Pirelli S.p.A. Milan Annual Report 2002
Pirelli S.p.A. Milan Annual Report 2002
Pirelli S.p.A. Milan Annual Report 2002
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<strong>Pirelli</strong> S.p.A. <strong>Milan</strong> <strong>Annual</strong> <strong>Report</strong> <strong>2002</strong>
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Call to AGM<br />
Contents<br />
Officers<br />
Structure of <strong>Pirelli</strong><br />
Group at December<br />
31, <strong>2002</strong><br />
<strong>Pirelli</strong> S.p.A. on the<br />
Stock Market<br />
Selected Financial Data<br />
Chairman’s Letter<br />
CALL TO ANNUAL GENERAL MEETING<br />
The shareholders of <strong>Pirelli</strong> Società per Azioni are called to the ordinary and extraordinary sessions<br />
of the shareholders’ meeting to be held in <strong>Milan</strong> at the Associazione Industriale Lombarda in Via<br />
Pantano 9<br />
– on Monday, May 5, 2003 at 4:00 P.M. in first call<br />
– on Tuesday, May 6, 2003 at 10:30 A.M. in second call<br />
to pass resolutions on the following<br />
AGENDA<br />
Ordinary session<br />
The Board of Directors’ <strong>Report</strong> on Operations, the Board of Statutory Auditors’ <strong>Report</strong>, the<br />
financial statements at December 31, <strong>2002</strong> and the appropriation of net income.<br />
Extraordinary session<br />
Approval of the plan of merger by incorporation in <strong>Pirelli</strong> & C. A.p.A. (<strong>Pirelli</strong> & C. S.p.A., after<br />
its transformation to a corporation) of <strong>Pirelli</strong> & C. Luxembourg S.p.A. (a wholly-owned<br />
subsidiary of <strong>Pirelli</strong> & C.) and of <strong>Pirelli</strong> S.p.A., involving, among other things, the issuance of a<br />
maximum 1,398,203,116 new ordinary shares and a maximum 113,580,020 new savings shares of<br />
<strong>Pirelli</strong> & C. – with dividend rights from January 1 of the year in which the merger comes into<br />
effect with third parties – respectively, to the ordinary and savings shareholders of <strong>Pirelli</strong> S.p.A.<br />
in a ratio of 4 new <strong>Pirelli</strong> & C. ordinary shares for every 3 <strong>Pirelli</strong> S.p.A. ordinary shares and 10<br />
new <strong>Pirelli</strong> & C. savings shares for every 7 <strong>Pirelli</strong> S.p.A. savings shares.<br />
Inherent and consequent resolutions.<br />
Conferring of powers.<br />
<strong>Pirelli</strong> S.p.A. V.le Sarca, 222 20126 <strong>Milan</strong>o Web site: http://www.pirelli.com E-mail: ir@pirelli.com 1
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Call to AGM<br />
Contents<br />
Officers<br />
Structure of <strong>Pirelli</strong><br />
Group at December<br />
31, <strong>2002</strong><br />
<strong>Pirelli</strong> S.p.A. on the<br />
Stock Market<br />
Selected Financial Data<br />
Chairman’s Letter<br />
CONTENTS<br />
Preliminary Information<br />
Pag.<br />
1<br />
Call to <strong>Annual</strong> General Meeting 1<br />
Officers 3<br />
Structure of <strong>Pirelli</strong> Group at December 31, <strong>2002</strong> 4<br />
<strong>Pirelli</strong> S.p.A. on the Stock Market 5<br />
Summary of Selected Consolidated Financial Data 6<br />
Chairman’s letter 7<br />
Directors’ <strong>Report</strong> on Operations 9<br />
The Group 11<br />
Cables and Systems Sector 21<br />
Energy Cables and Systems Sector 22<br />
Telecommunications Cables and Systems Sector 39<br />
Tyres Sector 50<br />
Information Systems 62<br />
Ecology and the Environment 64<br />
Human Resources 66<br />
Proforma Data 69<br />
Related Party Disclosures 71<br />
Equity Investments held by Directors,<br />
Statutory Auditors and General Managers 73<br />
Stock Option Plans 74<br />
Corporate Governance 79<br />
<strong>Pirelli</strong> S.p.A. - Summary Data 100<br />
Shareholders’ Resolution 102<br />
Consolidated Financial Statements at December 31, <strong>2002</strong> 103<br />
Consolidated Balance Sheets 104<br />
Consolidated Statements of Income 108<br />
Notes to Consolidated Financial Statements 109<br />
Supplementary Information 133<br />
Independent Auditors’ <strong>Report</strong> 149<br />
Extraordinary Session of the Shareholders’ Meeting 150<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 2
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Call to AGM<br />
Contents<br />
Officers<br />
Structure of <strong>Pirelli</strong><br />
Group at December<br />
31, <strong>2002</strong><br />
<strong>Pirelli</strong> S.p.A. on the<br />
Stock Market<br />
Selected Financial Data<br />
Chairman’s Letter<br />
OFFICERS<br />
Board of Directors<br />
Chairman and Chief Executive Officer<br />
Deputy Chairman<br />
Managing Directors and General Managers<br />
Directors<br />
Secretary to the Board<br />
Marco Tronchetti Provera<br />
Alberto <strong>Pirelli</strong><br />
Carlo Buora<br />
Giovanni Ferrario<br />
Gilberto Benetton<br />
Carlo Ciani<br />
Eugenio Coppola di Canzano<br />
Carlo De Benedetti<br />
Alberto Falck<br />
Giuseppe Gazzoni-Frascara<br />
Mario Greco<br />
Georg F. Krayer<br />
Massimo Moratti<br />
Luigi Orlando<br />
Giampiero Pesenti<br />
Ennio Presutti<br />
Carlo Alessandro Puri Negri<br />
Vincenzo Sozzani<br />
Frank Vischer<br />
Sergio Lamacchia<br />
Board of Statutory Auditors<br />
Chairman<br />
Standing members<br />
Alternate members<br />
Luigi Guatri<br />
Rosalba Casiraghi<br />
Paolo Francesco Lazzati<br />
Franco Ghiringhelli<br />
Sebastiano Guido<br />
General Managers<br />
Energy Cables and Systems Sector<br />
Telecommunications Cables and Systems Sector<br />
Tyres Sector<br />
Administration and Control<br />
Finance<br />
Valerio Battista<br />
Kevin Riddett<br />
Francesco Gori<br />
Claudio De Conto<br />
Luciano Gobbi<br />
Independent Auditors<br />
PricewaterhouseCoopers S.p.A.<br />
Note: The nature of the powers delegated to the Chairman, Managing Directors and General Managers is<br />
described on page 79 under Corporate Governance<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 3
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Call to AGM<br />
Contents<br />
Officers<br />
Structure of <strong>Pirelli</strong><br />
Group at December<br />
31, <strong>2002</strong><br />
<strong>Pirelli</strong> S.p.A. on the<br />
Stock Market<br />
Selected Financial Data<br />
Chairman’s Letter<br />
STRUCTURE OF PIRELLI GROUP<br />
AT DECEMBER 31, <strong>2002</strong><br />
39,2%<br />
<strong>Pirelli</strong> & C. A.p.A.<br />
<strong>Pirelli</strong> S.p.A.<br />
100% 100% 100%<br />
<strong>Pirelli</strong><br />
Tyre Holding N.V.<br />
<strong>Pirelli</strong> Cavi e Sistemi<br />
Energia S.p.A.<br />
<strong>Pirelli</strong> Cavi e Sistemi<br />
Telecom S.p.A.<br />
90% 95% 95%<br />
Tyres<br />
Energy Cables<br />
and Systems<br />
Telecom Cables<br />
and Systems<br />
10%<br />
3% 3%<br />
Minority Interets<br />
Cables and Systems<br />
Tyres<br />
Argentina<br />
Australia<br />
Brazil<br />
Canada<br />
China<br />
Finland<br />
France<br />
Germany<br />
Holland<br />
Hungary<br />
Indonesia<br />
Italy<br />
Ivory Coast Spain<br />
Malaysia Turkey<br />
Portugal United Kingdom<br />
Romania United States<br />
Slovak Republik<br />
South Africa<br />
Argentina<br />
Brazil<br />
Egypt<br />
Germany<br />
Italy<br />
Spain<br />
Turkey<br />
United Kingdom<br />
United States<br />
Venezuela<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 4
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Call to AGM<br />
Contents<br />
Officers<br />
Structure of <strong>Pirelli</strong><br />
Group at December<br />
31, <strong>2002</strong><br />
<strong>Pirelli</strong> S.p.A. on the<br />
Stock Market<br />
Selected Financial Data<br />
Chairman’s Letter<br />
PIRELLI S.P.A. ON THE STOCK MARKET<br />
Movements in <strong>Pirelli</strong> S.p.A.’s share capital from January 1,1996<br />
Date Share capital (in millions) Transactions<br />
January 1, 1996 Lire 1,557,020<br />
December 1996 Lire 1,557,090 Bond conversion (POC 5% 1994-98 of Lire<br />
1,011,309 million)<br />
December 1997 Lire 1,748,208 Bond conversion (POC 5% 1994-98 of Lire<br />
1,011,309 million)<br />
January 1998 Lire 1,942,623 Bond conversion (POC 5% 1994-98 of Lire<br />
1,011,309 million)<br />
June 1998 Lire 1,983,123 Issue of 23 million bonus shares assigned to all<br />
employees of the Group to celebrate the 125th<br />
anniversary of the founding of the company;<br />
issue of 17.5 million bonus shares assigned to<br />
the executives of the Group<br />
March 1999 Lire 1,984,558 Bonus shared assigned to the executives of the<br />
Group<br />
June 1999 Euros 1,031.970 Share capital expressed in euros by translation<br />
of par value from Lire 1,000 to Euro 0.52<br />
December 1999 Euros 1,032.152 Bonus shares assigned to executives of the<br />
February-<br />
December 2000<br />
Group<br />
Euros 1,035.261 Issue of No. 5,078,100 ordinary shares at par<br />
value and No. 900,000 ordinary shares at a<br />
price per share of Euros 2.774 each which, as<br />
voted by the board of directors on December<br />
20, 1999, March 20, 2000 and November 7,<br />
2000, have been assigned to executives and<br />
cadres of the Company ans its subsidiaries as<br />
well as its parent companies and other<br />
subsidiaries of the latter, in Italy and outside<br />
Italy.<br />
January- Euros 1,043.094 Issue of No. 5,602,900 ordinary shares at par<br />
December 2000<br />
value and No. 9,426,000 ordinary shares at a<br />
price per share of Euros 2.774 and No. 35,200<br />
ordinary shares at price of Euros 2.742 which,<br />
as voted by the board of directors on March<br />
20, 2000 and November 7, 2000, have been<br />
assigned to executives and cadres of the<br />
Company ans its subsidiaries as well as its<br />
parent companies and other subsidiaries of the<br />
latter, in Italy and outside Italy.<br />
January- Euro 1,043.604 Issue of No. 980,888 ordinary shares at par<br />
March <strong>2002</strong><br />
value as voted by the board of directors on<br />
March 20, 2000 and November 7, 2000, have<br />
been assigned to executives and cadres of the<br />
Company and its subsidiaries as well as its<br />
parent companies and other subsidiaries of the<br />
latter, in Italy and outside Italy.<br />
140<br />
100<br />
60<br />
20.000<br />
18.000<br />
16.000<br />
14.000<br />
12.000<br />
10.000<br />
8.000<br />
6.000<br />
4.000<br />
20 J F M A M J J A S O N D<br />
MIBTEL Index (monthly area)<br />
Market price of ordinary shares<br />
Market trading on the <strong>Milan</strong> Stock Exhange<br />
Shares traded<br />
in millions<br />
Volume<br />
(of euros)<br />
<strong>Pirelli</strong> S.p.A. - ordinary shares 3,666,288,370 4,965<br />
<strong>Pirelli</strong> S.p.A. - savings shares 18,268,161 28<br />
2.000<br />
0<br />
J F M A M J J A S O N D<br />
<strong>2002</strong><br />
Average monthly volume of ordinary<br />
shares traded on the <strong>Milan</strong> Stock<br />
Exchange (in thousands)<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 5
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Call to AGM<br />
Contents<br />
Officers<br />
Structure of <strong>Pirelli</strong><br />
Group at December<br />
31, <strong>2002</strong><br />
<strong>Pirelli</strong> S.p.A. on the<br />
Stock Market<br />
Selected Financial Data<br />
Chairman’s Letter<br />
FIVE-YEAR SUMMARY OF SELECTED<br />
CONSOLIDATED FINANCIAL DATA<br />
in milions of euro <strong>2002</strong> 2001 2000 1999 1998<br />
Net sales 6,311 7,509 7,477 6,482 5,487<br />
Gross operating profit 480 666 820 678 721<br />
Operating profit 117 295 437 331 412<br />
Net income (loss) (610) 86 3,626 305 276<br />
Net income (loss) attributable<br />
to <strong>Pirelli</strong> S.p.A. (614) 82 3,632 293 249<br />
Earnings per share (in euros) (0.31) 0.04 1.82 0.15 0.13<br />
Fixed assets 6,114 6,686 3,331 3,062 2,427<br />
Net working capital 768 971 253 1,200 1,013<br />
Net invested capital 6,882 7,657 3,584 4,262 3,440<br />
Shareholders’ equity 4,576 5,660 5,958 2,454 2,453<br />
Provisions 837 908 1,121 791 722<br />
Net financial (liquidity)/debt position 1,469 1,089 (3,495) 1,017 265<br />
Net equity attributable to <strong>Pirelli</strong> S.p.A. 4,394 5,462 5,756 2,275 2,283<br />
Equity per share (in euros) 2.19 2.72 2.89 1.15 1.15<br />
Free cash flows 419 (152) 173 214 179<br />
Net cash flows (376) (4,617) 4,413 (507) (253)<br />
R&D expenditures 219 237 213 200 196<br />
Capital expenditures 325 643 562 469 415<br />
Gross operating profit / Net sales 7.61% 8.87% 10.97% 10.47% 13.15%<br />
Operating profit / Net sales 1.85% 3.93% 5.86% 5.10% 7.52%<br />
Net income / Net equity* n.s. 1.48% 86.21% 12.44% 11.65%<br />
Operating profit / Net invested capital* 1.61% 5.25% 11.14% 8.59% 12.41%<br />
Net financial position / Net equity 0.32 0.19 (0.59) 0.41 0.11<br />
<strong>Pirelli</strong> S.p.A. ordinary shares<br />
(No. in millions) 1,919 1,918 1,903 1,897 1,895<br />
<strong>Pirelli</strong> S.p.A. saving shares<br />
(No. in millions) 88 88 88 88 88<br />
Total <strong>Pirelli</strong> S.p.A. shares<br />
(No. in millions) 2,007 2,006 1,991 1,985 1,983<br />
Treasury shares (No. in millions) 163 163 195 173 59<br />
Factories (number) 79 84 87 87 73<br />
Employees (at year-end) 36,079 39,127 41,914 40,103 38,209<br />
Net sales per employee<br />
(in thousands of euros) 167 185 183 162 149<br />
* Average amounts<br />
(in millions of euros)<br />
Net income<br />
4000<br />
2825<br />
1650<br />
475<br />
-600<br />
2000 2001 <strong>2002</strong><br />
Net sales<br />
8000<br />
7500<br />
7000<br />
6500<br />
6000<br />
2000 2001 <strong>2002</strong><br />
Shareholders’ equity<br />
6000<br />
5500<br />
5000<br />
4500<br />
4000<br />
2000 2001 <strong>2002</strong><br />
Gross operating profit<br />
900<br />
775<br />
650<br />
525<br />
400<br />
2000 2001 <strong>2002</strong><br />
Capital expenditures<br />
700<br />
600<br />
500<br />
400<br />
300<br />
2000 2001 <strong>2002</strong><br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 6
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Call to AGM<br />
Contents<br />
Officers<br />
Structure of <strong>Pirelli</strong><br />
Group at December<br />
31, <strong>2002</strong><br />
<strong>Pirelli</strong> S.p.A. on the<br />
Stock Market<br />
Selected Financial Data<br />
Chairman’s Letter<br />
CHAIRMAN’S LETTER<br />
To the shareholders,<br />
<strong>2002</strong> was a particularly difficult year for the <strong>Pirelli</strong> Group on<br />
account of the serious crisis in one of its main reference<br />
markets – that of Telecommunications infrastructures – and<br />
the decline of investments in utilities in the energy sector.<br />
Management of the Group reacted promptly to the crisis by<br />
implementing a Plan to improve efficiency in the sectors<br />
affected.<br />
The Telecommunications Cables and Systems Sector, in<br />
particular, suffered from an unprecedented fall in demand on a<br />
worldwide scale, calculated at more than 70 percent in terms of<br />
value, which seriously impacted the performance of companies<br />
operating in the sector in the major developed world markets.<br />
Despite the failure of investments to recover, stemming from<br />
the international economic slowdown and uncertain<br />
macroeconomic prospects, the Energy Cables and Systems<br />
Sector reported a slight gain in profitability. The Tyres Sector<br />
continued the pace of growth of recent years, consolidating its<br />
leadership position in the high-performance tyre range.<br />
During <strong>2002</strong>, therefore, the Group’s commitment to measures<br />
to improve efficiency was stepped up, considerably increasing<br />
cash flows and keeping financial exposure under control. In<br />
November, in a particularly complex economic context,<br />
management decided to implement further reorganization<br />
measures, with an impact of Euros 275 million, in order to be<br />
ready to take advantage of any upturn in the markets.<br />
By the end of <strong>2002</strong>, as efficiency measures were intensified,<br />
the first improvements were observed in the Telecommunications<br />
and Energy Cables and Systems Sectors, which carried<br />
through to the first months of the current year along with the<br />
continuing growth in the Tyres Sector.<br />
In March, the <strong>Pirelli</strong> Group launched a plan to streamline the<br />
corporate structure, which calls for the merger by incorporation<br />
of <strong>Pirelli</strong> S.p.A. in <strong>Pirelli</strong> & C.<br />
The move to bring all of the main businesses under a single<br />
holding company – including the real estate activities of <strong>Pirelli</strong><br />
& C. Real Estate, which continues to generate excellent results<br />
– will make it possible to reduce the costs of non-operational<br />
activities and optimize economic and financial flows.<br />
The transformation of the company’s legal status from a<br />
limited partnership to a corporation – without having to<br />
abandon the prestigious <strong>Pirelli</strong> & C. trademark – is a mark of<br />
revitalization and transparency, since it involves changes to the<br />
by-laws and the adoption of corporate governance regulations<br />
which are better suited to market expectations.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 7
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Call to AGM<br />
Contents<br />
Officers<br />
Structure of <strong>Pirelli</strong><br />
Group at December<br />
31, <strong>2002</strong><br />
<strong>Pirelli</strong> S.p.A. on the<br />
Stock Market<br />
Selected Financial Data<br />
Chairman’s Letter<br />
But, more particularly, the merger means that <strong>Pirelli</strong> will be able<br />
to create new synergies and fully express its growth potential,<br />
partly through more a flexible management of its resources and<br />
its assets in portfolio. A contributory factor will be the new<br />
financial injection from the share capital increase, which will<br />
make it possible to strengthen the equity structure further and to<br />
continue to invest in R&D in order to maintain the company’s<br />
technological and market leadership in sectors with a higher<br />
level of profitability.<br />
The <strong>Pirelli</strong> Group’s plan to simplify the corporate structure –<br />
parallel to the one launched by the Olivetti-Telecom Italia Group,<br />
in which <strong>Pirelli</strong> has a major stake – constitutes a decisive step in<br />
the company’s new medium-to-long-term strategy. As we<br />
announced two years ago, it will lead to the foundation of a new<br />
<strong>Pirelli</strong> Group, with a corporate structure that is radically<br />
different in terms of organization and business, and enhanced in<br />
such a way as to maximize the creation of value.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 8
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
DIRECTORS' REPORT ON OPERATIONS<br />
Dear Shareholders,<br />
The year <strong>2002</strong> closes with a consolidated net loss of Euros 610<br />
million compared to a consolidated net income of Euros 86<br />
million in 2001.<br />
The result includes Euros 275 million of restructuring charges,<br />
Euros 13 million of extraordinary income, Euros 138 million of<br />
writedowns and Euros 150 million for the effect of valuing the<br />
investment in Olimpia S.p.A. using the equity method. Net of<br />
the above, the net loss for the year would have been Euros 60<br />
million.<br />
The net loss attributable to <strong>Pirelli</strong> S.p.A. is Euros 614 million<br />
(equal to a loss per share of Euros 0.31), compared to a net<br />
income of Euros 82 million in the prior year (equal to earnings<br />
per share of Euros 0.04).<br />
Net sales<br />
The X-Pressure system for<br />
measuring the air pressure inside<br />
the tyre.<br />
Net sales amount to Euros 6,311 million and show a reduction of 10.6 percent compared to<br />
2001, net of the foreign exchange effect (decrease of -5.4 percent). The change is principally due<br />
to lower volumes (-9.3 percent) and the negative price/mix effect (-1.3 percent). The fall in<br />
revenues of the Telecom Cables and Systems Sector alone (-70 percent) led to a 9 percent<br />
reduction in net sales overall, again net of the exchange effect.<br />
Gross operating profit<br />
Gross operating profit is Euros 480 million, with a decrease of<br />
27.9 percent compared to Euros 666 million in 2001.<br />
The reduction is entirely due to the contraction in the Telecom<br />
Cables and Systems Sector (Euros 156 million), owing to the<br />
intensification of the crisis in the TLC market, and the end of<br />
the supply contract with Cisco Systems (Euros 59 million),<br />
partly offset by growth in the Energy Cables and Systems<br />
Sector and the Tyres Sector.<br />
<strong>Pirelli</strong> Labs: a clean room for<br />
research on new optical<br />
technologies.<br />
Operating profit<br />
Operating profit is Euros 117 million, equal to 1.9 percent of net sales, compared to Euros 295<br />
million in 2001 (3.9 percent of net sales). Constant and continuing attention to the efficiency of<br />
production factors, in addition to the efforts taken by management to reduce costs through the<br />
restructuring plan, led to a gross reduction in costs of Euros 215 million in <strong>2002</strong>. However,<br />
these savings were not sufficient to contain the negative effects of the economic scenario,<br />
particularly with regard to the Telecommunications Cables and Systems Sector.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 9
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
In any event, the Energy Cables and Systems Sector bettered its performance and the Tyres<br />
Sector reported a strong gain in results especially compared to the competitive panorama of the<br />
reference industries.<br />
The Group’s priority commitment to research and technological innovation is again confirmed<br />
by R&D expenditures which stand at roughly 3.5 percent of net sales compared to 3.2 percent in<br />
2001.<br />
Net cash flows and net financial position<br />
Free cash flows from operations, in spite of the trend of the<br />
Group’s operating profit, were a positive Euros 419 million<br />
thanks to a careful management of working capital and a<br />
selective investment policy.<br />
Net cash flows were a negative Euros 376 million (a negative<br />
Euros 4,617 million in 2001, including Euros 3,170 million for<br />
the investment in Olimpia S.p.A.). They reflect disbursements<br />
for the reorganization programs in the current and previous<br />
years of Euros 155 million, the final payment of income taxes<br />
on the sale of Optical Technologies to Corning of Euros 263<br />
million, the payment of dividends of Euros 149 million and are<br />
offset by the sale of tax receivables to Unicreditfactoring S.p.A.<br />
and Mediofactoring S.p.A. of Euros 113 million in the first six<br />
months of the year.<br />
Consequently, the net financial debt position went from Euros<br />
1,089 million at the end of 2001 to Euros 1,469 million at<br />
December 31, <strong>2002</strong>.<br />
Testing an Air Bag cable’s<br />
resistance to impact.<br />
Parent company<br />
The financial statements at December 31, <strong>2002</strong> of <strong>Pirelli</strong> S.p.A.,<br />
the parent company, show a net income of Euros 112 million<br />
compared to Euros 1,489 million in 2001.<br />
The <strong>2002</strong> financial statements essentially comprise the<br />
dividends paid by the subsidiaries Optical Technologies The<br />
Netherlands B.V. (Euros 250 million) and <strong>Pirelli</strong> Tyre Holding<br />
N.V. (Euros 70 million) and the writedowns of the investments<br />
in F.C. Internazionale <strong>Milan</strong>o S.p.A., in Caltagirone Editore<br />
S.p.A. and in the subsidiaries <strong>Pirelli</strong> Finance (Luxembourg) S.A.<br />
and <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A. for a total of Euros<br />
178 million.<br />
Last year, the results benefited from dividends related to the<br />
sale of the Optical Components Business to Corning (Euros<br />
1,000 million) together with dividends paid by the subsidiaries<br />
<strong>Pirelli</strong> Cavi e Sistemi S.p.A. (Euros 25 million) and <strong>Pirelli</strong> Tyre<br />
Holding N.V. (Euros 30 million).<br />
A phase in the production of a new<br />
MIRS Moto, which is operative at<br />
Bicocca, <strong>Milan</strong>.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 10
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
The Group<br />
Economic and<br />
Financial Review<br />
of <strong>2002</strong><br />
Outlook for the<br />
Current Year<br />
THE GROUP<br />
ECONOMIC AND FINANCIAL REVIEW OF <strong>2002</strong><br />
The performance of the Group in <strong>2002</strong> was sharply affected by<br />
the unprecedented crisis in the telecommunications<br />
infrastructures market, which had serious repercussions on<br />
the performance of companies in the sector in all the major<br />
countries of the Western world. This market has been the<br />
focus of a worldwide contraction in demand of more than 70<br />
percent in terms of value.<br />
In addition, in defiance of the negative trend of the<br />
international economy, combined with uncertainties in the<br />
economic scenario, the Energy Cables and Systems Sector,<br />
reported a slight improvement in profitability, although<br />
investments have so far failed to regain momentum.<br />
Conversely, it should be emphasized that the Tyres Sector<br />
continued to deliver growth.<br />
Undergrounding a power cable.<br />
This being the case, management of the Group showed a high<br />
capacity for reacting to the drastic changes of the market, on<br />
the one hand, by implementing measures to limit costs,<br />
leading to considerable savings in operating expenses and a<br />
reduction of the breakeven point, and, on the other, by<br />
focusing even greater attention on the management of cash<br />
flows, which was confirmed by a significant growth in free<br />
cash flows and better control over net indebtedness.<br />
Against the market background described above, in November,<br />
the Group decided to step up and intensify action already in<br />
progress in the various operating sectors to improve<br />
efficiency, in order to create the optimum conditions for<br />
acting upon any signs of a recovery as soon as they are<br />
perceived. The restructuring plan, which concentrated on the<br />
Energy and Telecom Cables and Systems Sectors and focused<br />
on rationalizing resources and industrial facilities, impacted<br />
<strong>2002</strong> results for a total of Euros 275 million.<br />
The efficiency measures are running according to schedule and most will have been entirely<br />
implemented by March 2003.<br />
In fact, the last quarter of <strong>2002</strong> showed the first signs of an improvement in the Energy Cables<br />
and Systems Sector, as well as continued growth in the Tyres sector.<br />
There follows a description of the major events in <strong>2002</strong>, in chronological order:<br />
The P Zero Corsa, fitted as original<br />
equipment to the Ferrari Challenge<br />
Stradale.<br />
– in February, <strong>Pirelli</strong> Finance (Luxembourg) S.A. signed a derivative equity swap agreement<br />
with J.P. Morgan on 100,000,000 Olivetti S.p.A. shares, expiring December 2006. Settlement<br />
can either be made through the physical delivery of the shares or through the payment of the<br />
differentials compared to the market prices.<br />
The initial price is equal to Euros 1.4213 per share plus quarterly interest at the 3-month<br />
Euribor plus a spread of 143 bps;<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 11
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
The Group<br />
Economic and<br />
Financial Review<br />
of <strong>2002</strong><br />
Outlook for the<br />
Current Year<br />
– in March, the placement was completed for bonds of Euros 500,000,000 issued by <strong>Pirelli</strong><br />
Finance (Luxembourg) S.A., maturing April 4, 2007, with a fixed interest rate of 6.5 percent.<br />
The bond issue serves to satisfy the objective of refinancing short-term debt by optimizing the<br />
financial structure of the Group from the standpoint of both interest rates and maturity dates.<br />
The proceeds from the issue were received at the beginning of April;<br />
– on April 22, <strong>2002</strong>, an agreement was signed for the sale of the 25.3 percent interest in<br />
EPIClink S.p.A., a company specialized in provided outsourcing services in the area of<br />
Information and Communication Technology, to Telecom Italia S.p.A.. The sale took place on<br />
August 1, <strong>2002</strong>, once authorization was received from the antitrust authorities;<br />
– on October 29, <strong>2002</strong>, the first stage of the Tiglio project was completed, with the formalization<br />
of the deeds for the transfer of the assets and the real estate designated for the initiative.<br />
For the <strong>Pirelli</strong> S.p.A. Group, the assets transferred to Tiglio I totaled a sum of about Euros 15<br />
million (of which about Euros 10 million were from <strong>Pirelli</strong> S.p.A. and Euros 5 million from<br />
<strong>Pirelli</strong> Cavi e Sistemi Energia Italia S.p.A.). The transaction led to a gross gain, on<br />
consolidation, of about Euros 8 million;<br />
– on December 19, <strong>2002</strong>, a transaction was approved to expand the shareholder base of Olimpia<br />
S.p.A., with the consequent strengthening of the shareholders’ equity and financial structure<br />
of the company. The transaction provides for the early redemption of the bonds issued with a<br />
face value of Euros 1 billion by Olimpia S.p.A. to Hopa S.p.A. (hereinafter Hopa), maturing in<br />
2007 and repayable with Olivetti shares, and the merger by incorporation in Olimpia S.p.A. of<br />
Holy S.r.l. (hereinafter Holy) a wholly-owned subsidiary of Hopa. In exchange for the<br />
contribution of this company, which has a net equity of Euros 961 million, Hopa will receive a<br />
16 percent stake in Olimpia S.p.A.<br />
Subsequent to the merger, Olimpia S.p.A.’s share capital will be held by the following:<br />
<strong>Pirelli</strong> 50.4%<br />
Edizione Finance International 16.8%<br />
Hopa 16.0%<br />
Intesa BCI 8.4%<br />
Unicredito Italiano 8.4%<br />
This transaction will permit Olimpia S.p.A. to reach the following important objectives:<br />
•a stronger balance sheet structure due to the reduction in debt of some Euros 476 million<br />
(following the early redemption of the bonds); an increase in shareholders’ equity of Euros<br />
961 million owing to the merger with Holy and an improvement in the net financial position<br />
due to the injection of liquidity of approx. Euros 99 million which will occur as a result of the<br />
merger with Holy, with a better gearing ratio which decreases from 0.7 to 0.5;<br />
• the greater flexibility that will be reached with the cessation of the restrictions and financial<br />
expenses connected with the bond issue which is expected to be almost totally extinguished.<br />
The redemption of the bonds and the merger of Olimpia S.p.A. and Holy will take place as<br />
described below:<br />
• Olimpia will offer early redemption to the bondholders with the delivery of not only Olivetti<br />
shares, as planned, but with a combination of about 99 million Olivetti shares and some 164<br />
million Olivetti convertible bonds;<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 12
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
The Group<br />
Economic and<br />
Financial Review<br />
of <strong>2002</strong><br />
Outlook for the<br />
Current Year<br />
• Holy, at the time of the merger, will have liquidity of about Euros 99 million, some 100 million<br />
Olivetti shares, around 164 million Olivetti bonds, in addition to a 19.99 percent interest in<br />
Holinvest. Holy’s shareholders’ equity will be equal to Euros 961 million;<br />
• Holinvest – 80.001 percent held directly and 19.999 percent held indirectly by Hopa, through<br />
Holy – will have assets consisting of some 135 million Olivetti 1.5% 2001-2010 convertible<br />
bonds, the right to obtain, by June 30, 2003, about 164 million Olivetti 1.5% 2001-2010<br />
convertible bonds acquired from the repayment of the same number of Olimpia S.p.A. bonds<br />
and about 486 million CDC indexed bonds and the same number of Olivetti ordinary shares<br />
and 2,431 Olivetti shares.<br />
-<br />
As a result of the new agreement that Hopa signed with Olimpia S.p.A.’s shareholders, Hopa will<br />
have the right to nominate a director in Olimpia S.p.A. and in the main listed companies of the<br />
Olivetti-Telecom Group. Hopa, which will hold no veto rights in Olivetti, in the event of dissent<br />
concerning important extraordinary transactions or if certain ratios are not met by Olimpia<br />
(1:1 debt to equity ratio), can obtain the spin-off of Olimpia S.p.A., whereas Olimpia S.p.A. can<br />
obtain the spin-off of Holinvest. Accordingly, Hopa would receive the proportional share of<br />
Olimpia S.p.A.’s assets and liabilities and Olimpia S.p.A. would receive the proportional share of<br />
Holinvest’s assets and liabilities. Regardless, the spin-off can not take place until 36 months<br />
have passed since the agreements came into force, unless extraordinary events occur of unusual<br />
severity.<br />
Olimpia’s rights as a shareholder in Holinvest will also be regulated by Holinvest’s by-laws as<br />
well as by an agreement with Hopa which attributes a veto right to Olimpia on certain specific<br />
matters and resolutions voted in the extraordinary session of the shareholders’ meetings.<br />
There will also be lock-ups and pre-emptive rights relating to financial instruments held by<br />
Holinvest and on the co-sale of the Hopa investment in Holinvest.<br />
Moreover, Holinvest will keep at least the majority of the financial instruments and the Olivetti<br />
convertible bonds for a period of 20 months from the date of signing of the agreements.<br />
Subsequently, a pre-emptive right on said instruments and bonds will be granted to Olimpia, at<br />
the same conditions. At the end of the agreement, a further pre-emptive right for a period of<br />
two years will be granted to Olimpia S.p.A..<br />
on December 23, <strong>2002</strong>, <strong>Pirelli</strong> S.p.A., through the subsidiary <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A.,<br />
and the private equity fund Investitori Associati III (Alfieri Associated Investors), reached an<br />
agreement for the purchase, on the part of Investitori Associati, of the manufacturing and<br />
marketing business carried out by <strong>Pirelli</strong> in the enameled wires and transposed conductors<br />
sector in Europe and China through the affiliates Invex and Icew Insulated Conductors, as well<br />
as the option to purchase the business in Brazil at net equity value by September 2004.<br />
The deal falls under a broader plan for the rationalization of <strong>Pirelli</strong>’s Energy Cables and<br />
Systems Sector, announced last November, which focuses on business segments with higher<br />
value-added.<br />
According to the understanding reached, <strong>Pirelli</strong> sold Investitori Associati the Invex plant<br />
facilities in Quattordio (Alessandria, Italy) and in Baoying (China), which, with about 350<br />
employees and 2001 sales of some Euros 110 million, are specialized in the manufacture of<br />
copper and aluminum wires used as conductors in the production of engines and transformers.<br />
The transaction had a negative impact on the <strong>2002</strong> statement of income of about Euros 6 million<br />
and will have a positive impact on the net financial position of about Euros 28 million.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 13
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
The Group<br />
Economic and<br />
Financial Review<br />
of <strong>2002</strong><br />
Outlook for the<br />
Current Year<br />
Key figures of the consolidated financial statements can be summarized as follows:<br />
<strong>2002</strong> <strong>2002</strong> 2001<br />
in millions of euros<br />
(excluding Olimpia)<br />
• Net sales 6,311 6,311 7,509<br />
• Gross operating profit 480 480 666<br />
% of net sales 7.6% 7.6% 8.9%<br />
• Operating profit 117 117 295<br />
% of net sales 1.9% 1.9% 3.9%<br />
• Financial income (expenses) (173) (*) (173) (*) (22) (*)<br />
• Share of earnings (losses) of equity investments (80) (230) (33)<br />
• Extyraordinary items (262) (262) (16)<br />
• Income taxes (62) (62) (138)<br />
• Net income (loss) (460) (610) 86<br />
% net sales n.s. n.s. 1.1%<br />
• Net income (loss) attributable to <strong>Pirelli</strong> S.p.A. (614) 82<br />
• Earnings (loss) per share (in euros) (0.31) 0.04<br />
• Shareholders’ equity 4,576 5,660<br />
• Net equity attributable to <strong>Pirelli</strong> S.p.A. 4,394 5,462<br />
• Equity per share (in euros) 2.19 2.72<br />
• Net financial (liquidity)/debt position 1,469 1,089<br />
• Capital expenditures 325 643<br />
• R&D expenditures 219 237<br />
• Employees (at year-end) 36,079 39,127<br />
• Factories (number) 79 84<br />
(*) includes adjustments to securities for Euros 38 million in <strong>2002</strong> and for Euros 16 million in 2001<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 14
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
The Group<br />
Economic and<br />
Financial Review<br />
of <strong>2002</strong><br />
Outlook for the<br />
Current Year<br />
Net sales<br />
Net sales amount to Euros 6,311 million, compared to Euros<br />
7,509 million in the prior year.<br />
The reduction is due to:<br />
• Currency exchange effect - 5.4%<br />
• Volumes - 9.3%<br />
• Prices/Mix - 1.3%<br />
- 16.0%<br />
Energy Cables<br />
and Systems<br />
The distribution of net sales by sector and geographical area is<br />
as follows:<br />
Sector <strong>2002</strong> 2001<br />
Energy Cables and Systems 48% 47%<br />
Telecom Cables and Systems 7% 15%<br />
Tyres 45% 38%<br />
Geographical area <strong>2002</strong> 2001<br />
Italy 17,9% 15,7%<br />
Other European countries 43,8% 45,0%<br />
North America 11,6% 13,6%<br />
Central and South America 12,3% 12,1%<br />
Australia, Africa and Asia 14,4% 13,6%<br />
Tyres<br />
Group sales in <strong>2002</strong> by Sector<br />
and geographical area<br />
Italy<br />
Telecom<br />
Cables and<br />
Systems<br />
Other European<br />
Countries<br />
Operating profit<br />
Operating profit is Euros 117 million and shows a decrease<br />
from Euros 295 million in 2001; operating profit as a<br />
percentage of net sales is 1.9 percent (3.9 percent in 2001).<br />
The change is due to the following:<br />
in milions of euros<br />
• Currency exchange effect - 34<br />
• Prices (excluding metals)/Mix - 32<br />
• Volumes - 190<br />
• Per unit materials cost - 9<br />
• Per unit labor cost - 33<br />
• Efficiencies + 199<br />
• Supply agreement with Cisco Systems - 59<br />
• Other - 20<br />
- 178<br />
Efficiencies led to a gross reduction in labor costs and other<br />
costs of Euros 215 million, countered by the negative effects<br />
on variable costs of Euros 16 million caused by the contraction<br />
in production volumes.<br />
North America<br />
Central and South America<br />
Australia, Africa and Asia<br />
Financial income (expenses)<br />
The balance of financial<br />
income (expenses) is an<br />
expense of Euros 173 million<br />
compared to Euros 22 million<br />
in the prior year. The balance<br />
includes Euros 38 million to<br />
adjust the value of securities<br />
in portfolio to market prices<br />
while the remaining amount of<br />
Euros 135 million represents<br />
the balance of financial<br />
income and expenses<br />
(including exchange gains and<br />
losses and accessory charges)<br />
relating to net indebtedness.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 15
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
The Group<br />
Economic and<br />
Financial Review<br />
of <strong>2002</strong><br />
Outlook for the<br />
Current Year<br />
Share of earnings (losses) of equity investments<br />
The share of the earnings (losses) of equity investments is a loss of Euros 230 million and refers<br />
to the share of the result of Olimpia S.p.A., accounted for using the equity method (Euros 150<br />
million), the writedown of the investment in F.C. Internazionale <strong>Milan</strong>o S.p.A. (Euros 18<br />
million), the writedown of the investment in e.Biscom S.p.A. (Euros 35 million) and the<br />
writedown of the investment in Caltagirone Editore S.p.A. (Euros 24 million).<br />
Extraordinary items<br />
Extraordinary items show an expense of Euros 262 million<br />
compared to an expense of Euros 16 million in 2001. The<br />
current year mainly includes restructuring costs connected<br />
with the new rationalization measures focused on the Energy<br />
and Telecom Cables and Systems Sectors (Euros 275 million),<br />
offset by gains realized by <strong>Pirelli</strong> S.p.A. (Euros 17 million) on<br />
the sale of the building used as the representative offices in<br />
Rome and the historical Bicocca degli Arcimboldi to <strong>Pirelli</strong> &<br />
C. A.p.A., as part of the broader process for the reallocation of<br />
properties.<br />
The historic Bicocca degli Arcimboldi<br />
building, property of <strong>Pirelli</strong>.<br />
In 2001, extraordinary items included the gain on real estate transactions by the Cables and<br />
Systems Sector (Euros 61 million), an earn-out at the end of the agreements with Cisco Systems<br />
(Euros 70 million) and restructuring costs (Euros 151 million).<br />
Net income (loss)<br />
The net result for <strong>2002</strong> is a net loss of Euros 610 million compared to a net income of Euros 86<br />
million in 2001. Before consolidating Olimpia S.p.A. using the equity method, the net loss is<br />
Euros 460 million.<br />
Shareholders’ equity<br />
Consolidated shareholders’ equity went from Euros 5,660 million at the end of 2001 to Euros<br />
4,576 million at the end of <strong>2002</strong>.<br />
Such reduction can be analyzed as follows:<br />
in million of euros<br />
• Translations adjustments (314)<br />
• Net loss for the year (610)<br />
• Dividends to third parties paid by:<br />
- <strong>Pirelli</strong> S.p.A. (148)<br />
- Other Group companies (1) (149)<br />
• Directors’ compensation (13)<br />
• Other changes 2<br />
(1,084)<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 16
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
The Group<br />
Economic and<br />
Financial Review<br />
of <strong>2002</strong><br />
Outlook for the<br />
Current Year<br />
Net financial position<br />
At December 31, <strong>2002</strong>, the net debt position is Euros 1,469 million compared to Euros 1,089<br />
million at December 31, 2001. The change of Euros 380 million is mainly due to:<br />
in million of euros<br />
• Exchange differences (5)<br />
• Operating profit 117<br />
• Depreciaiton and amortization 362<br />
• Net investments: (375)<br />
- intangible assets and property, plant and equipment (332)<br />
- financial assets (43)<br />
• Change in working capital 373<br />
• Change in provisions and other (58)<br />
• Free cash flow 419<br />
• Reclassification of derivatives referring to Olivetti securities (*) (77)<br />
• Extraordinary items (262)<br />
• Financial income (expenses) (173)<br />
• Income taxes (62)<br />
• Dividends paids (149)<br />
• Other changes (72)<br />
• Net cash flows (376)<br />
• Changes in shareholders’ equity 1<br />
• Changes in financial position (380)<br />
(*) Olivetti S.p.A. 2010 convertible bonds and Share Swap Transactions on Olivetti S.p.A. shares / Olivetti S.p.A. 2010 convertible<br />
bonds held by the subsidiary <strong>Pirelli</strong> Finance (Luxembourg) S.A. that were previously classified as current financial assets.<br />
“Other changes” principally include the final payment of income taxes inherent to the sale of<br />
Optical Technologies to Corning (Euros 263 million), the impact on cash of the restructuring<br />
charges accrued in prior years (Euros 130 million), partly offset by the sale of tax receivables to<br />
Unicreditfactoring S.p.A. and Mediofactoring S.p.A. (Euros 113 million) and the reversal of the<br />
non-cash effects relating to new accrued restructuring charges (Euros 190 million).<br />
Capital expenditures<br />
Capital expenditures total Euros 325 million in <strong>2002</strong> compared to Euros 643 million in 2001.<br />
The ratio of capital expenditures to depreciation is 1.04.<br />
R&D expenditures<br />
R&D expenditures are entirely charged to the statement of income and amount to Euros 219<br />
million (3.5 percent of net sales) compared to Euros 237 million in 2001 (3.2 percent of net<br />
sales).<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 17
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
The Group<br />
Economic and<br />
Financial Review<br />
of <strong>2002</strong><br />
Outlook for the<br />
Current Year<br />
<strong>Pirelli</strong> Labs<br />
<strong>Pirelli</strong> Labs was established in 2001 and is the Group’s cuttingedge<br />
hi-tech research center.<br />
As far as Materials Innovation is concerned, activities<br />
concentrate on research in the field of materials science for<br />
applications in <strong>Pirelli</strong>’s traditional areas of business, on<br />
distributed power generation, as well as basic research work.<br />
With regard to Optical Innovation, work is mainly focused on<br />
research in the field of photonics and in the world of<br />
telecommunications.<br />
Eight inch wafer with test pattern.<br />
<strong>Pirelli</strong> Labs is the benchmark for all the <strong>Pirelli</strong> research<br />
activities throughout the world and, thanks to a series of<br />
agreements and consortiums, is directly linked to important<br />
private and university research centers in Italy and worldwide.<br />
Since the beginning of <strong>2002</strong>, there has been intensive and highly successful collaboration on<br />
joint projects between <strong>Pirelli</strong> Labs and Telecom Italia Lab, the research center of the Telecom<br />
Italia Group. This kind of collaboration is of reciprocal advantage to both groups: <strong>Pirelli</strong> will<br />
gain access to information about the future development of telecommunications networks/services<br />
and, as a result, will be better able to direct the development of equipment and subsystems to<br />
sell on the market to potential suppliers of telecommunications operators; similarly, Telecom<br />
Italia will gain access to information about the evolution of innovative enabling technologies for<br />
the development of innovative networks and services.<br />
Through <strong>Pirelli</strong> Labs, the <strong>Pirelli</strong> Group intends to become a “Knowledge company” in its own<br />
right, a company that will evolve and create value by developing innovative know-how and<br />
technologies. The technological center, which is equipped with hi-tech laboratories, is the<br />
Group’s hub of technological excellence. Here, new ideas and technologies are developed for<br />
the products of the next generation which will emerge in the medium and long term.<br />
<strong>Pirelli</strong> Labs Optical Innovation<br />
With regard to telecommunications, the efforts of the new<br />
laboratories have concentrated on photonics and the<br />
development of fiber optic equipment based on new<br />
technologies (particularly nanotechnologies), and also on<br />
innovative systems and subsystems destined mainly for<br />
applications in metropolitan and access networks.<br />
Since the technological platform was completed at the<br />
beginning of <strong>2002</strong>, activities have concentrated on the<br />
development of innovative equipment which will mature into<br />
products over the coming years, with effect from the second<br />
half of 2003. Major projects in the short/medium term include<br />
a tunable laser for long-distance and regional fiber optic<br />
network applications and a completely fiber optic routing<br />
device based on nanotechnologies, which constitutes the first<br />
example of an integrated fiber optic circuit.<br />
Widely tunable laser for optical<br />
networks, produced in the <strong>Pirelli</strong><br />
Labs.<br />
In addition, a Radio over Fiber system has been developed to carry mobile signals on optical<br />
cables in the context of third-generation mobile networks (UMTS). This system will be<br />
integrated with the equipment of the main mobile network suppliers. As far as broadband<br />
access solutions are concerned, an innovative residential ADSL access terminal is being<br />
developed which will make it possible to introduce broadband applications to the domestic<br />
sphere that are controlled by smart cards and which eliminate the use of personal computers.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 18
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
The Group<br />
Economic and<br />
Financial Review<br />
of <strong>2002</strong><br />
Outlook for the<br />
Current Year<br />
<strong>Pirelli</strong> Labs Material Innovation<br />
The strategy pursued in <strong>2002</strong> was to give priority to projects to<br />
be completed in the short and medium term.<br />
The most important results were achieved in the development<br />
of CCM (Continuous Compound Mixing) technology, both<br />
through the testing and modeling of the process. Innovative<br />
solutions were also developed in connection with the Cyber<br />
Tyre project.<br />
For the Telecom Cables business, new house coatings for fiber<br />
optics were tested and patented.<br />
With regard to medium-term projects, work in the area of Fuel<br />
Cells made it possible to register a series of patents for critical<br />
components, of both the PEM (Polymer Electrolyte<br />
Membrane) and SOFC (Solid Oxide Fuel Cell) type.<br />
The most interesting results in the field of long-term activities<br />
were achieved in the Bio-electromagnetism project.<br />
The new CCM (Continuous<br />
Compound Mixing) technology,<br />
integrated into the MIRS plant at<br />
Bicocca, <strong>Milan</strong>.<br />
Employees<br />
The number of employees was 36,079 at December 31, <strong>2002</strong>,<br />
compared to 39,127 at December 31, 2001.<br />
The workforce can be analyzed as follows:<br />
12/31/<strong>2002</strong> 12/31/2001<br />
Total workforce 36,079 39,127<br />
of which, temporary employees 2,257 2,672<br />
As a result of the acceleration of the restructuring program<br />
prior to the end of <strong>2002</strong>, which led to a significant reduction in<br />
the headcount as at December 31, <strong>2002</strong>, on January 1, 2003 the<br />
workforce totaled 35,610.<br />
A bundle of optical fibres.<br />
Factories<br />
Compared to 2001, the number of factories decreased from 84 to 79: four in the Energy Cables<br />
and Systems Sector and two in the Telecom Cables and Systems Sector. In the Tyres Sector, a<br />
new factory was opened in the U.S.A. (in Rome), which is completely run on the new MIRS TM<br />
technology.<br />
Economic value added<br />
Economic value added is negative, amounting to Euros 207 million, which represents a<br />
reduction from last year, mainly as a result of the significant decrease in operating profit.<br />
(in millions of euros ) <strong>2002</strong> 2001<br />
Economic value added (207) (69)<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 19
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
The Group<br />
Economic and<br />
Financial Review<br />
of <strong>2002</strong><br />
Outlook for the<br />
Current Year<br />
OUTLOOK FOR THE CURRENT YEAR<br />
The uncertainty surrounding the current economic and political situation does not allow for<br />
assumptions about an impressive upswing in the reference markets of the Group. More<br />
particularly, in the Telecom Sector, no signs of improvement are expected until towards the end<br />
of the year, whereas, in the Energy Sector, selective investments in utilities are expected to<br />
continue and a slow recovery in demand is forecast for the other application sectors. The Tyres<br />
Sector will continue its policy of focusing on the high performance segment, which is expected<br />
to grow.<br />
In this scenario, the Group, in capitalizing on the benefits from restructuring measures, will aim<br />
to increase the operating profit of the Energy Cables and Systems Sector, partly through a major<br />
focus of its products portfolio on higher value-added segments. In the Telecom Cables and<br />
Systems Sector, the previously mentioned restructuring actions should lead to a breakeven in<br />
the operating result in the fourth quarter, while the Tyres Sector is expected to report a further<br />
increase in operating profit compared to <strong>2002</strong>.<br />
The first MIRS factory overseas went into operation at Rome, Georgia, (United States).<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Cables and Systems<br />
Sector<br />
CABLES AND SYSTEMS SECTOR<br />
For purposes of a comparison with the prior year, the combined highlights of the Cables and<br />
Systems Sector for the year ended December 31, <strong>2002</strong> are presented in the following table:<br />
Combined<br />
Total<br />
in millions of euros <strong>2002</strong> 2001<br />
• Net sales 3,489 4,688<br />
• Gross operating profit 136 357<br />
% of net sales 3.9% 7.6%<br />
• Operating profit (29) 179<br />
% of net sales n.s. 3,8%<br />
• Financial income (expenses) (98) (33)<br />
• Extraordinary items (242) 11<br />
• Income taxes (14) (81)<br />
• Net income (loss) (383) 76<br />
% of net sales n.s. 1.6%<br />
• Net financial (liquidity)/debt position 804 890<br />
• Capital expenditures 153 359<br />
• R&D expenditures 89 112<br />
• Employees (at year-end) 15,025 18,212<br />
• Factories (number) 57 63<br />
Development continues of innovative solutions for high voltage power transmission.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 21
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
ENERGY CABLES AND SYSTEMS SECTOR<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
The highlights of the consolidated financial statements of the Energy Cables and Systems Sector<br />
can be summarized as follows:<br />
in millions of euros <strong>2002</strong> 2001<br />
• Net sales 3,021 3,532<br />
• Gross operating profit 158 149<br />
% of net sales 5.2% 4.2%<br />
• Operating profit 55 52<br />
% of net sales 1.8% 1.5%<br />
• Financial income (expenses) (44) n.d<br />
• Extraordinary items (121) n.d<br />
• Income taxes (10) n.d<br />
• Net loss (120) n.d<br />
% of net sales n.s. n.d<br />
• Net financial (liquidity)/debt position 373 526<br />
• Capital expenditures 75 n.d<br />
• R&D expenditures 44 n.d<br />
• Employees (at year-end) 12,479 14,523<br />
• Factories (number) 50(*) 54<br />
(*) four of these are shared with the Telecommunications Cables and Systems Sector<br />
Net sales<br />
Net sales amount to Euros 3,021 million and show a decrease<br />
of 14.5 percent from the prior year, due to:<br />
Europe<br />
North America<br />
South America<br />
• Currency exchange effect - 3.9%<br />
• Volumes - 7.7%<br />
• Metal prices - 1.4%<br />
• Prices/Mix - 1.5%<br />
- 14.5%<br />
The distribution of net sales is as follows:<br />
Geographical area <strong>2002</strong> 2001<br />
Europe (of which Italy 16%) 65% 55%<br />
North America 14% 16%<br />
South America 7% 16%<br />
Oceania 4% 2%<br />
Asia 9% 10%<br />
Africa 1% 1%<br />
Africa<br />
Asia<br />
Oceania<br />
Energy Cables and Systems: <strong>2002</strong><br />
sales by geographical area and<br />
product category.<br />
Bulding wires,special cables<br />
and enameled wires<br />
Energy<br />
Product category <strong>2002</strong> 2001<br />
Power cables 48% 33%<br />
Building wires, special cables and enameled wires 26% 31%<br />
Accessories, installation activities and other activities 26% 36%<br />
Accessories, installation<br />
activities and other<br />
activites<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 22
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Operating profit<br />
Operating profit is Euros 55 million (1.8 percent of net sales),<br />
compared to Euros 52 million in the prior year (1.5 percent of<br />
net sales).<br />
The most important changes from the prior year can be<br />
summarized as follows:<br />
in millions of euros<br />
• Currency exchange effect - 10<br />
• Prices (excluding metals)/Mix - 15<br />
• Volumes - 64<br />
• Per unit materials cost + 9<br />
• Per unit labor cost - 8<br />
• Efficiencies + 89<br />
• Other + 2<br />
+ 3<br />
Extraordinary items<br />
Extraordinary items show an<br />
expense balance of Euros 121<br />
million and mainly include<br />
restructuring expenses of<br />
Euros 120 million.<br />
Net loss<br />
The net result is a loss of<br />
Euros 120 million after<br />
financial expenses of Euros 44<br />
million, extraordinary<br />
expenses of 121 million and<br />
income tax expenses of Euros<br />
10 million.<br />
Net financial position<br />
The net financial position is a debt position of Euros 373<br />
million. This is a significant improvement over Euros 526<br />
million at the end of the prior year and is attributable to a<br />
selective policy of investments and actions taken to optimize<br />
working capital.<br />
Capital expenditures<br />
New capital expenditures amount to Euros 75 million.<br />
The ratio of capital expenditures to depreciation is 0.8 percent.<br />
The main projects include:<br />
– investments associated with the paper-insulated submarine<br />
cables business<br />
– re-location of the new Cavimar factory in Spain<br />
– machinery upgrading for production and technological<br />
requirements (new products)<br />
– increasing the production capacity of Special Accessories<br />
and Cables<br />
A special cable of the DRYLAM ®<br />
family.<br />
Capital expenditures can be analyzed by geographical area as<br />
follows:<br />
Geographical area <strong>2002</strong><br />
Europe 78%<br />
South America 10%<br />
North America 5%<br />
Rest of the World 7%<br />
Armouring of a submarine umbilical<br />
cable.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 23
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Research & development<br />
In the field of Energy R&D, work is organized in a linear,<br />
compact way, with the aim of focusing on innovative projects<br />
for current and future business.<br />
In <strong>2002</strong>, 410 people were engaged in research activities for<br />
expenditures of Euros 44 million, representing 1.5 percent of<br />
total sales.<br />
The Networking-OPT (Opto-power Technologies) group has<br />
been set up within Energy Research & Development. Together<br />
with the other four groups (Functional Modules, Stratified<br />
Systems, Extruded Systems and Experimental Electrical Labs),<br />
its objective is the research and development of innovative<br />
and breakthrough solutions.<br />
In addition to cables and accessories, a study of network<br />
A generator of impulses for the<br />
study of high voltage.<br />
dynamics has been identified, with the aim of developing components, special systems and<br />
solutions which will meet the needs of the clientele, by anticipating future scenarios in the sector.<br />
The most important projects in <strong>2002</strong> include:<br />
• research and development of methods of thermal management for cable systems and of new<br />
Optopower TM – Networking technologies for lines with high-voltage cables applied to the<br />
following links:<br />
– Nunthorpe-Newby (UK)<br />
– Tilbury-Gravesend (UK)<br />
– Delta (Netherlands)<br />
– Elia (Belgium)<br />
– Barajas (Spain)<br />
• development and construction of cables, junctions and terminations for the 400-kV Madrid<br />
Airport – Barajas project to replace existing overhead lines with highly reliable underground<br />
Compact TM Cable Systems;<br />
• research into distributed fiber optic sensors for the distributed measurement of mechanical<br />
deformations induced by flexion of cables in the framework of Optopower TM – RTMM (Real<br />
Time Mechanical Monitoring);<br />
• research and development of WPM (Water Penetration Monitoring) systems;<br />
• research and development of a proprietary system - SIDIAT (High-voltage Diagnostic System)<br />
for cable systems diagnostics. In particular, a system/sensor has been developed to be<br />
integrated in 220 kV – 400 kV junctions for the measurement of partial discharges;<br />
• development of an innovative model for the automated management of very high-power<br />
transmission lines (2 x 1750 MVA) in tunnels. Development of the management system<br />
software controlling the flow of cooling air and the logic of intervention of alternating fans;<br />
• research and development of a screening system for magnetic fields produced by HV cables,<br />
for rapid installation. An application has already been found for this new technology, known<br />
as the Pit-Stop TM – EMC Cable System, on a 6.5-km link in the Naples area for ENEL;<br />
• research into innovative components and systems for HECCS (High Electrical Capacity<br />
Components System), to stabilize electrical energy distribution networks. Research findings were<br />
presented in South America for future applications;<br />
• development and creation of innovative network components: Surf-fit/60 kV which already<br />
meets international standards, and Surf-fit/90 kV which will obtain international qualification<br />
shortly;<br />
• development and qualification of the new MT Elaspeed TM junction with a collapsible support<br />
and automatic elastic ejection;<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 24
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
• long duration (6,000 hours) EDF test successfully conducted<br />
over a 400 kV cable and accessories with innovative<br />
composite terminations;<br />
• research, development and qualification of 275 kV-class EGS<br />
dry termination. The prototype was also used in China for<br />
qualification of the complete 220-kV system;<br />
• development of technology for Oil-free Terminations from<br />
60 kV to 275 kV;<br />
• research and development for HVDC extruded DC systems.<br />
Development of up to 200 kV junctions completed.<br />
Type tests passed by the developed prototypes;<br />
An Air Bag high voltage cable<br />
system.<br />
• development and qualification of new types of link-box and link components (250 and 400 A<br />
for EDF and ENEL), according to international standards;<br />
• development of Mechanical-Type Air-Bag TM technology, from Light versions to VHICP (Very<br />
High Impact and Crash Performance) versions;<br />
• research and development of Air-Bag TM - EMW (Electrical Mechanical and Water blocking)<br />
technology for multi-functional, integrated applications;<br />
• research and development of innovative modules for long-distance submarine links. The new<br />
concepts were presented within the framework of the BASSLINK project;<br />
• development of solutions for on-shore and off-shore Wind Generation applications.<br />
In particular, a rigid 132-kV junction was created and qualified for the off-shore Wind Park<br />
being built under the SEAS contract;<br />
• research and development of variable geometry cabled systems for industrial automation<br />
with innovative connecting components (SIEMENS);<br />
• development of new lines of FP fire-proof cables and systems and research into breakthrough<br />
technologies for the future Fire-Fit TM lines. The prototypes have passed the tests required by<br />
the main international standards;<br />
• development of innovative electrically driven integrated polymeric modules which are to replace<br />
metallic components traditionally used in Mining and Crane systems;<br />
• development of special EPR-Compact TM systems for industrial applications which require<br />
high levels of flexibility and thermal performance;<br />
• research and development of innovative technologies in the sphere of MICS (Mobile Integrated<br />
Cable Solutions). In particular, research concentrated on the creation of systems with miniaturized<br />
components for marine and land-based applications.<br />
Employees<br />
At December 31, <strong>2002</strong>, total employees in the Energy Sector were 12,479 (including 683<br />
employees with temporary contracts). Compared to December 31, 2001, there was a reduction<br />
of 2,044 (including 450 employees with temporary contracts).<br />
It should be emphasized that, as a result of the acceleration of the rightsizing program prior to<br />
the end of <strong>2002</strong>, which led to a significant reduction in the headcount as at December 31, <strong>2002</strong>,<br />
on January 1, 2003 the workforce in the Energy Sector totaled 12,187, with a decrease of a<br />
further 292 compared to December 31, <strong>2002</strong>.<br />
At December 31, <strong>2002</strong>, the workforce (excluding employees with temporary contracts) may be<br />
analyzed as follows:<br />
12/31/<strong>2002</strong> 12/31/2001<br />
Senior executives 1.4% 1.8%<br />
Staff 27.2% 28.0%<br />
Blue-collar 71.4% 70.2%<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 25
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Development of human resources<br />
Within the context of the Energy Sector, a survey of the areas of expertise of commercial<br />
resources has been conducted with the aim of completing a census of the professional skills<br />
present and drawing up improvement programs where necessary.<br />
Measures designed to monitor the professional growth and plan the careers of talented young<br />
employees, which began in 2001, continued in <strong>2002</strong> with particular reference to industrial and<br />
commercial functions in Europe.<br />
Factories<br />
At year-end <strong>2002</strong>, there were 50 factories operating in the Energy Cables and Systems Sector<br />
(of which 4 are shared with the Telecom Cables and Systems Sector), compared to 54 in<br />
December 2001.<br />
During <strong>2002</strong>, the closing of factories in Berlin, Southampton, Clayton and Settimo Torinese was<br />
completed, while the closing of the factories in Erith and Colusa began and is scheduled for<br />
completion by the first quarter of 2003.<br />
Geographically, the factories are distributed as follows: 35 in Europe, 4 in North America, 6 in<br />
South America and 5 in Australia, Asia and Africa.<br />
A Industrial operations<br />
During <strong>2002</strong>, power cable factories produced volumes which,<br />
although lower than expected, were substantially in line with<br />
those of the prior year.<br />
During the first half of the year, the closing of the Berlin<br />
factory was completed, its volumes having been re-allocated to<br />
Schwerin and Balassagyarmat. During the second half of the<br />
year, building work began in Spain on the new plant facilities<br />
to which the Cavimar (Energy and Telecom) factory will later<br />
be transferred. In the last quarter, with the closing of the<br />
factories at Settimo Torinese and the planned closing of the<br />
factory at Erith, the program to focus the manufacture of High<br />
Voltage Cables in three centers (located at Gron, Delft and<br />
Pikkala) and the manufacture of Submarine Cables in a single<br />
factory located at Arco Felice was set in motion.<br />
In parallel, the aim of reducing transformation costs in<br />
factories was kept under strong and constant pressure,<br />
especially in the second half of the year. In particular, a<br />
program was started to improve work efficiency which will<br />
already produce significant results in 2003.<br />
In <strong>2002</strong>, variable and fixed transformation costs were reduced<br />
by approximately 5 percent.<br />
The program to obtain ISO 14001 certification for the<br />
corporate Environmental Management System for production<br />
facilities proceeded as planned. In <strong>2002</strong>, the certification was<br />
awarded to 41 more factories.<br />
Most of the remaining factories are expected to obtain ISO<br />
14001 certification in 2003.<br />
The Arco Felice (Naples) factory,<br />
the centre of technological<br />
excellence for the submarine<br />
businesses.<br />
The programme of Certification of<br />
the Environmental Management<br />
System (ISO 14001) is progressing.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 26
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Materials<br />
As far as the trend of raw materials prices for power cables is concerned, in <strong>2002</strong>, the following<br />
took place:<br />
• in <strong>2002</strong>, non-ferrous metals quoted on the LME reported an average fall in prices compared to<br />
2001: copper -1 percent, aluminum -6 percent and lead -5 percent. This confirms the weak<br />
demand which persisted throughout the year.<br />
Prices are expected to increase in 2003, and there are already signs of a recovery following<br />
high demand, especially in China;<br />
• as far as the main commodities are concerned, after the continuous decline in prices in 2001,<br />
which reached a record low at the beginning of <strong>2002</strong>, prices began to recover during the first<br />
six months of <strong>2002</strong>, followed by a fall again in the second half of the year.<br />
There are conflicting forecasts for 2003: on the one hand, the price of oil and oil-derivatives is<br />
expected to rise and, on the other, there is expected to be a general weakness in demand in<br />
Europe and North America. Furthermore, manufacturers have reacted by closing facilities,<br />
some permanently, others in order to carry out extensive maintenance work;<br />
• with regard to specialties, in <strong>2002</strong>, prices were generally weak; the forecast for 2003 is for a<br />
similar trend.<br />
Overall, in <strong>2002</strong>, on average, the prices of raw materials (commodities and specialties) were two<br />
percentage points lower than in 2001.<br />
In 2003, the markets are expected to maintain the same prices as in <strong>2002</strong>, except for possible<br />
sharp rises in the price of oil.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 27
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
ENERGY SECTOR HOLDING COMPANY<br />
The statutory financial statements of <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A. for the year ended<br />
December 31, <strong>2002</strong> are summarized in the following balance sheet and statement of income. The<br />
statement of income is not comparable with that of the prior year as 2001, following the spin-off<br />
process during the year, did not represent a full year of operations.<br />
in millions of euros<br />
Balance sheet <strong>2002</strong> 2001<br />
Intangible assets 4.2 2.7<br />
Property, plant and equipment, net 15.1 30.8<br />
Financial assets 780.3 848.0<br />
Net working capital (28.0) 37.6<br />
771.6 919.1<br />
Shareholders’ equity 399.1 432.9<br />
Provisions 17.3 44.5<br />
Net financial (liquidity)/debt position 355.2 441.7<br />
771.6 919.1<br />
in millions of euros<br />
Statement of income <strong>2002</strong> 2001<br />
Production value 158.1 17.5<br />
Production costs:<br />
- raw materials and services (92.8) (12.1)<br />
- personnel (28.7) (2.6)<br />
- depreciation and amortization (5.3) (0.4)<br />
- other (51.5) –<br />
Operating profit (loss) (20.2) 2.4<br />
Financial income (expenses) (13.2) (1.4)<br />
Share of earnings (losses) of equity investments 23.1 –<br />
Income (loss) before extraordinary items and income taxes (10.3) 1.0<br />
Extraordinary items (18.3) –<br />
Income taxes (5.1) (0.6)<br />
Net income (loss) (33.7) 0.4<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 28
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
PERFORMANCE BY GEOGRAPHICAL AREA<br />
Italy<br />
<strong>Pirelli</strong> Cavi e Sistemi Energia Italia S.p.A. operates in the<br />
field of Energy in Italy. The year <strong>2002</strong> was marked by the<br />
following performance:<br />
• in the General Market, coverage of the distribution market<br />
continued to increase, while promotion activities were<br />
stepped up nationwide. In addition, the range of Afumex<br />
cables was completed with the development and<br />
introduction of the new MT range (Afumex MV Power 105)<br />
and the line of multicore building wire cables for mobile<br />
laying installations (Afumex Flex);<br />
• in terms of volumes, the market for medium and low voltage Power Cables reported a<br />
New families of Afumex cables have<br />
been introduced to the market.<br />
positive start to the year, which was followed by a fall in the last quarter due to a slowdown<br />
in demand from important customers. An opposite trend was reported in high voltage cables<br />
and systems, where there was a good jump in orders in the second half of the year. As for<br />
prices, there were modest increases in the prices of medium voltage cables;<br />
•in <strong>2002</strong>, the Accessories market fell slightly in terms of volumes compared to the prior year.<br />
A decrease in medium voltage accessories and a modest increase in high voltage accessories<br />
were noted in particular. In the case of the latter, the shift in the mix towards high range<br />
products, thanks to some 400-kV systems in Spain and Italy, proved to be positive;<br />
• in <strong>2002</strong>, sales of Special Cables remained fairly steady compared to the prior year, with price<br />
pressure owing to the weakness in demand, and exports just below 50 percent. Exports were<br />
generated by the Oil & Gas sector (cables for underwater pumps and for offshore platforms),<br />
petrochemical plants and railway systems dedicated to new technologies both in Italy and<br />
elsewhere in Europe with prospects of a further increase in business.<br />
On the domestic market, positive results were reported in the sector of special heavy cables,<br />
whereas the finer electro-engineering cables and the electronics cables (mainly for<br />
telecommunications) fell sharply.<br />
F<br />
France<br />
With regard to <strong>Pirelli</strong> Energie Câbles et Systèmes France<br />
S.A., in <strong>2002</strong>, the company was forced to operate in a market<br />
with a highly irregular trend marked by a fall in demand,<br />
especially in the second half of the year.<br />
In the General Market and Special Cables business areas, the<br />
negative nature of the market was accompanied by strong price<br />
pressures.<br />
In the Utilities market, sales volumes fell compared to the prior<br />
year owing to a reduction of orders from EDF. This was partly<br />
offset by higher exports in the high voltage market, for projects<br />
in Mexico, Spain and Tunisia.<br />
The energy cable factory at Gron,<br />
France.<br />
The High Voltage market also saw the conclusion of the Barajas project, making it possible to<br />
qualify the cutting-edge technology of the Gron factory.<br />
This market situation will prevail throughout 2003 and, for this reason, the company has taken<br />
measures to improve its efficiency.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 29
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Spain<br />
In <strong>2002</strong>, the trend of the Spanish economy was not particularly negative, compared to other<br />
European countries.<br />
The results of <strong>Pirelli</strong> Cables y Sistemas S.A. exceeded expectations.<br />
In the General Market business, the fall in margins was offset by a considerable increase in<br />
sales volumes.<br />
In the Utilities market, the company acquired orders and supplied the main high voltage<br />
projects.<br />
In <strong>2002</strong>, 25 percent of the land of the Cavimar factory was sold to new owners and construction<br />
of the new factory began at Villanueva y la Geltrù.<br />
United Kingdom<br />
<strong>Pirelli</strong> Cables Limited continues to operate in the Energy<br />
Sector and, since the year-end, merged the installations<br />
business hitherto operated by <strong>Pirelli</strong> Construction Company<br />
Ltd..<br />
The General Market business was affected by growing<br />
competition and erosion of prices, both on the domestic market<br />
and on the export market, generating a fall in results.<br />
Expectations of a recovery in 2003 are focused on the search<br />
for new customers and the introduction of new products.<br />
The High Voltage Cables market was marked by the<br />
completion of the installation of the 400-kV PPL cable for the<br />
NGC.<br />
After the cancellation of the Viking project, demand in the<br />
submarine cable sector gradually diminished, thus increasing<br />
the situation of production overcapacity on the world market.<br />
The company therefore decided to close the factories at<br />
Southampton and Erith (the closing of the latter will be<br />
completed in the first quarter of 2003).<br />
In the Power Distribution market, the company consolidated<br />
its position on the market by acquiring contracts with leading<br />
customers on the domestic market.<br />
The new high voltage cable<br />
developed using innovative PPL<br />
(Paper Polypropylene Laminate)<br />
