, the Chairman of the Board of Directors is directly responsible for dealing with confidential information, especially that of a price- sensitive nature. The release of documents and information concerning the Company and its subsidiaries is handled - always in agreement with the Chairman - by the Secretary to the Board and the Corporate Secretary for disclosures to the authorities and shareholders, by the External Relations Department for communications to the press, and by the Investor Relations Department for communications to institutional investors. The Chairman and the persons referred to above are able to consult at all times in the event of an urgent need to disclose documents or information.
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Introduction 3.2 Insider dealing As required by the current regulations, as of December 1, 2002 the Company has had an The Group Insider Dealing Code laying down the disclosure requirements and rules of conduct for Energy Cables and transactions involving “Financial Instruments” (briefly, ordinary and savings shares of Systems Sector Pirelli & C. S.p.A., shares of Pirelli & C. Real Estate S.p.A., instruments that give the right Telecom Cables and to buy or subscribe for such shares, and units of real-estate investment funds set up and Systems Sector managed by subsidiaries of Pirelli & C.) concluded by “Relevant Persons” (briefly, persons Tyres Sector who, as a consequence of the positions they hold in the Company, have access to material Real Estate Sector information). More accurate definitions of both terms are contained in the Insider Dealing Code (included at the end of this section and available on the Company’s website Pirelli & C. Ambiente www.pirelli.com). Information Systems The principal aims of the Insider Dealing Code are to ensure the maximum transparency Health, Safety and the vis-à-vis the market of transactions concluded by persons who have a special relationship Environment with the Company and its subsidiaries and to specify the blackout periods during which Human Resources such persons may not conclude transactions involving the securities in question. To this Proforma data end, the main provisions concern: 1) details of the persons required to disclose transactions; Related Party 2) the obligation to inform the market immediately of transactions involving a significant Disclosures amount of Financial Instruments, i.e. those whose aggregate value, including Equity Investments transactions concluded in the three preceding months, exceeds Euros 80,000; held by Directors, 3) the obligation to inform the market at the end of each quarter of transactions involving Statutory Auditor and Financial Instruments whose aggregate value is between Euros 35,000 and Euros 80,000; General Managers 4) the specification of blackout periods during which Relevant Persons may not conclude Stock Option Plans transactions involving Financial Instruments. Corporate Governance International Accounting Standards 4. Internal control Pirelli & C. S.p.A. - The internal control system of Pirelli & C. and the group it heads is designed to ensure the Summary Data provision of correct information and adequate cover of all the group’s activities, with special reference to those that are considered to be potentially at risk. Shareholders’ It has developed as a process intended to achieve substantial and procedural fairness, Resolutions transparency and accountability by ensuring that transactions and, more generally, business-related activities are efficient and can be known and verified, that accounting and operational data are accurate, that applicable laws and regulations are complied with, and that the assets of the business are safeguarded, not least with a view to prevent the perpetration of fraud against the Company and financial markets. The cardinal rules of the Company’s internal control system are: i. separation of roles in the performance of the principal activities involved in each operating process; ii. traceability and constant visibility of decisions; iii. decision-making on an objective basis.
Responsibility for the internal control system lies with the Board of Directors, which lays down the guidelines for the system and periodically verifies that it is adequate and working effectively. To this end the Board uses the Internal Control and Corporate Governance Committee and the Internal Audit Department, which is placed directly under the Chairman of Pirelli & C. S.p.A. with respect to its work in both the parent company and subsidiaries. The Department’s primary task is to follow developments in the internal control system and monitor its adequacy, effectiveness and efficiency on a group-wide basis. There is also a planning and control system that focuses on individual sectors and operating units and produces a detailed monthly report for the General Managers, so that they have a useful tool with which to monitor specific activities.
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Introduction In order to foster compliance with the strategies and guidelines adopted by the parent company, the competent General Managers and senior executives sit on the boards of The Group directors of the largest subsidiaries. Energy Cables and The internal control system described above has been further strengthened by the Systems Sector introduction of an organizational model that the Board of Directors approved on July 31, Telecom Cables and 2003. Intended to ensure the creation of a system responding to the specific requirements Systems Sector deriving from the entry into force of Legislative Decree 231/2001 on the administrative Tyres Sector liability of companies for criminal offences committed by their employees, the model Real Estate Sector consists of a set of principles and procedures arranged in a pyramid that, starting from the base, can be summarized as follows: Pirelli & C. Ambiente • Group Code of Ethics, which formulates the general principles (transparency and Information Systems fairness) inspiring the conduct of business. It indicates the objectives and the values Health, Safety and the informing business activity in relation to the main stakeholders with which Pirelli & C. Environment S.p.A. interacts on a daily basis: the shareholders, the financial market, customers and Human Resources staff. Proforma data • Internal control system, the process aimed at providing a reasonable guarantee that the operations will be efficient and effective, financial and operational data are accurate, Related Party laws and regulations complied with, and the Company’s assets are safeguarded, not least Disclosures against the perpetration of fraud. The internal control system is based on and Equity Investments characterized by a number of general principles defined within the framework of the held by Directors, organizational model, whose scope extends across all the different organizational levels Statutory Auditor and (Business Units, Central Functions and Companies). General Managers • Lines of conduct, which set out specific rules for dealings with representatives of Stock Option Plans governmental bodies. The rules are framed in both the positive (“to be done”) and the Corporate Governance negative (“not to be done”) and translate the principles established by the Group Code of International Ethics into operational terms. Accounting Standards • Internal control checklists, which set out the main phases of each process, list the Pirelli & C. S.p.A. - criminal offences that could be committed in connection with each process and the Summary Data specific checks to be performed with a view to their prevention, and specify the reports to be transmitted to the Oversight Committee to draw the attention to situations of Shareholders’ possible non-compliance with the procedures established in the organizational model. Resolutions The organizational model will be reviewed periodically in light of experience in its application and changes in the legal framework established by Legislative Decree 231/2001. The functioning of the model and compliance with it are monitored by an ad hoc Oversight Committee composed of Giuseppe Gazzoni Frascara, independent director and chairman of the Internal Control and Corporate Governance Committee, Paolo Francesco Lazzati, member of the Board of Auditors, and Sergio Romiti, head of the Internal Audit Department. Its composition ensures that the Committee includes the different professional competences that contribute to the control of the Company’s operations. The Oversight Committee is charged with making recommendations to the Board of Directors for it to adapt the organizational model to changes in the legal framework, the nature of the Company’s business activities and the ways they are conducted. It reports to the Board of Directors, the Internal Control and Corporate Governance Committee and the Board of Auditors on the checks performed and their results. The shareholders’ meeting of May 10, 2004 fixed the annual gross fee payable to each member of the Oversight Committee at Euros 10,000. With reference to unlisted Italian Group companies, the oversight committee has been adapted by adopting the technical and operational solution that, while respecting the mandate and the powers reserved to that body by law, is appropriate to the size and organizational context of each company.
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Introduction Lastly, a disciplinary system has been introduced to sanction non-compliance with the measures indicated in the organizational, operational and control systems. The Group The procedures for reporting information to the oversight committees were strengthened in Energy Cables and 2004 to implement Article 6.2d) of Legislative Decree 231/2001, which establishes Systems Sector information reporting requirements vis-à-vis the committee charged with monitoring the Telecom Cables and functioning of and compliance with the models. Systems Sector Tyres Sector Real Estate Sector 5. Relations with institutional investors and other shareholders In line with its tradition of transparency and fairness, the Company actively promotes Pirelli & C. Ambiente relations with shareholders and institutional investors within the proper limits of their Information Systems respective roles and periodically organizes meetings with representatives of the Italian and Health, Safety and the international financial communities. Environment In March 1999 the Company established an Investor Relations Department to foster Human Resources continuous dialogue with the financial market. The Investor Relations Department, which Proforma data reports directly to Managing Director Carlo Buora, is headed by Alberto Borgia and has its own section in the Company’s website www.pirelli.com. Related Party In this section of the website investors can find every document of interest, in English as Disclosures well as Italian, as regards to financial reporting (for example, the annual financial Equity Investments statements and the half-yearly and quarterly reports) and the Company’s corporate held by Directors, governance system (for example, the Rules of conduct for transactions with related parties, Statutory Auditor and the Procedure for satisfying the requirements of Article 150.1 of Legislative Decree 58/1998, General Managers the Insider Dealing Code and the minutes of shareholders’ meetings). The section also Stock Option Plans gives access to the documentation that the Company makes available to the financial Corporate Governance community in presentations and/or meetings and information on the Company’s share International capital and shareholders (including the publication of shareholders’ agreements). Accounting Standards Pirelli & C. was one of the first companies in Italy and Europe to publish inserts Pirelli & C. S.p.A. - specifically addressed to small investors in the mass media. Summary Data Investor queries may be sent to: e-mail: [email protected]; tel.: +39.0264422949; fax: +39.0264424686 Shareholders’ Resolutions 6. Shareholders’ meetings It is the Company’s constant policy to use shareholders’ meetings to communicate information on the Company and its prospects to the shareholders. Obviously, it does this in accordance with the rules governing price-sensitive information and, where necessary, simultaneously communicates the same information to the market. The Company carefully considers the choice of the place, date and time for convening shareholders’ meetings, to facilitate the participation of the shareholders. All the directors and all the members of the Board of Auditors make every possible effort to attend the meetings, especially those directors whose positions permit them to make an important contribution to the discussion.
7. Board of Auditors The shareholders’ meeting of May 7, 2003 elected the following Board of Auditors (with effect from August 4, 2003): Luigi Guatri (Chairman), Roberto Bracchetti and Paolo Francesco Lazzati. Franco Ghiringhelli and Sebastiano Guido were appointed as alternates. The current Board remains in office until the approval of the financial statements for the fiscal year ending December 31, 2005. The election was held using the slate voting system.
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Introduction The only slate was presented by the members of the Pirelli & C. blocking shareholders’ agreement. The Company considers the authority and reputation of the candidates The Group proposed as a possible reason why no alternative slate was presented by the minority Energy Cables and shareholders. Systems Sector Telecom Cables and Systems Sector In 2004 the Board of Auditors met 6 times. Tyres Sector Real Estate Sector The following tables summarize the Company’s procedures for adopting the principal Pirelli & C. Ambiente recommendations of the Code: Information Systems • Structure of the Board of Directors, the Remuneration Committee and the Committee Health, Safety and the for Internal Control and Corporate Governance Environment • Structure of the Board of Auditors Human Resources Proforma data • Other provisions of the Code Related Party • Positions of director or member of the board of auditors held by the Company’s directors Disclosures in other listed companies, in financial, banking and insurance companies, and in other Equity Investments large companies. held by Directors, Statutory Auditor and General Managers Stock Option Plans Corporate Governance International Accounting Standards Pirelli & C. S.p.A. - Summary Data Shareholders’ Resolutions
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Introduction Table 1 - STRUCTURE OF THE BOARD OF DIRECTORS AND THE BOARD COMMITTEES Board of Directors Committee for Remuneration The Group Internal Control Committee Energy Cables and Position Name executive non- independent **** Number *** **** *** **** Systems Sector executive of other positions ** Telecom Cables and Chairman Marco X 100% 6 Systems Sector Tronchetti Provera Tyres Sector Deputy Chairman Alberto Pirelli X 100% 6 Deputy Chairman Carlo A. Puri Negri X 100% 10 Real Estate Sector Managing Carlo Buora X 100% 7 Pirelli & C. Ambiente Director Managing Giovanni Ferrario (1) X 100% - Information Systems Director Health, Safety and the Director Carlo Acutis X 71% 14 Environment Director Gilberto Benetton X 29% 11 Director Carlo De Benedetti X 57% 7 Human Resources Director Gabriele Galateri X 86% 10 Proforma data di Genola Director Giuseppe X 71% 10 X 100% Related Party Gazzoni Frascara Disclosures Director Mario Greco X 71% 12 Equity Investments Director Georg F. Krayer X 43% 2 held by Directors, Director Giulia Maria Ligresti X 86% 11 Statutory Auditor and Director Massimo Moratti X 86% 5 General Managers Director Luigi Orlando X 43% 2 X 50% Director Giovanni Perissinotto X 43% 20 Stock Option Plans Director Giampiero Pesenti X 57% 13 X 100% Corporate Governance Director Ennio Presutti X 100% 3 X 100% X 100% Director Maurizio Romiti (2) X 20% - International Director Carlo Secchi X 100% 5 X 100% Accounting Standards Director Vincenzo Sozzani X 100% 3 Pirelli & C. S.p.A. - Director Frank Vischer X 86% 1 Summary Data Number of meetings held during Committee for Remuneration the year: Board of Directors: 7 Internal Control: 3 Committee: 2 Shareholders’ LEGEND Resolutions * Indicates that the director was elected from a slate presented by minority shareholders. ** The positions held on the boards of directors or auditors of other companies listed on Italian and foreign regulated markets, of financial, banking and insurance companies, and of other large companies are shown in detail in the Report on Corporate Governance. *** The “X” in one of these columns indicates membership of the relevant Board Committee. **** Indicates the attendance of directors at the meetings of the Board of Directors and the Board Committees. (1) Resigned on 7 December 2004. (2) Resigned on 15 September 2004.
Table 2 - BOARD OF AUDITORS Position Name Attendance at Number of other Board meetings positions held ** Chairman Luigi Guatri 83% 4 Auditor Roberto Bracchetti 100% 1 Auditor Paolo Francesco Lazzati 100% 2 Alternate Franco Ghiringhelli - 1 Alternate Sebastiano Guido - - Number of meetings held during the year: 6 Quorum required for the presentation of slates by minority shareholders for the election of auditors/alternates (Article 148 of the Consolidated Law on Finance): 2% LEGEND * Indicates that the auditor/alternate was elected from a slate presented by minority shareholders. ** Indicates the number of positions held on the boards of auditors of other companies listed on Italian regulated markets (excluding Pirelli Group companies). The main positions held in listed and unlisted companies are shown in detail in the Report on Corporate Governance.
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Introduction Table 3 - OTHER PROVISIONS OF THE SELF-REGULATORY CODE The Group YES NO Summary reasons for divergence from the recommendations Energy Cables and of the Code Systems Sector Delegated powers and transactions with related parties transactions with related parties Telecom Cables and the Board of Directors has delegated powers and established: Systems Sector a) the limits to such powers X b) the manner of exercising them X Tyres Sector c) the frequency of reports? X Real Estate Sector Has the Board reserved the right to examine and approve Pirelli & C. Ambiente transactions having a significant impact on the Company’s profitability, assets and liabilities or financial position Information Systems (including transactions with related parties)? X Health, Safety and the Has the Board established guidelines for Environment identifying “significant” transactions? X Human Resources Are the above guidelines described in the report? X Proforma data Has the Board established special procedures for Related Party examining and approving transaction with related parties? X Disclosures Are the procedures for approving transaction Equity Investments with related parties described in the report? X held by Directors, Statutory Auditor and Procedures used for the most recent appointments General Managers of the Board of Directors and the Board of Auditors Were the nominations to the board of directors Stock Option Plans filed at least ten days in advance? X Corporate Governance Were the nominations to the board of directors International accompanied by detailed information? X Accounting Standards Were the nominations to the board of directors accompanied Pirelli & C. S.p.A. - by an indication as to whether they qualified as independent? X Summary Data Were the nominations to the board of auditors Shareholders’ filed at least ten days in advance? X Resolutions Were the nominations to the board of auditors accompanied by detailed information? X Shareholders’ meetings Has the Company approved rules of proceeding for shareholders’ meetings? X (Are these rules included in the report (or does the report indicated where they can be obtained/downloaded)? X Internal control Has the Company appointed the persons responsible for internal control? X Are such persons hierarchically independent from the heads of the operating units? X Unit responsible for internal control (Art. 9.3 of the Code) X Investor relations Has the Company appointed a person to be responsible for investor relations? X Unit and contact details of the person responsible for investor relations X1
1 Investor Relations Department (directly under Managing Director Carlo Buora), headed by Alberto Borgia; Contact details: e-mail [email protected]; tel.: +39.02.64422949; fax: +39.02.64424686.
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Introduction Positions of Director or Auditor held by the members of the Board of Directors and the Board of Auditor in other listed companies, in financial, banking and The Group insurance companies of relevant dimensions Energy Cables and Systems Sector Name Position Telecom Cables and Marco Tronchetti Provera Chairman of the Board of Directors of Camfin S.p.A.; Systems Sector Chairman of the Board of Directors of Gruppo Partecipazioni Industriali S.p.A.; Tyres Sector Chairman of the Board of Partners of Marco Tronchetti Provera & C. A.P.A.; Chairman of the Board of Directors of Olimpia S.p.A.; Real Estate Sector Chairman of the Board of Directors of Pirelli & C. Real Estate S.p.A.; Pirelli & C. Ambiente Chairman of the Board of Directors of Telecom Italia S.p.A.. Alberto Pirelli Chairman of the Board of Partners of Fin.Ap. Di Alberto Pirelli & C. A.p.A.; Information Systems Deputy Chairman of Di Gruppo Partecipazioni Industriali S.p.A.; Health, Safety and the Director of Camfin S.p.A.; Environment Director of G.I.M. – Generale Industrie Metallurgiche S.p.A.; Director of Olimpia S.p.A.; Human Resources Director of Smi – Società Metallurgica Italiana S.p.A.. Proforma data Carlo Alessandro Chairman of the Board of Directors of Pirelli & C. Real Estate Sgr S.p.A.; Puri Negri Deputy Chairman And Managing Director of Pirelli & C. Real Estate S.p.A.; Related Party Deputy Chairman of the Board of Directors of Camfin S.p.A.; Disclosures Managing Director of Gruppo Partecipazioni Industriali S.p.A.; Equity Investments Director of Aon Italia S.p.A.; held by Directors, Director of Capitalia S.p.A..; Director of Eurostazioni S.p.A.; Statutory Auditor and Director of Istituto Europeo Di Oncologia S.r.l.; General Managers Director of Olimpia S.p.A.; Stock Option Plans Director of Telecom Italia S.p.A.. Corporate Governance Carlo Buora Chairman of the Board of Directors of Tim S.p.A.; Managing Director of Telecom Italia S.p.A.; International Director of Mediobanca - Banca Di Credito Finanziario S.p.A.; Accounting Standards Director of Olimpia S.p.A.; Director of Pirelli & C. Real Estate S.p.A.; Pirelli & C. S.p.A. - Director of Ras - Riunione Adriatica Sicurtà - S.p.A.. Summary Data Director of Rizzoli Corriere Della Sera Media Group S.p.A.. Shareholders’ Carlo Acutis Chairman of the Board of Directors of BPC Investimenti SGR S.p.A.; Resolutions Deputy Chairman of the Board of Directors of Vittoria Assicurazioni S.p.A.; Director of Banca Passadore & C. S.p.A..; Director of Camfin S.p.A.; Director of Ergo Italia S.p.A.; Director of Ergo Assicurazioni S.p.A.; Director of Ergo Previdenza S.A.; Director of Inbro N.V.; Director of Yura S.A.; Director of Yura International Holding B.V.; Director of Yura Capital S.A.; Director of Scor S.A.; Director of Vittoria Capital N.V.; Member of the Supervisory Board of Cogedim S.A.. Gilberto Benetton Chairman of the Board of Directors of Autogrill S.p.A.; Chairman of the Board of Directors of Edizione Holding S.p.A.; Deputy Chairman of the Board of Directors of Olimpia S.p.A.; Deputy Chairman of the Board of Directors of Telecom Italia S.p.A.; Director of Autogrill Group Inc. (Formerly HMS Host Corp.) Director of Autostrade S.p.A.; Director of Banca Antoniana Popolare Veneta S.p.A.; Director of Benetton Group S.p.A.; Director of Lloyd Adriatico S.p.A.; Director of Mediobanca - Banca Di Credito Finanziario S.p.A.; Director of Schemaventotto S.p.A..
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Introduction Name Position The Group Carlo De Benedetti Chairman of the Board of Directors of CDB Web Tech S.p.A.; Chairman of the Board of Directors of CIR S.p.A.; Energy Cables and Chairman of the Board of Directors of COFIDE S.p.A.; Systems Sector Chairman of the Board of Directors of SOGEFI S.p.A.; Director of Banca Intermobiliare di Investimenti e Gestioni S.p.A.; Telecom Cables and Director of Gruppo Editoriale L’Espresso S.p.A.; Systems Sector Director of Valeo S.A.. Tyres Sector Gabriele Galateri Chairman of the Board of Directors of Mediobanca - Banca di Credito Finanziario S.p.A.; Real Estate Sector di Genola Chairman of the Board of Directors of Istituto Europeo di Oncologia S.r.l.; Deputy Chairman of the Board of Directors of Assicurazioni Generali S.p.A.; Pirelli & C. Ambiente Director of Accor S.A.; Information Systems Director of Banca CRS S.p.A.; Director of Banca Esperia S.p.A.; Health, Safety and the Director of IFI S.p.A.; Environment Director of San Faustin N.V.; Director of UTET S.p.A.; Human Resources Member of the Supervisory Board of Commerzbank. Proforma data Giuseppe Gazzoni Director of Bologna Football Club 1909 S.p.A.; Related Party Frascara Director of Emif S.r.l.; Director of Euromobiliare Corporate Finance S.p.A.; Disclosures Director of F.G.F. - Financière Gazzoni Frascara S.p.A.; Equity Investments Director of F.G.F. - Finanziaria Generale Felsinea S.r.l.; held by Directors, Director of ITO S.r.l.; Statutory Auditor and Director of Lega Calcio Service S.p.A.; Director of Pirelli & C. Ambiente Holding S.p.A.; General Managers Director of Vittoria 2000 S.r.l.; Stock Option Plans Member of the Supervisory Board “Sofipa Equity Fund” (Managed By Mcc Sofipa Sgr S.p.A.). Corporate Governance Mario Greco Deputy Chairman of the Board of Directors of AGF RAS Holding B.V.; Deputy Chairman of the Board of Directors of Allianz Subalpina S.p.A.; International Deputy Chairman of the Board of Directors of Rasbank S.p.A.; Accounting Standards Deputy Chairman of the Board of Directors of Ras International N.V.; Managing Director and General Manager of Riunione Adriatica di Sicurtà S.p.A. - RAS; Pirelli & C. S.p.A. - Director of Allianz Compania de Seguros y Reaseguros; Summary Data Director of Allianz Suisse Lebensersicherungs; Shareholders’ Director of Allianz Suisse Versicherungen; Resolutions Director of Fastweb S.p.A.; Director of IFIL S.p.A.; Director of Merloni Elettrodomestici S.p.A.; Director of Unicredito Italiano S.p.A.. Georg F. Krayer Chairman of Bank Sarasin & Cie AG; Director of Baloise Holding. Giulia Maria Ligresti Chairman of the Board of Directors and Managing Director of Premafin Finanziaria S.p.A.; Chairman of the Board of Directors of FONSAI MB&A S.p.A.; Deputy Chairman of Fondiaria Sai S.p.A.; Managing Director of Sai Holding Italia S.p.A.; Managing Director of Saifin S.p.A.; Director of Finadin S.p.A.; Director of Iena Presboug S.A.; Director of Milano Assicurazioni S.p.A.; Director of Sailux S.A.; Director of Sainternational S.p.A.; Director of Telecom Italia Media S.p.A.. Massimo Moratti Partner of Angelo Moratti di Gianmarco e Massimo Moratti & C. S.a.p.a.; Managing Director of SARAS S.p.A. Raffinerie Sarde; Director of Interbanca S.p.A.; Director of Sarint S.A.; Director of Telecom Italia S.p.A.. Luigi Orlando Honorary Chairman of Europa Metalli S.p.A.; Honorary Chairman of G.I.M. - Generale Industrie Metallurgiche S.p.A.; Chairman of the Board of Partners of Orlando & C. - Gestioni Finanziarie S.a.p.A.; Member of the Supervisory Board of KM Europa Metal A.G..
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Introduction Name Position The Group Giovanni Perissinotto Chairman of the Board of Directors of Banca Generali S.p.A.; Chairman of the Board of Directors of Belgica Insurance Holding; Energy Cables and Chairman of the Board of Directors of Flandria Participation Financieres; Systems Sector Chairman of the Board of Directors of Generali Finances S.A.; Chairman of the Board of Directors of Generali Asset Management SGR S.p.A.; Telecom Cables and Chairman of the Board of Directors of Generali Properties S.p.A.; Systems Sector Deputy Chairman of the Board of Directors of BSI - Banca della Svizzera Italiana S.A.; Tyres Sector Managing Director and General Manager of Assicurazioni Generali S.p.A.; Director of Agorà Investimenti S.p.A.; Real Estate Sector Director of Albula; Pirelli & C. Ambiente Director of Alleanza Assicurazioni S.p.A.; Director of Assitalia S.p.A.; Information Systems Director of Banca Intesa S.p.A.; Health, Safety and the Director of Banca Nazionale del Lavoro S.p.A.; Director of Generali España Holding de Entidades de Seguros; Environment Director of Generali Finance B.V.; Human Resources Director of Generali France Holding S.A.; Director of INA Vita S.p.A.; Proforma data Director of Participatie Maatschappij Graafschap Holland N.V.; Related Party Director of Transocean Holding Corporation. Disclosures Giampiero Pesenti Chairman of the Board of Directors and Managing Director of Italmobiliare S.p.A.; Chairman of the Board of Directors of Intermobiliare S.p.A.; Equity Investments Chairman of the Board of Directors of Italcementi S.p.A.; held by Directors, Deputy Chairman of the Board of Directors of Ciment Francais; Statutory Auditor and Deputy Chairman of Fincomind AG; General Managers Director of Ciments du Maroc; Director of Compagnie Monegasque de Banque; Stock Option Plans Director of Credit Mobilier de Monaco; Corporate Governance Director of Finter Bank Zurich; Director of G.I.M. - Generale Industrie Metallurgiche S.p.A.; International Director of Mittel S.p.A.; Accounting Standards Director of RAS - Riunione Adriatica di Sicurtà S.p.A.; Pirelli & C. S.p.A. - Director of Soparfinter S.A. (Luxembourg). Summary Data Ennio Presutti Chairman of the Board of Directors of Sviluppo Garibaldi Repubblica S.p.A.; Director of Università Vita-Salute San Raffaele; Shareholders’ Director of Science Park Raf S.p.A.. Resolutions Carlo Secchi Director of Fastweb S.p.A.; Director of Fondazione Teatro alla Scala; Director of Lloyd Adriatico S.p.A.; Director of Tangenziali Esterne di Milano S.p.A.; Director of Veneranda Fabbrica del Duomo S.p.A.. Vicenzo Sozzani Director of Banco di Desio e della Brianza S.p.A.; Director of Pirelli & C. Real Estate S.p.A.; Director of Pirelli & C. Real Estate SGR S.p.A.. Frank Vischer Director of Pirelli Société Générale S.A..
