2002 Annual Report - 131th Year Pirelli & C. - Accomandita per Azioni Registered office in Milan - Via G. Negri 10 Share capital - Euros 339,422,773.56 fully paid-in Milan Companies Registry and Tax Code No. 00860340157 Annual Report 2002-131th Year PIRELLI & C. Accomandita per Azioni Leopoldo Pirelli Honorary Chairman BOARD OF MANAGING PARTNERS Marco Tronchetti Provera Chairman Alberto Pirelli Deputy Chairman Carlo Buora Luigi Orlando Carlo Alessandro Puri Negri Sergio Lamacchia Secretary to the Board BOARD OF STATUTORY AUDITORS Roberto Bracchetti Chairman Paolo Lazzati Standing member Salvatore Spiniello Standing member Paolo Colombo Alternate Marco Reboa Alternate GENERAL MANAGER Carlo Alessandro Puri Negri INDEPENDENT AUDITORS PricewaterhouseCoopers S.p.A. Note: The nature of the powers delegated to the Chairman and Deputy Chairman are described on page 45 under Corporate Governance. 3 NOTICE OF ANNUAL GENERAL SHAREHOLDERS’ MEETING Notice is hereby given that the Annual General Meeting of the shareolders of Pirelli & C. - Accomandita per Azioni, in ordinary session, will be held in Milan, at the Associazione Industriale Lombarda in Via Pantano 9 at 10:30 A.M. • Friday, May 7, 2003 in first call • Monday, May 8, 2003 in second call to discuss the following AGENDA Ordinary Meeting 1) Directors’ Report on operations; report by the Board of Auditors; balance sheet as of 31 December 2002; allocation of profits. 2) Proposal for the purchase and procedures for the disposal of own shares, subject to the prior revocation of the resolution adopted by the Board on 13 May 2002, insofar as it has not been employed. Inherent and consequent resolutions. Appointment of powers. Extraordinary Meeting 1) Change the limited share partnership company into a joint stock company and alter its business purpose; subsequent amendment of existing articles 1 (company name), 2 (business purpose), 7 (calling the meeting), 8 (setting up the meeting), 9 (chairmanship of the general meetings), 10 (corporate management), 11 (calling the administrative body and majorities), 12 (representing the company), 13 (directors’ remuneration), 14 (termination of directors) and 17 (allocation of profits) of the articles of association. Inclusion of a new article on the powers of the Board of Directors between articles 10 and 11 to be identified as article 11 and the new numbering of subsequent articles. Inherent and consequent resolutions. Appointment of powers. 2) Increase of the share capital which can be split for sale by issuing 1,950,355,809 ordinary shares at the most, flanked by an equal number of free warrants each equipped with independent circulation properties which will be offered as an option for ordinary and savings shareholders for a total of three new ordinary shares and a warrant for each owned share, whatever its nature, for a unit price of 0.52 Euros per share, corresponding to its face value. Subsequent increase of the share capital which can be split for sale by issuing 487,588,952 ordinary shares at the most, even in several batches, exclusively 4 and irrevocably linked to the use of the warrants (linked to a maximum number of 1,950,355,809 ordinary shares obtained by increasing the capital as described above) at a unit price of 0.52 Euros per share, corresponding to its face value. Subsequent amendment of article 5 (share capital) of the articles of association. Approval of the Regulation “Warrant for ordinary Pirelli & C. shares 2003-2006”. Inherent and consequent resolutions. Appointment of powers. 3) Endorsement of the merger plan by incorporation into Pirelli & C. A.p.A. (Pirelli & C. S.p.A. once it has become a joint stock company) of Pirelli & C. Luxembourg S.p.A. (fully owned company) and Pirelli S.p.A. amongst others, which will entail: (i) assigning a maximum number of 1,398,203,116 new ordinary shares and 113,580,020 new savings shares of Pirelli & C. - due as of 1 January of the year in which the merger comes into force in reference to third parties - to ordinary and savings shareholders of Pirelli S.p.A. in a ratio of 4 new Pirelli & C. ordinary shares every 3 Pirelli S.p.A. ordinary shares and 10 new Pirelli & C. savings shares every 7 Pirelli S.p.A. savings shares respectively; (ii) increasing the share capital of Pirelli & C. by issuing a maximum number of 1,398,203,116 ordinary shares and 113,580,020 savings shares of Pirelli & C. to serve the merger and the consequent amendment of article 5 (share capital) of the articles of association. (iii) assigning the Directors, as per article 2443 of the Italian Civil Code, the faculty to increase the share capital once or in several occasions and for a maximum