technology.<br />
Germany<br />
<strong>Pirelli</strong> Kabel und Systeme Holding GmbH, the German company had to face a persistently<br />
difficult economic situation in the country and was forced to operate in a domestic market that<br />
has been contracting for seven consecutive years. Despite the fall in sales, both in terms of<br />
volumes and prices, the company succeeded in improving its situation thanks to a restructuring<br />
program which included the closing of one of its production plants. The benefit of these<br />
measures was a significant increase in the operating result and the net result.<br />
In the General Market business, the reduction in volumes and pressure on prices continued,<br />
but the restructuring measures which had begun led to an improvement in profitability.<br />
The Utilities market increased net sales by 5 percent, due to a favorable situation in prices,<br />
which also led to an improvement in results.<br />
Sales of Special Cables contracted, both on the domestic and international markets, because<br />
of economic difficulties experienced by some of the major customers.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 30
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Holland<br />
<strong>Pirelli</strong> Cables and Systems N.V. achieved its planned<br />
results, despite the difficulties of the market.<br />
In the domestic market there was a contraction of volumes in<br />
all business areas, with the exception of the High Voltage<br />
market, which reported good results thanks to two important<br />
contracts, NUON Full Power and TZH InterGen, which<br />
generated sufficient production volumes.<br />
With regard to international markets, positive volumes were<br />
reported in the United States and in China in the field of High<br />
Voltage Accessories.<br />
Installations continued to grow.<br />
Sales volumes in the General Market business area reported<br />
higher sales volumes, despite being affected by the world<br />
crisis.<br />
In the Special Cables market, sales also increased, mainly<br />
due to the high quality of the products.<br />
400 Click-Fit ® joints will be supplied<br />
to the Dutch utility NOUN.<br />
Finland<br />
<strong>Pirelli</strong> Cables and Systems OY operates in the field of energy in Finland and, through its<br />
affiliates, also in Sweden and Norway.<br />
Sales volumes remained at the same level as the prior year, since the worsening of market<br />
conditions in Northern Europe was offset by a considerable increase in exports.<br />
In the Utilities market, the demand for high voltage cables increased in the United States,<br />
Spain and the Far East. This led to a positive performance of the whole business area.<br />
In the Power Distribution market, the company maintained its market position in Finland and<br />
in the Baltic States, and achieved significant gains in exports.<br />
The General Market business reported volumes similar to those in the prior year, whereas the<br />
Industrial and Special Cables market reported a negative performance, particularly in cables<br />
destined for the naval sector.<br />
Slovakia<br />
In <strong>2002</strong>, Kablo Bratislava Spol. S.R.O., the Slovak affiliate<br />
confirmed the positive trend of recent years.<br />
By rationalizing costs, it succeeded in compensating the<br />
growing pressure on prices, strengthening its position on the<br />
domestic market and also its place in the Czech Republic. It<br />
also confirmed its position on international markets, despite<br />
the recession of the global economy.<br />
Austria<br />
In Austria, despite the<br />
unfavorable market situation,<br />
<strong>Pirelli</strong>-OEKW GmbH again<br />
succeeded in maintaining its<br />
leadership position in the<br />
Utilities sector in <strong>2002</strong>.<br />
The reduction in fixed costs<br />
made it possible to reduce the<br />
impact of costs as a<br />
percentage of net sales by 2.5<br />
percent.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 31
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Hungary<br />
In Hungary, <strong>Pirelli</strong> operates in the Energy Sector through MKM Magyar Kabel Muvek RT,<br />
which, despite price pressures and volume reductions on the domestic market, succeeded in<br />
maintaining its leadership position, both in the General Market and Utilities sectors, through<br />
goal-oriented commercial initiatives.<br />
The reduction of volumes on the domestic and international market was offset by the increase<br />
in intercompany sales. Great efforts were made to reduce fixed costs, despite huge inflationary<br />
pressure.<br />
Romania<br />
In Romania, where S.C. <strong>Pirelli</strong> Romania Cabluri si Sisteme S.A. operates, performance<br />
suffered not only from the uncertainty of the domestic market and the legislative instability<br />
which have prevailed in the country for a number of years, but also from the restructuring<br />
process which involved the company’s main customers, Electrica and RomTelecom.<br />
The company confirmed its market share and again endeavored to be more competitive on the<br />
international market.<br />
Despite the general state of the economy, results were satisfactory.<br />
Turkey<br />
Crisis continues to affect the performance of the financial<br />
markets in Turkey and, as a result, domestic demand and<br />
results also continue to fall. In <strong>2002</strong>, there was a notable drop<br />
in inflation to 31 percent (89 percent in 2001), a figure well<br />
below the target set by the IMF, and the Turkish lira weakened<br />
against the Euro by 34 percent (105 percent in 2001).<br />
Turk <strong>Pirelli</strong> Kablo ve Sistemleri A.S. improved its results<br />
despite the unfavorable market conditions, while sustaining<br />
restructuring expenses and improving its financial position.<br />
A picture of the TÜRK PIRELLI<br />
Kablo ve Sistemleri A.S. commercial<br />
site.<br />
North America<br />
The North America Energy business, operated by <strong>Pirelli</strong> Power Cables and Systems USA<br />
LLC, significantly improved its results compared to the prior year, despite the stagnation of the<br />
economy.<br />
Net sales increased and margins improved considerably thanks to efficient action to reduce<br />
fixed and variable overheads.<br />
The company announced the closing of its factory in Colusa, California, at the end of the year.<br />
This restructuring measure will generate greater efficiency in costs and will make it possible to<br />
improve profits in 2003.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 32
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
In <strong>2002</strong>, the submarine cable installation company, <strong>Pirelli</strong><br />
Jacobson Inc., was consolidated with the high voltage<br />
installation business, thus achieving a significant reduction of<br />
costs. The installations business, however, had an excellent<br />
year, reporting high volumes and profits. Important contracts<br />
were completed for Exelon (ComEd and PECO), Oncor (TXU),<br />
PSE&G and Sierra Pacific (Nevada Power). <strong>Pirelli</strong> Power<br />
Cables and Systems LLC is well positioned in the North<br />
American market and is likely to benefit considerably from the<br />
recovery of the economy forecast for 2003.<br />
Brazil<br />
View of the laboratories for high<br />
voltage studies.<br />
The Brazilian economy was seriously affected by the instability of the local currency caused<br />
mainly by the uncertain political situation and by the negative impact of the international<br />
economy (especially the crisis in South America).<br />
<strong>Pirelli</strong> Energia Cabos e Sistemas do Brasil S.A. operates in the Energy Sector.<br />
In <strong>2002</strong>, the company succeeded in maintaining sales at a level comparable to the prior year<br />
despite the fall in volumes, mainly in the General Market business.<br />
The result was influenced by the restructuring measures which also involved the Brazilian<br />
affiliate and amounted to 43 percent of last year’s result.<br />
Argentina<br />
In Argentina, where <strong>Pirelli</strong> Energia Cables y Sistemas de Argentina S.A. operates, there<br />
was a serious recession which affected the whole market.<br />
During the first half of the year, the economic policy of “Convertibilidad” (U.S. $1 = Argentine<br />
peso 1) was abandoned, working capital was severely restricted and all the payables and<br />
receivables in U.S. dollars were converted to the local currency. This forced the company to renegotiate<br />
the expiry dates of payables with most of its suppliers.<br />
During the second half of <strong>2002</strong>, a halt to the decline in value of the local currency and the<br />
restitution of funds that had been blocked by the banks led to a gradual recovery of industrial<br />
activity and a greater focus on export markets.<br />
Australia<br />
In Australia, excellent results were achieved after the radical restructuring which took place in<br />
2001.<br />
<strong>Pirelli</strong> Power Cables & Systems Australia PTY Ltd succeeded in maintaining its strong<br />
position in the Utilities market and achieved substantial growth in the Special Cables market,<br />
mainly in the oil sector.<br />
With regard to future operations, in a context marked by a rapid fall in prices, especially in the<br />
Utilities sector, variable and fixed overheads must continue to be kept under control in order<br />
to improve results.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 33
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Indonesia<br />
P.T. <strong>Pirelli</strong> Cables Indonesia reported a positive performance, despite the persisting<br />
stagnation of the Indonesian economy, achieving the planned results. Priority was given to<br />
controlling fixed and variable overheads by improving efficiency.<br />
In the Power Cables segment, volumes remained constant with sales on export markets<br />
exceeding those on the domestic market.<br />
China<br />
Tianjin Top Power Cables Co. Ltd, the Chinese affiliate<br />
which operates in the area of products for Utilities, reported<br />
an increase in sales of 15 percent compared to the prior year,<br />
despite strong pressure on prices.<br />
The company also reported significant export volumes.<br />
It is worth mentioning that the company doubled its sales<br />
volumes compared to 1999, the year in which <strong>Pirelli</strong><br />
established the joint venture, and that a high level of<br />
efficiency has been achieved.<br />
The energy cable factory at<br />
Baosheng, China.<br />
In July <strong>2002</strong>, <strong>Pirelli</strong> increased its stake in the company from 51 percent to 67 percent.<br />
BICCGeneral Baosheng Cable Co. Ltd, acquired at the end of 2000, again reported positive<br />
results in <strong>2002</strong>, fulfilling all the forecasts made at the beginning of the year. The company<br />
completed the type-testing for a 220-kV XLPE cable at the Settimo Torinese factory and in the<br />
laboratory at Wuhan (the test center in China). The cable will be completed in 2003. Marketing<br />
of high voltage cables was stepped up with the aim of enabling the company to achieve the<br />
leadership position on the market for this kind of technology.<br />
Malaysia<br />
Power Cable Malaysia Sdn Bhd, (not consolidated) continued to raise profitability in <strong>2002</strong>.<br />
The company was awarded long-term contracts with CLP Hong Kong and PowerGrid Singapore,<br />
thus placing itself in a good position in the Utilities market.<br />
South Africa<br />
African Cables Ltd (not consolidated) significantly increased its sales revenues, and again<br />
reported improved results, thanks partly to excellent control of its financial position.<br />
In 2003, the company is expected to succeed in maintaining its satisfactory level of profitability.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 34
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
BUSINESS UNITS<br />
Overall performance of the Energy Cables and Systems business<br />
At the end of its first year of operations as an independent entity, the Energy Cables and<br />
Systems Sector reported a contraction of sales revenues (-14.6 percent of which 8 percent refers<br />
to volumes and 4 percent to the foreign exchange effect) compared to the prior year, due to a<br />
notable decline fall in volumes and a considerable contraction of prices worldwide.<br />
Despite the difficult market situation in which the sector operates, overall operating profit was<br />
equivalent to 1.8 percent of sales and increased 5.7 percent compared to the result in the prior<br />
year.<br />
The net result of the sector was negatively affected by restructuring costs, which refer to all the<br />
main affiliates of the sector, with the primary aim of reducing fixed overheads and improving<br />
production efficiency.<br />
As part of the far-reaching restructuring plan, the primary aim of which is to focus on the<br />
business segments with the highest value-added, the sale of the Enameled Wires business was<br />
announced in December.<br />
In particular, the sale refers to the manufacturing and marketing activities in the sector of<br />
enameled wires and transposed conductors in Europe and China.<br />
General Market Business Unit<br />
The year <strong>2002</strong> was marked by a continuous fall in prices worldwide. There was a general<br />
contraction in volumes, with the exception of Spain, Scandinavia, Australia and Canada, where<br />
modest growth was recorded. In this market situation, <strong>Pirelli</strong> maintained its market share and<br />
avoided a serious decline in the result by implementing measures aimed to reduce fixed<br />
overheads.<br />
Utilities Business Unit<br />
Net sales were slightly lower than in 2001, in particular:<br />
• in High Voltage Systems, overall, net sales in <strong>2002</strong><br />
remained stable, with a reduction in South America and an<br />
increase in China. The approach to the market of “turn-key”<br />
solutions was strengthened and will permit greater<br />
penetration in the European and North American markets.<br />
Price levels deteriorated in the 150-kV segment, whereas<br />
they improved in the 220-kV and 400-kV segments.<br />
Furthermore, industrial rationalization led to a better result<br />
than in the prior year;<br />
• in the Power Distribution segment, sales contracted,<br />
especially in South America due to foreign exchange effects,<br />
while in Europe the reduction in volumes can be attributed<br />
to the fall in investments on the part of the largest utilities.<br />
Price levels showed some signs of recovery, especially in the<br />
United Kingdom and in Germany, despite increasing<br />
competition;<br />
A phase in the installation of a<br />
system with Click-Fit ® joints.<br />
• in the Accessories business, the market was stable in <strong>2002</strong>. In China, <strong>Pirelli</strong> won the first bid<br />
for medium voltage systems. Industrial reorganization was completed in the high voltage<br />
segment.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 35
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Industrial Markets Business Unit<br />
The Business Unit reported a significant reduction in <strong>2002</strong>, compared to the prior year.<br />
The operating profit of the four segments of the business unit can be analyzed as follows:<br />
• the Industry and Specials segment reported a contraction of activity, especially in Germany<br />
and Italy. In these countries, the weakness of the Original Equipment Manufacturer channel,<br />
which is the most important buyer of high-margin cables, was accentuated in the last quarter<br />
of the year because of a widespread fall in investments.<br />
In the Contractor channel, the delay in the start-up of international projects caused a<br />
reduction in net sales, especially in the exploitation of natural resources;<br />
• in Enameled Wires, the negative trend of falling prices which began at the end of 2001<br />
continued, with stagnant volumes and an installed capacity that was greater than demand.<br />
With regard to transposed conductors, after a promising start in <strong>2002</strong>, there was slowdown in<br />
demand in North America. In Brazil, net of the weakness of the local currency, activities<br />
reflected expectations. In the last month of the year, the new Chinese company Invex<br />
Insulated Conductors (Baoying) Co. Ltd for the manufacture of transposed conductors<br />
became operational;<br />
• Automotive Cables reported a deterioration in margins due to the erosion of selling prices<br />
as a result of fierce competition. The joint venture in Tunisia, begun the prior year, became<br />
operational;<br />
• the Branchement business succeeded in combating the negative effect of price erosion<br />
thanks to higher sales volumes.<br />
Submarine power systems<br />
In <strong>2002</strong>, the Submarine Power System Business saw the start<br />
of the Basslink contract, which involves the supply and<br />
installation of a 400-kV interconnection system between<br />
Australia and Tasmania. 295 km of paper-insulated cable and<br />
195 km of extruded cable are required for the project,<br />
ensuring full production for the Arco Felice (Naples) factory<br />
over the next two years. In addition, in 2004 and 2005, the<br />
installation work will be conducted by our cable-laying vessel,<br />
Giulio Verne. Overall, the contract is worth approximately<br />
Euros 173 million.<br />
In <strong>2002</strong>, the activities of the business included the supply and<br />
installation of the 132- kV cable for SEAS (Denmark), to<br />
connect the mainland to one of the largest off-shore windmill<br />
parks in the world, situated 11.2 km off the island of Sjaelland<br />
in Denmark. The contract, worth more than Euros 16 million,<br />
will make a significant contribution to the spread of “clean”<br />
energy in Denmark.<br />
High voltage submarine cable in<br />
production.<br />
Furthermore, business is growing in the field of off-shore cables, with the production of cables<br />
for Saipem Panyu (China), Zadco (Arab Emirates) and NPCC Soorosh-Noorosh (Iran).<br />
At the same time, the business unit also carried out a restructuring project, concentrating its<br />
manufacturing activities in one single production site at Arco Felice.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 36
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
PERFORMANCE OF THE MAIN COMPANIES IN THE SECTOR<br />
Key data as they appear in the financial statements prepared by the boards of directors and<br />
approved or in the process of approval by the respective shareholders' meetings are given<br />
below.<br />
All amounts are expressed in local currency. However, the economic results are not<br />
comparable with the prior year as 2001, following the spin-off during the year, did not represent<br />
a full year of operations.<br />
Pir.Energie Câbles et Systèmes France S.A. - France (in thousands of euros)<br />
<strong>2002</strong> 2001<br />
• Net sales 352,275 393,638<br />
• Net income (loss) (15,055) (3,914)<br />
• Net financial (liquidity)/debt position (15,701) (3,707)<br />
• Shareholders’ equity 136,277 151,332<br />
Pir. Cables y Systemas S.A. (consolidated) - Spain (in thousands of euros)<br />
• Net sales 205,.570 265,146<br />
• Net income (loss) 8,779 27,702<br />
• Net financial (liquidity)/debt position 4,690 (25,259)<br />
• Shareholders’ equity 40,041 59,262<br />
Pir. General plc - U.K. - “B1” (in thousands of £)<br />
• Net sales 323,621 n.a.<br />
• Net income (loss) (41,188) n.a.<br />
• Net financial (liquidity)/debt position 60,534 131,152<br />
• Shareholders’ equity 80,959 63,286<br />
Pir. Kabel und Systeme Holding Gmbh (consolidated) - Germany (in thousands of euros)<br />
• Net sales 279,439 345,140<br />
• Net income (loss) (3,168) (11,187)<br />
• Net financial (liquidity)/debt position (41,731) 8,687<br />
• Shareholders’ equity 39,602 11,969<br />
Pir. Power Cables and Systems USA LLC - United States (in thousands of U.S. $)<br />
• Net sales 299,862 281,471<br />
• Net income (loss) (11,303) (2,472)<br />
• Net financial (liquidity)/debt position (32,074) (15,961)<br />
• Shareholders’ equity 68,590 80,929<br />
<strong>Pirelli</strong> Power Cables and Systems Canada Ltd - Canada (in thousands of Canadian $)<br />
• Net sales 179,790 303,992<br />
• Net income (loss) 4,400 4,434<br />
• Net financial (liquidity)/debt position (23,493) (7,078)<br />
• Shareholders’ equity 47,315 42,875<br />
Pir. Energia Cables y Sistemas de Argentina S.A. (cons.) - Argentina (in thousands of Pesos)<br />
• Net sales 99,307 118,583<br />
• Net income (loss) (69,380) (20,770)<br />
• Net financial (liquidity)/debt position (16,436) (9,816)<br />
• Shareholders’ equity 85,294 70,322<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 37
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Energy Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
<strong>2002</strong> 2001<br />
Pir. Energia Cabos e Sistemas do Brasil S.A. (consolidated) - Brazil (in thousands of Reais)<br />
• Net sales 501,973 682,333<br />
• Net income (loss) 15,824 47,494<br />
• Net financial (liquidity)/debt position (86,485) (88,328)<br />
• Shareholders’ equity 164,073 184,958<br />
Pir. Power Cables & Systems Australia PTY Ltd (consolidated) - Australia (in thousands of Australian $)<br />
• Net sales 205,450 104,312<br />
• Net income (loss) (5,217) (386)<br />
• Net financial (liquidity)/debt position 38,766 14,614<br />
• Shareholders’ equity 6,818 35,601<br />
OUTLOOK FOR THE CURRENT YEAR<br />
The forecast for the current year is for stable macro-economic conditions without signs of a<br />
recovery in the market.<br />
Actions taken to improve efficiency will continue for all of 2003 with the principal aim of<br />
mitigating the negative effects arising from the current market situation and making it possible<br />
to reach the forecast results.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 38
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Telecom Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
TELECOMMUNICATIONS CABLES AND SYSTEMS SECTOR<br />
The highlights of the consolidated financial statements of the Telecommunications Cables and<br />
Systems Sector can be summarized as follows:<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
in milions of euros <strong>2002</strong> 2001<br />
• Net sales 468 1,230<br />
• Gross operating profit (loss) (22) 134<br />
% of net sales n.s. 10.9%<br />
• Operating profit (loss) (84) 76<br />
% of net sales n.s. 6.2%<br />
• Financial income (expenses) (54) n.d<br />
• Extraordinary items (121) n.d<br />
• Income taxes (4) n.d<br />
• Net loss (263) n.d<br />
% of net sales n.s. n.d<br />
• Net financial (liquidity)/debt position 431 367<br />
• Capital expenditures 78 n.d<br />
• R&D expenditures 45 n.d<br />
• Employees (at year-end) 2,546 3,689<br />
• Factories (number) 11 (*) 13<br />
* four of these are shared with the Energy Cables and Systems Sector<br />
Net sales<br />
Net sales amount to Euros 468 million and show a decrease of<br />
62 percent from the prior year.<br />
The change is due to:<br />
• Currency exhange effect - 3.5%<br />
• Volumes - 48.6%<br />
• Prices/Mix - 19.5% (*)<br />
- 62.0%<br />
Europe<br />
North America<br />
South America<br />
Oceania<br />
(*) calculated on the basis of the prior year adjusted by the volume variance<br />
The distribution of net sales is as follows :<br />
Geographical area <strong>2002</strong> 2001<br />
Europe (of which Italy 9%) 49% 20%<br />
North America 22% 49%<br />
South America 6% 5%<br />
Oceania 12% 15%<br />
Asia 8% 9%<br />
Africa 3% 2%<br />
Africa<br />
Asia<br />
Telecom Cables and Systems:<br />
<strong>2002</strong> sales by geographical area<br />
and product category.<br />
Copper Cables<br />
Optical Cables<br />
Product category <strong>2002</strong> 2001<br />
Copper Cables 30% 12%<br />
Optical Cables 60% 77%<br />
Submarine Cables 3% 1%<br />
Accessories, istallation activities, optic fibres, other activities 7% 10%<br />
Submarine Cables<br />
Accessories, installation<br />
activities, optic fibres,<br />
other activities<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 39
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Telecom Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Operating profit (loss)<br />
The operating loss is Euros 84 million compared to an operating<br />
profit of Euros 76 million in the prior year. The efficiencies<br />
achieved in respect of the structures and processes were not<br />
sufficient to offset the negative impact from the fall in volumes<br />
and the deterioration in the mix associated with the market trend.<br />
The operating result includes insurance compensation of Euros<br />
6 million from the fire which started at Fibre Ottiche Sud’s<br />
factory in Battipaglia in 2001.<br />
The most important changes from the prior year can be<br />
summarized as follows<br />
in millions of euros<br />
• Currency exchange effect - 4<br />
• Prices (excluiding metals)/Mix - 119<br />
• Volumes - 185<br />
• Per unit material cost + 46<br />
• Per unit labor cost - 5<br />
• Efficiencies + 57<br />
• Other (*) + 50<br />
- 160<br />
(*) of which Euros 35 million for lower accruals on receivables and Euros 6 million for<br />
insurance compensation relating to Fibre Ottiche Sud<br />
Extraordinary items<br />
Extraordinary items show an<br />
expense balance of Euros 121<br />
million and mainly include<br />
restructuring expenses of<br />
Euros 118 million to<br />
implement the new measures<br />
aimed at rendering the<br />
restructuring actions more<br />
incisive.<br />
Net loss<br />
The net result is a loss of<br />
Euros 263 million after<br />
financial expenses of Euros 54<br />
million (of which Euros 35<br />
million are for the writedown<br />
of the investment in<br />
e.Biscom), extraordinary<br />
expenses of Euros 121 million<br />
and income tax expenses of<br />
Euros 4 million.<br />
Capital expenditures<br />
Capital expenditures amount to a total of Euros 78 million.<br />
Capital expenditures can be analyzed by geographical area as<br />
follows:<br />
Geographical area <strong>2002</strong><br />
Europe 94%<br />
South America 1%<br />
North America 2%<br />
Rest of the world 3%<br />
Net financial position<br />
The net financial position is a<br />
debt position of Euros 431<br />
million compared to Euros 367<br />
million at December 31, 2001.<br />
The change is attributable<br />
principally to operating<br />
requirements during the year<br />
that were accentuated on<br />
account of the decline in<br />
results and only partly<br />
compensated by measures to<br />
reduce working capital.<br />
Research & development<br />
R&D is conducted by an integrated structure of research centers and development and<br />
engineering units in various countries.<br />
A total of 184 persons were engaged in R&D and expenditures totaled Euros 45 million, equal to<br />
9.6 percent of net sales.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 40
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Telecom Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
The main projects include:<br />
in the field of fiber optics<br />
• development and introduction to the market of 50/125mm<br />
and 62.5/125mm multimode optical fibers (Standard ITU-T<br />
G.651), with bandwidth optimized at 850nm or 300nm with<br />
coating suitable for EPFU (Enhanced Performance Fiber<br />
Unit) cables for blown fiber applications;<br />
• further development of the FineLight TM fiber for applications<br />
in the sphere of LAN (Local Area Networks), obtaining<br />
10GigaEthernet performance;<br />
The Banka Nazionale of Bulgaria,<br />
cabled with the “blown fibres”<br />
system.<br />
• development of the new release of FreeLight TM fiber (compliant with ITU-T Rec. G.655)<br />
featuring excellent spliceability performance. Average splice loss is as low as 0.030 dB<br />
improving considerably the system power budget;<br />
• introduction of two new versions of the standard monomodal fibers SMR (Standard ITU-T<br />
G.652) with extremely low PMD (Polarization Mode Dispersion) values:<br />
– SMR Gold with PMD ≤ 0.2ps/÷km<br />
– SMR Platinum with PMD ≤ 0.1ps/÷km.<br />
in the field of telecommunications<br />
• development and supply of a new optical cable for application<br />
on Italy’s railway network, with a tough dielectric outer sheath<br />
of the AIRBAG type, (a <strong>Pirelli</strong> trademark), made with materials<br />
that do not contain halogens and produce low levels of fumes<br />
in the event of fire. This cable has been installed in tunnels<br />
both on roads crossing the Apennines (Bologna - Florence -<br />
Rome) and along the Tyrrhenian coast (Genoa - La Spezia);<br />
• completion of a new range of optical cables with smaller<br />
diameters and a potential of up to 288 fiber counts (ACTION<br />
cables - a <strong>Pirelli</strong> trademark) suitable for pneumatic or<br />
traditional installation methods;<br />
• development and qualification of a new series of microoptical<br />
cables for pneumatic installation in small tubes, with a<br />
potential of up to 72 fiber counts and a maximum outer<br />
diameter of 6.5 mm;<br />
One ACTION cable, which<br />
belongs to the family of reduced<br />
diameter optical cables.<br />
• development of a 12-fiber micromodule with a diameter of 1.4 mm for customer head-ends;<br />
• development and supply of a 24-fiber count optical cable with a central tube and rodent-proof<br />
metallic covering for Telecom Italia’s new broadband access network;<br />
• development and supply of a new ribbon optical cable for the Libyan network, with a tough<br />
covering of steel wires and an anti-corrosion sheath;<br />
• development and supply of a range of dielectric ribbon optical cables for the Scandinavian<br />
access network, with a potential of up to 48, 96 or 192 fiber counts;<br />
• qualification and supply of two new optical ground wires with a very small diameter and a<br />
central tube with potentials of 24 and 48 fiber counts, providing a suitable and competitive<br />
solution for a vast range of overhead lines in Europe and worldwide.<br />
Employees<br />
At December 31, <strong>2002</strong>, total employees in the Telecommunications Sector were 2,546 (including<br />
52 employees with temporary contracts).<br />
Compared to December 31, 2001, there was a reduction of 1,143 (including 190 employees with<br />
temporary contracts).<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 41
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Telecom Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
It should also be emphasized that, as a result of the acceleration of the rightsizing program<br />
prior to the end of <strong>2002</strong>, which led to significant reduction in the headcount as at December 31,<br />
<strong>2002</strong>, on January 1, 2003 the workforce in the Telecommunications Sector totaled 2,408, with a<br />
decrease of a further 138 compared to December 31, <strong>2002</strong>.<br />
At December 31, <strong>2002</strong>, the workforce (excluding employees with temporary contracts) may be<br />
analyzed as follows:<br />
12/31/<strong>2002</strong> 12/31/2001<br />
Senior executives 2.7% 2.3%<br />
Staff 32.5% 32.0%<br />
Blue-collar 64.8% 65.7%<br />
Organizational development<br />
In the light of the above-mentioned market difficulties, in <strong>2002</strong>, the Telecom Sector began and<br />
completed a “delayering” process, with the aim of making the organization structures more<br />
streamlined and effective, with the focus on macro-geographical areas.<br />
Development of human resources<br />
The training program developed downstream of last year’s assessment of the expertise of<br />
commercial resources was completed for the sales network in <strong>2002</strong>.<br />
Measures designed to monitor the professional growth and plan the careers of talented young<br />
employees, which began in 2001, continued in <strong>2002</strong> with particular reference to industrial functions.<br />
Factories<br />
At year-end <strong>2002</strong>, there were 11 factories compared to 13 in 2001. Of the 11 factories, 4 are<br />
shared with the Energy Cables and Systems Sector.<br />
Geographically, the factories are distributed as follows: 7 in Europe, 1 in North America, 1 in<br />
South America, 2 in Australia and Asia.<br />
At year-end <strong>2002</strong>, it was announced that the fiber optic manufacturing department at the factory<br />
in Bishopstoke (U.K.) would be closed at the beginning of 2003.<br />
Industrial operations<br />
During <strong>2002</strong>, telecommunications cables factories produced volumes that were significantly<br />
lower than those recorded in the prior year. The total reduction in the volume of optical cables<br />
was approximately 60 percent, whereas the volume of copper cables decreased by<br />
approximately 40 percent, compared to the prior year.<br />
Materials<br />
As far as the trend in the prices of raw materials for telecommunications cables is concerned, in<br />
<strong>2002</strong>, there was a reduction of 20 percent compared to 2001. Because of market dynamics,<br />
significant reductions were also recorded in prices of optic and glass fibers, as well as in prices<br />
of some plastic components used for the manufacture of optical cables.<br />
In 2003, the erosion of prices seems likely to continue although less dramatically than in <strong>2002</strong>.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 42
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Telecom Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
TELECOMMUNICATIONS SECTOR HOLDING COMPANY<br />
The statutory financial statements of <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A. for the year ended<br />
December 31, <strong>2002</strong> are summarized in the following balance sheet and statement of income.<br />
in millions of euros<br />
Balance sheet <strong>2002</strong> 2001<br />
Intangible assets 8.2 4.2<br />
Property, plant and equipment, net 13.7 7.6<br />
Financial assets 256.0 410.9<br />
Net working capital 11.5 9.1<br />
289.4 431.8<br />
Shareholders’ equity 82.6 199.4<br />
Provisions 45.7 87.5<br />
Net financial (liquidity)/debt position 161.1 144.9<br />
289.4 431.8<br />
in millions of euros<br />
Statement of income <strong>2002</strong> 2001<br />
Production value 56.9 12.6<br />
Production costs:<br />
- raw materials and services (59.0) (8.9)<br />
- personnel (15.6) (1.4)<br />
- depreciation and amortization (6.1) (0.5)<br />
- other (0.6) (1.7)<br />
Operating profit (loss) (24.4) 0.1<br />
Financial income (expenses) (4.2) (0.1)<br />
Share of earnings (losses) of equity investments (102.9) –<br />
Loss before extraordinary items and income taxes (131.5) –<br />
Extraordinary items (1.0) –<br />
Income taxes 15.6 (0.6)<br />
Net loss (116.9) (0.6)<br />
PERFORMANCE BY GEOGRAPHICAL AREA<br />
Italy<br />
<strong>Pirelli</strong> Cavi e Sistemi Telecom Italia S.p.A. operates in the field of telecommunications.<br />
Optical Cables for telecommunications, manufactured at the factory in Livorno Ferraris<br />
(Vercelli), were affected by the depressed market situation on a global scale. Not only were<br />
volumes and results lower than the prior year but they were also lower than forecasts. As far as<br />
Copper Cables are concerned, also manufactured in Livorno Ferraris, the results in terms of<br />
volumes were higher than forecasts and the prior year, whereas profitability was penalized by a<br />
change in the mix.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 43
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Telecom Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
The subsidiary Fibre Ottiche Sud S.p.A. (FOS), which<br />
manufactures optical fibers, recorded lower net sales and<br />
results than the prior year. This can mainly be attributed to<br />
the contraction in demand for fibers due to the world crisis in<br />
the telecommunications sector.<br />
However, investments to raise production capacity continued<br />
and are being carried out in relation to the trend of the market.<br />
France<br />
The FOS (Fibre Ottiche Sud SpA)<br />
factory at Battipaglia, Salerno.<br />
With regard to the subsidiary <strong>Pirelli</strong> Telecom Câbles et Systèmes France S.A., <strong>2002</strong> was a<br />
particularly difficult year. The decrease in volumes, which appeared evident in the second half<br />
of 2001, became more widespread during the course of <strong>2002</strong> and affected all sectors of activity.<br />
Volumes of Optical Cables and related connectivity equipment were very low indeed. After a<br />
first quarter in line with expectations, volumes of Copper Cables fell sharply.<br />
Conversely, in the segment of aerial (OPGW) cables, penetration of the Algerian market was<br />
satisfactory, and is expected to continue at the same pace in 2003.<br />
The forecasts for 2003 do not predict a recovery of volumes, however action will continue to<br />
rationalize the structure and costs in order to cope with the dramatic contraction of the market.<br />
Spain<br />
The positive performance of the spanish economy, especially<br />
in the first half of the year, and the stepping up of export<br />
activities, which, at the year-end, represented 68 percent of net<br />
sales, enabled <strong>Pirelli</strong> Telecom Cables y Sistemas España<br />
S.L., to obtain a positive result in its first full year of<br />
operation, with operating profitability equal to approximately<br />
8 percent of net sales.<br />
Sales mainly refer to aerial (OPGW) cables and various<br />
equipment for their installation in infrastructures operated by<br />
electricity companies.<br />
As always, priority was given to company management,<br />
leading to a considerable reduction of working capital and<br />
indebtedness.<br />
Work continues on the construction<br />
of the new factory at Villanueva y la<br />
Geltrù, Spain.<br />
During the year, work continued on construction of the new factory on the outskirts of<br />
Villanueva y la Geltru’, to which all the manufacturing and administrative activities will<br />
gradually be transferred during 2003.<br />
Despite the marked reduction in margins associated with the erosion of selling prices, prospects<br />
for the current year look promising, with the possible acquisition of some important contracts.<br />
United Kingdom<br />
At <strong>Pirelli</strong> Telecom Cables & Systems UK Ltd, action continued to rationalize production<br />
capacity and reduce operating costs in a context marked by the dramatic slowdown of the<br />
world optical fibers and optical cables market. In <strong>2002</strong>, the factories in Newport and Harlow<br />
were closed. Production of optical cables was concentrated in the Bishopstoke factory. At yearend<br />
<strong>2002</strong>, the company announced the closing of the department of the factory which produces<br />
optical fibers.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 44
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Telecom Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
These measures made it possible to maintain the market share and the operating profit in <strong>2002</strong>,<br />
and, at the same time, adapt the production capacity of optical fibers to the demand forecast for<br />
2003. Furthermore, the company seized two important business opportunities in <strong>2002</strong>: a<br />
contract – worth approximately Euros 30 million – to supply copper cables to Railtrack in<br />
connection with the plan to upgrade the railway network, scheduled to begin early in 2003; and<br />
a contract worth approximately Euros 10 million a year with British Telecom, for the supply of<br />
optical connectivity equipment.<br />
Germany<br />
In <strong>2002</strong>, <strong>Pirelli</strong> Telekom Kabel und Systeme Deutschland GmbH, which is responsible<br />
for marketing Copper and Optical Cables for telecom applications on the German market, had<br />
to face not only the collapse of the world telecommunications market, but also a drastic<br />
reduction in demand from the main operators on the German market. However, constant<br />
attention to fixed costs made it possible to record an operating profit representing 3.3 percent<br />
of sales.<br />
North America<br />
The North American telecommunications market reported a significant contraction in the first<br />
quarter of <strong>2002</strong>, and then settled at a very low level for the rest of the year.<br />
In this context, <strong>Pirelli</strong> Communications Cables and Systems USA LLC continued action to<br />
restructure operations and adopted strict measures to control costs in an endeavor to minimize<br />
the impact of the contingent market situation. At the same time, the American subsidiary<br />
concentrated its efforts on action to improve its market position vis-à-vis its most important<br />
customers. The results achieved are intended to allow the American subsidiary to take<br />
advantage of its position as soon as the first signs of a recovery become apparent.<br />
In fact, in 2003, the North American telecommunications market is expected to display a<br />
gradual but constant improvement, starting in the second half of the year.<br />
Brazil<br />
In <strong>2002</strong>, the Brazilian economy was seriously affected by the<br />
instability of the local currency, political uncertainty<br />
associated mainly with presidential elections, and the<br />
persisting international economic crisis, which had dramatic<br />
repercussions in South America.<br />
The telecommunications market showed no signs of emerging<br />
from the serious recession which hit the market in the second<br />
half of 2001 and the affiliate <strong>Pirelli</strong> Telecomunicações<br />
Cabos e Sistemas do Brasil S.A. reported a drastic fall in<br />
volumes (-68 percent compared to the prior year).<br />
The headquarters of <strong>Pirelli</strong> Cables<br />
Brazil in Santo Andrè.<br />
The operating result was seriously impacted by the unfavorable economic situation.<br />
Furthermore, reorganization costs were sustained to adapt the structures to the new market<br />
situation.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 45
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Telecom Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Australia<br />
For the affiliate <strong>Pirelli</strong> Telecom Cables & Systems<br />
Australia PTY Ltd, the year <strong>2002</strong> was marked by a rise in<br />
demand for Optical Cables compared to the prior year and<br />
by a slight fall in demand for Copper Cables. In fact, despite<br />
the slump in the general demand, the optical cables business<br />
benefited from two contracts in particular (Telstra and IP1),<br />
which made it possible to achieve results that were higher<br />
than the average of the local market. A continuous reduction<br />
in the cost of materials together with action to improve<br />
efficiency also made it possible to achieve satisfactory levels<br />
of profitability.<br />
<strong>Pirelli</strong> Telecom Cables and Systems<br />
Australia has won a Telstra contract.<br />
In 2003, there is expected to be a fall in volumes and prices compared to <strong>2002</strong>, and a worsening<br />
of the mix, with a marginal impact on the profitability of the australian affiliate.<br />
.<br />
China<br />
<strong>2002</strong> was a particularly difficult year for <strong>Pirelli</strong> Telecom Cables Co. Ltd Wuxi, owing to the<br />
depressed domestic market for optical cables. In fact, excess supply of both fibers and cables,<br />
combined with a drastic reduction in demand completely destabilized the market.<br />
In this situation, the greatest efforts were concentrated on export markets and on copper<br />
cables, in an attempt to keep losses to a minimum, and, at the same time, to preserve the<br />
market share and maintain close relations with the most important customers.<br />
The development of new strategic products continued and local production began of aerial<br />
(OPGW) cables, which have been enormously successful in China for several years. The aim is<br />
to improve the affiliate’s strategic positioning on the market.<br />
BUSINESS UNITS<br />
Overall performance of Telecom Cables and Systems business<br />
Terrestrial Cables and Systems<br />
The global decline in the world of telecommunications, which began in the second half in 2001<br />
and continued throughout <strong>2002</strong>, particularly affected areas which have been traditionally strong<br />
for <strong>Pirelli</strong>, such as North America and Western Europe.<br />
Investments by telecommunications companies underwent a drastic reduction and,<br />
consequently, the world market of cables and fibers reported a contraction of more than 50<br />
percent compared to 2001. Furthermore, the financial crises affecting some of the largest<br />
carriers and telephone operators also eroded the confidence of investors in the<br />
telecommunications market.<br />
In this context, dominated by an excessively high supply of optical cables and fibers, the<br />
Telecommunications Cables and Systems Sector continued the measures begun in 2001 to<br />
rationalize and consolidate its operations. Some factories were closed and production capacity<br />
was concentrated in others, with the aim of reducing operating costs and improving efficiency.<br />
The workforce was reduced by approximately 50 percent compared to the second half of 2001.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 46
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Telecom Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Current market forecasts show that the falling trend in<br />
demand has slowed down, suggesting that a period of greater<br />
stability lies ahead. However, it would not be realistic to<br />
forecast a recovery of the market in the short term. An<br />
improvement is not expected until the end of 2003.<br />
Submarine Cables and Systems<br />
Despite the extremely negative market conditions (the worst<br />
in the last decade), for submarine telecommunications cables<br />
and systems, <strong>2002</strong> proved to be a year marked by a gradual<br />
increase in operating and commercial activities compared to<br />
2001 (overall, <strong>Pirelli</strong> Submarine Telecom Systems Italia S.p.A.’s<br />
market share increased by 15 percent).<br />
In particular, the Palma – Algiers link project was completed;<br />
work on the Sumatra Backbone project continued (including<br />
surveying operations, cable production and cable-laying<br />
activities in Indonesia, where the link is scheduled for delivery<br />
in the first half of 2003). In addition, the Albacom link<br />
between Palmi and Mortelle was completed and delivered.<br />
Product development activities also continued, together with<br />
the restructuring of the business, with the aim of an overall<br />
curbing of costs and an improvement in the quality of services<br />
and products.<br />
Finally, at year-end, after a lengthy selection process, <strong>Pirelli</strong><br />
succeeded in winning the most important bid in <strong>2002</strong> in the<br />
submarine telecommunications sector. In fact, <strong>Pirelli</strong><br />
Submarine Telecom Systems Italia S.p.A. was awarded the<br />
turn-key contract, for the Icelandic company, Farice, to create<br />
an optical submarine system approximately 1,400 km long, to<br />
connect the networks of Iceland, Scotland and the Faeroe<br />
Islands. The contract, worth a total of Euros 30 million, is<br />
scheduled for completion by the end of 2003.<br />
The cable laying ship Giulio Verne.<br />
Sey isfjör ur<br />
Funningsfjör ur<br />
Dunnet Bay<br />
<strong>Pirelli</strong> has won a contract for the<br />
installation of a submarine cable<br />
link in optical fibre between Iceland,<br />
Scotland and Faroe Islands.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 47
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Telecom Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
PERFORMANCE OF THE MAIN COMPANIES IN THE SECTOR<br />
Key data as they appear in the financial statements prepared by the boards of directors and<br />
approved or in the process of approval by the respective shareholders' meetings are given<br />
below.<br />
All amounts are expressed in local currency. However, the economic results are not<br />
comparable with the prior year as 2001, following the spin-off process during the year, did not<br />
represent a full year of operations.<br />
<strong>2002</strong> 2001<br />
Pir. Cavi e Sistemi Telecom Italia S.p.A. - Italy (in thousands of Euros)<br />
• Net sales 115,488 62,281<br />
• Net income (loss) (11,418) (11,148)<br />
• Net financial (liquidity)/debt position 24,188 52,052<br />
• Shareholders’ equity 38,437 29,852<br />
Pir. Telecom Câbles et Systèmes France S.A. - France (in thousands of Euros)<br />
• Net sales 36,347 65,530<br />
• Net income (loss) (10,769) 2,092<br />
• Net financial (liquidity)/debt position 946 308<br />
• Patrimonio netto 8,913 21,637<br />
Pir. Telecom Cables y Systemas España S.L. - Spain (in thousands of Euros)<br />
• Net sales 63,252 13,307<br />
• Net income (loss) 2,606 7,483<br />
• Net financial (liquidity)/debt position 1,151 11,052<br />
• Shareholders’ equity 24,089 21,483<br />
Pir. Telecom Cables & Systems UK Ltd - United Kingdom (in thousands of £)<br />
• Net sales 49,482 n.a.<br />
• Net income (loss) (24,837) n.a.<br />
• Net financial (liquidity)/debt position 12,297 37,400<br />
• Shareholders’ equity 10,834 12,204<br />
Pir. Telekom Kabel und Systeme Deutschland GmbH - Germany (in thousands of Euros)<br />
• Net sales 10,037 22,192<br />
• Net income (loss) 283 929<br />
• Net financial (liquidity)/debt position (157) (6,613)<br />
• Shareholders’ equity 1,175 953<br />
Pir. Communications Cable and Systems USA LLC - United States (in thousands of U.S. $)<br />
• Net sales 85,388 323,336<br />
• Net income (loss) (63,433) (8,051)<br />
• Net financial (liquidity)/debt position 28,529 10,121<br />
• Shareholders’ equity 12,747 76.180<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 48
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Telecom Cables and<br />
Systems Sectors<br />
Sector Holding<br />
Company<br />
Performance by<br />
Geographical Area<br />
Business Units<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
<strong>2002</strong> 2001<br />
Pir. Telecomunicações Cabos e Sistemas do Brasil S.A. - Brazil (in thousands of Reais)<br />
• Net sales 78,849 99,599<br />
• Net income (loss) (19,543) 4,807<br />
• Net financial (liquidity)/debt position 19,936 7,740<br />
• Shareholders’ equity 57,717 77,443<br />
Pir. Telecom Cables & Systems Australia PTY Ltd (consolidated) Australia (in thousands of australian $)<br />
• Net sales 99,789 200,985<br />
• Net income (loss) 7,039 (513)<br />
• Net financial (liquidity)/debt position (5,256) 27,601<br />
• Shareholders’ equity 24,406 19,367<br />
OUTLOOK FOR THE CURRENT YEAR<br />
No significant changes in the economic scenario are forecast for the current year.<br />
The restructuring program begun in <strong>2002</strong> will make it possible to capitalize on efficiencies in<br />
costs which will allow an improvement in the operating result.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 49
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Tyres Sector<br />
Tyres Sector<br />
Holding Company<br />
Performance by<br />
Geographical Area<br />
Consumer Market<br />
Industrial Market<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
TYRES SECTOR<br />
The highlights of the consolidated financial statements of the Tyres Sector can be summarized<br />
as follows:<br />
in millions of euros <strong>2002</strong> 2001<br />
• Net sales 2,857 2,831<br />
• Gross operating profit 365 347<br />
% of net sales 12.8% 12.3%<br />
• Operating profit 191 172<br />
% of net sales 6.7% 6.1%<br />
• Financial income (expenses) (55) (75)<br />
• Extraordinary items (11) (27)<br />
• Income taxes (47) (36)<br />
• Net income 78 34<br />
% of net sales 2.7% 1.2%<br />
• Net financial (liquidity)/debt position 492 684<br />
• Capital expenditures 182 262<br />
• R&D expenditures 122 125<br />
• Employees (at year-end) 20,222 19,994<br />
• Factories (number) 22 21<br />
Net sales<br />
Net sales are moderately higher than in 2001 as a whole and<br />
the significant growth in volumes (+5.9 percent) and the<br />
price/mix (+3.6 percent) more than offset the negative<br />
currency exchange effect (-8.6 percent).<br />
Africa, Asia,<br />
Pacifico<br />
Italy<br />
Other European<br />
countries<br />
The distribution of net sales is as follows:<br />
Geographical area <strong>2002</strong> 2001<br />
Italy 14% 13%<br />
Other European countries 46% 46%<br />
North America 8% 7%<br />
South America 19% 22%<br />
Africa\Asia\Pacifico 13% 12%<br />
Product category <strong>2002</strong> 2001<br />
Car tyres 62% 61%<br />
Commercial vehicle tyres 26% 28%<br />
Motorcycle tyres 8% 7%<br />
Steelcord/Other tyres 4% 4%<br />
North America<br />
South America<br />
Tyres: <strong>2002</strong> sales by geographical<br />
area and product category.<br />
Car tyres<br />
Commercial<br />
vehicles tyres<br />
Other<br />
tyres<br />
Motorcycle<br />
tyres<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 50
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Tyres Sector<br />
Tyres Sector<br />
Holding Company<br />
Performance by<br />
Geographical Area<br />
Consumer Market<br />
Industrial Market<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Operating profit<br />
Operating profit is Euros 191 million, representing 6.7 percent<br />
of net sales, compared to Euros 172 million in the prior year,<br />
equal to 6.1 percent of net sales. The positive contribution by<br />
volumes, prices and mix along with actions to reduce costs,<br />
have more than offset the negative currency exchange effects<br />
and the increase in both raw material costs and labor costs.<br />
The most important changes from the prior year can be<br />
summarized as follow:<br />
in millions of euros<br />
• Currency exchange effect - 23<br />
• Prices (excluding metals)/Mix + 102<br />
•Volumes + 59<br />
• Per unit material cost - 64<br />
• Per unit labor cost - 19<br />
• Efficiencies + 25<br />
• Other (*) - 61<br />
+ 19<br />
(*) of which Euros 25 million for amortization and depreciation and<br />
MIRS/CCM start-up, Euros 22 million for local inflation costs in South<br />
America, Euros 9 million for fixed overheads charged to/from inventories<br />
and hyperinflation adjustments.<br />
There was a considerable increase<br />
in collaboration with car<br />
manufacturers in <strong>2002</strong>.<br />
The Scorpion STR tyre, latest<br />
addition to the Sport Utility Vehicle<br />
segment.<br />
Extraordinary items<br />
Extraordinary items show an expense balance of Euros 11<br />
million (including restructuring costs of Euros 9 million)<br />
compared to Euros 27 million in 2001 (including Euros 26<br />
million for layoff expenses).<br />
Net income<br />
Net income is Euros 78 million (after financial expenses of<br />
Euros 55 million, extraordinary expenses of Euros 11 million<br />
and income tax expenses of Euros 47 million) compared to<br />
Euros 34 million in the prior year (after financial expenses of<br />
Euros 75 million, extraordinary expenses of Euros 27 million<br />
and income tax expenses of Euros 36 million).<br />
With Burton-on-Trent (United<br />
Kingdom), installation of MIRS<br />
lines outside Italy continues.<br />
Net financial position<br />
The net financial position is a debt position of Euros 492 million, a reduction of Euros 192<br />
million from the end of 2001.<br />
The positive change is due to the capital increase with a share premium subscribed to by the<br />
parent company <strong>Pirelli</strong> S.p.A., equal to Euros 80 million, partly offset by the payment of<br />
dividends to the same parent company (Euros 30 million), actions taken in the management of<br />
working capital and investments focused and correlated to cash flows produced by depreciation.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 51
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Tyres Sector<br />
Tyres Sector<br />
Holding Company<br />
Performance by<br />
Geographical Area<br />
Consumer Market<br />
Industrial Market<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Capital expenditures<br />
Capital expenditures amount to Euros 182 million in <strong>2002</strong> for a<br />
ratio of 1.1 to depreciation and representing 6.4 percent of net<br />
sales.<br />
Industrial investments constitute 79 percent of the total and –<br />
in line with Group strategy and market demand – were<br />
directed to developing innovative processes, adjusting<br />
production capacity and launching new products.<br />
In particular:<br />
• Car tyres: in the area of innovative processes, the<br />
revolutionary new CCM process (Continuous Compound<br />
Mixing) was launched on an industrial scale and the use of<br />
MIRS (Modular Integrated Robotized System) was extended<br />
to new lines in Germany, the United Kingdom and Georgia<br />
(U.S.A.), with focus on the manufacture of high-performance<br />
and run-flat tyres.<br />
In South America and Europe, action continued to convert<br />
the production capacity to high-performance products and<br />
to re-qualify processes with machinery using traditional<br />
technology.<br />
With the aim of meeting increased market demand, while at<br />
the same time reducing manufacturing costs, production<br />
capacity in Turkey and Argentina was increased and<br />
construction began on a new Car Tyres factory being built in<br />
Bahia (Brazil).<br />
The industrialisation of compounds<br />
made using the revolutionary CCM<br />
(Continuous Compound Mixing)<br />
process has begun.<br />
MIRS technology has also been<br />
applied to the production of<br />
motorcycle tyres.<br />
• Commercial vehicle tyres: production capacity in Turkey, Brazil and Egypt was optimized<br />
through debottlenecking measures and actions to improve quality in the processing stages.<br />
In addition, the strategy to revitalize the product range and extend plans to improve efficiency<br />
continued in all the factories in the Group.<br />
• Motorcycle tyres: MIRS technology is being successfully applied ever more widely and is<br />
now also used to produce radial high-performance tyres for motorcycles, thanks to the startup<br />
of a new system at the Metzeler factory in Germany.<br />
In the field of traditional technology, production capacity continues to be adapted in the<br />
factories in Brazil and Germany.<br />
• Steel Cord: the plan to augment production capacity in Brazil and Turkey continues.<br />
New products are being developed to meet the requisites of the MIRS process and quality<br />
and productivity are being improved.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 52
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Tyres Sector<br />
Tyres Sector<br />
Holding Company<br />
Performance by<br />
Geographical Area<br />
Consumer Market<br />
Industrial Market<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Research & development<br />
In <strong>2002</strong>, R&D expenditures totaled Euros 122 million, equal to<br />
4.3 percent of net sales, and were focused on revitalizing the<br />
product range and pursuing the development of products and<br />
MIRS TM technology.<br />
During the first months of the year, the revolutionary new CCM<br />
(Continuous Compound Mixing) system was officially<br />
introduced. This is an innovative production process for<br />
compounds that ensures extremely precise control over the<br />
quality of the materials, which completes the MIRS TM process,<br />
strengthening <strong>Pirelli</strong>’s leadership in the high-performance range.<br />
During the year, new systems based on MIRS TM technology<br />
were introduced in Germany, the United Kingdom and the<br />
United States for manufacturing high-performance tyres.<br />
<strong>Pirelli</strong> already holds a substantial market share, which is likely<br />
to grow even further, thanks to this innovative process.<br />
As in previous years, collaboration continued with leading<br />
universities and research institutes to develop know-how,<br />
particularly in the area of materials research.<br />
As a result of all these activities, in <strong>2002</strong>, prestigious<br />
homologations were obtained in the SUV (Sport Utility<br />
Vehicle) segment, which is growing rapidly, in the UHP (Ultra<br />
High Performance) segment, with the P Zero Rosso and in the<br />
HP (High Performance) segment, where the P6 and P7<br />
complete the range of Premium products, while the P6 Four<br />
Seasons was designed specifically for vehicles destined<br />
The MIRS plant, which is in<br />
operation in Breuberg, Germany.<br />
<strong>Pirelli</strong> continues to compete at top<br />
level in the World Rally<br />
Championship.<br />
for the American market: an ever more complete and reliable portfolio of high-performance and<br />
Premium Brand products in terms of performance, quality and durability.<br />
Product and process know-how was further developed with the aim of expanding the market<br />
range of “run-flat” products. These are tyres that guarantee that the vehicle can be driven even<br />
with a puncture or air-leak. The new run-flat tyre Eufori@, which has a self-supporting sidewall<br />
and is mounted on standard wheel rims, obtained its first homologation certificate with the Mini<br />
Cooper and has become a benchmark product in the market, driven partly by the global success<br />
of the car.<br />
Still in the sphere of application of Total Mobility, work on “self supporting” technology,<br />
optimized on the MIRS process, has been speeded up and PAX technology is being developed<br />
using a new wheel rim standard.<br />
Finally, new products were introduced for Passenger Cars: the P Zero Nero in the UHP segment,<br />
the Cinturato P4 for the South American market and the Winter Carving for the North European<br />
market. New products were also developed for the Motorcycle and Commercial Vehicles segments.<br />
In the Racing segment, the <strong>Pirelli</strong> brand participated in Rally and Track events, achieving<br />
brilliant results both in the GT Championship and in the World Rally driving Championship,<br />
during which <strong>Pirelli</strong> triumphed at Monte Carlo, in the African Safari, in Argentina, at the<br />
Acropolis and at the British Rally, the last event of the WRC.<br />
In 2003, not only the Ferrari Challenge but also the new Maserati Trophy will be equipped with<br />
the <strong>Pirelli</strong> P Zero tyres, confirming not only the excellence of the product, but also a historical<br />
partnership which dates back to the very beginning of the Italian automobile industry.<br />
Furthermore, the repercussions of the technical solutions put to the test in races has been<br />
extremely useful from the point of view of technical innovation in the UHP and HP market<br />
segments where <strong>Pirelli</strong> predominates.<br />
As far as Motorcycle Racing is concerned, during the <strong>2002</strong> season, the foundations were laid to<br />
achieve a decisive improvement in performance in the World Superbike Championship: in fact,<br />
tyres made with MIRS TM technology and with compounds made with the new CCM process have<br />
produced much better results than standard tyres produced with traditional technology.<br />
Moreover, <strong>Pirelli</strong>’s traditional supremacy in the World Motocross Championship was confirmed,<br />
with victories in the 250-cc and 500-cc classes.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 53
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Tyres Sector<br />
Tyres Sector<br />
Holding Company<br />
Performance by<br />
Geographical Area<br />
Consumer Market<br />
Industrial Market<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
Employees<br />
At December 31, <strong>2002</strong>, employees in the Tyres Sector were 20,222, including 1,515 employees<br />
with temporary contracts.<br />
Compared to December 31, 2001, there was a reduction of 252 management and staff, of which<br />
24 are employed under temporary contracts, owing to the continuation of programs and<br />
measures which have the aim of rationalizing the structures.<br />
With regard to the number of blue-collar workers, there was an increase of 229 permanent<br />
workers to support MIRS production activities in Germany, the U.K. and the U.S.A., and 251<br />
workers on temporary contracts, which particularly refer to Turkey, Brazil and Germany, to<br />
cover production requirements associated with seasonal highs.<br />
With regard to organizational development, the Business Unit structure has been confirmed.<br />
This structure was implemented last year with the aim of ensuring a greater concentration of<br />
corporate resources and expertise.<br />
In keeping with this strategy, the Central Functions of each Sector have the fundamental<br />
responsibility for supplying services and being used as centers of expertise for the Business<br />
Units, whereas the Geographical Areas monitor the territory and ensure operational efficiency.<br />
In the sphere of the development of human resources, during <strong>2002</strong>, the expertise survey was<br />
completed, focusing special attention on management and staff with high potential; the program<br />
to obtain OSHA 18001 certification for security and hygiene in the industrial environment<br />
continued; training and development activities took place to support the innovative MIRS TM ,<br />
CCM and Tyre Systems.<br />
Factories<br />
At year-end <strong>2002</strong>, the number of factories was 22 compared to 21 at year-end 2001 due to the<br />
opening of the new MIRS TM factory in Rome (U.S.A.).<br />
TYRES SECTOR HOLDING COMPANY<br />
The statutory financial statements of <strong>Pirelli</strong> Tyre Holding N.V. for the year ended December 31,<br />
<strong>2002</strong> (not consolidated) are summarized in the following balance sheet and statement of income.<br />
in millions of euros<br />
Balance sheet <strong>2002</strong> 2001<br />
Intangible assets 2.0 –<br />
Financial assets 547.4 607.9<br />
Net working capital 6.3 6.4<br />
555.7 614.3<br />
Shareholders’ equity 684.0 753.0<br />
Net financial (liquidity)/debt position (128.3) (138.7)<br />
555.7 614.3<br />
in millions of euros<br />
Statement of income <strong>2002</strong> 2001<br />
Net earnings of affiliates 64.2 33.2<br />
Other income (expenses) 6.3 (0.3)<br />
Net income 70.5 32.9<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 54
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Tyres Sector<br />
Tyres Sector<br />
Holding Company<br />
Performance by<br />
Geographical Area<br />
Consumer Market<br />
Industrial Market<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
PERFORMANCE BY GEOGRAPHICAL AREA<br />
Europe and the rest of the world<br />
For the Car market, the year <strong>2002</strong> confirmed the presence of a scenario marked by a growth in<br />
volumes of the Replacements market (+2.7 percent), and a decrease in the Original Equipment<br />
market (-1.7 percent).<br />
In this scenario, <strong>Pirelli</strong> increased its share of the Passenger Car market, thanks to growth within<br />
the most attractive segments of the Replacements channel (HP/UHP, Winter, SUV), and the<br />
Original Equipment channel, through a strategy of selective growth which has led <strong>Pirelli</strong> to be<br />
regarded as a key partner by car manufacturers.<br />
Although there were some improvements in inflation and in the decline in value of foreign<br />
currencies in South America, the trend of prices remained generally critical, but was more than<br />
offset by the positive trend of the product mix, due to the success of new products which were<br />
launched in all the most attractive tyre segments.<br />
The Turkish market made a strong recovery, with growth of more than 40 percent in the Passenger<br />
Car segment, where the increase in <strong>Pirelli</strong>’s sales was more than proportional to market growth.<br />
The market of tyres for Commercial Vehicles in Europe decreased slightly, but was offset by the<br />
positive performance of the Turkish and Egyptian markets. Overall, our sales in this area<br />
increased at a faster pace than the market.<br />
North America<br />
In <strong>2002</strong>, the North American Passenger Car segment reported a<br />
downturn in the Replacements market (-2.5 percent) and a<br />
considerable increase in the Original Equipment market<br />
(+5.3 percent) compared to 2001.<br />
Net sales of our products followed the negative trend of the<br />
Replacements market, although there has been a growth as a<br />
result of the mix.<br />
With regard to Original Equipment, the first supplies were<br />
delivered to Ford and the foundations have been laid to<br />
increase sales volumes significantly in 2003.<br />
In <strong>2002</strong>, the alliance with Cooper was limited to the area of<br />
logistics and, consequently, a new commercial structure was<br />
implemented at the new headquarters in Georgia, where the new MIRS factory has been built<br />
and production of Scorpion Zero and P Zero Nero tyres has started.<br />
South America<br />
The trend in the South American market was considerably<br />
influenced by the economic and financial crises prevailing in the<br />
area, and figures reported there were generally lower than the<br />
prior year. In particular:<br />
Brazil<br />
With the end of energy rationing and due to the perception of<br />
a lower country risk at the end of 2001, economic activity<br />
improved slightly in the first quarter of <strong>2002</strong>.<br />
The crisis of confidence associated with possible changes in<br />
economic policy altered the scenario from June onwards.<br />
The new P6 Four Seasons tyre,<br />
designed specifically for the<br />
American market.<br />
The tyre factory at Feira de<br />
Santana, Brazil.<br />
In the second half of the year, there was a reduction in international trading and interbank<br />
credit lines and the repatriation of investments of non-residents, leading to a strong decline in<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 55
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Tyres Sector<br />
Tyres Sector<br />
Holding Company<br />
Performance by<br />
Geographical Area<br />
Consumer Market<br />
Industrial Market<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
the value of the Brazilian real against the U.S. dollar.<br />
The agreement signed in August with the International Monetary Fund (IMF) was not sufficient<br />
to invert the crisis of confidence. The situation stabilized only when presidential elections were<br />
held, after the declarations of the new President ratifying the country’s commitment to the<br />
objectives of the IMF program.<br />
The effect of the weak currency on prices resulted in inflation reaching a two-digit figure for<br />
the first time since 1995. One positive factor coming from the weakness of the Brazilian real<br />
against the U.S. dollar was the generation of a significant balance of trade surplus.<br />
In <strong>2002</strong>, the automotive sector reported a reduction of 1.6 percent in production compared to<br />
the prior year.<br />
In this economic scenario, the total volume of <strong>Pirelli</strong> sales showed a positive trend throughout<br />
its product range, compared to the prior year, and close to double-digit growth, due both to the<br />
steady trend of the domestic market and the growth of exports.<br />
Argentina<br />
After the default occurred in December 2001, in January <strong>2002</strong>,<br />
the Government decided to abandon the fixed exchange rate<br />
with the U.S. dollar. The 1-to-1 parity rate gave way to a<br />
fluctuating exchange system with strict currency control that<br />
had economic repercussions as well as political and legal<br />
consequences which, to date, are delaying the sealing of an<br />
agreement with the IMF.<br />
Despite the lack of international help, the increase in prices as The tyre factory at Merlo, Argentina.<br />
a result of the currency crisis was lower than that reported by<br />
other economies in similar situations.<br />
Especially in the second half of the year, bringing inflation under control was one of the main<br />
objectives achieved by the economic authorities, and the Government succeeded in controlling<br />
prices to some extent.<br />
In this economic scenario, <strong>Pirelli</strong> reported a reduction in sales volumes on the domestic market, but<br />
not in its market share. However the reduction was more than offset by the increase in exports.<br />
Venezuela<br />
Political and social unrest contributed to higher unemployment, inflation and the loss of<br />
currency values.<br />
The economy deteriorated in the last quarter of <strong>2002</strong> and particularly in December, leading to a<br />
“Civic Strike” which stopped the production and sale of oil.<br />
In this highly unstable scenario, <strong>Pirelli</strong> reported a reduction in sales volumes on the domestic<br />
market, which was partly offset by an increase in exports.<br />
CONSUMER MARKET<br />
Car Tyres Business Unit<br />
In <strong>2002</strong>, the market trend for passenger cars varied according to<br />
the different geographical areas and in relation to the<br />
Replacements or Original Equipment sales channels.<br />
The Replacements business closed <strong>2002</strong> on a global scale with a<br />
marked increase in volumes compared to the prior year in<br />
Europe, in export markets, in Turkey and South America.<br />
The only place where volumes decreased was North America,<br />
where the review of the agreements with Cooper affected sales<br />
operations for the first half of the year.<br />
<strong>Pirelli</strong> P Zero Rosso is fitted to all<br />
Porsche models.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 56
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Tyres Sector<br />
Tyres Sector<br />
Holding Company<br />
Performance by<br />
Geographical Area<br />
Consumer Market<br />
Industrial Market<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
After the successful launch in 2001 of the P6 and the P7, key<br />
products in the HP segment, <strong>2002</strong> saw the introduction of the<br />
P Zero Nero, completing the P Zero collection, regarded as a<br />
benchmark by all the competitors in the HP segment.<br />
On the Replacements market, the new P6 FourSeasons was<br />
presented in North America. This HP tyre is already very<br />
popular and has been chosen as Original Equipment by Audi,<br />
BMW, Daimler Chrysler, Ford, Jaguar and Saab for cars in the<br />
North America market.<br />
The return of Original Equipment in North America with a key<br />
The <strong>Pirelli</strong> Scorpion range is<br />
homologated for all the most<br />
prestigious models in the Sport<br />
Utility Vehicle segment.<br />
HP All Seasons product reinforces the image of <strong>Pirelli</strong> as a company that is technologically on<br />
the cutting edge, a vital factor for re-launching the brand on the Replacements market.<br />
Prestigious homologations were obtained for the P Zero Rosso (in <strong>2002</strong> it was also homologated<br />
on the Audi Quattro, Mercedes AMG, Volvo “R”, Porsche, Ferrari and Maserati), while the P6<br />
and P7 were homologated and approved on the new models of Alfa Romeo, Audi, BMW, Daimler<br />
Chrysler, Fiat, Ford, Peugeot, Volvo and GM/Saab.<br />
Development activities concluded with the homologations of the Scorpion on the SUV vehicle<br />
which leads world sales in its category, the Ford F150/F250, and on the new models of the<br />
Range Rover, Porsche Cayenne, VW Touareg and Volvo XC90.<br />
Motorcycle Tyres Business Unit<br />
In <strong>2002</strong>, the motorcycle tyres market reported significant<br />
growth in the most important markets, albeit at a lower level<br />
than in the prior year, enabling the Motorcycle Tyres Business<br />
Unit to confirm a good overall result.<br />
In the Replacements channel, the highest growth was reported<br />
in the North American and Australian markets, where <strong>Pirelli</strong><br />
already held a strong position. In Europe, the market grew by 7<br />
percent and the market share also improved due to the new<br />
products launched in the radial sporting tyre sector. In South<br />
America, the year was affected by the economic and financial<br />
crisis, especially in Argentina.<br />
In the Original Equipment channel, sales volumes of Motorcycle<br />
tyres increased in Europe and South America. In Europe, the<br />
slump in scooter production continued.<br />
The program to revitalize the product range went ahead, with<br />
the aim of satisfying the requirements of the most demanding<br />
The new press advertising<br />
campaign for the Diablo tyre.<br />