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Introduction Name Position The Group Luigi Guatri Chairman of the Board of Directors of Acb Group - Società Italiana dei Consulenti Economico - Aziendali S.p.A.; Energy Cables and Chairman of the Board of Directors of Acbgroup Finanza e Valore S.p.A.; Systems Sector Chairman of the Board of Directors of Finanziaria 2000 S.p.A.; Chairman of the Board of Directors of Vittoria Assicurazioni S.p.A.; Telecom Cables and Chairman of the Board of Directors of Walter Mieli S.p.A.; Systems Sector Deputy Chairman of the Board of Directors of Università L. Bocconi S.p.A.; Tyres Sector Director of Banco Di Desio e Della Brianza S.p.A.; Director of Ferrero, Gnudi, Guatri, Uckmar Consulenti Associati S.p.A.; Real Estate Sector Director of Graniti Fiandre S.p.A.; Pirelli & C. Ambiente Director of Maffei S.p.A.; Director of Negri Bossi S.p.A.; Information Systems Director of SO.PA.F. S.p.A.; Health, Safety and the Chairman of the Board of Auditors of BPU Banche Popolari Unite S.c.r.l.; Chairman of the Board of Auditors of Centrobanca S.p.A.; Environment Chairman of the Board of Auditors of Italcementi S.p.A.; Human Resources Chairman of the Board of Auditors of Italmobiliare S.p.A.; Chairman of the Board of Auditors of Movi Lemar S.p.A.; Proforma data Chairman of the Board of Auditors of Movi S.p.A.; Related Party Chairman of the Board of Auditors of Permasteelisa S.p.A.; Disclosures Chairman of the Board of Auditors of Rhifim S.p.A.; Chairman of the Board of Auditors of Wimed S.p.A.. Equity Investments Roberto Bracchetti Chairman of the Board of Auditors of Cantoni ITC S.p.A.; held by Directors, Chairman of the Board of Auditors of Durkopp Adler Italia S.p.A.; Statutory Auditor and Chairman of the Board of Auditors of Elba S.p.A.; General Managers Chairman of the Board of Auditors of Gestione Tessili Cantoni S.p.A.; Chairman of the Board of Auditors of Fag Italia S.p.A.; Stock Option Plans Chairman of the Board of Auditors of Mediolanum Farmaceutici S.p.A.; Corporate Governance Chairman of the Board of Auditors of Olimpia S.p.A.; Chairman of the Board of Auditors of Pirelli & C. Real Estate S.p.A.; International Chairman of the Board of Auditors of Pirelli & C. Real Estate SGR S.p.A.; Accounting Standards Chairman of the Board of Auditors of Ratti S.p.A.; Pirelli & C. S.p.A. - Chairman of the Board of Auditors of Rottapharm S.p.A.; Chairman of the Board of Auditors of Verbund Italia S.p.A.; Summary Data Member of the Board of Auditors of ABB S.p.A.; Shareholders’ Member of the Board of Auditors of Alstom Power Italia S.p.A.; Resolutions Member of the Board of Auditors of Energia S.p.A.; Member of the Board of Auditors of Energia Holding S.p.A.; Member of the Board of Auditors of Energia Italiana S.p.A.; Member of the Board of Auditors of Intesa Fiduciaria Sim S.p.A.; Member of the Board of Auditors of Isringhausen S.p.A.; Member of the Board of Auditors of Sadelmi S.p.A.; Member of the Board of Auditors of Velluti Redaelli S.p.A.; Member of the Board of Auditors of Viscontea Coface S.p.A.. Paolo Francesco Lazzati Director of Comocalor S.p.A.; Director of Finaval S.p.A.; Director of Fondazione Giangiacomo Feltrinelli; Member of the Board of Auditors of Camfin S.p.A.; Member of the Board of Auditors of CORECOM; Member of the Board of Auditors of Credito Artigiano S.p.A.; Member of the Board of Auditors of Dear Cinestudi S.p.A.; Member of the Board of Auditors of Ecla S.p.A.; Member of the Board of Auditors of Erogasmet S.p.A.; Member of the Board of Auditors of Fratelli Cerruti S.a.p.a.; Member of the Board of Auditors of Free Sim S.p.A.; Member of the Board of Auditors of Giangiacomo Feltrinelli Editore S.p.A.; Member of the Board of Auditors of Kosaido Milano S.p.A.; Member of the Board of Auditors of Julius Baer Creval Private Banking S.p.A.; Member of the Board of Auditors of Imation S.p.A.; Member of the Board of Auditors of Istituto Centrale delle Banche Popolari Italiane S.p.A.; Member of the Board of Auditors of Librerie Feltrinelli S.p.A.; Member of the Board of Auditors of Lanificio Fratelli Cerruti S.p.A.; Member of the Board of Auditors of Pirelli & C. Real Estate SGR S.p.A..
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Introduction PROCEDURE FOR COMPLIANCE The Group WITH THE REQUIREMENTS OF ARTICLE 150.1 Energy Cables and Systems Sector OF LEGISLATIVE DECREE 58/1998 Telecom Cables and Systems Sector Premise Tyres Sector Real Estate Sector According to Article 150.1 of Legislative Decree 58/1998 (hereinafter “Consolidated Law on Pirelli & C. Ambiente Financial Intermediation”) “the directors shall promptly inform the Board of Statutory Auditors, Information Systems in the manner laid down in the bylaws and at least every three months, of the activities carried out and the transactions having a significant impact on the company’s profitability, financial Health, Safety and the position or assets and liabilities effected by the company or its subsidiaries; in particular, they Environment shall report on any transaction in which they have an interest on their own behalf or on behalf Human Resources of third parties, or which is influenced by the party exercising management and coordination Proforma data activities”1. Related Party Pursuant to the above-mentioned provision and in the light of Consob’s communications Disclosures regarding corporate controls2, this procedure defines the persons and transactions involved in Equity Investments the flow of information directed to the Board of Auditors of Pirelli & C. S.p.A. (hereinafter held by Directors, “Pirelli” or “the Company”) and the phases and timetable of that flow. In particular, the Statutory Auditor and procedure defines: General Managers 1. the method, frequency and content of information; Stock Option Plans 2. the collection of the information. Corporate Governance This procedure thus aims, in the first place, to provide the Board of Statutory Auditors with International information serving for the performance of the oversight activity entrusted to it by the Accounting Standards Consolidated Law on Financial Intermediation (Article 149). Pirelli & C. S.p.A. - Secondly, this procedure implements corporate governance instruments that put into practice Summary Data the recommendations contained in the Self-Regulatory Code of Conduct drawn up by the Shareholders’ Committee for the Corporate Governance of Listed Companies, which Pirelli has adopted from Resolutions the time it was issued. In particular, by enhancing the transparency of the Company’s operations, it enables each director to participate in its management in a more knowledgeable and informed manner. Moreover, the procedure activates flows of information between directors exercising delegated powers and the Board, in accordance with the recommendations of the Self-Regulatory Code of Conduct, with a view both to sanctioning the “centrality” of the Board in its entirety and strengthening the functions of internal control.
Method, frequency and content of information
The Board of Directors, possibly by means of delegated organs, every three months shall send the Board of Auditors a specific written report on: a) the activity carried out; b) transactions having a significant impact on the Company’s profitability, financial position or assets and liabilities;
1 This provision is implemented by Article 11.3 of the Bylaws of Pirelli & C. S.p.A.: “The Board of Directors and the Board of Statutory Auditors are kept informed, also by the delegated bodies, about the activities carried out, the general performance of operations, the future outlook and the most important economic, financial and equity transactions carried out by the Company and its subsidiaries; in particular, the delegated bodies refer about transactions in which they have an interest, on their own behalf or on behalf of third parties, or transactions that are influenced by the party, if any, exercising management and coordination activities. Communication is given on a timely basis and, in any case, at least quarterly, at meetings of the Board of Directors and Executive Committee, if appointed, or by written communication.” 2 Currently, Consob Communications 97001574 of 20 February 1997 and 1025564 of 6 April 2001; see also Consob Communication 2064231 of 30 September 2002 concerning the definition of the notion of “related parties”.
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Introduction c) transactions potentially involving a conflict of interest, that is to say: c1) intra-group transactions; The Group c2) transactions with related parties other than intra-group transactions; Energy Cables and d) atypical or unusual transactions and any other activity or transaction which it is considered Systems Sector appropriate to report to the Board of Auditors. Telecom Cables and The information supplied shall refer to the activity performed and the transactions effected in Systems Sector the period of time following that covered by the previous report. Tyres Sector The report in question shall be transmitted simultaneously to all the directors and to the Board Real Estate Sector of Statutory Auditors. Pirelli & C. Ambiente Information Systems 1. Activity performed Health, Safety and the Environment The information shall regard executive activities and the developments of transactions already Human Resources approved by the Board of Directors, as well as the activities of the committees (Committee for Proforma data Internal Control and Corporate Governance, Committee for Remuneration and other internal committees); in particular, it shall report on the activities that the executive directors have Related Party performed, by means of the structures of the Company and its subsidiaries or otherwise, in the Disclosures exercise of the powers delegated to them, including the initiatives taken and the projects begun. Equity Investments held by Directors, Statutory Auditor and 2. Transactions having a significant impact on profitability, financial position or General Managers assets and liabilities Stock Option Plans Corporate Governance The information shall concern transactions having a significant impact on the Company’s International profitability, financial position or assets and liabilities and shall detail, in particular, their Accounting Standards strategic aims, consistency with the budget and industrial plan, manner of execution (including Pirelli & C. S.p.A. - the economic and other terms and conditions) and developments, as well as their possible Summary Data consequences and implications for the activity of the Pirelli Group. For the purposes of this procedure, in addition to transactions reserved to the Board of Shareholders’ Directors pursuant to Article 2381 of the Civil Code and the Bylaws, the following shall be Resolutions considered transactions having a significant impact on profitability, financial position or assets and liabilities: 1) issues of financial instruments for a total value of more than Euros 100 million; 2) the provision of real or personal guarantees in the interest of subsidiaries (or in the interest of Pirelli in the case of real guarantees) against obligations of an amount exceeding Euros 25 million; 3) the granting of loans or guarantees to the benefit or in the interest of third parties for amounts exceeding Euros 10 million; 4) the granting of loans to the benefit of subsidiaries, investments and disinvestments, including those involving real estate, and acquisitions and disposals of shareholdings, businesses or branches of businesses, tangible fixed assets or other assets for amounts exceeding Euros 100 million. 5) mergers or spin-offs in which subsidiaries participate where at least one of the applicable parameters below is equal to at least 15%: a. total assets of the merged company or activities to be spun off/total assets of the Company (data from the consolidated accounts); b. results before tax and non-recurring income and expense of the merged company or of the activities to be spun off/results before tax and non-recurring income and expense of the Company (data from the consolidated accounts); c. total net worth of the merged company or the branch of business to be spun off/total net worth of the Company (data from the consolidated accounts).
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Introduction Mergers and amalgamations between listed companies, amalgamations between a listed company and an unlisted company and mergers of a listed company into an unlisted The Group company shall for the purposes of this procedure always be considered transactions having Energy Cables and a significant impact on the Company’s profitability, financial position or assets and liabilities. Systems Sector Telecom Cables and The information shall also regard transactions which, although individually below the Systems Sector quantitative thresholds indicated above or those that determine the exclusive responsibility of Tyres Sector the Board of Directors, are interconnected within one and the same strategic or executive Real Estate Sector structure and therefore, when considered as a whole, exceed the threshold of significance. Pirelli & C. Ambiente Information Systems 3. Transactions potentially involving a conflict of interest Health, Safety and the Environment 3a) Intra-group transactions Human Resources Proforma data The information on intra-group transactions shall describe their underlying interest and logic in the group context and the manner of their execution (including the economic and other terms Related Party and conditions), with particular regard to the valuation procedures adopted. Disclosures Specific details shall be given of transactions whose value exceeds Euros 50 million, or less if Equity Investments not concluded at arm’s length conditions3.Details shall also be given of transactions which, held by Directors, although individually below the quantitative threshold indicated above, are interconnected Statutory Auditor and within one and the same strategic or executive structure and therefore, when considered as a General Managers whole, exceed it. Stock Option Plans For the purposes of this procedure, intra-group transactions4 shall be taken to mean Corporate Governance transactions effected by Pirelli or by subsidiaries of Pirelli with: International a) companies that directly or indirectly, or by means of a trust company or third parties, Accounting Standards control Pirelli pursuant to Article 2359, first and second paragraphs, of the Civil Code and Pirelli & C. S.p.A. - Article 93 of the Consolidated Law on Financial Intermediation; Summary Data b) companies that directly or indirectly, or by means of a trust company or third parties, are controlled by Pirelli pursuant to Article 2359, first and second paragraphs, of the Civil Code Shareholders’ and Article 93 of the Consolidated Law on Financial Intermediation; Resolutions c) companies that directly or indirectly, or by means of a trust company or third parties, are controlled by the same companies that control Pirelli pursuant to Article 2359, first and second paragraphs, of the Civil Code and Article 93 of the Consolidated Law on Financial Intermediation; d) companies related with Pirelli pursuant to Article 2359, third paragraph, of the Civil Code and those that exercise a significant influence on Pirelli. Such a relationship does not exist with the related company of a related company.
3b) Transactions with related parties other than intra-group transactions
The information on transactions with related parties other than intra-group transactions shall detail the underlying interest and describe the manner of their execution (including the economic and other terms and conditions), with particular regard to the valuation procedures adopted.
3 For the purposes of this procedure, transactions concluded at arm’s length conditions shall be taken to mean transactions concluded at the same conditions as those applied by the Company to whatsoever party. 4 The following shall be material for the purposes of this procedure: transfers, with or without a consideration, of personal or real property or of transferable economic rights, transactions involving the performance of work or services, the granting or obtaining of loans and guarantees, and cooperation agreements for the conduct and development of company business.
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5 Introduction For the purposes of this procedure, transactions with related parties shall be taken to mean transactions carried out by Pirelli or by its subsidiaries with parties directly or indirectly related The Group to Pirelli. Energy Cables and Systems Sector The following shall be considered parties directly related to Pirelli: a) natural persons who hold (directly or indirectly, or by means of a trust company or third Telecom Cables and Systems Sector parties) an interest equal to at least 10% of the share capital represented by ordinary shares of Pirelli; Tyres Sector b) natural persons who hold (directly or indirectly, or by means of a trust company or third Real Estate Sector parties) an equity interest smaller than the percentage indicated at point a) but who Pirelli & C. Ambiente nonetheless by virtue of shareholders’ agreements can, individually or jointly with the other Information Systems participants in the agreements, appoint the majority of the members of Pirelli’s Board of Directors; Health, Safety and the c) natural persons who hold (directly or indirectly, or by means of a trust company or third Environment parties) an equity interest smaller than the percentage indicated at point a) but who Human Resources nonetheless by virtue of shareholders’ agreements control, individually or jointly with the Proforma data other participants in the agreements, the majority of votes exercisable in Pirelli’s ordinary Related Party shareholders’ meeting; Disclosures d) Directors and members of the Board of Statutory Auditors of Pirelli; Equity Investments e) general managers, the secretary of the Board of Directors and the heads of business held by Directors, units/central functions/operating activities of Pirelli that report directly to the Chairman and Statutory Auditor and the Managing Directors (so-called first reports). General Managers The following shall be considered parties indirectly related to Pirelli: Stock Option Plans f) non legally separated spouses of persons referred to at points a) to e); Corporate Governance g) relatives by blood or affinity up to the second degree of kinship of persons referred to at points a) to e); International Accounting Standards h) companies in which persons referred to at points a) to g) hold directly or indirectly, or by means a of a trust company or third parties, an equity interest of at least 10% (in the case of Pirelli & C. S.p.A. - a listed company) or 20% (in the case of an unlisted company) of the share capital Summary Data represented by shares having voting rights in the ordinary shareholders’ meeting; Shareholders’ i) companies in which persons referred to at points a) to g) hold equity interests smaller than Resolutions percentages indicated at point h) but nonetheless by virtue of shareholders’ agreements can, individually or jointly with the other participants in the agreements, appoint the majority of the members of the company’s board of directors; j) companies in which persons referred to at points a) to g) hold equity interests smaller than the percentages indicated at point h) but nonetheless by virtue of shareholders’ agreements control, individually or jointly with the other participants in the agreements, the majority of the votes exercisable in the ordinary shareholders’ meeting of the company; k) companies in which persons referred to at points a) to g) have a strategic management role and subsidiaries of such companies; l) companies having a majority of directors in common with Pirelli. Parties related to Pirelli shall be as well considered direct or indirect participants in shareholders’ agreements referred to in Article 122.1 of Legislative Decree 58/1998 whose subject is the exercise of voting rights, if the shares covered by the agreement constitute a controlling interest. The information shall regard transactions having a value greater than Euros 500 thousand, or less if not concluded at arm’s length conditions, whether or not carried out by means of a third parties, with parties directly or indirectly related to Pirelli. Details must also be given of transactions which, although individually below the quantitative threshold indicated, are interconnected within one and the same strategic or executive structure and therefore, when considered as a whole, exceed it.
5 See preceding note.
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Introduction 4. Atypical or unusual transactions and other transactions The Group Information on atypical or unusual transactions, including those effected by subsidiaries, and on Energy Cables and every other activity or transactions about which it is considered appropriate to give information Systems Sector shall detail the underlying interest and describe the manner of their execution (including the Telecom Cables and economic and other terms and conditions), with particular regard to the valuation procedures Systems Sector adopted. Tyres Sector For the purposes of this procedure, atypical or unusual transactions shall be taken to mean those Real Estate Sector in which the object or nature of the transaction is extraneous to the normal course of business of the Company and those involving particular critical factors due to their characteristics and risks, Pirelli & C. Ambiente the nature of the counterpart or the time at which they are concluded 6. Information Systems Health, Safety and the Environment Procedure for collecting the information Human Resources Proforma data The Board of Directors shall report to the Board of Auditors by means of the delegated organs. To permit the specific report to be prepared, the information is to be transmitted to the Related Party Chairman and to the Managing Directors according to the procedure set out below. Disclosures Equity Investments 1. Information on the activity performed, on transactions having a significant held by Directors, impact on profitability, financial position or assets and liabilities, on intra-group Statutory Auditor and transactions and on atypical or unusual transactions General Managers Stock Option Plans General managers and the heads of business units/central functions/operating activities of Pirelli Corporate Governance that report directly to the Chairman and to the Managing Directors (so-called first reports) by International means of the General Directorate for Administration and Control shall send the Chairman and Accounting Standards the Managing Directors a specific note, on quarterly basis, on the activity performed during the Pirelli & C. S.p.A. - period by the structure concerned, with details of the transactions having a significant impact Summary Data on the Company’s profitability, financial position or assets and liabilities, of intra-group transactions of a value exceeding Euros 50 million, or less if not concluded at arm’s length Shareholders’ conditions, of atypical or unusual transactions, of executive activities and the developments of Resolutions transactions already approved by the Board of Directors, of the main activities carried out in the exercise of the powers delegated to them, including the most important projects begun and initiatives taken. Transactions which, although individually below the quantitative thresholds indicated above or those that determine the exclusive responsibility of the Board of Directors, are interconnected within one and the same strategic or executive structure and therefore, when considered as a whole, exceed the threshold of significance must also be reported7. The information on the activities of the Committee for Internal Control and Corporate Governance, the Committee for Remuneration and other internal committees shall be supplied by their respective chairmen.
2. Information on transactions with related parties other than intra-group transactions
The General Directorate for Administration and Control shall collect and transmit to the Chairman and to the Managing Directors, on the same quarterly basis of the preceding point 1, the declarations with which parties directly related to Pirelli report the transactions: • carried out, even by means of third parties, with Pirelli or subsidiaries of Pirelli, by themselves directly or through one of the persons referred to at the above paragraph 3.b,
6 Transactions carried out at the end or the beginning of the financial year. 7 In such case the transactions shall be material even where they are carried out in a span of time exceeding the three months covered by the report.
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Introduction from letter h) to letter l) by non legally separated spouses, by relatives by blood or affinity up to the second degree, having a value greater than Euros 500,000, or, if less, concluded not at The Group arm’s length conditions. Energy Cables and • In providing such information details must also be given of transactions which, although Systems Sector individually below the quantitative threshold indicated above, are mutually interconnected on Telecom Cables and the basis of a common relation and therefore, considered as a whole, exceed the Systems Sector aforementioned threshold8. Tyres Sector Real Estate Sector The General Directorate for Administration and Control shall also collect the declarations in which directly related parties (i) list the companies that by their means complete the case in Pirelli & C. Ambiente point as referred to the previous paragraph 3.b, from letter h) to letter k), as well as the Information Systems companies in which they are directors; (ii) update the above mentioned list. Health, Safety and the Environment The General Directorate for Administration and Control shall transmit the list of the parties Human Resources related to Pirelli as above identified, to the General Managers, the heads of Business Proforma data Units/Central Functions/Operating Activities of Pirelli that report directly to the Chairman and the Managing Directors (so called First Reports). Related Party Disclosures The First Reports quarterly inform the Chairman and the Managing Directors of the transactions Equity Investments carried out with Pirelli – or with its subsidiaries – by the indirectly related parties, as identified held by Directors, in the list provided by the General Directorate for Administration and Control, also by means of Statutory Auditor and third parties, having a value greater than Euros 500,000, and even if less, of those concluded not General Managers at arm’s length conditions. Stock Option Plans Corporate Governance International Rules of conduct for effecting transactions with related parties Accounting Standards Pirelli & C. S.p.A. - 1. Transactions with related parties, including intra-group transactions, except for typical or Summary Data usual transactions concluded at arm’s length conditions, must be approved in advance by the Board of Directors. Shareholders’ Resolutions 2. Typical or usual transactions shall be taken to mean those which, by their object or nature, are not extraneous to the normal course of business of the Company and those which do not involve particular critical factors due to their characteristics or to the risks related to the nature of the counterpart or to the time at which they are concluded. Transactions concluded at arm’s length conditions means transactions concluded at the same conditions as those applied by the Company to whatsoever party.
3. The Board of Directors shall receive adequate information on the nature of the relationship, the manner of execution of the transaction, the economic and other terms and conditions governing it, the valuation procedure adopted, the underlying interest and motivations, and the possible risks for the Company. Where the relationship is with a Director or with a party related by means of a Director, the Director concerned shall limit himself to providing clarifications and shall leave the meeting of the Board when the decision is to be taken.
4. Depending on the nature, value and other characteristics of the transaction, to guard against the transaction’s being carried out at unsuitable conditions the Board of Directors shall be
8 See preceding note.
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Introduction assisted by one or more experts, who shall express an opinion, according to the case, on the economic conditions and/or the legitimacy and/or the technical aspects of the transaction. The Group Energy Cables and 5. For transactions with related parties, including intra-group transactions, which are not Systems Sector submitted to the Board of Directors inasmuch as they are typical or usual concluded at arm’s Telecom Cables and length, the Directors having delegated powers or the managers responsible for carrying out Systems Sector the transaction, without detriment to compliance with the specific procedure pursuant to Tyres Sector Article 150.1 of the Consolidated Law on Financial Intermediation, shall collect and Real Estate Sector preserve, inter alia by type or group of transaction, adequate information on the nature of the relationship, the manner of execution of the transaction, the economic and other terms Pirelli & C. Ambiente and conditions governing it, the valuation procedure adopted, the underlying interest and Information Systems motivations, and the possible risks for the Company. For such transactions also, one or more Health, Safety and the experts may be appointed as provided above. Environment Human Resources 6. The experts are to be chosen from among persons of recognized professional experience Proforma data and competence in the matters concerned. Their independence and absence of conflicts of interest will be carefully evaluated. Related Party Disclosures Equity Investments held by Directors, Statutory Auditor and General Managers Stock Option Plans Corporate Governance International Accounting Standards Pirelli & C. S.p.A. - Summary Data Shareholders’ Resolutions
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Introduction PIRELLI & C. S.P.A.’S CODE OF CONDUCT The Group FOR INSIDER DEALING Energy Cables and Systems Sector (The provisions of the Code came into force on December 1, 2002) Telecom Cables and Systems Sector 1. Introduction Tyres Sector Real Estate Sector Further to the provisions of article 180, and subsequent articles, of Legislative Decree No. 58/1998 on the topic of misuse of privileged information, this Code of Conduct of Pirelli & C. Pirelli & C. Ambiente S.p.A. (the “Code”) is intended to regulate, with binding effect, the declaration and conduct Information Systems obligations inherent to Transactions carried out by Relevant Persons and the related disclosures Health, Safety and the to the market. Environment Human Resources Proforma data 2. Definitions Related Party For the purposes of this Code: Disclosures Equity Investments A. Relevant Persons: shall mean the Directors (executive and non-executive), the standing held by Directors, Statutory Auditors, the General Managers, the Secretary to the Board of Directors, the heads Statutory Auditor and of Departments as well as the head of Investor Relations. Furthermore, Relevant Person are General Managers also considered the heads of the following divisions: General Administration and Control Stock Option Plans Department, the General Finance Department, the Legal and Corporate Affairs Department, Corporate Governance the Legal Affairs Department – Industrial Sector, the External Communications Department International and the Audit Department shall be considered Relevant Persons, The heads of the following Accounting Standards departments of Pirelli & C. Real Estate S.p.A. shall also be considered Relevant Persons: the Pirelli & C. S.p.A. - Central Administration and Control Department, the General Finance Department and the Summary Data Central Legal and Corporate Affairs Department. Shareholders’ Each of the above-identified Relevant Persons may indicate other Relevant Persons in Resolutions relation to the activity they carry out or their assigned job, for an indefinite or limited period of time; immediate communication shall be made of such indications – and of the respective time limits, if any – to the person concerned and to the Authorized Person.
B. Financial Instruments: shall mean (i) negotiable financial instruments listed on the Italian and foreign regulated markets issued by Pirelli & C. S.p.A. and its subsidiaries, excluding non-convertible bonds; (ii) listed or unlisted financial instruments that give the right to subscribe to, purchase or sell the instruments referred to in (i), above, as well as the certificates representative of the instruments referred to in (i), above; (iii) derivative financial instruments and covered warrants whose underlying are the financial instruments referred to in (i), above, including those whose exercise involves the payment of a cash differential. The definition of Financial Instruments in (i), above, shall also include the subscriptions to real estate mutual investment funds promoted and managed by Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. in its capacity as a funds management company.
C. Transaction(s): shall mean any act that creates, modifies or extinguishes rights with respect to Financial Instruments, even if carried out within an individual investment portfolio management relationship. It shall also include the exercise of any stock options or option rights on Financial Instruments.
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Introduction D. Significant Transaction: shall mean every Transaction that, alone or in aggregate with other Transactions carried out in the preceding three months and not yet declared to the The Group Company, exceeds Euros 80,000. The notional value of derivative financial instruments or Energy Cables and covered warrants shall be calculated as the product of the number of shares on which the Systems Sector instrument is based and the official price of the underlying activity recorded on the day the Telecom Cables and transaction was concluded. Systems Sector Tyres Sector E. Authorized Person: shall be the Secretary to the Board of Directors of Pirelli & C. S.p.A., Real Estate Sector responsible for the receipt of declarations and administration of the information relating to Transactions carried out by Relevant Persons, who shall provide for the subsequent Pirelli & C. Ambiente disclosure to the market in accordance with the procedures provided by the Code. Information Systems Health, Safety and the Environment 3. Declaration Requirements of Relevant Persons Human Resources Proforma data Within the seventh calendar day after the end of each calendar quarter, Relevant Persons shall send to the Authorized Person the list of Transactions carried out in the quarter on Related Party Financial Instruments, whose total amounts is equal to or exceeds Euros 35,000. Disclosures In the event that a Significant Transaction was carried out, the Relevant Person shall declare Equity Investments this without delay to the Authorized Person, together with the list of Transactions carried held by Directors, out in the preceding three months and not yet declared to the Company. Statutory Auditor and Transactions carried out by the Relevant Person’s spouse, not legally separated, or minor General Managers children, or delegated to be carried out by nominees, trustees or subsidiaries shall also be Stock Option Plans subject to the declaration requirements. Corporate Governance The declaration to the Authorized Person shall be made using a form corresponding to the International model for submitting information established in the Instructions for the Regulations of Accounting Standards Markets Organized and Managed by Borsa Italiana S.p.A. for the disclosure of information. Pirelli & C. S.p.A. - Summary Data 4. Exemption from Transaction declaration requirements Shareholders’ Resolutions The Transactions carried out – directly or through nominees or trustees – between the Relevant Person and his or her spouse, not legally separated, or minor children, shall be excluded from the declaration requirements to the Authorized Person. Transactions involving the loan of securities in which the Relevant Person, directly or indirectly, his or her spouse, if not legally separated, or minor children, acts as the lender, and also Transactions creating liens or beneficial interests shall also be excluded.
5. Limitations on carrying out Transactions
Transactions carried out – directly or through nominees – by Relevant Persons, different from non-executive Directors and Statutory Auditors, shall be permitted only after the first release of final or preliminary economic-financial data for each quarter9 until the closing of next quarter. The non-executive Directors and Statutory Auditors shall abstain from carrying out Transactions from the day the Directors’ meeting called to examine the above-mentioned economic-financial data is convened, or from the time that they became acquainted with that data if earlier, until its release. Relevant Persons may carry out Transactions outside the allowed period only in the event of exceptional situations of personal necessity that are adequately justified by the person
9 Or, semester or year, in the case of exemption from the publication of the second and fourth quarter reports, respectively.
