Gruppo Editoriale L’Espresso Società per azioni Annual Report 2004 (Translation from the original issued in Italian) Gruppo Editoriale L’Espresso Società per azioni Annual Report 2004 (Translation from the original issued in Italian) Gruppo Editoriale L’Espresso 2004 | 5 Contents Report of the Board of Directors Report of the Board of Directors 13 Information required by Consob - resolution 11971/1999 27 Consolidated Financial Statements of the Espresso Group at 31 December, 2004 Consolidated Financial Statements 36 Notes to the Consolidated Financial Statements 45 Attachments 68 Reclassified Consolidated Financial Statements 80 Revenues, Group personnel, Circulation 84 Report of the Independent Auditors 89 Financial Statements of the Gruppo Editoriale L’Espresso SpA at 31 December, 2004 Financial Statements 92 Notes to the Financial Statements 101 Attachments 124 Reclassified Financial Statements 136 Report of the Board of Statutory Auditors 141 Report of the Independent Auditors 147 Financial highlights of subsidiaries 151 Report on Corporate Governance 155 Gruppo Editoriale L’Espresso 2004 | 7 Company Gruppo Editoriale L’Espresso Società per Azioni Share Capital Euro 64,896,058.20 Tax ID and Rome Company Register no. 00488680588 VAT no. 00906801006 Registered office Rome, Via Cristoforo Colombo, 149 Secondary office Rome, Via Cristoforo Colombo, 90 Board of Directors: Chairman Carlo Caracciolo Managing Director Marco Benedetto Directors Oliviero Maria Brega Cristina Busi Giulia Maria Crespi Mozzoni Carlo De Benedetti Rodolfo De Benedetti Francesco Dini Pierluigi Ferrero Milvia Fiorani Franco Girard Paolo Mancinelli Gianluigi Melega Alberto Milla Piero Ottone Alberto Piaser Vittorio Ripa di Meana Executive Committee: Carlo Caracciolo Marco Benedetto Oliviero Maria Brega Rodolfo De Benedetti Alberto Piaser Board of Statutory Auditors: Chairman Vittorio Bennani Auditors Claudio Berliri Federico Gamna Independent Auditors PricewaterhouseCoopers SpA Gruppo Editoriale L’Espresso 2004 | 9 Financial Highlights Consolidated financial data (in millions of euro) 2001 2002 2003 2004 Revenues 923 964 1,051 1,080 Value added 376 427 481 490 Gross operating profit 131 181 231 232 Operating profit 74 122 175 177 Net profit 1 46 68 88 Capital employed (excluding employee severance reserve) 602 567 590 620 Net financial position (111) (63) (150) (131) Shareholders' Equity 392 402 332 375 Net profit + depreciation and amortization 58 104 124 142 Employees 3,394 3,250 3,166 3,271 Ratios 2001 2002 2003 2004 Gross operating profit/revenues 14.2% 18.8% 22.0% 21.4% ROS 8.0% 12.7% 16.7% 16.4% ROCE 12.3% 21.6% 29.7% 28.6% ROE 0.3% 11.5% 20.4% 23.4% Per share data (euro) 2001 2002 2003 2004 Operating profit 0.17 0.29 0.41 0.41 Net profit 0.00 0.11 0.16 0.20 Net profit + depreciation and amortization 0.14 0.24 0.29 0.33 (in milions) No. of shares (excluding own shares) 430.1 428.2 429.1 429.3 Report of the Board of Directors Report of the Board of Directors | Gruppo Editoriale L’Espresso 2004 | 13 Report of the Board of Directors The Espresso Group closed the 2004 financial year Growth in the advertising market continued to be reporting a consolidated net profit of €87.7 mil- modest, though showing signs of a recovery in the lion, up from €67.8 million in 2003, on consolida- last quarter also as a result of full color advertising ted revenues equal to €1,079.8 million (up from offered by la Repubblica. With the coming into €1,051.1 million in 2003). Consolidated operating operation of the new rotary presses on schedule and profit amounted to €177.4 million (16.4% of mar- one year in advance of competitors, la Repubblica gin revenues), against €175.1 million in 2003 is currently the only national newspaper able to (16.7% of margin revenues). offer color advertising pages and formats without saturation constraints. The new offer was well Net financial debt at December 31, 2004 declined received by the market: in December, 73% of all to €131.1 million from €149.5 million at the end advertising published by the newspaper was in of the previous year thanks to cash flow genera- color, as compared with 49.4% in the same period ted by operations that more than offset capital in 2003; in 2004, national color advertising of la expenditure and dividends distributed. Repubblica grew by 12.3%, as compared with 7.5% for the market as a whole (source: FCP, Shareholders’ Equity grew from €332 million at December 2004). In the first months of 2005, the the end of 2003 to €375.2 million at December replacement of black and white advertising with 31, 2004. color continues, with good prospects for sales and margin growth. Main events in 2004 included the completion of the full color project by la Repubblica (involving