customers. Sales of new products were very satisfactory, including the super-sport <strong>Pirelli</strong><br />
Supercorsa and the Metzeler Sportec M1 in the Hypersport segment.<br />
The end of <strong>2002</strong> saw the launch of the new <strong>Pirelli</strong> Diablo radial sporting tyre, which is expected<br />
to be very successful in the coming years owing to a significant improvement in performance<br />
under all driving conditions. The new MIRS process, applied to the production of motorcycle<br />
tyres, has made it possible to produce the new super-sport <strong>Pirelli</strong> Diablo Corsa, scheduled to be<br />
launched at the beginning of 2003.<br />
From an industrial standpoint, the transfer of the manufacture of conventional products from<br />
Germany to Brazil was completed and the focus of the German factory is now on radial tyres,<br />
using both the traditional process and the new MIRS process.<br />
In the Racing segment, in addition to a long series of victories at national level, <strong>Pirelli</strong><br />
confirmed its reputation in the World Cross Championship, again winning the 250-cc class with<br />
M. Pichon riding a Suzuki and the 500-cc class with S. Everts racing a Yamaha. However, it was<br />
in speed-racing that <strong>Pirelli</strong> had the greatest successes, winning the World Supersport<br />
Championship with F. Foret on a Honda, the Tourist Trophy held in the Isle of Man with D.<br />
Jefferies on a Suzuki, and making good progress in the second year of participation in the World<br />
Superbike Championship.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 57
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Tyres Sector<br />
Tyres Sector<br />
Holding Company<br />
Performance by<br />
Geographical Area<br />
Consumer Market<br />
Industrial Market<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
INDUSTRIAL MARKET<br />
Truck Tyres Business Unit<br />
In <strong>2002</strong>, <strong>Pirelli</strong> confirmed its commitment to re-launch the<br />
Truck Tyres Business Unit.<br />
The competitive scenario was marked, in the first half of the<br />
year, by pressure on selling prices, radical measures on the<br />
part of the main competitors to rationalize production, and the<br />
search for low-cost production sources. The market in Europe<br />
was slightly negative.<br />
The Turkish market emerged from the crisis which had<br />
prevailed since 2001, with growth of more than 30 percent,<br />
followed by a similar growth in <strong>Pirelli</strong> sales, and opportunities<br />
were confirmed in African and Eastern markets where our<br />
Egyptian affiliate has further improved sales in the area.<br />
During the second half of <strong>2002</strong>, the whole world was affected by<br />
an increase in the cost of raw materials derived from oil and<br />
natural rubber. Finally, the South American market suffered as a<br />
result of the weakness of the Brazilian real and the crisis<br />
affecting Venezuela and Argentina, but the macroeconomic<br />
factors were more than offset by the growth of demand in Brazil<br />
(+8 percent), which favored the growth of sales in the area.<br />
In this scenario, <strong>Pirelli</strong> increased sales and strengthened its<br />
market share, and in the second half of the year implemented<br />
measures to reposition prices.<br />
The Business Unit has an optimal production framework. 80<br />
percent of production takes place in countries where the<br />
transformation cost is low, while the remaining 20 percent of<br />
manufacturing facilities are located in Italy.<br />
Improvements in performance were introduced to the main<br />
product lines, the product range was rationalized and new<br />
products were launched to be introduced in new markets.<br />
The new generation FR25 radials<br />
for trucks.<br />
Steelcord Tyres Business Unit<br />
In <strong>2002</strong>, the worldwide Steelcord market closed the year with an increase of more than 2<br />
percent compared to the prior year, driven in particular by emerging markets such as China,<br />
Eastern Europe and South America. The mature markets (Western Europe and NAFTA) closed<br />
with an equivalent reduction of consumption.<br />
The decrease in world demand for hose wire (-7 percent compared to 2001) signaled the failure<br />
of the economy to improve in the second half of the year as had been expected. From the point<br />
of view of supply, the concentration process was stepped up in <strong>2002</strong>.<br />
In this general scenario, the Steelcord Tyres Business Unit closed the year with an increase in<br />
net sales due to the consolidation of <strong>Pirelli</strong>’s market share with some important customers and<br />
the sales volumes of <strong>Pirelli</strong> products.<br />
From the industrial point of view, the two low-cost factories in Turkey and Brazil expanded<br />
their production capacity and reported improved performance compared to 2001, due to the<br />
increase of production volumes and constant control over fixed and variable overheads.<br />
In 2003, the world steelcord tyres market is expected to grow slightly compared to <strong>2002</strong>, driven<br />
once again by emerging markets. The situation of the hose wire markets will remain unchanged.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 58
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Tyres Sector<br />
Tyres Sector<br />
Holding Company<br />
Performance by<br />
Geographical Area<br />
Consumer Market<br />
Industrial Market<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
PERFORMANCE OF THE MAIN COMPANIES IN THE SECTOR<br />
Key data as they appear in the financial statements prepared by the boards of directors and<br />
approved or being approved by the respective shareholders' meetings are given below.<br />
All amounts are expressed in local currency and compared to the prior year.<br />
<strong>Pirelli</strong> Pneumatici S.p.A. - Italy (in thousands of Euros)<br />
<strong>2002</strong> 2001<br />
• Net sales 1,443,558 766,144<br />
• Net income (loss) (6,948) (10,884)<br />
• Net financial (liquidity)/debt position 91,012 38,541<br />
• Shareholders’ equity 281,113 297,396<br />
<strong>Pirelli</strong> Reifenwerke GmbH - Germany (in thousands of Euros)<br />
• Net sales 554,356 528,263<br />
• Net income (loss) 17,133 7,792<br />
• Net financial (liquidity)/debt position 23,833 42,496<br />
• Shareholders’ equity 48,602 39,261<br />
<strong>Pirelli</strong> UK Tyres Ltd - consolidated - United Kingdom (in thousands of £)<br />
• Net sales 245,320 247,658<br />
• Net income (loss) 3,222 3,435<br />
• Net financial (liquidity)/debt position 21,316 33,819<br />
• Shareholders’ equity 77,204 71,583<br />
<strong>Pirelli</strong> Neumaticos S.A. - Spain (in thousands of Euros)<br />
• Net sales 267,329 257,128<br />
• Net income (loss) 4,345 1,526<br />
• Net financial (liquidity)/debt position (15,255) (7,043)<br />
• Shareholders’ equity 72,653 69,052<br />
Metzeler Reifen GmbH - Germany (in thousands of Euros)<br />
• Net sales 124,208 114,086<br />
• Net income (loss) 1,763 4,824<br />
• Net financial (liquidity)/debt position 10,315 11,755<br />
• Shareholders’ equity 18,175 21,186<br />
Turk <strong>Pirelli</strong> Lastikleri A.S. - Turkey (in thousands of Euros)<br />
• Net sales 206,430 199,988<br />
• Net income (loss) 9,287 8,089<br />
• Net financial (liquidity)/debt position (10,170) (15,050)<br />
• Shareholders’ equity 88,356 80,098<br />
<strong>Pirelli</strong> Pneus S.A - Brazil (in thousands of Brazilian Reais)<br />
• Net sales 1,733,549 1,335,307<br />
• Net income (loss) 94,562 48,891<br />
• Net financial (liquidity)/debt position (44,531) (28,349)<br />
• Shareholders’ equity 624,220 519,923<br />
<strong>Pirelli</strong> Tire Llc - United States (in thousands of US $)<br />
• Net sales 154,327 158,523<br />
• Net income (loss) 10,398 9,139<br />
• Net financial (liquidity)/debt position 53,146 65,088<br />
• Shareholders’ equity (10,844) (74,242)<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 59
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Tyres Sector<br />
Tyres Sector<br />
Holding Company<br />
Performance by<br />
Geographical Area<br />
Consumer Market<br />
Industrial Market<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
<strong>2002</strong> 2001<br />
<strong>Pirelli</strong> Neumaticos S.A.I.C - Argentina (in thousands of Pesos)<br />
• Net sales 321,842 103,517<br />
• Net income (loss) (12,622) (302)<br />
• Net financial (liquidity)/debt position (16,883) 586<br />
• Shareholders’ equity 101,578 52,340<br />
<strong>Pirelli</strong> de Venezuela C.A - Venezuela (in thousands of US $)<br />
• Net sales 57,740 67,243<br />
• Net income (loss) 1,892 (1,006)<br />
• Net financial (liquidity)/debt position (6,028) 382<br />
• Shareholders’ equity 32,991 44,365<br />
OUTLOOK FOR THE CURRENT YEAR<br />
The year 2003 began with hopes of a possible transition of the world economy towards a<br />
recovery which, partly because of the numerous factors of uncertainty still unresolved,<br />
nevertheless will be slow and will in all likelihood occur only in the second half of the year.<br />
In the United States, the uncertain trend of consumption and<br />
the climate of confidence among consumers and companies<br />
require a certain amount of caution when formulating forecasts<br />
about growth. However, due partly to the expansive orientation<br />
of monetary policy and possible tax relief, for this year, annual<br />
average growth of 2.7 percent is expected, in line with the<br />
growth reached in the last part of <strong>2002</strong>.<br />
In Europe, prospects of a growth in the economy are linked to<br />
recovery in the United States, an improvement in the climate of<br />
confidence among operators and the re-absorption of the effect<br />
of the changeover to the Euro, which dampened consumption in<br />
<strong>2002</strong>. In 2003, recovery in domestic demand, combined with a<br />
boost from a possible cut in interest rates could constitute one<br />
of the main factors of growth in the area, which should reach<br />
an annual average of 1.6 percent (compared to 1 percent<br />
recorded in <strong>2002</strong>).<br />
Overall, the situation in South America seems to have<br />
stabilized and to be heading towards a modest recovery.<br />
However, the situation is still critical in some countries such as<br />
Argentina and Venezuela. Conversely, in Brazil, uncertainty<br />
The <strong>Pirelli</strong> advertising campaign has<br />
achieved prestigious international<br />
recognition.<br />
seems to be setting in again and this year the country could record growth of approximately 2<br />
percent, slightly higher than the figure recorded in <strong>2002</strong>.<br />
In Asia, the situation of Japan remains fragile. Here, despite some signs of an improvement in<br />
recent months, domestic demand is still feeble and is partly compensated by the positive trend<br />
of exports. This dependence on foreign sales, together with persisting deflation, justifies the<br />
forecast of weak growth for this year (0.4 percent). On the other hand, prospects are good for<br />
the other countries in the Pacific area (+3.9 percent) and for China and the Indian subcontinent<br />
(+6.8 percent).<br />
As far as the trend in consumer prices is concerned, whereas worldwide an increase similar to<br />
that recorded in <strong>2002</strong> is expected (2.7 percent), in the U.S.A., after the deceleration of the prior<br />
year, inflation is expected to return to a figure of over 2 percent. In the euro-zone, on the other<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 60
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Tyres Sector<br />
Tyres Sector<br />
Holding Company<br />
Performance by<br />
Geographical Area<br />
Consumer Market<br />
Industrial Market<br />
Performance of the<br />
Main Companies in the<br />
Sector<br />
Outlook for the Current<br />
Year<br />
hand, the rise in prices at year-end <strong>2002</strong> should be followed by a gradual decline and annual<br />
average inflation should settle at approximately 2 percent.<br />
Finally, there is great uncertainty about the trend of the oil market due to the complex<br />
international political situation. It is therefore possible that oil prices may remain higher than<br />
U.S. $30 a barrel in the first part of 2003, and then descend gradually.<br />
With regard to the European passenger car market, <strong>2002</strong> was not a good year. Registrations<br />
of new cars diminished almost everywhere in Europe (-3.1 percent).<br />
It is difficult to predict the trend in 2003, when, in any case, the possible fall in car production<br />
will be more than offset by the consolidation of the positive evolution of the mix in demand for<br />
Replacements.<br />
In <strong>2002</strong>, the market in the United States also reported a contraction. However, forecasts for<br />
the current year suggest that there will be a recovery in demand for Replacements.<br />
An improvement is also forecast for the market in South America, where the positive results of<br />
Brazil should be accompanied by a slight recovery in other countries in the area for all tyre<br />
products.<br />
With regard to truck tyres for the Commercial Vehicles market, the prospects are more<br />
uncertain in Europe, whereas the positive trend in South America is confirmed. Furthermore,<br />
the production and registration of new Commercial Vehicles are less vital for the equilibrium of<br />
production capacity than Passenger Cars, whereas the trend in demand for Replacements is<br />
expected to be more stable as a whole and in line with that of the Passenger Car business.<br />
In this difficult world scenario, the Tyres Sector will continue to pursue its strategy of<br />
concentrating on the high performance tyre segment, supported by the Business Unit<br />
organization and thus by a focus on the product. The Tyres Sector will give priority to all<br />
operational and workable measures which will enable it to achieve an improvement in its<br />
operating profit compared to <strong>2002</strong>.<br />
<strong>Pirelli</strong> continues to be a sponsor of the Ferrari Challenge single-marque racing series.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 61
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
INFORMATION SYSTEMS<br />
The year <strong>2002</strong> was marked by a period of adjustment after a<br />
period of intensive development, particularly as a result of<br />
Internet initiatives undertaken in the two prior years. This did<br />
not prevent <strong>Pirelli</strong> from promoting new goal-oriented initiatives<br />
to support the growth of business. All of the above confirms the<br />
stability achieved by the Group information and computer<br />
systems, from the point of view of applications (SAP) and<br />
infrastructures (APIS).<br />
After considerable expansion in 2001 and part of <strong>2002</strong>, the<br />
development of web applications is returning to a trend of<br />
normal growth. In connection with the Internet, it should be<br />
mentioned that the priority given last year to the quality of the<br />
service distributed by <strong>Pirelli</strong> websites in terms of content,<br />
availability and service, has led to a considerable increase in<br />
the number of hits and the number of new users registered on<br />
the actual sites.<br />
The new joint SAP-<strong>Pirelli</strong> press<br />
advertising campaign.<br />
In terms of hardware platforms, software and network infrastructures, the consolidation and<br />
spread of the new e-APIS 2000 architecture continued, and advantage was taken of the new<br />
design opportunities which have emerged, especially in the area of mobile computing to support<br />
the sales forces.<br />
With the transfer of the SAP R/3 system of the German affiliate of the Cables Sector to <strong>Milan</strong>,<br />
the consolidation of European SAP environments was completed.<br />
With regard to the search for opportunities of synergies and improvement of technological<br />
governance, the Data Center of the Turkish Cables Sector was consolidated with that of the<br />
Tyres Sector in Istanbul.<br />
With the gradual consolidation of the SAP applications platform, the number of users has risen<br />
to approximately 10,300 and led to the consequent continuous expansion of the APIS<br />
infrastructure platform which, at year-end <strong>2002</strong>, had approximately 16,100 users.<br />
In the Tyres Sector, operations focused on extending and enhancing B2B initiatives, creating the<br />
CRM platform and consolidating the SAP environments.<br />
In particular:<br />
– CRM (Contact Center and Mobile Sales Automation): mySAP CRM tool choice, kernel<br />
definition, U.K./Germany/Italy/Spain activation;<br />
–SFA (salespersons portal): roll-out in 12 European countries and the U.S.A.;<br />
– e-CRM (Customer Relationship Management): covers 10 markets, 50 percent increase in final<br />
user DB profiling, development of dealer applications, management of B2B2C campaign;<br />
– B2B Dealer: improved performance and enhanced content (7,300 customers activated),<br />
development of U.S.A. platform, Multi-brand Order application for long channel, "Motorsport"<br />
and "Safety & Innovation", on-line promotional catalog (Jakala);<br />
– Consolidation and standardization of SAP environments: go live "One business" project for the<br />
U.K. and Germany, activation of new European availability control processes;<br />
– SAP implementation in South Africa, kernel alignment in U.S.A. and profitability Greece;<br />
– DNI (Demand Network Integration): issue of DRP (SNP of SAP APO) module;<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 62
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
– Data Warehouse: preparation of Logistics and Sales basic data;<br />
– SMS (Specification Management System): issue of all modules for Italy, Spain and Brazil;<br />
– PCS (Production Control System): kernel definition, production scheduling tool choice, issue<br />
of WMS module for Germany;<br />
– Motorcycle Tyres BU: Continuous Alignment procedures and systems in use for all functional<br />
areas;<br />
– Sales report.<br />
In the Telecom Cables and Systems Sector, the centralization on a European scale of SAP<br />
infrastructures and applications was completed, in order to provide better support for the<br />
business model which requires a highly centralized governance of the Sector.<br />
Implementation involved the following systems:<br />
– Common Analysis: completion of European roll-out;<br />
– CRM: Common coding for Raw Materials at factories in France (cables and accessories);<br />
– SAP TLC: roll-out at Telecom cables factories (U.K.) and accessories factories (France and the<br />
U.K.) and also the sales affiliate in Germany;<br />
– SAP TLC: Upgrade of the European system to the new software release;<br />
– SAP BW: roll-out of the Business Intelligence system at the affiliates in the U.K. and Germany<br />
and on the Accessories product line;<br />
– E-KAM (Key Account Mgmt.): Customer Relationship Management pan-European tool - rollout<br />
in Germany and the U.K..<br />
In other non-European affiliates, projects were started to upgrade the SAP system releases. In<br />
particular, in North America a B2B project was started with the most important customers of<br />
the sector.<br />
In the Energy Cables and Systems Sector, a serious endeavor was made to contain the costs of<br />
new computer initiatives while ensuring that the systems were upgraded to meet the evolution<br />
of the reference businesses. Consequently, the promotion of initiatives was conducted very<br />
selectively. The initiatives include:<br />
– common classification of Products/Customers/scope of the Business Units worldwide;<br />
– creation of a centralized Data Warehouse for commercial/logistics reporting across Europe;<br />
– extension of KPI Purchases <strong>Report</strong>ing to non-European countries;<br />
– upgrade to the SAP 4.6.c Release for systems in the U.S.A. / Germany / the U.K./ Brazil and<br />
Argentina;<br />
– activation of the centralized system (Steadynet) to manage intercompany purchases / sales<br />
flows;<br />
– spread of the Common Analysis to all European countries;<br />
– installation of the production programming system (Cyberplan) to the pilot plant at Neustadt<br />
in Germany;<br />
– implementation of new functions within the SAP R/3 system.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 63
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
ECOLOGY AND THE ENVIRONMENT<br />
In continuing to pursue the path towards sustainable growth in<br />
<strong>2002</strong>, <strong>Pirelli</strong> not only achieved the objectives it had set itself<br />
but laid the foundations for further progress in the practical<br />
application of its policy for safeguarding the environment.<br />
In particular, more than 90 percent of the Operating Units had<br />
an environmental management system, certified according to<br />
the ISO 14001 quality certification, applying methodological<br />
criteria which are now consolidated in the various corporate<br />
activities, from the management of suppliers to the acquisition<br />
of products. Before very long, all the Operating Units will have<br />
been certified, including those recently acquired, which have<br />
rapidly been adapted to meet <strong>Pirelli</strong> standards.<br />
These same methodological criteria and the high qualitative<br />
standard of the Sector and Corporate functions involved have<br />
induced <strong>Pirelli</strong> to undertake an ambitious program of safety<br />
management, which will gradually lead to the certification of<br />
the Operating Units according to the OHSAS 18001 international<br />
standard. During <strong>2002</strong>, seven units were certified and a<br />
significant number of other units are expected to be certified<br />
in 2003.<br />
The Environmental <strong>Report</strong>, now in its third edition, benefited<br />
from the centralized management of data, which is now<br />
consolidated, through a simple and efficient Environmental<br />
Data Bank.<br />
The capacity to manage and assess data in a standard way<br />
contributed decisively to <strong>Pirelli</strong>’s inclusion in two prestigious<br />
Sustainability Indexes: those of the New York and London<br />
stock exchange – the Dow Jones and the FTSE4Good.<br />
With a view towards continuous improvement, in <strong>2002</strong>, even<br />
greater priority was given to the evaluation of the data<br />
collected, so that every chance could be seized to minimize the<br />
impact of the factories on the environment (energy consumption,<br />
water, raw materials, production emissions, and so on).<br />
In some cases, this methodological process led to an<br />
assessment of the impact of the whole production process,<br />
resulting in improvement not only in terms of the impact on<br />
the environment but also on the final product.<br />
One example of the application of this methodology is the new<br />
MIRS TM tyre manufacturing process which, in previous years,<br />
has already shown that it can reduce the quantity and improve<br />
the quality of emissions, as well as minimize energy<br />
consumption. Furthermore, in association with the MIRS TM<br />
manufacturing process, <strong>Pirelli</strong> has taken another step forward<br />
by designing and building a new compound mixing room which<br />
has made it possible to drastically reduce the amount of<br />
industrial emissions both towards the external environment<br />
and the internal work environment.<br />
The new CCM compound room for<br />
MIRS ensures a drastic reduction<br />
in the emission of pollutants.<br />
The run flat construction enables<br />
the tyre to function, even at zero<br />
pressure.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 64
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
In the Cables Sector, <strong>Pirelli</strong> has taken decisive action to obtain<br />
products with a low impact on the environment by using<br />
knowledge acquired through the analysis of the life cycle of<br />
products (Life Cycle Assessment). Examples include the cables<br />
of the Action line (a smaller quantity of raw materials is used),<br />
the Dry-Dry and Drylam lines (the lead content has been<br />
removed), Afumex (eliminates the build-up of toxic fumes in<br />
the event of fire) and Air Bag (plastic now replaces metal).<br />
In some cases, life-cycle assessment has led to different<br />
strategic choices with regard to marketing: the Micro Tunneling<br />
technique (used to lay underground cables) minimizes the<br />
environmental impact on the actual cables during the<br />
installation process.<br />
Since <strong>Pirelli</strong> regards the application of its Environmental Policy<br />
as a strategic lever from the point of view of creating value, it<br />
has oriented some of the research activities of <strong>Pirelli</strong> Labs<br />
towards leading-edge technologies that will contribute to<br />
Sustainable Growth. For example, in <strong>2002</strong>, some research<br />
projects were started in the field of the environment, such as<br />
an investigation into aspects of the recycling of waste (end-oflife<br />
tyres) and innovative systems for producing clean energy<br />
(fuel cells and photovoltaic processes).<br />
Finally, pursuing the principles which originally inspired the<br />
Environmental Policy in <strong>2002</strong>, <strong>Pirelli</strong> followed up its<br />
commitment to improve industrial areas by reclaiming those<br />
that have been abandoned or are in the process of being<br />
abandoned, and making them suitable for residential use, thus<br />
helping to give a new status to numerous urban areas.<br />
Laying cables underground<br />
minimises the environmental impact<br />
of the cables themselves during all<br />
stages of installation.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 65
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
HUMAN RESOURCES<br />
At December 31, <strong>2002</strong>, the overall workforce of the Group totaled 36,079, with a reduction of<br />
3,048 compared to the same date of the prior year.<br />
As a result of the acceleration of the rightsizing program in the latter part of <strong>2002</strong>, at January 1,<br />
2003 the workforce decreased to 35,610, with a reduction of 3,517 compared to December 31,<br />
2001.<br />
During <strong>2002</strong>, organizational rationalization continued in the three sectors, focusing on fixed<br />
structure cost reduction, particularly in the Energy and Telecom Cables and Systems Sectors.<br />
At December 31, <strong>2002</strong>, the workforce can be analyzed as follows:<br />
Sector<br />
Energy Cables and Systems 12,479 34.6%<br />
Telecom Cables and Systems 2,546 7.1%<br />
Tyres 20,222 56.0%<br />
Others 832 2.3%<br />
Geographical area<br />
Europe 61.5% (of which Italy 21.3%)<br />
North America 3.7%<br />
South America 23.0%<br />
Other areas 11.8%<br />
Composition<br />
Senior executives 508 1.4%<br />
Staff 9,068 25.1%<br />
Blue-collar 24,246 67.2%<br />
Temporary employment 2,257 6.3%<br />
Personnel costs for the year totaled Euros 1,352 million, with a reduction of 10 percent<br />
compared to the prior year; as a percentage of total net sales, personnel costs represent 21.4<br />
percent, compared to 20 percent in 2001.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 66
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
TRAINING AND DEVELOPMENT OF HUMAN RESOURCES<br />
The considerable investment in Intranet technologies and the<br />
in-house portal (Employee on Line) continued in <strong>2002</strong>.<br />
The main aim of the portal is to generate a direct relationship<br />
between the company and its employees by creating a virtual<br />
corporate meeting-place, where people can find much of the<br />
information they require for their daily work.<br />
With this in mind, further improvements have been made to the<br />
“Learning Lab”, or internal training portal. Thanks to this portal,<br />
employees can organize their own training programs according<br />
My appraisal, the new evaluation<br />
form of a person’s own<br />
performances.<br />
to their role in the company, in a combination of on-line and classroom training activities. The<br />
range of training courses has been enhanced with new e-Learning programs and packages, part<br />
of which have been purchased and part developed in-house.<br />
Another important innovation in the internal training portal enables all <strong>Pirelli</strong> employees to<br />
access the performance assessment sheet (“My Appraisal”) on-line. As a result, the annual<br />
process between department heads and staff of assigning work objectives, verifying progress<br />
over time and assessing the results can be supported on-line. A new training program on<br />
performance assessment supported the launch of this application.<br />
Data about portal: No. of connections No. of Contacts/Service Users<br />
Employee On Line 18,000 12.000/month<br />
Learning Lab (only in Italy) 1,000 100/month<br />
My Appraisal (connection only on request) 1,500 1,100<br />
Investment in international training activities, devoted to particularly talented employees and<br />
staff with high potential working at all the affiliates, proceeded along the lines of the<br />
investments made in the prior year. The program involved 70 new graduates considered to have<br />
high managerial potential and 50 employees with high potential, already occupying middle<br />
management positions and growing in their careers.<br />
As for management development, in addition to the aforementioned specific training, work days<br />
were organized – involving Top management of the Group and local management – at all the<br />
affiliates, devoted to a review of local management (“People Days”) and to pinpointing specific<br />
action for individual employees to develop and reinforce their professional skills.<br />
With reference to the difficulties experienced by some of the Businesses in <strong>2002</strong>, priority was<br />
given to creating direct, internal communication within the Group.<br />
In fact, Top Management of the Group organized Road Shows with all the management and<br />
some of the staff in every country where <strong>Pirelli</strong> has a significant presence, with the aim of<br />
illustrating the performance of the Businesses and Sectors in which the Group operates, and to<br />
describe the three-year plan.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 67
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
In 2003, the main lines of action on which the Group will focus will involve the following areas:<br />
• Communication<br />
The experience of direct communication between Top Management and the affiliates tried in<br />
<strong>2002</strong> will be repeated, considering the high success rate and usefulness.<br />
In addition, a new version of the “Employee on Line” portal will be created, with the aim of<br />
providing information about the company and the main work tools in a more timely and userfriendly<br />
way;<br />
• Strengthening the expertise of key players in <strong>Pirelli</strong>’s businesses<br />
The main objective is to supply management with adequate expertise with which to sustain<br />
the important challenges posed by business. Two areas of work have already been identified.<br />
The first involves a large investment in commercial resources through trenchant action to<br />
assess the suitability of existing expertise and implement the resulting action (replacing<br />
personnel if and where necessary, training and individual development plans). The second<br />
aims to tackle the training of Senior Executives with a different approach, namely by<br />
satisfying the need to provide support to the large number of executives occupying new and<br />
challenging positions for the first time;<br />
• Development of talent and turnover of management<br />
The “People Days” held at <strong>Pirelli</strong> affiliates will be continued so that the growth of talented<br />
employees can be monitored even more closely and the levers of international development,<br />
already employed to a significant degree by the Group (international job mobility and special<br />
international posts), and the potential offered by inter-business mobility can be exploited even<br />
more.<br />
Finally, in order to ensure turnover of management in the medium term, recruiting campaigns<br />
will be promoted with an international slant, focusing on talented young employees for the<br />
most critical functions or Businesses.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 68
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
PROFORMA DATA<br />
Proforma consolidated financial data assuming the line-by-line consolidation of<br />
Olimpia S.p.A. and the use of the equity method to value its investment in Olivetti<br />
S.p.A..<br />
Proforma consolidated financial data at December 31, <strong>2002</strong> of <strong>Pirelli</strong> S.p.A. is presented below,<br />
assuming the consolidation line-by-line of Olimpia S.p.A. and the use of the equity method to<br />
value Olimpia S.p.A.’s investment in Olivetti S.p.A..<br />
Proforma adjustments<br />
Consolidated Elimination of Olimpia S.p.A Consolidation Totale Proforma<br />
financial Olimpia S.p.A. line-by-line adjustments proforma consolidated<br />
statements net result consolidation and valuation of adjustments financial data<br />
<strong>2002</strong> <strong>Pirelli</strong> attributable to Olivetti S.p.A. <strong>2002</strong> <strong>Pirelli</strong><br />
S.p.A. (1) <strong>Pirelli</strong> S.p.A. (60%) using the equity S.p.A. (2)<br />
in millions of euros<br />
method<br />
Condensed Statements of Income<br />
• Net sales 6,311 – – – – 6,311<br />
• Operating profit 117 – (1) – (1) 116<br />
• Financial income (expenses)/<br />
Valuation adjustments<br />
to financial assets (403) 150 (241) (440) (531) (934)<br />
• Extraordinary items (262) – (4) – (4) (266)<br />
• Income taxes (62) – – – – (62)<br />
• Net income (loss) (610) 150 (246) (440) (536) (1,146)<br />
• Net income (loss) - <strong>Pirelli</strong> S.p.A. (614) 150 (148) (264) (262) (876)<br />
Goodwill amortization effect 3 – – 589 589 592<br />
Net income (loss)<br />
(excluding goodwill amortization) (607) 150 (246) 149 53 (554)<br />
Net income (loss) - <strong>Pirelli</strong> S.p.A.<br />
(excluding goodwill amortization) (611) 150 (148) 89 91 (520)<br />
Reclassified Balance Sheet<br />
• Fixed assets 6,114 169 8,541 (3,597) 5,113 11,227<br />
• Net working capital 768 – 58 – 58 826<br />
• Total net invested capital 6,882 169 8,599 (3,597) 5,171 12,053<br />
Financed by:<br />
• Shareholders’ equity 4,576 169 4,923 (3,597) 1,495 6,071<br />
– of which shareholders’ equity<br />
<strong>Pirelli</strong> S.p.A. 4,394 169 2,954 (3,406) (283) 4,111<br />
• Provisions 837 – – – – 837<br />
• Net financial (liquidity)/<br />
debt position 1,469 – 3,676 – 3,676 5,145<br />
(1) <strong>Pirelli</strong> S.p.A. consolidated financial statements (investment in Olimpia S.p.A. accounted for using the equity method)<br />
(2) proforma data (line-by-line consolidation of Olimpia S.p.A.and equity method valuation of Olivetti S.p.A.)<br />
The proforma consolidated financial data has been prepared using the statutory financial<br />
statements of Olimpia S.p.A. at December 31, <strong>2002</strong> and the consolidated financial statements of<br />
the Olivetti S.p.A. Group at the same date approved by the Boards of Directors.<br />
The net loss for the year of Olimpia S.p.A. (Euros 246 million) was mainly due to financial<br />
expenses of Euros 173 million and the loss of Euros 68 million since the Olivetti 2001-<strong>2002</strong><br />
warrants were not exercised.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 69
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
The principal proforma adjustments included in the above table are as follows:<br />
• in the column “Elimination of Olimpia S.p.A. net result attributable to <strong>Pirelli</strong> S.p.A. (60%)”:<br />
elimination of the statement of income and balance sheet effects of valuing Olimpia S.p.A. with<br />
the equity method in the <strong>Pirelli</strong> S.p.A. consolidated financial statements at December 31, <strong>2002</strong>;<br />
• in the column “Olimpia S.p.A. line-by-line consolidation”: inclusion of the assets, liabilities,<br />
revenues and costs resulting from the financial statements for the year ended December 31,<br />
<strong>2002</strong> of Olimpia S.p.A., attributing the share of net equity and results of operations to the<br />
minority interest;<br />
• in the column “Consolidation adjustments and valuation of investment in Olivetti S.p.A. using<br />
the equity method”: inclusion of the effect of accounting for Olivetti S.p.A. using the equity<br />
method, giving rise to a negative valuation adjustment of Euros 440 million, of which Euros<br />
220 million relate to the amortization of implicit goodwill for 12 months out of a total twentyyear<br />
period, and Euros 220 million to Olimpia S.p.A.’s share of the year <strong>2002</strong> results of the<br />
Olivetti Group.<br />
The “goodwill amortization effect” on the net result is detailed as follows:<br />
• in the column “Consolidated financial statements at December 31, <strong>2002</strong> <strong>Pirelli</strong> S.p.A.”, the<br />
amount of Euros 3 million refers to the amortization charge for the year on the goodwill<br />
booked by <strong>Pirelli</strong> S.p.A. in respect of Olimpia S.p.A.;<br />
• in the column “Consolidation adjustments and valuation of investment in Olivetti S.p.A. using<br />
the equity method”, the amount of Euros 589 million includes Euros 220 million for the<br />
goodwill booked by Olimpia S.p.A. in respect of Olivetti S.p.A. and Euros 369 million for the<br />
goodwill booked by Olivetti S.p.A. in respect of Telecom Italia S.p.A..<br />
A comparison of shareholders’ equity and net debt between the consolidated financial statements<br />
of <strong>Pirelli</strong> S.p.A. and the proforma consolidated financial data of <strong>Pirelli</strong> S.p.A. at December 31,<br />
<strong>2002</strong> and December 31, 2001 is presented below, assuming:<br />
• the line-by-line consolidation of Olimpia S.p.A. and the valuation of the investment in Olivetti<br />
S.p.A. using the equity method;<br />
• the line-by-line consolidation of both Olimpia S.p.A. and the Olivetti S.p.A. Group<br />
Patrimonio netto Shareholders’ Net debt Net debt Shareholders’<br />
equity Shareholders’ equity<br />
in millions of euros equity <strong>Pirelli</strong> S.p.A.<br />
<strong>2002</strong> 2001 <strong>2002</strong> 2001 <strong>2002</strong> 2001 <strong>2002</strong> 2001<br />
<strong>Pirelli</strong> SpA Group: consolidated<br />
financial statements at 12/31 4,576 5,660 1,469 1,089 0.32 0.19 4,394 5,462<br />
<strong>Pirelli</strong> SpA Group: proforma<br />
consolidated data with Olimpia S.p.A.<br />
consolidated line-by-line<br />
and Olivetti S.p.A. valued<br />
using the equity method 6,071 7,739 5,145 4,598 0.85 0.59 4,111 5,469<br />
<strong>Pirelli</strong> SpA Group: proforma<br />
consolidated data with Olimpia S.p.A.<br />
and Olivetti Group consolidated<br />
line-by-line 23,378 30,435 38,544 42,960 1.65 1.41 4,111 5,469<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 70
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
RELATED PARTY DISCLOSURES<br />
With reference to the disclosure required by Consob Communications No. 97001574 of February<br />
20, 1997 and No. 98015375 of February 27, 1998 which refer to related party transactions among<br />
Group companies, the effects of such transactions on the balance sheet and statement of<br />
income of the consolidated financial statements at December 31, <strong>2002</strong> are presented in the<br />
following table.<br />
The effects of the transactions between <strong>Pirelli</strong> S.p.A. and its subsidiaries are disclosed<br />
in the financial statements and in the notes of the same parent company just as transactions<br />
among subsidiaries are eliminated upon the preparation of the consolidated financial<br />
statements.<br />
All the transactions, including those between the parent company and its subsidiaries and<br />
among subsidiaries, are part of the ordinary operations of the Group and are carried out at<br />
arm’s length and there are no transactions of an unusual and exceptional nature, or constituting<br />
a potential conflict of interest.<br />
The following table presents the major transactions at December 31, <strong>2002</strong> that <strong>Pirelli</strong> S.p.A.<br />
Group has entered into with the parent companies (<strong>Pirelli</strong> & C. A.p.A. and <strong>Pirelli</strong> & C.<br />
Luxembourg S.A.) and the subsidiaries of the latter companies, which are included in the scope<br />
of consolidation of <strong>Pirelli</strong> & C. A.p.A..<br />
in millions of euros<br />
Type of transaction With With subsidiaries Total<br />
parent companies<br />
of <strong>Pirelli</strong> & C. A.p.A.<br />
Trade receivables and other 0.5 0.4 0.9<br />
Trade payables and other (1.2) (2.9) (4.1)<br />
Financial receivables – – –<br />
Financial payables (1.3) (17.4) (18.7)<br />
Revenues for goods and services 1.2 3.4 4.6<br />
Costs for goods and services (5.2) (9.7) (14.9)<br />
Financial income 1.4 7.1 8.5<br />
Financial expenses (23.3) (0.6) (23.9)<br />
Exraordinary income 16.5 – 16.5<br />
Extraordinary expenses – (1.2) (1.2)<br />
Transactions of <strong>Pirelli</strong> S.p.A. and its subsidiaries with the parent companies mainly refer to<br />
the following:<br />
• financial payables, relating to payables from transactions on the current account by <strong>Pirelli</strong><br />
Servizi Finanziari S.p.A. with <strong>Pirelli</strong> & C. A.p.A.;<br />
• revenues for goods and services, relating to the performance of various services rendered<br />
by <strong>Pirelli</strong> S.p.A. and <strong>Pirelli</strong> Informatica S.p.A. to <strong>Pirelli</strong> & C. A.p.A.;<br />
• costs for goods and services, relating to costs for corporate secretarial services and<br />
internal auditing rendered by <strong>Pirelli</strong> & C. A.p.A. on behalf of <strong>Pirelli</strong> S.p.A.;<br />
• financial income and expenses, relating to interest income and expenses on the<br />
aforementioned current account transactions and loans, as well as costs and revenues for<br />
hedging transactions carried out by <strong>Pirelli</strong> International Ltd. (subsidiary of <strong>Pirelli</strong> S.p.A.) on<br />
behalf of <strong>Pirelli</strong> & C. A.p.A.;<br />
• extraordinary income relating to the gain realized by <strong>Pirelli</strong> S.p.A. on the sale of the<br />
representative offices in Rome and Bicocca degli Arcimboldi to <strong>Pirelli</strong> & C. A.p.A.. Such sale<br />
originated from the opportunity of allocating the assets to <strong>Pirelli</strong> & C. A.p.A., the parent<br />
company, since these properties are used by the entire Group.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 71
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
Transactions of <strong>Pirelli</strong> S.p.A. and its subsidiaries with the subsidiaries of <strong>Pirelli</strong> & C. A.p.A.<br />
mainly refer to the following:<br />
• trade payables and other, relating to services rendered by companies in the <strong>Pirelli</strong> & C.<br />
Real Estate S.p.A. Group (subsidiary of <strong>Pirelli</strong> & C. A.p.A.) to <strong>Pirelli</strong> S.p.A. and its subsidiaries;<br />
• financial receivables and payables, relating to transactions on the current account by<br />
<strong>Pirelli</strong> Servizi Finanziari S.p.A. with companies in the <strong>Pirelli</strong> & C. Real Estate S.p.A. Group<br />
(subsidiary of <strong>Pirelli</strong> & C. A.p.A.);<br />
• revenues for goods and services, relating to cost recoveries for various services rendered<br />
by <strong>Pirelli</strong> S.p.A. and <strong>Pirelli</strong> Informatica S.p.A. (subsidiary of <strong>Pirelli</strong> S.p.A.) on behalf of <strong>Pirelli</strong><br />
& C. Real Estate S.p.A. and its subsidiaries;<br />
• costs for goods and services, relating to costs for property management services incurred<br />
by <strong>Pirelli</strong> S.p.A. and its subsidiaries for the services rendered by companies in the <strong>Pirelli</strong> & C.<br />
Real Estate S.p.A. Group (subsidiary of <strong>Pirelli</strong> & C. A.p.A.);<br />
• financial income and expenses, relating to interest income and expenses on the<br />
aforementioned current account and loan transactions.<br />
Furthermore, in order to provide more complete information, the transactions in <strong>2002</strong> between<br />
the <strong>Pirelli</strong> S.p.A. Group and the Olivetti-Telecom group are described below. These transactions<br />
fall within the ordinary operations of the Group, are carried out at arm’s length and there are no<br />
transactions of an unusual and exceptional nature. Such transactions refer to:<br />
• revenues for goods and services, relating mainly to the supply of telecommunications<br />
cables (Euros 53 million);<br />
• costs for goods and services, mainly relating to telephone services received (Euros 10<br />
million);<br />
• trade receivables, relating to the supply of the goods and services described above (Euros 8<br />
million);<br />
• trade payables, relating to the telephone services described above (Euros 1,6 million);<br />
• other income, relating to the gain of Euros 6.8 million on the sale of the 25.3 percent stake<br />
held by <strong>Pirelli</strong> S.p.A. in EPIClink (sales price of Euros 17.7 million) and to the gain of Euros<br />
0.8 million realized by <strong>Pirelli</strong> Informatica on the sale of a business segment to EPIClink (sales<br />
price of Euros 3 million).<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 72
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
EQUITY INVESTMENTS HELD BY DIRECTORS,<br />
STATUTORY AUDITORS AND GENERAL MANAGERS<br />
Pursuant to article 79 of Consob Regulation approved by resolution No. 11971 of May 14, 1999,<br />
the following information is provided as regards the equity investments held in the company<br />
<strong>Pirelli</strong> S.p.A., and its subsidiaries, by the Directors, Statutory Auditors and General Managers, as<br />
well as spouses, not legally separated, and minor children, either directly or through<br />
subsidiaries, trustee companies or individual persons, resulting from the shareholders’ register<br />
at December 31, <strong>2002</strong>, from notices received or other information acquired from the same<br />
Directors, Statutory Auditors and General Managers.<br />
Name Company in which No. of shares No. of shares No. of No. of shares<br />
equity investment held at prior purchased shares sold held at current<br />
held year-end year-end<br />
Tronchetti Provera<br />
Marco<br />
<strong>Pirelli</strong> S.p.A.<br />
(indirect ownership) (1) 30,513,000 6,848,855 – 37,361,855<br />
Buora Carlo <strong>Pirelli</strong> S.p.A. 42,517 – – 42,517<br />
Coppola di Canzano<br />
Eugenio <strong>Pirelli</strong> S.p.A. 39,152 – – 39,152<br />
Ferrario Giovanni <strong>Pirelli</strong> S.p.A. 415,000 – – 415,000<br />
Perissich Riccardo <strong>Pirelli</strong> S.p.A. 2,517 – – 2,517<br />
Presutti Ennio <strong>Pirelli</strong> S.p.A. 30,000 – – 30,000<br />
Sozzani Vincenzo <strong>Pirelli</strong> S.p.A. 32,483 – – 32,483<br />
Battista Valerio <strong>Pirelli</strong> S.p.A. 5,050 – – 5,050<br />
Cristianci Oscar<br />
Carlos <strong>Pirelli</strong> S.p.A. 500,000 – – 500,000<br />
De Conto Claudio <strong>Pirelli</strong> S.p.A. 37,920 – – 37,920<br />
Gori Francesco <strong>Pirelli</strong> S.p.A. 11,304 – – 11,304<br />
Riddett Kevin Edward <strong>Pirelli</strong> S.p.A. 2,517 105,088 105,088 2,517<br />
Guatri Luigi <strong>Pirelli</strong> S.p.A. (2) 100,000 – – 100,000<br />
(1) Shares held through Camfin S.p.A.<br />
(2) Shares held by spouse<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 73
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
STOCK OPTION PLANS<br />
No new stock option plans were introduced in <strong>2002</strong>.<br />
The following disclosure is provided, also pursuant to the recommendations of Consob, on the<br />
progress of stock options plans begun in previous years and still in existence.<br />
1. INCENTIVE PLAN 1999-2000<br />
Features of the plan: option rights granted, non-transferable to third parties, for the<br />
subscription of future new issues of <strong>Pirelli</strong> S.p.A. ordinary shares.<br />
Start of plan: plan begun in 1999.<br />
End of plan: March 15, 2003.<br />
Beneficiaries: 439 employees (managers and cadres) of <strong>Pirelli</strong> S.p.A. or its subsidiaries or the<br />
parent company <strong>Pirelli</strong> & C. A.p.A. and other subsidiaries of the latter.<br />
Conditions for exercising options:<br />
a) continuance of employment in one of the above companies;<br />
b) specific targets reached in the two-year period 1999-2000 (minimum and maximum, with a<br />
consequent proportional number of exercisable options), granted by the appropriate<br />
functions to each beneficiary.<br />
Subscription price per share: Euros 0.52.<br />
Period for exercising options: from February 16, 2001 to March 15, 2001, from July 1, 2001 to<br />
August 31, 2001 in addition to the same periods in <strong>2002</strong> and, not extendable, from February 16,<br />
<strong>2002</strong> to March 15, 2003.<br />
Maximum number of shares for which the offer was initially open:<br />
No. 22,304,300, equal to about 1.18 percent of outstanding ordinary shares.<br />
Maximum number of shares for which the offer was still open at January 1, <strong>2002</strong>:<br />
No. 1,179,048, equal to about 0.06 percent of outstanding ordinary shares.<br />
Maximum number of shares for which the offer was still open at December 31, <strong>2002</strong>:<br />
No. 198,160, equal to about 0.01 percent of outstanding ordinary shares.<br />
Shares issued, against the exercise of the option rights, at March 15, 2003:<br />
No. 11,860,048, equal to about 0.6 percent of outstanding ordinary shares at that date, granted to<br />
409 employees.<br />
Maximum number of shares for which the offer was still open at March 15, 2003:<br />
none; the plan was definitively closed.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 74
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
2. PIRELLI TO PEOPLE<br />
Features of the plan: option rights granted, non-transferable to third parties, for the<br />
subscription of future new issues of <strong>Pirelli</strong> S.p.A. ordinary shares or, as decided by the latter,<br />
for the purchase of treasury shares of <strong>Pirelli</strong> S.p.A..<br />
Objective of the plan: to strengthen allegiance and loyalty.<br />
Beneficiaries: 725 employees (managers, cadres, employees with a “high potential”) of <strong>Pirelli</strong><br />
S.p.A. or its subsidiaries or the parent company <strong>Pirelli</strong> & C. A.p.A. and other subsidiaries of the<br />
latter.<br />
Conditions for exercising options: continuance of employment with one of the above<br />
companies.<br />
Subscription price per share: Euros 1.712.<br />
Period for exercising options: up to nine years from the date the options are granted but not<br />
before one year has passed from that date for 50 percent of the options, two years for another<br />
25 percent and three years for the remaining 25 percent.<br />
Maximum number of shares for which the offer was initially open:<br />
No. 37,049,600, equal to about 1.93 percent of outstanding ordinary shares.<br />
Maximum number of shares for which the offer was open at December 31, <strong>2002</strong>:<br />
No. 32,313,300, equal to about 1.68 percent of outstanding ordinary shares (of which 50 percent<br />
can be exercised starting from November 5, <strong>2002</strong>) for 636 employees.<br />
Options expiring during the period as a result of persons leaving the Group:<br />
No. 4,736,300.<br />
Shares issued during the year: none<br />
3. GROUP SENIOR EXECUTIVES<br />
Features of the plan: option rights granted, non-transferable to third parties, for the<br />
subscription of future new issues of <strong>Pirelli</strong> S.p.A. ordinary shares or, as decided by the latter,<br />
for the purchase of treasury shares of <strong>Pirelli</strong> S.p.A..<br />
Beneficiaries: 51 managers of <strong>Pirelli</strong> S.p.A. or its subsidiaries or the parent company <strong>Pirelli</strong> &<br />
C. A.p.A. and other subsidiaries of the latter.<br />
Conditions for exercising options:<br />
a) continuance of employment in one of the above companies;<br />
b) specific targets reached in the two-year period 2000-2001 (minimum and maximum, with a<br />
consequent proportional number of exercisable options), granted to each beneficiary.<br />
Subscription price per share: Euros 1.712.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 75
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
Maximum number of shares for which the offer was open:<br />
No. 15,811,563 (equal to 0.82 percent of outstanding ordinary shares); number determined – at<br />
May <strong>2002</strong> – on the basis of the performance targets effectively reached (against a theoretical<br />
maximum number of 22,390,000).<br />
On November 5, 2001, based on a provisional estimate of the minimum performance targets –<br />
definitively reached – No. 7,164,800 options were granted; on May 10, <strong>2002</strong>, the remaining<br />
8,646,763 options were granted – definitively – to the beneficiaries.<br />
Period for exercising options:<br />
a) for the options already granted on November 5, 2001 (No. 7,164,800), up to nine years from<br />
the date the options are granted but not before one year has passed from that date for 50<br />
percent of the options, two years for another 25 percent and three years for the remaining 25<br />
percent;<br />
b) for the options granted definitively on May 10, <strong>2002</strong> (No. 8,646,763), up to May 31, 2009 but<br />
not before June 1, <strong>2002</strong> for 50 percent of the options and not before January 1, 2003 for the<br />
remaining 50 percent.<br />
Maximum number of shares for which the offer was open at December 31, <strong>2002</strong>:<br />
No. 14,516,392, equal to about 0.76 percent of outstanding ordinary shares for 46 employees.<br />
Options expiring during the period as a result of persons leaving the Group:<br />
No. 1,295,171.<br />
Shares issued during the year: none<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 76
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
Changes in the aforementioned plans are presented in the following tables.<br />
Table 1 Year <strong>2002</strong><br />
Incentive plan 1999-2000<br />
Number <strong>Annual</strong> average Market price<br />
of shares exercise price in € in € *<br />
Option existing at 1/1/<strong>2002</strong> 1,179,048 0.52 1.97<br />
Option granted during the period – – –<br />
(Options exercised during the period)980,888 0.52 1.80<br />
(Option expired during the period) – – –<br />
Options existing at 12/31/<strong>2002</strong> 198,160 0.52 0.9<br />
Year 2001<br />
Number <strong>Annual</strong> average Market price<br />
of shares exercise price in € in €<br />
14,053,300 0.52 3.858<br />
– – –<br />
5,602,900 0.52 3.80<br />
7,271,352 0.52 –<br />
1,179,048 0.52 1.97<br />
* The market price is the average of the market prices at the various exercise dates, weighted for the quantity of options exercised:<br />
• January 2001 No. 55,200 € 3.88; February 2001 No. 2,493,484 € 3.97; March 2001 No. 2,565,206 € 3.77; July 2001 No. 386,230 € 3.30<br />
and August 2001 No. 102,780 € 2.31<br />
• January <strong>2002</strong> No. 209,310 € 2.08; February <strong>2002</strong> No. 377,188 € 1.64 and March <strong>2002</strong> No. 394,390 € 1.81<br />
Table 2 Options granted - existing at December 31, <strong>2002</strong><br />
Exercise price<br />
Residual contract life<br />
2 years Total<br />
€ 0.52 198,160 – – 198,160<br />
* already exercised during the period February 20 - March 10, 2003<br />
Table 1 Year <strong>2002</strong><br />
<strong>Pirelli</strong> to People<br />
Number <strong>Annual</strong> average Market price<br />
of shares exercise price in € in € *<br />
Option existing at 1/1/<strong>2002</strong> 37,049,600 1.712 1.97<br />
Option granted during the period – – –<br />
(Options exercised during the period) – – –<br />
(Option expired during the period<br />
due to person leaving group) 4,736,300 1.712 –<br />
Options existing at 12/31/<strong>2002</strong> 32,313,300 1.712 0.9<br />
of which exercisable at 12/31/<strong>2002</strong> 16,156,650 – –<br />
Of which exercisable<br />
Average residual contract life<br />
Totale<br />
– –<br />
Year 2001<br />
Number <strong>Annual</strong> average Market price<br />
of shares exercise price in € in €<br />
– – –<br />
37,049,600 * 1.712 1.61<br />
– – –<br />
– – –<br />
37,049,600 1.712 1.97<br />
– – –<br />
* date granted, November 5, 2001<br />
Table 2 Options granted - existing at December 31, <strong>2002</strong><br />
Exercise price Residual contract life Of which exercisable<br />
>2 year* Total from 11/5/02 from 11/5/03 from 11/5/04<br />
€ 1.712 32,313,300 32,313,300 16,156,650 8,078,325 8,078,325<br />
* up to November 5, 2010<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 77
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Table 1 Year <strong>2002</strong><br />
Group Senior Executives<br />
Number <strong>Annual</strong> average Market price<br />
of shares exercise price in € in € *<br />
Year 2001<br />
Number <strong>Annual</strong> average Market price<br />
of shares exercise price in € in €<br />
Option existing at 1/1/<strong>2002</strong> 7,164,800 1.712 1.97<br />
– – –<br />
Option granted during the<br />
period 8,646,763** 1.712 1.56 7,164,800 * 1.712 1.61<br />
(Options exercised during<br />
the period) – – –<br />
– – –<br />
(Option expired during the period<br />
due to person leaving group) 1,295,171 – –<br />
– – –<br />
Options existing at 12/31/<strong>2002</strong> 14,516,392 1.712 0.9 7,164,800 1.712 1.97<br />
of which exercisable at 12/31/<strong>2002</strong> 7,258,196 1.712 –<br />
– – –<br />
* date granted, November 5, 2001<br />
** in reference to the Group Senior Executives plan of November 5, 2001, balance of options granted - definitively - on May 10, <strong>2002</strong><br />
Table 2 Options granted - existing at December 31, <strong>2002</strong><br />
Exercise price Residual contract life Of which exercisable **<br />
>2 years * Total Year <strong>2002</strong> Year 2003 Year 2004<br />
€ 1.712 14,516,392 14,516,392 7,258,196 5,641,396 1,616,800<br />
* up to May 31, 2009<br />
** exercise dates: from June 1, <strong>2002</strong> No. 4,024,596; from November 5, <strong>2002</strong> No. 3,233,600; from January 2, 2003 No. 4,024,596;<br />
from November 5, 2003 No. 1,616,800 and from November 5, 2004 No. 1,616,800<br />
Stock Options granted to the Directors and General Managers<br />
Options held Options granted Options Options Options<br />
at the beginning of year during year exercised expired held at end<br />
during year during year of year<br />
Shareholders’ Resolutions<br />
(A/B) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) = (12) (13)<br />
1+4-7-10<br />
Name/Post held Numbers Average Average Number Average Average Numbers Average Exercise Number Number Average Average<br />
of options exercise expiration of exercise expiration of exercise price of of exercise expir.<br />
price date options price date options price per options options price date<br />
(*) share €<br />
Buora Carlo,<br />
Managing Director 320,000 a) 1.712 – 680,000 a) 1.712 – – – – – 1,000,000 a) 1.712 –<br />
Ferrario Giovanni,<br />
Managing Director 320,000 a) 1.712 – 680,000 a) 1.712 – – – – – 1,000,000 a) 1.712 –<br />
Battista Valerio,<br />
General Manager 320,000 a) 1.712 – 417,600 a) 1.712 – – – – – – – –<br />
Energy Cables and Systems Sector 500,000 b) 1.712 – – – – – – – – 1,237,600 a)+b) 1.712 –<br />
De Conto Claudio,<br />
General Manager 224,000 a) 1.712 – 360,080 a) 1.712 – – – – – – – –<br />
Administration and Control 308,000 b) 1.712 – – – – – – – – 892,080 a)+b) 1.712 –<br />
Gobbi Luciano,<br />
Finance General Manager 224,000 a) 1.712 – 360,080 a) 1.712 – – – – – – – –<br />
270,000 b) 1.712 – – – – – – – – 854,080 a)+b) 1.712 –<br />
Gori Francesco,<br />
General Manager 320,000 a) 1.712 – 80,000 a) 1.712 – – – – – – – –<br />
Tyres Sector 500,000 b) 1.712 – – – – – – – – 900,000 a)+b) 1.712 –<br />
Riddett Kevin Edward,<br />
General Manager 48,000 a) 1.712 – 84,000 a) 1.712 – – – – – – – –<br />
Telecom Cables<br />
and Systems Sector 150,000 b) 1.712 – – – – – – – – 282,000 a)+b) 1.712<br />
105,088 c) 0.52 – – – – 105,088 0.52 1.675 – – – –<br />
Notes - Each option corresponds to the subscription or purchase of a share: a) "Group Senior Executives" Stock Option Plan of November 5, 2001;<br />
(*) In reference to the Group Senior Executives Stock Option Plan of November 5, 2001, balance of options granted - definitively - May 10, <strong>2002</strong>;<br />
b) "<strong>Pirelli</strong> to People" Stock Option Plan; c) Inventive Plan 1999-2000 (in reference to options granted in 1999).<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 78
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
CORPORATE GOVERNANCE<br />
Introduction<br />
On November 16, 1999, the Company informed the market about the adoption of the “Code of<br />
Self-discipline of listed companies” (hereinafter “Code”), recommended by Borsa Italiana S.p.A..<br />
In conformity with the Instructions for the Regulations of the markets organized and managed<br />
by Borsa Italiana, here below, the Company wishes to represent its corporate governance<br />
system which has gradually come to be formed over time.<br />
1. Board of Directors<br />
1.1 The role of the Board of Directors<br />
The Company is administered by a Board of Directors composed of from seven to nineteen<br />
members who serve for three years (unless a shorter period is established by the<br />
shareholders’ meetings when the Directors are appointed) and can be re-elected (art. 12 of<br />
the by-laws).<br />
Pursuant to the by-laws (art. 18), the Board is empowered with the management of the<br />
Company and, for this purpose, is invested with the fullest powers of administration, except<br />
those, which according to the by-laws or by law, are reserved for the shareholders’ meetings.<br />
The Board, in fact, exercises its powers in conformity with point 1.2 of the Code, that is:<br />
– examines the corporate, industrial and financial plans of the Company and the corporate<br />
structure of the Group which the Company heads;<br />
– assigns and revokes the delegation of powers to the Directors, establishing the limits<br />
and manner of exercising such powers;<br />
– establishes, after examining the proposals of the specific compensation committee and<br />
after having consulted the Board of Statutory Auditors, the compensation to be paid to<br />
the Managing Directors and those who hold specific posts, as well as dividing the total<br />
compensation to which the Directors are entitled among the individual members of the<br />
board, if this has not already been decided by the shareholders’ meeting;<br />
– monitors the general performance of operations, with special attention being paid to the<br />
conflicts of interest, taking into account, in particular, the information received from the<br />
Managing Directors and the Audit Committee for internal control and corporate<br />
governance, as well as comparing the results with the budgets on a regular basis;<br />
– examines and approves transactions that have a significant economic, financial or equity<br />
impact, with particular reference to related party transactions;<br />
– generally, at the board meetings, held at least quarterly, the Board of Statutory Auditors<br />
– through the delegated boards – is kept posted about the activities carried out and the<br />
most important transactions entered into, also by the subsidiaries;<br />
– verifies the adequacy of the general organizational and administrative structure of the<br />
Company and group as organized by the Managing Directors;<br />
– keeps the shareholders informed at the shareholders’ meetings.<br />
1.2 The appointment of Directors<br />
In conformity with point 7 of the Code, from now on, as a normal rule, the proposals for<br />
the post of Director will be accompanied by exhaustive disclosure concerning the personal<br />
and professional characteristics of the candidates and will be deposited at the corporate<br />
offices, if possible, at least ten days prior to the expected date of the shareholders’ meeting.<br />
The Board of Directors did not deem it necessary to form an internal committee to nominate<br />
candidates for the post of Director, since, at present, the assumptions for doing so as<br />
contemplated by the Code do not apply to the Company and, particularly because no special<br />
difficulties are envisaged in nominating candidates, in view of the actual shareholder base.<br />
Lastly, the by-laws do not contemplate the mechanism of voting by lists for the<br />
appointment of the Directors.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 79
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
1.3 The composition of the Board of Directors<br />
The Board of Directors, since May 9, <strong>2002</strong>, is composed of the following members:<br />
Dott. Marco Tronchetti Provera – Chairman and Chief Executive Officer<br />
Dott. Alberto <strong>Pirelli</strong> – Deputy Chairman<br />
Dott. Carlo Buora – Managing Director<br />
Dott. Giovanni Ferrario – Managing Director<br />
Gilberto Benetton<br />
Dott. Carlo Ciani<br />
Dott. Eugenio Coppola di Canzano<br />
Ing. Carlo De Benedetti<br />
Dott. Alberto Falck<br />
Dott. Giuseppe Gazzoni Frascara<br />
Dott. Mario Greco<br />
Dott. Georg F. Krayer<br />
Dott. Massimo Moratti<br />
Dott. Luigi Orlando<br />
Ing. Giampiero Pesenti<br />
Ing. Ennio Presutti<br />
Carlo Alessandro Puri Negri<br />
Dott. Vincenzo Sozzani<br />
Prof. Frank Vischer<br />
Therefore, the Board is composed of 19 Directors of which four are executive, with the<br />
Executive Directors being, according to point 2.1 of the Code, - the Chairman – and CEO<br />
Dott. Marco Tronchetti Provera, the Deputy Chairman Dott. Alberto <strong>Pirelli</strong> (who carries<br />
out management functions in the Tyres Sector), the Managing Directors and General<br />
Managers Dott. Carlo Buora and Dott. Giovanni Ferrario.<br />
The Code provides, at point 3, that “independent Directors” are those who:<br />
a) do not have, directly, indirectly or on behalf of third parties, nor have recently had<br />
economic relationships with the Company, with its subsidiaries, the executive Directors,<br />
the shareholder or groups of shareholders which control the Company, of such<br />
significance as to influence the independence of opinion of the Company;<br />
b) do not hold, directly, indirectly or on behalf of third parties, equity stakes of such entity<br />
as to allow them to exercise control over the Company or exercise a significant<br />
influence, nor do they belong to shareholder pacts for the control of the same<br />
Company;<br />
c) are not close relatives of the executive Directors of the Company or individuals which<br />
are in the situations indicated in the previous letters a) and b).<br />
Based on this definition, the Board of Directors has determined that seven of the<br />
remaining 15 Directors (Ing. Carlo De Benedetti, Dott. Alberto Falck, Dott. Giuseppe<br />
Gazzoni Frascara, Dott. Georg F. Krayer, Ing. Giampiero Pesenti, Ing. Ennio Presutti and<br />
Prof. Frank Vischer) can qualify as “independent Directors” while another six (Mr. Gilberto<br />
Benetton, Dott. Carlo Ciani, Dott. Eugenio Coppola di Canzano, Dott. Mario Greco, Dott.<br />
Massimo Moratti and Dott. Luigi Orlando) represent companies which belong to the voting<br />
trust of <strong>Pirelli</strong> & C. A.p.A., the de facto parent company, of <strong>Pirelli</strong> S.p.A..<br />
Finally, the independent Directors do not include Mr. Carlo Alessandro Puri Negri, in view<br />
of the executive responsibilities performed within the <strong>Pirelli</strong> & C. Group, and – only in<br />
consideration of the long period in which he has carried out such positions in the same<br />
group – Dott. Vincenzo Sozzani.<br />
The term of office of the current Directors expires on May 9, 2005.<br />
A list of the posts held as Director or statutory auditor by each of the Directors in<br />
other listed companies in regulated markets, also abroad, in financial, banking, insurance<br />
or other companies of significant size are presented at the end of this section of the<br />
report.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 80
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
1.4 The meetings of the Board<br />
A Chairman, and if necessary, one or more Deputy Chairmen shall be appointed from<br />
amongst the members of the Board.<br />
In the event of the Chairman being absent, the chair shall be taken by a Deputy Chairman<br />
or a Managing Director, in that order; if there should happen to be two or more Deputy<br />
Chairmen or Managing Directors, the chair shall be taken respectively by the senior in age.<br />
The Board shall appoint a Secretary who is not necessarily a member of the Board.<br />
The Board shall meet at the invitation of the Chairman or whomsoever is acting on his<br />
behalf, at the registered office of the Company or in any other place stated in the letter of<br />
convocation, every time he considers it in the best interests of the Company, or whenever<br />
a meeting has been requested by one of the Managing Directors or by at least two standing<br />
statutory auditors.<br />
To this end, the by-laws do not establish a minimum number of meetings; it is nevertheless<br />
the practice to hold at least six meetings a year (to examine the preliminary data at June<br />
30, and December 31, the draft financial statements and the quarterly and semiannual<br />
reports).<br />
Meetings of the Board may be held by teleconference or videoconference.<br />
In this case the following must be guaranteed:<br />
a) identification of all the participants at each point in the teleconference or<br />
videoconference;<br />
b) the possibility for each participant to intervene, to orally put forward same’s own<br />
opinion, to view, receive and transmit all documentation, as well as the contextuality of<br />
considerations and resolutions;<br />
c) meetings are considered to be held in the place in which the Chairman and the<br />
Secretary must be simultaneously.<br />
Board meetings shall be convened by means of a letter, telegram, telex or fax sent to the<br />
address of each Director and each standing statutory auditor, at least five days before<br />
(or in urgent cases at least six hours before) the day set for the meeting.<br />
However, the Board may validly pass resolutions, even failing any formal convocation, if<br />
all the board members and all the statutory auditors in office are present.<br />
The presence of at least half the members plus one is necessary for the resolutions of the<br />
Board to be deemed valid, and the favorable vote of the majority of those attending is<br />
required.<br />
In the event of a tie in votes, the casting vote shall be that of the Chairman.<br />
The resolutions of the Board, even when passed by meetings held through<br />
videoconference, are recorded in a special book signed by the Chairman and the Secretary.<br />
Any copies and extracts thereof, that have not been drawn up by a notary public, shall be<br />
certified as true copies by the Chairman.<br />
In <strong>2002</strong>, eight Board meetings were held; total attendance by the Directors at the meetings<br />
was approx. 80 percent; attendance by the independent Directors was about 66 percent.<br />
Except in exceptional circumstances, the Directors are provided with the necessary<br />
documentation and information reasonably in advance of the meetings in order to allow<br />
the board to express its opinion knowledgeably on the matters under examination.<br />
Two meetings have already been held in 2003 and at least another four are planned.<br />
1.5 The compensation to the Directors<br />
The compensation of the Board of Directors consists of the part-share of profits<br />
established under article 23 of the by-law; precisely, a sum is attributed to the board equal<br />
to 1 percent of the net profits which exceed:<br />
a) the amount set aside in the legal reserve;<br />
b) the amount equal to 7 percent of the par value of the savings shares;<br />
c) the amount equal to 5 percent of par value paid-in represented by ordinary shares.<br />
Furthermore, the shareholders’ meeting may assign a fixed annual amount to the members<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 81
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
of the Board, currently established in Lire 15 million for each Director (Euros 7,746.85),<br />
which remain fixed and unchanged until the shareholders’ meeting resolves otherwise.<br />
In addition to this, the members of the Board shall be reimbursed for all expenses<br />
incurred during the course of their duties.<br />
The Board has internally set up the “Compensation Committee”, establishing that:<br />
a) as regards its functions:<br />
-– proposals are presented to the Board for the compensation of the Managing<br />
Directors (a part of which is linked to the economic results achieved by the Group<br />
and, eventually, specific targets) and those who have particular responsibilities in<br />
addition to, as indicated by the Managing Directors, the determination of the criteria<br />
for the remuneration of the top management of the Company;<br />
-– preliminary examinations are made of the proposals for stock option plans;<br />
b) as regards its composition:<br />
– in general, it is exclusively composed of non-executive Directors (not less than three<br />
in number) who shall appoint the Chairman and a Secretary, who is not necessarily a<br />
member of the Board;<br />
– the Board of Statutory Auditors and Managing Directors shall also attend the Board<br />
meetings;<br />
– the Managing Directors shall absent themselves the meeting when their<br />
compensation is being discussed and also in the event of discussions which interest<br />
them personally;<br />
c) as to its working format:<br />
– meetings are held any time the Chairman deems it necessary or when a request has<br />
been made by another member or a Managing Director;<br />
– for convening meetings and for the validity of their constitution and the resolutions,<br />
the same rules apply as those stated in the by-laws for the meetings of the Board of<br />
Directors.<br />
The “Compensation Committee” is currently composed of the Directors Ing. Ennio<br />
Presutti, who is Chairman, Dott. Luigi Orlando and Ing. Giampiero Pesenti. Five meeting<br />
were held in <strong>2002</strong>.<br />
2. Granting of power. Information provided to the Board of Directors<br />
The Board of Directors granted the Chairman-CEO, Dott. Marco Tronchetti Provera the<br />
following powers:<br />
– relations with the shareholders and information provided to them;<br />
– coordination of the activities of the Directors with delegated powers;<br />
– the determination, in agreement with the Directors with delegated powers, of the<br />
general strategies and development policy of the Company and the Group, as well as<br />
the extraordinary transactions, to be submitted to the Board of Directors;<br />
– the proposals, in agreement with the Directors with delegated powers, for the<br />
nomination of the members of the general management and, after having consulted the<br />
Compensation Committee, the fees to be paid to them, to be submitted to the Board of<br />
Directors;<br />
– the chairmanship of the management Committees with strategic functions;<br />
– the appointment of consultants and professionals, after having consulted the Directors<br />
with delegated powers, and with the right to delegate powers to same;<br />
– external communication in any form, with the right to delegate to the Directors with<br />
delegated powers;<br />
– the right to acquire all data and information considered necessary for carrying out the<br />
functions mentioned above from the Directors with delegated powers and from the<br />
management of the Group.<br />
The Board, moreover, for purposes of a broader capacity to represent the Company before<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 82
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
third parties, has conferred to him the necessary powers to carry out all acts pertinent to<br />
the corporate business purpose in its various forms, to be exercised with single signature<br />
powers, with the exception of the power to issue guarantees for obligations of the<br />
Company and the subsidiaries in excess of single amounts of Euros 25 million or<br />