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Introduction concerned. The assessment of the existence of a situation of personal necessity shall be handed-out to the Chairman of the Board of Directors. The Group The limitations referred to in the first paragraph of this article shall not apply to the exercise Energy Cables and of stock options or option rights involving Financial Instruments and the consequent Systems Sector Transactions, provided that they are carried out at the same time the options or rights are Telecom Cables and exercised. Systems Sector The Board of Directors may identify additional periods or circumstances in which Tyres Sector Transactions are subject to limits and conditions and shall immediately inform the Real Estate Sector Authorized Person and Relevant Persons thereof. Pirelli & C. Ambiente Information Systems 6. Disclosure of transactions to the Market Health, Safety and the Environment The Authorized Person shall disclose the information received from Relevant Persons to the Human Resources market within the tenth trading day of the stock market after each calendar quarter by Proforma data means of the transmission of a specific communication to Borsa Italiana, in accordance with the procedures provided in the Regulation of Organized Markets and Managed by Borsa Related Party Italiana and in the related Instructions. Disclosures Significant Transactions shall be disclosed to the market without delay, in the manner Equity Investments specified in the previous paragraph. held by Directors, Statutory Auditor and General Managers 7. Sanctions Stock Option Plans Corporate Governance With the understanding that Pirelli & C. S.p.A. has the right to seek compensation for any International damages and/or liability that may result from conduct in violation of the Code, the breach of Accounting Standards the declaration requirements or of the limitations on carrying out Transactions shall lead to: Pirelli & C. S.p.A. - (i) for employees, the imposition of disciplinary sanctions as provided by the laws in force Summary Data and by the applicable collective national labor contract; (ii) for any other collaborators, the termination – with or without notice – of the relationship; (iii) for the Directors and Shareholders’ statutory auditors, the Board of Directors may propose the revocation of their appointments Resolutions to the next shareholders’ meeting if in default.
8. Acceptance
Acceptance of this Code by each Relevant Person shall be made by signing the form attached as an Appendix hereto.
9. Updating of the Code and treatment of personal data
The Authorized Person shall be responsible for monitoring the application and effectiveness of the Code in respect of its intended purpose, and for the possible submission of any modifications or integrations to the Board of Directors. The Authorized Person shall keep the written declarations with which the Relevant Persons confirm their full knowledge and acceptance of the Code and grant their consent, pursuant to Legislative Decree No. 196/2003, for the treatment of the requested data.
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Introduction RULES OF PROCEEDING FOR THE The Group SHAREHOLDERS’ MEETING Energy Cables and Systems Sector Article 1 Telecom Cables and - These Rules shall apply to the Company’s ordinary and extraordinary shareholders’ meetings. Systems Sector Tyres Sector Article 2 Real Estate Sector - For matters not expressly governed by these Rules, the chairman of the shareholders’ meeting (hereinafter the “Chairman”) shall adopt the measures and solutions deemed most Pirelli & C. Ambiente appropriate, in conformity with applicable law and the bylaws, to ensure the regular conduct Information Systems of the proceedings. Health, Safety and the Environment Article 3 Human Resources - Persons may attend the shareholders’ meeting with the right to take part in the discussion and to vote who have entitlement pursuant to the applicable rules (hereinafter the “Participants”). Proforma data - Unless stated otherwise in the notice convening the meeting, verification of Participants’ Related Party identity and of their right to attend the meeting shall begin at the place where the meeting is Disclosures to be held at least one hour before the time fixed for the start of the meeting. Once the Equity Investments Participants have been identified and their right to attend verified under the supervision of held by Directors, the Chairman, the auxiliary staff provided by the Company shall issue badges for control Statutory Auditor and purposes and for the exercise of the right to vote. General Managers - Participants shall be guaranteed the possibility to follow and take part in the discussion and to Stock Option Plans exercise their right to vote using the technical methods established on each occasion by the Corporate Governance Chairman. - Participants who, after being admitted to the meeting, intend for any reason to leave the International Accounting Standards premises where it is being held must inform the auxiliary staff accordingly. Pirelli & C. S.p.A. - Article 4 Summary Data - Directors, managers and employees of the Company or Group companies and other persons whose Shareholders’ presence is deemed useful in relation to the matters to be discussed may attend the meeting. Resolutions - With the agreement of the Chairman, members of the professions, consultants, experts, financial analysts and journalists, accredited meeting by meeting, may follow the proceedings and special areas may be made available to them for that purpose. - Persons accredited to follow the proceedings must report for identification by the Company’s appointees at the entrance of the premises where the meeting is to be held and collect a special badge to be exhibited upon request. Article 5 - In accordance with applicable law and the bylaws, it shall be the duty of the Chairman to direct the proceedings, ensuring the best conditions for the orderly and effective conduct of the meeting. - The Chairman may authorize the use of audio-visual recording and transmission equipment. Article 6 - The Chairman shall be assisted in conducting the meeting and preparing the minutes by a Secretary, where a notary public is not required. The Secretary or the notary public may in turn arrange to be assisted by fiduciaries. - The Chairman shall be assisted by scrutineers in conducting the voting procedures; he may use auxiliary staff to provide the necessary technical support and to maintain order. Article 7 - When the quorum of the shareholders’ meeting is not reached, after an appropriate period of time the Participants shall be informed of the fact and the discussion of the matters on the agenda shall be understood to be deferred until the next call of the meeting, if any.
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Introduction - During a meeting the Chairman may suspend the proceedings for up to three hours if he deems it desirable and the majority of the capital represented at the meeting does not object. The Group Energy Cables and Article 8 Systems Sector - The Chairman shall establish the order in which the items on the agenda are to be discussed, Telecom Cables and which may differ from that indicated in the notice convening the meeting. Systems Sector - The Chairman may provide for several items to be discussed together or for the discussion to Tyres Sector proceed item by item. Real Estate Sector - The Chairman and, at his invitation, persons attending the meeting pursuant to the first paragraph of Article 4 shall explain the items on the agenda. Pirelli & C. Ambiente Information Systems Article 9 Health, Safety and the - It shall be the duty of the Chairman to direct and moderate the discussion, ensure its Environment correctness and prevent disruption of the orderly conduct of the meeting. Human Resources - The Chairman, taking account of the subject matter and importance of the individual items on Proforma data the agenda, may establish at the start of the meeting the time allotted to each speaker, which must not be less than 15 minutes. Related Party - The Chairman shall call on Participants to comply with the time limits for speaking Disclosures established in advance and to keep to the matters stated in the agenda. In the event of an Equity Investments overrun and/or an abuse, the Chairman shall interrupt the speaker. held by Directors, Statutory Auditor and Article 10 General Managers - Persons who intend to speak must apply to the Chairman or the Secretary, indicating the Stock Option Plans subject they will address. Such requests may be submitted until the Chairman closes the Corporate Governance discussion on the subject to which they refer. International - Participants may ask to take the floor a second time during the same discussion, for not more Accounting Standards than five minutes, exclusively to respond to other speakers or to declare how they intend to Pirelli & C. S.p.A. - vote. Summary Data Article 11 Shareholders’ - The Board of Directors and the Participants may put forward, giving the reasons, proposals Resolutions for alternative or amended resolutions with respect to those originally put forward by the Board of Directors. The Chairman shall evaluate the compatibility of such proposals in relation to the agenda of the meeting.
Article 12 - The members of the Board of Directors and the Board of Auditors may intervene in the discussion; at the invitation of the Chairman, persons attending the meeting pursuant to the first paragraph of Article 4 may also take the floor, inter alia to respond to requests for clarification.
Article 13 - The Chairman shall take appropriate action to ensure orderly voting and provide for the poll on an item to be held immediately after the discussion thereof or at the end of the discussion of all the items on the agenda. - The Chairman shall establish how each poll is to be conducted and the procedures for recording and counting the votes cast and shall be responsible for verifying the results.
Article 14 - Upon completion of the voting and the counting of the votes with the assistance of the scrutineers and the Secretary, the results of the poll shall be announced.
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Introduction ABRIDGED FORM OF PIRELLI & C. SOCIETÀ PER The Group AZIONI SHAREHOLDERS AGREEMENT Energy Cables and Systems Sector 1. Type and objective of the agreement Telecom Cables and The purpose of the Pirelli & C. shareholders agreement is to ensure a stable shareholder base Systems Sector and a uniform strategy in the management of the company. Tyres Sector Real Estate Sector 2. Parties to the shareholders agreement and Pirelli & C. shares transferred to the agreement:
Pirelli & C. Ambiente % on total % on total Information Systems Number of shares shares ordinary conferred conferred shares issued Health, Safety and the Environment CAMFIN S.p.A. 983,205,991 40.65 18.98 FONDIARIA - SAI S.p.A. 223,543,498 9.24 4.32 Human Resources MEDIOBANCA S.p.A. 222,967,099 9.22 4.30 Proforma data EDIZIONE HOLDING S.p.A. 222,958,537 9.22 4.30 Related Party R.A.S. S.p.A. 222,958,537 9.22 4.30 Disclosures ASSICURAZIONI GENERALI S.p.A. (*) 222,958,531 9.22 4.30 Equity Investments BANCA INTESA S.p.A. 78,148,292 3.23 1.51 held by Directors, Statutory Auditor and CAPITALIA S.p.A. 78,148,292 3.23 1.51 General Managers RIZZOLI CORRIERE DELLA SERA MEDIAGROUP S.p.A. 73,950,048 3.06 1.43 Stock Option Plans Massimo MORATTI (**) 57,703,122 2.39 1.11 SINPAR HOLDING S.A. 32,048,563 1.32 0.62 Corporate Governance Total 2,418,590,510 100 46.68 International Accounting Standards (*) 57,400,000 shares through La Fédération Continentale Compagnie d'Assurances Sur La Vie S.A., 82,779,265 Pirelli & C. S.p.A. - shares through Ina Vita S.p.A. and 82,779,266 shares through Generali Vita S.p.A. Summary Data (**) Including 37,420,339 shares through CMC S.p.A. and 11,328,318 shares fiduciary owned by Istifid S.p.A. Shareholders’ Resolutions 3. The party, if any, which, through the agreement, can exercise control over the company There is no party which, through the agreement, can exercise control over Pirelli & C..
4. Restrictions on the sale of the shares transferred and on the subscription and the purchase of new shares The sale of the shares to third parties (and option rights in the event of a capital increase against payment) is prohibited. Shares can be sold freely and pre-emptively to subsidiaries, according to article 2359, paragraph 1, point 1 of the Italian Civil Code, and to the parent companies as well as other participants to the shareholders agreement. Each participant may buy or sell additional shares for an amount not in excess of the higher of 20% of the shares already transferred by the participant itself and 2% of the ordinary share capital issued; purchases of greater amounts are permitted only with the intent of reaching a holding equal to 5% of the ordinary share capital issued, on condition that the amount in excess of the above limits came under the shareholders agreement. CAMFIN S.p.A. is authorized to freely purchase additional Pirelli & C. shares; it can transfer shares to the shareholders agreement, but to the extent that, at any one time, the shares do not exceed 49,99% of total shares transferred by all the participants in the shareholders agreement. This has been decided so that a stable predominate position is not assumed in the shareholders agreement or a stable veto power is not exercised over common decisions. Except where the Pirelli & C. ordinary shares in the shareholders agreement correspond to the majority of the voting rights in the ordinary shareholders’ meetings, each participant (also through parent companies and/or subsidiaries) intending to purchase shares of that category
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Introduction shall inform the President in writing beforehand and the President shall inform the participant if, taking into account the laws in force concerning tender offers, the participant can proceed, The Group in whole or in part, with the proposed purchase. Energy Cables and Systems Sector 5. Availability of the shares Telecom Cables and The shares transferred shall remain at disposal of the participants in the shareholders Systems Sector agreement. Tyres Sector Real Estate Sector 6. Bodies governing the agreement, composition, meetings and powers The Body governing the agreement is the Shareholders Agreement Executive Committee. Pirelli & C. Ambiente The Shareholders Agreement Executive Committee shall consist of a president and vice- Information Systems president, in the form of the president and the longest serving vice-president of Pirelli & C., and Health, Safety and the by a member representing each participant unless a participant has deposited more than 10% of Environment ordinary share capital, in which case another member may be designated: for this purpose, in Human Resources the event the shareholders agreement is composed of several companies related by a controlling Proforma data relationship or belonging to the same parent company, their aggregate shall be considered for this purpose as one sole participant in the shareholders agreement. Related Party The Shareholders Agreement Executive Committee shall be convened to evaluate the proposals Disclosures to be submitted to the shareholders’ meetings, for the possible earlier termination of the Equity Investments agreement and for the admission of new participants. The Shareholders Agreement Executive held by Directors, Committee shall also meet at least twice a year to examine the semiannual performance, the Statutory Auditor and annual results, the general guidelines for the company’s development, the investment policy and General Managers proposed significant divestitures and more in general, all the relevant matters of discussion by Stock Option Plans both the ordinary and extraordinary sessions of the shareholders’ meetings. Corporate Governance International 7. Matters covered by the Agreement Accounting Standards Those contemplated in points 4 and 6 above. Pirelli & C. S.p.A. - Summary Data 8. Majorities needed to reach decisions regarding the issues governed by the Agreement The Shareholders Agreement Executive Committee approves its resolutions with the favorable Shareholders’ vote of the majority of the shares transferred; the Shareholders Agreement Executive Resolutions Committee can designate a trusted person to represent the shares in the shareholders agreement at the shareholders’ meetings in order to vote according to its instructions. Whenever the decisions of the Shareholders Agreement Executive Committee are not voted unanimously, the dissenting participant shall have the right to freely vote at the shareholders’ meeting.
9. Term, renewal and cancellation of the agreement The agreement shall be valid until April 15, 2007 and shall be tacitly renewed for a period of three years except for withdrawal, which can be exercised between December 15 and January 15 prior to the expiration date. In case of withdrawal, the shares transferred by the withdrawing party shall be automatically offered pro quota to the other participants. The agreement shall remain in force, whenever it is possible, at every expiration date, to renew the agreement for a percentage of Pirelli & C.’s subscribed ordinary share capital of not less than 33%.
10. Penalties for breach of the commitments contained in the agreement They are not envisaged by the agreement.
11. Registration of the agreement at the Company Registry The agreement is registered at the office of the Milan Companies Registry.
Milan, March 17, 2005
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Introduction INTERNATIONAL ACCOUNTING STANDARDS The Group Energy Cables and Evolution of the benchmark regulatory framework Systems Sector Telecom Cables and The guidelines and the benchmark regulatory framework applicable to companies listed within Systems Sector the European Union regarding the transition to IAS/IFRS are: Tyres Sector Real Estate Sector • the adoption of Regulation No. 1606 issued by the European Parliament and by the Council of the European Union in July 2002 which provides for the mandatory application of IAS/IFRS, Pirelli & C. Ambiente beginning from 2005, for the consolidated financial statements of companies listed in Information Systems regulated markets of the European Union; moreover, this Regulation accorded to the Member Health, Safety and the States the authority to permit or to require the application of IAS/IFRS also for the Environment preparation of the annual statutory accounts of listed companies and the annual statutory Human Resources accounts and consolidated financial statements of unlisted companies; Proforma data • the European Commission’s adoption of Regulation No. 1725 dated September 29, 2003 which Related Party approved the international accounting standards, and related interpretations, existing at Disclosures September 14, 2002; IAS 32 and IAS 39, relating to the disclosure and measurement of Equity Investments financial instruments, respectively, and the related interpretations (SIC 5, 16 and 17) were held by Directors, excluded from that approval process; Statutory Auditor and General Managers • the issue, by Italian legislators, of Law No. 306 dated October 31, 2003 (2003 EU Law) by Stock Option Plans which the Italian legislators exercised (Art. 25) the option permitted by the above-cited EU Corporate Governance Regulation No. 1606/2002, and, accordingly, delegating the Government to adopt one or more International legislative decrees implementing the authority provided by the above-mentioned EU Accounting Standards Regulation within one year of the law coming into force (i.e. within November 30, 2004). Pirelli & C. S.p.A. - On November 26, 2004, the Council of Ministers approved the draft of the implementing Summary Data decree provided by Art. 25 of the above-cited Law 306/2003. That document (which was approved by the competent Parliamentary Commissions in the first half of February 2005) Shareholders’ Resolutions provides that listed companies required by EU Regulation No. 1606/2002 to prepare their consolidated financial statements in accordance with IAS/IFRS may, from 2005, also draw up their annual statutory financial statements in accordance with those standards (obligatory from 2006). The possibility to apply IAS/IFRS is also conceded to the unlisted subsidiaries of listed companies;
• the recommendations of CESR (Committee of European Securities Regulators) published on December 30, 2003 and containing guidelines for companies listed within the EU regarding the transition to IAS/IFRS;
• the European Commission’s adoption of Regulations No. 707 dated April 6, 2004, which approved IFRS 1 “First-time adoption of International Financial Reporting Standards”, No. 2086 dated November 19, 2004, which approved, with certain limitations, IAS 39, and No. 2236, No. 2237 and No. 2238 dated December 29, 2004 which approved IAS 32 and the other accounting standards reviewed by the IASB in December 2003 and March 2004, the new IFRSs issued in March 2004 (with the exception of IFRS 2, approved by the European Commission with Regulation No. 211 dated February 4, 2005), and the interpretation document IFRIC 1 “Changes in Existing Decommissioning, Restoration and Similar Liabilities”, thereby achieving a stable system of accounting standards. However, the version of IAS 39 approved by the EU in the above-cited Regulation No. 2086 differs from the text approved by the IASB with regard to certain aspects of the valuation of liabilities at fair value and of the macro-hedging of the interest rate risk associated with portfolios of assets and liabilities.
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Introduction Pirelli & C. Group’s process of conversion to IAS/IFRS The Group During 2003, the Pirelli Group commenced a program for the adoption of IAS/IFRS which Energy Cables and required the establishment of a working group for the various areas of the financial statements, Systems Sector with the task of identifying the changes to and the integrations with Group accounting Telecom Cables and principles, highlighting the differences with the principles currently applied and the principal Systems Sector implications on the information systems deriving from the adoption of the new standards. Tyres Sector Furthermore, a group technical disclosure and employee training program was instituted to Real Estate Sector share the changes deriving from the new international standards, their operational implications and proposed solutions. Pirelli & C. Ambiente Information Systems The restatement of the consolidated financial statements at December 31, 2004 according to Health, Safety and the IAS/IFRS is currently in progress (for comparative purposes only). Environment The impacts on opening shareholders’ equity at January 1, 2004 (date of transition) and on the Human Resources 2004 result will be published with the data on the first quarter of 2005, which will be drawn up Proforma data by applying IAS/IFRS for the valuation and measurement of the accounting values. Among the options provided by IAS/IFRS, the Pirelli & C. Group took the following decisions: Related Party Disclosures Equity Investments a) principal optional exemptions provided by IFRS 1 upon first-time application of held by Directors, IAS/IFRS Statutory Auditor and • business combinations: should be accounted for by applying the purchase method General Managers provided by IFRS 3. For purposes of the first-time adoption of IAS/IFRS, IFRS 1 allows a Stock Option Plans company/group not to apply IFRS 3 retrospectively to any business combinations which Corporate Governance occurred before the date of transition to IAS/IFRS (January 1, 2004). However, if any International business combination which occurred before the date of transition is restated to comply Accounting Standards with IFRS 3, all subsequent business combinations should be restated in accordance with Pirelli & C. S.p.A. - the purchase method set out in IFRS 3. The Pirelli & C. Group has chosen to adopt IFRS 3 Summary Data prospectively beginning from January 1, 2004; Shareholders’ • financial instruments: IFRS 1 allows a company/group not to apply IAS 39 (“Financial Resolutions Instruments: Recognition and Measurement”) and IAS 32 (“Financial Instruments: Disclosures and Presentation”) in the presentation of the information of the comparative period (2004) in the first IFRS financial statements (December 31, 2005). The Pirelli & C. Group has chosen to take advantage of this exemption;
• employee benefits: a company/group can choose not to apply the “corridor” approach retrospectively, that is, it can choose to completely recognize the accumulated actuarial gains and losses at the date of transition to IAS/IFRS, even if the “corridor” approach is used for actuarial gains and losses realized successively. The Pirelli & C. Group has chosen to take advantage of this optional exemption.
b) principal accounting treatment options provided by IAS/IFRS • statement of income presentation: in accordance with IAS 1, the statement of income may be presented with expenses classified by function or by nature. The Pirelli & C. Group has chosen to adopt the classification of expenses by nature, continuing with the current presentation; • valuation of property, plant and equipment and intangible assets: subsequent to initial recording at cost, IAS 16 and IAS 38 provide that such assets can be valued at cost (and depreciated/amortized) or at fair value. The Pirelli & C. Group has chosen to adopt the cost method, continuing with the current principles;
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Introduction • borrowing costs: for the purposes of recording borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, IAS 23 The Group provides that an entity may apply the benchmark accounting treatment, which provides for Energy Cables and the immediate expensing of borrowing costs, or the allowed alternative accounting Systems Sector treatment, which provides, in the presence of certain conditions, for the capitalization of Telecom Cables and borrowing costs. The Pirelli & C. Group has chosen to record such borrowing costs using Systems Sector the allowed alternative accounting treatment, continuing with the current accounting Tyres Sector treatment; Real Estate Sector • valuation of interests in joint ventures in the consolidated financial statements: Pirelli & C. Ambiente in accordance with IAS 31, interests in joint ventures may be accounted for using the Information Systems equity method or, alternatively, using the proportionate consolidation method. The Pirelli Health, Safety and the & C. Group has chosen to adopt the equity method; Environment Human Resources • employee benefits: IAS 19 allows application of the “corridor” approach, which consists Proforma data in not recognizing in the statement of income the actuarial gains and losses relating to defined benefit pension plans until the accumulated unrecognized actuarial gains and losses Related Party exceed a “corridor” (corresponding to 10 percent of the greater of the present value of the Disclosures defined benefit obligations at that date or the fair value of any assets servicing the plan at Equity Investments that date). The portion of actuarial gains and losses in excess of the corridor is recognized held by Directors, over the expected average remaining working lives of the participating employees. The Statutory Auditor and Pirelli & C. Group has chosen to adopt the “corridor” approach; General Managers Stock Option Plans • government grants: in accordance with IAS 20, government grants may be recorded as Corporate Governance deferred income and recognized as income in the statement of income in proportion to the International depreciation of the asset for the purchase of which the grant was received (deferred Accounting Standards income method) or, alternatively, recorded directly as a deduction of the value of the Pirelli & C. S.p.A. - asset. The Pirelli & C. Group has chosen to adopt the deferred income method, continuing Summary Data with the current principles. Shareholders’ Resolutions Principal differences emerging from the application of IAS/IFRS for the Pirelli & C. Group
The principal differences emerging from the application of IAS/IFRS compared to Italian accounting principles are summarized as follows:
• goodwill and differences on consolidation: these items may no longer be amortized systematically in the statement of income but should be subject to a valuation, carried out at least annually, in order to identify any impairment in value (impairment test);
• employee benefits: in accordance with IAS 19, post-employment benefits – for example, pensions and provisions for employees’ leaving indemnity (TFR) and other long-term benefits – for example, long-service seniority benefits and deferred compensation should be subject to actuarial valuation to express the present value of the benefit, payable upon termination of employment, that employees have matured up to the balance sheet date; in particular, with reference to the above-described post-employment benefits alone, the Pirelli & C. Group has chosen to take advantage of the exemption provided by IFRS 1 which allows, upon transition to IAS/IFRS (January 1, 2004), complete recognition of the accumulated actuarial gains and losses at that date: for subsequent years, the Pirelli & C. Group has chosen to apply the “corridor” approach, which consists in recognizing in the statement of income, over the expected average remaining working lives of the participating employees, only the portion of the actuarial gains and losses in excess of the “corridor”;
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Introduction • stock options: IFRS 2 classifies stock options into two types which require two different types of accounting treatment: The Group - “equity-settled” stock options: this method is generally applied in the absence of put options Energy Cables and of the beneficiary with the issuer. Systems Sector The fair value of the option, determined at the grant date, is recognized as a cost over the Telecom Cables and period of the plan with a contra-entry to increase reserves in shareholders’ reserves. Systems Sector Tyres Sector - “cash-settled” stock options: this method is applied in the presence of put options by the Real Estate Sector beneficiary, combined with call options by the issuer, or in those cases where the beneficiary directly receives cash. the capital gain. Pirelli & C. Ambiente The fair value of the option, determined at the grant date, is recognized as a cost over the Information Systems period of the plan with a contra-entry to liabilities. The periodical charges of the costs are Health, Safety and the remeasured at each reporting date based upon the adjustment of the measurement of fair Environment value. Human Resources Proforma data • derivatives on investments: derivatives on investments, depending on the economic effects they involve, may be recorded at fair value in accordance with IAS 39, or in accordance with Related Party IAS 27 which provides for the increase in the value of the investment with a contra-entry to Disclosures the relative liability; Equity Investments held by Directors, • impairment of property, plant and equipment and intangible assets: IAS provide more Statutory Auditor and objective and detailed guidelines for the measurement of the impairment of property, plant General Managers and equipment and intangible assets; Stock Option Plans Corporate Governance • spare parts: in accordance with IAS, spare parts of significant value should be capitalized, International those of non-significant value should be expensed in the statement of income when the Accounting Standards expense is incurred; the value may not be recorded in inventories; Pirelli & C. S.p.A. - Summary Data • contingent assets: IAS clearly define the concept of contingent assets, establishing that they may not be recognized in the financial statements because that would involve the recognition Shareholders’ of income that may never be realized. When the realization of income becomes virtually Resolutions certain, then the related asset is not a contingent asset and its recognition is appropriate;
• intangible assets: certain types of costs, that can be capitalized under Italian accounting principles, do not meet the requisites for recognition under intangible assets according to IAS/IFRS (for example, formation costs, start-up costs, advertising costs, capital-related costs) or, however, more restrictive conditions must be met for their capitalization (development costs);
• extraordinary items: in accordance with IAS/IFRS extraordinary items may no longer be recorded separately in the statement of income but should be classified as ordinary items;
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Introduction The following principal differences emerging from the application of IAS 32 (“Financial Instruments: Disclosures and Presentation”) and IAS 39 (“Financial Instruments: Recognition The Group and Measurement”) are also summarized as follows: Energy Cables and Systems Sector • treasury shares: in accordance with IAS/IFRS, treasury shares may no longer be recorded as Telecom Cables and an asset but should be recorded as a reduction of shareholders’ equity (for the par value) and Systems Sector additional paid-in capital (for the excess amount); Tyres Sector Real Estate Sector • derivative financial instruments: in accordance with IAS/IFRS, all derivatives should be reflected in the financial statements at their fair value. The method of accounting for Pirelli & C. Ambiente derivative financial instruments varies based on their characteristics (hedging instruments and Information Systems non-hedging instruments); Health, Safety and the Environment • financial assets “available for sale”: the investments now included in financial assets Human Resources under fixed assets are classified in accordance with IAS/IFRS as financial assets “available for Proforma data sale”, and should be valued at fair value with a contra-entry to shareholders’ equity; Related Party • financial assets “held for trading”: securities held for trading are classified under IAS as Disclosures financial assets “held for trading”, and should be valued at fair value with a contra-entry to Equity Investments the statement of income. held by Directors, Statutory Auditor and General Managers Stock Option Plans Corporate Governance International Accounting Standards Pirelli & C. S.p.A. - Summary Data Shareholders’ Resolutions
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Introduction PIRELLI & C. S.P.A. - SUMMARY DATA The Group Energy Cables and (in millions of euros) Systems Sector Balance sheet 12/31/2004 12/31/2003 Telecom Cables and Intangible assets 9.6 12.3 Systems Sector Property, plant and equipment 55.9 56.4 Tyres Sector Financial assets 4,834.4 4,657.7 Real Estate Sector Net working capital 243.8 196.6 Pirelli & C. Ambiente 5,143.7 4,923.0 Information Systems Shareholders’ equity 3,571.0 3,355.1 Health, Safety and the Provisions 380.3 354.2 Environment Net financial (liquidity)/debt position 1,192.4 1,213.7 Human Resources 5,143.7 4,923.0 Proforma data Related Party Disclosures Equity and financial structure Equity Investments The above statement presents the equity and financial structure of the company. The most held by Directors, Statutory Auditor and significant changes in 2004 are commented below: General Managers • financial assets increased by Euros 176.7 million due to share capital increases and Stock Option Plans investments for future share capital increases of Eurostazioni S.p.A. (Euros 33.3 million), F.C. Corporate Governance Internazionale Milano S.p.A. (Euros 11.7 million), Eurofly Service S.p.A. (Euros 1.3 million) International and Pirelli & C. Ambiente S.p.A. (Euros 1.8 million), the purchase of 47,155,300 Telecom Italia Accounting Standards S.p.A. ordinary shares from the subsidiary Pirelli Finance (Luxembourg) S.A. (Euros 124 Pirelli & C. S.p.A. - million), the purchase on the market of 7,413,341 RCS Mediagroup S.p.A. ordinary shares Summary Data (Euros 32.6 million) and the purchase of 5,791,200 Pirelli & C. Ambiente Holding S.p.A. shares Shareholders’ (Euros 5.8 million). Resolutions Such increase was partly offset by the sale of 3,400,000 Pirelli & C. Real Estate S.p.A. shares (Euros 3.5 million), the sale of the entire investment in Banca Intesa S.p.A. (Euros 5.7 million) and the adjustment to investment holdings (Euros 25.5 million).