amount of 52,000,000.00 Euros face value, by issuing ordinary shares to be assigned to managers and to the middle-management of Pirelli & C. A.p.A. (after becoming a joint stock company Pirelli & C. S.p.A.) and of the subsidiary companies, including the subsidiaries of the latter, both in Italy and abroad, as per articles 2441 and/or 2349 of the Italian Civil Code, also to successfully uphold the shareholding incentive plan of the incorporation company Pirelli S.p.A.. Subsequent further amendment of article 5 (share capital) of the articles of association; (iv) further amendment of article 17 (allocation of profits) – which has become article 18 under the new numbering - of the articles of association. Inherent and consequent resolutions. Appointment of powers. Again in the ordinary meeting 3) Appointment of the Directors, as the mandate of the unlimited partners has ended due to the company becoming a joint stock company, after having defined their number; definition of the remuneration due to the Directors. 4) Appointment of the Board of Auditors and its Chairman; determination the honorarium for the Statutory auditors. 5 6 TABLE OF CONTENTS Notice of Annual General Shareholders’ Meeting Page 4 Agenda » 4 Summary of selected consolidated financial data » 8 Report of the Managing Partners »9 – The Group » 11 – Significant subsequent events » 22 – Outlook for the current year » 22 – Related party disclosures » 22 – Performance of the major group companies » 24 – Equity investments held by the Managing Partners » 38 – Proforma data » 39 – Stock option plans » 44 – Corporate Governance » 45 – The parent company - Pirelli & C. » 67 Shareholders’ resolutions » 71 Consolidated financial statements at December 31, 2002 – Consolidated balance sheets » 76 – Consolidated statements of income » 80 – Notes to consolidated financial statements » 82 – Supplementary information » 115 – Indipendent Auditor’s Report » 135 Extraordinary Session » 137 7 FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA (in millions of euros) 2002 2001 2000 1999 1998 Net sales 6,718 7,762 7,697 6,654 5,655 Gross operating profit 523 704 850 699 733 Operating profit 118 297 432 322 397 Net income (loss) (405) 194 3,759 293 282 Net income (loss) attributable to Pirelli & C. (58) 125 1,405 86 74 Earnings (loss) per share (in euros) (0.09) 0.20 2.28 0.14 0.12 Fixed assets 6,596 7,092 3,728 3,312 2,916 Net working capital 991 1,314 667 1,401 1,256 Net invested capital 7,587 8,406 4,395 4,713 4,172 Shareholders’ equity 4,626 5,407 5,844 2,313 2,245 Provisions 911 970 1,186 803 731 Net financial (liquidity)/debt position 2,050 2,029 (2,635) 1,597 1,196 Net equity attributable to Pirelli & C. 1,933 2,119 2,171 809 748 Equity per share (in euros) 2.96 3.39 3.52 1.35 1.20 Free cash flows 476 26 176 96 122 Net cash flows (168) (4,691) 4,118 (388) (1,235) R&D expenditures 219 237 213 200 196 Capital expenditures 337 646 570 476 390 Gross operating profit/Net sales 7.79% 9.07% 11.04% 10.50% 12.96% Operating profit/Net sales 1.76% 3.83% 5.61% 4.84% 7.02% Net icome/Net equity (8.75%) 3.59% 64.32% 12.67% 12.56% Operating profit/Net invested capital 1.56% 3.53% 9.83% 6.83% 9.52% Net financial position/Net equity 0,44 0,38 (0,45) 0,69 0,53 Pirelli & C. ordinary share (No. in millions) 618.2 591.4 582.8 563.6 563.6 Pirelli & C. savings share (No. in millions) 34.4 34.4 34.4 34.4 34.4 Total Pirelli & C. shares (No. in millions) 652.6 625.8 617.2 598.0 598.0 Treasury shares (No. in millions) 2.6 2.6 2.6 2.6 2.6 8 REPORT OF THE MANAGING PARTNERS Dear Shareholders, the consolidated financial statements of the Pirelli & C. Group for the year ended December 31, 2002 show a consolidated net loss of Euros 405 million compared to a consolidated net income of Euros 194 million in the prior year. The result includes Euros 275 million of restructuring charges, Euros 13 million of extraordinary income, Euros 138 million of writedowns and Euros 150 million for the effect of valuing the investment in Olimpia S.p.A. using the equity method. Offsetting the above expenses were the gain realized on the offering of Pirelli & C. Real Estate S.p.A. shares on the stock market (Euros 149 million before income taxes) and the gain realized by Pirelli & C. Real Estate S.p.A. on the sale of the last tranche of ex-Unim securities in the portfolio (Euros 51 million). The net loss, after minority interest, is equal to Euros 58 million compared to a net income of Euros 125 million in the prior year. Net sales amount to Euros 6,718 million, with a decrease of 8.2 percent compared to 2001, net of the negative currency exchange effect due to the conversion into Euros (-5.2 percent).