guarantees in the interest of third parties for obligations in excess of single amounts of<br />
Euros 10 million; in these last cases, a joint signature with another Managing Director is<br />
necessary.<br />
Dott. Carlo Buora, a Managing Director – and still holding the position of General Manager<br />
– has been entrusted with all finance and administration activities, has been granted every<br />
and all powers, pertinent to the specific functions, with quantitative limits for the most<br />
significant transactions; similar powers, to be exercised in the typical activities of the<br />
industrial sectors, have been delegated to the other Managing Director – the General<br />
Manager Dott. Giovanni Ferrario.<br />
Specific and more limited powers were conferred to the other executives of the Company,<br />
to be used in carrying out their specific responsibilities.<br />
Also during <strong>2002</strong>, as in the past, the Chairman-CEO, the General Managers and executives<br />
used the powers conferred to them to carry out the normal operations of the Company (of<br />
which the Directors of the Company were periodically informed), waiving such powers in<br />
the case of significant transactions in terms of quality or value from an economic and<br />
financial standpoint, and submitting them to the same Board of Directors. In accordance<br />
with art. 18 of the by-laws, (which is in compliance with that set forth by art. 150,<br />
paragraph 1 of Legislative Decree No. 59 of 1998), the Board of Directors and the Board of<br />
Statutory Auditors have also been kept posted – on a quarterly basis – about the activities<br />
and any important economic, financial or equity transactions carried out by the Company<br />
or the subsidiaries as well as transactions involving any potential conflict of interest,<br />
supplying all the elements necessary for an understanding of these transactions. To this<br />
end, it should be pointed out that in July <strong>2002</strong>, the Company adopted a specific procedure<br />
(the text of which is presented at the end of this section of the report) which defines, in<br />
precise terms, the rules to be followed to comply with the above-mentioned disclosure<br />
obligations.<br />
On this occasion, the principles of conduct were also established (the text of which is<br />
presented at the end of this section of the report) for carrying out transactions with<br />
related parties.<br />
It should also be considered that in view of the organization structure of the Group,<br />
characterized by the existence of autonomous companies in several countries operating in<br />
the main business segments, individual acts are not frequently carried out - within the<br />
parent company taken alone - which have a considerable impact on the economic-equity<br />
situation of the Group itself; instead, at this level, strategic and operating guidelines are<br />
defined, as well as the coordination of the specific segments and functions of the Group.<br />
Both the parent company and the subsidiary companies, however, are required to follow<br />
the policies and rules which govern the main areas of business, in addition to the<br />
administrative principles and rules of the Group governing the accounting treatment of<br />
administrative events and the preparation of the consolidated financial statements and<br />
period statements.<br />
Finally, as regards the information provided to the Board, the Managing Directors inform<br />
the Directors and, if necessary, discuss any major new legislation and regulations that<br />
refer to the Company and the corporate boards.<br />
Lastly, it should be pointed out that, starting from December 1, <strong>2002</strong>, in accordance with<br />
the regulations of Borsa Italiana, a Code of Conduct on Insider Dealing was adopted (the<br />
text of which is presented at the end of this section of the report) which states the rules<br />
according to which transactions effected by relevant persons on the listed securities of the<br />
Group should be disclosed to the market.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 83
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
3. Internal control<br />
The internal control system of the Group is organized in such a way as to ensure proper<br />
disclosure and an adequate system of control of all its activities and, in particular, in the<br />
major areas of corporate risk. There is also a planning and control system, by sector and<br />
operating unit, which monthly produces a detailed report for the General Managers - so<br />
that they have a useful instrument to monitor specific activities.<br />
In order to follow through on the strategies and guidelines adopted by the parent<br />
company, the competent General Managers and executives of the Sectors and functions<br />
also sit on the Boards of Directors of the largest subsidiaries.<br />
Furthermore, reporting directly to the Chairman of the parent company <strong>Pirelli</strong> & C. A.p.A.<br />
is the Internal Audit Function (not involved in financial operating activities and in the<br />
preparation of the financial statements and period statements) which has the main<br />
responsibility for verifying that the system of internal control of the Group is working and<br />
is adequate in terms of effectiveness and efficiency. To this end, it should be pointed out<br />
that in <strong>2002</strong>, activities continued in order to spread and develop the methodology for<br />
managing operating risk within all the major units of the Group. The Internal Audit<br />
Function has given support to the Sectors in defining an action plan to update and monitor<br />
the “risk portfolio” of the operating units.<br />
In relation to Legislative Decree No. 231/2001, based upon the guidelines published by<br />
Confindustria, the Internal Audit Function has assisted the Group in implementing a<br />
specific methodology aimed at ensuring a compliance with the Decree itself, which will be<br />
aimed at the construction of a model for organization, management and control in 2003.<br />
In line with the audit program for payments (Italy and abroad) begun in 2001, periodical<br />
tests were carried out during the year on selected types of financial payments.<br />
The Board of Directors has internally set up an “Audit Committee” for internal control and<br />
corporate governance, establishing that:<br />
a) as regard its functions:<br />
– carries out advisory and proposal functions for the Board of Directors and, in particular:<br />
• assists the Board in determining the guidelines of the internal control system and in<br />
the periodical testing of its adequacy and its effective functioning, in order to be<br />
sure that corporate risks are suitably managed;<br />
• evaluates the adequacy of the accounting principles used together with the persons<br />
in charge of the financial functions of the Company and the auditors;<br />
• evaluates the work plan prepared by those in charge of internal control and receive<br />
their reports periodically;<br />
• evaluates the proposals formulated by the independent audit firms in order to be<br />
appointed as auditors as well as the audit work plan and the results expressed in<br />
the report and letter of recommendations;<br />
• informs the Board about the work carried out and the adequacy of the system of<br />
internal control at least every six months, at the time of the approval of the annual<br />
financial statements and six-month financial statements;<br />
• performs the additional tasks assigned by the Board of Directors, particularly with<br />
regard to relations with the independent audit firm;<br />
• monitors the continuous update of the rules of corporate governance and ascertains<br />
that the principles of conduct eventually adopted by the Company and its<br />
subsidiaries are followed;<br />
b) as regard its composition:<br />
– it is exclusively composed of non-executive Directors (not less than three in number)<br />
who shall appoint the Chairman and a Secretary, who is not necessarily a member of<br />
the Board;<br />
– the Board of Statutory Auditors and Managing Directors shall also attend the<br />
meetings, as well as, by invitation, the person in charge of the Internal Audit Function<br />
and one or more General Managers;<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 84
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
c) as regard its working format:<br />
– meetings are held at least twice a year, before the Board meetings for the approval of<br />
the annual financial statements and the six-month financial statements, or at any time<br />
the Chairman deems it necessary or a request has been made by another member or a<br />
Managing Director;<br />
– for convening meetings and for the validity of its constitution and the resolutions, the<br />
same rules apply as those stated in the by-laws for the meetings of the Board of<br />
Directors.<br />
The “Audit Committee” for internal control and corporate governance is currently<br />
composed of the Directors Dott. Giuseppe Gazzoni Frascara, who is Chairman, Dott.<br />
Alberto Falck and Ing. Ennio Presutti.<br />
Three meetings were held in <strong>2002</strong>. Again in <strong>2002</strong>, the Internal Audit function reported on<br />
its work to the Chairman at least monthly and to the Audit Committee three times.<br />
The Audit Committee for internal control and corporate governance and the Board of<br />
Directors, also on the basis of indications received from the Board of Statutory Auditors,<br />
have deemed the system of internal control to be adequate.<br />
4. The Board of Statutory Auditors<br />
It is felt that the entire article 21 of the by-laws should be reported herein, as follows:<br />
“The Board of Statutory Auditors is composed of three standing statutory auditors and two<br />
alternate statutory auditors who must hold the requisites required by the existing laws and<br />
also by regulations; to this end, account will be taken that the matters and sectors of<br />
business strictly inherent to those of the Company are those indicated in the corporate<br />
business purpose with particular reference to companies or entities operating in the<br />
financial, industrial, banking, insurance, real estate and services sectors in general.<br />
The ordinary shareholders’ meeting shall elect the Board of Statutory Auditors and<br />
determine its compensation. The minority shareholders shall appoint one standing<br />
statutory auditor and one alternate statutory auditor.<br />
With the exception of the provisions of the second last paragraph of the present article,<br />
the appointment of the Board of Statutory Auditors is made on the grounds of lists put<br />
forward by the shareholders in which candidates are listed under progressive numbers.<br />
Each list contains a number of candidates which does not exceed the number of members<br />
to be appointed. All shareholders who, alone or together with other shareholders,<br />
represent at least 2 percent of the shares with voting rights in the ordinary shareholders’<br />
meeting, have the right to put forward a list.<br />
The lists of candidates, undersigned by the parties presenting them, must be filed at the<br />
Company’s registered office at least ten days before the day fixed for the meeting in first<br />
call. A description of the professional résumé of the individuals standing for election must<br />
be enclosed with the lists together with statements whereby the single candidates accept<br />
the nomination and attest, under their own personal responsibility, that no circumstances<br />
exist for ineligibility or incompatibility, and that they comply with requirements prescribed<br />
by law or by the articles for the position.<br />
Any lists put forward which do not comply with the aforesaid provisions shall be<br />
considered not to have been put forward.<br />
Each candidate may be included on only one list, under penalty of ineligibility.<br />
Likewise, any individuals who are not in possession of the requisites established by the<br />
applicable rules and regulations or who already hold the position of statutory auditor in<br />
more than five companies with stocks listed on official Italian markets, with the exception<br />
of controlling companies and subsidiaries of <strong>Pirelli</strong> S.p.A., may not be appointed as<br />
statutory auditors.<br />
Each individual with voting rights may vote for only one list.<br />
The election of the members of the Board of Statutory Auditors is performed as follows:<br />
two standing statutory members and one alternate member are taken from the list which<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 85
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
has obtained the highest number of votes, in the progressive order in which they are listed<br />
thereon; the remaining standing statutory member and the other alternate member are<br />
taken from the list which has obtained the highest number of votes from the meeting after<br />
the first list, again in the progressive order in which same are listed thereon; in the event<br />
of several lists obtaining the same number of votes, a new run-off vote between the said<br />
lists will be cast by all the shareholders present at the meeting, and the candidates on the<br />
list which obtains the simple majority of the votes will be appointed.<br />
The Chairman of the Board of Statutory Auditors shall be the statutory member indicated<br />
as the first candidate on the list which obtained the highest number of votes.<br />
In case of death, waiver or resignation of a Statutory Auditor, the alternate belonging to<br />
the same list as the resigned Statutory Auditor shall replace him. In the event of<br />
replacement of the Chairman of the Board of Statutory Auditors, the chair shall be taken<br />
by the other statutory member on the list to which the resigning chairman belonged; if it is<br />
not possible to perform substitutions and replacements as set out hereinabove, then a<br />
meeting shall be convened to integrate and complete the Board of Statutory Auditors and<br />
which shall pass resolutions with a relative majority.<br />
When the meeting has to make provisions, pursuant to the terms of the aforegoing paragraph<br />
or to the terms of law, for the appointment of statutory auditors and/or alternates needed to<br />
complete the Board of Statutory Auditors, it shall proceed as follows: if statutory auditors<br />
appointed from the majority list have to be replaced, then the appointment is made with a<br />
relative majority vote without being tied to any list; if, on the other hand, statutory auditors<br />
appointed by the minority shareholders have to be replaced, the meeting shall replace them<br />
with a relative majority vote choosing names where possible from amongst the candidates<br />
indicated on the list on which the Statutory Auditor to be replaced appeared.<br />
If only one single list has been put forward, then the meeting shall cast its vote in relation<br />
to that list; if the list obtains a relative majority, then the first three candidates on the list<br />
in progressive order shall be appointed as the standing Statutory Auditors, and the fourth<br />
and fifth candidate shall be appointed as alternate Statutory Auditors; Chairman of the<br />
Board of Statutory Auditors shall be the person indicated at the top of the list put forward;<br />
in case of death, waiver or resignation of a Statutory Auditor, and in the event of<br />
substitution of the Chairman of the Board of Statutory Auditors, they shall be replaced<br />
respectively by an alternate Statutory Auditor and a standing Statutory Auditor in the<br />
order arising from the progressive numbering of the said list.<br />
Failing any lists, the Board of Statutory Auditors and its Chairman shall be appointed by<br />
the shareholders’ meeting with the majorities prescribed by law.<br />
Resigning Statutory Auditors may be re-elected”.<br />
The shareholders’ meeting of May 9, <strong>2002</strong> appointed as standing Statutory Auditors: Prof.<br />
Luigi Guatri (Chairman), Dott. Paolo Francesco Lazzati and – based on the list presented<br />
by the minority shareholders - Dottoressa Rosalba Casiraghi.<br />
Rag. Franco Ghiringhelli and Rag. Sebastiano Guido were appointed as alternate Statutory<br />
Auditors. The current Board of Statutory Auditors will remain in office until May 9, 2005.<br />
5. The shareholders’ meetings<br />
It is the Company’s consistent policy to use the shareholders’ meetings to provide the<br />
shareholders with information about the Company and its prospects; this obviously is<br />
complied with in accordance with the rules governing price sensitive issues and, therefore,<br />
where necessary, by providing the market with such information.<br />
It is also the Company’s policy to call attention to the location, date and time of the<br />
meeting in order to facilitate the participation of the shareholders at the meetings;<br />
furthermore, where possible, all the Directors and statutory auditors try to attend the<br />
shareholders’ meetings, in particular the Directors who, because of the posts they hold,<br />
can make a useful contribution to the discussion.<br />
Lastly, the Board of Directors makes known that it does not feel – at the present time –<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 86
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
that the Company has a need to establish rules for conducting shareholders’ meetings,<br />
deeming that what is envisaged in the by-laws on this matter is sufficient for the orderly<br />
and proper execution of the shareholders’ meetings.<br />
6. Relations with investors and the other shareholders<br />
The Company has always actively tried to establish a dialogue with its shareholders and<br />
institutional investors based on an understanding of the reciprocal roles, and also by planning<br />
periodical meetings with members of the Italian and international financial community.<br />
Moreover, as early as March 1999, an Investor Relations office was established under the<br />
General Office of the Finance and Administration function, now entrusted to Dott. Roberto<br />
Rivellino.<br />
7. Treatment of confidential information<br />
The management of confidential information, with special reference to price sensitive<br />
information, is under the direct responsibility of the Chairman-CEO.<br />
Outside communications regarding documents and information about the Company and its<br />
subsidiaries are conducted – always in agreement with the Chairman-CEO – by the<br />
Secretary to the Board and the Corporate Secretary for communications to the authorities<br />
and the shareholders, by the External Relations function for communications to the press<br />
and the Investor Relations function for communications directed to institutional investors.<br />
The Chairman-CEO and those in charge of the aforementioned functions are invariably<br />
able to join together to issue any urgent external communications.<br />
Posts held as director or statutory auditor by the members of the Board of Directors<br />
in other listed companies, in financial, banking, insurance, other important or other<br />
companies of significant size<br />
Marco Camfin S.p.A. Chairman<br />
Tronchetti Provera G.P.I. - Gruppo Partecipazioni Industriali S.p.A. Chairman<br />
Marco Tronchetti Provera & C. S.a.p.A.<br />
Chairman<br />
Olimpia S.p.A.<br />
Chairman<br />
<strong>Pirelli</strong> & C. S.a.p.A.<br />
Chairman<br />
<strong>Pirelli</strong> & C. Ambiente S.p.A.<br />
Chairman<br />
<strong>Pirelli</strong> & C. Real Estate S.p.A.<br />
Chairman<br />
Telecom Italia S.p.A.<br />
Chairman<br />
Olivetti S.p.A.<br />
Deputy Chairman e Managing Director<br />
Alberto <strong>Pirelli</strong> G.P.I. - Gruppo Partecipazioni Industriali S.p.A. Deputy Chairman<br />
<strong>Pirelli</strong> & C. S.a.p.A.<br />
Deputy Chairman<br />
Camfin S.p.A.<br />
Director<br />
G.l.M. - Generale Industrie Metallurgiche S.p.A. Director<br />
Olimpia S.p.A.<br />
Director<br />
Olivetti S.p.A.<br />
Director<br />
SMI - Societa Metallurgica Italiana S.p.A. Director<br />
Carlo Buora Tim S.p.A. Chairman<br />
Olivetti S.p.A.<br />
Managing Director<br />
Telecom Italia S.p.A.<br />
Managing Director<br />
<strong>Pirelli</strong> & C. S.a.p.A.<br />
General Partner<br />
HDP Holding di Partecipazioni Industriali S.p.A. Director<br />
Mediobanca S.p.A.<br />
Director<br />
Olimpia S.p.A.<br />
Director<br />
<strong>Pirelli</strong> & C. Ambiente S.p.A.<br />
Director<br />
<strong>Pirelli</strong> & C. Real Estate S.p.A.<br />
Director<br />
Ras S.p.A.<br />
Director<br />
Giovanni Ferrario <strong>Pirelli</strong> Tyre Holding NV Chairman<br />
<strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
Director<br />
<strong>Pirelli</strong> Labs S.p.A.<br />
Director<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 87
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
Gilberto Benetton Autogrill S.p.A. Chairman<br />
Edizione Holding S.p.A.<br />
Chairman<br />
Olimpia S.p.A.<br />
Deputy Chairman<br />
Olivetti S.p.A.<br />
Deputy Chairman<br />
Telecom Italia S.p.A.<br />
Deputy Chairman<br />
A.C.E.S.A. Infraestructuras<br />
Director<br />
Autostrade S.p.A.<br />
Director<br />
Banca Antoniana Popolare Veneta<br />
Director<br />
Benetton Group S.p.A.<br />
Director<br />
Beni Stabili S.p.A.<br />
Director<br />
HMS Host Corp.<br />
Director<br />
LloydAdriatico S.p.A.<br />
Director<br />
Mediobanca S.p.A.<br />
Director<br />
Schemaventotto S.p.A.<br />
Director<br />
Carlo Ciani Centro Cardiologico Monzino Director<br />
Istituto Europeo di Oncologia S.r.l.<br />
Director<br />
Siat S.p.A.<br />
Director<br />
Eugenio Coppola Transocean Holding Chairman<br />
di Canzano Banco Vitalicio de Espana Director<br />
Gefina Intl Ltd<br />
Director<br />
Generali Assurances Generales<br />
Director<br />
La Federation Continentale<br />
Permanent representative<br />
of Assicurazioni General S.p.A.<br />
Carlo De Benedetti CDB Web Tech S.p.A. Chairman<br />
CIR S.p.A.<br />
Chairman<br />
COFIDE S.p.A.<br />
Chairman<br />
SOGEFI S.p.A.<br />
Chairman<br />
Gruppo Editoriale L’Espresso S.p.A.<br />
Director<br />
Valeo SA<br />
Director<br />
Alberto Falck Actelios S.p.A. Director<br />
Camfin S.p.A.<br />
Director<br />
Falck S.p.A.<br />
Director<br />
Italcementi S.p.A.<br />
Director<br />
<strong>Milan</strong>o Assicurazioni S.p.A.<br />
Director<br />
RAS - Riunione Adriatica di Sicurtà S.p.A. Director<br />
RCS Editori S.p.A.<br />
Director<br />
Giuseppe GTS Group S.p.A. Chairman<br />
Gazzoni-Frascara Bologna Football Club 1909 S.p.A. Director<br />
Euromobiliare Corporate Finance S.p.A.<br />
Director<br />
Fondo “Sofipa Equity Fund” gestito<br />
Supervisory Board<br />
da MCC - Sofipa SGR S.p.A.<br />
Mario Greco L’Assicuratrice Italiana Danni S.p.A. Chairman<br />
Investitori Holding S.p.A.<br />
Chairman<br />
Investitori SGR S.p.A.<br />
Chairman<br />
AGF RAS Holding BV<br />
Deputy Chairman<br />
Allianz Subalpina S.p.A.<br />
Deputy Chairman<br />
CreditRas Assicurazioni S.p.A.<br />
Deputy Chairman<br />
CreditRas Vita S.p.A.<br />
Deputy Chairman<br />
Mondial Assistance Italia S.p.A.<br />
Deputy Chairman<br />
RAS Asset Management SGR S.p.A.<br />
Deputy Chairman<br />
Rasbank S.p.A.<br />
Deputy Chairman<br />
RAS International NV<br />
Deputy Chairman<br />
RAS - Riunione Adriatica di Sicurtà S.p.A. Managing Director<br />
Allianz Compania de Seguros y Reaseguros Director<br />
Allianz Suisse Lebensersicherungs<br />
Director<br />
Allianz Suisse Versicherungen<br />
Director<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 88
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
e.Biscom S.p.A.<br />
Fastweb S.p.A.<br />
Genialloyd S.p.A.<br />
GIM - Generale Industrie Metallurgiche S.p.A.<br />
IFIL S.p.A.<br />
Istituto Europeo di Oncologia S.r.l.<br />
L’Assicuratrice Italiana Vita S.p.A.<br />
Mediobanca S.p.A.<br />
Ras Altemative Investments SGR S.p.A.<br />
Rasfin SIM S.p.A.<br />
Unicredito Italiano S.p.A.<br />
Director<br />
Director<br />
Director<br />
Director<br />
Director<br />
Director<br />
Director<br />
Director<br />
Director<br />
Director<br />
Director<br />
Georg F. Krayer Bank Sarasin & Cie AG Chairman<br />
Baloise Holding<br />
Director<br />
Massimo Moratti F.C. Internazionale <strong>Milan</strong>o S.p.A. Chairman<br />
Interbanca S.p.A.<br />
Director<br />
Telecom Italia S.p.A.<br />
Director<br />
Luigi Orlando Europa Metalli S.p.A. Honorary Chairman<br />
Orlando & C. - Gestioni Finanziarie S.a.p.A. Chairman<br />
G.l.M. - Generale Industrie Metallurgiche S.p.A. Chairman<br />
SMI - Societa Metallurgica Italiana S.p.A. Chairman<br />
<strong>Pirelli</strong> & C. S.a.p.A<br />
General Partner<br />
RAS - Riunione Adriatica di Sicurtà S.p.A. Director<br />
Giampiero Pesenti Italmobiliare S.p.A. Chairman and Managing Director<br />
Intermobiliare S.p.A.<br />
Chairman<br />
Italcementi S.p.A.<br />
Managing Director<br />
Ciment Francais<br />
Deputy Chairman<br />
Fincomind AG<br />
Deputy Chairman<br />
Ciments du Maroc<br />
Director<br />
Compagnie Monegasque de Banque<br />
Director<br />
Credit Mobilier de Monaco<br />
Director<br />
Finter Bank France<br />
Director<br />
Finter Bank Zurich<br />
Director<br />
G.l.M. - Generale Industrie Metallurgiche S.p.A Director<br />
Mittel S.p.A.<br />
Director<br />
RAS - Riunione Adriatica di Sicurtà S.p.A. Director<br />
Soparfinter SA (Luxembourg)<br />
Director<br />
Ennio Presutti ABB Italia S.p.A. Advisor Board Member<br />
Air Liquide Italia S.p.A.<br />
Director<br />
Carlo Alessandro Partecipazioni Real Estate S.p.A. Chairman<br />
Puri Negri <strong>Pirelli</strong> & C. Real Estate S.p.A. Deputy Chairman e Managing Director<br />
Camfin S.p.A.<br />
Deputy Chairman<br />
<strong>Pirelli</strong> & C. Ambiente S.p.A.<br />
Deputy Chairman<br />
GPI - Gruppo Partecipazioni Industriali S.p.A. Managing Director<br />
<strong>Pirelli</strong> & C. S.a.p.A.<br />
General Partner and General Manager<br />
Aon Italia S.p.A.<br />
Director<br />
Olimpia S.p.A.<br />
Director<br />
Olivetti S.p.A.<br />
Director<br />
Permasteelisa S.p.A.<br />
Director<br />
Telecom Italia S.p.A.<br />
Director<br />
Vincenzo Sozzani Banco di Desio Director<br />
<strong>Pirelli</strong> & C. Real Estate S.p.A.<br />
Director<br />
<strong>Pirelli</strong> & C. Ambiente S.p.A.<br />
Director<br />
Olimpia S.p.A.<br />
Director<br />
Frank Vischer <strong>Pirelli</strong> Société Générale SA Director<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 89
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
PROCEDURE FOR COMPLIANCE WITH THE<br />
REQUIREMENTS OF ART. 150, PARAGRAPH 1,<br />
OF LEGISLATIVE DECREE NO. 58 OF 1998<br />
Introduction<br />
In accordance with article 150, paragraph 1, of Legislative Decree No. 58 of 1998 (hereinafter,<br />
the “Italian Income Tax Code”) “the Directors shall report to the Board of Statutory Auditors, on<br />
a timely basis, in accordance with the procedures set out in the by-laws and at least quarterly,<br />
on the activities performed and on transactions carried out by the company or its subsidiaries<br />
that have a significant economic, financial or equity impact; in particular, they shall report on<br />
transactions involving a potential conflict of interest” 1 .<br />
The present procedure, pursuant to the above-cited provision and in light of the<br />
communications by Consob relating to corporate controls 2 , defines the individuals and<br />
transactions involved in the information flows of which the Statutory Auditors of <strong>Pirelli</strong> S.p.A.<br />
(hereinafter “<strong>Pirelli</strong>” or “the Company”) are the recipients, and the phases and timing<br />
characterizing those flows. In particular, the procedure sets out:<br />
1. the method, frequency and content of the information;<br />
2. the collection of the information.<br />
Attached to this procedure is an illustrative report that considers the issues underlying the<br />
definition of the information flows in question and the decisions made.<br />
Consequently, the main objective of this procedure is to provide the Board of Statutory Auditors<br />
with the information that is necessary for the performance of its monitoring and oversight<br />
activities as required by the Italian Income Tax Code (article 149).<br />
Secondly, this procedure implements the corporate governance tools, allowing for the tangible<br />
realization of the recommendations contained in the Code of Self-discipline prepared by the<br />
Committee for Corporate Governance of Listed Companies which <strong>Pirelli</strong> has complied with since<br />
its release. In particular, by increasing the transparency of the Company’s management, this<br />
procedure allows each Director to participate in that management in a more knowledgeable and<br />
informed manner. Furthermore, this procedure sets in motion the information flows between the<br />
Directors with delegated powers and the Board of Directors, recommended by the Code of Selfdiscipline<br />
and aimed, on the one hand, at endorsing the “centrality” of the Company’s<br />
management body in its entirety and, on the other hand, at strengthening the internal control<br />
functions.<br />
Method, frequency and content of the information<br />
The Board of Directors, also through its delegated bodies, shall send a specific written report to<br />
the Board of Statutory Auditors on a quarterly basis:<br />
a) on the activities performed;<br />
1 This provision was incorporated in <strong>Pirelli</strong> S.p.A.’s by-laws; article 18, paragraph 2 of the by-laws states that “The<br />
Board of Directors, also through its delegated bodies, shall report on a timely basis to the Board of Statutory<br />
Auditors on the activities performed and the most significant economic, financial and equity transactions carried<br />
out by the Company and its subsidiaries; in particular, it reports on the transactions involving a potential conflict<br />
of interest. The information is delivered, at least quarterly, during the meetings of the Directors or the Executive<br />
Committee or through written communication to the Board of Statutory Auditors”.<br />
2 See, currently, Consob Communication No. 97001574 dated February 20, 1997 and Consob Communication No.<br />
1025564 dated April 6, 2001. See also, Consob Communication No. 2064231 dated September 30, <strong>2002</strong> which<br />
defines the concept of related parties.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 90
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
b) on transactions that have a significant economic, financial or equity impact;<br />
c) on transactions involving a potential conflict of interest, i.e.:<br />
c1) on intra-group transactions;<br />
c2) on transactions with related parties, other than intra-group transactions;<br />
d) on atypical or unusual transactions and on every other activity or transaction that it<br />
considers appropriate to communicate to the Board of Statutory Auditors.<br />
The information provided shall refer to the activities performed and transactions carried out<br />
during the period subsequent to the previous report.<br />
The report shall be sent simultaneously to all Directors and Standing Statutory Auditors.<br />
1. Activities performed<br />
The information shall regard executive activities and the status of transactions already<br />
approved by the Board of Directors, as well as the activities of Committees (Audit Committee,<br />
Compensation Committee and other internal committees); in particular, Executive Directors<br />
report on the activities performed by them – also through the Company’s and its subsidiaries’<br />
structures – in exercising the powers delegated to them, including the initiatives adopted and<br />
the projects introduced.<br />
2. Transactions having a significant economic, financial or equity impact<br />
The information shall focus on transactions that have a significant economic, financial or equity<br />
impact, highlighting, in particular, the strategic aims, consistent with the budget and the<br />
industrial plan, manner of execution (including terms and conditions, both economic and<br />
otherwise, of their realization) and developments, as well as any conditions and implications<br />
that they carry for the <strong>Pirelli</strong> Group’s activities.<br />
For the purposes of this procedure, the following transactions carried out by <strong>Pirelli</strong> or its<br />
subsidiaries - in addition to the transactions reserved for the Board of Directors in accordance<br />
with article 2381 of the Italian Civil Code and the by-laws - are considered to have a significant<br />
economic, financial or equity impact:<br />
1) the issue of financial instruments for a total equivalent value in excess of Euros 100 million;<br />
2) the granting of real or personal guarantees in the interest of subsidiaries (and, in the interest<br />
of <strong>Pirelli</strong> in the case of real guarantees) against obligations in excess of single amounts of<br />
Euros 25 million;<br />
3) the granting of financing or guarantees to the benefit of or in the interest of third parties in<br />
excess of Euros 10 million;<br />
4) the granting of financing to subsidiaries, investment and divestiture transactions, also<br />
including real estate transactions, and transactions involving the acquisition and disposal of<br />
equity investments, of companies or business segments of companies, of property, plant and<br />
equipment and of other assets, in excess of Euros 100 million;<br />
5) merger and demerger transactions, involving subsidiaries, if at least one of the following<br />
parameters, where applicable, is equal to or in excess of 15 percent:<br />
a. total assets of the incorporated (merged) company or the activities subject to<br />
demerger/total assets of the Company (data taken from the consolidated financial<br />
statements);<br />
b. result before tax and extraordinary items of the incorporated (merged) company or the<br />
activities to be demerged/result before tax and extraordinary items of the Company (data<br />
taken from the consolidated financial statements);<br />
c. total shareholders’ equity of the incorporated (merged) company or the business segment<br />
subject to demerger/total shareholders’ equity of the Company (data taken from the<br />
consolidated financial statements).<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 91
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
However, transactions involving the merger (by incorporation or by pooling of interests) of<br />
listed companies as well as the merger by pooling of interests of a listed company with an<br />
unlisted company or by incorporation of a listed company into an unlisted company are<br />
considered, for the purposes of this procedure, transactions that have a significant economic,<br />
financial or equity impact.<br />
The information shall also include transactions that, while individually below the thresholds<br />
specified above or those that determine the exclusive responsibility of the Board of Directors,<br />
are interconnected within the same strategic or executive structure and therefore, when<br />
considered in the aggregate, exceed the relevant thresholds.<br />
3. Transactions involving a potential conflict of interest<br />
3a) Intra-group transactions<br />
The information concerning intra-group transactions shall illustrate the underlying interests and<br />
the significance from the Group perspective, as well as how the transactions are executed<br />
(including the terms and conditions, both economic and otherwise, of their realization) with<br />
particular regard to the valuation methods followed.<br />
Specific emphasis shall be placed on transactions with a value exceeding Euros 50 million, or<br />
less if those transactions are not finalized at arm’s length conditions 3 . Emphasis should also be<br />
placed on transactions that, while individually below the specified threshold, are interconnected<br />
within the same strategic or executive structure and therefore, when considered in aggregate,<br />
exceed that threshold.<br />
For the purposes of this procedure, intra-group transactions 4 shall be those transactions carried<br />
out by <strong>Pirelli</strong> or its subsidiaries with:<br />
a) companies that, directly or indirectly (i.e. also through fiduciary companies or nominees),<br />
control <strong>Pirelli</strong> pursuant to article 2359, paragraphs 1 and 2, of the Italian Civil Code and<br />
article 93 of the Italian Income Tax Code;<br />
b) companies that, directly or indirectly (i.e. also through fiduciary companies or nominees),<br />
are controlled by <strong>Pirelli</strong> pursuant to article 2359, paragraphs 1 and 2, of the Italian Civil<br />
Code and article 93 of the Italian Income Tax Code;<br />
c) companies that, directly or indirectly (i.e. also through fiduciary companies or nominees),<br />
are controlled by the same companies that control <strong>Pirelli</strong> pursuant to article 2359,<br />
paragraphs 1 and 2, of the Italian Civil Code and article 93 of the Italian Income Tax Code;<br />
d) associated companies of <strong>Pirelli</strong> pursuant to article 2359, paragraph 3, of the Italian Civil<br />
Code and those that exercise significant influence on <strong>Pirelli</strong>; an associated company<br />
relationship does not exist with the associated company of an associated company.<br />
3b) Transactions with related parties, other than intra-group transactions<br />
The information concerning transactions with related parties, other than intra-group<br />
transactions shall highlight the underlying interests and illustrate how the transactions are<br />
executed (including the terms and conditions, both economic and otherwise, of their<br />
realization) with particular regard to the valuation methods followed.<br />
3 For the purposes of this procedure, transactions finalized at standard conditions are those transactions entered<br />
into at the same conditions as the Company applies to all arm’s length transactions with whatsoever party.<br />
4 For the purposes of this procedure, intra-group transactions cover the disposal, with or without consideration, of<br />
personal or real property and of transferable economic rights, transactions involving the performance of works<br />
and services, the granting or securing of financing and guarantees, and cooperation agreements for conducting<br />
and developing the Company’s business.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 92
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
For the purposes of this procedure, transactions with related parties 5 shall be those transactions<br />
carried out by <strong>Pirelli</strong> or its subsidiaries with parties directly or indirectly related to <strong>Pirelli</strong>.<br />
Parties directly related to <strong>Pirelli</strong> are:<br />
a) individuals who hold (directly or indirectly, i.e. also through fiduciary companies or<br />
nominees) an investment equal to or exceeding 10 percent of the share capital represented<br />
by ordinary shares of <strong>Pirelli</strong>;<br />
b) individuals who, even though holding (directly or indirectly, i.e. also through fiduciary<br />
companies or nominees) an investment below the percentage indicated in a), may, by virtue<br />
of shareholders’ agreements, nominate, alone or jointly with the other parties adhering to<br />
the agreements, a majority of the members of <strong>Pirelli</strong>’s Board of Directors;<br />
c) individuals who, even though holding (directly or indirectly, i.e. also through fiduciary<br />
companies or nominees) an investment below the percentage indicated in a), command, by<br />
virtue of shareholders’ agreements, alone or jointly with the other parties adhering to the<br />
agreements, a majority of the exercisable votes in <strong>Pirelli</strong>’s ordinary shareholders’ meetings;<br />
d) <strong>Pirelli</strong>’s Directors and Standing Statutory Auditors;<br />
e) <strong>Pirelli</strong>’s General Managers, Secretary to the Board of Directors and Heads of Business<br />
Units/Central Functions/Operating Activities who report directly to the Chairman and the<br />
Managing Directors (so-called first reports).<br />
Parties indirectly related to <strong>Pirelli</strong> are:<br />
f) spouses, not separated, of the parties referred to in a) to e) above;<br />
g) relatives by blood or affinity, up to the second degree, of the parties referred to in a) to e)<br />
above;<br />
h) companies in which the parties referred to in a) to g) above hold, directly or indirectly<br />
(i.e. also through fiduciary companies or nominees) an investment equal to or exceeding 10<br />
percent (if a listed company) or 20 percent (if an unlisted company) of the share capital<br />
represented by shares having voting rights in the ordinary shareholders’ meetings;<br />
i) companies in which the parties referred to in a) to g) above, although holding investments<br />
below the percentage indicated in h), may, by virtue of shareholders’ agreements, nominate,<br />
alone or jointly with the other parties adhering to the agreements, a majority of the members<br />
of that company’s Board of Directors;<br />
j) companies in which the parties referred to in a) to g) above, although holding investments<br />
below the percentage indicated in h), command, by virtue of shareholders’ agreements, alone<br />
or jointly with the other parties adhering to the agreements, a majority of the exercisable<br />
votes in that company’s ordinary shareholders’ meetings;<br />
k) companies in which the parties referred to in a) to g) above have a strategic management<br />
role, and their subsidiaries;<br />
l) companies that have a majority of their Directors in common with <strong>Pirelli</strong>.<br />
The following are also related parties:<br />
those adhering, even indirectly, to shareholders’ agreements referred to in article 122, paragraph<br />
1, of Legislative Decree No. 58/98, the objective of which is the exercise of voting rights, if the<br />
interests covered by such agreements constitute the controlling interest.<br />
Information should be given of transactions exceeding Euros 500 thousand, or less if not<br />
finalized at arm’s length conditions, carried out (also through nominees) with parties directly or<br />
indirectly related to <strong>Pirelli</strong>. Further, evidence should be provided of transactions that, while<br />
individually below the specified threshold, are interconnected within the same strategic or<br />
executive structure and therefore, when considered in the aggregate, exceed that threshold.<br />
5 See note 4.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 93
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
4. Atypical or unusual transactions and other transactions<br />
The information on atypical or unusual transactions, including those carried out by subsidiaries,<br />
and on every other activity or transaction on which it is considered appropriate to provide<br />
information, shall highlight the underlying interests and illustrate the manner in which the<br />
transactions are executed (including the terms and conditions, both economic and otherwise, of<br />
their realization) with particular regard to the valuation methods followed.<br />
For the purposes of this procedure, atypical or unusual transactions shall be those transactions,<br />
which, by object or nature, are outside the normal course of the Company’s business and those<br />
that show particular critical elements due to their characteristics and to the inherent risks, the<br />
nature of the counterpart, or the time of their completion 6 .<br />
Procedure for the collection of information<br />
The Board of Directors shall report to the Board of Statutory Auditors through the<br />
delegated bodies. For the purposes of preparing the specific report, the information should be<br />
transmitted to the Chairman and the Managing Directors, in accordance with the following<br />
procedure.<br />
1. Information on the activities performed, on transactions that have a significant<br />
economic, financial or equity impact, on intra-group transactions and on atypical<br />
or unusual transactions<br />
<strong>Pirelli</strong>’s General Managers and Heads of Business Units/Central Functions/Operating Activities,<br />
who report directly to the Chairman and Managing Directors (so-called first reports) through<br />
the General Administration and Control function, shall report monthly to the Chairman and the<br />
Managing Directors, by specific communication, on the activities performed by their structure<br />
in the period, giving details on transactions that have a significant economic, financial or equity<br />
impact, intra-group transactions exceeding Euros 50 million, or less if not finalized at arm’s<br />
length conditions, atypical or unusual transactions, executive activities and the status of<br />
transactions already approved by the Board of Directors, as well as the principal activities<br />
performed by Directors in exercising the powers delegated to them, comprising the most<br />
important projects introduced and the most significant initiatives adopted.<br />
They should also communicate transactions that, while individually below the previously<br />
specified thresholds or those that determine the exclusive responsibility of the Board of<br />
Directors, are interconnected within the same strategic or executive structure and therefore,<br />
when considered in the aggregate, exceed the relevant thresholds 7 .<br />
Information on the activities of the Audit Committee, Compensation Committee and other<br />
internal committees are provided by the respective Chairmen.<br />
Each quarter, the General Administration and Control function shall prepare and send to the<br />
Chairman and Managing Directors summary reports containing the aggregate data of the above<br />
transactions that were carried out during the period subsequent to the previous report.<br />
Further, details should also be provided of transactions that, while individually below the<br />
previously specified threshold, are interconnected within the same strategic or executive<br />
structure and therefore, when considered in the aggregate, exceed the cited threshold 8 .<br />
6 Transactions carried out in proximity to the end or beginning of the year.<br />
7 In such case, the transactions are relevant also if carried out over a period of time exceeding the three months<br />
covered by the report.<br />
8 See note 7.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 94
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
2. Information on transactions with related parties, other than intra-group<br />
transactions<br />
2.1 <strong>Pirelli</strong>’s General Managers and Heads of Business Units/Central Functions/Operating<br />
Activities who report directly to the Chairman and Managing Directors (so-called first<br />
reports) shall send to the General Administration and Control function, by specific<br />
communication, a list of transactions with related parties, other than intra-group<br />
transactions, carried out by <strong>Pirelli</strong> or its subsidiaries exceeding Euros 500 thousand or<br />
less if not finalized at arm’s length conditions, using the same methods and with the same<br />
frequency as in point 1) above.<br />
<strong>Pirelli</strong>’s Directors and Standing Statutory Auditors, Secretary to the Board of Directors,<br />
General Managers and Heads of Business Units/Central Functions/Operating Activities<br />
who report directly to the Chairman and Managing Directors (so-called first reports)<br />
communicate to the General Management Administration and Control – in accordance<br />
with the format laid down in Appendix A – any transactions carried out with <strong>Pirelli</strong> or<br />
with its subsidiaries by each of them or by parties indirectly related to <strong>Pirelli</strong> through<br />
them 9 that exceed Euros 500 thousand, or less if not finalized at arm’s length conditions,<br />
within fifteen days of the transaction’s conclusion.<br />
2.2 In providing the information on transactions with related parties, other than intra-group<br />
transactions, set forth in point 2.1, above, emphasis should also be given to transactions<br />
that, while individually below the previously specified threshold, are interconnected<br />
within the same relationship and therefore, when considered in the aggregate, exceed the<br />
mentioned threshold 10 .<br />
2.3 Each quarter, on the basis of the information received in accordance with points 2.1 and<br />
2.2 above, the General Administration and Control function shall send a summary to the<br />
Chairman and Managing Directors containing all of the elements necessary to comply<br />
with the disclosure requirements related to the above transactions.<br />
Rules of conduct for carrying out transactions with related parties<br />
1. Transactions with related parties, including intra-group transactions, with the exception of<br />
transactions that are typical or usual or to be finalized at standard conditions shall be<br />
approved in advance by the Board of Directors.<br />
2. Typical or usual transactions are those transactions, which, by subject or nature, are not<br />
outside the normal course of the Company’s business and that do not present particular<br />
critical elements due to their characteristics or to the risks inherent to the nature of the<br />
counterpart or to the time of their completion. Transactions finalized at standard conditions<br />
are those transactions entered into at the same conditions as the Company applies to all<br />
arm’s length transactions with whatsoever party.<br />
3. The Board of Directors shall receive adequate information on the nature of the relationship,<br />
the manner in which the transaction is to be executed, the conditions, both economic and<br />
otherwise, for its realization, the valuation method followed, the underlying interests and<br />
motivations and any risks to the Company. In the event that the relationship is with a<br />
9 This declaration is requested mainly in view of the difficulty, if not impossibility, for <strong>Pirelli</strong> to know or to identify<br />
with certainty parties indirectly related to it through the aforementioned individuals; nor would it appear<br />
appropriate, first and foremost for reasons of privacy, to request from each of those individuals a list of said<br />
possible parties.<br />
10 See note 7.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 95
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
Director or with a party related through a Director, the Director concerned shall limit his<br />
involvement to providing clarification and shall leave the Directors’ meeting at the time the<br />
decisions are taken.<br />
4. In relation to the nature, value or other characteristics of the transaction, the Board of<br />
Directors, in order to avoid that the transaction is entered into at unsuitable conditions, is<br />
assisted by one or more experts who, depending on the circumstances, express an opinion<br />
on the economic conditions, and/or the legitimacy, and/or the technical aspects of the<br />
transaction.<br />
5. With respect to transactions with related parties, including intra-group transactions, that are<br />
not submitted to the Board of Directors in that they are typical or usual and/or at standard<br />
conditions, the Directors with delegated powers or managers responsible for the realization<br />
of the transaction, except for the observance of the specific procedure as per article 150,<br />
paragraph 1, of the Italian Income Tax Code, shall collect and conserve, including by<br />
transaction type or group, adequate information on the nature of the relationship, the<br />
manner in which the transaction is to be executed, the conditions, both economic and<br />
otherwise, for its realization, the valuation method followed, the underlying interests and<br />
motivations and any risks to the Company. One or more experts may be appointed also for<br />
these transactions as provided above.<br />
6. The choice of experts shall be from among individuals with recognized professional<br />
credentials and expertise on the subject matter, who shall be carefully evaluated in terms of<br />
their independence and the absence of conflicts of interest.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 96
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
PIRELLI S.P.A.’S CODE OF CONDUCT ON<br />
INSIDER DEALING<br />
1. Introduction<br />
Further to the provisions set by article 180 and subsequent articles of Legislative Decree No.<br />
58/1998 on the topic of misuse of privileged information, this Code of Conduct of <strong>Pirelli</strong> S.p.A.<br />
(the “Code”) aims to regulate the binding obligations referring to the declaration requirements<br />
and conduct inherent to Transactions carried out by Relevant Persons and the related<br />
disclosure to the market.<br />
2. Definitions<br />
For the purposes of this Code, it is intended by:<br />
A. Relevant Persons: the Directors (executive and non-executive), the Standing Statutory<br />
Auditors, the General Managers, the Secretary to the Board of Directors, the Heads of<br />
Departments and the Head of Investor Relations. Furthermore, Relevant Persons are<br />
considered to be the Heads of the functions which form the General Administration and<br />
Control function, the General Finance function and the Department of Legal Affairs.<br />
The heads of the following Departments of <strong>Pirelli</strong> & C. Accomandita per Azioni are<br />
also considered Relevant Persons: the Legal and Corporate Affairs Department,<br />
Financial Statements and Administration Department, External Communications<br />
Department and Audit Department, as well as the heads of the functions which form<br />
such Departments.<br />
Each of the above identified Relevant Persons may indicate other Relevant Persons, in<br />
relation to the activity they carry out or their assigned job, for a indefinite or limited<br />
period of time; immediate communication of such identification – and of the respective<br />
time limits, if set – should be made to the person concerned and to the Referee.<br />
B. Financial Instruments: (i) negotiable financial instruments listed on Italian and foreign<br />
regulated stock markets issued by <strong>Pirelli</strong> S.p.A., its subsidiaries and its parent companies,<br />
excluding non-convertible bonds; (ii) listed or unlisted financial instruments that<br />
attribute a right to subscribe to, acquire or sell the instruments referred to in (i), above,<br />
and the certificates representative of the instruments referred to in (i), above; (iii)<br />
derivative financial instruments, and covered warrants, having as their underlyings the<br />
financial instruments referred to in (i), above, even when their exercise occurs through<br />
the payment of a cash differential.<br />
C<br />
Transaction(s): any type of act creating, modifying or extinguishing rights on Financial<br />
Instruments, even if carried out within an individual investment portfolio management<br />
relationship. Included in such category are also acts for exercising any stock options or<br />
options rights on Financial Instruments.<br />
D. Significant Transaction: every Transaction that, alone or in aggregate with other<br />
Transactions carried out in the previous three months and not yet declared to the<br />
Company, exceeds Euros 80,000. The notional equivalent value of derivative financial<br />
instruments or covered warrants is calculated as the product of the number of shares on<br />
which the instrument is based and the official price of the underlyings recorded on the<br />
day of conclusion of the transactions.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 97
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
E. Referee: the Secretary to the Board of Directors of <strong>Pirelli</strong> S.p.A., responsible for the<br />
receipt of declarations and administration of the information relating to Transactions<br />
carried out by Relevant Persons, who shall provide for the subsequent disclosure to the<br />
market in accordance with the procedures provided by the Code.<br />
3. Declaration Requirements of Relevant Persons<br />
Within the seventh calendar day after the end of each calendar quarter, Relevant Persons shall<br />
send the Referee the list of Transactions carried out in the quarter on Financial Instruments,<br />
that in total amount to or exceed Euros 35,000.<br />
In the event that a Significant Transaction was carried out, the Relevant Person should declare<br />
this without delay to the Referee, together with the list of Transactions carried out in the<br />
preceding three months and not yet declared to the Company.<br />
Transactions carried out by the Relevant Person’s spouse, if not legally separated, or minor<br />
children, or delegated to be carried out by nominees, trustees or subsidiaries are also subject to<br />
the declaration requirements.<br />
The declaration to the Referee should be made on the form corresponding to the one required<br />
by Borsa Italiana S.p.A. in the Instructions for the Regulation of Markets Organized and<br />
Managed by Borsa Italiana S.p.A. for information purposes.<br />
4. Exemption from Transaction declaration requirements<br />
The Transactions carried out – even through nominees or trustees – between the Relevant<br />
Person and his or her spouse, if not legally separated, or minor children, are excluded from the<br />
declaration requirements to the Referee.<br />
Also excluded are transactions involving the loan of securities, in the case where the Relevant<br />
Person, directly or indirectly, his or her spouse, if not legally separated, or minor children, acts<br />
as the lender, and Transactions creating liens or beneficial interests.<br />
5. Limitations on carrying out Transactions<br />
Transactions carried out – directly or through nominees – by Relevant Persons, excluding nonexecutive<br />
Directors and Statutory Auditors, is permitted only from the day after the first release<br />
of final or preliminary economic-financial data regarding each quarter 1 until the closing of next<br />
quarter. The non-executive Directors and Statutory Auditors shall abstain from carrying out<br />
Transactions from the day of convocation of the Directors’ meeting called to examine the<br />
above-cited economic-financial data, or from the time that they became acquainted with that<br />
data, if earlier, until the day after its release.<br />
Relevant Persons may carry out Transactions outside the allowed period only in the event of<br />
exceptional situations of personal necessity that are adequately justified by the person<br />
concerned. The assessment of the existence of a situation of personal necessity is referred to<br />
the Chairman of the Board of Directors.<br />
The limitations referred to in the first paragraph of this article shall not apply in the event of<br />
exercising the stock options or option rights on Financial Instruments and the consequent<br />
Transactions, provided that they are carried out at the same time the options or rights are<br />
exercised.<br />
1 Or, the six months or full year, in the case of exemption from the publication of the second and fourth quarter<br />
reports, respectively.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 98
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
The Board of Directors can identify additional periods or circumstances in which Transactions<br />
are subject to limits and conditions, providing the Referee and the Relevant Persons with<br />
immediate communication.<br />
6. Disclosure of transactions to the Market<br />
The Referee discloses the information received from the Relevant Persons to the market within<br />
the tenth trading day of the stock market after each calendar quarter by means of the<br />
transmission of a specific communication to Borsa Italiana, in accordance with the procedures<br />
provided in the Regulation of Markets Organized and Managed by Borsa Italiana and in the<br />
related Instructions.<br />
Significant Transactions shall be disclosed to the market without delay, by means of the<br />
procedures stated in the previous paragraph.<br />
7. Sanctions<br />
Apart from the possibility of <strong>Pirelli</strong> S.p.A. seeking compensation for any damages and/or liability<br />
that may result from conduct in violation of the Code, the breach of the declaration<br />
requirements or of the limitations on carrying out Transactions shall lead to: (i) for employees,<br />
the imposition of disciplinary sanctions as provided by the laws in force and the applicable<br />
collective national labor contract; (ii) for any other collaborators, the termination – with or<br />
without notice – of the relationship; (iii) for Directors and Statutory Auditors, the Board of<br />
Directors may propose the revocation of their appointments to the next shareholders’ meeting.<br />
8. Acceptance<br />
Acceptance of this Code by each Relevant Person shall be by signing the form attached as an<br />
Appendix.<br />
9. Updating of the Code and treatment of personal data<br />
The Referee is responsible for monitoring the application and effectiveness of the Code in<br />
respect of its intended purpose, and the submission of any modifications or integrations to the<br />
Board of Directors.<br />
The Referee shall conserve the written declarations by which the Relevant Persons confirm<br />
their full knowledge and acceptance of the Code and grant their consent, in accordance with<br />
Law No. 675/1996, for the treatment of the requested data.<br />
10. Transitory regulations<br />
The regulations of the Code shall become effective as from December 1, <strong>2002</strong>.<br />
Transactions carried out during the month of December <strong>2002</strong> shall be accumulated, for the<br />
purposes of the declaration requirements referred to in article 3, with those of the first quarter<br />
of 2003.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 99
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
SUMMARY DATA OF PIRELLI S.P.A.<br />
(in millions of euros)<br />
Balance sheet <strong>2002</strong> 2001<br />
Intangible assets 14.5 15.8<br />
Property, plant and equipment 40.6 27.5<br />
Investments 5,646.0 5,707.3<br />
Net working capital 132.9 (86.1)<br />
Financial position<br />
5,834.0 5,664.5<br />
Shareholders’ equity 4,936.2 4,984.9<br />
Provisions 72.8 49.1<br />
Net financial debt 825.0 630.5<br />
(in millions of euros)<br />
5,834.0 5,664.5<br />
Statement of income <strong>2002</strong> 2001<br />
Financial income and expenses 305.1 1,061.1<br />
Valuation adjustments to financial assets (177.9) (38.2)<br />
Other operating expenses (35.1) (37.0)<br />
Income before extraordinary items and income taxes 92.1 985.9<br />
Extraordinary items 13.0 767.9<br />
Income taxes 7.0 (264.5)<br />
Net income 112.1 1,489.3<br />
The balance sheet structure of the company between December 31, 2001 and December 31, <strong>2002</strong><br />
changed as a result of the merger by absorption of <strong>Pirelli</strong> Cavi e Sistemi S.p.A. in <strong>Pirelli</strong> S.p.A..<br />
The merger was carried out on December 30, <strong>2002</strong> in execution of the resolutions passed by the<br />
shareholders’ meetings on May 9, <strong>2002</strong>. Other changes during the period were mainly due to the<br />
following movements:<br />
• property, plant and equipment increased by Euros 13.1 million primarily as a result of the<br />
buildings that were acquired upon the merger by absorption of <strong>Pirelli</strong> Cavi e Sistemi S.p.A. in<br />
<strong>Pirelli</strong> S.p.A. (Euros 25.4 million);<br />
• investments decreased by Euros 61.3 million compared to December 31, 2001. The reduction<br />
was principally due to the sale of the investment in EPIClink S.p.A. (Euros 10.9 million), the<br />
writedown of the investments in subsidiaries (Euros 135.4 million) and in other companies<br />
(Euros 42.5 million) and the cancellation of the shares of the merged company <strong>Pirelli</strong> Cavi e<br />
Sistemi S.p.A. (Euros 24.9 million). The reduction was partly compensated by the capital<br />
contribution to <strong>Pirelli</strong> Tyre Holding N.V. (Euros 80 million) and F.C. Internazionale <strong>Milan</strong>o<br />
S.p.A. (Euros 40.9 million), the purchase of Sipir Finance N.V. (Euros 19 million) and the<br />
shares included in the investment portfolio of <strong>Pirelli</strong> Cavi e Sistemi S.p.A. acquired as a result<br />
of the aforementioned merger (Euros 10 million);<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 100
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
• net working capital increased by Euros 219 million compared to December 31, 2001, mainly<br />
as a result of the decrease in taxes payable (Euros 235.9 million), which were partly<br />
compensated by the sale of Irpeg tax receivables (Euros 86.5 million);<br />
• shareholders’ equity increased by the net income for the year and takes into account the<br />
payment of dividends relating to the prior year;<br />
• the net financial position, after these movements, is a net debt position of Euros 825<br />
million compared to Euros 630.5 million at December 31, 2001.<br />
Results of operations<br />
The net income for the year <strong>2002</strong> was Euros 112.1 million compared to Euros 1,489.3 million in<br />
the prior year.<br />
The change is mainly due to the reduction in dividends, the writedown of investments and the<br />
decrease in extraordinary income, countered by a reduction in income taxes.<br />
Components of the results of operations<br />
• Financial income and expenses of Euros 305.1 million (Euros 1,061.1 million in 2001)<br />
include income from investments in subsidiaries of Euros 326.3 million and other companies<br />
of Euros 9.7 million and the net interest expense balance of Euros 30.9 million.<br />
• Valuation adjustments to financial assets include writedowns made to the cost of the<br />
investments in <strong>Pirelli</strong> Finance (Luxembourg) S.A. of Euros 75 million, <strong>Pirelli</strong> Cavi e Sistemi<br />
Telecom S.p.A. of Euros 60 million, Caltagirone Editore S.p.A. of Euros 24.1 million and F.C.<br />
Internazionale <strong>Milan</strong>o of Euros 18.4 million.<br />
• Extraordinary items include extraordinary income of Euros 25.9 million and extraordinary<br />
expenses of Euros 12.9 million.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 101
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Introduction<br />
The Group<br />
Cables and Systems<br />
Sector<br />
Energy Cables and<br />
Systems Sector<br />
Telecom Cables and<br />
Systems Sector<br />
Tyres Sector<br />
Information Systems<br />
Ecology and the<br />
Environment<br />
Human Resources<br />
Proforma Data<br />
Related Party<br />
Disclosures<br />
Equity Investments<br />
held by Directors,<br />
Statutory Auditors and<br />
General Managers<br />
Stock Option Plans<br />
Corporate Governance<br />
<strong>Pirelli</strong> S.p.A. -<br />
Summary Data<br />
Shareholders’ Resolutions<br />
SHAREHOLDERS’ RESOLUTIONS<br />
Appropriation of net income<br />
The year ended December 31, <strong>2002</strong> shows a net income of Euros 112,098,471.<br />
The Board of Directors proposes the distribution of dividends, before withholding taxes, of:<br />
• Euros 0.0364 for each savings share<br />
The proposed dividends carry an ordinary tax credit equal to 56.25 percent (art. 105, letter a) of<br />
D.P.R. 917/86).<br />
Therefore, dividends on:<br />
• savings shares<br />
carry a reimbursable tax credit of Euros 0.02047.<br />
If in agreement with our proposal, we ask you to pass the following<br />
resolution<br />
The shareholders' meeting:<br />
• having taken note of the Directors’ <strong>Report</strong> on operations;<br />
• having taken note of the Board of Statutory Auditors’ <strong>Report</strong>;<br />
• having examined the financial statements at December 31, <strong>2002</strong> which show a net income of<br />
Euros 112,098,471.<br />
votes<br />
a) to approve:<br />
• the Directors’ <strong>Report</strong> on operations;<br />
• the balance sheet, the statement of income, the notes to financial statements for the year<br />
ended December 31, <strong>2002</strong> which show a net income of Euros 112,098,471 as presented by the<br />
Board of Directors in their entirety and in the individual entries, with the proposed accruals;<br />
b) to appropriate the net income for the year of Euros 112,098,471 as follows:<br />
• to the legal reserve to reach 20 percent of share capital Euros 102,012<br />
• to the shareholders:<br />
Euros 0.0364 to each of the 88,006,016 savings shares for a total of Euros 3,203,419<br />
• to the directors, 1 percent of the amount established<br />
on the basis of art. 23 of the by-laws Euros 588,958<br />
• to retained earnings Euros 108,204,082<br />
c) to authorize the directors, in the event treasury shares are purchased before presentation of<br />
the coupons in b), to appropriate the amount of the dividends to which such shares are<br />
entitled to retained earnings, and to charge the same item for the balance of roundings which<br />
may arise at the time of the payment of the dividends.<br />
The Board of Directors<br />
<strong>Milan</strong>, March 11, 2003<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 102
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Consolidated Financial Statements at December 31, <strong>2002</strong><br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Consolidated balance sheets<br />
Assets<br />
(in thousands of euros)<br />
12.31.<strong>2002</strong> 12.31.2001<br />
A) Capital subscription rights<br />
B) Fixed assets<br />
I) Intangible assets<br />
Formation costs 2,651 3,557<br />
Patents and design patent rights 2,932 4,048<br />
Concession, licenses, trademarks and similar rights 6,866 8,076<br />
Goodwill 8,819 11,840<br />
Difference on consolidation 59,825 64,226<br />
Intangible assets in progress and payments on account 1,119 7,358<br />
Other intangible assets 79,317 78,924<br />
Total intangible assets 161,529 178,029<br />
II) Property, plant and equipment<br />
Land and buildings 735,045 799,830<br />
Plant and machinery 1,231,336 1,332,006<br />
Industrial and commercial equipment 134,567 147,790<br />
Other property, plant and equipment 90,135 106,700<br />
Assets under construction and advances to suppliers 201,175 434,922<br />
Total property, plant and equipment 2,392,258 2,821,248<br />
III) Financial assets<br />
Investments in:<br />
a) Subsidiaries 197 197<br />
b) Jointly controlled subsidiaries 3,000,888 3,150,840<br />
c) Associated companies 30,390 43,595<br />
d) Other companies 135,940 176,546<br />
Financial receivables:<br />
a.2) Subsidiaries due beyond 1 year 14,662 14,662<br />
b.2) Associated companies due beyond 1 year 5 22<br />
c.1) Other companies due within 1 year 2,222 1,068<br />
c.2) Other companies due beyond 1 year 55,159 65,509<br />
Other securities 79,000 7,462<br />
Treasury shares 315,334 315,334<br />
Total financial assets 3,633,797 3,775,235<br />
Total fixed assets 6,187,584 6,774,512<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 104
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Assets (continued)<br />
(in thousands of euros)<br />
12.31.<strong>2002</strong> 12.31.2001<br />
C) Current assets<br />
I) Inventories<br />
Raw materials, auxiliaries and consumables 223,703 247,662<br />
Work in process and semifinished products 145,274 160,488<br />
Contract work in progress 58,304 83,792<br />
Finished products and goods for resale 465,192 524,826<br />
Advances 13,865 8,758<br />
Total inventories 906,338 1,025,526<br />
II) Receivables<br />
Trade 1,248,155 1,653,795<br />
Subsidiaries 1,728 287<br />
Associated companies 1,133 1,628<br />
Parent companies 565 97,094<br />
Other receivables 482,169 1,107,826<br />
Total receivables 1,733,750 2,860,630<br />
III) Current financial assets<br />
Other securities 189,925 552,952<br />
Total current financial assets 189,925 552,952<br />
IV) Cash and banks<br />
Bank and postal deposits 324,234 427,309<br />
Checks 2,027 7,267<br />
Cash on hand 2,454 7,485<br />
Total cash and banks 328,715 442,061<br />
Total current assets 3,158,728 4,881,169<br />
D) Accrued income and prepaid expenses<br />
Accrued income 41,876 35,150<br />
Prepaid expenses 41,246 36,041<br />
Total accrued income and prepaid expenses 83,122 71,191<br />
Total assets 9,429,434 11,726,872<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Liabilities and shareholders’ equity<br />
(in thousands of euros)<br />
12.31.<strong>2002</strong> 12.31.2001<br />
A) Shareholders’ equity<br />
- Parent company interest 4,394,054 5,461,812<br />
I) Share capital 1,043,604 1,043,094<br />
II) Share premium reserve 311,958 313,808<br />
III) Revaluation reserve 2,855 2,855<br />
IV) Legal reserve 208,619 207,052<br />
V) Reserve for treasury shares in portfolio 315,334 315,334<br />
VII) Other reserves 228,809 1,926,993<br />
VIII) Retained earnings 2,896,918 1,570,377<br />
IX) Net income (loss) (614,043) 82,299<br />
- Minority interest 181,673 198,163<br />
a) Capital and reserves 177,923 194,181<br />
b) Net income 3,750 3,982<br />
Total shareholders’ equity 4,575,727 5,659,975<br />
B) Provisions for liabilities and expenses<br />
Pensions and similar obligations 205,232 237,806<br />
Income taxes 181,424 197,264<br />
Other 307,648 376,334<br />
Total provisions for liabilities and expenses 694,304 811,404<br />
C) Provision for employees’ leaving indemnity 143,640 96,616<br />
D) Payables<br />
Bonds 1,000,004 500,004<br />
Bank borrowings 938,818 1,787,153<br />
Other financial companies 116,913 114,210<br />
Advances from customers 84,484 128,962<br />
Trade 1,054,892 1,224,004<br />
Subsidiaries 2 -<br />
Associated companies 21,312 3,165<br />
Parent companies 2,488 206,439<br />
Taxes 148,484 495,492<br />
Social security agencies 52,913 47,523<br />
Other payables 335,315 395,557<br />
Total payables 3,755,625 4,902,509<br />
E) Accrued liabilities and deferred income<br />
Accrued liabilities 239,465 226,690<br />
Deferred income 20,673 29,678<br />
Total accrued liabilities and deferred income 260,138 256,368<br />
Total liabilities and shareholders’ equity 9,429,434 11,726,872<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 106
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Memorandum accounts<br />
(in thousands of euros)<br />
12.31.<strong>2002</strong> 12.31.2001<br />
Personal guarantees<br />
- Sureties on behalf of other companies 45,165 8,648<br />
- Credit guarantees on behalf of other companies 10,656 34,969<br />
55,821 43,617<br />
Thir party assets held in deposit<br />
- Securities held in deposit 163,608 167,072<br />
- Third-party goods held in deposit 7,625 2,339<br />
171,233 169,411<br />
Assets held by third parties<br />
- Securities held as guarantees and sureties 16,892 40,867<br />
- Shares held in deposit 1,689,809 2,353,169<br />
- Goods held by third parties 9,103 10,757<br />
1,715,804 2,404,793<br />
Commitments and contingencies<br />
- Capital expenditures 45,581 57,635<br />
- Nominal value of put options given to third parties 2,151,517 2,165,102<br />
- Sale of tax receivables 102,052 –<br />
2,299,150 2,222,737<br />
Other memorandum accounts<br />
- Potential losses for risk of default on discounted bills 31,500 67,188<br />
- Forward securities purchase 200,000 200,000<br />
231,500 267,188<br />
Total 4,473,508 5,107,746<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 107
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Consolidated statements of income<br />
(in thousands of euros)<br />
<strong>2002</strong> 2001<br />
A) Production value<br />
Revenues from sales and services 6,311,476 7,509,220<br />
Changes in inventories of work in process, semifinished and finished products (13,707) (99,559)<br />
Changes in contract work in progress (14,042) (37,988)<br />
Increase in property, plant and equipment 11,194 16,313<br />
Other revenues and income:<br />
a) Miscellaneous 98,610 193,770<br />
b) Government grants 5,188 7,516<br />
Total production value 6,398,719 7,589,272<br />
B) Production costs<br />
Raw materials, auxiliaries, consumables and goods for resale (3,117,734) (3,822,787)<br />
Service expenses (1,074,485) (1,181,035)<br />
Lease and rent expenses (70,209) (80,077)<br />
Personnel costs (1,352,431) (1,501,738)<br />
Amortization, depreciation and writedowns:<br />
a) Amortization of intangible assets (50,506) (46,571)<br />
b) Depreciation of property, plant and equipment (311,954) (324,062)<br />
d) Writedowns of receivables included in current assets and cash and banks (37,651) (77,174)<br />
Changes in inventories of raw materials, auxiliaries, consumables and goods for resale (1,493) (6,511)<br />
Other accruals (19,598) (30,521)<br />
Other operating expenses (245,268) (223,881)<br />
Total production costs (6,281,329) (7,294,357)<br />
Difference between production value and production costs 117,390 294,915<br />
C) Financial income and expenses<br />
Investments income 15,457 7,754<br />
Other financial income:<br />
a) from receivables included in fixed assets 250 196<br />