• net working capital increased by Euros 47.2 million. This increase principally refers to higher dividends receivable recorded in 2004 compared to the prior year (Euros 33.3 million) and the posting of receivables from and payables to the tax authorities and some Italian subsidiaries which have decided to adhere to the tax consolidation system (Euros 19.7 million).
• shareholders’ equity increased by Euros 215.9 million compared to the prior year, changes in shareholders’ equity are presented in the following table:
(in millions of euros) Shareholders’ equity at 12/31/2003 3,355.1 Dividends paid (108.6) Exercise of 2003 - 2006 warrants 174.9 Net income 149.6 Total change 215.9 Shareholders’ equity at 12/31/2004 3,571.0
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Introduction • the increase in provisions of Euros 26.1 million compared to December 31, 2003 is chiefly the result of the accrual of Euros 40 million made to the provision for risks and future expenses The Group in respect of the options granted to the shareholder banks of Olimpia S.p.A. and Hopa S.p.A. Energy Cables and under shareholders’ agreements. This increase was partly compensated by the utilization and Systems Sector release of provisions for a total of Euros 18.3 million. Telecom Cables and Systems Sector • net financial debt position went from Euros 1,213.7 million at December 31, 2003 to Tyres Sector Euros 1,192.4 million at December 31, 2004. A summary of the changes is detailed in the Real Estate Sector following table: Pirelli & C. Ambiente (in millions of euros) Information Systems Operating loss (24.3) Health, Safety and the Investment income (expenses) (15.3) Environment Others changes (2.6) Human Resources Free cash flow (42.2) Financial income (expenses) (48.9) Proforma data Dividends collected 142.6 Related Party Dividends paid (108.6) Disclosures Other changes 78.4 Equity Investments Total change 21.3 held by Directors, Statutory Auditor and General Managers Results of operations Stock Option Plans (in millions of euros) Corporate Governance Statement of Income 2004 2003 International Financial income (expenses) (49.7) (46.5) Accounting Standards Investment income 176.8 261.4 Pirelli & C. S.p.A. - Valuation adjustments to financial assets (27.1) (56.5) Summary Data Other operating income (expenses) (24.3) (19.1) Shareholders’ Income before extraordinary items and income taxes 75.7 139.3 Resolutions Extraordinary items 46.0 (20.6) Income taxes 27.9 19.1 Net income 149.6 137.8
The year 2004 ended with a net income of Euros 149.6 million compared to Euros 137.8 million in 2003. The decrease in the income before extraordinary items and income taxes (Euros 63.6 million) is mainly due to the reduction in investment income (Euros 84.6 million); account should also be taken of the fact that in 2003 the subsidiary Sipir Finance N.V. had distributed reserves of Euros 120 million. The decrease in income before extraordinary items and income taxes is offset by an increase in extraordinary items (Euros 66.6 million) and income taxes (Euros 8.8 million). Extraordinary items include the gain realized on the sale of 3,400,000 Pirelli & C. Real Estate S.p.A. shares (Euros 89.2 million) to third parties and the accrual to the provision for liabilities and expenses for the risks associated with the options granted to the shareholder banks of Olimpia S.p.A. and to Hopa under shareholders’ agreements (Euros 40 million). It should also be mentioned that extraordinary items in 2003 had included the costs for the Pirelli S.p.A. and Pirelli & C. Luxembourg S.p.A. merger (Euros 16.1 million). In 2004, Pirelli & C. S.p.A. exercised the option to file for consolidated taxation as head of the group, which led to posting of a net benefit in income taxes of Euros 19.7 million.
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Introduction SHAREHOLDERS’ RESOLUTIONS The Group Energy Cables and Systems Sector Appropriation of net income Telecom Cables and The year ended December 31, 2004 shows a net income of Euros 149,620,758. Systems Sector The Board of Directors proposes the distribution of dividends, before withholding taxes, of: Tyres Sector • Euros 0.0210 for each ordinary share Real Estate Sector • Euros 0.0364 for each savings share. Pirelli & C. Ambiente If in agreement with our proposal, we ask you to pass the following Information Systems Health, Safety and the resolution Environment Human Resources The shareholders’ meeting: Proforma data • having taken note of the Directors’ Report on Operations; • having taken note of the Board of Statutory Auditors’ Report; Related Party • having examined the financial statements at December 31, 2004 which show a net income of Disclosures Euros 149,620,758 Equity Investments held by Directors, resolves Statutory Auditor and General Managers a) to approve: Stock Option Plans - the Directors’ Report on Operations; Corporate Governance - the balance sheet, the statement of income, the notes to financial statements for the year International ended December 31, 2004 which show a net income of Euros 149,620,758 as presented by Accounting Standards the Board of Directors in their entirety and in the individual entries, with the proposed Pirelli & C. S.p.A. - accruals; Summary Data b) to appropriate the net income for the year of Euros 149,620,758 as follows: Shareholders’ Resolutions • 5 percent to the legal reserve Euros 7,481,038 • to the shareholders: Euros 0.0210 to 5,177,943,110 (*) ordinary shares, for a total Euros 108,736,805 Euros 0.0364 to 134,764,429 savings shares, for a total Euros 4,905,425 • to retained earnings Euros 28,497,490
(*) net of 2,617,500 treasury shares currently held by the Company
c) to authorize the Directors, in the event treasury shares are purchased before the ex dividend date in reference to point b) to appropriate the amount of the dividends to which such shares are entitled to retained earnings, and to charge the same caption for the balance of roundings which may arise at the time of the payment of the dividends.
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Introduction Appointment of the Board of Directors after establishing the number of its The Group members; determination of the compensation of the directors Energy Cables and Systems Sector Dear Shareholders, Telecom Cables and Systems Sector On March 22, 2005, all the members of the Board of Directors tendered their resignations from Tyres Sector office – which would have expired upon approval of the financial statements for the year ended Real Estate Sector December 31, 2005 – in order to immediately render applicable the mechanism of the so-called slates for the appointment of the members of the Board of Directors – introduced by the May Pirelli & C. Ambiente 11, 2004 shareholders’ meeting, and encourage – in line with international best practices – an Information Systems evermore increasing participation of all the shareholders in the life of the company and in the Health, Safety and the decisions capable of determining the success of the company. Environment The shareholders’ meeting is therefore asked to appoint the new Board of Directors after Human Resources establishing the number of its members. To this end, it should be recalled that art. 10 of the bylaws (presented at the end of this report) Proforma data states that the Board of Directors of the company should be composed of between 7 (seven) Related Party and 23 (twentythree) members and establishes the terms of office in three years (unless a Disclosures shorter period is fixed by the shareholders’ meeting), with the possibility of re-election. Equity Investments In short, it is recalled that, according to the same art. 10 of the bylaws, the appointment of the held by Directors, Board of Directors will take place on the basis of slates in which the candidates are listed by Statutory Auditor and consecutive number. These slates can be presented by the shareholders who, alone or together General Managers with other shareholders, hold, in total, shares representing at least 2 (two) percent of the shares Stock Option Plans with voting rights in the ordinary shareholders’ meeting, according to the manner and times Corporate Governance indicted in the cited art. 10 of the bylaws and also stated in the call to the shareholders’ International meeting. Accounting Standards In particular, the slate of candidates, also pursuant to the provisions of art. 7.1 of the Self-Regulatory Code of listed companies (presented at the end of this report), which the Pirelli & C. S.p.A. - Company has adopted, must be filed at the company’s registered office at least ten days before Summary Data the date fixed for the meeting in first call together with the statements whereby the single Shareholders’ candidates accept the nomination and attest, under their own personal responsibility, that no Resolutions circumstances exist for ineligibility or incompatibility, and that they have the requisites prescribed for the position. A description of the personal and professional résumé of each individual standing for election must be filed with the statements, with eventual indication of the eligibility of the person to be qualified as an independent candidate, in accordance with art. 3.1 of the cited Self-Regulatory Code of listed companies (also presented at the end of this report).
The shareholders’ meeting must also fix the compensation of the new directors.
Having said this, the Board of Directors, • having taken note of what is prescribed by the bylaws with regard to the composition and the manner of appointing the Board of Directors;
asks the shareholders’ meeting
• to determine the number of members of the Board of Directors, establishing the period of the term of office and the relative compensation; • to vote the slates of candidates for the post of Director of the Company that were put forward and made known according to the manner and time indicated in art. 10 of the bylaws.
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Art. 10 of the bylaws Introduction The company is managed by a Board of Directors composed of between seven and twenty-three members who shall remain in office The Group for three years (unless the meeting fixes a shorter term of office at the time of making the appointment) and may be re-elected. The shareholders’ meeting shall determine the number of members of the Board of Directors, a number that shall remain fixed until Energy Cables and another resolution is passed. Systems Sector The appointment of the Board of Directors shall be made on the grounds of slates put forward by the shareholders, according to the following paragraphs, in which the candidates are listed by consecutive number. Telecom Cables and The slates put forward by the shareholders, undersigned by the parties presenting them, must be filed at the company’s registered Systems Sector office and available to anyone on request at least ten days before the date fixed for the meeting in first call. Each shareholder may put forward or take part in putting forward only one slate and each candidate shall be presented on only one Tyres Sector slate, on penalty of ineligibility. Real Estate Sector All shareholders who, alone or together with other shareholders, represent at least 2 percent of the shares with voting rights in the ordinary shareholders’ meeting, have the right to put forward a slate, with the obligation of proving ownership of the number of Pirelli & C. Ambiente shares necessary to put forward the slates within two days prior to the shareholders’ meeting in first call. Statements must be filed together with the slates, within the terms indicated above, whereby the single candidates accept the Information Systems nomination and attest, under their own personal responsibility, that no circumstances exist for ineligibility or incompatibility, and Health, Safety and the that they have the requisites prescribed for the position. A description of the personal and professional résumé of each individual Environment standing for election must be filed with the statements, with eventual indication of the eligibility of the person to be qualified as an independent candidate. Human Resources Any slates put forward which do not comply with the aforesaid provisions shall be considered not to have been put forward. Anyone with voting rights may vote for only one slate. Proforma data The election of the Board of Directors is performed as follows: Related Party a) four fifths of the directors to be elected, with roundings, in the case of a fraction of a number to the lower unit, are taken from Disclosures the slate which has obtained the highest number of votes, in the consecutive order in which they are listed thereon; b) the remaining directors are taken from the other slates; to this end, the votes obtained by the slates themselves shall be divided Equity Investments successively for one, two, three, four – and so on – according to the number of directors to be elected. The quotients thus held by Directors, obtained will be consecutively applied to the candidates on each of these slates, in the respective order in which they appear Statutory Auditor and on the slate. The quotients thus assigned to the candidates of the various slates will be ranked in a single descending General Managers classification. Those with the highest quotients will be elected. Stock Option Plans When more than one candidate has obtained the same quotient, the candidate on the slate which has not yet elected any directors or which has elected the lowest number of directors will be elected. Corporate Governance If none of these slates has as yet elected a director or all the slates have elected the same number of directors, the candidate on the International slate which received the most votes shall be appointed. In the event of several slates obtaining the same number of votes, and again Accounting Standards with the same quotient, a new run-off vote will be cast by all the shareholders present at the meeting and the candidate who obtains the simple majority shall be elected. Pirelli & C. S.p.A. - For the appointment of the directors who, for whatsoever reason, were not appointed by the procedures described herein, the Summary Data meeting shall elect the directors by the majorities prescribed by law. If because one or more directors are not present during the year, the provisions of art. 2386 of the Italian Civil Code will apply. Shareholders’ The Board of Directors appoints a Chairman, where this has not already been done by the shareholders’ meeting, and, if necessary, Resolutions one or more Deputy Chairmen. In the event of the Chairman being absent, the chair shall be taken by a Deputy Chairman or a Managing Director, in that order; if there should happen to be two or more Deputy Chairmen or Managing Directors, the chair shall be taken respectively by the senior in age. The Board shall appoint a Secretary, who is not necessarily a member of the Board. Unless otherwise decided by the shareholders’ meeting, the directors are not bound over by the prohibition mentioned under art. 2390 of the Italian Civil Code.
Art. 3 of the Self-Regulatory Code of listed companies – Independent directors 3.1 A sufficient number of non-executive directors are independent, in the sense that they: a) do not have, directly, indirectly or on behalf of third parties, nor have they recently had, economic relationships with the company, its subsidiaries, the executive directors, or the shareholder or group of shareholders which control the company, of such significance as to influence their independence of opinion; b) do not hold, directly, indirectly or on behalf of third parties, equity stakes of such magnitude as to allow them to exercise control or significant influence over the company, nor do they belong to shareholders’ agreements for control of the company; c) are not close relatives of the executive directors of the company or of individuals who are in the situations indicated in letters a) and b), above.
Art. 7 of the Self-Regulatory Code of listed companies – Appointment of directors 7.1 The proposals for the appointment to the post of director, accompanied by exhaustive disclosure concerning the personal and professional characteristics of the candidates, with evidence of any eligibility of the candidates to qualify as independent in accordance with art. 3 of the Code, shall be filed at the registered offices - if possible - at least ten days prior to the date fixed for the shareholders’ meeting, or when the slates are filed, where provided.
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Introduction Determination of the compensation to be assigned to the members of the Supervisory The Group Panel appointed pursuant to Legislative Decree No. 231 dated June 8, 2001 Energy Cables and Systems Sector Dear Shareholders, Telecom Cables and Systems Sector Legislative Decree No. 231 dated June 8, 2001 (“Rules regarding the administrative liability of Tyres Sector legal entities, companies and associations with no juridical personality, according to Law No. Real Estate Sector 300, art. 11, dated September 29, 2000) introduced the possibility of directly recognizing companies liable for specific crimes against the public administration (corruption, extortion, Pirelli & C. Ambiente misappropriation, computer fraud, forgery of money, public instruments and revenues stamps, Information Systems in addition to corporate crimes, those directed to terrorism and those against the individual Health, Safety and the personality) committed by directors, employees and associates in the interests of the same Environment companies. Human Resources Companies can be excluded from such liability only if they can demonstrate that they have adopted organizational models suitable for preventing the committing of such crimes. Proforma data In view of the above, the Board of Directors of Pirelli & C. S.p.A., in its meeting of July 31, 2003, Related Party approved the “231 Organizational Model” and also set up a specific Supervisory Panel composed Disclosures of three members, specifically, an independent director, the head of the internal audit Equity Investments department and a member of the Board of statutory auditors. held by Directors, The Board of Directors also established that the term of office of the members of the Statutory Auditor and Supervisory Panel should coincide with that of the same Board of Directors. General Managers Since the Board of Directors will now be elected, the members of the Supervisory Panel should Stock Option Plans be re-appointed as well. Corporate Governance This will be dealt with by the Board of Directors that will be elected by the convening International shareholders’ meeting. Accounting Standards The Board believes it opportune – in line with what has already transpired in the past - to refer the determination of the compensation to be paid to each member of the Supervisory Panel Pirelli & C. S.p.A. - holding the office of statutory auditor and director, for the activities performed, to the same Summary Data shareholders’ meeting. Shareholders’ You are therefore asked to duly pass resolutions on the above compensation. Resolutions
Appointment of the audit firm for the audit of the statutory financial statements, the consolidated financial statements and the six-month reports for the years ending December 31, 2005, 2006 and 2007
Dear Shareholders,
With the release of the audit report on the financial statements for the year ended December 31, 2004, the audit appointment conferred by the shareholders’ meeting of May 13, 2002 to PricewaterhouseCoopers S.p.A. expires. Therefore, in accordance with Legislative Decree No. 58 of February 24, 1998, art. 159 (the so-called “Draghi Law”), it becomes necessary to appoint independent auditors to audit the statutory financial statements and the consolidated financial statements, and, in compliance with the Consob recommendation No. 97001574 of February 20, 1997, the interim six-month reports, for the years ending December 31, 2005, 2006 and 2007. To this end, a fee proposal has been obtained from PricewaterhouseCoopers S.p.A. relating to these same services, which has been prepared in accordance with the criteria established by Consob in its communication No. 96003556 of April 18, 1996.
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Introduction In view of the high professional standards demonstrated by PricewaterhouseCoopers S.p.A., as well as the considerable knowledge acquired by this audit firm on the dynamic evolution of the The Group Group, manifested during the course of these last few years, and also considering reasons of Energy Cables and opportunity and of an organizational nature, including the fact that the Group would incur higher Systems Sector internal costs should another audit firm be chosen, we propose that PricewaterhouseCoopers Telecom Cables and S.p.A. be confirmed as auditors for another three years (the last allowed by existing law). Systems Sector The fee proposal by PricewaterhouseCoopers S.p.A., as provided by the procedures adopted by Tyres Sector the company, was submitted for evaluation beforehand to the Committee for Internal Control Real Estate Sector and Corporate Governance which has expressed its favorable opinion. The same opinion was also expressed by the Board of statutory auditors. Pirelli & C. Ambiente Information Systems The costs and commitments in the proposal received for professional services are summarized Health, Safety and the in the following table: Environment Human Resources Commitments Hours Fee in euros Proforma data Full audit of statutory financial statements 690 64,000 Full audit of consolidated financial statements 1,850 176,000 Related Party Disclosures Limited review of six-month interim financial report 790 74,000 Control activities, pursuant to Leg. Decree 58/98, Equity Investments art. 155, paragraph 1, letter a) 270 21,000 held by Directors, Total 3,600 335,000 Statutory Auditor and General Managers The above fees have been calculated on the basis of the hourly rate which is valid until June 30, Stock Option Plans 2006. On July 1, 2006, and every year thereafter on July 1, the fees will be adjusted on the basis Corporate Governance of the total change in the ISTAT cost-of-living index. International These fees do not include out-of-pocket expenses and secretarial charges, which will be Accounting Standards invoiced on the basis of the actual costs incurred, or the supervisory fee on behalf of Consob. Pirelli & C. S.p.A. - Summary Data We would also like to inform you that the major subsidiaries will confirm the same audit firm of PricewaterhouseCoopers S.p.A. for the audit of their financial statements and will directly bear Shareholders’ the costs of the audits which will amount to about Euros 1,558,000 for the Italian subsidiaries Resolutions and about Euros 2,202,000 for the foreign subsidiaries.
If in agreement with our proposals, we ask you to pass the following
RESOLUTION “The shareholders’ meeting: - having taken note of the proposal by the Board of Directors - having taken note of the favorable opinion of the Board of statutory auditors to the proposal of PricewaterhouseCoopers S.p.A.,
RESOLVES
- to appoint PricewaterhouseCoopers S.p.A., in accordance with Legislative Decree No. 58 of February 24, 1998, article, 159, and taking into account Consob recommendation No. 97001574 of February 20, 1997, to audit the statutory financial statements and the consolidated financial statements and the six-months reports for the years ending December 31, 2005, 2006 and 2007; - to establish, on the basis of the fee proposal prepared in accordance with the criteria of Consob resolution No. 96003556 of April 18, 1996, the annual fee in Euros 335,000 payable to the above audit firm, of which Euros 64,000 is for the statutory financial statements, Euros 176,000 for the consolidated financial statements of the Group, Euros 74,000 for the limited review of the interim six-month financial statements and Euros 21,000 for the controls required by Legislative Decree No. 58 dated February 24, 1998, art. 155, paragraph 1, letter a).
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Introduction The above fees have been calculated on the basis of the hourly rate which is valid until June 30, 2006. On July 1, 2006, and every year thereafter on July 1, the fees will be adjusted on the The Group basis of the total change in the ISTAT cost-of-living index. Energy Cables and These fees do not include out-of-pocket expenses and secretarial charges, which will be Systems Sector invoiced on the basis of the actual costs incurred, or the supervisory fee on behalf of Consob. Telecom Cables and Furthermore, the fees will be adjusted when exceptional or unforeseen circumstances arise, Systems Sector including significant changes in the structure and business of the Company which may require Tyres Sector more or less resources and time to carry out the audit work”. Real Estate Sector Pirelli & C. Ambiente Information Systems Health, Safety and the Environment Human Resources Proforma data Proposal for the purchase and disposition procedures of treasury shares Related Party Disclosures Dear Shareholders, Equity Investments held by Directors, In the resolution passed on May 11, 2004, you authorized the purchase of treasury shares Statutory Auditor and (ordinary and savings shares) up to the maximum amount allowed by art. 2357 of the Italian General Managers Civil Code, equal to 10 percent of share capital pro-tempore and for a period of 18 months from Stock Option Plans the date of the resolution. Corporate Governance This authorization will expire on November 10, 2005. International Accounting Standards With regard to the purchase of treasury shares, which we submit for your approval, the same Pirelli & C. S.p.A. - opportunities now exist which persuaded the directors to propose to you the May 2004 Summary Data resolution, that being the convenience of taking action (in accordance with the law and Shareholders’ ensuring equal treatment to the shareholders), in relation to contingent market situations, to act Resolutions in a manner which favors, in the presence of particular circumstances, normal trading in order to safeguard the interests of all the shareholders.
We therefore believe it useful to propose, with today’s shareholders’ meeting and to avoid convening a specific meeting close to the above expiration date, to proceed to issue a new authorization, which is completely the same as the existing one, canceling the authorization not used; the related procedures for the purchase and sale, as well as the procedures for the sale of the treasury shares already held in portfolio are contained in the following proposed resolution.
If in agreement, we ask you to pass the following
RESOLUTION “The shareholders’ meeting:
• having taken note of the proposal by the directors;
• having taken note of the provisions of art. 2357 and 2357-ter of the Italian Civil Code;
• having taken note that, as of today, the company holds 2,617,500 ordinary shares, equal to approximately 0.05% of share capital amounting to Euros 2,763,969,020.28;
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Introduction RESOLVES The Group a) to cancel the resolutions passed by the shareholders’ meeting of May 11, 2004 authorizing Energy Cables and the purchase of treasury shares and the disposition of the same, as not used; Systems Sector Telecom Cables and b) to authorize the purchase of treasury shares (ordinary and savings shares) of par value Systems Sector Euros 0.52 each within the maximum limit established by art. 2357 of the Italian Civil Code, Tyres Sector equal to 10 percent of share capital pro-tempore, establishing that: Real Estate Sector - the purchase can be made at one or more times within 18 months of the date of this resolution; Pirelli & C. Ambiente - the purchase shall be carried out according to the manner agreed with the company Information Systems managing the market so that equal treatment among shareholders can be ensured, in Health, Safety and the accordance with Legislative Decree No. 58 of February 24, 1998, art. 132, or – taking into Environment account the specific exemption provided by paragraph 3 of the same art. 132 – according Human Resources to any other manner allowed by law and existing regulations; Proforma data - the purchase price of each share shall not be either lower or higher, in both cases, than a maximum of 15 percent of the average reference price recorded by the Italian stock Related Party exchange in the three trading sessions prior to each single transaction; Disclosures - the purchase shall be made by using retained earnings and the available reserves as shown Equity Investments in the latest approved financial statements, setting up a reserve for treasury shares in the held by Directors, manner and within the limits established by law; Statutory Auditor and General Managers c) to authorize the Board – and on its behalf the Chairman, the Deputy Chairmen and the Stock Option Plans Managing Directors, separately – to dispose, without any time limit, the treasury shares Corporate Governance already held or purchased according to the resolution referring to point b) even before International having completed all the purchases; the sale can occur at one or more times; the shares shall Accounting Standards be sold through a sale or exchange (also through a public offer, to the shareholders, to Pirelli & C. S.p.A. - employees, and/or directors and/or associates - also as part of any stock option plans); in the Summary Data event of sale, the price shall not be less than the lower of (a) the average official market prices of the share in the 15 trading days preceding each single sale transaction and (b) the Shareholders’ value obtained by applying a discount of not more than 5 percent to the minimum price Resolutions recorded by the Pirelli & C. ordinary or savings shares on the day of each sale transaction, or, however, at the last price available; such price limits shall not be applied when the sale of the shares takes place with employees and/or directors and/or associates of the company, and companies which it controls, under possible stock option plans; the shares can also be sold by being attached to bonds or warrants for their exercise;
d) to confer to the Board, and on its behalf the Chairman, Deputy Chairmen and Managing Directors, separately, any and all powers necessary to make purchases and sales and in any case to carry out the preceding resolutions, also through those holding power of attorney, fulfilling that eventually required by the appropriate authorities”.