Sales of products sold optionally in conjunction also the construction of a new printing center in with Group publications confirmed once again Rome), the transfer of all Group companies based that there now exists a sustainable, well consoli- in Rome to a new location, the good performance dated market accounting for a stable proportion of products sold optionally in conjunction with la of revenues and profits of the Group. Repubblica and L’espresso, the growth of radio In 2004, revenues from products sold optionally audiences and the successful completion of restruc- in conjunction with Group publications reached turing in the Internet area. €227.2 million, with a margin exceeding 35%. In 2004, sales benefited from the good reception by Along with the strengthening of the Group’s core the public of the l’Enciclopedia di Repubblica and business, efforts were devoted also to development: La Storia series, that sold a total of over 9.6 mil- new publishing activities, such as the launch of a lion volumes with an average circulation of over magazine devoted to TV programs (TV magazine) 280 thousand copies per issue. Sales initiatives of and the restyling of the magazine Musica with its L’espresso and local newspapers also reported conversion to a monthly magazine, in addition to good results. the signing of an important agreement for the acquisition of a national TV network Rete A. This Circulation of newspapers and periodicals were in is a network aimed at a very young public that is line with 2003: la Repubblica had an average cir- currently registering a growth in audience and culation of 625 thousand copies per issue, local advertising sales and will be able to develop further newspapers one of 488 thousand copies and L’e- by exploiting the trademarks and know-how of spresso an average circulation of 390 thousand Group’s radio stations, in addition to the technolo- copies per week. gical support provided by the Internet area. The last Audipress report (2004/II), released at the beginning of the current year, rewards la Repub- 14 | Gruppo Editoriale L’Espresso 2004 | Report of the Board of Directors blica, placing it at the top position of Italian new- hosting the Group in Rome, amounted to €94.3 spapers (2.9 million readers). million (as compared with €70.8 million in 2003). Radio stations registered further gains in terms of audience, reaching a total of 8.4 million average At December 31, 2004, the consolidated net finan- daily listeners and a 20.5 million weekly audience cial position showed an indebtness of €131.1 mil- (source: Audiradio 2004 annual data). Radio lion, improving from €149.5 million at December Deejay climbed to 5.6 million average daily liste- 31, 2003 thanks to the strong cash flow generated ners, confirming its ranking as first radio station in the year (€162 million) that allowed to finance in terms of audience for the whole week with 12.7 capital expenditure and the payment of €47.1 mil- million listeners; Radio Capital’s audience grew to lion in dividends. almost 2 million average daily listeners and 5.6 million average weekly listeners, while m2o, aimed At the end of 2004, the Group employed 3,271 at a younger public, doubled its audience in the persons, including personnel under term con- last two years to almost 1 million average daily tracts, as compared with 3,166 at December 31, listeners. Advertising revenues of the three radios 2003. The increase is due to the decision to mana- grew by 18.9% on the previous year. ge directly the pre-printing and printing of la Repubblica in Rome, involving the hiring of per- After the completion of the critical phase of the sonnel by subsidiary Rotocolor. restructuring process, the Internet area begun to exploit new sources of revenue and growth. In Below are finally reported 2004 main results, 2004 Kataweb sharply reduced its operating loss compared with previous year statements: from €9 million in 2003 to €2.9 million. _____ (€million) 2003 2004 ch. % Revenues 1,051.1 1,079.8 +2.7% Financial charges declined significantly from of which: € € 28.6 million at the end of 2003, to 12.9 mil- • Circulation 482.8 496.4 +2.8% lion at the end of 2004; financial charges in the • Advertising 534.0 546.1 +2.3% previous year were negatively affected by costs Gross operating profit 231.5 231.5 - incurred in the unwinding and termination of Operating profit 175.1 177.4 +1.3% interest rate hedging transactions. Financial income/(expense) (28.6) (12.9) Net profit 67.8 87.7 After having made public its “BBB-” Stan- dard&Poor’s rating with a positive outlook, on Shareholders’ Equity 332.0 375.2 October 8 the Company placed a 10 year, €300 mil- Net financial position (149.5) (131.1) lion bond with institutional investors.