c) from securities included in current assets 12,487 3,073<br />
d) income other than the above 501,721 445,852<br />
Interest and other financial expenses (703,228) (478,195)<br />
Total financial income and expenses (173,313) (21,320)<br />
D) Valuation adjustments to financial assets<br />
Revaluations – 43<br />
Writedowns (230,147) (33,396)<br />
Total valuation adjustments (230,147) (33,353)<br />
E) Extraordinary items<br />
Extraordinary income 46,519 230,025<br />
Extraordinary expenses (309,182) (246,388)<br />
Total (loss) extraordinary items (262,663) (16,363)<br />
Income (loss) before income taxes (548,733) 223,879<br />
Income taxes (61,560) (137,598)<br />
Net income (loss) (610,293) 86,281<br />
Parent company interest (614,043) 82,299<br />
Minority interest 3,750 3,982<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 108
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Notes to consolidated financial statements<br />
at December 31, <strong>2002</strong><br />
Form and content<br />
The consolidated financial statements for the year ended December 31, <strong>2002</strong> have been drawn up in accordance with the<br />
provisions introduced by Legislative Decree No. 127 of April 9, 1991 which incorporate those of the VII directive of the EC.<br />
The consolidated financial statements include the financial statements of <strong>Pirelli</strong> S.p.A., the parent company, and the<br />
companies in which <strong>Pirelli</strong> S.p.A. holds, directly or indirectly, control as defined by Legislative Decree 127/91, art. 26.<br />
The subsidiaries which fall under the cases indicated in Legislative Decree 127/91, art. 28 are excluded from the scope of<br />
consolidation.<br />
A list of the investments included in the scope of consolidation is provided in the supplementary information which is<br />
considered an integral part of these notes.<br />
All amounts are expressed in thousands of Euros, unless otherwise indicated.<br />
The audit report on the consolidated financial statements has been issued by PricewaterhouseCoopers S.p.A. pursuant to<br />
art. 159 of Legislative Decree No. 58 of February 24, 1998 and takes into account the CONSOB recommendation of February<br />
20, 1997, in execution of the resolution passed by the shareholders on May 9, <strong>2002</strong> which appointed the audit firm for the<br />
three-year period <strong>2002</strong>-2004. The agreed audit fee is Euros 140 thousand.<br />
The fees for the audit of the individual Group companies have been borne directly by the companies concerned; the<br />
equivalent Euro amount of fees for the year <strong>2002</strong> has amounted to approximately Euros 2,916 thousand, including the fees<br />
for the limited review of the six-month financial statements.<br />
Principles of consolidation<br />
The financial statements used in consolidation are those at December 31, <strong>2002</strong> prepared locally for approval by the<br />
shareholders of the individual companies and adjusted, where necessary, to agree with the "Common Accounting Principles"<br />
of the Group, which comply with those established by Legislative Decree 127/91 and those issued by the National Boards of<br />
Dottori Commercialisti and Ragionieri.<br />
The financial statements of subsidiaries operating in high-inflation countries have been adjusted to take into account the<br />
changed purchasing power of the local currency, in accordance with the principles for inflation accounting.<br />
The financial statements expressed in foreign currency have been translated into Euros at rates prevailing at year-end for<br />
the balance sheet and at average exchange rates for the statement of income, with the exception of the financial statements<br />
of companies operating in high-inflation countries, whose statements of income have been translated at year-end rates.<br />
The differences arising from the translation of opening shareholders' equity at year-end exchange rates have been recorded<br />
in translation adjustments in shareholders’ equity.<br />
The exchange rates which have been applied are presented under "Other information" in the notes.<br />
All the subsidiaries in the scope of consolidation have been consolidated using the line-by-line consolidation method, which<br />
may be summarized as follows:<br />
– the assets, liabilities, revenues and costs are consolidated in full and the share of net equity and results of operations<br />
attributable to minority interests are shown separately;<br />
– the carrying value of investments in consolidated companies has been eliminated against the related underlying net<br />
equity;<br />
– receivables, payables, revenues and costs related to transactions between consolidated companies, including dividends<br />
paid within the Group, have been eliminated;<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 109
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
– the gains and losses arising from transactions between consolidated companies, if not yet realized through transactions<br />
with third parties, have been eliminated.<br />
For investments in consolidated companies and for those valued using the equity method, the differences, at acquisition,<br />
between the carrying value of the investments and the corresponding share of net equity have been accounted for as<br />
follows:<br />
– negative differences are shown as a deduction from fixed assets, except those of definite amount; any additional negative<br />
difference is recorded in the consolidation reserve;<br />
– positive differences, where not attributable to the assets or liabilities of the investee companies, have been recorded as a<br />
reduction of the consolidation reserve up to the amount of same and the remaining amount has been recorded as an<br />
asset in “difference on consolidation”.<br />
The reconciliation between the net results and shareholders' equity of <strong>Pirelli</strong> S.p.A. at December 31, <strong>2002</strong> and the<br />
corresponding consolidated figures is presented in the supplementary information.<br />
Summary of significant accounting policies<br />
The accounting policies adopted are those set forth by the provisions of art. 2426 of the Italian Civil Code, referred to and<br />
supplemented by the provisions of CONSOB and by the accounting principles issued by the National Boards of Dottori<br />
Commercialisti and Ragionieri.<br />
The accounting principles have been applied on a basis consistent with the prior year. Unless otherwise indicated, the<br />
accounting principles applied in the valuation of the components of the consolidated financial statements are in compliance<br />
with those adopted in the financial statements of the parent company.<br />
• Intangible assets<br />
“Formation costs” relate to the capital increase costs of consolidated companies and are amortized over a period of five<br />
years.<br />
“Patents and design patent rights”, “concessions, licenses, trademarks and similar rights” are amortized over their<br />
expected economic lives, estimated in a period of five years.<br />
“Goodwill” includes the amount paid for this purpose by the Group companies for the acquisition of companies or other<br />
corporate transactions. Goodwill is amortized over a period of ten years, which identifies the possible period of<br />
utilization.<br />
“Difference on consolidation”, relating to the acquisition of investments, is amortized over a period between ten and<br />
twenty years; this period identifies the possible period of utilization.<br />
The caption "other intangible assets" includes sundry costs benefiting future periods, and in particular refers to:<br />
– applied software acquisition costs, amortized over a period between three and five years;<br />
– leasehold improvements, amortized over the period of the lease and, in any case, not exceeding five years;<br />
– image awareness costs benefiting future periods, amortized over the duration of the contract and, in any case, not<br />
exceeding five years;<br />
– loan acquisition costs, amortized over a period not exceeding the duration of the loan and, in any case, not exceeding<br />
five years.<br />
• Property, plant and equipment<br />
Property, plant and equipment are stated at purchase or production cost including directly attributable incidental<br />
expenses and eventually increased by revaluations effected in accordance with specific laws.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Depreciation is calculated starting from the month when the asset is available and ready for use or potentially able to<br />
provide economic benefits.<br />
Depreciation is calculated on the straight-line method on a monthly basis at rates designed to completely write-off the<br />
assets over their estimated useful lives or, for disposals, up to the last month of utilization:<br />
Buildings 3% - 10%<br />
Plant 7% - 10%<br />
Machinery 5% - 10%<br />
Tools and equipment 10% - 33%<br />
Furniture 10% - 33%<br />
Vehicles 10% - 25%<br />
In addition, property, plant and equipment are written down when the net recoverable amount is permanently impaired<br />
and lower than the net book value, in accordance with article 2426, point 3 of the Italian Civil Code.<br />
Ordinary maintenance and repair costs are expensed in the year incurred.<br />
Government investment grants relating to property, plant and equipment are recorded in a special provision under<br />
liabilities and are released to income in proportion to the future depreciation of the assets to which they refer.<br />
Assets acquired under financial leasing contracts are accounted for as property, plant and equipment with a contra-entry<br />
to financial payables and are therefore capitalized and depreciated over their estimated useful lives. The lease<br />
installment is divided between interest expense, recorded in the statement of income, and the repayment of principal,<br />
recorded as a deduction of the financial liability.<br />
• Financial assets<br />
– Investments<br />
Equity investments in unconsolidated subsidiaries and other companies are valued at cost, reduced for any permanent<br />
impairment in value; the original amount is reinstated whenever the reasons for the adjustment no longer apply.<br />
Equity investments in jointly controlled subsidiaries are valued using the equity method.<br />
Equity investments in associated companies are valued using the equity method, in accordance with article 2359 of the<br />
Italian Civil Code.<br />
– Other securities<br />
Other securities are stated at cost, reduced for any permanent impairment in value.<br />
– Treasury shares<br />
Treasury shares are valued at purchase cost using the LIFO method and adjusted for any permanent impairment in<br />
value. An undistributable reserve for the same amount is recorded in shareholders' equity.<br />
• Current assets<br />
– Inventories<br />
Inventories are stated at the lower of cost, determined on the FIFO basis, and estimated realizable value. Work in<br />
process on long-term contracts is stated in proportion to the stage of completion of the work on the basis of agreed<br />
prices and taking into account estimated losses.<br />
The cost of strategic inventories of metals (copper, aluminum, etc.) is determined using the LIFO method.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
– Receivables and payables<br />
Receivables (under both fixed assets and current assets) are stated at estimated realizable value. Payables are stated<br />
at nominal value.<br />
Receivables and payables in foreign currencies other than the functional currency of the individual companies, are<br />
adjusted to the year-end exchange rates; the effects of hedging contracts are recorded in accrued income and accrued<br />
liabilities; related exchange gains or losses are recorded in the statement of income.<br />
– Other securities<br />
Other securities are stated at the lower of cost and fair value.<br />
– Cash and banks<br />
Cash and banks are stated at nominal value.<br />
– Accruals and prepayments<br />
Accruals and prepayments are recorded on the accrual basis.<br />
• Provisions for liabilities and expenses<br />
– Provisions for pensions and similar obligations<br />
These provisions refer to pensions, health care and other benefits in favor of employees, not included in specific laws<br />
but covered by local labor agreements, and benefit plans operating at some Group companies.<br />
The accounting method is based on the allocation of the entire cost at maturity over the service lives of the employees<br />
based on entitlement earned, using actuarial methods.<br />
– Provision for income taxes<br />
The provision includes deferred tax liabilities and tax losses that are certain or likely to be incurred but uncertain as<br />
to the amount or the date on which they will arise; definite and certain income taxes payable are recorded in a<br />
specific account in the balance sheet.<br />
– Other provisions<br />
Other provisions include liabilities that are certain or likely to be incurred but uncertain as to the amount or the date<br />
on which they will arise.<br />
• Provision for employees' leaving indemnity<br />
The provision for employees' leaving indemnity includes amounts payable to employees accrued on their behalf in<br />
accordance with specific laws or national labor contracts.<br />
• Financial instruments<br />
Forward contracts and derivative financial instruments used for hedging purposes are recorded under commitments at<br />
the time the contract is stipulated, for the notional amount. Income and expenses, as well as any effects, corresponding<br />
to the difference between the original contract amount and the fair value at the end of the year, are accounted for on the<br />
accrual basis.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
• Recognition of revenues<br />
Revenues from the sale of products are recognized at the time of transfer of title of ownership which generally coincides<br />
with the delivery or shipment of the goods.<br />
Revenues from sales are shown net of discounts and allowances.<br />
• Research & development and advertising costs<br />
"Research & development and advertising costs" are charged to the statement of income in the year incurred.<br />
• Dividends<br />
Dividends are recorded on a cash basis, gross of tax credits.<br />
• Income taxes<br />
Current income tax liabilities are determined on the basis of a realistic estimate of the tax expense payable under the<br />
current tax laws of the country; the related liability is shown in taxes payable net of advance payments, withholdings and<br />
tax credits.<br />
Deferred taxes are calculated on the temporary difference existing between the value of assets and liabilities in the<br />
balance sheet and their tax basis (liability method). Any deferred tax liabilities are recorded in the provision for income<br />
taxes. Deferred tax assets are accounted for only where is a reasonable certainty of recovery and these are recorded in<br />
Other receivables.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
CONSOLIDATED BALANCE SHEETS<br />
Assets<br />
B) Fixed assets<br />
I) Intangible assets<br />
Intangible assets can be analyzed as follows:<br />
(in thousands of euros)<br />
12/31/2001 Translations Increase Decrease Amor- 12/31/<strong>2002</strong><br />
adjustment<br />
tization<br />
• Formation costs 3,557 (2) 1,018 - (1,922) 2,651<br />
• Patents and design patent rights 4,048 9 1,367 - (2,492) 2,932<br />
• Concessions, licenses, trademarks and similar lights 8,076 (266) 2,367 (477) (2,834) 6,866<br />
• Goodwill 11,840 (606) - (720) (1,695) 8,819<br />
• Difference on consolidation 64,226 - 45 - (4,446) 59,825<br />
• Other 86,282 (5,545) 36,815 - (37,116) 80,436<br />
178,029 (6,410) 41,612 (1,197) (50,505) 161,529<br />
The increase in “formation costs” is due to the registration tax capitalized by <strong>Pirelli</strong> Tyre Holding N.V. – Amsterdam – as a<br />
consequence of the increase in share capital subscribed to by <strong>Pirelli</strong> S.p.A..<br />
The increase in “patents and design patent rights” is mainly due to costs incurred by <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
(a company merged in <strong>Pirelli</strong> S.p.A.) to file industrial patents.<br />
“Concessions, licenses, trademarks and similar rights” mainly include the costs incurred to extend the number of<br />
software user rights for <strong>Pirelli</strong> S.p.A.’s new integrated information system (SAP/ORACLE).<br />
The major items included in “other” relate to software applications costs, expenses for the development of a new<br />
commercial and financial reporting system, expenses for the Tyre Sector’s CCM project, expenses for the implementation of<br />
e-business solutions, loan acquisition costs and leasehold improvements.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
II) Property, plant and equipment<br />
The movements in property, plant and equipment during the year are as follows:<br />
(in thousands of euros)<br />
12/31/<strong>2002</strong> 12/31/2001<br />
Gross value<br />
• Opening balances 6,394,890 6,238,375<br />
• Translation adjustment (714,050) (269,905)<br />
• Additions 324,963 642,651<br />
• Disposals (270,834) (216,231)<br />
5,734,969 6,394,890<br />
Accumulated depreciation<br />
• Opening balances 3,573,642 3,635,206<br />
• Translation adjustment (390,047) (224,702)<br />
• Depreciation charge 311,954 324,062<br />
• Disposals (152,838) (160,924)<br />
3,342,711 3,573,642<br />
Net book value 2,392,258 2,821,248<br />
The net increase from the prior year is due to the combination of the following:<br />
– translation adjustments, in reference to property, plant and equipment included in the financial statements of foreign<br />
companies;<br />
– additions, which are lower than the prior year, equal to 1.04 times depreciation;<br />
– disposals, mainly in reference to plants as a consequence of production rationalization.<br />
Gross values include about Euros 21,147 thousand of assets which are no longer in use and are being held for transfer to<br />
other Group companies or disposal to third parties.<br />
III) Financial assets<br />
“Investments in subsidiaries” amount to Euros 197 thousand and refer to the investment in AFCAB Holdings<br />
(Proprietary) Ltd (50 percent).<br />
“Investments in jointly controlled subsidiaries” amount to Euros 3,000,888 thousand and refer to the investment in<br />
Olimpia S.p.A. (60 percent) which has been accounted for using the equity method. This amount includes goodwill that will<br />
be amortized over 20 years (Euros 47,030 thousand).<br />
“Investments in associated companies” amount to Euros 30,390 thousand and decreased from Euros 43,595 thousand at<br />
the end of the prior year. The reduction is mainly due to the sale of the 25.3 percent investment in EPIClink S.p.A. to<br />
Telecom Italia S.p.A..<br />
The most important investments in associated companies relate to the following:<br />
(in thousands of euros)<br />
• Power Cables Malaysia Sdn Bhd (Malaysia) 9,243<br />
• Drahtcord Saar GmbH & Co. K.G. (Germany) 5,403<br />
• Rodco Ltd (United Kingdom) 4,131<br />
• Kabeltrommel GmbH & Co K.G. (Germany) 2,810<br />
• STIP Tunisi (Tunisia) 2,410<br />
• SMP Melfi S.r.l. (Italy) 1,807<br />
• Auto Cable Tunisie (Tunisia) 1,796<br />
• K.M.P. Cabos Especiais e Sistemas Ltda (Brazil) 1,353<br />
• Industriekraftwerk (Germany) 521<br />
• Euros Drive Car S.L. (Spain) 129<br />
• Other minor investments 787<br />
30.390<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
“Investments in other companies” amount to Euros 135,940 thousand and include Euros 66,130 thousand of shares<br />
owned in companies listed on the stock exchange and held in the portfolios of <strong>Pirelli</strong> S.p.A., Trefin S.r.l. and <strong>Pirelli</strong> Cavi e<br />
Sistemi Telecom S.p.A.. Such investments consist of shares held in Mediobanca, Impregilo, Società Metallurgica Italiana,<br />
Generale Industrie Metallurgiche, Banca Intesa, Caltagirone Editore and e.Biscom.<br />
The change from the prior year is mainly attributable to the writedown of the investment in e.Biscom S.p.A. by Euros 34,666<br />
thousand, the writedown of the investment in Caltagirone Editore S.p.A. by Euros 24,079 thousand and the subscription to<br />
the share capital increase by F.C. Internazionale <strong>Milan</strong>o S.p.A. for Euros 40,890 thousand, which was offset by the<br />
writedown of the same investment for Euros 18,437 thousand.<br />
“Financial receivables from other companies”, due beyond one year, amount to Euros 55,159 thousand, and include:<br />
– Euros 4,502 thousand of interest-bearing fixed rate loans; the carrying value approximates fair value at the end of the year;<br />
– Euros 26,639 thousand of interest-bearing fixed rate obligatory deposits;<br />
– Euros 8,505 thousand of interest-bearing variable rate loans;<br />
– Euros 2,307 thousand of non-interest bearing security deposits;<br />
– Euros 13,206 thousand of non-interest bearing loans.<br />
Receivables due beyond five years total Euros 26,859 thousand.<br />
“Other securities” total Euros 79,000 thousand compared to Euros 7,462 thousand at December 31, 2001. The change is<br />
mainly due to the reclassification from current financial assets of Convertible Bond Asset Swaps on Olivetti S.p.A. 2010<br />
convertible bonds and Share Swap Transactions on Olivetti S.p.A. shares / Olivetti S.p.A. 2010 convertible bonds held by the<br />
subsidiary <strong>Pirelli</strong> Finance (Luxembourg) S.A.. The strategic value of the Olivetti S.p.A. securities was taken into<br />
consideration in making this reclassification. The effect of adjusting these securities to market value, had they remained in<br />
current financial assets, would have been a writedown of about Euros 69 million.<br />
“Treasury shares” amount to Euros 315,334 thousand, unchanged compared to the prior year. They relate to 163,263,699<br />
ordinary shares, equal to 8.13 percent of share capital (8.51 percent of ordinary shares) for a weighted average carrying<br />
price of Euros 1.93 per share.<br />
46,154,000 of such shares are earmarked for the exercise of subscription rights on <strong>Pirelli</strong> S.p.A. warrants relating to the<br />
IntesaBci Mediocredito S.p.A. (former Mediocredito Lombardo S.p.A.) bonds linked to the loan received of Euros 149,646<br />
thousand. Such rights can be exercised in July 2003 at a price of Euros 3.24 per share.<br />
A comparison of the treasury shares with the average market prices shows a lower value of Euros 153.2 million.<br />
The valuation at cost, which approximates the net equity per share, has been maintained in the financial statements as there<br />
is no permanent impairment in value.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 116
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
C) Current assets<br />
I) Inventories<br />
Inventories amount to Euros 906,338 thousand, compared to Euros 1,025,526 thousand in the prior year, and may be<br />
analyzed as follows:<br />
(in thousands of euros)<br />
12/31/<strong>2002</strong> 12/31/2001<br />
• Energy Cables and Systems Sector 385,211 441,529<br />
• Telecommunications Cables and Systems Sector 91,144 128,240<br />
• Tyres Sector 429,983 455,756<br />
• Other – 1<br />
Total 906,338 1,025,526<br />
II) Receivables<br />
Receivables, which decreased from Euros 2,860,630 thousand in the prior year to Euros 1,733,750 thousand at the end of<br />
<strong>2002</strong>, can be analyzed as follows:<br />
12/31/<strong>2002</strong> 12/31/2001<br />
(in thousands of euros)<br />
Financial Trade and other Financial Trade and other<br />
• Trade – 1,248,155 – 1,653,795<br />
• Subsidiaries – 1,728 – 287<br />
• Associated companies – 1,133 1,298 330<br />
• Parent companies 48 517 96,935 159<br />
• Other receivables 25,069 457,100 340,563 767,263<br />
25,117 1,708,633 438,796 2,421,834<br />
Specifically:<br />
– Trade receivables<br />
Trade receivables from customers by due date are detailed as follows:<br />
(in thousands of euros)<br />
12/31/<strong>2002</strong> 12/31/2001<br />
• Due within 1 year 1,393,681 1,80,271<br />
• Due beyond 1 year 540 6,471<br />
• Allowance for doubtful receivables (146,066) (159,947)<br />
1,248,155 1,653,795<br />
No receivables are due beyond five years.<br />
The carrying value of receivables, adjusted for probable future losses, approximates estimated fair value at year end.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
– Other receivables<br />
Financial receivables amount to Euros 25,069 thousand and mainly consist of receivables from third-party companies. The<br />
reduction from the prior year was mainly due to the repayment of loans receivable from companies in the <strong>Pirelli</strong> & C. A.p.A.<br />
Group.<br />
“Other receivables - Trade and other”, which amount to Euros 457,100 thousand, include the balance of deferred tax assets<br />
of Euros 83,109 thousand; amounts due from the tax authorities of Euros 157,061 thousand; receivables from sales of fixed<br />
assets of Euros 1,542 thousand; receivables from employees of Euros 9,223 thousand and receivables from social security<br />
agencies, export refunds and other minor amounts of Euros 206,165 thousand. Part of the reduction from December 31,<br />
2001 is due to the sale of tax receivables to Unicreditfactoring S.p.A. and Mediofactoring S.p.A.. for Euros 112,815 thousand.<br />
The amount due beyond one year and within five years is Euros 86,895 thousand, while receivables due beyond five years<br />
amount to Euros 85,475 thousand.<br />
III) Current financial assets<br />
“Other securities” amount to Euros 189,925 thousand and include the following:<br />
– Euros 60,838 thousand of fixed rate bonds issued and guaranteed by banking institutions;<br />
– Euros 66,953 thousand of variable rate bonds issued and guaranteed by banking institutions;<br />
– Euros 5,525 thousand of fixed rate bonds issued and guaranteed by governments of various countries;<br />
– Euros 3,183 thousand of variable rate bonds issued and guaranteed by governments of various countries;<br />
– Euros 5,189 thousand of bonds issued and guaranteed by primary issuers;<br />
– Euros 33,589 thousand of equity securities intended for sale;<br />
– Euros 14,648 thousand of premiums paid on call options on Olivetti S.p.A. ordinary shares or Olivetti S.p.A. 2001-2010<br />
convertible bonds.<br />
The securities are held in safe-keeping at leading banking institutions.<br />
IV) Cash and banks<br />
“Bank and postal deposits” are concentrated in the financial companies, holding companies and subholding companies of<br />
the Group. Available liquidity is mainly invested in the short-term deposits market at leading banking counterparts primarily<br />
at interest rates reflecting the market rates at year-end.<br />
D) Accrued income and prepaid expenses<br />
“Accrued income”, calculated on the accrual basis, went from Euros 35,150 thousand to Euros 41,876 thousand. Accrued<br />
income mainly relates to hedging revenues, interest income, insurance and other minor items.<br />
“Prepaid expenses” increased from Euros 36,041 thousand at December 31, 2001 to Euros 41,246 thousand at December<br />
31, <strong>2002</strong>. Prepaid expenses mainly relate to prepaid insurance and building rent.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
LIABILITIES AND SHAREHOLDERS’ EQUITY<br />
A) Shareholders’ equity<br />
Parent company interest<br />
“Share capital” amounts to Euros 1,043,604 thousand at December 31, <strong>2002</strong> and consists of 1,918,925,561 ordinary shares<br />
and 88,006,016 savings shares, all with a par value of Euros 0.52 per share and normal dividend rights.<br />
During the year, 980,888 ordinary shares were issued at par value which, as voted by the Boards of Directors’ Meetings on<br />
March 20, 2000 and November 7, 2000, were assigned to the managers and cadres of the Company and its subsidiaries, as<br />
well as the parent companies and other subsidiaries of the latter, in Italy and abroad.<br />
The “share premium reserve”, equal to Euros 311,958 thousand, decreased by Euros 1,850 thousand due to the<br />
replenishment of the contribution reserve ex Law 904/77, according to and as set forth in art. 22, paragraph 8 of Law 85/95,<br />
following the merger by incorporation of <strong>Pirelli</strong> Cavi e Sistemi S.p.A. in <strong>Pirelli</strong> S.p.A..<br />
The “revaluation reserve” which includes the reserve ex law No. 413/1991 of Euros 1,883 thousand and the reserve ex law<br />
No. 72/1983 of Euros 972 thousand, has remained unchanged compared to December 31, 2001.<br />
The statement of changes in shareholders’ equity is presented in the supplementary information.<br />
Minority interest<br />
The minority interest in shareholders' equity amounts to Euros 181,673 thousand, compared to Euros 198,163 thousand at<br />
the end of the prior year. The change derives from the balance of the results for the year <strong>2002</strong>, the payment of dividends<br />
and the translation adjustment from the conversion of foreign currency financial statements to Euros.<br />
The main percentage of investments held by the minority interest is as follows:<br />
12/31/<strong>2002</strong> 12/31/2001<br />
Celikord A.S. (Turkey) 49.00% 49.00%<br />
Sicable S.A. (Ivory Coast) 49.00% 49.00%<br />
P & A.K.K. (Japan) 32.85% 49.00%<br />
Tianjin Top Power Cables Co. Ltd (China) 33.00% 48.86%<br />
Turk <strong>Pirelli</strong> Lastikleri A.S. (Turkey) 36.94% 36.94%<br />
BICCGeneral Baosheng Cable Co. Ltd (China) 33.00% 33.00%<br />
<strong>Pirelli</strong> Telecom Cables Co. Ltd Wuxi (China) 28.16% 30.90%<br />
Alexandria Tire Co. S.A.E. (Egypt) 13.19% 17.27%<br />
Turk <strong>Pirelli</strong> Kablo ve Sistemleri A.S. (Turkey) 16.25% 16.25%<br />
Solac Soc. Laminadora Ltda (Brazil) 11.00% 11.00%<br />
<strong>Pirelli</strong> Submarine Telecom Systems Holding B.V. (The Netherlands) 10.00% 10.00%<br />
<strong>Pirelli</strong> de Venezuela C.A. (Venezuela) 3.78% 3.78%<br />
Pir. Telecomunicaçoes Cabos e Sistemas S.A. (Brazil) 0.59% 0.67%<br />
<strong>Pirelli</strong> Energia Cabos e Sistemas S.A. (Brazil) 0.59% 0.67%<br />
<strong>Pirelli</strong> Pneus S.A. (Brazil) 0.31% 0.44%<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 119
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
B) Provisions for liabilities and expenses<br />
“Provisions for pensions and similar obligations” include accruals for pensions, health care and other benefits in favor<br />
of employees, not governed by specific laws but covered by local labor agreements and benefit plans operating at some<br />
Group companies.<br />
In those companies operating in the U.S.A. and the United Kingdom where the defined benefit pension schemes are in place,<br />
the comparison between the liability for future obligations towards those entitled to benefits and the value of assets<br />
invested by the plans shows, at December 31, <strong>2002</strong>, a deficit valued at about Euros 150 million, which will be amortized<br />
over the remaining service period of the participants in the plan in accordance with suitable actuarial methods. The deficit<br />
arose in the last part of the year as a result of the continuous deterioration of the financial markets with the consequent<br />
reduction in the value of plan assets.<br />
The “provisions for income taxes” include accruals relating to income taxes likely to be incurred but uncertain as to the<br />
amount or the date on which they will arise, as well as deferred taxation, as follows:<br />
(in thousands of euros)<br />
12/31/<strong>2002</strong> 12/31/2001<br />
• Provision for current taxes 37,264 25,593<br />
• Provision for deferred taxes 144,160 171,671<br />
181,424 197,264<br />
The tax charge for the year is composed of the following:<br />
(in thousands of euros)<br />
12/31/<strong>2002</strong> 12/31/2001<br />
• Current taxes 57,721 120,594<br />
• Deferred taxes 3,839 17,004<br />
61,560 137,598<br />
The lower current and deferred tax expense compared to the prior year is mainly due to the reduction in results reported by<br />
companies, especially by the Energy and Telecom Cables and Systems Sectors.<br />
The Group companies which show tax liabilities generally display tax rates in line with the nominal rates applicable in the<br />
countries in which they operate.<br />
The tax rates in the principal countries in which the Group operates are as follows:<br />
Europe:<br />
Rest of the World:<br />
Italy 40.25% U.S.A. 40.00%<br />
France 35.43% Canada 33.00%<br />
Spain 35.00% Argentina 35.00%<br />
Germany 38.00% Brazil 34.00%<br />
United Kingdom 30.00% Venezuela 34.00%<br />
Turkey 33.00% Australia 30.00%<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 120
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Other provisions<br />
The movements during the year in “Other provisions” are as follows:<br />
(in thousands of euros)<br />
Restructuring costs Other Total<br />
Balance at December 31, 2001 200,225 176,109 376,334<br />
• Translation adjustment (4,621) (6,692) (11,313)<br />
• Utilization (294,642) (96,152) (390,794)<br />
• Increase 275,189 58,232 333,421<br />
Balance at December 31, <strong>2002</strong> 176,151 131,497 307,648<br />
Utilizations of the provision for restructuring costs were in respect of the Energy Cables and Systems Sector for Euros<br />
133,392 thousand, Telecommunications Cables and Systems Sector for Euros 98,201 thousand and the Tyres Sector for Euros<br />
31,523 thousand. The balance of the provision relates to the Energy Cables and Systems Sector for Euros 104,557 thousand,<br />
Telecommunications Cables and Systems Sector for Euros 42,048 thousand and the Tyres Sector for Euros 7,571 thousand.<br />
The increase in the provision for restructuring costs mainly relates to the reorganization plan for the industrial structures.<br />
The total of other provisions of Euros 131,497 thousand includes accruals for litigation, industrial risks and claims, product<br />
warranties, and other contingencies.<br />
D) Payables<br />
Payables amount to Euros 3,755,625 thousand, compared to Euros 4,902,509 thousand in the prior year, and may be analyzed<br />
as follows:<br />
12/31/<strong>2002</strong> 12/31/2001<br />
(in thousands of euros)<br />
Financial Trade and other Financial Trade and other<br />
• Bonds 1,000,004 - 500,004 -<br />
• Bank borrowings 938,818 - 1,787,153 -<br />
• Other financial companies 116,913 - 114,210 -<br />
• Advances from customers - 84,484 - 128,962<br />
• Trade - 1,054,892 - 1,224,004<br />
• Subsidiaries - 2 - -<br />
• Associated companies 752 20,560 71 3,094<br />
• Parent companies 1,323 1,165 205,966 473<br />
• Taxes - 148,484 - 495,492<br />
• Social security agencies - 52,913 - 47,523<br />
• Other payables - 335,315 - 395,557<br />
2,057,810 1,697,815 2,607,404 2,295,105<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
The analysis of payables by due date is as follows:<br />
• Financial payables<br />
(in thousands of euros)<br />
12/31/<strong>2002</strong> 12/31/2001<br />
within 1 year beyond 1 year within 1 year beyond 1 year<br />
• Bonds 4 1,000,000 4 500,000<br />
• Bank borrowings 531,846 406,972 975,560 811,593<br />
• Other financial companies 58,280 58,633 55,102 59,108<br />
• Associated companies 752 - 71 -<br />
• Parent companies 1,323 - 205,966 -<br />
592,205 1,465,605 1,236,703 1,370,701<br />
Financial payables are secured by liens and mortgages of Euros 40,098 thousand.<br />
Financial payables due beyond five years amount to Euros 1,097,445 thousand.<br />
Additional disclosure is provided as follows:<br />
– Bonds<br />
These refer to <strong>Pirelli</strong> S.p.A. 1998-2008 bonds of Euros 500 million, issued on October 21, 1998, paying interest at 4.875<br />
percent and repayable in a one-off payment on October 21, 2008. They also includes bonds of Euros 500,000 million issued<br />
in <strong>2002</strong> by the subsidiary <strong>Pirelli</strong> Finance (Luxembourg) S.A. maturing April 4, 2007 and paying interest at a fixed rate of 6.5<br />
percent.<br />
– Bank borrowings<br />
Bank borrowings due within one year amount to Euros 531,846 thousand and include the current portion of long-term debt<br />
of Euros 40,896 thousand.<br />
Bank borrowings due beyond one year amount to Euros 406,972 thousand and include of floating rate loans of Euros<br />
250,241 thousand and fixed rate loans of Euros 156,731 thousand.<br />
– Payables to other financial companies<br />
The amount due beyond one year includes an amount of Euros 31,901 thousand payable after five years.<br />
– Payables to parent companies<br />
These relate to the current balances between <strong>Pirelli</strong> Servizi Finanziari S.p.A. and <strong>Pirelli</strong> & C. A.p.A..<br />
• Trade and other payables<br />
(in thousands of euros)<br />
12/31/<strong>2002</strong> 12/31/2001<br />
within 1 year beyond 1 year within 1 year beyond 1 year<br />
• Advances from customers 82,493 1,991 128,962 -<br />
• Trade 1,054,892 - 1,224,004 -<br />
• Subsidiaries 2 - - -<br />
• Associated companies 20,560 - 3,094 -<br />
• Parent companies 1,165 - 473 -<br />
• Taxes 107,095 41,389 423,279 72,213<br />
• Social security agencies 52,913 - 47,523 -<br />
• Other payables 299,275 36,040 362,075 33,482<br />
1,618,395 79,420 2,189,410 105,695<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
– Payables to associated companies<br />
As for trade payables, the most significant amounts refer to Société Tunisienne des Industries De Pnéumatiques S.A. (Euros<br />
16,023 thousand) and Drahtcord Saar GmbH & Co. K.G. (Euros 2,399 thousand).<br />
– Payables to parent companies<br />
These relate to amounts payable by <strong>Pirelli</strong> S.p.A. to <strong>Pirelli</strong> & C. A.p.A. for corporate secretarial services and internal<br />
auditing.<br />
– Taxes payable<br />
The reduction in taxes payable is principally due to the final payment of income taxes on the sale of Optical Technologies to<br />
Corning, accrued in prior years.<br />
– Other payable<br />
These amount to Euros 335,315 thousand and mainly include payables to employees of Euros 77,543 thousand, security<br />
deposits from customers for packaging of Euros 9,258 thousand, legal and consulting fees of Euros 7,180 thousand,<br />
purchases of fixed assets of Euros 27,658 thousand and notes payable of Euros 54,047 thousand.<br />
E) Accrued liabilities and deferred income<br />
“Accrued liabilities” increased from Euros 226,690 thousand at December 31, 2001 to Euros 239,465 thousand.<br />
They include the portion of exchange differences on hedging transactions, property leases payable, hedging costs and other<br />
minor items.<br />
“Deferred income” decreased from Euros 29,678 thousand to Euros 20,673 thousand. They include installment payments<br />
received in advance.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
MEMORANDUM ACCOUNTS<br />
Memorandum accounts amount to Euros 4,473,508 thousand compared to Euros 5,107,746 thousand in the prior year.<br />
Personal guarantees<br />
– Sureties on behalf of other companies<br />
These are mainly given to guarantee loans received and job orders in the process of being delivered or tested.<br />
Third party assets held in deposit<br />
– Securities held in deposit<br />
These include securities entrusted for administration.<br />
Assets held by third parties<br />
– Securities held as guarantees and sureties<br />
These include securities owned by the Group and held by third parties in deposit as guarantees or entrusted for<br />
administration and also sureties given by <strong>Pirelli</strong> S.p.A. against commitments and contractual obligations.<br />
Commitments and contingencies<br />
– Nominal value of put options given to third parties<br />
The amount represents the nominal value of the options given to IntesaBci S.p.A. (Euros 520,000 thousand) and Unicredito<br />
Italiano S.p.A. (Euros 520,000 thousand) (hereinafter, the “Banks”) and to Edizione Holding S.p.A. (Euros 1,040,000<br />
thousand) in respect of their investments in Olimpia S.p.A., under the Olimpia S.p.A. shareholder agreements.<br />
The put options granted to the Banks can be exercised from September 2006 or, before that date, in the case of a deadlock<br />
among the shareholders or in the case of the withdrawal of <strong>Pirelli</strong> S.p.A. from the shareholders agreements, at a price equal<br />
to the value of the economic capital of Olimpia S.p.A., plus a premium (the “Price”). This Price shall be determined by the<br />
parties and shall not be less than the outlays made by the banks (Floor) nor higher than such sum, less any dividends<br />
received, increased by an annual IRR, before income taxes, equal to 15 percent (Cap).<br />
The put options granted to Edizione Holding S.p.A. can be exercised in the case of a (I) deadlock situation among the<br />
shareholders, (II) withdrawal on the part of <strong>Pirelli</strong> S.p.A. from the shareholder agreements and (III) the occurrence of a<br />
substantial change in the controlling structure of <strong>Pirelli</strong> S.p.A. (including for these purposes <strong>Pirelli</strong> & C. Accomandita per<br />
Azioni), by which is meant the exercise by parties other than those currently holding the determining power to nominate the<br />
majority of the components of the management board, with a consequent potential modification of the strategic guidelines.<br />
The exercise price of the put options granted to Edizione Holding S.p.A. is equal to, respectively, (I) the Price indicated above,<br />
(II) the Price increased by an additional 50 percent and (III) the Price increased by an amount equal to 200 percent of the<br />
Price. In this case, however, there is no expectation of a Floor or Cap as in the aforementioned agreements with the Banks.<br />
This item also includes the nominal value of the option given to Cisco Systems on the <strong>Pirelli</strong> Submarine Telecom Systems<br />
Holding B.V. shares which it holds. This amount (U.S. $75 million) is already shown in the financial statements under the<br />
minority interest in shareholders’ equity.<br />
Other memorandum accounts<br />
– Forward securities purchase<br />
This refers to the forward purchase (expiration date of November 23, 2006) of 200,000,000 Olivetti 2001-2010 convertible<br />
bonds effected with Credit Agricole Lazard Financial Products Bank as described in the Directors’ <strong>Report</strong> on operations.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
FINANCIAL INSTRUMENTS<br />
It is the Group's policy to reduce financial risks deriving from international activities conducted in research, manufacturing<br />
and distribution through operating and financial management decisions.<br />
To this end, the Group uses forward exchange contracts and derivative financial instruments to protect its operating results<br />
from unfavorable fluctuations of exchange and interest rates and the prices of raw materials. The Group policy is to use<br />
financial instruments in the normal course of business and not for speculative purposes. With an overall view towards<br />
reducing exposure to risk, the Group deals exclusively with leading bank counterparts and in highly liquid instruments.<br />
The following table gives the position of derivative financial instruments in the major currencies:<br />
Exchange rate risk<br />
(in millions of euros)<br />
Gross notional amounts Fair Maturing Maturing<br />
(at year-end exchange rates) value within one year beyond one year<br />
• Forward contracts 2,430 2,388 2,380 8<br />
• Swaps contracts 576 694 - 694<br />
• Futures contracts 225 - - -<br />
Interest rate risk<br />
• Forward rate agreement - 1 1 -<br />
• Interest rate swaps - 43 43 -<br />
Raw materials price risk<br />
• Futures contracts 1 1 1 -<br />
The fair value of derivative financial instruments used to hedge exchange, interest rate and materials price risks,<br />
approximates the fair value of the positions being hedged.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
CONSOLIDATED STATEMENTS OF INCOME<br />
A) Production value<br />
• Revenues from sales and services<br />
The distribution of sales by geographical area of destination and industry sector are reported in the following table.<br />
(in thousands of euros)<br />
Geographical area <strong>2002</strong> 2001<br />
Europe<br />
• Italy 1,132,272 17.94% 1,181,268 15.73%<br />
• Other European countries 2,759,848 43.73% 3,377,174 44.97%<br />
North America 731,366 11.59% 1,017,876 13.56%<br />
Central and South America 778,441 12.33% 904,938 12.05%<br />
Oceania, Africa and Asia 909,549 14.41% 1,027,964 13.69%<br />
Sector<br />
6,311,476 100.00% 7,509,220 100.00%<br />
Energy Cables and Systems Sector 3,021,391 47.86% 3,457,938 46.05%<br />
Telecommunications Cables and Systems 468,151 7.42% 1,230,000 16.38%<br />
Tyres 2,857,000 45.27% 2,831,171 37.70%<br />
Other 114,638 1.82% 109,545 1.46%<br />
Inter-elimination (149,704) (2.37%) (119,434) (1.59%)<br />
6,311,476 100.00% 7,509,220 100.00%<br />
The distribution of sales by destination and by major product category is commented in the Directors' <strong>Report</strong> on operations.<br />
• Other revenues and income<br />
The caption "miscellaneous" includes rent income, commissions, insurance indemnities and refunds, gains from the ordinary<br />
disposal of property, plant and equipment and other minor items. Last year, the caption included the supply agreement with<br />
Cisco Systems (Euros 59 million).<br />
B) Production costs<br />
• Service expenses<br />
(in thousands of euros)<br />
<strong>2002</strong> 2001<br />
• Selling expenses 345,868 385,578<br />
• Ordinary maintenance costs 71,840 81,265<br />
• Outside processing costs 35,132 35,678<br />
• Electrical power costs 166,400 162,320<br />
• EDP expenses 41,924 44,605<br />
• Insurance costs 45,600 41,576<br />
• Advertising costs 117,867 126,655<br />
• Consulting fees 38,861 46,107<br />
• Employee loan costs 22,259 23,585<br />
• Technical assistance and other minor expenses 188,734 233,666<br />
1,074,485 1,181,035<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
• Lease and rent expenses<br />
Lease and rent expenses mainly consist of rent expenses of Euros 47,661 thousand, operating lease installments of Euros<br />
17,219 thousand and patent utilization rights of Euros 5,329 thousand.<br />
• Personnel costs<br />
Personnel costs consist of the following:<br />
(in thousands of euros)<br />
<strong>2002</strong> 2001<br />
• Salaries and wages 1,037,277 1,169,424<br />
• Social security costs 229,052 249,276<br />
• Leaving idemnity 41,559 38,308<br />
• Pension and similar costs 26,187 21,898<br />
• Other costs 18,356 22,832<br />
1,352,431 1,501,738<br />
• Depreciation of property, plant and equipment<br />
The depreciation charge for property, plant and equipment can be analyzed as follows:<br />
(in thousands of euros)<br />
<strong>2002</strong> 2001<br />
• Buildings 31,139 32,668<br />
• Plant and machinery 201,814 212,406<br />
• Commercial and industrial equipment 45,300 41,482<br />
• Other assets 33,701 37,506<br />
311,954 324,062<br />
• Other operating expenses<br />
(in thousands of euros)<br />
<strong>2002</strong> 2001<br />
• Administrative expenses 13,718 21,992<br />
• Travel expenses 57,171 68,777<br />
• Revenue stamps and local taxes 30,870 31,680<br />
• Losses on the disposal of property, plant and equipment 6,162 7,891<br />
• Legal fees 7,265 11,140<br />
• Association dues 8,273 8,177<br />
• Entertainment expenses 4,851 8,011<br />
• Other minor expenses 116,958 66,213<br />
245,268 223,881<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
C) Financial income ad expenses<br />
• Investment income<br />
(in thousands of euros)<br />
<strong>2002</strong> 2001<br />
• Dividends from subsidiaries 1,388 1,117<br />
• Dividends from other companies 6,377 5,442<br />
• Other income 7,692 1,195<br />
15,457 7,754<br />
• Other financial income<br />
“Income other than the above” consists of the following:<br />
(in thousands of euros)<br />
<strong>2002</strong> 2001<br />
• Interest from subsidiaries - 2<br />
• Interest from jointly controlled companies - 75<br />
• Interest from associated companies 585 1,038<br />
• Interest from parent companies 1,422 3,157<br />
• Bank interest and other interest 52,233 187,932<br />
• Other financial income from parent companies 11 155<br />
• Miscellaneous financial income 55,021 35,940<br />
• Gains on exchange 392,449 217,553<br />
501,721 445,852<br />
Miscellaneous financial income includes revenues from forward contracts, gains on the sale of fixed rate securities,<br />
interest on receivables due from the tax authorities and other minor financial income.<br />
• Interest and other financial expenses<br />
These expenses include:<br />
(in thousands of euros)<br />
<strong>2002</strong> 2001<br />
• Interest to associated companies 46 46<br />
• Interest to parent companies 6,021 402<br />
• Bond interest 48,840 24,375<br />
• Bank interest and interest to other financial companies 123,213 134,444<br />
• Other financial expenses to subsidiaries - 38<br />
• Other financial expenses to associated companies - 102<br />
• Other financial expenses to parent companies 17,245 11,710<br />
• Miscellaneous financial expenses 108,926 80,335<br />
• Losses on exchange 398,937 226,743<br />
703,228 478,195<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Miscellaneous financial expenses include costs for forward contracts, losses on the sale of fixed rate securities, bank<br />
commissions and other minor financial expenses.<br />
Financial expenses net, excluding amounts not directly associated with receivables and payables, amount to Euros 123,880<br />
thousand.<br />
D) Valuation adjustments to financial assets<br />
• Writedowns<br />
Writedowns amount to Euros 230,147 thousand and mainly include the share of the results of Olimpia S.p.A., accounted for<br />
using the equity method, of Euros 149,953 thousand, the writedown of the investment in F.C. Internazionale <strong>Milan</strong>o S.p.A. of<br />
Euros 18,437 thousand, the writedown of the investment in e.Biscom S.p.A. of Euros 34,666 thousand and the writedown of<br />
the investment in Caltagirone Editore S.p.A. of Euros 24,079 thousand.<br />
E) Extraordinary items<br />
• Extraordinary income<br />
Extraordinary income amounts to Euros 46,519 thousand compared to Euros 230,025 thousand in the prior year, and may be<br />
analyzed as follows:<br />
(in thousands of euros)<br />
<strong>2002</strong> 2001<br />
• Gains on disposals 31,574 103,643<br />
• Miscellaneous 14,945 126,382<br />
46,519 230,025<br />
“Gains on disposal” mainly include Euros 16,460 thousand on the sale of Bicocca degli Arcimboldi and the representative<br />
offices in Rome to <strong>Pirelli</strong> & C. A.p.A., Euros 7,920 thousand on the sale of a portion of the Settimo Torinese building to<br />
Tiglio I S.r.l., Euros 1,204 thousand on the sale of Minto – Australia and real estate gains realized in Great Britain of Euros<br />
3,747 thousand.<br />
Last year, the caption included Euros 30,285 thousand of gains on the sale of <strong>Pirelli</strong> S.p.A. treasury shares on the market<br />
and Euros 72,102 thousand of gains on the disposal of real estate properties by the Cables and Systems Sector.<br />
“Miscellaneous” principally includes the adjustment for the higher tax credit of Euros 5,108 thousand on dividends<br />
received by the parent company, other prior years’ taxes of Euros 2,465 thousand relating to the company <strong>Pirelli</strong> Labs and<br />
the remaining amount relates to insurance compensation, sundry refunds and other minor items.<br />
Last year, this caption primarily included an earn-out of Euros 70,497 thousand on the closing of agreements with Cisco<br />
Systems for the sale of the Terrestrial Optical Systems business, the price adjustment with BICC of Euros 16,626 thousand<br />
for the activities purchased, the gain of Euros 5,927 thousand from the pay-off of part of the share capital of <strong>Pirelli</strong> Société<br />
Générale S.A. – Basel and income of Euros 11,000 thousand for higher tax credits on dividends received in 2001.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
• Extraordinary expenses<br />
Extraordinary expenses amount to Euros 309,182 thousand, compared to Euros 246,388 thousand in the prior year. They<br />
may be analyzed as follows:<br />
(in thousands of euros)<br />
<strong>2002</strong> 2001<br />
• Losses on disposals 1,777 1,119<br />
• Miscellaneous 307,405 245,269<br />
309,182 246,388<br />
“Miscellaneous” mainly includes Euros 275 million for the restructuring costs of the industrial structure.<br />
Other informations<br />
• Directors' and statutory auditors' fees<br />
Fees to the directors and statutory auditors of <strong>Pirelli</strong> S.p.A., who also carry out these functions in other companies included<br />
in consolidation, are as follows:<br />
(in thousands of euros)<br />
Directors 12,588<br />
Statutory auditors 190<br />
12,778<br />
• Employees<br />
The average number of employees in companies included in consolidation, by category, is as follows:<br />
Senior executives 566<br />
Staff 9,597<br />
Blue-collar 24,896<br />
Temporary employment 2,650<br />
37,709<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Exchange rates<br />
The main exchange rates used for the translation of foreign currency financial statements in the consolidated financial<br />
statements are as follows:<br />
(local currency against euros)<br />
Year-end<br />
Average<br />
Change<br />
Change<br />
12/31/<strong>2002</strong> 12/31/2001 in % <strong>2002</strong> 2001 in %<br />
Europe<br />
British pound 0.6505 0.6085 6.90% 0.6288 0.62172 1.14%<br />
Swiss franc 1.4524 1.4829 (2.06%) 1.4670 1.5102 (2.86%)<br />
Hungarian forint 236.2900 245.1800 (3.63%) 242.9587 256.5446 (5.30%)<br />
Slovakian koruna 41.5030 42.2610 (1.79%) 42.6933 43.2811 (1.36%)<br />
North America<br />
American dollar 1.0487 0.8813 18.99% 0.9454 0.8954 5.58%<br />
Canadian dollar 1.6550 1.4077 17.57% 1.4835 1.3865 7.00%<br />
South America<br />
Brazilian real 3.7054 2.0450 81.19% 2.7709 2.1062 31.56%<br />
Venezuelan bolivar 1,471.3261 667.1441 120.54% 1,112.7547 647.6493 71.81%<br />
Argentine peso 3.5341 1.4100 150.65% 3.0120 0.8954 236.39%<br />
Oceania<br />
Australian dollar 1.8556 1.7280 7.38% 1.7374 1.7320 0.31%<br />
Asia<br />
Chinese yuan RMB 8.6832 7.2942 19.04% 7.8250 7.3827 5.99%<br />
Singapore dollar 1.8199 1.6269 11.86% 1.6909 1.6048 5.37%<br />
Indonesian rupiah 9,338.6735 9,121.0000 2.39% 8,794.7906 9,165.0000 (4.04%)<br />
Africa<br />
Egyptian pound 4.8398 4.0187 20.43% 4.3581 3.6236 20.27%<br />
Ivory Coast franc 655.957 655.957 0.00% 655.9570 655.9570 0.00%<br />
Net financial position<br />
The composition of the net financial position, the increase of which is commented in the introduction to the Directors’<br />
<strong>Report</strong> on operations, is presented as follows:<br />
(in thousands of euros)<br />
<strong>2002</strong> 2001<br />
• Short-term financial payables 592,205 1,236,708<br />
• Accrued interest expenses 50,320 11,702<br />
• Cash and banks (328,719) (442,061)<br />
• Other securities (189,925) (552,952)<br />
• Short-term financial receivables (27,339) (439,864)<br />
• Accrued interest income (22,233) (7,294)<br />
Net short-term (liquidity)/debt 74,309 (193,761)<br />
• Medium/long-term financial payables 1,465,605 1,370,701<br />
• Medium/long-term financial receivables (69,826) (80,193)<br />
• Other securities (1,558) (7,462)<br />
Net medium/long-term debt 1,394,221 1,283,046<br />
Net financial position 1,468,530 1.089,285<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
R & D expenditures<br />
In <strong>2002</strong>, the Group incurred research and development expenditures and technical management costs for a total of Euros<br />
219 million, entirely charged to operating expenses, compared to Euros 237 million in the prior year. <strong>2002</strong> expenditures<br />
represent 3.5 percent of consolidated net sales (3.2 percent in 2001).<br />
Such costs are detailed by geographical area as follows:<br />
Europe 92% Oceania 1%<br />
North America 3% South America 4%<br />
A number of research programs are subsidized by the governments of various countries. In particular, in Italy, where the<br />
research activities are mainly concentrated, the projects financed under the various laws are numerous and apply, in<br />
differing proportions, to all sectors of activity.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Supplementary information<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Consolidated statements of cash flow<br />
(in thousands of euros)<br />
1/1-12/31/<strong>2002</strong> 1/1-12/31/2001<br />
Net liquidity (debt), at beginning of year (1,089,285) 3,495,224<br />
Translation adjustments (5,110) (2,795)<br />
Operating profit 117,390 294,915<br />
Depreciation and amortization 362,460 370,633<br />
Increase in intangible assets (43,264) (90,125)<br />
Increase in property, plant and equipment (324,963) (642,651)<br />
Increase in financial assets (61,921) (3,269,807)<br />
Disposal of intangible assets 764 1,909<br />
Disposal of property, plant and equipment 35,856 31,601<br />
Disposal of financial assets 18,116 4,086<br />
Net investments (375,412) (3,964,987)<br />
Changes in inventories 16,510 168,448<br />
Changes in trade and other accounts receivable/payable 356,597 (252,649)<br />
Changes in working capital 373,107 (84,200)<br />
Changes in employee - related provisions and other provisions (35,763) (44,136)<br />
Other changes (22,653) 29,400<br />
Free cash flow 419,129 (3,398,375)<br />
Extraordinary items, net (262,661) (16,364)<br />
Financial expenses, net (173,313) (54,740)<br />
Income taxes, net (61,561) (137,598)<br />
Purchase/sale of treasury shares - 94,183<br />
Other changes (147,936) (816,889)<br />
Cash flows before dividends (226,342) (4,329,782)<br />
Dividends paid (149,420) (287,169)<br />
Net Cash Flows (375,762) (4,616,951)<br />
Share capital increase <strong>Pirelli</strong> S.p.A. 510 29,158<br />
Share capital increase minority interest 1,117 6,080<br />
Changes in share capital 1,627 35,238<br />
Changes in net financial position (*) (379,245) (4,584,509)<br />
Net liquidity (debt), at end of year (1,468,530) (1,089,285)<br />
(*) Financed by:<br />
Increase (decrease) in long-term loans 111,175 60,696<br />
Increase (decrease) in short-term loans (208,303) 580,376<br />
Decrease (increase) in cash and banks and cash equivalents 476,373 3,943,437<br />
379,245 4,584,509<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 134
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Consolidated statements of changes un shareholders’ equity<br />
Share Cumulative Other reserves (*)<br />
Share premium Legal translation retained earnings<br />
capital reserve reserve reserve net income (loss) Total<br />
Balance at December 31, 2000 1,035,261 262,160 206,430 107,451 4,144,777 5,756,079<br />
Profit distribution, as per resolution of May 8, 2001<br />
• to Legal Reserve 622 (622) -<br />
• dividends to shareholders (286,217) (286,217)<br />
• to directors (14,141) (14,141)<br />
January subscription of No. 355,200 ordinary shares 185 676 861<br />
February subscription of No. 8,689,484 ordinary shares 4,518 13,966 18,484<br />
March subscription of No. 4,701,006 ordinary shares 2,444 4,814 7,258<br />
May subscription of No. 583,900 ordinary shares 304 1,316 1,620<br />
June subscription of No. 121,000 ordinary shares 63 273 336<br />
July subscription of No. 510,730 ordinary shares 266 279 545<br />
August subscription of No. 102,780 ordinary shares 54 54<br />
Drawn from share premium reserve to reestablish reserve<br />
for treasury shares in portfolio 30,324 (30,324)<br />
Adjustment from translation of foreign currency financial statements (105,365) (105,365)<br />
Net income for the year 82,299 82,299<br />
Balance at December 31, 2001 1,043,095 313,808 207,052 2,086 3,895,772 5,461,813<br />
Profit distribution, as per resolution of May 9, <strong>2002</strong><br />
(in thousands of euros)<br />
• to Legal Reserve 1,567 (1,567) -<br />
• dividends to shareholders (148,409) (148,409)<br />
• to directors (12,808) (12,808)<br />
January subscription of No. 209,310 ordinary shares 109 109<br />
February subscription of No. 377,188 ordinary shares 196 196<br />
March subscription of No. 394,390 ordinary shares 204 204<br />
Drawn from share premium reserve to reestablish merger<br />
reserve ex Law 904/77, according to and for the effects<br />
of art. 22, paragraph 8, of Law 85/95 (1,850) 1,850 -<br />
Adjustment from translation of foreign currency<br />
financial statements (293,008) (293,008)<br />
Net loss for the year (614,043) (614,043)<br />
Balance at December 31, <strong>2002</strong> 1,043,604 311,958 208,619 (290,922) 3,120,795 4,394,054<br />
(*) The item "Other reserves" includes the Revaluation reserve, the Reserve for treasury shares in portfolio, the Merger reserve, the Reserve from contributions and the<br />
Consolidation reserve.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 135
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Reconciliation of net results and shareholders’ equity of <strong>Pirelli</strong> S.p.A.<br />
and correponding consolidated figures of the group at December 31, 2001<br />
(in thousands of euros)<br />
Share<br />
capital Reserves Net income Total<br />
<strong>Pirelli</strong> S.p.A. financial statements 1,043,604 3,780,537 112,098 4,936,239<br />
Earnings (losses) for the year of consolidated companies<br />
(before consolidation adjustments) (376,774) (376,774)<br />
Capital and reserves of consolidated companies<br />
(before consolidation adjustments) 2,506,613 2,506,613<br />
Consolidation adjustments:<br />
– carrying value of investments in consolidated companies (2,261,991) (2,261,991)<br />
– intragroup dividends 252,813 (325,073) (72,260)<br />
– other (313,479) (24,294) (337,773)<br />
Group 1,043,604 3,964,493 (614,043) 4,394,054<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 136
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
List of investments<br />
Companies consolidated using the full consolidation method<br />
Percentage Percentage<br />
Company Business Headquarters Share Capital owner. of vote Held by<br />
Europe<br />
Austria<br />
<strong>Pirelli</strong> Gesellschaft mbH Tyre Vienna Euro 726,728 100.00% Lunares S.A.<br />
<strong>Pirelli</strong>-Oekw GmbH Energy Cables and Systems Vienna Euro 2,071,176 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
Belgium<br />
<strong>Pirelli</strong> Tyres Belux S.A. Tyre Bruxelles Euro 700,000 100.00% Lunares S.A.<br />
Finlandia<br />
<strong>Pirelli</strong> Cables and Systems OY Energy Cables and Systems Helsinki Euro 10,000,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
France<br />
<strong>Pirelli</strong> Energie Câbles et<br />
Eurelectric S.A. Energy Cables and Systems La Bresse Euro 4,036,500 100.00% Systèmes France S.A.<br />
<strong>Pirelli</strong> Moto France - PMF S.a.s. Tyre Gonesse Euro 77,000 100.00% Metzeler Reifen GMBH<br />
<strong>Pirelli</strong> Energie Câbles<br />
et Systèmes France S.A. Energy Cables and Systems Paron de Sens Euro 136,800,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Telecom Câbles Telecom Cables<br />
et Systèmes France S.A. and Systems Bagnolet Cedex Euro 16,295,000 100.00% <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
Pneus <strong>Pirelli</strong> S.A. Tyre Puteaux Euro 3,062,400 100.00% Lunares S.A.<br />
<strong>Pirelli</strong> Energie Câbles et<br />
Superent Bis France S.A. Energy Cables and Systems Bagnolet Cedex Euro 40,000 100.00% Systèmes France S.A.<br />
Germany<br />
Bergmann Kabel und<br />
<strong>Pirelli</strong> Kabel und Systeme<br />
Leitungen GmbH Energy Cables and Systems Schwerin Euro 1,022,600 100.00% Holding GmbH<br />
Deutsche <strong>Pirelli</strong> Reifen<br />
Holding GmbH Financial Breuberg/Odenwald Euro 7,694,943 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
ISO Industrie Spedition<br />
<strong>Pirelli</strong> Reifenwerke<br />
Odenwald GmbH Tyre Breuberg/Odenwald Euro 25,565 100.00% GmbH & Co. K.G.<br />
Materialverwertungsgesellschaft<br />
Breuberg GmbH Tyre Breuberg/Odenwald Euro 25,565 100.00% Deutsche <strong>Pirelli</strong> Reifen Holding GmbH<br />
Metzeler Reifen GmbH Tyre Breuberg/Odenwald Euro 16,361,340 100.00% <strong>Pirelli</strong> Deutschland A.G.<br />
<strong>Pirelli</strong> Deutschland A.G. Tyre Breuberg/Odenwald Euro 26,075,886 100.00% Deutsche <strong>Pirelli</strong> Reifen Holding GmbH<br />
<strong>Pirelli</strong> Kabel<br />
<strong>Pirelli</strong> Kabel und Systeme<br />
Grundstücksverwaltungs GmbH Energy Cables and Systems Berlin Euro 25,600 100.00% Holding GmbH<br />
<strong>Pirelli</strong> Kabel und Systeme<br />
<strong>Pirelli</strong> Kabel und Systeme<br />
Beteiligungs GmbH Energy Cables and Systems Berlin Euro 25,600 100.00% Holding GmbH<br />
<strong>Pirelli</strong> Kabel und Systeme<br />
Holding GmbH Energy Cables and Systems Berlin Euro 26,000 99.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
1.00% <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A.<br />
<strong>Pirelli</strong> Kabel und Systeme GmbH<br />
(formerly <strong>Pirelli</strong> Kabel und Systeme<br />
<strong>Pirelli</strong> Kabel und Systeme<br />
Verwaltungs GmbH) Energy Cables and Systems Berlin Euro 50,000 100.00% Beteiligungs GmbH<br />
<strong>Pirelli</strong> Reifenwerke<br />
Deutsche <strong>Pirelli</strong> Reifen<br />
Geschaeftsfuehrungs GmbH Services Breuberg/Odenwald Euro 25,565 100.00% Holding GmbH<br />
<strong>Pirelli</strong> Reifenwerke<br />
GmbH & Co. K.G. Tyre Breuberg/Odenwald Euro 35,790,943 100.00% <strong>Pirelli</strong> Deutschland A.G.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 137
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Percentage Percentage<br />
Company Business Headquarters Share Capital owner. of vote Held by<br />
<strong>Pirelli</strong> Telekom Kabel und Telecom Cables<br />
Systeme Deutschland GmbH and Systems Berlin Euro 25,000 100.00% <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
Pneumobil GmbH Tyre Breuberg/Odenwald Euro 259,225 99.62% <strong>Pirelli</strong> Reifenwerke GmbH & Co. K.G.<br />
Veith Wohnungsbau GmbH Real Estate Breuberg/Odenwald Euro 127,823 100.00% <strong>Pirelli</strong> Deutschland A.G.<br />
Greece<br />
Elastika <strong>Pirelli</strong> S.A. Tyre Athens Euro 1,632,010 99.90% Lunares S.A.<br />
0.10% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
<strong>Pirelli</strong> Hellas S.A. (in liquid.) Tyre Athens US $ 22,050,000 79.86% <strong>Pirelli</strong> Tyre Holding N.V.<br />
Hungary<br />
Kabel Keszletertekesito BT. Energy Cables and Systems Budapest Hun. Forint/000 1,239,841 100.00% MKM Magyar Kabel Muvek Rt.<br />
MKM Magyar Kabel Muvek RT. Energy Cables and Systems Budapest Hun. Forint/000 6,981,070 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Construction<br />
Hungary Ltd Energy Cables and Systems Budapest Hun. Forint/000 3,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Hungary Tyre Trading<br />
and Services Ltd Tyre Budapest Hun. Forint/000 3,000 100.00% Lunares S.A.<br />
Ireland<br />
<strong>Pirelli</strong> Reinsurance<br />
Company Ltd Reinsurance Dublino US $ 7,150,000 100% <strong>Pirelli</strong> Finance (Luxembourg) S.A.<br />
Italy<br />
Centro Servizi<br />
Amministrativi <strong>Pirelli</strong> S.r.l. Services <strong>Milan</strong> Euro 51,000 100.00% <strong>Pirelli</strong> S.p.A.<br />
Driver Italia S.p.A. Commercial <strong>Milan</strong> Euro 200,000 80.935% <strong>Pirelli</strong> Pneumatici S.p.A.<br />
Fibre Ottiche Sud - F.O.S. S.p.A. Optical fibers Battipaglia (SA) Euro 5,200,000 100.00% <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
Invex S.r.l. Energy Cables and Systems Quattordio (AL) Euro 10,000 100.00% <strong>Pirelli</strong> Cavi e Sistemi Energia Italia S.p.A.<br />
Telecom<br />
Maristel S.p.A. Cables and Systems <strong>Milan</strong> Euro 1,020,000 100.00% <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
<strong>Pirelli</strong> Cavi e Sistemi<br />
Energy Cables and Systems<br />
Energia S.p.A. Holding Comany <strong>Milan</strong> Euro 100,000,000 98.749% <strong>Pirelli</strong> S.p.A.<br />
1.251% <strong>Pirelli</strong> Finance (Luxembourg) S.A.<br />
<strong>Pirelli</strong> Cavi e Sistemi<br />
Energia Italia S.p.A. Energy Cables and Systems <strong>Milan</strong> Euro 110,000,000 100.00% <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A.<br />
<strong>Pirelli</strong> Cavi e Sistemi<br />
Energy Cables and Systems<br />
Telecom S.p.A. Holding Comany <strong>Milan</strong> Euro 70,000,000 98.749% <strong>Pirelli</strong> S.p.A.<br />
1.251% <strong>Pirelli</strong> Finance (Luxembourg) S.A.<br />
<strong>Pirelli</strong> Cavi e Sistemi<br />
Telecom<br />
Telecom Italia S.p.A. Cables and Systems <strong>Milan</strong> Euro 41,000,000 100.00% <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
<strong>Pirelli</strong> Cultura S.p.A. Sundry <strong>Milan</strong> Euro 1,000,000 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Informatica S.p.A. Information Systems <strong>Milan</strong> Euro 520,000 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Labs S.p.A. Research and Development <strong>Milan</strong> Euro 10,000,000 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Nastri Tecnici S.p.A.<br />
(in liquidation) Sundry <strong>Milan</strong> Euro 384,642 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Pneumatici Holding S.p.A. Financial <strong>Milan</strong> Euro 121,800,000 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
<strong>Pirelli</strong> Pneumatici S.p.A. Tyre <strong>Milan</strong> Euro 252,320,000 100.00% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
<strong>Pirelli</strong> Servizi Finanziari S.p.A. Financial <strong>Milan</strong> Euro 1,976,000 100.00% <strong>Pirelli</strong> S.p.A.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 138
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Percentage Percentage<br />
Company Business Headquarters Share Capital owner. of vote Held by<br />
<strong>Pirelli</strong> Submarine Telecom Telecom <strong>Pirelli</strong> Submarine<br />
Systems Italia S.p.A. Cables and Systems <strong>Milan</strong> Euro 50,000,000 100.00% Telecom Systems Holding B.V.<br />
Polo Viaggi S.r.l. Travel Agency <strong>Milan</strong> Euro 46,800 100.00% <strong>Pirelli</strong> S.p.A.<br />
Servizi Aziendali <strong>Pirelli</strong> S.C.p.A. Services <strong>Milan</strong> Euro 104,000 93.00% <strong>Pirelli</strong> S.p.A.<br />
0.50% <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A.<br />
0.50% <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
1.00% <strong>Pirelli</strong> Pneumatici S.p.A.<br />
1.00% Polo Viaggi S.r.l.<br />
1.00% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
Sistema Puntogomme S.p.A. Tyre <strong>Milan</strong> Euro 3,060,000 100.00% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
Trefin S.r.l. Financial <strong>Milan</strong> Euro 4,242,476 100.00% <strong>Pirelli</strong> S.p.A.<br />
Luxembourg<br />
Gamirco S.A. Financial Luxembourg Swiss Franc 2,100,000 100.00% <strong>Pirelli</strong> Finance (Luxembourg) S.A.<br />
<strong>Pirelli</strong> Finance (Luxembourg) S.A. Financial Luxembourg Euro 270,228,168 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Financial Services<br />
Company S.A. Financial Luxembourg Euro 35,000 100.00% <strong>Pirelli</strong> Finance (Luxembourg) S.A.<br />
<strong>Pirelli</strong> International Finance S.A.<br />
(formerly <strong>Pirelli</strong> Finance (N.A.)<br />
N.V.) Insurance Luxembourg Euro 35,000 100.00% <strong>Pirelli</strong> Finance (Luxembourg) S.A.<br />
Norway<br />
<strong>Pirelli</strong> Kabler og Systemer AS Energy Cables and Systems Ski Nor. Krone 100,000 100.00% <strong>Pirelli</strong> Cables and Systems OY<br />
Poland<br />
<strong>Pirelli</strong> Polska Sp.z.o.o. Tyre Varsaw Pol. Zloty/mil. 6,258 100.00% Lunares S.A.<br />
Portugal<br />
Desco Fabrica Portuguesa de<br />
Material Electrico e<br />
<strong>Pirelli</strong> Energie Câbles et<br />
Electronico S.A. Energy Cables and Systems Arcozelo Vngaia Euro 1,545,000 70.93% Systèmes France S.A.<br />
29.07% Eurelectric S.A.<br />
Romania<br />
S.C. <strong>Pirelli</strong> Romania<br />
Rom. Leu<br />
Cabluri si Sisteme S.A. Energy Cables and Systems Slatina /000 208,927,700 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
Russia<br />
OOO <strong>Pirelli</strong> Tyre Russia Commercial Moscow Rus. Rouble 950,000 95.00% Lunares S.A.<br />
5.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
Solvakia<br />
Kablo Bratislava Spol. S.R.O. Energy Cables and Systems Bratislava Slov. Korona 523,334,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Slovakia S.R.O. Tyre Bratislava Slov. Korona 200,000 100.00% Lunares S.A.<br />
Spain<br />
Fercable S.A. Energy Cables and Systems Barcelona Euro 3,606,073 100.00% <strong>Pirelli</strong> Cables y Sistemas S.A.<br />
Omnia Motor S.A. Tyre Barcelona Euro 1,502,530 100.00% <strong>Pirelli</strong> Neumaticos S.A.<br />
<strong>Pirelli</strong> Cables y Sistemas S.A. Energy Cables and Systems Barcelona Euro 24,000,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Esmar S.A. Energy Cables and Systems Torredembarra Euro 8,714,675 100.00% <strong>Pirelli</strong> Cables y Sistemas S.A.<br />
<strong>Pirelli</strong> Neumaticos S.A. Tyre Barcelona Euro 45,075,908 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
<strong>Pirelli</strong> Telecom Cables y Telecom<br />
Sistemas Espana S.L. Cables and Systems Barcelona Euro 12,000,000 100.00% <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 139
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Percentage Percentage<br />
Company Business Headquarters Share Capital owner. of vote Held by<br />
Sweden<br />
<strong>Pirelli</strong> Kablar och System AB Energy Cables and Systems Hoganas Swed. Korona 100,000 100.00% <strong>Pirelli</strong> Cables and Systems OY<br />
<strong>Pirelli</strong> Tyre Nordic AB Tyre Bromma Swed. Korona 950,000 100.00% Lunares S.A.<br />
Switzerland<br />
Agom S.A. Tyre Conthey Swiss Franc 50,000 75.00% Lunares S.A.<br />
Agom S.A. Bioggio Tyre Bioggio Swiss Franc 590,000 75.00% Lunares S.A.<br />
Lunares S.A. Tyre holding company Basel Swiss Franc 10,000,000 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
<strong>Pirelli</strong> Cables and Systems S.A. Energy Cables and Systems Basel Swiss Franc 500,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Société de Services S.a.r.l. Financial Basel Swiss Franc 50,000 100.00% <strong>Pirelli</strong> Société Générale S.A.<br />
<strong>Pirelli</strong> Société Générale S.A. Financial Basel Swiss Franc 28,000,000 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Submarine Telecom Telecom <strong>Pirelli</strong> Submarine Telecom<br />
Systems S.A. (in liquidation) Cables and Systems Basel Swiss Franc 1,230,000 100.00% Systems Holding B.V.<br />
<strong>Pirelli</strong> Tyre (Europe) S.A. Tyre Basel Swiss Franc 1,000,000 100.00% Lunares S.A.<br />
The Netherlands<br />
ICEW (Insulated Conductors and<br />
Enameled Wires) N.V. (formerly<br />
<strong>Pirelli</strong> Telecom Cables and<br />
Systems The Netherlands N.V.) Energy Cables and Systems Delft Euro 250,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Cables and Systems N.V. Energy Cables and Systems Delft Euro 5,000,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
Energy Cables and Systems<br />
<strong>Pirelli</strong> Cable Holding N.V. holding company Delft Euro 272,515,065 100.00% <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A.<br />
Telecom<br />
<strong>Pirelli</strong> Cable Overseas N.V. Cables and Systems Delft Euro 10,000,000 100.00% <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
<strong>Pirelli</strong> Submarine Telecom Telecom<br />
Systems Holding B.V. Cables and Systems Delft Euro 4,500,000 90.00% <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
<strong>Pirelli</strong> Tyre Holding N.V. Tyre holding company Breukelen Euro 250,000,000 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Tyres Nederland B.V. Tyre Breukelen Euro 18,152 100.00% Lunares S.A.<br />
Sipir Finance N.V. Financial Rotterdam Euro 13,021,222 100.00% <strong>Pirelli</strong> S.p.A.<br />
Turkey<br />
Celikord A.S. Tyre Istanbul Turk. Lira/mil. 17,100,000 50.466% <strong>Pirelli</strong> Tyre Holding N.V.<br />
0.267% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
0.267% <strong>Pirelli</strong> Deutschland A.G.<br />
Turk-<strong>Pirelli</strong> Lastikleri A.S. Tyre Istanbul Turk. Lira/mil. 88,000,000 62.449% <strong>Pirelli</strong> Tyre Holding N.V.<br />
0.076% <strong>Pirelli</strong> Deutschland A.G.<br />
0.076% <strong>Pirelli</strong> UK Tyres Ltd<br />
0.076% <strong>Pirelli</strong> Pneumatici S.p.A.<br />
0.076% Lunares S.A.<br />
0.076% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
0.076% Metzeler Reifen GmbH<br />
0.076% <strong>Pirelli</strong> Reifenwerke GmbH & Co. K.G.<br />
0.076% <strong>Pirelli</strong> Neumaticos S.A.<br />
Türk <strong>Pirelli</strong> Kablo ve Sistemleri A.S. Energy Cables and Systems Mudania / Bursa Turk Lira/mil. 9,828,000 83.746% <strong>Pirelli</strong> Cable Holding N.V.<br />
Zalsan Zirai Arac Lastikleri A.S. Tyre Istanbul Turk Lira/mil. 1,400,000 70.00% Turk-<strong>Pirelli</strong> Lastikleri A.S.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 140