The Board of Directors Milan, March 22, 2005
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Consolidated financial statements at December 31, 2004
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Consolidated financial statements at December 31, 2004 Consolidated balance sheets
Assets (in thousands of euros) 12/31/2004 12/31/2003 A) Capital subscription rights Portion not called-up 458 - B) Fixed assets I) Intangible assets Formation costs 13,993 19,775 Patents and design patent rights 2,293 1,708 Concession, licenses, trademarks and similar rights 24,756 24,844 Goodwill 39,370 33,132 Difference on consolidation 392,448 421,376 Intangible assets in progress and payments on account 2,012 2,096 Other intangible assets 55,386 53,577 Total intangible assets 530,258 556,508 II) Property, plant and equipment Land and buildings 644,147 682,529 Plant and machinery 1,088,544 1,071,596 Industrial and commercial equipment 119,909 127,290 Other property, plant and equipment 61,103 86,766 Assets under construction and advances to suppliers 151,508 186,414 Total property, plant and equipment 2,065,211 2,154,595 III) Financial assets Investments in: a) Unconsolidated subsidiaries - 19,381 b) Jointly controlled subsidiaries 2,594,041 2,588,671 c) Associated companies 265,674 187,809 d) Other companies 516,764 313,069 Financial receivables: b.2) Associated companies beyond 1 year 209,980 219,641 c.1) Other companies due within 1 year 2,618 6,878 c.2) Other companies due beyond 1 year 55,957 56,217 Other securities 81,583 81,824 Treasury shares 4,678 4,678 Total financial assets 3,731,295 3,478,168 Total fixed assets 6,326,764 6,189,271
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Assets (in thousands of euros) 12/31/2004 12/31/2003 C) Current assets I) Inventories Raw materials, auxiliaries and consumables 254,512 228,941 Work in process and semifinished products 232,255 217,478 Contract work in progress 256,862 156,958 Finished products and goods for resale 584,262 609,419 Advances 10,120 9,218 Total inventories 1,338,011 1,222,014 II) Receivables Trade 1,330,347 1,326,740 Unconsolidated subsidiaries 368 22,004 Associated companies 138,756 166,807 Deferred tax assets 51,832 67,153 Other receivables 346,115 346,782 Total receivables 1,867,418 1,929,486 III) Current financial assets Other securities 242,314 283,525 Total current financial assets 242,314 283,525 IV) Cash and banks Bank and postal deposits 547,567 257,704 Checks 1,727 2,979 Cash on hand 1,959 2,933 Total cash and banks 551,253 263,616 Total current assets 3,998,996 3,698,641 D) Accrued income and prepaid expenses Accrued income 30,370 40,453 Prepaid expenses 29,144 32,681 Total accrued income and prepaid expenses 59,514 73,134 Total accrued 10,385,732 9,961,046
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Liabilities and shareholders’ equity (in thousands of euros) 12/31/2004 12/31/2003 A) Liabilities and shareholders’ equity - Parent company interest 3,735,842 3,428,567 I) Share capital 1,800,383 1,799,399 II) Share premium reserve 500,291 500,291 III) Revaluation reserve 1,680 1,680 IV) Legal reserve 74,773 67,885 V) Reserve for treasury shares in portfolio 4,678 4,678 VII) Other reserves 899,772 879,153 VIII) Retained earnings 237,090 214,838 IX) Net income (loss) 217,175 (39,357) - Minority interest 351,778 249,180 a) Capital and reserves 294,856 205,535 b) Net income 56,922 43,645 Total shareholders’ equity 4,087,620 3,677,747 B) Provisions for liabilities and expenses Pensions and similar obligations 175,370 198,665 Income taxes 118,893 162,322 Other provisions 541,740 515,152 Total provisions for liabilities and expenses 836,003 876,139 C) Provision for employees’ leaving indemnity 175,388 169,006 D) Payables Bonds 1,150,000 1,150,004 Bank borrowings 1,312,898 1,271,441 Other financial companies 87,147 159,803 Advances from customers 245,837 134,069 Trade 1,506,556 1,380,117 Unconsolidated subsidiaries 2,416 5,321 Associated companies 25,487 56,418 Taxes 167,860 192,871 Social security agencies 58,730 56,999 Other payables 418,839 522,003 Total payables 4,975,770 4,929,046 E) Accrued liabilities and deferred income Accrued liabilities 260,215 230,873 Deferred income 50,736 78,235 Total accrued liabilities and deferred income 310,951 309,108 Total liabilities and shareholders’ equity 10,385,732 9,961,046
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Memorandum accounts (in thousands of euros) 12/31/2004 12/31/2003 Personal guarantees - Sureties on behalf of other companies 218,885 273,254 - Credit guarantees on behalf of other companies 22,931 16,906 - Other guarantees 105,202 45,156 347,018 335,316 Third party assets held in deposit - Securities held in deposit 1,206,406 1,230,245 - Third-party goods held in deposit 6,896 10,100 1,213,302 1,240,345 Assets held by third parties - Securities held as guarantees and sureties 50,681 56,715 - Goods held by third parties 4,682 4,314 55,363 61,029 Commitments and contingencies - Commitments for purchases of fixed assets 434,732 534,356 - Commitments for purchases of investments 61,253 40,948 - Nominal value of put options given to third parties 2,234,479 2,209,360 - Sale of tax receivables 40,451 101,558 2,770,915 2,886,222 Other memorandum accounts - Potential losses for risk of default on discounted bills 150 21,954 - Forward securities purchase 342,100 342,100 342,250 364,054 Total 4,728,848 4,886,966
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Consolidated statements of income
(in thousands of euros) 2004 2003 A) Production value Revenues from sales and services 7,114,085 6,671,300 Changes in inventories of work in process, semifinished and finished products 692 (2,447) Changes in contract work in progress 87,189 20,153 Increase in property, plant and equipment 12,374 10,659 Other revenues and income: a) Miscellaneous 271,647 150,668 b) Government grants 2,066 6,375 Total production value 7,488,053 6,856,708 B) Production costs Raw materials, auxiliaries, consumables and goods for resale (3,569,142) (3,215,408) Service expenses (1,463,258) (1,385,871) Lease and rent expenses (89,149) (80,662) Personnel costs (1,443,576) (1,371,175) Amortization, depreciation and writedowns: a) amortization of intangible assets (79,136) (82,853) b) depreciation of property, plant and equipment (265,387) (277,701) d) writedowns of receivables included in current assets and cash and banks (15,292) (26,263) Changes in inventories of raw materials, auxiliaries, consumables and goods for resale 36,815 63,262 Other accruals (35,819) (47,135) Other operating expenses (183,808) (165,222) Total production costs (7,107,752) (6,589,028) Difference between production value and production costs 380,301 267,680 C) Financial income and expenses Investment income 23,809 14,432 Other financial income: a) from receivables included in fixed assets 14,652 10,246 c) from sureties included in current assets 24,211 25,455 d) income other than the above 56,179 65,496 Interest and other financial expenses (224,338) (234,632) Gains/(losses) on exchange (2,951) (14,935) Total financial income and expenses (108,438) (133,938) D) Valuation adjustments to financial assets Revaluations 111,536 70,676 Writedowns (35,532) (121,027) Total valuation adjustments 76,004 (50,351) E) Extraordinary items Extraordinary income 175,908 69,064 Extraordinary expenses (155,590) (77,964) Total extraordinary items 20,318 (8,900) Income before income taxes 368,185 74,491 Current taxes (96,478) (113,198) Deferred tax benefit 17,712 65,879 Deferred tax expense (15,321) (22,884) Net income 274,098 4,288 Parent company interest 217,176 (39,357) Minority interest 56,922 43,645
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Notes to the consolidated financial statements at December 31, 2004
Form and content The consolidated financial statements for the year ended December 31, 2004 have been drawn up in accordance with the provisions introduced by Legislative Decree No. 127 dated April 9, 1991 which incorporate those of the VII directive of the EC. The consolidated financial statements include the financial statements of Pirelli & C. S.p.A., the parent company, and the companies in which Pirelli & C. S.p.A. holds, directly or indirectly, control as defined by Legislative Decree 127/91, art. 26. Jointly controlled subsidiaries are consolidated proportionally, by consolidating the individual items of the financial statements on a proportional basis, or valued using the equity method. The subsidiaries which fall under the cases indicated in Legislative Decree 127/91, art. 28 are excluded from the scope of consolidation. The list of companies included in consolidation, the statements of cash flows and the statements of changes in shareholders’ equity are presented in the supplementary information which is considered an integral part of these notes. All amounts in the notes are expressed in thousands of euros, unless otherwise indicated. The financial statements have been prepared in accordance with the principles set forth in article 2423 bis of the Italian Civil Code and, in particular: – items are valued on a prudent basis and according to the going-concern concept; – income and expenses are accounted for on the accrual basis; – risks and losses referring to the current year are taken into account even if they become known after the balance sheet date; – gains are only included if realized by the year-end date in accordance with the accrual principle. The posting of items to the balance sheet and the statement of income is made in conformity with the principles stated in articles 2424 bis and 2425 bis of the Italian Civil Code. The balance sheet and statement of income also present the corresponding comparative figures for the prior year. Reclassifications, where appropriate, have been made to the previous year’s financial statements for purposes of comparison. The audit report on the consolidated financial statements has been issued by PricewaterhouseCoopers S.p.A. pursuant to art. 159 of Legislative Decree No. 58 dated February 24, 1998 and takes into account the CONSOB recommendation dated February 20, 1997, in execution of the resolution passed by the shareholders on May 13, 2002 which appointed the audit firm for the three-year period 2002-2004. The audit fee for the consolidated financial statements has been agreed at Euros 157 thousand per year. The fees for the audit of the individual Group companies have been borne directly by the companies concerned; the equivalent euro amount of fees for the year 2004 has amounted to approximately Euros 3,511 thousand, including the fees for the limited review of the six-month financial statements.
Principles of consolidation The financial statements used in consolidation are those at December 31, 2004 prepared locally for approval by the shareholders of the individual companies and adjusted, where necessary, to agree with the "Common Accounting Principles" of the Group, which comply with those established by Legislative Decree 127/91 and those issued by the National Boards of Dottori Commercialisti and Ragionieri. The financial statements of subsidiaries operating in high-inflation countries have been adjusted to take into account the changed purchasing power of the local currency, in accordance with the principles for inflation accounting.
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The financial statements expressed in foreign currency have been translated into euros at rates prevailing at year-end for the balance sheet and at average exchange rates for the statement of income, with the exception of the financial statements of companies operating in high-inflation countries, whose statements of income have been translated at year-end rates. The differences arising from the translation of opening shareholders' equity at year-end exchange rates have been recorded in translation adjustments in shareholders’ equity. The exchange rates which have been applied are presented under "Other information" in the notes. The principles of consolidation are as follows: – For companies included in the scope of consolidation that are consolidated line-by-line or proportionally, the carrying value of the investments has been eliminated against the related underlying share of net equity. For companies valued using the equity method, the purchase cost is adjusted to the corresponding share of underlying net equity at December 31, 2004 resulting from their respective financial statements. For investments in consolidated companies and for those valued using the equity method, the differences emerging, at acquisition, between the carrying value of the investments and the corresponding share of net equity have been accounted for as follows: 1. negative differences are shown as a deduction from fixed assets, except those of definite amount; any additional negative difference is recorded in the consolidation reserve; 2. positive differences, where not attributable to the assets or liabilities of the investee companies, have been recorded as a reduction of the consolidation reserve up to the amount of same and the remaining amount has been recorded as an asset in “difference on consolidation”. – Balance sheet and statement of income transactions between consolidated companies, including dividends paid within the Group, have been eliminated. – Gains and losses arising from transactions between consolidated companies, if not yet realized through transactions with third parties, have been eliminated. – The share of net equity and results of operations attributable to minority interests are shown separately, respectively, in the balance sheet and statement of income. The reconciliation between the net results and shareholders' equity of Pirelli & C. S.p.A. at December 31, 2004 and the corresponding consolidated figures is presented in the supplementary information.
Summary of significant accounting policies The accounting policies adopted are those set forth by the provisions of art. 2426 of the Italian Civil Code, referred to and supplemented by the provisions of CONSOB and by the Accounting Principles issued by the National Boards of Dottori Commercialisti and Ragionieri. The accounting principles have been applied on a basis consistent with the prior year. Unless otherwise indicated, the accounting principles applied in the valuation of the components of the consolidated financial statements are consistent with those adopted in the financial statements of the parent company.
• Intangible assets “Formation costs” relate to the capital increase costs of consolidated companies and are amortized over a period of five years. “Patents and design patent rights”, “concessions, licenses, trademarks and similar rights” are amortized over their expected economic lives, estimated in a period of five years. “Goodwill” includes the amount paid for this purpose by the Group companies for the acquisition of companies or other corporate transactions. Goodwill is amortized over a period between five and twenty years which identifies the possible period of utilization. The “difference on consolidation”, relating to the acquisition of investments, is amortized over a period between ten and twenty years; this period identifies the possible period of utilization. Applied software acquisition costs are amortized over a period between three and five years.
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Leasehold improvements are amortized over the period of the lease and, in any case, not exceeding five years. Image awareness costs benefiting future periods are amortized over the duration of the contract and, in any case, not exceeding five years. Loan acquisition costs are amortized over a period not exceeding the duration of the loan and, in any case, not exceeding five years.
• Property, plant and equipment Property, plant and equipment are stated at purchase or production cost including directly attributable incidental expenses and eventually increased by revaluations effected in accordance with specific laws. Depreciation is calculated starting from the month when the asset is available and ready for use or potentially able to provide economic benefits. Depreciation is calculated on the straight-line method on a monthly basis at rates designed to completely write-off the assets over their estimated useful lives or, for disposals, up to the last month of utilization:
Buildings 3% - 10% Plant 7% - 10% Machinery 5% - 10% Tools and equipment 10% - 33% Furniture 10% - 33% Vehicles 10% - 25%
In addition, property, plant and equipment is written down when the net recoverable amount is permanently impaired and lower than the net book value, in accordance with article 2426, point 3 of the Italian Civil Code. Ordinary maintenance and repair costs are expensed in the year incurred. Government investment grants relating to property, plant and equipment are recorded in a special provision under liabilities and are released to income in proportion to the future depreciation of the assets to which they refer. Assets acquired under financial leasing contracts are accounted for as property, plant and equipment with a contra-entry to financial payables and are therefore capitalized and depreciated over their estimated useful lives. The lease payment is divided between interest expense, recorded in the statement of income, and the repayment of principal, recorded as a deduction of the financial liability.
• Financial assets – Investments Equity investments in unconsolidated subsidiaries and other companies are valued at average cost, reduced for any permanent impairment in value; the original amount is reinstated whenever the reasons for the adjustment no longer apply. Equity investments in jointly controlled subsidiaries are valued using the equity method. Equity investments in associated companies are valued using the equity method, in accordance with article 2359 of the Italian Civil Code.
– Other securities Other securities are stated at cost, reduced for any permanent impairment in value.
– Treasury shares Treasury shares are valued at purchase cost, eventually adjusted for any permanent impairment in value. An undistributable reserve for an amount corresponding to the book value is recorded in shareholders’ equity pursuant to art. 2357 of the Italian Civil Code.
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• Current assets – Inventories Inventories are stated at the lower of cost, determined on the FIFO basis, and estimated realizable value. Work in process on long-term contracts is stated in proportion to the stage of completion of the work on the basis of agreed prices and taking into account estimated losses which are fully recognized in the year they become known. Land for development and properties under construction and/or renovation are stated at cost plus interest effectively incurred during the course of their development, construction or renovation. Furthermore, any requests for additional expenditures associated with the construction of university buildings are recorded in inventories based on a prudent estimate of the amounts to be recognized. Penalties for delays in deliveries of properties are accrued whenever such delays are chargeable to the contractor and not the principal.
– Receivables and payables Receivables (under both fixed assets and current assets) are stated at estimated realizable value. Payables are stated at nominal value. Receivables and payables in foreign currencies other than the functional currency of the individual companies, are adjusted to the year-end exchange rates; the effects of hedging contracts are recorded in accrued income and accrued liabilities; related exchange gains or losses are recorded in the statement of income, for the period to which they refer.
– Other investments and other securities Investments and other securities recorded in current assets designated for trading purposes and/or to meet treasury requirements, are stated at the lower of cost and fair value.
– Cash and banks Cash and banks are stated at nominal value.
– Accruals and prepayments Accruals and prepayments are recorded on the accrual basis.
• Provisions for liabilities and expenses – Provisions for pensions and similar obligations These provisions refer to pensions, health care and other benefits in favor of employees, not regulated by specific laws but covered by local labor agreements and benefit plans operating at some Group companies. The accounting method is based on the allocation of the entire cost at maturity over the service lives of the employees based on entitlement earned, using actuarial methods.
– Provision for income taxes The provision includes deferred tax liabilities and tax losses that are certain or likely to be incurred but uncertain as to the amount and/or the date on which they will arise; definite and certain income taxes payable are recorded in a specific account in the balance sheet.
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– Other provisions Other provisions include liabilities that are certain or likely to be incurred but uncertain as to the amount or the date on which they will arise.
• Provision for employees' leaving indemnity The provision for employees' leaving indemnity includes amounts payable to employees accrued on their behalf in accordance with specific laws or national labor contracts.
• Guarantees and commitments Guarantees given to third parties and commitments are recorded at the contract value of the commitment assumed on behalf of the beneficiary. Options granted to third parties and third-party securities held in deposit are recorded at nominal value.
• Financial instruments Forward contracts and derivative financial instruments used for hedging purposes are recorded under commitments at the time the contract is signed, for the notional amount. Income and expenses, as well as any effects, corresponding to the difference between the original contract amount and the fair value at the end of the year, are accounted for on the accrual basis.
• Recognition of revenues Revenues from the sale of products are recognized at the time of transfer of title of ownership which generally coincides with the delivery or shipment of the goods. Revenues from sales are shown net of discounts and allowances.
• Research & development and advertising costs "Research & development and advertising costs" are charged to the statement of income in the year incurred.
• Dividends Dividends are recorded on a cash basis, gross of tax credits.
• Income taxes Current income tax liabilities are determined on the basis of a realistic estimate of the tax expense payable under the current tax laws of the country; the related liability is shown in “taxes payable” net of advance payments, withholdings and tax credits. Deferred taxes are calculated on the temporary differences existing between the value of assets and liabilities in the balance sheet and their tax basis (liability method). Any deferred tax liabilities are recorded in the provision for income taxes. Deferred tax assets are accounted for only where is a reasonable certainty of recovery and these are recorded in “deferred tax assets”.
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CONSOLIDATED BALANCE SHEETS
Assets
B) Fixed assets
I) Intangible assets
The composition and changes in intangible assets are presented below:
(in thousands of euros) 12/31/2003 Translation Change in Reclassi- Increase Decrease Amor- 12/31/2004 adjustment the scope of fications tization consolidation • Formation costs 19,775 - 13 826 122 (166) (6,577) 13,993 • Patents and design patent rights 1,708 - 935 14 226 - (590) 2,293 • Concessions, licenses, trademarks and similar rights 24,844 1 10 1,425 4,162 (38) (5,648) 24,756 • Goodwill 33,132 45 10,837 - 626 - (5,270) 39,370 • Difference on consolidation 421,376 - 2,646 - 740 (185) (32,129) 392,448 • Other intangible assets 55,673 (240) 8 (2,265) 33,584 (440) (28,922) 57,398 556,508 (194) 14,449 - 39,460 (829) (79,136) 530,258
“Formation costs” mainly include expenses incurred for share capital increases, payments against future increases in share capital, mergers and demergers. “Concessions, licenses, trademarks and similar rights” mainly include the costs incurred for software applications to manage the franchising operations of Pirelli & C. Real Estate S.p.A. and the costs incurred by Parcheggi Bicocca S.r.l. to lay out the P7 and P9 parking lots in the Bicocca area as agreed with the City of Milan which granted the license to operate the lots until July 2032. The change in the scope of consolidation under “goodwill” is due to the contribution of the activities of Pirelli & C. Ambiente S.p.A. and Cam Tecnologie S.p.A. (now Pirelli & C. Ambiente Tecnologie S.p.A.), a company previously controlled by Camfin S.p.A., to Pirelli & C. Ambiente Holding S.p.A. (owned 51 percent by Pirelli & C. S.p.A., 45.3 percent by Camfin S.p.A. and 3.7 percent by Centrobanca Sviluppo Impresa SGR). The “difference on consolidation” mainly includes Euros 323,089 thousand, representing the difference on the price paid for the underlying net equity of the company Pirelli S.p.A. which emerged in prior years following the purchase of shares by Pirelli & C. A.p.A. and by Pirelli & C. Luxembourg S.A., net of amortization (calculated over a period of 20 years). The caption also comprises Euros 18,549 thousand relating to the differences on consolidation in the real estate sector that were generated by the first-time consolidation of Pirelli & C. Real Estate Facility Management S.p.A. in OMS Facility S.r.l., the company which took over the facility management activities headed by the Olivetti group (now Telecom Italia). The major items included in “other intangible assets” relate to costs for software applications of the industrial sector, expenses for the development and implementation of the Group portal, expenses for new software for manufacturing and sales applications in the Tyres Sector, expenses for the implementation of e-business solutions, loan acquisition costs and leasehold improvements.
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II) Property, plant and equipment The movements in property, plant and equipment during the year are as follows: (in thousands of euros) 12/31/2004 12/31/2003 Gross value • Opening balance 5,390,891 5,757,030 • Translation adjustment (61,829) (363,950) • Change in the scope of consolidation 3,804 13,039 • Allocation of merger surplus - (124,909) • Additions 281,167 273,475 • Disposals (263,767) (163,794) 5,350,266 5,390,891 Accumulated depreciation • Opening balance 3,236,296 3,350,624 • Translation adjustment (23,143) (268,401) • Change in the scope of consolidation - 1,302 • Depreciation charge 265,387 277,701 • Disposals (193,485) (124,930) 3,285,055 3,236,296 Net book value 2,065,211 2,154,595
The net decrease from the prior year is due to a combination of the following: – translation adjustments, in reference to property, plant and equipment included in the financial statements of foreign companies; – additions, higher than the prior year; – disposals, largely in reference to plant; – depreciation charge. Gross values include about Euros 16,291 thousand of assets which are no longer in use and are being held for transfer to other Group companies or disposal to third parties.
III) Financial assets Investments went from Euros 3,108,930 thousand to Euros 3,376,479 thousand and can be analyzed as follows: (in thousands of euros) 12/31/2003 Change in the Increase Decrease 12/31/2004 scope of consolidation Investments in unconsolidated subsidiaries 19,381 (4,522) - (14,859) - Investments in jointly controlled subsidiaries 2,588,671 - 5,370 - 2,594,041 Investments in associated companies 187,809 20,584 78,711 (21,430) 265,674 Investments in other companies 313,069 - 240,392 (36,697) 516,764 3,108,930 16,062 324,473 (72,986) 3,376,479
The decrease in “Investments in unconsolidated subsidiaries” is due to the sale of the investment in Afcab Holdings (Proprietary) Ltd (50 percent ), the sole shareholder of the South African power cables manufacturer African Cables Limited, to the parent company Reunert Limited.
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“Investments in jointly controlled subsidiaries” amount to Euros 2,594,041 thousand and refer to the investment in Olimpia S.p.A. (50.4 percent), which has been accounted for using the equity method. The amount includes goodwill that is being amortized over 20 years (Euros 41,894 thousand). “Investments in associated companies” amount to Euros 265,674 thousand, and increased compared to the prior year (Euros 187,809 thousand). Details of these investments are as follows: (in thousands of euros) 12/31/2004 12/31/2003 REAL ESTATE GROUP CFT Finanziaria S.p.A. - 12,933 Bernini Immobiliare S.r.l. 1,968 1,768 Spazio Industriale B.V. 729 - Continuum S.r.l. 3,484 3,633 Delta S.p.A. 1,291 2,168 Domogest S.r.l. 1,360 1,588 Solaris S.r.l. 3,282 - Geolidro S.r.l. 5,661 2,233 Localto S.p.A. 778 1,697 M.S.M.C. Holding B.V. 22,027 11,640 M.S.M.C. Solferino S.a.r.l. 2,054 2,220 Esedra S.r.l. 2,187 2,624 Trixia S.r.l. 5,453 6,999 Dixia S.r.l. 6,133 6,442 Massetto 1 B.V. 26,431 14,911 Mirandia Trading e Consultoria Lda 31,197 - Tronador - Consultoria Economica Lda 3,507 - Moncalieri Center S.r.l. 2,056 - Immobiliare Prizia S.r.l. 4,671 4,281 Iniziative Immobiliari S.r.l. 24,718 36,588 Popoy B.V. 14,416 11,449 Sci Roev Partners L.P. 2,149 2,516 IN Holding Italy S.a.r.l. 4,642 6,495 Induxia S.r.l. 2,320 2,509 Ininm Due S.a.r.l. 2,368 3,097 Aree Urbane S.r.l. (ex-Ortensia S.r.l.) 8,307 2,730 Bicocca Center S.r.l. 932 - Orione Immobiliare Prima S.p.A. 3,365 - Other minor companies 144 1,860 187,630 142,381 INDUSTRIAL GROUP Power Cables Malaysia Sdn Bhd (Malaysia) 7,811 7,842 Drathcord Saar & Co. K.G. (Germany) 5,102 5,266 Rodco Ltd. (United Kingdom) 4,145 4,146 Kabeltrommel Gmbh & Co. K.G. (Germany) 2,810 2,810 STIP Tunisi (Tunisia) 2,410 2,410 SMP Melfi S.r.l. (Italy) 1,807 1,807 Industriekraftwerk (Germany) 521 521 Euro Drive Car S.L. (Spain) 160 - Other minor companies 898 2,131 25,664 26,933 OTHER Eurostazioni S.p.A. 51,740 17,862 I.D.E.A. Granda Società consortile 640 633 52,380 18,495 Total 265,674 187,809
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“Investments in other companies” amount to Euros 516,764 thousand and include Euros 335,642 thousand of shares owned in companies listed on the stock exchange and held in the portfolios of Pirelli & C. S.p.A., Pirelli Finance (Luxembourg) S.A. and Trefin S.r.l.. Such investments consist of shares held in Mediobanca, Impregilo, Società Metallurgica Italiana, Generale Industrie Metallurgiche, Gemina, Capitalia, Telecom Italia and RCS Mediagroup. The change from the prior year is mainly due to the exercise of the option rights on Telecom Italia S.p.A. ordinary shares (Euros 109,670 thousand), the purchase of RCSMediagroup S.p.A. ordinary shares (Euros 32,619 thousand), the purchase of a 5 percent stake in Alcatel Submarine (Euros 44,805 thousand), the capital increases in F.C. Internazionale Milano S.p.A. (Euros 11,720 thousand) and in Eurofly S.p.A. (Euros 1,334 thousand), the purchase by Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. of a 5 percent share in Cloe Fondo Uffici (the seeded mutual fund for investments destined for institutional investors) for an amount of Euros 15,000 thousand, a 2 percent share in Tecla Fondo Uffici for an amount of Euros 6,330 thousand and a 5 percent share in Olinda Fondo Shops for an amount of Euros 13,261 thousand. Such increases have been offset by reductions made to the investments in F.C. Internazionale Milano S.p.A. (Euros 10,000 thousand), Eurofly S.p.A. (Euros 2,462 thousand), Euroqube S.A. (Euros 3,000 thousand), Istituto Europeo di Oncologia (Euros 1,600 thousand), in Alloptic (Euros 3,394 thousand) and Rubbernetwork (Euros 2,158 thousand) in addition to the sale of the entire interest held by Pirelli & C. S.p.A. in Banca Intesa S.p.A. (Euros 5,737 thousand). “Financial receivables from associated companies” refer to loans by the shareholders to companies in which the Pirelli & C. Real Estate group holds minority stakes. “Financial receivables from other companies”, due beyond one year, amount to Euros 55,957 thousand, and include: – Euros 6,523 thousand of interest-earning fixed rate loans; – Euros 34,551 thousand of interest-earning fixed rate obligatory deposits; – Euros 5,565 thousand of interest-earning floating rate loans; – Euros 2,666 thousand of non-interest earning security deposits; – Euros 6,652 thousand of non-interest earning loans. Receivables due beyond five years total Euros 36,431 thousand. “Other securities” amount to Euros 81,583 thousand compared to Euros 81,824 thousand at December 31, 2003. They mainly refer to Fenera Holding S.p.A. 3.5 percent convertible bonds 1998-2005 (Euros 2,582 thousand) held by Pirelli & C. S.p.A., 10 Fondo Prudentia shares equal to Euros 517 thousand held by Pirelli & C. S.p.A. and advances on convertible bond asset swaps on Telecom Italia S.p.A. convertible bonds 2010 and share swap transactions on Telecom Italia S.p.A. shares – Telecom Italia S.p.A. convertible bonds 2010 held by the subsidiary Pirelli Finance (Luxembourg) S.A. (Euros 77,442 thousand). A comparison with the market prices of these assets shows a difference of approx. Euros 1 million. No writedown has been made since there is no permanent impairment in value. “Treasury shares” amount to Euros 4,678 thousand and consist of 2,617,500 ordinary shares, equal to 0.08 percent of share capital (0.08 percent of ordinary shares alone) for a weighted average carrying price of Euros 1.79 per share. Pursuant to art. 2357-ter of the Italian Civil Code, a “Reserve for treasury shares in portfolio” was set up for the same amount. A comparison of the price of the treasury shares with the average market price shows a total lower value of Euros 2.2 million. Valuation at cost has been maintained in the financial statements as this is not considered a permanent impairment in value.
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C) Current Assets
I) Inventories Inventories amount to Euros 1,338,011 thousand, compared to Euros 1,222,014 thousand in the prior year, and may be analyzed as follows:
(in thousands of euros) 12/31/2004 12/31/2003 • Energy Cables and Systems Sector 562,617 395,030 • Telecom Cables and Systems Sector 41,008 58,213 • Tyres Sector 461,429 453,342 • Real Estate 274,781 325,035 • Other/consolidation adjustments (1,824) (9,606) 1,338,011 1,222,014
II) Receivables Receivables decreased from Euros 1,929,486 thousand at December 31, 2003 to Euros 1,867,418 thousand at December 31, 2004, and can be analyzed as follows: (in thousands of euros) 12/31/2004 12/31/2003 Financial Trade and other Financial Trade and other • Trade - 1,330,347 - 1,326,740 • Unconsolidated subsidiaries - 368 18,428 3,576 • Associated companies 175 138,581 32,723 134,084 • Deferred tax assets - 51,832 - 67,153 • Other receivables 49,992 296,123 2,151 344,631 50,167 1,817,251 53,302 1,876,184
Specifically: – Trade receivables Trade receivables from customers are detailed by due date as follows: (in thousands of euros) 12/31/2004 12/31/2003 • Due within 1 year 1,442,676 1,468,773 • Due beyond 1 year 459 469 • Less: allowance for doubtful receivables (112,788) (142,502) 1,330,347 1,326,740
No receivables are due beyond five years. The carrying value of receivables, adjusted for probable future losses, approximates fair value at year-end.
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– Receivables from unconsolidated subsidiaries With regard to financial receivables, the decrease from last year is attributable to the subsidiaries of Pirelli & C. Real Estate S.p.A. which were consolidated line-by-line for the first time at December 31, 2004; the caption therefore shows a nil balance.
– Receivables from associated companies With regard to financial receivables, the decrease from last year is due to the extinguishment of the loan made to Eurostazioni S.p.A. (Euros 32,425 thousand) by Pirelli & C. S.p.A. The most significant trade receivables refer to services rendered by direct and indirect associated companies of Pirelli & C. Real Estate S.p.A. (Euros 135,052 thousand). All amounts are receivable within one year.
– Other receivables “Other receivables - Trade and other”, which total Euros 296,123 thousand, include amounts due from the tax authorities of Euros 150,192 thousand, receivables from sales of financial assets of Euros 6,000 thousand, receivables from employees of Euros 9,733 thousand, receivables from social security agencies of Euros 4,010 thousand and export refunds and other minor amounts of Euros 126,188 thousand. The amount due beyond one year and within five years is Euros 60,863 thousand, while receivables due beyond five years total Euros 44,140 thousand.
III) Current financial assets “Other securities” amount to Euros 242,314 thousand and include the following: – Euros 126,001 thousand of fixed rate bonds issued and guaranteed by banking institutions; – Euros 62,768 thousand of floating rate bonds issued and guaranteed by banking institutions; – Euros 76 thousand of fixed rate bonds issued and guaranteed by governments of various countries; – Euros 2,040 thousand of floating rate bonds issued and guaranteed by governments of various countries; – Euros 45,124 thousand of equity securities intended for sale; – Euros 6,305 thousand of investment funds negotiable on demand. The securities are held in safe-keeping at leading banking institutions.
IV) Cash and banks “Bank and postal deposits” are concentrated in the financial companies, holding companies and subholding companies of the Group. Available liquidity is mainly invested in the short-term deposits market at leading banking counterparts primarily at interest rates reflecting the market rates.
D) Accrued income and prepaid expenses “Accrued income”, calculated on the accrual basis, decreased from Euros 40,453 thousand at December 31, 2003 to Euros 30,370 thousand at December 31, 2004. Accrued income mainly relates to hedging revenues, interest income, insurance and other minor items. “Prepaid expenses” decreased from Euros 32,681 thousand at December 31, 2003 to Euros 29,144 thousand at December 31, 2004. Prepaid expenses mainly relate to insurance, building rent and other minor items.
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LIABILITIES AND SHAREHOLDERS’ EQUITY
A) Shareholders’ equity
– Parent company interest “Share capital” amounts to Euros 1,800,383 thousand at December 31, 2004 and consists of 3,327,511,183 ordinary shares and 134,764,429 savings shares, all with a par value of Euros 0.52 per share and normal dividend rights. The increase of Euros 984 thousand compared to December 31, 2003 is due to the exercise of 7,568,608 warrants (exercise ratio 1:4). At December 31, 2004, the total amount of warrants exercised during 2004 is equal to 1,345,657,952. For the portion of warrants exercised (1,338,089,344) that resulted in the issue of shares in January 2005, a reserve called “shares subscribed due to the exercise of warrants” was set up under other reserves for Euros 173,952 thousand. At December 31, 2004, outstanding warrants total 216,197,374 and are exercisable by June 20, 2006. The “share premium reserve”, equal to Euros 500,291 thousand, has remained unchanged compared to the end of the prior year. The “revaluation reserve”, equal to Euros 1,680 thousand, has remained unchanged compared to December 31, 2004. The “legal reserve” rose from Euros 67,885 thousand to Euros 74,773 thousand as a result of the appropriation of 5 percent of 2003 net income to the reserve. The statement of changes in shareholders’ equity is presented in the supplementary information.
– Minority interest The minority interest in shareholders’ equity amounts to Euros 351,778 thousand, compared to Euros 249,180 thousand at the end of the prior year. The change is due mostly to the results for the year 2004, the payment of last year’s dividends and the effect of the translation of foreign currency financial statements to euros.
The major percentages of investments held by the minority interest are as follows:
12/31/2004 12/31/2003 Shared Service Center s.c.r.l. (Italy) 50.00% 50.00% Auto Cables Tunisie S.A. (Tunisia) 49.00% 49.00% Celikord A.S. (Turkey) 49.00% 49.00% Sicable S.A. (Ivory Coast) 49.00% 49.00% Pirelli & C. Ambiente Holding S.p.A. (Italy) 49.00% – Turk Pirelli Lastikleri A.S. (Turkey) 36.94% 36.94% Pirelli & C. Real Estate S.p.A. (Italy) 46.06% 35.38% Pirelli Baosheng Cable Co. Ltd (China) 33.00% 33.00% Tianjin Pirelli Power Cables Co. Ltd (China) 33.00% 33.00% P & A.K.K. (Japan) – 30.85% Turk Pirelli Kablo ve Sistemleri A.S. (Turkey) 16.25% 16.25% Pirelli Telecom Cables Co. Ltd Wuxi (China) 13.29% 13.29% Alexandria Tire Co. S.A.E. (Egypt) 13.21% 13.19% Pirelli de Venezuela C.A. (Venezuela) 3.78% 3.78%
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B) Provisions for liabilities and expenses “Provisions for pensions and similar obligations” include accruals for pensions, health care and other benefits in favor of employees, not regulated by specific laws but covered by local labor agreements and benefit plans operating at some Group companies. In those companies operating in the U.S.A. and the U.K. where defined benefit pension schemes are in place, the comparison between the liability for future obligations towards those entitled to benefits and the value of assets invested by the plans shows, at December 31, 2004, a deficit valued at about Euros 150 million, which will be amortized over the remaining service period of the participants in the plan in accordance with suitable actuarial methods. The “provisions for income taxes” include accruals relating to income taxes likely to be incurred but uncertain as to the amount or the date on which they will arise, as well as deferred taxation, as follows:
(in thousands of euros) 12/31/2004 12/31/2003 • Provision for current taxes 39,931 52,627 • Provision for deferred taxes 78,962 109,695 118,893 162,322
The income tax charge for the year is composed of the following:
(in thousands of euros) 12/31/2004 12/31/2003 • Current taxes 96,478 113,198 • Deferred tax benefit (17,712) (65,879) • Deferred tax expense 15,321 22,884 94,087 70,203
Compared to the prior year, the year 2004 shows a reduction in total current income taxes partly attributable to the Energy Sector as a result of the compensation at some subsidiaries of taxable income against tax loss carryforwards which had not been recorded in deferred tax assets. The figure also includes the recording, by Pirelli & C. S.p.A., of the tax effects deriving from the adoption of the national tax consolidation system. This reduction in current income taxes however is contrasted by a considerably lower reduction in the provision for deferred income taxes than last year, partly in relation to the estimated taxable income of the Italian and foreign companies. The Group’s tax charge for 2004 is equal to 33.7 percent which is substantially in line with the nominal tax rates applicable in the countries in which the major companies of the group operate, as shown in the following table:
Europe: North America: Italy 37.25% U.S.A. 40.00% France 34.30% Canada 33.00% Spain 35.00% South America: Germany 36.00% Argentina 35.00% United Kingdom 30.00% Brazil 34.00% Turkey 30.00% Venezuela 34.00% Oceania: Australia 30.00%
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Movements during the year in “Other provisions” are as follows: (in thousands of euros) Provision for Sundry Total restructuring costs provisions Balance at December 31, 2003 51,481 463,671 515,152 • Translation adjustment (114) (369) (483) • Utilization (43,690) (78,916) (122,606) • Increase 10,331 139,346 149,677 Balance at December 31, 2004 18,008 523,732 541,740
Utilizations of the “provision for restructuring costs” were in respect of the Energy Cables and Systems Sector for Euros 26,247 thousand, the Telecom Cables and Systems Sector for Euros 8,033 thousand and the Tyres Sector for Euros 9,410 thousand. The balance of the provision relates to the Energy Cables and Systems Sector for Euros 12,617 thousand and the Telecom Cables and Systems Sector for Euros 5,391 thousand. “Sundry provisions” amount to Euros 523,732 thousand and include the accruals relating to the risks on the options granted to the shareholder banks of Olimpia S.p.A. and Hopa S.p.A. under the shareholders’ agreements (Euros 320,925 thousand) and accruals for litigation, industrial risks and claims, product warranties, and other contingencies.
D) Payables Payables amount to Euros 4,975,770 thousand, compared to Euros 4,929,046 thousand in the prior year, and may be analyzed as follows: (in thousands of euros) 12/31/2004 12/31/2003 Financial Trade Financial Trade and other and other • Bonds 1,150,000 - 1,150,004 - • Bank borrowings 1,312,898 - 1,271,441 - • Other financial companies 87,147 - 159,803 - • Advances from customers - 245,837 - 134,069 • Trade - 1,506,556 - 1,380,117 • Unconsolidated subsidiaries - 2,415 4,834 487 • Associated companies 1,734 23,754 9,609 46,809 • Taxes - 167,860 - 192,871 • Social security agencies - 58,730 - 56,999 • Other payables - 418,839 - 522,003 2,551,779 2,423,991 2,595,691 2,333,355
The analysis of financial payables by due date is as follows:
(in thousands of euros) 12/31/2004 12/31/2003 within 1 year beyond 1 year within 1 year beyond 1 year • Bonds - 1,150,000 4 1,150,000 • Bank borrowings 736,504 576,394 750,681 520,760 • Other financial companies 45,153 41,994 136,810 22,993 • Unconsolidated subsidiaries -- 4,834 - • Associated companies 1,734 - 9,609 - 783,391 1,768,388 901,938 1,693,753
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Financial payables Financial payables secured by liens and mortgages amount to Euros 71,475 thousand. Financial payables due beyond five years amount to Euros 220,734 thousand. Additional disclosure is provided as follows: – Bonds These refer to Pirelli & C. S.p.A. 1998-2008 bonds of Euros 500 million, issued on October 21, 1998, paying interest at 4.875 percent and repayable in a one-off payment on October 21, 2008. The caption also includes bonds of Euros 500 million issued in 2002 by the subsidiary Pirelli Finance (Luxembourg) S.A., paying interest at a fixed rate of 6.5 percent, maturing April 4, 2007, and bonds of Euros 150 million issued by Pirelli & C. S.p.A. in 1999, paying interest at 5.125 percent, maturing April 7, 2009. – Bank borrowings Bank borrowings due within one year amount to Euros 736,504 thousand and include the current portion of long-term debt of Euro 56,900 thousand. Bank borrowings due beyond one year amount to Euros 576,394 thousand and include floating rate loans of Euros 331,785 thousand and fixed rate loans of Euros 244,609 thousand.
Trade and other payables (in thousands of euros) 12/31/2004 12/31/2003 within 1 year beyond 1 year within 1 year beyond 1 year • Advances from customers 201,748 44,089 97,845 36,224 • Trade 1,506,556 - 1,380,114 3 • Unconsolidated subsidiaries 2,415 - 487 - • Associated companies 23,754 - 46,809 - • Taxes 140,432 27,428 146,559 46,312 • Social security agencies 58,730 - 56,999 - • Other payables 384,969 33,870 485,183 36,820 2,318,604 105,387 2,213,996 119,359
– Payables to associated companies Payables to associated companies refer to advances received from Pirelli & C. Opere Generali S.p.A. for urbanization works regarding the Bicocca and Pioltello areas.
– Other payables Other payables amount to Euros 418,839 thousand and mainly refer to payables to employees of Euros 140,897 thousand, security deposits from customers for packaging guarantees of Euros 4,028 thousand, legal and consulting fees of Euros 5,686 thousand, legal litigation fees of Euros 5,740 thousand, purchases of fixed assets of Euros 19,939 thousand, notes payable of Euros 74,854 thousand and property management charges by third parties of Euros 8,714 thousand.
E) Accrued liabilities and deferred income “Accrued liabilities” increased from Euros 230,873 thousand at December 31, 2003 to Euros 260,215 thousand. They include the portion of exchange differences on hedging transactions, building leases payable, hedging costs and other minor items. “Deferred income” decreased from Euros 78,235 thousand at December 31, 2003 to Euros 50,736 thousand. They include installment payments received in advance.
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MEMORANDUM ACCOUNTS Memorandum accounts amount to Euros 4,728,848 thousand compared to Euros 4,886,966 thousand in the prior year.
Personal guarantees – Sureties on behalf of other companies Sureties are mainly given to guarantee loans received and job orders in the process of being delivered or tested.
– Other guarantees Other guarantees are mainly given against contractual commitments.
Third party assets held in deposit – Securities held in deposit These include securities entrusted for administration.
Assets held by third parties – Securities held as guarantees and sureties These include owned securities held by third parties in deposit as guarantees (mainly in reference to the pledged quotas of the companies Iniziative Immobiliari S.r.l., Trixia S.r.l., Dixia S.r.l. and Immobiliare Prizia S.r.l.), owned securities held in deposit for safe-keeping and sureties given by Pirelli & C. S.p.A. against commitments and contractual obligations.
Commitments and contingencies – Commitments for purchases of fixed assets This caption includes Euros 320,000 thousand for the commitment undertaken by Pirelli & C. Real Estate S.p.A. to purchase part of the buildings owned by Imser 60 S.r.l.. It also comprises Euros 48,010 thousand for the commitment undertaken by Pirelli & C. Real Estate S.p.A. to purchase the buildings that remain unsold by the associated company Bernini Immobiliare S.r.l. and Euros 30,000 thousand for the commitment by Pirelli & C. Real Estate S.p.A to purchase the properties that remain unsold by the company Iniziative Immobiliari S.r.l. at the date of December 22, 2005.
– Commitments for purchases of investments These commitments refer to the following purchase options and forward purchase commitments of Pirelli & C. Real Estate S.p.A.: 1) Purchase options: – purchase option of Euros 14,052 thousand undertaken in relation to the options to sell the shares of the associated company Iniziative Immobiliari S.r.l. by Banca Nazionale del Lavoro S.p.A. and Banca Intesa S.p.A.. This option will expire on December 31, 2005; – prorata purchase option of Euros 5,693 thousand undertaken in favor of Cordusio Immobiliare S.r.l. in respect of the option to sell the shares held by the latter in Modus S.r.l. to the indirect associated companies Aida S.r.l. and MSMC Immobiliare 4 S.r.l.; – option of Euros 22,500 thousand in respect of the option to sell, exercisable beginning January 1, 2008, by Morgan Stanley Real Estate Funds, with reference to the purchase of 52.63 percent of the investment in Servizi Immobiliari Banche SIB S.p.A..
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2) Forward purchase commitments: – commitment of Euros 10,568 thousand with the shareholders of the associated company Iniziative Immobiliari S.r.l. for the forward purchase of their respective investment holdings, equal to 9.601 percent of the share capital of the subsidiary; – commitment of Euros 1,850 thousand for the purchase of 5 percent of the company FONSPA S.p.A.; – commitment of Euros 3,132 thousand for the purchase, beginning January 1, 2005, of 47.37 percent of the share capital of Servizi Immobiliari Banche SIB S.p.A. from Morgan Stanley Real Estate Funds; upon purchase, Pirelli & C Real Estate S.p.A. will make a loan for an amount of about Euros 3,450 thousand.
– Put options given to third parties These include: – the put options granted to the shareholders banks of Olimpia S.p.A., Banca Intesa S.p.A. and Unicredito Italiano S.p.A. (hereinafter, the “Banks”) under the shareholders’ agreement signed on September 14, 2001 and subsequently amended (“Banks’ Agreement”). These options can be exercised from September 2006, or before that date, in the case of irremediable dissent among the shareholders (so-called “Deadlock”) or in the case of withdrawal by Pirelli & C. from the Banks’ Agreement. Under this Agreement, the put options can be exercised by the Banks at a price equal to the value of the economic capital of Olimpia plus a premium (the “Price”). This Price shall be determined by the parties and shall not be less than the outlays made by the Banks (Floor) nor higher than such sum, less any dividends received, increased by an annual IRR, before income taxes, equal to 15 percent (Cap). The valuation of the put options – at Euros 584,680 thousand for each Bank – was carried out, for Euros 520,000 thousand of that amount, by reference to the outlays effected by the Banks (Floor). As for the remaining amount of Euros 64,680 thousand (outlays effected by each Bank for Olimpia’s capital increase in December 2003), the valuation was based – in accordance with what was agreed in one of the amendments to the Banks’ Agreement (specifically the amendment dated December 16, 2003) – on the exercise price of the put on the shares that came to the Banks from the aforementioned capital increase, determined in an amount equal to the higher of Euros 3.53 and the weighted average price of reference recorded by the Telecom Italia shares in the 30 days of trading prior to the request of sale, multiplied by 18,322,946 shares.
– the put option granted to Edizione Finance International S.A./Edizione Holding S.p.A. (Euros 1,065,119 thousand) (“Edizione”), under the shareholders’ agreement signed on August 7, 2001 and subsequently amended. The put option in question can be exercised in the case of a (I) deadlock situation among the shareholders, (II) withdrawal on the part of Pirelli & C. S.p.A. from the shareholders’ agreements and (III) the occurrence of a substantial change in the controlling structure of Pirelli & C., by which is meant the exercise by parties other than those currently holding the determining power to nominate the majority of the components of the management board, with a consequent potential modification of the strategic guidelines. The exercise price of the put option is equal, respectively, under the assumption (I) to the price equal to the value of the economic capital of Olimpia increased by a premium (the “Price”), in the case of (II) to the Price increased by an amount equal to 50 percent of the Price and in the case of (III) to the Price increased by an amount equal to 200 percent of the Price. In this case, however, there is no expectation of a Floor or Cap as in the Banks’ Agreement. As for the valuation of the put option equal to Euros 1,065,119 thousand, since it is not possible to provide univocal valuations regarding the component of the Price consisting of the premium, this has been effected on the basis of the value of Edizione’s share (16.8 percent) of Olimpia’s net equity at December 31, 2004.
Sale of tax receivables These refer to the nominal value of the tax and accrued interest receivable from the tax authorities sold without recourse to Unicreditfactoring S.p.A. and Mediofactoring S.p.A..
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Other memorandum accounts – Forward securities purchases These refer to the commitment undertaken by Pirelli Finance (Luxembourg) S.A. for the forward purchase (expiration date of November 23, 2006) of 200,000,000 Telecom Italia S.p.A. 2001-2010 convertible bonds effected with Credit Agricole Lazard Financial Products Bank (Euros 200,000 thousand) and the commitment for the forward purchase of 47,155,300 Telecom Italia S.p.A. shares (expiration date of December 2006) subscribed with JP Morgan for an amount of Euros 142,100 thousand. * * * Furthermore, - on the basis of the shareholders’ agreement between Hopa S.p.A. (Hopa), Pirelli & C. S.p.A., Edizione Finance S.A., Olimpia S.p.A. and the Banks (in February 2003) ("Hopa Agreement") - in the event of dissent over certain matters, such as investments, trading, loans or resolutions convening the extraordinary shareholders’ meeting (so-called “Deadlock”), or in the event of failure to renew the Hopa Agreement at expiration, Hopa shall have the right to obtain the spin-off of Olimpia, receiving a proportional share of the assets and liabilities (including the Telecom Italia shares) owned by Olimpia and Olimpia shall have the consequent right to obtain the spin-off of Holinvest S.p.A., receiving a proportional share of the assets and liabilities (including the Telecom Italia shares) owned by Holinvest S.p.A.. Hopa will also have the right to receive a premium which – in accordance with an amending agreement signed on January 28, 2005 – was determined as an all-inclusive amount of Euros 208 million in the event the spin-offs occur as a result of a Deadlock or the pact is not renewed at its expiration date of May 8, 2006. Regardless, the spin-offs cannot take place until 36 months have passed since the Hopa Agreement came into force (May 2006), unless extraordinary events occur of unusual severity (so-called “Accelerated Deadlock”), such as, for example, Olimpia reduces its investment ownership in Telecom Italia S.p.A. to below a percentage existing as of the time of signing the Hopa Agreement, or a resolution is passed to merge Olimpia or Telecom Italia S.p.A. with companies other than those controlled directly or indirectly, or if certain ratios are not met by Olimpia: 1:1 debt to equity ratio. Under these assumptions, Hopa S.p.A. would have the right to obtain the execution of the spin-off of Olimpia at the earliest possible date and a premium provided by the Hopa Agreement and Olimpia would have the right to consequently obtain the spin-off of Holinvest S.p.A.. A provision of Euros 321 million is recorded in the financial statements in respect of these commitments relating to the rights granted to the shareholder banks of Olimpia S.p.A and Hopa S.p.A. under the aforementioned shareholders’ agreements.
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FINANCIAL INSTRUMENTS
It is the Group's policy to reduce financial risks deriving from international activities conducted in research, manufacturing and distribution through operating and financial management decisions.
To this end, the Group uses forward exchange contracts and derivative financial instruments to protect its operating results from unfavorable fluctuations of exchange rate and interest rates and the prices of raw materials. With an overall view towards reducing exposure to risk, the Group deals exclusively with leading bank counterparts and in highly liquid instruments.
The following table gives the positions of derivative financial instruments in the major currencies:
(in millions of euros) Gross notional amounts Fair Maturing Maturing (at year-end value within one year beyond one year exchange rates) Exchange rate risk • Forward contracts 1,269 1,223 1,055 168 • Swap contracts 88 77 38 40 • Futures contracts 10 70 (4) - Interest rate risk • Forward rate agreement - - - - • Interest rate swaps 8 - - - Raw materials price risk • Futures contracts - 4 4 -
The fair value of derivative financial instruments used to hedge exchange rate, interest rate and materials price risks approximates the fair value of the positions being hedged.
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CONSOLIDATED STATEMENTS OF INCOME
A) Production value Revenues from sales and services The distribution of sales by geographical area of destination and industry sector are reported in the following table. (in thousands of euros) 2004 2003 Geographical area Europe • Italy 1,522,205 21.40% 1,490,676 22.34% • Other European countries 3,118,753 43.84% 2,877,389 43.13% North America 688,590 9.68% 624,266 9.36% Central and South America 993,278 13.96% 821,859 12.32% Oceania, Africa and Asia 791,259 11.12% 857,110 12.85% 7,114,085 100.00% 6,671,300 100.00% Sector Energy Cables and Systems 2,887,968 40.60% 2,636,668 39.52% Telecom Cables and Systems 429,987 6.04% 426,998 6.40% Tyres 3,254,570 45.75% 2,970,219 44.52% Real Estate 570,076 8.01% 644,759 9.67% Others and inter-eliminations (28,516) (0.40%) (7,344) (0.11%) 7,114,085 100.00% 6,671,300 100.00%
Other revenues and income The caption “miscellaneous” includes rent income, commissions, insurance indemnities and refunds, gains from the ordinary disposal of property, plant and equipment and other minor items.
B) Production costs Service expenses (in thousands of euros) 2004 2003 • Selling expenses 329,344 306,674 • Building construction expenses 25,216 75,653 • Building running expenses 90,049 83,353 • Ordinary maintenance expenses 70,923 62,010 • Commissioned outside expenses 23,608 34,432 • Electrical power expenses 166,982 161,162 • EDP expenses 53,308 44,936 • Insurance expenses 46,593 50,916 • Advertising expenses 131,403 115,733 • Consulting fees 152,365 100,790 • Employee loan expenses 30,387 27,915 • Administrative expenses 10,365 10,349 • Traveling expenses 57,071 55,592 • Legal expenses 7,646 6,427 • Entertainment expenses 4,464 4,888 • Technical assistance and other minor expenses 263,534 245,041 1,463,258 1,385,871
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Lease and rent expenses Lease and rent expenses consist of rent expenses of Euros 69,982 thousand, operating lease installments of Euros 12,903 thousand and patent utilization rights of Euros 6,264 thousand.
Personnel costs Personnel costs consist of the following:
(in thousands of euros) 2004 2003 • Salaries and wages 1,098,651 1,036,417 • Social security costs 251,935 243,109 • Leaving indemnity 44,106 47,157 • Pension and similar costs 27,565 23,465 • Other costs 21,319 21,027 1,443,576 1,371,175
Depreciation of property, plant and equipment The depreciation charge for property, plant and equipment can be analyzed as follows:
(in thousands of euros) 2004 2003 • Buildings 21,713 28,947 • Plant and machinery 172,650 172,989 • Commercial and industrial equipment 43,681 44,946 • Other assets 27,343 30,819 265,387 277,701
Other operating expenses
(in thousands of euros) 2004 2003 • Revenue stamps and local taxes 33,203 33,434 • Losses on the disposal of property, plant and equipment 1,668 3,021 • Association dues 9,220 8,303 • Other minor expenses 139,717 120,464 183,808 165,222
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C) Financial income and expenses Investment income
(in thousands of euros) 2004 2003 Dividends from unconsolidated subsidiaries 12 3,679 Dividends from other companies 22,589 7,844 Other income 1,208 2,909 23,809 14,432
The caption “dividends from other companies” mainly includes dividends received from Telecom Italia S.p.A. (Euros 9,572 thousand) and Mediobanca S.p.A. (Euros 5,647 thousand).
Other financial income “Income other than the above” consists of the following:
(in thousands of euros) 2004 2003 • Interest from unconsolidated subsidiaries - 639 • Interest from associated companies 657 2,589 • Bank interest and other interest 25,785 29,992 • Other financial income from associated companies 312 540 • Miscellaneous financial income 29,425 31,736 56,179 65,496
“Miscellaneous financial income” includes revenues from forward contracts, gains on the sale of fixed-rate securities, interest on receivables due from the tax authorities and other minor financial income.
Interest and other financial expenses These expenses include:
(in thousands of euros) 2004 2003 • Interest to unconsolidated subsidiaries - 7 • Interest to associated companies 14 68 • Bond interest 64,584 64,264 • Bank interest and interest to other financial companies 106,404 114,572 • Other financial expenses to associated companies 48 21 • Miscellaneous financial expenses 53,288 55,700 224,338 234,632
“Miscellaneous financial expenses” include costs for forward contracts, losses on the sale of fixed-rate securities, bank commissions and other minor financial expenses.
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D) Valuation adjustments to financial assets Revaluations Revaluations amount to Euros 111,536 thousand and mainly refer to the share of the earnings of the associated companies of Pirelli & C. Real Estate S.p.A (Euros 104,438 thousand) and to the investment in Olimpia S.p.A. (Euros 5,370 thousand) accounted for using the equity method.
Writedowns
(in thousands of euros) 2004 2003 Losses of companies accounted for using the equity method 1,142 3,638 Losses of jointly controlled subsidiaries - 100,297 Writedowns of investments 34,390 17,092 35,532 121,027
“Writedowns of investments” mainly include the writedown of the investments in F.C. Internazionale Milano S.p.A. (Euros 10,000 thousand), Eurofly Service S.p.A. (Euros 3,967 thousand), Euroqube S.A. (Euros 3,000 thousand), Istituto Europeo di Oncologia (Euros 1,600 thousand), Alloptic Inc. (Euros 3,394 thousand), RubberNetwork (Euros 2,158 thousand) and in some companies of Pirelli & C. Real Estate S.p.A. (Euros 6,599 thousand).
E) Extraordinary items Extraordinary income Extraordinary income amounts to Euros 175,908 thousand compared to Euros 69,064 thousand in the prior year, and may be analyzed as follows:
(in thousands of euros) 2004 2003 • Gains on disposals 86,867 21,889 • Miscellaneous 89,041 47,175 175,908 69,064
“Gains on disposal” mainly include Euros 56,979 thousand on the sale of 3,400,000 Pirelli & C. Real Estate S.p.A. shares (equal to 8.37 percent), Euros 6,864 thousand for the sale of the non-controlling investment (50 percent ) in Afcab Holdings, Euros 11,736 thousand for the sale of the Erith (U.K.) site, Euros 5,665 thousand for the sale of the Budapest property and Euros 2,615 thousand for the sale of Torrembarra (Spain). Last year, this caption had principally included Euros 8,769 thousand for the sale of the former R&D building in the Bicocca area, Euros 2,788 thousand for the sale of the building complex at S. Giuliano Milanese and Euros 6,375 for the sale of a part of the area at Southampton (U.K.). “Miscellaneous” mainly comprises Euros 53,600 thousand of income realized on the sale of the intellectual property rights and commercial activities under the agreement signed on May 6, 2004 with Alcatel, Euros 6,622 thousand to adjust prior year income taxes of Pirelli & C. Real Estate S.p.A. and Euros 9,934 thousand of income realized on the sale of Pirelli & C. Real Estate S.p.A. treasury shares by the same company and by Progetto Grande Bicocca S.r.l. Last year, “miscellaneous” had included Euros 14,000 thousand for the consideration paid to the Tyres Sector under the “Milan-Turin High-Speed Train Project” with regard to the factory in Settimo Torinese, Euros 4,583 thousand for prior years’ taxes and Euros 4,930 thousand for the change in the valuation method of strategic metals inventories from LIFO to FIFO.