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Percentage Percentage<br />
Company Business Headquarters Share Capital owner. of vote Held by<br />
United Kingdom<br />
Aberdare Cables Ltd Energy Cables and Systems London British Pound 609,654 100.00% <strong>Pirelli</strong> General plc<br />
Cable Makers Properties<br />
and Services Ltd Energy Cables and Systems East Molesey British Pound 33 63.531% <strong>Pirelli</strong> General plc<br />
Central Tyre Ltd Tyre London British Pound 100,000 100.00% <strong>Pirelli</strong> UK Tyres Ltd<br />
Comergy Ltd Energy Cables and Systems London British Pound 1,000,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
Courier Tyre Company Ltd Tyre London British Pound 10,000 100.00% <strong>Pirelli</strong> UK Tyres Ltd<br />
CPK Auto Products Ltd Tyre London British Pound 10,000 100.00% <strong>Pirelli</strong> UK Tyres Ltd<br />
CTC 1994 Ltd Tyre London British Pound 984 100,00% Central Tyre Ltd<br />
<strong>Pirelli</strong> Cables (2000) Ltd Energy Cables and Systems London British Pound 118,653,473 100.00% <strong>Pirelli</strong> General plc<br />
<strong>Pirelli</strong> Cables (Industrial) Ltd Energy Cables and Systems London British Pound 9,010,935 100.00% <strong>Pirelli</strong> General plc<br />
<strong>Pirelli</strong> Cables (Supertention) Ltd Energy Cables and Systems London British Pound 5,000,000 100.00% <strong>Pirelli</strong> General plc<br />
<strong>Pirelli</strong> Cables and Systems<br />
International Ltd Energy Cables and Systems London Euro 100,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Cables Ltd Energy Cables and Systems London British Pound 100,000 100.00% <strong>Pirelli</strong> General plc<br />
<strong>Pirelli</strong> Construction Company Ltd Energy Cables and Systems London British Pound 8,000,000 100.00% <strong>Pirelli</strong> General plc<br />
<strong>Pirelli</strong> Focom Ltd Energy Cables and Systems London British Pound 6,447,000 100.00% <strong>Pirelli</strong> General plc<br />
<strong>Pirelli</strong> General plc Cables and Systems London British Pound 144,139,360 100.00% <strong>Pirelli</strong> UK plc “B1”/“B2”<br />
<strong>Pirelli</strong> International Ltd Financial London Euro 250,000,000 100.00% <strong>Pirelli</strong> Finance (Luxembourg) S.A.<br />
<strong>Pirelli</strong> Metals Ltd Energy Cables and Systems London British Pound 100,000 100.00% <strong>Pirelli</strong> General plc<br />
<strong>Pirelli</strong> Telecom Cables and Telecom<br />
Systems UK Ltd Cables and Systems London British Pound 100,000 100.00% <strong>Pirelli</strong> General plc<br />
<strong>Pirelli</strong> Tyres Ltd Tyre London British Pound 16,000,000 100.00% <strong>Pirelli</strong> UK Tyres Ltd<br />
<strong>Pirelli</strong> UK Employee Share<br />
Trustee Ltd Financial London British Pound 2 100.00% <strong>Pirelli</strong> UK plc “C”<br />
<strong>Pirelli</strong> UK Finance Ltd Financial London British Pound 6,969,280 100.00% <strong>Pirelli</strong> UK plc “C”<br />
<strong>Pirelli</strong> UK plc “A” Tyre holding company London British Pound 68,535,300 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
Energy Cables and Systems<br />
<strong>Pirelli</strong> UK plc “B1” holding company London British Pound 69,188,889 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
Telecom Cables and Systems<br />
<strong>Pirelli</strong> UK plc “B2” holding company London British Pound 27,149,529 100.00% <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
<strong>Pirelli</strong> UK plc “C” Finance holding company London British Pound 11,625,978 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> UK Tyres Ltd Tyre London British Pound 68,000,000 100.00% <strong>Pirelli</strong> UK plc “A”<br />
North America<br />
Canada<br />
<strong>Pirelli</strong> Power Cables and<br />
Saint John<br />
Systems Canada Ltd Energy Cables and Systems (New Brunswich) Can. $ 40,000,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Tire Inc. Tyre Ottawa (Ontario) Can. $ 6,000,000 100.00% Lunares S.A.<br />
U.S.A.<br />
Metzeler Motorcycle Tire<br />
North America Corp. Tyre Seattle (Washington) US $ 150,000 100.00% Metzeler Reifen GmbH<br />
<strong>Pirelli</strong> Communications Telecom<br />
Cables and Systems USA LLC Cables and Systems Wilmington (Delaware) US $ 10 100.00% <strong>Pirelli</strong> North America Inc. “B1”<br />
<strong>Pirelli</strong> Communications<br />
<strong>Pirelli</strong> Communications<br />
Cables Corporation Commercial Wilmington (Delaware) US $ 1 100.00% Cables and Systems USA LLC<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 141
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Percentage Percentage<br />
Company Business Headquarters Share Capital owner. of vote Held by<br />
<strong>Pirelli</strong> Construction<br />
<strong>Pirelli</strong> Power Cables<br />
Services Inc. Energy Cables and Systems Dover (Delaware) US $ 1,000 100.00% and Systems USA LLC<br />
<strong>Pirelli</strong> North America Inc. “A” Tyre Wilmington (Delaware) US $ 3.15 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
Telecom<br />
<strong>Pirelli</strong> North America Inc. “B1” Cables and Systems Wilmington (Delaware) US $ 5.75 100.00% <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
<strong>Pirelli</strong> North America Inc. “B2” Energy Cables and Systems Wilmington (Delaware) US $ 1.10 100.00% <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A.<br />
<strong>Pirelli</strong> Power Cables and<br />
Systems USA LLC Energy Cables and Systems Wilmington (Delaware) US $ 10 100.00% <strong>Pirelli</strong> North America Inc. “B2”<br />
<strong>Pirelli</strong> RNC Inc. Commercial Wilmington (Delaware) US $ 1 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
<strong>Pirelli</strong> Tire LLC Tyre Wilmington (Delaware) US $ 1 100.00% <strong>Pirelli</strong> North America Inc. “A”<br />
Central/South America<br />
Argentina<br />
<strong>Pirelli</strong> Consultora Conductores<br />
Fipla S.A. Energy Cables and Systems Buenos Aires Arg. Peso 1 66.97% e Instalaciones S.A.I.C.<br />
<strong>Pirelli</strong> Argentina<br />
de Mandatos S.A. Services Buenos Aires Arg. Peso 500,000 100.00% <strong>Pirelli</strong> Société Générale S.A.<br />
<strong>Pirelli</strong> Consultora Conductores<br />
e Instalaciones S.A.I.C. Energy Cables and Systems Buenos Aires Arg. Peso 2,227 99.996% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Energie Câbles<br />
0.004% et Systèmes France S.A.<br />
<strong>Pirelli</strong> Energia Cables y<br />
<strong>Pirelli</strong> Consultora Conductores<br />
Sistemas de Argentina S.A. Energy Cables and Systems Buenos Aires Arg. Peso 44,509,458 74.91% e Instalaciones S.A.I.C.<br />
24.69% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Neumaticos S.A.I.C. Tyre Buenos Aires Arg. Peso 19,016,500 99.02% <strong>Pirelli</strong> Tyre Holding N.V.<br />
0.98% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
<strong>Pirelli</strong> Telecomunicaciones Cables Telecom<br />
<strong>Pirelli</strong> Telecomunicações<br />
y Sistemas de Argentina S.A. Cables and Systems Buenos Aires Arg. Peso 12,000 100.00% Cabos e Sistemas do Brasil S.A.<br />
<strong>Pirelli</strong> Energia Cables y<br />
Tel 3 S.A. Energy Cables and Systems Buenos Aires Arg. Peso 11,075,000 51.00% Sistemas de Argentina S.A.<br />
Brazil<br />
Cordas Metalicas do Brasil Ltda Tyre Sumarè Bra. Real 1,000 99.90% <strong>Pirelli</strong> Pneus S.A.<br />
0.10% Muriaè Ltda<br />
Muriaé Ltda Financial Santo Andrè Bra. Real 80,000,000 99.999% <strong>Pirelli</strong> Pneus S.A.<br />
0.001% <strong>Pirelli</strong> S.A.<br />
Novacorp Consultora e<br />
Serviços Corporativos Ltda Holding Santo Andrè Bra. Real 6,000 99.983% <strong>Pirelli</strong> S.A.<br />
<strong>Pirelli</strong> Energia Cabos e<br />
Sistemas do Brasil S.A. Energy Cables and Systems Santo Andrè Bra. Real 106,824,993 87.202% 88.783% <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A.<br />
12.211% 10.342% <strong>Pirelli</strong> S.A.<br />
<strong>Pirelli</strong> Pneus Nordeste Ltda Tyre Feira de Santana Bra. Real 29,991,402 100.00% <strong>Pirelli</strong> Pneus S.A.<br />
<strong>Pirelli</strong> Pneus S.A. Tyre Santo Andrè Bra. Real 300,617,484 54.826% 19.031% <strong>Pirelli</strong> Pneumatici S.p.A.<br />
41.200% 79.719% <strong>Pirelli</strong> Tyre Holding N.V.<br />
3.667% 0.776% <strong>Pirelli</strong> S.A.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 142
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Percentage Percentage<br />
Company Business Headquarters Share Capital owner. of vote Held by<br />
<strong>Pirelli</strong> Produtos<br />
<strong>Pirelli</strong> Energia Cabos e Sistemas<br />
Especiais Ltda Energy Cables and Systems Cerquilho Bra. Real 43,143,421 100.00% do Brasil S.A.<br />
<strong>Pirelli</strong> S.A. Financial Santo Andrè Bra. Real 45,848,684 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Telecomunicações Telecom<br />
Cabos e Sistemas do Brasil S.A. Cables and Systems Sorocaba Bra. Real 65,236,771 87.202% 88.782% <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
12.211% 10.343% <strong>Pirelli</strong> S.A.<br />
Pneuac Comercial e<br />
Importadora Ltda Tyre San Paolo Bra. Real 12,913,526 100.00% <strong>Pirelli</strong> Pneus S.A.<br />
Solac-Laminadora<br />
<strong>Pirelli</strong> Energia Cabos e Sistemas<br />
de Cobre Ltda Energy Cables and Systems Jacarei Bra. Real 8,971,950 89.000% do Brasil S.A.<br />
Chile<br />
<strong>Pirelli</strong> E y T S.A. Energy Cables and Systems Santiago ChilePeso/000 3,072.471 99.82% <strong>Pirelli</strong> Instalaciones Chile S.A.<br />
<strong>Pirelli</strong> Consultora Conductores<br />
<strong>Pirelli</strong> Instalaciones Chile S.A. Energy Cables and Systems Santiago Chile Peso/000 918,707 90.00% e Instalaciones S.A.I.C.<br />
10.00% Cite S.A.<br />
<strong>Pirelli</strong> Neumaticos Chile Limitada Tyre Santiago US $ 1,918,451 99.98% <strong>Pirelli</strong> Pneus S.A.<br />
Colombia<br />
0.02% Pneuac Comercial e Importadora Ltda<br />
<strong>Pirelli</strong> de Colombia S.A. Tyre Santa Fe De Bogotà Col. Peso/000 10,977,466 94.95% <strong>Pirelli</strong> Pneus S.A.<br />
Mexico<br />
1.63% <strong>Pirelli</strong> de Venezuela C.A.<br />
1.14% Muriaè Ltda<br />
1.14% <strong>Pirelli</strong> Pneus Nordeste Ltda<br />
1.14% Pneuac Comercial e Importadora Ltda<br />
<strong>Pirelli</strong> Neumaticos de<br />
Mexico S.A. de C.V. Tyre Mexico City Mex. Peso 35,098,600 99.98% <strong>Pirelli</strong> Pneus S.A.<br />
Uruguay<br />
0,02% Pneuac Comercial e Importadora Ltda<br />
<strong>Pirelli</strong> Energia Cabos e<br />
Cite S.A. Energy Cables and Systems Montevideo Urug. Peso 4,900,000 100.00% Sistemas do Brasil S.A.<br />
Venezuela<br />
<strong>Pirelli</strong> de Venezuela C.A. Tyre Valencia Ven. Bolivar/000 13,062,679 96.22% <strong>Pirelli</strong> Tyre Holding N.V.<br />
Africa<br />
Egypt<br />
Alexandria Tire<br />
Company S.A.E. Tyre Alessandria Egy. Pound 393,000,000 80.563% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
6.251% <strong>Pirelli</strong> Pneumatici S.p.A.<br />
International Tire Company Ltd Tyre Alessandria Egy. Pound 50,000 96.00% Alexandria Tire Company S.A.E.<br />
Ivory Coast<br />
SICABLE - Société Ivoirienne<br />
<strong>Pirelli</strong> Energie Câbles et Systèmes<br />
de Cables S.A. Energy Cables and Systems Abidjan Cfa Franc 740,000,000 51.00% France S.A.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 143
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Percentage Percentage<br />
Company Business Headquarters Share Capital owner. of vote Held by<br />
Sud Africa<br />
<strong>Pirelli</strong> Cables & Systems<br />
(Proprietary) Ltd Commercial Woodmead, S.A. S.A. Rand 100 100.00% <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A.<br />
<strong>Pirelli</strong> Tyre (Pty) Ltd Tyre Sandton S.A. Rand 1 100.00% Lunares S.A.<br />
Oceania<br />
Australia<br />
<strong>Pirelli</strong> Power Cables & Systems<br />
Australia Pty Ltd Energy Cables and Systems Liverpool - N.S.W. Aus. $ 15,000,000 100.00% <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A.<br />
<strong>Pirelli</strong> Telecom Cables & Telecom<br />
Systems Australia Pty Ltd Cables and Systems Liverpool - N.S.W. Aus. $ 38,500,000 100.00% <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
<strong>Pirelli</strong> Tyres Australia Pty Ltd Tyre Pymble - N.S.W. Aus. $ 150,000 100.00% Lunares S.A.<br />
New Zealand<br />
<strong>Pirelli</strong> Power Cables &<br />
<strong>Pirelli</strong> Power Cables & Systems<br />
Systems New Zealand Ltd Energy Cables and Systems Auckland NZ. $ 10,000 100.00% Australia Pty Ltd<br />
<strong>Pirelli</strong> Telecom Cables & Telecom <strong>Pirelli</strong> Telecom Cables & Systems<br />
Systems New Zealand Ltd Cables and Systems Auckland NZ. $ 10,000 100.00% Australia Pty Ltd<br />
<strong>Pirelli</strong> Tyres (NZ) Ltd Tyre Wellington NZ. $ 100 100.00% <strong>Pirelli</strong> Tyres Australia Pty Ltd<br />
Asia<br />
China<br />
BICCGeneral Baosheng<br />
Cable Co. Ltd Energy Cables and Systems Jiangsu US $ 19,500,000 67.00% <strong>Pirelli</strong> Cables Asia-Pacific Pte Ltd<br />
Invex Insulated Conductors<br />
ICEW (Insulated Conductors and<br />
(Baoying) Co. Ltd. Energy Cables and Systems Yangzhou Euro 6,000,000 100.00% Enameled Wires) N.V.<br />
<strong>Pirelli</strong> Cables (Shanghai)<br />
Trading Co. Ltd Energy Cables and Systems Shanghai US $ 200,000 100.00% <strong>Pirelli</strong> Cables Asia-Pacific Pte Ltd<br />
<strong>Pirelli</strong> Telecom Cables Co. Telecom<br />
Ltd Wuxi Cables and Systems Xuelang Town US $ 29,941,250 71.843% <strong>Pirelli</strong> Cable Overseas N.V.<br />
Tianjin Top Power<br />
Cables Co. Ltd Energy Cables and Systems Tianjin Municipality US $ 13,100,000 67.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
India<br />
<strong>Pirelli</strong> Cables (India)<br />
Private Ltd Energy Cables and Systems Nuova Delhi India Rupee 10,000,000 99.998% <strong>Pirelli</strong> Cable Holding N.V.<br />
Indonesia<br />
0.002% <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A.<br />
P.T. <strong>Pirelli</strong> Cables Indonesia Energy Cables and Systems Jakarta US $ 67,300,000 99.48% <strong>Pirelli</strong> Cable Holding N.V.<br />
Japan<br />
0.52% <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A.<br />
P & A K.K. Tyre Tokyo Jap.Yen 2,700,000,000 69.148% <strong>Pirelli</strong> Tyre Holding N.V.<br />
<strong>Pirelli</strong> K.K. Tyre Tokyo Jap.Yen 40,000,000 100.00% Lunares S.A.<br />
Malaysia<br />
BICC (Malaysia) Sdn Bhd Energy Cables and Systems Kuala Lumpur Mal. Ringgit 100,000 100.00% <strong>Pirelli</strong> Cables Asia-Pacific Pte Ltd<br />
Submarine Cable<br />
Installation Sdn Bhd Energy Cables and Systems Kuala Lumpur Mal. Ringgit 10,000 100.00% <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 144
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Percentage Percentage<br />
Company Business Headquarters Share Capital owner. of vote Held by<br />
Mauritius<br />
BICCGeneral Asia<br />
Pacific Holdings Energy Cables and Systems Port Louis US $ 2 100.00% <strong>Pirelli</strong> Cables Asia-Pacific Pte Ltd<br />
Singapore<br />
<strong>Pirelli</strong> Asia Pte Ltd Tyre Singapore Sing. $ 2 100.00% Lunares S.A.<br />
<strong>Pirelli</strong> Cable Systems Pte Ltd Energy Cables and Systems Singapore Sing. $ 25,000 50.00% <strong>Pirelli</strong> General plc<br />
50.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Cables<br />
Asia-Pacific Pte Ltd Energy Cables and Systems Singapore Sing. $ 213,324,290 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
Trans-Power Cables Pte Ltd Energy Cables and Systems Singapore Sing. $ 1,500,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 145
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Investments accounted for using the equity method<br />
Percentage Percentage<br />
Company Business Headquarters Share Capital owner. of vote Held by<br />
Jointly controlled companies<br />
Europe<br />
Italy<br />
Olimpia S.p.A. Industrial holding company <strong>Milan</strong> Euro 1,562,596,150 60.00% <strong>Pirelli</strong> S.p.A.<br />
Subsidiaries<br />
Europe<br />
Germany<br />
Drahtcord Saar<br />
Geschaeftsfuehrungs GmbH Tyre Merzig Deut. Mark 60,000 50.00% <strong>Pirelli</strong> Deutschland A.G.<br />
Drahtcord Saar<br />
GmbH & Co. K.G. Tyre Merzig Deut. Mark 30,000,000 50.00% <strong>Pirelli</strong> Deutschland A.G.<br />
Kabeltrommel Gesellshaft<br />
mbH & Co K.G. Energy Cables and Systems Colonia Deut. Mark 20,000,000 27.48% <strong>Pirelli</strong> Kabel und Systeme GmbH<br />
Italy<br />
SMP Melfi S.r.l. Tyre Melito (NA) Euro 3,511,906 50.00% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
Spagna<br />
Optiwire S.L. Energy Cables and Systems Barcelona Euro 6,010 50.00% <strong>Pirelli</strong> Cables y Sistemas S.A.<br />
United Kingdom<br />
Rodco Ltd Energy Cables and Systems Gravesend BritishPound 5,000,000 40.00% <strong>Pirelli</strong> General plc<br />
Central/South America<br />
Argentina<br />
Lineas de Transmision de<br />
Buenos Aires S.A.<br />
(in liquidation) Energy Cables and Systems Buenos Aires Arg. Peso/000 12 20.00% <strong>Pirelli</strong> Argentina de Mandatos S.A.<br />
Brazil<br />
K.M.P. Cabos Especiais<br />
<strong>Pirelli</strong> Energia Cabos e Sistemas<br />
e Sistemas Ltda Energy Cables and Systems San Paolo Bra. Real 6,600,916 40.00% do Brasil S.A.<br />
<strong>Pirelli</strong> & C. Real Estate Ltda Information Systems Santo Andrè Bra. Real 2,000,000 30.00% <strong>Pirelli</strong> S.A.<br />
Asia<br />
Saudi Arabia<br />
Sicew-Saudi Italian Co.<br />
for Electrical Works Ltd Energy Cables and Systems Jeddah S. Arab. Riyal 1,000,000 34.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 146
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Other investments in subsidiaries and associated companies<br />
Percentage Percentage<br />
Company Business Headquarters Share Capital owner. of vote Held by<br />
Europe<br />
Austria<br />
<strong>Pirelli</strong> Kabelwerke<br />
und Systeme GmbH (*) Energy Cables and Systems Vienna Euro 36,336 100.00% <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A.<br />
Germany<br />
Industriekraftwerk<br />
Breuberg GmbH Cogeneration Breuberg/Odenwald Euro 1,533,876 26.00% <strong>Pirelli</strong> Deutschland AG<br />
Hungary<br />
Ipoly Kabeldob KFT. Energy Cables and Systems Szecseny Hun. Forint/000 36,350 25.172% MKM Magyar Kabel Muvek Rt.<br />
Spain<br />
Euro Driver Car S.L. Tyre Barcelona Euro 492,000 25.00% <strong>Pirelli</strong> Neumaticos S.A.<br />
26.22% Proneus S.L.<br />
Proneus S.L. (*) Tyre Barcelona Euro 3,005,06 51.00% <strong>Pirelli</strong> Neumaticos S.A.<br />
Africa<br />
South Africa<br />
AFCAB Holdings<br />
(Proprietary) Ltd (*) Energy Cables and Systems Sandton S.A. Rand 4,000 50.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
African Cables Ltd (*) Energy Cables and Systems Vereeniging S.A. Rand 9,886,098 100.00% AFCAB Holdings (Proprietary) Ltd<br />
ATC (Proprietary) Ltd Energy Cables and Systems Brits S.A. Rand 632,912 21.00% African Cables Ltd<br />
Tunisia<br />
<strong>Pirelli</strong> Energie Câbles et Systèmes<br />
Auto Cables Tunisie S.A. (*) Energy Cables and Systems Tunisi Tun. Dinar 4,450,000 51.00% France S.A.<br />
Société Tunisienne des Industries<br />
de Pnéumatiques S.A. Tyre Tunisi Tun. Dinar 38,252,940 15.83% <strong>Pirelli</strong> Pneumatici S.p.A.<br />
Zimbabwe<br />
BICC CAFCA Ltd (*) Energy Cables and Systems Harare Zimbabwe $ 15,706,000 73.463% African Cables Ltd<br />
BICC (CENTRAL AFRICA)<br />
(Private) Ltd (*) Energy Cables and Systems Harare Zimbabwe $ 200,000 100.00% BICC CAFCA Ltd<br />
Zimbabwe Cables (Pte) Ltd (*) Energy Cables and Systems Harare Zimbabwe $ 2 100.00% BICC CAFCA Ltd<br />
Asia<br />
Malaysia<br />
Power Cables Malaysia<br />
Sdn Bhd Energy Cables and Systems Selangor Darul Ehsan Mal. Ringgit 8,000,000 40.00% <strong>Pirelli</strong> Cables Asia - Pacific Pte Ltd<br />
(*) These investments have not been consolidated in that they are not material or the rights of the parent company are subject to restriction or the holding were recently acquired.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 147
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Other investments considered significant as per Consob resolution no. 11971 of May 14, 1999<br />
Percentage Percentage<br />
Company Business Headquarters Share Capital owner. of vote Held by<br />
Australia<br />
Optix Australia Ltd Telecom Tottenham (Victoria) $ Austr. 4,000,000 15.00% <strong>Pirelli</strong> Telecom Cables & Systems<br />
Cables and Systems<br />
Australia Pty Ltd<br />
France<br />
Aliapur S.A. Tyre Vitry sur Seine Euro 262,500 14.286% <strong>Pirelli</strong> Pneumatici S.p.A.<br />
Italy<br />
Eurofly Service S.p.A. Services Caselle Torinese Euro 4,275,000 16.33% <strong>Pirelli</strong> S.p.A.<br />
F.C. Internazionale<br />
<strong>Milan</strong>o S.p.A. Sport <strong>Milan</strong> Euro 53,465,000 19.485% <strong>Pirelli</strong> S.p.A.<br />
Servizio Titoli S.r.l. Services Turin Euro 105,000 12.381% <strong>Pirelli</strong> S.p.A.<br />
Poland<br />
Centrum Utylizacij Opon<br />
Otganizacja Odzyseu S.A. Tyre Varsaw Pol. Zloty 1,008,000 14.00% <strong>Pirelli</strong> Polska Sp.z.o.o.<br />
Switzerland<br />
Voltimum S.A. Energy Cables and Systems Meyrin Swiss Franc 2,850,120 14.286% <strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A.<br />
The Netherlands<br />
MB Venture Capital Fund<br />
I Participating Company G N.V. Finance Amsterdam Euro 50,000 14.00% <strong>Pirelli</strong> Finance (Luxembourg) S.A.<br />
Turkey<br />
Türk Sondel Enerji A.S. Cogeneration Istanbul Turk. Lira/mil. 900,000 13.98% Türk-<strong>Pirelli</strong> Lastikleri A.S.<br />
U.S.A.<br />
4.99% Celikord A.S.<br />
Alloptic Inc. Energy Cables and Systems Pleasanton (CA) US $ 120,675,987 15.441% <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 148
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Independent Auditors’ <strong>Report</strong><br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 149
Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Extraordinary session of the Shareholders’ Meeting<br />
<strong>Report</strong> of the Board of Directors<br />
Dear Shareholders,<br />
The Directors of <strong>Pirelli</strong> S.p.A. have called you to the shareholders’ meeting to vote on the merger by incorporation in <strong>Pirelli</strong><br />
& C., after transforming the legal structure of the company from a limited partnership company (A.p.A.) to a corporation<br />
(S.p.A.), (hereinafter “<strong>Pirelli</strong> & C.”), of <strong>Pirelli</strong> & C. Luxembourg S.p.A. (hereinafter “<strong>Pirelli</strong> & C. Luxembourg”, a whollyowned<br />
subsidiary of <strong>Pirelli</strong> & C.) and <strong>Pirelli</strong> S.p.A. (hereinafter the “Merger”) on the basis of the plan of merger which you<br />
have been called to approve.<br />
1. Description and reasons for the merger<br />
The Merger is being proposed in order to simplify the corporate structure of the Group which is headed by the parent<br />
company <strong>Pirelli</strong> & C., by concentrating the role of holding company in the latter. In fact, <strong>Pirelli</strong> & C., after the merger of<br />
<strong>Pirelli</strong> & C. Luxembourg and <strong>Pirelli</strong> S.p.A., will find itself directly holding all the controlling investments in the various<br />
companies which form the Sectors in which the Group operates (<strong>Pirelli</strong> Cavi e Sistemi Energia S.p.A. for the Energy Cables<br />
Sector, <strong>Pirelli</strong> Cavi e Sistemi Telecom S.p.A. for the Telecommunications Cables Sector, <strong>Pirelli</strong> Tyre Holding N.V. for the<br />
Tyres Sector, in addition to <strong>Pirelli</strong> & C. Real Estate S.p.A. in the real estate area) and other important investments which at<br />
the moment link <strong>Pirelli</strong> S.p.A. to Olivetti S.p.A. and therefore to the telecommunications sector.<br />
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The charts that follow depict the structure of the Group headed by <strong>Pirelli</strong> & C. as of the date of this report and the structure<br />
as it will be after the Merger. The charts also indicate the percentage of ownership of ordinary share capital.<br />
<strong>Pirelli</strong> & C. A.p.A.<br />
100%<br />
14,2%<br />
<strong>Pirelli</strong> & C. A.p.A.<br />
Luxembourg S.A.<br />
27,5%<br />
61,2%<br />
<strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> & C.<br />
Real Estate S.p.A.<br />
Olimpia S.p.A.*<br />
60%<br />
100%<br />
<strong>Pirelli</strong> Cavi e Sistemi<br />
Energia S.p.A.<br />
<strong>Pirelli</strong> Cavi e Sistemi<br />
Telecom S.p.A.<br />
<strong>Pirelli</strong><br />
Tyre Holding N.V.<br />
* The investment holding will be reduced to 50.4% after the merger of Holy S.r.l. in Olimpia S.p.A., which will in all<br />
likelihood take place in May 2003.<br />
POST-MERGER<br />
<strong>Pirelli</strong> & C. S.p.A.<br />
<strong>Pirelli</strong> & C.<br />
Real Estate S.p.A.<br />
Olimpia S.p.A.*<br />
50,4%<br />
100%<br />
61,2%<br />
<strong>Pirelli</strong> Cavi e Sistemi<br />
Energia S.p.A.<br />
<strong>Pirelli</strong> Cavi e Sistemi<br />
Telecom S.p.A.<br />
<strong>Pirelli</strong><br />
Tyre Holding N.V.<br />
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The objectives which are meant to be pursued by the merger described above are as follows:<br />
– to maximize the market capitalization of the Group, on the one hand, eliminating investors’ uncertainty about the stock in<br />
which to invest (with positive consequences on volatility/arbitrage) and, on the other hand, offering you the possibility of<br />
exchanging your shares for shares in a larger-size company, with a broader asset portfolio, a much larger shareholder<br />
base and better features of liquidity and contendability of the underlying security;<br />
– to help focus management on the creation of value for a single shareholder group instead of two different ones;<br />
– to increase the unitariness of strategic and operational guidelines, reinforcing the internal control function across the<br />
board;<br />
– to speed up the times in the decision-making process, raising the Group’s capacity to interact with the market, with<br />
strategic partners and with institutions;<br />
– to create the basis for a more flexible development and management of the assets in portfolio;<br />
– to optimize economic and financial flows within the Group and with shareholders;<br />
– to simplify administrative activities.<br />
From a legal standpoint, the Merger will mean that <strong>Pirelli</strong> & C. will universally take the place of <strong>Pirelli</strong> & C. Luxembourg<br />
and <strong>Pirelli</strong> S.p.A., as a result of which the merging company will take over all the assets, and rights and obligations of the<br />
companies to be merged, and therefore, as an example only, all the relative property, plant and equipment and intangible<br />
assets, accounts receivable and payables accrued or due, the contract positions of the companies to be merged and, in<br />
general, the entire equity of the same companies without exclusion or limitations whatsoever.<br />
Moreover, <strong>Pirelli</strong> & C. will replace: (i) <strong>Pirelli</strong> & C. Luxembourg as the issuer of the “<strong>Pirelli</strong> & C. Luxembourg S.A. – 5.125%<br />
Guaranteed Notes due 2009” of Euros 150,000,000 (ii) <strong>Pirelli</strong> S.p.A. as the issuer of “<strong>Pirelli</strong> S.p.A.– 4.875% Notes due 2008” of<br />
Euros 500,000,000 and (iii) <strong>Pirelli</strong> S.p.A. as the guarantor of the “<strong>Pirelli</strong> Finance (Luxembourg) S.A.– 6.50% Guaranteed Notes<br />
due 2007” of Euros 500,000,000.<br />
As to the corporate aspects, should the shareholders of <strong>Pirelli</strong> & C. cast a favorable vote, the Merger will be preceded by:<br />
(i) the transformation of <strong>Pirelli</strong> & C. from a limited partnership company to a corporation. This transformation will allow<br />
our parent company to assume a legal entity that is more easily recognizable by the market – and, in particular, by<br />
international investors – which provides, by eliminating the subdivision of general partners and limited partners, for a<br />
more significant participation by all the shareholders in the decision-making process;<br />
(ii) the change in the corporate business purpose of <strong>Pirelli</strong> & C. to a more modern and precise formulation, which gives a<br />
better definition of the role of coordination that will be conducted by the group holding company;<br />
(iii) a share capital increase by <strong>Pirelli</strong> & C., separable, against payment for a maximum of Euros 1,014,185,020.68 through<br />
the issue of a maximum of 1,950,355,809 ordinary shares, with free warrants attached, that can be traded separately<br />
one from the other, to be granted on option to the <strong>Pirelli</strong> & C. ordinary and savings shareholders, at the unit price equal<br />
to par value Euros 0.52 per share, in a ratio of 3 new shares cum warrants for every 1 share of any class of stock held.<br />
A consequent share capital increase, separable, against payment for a maximum of Euros 253,546,255.04 through the<br />
issue, at one or more times, of a maximum of 487,588,952 ordinary shares to be reserved exclusively for the exercise of<br />
the aforementioned warrants, at the unit price equal to par value Euros 0.52 per share. Such warrants give the right to<br />
subscribe at any time from January 1, 2004 to June 30, 2006, presenting the request by June 20, 2006, to 1 new <strong>Pirelli</strong> &<br />
C. ordinary share, with normal dividend rights and with a par value of Euros 0.52, for every 4 warrants held, at a unit<br />
price equal to par value.<br />
The agenda for the same shareholders’ meeting also calls for the renewal of the corporate boards.<br />
The holders of <strong>Pirelli</strong> & C. ordinary shares absent or dissenting to the resolutions for the transformation into a corporation<br />
and for the change in the corporate business purpose referred to in the preceding paragraph sub (i) and (ii), and the holders<br />
of savings shares, will have the right to withdraw pursuant to art. 2437 of the Italian Civil Code, which should be exercised<br />
before the option is granted as per sub (iii) and, therefore, prior to the date set to execute the Merger.<br />
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2. Values attributed to <strong>Pirelli</strong> & C. and <strong>Pirelli</strong> S.p.A. for purposes of determining the exchange ratio<br />
Since <strong>Pirelli</strong> S.p.A., unlike <strong>Pirelli</strong> & C. Luxembourg, has other shareholders besides <strong>Pirelli</strong> & C., the Merger requires the<br />
determination of the exchange ratio of <strong>Pirelli</strong> S.p.A. shares, which will be cancelled as a result of the Merger, with <strong>Pirelli</strong> &<br />
C. shares to be assigned in substitution.<br />
The Directors of <strong>Pirelli</strong> S.p.A. have entrusted Lehman Brothers International (Europe) - Italian Branch (hereinafter “Lehman<br />
Brothers”) and Morgan Stanley & Co. Limited (hereinafter “Morgan Stanley”) with the responsibility for drawing up a<br />
study for the valuation of the economic capitals of the two companies for purposes of determining the merger ratios.<br />
In particular, Lehman Brothers and Morgan Stanley (jointly, the “Consultants”) were appointed to express, for the internal<br />
and exclusive use of the <strong>Pirelli</strong> S.p.A. Board of Directors and to support the determinations of its competence, an opinion<br />
on the fairness, from a financial standpoint, of the value obtained by <strong>Pirelli</strong> S.p.A.’s shareholders from the application of the<br />
merger ratios (hereinafter “Merger Ratios” or “Exchange Ratios”) between the <strong>Pirelli</strong> S.p.A. ordinary and non-convertible<br />
savings shares and the <strong>Pirelli</strong> & C. ordinary and non-convertible savings shares, in relation to the Merger.<br />
From an economic standpoint, the relative values of <strong>Pirelli</strong> & C. and <strong>Pirelli</strong> S.p.A. were arrived at on the basis of the balance<br />
sheet data of the companies at December 31, <strong>2002</strong>, which coincides with their respective year-ends, taking into account the<br />
following significant events subsequent to that date:<br />
(i) the purchase by <strong>Pirelli</strong> & C. of 47,973,139 <strong>Pirelli</strong> S.p.A. ordinary shares (equal to 2.5 percent of ordinary share capital)<br />
from BZ Group Holding Limited for a total price of about Euros 43.1 million;<br />
(ii) the merger of Holy S.r.l. in Olimpia S.p.A. on the basis of the agreements signed between the shareholders of Olimpia<br />
S.p.A., Olimpia S.p.A. and Hopa S.p.A. and announced to the market on December 19, <strong>2002</strong> (published in accordance<br />
with the law), after which <strong>Pirelli</strong> S.p.A.’s investment in Olimpia S.p.A. will be reduced from 60 percent to 50.4 percent;<br />
(iii) the proposed pay out of dividends from <strong>2002</strong> profits by both <strong>Pirelli</strong> & C. (Euros 0.08 per ordinary share and Euros<br />
0.0904 per savings share, for a total of about Euros 52 million) and <strong>Pirelli</strong> S.p.A. (Euros 0.0364 per savings share for a<br />
total of about Euros 3 million), submitted to the approval of the respective shareholders’ meetings;<br />
(iv) the capital increase cum warrants offered on option to the shareholders of <strong>Pirelli</strong> & C. mentioned in the preceding<br />
paragraph 1.<br />
The companies subject to valuation<br />
The companies being valued, <strong>Pirelli</strong> & C. and <strong>Pirelli</strong> S.p.A., principally carry out financial investment activities. <strong>Pirelli</strong> & C.<br />
holds control of <strong>Pirelli</strong> S.p.A., directly and through the investment in <strong>Pirelli</strong> & C. Luxembourg, which represents the majority<br />
of its assets. <strong>Pirelli</strong> & C. also has a controlling investment in <strong>Pirelli</strong> & C. Real Estate S.p.A., a listed company operating in<br />
the real estate segment, and certain other minor investments in other listed companies.<br />
<strong>Pirelli</strong> S.p.A. heads the group of industrial investments operating in the Cables Sector (Energy and Telecom) and the Tyres<br />
Sector. It also holds, following the merger of Holy S.r.l. in Olimpia S.p.A., referred to in paragraph 8 of this report, a 50.4<br />
percent investment in Olimpia S.p.A., the company which holds the approx. 28.5 percent investment in Olivetti S.p.A.,<br />
which, in turn holds the 54.9 percent investment in Telecom Italia S.p.A.<br />
The valuation methods<br />
In a merger between companies, the objective of the valuation is to determine the values of economic capital and the<br />
consequent merger ratio, that is, the proportion between the number of shares of the companies to be merged, destined to<br />
be withdrawn from circulation, and the number of shares that the merging company will assign to the shareholders of the<br />
company to be merged. The principal purpose of the valuations of the companies involved in the merger, therefore, is not<br />
so much the estimate of the absolute values of economic capital of the companies concerned, but rather the availability of<br />
significantly relative comparable values for purposes of determining the merger ratio.<br />
The objective of the comparability of the values can also be pursued by choosing a plurality of valuation methods which<br />
make it possible to effectively express the value of the companies involved in the merger, while keeping well in mind the<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
fact that diverse situations can be characterized by different value components according to the origin and that they<br />
therefore require a proper interpretation.<br />
The essential features of the methods used in the valuation and the results which were obtained are presented in the<br />
following paragraph.<br />
In order to determine the Exchange Ratios, we made an in-depth examination of the study conducted by Lehman Brothers and<br />
Morgan Stanley, agreeing with both the methodological approach and the conclusions. As part of their study, Lehman Brothers<br />
and Morgan Stanley decided to use more than one valuation method in order to reach significant results for purposes of<br />
determining the Exchange Ratios. In particular, the Market Valuation Method and the Sum of the Parts Method were used.<br />
The Market Valuation Method<br />
The Market Valuation Method expresses the value of the company that is the subject of the valuation in terms of<br />
capitalization expressed on the basis of the prices of the stocks, traded on regulated stock markets, representative of the<br />
company itself. In particular, the Market Valuation Method is considered basic for the valuation of listed companies when<br />
the average volumes are considered significant.<br />
Under this method, a right balance must be identified between the need to mitigate, by observations over sufficiently<br />
extended time frames, the effect of the volatility of the daily stock prices and the need to utilize a current value, indicative<br />
of a recent market value of the company that is the subject of the valuation.<br />
For purposes of applying this method, Lehman Brothers and Morgan Stanley analyzed the performance of the market prices<br />
of the stocks of the companies being valued over a period of one, three and six months, to mitigate the short-term<br />
fluctuations and speculative movements which could have taken place.<br />
The Sum of the Parts Method<br />
The Sum of the Parts Method takes into account the presence of a plurality of operational areas within the companies being<br />
valued in general, and, in particular, <strong>Pirelli</strong> S.p.A.’s and <strong>Pirelli</strong> & C.’s composition, which embody, through their subsidiaries<br />
and associated companies, the vehicle tyres business, telecommunications cables, energy cables, real estate operations and<br />
financial activities.<br />
The Sum of the Parts Method is based upon the consideration that, in the case of financial investment companies, the<br />
economic value of these companies is mainly represented by the sum of the economic values of the investments held,<br />
considered as economic entities that can be valued individually.<br />
Lehman Brothers and Morgan Stanley, moreover, have indicated that the corporate structure is such that the valuation of<br />
<strong>Pirelli</strong> & C. is significantly dependent upon the value attributed to <strong>Pirelli</strong> S.p.A..<br />
In detail, under the Sum of the Parts Method, Lehman Brothers and Morgan Stanley have adopted the following criteria:<br />
<strong>Pirelli</strong> S.p.A.<br />
• Industrial activities (tyres, telecommunications cables and energy cables): the market multiples method and consensus of<br />
the analysts, with the application of a strategic bonus in the tyres sector;<br />
• Investment held in Olimpia S.p.A.: valued on the basis of the value attributed, using the Sum of the Parts Method, to the<br />
Olivetti S.p.A. shares and convertible bonds held, with the application of a bonus to take into account the situation of the<br />
shareholder of reference in the share capital of Olivetti S.p.A.;<br />
• Listed equity investments: Market Valuation Method;<br />
• Holding costs: value shown in the draft financial statements at December 31, <strong>2002</strong>;<br />
• Net other assets/liabilities: financial statement value, estimates provided by management or results of available<br />
appraisals.<br />
<strong>Pirelli</strong> & C.<br />
• Investment in <strong>Pirelli</strong> S.p.A.: share of the value resulting from the Sum of the Parts Method applied to <strong>Pirelli</strong> S.p.A.;<br />
• <strong>Pirelli</strong> & C. Real Estate S.p.A.: Sum of the Parts Method with the application of a strategic bonus;<br />
• Listed equity investments: Market Valuation Method;<br />
• Holding costs: value shown in the draft financial statements at December 31, <strong>2002</strong>;<br />
• Net other assets/liabilities: financial statement value and estimates provided by management.<br />
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3. Exchange ratio established and criteria followed in arriving at such determination<br />
Lehman Brothers and Morgan Stanley have indicated the following arithmetic weighted averages of the market prices of<br />
<strong>Pirelli</strong> S.p.A. and <strong>Pirelli</strong> & C. stocks in the last month, in the last three months and in the last six months:<br />
Average Share Prices of <strong>Pirelli</strong> S.p.A.<br />
Euro per share<br />
Ordinary shares<br />
Savings shares<br />
Average price 1 month 0.82 0.83<br />
Average price 3 months 0.87 0.85<br />
Average price 6 months 0.92 0.94<br />
Prices adjusted to account for proposed dividends <strong>2002</strong><br />
Average Share Prices of <strong>Pirelli</strong> & C.<br />
Euro per share<br />
Ordinary shares<br />
Savings shares<br />
Average price 1 month 1.11 1.06<br />
Average price 3 months 1.18 1.13<br />
Average price 6 months 1.26 1.14<br />
Prices adjusted to account for proposed dividends <strong>2002</strong><br />
And the following market capitalizations:<br />
Market Capitalization of <strong>Pirelli</strong> S.p.A.<br />
in millions of euros<br />
Ordinary shares Savings shares Total capitalization<br />
Average 1 month 1,440 73 1,513<br />
Average 3 months 1,524 75 1,599<br />
Average 6 months 1,615 83 1,698<br />
Prices adjusted to account for proposed dividends <strong>2002</strong>. Calculations exclude treasury shares held by company.<br />
Market Capitalization of <strong>Pirelli</strong> & C.<br />
in millions of euros<br />
Ordinary shares Savings shares Total capitalization<br />
Average 1 month 683 36 720<br />
Average 3 months 728 39 767<br />
Average 6 months 776 39 815<br />
Prices adjusted to account for proposed dividends <strong>2002</strong>. Calculations exclude treasury shares held by company.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
The Sum of the Parts Method used by the Consultants for <strong>Pirelli</strong> S.p.A. gives the following values:<br />
Sum of the Parts Method – Summary of Results<br />
Total Ordinary shares Savings shares<br />
Economic Capital Value (Euro mln) 1,653 1,575 78<br />
Number of shares (mln) 1,756 88<br />
Value per share (Euro) 0.90 0.88<br />
The allocation of the economic capital to different classes of stock was made net of treasury shares.<br />
Whereas for <strong>Pirelli</strong> & C., the Sum of the Parts Method used by Lehman Brothers and Morgan Stanley gives the following values:<br />
Sum of the Parts Method – Summary of Results<br />
Total Ordinary shares Savings shares<br />
Economic Capital Value (Euro mln) 894 849 45<br />
Number of shares (mln) 616 34<br />
Value per share (Euro) 1.38 1.31<br />
The allocation of the economic capital to different classes of stock was made net of treasury shares.<br />
Lehman Brothers and Morgan Stanley, for purposes of determining the Exchange Ratios, assumed that the <strong>Pirelli</strong> & C. capital<br />
increase before the Merger, referred to in the preceding paragraph 1, will be entirely subscribed to, also by virtue of the fact,<br />
among other things, that an underwriting syndicate will be formed that will be headed by Mediobanca – Banca di Credito<br />
Finanziario S.p.A..<br />
As for the valuation of the warrants attached to the shares that will be issued as part of the above capital increase, the<br />
Consultants have assumed that they will be exercised at the end of the three years and have calculated the present value of the<br />
corresponding value of the capital increase connected to the issue of the shares underlying such instruments.<br />
Again for purposes of determining the Exchange Ratios, the Consultants have also valued the effect represented by the potential<br />
exercise of the right of withdrawal to which the absent and dissenting shareholders of <strong>Pirelli</strong> & C. are entitled in relation to the<br />
resolutions passed on the subject of the transformation of the company and the change in the corporate business purpose.<br />
The price at which the withdrawal can be exercised can only be determined at the time the resolutions are passed and will be<br />
equal to the “average price for the last six months” (art. 2437 of the Italian Civil Code).<br />
The Consultants maintain that such effect would in any case be negligible, assuming that such right would only be exercised<br />
by the shareholders that are not part of the <strong>Pirelli</strong> & C. Voting Trust (see following paragraph 8). The following table<br />
summarizes the results of the analyses performed by Lehman Brothers and Morgan Stanley:<br />
Summary of Valuations<br />
<strong>Pirelli</strong> S.p.A. <strong>Pirelli</strong> & C.<br />
Market valuation Ordinary shares Savings shares Total Ordinary shares Savings shares Total<br />
Economic Capital Value (Euro mln) 1,524 75 1,599 1,976 20 1,997<br />
Number of shares (mln) 1,756 88 3,054 34<br />
Value per share (Euro) 0.87 0.85 0.65 0.59<br />
<strong>Pirelli</strong> S.p.A. <strong>Pirelli</strong> & C.<br />
Sum of the Parts Valuation Ordinary shares Savings shares Total Ordinary shares Savings shares Totale<br />
Economic Capital Value (Euro mln) 1,575 78 1,653 2,103 21 2,124<br />
Number of shares (mln) 1,756 88 3,054 34<br />
Value per share (Euro) 0.90 0.88 0.69 0.62<br />
The allocation of the economic capital to different classes of stock was made net of treasury shares.<br />
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Exchange Ratios<br />
Market<br />
Sum of the Parts<br />
<strong>Pirelli</strong> S.p.A. - Ordinary shares 0.87 A 0.90 A<br />
<strong>Pirelli</strong> S.p.A. - Savings shares 0.85 B 0.88 B<br />
<strong>Pirelli</strong> & C. - Ordinary shares 0.65 C 0.69 C<br />
<strong>Pirelli</strong> & C. - Savings shares 0.59 D 0.62 D<br />
Exchange ratio - Ordinary shares 1.34 A / C 1.31 A / C<br />
Exchange ratio - Savings shares 1.44 B /D 1.42 B /D<br />
On the basis of the indications of Lehman Brothers and Morgan Stanley, the Board of Directors of <strong>Pirelli</strong> S.p.A., taking into<br />
account the fundamental correspondence of the results obtained from the application of the two methods, has agreed to<br />
adopt the following Exchange Ratio for the ordinary shares<br />
• 1.33 <strong>Pirelli</strong> & C. ordinary shares for each <strong>Pirelli</strong> S.p.A. share, or 4 <strong>Pirelli</strong> & C. ordinary shares for every 3 <strong>Pirelli</strong> S.p.A.<br />
ordinary shares<br />
For the savings shares, the Exchange Ratio is set at:<br />
• 1.43 <strong>Pirelli</strong> & C. savings shares for every <strong>Pirelli</strong> S.p.A. savings share, or 10 <strong>Pirelli</strong> & C. savings shares for every 7 <strong>Pirelli</strong><br />
S.p.A. savings shares<br />
In reaching the above decisions, also in applying art. 2501, quater, of the Italian Civil Code, the Board of Directors took into<br />
consideration the fact that the valuations made for purposes of determining the Exchange Ratios contain typical issues<br />
inherent to this type of analysis. In particular, the detailed type valuation (Sum of the Parts Method) is largely based upon<br />
preliminary data which, although accurately reflecting the expectations of the company, are subject to risks and<br />
uncertainties connected with the sectors in which the various businesses operate. On the other hand, the valuations based<br />
upon market prices, even if mitigated by the fact that averages relating to longer time frames are used instead of precise<br />
data, are subject to the actual volatility of the financial markets, which appears particularly accentuated in the present<br />
period.<br />
Conclusions<br />
On the basis of what was described above, the Exchange Ratios are set at:<br />
– 4 <strong>Pirelli</strong> & C. ordinary shares for every 3 <strong>Pirelli</strong> S.p.A. ordinary shares;<br />
– 10 <strong>Pirelli</strong> & C. non-convertible savings shares for every 7 <strong>Pirelli</strong> S.p.A. non-convertible savings shares.<br />
No cash differential is anticipated.<br />
These Exchange Ratios have received the consent of the directors of <strong>Pirelli</strong> & C..<br />
Moreover, the new <strong>Pirelli</strong> & C. shares designated for the Exchange Ratio do not carry the right to either receive <strong>Pirelli</strong> & C.<br />
dividends for the year ended December 31, <strong>2002</strong> or to participate in the <strong>Pirelli</strong> & C. capital increase described in the<br />
preceding paragraph 1.<br />
Fairness opinion<br />
The report on the fairness of the exchange ratio was drawn up, in the case of <strong>Pirelli</strong> & C., by PricewaterhouseCoopers<br />
S.p.A., the firm charged with the audit of the financial statements of both <strong>Pirelli</strong> & C. and <strong>Pirelli</strong> S.p.A..<br />
Inasmuch as, pursuant to art. 158, fourth paragraph of Legislative Decree No. 58 dated February 24, 1998, the company<br />
charged with the audit of more than one of the companies in the merger can draw up the report on the fairness of the<br />
exchange ratio for only one of the merging companies, <strong>Pirelli</strong> S.p.A. will petition the President of the <strong>Milan</strong> Courts to<br />
appoint an expert as set forth in art. 2501 quinquies of the Italian Civil Code.<br />
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4. Manner of assigning <strong>Pirelli</strong> & C. shares and the date the dividend rights accrue to these shares<br />
<strong>Pirelli</strong> & C. will execute the Merger by:<br />
– cancellation, without exchange, of the shares representing the entire share capital of <strong>Pirelli</strong> & C. Luxembourg;<br />
– cancellation, without exchange, of the <strong>Pirelli</strong> S.p.A. ordinary and savings shares that, at the date the Merger becomes<br />
effective, are owned by <strong>Pirelli</strong> & C. or <strong>Pirelli</strong> & C. Luxembourg;<br />
– cancellation, without exchange, of the shares of the company to be merged, <strong>Pirelli</strong> S.p.A., which, at the date the Merger<br />
becomes effective, are owned by the same company to be merged;<br />
– increase of its share capital for a maximum par value of Euros 786,127,230.72 through the issue of a maximum number of<br />
1,398,203,116 ordinary shares and a maximum number of 113,580,020 non-convertible savings shares of par value Euros<br />
0.52 each with dividend rights from January 1 of the year in which the Merger comes into effect with third parties, to be<br />
reserved for the shareholders of <strong>Pirelli</strong> S.p.A. (other than <strong>Pirelli</strong> & C. and <strong>Pirelli</strong> & C. Luxembourg) on the basis of the<br />
Exchange Ratios indicated in the preceding paragraph 3.<br />
As a result, art. 5 (share capital) of the by-laws of the merging company will be amended.<br />
The amount of the capital increase to service the exchange represents the maximum theoretical amount based upon the<br />
structure of the shareholder base as of the date of this report, assuming: (i) full exercise of the 46,154,000 “Mediocredito<br />
Lombardo Warrants – <strong>Pirelli</strong> S.p.A. ordinary shares 1998-2003”, held by a single party, valid for the subscription, in the<br />
period July 1 – 31, 2003, of 1 <strong>Pirelli</strong> S.p.A. ordinary share for each 1 warrant held at the price of approx. Euros 3.24 per<br />
share, and (ii) full exercise of the options granted by <strong>Pirelli</strong> S.p.A. under the existing incentive plans giving the beneficiaries<br />
the right to subscribe to 46,829,692 <strong>Pirelli</strong> S.p.A. ordinary shares.<br />
In order for the <strong>Pirelli</strong> S.p.A. shares, that are to be exchanged for the Exchange Ratio to be exactly divisible, up to a<br />
maximum of 2 ordinary shares and up to a maximum of 6 savings shares of <strong>Pirelli</strong> S.p.A. will be cancelled and made<br />
available to a shareholder. The exact amount of the shares to be cancelled will be determined at the time of signing the<br />
deed of merger, taking into account the number of <strong>Pirelli</strong> S.p.A. ordinary and savings shares held by <strong>Pirelli</strong> & C., <strong>Pirelli</strong> & C.<br />
Luxembourg and the same <strong>Pirelli</strong> S.p.A. at that date, as well as the eventual exercise of “Mediocredito Lombardo Warrants –<br />
<strong>Pirelli</strong> S.p.A. ordinary shares 1998-2003” and the eventual exercise of the options granted by <strong>Pirelli</strong> S.p.A. to the<br />
beneficiaries of the existing incentive plans.<br />
The <strong>Pirelli</strong> & C. shares issued under the Exchange Ratios will be made available to those entitled, under conditions of<br />
dematerialization, through the respective authorized depositary agents registered with Monte Titoli S.p.A. beginning from<br />
the date the Merger becomes effective, if the stock market is open for trading or from the first trading day thereafter.<br />
Where necessary, <strong>Pirelli</strong> S.p.A. will ensure, through a broker charged especially for the purpose, that shareholders can<br />
purchase or sell the minimum number of <strong>Pirelli</strong> S.p.A. shares in order to have a whole number of <strong>Pirelli</strong> & C. shares without<br />
any additional expenses, revenues stamps and commissions. This information will be announced on a timely basis through<br />
a specific notice published in at least one national newspaper.<br />
<strong>Pirelli</strong> & C. and <strong>Pirelli</strong> S.p.A. will advise those concerned of the necessary procedures to be followed to exchange the shares<br />
after the Merger has been executed through publication of a specific notice in at least one national newspaper.<br />
As from the date the Merger becomes effective, if the stock market is open for trading, or from the first trading day<br />
thereafter, the <strong>Pirelli</strong> S.p.A. shares of all classes of stock will be delisted from the Mercato Telematico Azionario organized<br />
and operated by Borsa Italiana S.p.A..<br />
<strong>Pirelli</strong> & C. shares, including the new shares issued to service the exchange ratio, will continue to be listed on the Mercato<br />
Telematico Azionario organized and operated by Borsa Italiana S.p.A..<br />
Proposal to modify the features of the <strong>Pirelli</strong> & C. savings shares<br />
The approval of the Merger on the part of the shareholders of the companies participating in the merger will entail a<br />
modification of the privileges offered by the <strong>Pirelli</strong> & C. savings shares as regards the distribution of profits. In fact, the bylaws<br />
of <strong>Pirelli</strong> & C. and <strong>Pirelli</strong> S.p.A. (and, in particular, art. 17 – which will be renumbered art. 18 – of <strong>Pirelli</strong> & C. and art.<br />
23 of <strong>Pirelli</strong> S.p.A.) establishes, respectively, a preference dividend equal to, respectively, 5 percent and 7 percent of the par<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
value of the savings shares (Euros 0.52 for both companies) to be paid from the annual earnings calculated net of the<br />
portion to appropriate to the legal reserve. In view of the fact that the Directors believe it more advisable to choose,<br />
between the two alternatives, the one that is more advantageous to the holders of savings shares, the by-laws attached to<br />
the plan of merger, on which your approval is requested, provides for a treatment of the savings shareholders identical to<br />
that currently established by art. 23 of the by-laws of <strong>Pirelli</strong> S.p.A.. Therefore, beginning from the date the Merger comes<br />
into effect with third parties, the <strong>Pirelli</strong> & C. non-convertible savings shares and, therefore, also those that will be issued to<br />
service the exchange ratio, will have the same rights and the same features as the <strong>Pirelli</strong> S.p.A. non-convertible savings<br />
shares outstanding prior to the date that the Merger takes effect.<br />
Furthermore, the new formulation of the above art. 18 does not contain the clause, that instead was in art. 23 of the by-laws<br />
of your company, relating to the portion of profits to be distributed to the members of the Board of Directors. The directors<br />
of your company, and those of <strong>Pirelli</strong> & C., think it more advisable to eliminate such clause and leave the determination of<br />
the compensation to which they are entitled – mindful of the provision of art. 2389, paragraph 2, of the Italian Civil Code –<br />
to the wish of the shareholders convened in the shareholders’ meeting.<br />
Delegation of powers ex art. 2443 to the Directors of <strong>Pirelli</strong> & C.<br />
The <strong>Pirelli</strong> & C. shareholders’ meeting called to approve the plan of merger will also be asked to grant the Directors the<br />
power to increase, at one or more times, the share capital, through the issue of a maximum of 100,000,000 ordinary shares,<br />
by April 30, 2008, to be granted to the managers and cadres of the company and its subsidiaries and subsidiaries of the<br />
latter, in Italy and abroad, pursuant to articles 2441 and/or 2349 of the Italian Civil Code. This delegation of power is based,<br />
on the one hand, upon the wish to allow the beneficiaries of the stock incentive plans approved by the Board of Directors<br />
of your company on November 5, 2001 to retain the rights granted even after the Merger becomes effective and, on the<br />
other hand, to have the opportunity to design new plans for sharing in the risk capital of <strong>Pirelli</strong> & C., the features of which<br />
take into account the applicable tax legislation and tend to favor the loyalty of the employees by further developing the<br />
sense of belonging to the <strong>Pirelli</strong> Group also after the extraordinary transactions that are described in this report.<br />
Date dividend rights accrue to shares servicing the Exchange Ratio<br />
The <strong>Pirelli</strong> & C. ordinary and non-convertible savings shares granted in the exchange will have dividend rights from January<br />
1 of the year in which the Merger comes into effect with third parties.<br />
5. Effective date of the Merger<br />
The deed of merger will establish the date from which the Merger will be in effect ex art. 2504 bis of the Italian Civil Code.<br />
The date could also be subsequent to the date in which the final registrations required by art. 2504 of the Italian Civil Code<br />
have been completed.<br />
In accordance with the combined provision of articles 2504 bis, paragraph 3, and 2501 bis, paragraph 6 of the Italian Civil<br />
Code, the transactions of <strong>Pirelli</strong> & C. Luxembourg and <strong>Pirelli</strong> S.p.A. will be taken up by <strong>Pirelli</strong> & C. in its financial<br />
statements beginning from January 1 of the year in which the merger comes into effect with third parties, and this is also<br />
the date on which the merger becomes effective for tax purposes, pursuant to art. 123, paragraph 7, of D.P.R. No. 917 of<br />
December 22, 1986 (the “Tuir”).<br />
6. Tax impact of the Merger on the companies concerned<br />
The merger transactions are governed, from a tax standpoint, by art. 123 Tuir and Legislative Decree 358/97.<br />
In general terms, the provisions provide for a neutral tax effect on the transaction since it does not give rise to the<br />
assumption of either the realization or the distribution of gains of the merged company.<br />
As a result, it follows that the values fiscally recognized for the assets of the companies that are to be merged will be<br />
maintained by the merging company.<br />
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Differences upon merger<br />
The merger, since it involves the unification of the net assets of the companies participating in the transaction, can give rise<br />
to the need to make specific entries to maintain the accounting equilibrium between the values of the assets and liabilities:<br />
the surplus or deficit on merger.<br />
From a fiscal standpoint, the merger surplus (represented by the exchange ratio and/or cancellation of the investment in the<br />
companies that were merged) is not taxable for the merging company. The merger surplus will become part of<br />
shareholders’ equity of the merging company, maintaining proportionally the same tax nature (of profits or capital) of the<br />
shareholders’ equity of the companies being merged prior to the merger.<br />
As regards, instead, the merger deficit, under civil law, it can be used to the increase the value of the assets of the<br />
companies being merged. To this end, Legislative Decree 358/97 states that this higher value can be recognized fiscally if<br />
subjected to an equalization tax of 19 percent.<br />
Furthermore, fiscal recognition of the merger deficit alone from the cancellation of the investment is allowed, even without<br />
paying the equalization tax, if and to the extent that the cancelled investments had given rise to gains subjected to taxes by<br />
the previous owners.<br />
If the merger deficit is recorded in the income statement, it does not form part of the taxable income of the merging<br />
company and, therefore, should be considered non-deductible for Irpeg purposes.<br />
Reserves in abeyance of taxation<br />
The reserves in abeyance of taxes recorded in the last financial statements of the merged companies will form part of the<br />
income of the merging company if and to the extent in which they have not been re-established in its financial statements.<br />
This does not apply to reserves which are taxable only in the event of distribution (for example, the monetary revaluation<br />
reserves), which must be re-established in the equity of the merging company only if there is a merger surplus or a capital<br />
increase for a amount that is higher than the total capital of the companies participating in the merger, net of the portion of<br />
share capital of each of them already owned by the same or by the others. In this case, the reserves form part of the<br />
income of the company resulting from the merger or of the merging company in the case of the successive distribution of<br />
the surplus or the reduction of capital due to an excess.<br />
The reserves already allocated to the capital of the merged companies shall be intended as transferred to the capital of the<br />
merging company and form part of the income in the case of the reduction of capital due to an excess.<br />
Loss carryforwards<br />
The tax losses of the companies participating in the merger, including the merging company, can be carried forward by the<br />
merging company for the portion of their amount which does not exceed the amount of the respective shareholders’ equity,<br />
as shown in the most recent financial statements or, if lower, as shown in the balance sheet data pursuant to art. 2502 of the<br />
Italian Civil Code without taking into account the contributions and payments against capital increases made in the last<br />
twenty-four months prior to the date of the same balance sheet data.<br />
The tax losses can, however, be carried forward on further condition that in the statement of income of the company to<br />
which the losses refer, relating to the year prior to the one in which the merger was decided, the amount of revenues and<br />
the amount of expenses for personnel costs and related social security costs are 40 percent higher than those resulting from<br />
the average of the two previous years.<br />
The losses can not, in any case, be carried forward up to the total amount of the writedowns of the shares of the merged<br />
companies deducted by the merging company or by the company which sold the shares to the merging company after the<br />
year to which the losses refer and before the deed of merger.<br />
Effective date for tax purposes<br />
The law allows a merger to be effective for tax and accounting purposes on a date prior to that established by civil law.<br />
Such date can not, however, be prior to the closing date of the last year of the merged companies or, if closer, the merging<br />
company.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Registration tax<br />
A fixed registration tax is applied to mergers.<br />
Effects on the shareholders of the merged companies<br />
The exchange of the investments held by the shareholders of the merged companies with shares of the merging company is<br />
irrelevant for tax purposes since there is neither the realization or distribution of gains nor the attainment of revenues.<br />
As regards the Merger transaction in question, the following can be said:<br />
– in view of the year-end closing date of the merged companies, the Merger will be effective for tax purposes from January<br />
1 of the year in which the Merger itself comes into effect with third parties;<br />
– the difference on merger arising from the cancellation of the <strong>Pirelli</strong> S.p.A. shares held by the merging company and the<br />
exchange of <strong>Pirelli</strong> S.p.A. shares held by third parties will be recorded for statutory purposes in the balance sheet of the<br />
merging company;<br />
– the reserves in abeyance of taxes recorded by the merged companies, which amount to Euros 45,824,199, will be<br />
recorded by the merging company by booking the merger surplus, whereas the reserve in abeyance of taxes already<br />
recorded in the capital of the merged companies, for a total of Euros 27,076,810, will be transferred to the capital of the<br />
merging company (in any case, taking into account the effects represented by the eventual withdrawal of the<br />
shareholders that has already taken place);<br />
– a fixed registration tax of Euros 129.11 will be applied to the merger, to be paid at the time of registering the deed of<br />
merger.<br />
7. Forecast of the relevant shareholder composition and the controlling structure of <strong>Pirelli</strong> & C. after the<br />
Merger<br />
The shareholder base of <strong>Pirelli</strong> S.p.A. as of the date of this report is as follows (information is provided on investments<br />
higher than two percent of subscribed share capital, represented by shares with voting rights, as shown in the shareholders’<br />
register, in official information received or in other available information):<br />
Shareholder / Declaring party No. of <strong>Pirelli</strong> S.p.A. shares % of ordinary share capital % of share capital<br />
<strong>Pirelli</strong> & C. 800,191,375 (1) 41.70 39.87<br />
Landesbank Baden Wuerttemberg 106,576,882 5.55 5.31<br />
<strong>Pirelli</strong> S.p.A. – treasury shares 163,263,699 (2) 8.51 8.13<br />
Other (*) 849,091,765 44.24 42.31<br />
Total 1,919,123,721 100.00 95.62<br />
Savings shareholders (**) 88,006,016 – 4.38<br />
Grand total 2,007,129,737 100.00 100.00<br />
Note:<br />
1. Sum of the investment held directly (272,378,274 shares) and indirectly through <strong>Pirelli</strong> & C. Luxembourg (527,813,101 shares).<br />
2. Of which 46,154,000 treasury shares available for eventual exercise of the “Mediocredito Lombardo Warrants – <strong>Pirelli</strong> S.p.A. ordinary shares 1998-2003”.<br />
(*) Camfin S.p.A. holds 37,361,855 ordinary shares (1.95 percent of ordinary share capital).<br />
(**) <strong>Pirelli</strong> & C. holds 8,500,000 savings shares.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
The shareholder base of <strong>Pirelli</strong> & C. as of the date of this report is as follows (information is provided on investments<br />
higher than two percent of subscribed share capital, represented by shares with voting rights, as shown in the shareholders’<br />
register, in official information received or in other available information; also presented are the investments held by the<br />
participants of the <strong>Pirelli</strong> & C. Accomandita per Azioni Voting Trust and the <strong>Pirelli</strong> & C. treasury shares, even if less than the<br />
2 percent threshold):<br />
Shareholder / Declaring Party No. of <strong>Pirelli</strong> & C. shares % of ordinary share capital % of share capital<br />
Camfin S.p.A.* 184,854,284 (1) 29.90 28.32<br />
Serfis S.p.A. 59,269,815 (2) 9.59 9.08<br />
Assicurazioni Generali S.p.A.* 38,423,166 6.21 5.89<br />
Holding di Partecipazioni Industriali S.p.A.* 36,731,056 5.94 5.63<br />
Fondiaria - Sai S.p.A.* 34,735,046 (3) 5.62 5.32<br />
Edizione Holding S.p.A.* 32,673,670 (4) 5.28 5.01<br />
Mediobanca S.p.A.* 31,378,375 5.07 4.81<br />
R.A.S. S.p.A.* 31,377,170 (5) 5.07 4.81<br />
e.Biscom S.p.A. 29,645,680 (6) 4.79 4.54<br />
S.M.I. S.p.A.* 12,228,540 1.98 1.87<br />
Massimo Moratti* 8,120,616 (7) 1.31 1.24<br />
Sinpar Holding S.A.* 6,115,487 0.99 0.94<br />
<strong>Pirelli</strong> & C. - treasury shares 2,617,500 0.42 0.40<br />
Other 110,147,441 17.83 16.87<br />
Total 618,317,846 100.00 94.73<br />
Saving shareholders 34,418,257 – 5.27<br />
Grand Total 652,736,103 100.00 100.00<br />
Note:<br />
1. Sum of the investment held by Camfin S.p.A. (184,852,214 shares) and by the controlling party Marco Tronchetti Provera ( 2,070 shares).<br />
2. Of which 29,528,225 held through Serfig S.r.l..<br />
3. Controlling party: Premafin HP S.p.A..<br />
4. Controlling party: Ragione di G. Benetton & C. S.a.p.a..<br />
5. Controlling party: Allianz Aktiengellschaft.<br />
6. Controlling party: Silvio Scaglia.<br />
7. Of which 6,792,046 shares held through CMC S.p.A..<br />
(*) Participants of the <strong>Pirelli</strong> & C. Accomandita per Azioni Voting Trust. The percentage of ordinary shares covered by the Voting Trust is currently equal to 56.48 percent.<br />
The following table shows the anticipated composition of the <strong>Pirelli</strong> & C. shareholder base after the effective date of the<br />
Merger, calculated by assuming that:<br />
– the current shareholders of <strong>Pirelli</strong> & C. will not exercise the right of withdrawal to which they are entitled as a result of<br />
the resolutions passed concerning the transformation to a corporation and the change in the corporate business purpose<br />
as more fully illustrated in the preceding paragraph 1;<br />
– the current shareholders of <strong>Pirelli</strong> & C. will participate proportionally in <strong>Pirelli</strong> & C.’s capital increase cum warrants,<br />
more fully described in the preceding paragraph 1 (therefore subscribing to their share of the stock and exercising the<br />
free warrants attached to the shares);<br />
– the “Mediocredito Lombardo Warrants – <strong>Pirelli</strong> S.p.A. ordinary shares 1998-2003” will not be exercised;<br />
– the options granted by <strong>Pirelli</strong> S.p.A. under the existing incentive plans which give the beneficiaries the right to subscribe<br />
to 46,829,692 <strong>Pirelli</strong> S.p.A. ordinary shares will not be exercised.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Shareholder / Declaring party % of ordinary shares post- % of ordinary shares post<br />
capital increase<br />
capital increase / post-exercise<br />
and post-Merger<br />
of warrants and post-Merger<br />
Camfin S.p.A.* 20.54 21.43 (1)<br />
Serfis S.p.A. 6.17 6.50 (2)<br />
Assicurazioni Generali S.p.A.* 4.00 4.21<br />
Holding di Partecipazioni Industriali S.p.A.* 3.82 4.03<br />
Fondiaria - Sai S.p.A.* 3.62 3.81 (3)<br />
Edizione Holding S.p.A.* 3.40 3.58 (4)<br />
Mediobanca S.p.A.* 3.27 3.44<br />
R.A.S. S.p.A.* 3.27 3.44 (5)<br />
Landesbank Baden Wuerttemberg 3.70 3.28<br />
e.Biscom S.p.A. 3.09 3.25 (6)<br />
S.M.I. S.p.A.* 1.27 1.34<br />
Massimo Moratti* 0.85 0.89 (7)<br />
Sinpar Holding S.A.* 0.64 0.67<br />
<strong>Pirelli</strong> & C. - treasury shares 0.07 0.06<br />
Other 42.29 40.07<br />
Total 100.00 100.00<br />
Note:<br />
1. Controlling party: Marco Tronchetti Provera.<br />
2. Also through the subsidiary Serfig S.r.l..<br />
3. Controlling party: Premafin HP S.p.A..<br />
4. Controlling party: Ragione di G. Benetton & C. S.a.p.a.<br />
5. Controlling party: Allianz Aktiengellschaft.<br />
6. Controlling party: Silvio Scaglia.<br />
7. Also through CMC S.p.A..<br />
(*) Participants in the Azioni <strong>Pirelli</strong> & C. Accomandita per Azioni Voting Trust.<br />
<strong>Pirelli</strong> & C. is not aware of the existence of individuals and/or legal entities which, after the Merger, could exercise control<br />
over same.<br />
After the Merger, and assuming the full subscription to the <strong>Pirelli</strong> & C. capital increase on option prior to the Merger<br />
(as well as the full exercise of the warrants), with no change in what was assumed above, the percentage of the total<br />
investment contributed to the <strong>Pirelli</strong> & C. Accomandita per Azioni Voting Trust (calculated on the ordinary share capital)<br />
will decrease from the current 56.48 percent to about 38.32 percent.<br />
8. Effects of the Merger on relevant Shareholder Agreements pursuant to art. 122 of Legislative Decree No. 58<br />
of February 24, 1998<br />
<strong>Pirelli</strong> & C.<br />
<strong>Pirelli</strong> & C. Accomandita per Azioni Voting Trust<br />
As a result of the capital increase earmarked to service the exchange ratio, and also taking into account the diluting effect<br />
of the <strong>Pirelli</strong> & C. capital increase cum warrants (as more fully described in the preceding paragraph 1) consequent to the<br />
offer of ordinary shares made also to savings shareholders, the percentage of the total investment contributed to the Voting<br />
Trust (calculated on ordinary share capital) will decrease from the current 56.48 percent to about 38.32 percent.<br />
No other significant effects on the aforementioned voting trust are anticipated.<br />
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<strong>Pirelli</strong> S.p.A.<br />
Agreement between <strong>Pirelli</strong> S.p.A. and Intesa Mediocredito S.p.A. and between <strong>Pirelli</strong> S.p.A. and Fondazione Cariplo<br />
Iniziative Patrimoniali S.p.A.<br />
No significant effects are expected on the above agreements, whose date of expiry (August 1, 2003) is presumably before<br />
the date that the Merger becomes effective.<br />
Agreements between: (i) <strong>Pirelli</strong> S.p.A. and Edizione Holding S.p.A. – Edizione Finance International S.A., (ii) <strong>Pirelli</strong><br />
S.p.A., UniCredito Italiano S.p.A. and Intesa S.p.A., and (iii) <strong>Pirelli</strong> S.p.A. Edizione Holding S.p.A. – Edizione Finance<br />
International S.A., UniCredito Italiano S.p.A., Intesa S.p.A., Olimpia S.p.A. and Hopa S.p.A.<br />
The above agreements are finalized to regulate the control and governing of the common quality of shareholders in Olimpia<br />
S.p.A., the company which holds an investment in Olivetti S.p.A..<br />
In executing the agreement signed between <strong>Pirelli</strong> S.p.A., Edizione Holding S.p.A. - Edizione Finance International S.A.,<br />
UniCredito Italiano S.p.A., Intesa S.p.A., Olimpia S.p.A. and Hopa S.p.A., the Olimpia S.p.A. shareholders’ meeting passed a<br />
resolution, on March 3, 2003, for the merger of Holy S.r.l., the wholly-owned subsidiary of Hopa S.p.A., in Olimpia S.p.A..<br />
After this merger, 50.4 percent of Olimpia S.p.A.’s share capital will be held by <strong>Pirelli</strong> S.p.A., 16.8 percent by Edizione<br />
Finance International S.A., 16 percent by Hopa S.p.A. and 8.4 percent by UniCredito Italiano S.p.A. and Intesa S.p.A..<br />
The Merger is not expected have any significant effects on the above agreements, except that <strong>Pirelli</strong> & C. will consequently<br />
take over the rights and obligations of <strong>Pirelli</strong> S.p.A..<br />
<strong>Pirelli</strong> & C. Luxembourg<br />
There are no shareholder agreements covering <strong>Pirelli</strong> & C. Luxembourg shares.<br />
Extracts of the agreements cited in this paragraph 8, published in accordance with the law, are presented as an attachment<br />
to this report.<br />
9. Evaluation of the Board of Directors on the eventual recourse to the right of withdrawal pursuant<br />
to art. 2437 of the Italian Civil Code<br />
The Board of Directors of <strong>Pirelli</strong> S.p.A. does not believe that the Merger gives rise to the right of withdrawal for the<br />
shareholders of <strong>Pirelli</strong> & C. and <strong>Pirelli</strong> S.p.A. pursuant to art. 2437 of the Italian Civil Code.<br />
However, the absent or dissenting holders of <strong>Pirelli</strong> & C. ordinary shares regarding the specific resolutions on the<br />
transformation of <strong>Pirelli</strong> & C. to a corporation and the change in the corporate business purpose (more fully described in<br />
the preceding paragraph 1) and the holders of <strong>Pirelli</strong> & C. savings shares, will be entitled to the right of withdrawal<br />
pursuant to art. 2437 of the Italian Civil Code to be exercised in the manner indicated in the specific notice that will be<br />
published in at least one national newspaper subsequent to the registration of the relative resolutions in the Companies<br />
Registry.<br />
10. Amendments to by-laws<br />
As a result of the Merger, your company will be incorporated in <strong>Pirelli</strong> & C. which will adopt the by-laws attached to this<br />
report.<br />
Except for combining the provisions of certain articles and the consequent re-numbering of the articles, the provisions<br />
contained in the by-laws which are being proposed for approval as an attachment to the plan of merger, in substance,<br />
reflect what is currently contained in the by-laws of your company. In fact, the new text re-proposes the type of legal entity<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
(art. 1), the corporate business purpose (art. 2), the subdivision of share capital in ordinary and savings shares (art. 6), the<br />
functioning of the corporate bodies (articles 7 through 9 with regard to shareholders’ meetings and articles 10 through 15<br />
with regard to the Board of Directors and Executive Committee and article 16 for the Board of Statutory Auditors) and the<br />
distribution of profits (art. 18).<br />
The most important changes compared to the by-laws adopted by your company are as follows:<br />
(i) taking the name of the merging company;<br />
(ii) a different location for the registered office: from Viale Sarca 222 to Via G. Negri 10, always in <strong>Milan</strong>;<br />
(iii) an increase in the maximum number of Board members from the current 19 to 23 (art. 10);<br />
(iv) the deletion, described in the preceding paragraph 4, of the destination of a part of the profits to compensate the work<br />
carried out by the Directors (art. 23 of the <strong>Pirelli</strong> S.p.A. currently in force).<br />
Art. 5 will also be amended to reflect the new amount of share capital as a result of the Merger.<br />
Lastly, another paragraph will be added to art. 5 to reflect the delegation of power that will be attributed to the Directors of<br />
<strong>Pirelli</strong> & C. to increase share capital through the issue, at one or more times, of a maximum of 100,000,000 <strong>Pirelli</strong> & C.<br />
ordinary shares, by April 30, 2008, to be granted to the managers and cadres of the company and its subsidiaries and<br />
subsidiaries of the latter, in Italy and abroad, pursuant to articles 2441 and/or 2349 of the Italian Civil Code.<br />
Attached are the plan of merger and the text of the by-laws of the merging company which, when approved by you, will<br />
become effective on the date the Merger come into force, pursuant to art. 2504 bis of the Italian Civil Code and in<br />
accordance with that established in the plan of merger.<br />
* * *<br />
If in agreement with our proposal, we ask you to pass the following<br />
resolution<br />
“The extraordinary shareholders’ meeting:<br />
• having examined the plan of merger drawn up in accordance with article 2501 bis of the Italian Civil Code and the<br />
relative report of the Directors;<br />
• having taken note of the balance sheet data of the company at December 31, <strong>2002</strong>;<br />
• having taken note of the balance sheet data <strong>Pirelli</strong> & C. Luxembourg at December 31, <strong>2002</strong>;<br />
• having taken note of the balance sheet data <strong>Pirelli</strong> & C. at December 31, <strong>2002</strong>;<br />
• having taken note of the registration of the plan of merger at the <strong>Milan</strong> Companies Registry, in accordance with art. 2501<br />
bis of the Italian Civil Code, under date of April ……, 2003 for <strong>Pirelli</strong> & C., <strong>Pirelli</strong> & C. Luxembourg and <strong>Pirelli</strong> S.p.A.,<br />
and the documentation filed as required by the provisions of art. 2501 sexies and art. 2504 quinquies of the Italian Civil<br />
Code within the terms of the law;<br />
• having taken note of the statement by the Board of Statutory Auditors which attests that the current share capital of<br />
<strong>Pirelli</strong> S.p.A. of Euros 1,043,707,463.24, represented by 1,919,123,721 ordinary shares and 88,006,016 savings shares, all<br />
with a par value of Euros 0.52, is entirely subscribed and paid-in;<br />
• having taken note that <strong>Pirelli</strong> & C. owns 270,000 <strong>Pirelli</strong> & C. Luxembourg shares of par value Euros 680.00 each,<br />
representing the entire share capital of said company;<br />
• having taken note of the opinion of the experts, ex art. 158, paragraph 4, Legislative Decree No. 58/98, on the fairness of<br />
the exchange ratio of the shares relating to the merger by incorporation of <strong>Pirelli</strong> & C. Luxembourg and <strong>Pirelli</strong> S.p.A. in<br />
<strong>Pirelli</strong> & C. issued, pursuant to art. 2501 quinquies of the Italian Civil Code, for <strong>Pirelli</strong> & C. by PricewaterhouseCoopers<br />
S.p.A. and for <strong>Pirelli</strong> S.p.A. by ………. following the decree for nomination by the President of the <strong>Milan</strong> Courts;<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
votes<br />
to approve the plan of merger by incorporation in <strong>Pirelli</strong> & C. of <strong>Pirelli</strong> & C. Luxembourg and <strong>Pirelli</strong> S.p.A. (attached to<br />
these minutes) as registered in the <strong>Milan</strong> Companies Registry, according to the provisions of art. 2501 bis of the Italian Civil<br />
Code, and thus, for the purpose, with no changes to any other provisions of the same plan:<br />
a) to merge by incorporation in <strong>Pirelli</strong> & C., with registered office in <strong>Milan</strong>, Via G. Negri 10, now with share capital of Euros<br />
339,422,773.56, <strong>Pirelli</strong> & C. Luxembourg with registered office in <strong>Milan</strong>, Via G. Negri 10, with share capital of Euros<br />
183,600,000 (a wholly-owned subsidiary of <strong>Pirelli</strong> & C.) and <strong>Pirelli</strong> S.p.A. with registered office in <strong>Milan</strong>, Viale Sarca 222,<br />
now with share capital of Euros 1,043,707,463.24, on the basis of the respective balance sheet data at December 31, <strong>2002</strong>,<br />
with (i) cancellation without substitution of all the <strong>Pirelli</strong> & C. Luxembourg shares and without a capital increase on the<br />
part of <strong>Pirelli</strong> & C., since the latter owns the entire share capital of the merged company, (ii) cancellation without<br />
substitution of the <strong>Pirelli</strong> S.p.A. ordinary and savings shares that will be owned, at the date the merger becomes<br />
effective, by the merging company, by <strong>Pirelli</strong> & C. Luxembourg and by <strong>Pirelli</strong> S.p.A., and (iii) the increase of the capital<br />
of <strong>Pirelli</strong> & C. for a maximum par value of Euros 786,127,230.72 through the issue of a maximum of 1,398,203,116<br />
ordinary shares and a maximum of 113,580,020 savings shares, all of par value Euros 0.52 each, with dividend rights from<br />
January 1 of the year in which the merger comes into effect with third parties, to be assigned to the third-party holders<br />
of <strong>Pirelli</strong> S.p.A. ordinary and savings shares in a ratio of 4 new <strong>Pirelli</strong> & C. ordinary shares for every 3 <strong>Pirelli</strong> S.p.A.<br />
ordinary shares and 10 new <strong>Pirelli</strong> & C. non-convertible savings shares for every 7 <strong>Pirelli</strong> S.p.A. non-convertible savings<br />
shares;<br />
b) to delegate to the Chairman, Deputy Chairman and, where appointed, the Managing Directors pro tempore in office, any<br />
and all powers, so that each of them, separately, and also through those holding special power of attorney, can execute<br />
the preceding resolutions, with the right to make changes in form and not substance, that might be required for purposes<br />
of registration in the Companies Registry, determining every single formality for the individual transactions according to<br />
the dictates of the plan of merger, reaching an agreement for the stipulation of the deed of merger, and any other act<br />
inherent to and consequent thereof, once <strong>Pirelli</strong> & C. has approved the transformation to a corporation with the related<br />
amendment to the by-laws and the capital increase offered on option to the <strong>Pirelli</strong> & C. shareholders has been effected<br />
as submitted for approval to the shareholders on May 7, 2003 in first call and on May 8, 2003 in second call, allowing<br />
transfers, transcriptions and notes in the public registers and exonerating the Land and Property Registrar and any other<br />
Public Office from whatsoever responsibility and fulfilling all that is essential for the complete execution of the<br />
aforementioned resolutions, with all the necessary and appropriate power for this purpose, none excluded or excepted.”<br />
The Board of Directors<br />
<strong>Milan</strong>, March 11, 2003<br />
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PIRELLI & C. ACCOMANDITA PER AZIONI VOTING TRUST AGREEMENT<br />
1. Type of agreement and purpose<br />
The purpose of the <strong>Pirelli</strong> & C. voting trust agreement is to ensure a stable shareholder base and a uniform strategy in the management of the company.<br />
2 Parties to the agreement and <strong>Pirelli</strong> & C. shares transferred to the voting trust<br />
Number of shares % of total shares % of total ordinary<br />
transferred to trust transferred to trust shares issued<br />
CAMFIN S.p.A. 126,090,714 36.10% 20.39%<br />
HOLDING DI PARTEC. INDUST. S.p.A. 36,583,598 10.47% 5.92%<br />
FONDIARIA - SAI S.p.A. 34,685,046 9.93% 5.61%<br />
MEDIOBANCA S.p.A. 31,378,375 8.98% 5.07%<br />
EDIZIONE HOLDING S.p.A. 31,377,170 8.98% 5.07%<br />
R.A.S. S.p.A. 31,377,170 8.98% 5.07%<br />
ASSICURAZIONI GENERALI S.p.A. 31,377,170 8.98% 5.07%<br />
S.M.I. S.p.A. 12,228,540 3.50% 1.98%<br />
Massimo MORATTI (*) 8,120,616 2.33% 1.31%<br />
SINPAR HOLDING S.A. 6,115,487 1.75% 0.99%<br />
Total 349,333,886 100% 56.48%<br />
(*) of which 6,792,046 shares through CMC S.p.A.<br />
3. The party, if any, which, through the agreement, can exercise control over the company<br />
There is no party which, through the agreement, can exercise control over <strong>Pirelli</strong> & C..<br />
4. Restrictions on the sale of the shares transferred and on the subscription and the purchase of new shares<br />
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<br />
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 of the voting trust.<br />
Each participant may buy or sell additional shares for an amount not in excess of the higher of 20% of the shares already transferred and 2% of the ordinary share<br />
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<br />
the amount in excess of the above limits came under the voting trust.<br />
CAMFIN S.p.A. is authorized to freely purchase additional <strong>Pirelli</strong> & C. shares; it can transfer shares to the voting trust, but to the extent that, at any one time, the<br />
shares do not exceed 40% of total shares transferred by all the participants in the voting trust. This has been decided so that a stable predominate position is not<br />
assumed in the voting trust or a stable veto power is not exercised over common decisions.<br />
5. Disposition of the shares<br />
The shares transferred shall remain at the disposition of the participants in the voting trust.<br />
6. Bodies governing the agreement, criteria and manner of composition, cases when meetings are called and powers delegated<br />
The Body governing the agreement is the management of the voting trust.<br />
Management of the voting trust shall consist of a president and vice-president designated by <strong>Pirelli</strong> & C. from among its directors and by a member representing each<br />
participant unless a participant has deposited more than 10% of ordinary share capital, in which case another member may be designated: for this purpose, in the<br />
event the voting trust is composed of several companies related by a controlling relationship or belonging to the same parent company, their aggregate shall be<br />
considered for this purpose as one sole participant in the voting trust.<br />
The management of the voting trust shall be convened to evaluate the proposals to be submitted to the Shareholders’ Meetings, for the possible earlier termination of<br />
the agreement and for the admission of new participants. The Shareholders’ Meeting shall also meet at least twice a year to examine, with the directors of <strong>Pirelli</strong> & C.,<br />
the half-year performance, the annual results, the general guidelines for the company’s development, the investment policy and proposed significant divestitures. and<br />
more in general, all the relevant matters of discussion by both the ordinary and extraordinary sessions of the Shareholders’ Meetings.<br />
The agreement shall be terminated when the majority of the directors of <strong>Pirelli</strong> & C. do not share the guidelines decided by the management of the voting trust.<br />
7. Matters covered by the agreement<br />
Those contemplated in points 4 and 6.<br />
8. Majority vote required for decisions relating to matters in the agreement<br />
The management of the voting trust passes resolutions by casting votes in favor by the members representing at least three-fifths of the shares transferred;<br />
management of the voting trust can designate trustees to represent the shares in the voting trust at the Shareholders’ Meetings in order for voting to take place<br />
according to the instructions of the management of the voting trust. Whenever the decisions of the management of the voting trust are not voted unanimously, the<br />
dissenting participant shall have the right to freely exercise his/hers/its vote in the Shareholders’ Meeting.<br />
9. Term, renewal and cancellation of the agreement<br />
The agreement shall be valid until April 15, 2004 and shall be tacitly renewed for a period of three years except for withdrawal, which can be exercised between<br />
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 proquota<br />
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<br />
<strong>Pirelli</strong> & C.’s subscribed ordinary share capital of not less than 33%.<br />
10. Penalties for breach of the commitments contained in the agreement<br />
They are not envisaged by the agreement.<br />
11. Registration of the agreement at the Company Registry<br />
The agreement is registered at the office of the <strong>Milan</strong> Companies Registry.<br />
<strong>Milan</strong>, December 31, <strong>2002</strong><br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Notice pursuant to art. 10, paragraph 4, Law No. 149 of February 18, 1992 and Consob resolution No. 7835 of March 8, 1994<br />
<strong>Pirelli</strong> S.p.A. reached an agreement for a loan of about Lire 290 billion coming from the issue of “Mediocredito Lombardo S.p.A. 1998/2003 2.2% special series bonds cum<br />
warrants for <strong>Pirelli</strong> S.p.A. ordinary shares” (the “Loan”) issued by Mediocredito Lombardo S.p.A. (“Mediocredito”) and subscribed to by Fondazione Cariplo Iniziative<br />
Patrimoniali S.p.A. (“Fondazione”).<br />
Each bond carries a “Mediocredito Lombardo Warrant - <strong>Pirelli</strong> S.p.A. ordinary shares 98-03” (the “Warrants”) to acquire at pre-fixed prices, over the next five years, up to a<br />
maximum of 46,154,000 <strong>Pirelli</strong> S.p.A. ordinary shares (the “Shares”). The Shares shall be made available by the same <strong>Pirelli</strong> S.p.A. which will draw them from the treasury<br />
shares. The Loan contains the so-called cash equivalent clause whereby <strong>Pirelli</strong> S.p.A. has the right, should Mediocredito declare that the holder of the Warrants intends to<br />
exercise them, to choose between delivering the shares or paying the difference, if positive, between the market price of the shares, in reference to the arithmetic average<br />
of the last three official prices available at the time the warrants are exercised, and the price of exercising the Warrants.<br />
Agreement between <strong>Pirelli</strong> S.p.A. and Mediocredito Lombardo S.p.A.<br />
1. Type of agreement and purpose<br />
Compendium agreement having the purpose of guaranteeing the issuer Mediocredito the amount of <strong>Pirelli</strong> S.p.A. ordinary shares or money needed to allow the same<br />
Mediocredito to fulfill its obligations to the carriers of Warrants at the time they are eventually exercised.<br />
2. Parties to the agreement<br />
The parties to the agreement are Mediocredito and <strong>Pirelli</strong> S.p.A..<br />
3. Financial instruments covered by the agreement<br />
The <strong>Pirelli</strong> S.p.A. ordinary shares covered by the agreement are a maximum of No. 46,154,000.<br />
They represent 2.44% of the ordinary share capital of <strong>Pirelli</strong> S.p.A. as of today’s date.<br />
4. The party, if any, which, through the agreement, can exercise control over the company<br />
There is no party which, through the agreement, can exercise control over <strong>Pirelli</strong> S.p.A..<br />
5. Restrictions on the sale of the shares<br />
There are no restrictions whatsoever on the Shares or destined in any way whatsoever to limit their disposition.<br />
6. Disposition of the shares<br />
The Shares shall remain at the disposition of <strong>Pirelli</strong> S.p.A..<br />
7. Bodies governing the agreement<br />
They are not envisaged by the agreement.<br />
8. Matters covered by the agreement.<br />
Those covered in paragraph 1.<br />
9. Term, renewal and cancellation of the agreement<br />
The agreement runs until the expiration date for the exercise of the Warrants (July 31, 2003) and it is not renewable nor is it subject to cancellation or withdrawal.<br />
10. Penalties for breach of the commitments contained in the agreement<br />
They are not envisaged by the agreement.<br />
Agreements between <strong>Pirelli</strong> S.p.A. and Fondazione Cariplo Iniziative Patrimoniali S.p.A.<br />
1. Type of agreement and purpose<br />
Pre-emptive agreement having the purpose of guaranteeing <strong>Pirelli</strong> S.p.A., or parties indicated by it, the pre-emptive right to acquire the Warrants (or the rights to the<br />
Warrants) assigned, at issue, to the Loan.<br />
2. Parties to the agreement<br />
The parties to the agreement are Fondazione and <strong>Pirelli</strong> S.p.A..<br />
3. Financial instruments covered by the agreement<br />
Warrants covered by the agreement are a maximum of No. 46,154,000.<br />
In the event the Warrants are exercised, they give the right to acquire Shares representing 2.44% of the ordinary share capital of <strong>Pirelli</strong> S.p.A. as of today’s date.<br />
4. The party, if any, which, through the agreement, can exercise control over the company<br />
There is no party which, through the agreement, can exercise control over <strong>Pirelli</strong> S.p.A..<br />
5. Restrictions on the sale of the warrants.<br />
There are no restrictions whatsoever on the Warrants or destined in any way whatsoever to limit their disposition.<br />
The sale of the Warrants, or the rights to them, to subsidiaries as set forth by art. 2359, paragraph 1, point l, of the Italian Civil Code and to the parent companies of<br />
the Fondazione, is freely permitted; to third parties it is allowed by pre-emption; to commercial competitors of <strong>Pirelli</strong> S.p.A. it is permitted with approval.<br />
6. Disposition of the warrants<br />
The Warrants remain at the disposition of the holders.<br />
7. Bodies governing the agreement<br />
They are not envisaged by the agreement.<br />
8. Matters covered by the agreement.<br />
Those covered in paragraphs 1 and 5.<br />
9. Term, renewal and cancellation of the agreement<br />
The agreement runs until August 1, 2003; it is not renewable nor is it subject to cancellation or withdrawal.<br />
10. Penalties for breach of the commitments contained in the agreement<br />
They are not envisaged by the agreement.<br />
<strong>Milan</strong>, December 15, 1998<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Notice pursuant to art. 122 of Legislative Decree No. 58 of February 24, 1998 and the regulation for its introduction adopted with Consob resolution No.<br />
11971 of May 14, 1999 (and subsequent amendments)<br />
Agreement between <strong>Pirelli</strong> S.p.A. and Fondazione Cariplo Iniziative Patrimoniali S.p.A.<br />
(the extract of which was published in the Press on December 15, 1998)<br />
Be it communicated, that in accordance with above provisions, that the agreement between <strong>Pirelli</strong> S.p.A. and Fondazione Cariplo Iniziative Patrimoniali S.p.A., has been<br />
renewed, in accordance with the original wish of the contracting parties, up to August 2003.<br />
At this time, be it furthermore communicated, that also the agreement between <strong>Pirelli</strong> S.p.A. and Mediocredito Lombardo S.p.A. (which was taken over, in the meantime,<br />
by IntesaBci Mediocredito S.p.A.) will be binding up to August 2003.<br />
The above agreements have been filed with the <strong>Milan</strong> Companies Registry.<br />
<strong>Milan</strong>, December 22, 2001<br />
AGREEMENT BETWEEN PIRELLI S.p.A. AND EDIZIONE HOLDING S.p.A. – EDIZIONE FINANCE INTERNATIONAL S.A.<br />
Notice published according to article 122 of Legislative Decree No. 58 dated February 24, 1998 and to the regulation for its introduction adopted with<br />
Consob’s resolution No. 11971 of May 14, 1999 (and subsequent changes)<br />
Provided that:<br />
• <strong>Pirelli</strong> S.p.A. (with registered offices in <strong>Milan</strong>, at Viale Sarca 222, registered in the <strong>Milan</strong> Companies Registry under tax code and VAT No. 00886890151 hereafter<br />
referred to as “<strong>Pirelli</strong>”), and Edizione Holding S.p.A. (with registered offices in Treviso, at Calmaggiore 23, registered in the Treviso Companies Registry under tax<br />
code No. and VAT No. 00778430264 hereafter referred to as “Edizione”) executed on August 7, 2001 an agreement in order to govern as shareholders a vehicle<br />
company designated specifically for the acquisition from BELL S.A. and other parties of No. 1,552,662,120 ordinary shares (the “Shares”) and No. 68,409,125 “warrants<br />
ordinary shares Olivetti 2001-<strong>2002</strong>”(“Warrants” and together with the Shares, the “Investment”) of Olivetti S.p.A. (hereafter “Olivetti”);<br />
• On August 9, 2001, Edizione and <strong>Pirelli</strong> transferred to Olimpia S.p.A. (with registered offices in <strong>Milan</strong>, at Viale Sarca 222 “Newco” or “Olimpia”) respectively No.<br />
134,322,250 and No. 130,980,000 Olivetti ordinary shares, equal, respectively, to 1.84% and to 1.80% of Olivetti share capital with voting rights;<br />
• On August 9, 2001, an additional No. 147,337,880 of Olivetti ordinary shares were transferred to Newco that <strong>Pirelli</strong> purchased, through a subsidiary, from Bell S.A and<br />
from another party on July 30, 2001 (equal to 2.02% of Olivetti share capital with voting rights);<br />
• Effective August 7, 2001, Edizione Finance International S.A. (a subsidiary of Edizione) took over the rights and obligations of Edizione under the Agreement as<br />
defined below;<br />
• <strong>Pirelli</strong>, Edizione and Edizione Finance International S.A. (the “Parties” and individually the “Party”) on September 14, 2001 signed an amendment, publicly announced<br />
on September 22, 2001, in accordance with existing laws.<br />
Moreover:<br />
• the Parties, on February 13, <strong>2002</strong>, stipulated a second amendment to the Agreement, which is underlined in bold later in the report in the paragraph “Further<br />
commitments of the parties”, so that the Parties may purchase (and eventually convert) convertible bonds into Olivetti shares (hereafter referred to as the “Bonds”).<br />
The entire agreement is summarized below, specifying that Olimpia’s investment in the share capital of Olivetti is equal to approximately 28.7%.<br />
1. Content of the agreement<br />
Purpose and content of the agreement<br />
The Parties have reached an agreement (the “Agreement”) as to the criteria governing the shareholders of a specifically identified vehicle company (Olimpia) for the<br />
acquisition of the Investment from BELL S.A. and/or other parties designated by it.<br />
Transfer of Olivetti shares to Newco<br />
The Investment shall be transferred to Newco.<br />
Share capital of Newco<br />
Newco’s share capital is 80% held by <strong>Pirelli</strong> and 20% by Edizione. <strong>Pirelli</strong> will have the right, with prior consent from Edizione, to sell up to 20% of the share capital of<br />
Newco to one or more parties.<br />
Shareholders’ Meeting, Board of Directors and Board of Statutory Auditors of Newco<br />
The By-laws of Newco state that the Extraordinary Shareholders’ Meeting shall pass resolutions with 81% of the share capital casting a vote in favor both in first and<br />
second call.<br />
The Board of Directors of Newco shall be formed by ten members nominated by voting list. Edizione will have the right to nominate two directors. <strong>Pirelli</strong> agrees to do<br />
everything in its power so that, within the limits of law, no decision shall be made by the Board of Directors of Newco without a vote cast in favor by at least one of the<br />
board members appointed by Edizione (if present) on certain key issues such as:<br />
• an indication of the vote to be expressed in the Ordinary and Extraordinary Shareholders’ Meetings of Olivetti;<br />
• the purchase, sale or acts to dispose in any manner of investments with a total value greater than Euros 100,000,000 per single transaction.<br />
The Parties hereby agree to do everything in their power so that one acting statutory auditor and one alternate statutory auditor of Newco shall be named by Edizione.<br />
Corporate boards of Olivetti and its listed subsidiaries, resolutions passed by the Board of Directors of Olivetti and its listed subsidiaries<br />
The Parties agree to do everything in their power, within the limits of law, so that, as regards the directors of Olivetti S.p.A., Telecom Italia S.p.A., TIM – Telecom Italia<br />
Mobile S.p.A. and Seat Pagine Gialle S.p.A. (hereinafter “Listed Companies”), Edizione may designate one-fifth of the available members of the Boards of Directors for<br />
nomination (net of the directors nominated by the market and government entities) and the Deputy President with vice-representation in the aforementioned companies.<br />
• For the entire term of this Agreement, Edizione agrees not to present opposition to the fact that the members of the Board of Directors of Listed Companies and the<br />
subsidiaries not named by Edizione, the market, or government agencies, shall be named by <strong>Pirelli</strong>.<br />
• The parties agree to do everything in their power so that no decision shall be made by the Board of Directors of Olivetti and Listed Companies without a vote cast in<br />
favor by at least one of the board members named by Edizione on the following points of business:<br />
– individual investments greater than Euros 250 million;<br />
– purchase, sale and acts to dispose for any reason whatsoever of subsidiary or affiliate investments with a unit value of greater than Euros 250 million;<br />
– acts to dispose for any reason whatsoever of companies or business segments individually greater than Euros 250 million;<br />
– proposals to call the Extraordinary Shareholders’ Meeting;<br />
– infragroup transactions between the Olivetti group and the <strong>Pirelli</strong> group for amounts individually greater than Euros 50 million;<br />
– related party transactions.<br />
Penalty<br />
The breach of the provisions of this Agreement shall cause the breaching party to pay to the complying party a penalty equal to 10% of the principal amount invested by<br />
the complying party, including the right to higher damages.<br />
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Term<br />
This Agreement shall run for three years and shall be deemed to be tacitly renewed on each expiration date unless notice of withdrawal has been given by Edizione 6 (six)<br />
months in advance.<br />
Further commitments of the Parties<br />
The Agreement provides that the Parties and/or their subsidiaries or parent companies pursuant to article 2359, paragraph 1 of the Italian Civil Code may not purchase<br />
further shares or bonds which may be converted into Olivetti shares. Nevertheless, the Parties may, with prior notice to the other party, purchase bonds; the<br />
Party which holds the bonds may exercise the conversion right, with prior notice of 60 days to the other party, only to the extent that the amount of the<br />
Olivetti shares coming from the conversion (eventually increased by the numbers of Olivetti shares owned at the same date, coming from prior<br />
conversion), does not exceed after conversion, the percentage of the Olivetti share capital corresponding to the difference between 28.74% and the<br />
percentage of Olimpia’s investment in the share capital with voting rights in Olivetti at the time of conversion. Such limit may be exceeded with the<br />
consent of the other Party within the applicable threshold for Takeover Bids (OPA). In this case, the Party which has exercised the conversion right<br />
shall have the obligation to sell to the other Party, if requested, shares of the same nature and typology of those coming from the exercise of the<br />
conversion of the Bonds, to the extent that such shares shall be divided between the Parties in relation to the original proportion of the Investment by<br />
the Parties in the share capital of Olimpia: <strong>Pirelli</strong> 80% and Edizione 20%.<br />
In the event that third parties should make a Takeover Bid (OPA) for Olivetti, Edizione hereby agrees, when so requested by <strong>Pirelli</strong>, not to oppose Newco’s acceptance of<br />
the OPA.<br />
In the event of non-renewal of the Agreement upon expiration by <strong>Pirelli</strong>, Edizione shall have the right to sell to <strong>Pirelli</strong>, which shall have the corresponding obligation to<br />
buy, all of its Newco shares.<br />
The Agreement in addition provides for the terms and conditions to overcome a deadlock situation in Newco or in the Board of Directors of the Listed Companies which<br />
are resolved as follows: (i) Edizione shall have the right to sell to <strong>Pirelli</strong>, which shall have the corresponding obligation to purchase all the Newco shares; ii) <strong>Pirelli</strong> shall<br />
have the right to purchase from Edizione, which shall have the corresponding obligation to sell all the Newco shares.<br />
The by-laws of Newco shall provide for a pre-emptive right in case of acts for disposal which will cause a direct or indirect transfer of Newco’s shares and, in accordance<br />
with the pre-emptive right, a co-sale right in favor of the minority shareholder/s/ where Newco’s shares are offered to third parties by the majority shareholder (50.01%).<br />
Whenever, during the term of this Agreement, following one or several acts inter vivos carried out for whatsoever reason, there occurs, with reference to the situation that<br />
existed at the time the agreement was signed, a material change in the controlling structure of Edizione or <strong>Pirelli</strong> (including <strong>Pirelli</strong> & C Accomandita per Azioni for these<br />
purposes), meaning that parties other than those currently having the power may nominate the majority of the members of the governing body with a subsequent possible<br />
change in the strategic guidelines, this will constitute a “Key Event”.<br />
In the presence of a Key Event concerning one Party, the other Party shall have the right to transfer all of its Newco shares to the party which caused the Key Event to<br />
occur.<br />
2. Registration at the office of the Companies Registry<br />
The Agreement is registered at the office of the <strong>Milan</strong> and Turin/Ivrea Companies Registry.<br />
February 21, <strong>2002</strong><br />
AGREEMENT BETWEEN PIRELLI S.p.A., UNICREDITO ITALIANO S.p.A. and INTESABCI S.p.A.<br />
Notice published according to article 122 of Legislative Decree No. 58 dated February 24, 1998 and to the regulation for its introduction adopted with<br />
Consob’s resolution No. 11971 of May 14, 1999 (and subsequent changes)<br />
Considering that:<br />
<strong>Pirelli</strong> S.p.A., IntesaBCI S.p.A. and Unicredito Italiano S.p.A. on October 24, 2001 have agreed to amend this Agreement, underlined in bold in paragraph 11, Further<br />
Commitments points 11.1 and 11.2 such as to allow the Parties to subscribe to bonds convertible into Olivetti shares and/or warrants with rights to acquire shares and/or<br />
bonds convertible into Olivetti shares, the entire agreement is summarized below, which has been updated, and reports the data relating to the investment held by Olimpia<br />
in Olivetti (paragraph 1, Purpose and content of the agreement) and the equity interest of the shareholders in Olimpia (paragraph 2, Olimpia’s share capital).<br />
1. Purpose and content of the Agreement<br />
The Parties as defined herein, have reached an agreement (the “Agreement”) regarding the entry of Unicredito Italiano S.p.A. (”UCI”) and IntesaBCI S.p.A. (“BCI”, BCI<br />
and UCI together “the New Shareholders”, each of the New Shareholders individually the “New Shareholder” and the New shareholders jointly with <strong>Pirelli</strong> “the<br />
Parties”) in Olimpia’s S.p.A. share capital (“Olimpia” or “Company”) and the criteria of the management and rules concerning their quality as Olimpia’s shareholders.<br />
Olimpia currently owns overall No. 2,019,302,250 Olivetti S.p.A. ordinary shares (“Olivetti”), equal to approximately to 27.7% of Olivetti share capital and No. 68,409,125<br />
warrants Olivetti ordinary shares 2001-<strong>2002</strong>.<br />
2. Olimpia’s share capital<br />
Olimpia’s share capital is divided as follows: 60% <strong>Pirelli</strong>, 20% Edizione Finance International S.A. 10% UCI (“Olimpia UCI Investment”) and 10% BCI (“Olimpia BCI<br />
Investment”).<br />
3. Olimpia’s Board of Directors<br />
3.1 It is understood that, within the limits allowed by law and for the entire term of this Agreement: (i) the Board of Directors of the Company will be made up of 10 (ten)<br />
members; (ii) 1 (one) director out of 10 (ten) shall be appointed at the request and upon indication of UCI; (iii) 1 (one) director out of 10 (ten) shall be appointed at the<br />
request and upon indication of BCI; (iv) should an Executive Committee be instituted, UCI and BCI will have, respectively, the right to request at any time the inclusion of<br />
the directors designated by them in said committee.<br />
3.2 It is understood that the power of UCI and BCI to designate, each, a member of the Board of Directors of the Company will remain valid even after the first expiration<br />
of this Agreement, if it is extended pursuant to Art. 8.1 (a), provided UCI and BCI hold, jointly, a percentage of the company’s share capital above 10%. However, if the<br />
joint holding of BCI and UCI in the company’s share capital is 10% or less, then BCI and UCI may designate, jointly, only one director.<br />
4. Composition of the Board of Directors in Olivetti, Telecom Italia S.p.A. (“Telecom”), Seat- Pagine Gialle S.p.A. (“Seat”) and Telecom Italia Mobile<br />
S.p.A. (“TIM”)<br />
4.1 It is understood that, within the limits allowed by law and for the entire term of this Agreement, in the Board of Directors of Olivetti, Telecom, Seat and TIM (the<br />
“Olivetti Companies”), one director must be appointed at the request and upon designation of UCI and another director at the request and upon designation of BCI.<br />
4.2 It is understood that the power of UCI and BCI to designate, each, a member of the Board of Directors of the Olivetti Companies will remain valid even after the first<br />
expiration of this Agreement, if it is extended pursuant to Art. 8.1, provided UCI and BCI hold, jointly, a percentage of the company capital above 10%. However, if the<br />
joint holding of BCI and UCI in the company capital is 10% or less, then BCI and UCI may designate, jointly, only one director.<br />
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5. Key Issues<br />
Pursuant to Art. 6 below, the following shall be deemed Key Issues:<br />
a) the decisions of the Extraordinary Shareholders’ Meeting and those of the Board of Directors of the Company, the latter referring to the following:<br />
- indication as to how to vote in Olivetti’s Ordinary Shareholders’ Meeting on Key Issues, for the purposes of the application of Articles 104 or 107 T.U. No. 58 of<br />
February 24, 1998, and in matters of acquisition of treasury shares, as well as voting in Olivetti’s Extraordinary Shareholders’ Meeting;<br />
- acquisition, sale and acts of disposal under any status (i) of treasury shares in any amount and (ii) holdings (including shares and financial instruments of any<br />
type issued by Olivetti and/or the Olivetti Companies) at a value, by individual transaction, greater than Euros 100 million;<br />
- determination of the ratio between equity and debt of the Company and methods, terms and conditions for resorting to outside financing sources;<br />
- draft proposals to be submitted to the Company’s Extraordinary Shareholders’ Meeting;<br />
b) resolutions of the Board of Directors of Olivetti and Telecom, referring to:<br />
- individual investments greater than Euros 300 million;<br />
- acquisition, sale and acts of disposal under any status (i) of treasury shares in any amount and (ii) affiliate and subsidiary holdings (including shares and other<br />
financial instruments issued by the Company or the Olivetti Companies) at a value, by individual operation, greater than Euros 300 million;<br />
- acts of disposal under any status of companies or business segments thereof, with an individual value greater than Euros 300 million;<br />
- proposals to call the Extraordinary Shareholders’ Meeting for resolutions in matters of modification of the corporate purpose, transactions involving share<br />
capital of any nature, merger, spin-off, transformation and dissolution;<br />
- transactions between Olivetti, Telecom and the <strong>Pirelli</strong> Group, with an individual value greater than Euros 50 million;<br />
- related party transactions.<br />
6. Provisions on Deadlock<br />
6.1 Obligation to Consult<br />
<strong>Pirelli</strong> and the New Shareholders, the latter jointly between them, pledge to consult previously each other whenever a decision on one of the Key Issues, identified in<br />
paragraph 5, must be discussed or decided upon.<br />
6.2 Manifestation of Will<br />
Whenever, in the previous consultation referred to in paragraphs 6.1 above, <strong>Pirelli</strong> and the New Shareholders did not reach an agreement concerning the issues under<br />
consultation, the dissenting New Shareholders, separately or jointly, will have, or the single dissenting New Shareholder will have, the right to send to <strong>Pirelli</strong>, by telegram<br />
or registered letter, pursuant to paragraph 12.02, a “Notice of Deadlock” within 15 (fifteen) days of the end of the consultation referred to in paragraph 6.1.<br />
6.3 Rights of the New Shareholders.<br />
(a) Whenever UCI and/or BCI send a Notice of Deadlock, the New Shareholder which sent the Notice of Deadlock will have the right to sell to <strong>Pirelli</strong>, which will have the<br />
corresponding obligation to buy from the respective New Shareholder, respectively, all but not part of the Olimpia UCI Investment and/or all but not part of the Olimpia<br />
BCI Investment at a price determined pursuant to the provisions in item (b) below.<br />
(b) For the purposes of item (a) above, the Parties agree, including in an aleatory manner, that the object of the decision must be: (x) the price of the Olimpia BCI<br />
Investment and/or Olimpia UCI Investment, corresponding proportionately to the value of the Company’s economic capital (“Price of the Olimpia UCI Investment”<br />
and/or “Price of the Olimpia BCI Investment”), as well as (y) an increase expressing the proportion of the increase premium, as if the Olimpia BCI Investment and/or<br />
Olimpia UCI Investment were the expression of Olivetti’s control, assuming that the latter controls Telecom and the companies controlled by the latter (“Premium”).<br />
(c) the price owed by <strong>Pirelli</strong> will not be lower than the amounts paid by the New Shareholder for the acquisition and subscribing of shares in the Company, less any<br />
dividends received (“Floor”), nor higher than an amount which implies, in connection to the same amounts, less any dividends received, an annual IRR, including taxes,<br />
equal to 15% (“Cap”).<br />
7. Penalty<br />
In the event of breach of one or several commitments made pursuant to the provisions of this Agreement, the breaching Party, at the simple written request of the Parties<br />
or of the other Party, and without prejudice to any other of its/their rights (including the right to higher damages), will be obligated to pay, as penalty, to the complying<br />
Party or complying Parties, a single and total amount equal, for each breach, to 5% (five percent) of the amounts paid by the breaching Party for the acquisitions and<br />
subscriptions of shares made in the Company as of that date.<br />
8. Term<br />
8.1 This agreement will have a term of three years from October 5, 2001 (Effective Date) and will be deemed tacitly renewed from time to time on expiration for the<br />
following two years, in the absence of an opt-out notice from one of the Parties, without prejudice to the provisions of point 9. below.<br />
8.2 Except in the cases required by law, each of the Parties may opt out of this Agreement before every expiration, with notice sent 6 (six) months in advance.<br />
9. Absence of Renewal.<br />
(a) If, before the first expiration of this Agreement or successive ones, <strong>Pirelli</strong> should send to the New Shareholders, jointly or separately, the opt-out notice referred to in<br />
point 8.2 above, UCI and BCI will individually have the right to send to <strong>Pirelli</strong> which, upon simple request, will have the corresponding obligation to acquire, respectively, all<br />
but not part of the Olimpia UCI Investment and Olimpia BCI Investment held by the New Shareholders which exercised the option right set forth herein, under terms and<br />
conditions determined, mutatis mutandis, pursuant to paragraph 6.3 (b) above (and the provisions mentioned therein), giving notice to <strong>Pirelli</strong> within 30 (thirty) Business<br />
Days, notwithstanding paragraph 6.3(c). The above price will be paid in cash.<br />
(b) If, on the first expiration date of this Agreement, both or one of the New Shareholders should, jointly or separately, send to <strong>Pirelli</strong>, the opt-out notice in the terms set<br />
forth in paragraph 8.2 above, <strong>Pirelli</strong> will have the right to acquire from both New Shareholders opting out, or from the single New Shareholder opting out, which, upon<br />
simple request, will have the corresponding obligation to sell, respectively, all but not part of the Olimpia UCI Investment and Olimpia BCI Investment held by the New<br />
Shareholders which exercised the opt out right set forth herein, under terms and conditions determined, mutatis mutandis, pursuant to paragraph 6.3(b)above (and the<br />
provisions mentioned therein), less the Premium, giving notice to the New Shareholders which sent the opt-out notice, within 30 (thirty) Business Days.<br />
(c) If both or one of the New Shareholders should send to <strong>Pirelli</strong>, at the expiration of the first renewal for the following two years, the opt-out notice referred to in<br />
paragraph 8.1, and therefore, on the expiration of the fifth year after the effective Date of this Agreement, or on the successive additional expiration dates, both New<br />
Shareholders opting out, jointly or separately, or the single New Shareholder opting out, will have the right to sell to <strong>Pirelli</strong>, which, upon simple request, will have the<br />
corresponding obligation to acquire, respectively, all but not part of the Olimpia UCI Investment and/or all but not part of the Olimpia BCI Investment held by the New<br />
Shareholders which exercised the opt out right set forth herein, under terms and conditions determined, mutatis mutandis, pursuant to paragraph 6.3 (b) above (and the<br />
provisions mentioned therein), giving notice to the New Shareholders that sent the opt-out notice, within 30 (thirty) Business Days notwithstanding paragraph 6.3(c).<br />
10. Changes in shareholder base<br />
10.1 For the purposes of this paragraph, “Change of Control” means a substantial modification in the direct and indirect shareholder control base of <strong>Pirelli</strong>, which means<br />
the stoppage of the control of <strong>Pirelli</strong> & C. Accomandita per Azioni over <strong>Pirelli</strong> S.p.A., as exercised today.<br />
10.2 If the Change of Control occurs, each of the New Shareholders will have the right to transfer, respectively, all but not part of the Olimpia UCI Investment and/or all<br />
but not part of the Olimpia BCI Investment owned by <strong>Pirelli</strong> which, upon simple request, will have the obligation to acquire, under terms and conditions determined,<br />
mutatis mutandis, pursuant to paragraph 6.3 (b) above (and the provisions mentioned therein), giving notice to <strong>Pirelli</strong> within 30 (thirty) Business Days of the date the New<br />
Shareholders, separately or jointly, declared in writing that they have learned about the Change of Control, or received written communication about this circumstance. It<br />
is, however, agreed, including in an aleatory manner, that the price owed by <strong>Pirelli</strong> will not be lower than the amounts paid by the New Shareholder for the acquisitions<br />
and subscriptions of shares in the Company, less any dividends received (“Floor”), nor higher than an amount which implies, in connection to the same amounts, less any<br />
dividends received, an annual IRR, including taxes, equal to 15% (“Cap”).<br />
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10.3 If <strong>Pirelli</strong> intends to divest, in any form, part of its investment in the Company, so that <strong>Pirelli</strong> would hold less than a majority of the capital thereof, <strong>Pirelli</strong> may not<br />
sign any agreement in this sense, being first obligated to give prior timely notice to both the New Shareholders about the planned transfer, fully indicating the terms and<br />
conditions of the transfer operation and any possible outside agreements (of blockage and vote) with the buyers.<br />
10.4 Within 30 (thirty) Business Days of receipt of the aforementioned communication, UCI and/or BCI will, individually, have the right to sell to <strong>Pirelli</strong>, which, upon<br />
simple request, will have the corresponding obligation to acquire, respectively, all but not part of the Olimpia UCI Investment and/or all but not part of the Olimpia BCI<br />
Investment held by the New Shareholders that exercised the Option Right set forth herein, under terms and conditions determined, mutatis mutandis, pursuant to<br />
paragraph 6.3 (b) above, with the understanding, including in an aleatory manner, that the price owed by <strong>Pirelli</strong> will not be lower than the amounts paid by the New<br />
Shareholder for the acquisitions and subscriptions of shares in the Company, less any dividends received (“Floor”).<br />
11. Further commitments<br />
11.1 For the entire term of the Agreement, the Parties agree, also through their subsidiaries and/or parent companies according to article 2359, paragraph 1, of the Italian<br />
Civil Code, that they shall neither acquire nor hold Olivetti ordinary shares (including those deriving from the conversion of convertible bonds and/or the<br />
exercise of the Warrants). Nonetheless UCI and BCI are allowed to acquire and to hold such securities within the maximum limit of 0.40% of the Olivetti’s capital for<br />
each of them.<br />
11.2 The Company, unless otherwise agreed among the Parties, may not acquire Olivetti ordinary shares (neither exercise the conversion rights, nor acquire or<br />
subscribe Olivetti ordinary shares as per paragraph 11.1) in such a measure as to exceed the takeover threshold currently at 30% (thirty percent) and also taking<br />
into account, for this purpose, the impact of the securities described in paragraph 11.1 held by BCI and UCI and the treasury shares owned directly and indirectly by<br />
Olivetti, according to the provisions of the law and regulations in force, including the rules issued by Consob.<br />
12. Disputes<br />
Any dispute arising from this Agreement will be submitted to the unappealable judgement of an Arbitration Board.<br />
13. Registration of the agreement at the Companies Registry<br />
The agreement is registered at the office of the <strong>Milan</strong> and Turin/Ivrea Companies Registry.<br />
<strong>Milan</strong>, November 3, 2001<br />
Agreement between <strong>Pirelli</strong> S.p.A. - Edizione Finance International S.A – Edizione Holding S.p.A. - Banca Intesa S.p.A. - Unicredito Italiano S.p.A. -<br />
Olimpia S.p.A. - Hopa S.p.A.<br />
Notice according to article 122 of Legislative Decree No. 58/98 and articles 127 and 129 of the Regulations adopted by CONSOB with resolution No. 11971/99<br />
According to article 122 of Legislative Decree 58/98 and articles 127 of the Regulations adopted by CONSOB with resolution No. 11971 of May 14, 1999 (as subsequently<br />
modified with resolutions No. 12475 of April 6, 2000, No. 13086 of April 18, 2001, No. 13106 of May 3, 2001, No. 13130 of May 22, 2001, No. 13605 of June 5, <strong>2002</strong> and No. 13616<br />
of June 12, <strong>2002</strong>), <strong>Pirelli</strong> S.p.A., with registered offices in <strong>Milan</strong>, at Viale Sarca 222, registered in the <strong>Milan</strong> Companies Registry under tax code and VAT No. 0088689015,<br />
(“<strong>Pirelli</strong>”) states that it has stipulated on February 21, 2003 the agreement (“Agreement”) with Edizione Finance International S.A., with registered offices at Place d’Armes 1,<br />
L-1136, registered with the Luxembourg Chamber of Commerce under number B77504, (“Edizione Finance”); Banca Intesa S.p.A. (formerly Intesa BCI S.p.A.), with registered<br />
offices in <strong>Milan</strong>, at Piazza Paolo Ferrari 10, Administrative Offices at Via Monte de Pietà 8, registered in the <strong>Milan</strong> Companies Registry under tax code No. 00799960158 and<br />
VAT No. 108107000152 (“Intesa”); Unicredito Italiano S.p.A., with registered offices in Genoa, at Via Dante 1, Central Administration in <strong>Milan</strong>, Piazza Cordusio, registered in<br />
the Genoa Companies Registry under tax code No. and VAT No. 00348170101 (“Unicredito”); Olimpia S.p.A., with registered offices in <strong>Milan</strong>, at Viale Sarca 222, registered in<br />
the <strong>Milan</strong> Companies Registry under tax code No. and VAT No. 03232190961 (“Olimpia”); Hopa S.p.A., with registered offices in Brescia, at Corso Zanardelli 32, registered in<br />
the Brescia Companies Registry under tax code No. and VAT No. 03051180176 (“Hopa”) and Edizione Holding S.p.A., with registered offices in Treviso, at Calmaggiore 23,<br />
registered in the Treviso Companies Registry under number 13945, tax code No. and VAT No. 00778430264 (as the guarantor of the Edizione Finance bonds “Edizione”)<br />
including, inter alia, the following clauses of the shareholders’ agreement which - by wish of the contracting parties - is published herein in its entirety:<br />
OMISSIS<br />
Article I - Definitions<br />
1.01 “Olivetti Shares”: ordinary shares with voting rights in Olivetti (as defined in paragraph 1.23 below).<br />
1.02 “Current Olimpia Shareholders”: <strong>Pirelli</strong>, Edizione Finance, Unicredito and Intesa, collectively.<br />
1.03 “Hopa Controlling Companies”: Fingruppo Holding S.p.A., Banca Monte dei Paschi di Siena, S.p.A., Compagnia Assicuratrice Unipol S.p.A., Banca Popolare di Lodi<br />
S.c.a.r.l. and other private individuals signatory to the voting trust with regard to Hopa.<br />
1.04 “Notice of Deadlock”: shall have the meaning set forth in paragraph 8.04(d) below.<br />
1.05 “Notice of Accelerated Deadlock”: shall have the meaning set forth in paragraph 8.06 (b)(i) below.<br />
1.06 “Control”, “to control”, “Subsidiaries,” and “Controlling companies”: other than cases that expressly differ from the context herein, shall have the meaning set forth in<br />
Article 2359, paragraph 1, No. 1 and No. 2 of the Italian Civil Code.<br />
1.07 “Relevant Date”: shall have the meaning set forth in paragraph 9.01 of the present Contract.<br />
1.08 “Term of Agreement”: shall have the meaning set forth in paragraph 6.00 below.<br />
OMISSIS<br />
1.12 “Business Day”: every calendar day other than Saturday, Sunday, and other days when as a general rule the banks of <strong>Milan</strong> are not open for performing their usual<br />
activities.<br />
1.13 “Holinvest”: Holinvest S.p.A., with registered offices in Brescia, at Corso Zanardelli 32, issued capital of _ 700,000,000 and subscribed capital of _ 514,000,000.00,<br />
registered in the Brescia Companies Registry under registration No., tax code No. and VAT No. 03562710172.<br />
1.14 “Holy”: Holy S.r.l., with registered offices in Brescia, at Corso Zanardelli 32, capital of _ 10,000.00, registered in the Brescia Companies Registry under registration No.,<br />
tax code No.,<br />
and VAT No. 03517530170.<br />
OMISSIS<br />
1.16 “Net Financial Borrowings”: unless otherwise specified with regard to specific cases, shall be the algebraic sum on a consolidated basis (with the understanding that<br />
for each case net financial borrowings for Olimpia, borrowings for Olivetti and its Subsidiaries will not be taken into account) of the following items entered in the<br />
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balance sheet prepared pursuant to Art. 2424 of the Italian Civil Code: “bonds (D1) = convertible bonds (D2) + due to banks (D3) + due to other financial backers (D4) +<br />
financial debts owed to unconsolidated subsidiaries (D8) + financial debts owed to affiliates (D9) + financial debts owed to controlling companies (D10) – amounts due<br />
from unconsolidated subsidiaries (C II 2) – amounts due from affiliates (C II 3) – amounts due from controlling companies (C II 4) – financial assets other than fixed<br />
assets (C III) – liquid assets (C IV).” Any existing present value must be added to this amount, for financial leases, if such are not included in the aforementioned items.<br />
OMISSIS<br />
1.18 “Key Issues”: shall have the meaning set forth in paragraph 6.02 below.<br />
1.19 “Net Asset Value”: shall mean the valuation method used for calculating the value, according to market practice and at current values, of financial assets and<br />
liabilities.<br />
1.20 “Olimpia Bonds”: 1.5% Olimpia bonds, 2001-<strong>2002</strong>, each of which is an “Olimpia bond.”<br />
1.21 “Olivetti Bonds”: 1.5% convertible bonds, 2001-2010, convertible to Olivetti Shares issued by Olivetti, each of which is an “Olivetti Bond”.<br />
OMISSIS<br />
1.24 “Extraordinary Transactions”: every merger or spin-off involving Olivetti, on the one hand, and one or more of its direct or indirect subsidiaries, on the other.<br />
1.24bis “Capital Transactions”: such extraordinary transactions as may involve Olivetti capital and which change the number of shares or which result in, by way of<br />
example though not exclusively: stock splits, reverse splits, assignments of Olivetti shares to shareholders for bonus increases in share capital.<br />
1.25 “Holy holding in Holinvest”: Holy holding in Holinvest capital, or 19.999% of this capital.<br />
1.26 “Hopa holding in Holinvest”: Hopa holding in Holinvest capital, or 80.001% of this capital.<br />
1.27 “Olivetti holding”: alternately:<br />
(i) when there are no Extraordinary Transactions, holding with full voting rights equal to at least 25% of Olivetti capital on the date the present Contract is signed, or<br />
(ii) when there are Extraordinary Transactions, the entire package of Olivetti Shares and/or Financial Instruments (granting equal voting rights) arising from the<br />
exchange of shares with voting rights equal to at least 25% of Olivetti capital that would be attained through Extraordinary Transactions executed prior to the<br />
Relevant Date.<br />
OMISSIS<br />
1.29 “Net Assets”: the difference – to be determined in accordance with Accounting Principles – between assets and liabilities on the “statutory” balance sheets of a<br />
corporation where, upon drafting the resultant consolidated balance sheet, it is understood that for purposes of determining Olimpia’s Net Assets the assets of Olivetti and<br />
its Subsidiaries are not taken into account.<br />
1.30 “Agreements”: agreements among shareholders set forth in Articles VI and VII of the present Contract.<br />
OMISSIS<br />
1.32 “Increase Premium”: shall have the meaning set forth in paragraph 10.00 below.<br />
1.33 “Accounting Principles”: Accounting principles as provided by law, and when not specifically stated therein, those set forth by the National Council of Professional<br />
Accountants, or otherwise by the International Accounting Standards Committee.<br />
1.34 “Debt/equity ratio”: the ratio between Net Assets (as defined in paragraph 1.29 above) and Net Financial Borrowings (as defined in paragraph 1.16 above). Possible<br />
derivative instruments (as defined in Decree Law No. 58 dated February 24, 1998,– Draghi Law, Article 1, paragraph 2), not for hedging, (as defined by Banca d’Italia<br />
Measure of July 30, <strong>2002</strong>) put into place as of November 30, <strong>2002</strong>, must be valued at cost or market price, whichever is less, and any necessary write-off must result in a<br />
reduction in Net Assets. Possible derivative instruments for hedging must be valued in a manner consistent with the asset or liability being hedged, with it understood that<br />
the so-called equity swap underwritten by Olimpia on November 20, 2001, will be valued at cost as a matter of course.<br />
OMISSIS<br />
1.36 “Spin-off”: shall have the meaning set forth in paragraph 9.01 below.<br />
1.37 “Holinvest Spin-off”: shall have the meaning set forth in paragraph 9.05 below.<br />
OMISSIS<br />
1.39 “Holy Position”: Balance sheet of Holy at December 31, <strong>2002</strong>, with the accompanying reports, attached hereto as number 5.02(ii) which – in accordance with the<br />
provisions of paragraph 5.02(ii) below – shall represent the Holy financial position of reference for the plan of Merger.<br />
1.40 “Olimpia Position”: Balance sheet of Olimpia at November 30, <strong>2002</strong>, with the accompanying reports, attached hereto as number 5.02(i) which – in accordance with the<br />
provisions of paragraph 5.02(i) below – shall represent the Olimpia financial position of reference for the plan of Merger.<br />
1.41 “Olivetti Companies”: Telecom, TIM, and Seat, collectively.<br />
1.42 “Deadlock”: shall have the meaning set forth in paragraph 8.01 below.<br />
1.42bis “Accelerated Deadlock”: shall have the meaning set forth in paragraph 8.06 below.<br />
1.43 “Financial Instruments”: every financial instrument (including Olivetti Instruments as defined below) that directly or indirectly grants subscription rights to Olivetti<br />
Shares (which, by way of example and not exclusively, includes convertible bonds, forward contracts, call options, and prepaid swaps).<br />
1.44 “Olivetti Instruments”: instruments with the characteristics as set forth in the attached document 1.44.<br />
OMISSIS<br />
1.46 “Initial Term”: shall have the meaning set forth in paragraph 8.05 below.<br />
OMISSIS<br />
Article II - Object of Contract<br />
(a) Under the present Contract, the various transactions governed thereby and the Shareholder Agreements contained herein, the Current Olimpia Shareholders, Olimpia,<br />
and Hopa hereby agree on the terms and conditions for creating a partnership with strategic connotations.<br />
(b) The partnership referred to in the previous paragraph shall be achieved by Hopa’s joining its capital to that of Olimpia (by Holy’s merger with Olimpia) together with<br />
the Current Olimpia Shareholders, and the subsequent joining of Olimpia’s capital to that of Holinvest, together with Hopa.<br />
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(c) The following stipulations in the present Contract shall, inter alia, govern:<br />
(i) the steps taken to achieve the aforesaid situation (setting the terms and conditions thereof), in particular with regard to the provisions of Articles II, IV, and V<br />
below;<br />
(ii) the rules of corporate governance and other provisions in shareholders’ agreements to which the Parties have agreed, in particular with regard to the provisions<br />
of Articles VI and VII below;<br />
(iii)<br />
(A) the mechanisms for settling possible Deadlocks or Accelerated Deadlocks such as may arise in the administration of Olimpia (also with regard to voting<br />
instructions for Olivetti Extraordinary Shareholders’ Meeting) and/or of Holinvest; and<br />
(B) the means of any possible dissolution of the partnership carried out under the present Contract, with regard to confirming a Deadlock or Accelerated<br />
Deadlock, as well as to the failure to renew Agreements upon their expiration;<br />
with particular regard to the provisions of Articles VIII, IX, and X below.<br />
Article III - Preliminary Obligations of the Parties<br />
OMISSIS<br />
Article IV – Suspensive Conditions<br />
OMISSIS<br />
Article V - Merger<br />
OMISSIS<br />
5.09 Olimpia and Holinvest post-Merger ownership. The Parties mutually recognize that, on the basis of the Stipulated Exchange Rate:<br />
(i) Olimpia post-Merger shall be owned as follows:<br />
<strong>Pirelli</strong> : 50.40%;<br />
Edizione : 16.80%;<br />
Hopa : 16.00%;<br />
Unicredito<br />
: 8.40%; and<br />
Intesa : 8.40%.<br />
(ii) Holinvest post-Merger shall be owned as follows:<br />
Hopa<br />
: 80.001%; and<br />
Olimpia : 19.999%.<br />
OMISSIS<br />
Article VI – Shareholder Agreements concerning Olimpia and Olivetti Companies<br />
6.00 Agreements and Term of Agreement. (a) The Parties mutually recognize that the provisions in this Article VI, as well as those in Article VII below (collectively, the<br />
“Agreements”) shall be effective for the entire period (“Term of Agreement”) between the effective date of the Merger and the earlier of either:<br />
(i) the natural expiration of such Agreements, as regulated under paragraph (b) below; or<br />
(ii) the date on which, in compliance with the applicable provisions herein, (A) – as a result of a Deadlock, the Spin-off and Holinvest Spin-off become effective; (B)<br />
as a result of an Accelerated Deadlock, the Current Olimpia Shareholders receive an Notice of Accelerated Deadlock.<br />
(b) The Agreements shall have a term of three years as from the effective date of the Merger, and upon expiration shall be deemed tacitly extended [for an equal period],<br />
unless a notice of termination is served by either Party to the other, subject to the provisions in paragraph (c) below.<br />
(c) Without prejudice to the provisions of the law, the Parties may withdraw from the Agreements, effective on the expiration date, by written notice to the other Party 3<br />
(three) months before such expiration date.<br />
6.01 Board of Directors of Olimpia. (a) For the entire Term of the Agreements, the Board of Directors of Olimpia will be made up of a fixed and unchangeable group of 10<br />
members, one of which will be appointed upon designation by Hopa. The first Director appointed by Hopa will be Emilio Gnutti.<br />
(b) In the event the Director appointed by Hopa should cease to be on the Board, a replacement shall be designated within the next 20 (twenty) Business Days, and it is<br />
understood that the designation of the replacement will be still made by Hopa, with the consent of <strong>Pirelli</strong>, which shall not withhold it unreasonably.<br />
(c)<br />
Should Hopa wish to revoke one or more of the Directors it designated, the Current Olimpia Shareholders will cooperate fully, in order for this revocation to proceed<br />
as rapidly as possible. Hopa shall have the right to designate – in accordance to what was set forth in the preceding paragraph (b) – the Director to be appointed as a<br />
replacement for the Director who was revoked, subject to the consent of <strong>Pirelli</strong>, which shall not withhold such consent unreasonably.<br />
(d) The Parties commit to holding each other exonerated and discharged and to holding Olimpia exonerated and discharged from any onus or damage deriving from the<br />
revocation without just cause of the Directors that each one of them from time to time designates, pursuant to paragraph 6.01.<br />
6.02 Key Issues. (a) For the purposes of this contract and in particular of subsequent Article VIII the following shall be considered to be Key Issues:<br />
(i)<br />
In reference to the resolutions to be adopted by Olimpia’s Extraordinary Shareholders’ Meeting in relation to any subject that pertains to it, any time the<br />
resolution is adopted:<br />
(A) In opposition to a proposal by Olimpia’s Board of Directors passed with the agreement of the Directors appointed by Olimpia’s Current Shareholders and by<br />
Hopa; or<br />
(B) In agreement with a proposal by Olimpia’s Board of Directors passed without the agreement of the Director appointed by Hopa;<br />
(ii) In reference to the resolutions to be adopted by Olimpia’s Board of Directors in relation to those pertaining to:<br />
(A) The suggested vote to be cast during Olivetti’s Extraordinary Shareholders’ Meeting;<br />
(B) the purchase, sale and transfer of any interest valued over _ 100,000,000.00 per transaction, or for multiple transactions carried out during the same calendar<br />
year, with the exception of that which is provided for in the subsequent paragraph (b);<br />
(C) Acts or initiatives that modify or will modify the debt/equity ratio from a 1:1 ratio (while keeping open the option to remedy this situation pursuant to the<br />
procedure outlined in subsequent paragraph 8.07(a)(ii) and with the understanding that in this case it will not be considered to be a situation causing a<br />
Deadlock) and/or that concern the definition of the terms and conditions for using outside sources of financing;<br />
(D) Proposals for resolutions to be submitted to Olimpia’s Extraordinary Shareholders’ Meeting.<br />
(b) The Parties reciprocally acknowledge that – in spite of being slightly different from what was outlined in the preceding paragraph (a) (ii) (B) – the following shall not<br />
be considered Key Issues for the purposes of this Contract: actions relating to the purchase or sale of Olivetti shares, the conversion of convertible Olivetti bonds into<br />
Olivetti shares or equivalent financial instruments, as long as Olimpia’s debt/equity ratio remains below 1:1 even after these transactions.<br />
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6.03 Board of Directors of Olivetti Companies. (a) For the entire Term of the Agreements the Current Olimpia Shareholders will do whatever is in their power to ensure<br />
that, in the meetings of the Boards of Directors of the Olivetti Companies, a director shall be appointed as a result of being designated by Hopa. The first directors that<br />
Hopa designates to this end are those indicated in the attached document by number 6.03(a).<br />
(b) The new Boards of Directors of the Olivetti Companies, made up according to the dispositions in the preceding paragraph (a), will be appointed as soon as possible<br />
after the Merger and in any event within and no later than 60 Business Days after the effective date of the Merger itself.<br />
(c)<br />
The dispositions in the preceding paragraphs 6.01(b) and (c) will apply, mutatis mutandis, also regarding the meetings of the Board of Directors of the Olivetti<br />
Companies.<br />
6.04 Tender Offers for Olivetti Shares. Hopa commits itself to the fact that, in the event Olivetti Shares are subject to a tender offer, the Director that it designated in<br />
Olimpia’s Board of Directors – if the Current Olimpia Shareholders requests it in writing – will not oppose Olimpia’s agreeing to such tender offer.<br />
6.05 Deadlock. (a) Except for what is set forth in the subsequent paragraph (b) or expressly provided for by this Contract, the Current Olimpia Shareholders and Hopa<br />
(also with respect to its respective controlling companies and subsidiaries) commit themselves not to purchase Olivetti Shares for the Term of the Agreements, and agree<br />
to the fact that Olimpia – in partial derogation from this limitation - notwithstanding what is set forth in subsequent paragraph 8.06, will have the right to buy and sell<br />
Olivetti Shares as long as these transactions do not cause the limits described in paragraph 4.01(iii) to be exceeded, notwithstanding the fact that in order to calculate the<br />
threshold specified in the aforementioned paragraph, one shall have to take into account the quantities allowed by paragraph (a) of Article III.<br />
(b) The following cases are exceptions to the Deadlock commitment specified in paragraph 6.05(a):<br />
(c)<br />
(i)<br />
The exercise on <strong>Pirelli</strong>’s part of the rights already acquired before executing this Contract, in relation to the exercise of call options and swap contracts relating<br />
to the purchase of Olivetti Shares and Bonds (which are described in detail in the attached document designated by number 6.05(b)(i);<br />
(ii) For purchases of Olivetti Shares which were already allowed:<br />
(A) to Unicredito and Intesa, by the current Shareholder Agreements agreed to by these entities with <strong>Pirelli</strong>, which is described in the attached document<br />
designated by number 6.05 (b) (ii) (A); and<br />
(B) to Edizione, within the limits outlined by the current Shareholder Agreements agreed to by this entity with <strong>Pirelli</strong>, which are described in the attached<br />
document designated by number 6.05(b) (ii) (B).<br />
(iii) The maximum number of Olivetti Shares that the Hopa Controlling Companies are authorized to possess pursuant to paragraph 4.01.<br />
Notwithstanding the above mentioned rights, furthermore, the Parties reciprocally acknowledge that the purchase by one Party of convertible bonds and/or warrants<br />
that grant the right to subscribe to bonds convertible into Olivetti Shares and the exercise of the rights that go with it will be allowed only following the consent of<br />
the other Party, consent that shall not be unreasonably withheld, with the proviso that in the event of a request by Hopa there will have to be the unanimous consent<br />
of all the Current Olimpia Shareholders that at the time of this request are Olimpia shareholders.<br />
6.06 Olimpia’s Business Purpose. The Current Olimpia Shareholders commit themselves not to change Olimpia’s business purpose (as reflected in the sample by-laws<br />
which are found under attachment 5.07 (b) up to the latter of the following dates (i) the date of the natural expiration of the Agreements as set forth by paragraph 6<br />
(b) of this Contract; and (ii) in the event of a Deadlock or an Accelerated Deadlock, the effective date of the Spin-off and the Holinvest Spin-off.<br />
6.07 Other Commitments Relating to Olimpia. The Current Olimpia Shareholders commit to make it so that, for the entire term of the Agreements, Olimpia:<br />
(i)<br />
Does not have other holdings or financial investments other than its holding in Olivetti, Olivetti’s bonds, Olivetti’s instruments and the holding by Olimpia in<br />
Holinvest possessed as a result of the Merger;<br />
(ii) Has a debt/equity ratio that does not exceed 1:1; and<br />
(iii) Does not sell its holding in Olivetti to entities controlled by Olimpia or that are parts of groups whose ownership can be ascribed to the Current Olimpia<br />
Shareholders.<br />
6.08 Co-sale Rights and Obligations. (a) Except when otherwise set forth in this Contract and in particular in the following paragraph 8.06(b)(iii) and 8.07(b)(ii), for the<br />
entire Term of the Agreements – and in any case until the effective date of the Spin-off and of the Holinvest Spin-off – if the holding of <strong>Pirelli</strong> in the capital of Olimpia is<br />
reduced by transfer, contribution, assignment (including by spin-off), or sale of a portion thereof, directly or indirectly, or a financial instrument that may be converted<br />
and/or which gives right to a holding in the capital of Olimpia (hereinafter collectively the “Assigned Holding”) for payment, free of charge, for cash, or for payment in<br />
kind, under any status, including in several tranches as compared to that held as of the signing date of this Contract, Hopa will have the right to claim (and therefore<br />
<strong>Pirelli</strong> will be obligated to cause) that the buyer (hereinafter the “Third-Party Buyer”) – pursuant to the applicable provisions of this paragraph 6.08:<br />
(i)<br />
whenever, notwithstanding the transfer and/or sale of the Assigned Holding, <strong>Pirelli</strong>, together with Unicredito and Intesa, maintains absolute majority in the capital<br />
of Olimpia, acquires:<br />
(A) a percentage of the holding of Holinvest equal to the percentage between the Assigned Holding and 50.4% according to the following formula:<br />
PPiH : PiH = PC : 50.4%<br />
Where:<br />
PPiH: is the holding percentage of Hopa in Holinvest that Hopa may claim transfer to the Third-Party Buyer;<br />
PiH: is the total holding (expressed as a percentage of the capital of Holinvest) of Hopa in Holinvest;<br />
PC: is the Assigned Holding (expressed as a percentage of the capital of Olimpia);<br />
or, as an alternative<br />
(B) a percentage of the Olivetti Instruments and/or of the Olivetti Shares and/or of the Financial Instruments held by Holinvest on the date <strong>Pirelli</strong> communicates its<br />
intent, equal to the percentage between the Assigned Holding and 50.4% according to the following formula:<br />
PSOH : SOH = PC : 50.4%<br />
Where:<br />
PSOH: is the portion of the Olivetti Instruments and/or Olivetti Shares and/or of the Financial Instruments held by Holinvest on the date <strong>Pirelli</strong> communicates its<br />
intent, for which Hopa may claim transfer to the Third-Party Buyer;<br />
SOH: the total number of Olivetti Instruments and/or Olivetti Shares and/or of the Financial Instruments on the date <strong>Pirelli</strong> communicates its intent, held by<br />
Holinvest;<br />
PC: is the Assigned Holding (expressed as a percentage of the capital of Olimpia);<br />
and therefore<br />
(C) a percentage of its own holding in Olimpia equal to the percentage between the Assigned Holding and 50.4%:<br />
PPiO : PiO = PC : 50.4%<br />
Where:<br />
PPiO: is the portion of Hopa’s holding in Olimpia for which Hopa may claim transfer to the Third-Party Buyer;<br />
PiO: the total holding held by Hopa in Olimpia;<br />
PC: Assigned Holding (expressed as a percentage of the capital of Olimpia);<br />
(ii) whenever the sale and/or transfer with price paid in kind (contribution and/or spin-off) of the Assigned Holding implies the loss of the absolute majority in the<br />
ordinary capital of Olimpia by <strong>Pirelli</strong> together with Unicredito and Intesa, acquires the entire holding held by Hopa in Olimpia and/or Holinvest;<br />
(iii) whenever the sale and/or transfer with the price paid in cash of the Assigned Holding implies the loss of the absolute majority in the ordinary capital of Olimpia,<br />
by <strong>Pirelli</strong>, together with Unicredito and Intesa, Hopa will also have the obligation to sell (and, respectively, <strong>Pirelli</strong> will have the obligation and the right to cause<br />
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Hopa to sell) to the Third-Party Buyer the entire holding of Hopa in Olimpia and/or in Holinvest;<br />
with the understanding that:<br />
(x) for the purposes of this paragraph 6.08, the financial instruments whose acquisition by the Third Party-Buyer must be imposed by Hopa, exercising the alternative<br />
power set forth in this paragraph 6.08(a), will be identified as “Instruments to be Assigned”;<br />
(i)<br />
once Hopa communicates – pursuant to the following paragraph (c) – to <strong>Pirelli</strong> that it wishes to exercise the co-sale right set forth in this paragraph 6.08(a),<br />
Hopa will be obligated to sell the Instruments to be Assigned under the terms and conditions set forth in this paragraph 6.08 and, in particular, the following<br />
paragraphs (d) and (e); and<br />
(ii) the choice between the options referred to in the previous paragraph 6.08(a)(i) will be exercised discretionally by Hopa and will be final.<br />
(b) In order to allow Hopa to exercise the rights set forth in the previous paragraph (a), <strong>Pirelli</strong> undertakes to communicate to Hopa any intention to sell, transfer, assign<br />
(including by spin-off) or otherwise transfer under any status all or part of its own holding in Olimpia, as soon as allowed by the negotiations with the Third-Party<br />
Buyer (taking into consideration possible reasons of confidentiality), communicating to Hopa the nature of the Third-Party Buyer and the terms and conditions of the<br />
possible transfer transaction.<br />
(c) Hopa, after receiving the communication about the plan to transfer the Assigned Holding by <strong>Pirelli</strong>, must communicate to <strong>Pirelli</strong> within twenty (20) Business Days<br />