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Extraordinary expenses Extraordinary expenses amount to Euros 155,590 thousand, compared to Euros 77,964 thousand in the prior year. They may be analyzed as follows: (in thousands of euros) 2004 2003 • Losses on disposals 9,321 492 • Miscellaneous 146,269 77,472 155,590 77,964
“Miscellaneous” mainly includes Euros 40,000 thousand for the accrual made by Pirelli & C. S.p.A. in respect of the risks associated with the options granted to the shareholders banks of Olimpia and Hopa under the shareholders’ agreements, Euros 35,714 thousand for layoff costs, Euros 9,385 thousand for the replacement of the high-voltage cable in Singapore, Euros 5,735 thousand for the accruals regarding disputes pending with the Brazilian tax authorities relating to 1999 and 2000 tax incentives for I.T. investments and Euros 27,300 thousand for the writeoffs and layoffs connected with the agreement with Alcatel. Last year “miscellaneous” had included Euros 16,059 thousand for the merger costs incurred by Pirelli & C. S.p.A., Euros 6,910 thousand for layoff costs, Euros 9,070 thousand for expenses relating to the reclamation of unused areas, Euros 13,969 thousand for the tax amnesty, Euros 4,000 thousand for the costs connected with the “Milan-Turin High-Speed Train” project relative to the Settimo Torinese factory and Euros 1,950 thousand for the reorganization of the Arco Felice factory.
Other information – Directors’ and statutory auditors’ fees Compensation to the directors and statutory auditors of Pirelli & C. S.p.A., who also carry out these functions in other companies included in consolidation, are as follows:
(in thousands of euros) Directors 30,447 Statutory auditors 319 30,766
– Employees The average number of employees in companies included in consolidation, by category, is as follows:
Senior executives/staff 10,448 Blue-collar 23,256 Temporary employees 3,269 36,973
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– Exchange rates The main exchange rates used for the translation of foreign currency financial statements in the consolidated financial statements are as follows:
(local currency against euros) Year-end Average Change Change 12/31/2004 12/31/2003 in % 2004 2003 in % Europe British pound 0.7051 0.7048 0.04% 0.6787 0.6920 (1.93%) Swiss franc 1.5429 1.5579 (0.96%) 1.5438 1.5212 1.49% Hungarian forint 245.9700 262.5000 (6.30%) 251.6561 253.5875 (0.76%) Slovakian koruna 38.7450 41.1700 (5.89%) 40.0218 41.4867 (3.53%) North America American dollar 1.3621 1.2630 7.85% 1.2439 1.1311 9.97% Canadian dollar 1.6416 1.6234 1.12% 1.6168 1.5818 2.21% South America Brazilian real 3.6156 3.6491 (0.92%) 3.6393 3.4742 4.75% Venezuelan bolivar 2,615.2320 2,020.8000 29.42% 2,321.6896 1,821.3716 27.47% Argentine peso 4.0577 3.7006 9.65% 3.6597 3.3367 9.68% Oceania Australian dollar 1.7459 1.6802 3.91% 1.6905 1.7381 (2.74%) Asia Chinese yuan RMB 11.2734 10.4535 7.84% 10.2955 9.3622 9.97% Singapore dollar 2.2262 2.1450 3.79% 2.1016 1.9703 6.66% Indonesian rupiah 12,626.6670 10,621.8300 18.87% 11,118.3759 9,688.5555 14.76% Africa Egyptian pound 8.2543 7.7675 6.27% 7.7001 6.6385 15.99% Ivory Coast franc 655.9570 655.9570 0.00% 655.9570 655.9570 0.00%
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– Net financial position The composition of the net financial position, which decreased from last year, is commented in the introduction to the Directors’ Report on operations. Details are as follows:
(in millions of euros) Net financial position 12/31/2004 12/31/2003 • Short-term financial payables 783 902 • Accrued interest expenses 49 50 • Cash and banks (551) (264) • Other short-term securities (242) (284) • Short-term financial receivables (53) (60) • Accrued interest income (16) (14) Net short-term (liquidity)/ debt (30) 330 • Medium/long-term financial payables 1,769 1,695 • Medium/long-term financial receivables (266) (276) • Other securities (4) (4) Net medium/long-term debt 1,499 1,415 Net financial position 1,469 1,745
– R&D expenditures In 2004, the Group incurred research and development expenditures and technical management costs for a total of Euros 198 million (3 percent of industrial aggregate sales), entirely charged to operating expenses, compared to Euros 204 million in the prior year (3.4 percent of industrial aggregate sales).
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Supplementary information
Web site: http://www.pirelli.com E-mail: [email protected] 171 Preliminary Information Directors’ Report Consolidated Financial Statements
Consolidated statements of cash flows
(in thousands of euros) 2004 2003 Net debt, at the beginning of the year (1,745,363) (2,050,385) Translation adjustments (3,469) 20,568 Operating profit 380,301 267,680 Depreciation and amortization 344,522 360,553 Increase in intangible assets (50,470) (88,549) Increase in property, plant and equipment (281,167) (273,475) Increase in financial assets (69,792) (69,027) Disposal of intangible assets 1,772 16,705 Disposal of property, plant and equipment 20,887 13,799 Disposal of financial assets 75,479 10,427 Net investments (303,291) (390,120) Changes in inventories (136,732) 29,288 Changes in trade and other accounts receivable/payable 206,296 310,607 Changes in working capital 69,564 339,895 Changes in employee-related provisions and other provisions 15,141 3,165 Other changes (7,876) (17,253) Free cash flow 498,361 563,920 Extraordinary items, net 20,317 (8,900) Financial expenses, net (132,197) (148,369) Income taxes, net (94,087) (70,202) Olimpia S.p.A. capital increase - (388,080) Purchase of Capitalia shares - (79,449) Purchase of Telecom Italia S.p.A. shares (109,670) - Purchase of other minority holdings - (103,800) Other changes 25,012 (66,327) Net cash flows before dividends 207,736 (301,207) Dividends paid (131,768) (63,772) Net cash flows 75,968 (364,979) Share capital increase of Pirelli & C S.p.A. - 812,165 Reimbursement of share capital and reserves due to share withdrawals - (162,629) Share capital increase minority interest 204,066 (103) Changes in share capital 204,066 649,433 Change in net debt (*) 276,565 305,022 Net debt, at end of year (1,468,798) (1,745,363) (*) Financed by: Increase (decrease) in long-term loans 83,932 (210,622) Increase (decrease) in short-term loans (113,071) (131,259) Decrease (increase) in cash and banks and cash equivalents (247,426) 36,859 (276,565) (305,022)
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Consolidated statements of changes in shareholders’ equity
(in thousands of euros) Share Cumulative Other reserves, Share premium Legal translation retained earnings capital reserve reserve adjustments net income (loss) (*) Total Balance at December 31, 2002 339,423 549,674 67,880 (193,630) 1,169,591 1,932,938 Profit distribution, as per resolution of May 7, 2003 • appropriation to legal reserve 4 (4) - • dividends to shareholders (41,871) (41,871) Share capital increase 812,164 812,164 Share capital increase from share exchange 715,152 220,047 935,199 Reimbursement of share capital and reserves (67,340) (49,383) (45,906) (162,629) Replenishment of reserves of former merged companies 45,824 45,824 Adjustment from translation of foreign currency financial statements (53,701) (53,701) Net loss for the year (39,357) (39,357) Balance at December 31, 2003 1,799,399 500,291 67,884 (247,331) 1,308,324 3,428,567 Profit distribution, as per resolution of May 11, 2004 • appropriation to legal reserve 6,888 (6,888) - • dividends to shareholders (108,623) (108,623) Exercise of 2003-2006 warrants 984 173,952 174,936 Adjustment from translation of foreign currency financial statements 23,787 23,787 Net income for the year 217,175 217,175 Balance at December 31, 2004 1,800,383 500,291 74,772 (223,544) 1,583,940 3,735,842
(*) The item "Other reserves" includes the Revaluation reserve, the Reserve for treasury shares in portfolio, the Merger reserve, the Reserve from contributions and the Reserve for shares subscribed due to the exercise of warrants.
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Reconciliation of net results and shareholders’ equity of Pirelli & C. S.p.A. And corresponding consolidated figures of the group at december 31, 2004
(in thousands of euros) Share Reserves Net income Total Capital (loss) Pirelli & C. S.p.A. 1,800,383 1,621,022 149,621 3,571,026 Earnings (losses) for the year of consolidated companies (before consolidation adjustments) 337,792 337,792 Capital and reserves of consolidated companies (before consolidation adjustments) 2,082,506 2,082,506 Consolidation adjustments: - carrying value of investments in consolidated companies (2,076,637) (2,076,637) - intragroup dividends 16,988 (181,953) (164,965) - other 74,405 (88,285) (13,880) Group 1,800,383 1,718,284 217,175 3,735,842
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List of investments
Companies consolidated using the full consolidation method
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by Europe Austria Pirelli Gesellschaft mbH Tyre Vienna Euro 726,728 100.00% Pirelli Tyre (Europe) S.A. Pirelli-Oekw GmbH Energy Cables and Systems Vienna Euro 2,071,176 100.00% Pirelli Cable Holding N.V. Belgium Pirelli Tyres Belux S.A. Tyre Brussels Euro 700,000 100.00% Pirelli Tyre (Europe) S.A. Finland Pirelli Cables and Systems OY Energy Cables and Systems Helsinki Euro 10,000,000 100.00% Pirelli Cable Holding N.V. France Pirelli Energie Câbles Eurelectric S.A. Energy Cables and Systems La Bresse Euro 4,036,500 100.00% et Systèmes France S.A. Gecam France S.a.S Environment Paris Euro 450,000 83.34% Pirelli & C. Ambiente Tecnologie S.p.A. Pirelli Energie Câbles et Systèmes France S.A. Energy Cables and Systems Paron de Sens Euro 136,800,000 100.00% Pirelli Cable Holding N.V. Pirelli Telecom Câbles Chavanoz Pont de et Systèmes France S.A. Telecom Cables and Systems Cheruy Cedex Euro 7,455,000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A. Pneus Pirelli S.A.S Tyre Roissy en France Euro 1,515,858 100.00% Pirelli Tyre (Europe) S.A. Project Saint Maurice S.A. Real Estate Paris Euro 38,200 100.00% Pirelli & C. Real Estate S.p.A. Germany Bergmann Kabel und Pirelli Kabel und Systeme Leitungen GmbH Energy Cables and Systems Schwerin Euro 1,022,600 100.00% Holding GmbH Deutsche Pirelli Reifen Holding GmbH Financial Breuberg/Odenwald Euro 7,694,943 100.00% Pirelli Tyre Holding N.V. Driver Fleet Solution Gmbh (before Materialverwertungsgesellschaft Deutsche Pirelli Reifen Breuberg GmbH) Tyre Breuberg/Odenwald Euro 26,000 100.00% Holding GmbH Deutsche Pirelli Reifen Pirelli Deutschland GmbH Tyre Breuberg/Odenwald Euro 26,334,100 100.00% Holding GmbH Pirelli Kabel Energy Cables and Systems Hoechst/Odenwald Euro 25,600 100.00% Pirelli Kabel und Systeme Grundstueckverwaltung Gmbh Holding GmbH Pirelli Kabel und Pirelli Kabel und Systeme Systeme GmbH Energy Cables and Systems Berlin Euro 50,000 100.00% Holding GmbH Pirelli Kabel und Systeme Holding GmbH Energy Cables and Systems Berlin Euro 26,000 99.00% Pirelli Cable Holding N.V. 1.00% Pirelli Cavi e Sistemi Energia S.p.A. Deutsche Pirelli Reifen Pirelli Personal Service Gmbh Tyre Breuberg/Odenwald Euro 25,000 100.00% Holding GmbH Pirelli Telekom Kabel und Systeme Deutschland GmbH Telecom Cables and Systems Berlin Euro 25,000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A. PK Grundstueckverwaltung Gmbh (before Plus Deutsche Pirelli Reifen Beteiligungsgesellschaft mbH) Tyre Hoechst/Odenwald Euro 26,000 100.00% Holding GmbH Deutsche Pirelli Reifen Pneumobil GmbH Tyre Breuberg/Odenwald Euro 259,225 100.00% Holding GmbH
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Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by Greece Elastika Pirelli S.A. Tyre Athens Euro 785,370 99.90% Pirelli Tyre (Europe) S.A. 0.10% Pirelli Pneumatici S.p.A. Pirelli Hellas S.A. (in liquidation) Tyre Athens US $ 22,050,000 79.86% Pirelli Tyre Holding N.V. Hungary Kabel Keszletertekesito BT. Energy Cables and Systems Budapest Hun. Forint/000 1,239,841 100.00% MKM Magyar Kabel Muvek Rt. MKM Magyar Kabel Muvek RT. Energy Cables and Systems Budapest Hun. Forint/000 6,981,070 100.00% Pirelli Cable Holding N.V. Pirelli Construction Hungary Ltd (in liquidation) Energy Cables and Systems Budapest Hun. Forint/000 3,000 100.00% Pirelli Cable Holding N.V. Pirelli Hungary Tyre Trading and Services Ltd Tyre Budapest Hun. Forint/000 3,000 100.00% Pirelli Tyre (Europe) S.A. Ireland Pirelli Reinsurance Company Ltd Reinsurance Dublin US $ 7,150,000 100.00% Pirelli Finance (Luxembourg) S.A. Italy Acquario S.r.l. (in liquidation) Real Estate Genoa Euro 255,000 100.00% Pirelli & C. Real Estate S.p.A. Alfa S.r.l. Real Estate Milan Euro 2,600,000 100.00% Pirelli & C. Real Estate S.p.A. Alfa Due S.r.l. (in liquidation) Real Estate Milan Euro 1,300,000 100.00% Pirelli & C. Real Estate S.p.A. Altofim S.r.l. Financial Milan Euro 78,000 100.00% Pirelli & C. S.p.A. Beta S.r.l. Real Estate Milan Euro 26,000 89.00% Partecipazioni Real Estate S.p.A. Casaclick S.p.A. Real Estate Milan Euro 299,000 100.00% Pirelli & C. Real Estate Agency S.p.A. Centrale Immobiliare S.p.A. Real Estate Milan Euro 5,200,000 100.00% Pirelli & C. Real Estate S.p.A. Centro Servizi Amministrativi Pirelli S.r.l. Services Milan Euro 51,000 100.00% Pirelli & C. S.p.A. CFT Finanziaria S.p.A. Real Estate Florence Euro 10,010,000 89.33% Partecipazioni Real Estate S.p.A. Driver Italia S.p.A. Commercial Milan Euro 200,000 62.49% Pirelli Pneumatici S.p.A. Edilnord Gestioni S.p.A. Real Estate Milan Euro 517,000 100.00% Pirelli & C. Real Estate S.p.A. Edilnord Progetti S.p.A. Real Estate Milan Euro 250,000 100.00% Pirelli & C. Real Estate S.p.A. Elle Uno Società Consortile a.r.l. Real Estate Milan Euro 100,000 60.00% Edilnord Gestioni S.p.A. Erato Finance S.r.l. Real Estate Milan Euro 600,000 53.85% Pirelli & C. Real Estate S.p.A. Erice S.r.l. Real Estate Milan Euro 10,000 100.00% Pirelli & C. Real Estate S.p.A. Fibre Ottiche Sud - F.O.S. S.p.A. Optical Fibers Battipaglia (SA) Euro 47,700,000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A. FIM - Fabbrica Italiana di Mediazione S.r.l. Real Estate Milan Euro 100,000 100.00% Pirelli & C. Real Estate Agency S.p.A. Iota S.r.l. Real Estate Milan Euro 93,600 100.00% Pirelli & C. Real Estate S.p.A. Lambda S.r.l. Real Estate Milan Euro 578,760 100.00% Pirelli & C. Real Estate S.p.A. Maristel S.p.A. Telecom Cables and Systems Milan Euro 1,020,000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A. NewCo RE 1 S.r.l. Real Estate Milan Euro 30,000 100.00% Pirelli & C. Real Estate S.p.A. NewCo RE 2 S.r.l. Real Estate Milan Euro 10,000 100.00% Pirelli & C. Real Estate S.p.A. NewCo RE 3 S.r.l. Real Estate Milan Euro 10,000 100.00% Pirelli & C. Real Estate S.p.A. NewCo RE 4 S.r.l. Real Estate Milan Euro 10,000 100.00% Pirelli & C. Real Estate S.p.A.
Web site: http://www.pirelli.com E-mail: [email protected] 176 Preliminary Information Directors’ Report Consolidated Financial Statements
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by Parcheggi Bicocca S.r.l. Real Estate Milan Euro 1,500,000 75.00% Pirelli & C. Real Estate S.p.A. Partecipazioni Real Estate S.p.A. Real Estate Milan Euro 1,360,280 100.00% Pirelli & C. Real Estate S.p.A. PBS S.c.a.r.l. Real Estate Milan Euro 100,000 60.00% Edilnord Gestioni S.p.A. Pirelli Broadband Solutions S.p.A. Telecom Cables and Systems Milan Euro 120,000 98.75% Pirelli & C. S.p.A. Milan 1.25% Pirelli Finance (Luxembourg) S.A. Pirelli & C. Ambiente S.p.A. Environment Milan Euro 3,060,000 100.00% Pirelli & C. Ambiente Holding S.p.A. Pirelli & C. Ambiente Holding S.p.A. (before Progetto Ambiente Beta S.r.l.) Environment Milan Euro 23,120,000 51.00% Pirelli & C. S.p.A. Pirelli & C. Ambiente Tecnologie S.p.A. Environment Milan Euro 2,080,000 100.00% Pirelli & C. Ambiente Holding S.p.A. Pirelli & C. Opere Generali S.p.A. Real Estate Milan Euro 104,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate S.p.A. Real Estate Milan Euro 20,583,241 52.05% Pirelli & C. S.p.A. 3.47% 0.00% Pirelli & C. Real Estate S.p.A. 0.02% 0.00% Progetto Grande Bicocca S.r.l. Pirelli & C. Real Estate Agency S.p.A. Real Estate Milan Euro 832,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Credit Servicing S.p.A. Financial Milan Euro 2,000,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Pirelli & C. Real Estate Energy S.p.A. Real Estate Milan Euro 120,000 100.00% Facility Management S.p.A. Pirelli & C. Real Estate Facility Management S.p.A. Real Estate Milan Euro 5,561,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Franchising S.p.A. (before Pirelli & C. Real Estate Real Estate Milan Euro 500,000 100.00% Pirelli & C. Real Estate Servizi di Rete S.p.A.) Franchising Holding S.r.l. Pirelli & C. Real Estate Franchising Agenzia Pirelli & C. Real Estate Assicurativa S.r.l. Real Estate Milan Euro 10,000 100.00% Franchising Holding S.r.l. Pirelli & C. Real Estate Franchising Holding S.r.l. Real Estate Milan Euro 120,000 70.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Project Management S.p.A. Real Estate Milan Euro 520,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Property Management S.p.A. Real Estate Milan Euro 114,400 100.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. Real Estate Milan Euro 8,225,000 90.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. Private Real Estate Milan Euro 1,000,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli Cavi e Sistemi Energy Cables and Systems Energia S.p.A. holding company Milan Euro 100,000,000 98.75% Pirelli & C. S.p.A. 1.25% Pirelli Finance (Luxembourg) S.A. Pirelli Cavi e Sistemi Energia Italia S.p.A. Energy Cables and Systems Milan Euro 110,000,000 100.00% Pirelli Cavi e Sistemi Energia S.p.A.
Web site: http://www.pirelli.com E-mail: [email protected] 177 Preliminary Information Directors’ Report Consolidated Financial Statements
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by Pirelli Cavi e Sistemi Telecom Cables and Systems Telecom S.p.A. holding company Milan Euro 70,000,000 98.75% Pirelli & C. S.p.A. 1.25% Pirelli Finance (Luxembourg) S.A. Pirelli Cavi e Sistemi Telecom Italia S.p.A. Telecom Cables and Systems Milan Euro 41,000,000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A. Pirelli Cultura S.p.A. Sundry Milan Euro 1,000,000 100.00% Pirelli & C. S.p.A. Pirelli Labs S.p.A. Research and Development Milan Euro 10,000,000 100.00% Pirelli & C. S.p.A. Pirelli Nastri Tecnici S.p.A. (in liquidation) Sundry Milan Euro 384,642 100.00% Pirelli & C. S.p.A. Pirelli Pneumatici S.p.A. Tyre Milan Euro 256,820,000 100.00% Pirelli Tyre Holding N.V. Pirelli Servizi Finanziari S.p.A. Financial Milan Euro 1,976,000 100.00% Pirelli & C. S.p.A. Pirelli Submarine Telecom Real Estate Milan Euro 50,000,000 100.00% Pirelli Submarine Telecom Systems Systems Italia S.p.A. Holding B.V. PIT - Promozione Imprese e Pirelli & C. Real Estate Facility Territorio S.c.r.l. Real Estate Pozzuoli Euro 25,823 100.00% Management S.p.A. Polo Viaggi S.r.l. Travel Agency Milan Euro 46,800 100.00% Pirelli & C. S.p.A. Progetto Ambiente Gamma S.r.l. Environment Milan Euro 25,500 100.00% Pirelli & C. Ambiente S.p.A. Progetto Bicocca Esplanade S.p.A. Real Estate Milan Euro 2,500,000 100.00% Pirelli & C. Real Estate S.p.A. Progetto Grande Bicocca S.r.l. Real Estate Milan Euro 93,600 100.00% Pirelli & C. Real Estate S.p.A. Progetto Grande Bicocca Multisala S.r.l. (in liquidation) Real Estate Milan Euro 1,530,000 100.00% Pirelli & C. Real Estate S.p.A. Progetto Moncalieri S.r.l. Real Estate Milan Euro 90,000 100.00% Pirelli & C. Real Estate S.p.A. Progetto Salute Bollate S.r.l. Real Estate Milan Euro 100,000 100.00% Pirelli & C. Real Estate S.p.A. Repeg Italian Finance S.r.l. Real Estate Milan Euro 500,000 100.00% Partecipazioni Real Estate S.p.A. Rofau S.r.l. Real Estate Milan Euro 10,000 100.00% Altofim S.r.l. Serenergy S.r.l. (before Progetto Ambiente Alfa S.r.l.) Environment Milan Euro 25,500 50.00% Pirelli & C. Ambiente S.p.A. Servizi Amministrativi Real Estate S.p.A. Real Estate Milan Euro 520,000 100.00% Pirelli & C. Real Estate S.p.A. Servizi Aziendali Pirelli S.C.p.A. Services Milan Euro 104,000 94.00% Pirelli & C. S.p.A. 0.50% Pirelli Cavi e Sistemi Energia S.p.A. 0.50% Pirelli Cavi e Sistemi Telecom S.p.A. 2.00% Pirelli Pneumatici S.p.A. 1.00% Polo Viaggi S.r.l. 1.00% Alfa Due S.r.l. 1.00% Pirelli & C. Real Estate S.p.A. Shared Service Center s.c.r.l. Information Systems Milan Euro 1,756,612 50.00% Pirelli & C. S.p.A. Pirelli & C. Real Estate Facility Somogi S.r.l. Real Estate Vimodrone (MI) Euro 90,000 88.00% Management S.p.A. Stella Polare S.r.l. (in liquidation) Real Estate Naples Euro 289,215 100.00% Pirelli & C. Real Estate S.p.A. Tintoretto S.r.l. Real Estate Milan Euro 10,000 100.00% Partecipazioni Real Estate S.p.A. Trefin S.p.A. Financial Milan Euro 4,242,476 100.00% Pirelli & C. S.p.A. T.R.E.-Total Renewable Energy S.r.l. Environment Pero Euro 10,000 100.00% Pirelli & C. Ambiente Tecnologie S.p.A.
Web site: http://www.pirelli.com E-mail: [email protected] 178 Preliminary Information Directors’ Report Consolidated Financial Statements
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by Luxembourg Pirelli Finance (Luxembourg) S.A. Financial Luxembourg Euro 270,228,168 100.00% Pirelli & C. S.p.A. Pirelli International Finance S.A. Insurance Luxembourg Euro 35,000 100.00% Pirelli Finance (Luxembourg) S.A. Norway Pirelli Kabler og Systemer AS Energy Cables and Systems Ski Nor. Krone 100,000 100.00% Pirelli Cables and Systems OY Poland Driver Polska Sp.ZO.O. Tyre Warsaw Pol. Zloty/mil. 100,000 84.00% Pirelli Polska Sp.ZO.O. Pirelli Polska Sp.ZO.O. Tyre Warsaw Pol. Zloty/mil. 625,771 100.00% Pirelli Tyre (Europe) S.A. Portugal Desco Fabrica Portuguesa de Material Pirelli Energie Câbles et Electrico e Electronico S.A. Energy Cables and Systems Arcozelo Vngaia Euro 1,545,000 70.93% Systèmes France S.A. 29.07% Eurelectric S.A. Romania S.C. Cord Romania SRL Tyre Slatina Rom. Leu/000 51,951,000 80.00% Pirelli Tyre Holding N.V. S.C. Pirelli Romania Cabluri si Sisteme S.A. Energy Cables and Systems Slatina Rom. Leu/000208,927,700 100.00% Pirelli Cable Holding N.V. S.C. Pirelli Tyres Romania S.R.L. Tyre Slatina Rom. Leu/000 90,620,000 95.00% Pirelli Tyre Holding N.V. 5.00% Pirelli Pneumatici S.p.A. Russia OOO Pirelli Tyre Russia Commercial Moscow Russian Rouble 950,000 95.00% Pirelli Tyre (Europe) S.A. 5.00% Pirelli Tyre Holding N.V. Slovakia Kablo Bratislava Spol. S.R.O. Energy Cables and Systems Bratislava Slov. Koruna 523,334,000 100.00% Pirelli Cable Holding N.V. Pirelli Slovakia S.R.O. Tyre Bratislava Slov. Koruna 200,000 100.00% Pirelli Tyre (Europe) S.A. Spain Euro Driver Car S.L. Tyre Barcelona Euro 600,000 25.00% Pirelli Neumaticos S.A. 26.00% Proneus S.L. Fercable S.A. Energy Cables and Systems Barcelona Euro 3,606,073 100.00% Pirelli Cables y Sistemas S.A. Omnia Motor S.A. Tyre Barcelona Euro 1,502,530 100.00% Pirelli Neumaticos S.A. Pirelli Cables y Sistemas S.A. Energy Cables and Systems Barcelona Euro 24,000,000 100.00% Pirelli Cable Holding N.V. Pirelli Neumaticos S.A. Tyre Barcelona Euro 45,075,908 100.00% Pirelli Tyre Holding N.V. Pirelli Telecom Cables y Sistemas Espana S.L. Telecom Cables and Systems Barcelona Euro 12,000,000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A. Proneus S.L. Tyre Barcelona Euro 3,005 51.00% Pirelli Neumaticos S.A. Sweden Pirelli Kablar och System AB Energy Cables and Systems Hoganas Swed. Krona 100,000 100.00% Pirelli Cables and Systems OY Pirelli Tyre Nordic AB Tyre Bromma Swed. Krona 950,000 100.00% Pirelli Tyre (Europe) S.A. Switzerland Agom S.A. Tyre Conthey Swiss Franc 50,000 80.00% Pirelli Tyre (Europe) S.A. Agom S.A. Bioggio Tyre Bioggio Swiss Franc 590,000 100.00% Pirelli Tyre (Europe) S.A. Pirelli Cables and Systems S.A. Energy Cables and Systems Basil Swiss Franc 500,000 100.00% Pirelli Cable Holding N.V.
Web site: http://www.pirelli.com E-mail: [email protected] 179 Preliminary Information Directors’ Report Consolidated Financial Statements
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by Pirelli Société de Services S.a.r.l. Financial Basil Swiss Franc 50,000 100.00% Pirelli Société Générale S.A. Pirelli Société Générale S.A. Financial Basil Swiss Franc 28,000,000 100.00% Pirelli & C. S.p.A. Pirelli Tyre (Europe) S.A. Tyre Basil Swiss Franc 1,000,000 100.00% Pirelli Tyre Holding N.V. The Netherlands Pirelli Cables and Systems N.V. Energy Cables and Systems Delft Euro 5,000,000 100.00% Pirelli Cable Holding N.V. Energy Cables and Systems Pirelli Cable Holding N.V. holding company Delft Euro 272,515,065 100.00% Pirelli Cavi e Sistemi Energia S.p.A. Pirelli Cable Overseas N.V. Telecom Cables and Systems Delft Euro 10,000,000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A. Pirelli Submarine Telecom Systems Holding B.V. Real Estate Delft Euro 4,500,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli Tyre Holding N.V. Tyre Holding Company Heinenoord Euro 250,000,000 100.00% Pirelli & C. S.p.A. Pirelli Tyres Nederland B.V. Tyre Heinenoord Euro 18,152 100.00% Pirelli Tyre (Europe) S.A. Sipir Finance N.V. Financial Delft Euro 13,021,222 100.00% Pirelli & C. S.p.A. Turkey Celikord A.S. Tyre Istanbul Turk. Lira/mil. 28,000,000 50.733% Pirelli Tyre Holding N.V. 0.27% Pirelli Pneumatici S.p.A. Turk-Pirelli Lastikleri A.S. Tyre Istanbul Turk. Lira/mil.136,000,000 62.90% Pirelli Tyre Holding N.V. 0.15% Pirelli Pneumatici S.p.A. Türk Pirelli Kablo ve Sistemleri A.S. Energy Cables and Systems Mudania / Bursa Turk. Lira/mil. 39,312,000 83.75% Pirelli Cable Holding N.V. Zalsan Zirai Arac Lastikleri A.S. Tyre Istanbul Turk. Lira/mil. 3,283,000 70.00% Turk-Pirelli Lastikleri A.S. United Kingdom Aberdare Cables Ltd Energy Cables and Systems London British Pound 609,654 100.00% Pirelli General plc Cable Makers Properties and Services Ltd Energy Cables and Systems East Molesey British Pound 33 63,53% Pirelli General plc Central Tyre Ltd Tyre London British Pound 100,000 100.00% Pirelli UK Tyres Ltd Comergy Ltd Energy Cables and Systems London British Pound 1,000,000 100.00% Pirelli Cable Holding N.V. Courier Tyre Company Ltd Tyre London British Pound 10,000 100.00% Pirelli UK Tyres Ltd CPK Auto Products Ltd Tyre London British Pound 10,000 100.00% Pirelli UK Tyres Ltd CTC 1994 Ltd Tyre London British Pound 984 100.00% Central Tyre Ltd Pirelli & C. Real Estate Ltd Real Estate London Euro 100,000 100.00% Pirelli & C. Real Estate S.p.A. Pirelli Cables (2000) Ltd Energy Cables and Systems London British Pound118,653,473 100.00% Pirelli General plc Pirelli Cables (Industrial) Ltd Energy Cables and Systems London British Pound 9,010,935 100.00% Pirelli General plc Pirelli Cables (Supertention) Ltd Energy Cables and Systems London British Pound 5,000,000 100.00% Pirelli General plc Pirelli Cables and Systems International Ltd Energy Cables and Systems London Euro 100,000 100.00% Pirelli Cable Holding N.V. Pirelli Cables Ltd Energy Cables and Systems London British Pound 100,000 100.00% Pirelli General plc Pirelli Construction Company Ltd Energy Cables and Systems London British Pound 8,000,000 100.00% Pirelli General plc Pirelli Focom Ltd Energy Cables and Systems London British Pound 6,447,000 100.00% Pirelli General plc
Web site: http://www.pirelli.com E-mail: [email protected] 180 Preliminary Information Directors’ Report Consolidated Financial Statements
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by Pirelli General plc Cables and Systems London British Pound144,139,360 100.00% Pirelli UK plc “B1”/“B2” Pirelli International Ltd Financial London Euro 250,000,000 100.00% Pirelli Finance (Luxembourg) S.A. Pirelli Metals Ltd Energy Cables and Systems London British Pound 100,000 100.00% Pirelli General plc Pirelli Telecom Cables and Systems UK Ltd Telecom Cables and Systems London British Pound 100,000 100.00% Pirelli General plc Pirelli Tyres Ltd Tyre London British Pound 16,000,000 100.00% Pirelli UK Tyres Ltd Pirelli UK Employee Share Trustee Ltd Financial London British Pound 2 100.00% Pirelli UK plc “C” Pirelli UK Finance Ltd Financial London British Pound 6,969,280 100.00% Pirelli UK plc “C” Pirelli UK plc “A” Tyre Holding company London British Pound 85,535,300 100.00% Pirelli Tyre Holding N.V. Energy Cables and Systems Pirelli UK plc “B1” holding company London British Pound 69,188,889 100.00% Pirelli Cable Holding N.V. Telecom Cables and Systems Pirelli UK plc “B2” holding company London British Pound 27,149,529 100.00% Pirelli Cavi e Sistemi Telecom S.p.A. Pirelli UK plc “C” Finance Holding Company London British Pound 11,625,978 100.00% Pirelli & C. S.p.A. Pirelli UK Tyres Ltd Tyre London British Pound 85,000,000 100.00% Pirelli UK plc “A”
North America Canada Pirelli Power Cables and Saint John Systems Canada Ltd Energy Cables and Systems (New Brunswich) Can. $ 1,000,000 100.00% Pirelli Cable Holding N.V. Frederic Town Pirelli Tire Inc. Tyre (New Brunswich) Can. $ 6,000,000 100.00% Pirelli Tyre (Europe) S.A. U.S.A. Pirelli Communications Cables Wilmington and Systems USA LLC Telecom Cables and Systems (Delaware) US $ 10 100.00% Pirelli North America Inc. “B1” Pirelli Communications Wilmington Pirelli Communications Cables and Cables Corporation Commercial (Delaware) US $ 1 100.00% Systems USA LLC Pirelli Power Cables and Systems Pirelli Construction Services Inc. Energy Cables and Systems Dover (Delaware) US $ 1,000 100.00% USA LLC Wilmington Pirelli North America Inc. “A” Tyre (Delaware) US $ 3,15 100.00% Pirelli Tyre Holding N.V. Wilmington Pirelli North America Inc. “B1” Telecom Cables and Systems (Delaware) US $ 5,75 100.00% Pirelli Cavi e Sistemi Telecom S.p.A. Wilmington Pirelli North America Inc. “B2” Energy Cables and Systems (Delaware) US $ 1,10 100.00% Pirelli Cavi e Sistemi Energia S.p.A. Pirelli Power Cables and Wilmington Systems USA LLC Energy Cables and Systems (Delaware) US $ 10 100.00% Pirelli North America Inc. “B2” Wilmington Pirelli RNC Inc. Commercial (Delaware) US $ 1 100.00% Pirelli Tyre Holding N.V. Wilmington Pirelli Tire LLC Tyre (Delaware) US $ 1 100.00% Pirelli North America Inc. “A”
Central/South America Argentina Pirelli Consultora Conductores Fipla S.A. Energy Cables and Systems Buenos Aires Arg. Peso 1 66.97% e Instalaciones S.A.I.C.
Web site: http://www.pirelli.com E-mail: [email protected] 181 Preliminary Information Directors’ Report Consolidated Financial Statements
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by Pirelli Argentina de Mandatos S.A. Services Buenos Aires Arg. Peso 500,000 100.00% Pirelli Société Générale S.A. Pirelli Consultora Conductores e Instalaciones S.A.I.C. Energy Cables and Systems Buenos Aires Arg. Peso 2,227 100.00% Pirelli Cable Holding N.V. Pirelli Energia Cables y Sistemas Pirelli Consultora Conductores de Argentina S.A. Energy Cables and Systems Buenos Aires Arg. Peso 44,509,458 74.91% e Instalaciones S.A.I.C. 24.69% Pirelli Cable Holding N.V. Pirelli Neumaticos S.A.I.C. Tyre Buenos Aires Arg. Peso 19,016,500 99.02% Pirelli Tyre Holding N.V. 0.98% Pirelli Pneumatici S.p.A. Pirelli Telecomunicaciones Telecom Cables and Systems Buenos Aires Arg. Peso 12,000 100.00% Pirelli Telecomunicações Cabos Cables y Sistemas de Argentina S.A. e Sistemas do Brasil S.A. Pirelli Energia Cables y Sistemas Tel 3 S.A. Energy Cables and Systems Buenos Aires Arg. Peso 7,822,000 51.00% de Argentina S.A. Brazil Cordas Metalicas do Brasil Ltda Tyre Sumarè Bra. Real 1,000 99.90% Pirelli Pneus S.A. 0.10% Muriaè Ltda Muriaé Ltda Financial Santo Andrè Bra. Real 80,000,000 100.00% Pirelli Pneus S.A. Novacorp Consultora e Serviços Corporativos Ltda Holding Santo Andrè Bra. Real 6,000 99.98% Pirelli S.A. Pirelli & C. Real Estate Ltda Real Estate Santo Andrè Bra. Real 2,000,000 100.00% Pirelli S.A. Pirelli Energia Cabos e Sistemas do Brasil S.A. Energy Cables and Systems Sorocaba Bra. Real 106,824,993 87.20% 88.78% Pirelli Cavi e Sistemi Energia S.p.A. 12.24% 10.37% Pirelli S.A. Pirelli Pneus Nordeste Ltda Tyre Feira de Santana Bra. Real 29,991,402 100.00% Pirelli Pneus S.A. Pirelli Pneus S.A. Tyre Feira de Santana Bra. Real 342,085,095 96.05% 98.77% Pirelli Pneumatici S.p.A. 3.68% 0.79% Pirelli S.A. Pirelli S.A. Financial San Paolo Bra. Real 46,364,284 100.00% Pirelli & C. S.p.A. Pirelli Telecomunicações Cabos e Sistemas do Brasil S.A. Telecom Cables and Systems Sorocaba Bra. Real 81,288,046 90.22% 91.43% Pirelli Cavi e Sistemi Telecom S.p.A. 9.35% 7.92% Pirelli S.A. Pneuac Comercial e Importadora Ltda Tyre San Paolo Bra. Real 12,913,526 100.00% Pirelli Pneus S.A. Chile Pirelli E y T S.A. Energy Cables and Systems Santiago Chile Peso/000 3,072,471 99.82% Pirelli Instalaciones Chile S.A. Pirelli Consultora Conductores Pirelli Instalaciones Chile S.A. Energy Cables and Systems Santiago Chile Peso/000 918,707 100.00% e Instalaciones S.A.I.C. Pirelli Neumaticos Chile Limitada Tyre Santiago US $ 1,918,451 99.98% Pirelli Pneus S.A. 0.02% Pneuac Comercial e Importadora Ltda Colombia Pirelli de Colombia S.A. Tyre Santa Fe De Bogota Col. Peso/000 3,315,069 92.91% Pirelli Pneus S.A. 2.28% Pirelli de Venezuela C.A. 1.60% Muriaè Ltda 1.60% Pirelli Pneus Nordeste Ltda 1.60% Pneuac Comercial e Importadora Ltda
Web site: http://www.pirelli.com E-mail: [email protected] 182 Preliminary Information Directors’ Report Consolidated Financial Statements
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by Mexico Pirelli Neumaticos de Mexico S.A. de C.V. Tyre Naucalpan Mex Peso 35,098,600 99.98% Pirelli Pneus S.A. 0.02% Pneuac Comercial e Importadora Ltda Servicios Pirelli Mexico S.A. de C.V. Tyre Mexico City Mex Peso 50,000 99.00% Pirelli Pneus S.A. 1.00% Pneuac Comercial e Importadora Ltda Uruguay Pirelli Energia Cabos e Sistemas Cite S.A. Energy Cables and Systems Montevideo Urug. Peso 24,062,721 100.00% do Brasil S.A. Venezuela Pirelli de Venezuela C.A. Tyre Valencia Ven. Bolivar/00010,062,679 96.22% Pirelli Tyre Holding N.V.
Africa Ivory Coast SICABLE - Société Ivoirienne Pirelli Energie Câbles et Systèmes de Cables S.A. Energy Cables and Systems Abidjan Cfa Franc 740,000,000 51.00% France S.A. Egypt Alexandria Tire Company S.A.E. Tyre Alexandria Egy. Pound 393,000,000 86.79% Pirelli Pneumatici S.p.A. 0.03% Pirelli Tyre (Europe) S.A. International Tire Company Ltd Tyre Alexandria Egy. Pound 50,000 96.00% Alexandria Tire Company S.A.E. South Africa Pirelli Cables & Systems (Proprietary) Ltd Commercial Woodmead, S.A. Rand Sudafr. 100 100.00% Pirelli Cavi e Sistemi Energia S.p.A. Pirelli Tyre (Pty) Ltd Tyre Sandton Rand Sudafr. 1 100.00% Pirelli Tyre (Europe) S.A. Tunisia Pirelli Energie Câbles et Systèmes Auto Cables Tunisie S.A. Energy Cables and Systems Tunis Tun. Dinar 4,450,000 51.00% France S.A.
Oceania Australia Pirelli Power Cables & Systems Australia Pty Ltd Energy Cables and Systems Liverpool - N.S.W. $ Austr. 15.000.000 100.00% Pirelli Cavi e Sistemi Energia S.p.A. Pirelli Telecom Cables & Systems Australia Pty Ltd Telecom Cables and Systems Liverpool - N.S.W. $ Austr. 38.500.000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A. Pirelli Tyres Australia Pty Ltd Tyre Pymble - N.S.W. $ Austr. 150.000 100.00% Pirelli Tyre (Europe) S.A. New Zealand Pirelli Power Cables & Systems Pirelli Power Cables & Systems New Zealand Ltd Energy Cables and Systems Auckland $ Nz. 10.000 100.00% Australia Pty Ltd Pirelli Telecom Cables & Systems Pirelli Telecom Cables & Systems New Zealand Ltd Telecom Cables and Systems Auckland $ Nz. 10.000 100.00% Australia Pty Ltd Pirelli Tyres (NZ) Ltd Tyre Wellington $ Nz. 100 100.00% Pirelli Tyres Australia Pty Ltd
Web site: http://www.pirelli.com E-mail: [email protected] 183 Preliminary Information Directors’ Report Consolidated Financial Statements
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by
Asia China Pirelli Baosheng Cable Co. Ltd Energy Cables and Systems Jiangsu US $ 19,500,000 67.00% Pirelli Cables Asia-Pacific Pte Ltd Pirelli Cables (Shanghai) Trading Co. Ltd Energy Cables and Systems Shanghai US $ 500,000 100.00% Pirelli Cables Asia-Pacific Pte Ltd Pirelli Telecom Cables Co. Ltd Wuxi Telecom Cables and Systems Xuelang Town US $ 29,941,250 86.71% Pirelli Cable Overseas N.V. Tianjin Pirelli Power Cables Co. Ltd Energy Cables and Systems Tianjin Municipality US $ 13,100,000 67.00% Pirelli Cable Holding N.V. Japan Pirelli Japan K.K. (before P & A K.K.) Tyre Tokyo Jap. Yen 2,700,000,000 100.00% Pirelli Tyre Holding N.V. India Pirelli Cables (India) Private Ltd Energy Cables and Systems New Delhi India Rupee 10,000,000 100.00% Pirelli Cable Holding N.V. Indonesia P.T. Pirelli Cables Indonesia Energy Cables and Systems Jakarta US $ 67,300,000 99.48% Pirelli Cable Holding N.V. 0.52% Pirelli Cavi e Sistemi Energia S.p.A. Malaysia BICC (Malaysia) Sdn Bhd Energy Cables and Systems Kuala Lumpur Mal. Ringgit 100,000 100.00% Pirelli Cables Asia-Pacific Pte Ltd Submarine Cable Installation Sdn Bhd Energy Cables and Systems Kuala Lumpur Mal. Ringgit 10,000 100.00% Pirelli Cavi e Sistemi Energia S.p.A. Singapore Pirelli Asia Pte Ltd Tyre Singapore $ Sing. 2 100.00% Pirelli Tyre (Europe) S.A. Pirelli Cable Systems Pte Ltd Energy Cables and Systems Singapore $ Sing. 25,000 50.00% Pirelli General plc 50.00% Pirelli Cable Holding N.V. Pirelli Cables Asia-Pacific Pte Ltd Energy Cables and Systems Singapore $ Sing. 213,324,290 100.00% Pirelli Cable Holding N.V. Trans-Power Cables Pte Ltd Energy Cables and Systems Singapore $ Sing. 1,500,000 100.00% Pirelli Cable Holding N.V.
Web site: http://www.pirelli.com E-mail: [email protected] 184 Preliminary Information Directors’ Report Consolidated Financial Statements
Other investments in subsidiaries and associated companies
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by Europe Italy G6 Advisor Real Estate Milan Euro 50,000 42.30% Pirelli & C. Real Estate Agency S.p.A. Progetto Bicocca Università S.r.l. Real Estate Milan Euro 873,600 34.00% Pirelli & C. Real Estate S.p.A.
Web site: http://www.pirelli.com E-mail: [email protected] 185 Preliminary Information Directors’ Report Consolidated Financial Statements
Investments accounted for using the equity method
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by
Jointly controlled companies
Europe Italy Olimpia S.p.A. Industrial Holding Company Milan Euro 2,630,233,510 50.40% Pirelli & C. S.p.A.
Subsidiaries
Europe Germany Drahtcord Saar Geschaeftsfuehrungs GmbH Tyre Merzig Marchi T. 60,000 50.00% Pirelli Deutschland A.G. Drahtcord Saar GmbH & Co. K.G. Tyre Merzig Marchi T. 30,000,000 50.00% Pirelli Deutschland A.G. Kabeltrommel Gesellshaft mbH & Co K.G. Energy Cables and Systems Cologne Euro 10,225,838 27.48% Pirelli Kabel und Systeme GmbH 1.00% Bergmann Kabel und Leitungen GmbH Italy Agorà S.r.l. Real Estate Milan Euro 10,000 40.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Facility Altair Zander Italia S.r.l. Real Estate Milan Euro 100,000 50.00% Management S.p.A. Aree Urbane S.r.l. Real Estate Milan Euro 307,717 34.60% Pirelli & C. Real Estate S.p.A. 0.28% Pirelli & C. S.p.A. Bernini Immobiliare S.r.l. Real Estate Milan Euro 500,000 14.00% Pirelli & C. Real Estate S.p.A. Bicocca Center S.r.l. Real Estate Milan Euro 51,000 25.00% Pirelli & C. Real Estate S.p.A. Continuum S.r.l. Real Estate Milan Euro 500,000 40.00% Pirelli & C. Real Estate S.p.A. Delta S.p.A. Real Estate Milan Euro 153,000 47.50% Pirelli & C. Real Estate S.p.A. Dixia S.r.l. Real Estate Milan Euro 2,500,000 30.00% Pirelli & C. Real Estate S.p.A. Domogest S.r.l. Real Estate Florence Euro 1,050,000 50.00% Centrale Immobiliare S.p.A. Elle Dieci Pirelli & C. Real Estate Property Società Consortile a.r.l. Real Estate Milan Euro 100,000 40.00% Management S.p.A. Elle Nove Società Consortile a.r.l. Real Estate Milan Euro 100,000 34.90% Edilnord Gestioni S.p.A. Pirelli & C. Real Estate Property Elle Tre Società Consortile a.r.l. Real Estate Milan Euro 100,000 40.00% Management S.p.A. Esedra S.r.l. Real Estate Milan Euro 2,376,234 35.00% Pirelli & C. Real Estate S.p.A. Eurofly Service S.p.A. Services Caselle Torinese Euro 8,255,000 24.55% Pirelli & C. S.p.A. Eurostazioni S.p.A. Holding Rome Euro 160,000,000 32.71% Pirelli & C. S.p.A. Geolidro S.p.A. Real Estate Naples Euro 3,099,096 49.00% Centrale Immobiliare S.p.A. Holdim S.r.l. Real Estate Milan Euro 1,000,000 30.00% Pirelli & C. Real Estate S.p.A. Idea Granda S. Consortile r.l. Environment Cuneo Euro 1,292,500 49.00% Pirelli & C. Ambiente S.p.A. Immobiliare le Ghirlande S.r.l. Real Estate Milan Euro 10,000 35.00% Pirelli & C. Real Estate S.p.A. Immobiliare Prizia S.r.l. Real Estate Milan Euro 469,000 36.00% Pirelli & C. Real Estate S.p.A.
Web site: http://www.pirelli.com E-mail: [email protected] 186 Preliminary Information Directors’ Report Consolidated Financial Statements
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by Induxia S.r.l. Real Estate Milan Euro 836,300 18.00% Pirelli & C. Real Estate S.p.A. Iniziative Immobiliari S.r.l. Real Estate Gavirate (VA) Euro 5,000,000 29.07% Pirelli & C. Real Estate S.p.A. Le Case di Capalbio S.r.l. Real Estate Milan Euro 10,000 20.00% Pirelli & C. Real Estate S.p.A. Localto S.p.A. Financial Milan Euro 5,200,000 35.00% Partecipazioni Real Estate S.p.A. LSF Italian Finance Company S.p.A. Financial Milan Euro 10,000 30.00% Partecipazioni Real Estate S.p.A. Moncalieri Center S.r.l. Real Estate Milan Euro 22,000 25.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Facility MP Facility S.p.A Real Estate Milan Euro 1,000,000 50.00% Management S.p.A. Orione Immobiliare Prima S.p.A. Real Estate Milan Euro 104,000 35.00% Pirelli & C. Real Estate S.p.A. Perseo S.r.l. Services Milan Euro 20,000 24.55% Pirelli & C. S.p.A. Progetto Bicocca la Piazza S.r.l. Real Estate Milan Euro 3,151,800 26.00% Pirelli & C. Real Estate S.p.A. Progetto Corsico S.r.l. Real Estate Milan Euro 100,000 49.00% Pirelli & C. Real Estate S.p.A. Progetto Fontana S.r.l. Real Estate Milan Euro 500,000 23.00% Pirelli & C. Real Estate S.p.A. Progetto Gioberti S.r.l. Real Estate Milan Euro 100,000 50.00% Pirelli & C. Real Estate S.p.A. Progetto Lainate S.r.l. Real Estate Milan Euro 25,500 25.00% Pirelli & C. Real Estate S.p.A. Realco LSF S.r.l. Real Estate Milan Euro 10,000 33.00% Partecipazioni Real Estate S.p.A. Regus Business Centres Italia S.p.A. Real Estate Milan Euro 661,220 35.00% Pirelli & C. Real Estate S.p.A. SMP Melfi S.r.l. Tyre Melito (NA) Euro 3,511,906 50.00% Pirelli Pneumatici S.p.A. Solaris S.r.l. Real Estate Milan Euro 20,000 40.00% Pirelli & C. Real Estate S.p.A. Pirelli & C. Real Estate Facility Telepost S.p.A. Real Estate Milan Euro 120,000 20.00% Management S.p.A. Trixia S.r.l. Real Estate Milan Euro 1,209,700 36.00% Pirelli & C. Real Estate S.p.A. Verdi S.r.l. Real Estate Milan Euro 20,000 43.74% Pirelli & C. Real Estate S.p.A. Vindex S.r.l. Real Estate Brescia Euro 12,000 16.00% Partecipazioni Real Estate S.p.A. 37.00% CFT Finanziaria S.p.A. Luxembourg IN Holdings I S.a.r.l. Real Estate Luxembourg Euro 4,595,725 20.50% Pirelli & C. Real Estate S.p.A. Inimm Due S.a.r.l. Real Estate Luxembourg Euro 240,950 25.00% Pirelli & C. Real Estate S.p.A. M.S.M.C. Solferino S.a.r.l. (in liquidation) Real Estate Luxembourg Euro 136,700 31.25% Pirelli & C. Real Estate S.p.A. Portugal Mirandia - Trading e Consultoria Lda Real Estate Madeira Euro 5,000 15.00% Pirelli & C. Real Estate S.p.A. Tronador - Consultoria Economica Lda Real Estate Madeira Euro 70,955 15.00% Pirelli & C. Real Estate S.p.A. The Netherlands M.S.M.C. Italy Holding B.V. Real Estate Amsterdam Euro 20,000 25.00% Pirelli & C. Real Estate S.p.A. Masseto 1 B.V. Real Estate Amsterdam Euro 19,000 33.00% Pirelli & C. Real Estate S.p.A. Popoy Holding B.V. Financial Amsterdam Euro 26,550 25.05% Pirelli & C. Real Estate S.p.A. Spazio Industriale B.V. Real Estate Amsterdam Euro 763,077 25.00% Pirelli & C. Real Estate S.p.A. United Kingdom Rodco Ltd Energy Cables and Systems Gravesend British Pound 5,000,000 40.00% Pirelli General plc
Web site: http://www.pirelli.com E-mail: [email protected] 187 Preliminary Information Directors’ Report Consolidated Financial Statements
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by
North America U.S.A. Sci Roev Texas Partners L.P. Real Estate Dallas US $ 12,000,000 10.00% Pirelli & C. Real Estate S.p.A.
Central/South America Argentina Lineas de Transmision de Buenos Aires S.A. (in liquidation) Energy Cables and Systems Buenos Aires Arg. Peso/000 12,000 20.00% Pirelli Argentina de Mandatos S.A. Brazil K.M.P. Cabos Especiais Pirelli Energia Cabos e Sistemas e Sistemas Ltda Energy Cables and Systems San Paolo Bra. Real 6,600,916 40.00% do Brasil S.A.
Asia Saudi Arabia Sicew-Saudi Italian Co. for Electrical Works Ltd Energy Cables and Systems Jeddah S. Arab. Riyal 1,000,000 34.00% Pirelli Cable Holding N.V.
Web site: http://www.pirelli.com E-mail: [email protected] 188 Preliminary Information Directors’ Report Consolidated Financial Statements
Other investments in subsidiaries and associated companies
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by
Europe Austria Pirelli Kabelwerke und Systeme GmbH (*) Energy Cables and Systems Vienna Euro 36,336 100.00% Pirelli Cavi e Sistemi Energia S.p.A. Germany Industriekraftwerk Breuberg GmbH Cogeneration Hoechst/Odenwald Euro 1,533,876 26.00% Pirelli Deutschland AG Hungary Ipoly Kabeldob KFT. (in liquidation) Energy Cables and Systems Szecseny Hun. Forint/000 36,350 25.17% MKM Magyar Kabel Muvek Rt.
Asia Malaysia Power Cables Malaysia Sdn Bhd Energy Cables and Systems Selangor Darul Ehsan Ringgit Mal. 8,000,000 40.00% Pirelli Cables Asia - Pacific Pte Ltd
(*) This investments have not been consolidated since they are considered immaterial.
Web site: http://www.pirelli.com E-mail: [email protected] 189 Preliminary Information Directors’ Report Consolidated Financial Statements
Other investments considered significant as per Consob resolution no. 11971 of May 14, 1999
Percentage Percentage Company Business Headquarters Share Capital ownership of vote Held by Belgium Euroqube S.A. Services Brussels Euro 84,861,116 17.79% Pirelli & C. S.p.A. Brazil Estrutura.net Ltda Services San Paolo Bra. Real 10,000,000 7.54% Pirelli S.A. 7.54% Pirelli Energia Cabos e Sistemas do Brasil S.A. France Aliapur S.A. Tyre Lion Euro 262,500 14.29% Pirelli Pneumatici S.p.A. Germany Kabeltrommel Gesellschaft mbh Energy Cables and Systems Colonia Euro 26,076 5.88% Pirelli Kabel und Systeme GmbH 5.88% Bergmann Kabel und Leitungen GmbH Italy F.C. Internazionale Milano S.p.A. Sport Milan Euro 66,831,250 19.49% Pirelli & C. S.p.A. Fin. Priv. S.r.l. Financial Milan Euro 20,000 14.29% Pirelli & C. S.p.A. Servizio Titoli S.p.A. Services Turin Euro 126,000 12.38% Pirelli & C. S.p.A. Tecnocittà S.r.l. (in liquidation) Real Estate Milan Euro 547,612 12.00% Pirelli & C. Real Estate S.p.A. Poland Centrum Utylizacji Opon Otganizacja Odzyseu S.A. Tyre Warsaw Pol. Zloty 1,008,000 14.28% Pirelli Polska Sp.ZO.O. Switzerland Voltimum S.A. Energy Cables and Systems Meyrin Swiss Franc 2,968,970 13.71% Pirelli Cavi e Sistemi Energia S.p.A. The Netherlands MB Venture Capital Fund I Participating Company G N.V. Financial Amsterdam Euro 50,000 14.00% Pirelli Finance (Luxembourg) S.A. Tunisia Société Tunisienne des Industries de Pnéumatiques S.A. Tyre Tunis Tun. Dinar 42,078,240 15.83% Pirelli Pneumatici S.p.A.
Web site: http://www.pirelli.com E-mail: [email protected] 190 Preliminary Information Directors’ Report Consolidated Financial Statements
Independent Auditors’ Report
Web site: http://www.pirelli.com E-mail: [email protected] 191 Graphic project Ippolito Fassati, CRM S.r.l. - www.crm.it Lucini printig, Milan - www.lucinisrl.com
Printed on recycled paper