from receipt of the communication, whether or not it intends to exercise its own co-sale right and whenever <strong>Pirelli</strong>’s communication refers to a transaction of the type<br />
indicated in the previous paragraph (a)(i), which of the options set forth in Sections (A) through (C) of said paragraph (a)(i) it intends to choose.<br />
(d) Should Hopa exercise the co-sale right set forth in this paragraph 6.08, the transfers of the Instruments to be Assigned to the Third-Party Buyer following such<br />
exercise must be perfected simultaneously with the transfer of the Assigned Holding by <strong>Pirelli</strong> to the Third-Party Buyer.<br />
(e) The transfer price of the Instruments to be Assigned must be established pursuant to the following provisions:<br />
(i)<br />
whenever Hopa exercised the co-sale right set forth in its favor in the previous paragraph 6.08(a)(i)(C) or 6.08(a)(ii), the latter in the portion referring to the<br />
Olimpia holding, the price will be equal to the same price for each Olimpia share obtained by <strong>Pirelli</strong> from the sale of the Assigned Holding;<br />
(ii) whenever Hopa exercised the co-sale right in its favor pursuant to the previous paragraph 6.08(a)(i)(A) or 6.08(a)(ii), the latter in the portion referring to the<br />
holding in Holinvest, the price will be established by considering the implicit value assigned by the Third-Party Buyer to the Olivetti shares and to any Financial<br />
Instrument held by Olimpia valuing Holinvest on this basis at Net Asset Value;<br />
(iii) whenever Hopa exercised the co-sale right in its favor pursuant to the previous paragraph 6.08(a)(i)(B), the price of the Olivetti Instruments will be established<br />
considering the implicit value assigned by the Third-Party Buyer to the Olivetti shares and to any Financial Instrument held by Olimpia.<br />
with the understanding that, for the purposes of this paragraph, the Net Asset Value (referred to in the previous paragraph (ii)) and the price of the Financial<br />
Instruments (referred to in the previous paragraph (iii)) will be established pursuant to the previous paragraph (e) and, in the event of disagreement between <strong>Pirelli</strong><br />
and Hopa, by an audit firm included among the so-called “Big Four” – appointed by the Parties by mutual agreement or, in the absence of such agreement, by the<br />
Presiding Judge of the Court of <strong>Milan</strong> at the request of the most diligent Party; with the understanding that – the determinations made by audit firm will be<br />
unappealable and final.<br />
(f) It is understood between the Parties that the obligations set forth in this paragraph 6.08 must be considered exclusively at the charge of <strong>Pirelli</strong>, excluding any joint<br />
liability of the Current Olimpia Shareholders.<br />
6.08bis Co-sale Rights concerning Olimpia’s assets. (a) For the entire Term of the Agreements – and in any event until the effective date of the Spin-off and of the<br />
Holinvest Spin-off – if Olimpia’s holding is reduced to a level below 25% of Olivetti’s capital or, whenever it is so reduced, it is further reduced by transfer, assignment<br />
(including by spin-off) or sale of a portion thereof for payment, free of charge, for cash or by payment in kind, under any status, including in several tranches (hereinafter,<br />
together, the “Assigned Olivetti Holding”), Holinvest will have the right to claim (and therefore Olimpia will be obligated to cause) that the buyer (hereinafter the “Third-<br />
Party Buyer of Olivetti Instruments”) – pursuant to the applicable provisions of this paragraph - acquire a percentage of the Olivetti Shares (and/or Financial Instruments)<br />
held by it on that date, equal to the percentage between the Assigned Olivetti Holding and Olimpia’s holding in Olivetti, held before the assignment of the Assigned Olivetti<br />
Holding:<br />
PAOH : AOH = POC : PO<br />
Where:<br />
PAOH: is the number of Olivetti Shares (and/or Financial Instruments) held by it, for which Holivest [sic] may claim the transfer to the Third-Party Buyer;<br />
AOH: is the total number of Olivetti Shares (and/or Financial Instruments) held by Holinvest on the date Olimpia communicates its intent to transfer the Assigned<br />
Investment;<br />
POC: is the Assigned Olivetti Holding (expressed as a percentage of the Olivetti Shares (and/or of the Financial Instruments) held by Olimpia on the date Olimpia<br />
communicates its intent to transfer the Assigned Olivetti Holding);<br />
PO: the total holding in Olivetti and/or all Financial Instruments held by Olimpia before the assignment of the Assigned Olivetti Holding;<br />
with the understanding that:<br />
(x) for the purposes of this paragraph 6.08bis, the Olivetti Shares and/or Financial Instruments for which Holinvest must impose the acquisition of the Olivetti<br />
Instruments by the Third-Party Buyer will be identified as “Olivetti Instruments to be Assigned”;<br />
(y)<br />
once Holinvest communicates – pursuant to the following paragraph (c) – to Olimpia that it wishes to exercise the co-sale right set forth in this paragraph 6.08bis,<br />
Holinvest will be obligated to sell the Olivetti Instruments to be Assigned under the terms and conditions set forth in this paragraph 6.08bis and, in particular, the<br />
following paragraphs (d) and (e); and<br />
(b) In order to allow Holinvest to exercise the rights set forth in the previous paragraph (a), Olimpia undertakes to communicate to Holinvest any intention to sell,<br />
transfer, assign (including by spin-off), or otherwise transfer under any status all or part of its own holding in Olivetti, as soon as allowed by the negotiations of the<br />
Olivetti Instruments with the Third-Party Buyer (taking into consideration possible reasons of confidentiality), communicating to Holinvest the nature of the Third-<br />
Party Buyer of the Olivetti Instruments and the terms and conditions of the possible transfer transaction.<br />
(c) Holinvest, after receiving the communication about the plan to transfer the Assigned Olivetti Holding by Olimpia, must communicate to Olimpia within twenty (20)<br />
Business Days from receipt of the communication, whether or not it intends to exercise its own co-sale right.<br />
(d) Should Holinvest exercise the co-sale right set forth in this paragraph 8.06(ii)[sic], the transfers of the Assigned Olivetti Instruments to the Third-Party Buyer of the<br />
Olivetti Instruments to be Assigned following such exercise must be perfected simultaneously with the transfer by Olimpia to the Third-Party Buyer of the Olivetti<br />
Instruments of the Assigned Olivetti Holding.<br />
(e) The transfer price of the Olivetti Instruments to be Assigned will be equal to the price for each Olivetti share (and/or Financial Instrument) obtained by Olimpia from<br />
the transfer for the assignment of the Assigned Olivetti Holding.<br />
(f) The Parties mutually take note and agree that – as a partial exception to the provisions of this paragraph 6.08bis – whenever Holinvest exercises the co-sale right<br />
referred to in this paragraph 6.08bis, the assignment of the Assigned Olivetti Holding which – pursuant to the terms of the preceding paragraph would give rise to an<br />
event of Accelerated Deadlock – will not be considered Accelerated Deadlock.<br />
6.09 Taking Note. The parties mutually take note that:<br />
(i) the Agreements set forth in this Contract do not replace and therefore do not impair the validity, efficacy and enforceability of the Agreements referred to in the<br />
Shareholder Agreement executed on September 14, 2001 between <strong>Pirelli</strong>, Unicredito, and Intesa;<br />
(ii) in light of the preceding paragraph (i), the exercise by Unicredito and/or Intesa of the rights set forth in their favor in the Shareholder Agreement referred to in the<br />
previous paragraph (i) may not in any manner represent nonperformance of any commitments assumed by Unicredito and Intesa (as Current Olimpia Shareholders)<br />
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under this Contract, nor cause under any other status any liability for Unicredito and Intesa themselves;<br />
(iii) whenever Unicredito and/or Intesa exercise the put right pursuant to the Shareholder Agreement referred to in the preceding paragraph (i), they will immediately be<br />
released from any obligation towards Hopa arising from this Contract, regardless of the date of the actual transfer of the Olimpia shares subject to the put, without<br />
prejudice to the fact that <strong>Pirelli</strong> will be automatically obligated towards Hopa to perform all such obligations towards Hopa itself;<br />
(iv) whenever Unicredito and/or Intesa exercise the put right referred to in the previous paragraph (iii), Edizione Finance and Hopa waive, as of now, exercising the preemptive<br />
right established in their favor in the by-laws.<br />
Article VII – Shareholder Agreements Concerning Holinvest<br />
7.01 Board of Directors of Holinvest.<br />
(a) For the entire Term of the Agreements, the Board of Directors of Holinvest will be made up of a fixed, unchangeable number of 7 members, one of whom will be<br />
appointed by Olimpia’s designation.<br />
(b) The provisions of the previous paragraphs 6.01(b), (c) and (d) will apply, mutatis mutandis, to the Board of Directors of Holinvest.<br />
7.02 Lock-up Commitments.<br />
(a) As of the date of this Contract and for a period of twenty months from the effective date of the Merger, Hopa:<br />
(i) undertakes not to:<br />
(A) offer, constitute in pledge, sell, carry out preliminary sales, lend or otherwise transfer or assign (including by contribution or partial spin-off), directly or<br />
indirectly, Hopa’s Holinvest Holding or any financial instrument that may be converted or which would give right to a holding in the capital of Holinvest, or<br />
(B) execute swap contracts and other acts and/or contracts transferring to a different party, in full or in part, any risk or economic profit arising from Hopa’s<br />
ownership of the Holinvest Holding, regardless of the fact that the transactions described in the preceding points (A) and (B) must be liquidated by delivery<br />
of Hopa’s Holinvest Holding or of the aforementioned financial instruments, for cash or otherwise.<br />
(ii) it pledges – without prejudice to the provisions of the following paragraphs (b) and (c) – to take all necessary steps to prevent Holinvest from:<br />
(A) offering, selling, carrying out preliminary sales, lending, granting in pledge to guarantee obligations of third parties or otherwise transferring or assigning<br />
(including by contribution or partial spin-off), directly or indirectly, the Olivetti Instruments which, as of the date of this Contract, are owned by it, or any<br />
other financial instrument that may be converted or which gives right to a holding in the capital of Olivetti; or<br />
(B) executing swap contracts or other acts and/or contracts transferring to a different party, in full or in part, any risk or economic profit arising from the<br />
ownership of the Olivetti Instruments which, as of the date of this Contract, are owned by it, regardless of the fact that the transactions described in the<br />
preceding points (A) and (B) must be liquidated by delivery of the Olivetti Instruments or of the other aforementioned financial instruments, for cash or<br />
otherwise.<br />
(b) Concerning the provisions of the following paragraph 7.03:<br />
(c)<br />
(i)<br />
the Parties mutually take note of their awareness of the following:<br />
(A) Holinvest gave in pledge to the banks which financed it (the “Creditor Banks”) the Olivetti Instruments which, as of the date of this Contract, are owned by<br />
it (as identified in the document enclosed herewith under No. 7.02(b)(ii)(A)) as guarantee of the obligations to reimburse the financing granted to it by said<br />
Creditor Banks;<br />
(B) Hopa undertakes to take all possible steps to avoid any enforcement of the pledge by the Creditor Banks and therefore to preserve the pre-emptive rights in<br />
favor of Olimpia referred in paragraph 7.03 below;<br />
(ii) in light of the provisions of the preceding paragraph (i), the Parties agree that:<br />
(A) following the execution of this Contract, Hopa will do everything possible so that the Creditor Banks:<br />
(1) consent that, in the event of sale of the Olivetti Instruments following the enforcement of the pledge referred to in the preceding paragraph (i)(A),<br />
Olimpia be granted a pre-emptive right concerning the acquisition of the Olivetti Instruments so sold; or, whenever such hypothesis is not feasible,<br />
(2) accept – in the event that the pledge referred to in the preceding paragraph (i)(A) must be enforced – to transfer to Olimpia the financing contracts and<br />
the respective guarantees, at a price equal to the market value as of that date of the credit granted by the Creditor Banks to Holinvest, under the same<br />
financing contracts so assigned; on the other hand, it is understood that Hopa undertakes as of now to cause Holinvest – in the event that the Creditor<br />
Banks declare their availability to transfer the contract as indicated in this paragraph (ii)(A)(2) to accept – and therefore consent to – such assignments:<br />
(B) without limitation to the provisions of the preceding paragraph (A), immediately after the execution of this contract, the Parties will send a joint<br />
communication to the Creditor Banks to inform them of the existence of the pre-emptive right referred to in paragraph 7.03 below, and also requesting the<br />
Creditor Banks to a meeting to discuss the provisions of the aforementioned paragraph (ii)(A);<br />
(C) in order to help Olimpia achieve the purposes set forth in the previous paragraph (i)(C), Hopa will allow a representative of Olimpia (chosen by Olimpia with<br />
the consent of Hopa – which may not be unreasonably denied) to participate in all the meetings with the Creditor Banks which are the consequence or<br />
related to the provisions of the previous paragraph (ii)(A);<br />
(iii) the sections in the previous paragraphs(i) and (ii) will apply, mutatis mutandis, also in the case of subsequent financing and the respective pledges, with the<br />
understanding that the pledges so granted by Holinvest may refer only to the debts contracted by it, to the exclusion of the guarantees pledging the debts of<br />
other parties.<br />
Hopa’s obligation referred to in the previous paragraph (a)(ii) is understood in the sense of allowing Holinvest to freely dispose – during the lock-up period – of the<br />
Olivetti Instruments and/or Financial Instruments (but without application of the pre-emptive right referred to in paragraph 7.03 below) provided that during said<br />
period, Holinvest keeps its ownership of a number of securities of not less than 65% and not more than 125% of those listed in the previous paragraph 4.01(ii)(A) and<br />
provided the shares of the companies directly or indirectly controlled by Olivetti do not exceed 10% of the assets of Holinvest, without prejudice to the composition<br />
of the assets of Holinvest on the Relevant Date.<br />
7.03 First Pre-emptive Right in Favor of Olimpia. (a) At the end of the Lock-up period referred to in the previous paragraph 7.02(a)(ii) and for the entire residual Term of<br />
the Agreements – and in any case until the effective date of the Spin-off and of the Holinvest Spin-off – Holinvest may freely dispose of the Financial Instruments and of<br />
the Olivetti Shares, provided – should it carry out any of the transactions set forth in the previous paragraph 7.02(a)(ii)(A) and (B) – it grants Olimpia (with written<br />
communication detailing the identity of the potential buyer whenever it is known to Holinvest, regardless of the fact that the sale takes place on the regulated market, and<br />
all the elements necessary for the adequate evaluation of the offer of the latter and of the elements showing seriousness) a pre-emptive right to the Olivetti Instruments<br />
which are the object of such transaction.<br />
(b) It is understood that:<br />
(i)<br />
the offer must be presented by the third party within (30) thirty Business Days from the date Olimpia received Holinvest’s communication referred to in the<br />
previous paragraph 7.03(a);<br />
(ii) the pre-emptive right referred to in the previous paragraph (b) must be exercised by Olimpia within two (2) Business Days after Olimpia’s receipt of the<br />
respective denunciatio.<br />
7.04 Holinvest’s By-laws. Hopa will take all necessary steps so that, by the date of the Merger and not later, Holinvest’s by-laws will be amended to allow Holinvest<br />
exclusively to engage in the holding and financial activity concerning holding and trading of the Olivetti Shares, Olivetti Instruments and Financial Instruments, as well as<br />
the shares and/or financial instruments of the companies directly or indirectly controlled by Olivetti; Hopa’s commitment is subject to the admissibility of such amendment<br />
pursuant to current legislation, without prejudice to the fact that Hopa will not be obligated to make such amendment whenever it implies that Holinvest will be<br />
prohibited from continuing to hold investments in securities other than those indicated in this paragraph currently held, with the understand that, in this case, Hopa<br />
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undertakes to cause Holinvest not to acquire new investment securities other than those described above. In addition, within the same term, Hopa undertakes to make in<br />
the current by-laws of Holinvest [sic] the amendments necessary to make it consistent with the model by-laws enclosed herewith under No. 7.04.<br />
7.05 Second Pre-emptive Right in Favor of Olimpia.<br />
(a) Unless there is an Accelerated Deadlock, on the expiration of the first three-year period of the Term of the Agreements (but completely independently from the fact<br />
that the agreements are extended for a subsequent three-year period or not) Hopa will cause Holinvest to execute with Olimpia a pre-emptive rights agreement with a<br />
term of two years, under which – as of that date – Holinvest – whenever it intends to offer, pledge, sell, carry out preliminary sales, sell any purchase option or<br />
contract, purchase any sale option or contract, grant any option, right or warrant for acquisition, lend or otherwise transfer, assign or dispose (including by<br />
contribution or partial spin-off), directly or indirectly, all or part of Olivetti’s holding post-Spin-off – it must offer it pre-emptively to Olimpia to the extent that, due to<br />
the transaction planned, Hopa and Holinvest would own together less than:<br />
(i) 65% of the holding in Olivetti belonging to them by the effect of the Spin-off; or<br />
(ii) 65% of the Olivetti Instruments owned by Holinvest on the reference date of the Spin-off.<br />
(b The pre-emptive right referred to in the previous paragraph (a) must be exercised by Olimpia within 15 days after its receipt of the respective denunciatio.<br />
(c) For the entire term of the pre-emptive rights agreement set forth in this paragraph 7.05, the provisions of the previous paragraph 6.05 apply, mutatis mutandis.<br />
ARTICLE VIII - Deadlock and Accelerated Deadlock<br />
8.01 Identification of Deadlock cases. For the purposes of this Contract, “Deadlock” means a situation of disagreement, expressed in preliminary consultations or, in the<br />
absence thereof, in the Extraordinary Shareholders’ Meeting of Olimpia or in the Board of Directors’ Meeting of Olimpia, among the Current Olimpia Shareholders,<br />
on the one hand, and Hopa, on the other hand, on a Key Issue, at any time during the Term of the Agreements.<br />
8.02 Obligation of consultation. The Current Olimpia Shareholders undertake to first consult Hopa whenever a Relevant Deliberation must be discussed or approved.<br />
8.03 Procedure.<br />
(a) For the performance of the obligation referred to in paragraph 8.02 above, the Current Olimpia Shareholders and Hopa undertake to meet, or to first consult each<br />
other by telephone conference or videoconference, subject to the appropriate minutes, within and not later than the third (3rd) day prior to the day scheduled for the<br />
meeting of the board or shareholders of Olimpia, or immediately after they become aware, in the event of urgent invitation to call a meeting of the Board of Olimpia<br />
pursuant to the applicable by-laws’ provisions.<br />
(b) In the consultation referred to in this paragraph, the Current Olimpia Shareholders and Hopa will do everything possible to reach an agreement and/or identify a<br />
common position on the issues submitted to their examination, and undertake for this purpose to act in good faith.<br />
(c) The unjustified absence of a Party in the preliminary consultation or its abstention from decisions reached during the consultation, implies acceptance of the<br />
decisions reached by the other Party and imposes on the absent or abstaining Party the obligation to comply with and observe such decisions.<br />
8.04 Manifestation of will.<br />
(a) Whenever the Current Olimpia Shareholders and Hopa, in the preliminary consultation referred to in paragraphs 8.02 and 8.03 above, reach an agreement concerning<br />
the issues submitted to said consultation, they will be obligated to express their will at the relevant level, according to the following provisions:<br />
(i) by delegating a common representative to participate in Olimpia’s Extraordinary Shareholders’ Meeting and to cast the vote in said meeting, according to the<br />
decision made; or, as applicable,<br />
(ii) to cause its representatives on the Board of Directors of Olimpia to participate in the meeting of the board and cast their vote there, according to the common<br />
decisions reached in the preliminary consultation.<br />
(b) Otherwise, in the absence of mutual agreement on the issues submitted to consultation, Hopa will be obligated to refrain from participating in the meeting of the<br />
shareholders or of the board and from casting or causing its vote to be cast at said level and/or refrain from expressing, at any level and mode, its will or position<br />
concerning the issue subject to said preliminary consultation, except as indicated in point (d) below.<br />
(c)<br />
Whenever the preliminary consultation referred to in the previous paragraphs 8.02 and 8.03 does not take place by the fault of the Current Olimpia Shareholders,<br />
Hopa will have the right to participate in the meeting of the shareholders and/or board and cast or cause casting of its vote at that level and/or to express, at any level<br />
and mode, its will or position concerning the Key Issue, except as set forth in point (d) below.<br />
(d) Whenever the situation referred to in point (b) or the situation referred to in point (c) above occur, Hopa will have the right to send to the Current Olimpia<br />
Shareholders, by telegram or registered letter and pursuant to paragraph 12.03, a “Notice of Deadlock” within the term of 15 (fifteen) days from the end of the<br />
consultation referred to in paragraph 8.03 or, in the absence of consultation, from the date of the decision referred to in the preceding paragraph 8.04(c).<br />
(e) Within 30 Business Days from the date the Current Olimpia Shareholders received the Notice of Deadlock, the Parties must submit – for the only purpose referred to<br />
in paragraph 10.01 below – to the unappealable judgement of an Arbitration Board, to be appointed in accordance with Article XIII below, as regards the<br />
ascertainment, for the purposes set forth in Article X, of whether or not the Deadlock situation was declared by Hopa in good faith.<br />
In any event, it is understood in order to avoid any doubt, that Hopa’s right (as referred to in Article IX below) to have the Spin-off [and] the Holinvest Spin-off take<br />
place without the results of such ascertainment and therefore the Current Olimpia Shareholders must implement all necessary steps for the Spin-off and Holinvest<br />
Spin-off to take place within the term indicated in paragraph 9.01(c) below.<br />
8.05 Rights of the Parties.<br />
(a)<br />
Whenever Hopa sends to the Current Olivetti Shareholders a Notice of Deadlock pursuant to paragraph 9.04 (c) above, Hopa will have the right (which will be<br />
deemed exercised by the receipt of the Notice of Deadlock by the Current Olimpia Shareholders pursuant to point (c) paragraph 8.04 above) to claim – as of the end<br />
of the thirty-sixth (36) month after the date of the Merger (the “Initial Term”) – all necessary steps to be taken so that within 6 months from the Initial Term, the Spinoff<br />
and Holinvest Spin-off take place pursuant to the applicable provisions of Article IX below.<br />
(b) The Parties agree that in any case of absence of opt-out of the Agreements and their consequent automatic renewal pursuant to the provisions of paragraph 6.00(b)<br />
above, the Initial Term must be considered from time to time [the end of the thirty-sixth (36) month after the date of each renewal].<br />
8.06 Identification of Cases of Accelerated Deadlock. (a) Whenever - during the Term of the Agreements – one of the following events takes place (each of them an event<br />
of “Accelerated Deadlock”):<br />
(i) a decision is made for the merger and/or spin-off of Olimpia and/or Olivetti with companies other than companies directly or indirectly controlled;<br />
(ii) Olimpia stops owning a holding in Olivetti at least equal to the Holding in Olivetti, also as a consequence of:<br />
(A) sale and/or assignment (including by spin-off) and/or contribution of all or part of its holding in Olivetti and/or Financial Instruments (with voting right) to<br />
companies belonging to the groups in which the Current Olimpia Shareholders are members or which are managed by them; or<br />
(B) sale and/or assignment (including by spin-off) of all or part of its holding in Olivetti and/or Financial Instruments (with voting right) to third parties with<br />
payment in kind (for example by swap or contribution).<br />
(iii) Olimpia’s debt/equity Ratio - without prejudice to paragraph (b) below – exceeds 1:1;<br />
(iv) the Current Olimpia Shareholders decide to contribute all or part of their total holding in Olimpia to companies belonging to groups in which the Current Olimpia<br />
Shareholders are members or which are managed by them;<br />
(v)<br />
without prejudice to the provisions of paragraph 8.06(b) (iii) (C) below, there are plans for transfer, sale and/or assignment (including by spin-off) under any<br />
status, of all or part of the total holding of the Current Olimpia Shareholders in Olimpia, to companies belonging to groups in which the Current Olimpia<br />
Shareholders are members or which are managed by them, at a price lower than the market price of Olimpia’s holding in Olivetti plus _ 0.60 per Olivetti Share<br />
and/or Financial Instrument owned by Olimpia. It is understood that, whenever Extraordinary Transactions or Capital Transactions are carried out, such increase<br />
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of _ 0.60 must be determined for a number of Olivetti Shares and/or Financial Instruments appropriately adjusted or changed as a consequence of such<br />
Transactions, according to market practice, with the understanding that whenever, due to the determination of such number there is a disagreement among the<br />
Parties, such determination will be requested by the most diligent Party from a prime business bank chosen by mutual agreement or, in the absence thereof,<br />
designated by the Presiding Judge of the Court of <strong>Milan</strong>;<br />
(vi) there are plans for the sale and/or assignment (including by spin-off) of all or part of the total investment of the Current Shareholders in Olimpia to third parties,<br />
with payment in kind (for example by swap or contribution), whenever the third party does not assume towards Hopa the same obligations assumed by the<br />
Current Olimpia Shareholders pursuant to the Agreements, without prejudice to the fact that in such case Hopa will not be subject to any co-sale obligation;<br />
in all these cases, Hopa will have the right to ask Olimpia and the Current Olimpia Shareholders to take all necessary steps in order to decide – pursuant to the<br />
applicable provisions of Article IX below – on the Spin-off and Holinvest Spin-off.<br />
(b) The Parties mutually take note that:<br />
(i)<br />
the right granted to Hopa in paragraph (a) above will be deemed exercised when the Current Olimpia Shareholders receive a written communication from Hopa<br />
indicating to the Current Olimpia Shareholders its desire to enforce its rights established in the event of Accelerated Deadlock, “Notice of Accelerated Deadlock”;<br />
(ii) this communication must be sent by Hopa to the Current Olimpia Shareholders not later than by the fifteenth (15th) day after the occurrence of one of the events<br />
referred to in paragraph (a) above;<br />
(iii) in the event referred to in paragraph 8.06(a)(v) above, Hopa will not have:<br />
(A) the right to exercise the co-sale rights reserved in its favor in paragraph 6.08(a) above;<br />
(B) the right to exercise its pre-emptive right established in the by-laws; and<br />
(C) any co-sale obligation.<br />
8.07 Exceptions to Cases of Accelerated Deadlock.<br />
(a)<br />
In partial derogation to the provisions of paragraph 8.06(a)(iii) above, the Parties mutually take note that:<br />
(i) the verification of whether the threshold of 1:1 in the debt/equity Ratio of Olimpia was possibly exceeded, relevant for the purposes of paragraph 8.06(iii) above,<br />
will exclusively be carried out by Olimpia and the Current Olimpia Shareholders and communicated by them to Hopa (including as part of the approval of the<br />
periodic balance sheet situation and the financial statements of Olimpia by its Board of Directors) quarterly, and at any time following a written request from<br />
Hopa to Olimpia; and<br />
(ii) it may be considered that the event referred to in the previous paragraph 8.06(iii) took place only if, following said event, the debt/equity Ratio of Olimpia is not<br />
restored to a value equal to or lower than 1:1 within the next 5 days from the date of the communication by which Olimpia notifies Hopa that the debt/equity<br />
Ratio of Olimpia has exceeded 1:1 or, as an alternative, the latter does not irrevocably undertake to restore it, with the understanding that such restoration may<br />
occur (A) by non-refundable payments to the capital account made by the Current Olimpia Shareholders and without causing economic difficulties for Hopa or<br />
dilutions of the latter’s holding in Olimpia or (B) by subordinated financing, with the understanding that, in this case, the Current Olimpia Shareholders will be<br />
obligated (in order to avoid an Accelerated Deadlock) to convert or replace within 60 (sixty) days such subordinated financing by non-refundable payments to<br />
the capital account, without causing economic difficulties for Hopa or dilution of the latter’s holding in Olimpia.<br />
(b) In addition, the Parties mutually take note that:<br />
(i)<br />
the sale or contribution of their holding in Olimpia will not constitute a case of Accelerated Deadlock pursuant to paragraph 8.06(v) above:<br />
(A) by one of the Current Olimpia Shareholders, to a company which is (and remains) controlled by it; and<br />
(B) by Unicredito and Intesa to:<br />
(1) a company subject to joint control of said parties in their respective bank group and as long as they remain members thereof; and/or<br />
(2) to <strong>Pirelli</strong>, pursuant to the provisions of the current Voting Trust Agreement between <strong>Pirelli</strong>, on the one hand, and Unicredito and Intesa on the other<br />
hand, provided that <strong>Pirelli</strong> – simultaneously with such sale or contribution – is subrogated in the obligations assumed by Unicredito and Intesa towards<br />
Hopa pursuant to the Agreements and in general pursuant to this Contract;<br />
(C) by Edizione to <strong>Pirelli</strong> pursuant to the provisions of the current Voting Trust Agreement between <strong>Pirelli</strong>, on the one hand, and Edizione, on the other hand,<br />
whereby <strong>Pirelli</strong> is subrogated as of now, in the event of such sale or contribution, in the obligations assumed by Edizione towards Hopa pursuant to the<br />
Agreements and, in general, pursuant to this Contract;<br />
(ii) the sales referred to in paragraph 8.07(b)(i) above will not give Hopa the right to exercise the co-sale rights reserved to it under paragraph 6.08(a) above, nor the<br />
pre-emptive right established for it in the by-laws, nor will they create any co-sale obligation for Hopa.<br />
8.08. Relations between Deadlock and Accelerated Deadlock. The Parties mutually take note that whenever, in the event of a Deadlock, there is an event of Accelerated<br />
Deadlock, the applicable provisions in the case of Accelerated Deadlock will prevail and, whenever there is an Accelerated Deadlock, there may be no Deadlock or a<br />
subsequent Accelerated Deadlock, with the understanding that in the event of a Deadlock, an Accelerated Deadlock may take place but a subsequent Deadlock may not be<br />
deemed to occur.<br />
Article IX - Spin-off and Holinvest Spin-off<br />
9.00 Triggering Events. Should Hopa exercise the rights set forth in its favor in paragraphs 8.05 and 8.06(a) above, and in the event of failure to renew the Agreements on<br />
their initial expiration or at the expiration of the subsequent renewals periods pursuant to paragraph 6.00 above:<br />
(i)<br />
the Current Olimpia Shareholders undertake to do everything necessary so that – pursuant to the following paragraphs of this Article IX and in particular<br />
paragraph 9.01 – the Spin-off takes place; and<br />
(ii) Hopa and Olimpia undertake to do everything necessary so that - pursuant to the following paragraphs of this Article IX and in particular paragraph 9.04 – the<br />
Holinvest Spin-off takes place.<br />
9.01 The Spin-off. (a) The Spin-off will consist of a partial spin-off of Olimpia as a consequence of which Hopa will receive the pro-quota of Olimpia’s assets and<br />
liabilities.<br />
(b) The reference date, including for the determination of the pro-quota of the assets and liabilities and without prejudice to paragraph 9.02, of the Spin-off (the “Relevant<br />
Date”) will be:<br />
(i) the Initial Term, in the event of Deadlock and in the event of failure to renew the Agreements on the original expiration or on the expiration of the subsequent<br />
renewal periods (without prejudice to paragraph 8.05(b) above); and<br />
(ii) a date coinciding with the third (3rd) Business Day following the date of the key issue for the purposes of Accelerated Deadlock, in the event of Accelerated<br />
Deadlock.<br />
(c) Without prejudice to paragraph 9.06 below, the Current Olimpia Shareholders must take all necessary steps to complete the Spin-off within six (6) months:<br />
(i) from the Initial Term, in the event of Deadlock and in the event of failure to renew the Agreements on the original expiration or on the expiration of the<br />
subsequent renewals periods; and<br />
(ii) from the date of receipt of the Notice of Accelerated Deadlock, in the event of Accelerated Deadlock.<br />
9.02 Commitment of the Current Olimpia Shareholders. Without prejudice to paragraph 9.07 below for the so-called cash settlements, in all cases in which, pursuant to<br />
this Contract, it is necessary to proceed with the Spin-off, the Current Olimpia Shareholders must do everything necessary so that, on the Relevant Date:<br />
(i) the assets of Olimpia consist at least of the Olivetti Holding<br />
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(ii) the share of the Olivetti Holding and Financial Instruments to be attributed to Hopa in the Spin-off is equal to the percentage of Hopa’s holding in the capital of<br />
Olimpia, without prejudice to the fact that, in the Spin-off, Hopa must be attributed a share of the Olivetti Holding including in the event that, on the Relevant<br />
Date, Olimpia has a holding lower than the Olivetti Holding, except that, upon the reduction of Olimpia’s holding in Olivetti below the Olivetti Holding, the<br />
exercise of the co-sale right is obtained by Hopa; in this case, Hopa will be attributed the prorata of Olimpia’s holding in Olivetti and of its financial instruments;<br />
(iii) Hopa will be attributed a portion, in a percentage equal to Hopa’s holding percentage in Olimpia’s capital,<br />
(A) of Olimpia’s holding in Holinvest on the Relevant Date; or<br />
(B) the share reserved to Olimpia in connection with Holinvest’s assets and liabilities on the same date.<br />
9.03 Further Commitments in the Event of Deadlock, Accelerated Deadlock and Failure to Renew. In addition to the provisions of Paragraph 9.02 above, in the event of a<br />
Spin-off following a Deadlock, and an Accelerated Deadlock or failure to renew the Agreements, the Current Olimpia Shareholders must take all necessary steps so that<br />
the debt/equity Ratio of Olimpia on the Relevant Date is not higher than 1:1.<br />
9.04 Subsequent Commitments only in the Event of Accelerated Deadlock. In addition to the provisions of paragraph 9.02 above, in the event of Spin-off following an<br />
Accelerated Deadlock (and therefore not in the case of Deadlock or failure to renew the Agreements), the Current Olimpia Shareholders must take all necessary steps so<br />
that the effects of the event which gives rise to Hopa’s right to enforce the Accelerated Deadlock (provided it does not consist of the events referred to in paragraphs<br />
8.06(ii) and 8.06(iii) above) do not prejudice the Spin-off.<br />
9.05 Holinvest Spin-off.<br />
(a) The Holinvest Spin-off will consist of a partial Spin-off of Holinvest as a consequence of which Olimpia will be attributed the pro-quota of the assets and liabilities of<br />
Holinvest.<br />
(b) Without prejudice to paragraph 9.07 below, the reference date of the Holinvest Spin-off will be the Relevant Date of the Spin-off (and must therefore be determined<br />
pursuant to paragraph 9.01(b) above).<br />
(c) Without prejudice to paragraph 9.07 below, Hopa must take all necessary steps for the Holinvest Spin-off to be completed within six (6) months:<br />
(i) from the Initial Term, in the event of Deadlock and in the event of failure to renew the Agreements on the original expiration or on the expiration of the<br />
subsequent renewals periods; and<br />
(ii) from the date of receipt of the Notice of Accelerated Deadlock, in the event of Accelerated Deadlock.<br />
9.06 Commitment of Hopa. In all cases in which the Holinvest Spin-off must be carried out, Hopa will take all necessary steps so that, on the Relevant Date:<br />
(i) Holinvest’s debt/equity Ratio is not higher than 1:1; and<br />
(ii) Holinvest’s assets do not include financial instruments other than Olivetti Bonds or other Olivetti Instruments or financial instruments coming from Extraordinary<br />
Transactions or Olivetti Shares arising from the conversion of the instruments mentioned above, in addition to the Olivetti Shares referred to in paragraph 4.01<br />
(a) (ii) (A) (4) above.<br />
9.07 Procedures for the Spin-off and Holinvest Spin-off.<br />
(a) Without prejudice to the previous paragraphs of this Article IX, the Parties mutually take note that, in order to carry out the agreement of the Parties in the event that<br />
it is necessary to proceed with the Spin-off and the Holinvest Spin-off:<br />
(i) the Holinvest Spin-off must proceed and be effective before the Spin-off becomes effective, and must attribute to Olimpia (or, should it so require, in writing, to<br />
one of its 100%-owned subsidiaries) the pro-quota of the assets and liabilities of Holinvest (as set forth in paragraphs 9.05 and 9.06 above); however, it is<br />
understood that, whenever Hopa so desires, instead of the Holinvest Spin-off (and therefore instead of the allocation to Olimpia of the pro-quota of the assets and<br />
liabilities of Holinvest) Hopa may liquidate Olimpia [and therefore buy Olimpia’s holding in Holinvest] with a payment in cash (so-called cash settlement) whose<br />
amount must be calculated equal to the difference, calculated at market prices on the Relevant Date, between the assets and liabilities which, in the event of the<br />
Holinvest Spin-off (and therefore in the event of allocation to Olimpia of the pro-quota of the assets and liabilities of Holinvest) would have been reserved for<br />
Olimpia; with the understanding that this right may be exercised by Hopa only within 15 (fifteen) Business Days from the Relevant Date, and that the payment of<br />
the aforementioned amount must take place within 15 (fifteen) Business Days after the exercise of said right.<br />
(ii) subsequently – although uninterruptedly – at the time the Holinvest Spin-off becomes effective, the Spin-off will be carried out attributing to Hopa (or, if it so<br />
desires, to one of its 100% subsidiaries) the pro-quota of the assets and liabilities of Olimpia (as set forth in paragraphs 9.01 to 9.04 above); however, it is<br />
understood that, whenever the Current Olimpia Shareholders so desire, instead of the Spin-off (and therefore instead of the allocation to Hopa of the pro-quota of<br />
the assets and liabilities of Olimpia) the Current Olimpia Shareholders may liquidate Hopa [and therefore buy the pro-quota, unless decided otherwise, of Hopa’s<br />
entire holding in Olimpia] with a payment in cash (so-called cash settlement) whose amount must be calculated equal to the difference, calculated at market<br />
prices on the Relevant Date, between the assets and liabilities which, in the event of the Spin-off (and therefore in the event of allocation to Hopa of the proquota<br />
of the assets and liabilities of Olimpia) would have been reserved for Hopa; with the understanding that this right may be exercised by the Current Olimpia<br />
Shareholders only within 15 (fifteen) Business Days from the Relevant Date, and that the payment of the aforementioned amount must take place within 15<br />
(fifteen) Business Days after the exercise of said right.<br />
(iii) including in the event of cash settlement, Hopa will be paid or attributed the Increase Premium to which it is entitled pursuant to Article X below.<br />
(iv) the stipulation of the Spin-off instrument will be subject to the stipulation of the pre-emptive right agreement referred to in paragraph 7.05 above, whose<br />
enforceability will be, in turn, subject, as a suspensive condition, to the completion of the Spin-off.<br />
(b) Furthermore, the Parties mutually take note of the fact that Olimpia’s liabilities include a “syndicated loan,” in the amount of _ 1.8 billion maturing in October 2006,<br />
which cannot be distributed as part of the Spin-off between the company subject to spin-off and the beneficiary, and that therefore:<br />
(i) such syndicated loan will fully remain in the liabilities of Olimpia;<br />
(ii) as part of the Spin-off, Olimpia will attribute to the beneficiary another financial loan, equal to the portion of the syndicated loan which would be due to the<br />
beneficiary of the Spin-off, without changing the preexisting pro-quota of the assets and liabilities to which the beneficiary is entitled.<br />
(c) The Parties mutually take note that, as part of the Holinvest Spin-off, as part of the attribution of the pro-quota of the applicable assets and liabilities, Hopa will be<br />
attributed 100,000,000 Olivetti Bonds and the respective debt as referred to in paragraph 4.01(ii)(D)(2).<br />
OMISSIS<br />
Article X - Increase Premium<br />
10.00 Description. In all the events in which it is necessary to proceed with the Spin-off, pursuant to the applicable provisions of this contract and in particular Article 9<br />
above (in the calculation of the pro quota of the assets and liabilities to which the beneficiary is entitled under the Spin off) Olimpia or the Current Olimpia Shareholders,<br />
if Olimpia fails to do so, must pay to Hopa, by the methods referred to in paragraph 10.04 below, but in addition to any right of Hopa by the effect of the Spin-off pursuant<br />
to Article IX above, an Increase Premium (the “Increase Premium”) for each Olivetti share and/or financial instrument which, by the effect of the Spin-off, must be<br />
attributed to Hopa (or should have been attributed to Hopa in the event that the Current Olimpia Shareholders would have exercised their right to the cash settlement<br />
pursuant to the paragraph 9.07(a) above, to be determined and paid pursuant to the provisions of the following paragraphs of this Article X. It is understood that,<br />
whenever Extraordinary Transactions or Capital Transactions are carried out, such Increase Premium must be paid for the entire number of Olivetti Shares and/or<br />
Financial Instruments timely adjusted or changed as a consequence of such transactions, according to market practice, with the understanding that whenever, due to the<br />
determination of such number there is a disagreement between the Parties, such determination will be requested by the most diligent Party from a prime business bank<br />
chosen by mutual agreement or, in the absence thereof, designated by the Presiding Judge of the Court of <strong>Milan</strong>; with the understanding that, without prejudice to<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
paragraph (i) above, the Increase Premium will be paid only for the Olivetti shares and Financial Instruments directly or indirectly owned, held, or available to Olimpia as<br />
of the date of the Spin-off (net of those arising from the Holinvest Spin-off, which will consequently not be considered for the determination of the Increase Premium).<br />
Whenever actually paid, the Increase Premium must be considered to include all Hopa’s claims following the Deadlock or the Accelerated Deadlock, as the case may be.<br />
10.01 The Increase Premium in the Event of Deadlock: In the event that the Spin-off takes place following a Deadlock, the Increase Premium must be determined as<br />
follows:<br />
(i)<br />
at € 0.35, whenever the Arbitration Board referred to in Article XIII below, selected by the Parties pursuant to paragraph 8.04(d) above, determines that the<br />
Deadlock was not declared by Hopa in good faith; or instead<br />
(ii) at € 0.60, whenever the Arbitration Board referred to in Article XIII below, selected by the Parties pursuant to paragraph 8.04(d) above, determines that the<br />
Deadlock was declared by Hopa in good faith.<br />
10.02 The Increase Premium in the Event of Accelerated Deadlock. In the event that the Spin-off takes place following an Accelerated Deadlock, the Increase Premium<br />
will be equal to € 0.60, without prejudice to the fact that, in the case referred to in paragraph 8.06 (ii) above, the Increase Premium will be equal to € 0.70.<br />
10.03 The Increase Premium in the Event of Failure to Renew the Agreements. In the event that the Spin-off takes place as the consequence of the failure to renew the<br />
Agreements, the Increase Premium will be determined according to the following provisions:<br />
(i) the Increase Premium may not in any event and therefore not even if the Parties resort to the evaluation of the investment banks referred to in paragraph (ii)<br />
below, be determined at an amount of less than € 0.35;<br />
(ii) the Increase Premium will be determined by mutual agreement between the Current Olimpia Shareholders and Hopa within 10 business days from the last day of<br />
the term of the agreement or, in the absence of such agreement, by two “investment banks” with the national standing selected one by each Party; for the<br />
purposes of this paragraph 10.03. Party means Hopa, on the one hand, and the Current Olimpia Shareholders on the other hand, without prejudice to the fact<br />
that, whenever the “investment banks” so appointed disagree on the evaluation within 30 business days from their appointment, the evaluation will be made by a<br />
third “investment bank” with the same standing, selected by agreement between the first two (at the time the Parties give the assignment) or, in the absence of<br />
agreement, by the Presiding Judge of the Court of <strong>Milan</strong>;<br />
(iii) the Presiding Judge of the Court of <strong>Milan</strong> will be (in the order and in the terms indicated above) also requested to appoint the “investment bank” which one of<br />
the Parties may have omitted to appoint or to replace it, in the event it is released from its assignment;<br />
(iv) the evaluation referred to in point (i) above will be final and binding for the Parties pursuant to articles 1349 and 1473 of the Italian Civil Code, for the purposes<br />
of this Article X and in particular this paragraph 10.03.<br />
10.04 Terms and Manner of Payment of the Increase Premium. The Increase Premium must be paid or allocated to Hopa by Olimpia – or by the Current Olimpia<br />
Shareholders pursuant to paragraph 10.00 above – in immediately available funds;<br />
(i)<br />
in the event referred to in paragraph 10.01 above;<br />
(A) concerning the € 0.35, at the time of affecting the Spin-off: and<br />
(B) concerning the possible balance (equal to € 0.25), within 15 (fifteen) business days from the decision of the Arbitration Board, determining that the<br />
Deadlock was determined by Hopa in good faith;<br />
(ii) in the event referred to in paragraph 10.02 above, concerning the _ 0.35, within 30 (thirty) calendar days from receipt of the notice of Accelerated Deadlock by<br />
the Current Olimpia Shareholders, and the balance of the applicable Increase Premium at the time of perfecting the Spin-off;<br />
(iii) in the event referred to in paragraph 10.03 above, within 30 (thirty) business days from the determination referred to in points (ii) to (iv) of paragraph 10.03<br />
above.<br />
Article XI – Tax expenses<br />
OMISSIS<br />
Article XII - General Provisions<br />
OMISSIS<br />
Article XIII - Disputes<br />
OMISSIS<br />
The full text of the Contract without any OMISSIS):<br />
(i) will be filed – in accordance with the paragraph 1, letter (c) of article 122 of Legislative Decree No. 58/98 – at the <strong>Milan</strong> and Turin/Ivrea Companies Registry; and<br />
(ii) is already available for viewing on the corporate website www.pirelli.com<br />
<strong>Milan</strong>, March 1, 2003<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Plan for the merger by incorporation in <strong>Pirelli</strong> & C. A.p.A. (after its<br />
transformation to a corporation) of <strong>Pirelli</strong> & C. Luxembourg S.p.A. and <strong>Pirelli</strong><br />
S.p.A. drawn up in accordance with art. 2501 bis of the Italian Civil Code.<br />
Considering that:<br />
a. the intention is to proceed with the merger by incorporation in <strong>Pirelli</strong> & C. A.p.A. (after its transformation, in the same<br />
shareholders’ meeting called to approve this plan of merger, but with immediate effect, from a limited partnership to a<br />
corporation – hereinafter <strong>Pirelli</strong> & C.) of <strong>Pirelli</strong> & C. Luxembourg S.p.A. (hereinafter <strong>Pirelli</strong> & C. Luxembourg) and <strong>Pirelli</strong><br />
S.p.A.;<br />
b. the assumptions for the merger are described in the reports by the Board of Managing Partners of <strong>Pirelli</strong> & C. and the<br />
Board of Directors of <strong>Pirelli</strong> S.p.A. to the respective shareholders’ meetings;<br />
c. the plan of merger makes reference to the balance sheet data at December 31, <strong>2002</strong> of the companies taking part in the<br />
merger, that in all cases coincide with the respective annual financial statements. For purposes of determining the<br />
exchange ratios and the valuations needed of the relative value of the economic capitals of the companies, account was<br />
also taken of the following significant events subsequent to such date:<br />
(i) the purchase by <strong>Pirelli</strong> & C. of 47,973,139 <strong>Pirelli</strong> S.p.A. ordinary shares (equal to 2.5 percent of ordinary share<br />
capital) from BZ Group Holding Limited for a total price of about Euros 43.1 million;<br />
(ii) the merger of Holy S.r.l. in Olimpia S.p.A. on the basis of the agreements signed between the shareholders of<br />
Olimpia S.p.A., Olimpia S.p.A. and Hopa S.p.A. and announced to the market on December 19, <strong>2002</strong> (published in<br />
accordance with the law), after which <strong>Pirelli</strong> S.p.A.’s investment in Olimpia S.p.A. will be reduced from 60 percent<br />
to 50.4 percent;<br />
(iii) the proposed pay out of dividends from <strong>2002</strong> profits by both <strong>Pirelli</strong> & C. (Euros 0.08 per ordinary share and Euros<br />
0.0904 per savings share, for a total of about Euros 52 million) and <strong>Pirelli</strong> S.p.A. (Euro 0.0364 per savings share for a<br />
total of about Euros 3 million), submitted to the approval of the respective shareholders’ meetings;<br />
(iv) the capital increase cum warrants offered on option to the shareholders of <strong>Pirelli</strong> & C. referred to in the preceding<br />
paragraph 2.<br />
Having said that<br />
The following plan of merger by incorporation is submitted for approval to the shareholders’ meetings of <strong>Pirelli</strong> & C., <strong>Pirelli</strong><br />
& C. Luxembourg and <strong>Pirelli</strong> S.p.A..<br />
1. Type, name of company and registered offices of the companies taking part in the merger<br />
Merging company<br />
<strong>Pirelli</strong> & C. A.p.A. (<strong>Pirelli</strong> & C. S.p.A. after transformation of its legal entity as stated in the introduction), with<br />
registered office in <strong>Milan</strong>, Via Gaetano Negri 10, with share capital of Euros 339,422,773.56, fully paid-in, subdivided<br />
into 652,736,103 shares of par value Euros 0.52 each, of which 618,317,846 ordinary shares and 34,418,257 savings<br />
shares, <strong>Milan</strong> Companies Registry number 00860340157, tax code number 00860340157, established in <strong>Milan</strong> on May<br />
15, 1883 by deed of the notary public Stefano Allocchio, file number 10752.<br />
Companies to be merged<br />
<strong>Pirelli</strong> & C. Luxembourg S.p.A., with registered office in <strong>Milan</strong>, Via Gaetano Negri 10, (formerly <strong>Pirelli</strong> & C. Luxembourg S.A.,<br />
with registered offices in Luxembourg, 13 Boulevard du Prince Henri), share capital of Euros 183,600,000.00, fully paid-in,<br />
subdivided into 270,000 ordinary shares of par value Euros 680.00 each, <strong>Milan</strong> Companies Registry number 03913350967, tax<br />
code number 03913350967, established in Luxembourg on February 28, 1997 by deed of the notary public Jacques Delvaux.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
<strong>Pirelli</strong> S.p.A., with registered office in <strong>Milan</strong>, Viale Sarca 222, share capital of Euros 1,043,707,463.24, fully paid-in,<br />
subdivided into 2,007,129,737 shares of par value Euros 0.52 each, of which 1,919,123,721 ordinary shares and 88,006,016<br />
savings shares, <strong>Milan</strong> Companies Registry number 00886890151, tax code number 00886890151, established in <strong>Milan</strong> on<br />
November 3, 1920 by deed of the notary public Gerolamo Serina, file number 18657.<br />
2. By-laws of the merging company and amendments to the by-laws as a result of the merger<br />
The shareholders’ meeting of <strong>Pirelli</strong> & C. called to vote on the merger will be asked to pass resolutions, beforehand, on the<br />
transformation of the merging company to a corporation, the change in the corporate business purpose and a series of<br />
consequent amendments to the by-laws, the one and the other effective immediately.<br />
Specifically, amendments will be made to articles 1 (name of the company), 2 (corporate business purpose), 7 (convocation<br />
of shareholders’ meetings), 8 (constitution of shareholders’ meetings), 9 (chairmanship of shareholders’ meetings), 10<br />
(management of the company), 11 (convocation of the Board of Directors and majorities), 12 (representation of the<br />
company), 13 (compensation to the directors), 14 (resignation of the directors) and 17 (distribution of profits) of the bylaws<br />
of <strong>Pirelli</strong> & C..<br />
A new article will also be inserted between articles 10 and 11 relating to the powers of the Board of Directors and will be<br />
numbered article 11, with the consequent re-numbering of the following articles.<br />
The same shareholders’ meeting, always before the resolution on the merger, will be asked to approve a share capital<br />
increase cum warrants that will be offered on option to shareholders of <strong>Pirelli</strong> & C. prior to the effective date of the merger,<br />
as a result of which article 5 of the by-laws of the aforementioned company will be consequently amended.<br />
Specifically, the shareholders of <strong>Pirelli</strong> & C. will be asked to approve:<br />
a) a share capital increase by <strong>Pirelli</strong> & C., separable, against payment for a maximum par value of Euros 1,014,185,020.68<br />
through the issue of a maximum of 1,950,355,809 ordinary shares, all with a par value of Euros 0.52, with regular<br />
dividend rights from January 1, 2003, to be granted on option to the shareholders, in a ratio of 3 new ordinary shares for<br />
every 1 share of any class of stock held, at a price equal to par value, for a total equivalent spot amount of a maximum<br />
of Euros 1,014,185,020.68. Each new share issued will also have a free warrant attached, that can be traded separately,<br />
valid to subscribe, from January 1, 2004 to June 30, 2006, to <strong>Pirelli</strong> & C. ordinary shares in a ratio of 1 new <strong>Pirelli</strong> & C.<br />
share for every 4 warrants held, at a unit price equal to par value;<br />
b) a consequent share capital increase, separable, against payment for a maximum par value of Euros 253,546,255.04<br />
through the issue, at one or more times, of a maximum of 487,588,952 ordinary shares, all with a par value of Euros 0.52,<br />
with regular dividend rights, to be reserved exclusively and irrevocably for the exercise of the warrants attached to the<br />
shares that will be issued as described in the preceding point a), for a further equivalent amount in the future of a<br />
maximum of Euros 253,546,255.04.<br />
Again on the basis of the resolutions that will be proposed to the aforementioned extraordinary shareholders’ meeting, as a<br />
result of the merger, and effective from the date the merger comes into effect with third parties, articles 5 and 17<br />
(previously numbered article 18) of the by-laws of the merging company will be further amended.<br />
As for article 5, the amendments incorporate: (i) the capital increase to service the merger and (ii) the delegation of power<br />
to the Directors of <strong>Pirelli</strong> & C. to increase share capital through the issue, at one or more times, of a maximum of<br />
100,000,000 <strong>Pirelli</strong> & C. ordinary shares, by April 30, 2008, to be granted to the managers and cadres of the company and its<br />
subsidiaries, in Italy and abroad, pursuant to articles 2441 and/or 2349 of the Italian Civil Code.<br />
As for art. 17 (renumbered art. 18), the amendment refers to the increase in the preference dividend from 5 percent to 7<br />
percent of the par value of the savings shares (Euros 0.52 for both <strong>Pirelli</strong> & C. and for <strong>Pirelli</strong> S.p.A.) to be paid from the<br />
annual earnings calculated net of the portion to appropriate to the legal reserve. This was done in order to render the<br />
economic treatment of <strong>Pirelli</strong> & C. savings shareholders the same as <strong>Pirelli</strong> S.p.A. savings shareholders.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
A copy of the by-laws – in the version reflecting the changes that will be submitted to the extraordinary shareholders’<br />
meeting of <strong>Pirelli</strong> & C. convened to approve, among other things, this plan of merger, described in the preceding paragraphs<br />
– is attached to the plan of merger.<br />
The renewal of the corporate boards will also be proposed to the <strong>Pirelli</strong> & C. shareholders’ meeting.<br />
3. Share exchange ratio<br />
The exchange ratio is equal to the following:<br />
• 4 new <strong>Pirelli</strong> & C. ordinary shares for every 3 <strong>Pirelli</strong> S.p.A. ordinary shares;<br />
• 10 new <strong>Pirelli</strong> & C. non-convertible savings shares for every 7 <strong>Pirelli</strong> S.p.A. non-convertible savings shares.<br />
There is no cash differential anticipated.<br />
The shares of <strong>Pirelli</strong> & C. Luxembourg (a wholly-owned subsidiary of the merging company) will be cancelled, without exchange.<br />
4. Manner of assigning the shares of the merging company<br />
<strong>Pirelli</strong> & C. will execute the merger by:<br />
– cancellation, without exchange, of the shares representing the entire share capital of <strong>Pirelli</strong> & C. Luxembourg, since it is<br />
a wholly-owned subsidiary of the merging company;<br />
– cancellation, without exchange, of the <strong>Pirelli</strong> S.p.A. ordinary and savings shares that, at the date the merger becomes<br />
effective, are owned by <strong>Pirelli</strong> & C. or <strong>Pirelli</strong> & C. Luxembourg;<br />
– cancellation, without exchange, of the shares of the company to be merged, <strong>Pirelli</strong> S.p.A., which, at the date the merger<br />
becomes effective, are owned by the same company to be merged;<br />
– increase of its share capital for a maximum par value of Euros 786,127,230.72 through the issue of a maximum number<br />
of 1,398,203,116 ordinary shares and a maximum number of 113,580,020 non-convertible savings shares of par value<br />
Euros 0.52 each with dividend rights from January 1 of the year in which the merger comes into effect with third parties,<br />
to be reserved for the shareholders of <strong>Pirelli</strong> S.p.A. (other than <strong>Pirelli</strong> & C. and <strong>Pirelli</strong> & C. Luxembourg) on the basis of<br />
the exchange ratios indicated in the preceding paragraph 3.<br />
The amount of the capital increase to service the exchange ratio represents the maximum theoretical amount based upon<br />
the structure of the shareholder base as of the date of this report, assuming: (i) full exercise of the 46,154,000 “Mediocredito<br />
Lombardo Warrants – <strong>Pirelli</strong> S.p.A. ordinary shares 1998-2003”, held by a single party, valid for the subscription, in the<br />
period July 1 – 31, 2003, of 1 <strong>Pirelli</strong> S.p.A. ordinary share for each 1 warrant held at the price of approx. Euros 3.24 per<br />
share, and (ii) full exercise of the options granted by <strong>Pirelli</strong> S.p.A. under the existing incentive plans giving the beneficiaries<br />
the right to subscribe to a maximum of 46,829,692 <strong>Pirelli</strong> S.p.A. ordinary shares.<br />
In order for the <strong>Pirelli</strong> S.p.A. shares, that are to be exchanged for the exchange ratio to be exactly separable, up to a<br />
maximum of 2 ordinary shares and up to a maximum of 6 savings shares of <strong>Pirelli</strong> S.p.A. will be cancelled and made<br />
available to a shareholder. The exact amount of the shares to be cancelled will be determined at the time of signing the<br />
deed of merger, taking into account the number of <strong>Pirelli</strong> S.p.A. ordinary and savings shares held by <strong>Pirelli</strong> & C., <strong>Pirelli</strong> & C.<br />
Luxembourg and the same <strong>Pirelli</strong> S.p.A. at that date, as well as the eventual exercise of “Mediocredito Lombardo Warrants –<br />
<strong>Pirelli</strong> S.p.A. ordinary shares 1998-2003” and the eventual exercise of the options granted by <strong>Pirelli</strong> S.p.A. to the<br />
beneficiaries of the existing incentive plans.<br />
The <strong>Pirelli</strong> & C. shares issued under the exchange ratios referred to in the preceding paragraph 3 will be made available to<br />
those entitled, under conditions of dematerialization, through the respective authorized depositary agents registered with<br />
Monte Titoli S.p.A. beginning from the date the merger becomes effective, if the stock market is open for trading or from<br />
the first trading day thereafter.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Where necessary, <strong>Pirelli</strong> S.p.A. will ensure, through a broker charged especially for the purpose, that shareholders can<br />
purchase or sell the minimum number of <strong>Pirelli</strong> S.p.A. shares in order to have a whole number of <strong>Pirelli</strong> & C. shares without<br />
any additional expenses, stamps, duties and commissions. This information will be announced on a timely basis through a<br />
specific notice published in at least one national newspaper.<br />
<strong>Pirelli</strong> & C. and <strong>Pirelli</strong> S.p.A. will advise those concerned of the necessary procedures to be followed to exchange the shares<br />
after the merger has been executed through publication of a specific notice in at least one national newspaper.<br />
As from the date the merger becomes effective, if the stock market is open for trading, or from the first trading day<br />
thereafter, the <strong>Pirelli</strong> S.p.A. shares of all classes of stock will be delisted from the Mercato Telematico Azionario organized<br />
and operated by Borsa Italiana S.p.A..<br />
<strong>Pirelli</strong> & C. shares, including the new shares issued to service the exchange ratio, will continue to be listed on the Mercato<br />
Telematico Azionario organized and operated by Borsa Italiana S.p.A..<br />
5. Date from which the new <strong>Pirelli</strong> & C. shares accrue dividend rights<br />
The new <strong>Pirelli</strong> & C. ordinary and non-convertible savings shares to service the exchange will have dividend rights from<br />
January 1 of the year in which the merger comes into effect with third parties.<br />
6. Date the merger becomes effective<br />
The deed of merger will establish the date from which the merger will be in effect ex art. 2504 bis of the Italian Civil Code.<br />
The date could also be subsequent to the date in which the final registrations required by art 2504 of the Italian Civil Code<br />
have been completed.<br />
In accordance with the combined provision of articles 2504 bis, paragraph 3, and 2501 bis, paragraph 6 of the Italian Civil Code,<br />
the transactions of <strong>Pirelli</strong> & C. Luxembourg and <strong>Pirelli</strong> S.p.A. will be taken up by <strong>Pirelli</strong> & C. in its financial statements<br />
beginning from January 1 of the year in which the merger comes into effect with third parties, and this is also the date on<br />
which the merger becomes effective for tax purposes, pursuant to art. 123, paragraph 7, of D.P.R. No. 917 of December 22, 1986.<br />
7. Eventual treatment reserved for specific categories of shareholders and holders of securities other than shares<br />
The exchange ratio to which the <strong>Pirelli</strong> S.p.A. ordinary and savings shareholders are entitled are indicated in the preceding<br />
paragraph 3.<br />
As a result of the amendment to art. 17 (renumbered art. 18) of the by-laws following the approval of the plan of merger, the<br />
<strong>Pirelli</strong> & C. holders of savings shares (including those coming from the exchange ratio with <strong>Pirelli</strong> S.p.A. shares) will be<br />
entitled to a preference dividend on profits equal to 7 percent of the par value of the savings shares (Euros 0.52) to be paid<br />
from the annual earnings, calculated net of the portion to appropriate to the legal reserve. This change will come into force<br />
from the date the merger comes into effect with third parties, taking into account the comments in the preceding paragraph 5.<br />
The <strong>Pirelli</strong> & C. savings shares granted in the exchange ratio for the <strong>Pirelli</strong> S.p.A. savings shares will have all the features of<br />
the latter.<br />
As for the 46,154,000 “Mediocredito Lombardo Warrants – <strong>Pirelli</strong> S.p.A. ordinary shares 1998-2003”, valid for the<br />
subscription, in the period July 1 – 31, 2003, of 1 <strong>Pirelli</strong> S.p.A. ordinary share for each 1 warrant held at the price of approx.<br />
Euros 3.24 per share, account was taken of the eventual exercise of the warrants for purposes of determining the maximum<br />
number of shares to be issued to service the exchange.<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Lastly, <strong>Pirelli</strong> & C. will substitute: (i) <strong>Pirelli</strong> & C. Luxembourg as the issuer of the “<strong>Pirelli</strong> & C. Luxembourg S.A. – 5.125%<br />
Guaranteed Notes due 2009” of Euros 150,000,000 (ii) <strong>Pirelli</strong> S.p.A. as the issuer of “<strong>Pirelli</strong> S.p.A.– 4.875% Notes due 2008” of<br />
Euros 500,000,000 and (iii) <strong>Pirelli</strong> S.p.A. as the guarantor of the “<strong>Pirelli</strong> Finance (Luxembourg) S.A.– 6.50% Guaranteed Notes<br />
due 2007” of Euros 500,000,000”.<br />
There are no treatments reserved for the holders of securities other than those mentioned above.<br />
However, the absent or dissenting holders of <strong>Pirelli</strong> & C. ordinary shares regarding the specific resolutions on the<br />
transformation of <strong>Pirelli</strong> & C. to a corporation and the change in the corporate business purpose (more fully described in<br />
the preceding paragraph 2) referred to in point 1 of the agenda of the extraordinary session of the <strong>Pirelli</strong> & C. shareholders’<br />
meeting called to approve, among other things, the plan of merger, and the holders of <strong>Pirelli</strong> & C. savings shares, will be<br />
entitled to the right of withdrawal pursuant to art. 2437 of the Italian Civil Code to be exercised in the manner indicated in<br />
the specific notice that will be published in at least one national newspaper subsequent to the registration of the relative<br />
resolutions in the Companies Registry.<br />
8. Specific advantages eventually proposed in favor of the directors of the merging company and/or merged companies<br />
There are no particular advantages anticipated for the directors of the merging company and/or merged companies.<br />
<strong>Milan</strong>, March 11, 2003<br />
<strong>Pirelli</strong> & C. Accomandita per Azioni<br />
The Chairman<br />
Marco Tronchetti Provera<br />
<strong>Pirelli</strong> Società per Azioni<br />
The President and CEO<br />
Marco Tronchetti Provera<br />
<strong>Milan</strong>, April 2, 2003<br />
<strong>Pirelli</strong> & C. Luxembourg S.p.A.<br />
The Chairman<br />
Pierluigi Zanaboni<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
Appendix 1<br />
BY-LAWS<br />
COMPANY’S NAME, PURPOSE, REGISTERED OFFICE<br />
AND DURATION<br />
Article 1<br />
A Corporation is hereby incorporated under the name<br />
<strong>Pirelli</strong> & C. Società per Azioni.<br />
Article 2<br />
The purpose of the Company is the following:<br />
a) the acquisition of participating interests in other<br />
companies or corporations, both in Italy and abroad;<br />
b) the financing, the technical and financial co-ordination of<br />
the companies or corporations in which it has interests;<br />
c) the sale, ownership, management or placement of both<br />
government and private securities;<br />
The Company may carry out all transactions of any type<br />
whatsoever - excluding the collection of savings deposits<br />
from the public - connected to its corporate business purpose.<br />
Article 3<br />
The registered office of the Company is in <strong>Milan</strong>, at Via G.<br />
Negri 10.<br />
Article 4<br />
The duration of the Company is fixed until the date of<br />
December 31, 2100.<br />
SHARE CAPITAL<br />
Article 5<br />
The share capital is Euros 339,422,773.56<br />
(threehundredthirtyninemillionfourhundredtwentytwo<br />
thousandsevenhundredseventythreeandfiftysixcents) divided<br />
into 652,736,103<br />
(sixhundredfiftytwomillionsevenhundredthirtysixthousand<br />
onehundredthree) shares with a par value of Euros 0.52<br />
(fiftytwocents) each consisting of 618,317,846<br />
(sixhundredeighteenmillionthreehundredseventeenthousand<br />
eighthundredfourtysix) ordinary shares and 34,418,257<br />
(thirtyfourmillionfourhundredeighteenthousandtwohundred<br />
fiftyseven) savings shares.<br />
By resolution passed by the extraordinary shareholders’<br />
meeting held on December 22, 1998, the Directors were<br />
granted the power to increase the share capital, at one or<br />
more times, by a maximum amount of Euros 103,291,379.81<br />
(onehundredthreemilliontwohundrednintyonethousandthree<br />
hundredseventynineandeightyonecents) and for a maximum<br />
time period of five years from the date of said resolution.<br />
The share capital increase may be carried out by issuing,<br />
also with a premium, both ordinary and savings shares, and<br />
must be reserved for shareholders and/or holders of<br />
convertible bonds.<br />
By resolution passed by the extraordinary shareholders’<br />
meeting held on December 22, 1998, the Directors were<br />
granted the power to issue bonds, at one or more times,<br />
including bonds that are convertible both into ordinary<br />
shares or into savings shares, or bonds with warrants valid<br />
for the subscription of said shares, for a maximum par value<br />
amount of Euros 206,582,759.63<br />
(twohundredsixmillionfivehundredeightytwothousandseven<br />
hundredfiftynineandsixtythreecents) and for a maximum<br />
time period of five years from the date of said resolution,<br />
with the consequent possible increase of the share capital to<br />
serve the bond conversion.<br />
The extraordinary shareholders’ meeting of ….…. voted the<br />
following:<br />
a) to increase share capital, against payment, separable, by<br />
and no later than December 31, 2003, of a maximum of<br />
Euros 1,014,185,020.68 (onebillionfourteenmillionone<br />
hundredeightyfivethousandandtwentyandsixtyeightcents),<br />
through the issue of a maximum of 1,950,355,809<br />
(onebillionninehundredfiftymillionthreehundredfiftyfive<br />
thousandeighthundredandnine) ordinary shares of par<br />
value Euros 0.52 (fiftytwocents) each, with dividend<br />
rights from January 1, 2003, to be offered on option to<br />
the shareholders, at a unit price equal to par value, in a<br />
ratio of 3 new ordinary shares for every 1 share of<br />
whatsoever class of stock owned;<br />
b) to attach to each share referred to in point a) a free<br />
warrant, that can be traded separately, valid to subscribe,<br />
at any time from January 1, 2004 to June 30, 2006, in a<br />
ratio of 1 <strong>Pirelli</strong> & C. ordinary share, with regular dividend<br />
rights and a par value of Euros 0.52 (fiftytwocents) for<br />
every 4 warrants held, at a unit price equal to par value;<br />
c) to consequently increase share capital against payment,<br />
separable, by and not later than June 30, 2006, of a<br />
maximum par value of Euros 253,546,255.04<br />
(twohundredfiftythreemillionfivehundredfortysixthousand<br />
twohundredfiftyfiveandfourcents) through the issue, at<br />
one or more times, of a maximum of 487,588,952<br />
(fourhundredeightysevenmillionfivehundredeightyeight<br />
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thousandninehundredfiftytwo) ordinary shares, of par<br />
value Euros 0.52 (fiftytwocents) each, with regular<br />
dividend rights, to be reserved exclusively and<br />
irrevocably for the exercise of a maximum of<br />
1,950,355,809<br />
(onebillionninehundredfiftymillionthreehundredfiftyfive<br />
thousandeighthundredninne) warrants attached to the<br />
shares referred to in the preceding point b).<br />
The extraordinary shareholders’ meeting of ……. which<br />
approved the merger by incorporation in <strong>Pirelli</strong> & C. S.p.A.<br />
of <strong>Pirelli</strong> & C. Luxembourg S.p.A. and <strong>Pirelli</strong> S.p.A. voted to<br />
increase share capital to service the exchange ratio by a<br />
maximum par value of Euros 786,127,230.72<br />
(sevenhundredeightysixmilliononehundredtwentyseven<br />
thousandtwohundredthirtyandseventytwocents) through the<br />
issue of a maximum of 1,398,203,116<br />
(onebillionthreehundredninetyeightmilliontwohundredand<br />
threethousandonehundredandsixteen) ordinary shares and a<br />
maximum of 113,580,020<br />
(onehundredthirteenmillionfivehundredeightythousandtwenty)<br />
savings shares of par value Euro 0.52 (fiftytwocents) each<br />
with dividend rights from January 1 of the year in which the<br />
merger comes into effect with third parties, to be reserved<br />
for the shareholders of <strong>Pirelli</strong> S.p.A., other than <strong>Pirelli</strong> & C.<br />
S.p.A. and <strong>Pirelli</strong> & C. Luxembourg S.p.A., on the basis of<br />
the exchange ratio of: (i) 4 new <strong>Pirelli</strong> & C. ordinary shares<br />
for every 3 <strong>Pirelli</strong> S.p.A. ordinary shares and (ii) 10 new<br />
<strong>Pirelli</strong> & C. non-convertible savings shares for every 7 <strong>Pirelli</strong><br />
S.p.A. non-convertible savings shares.<br />
By resolution voted by the extraordinary shareholders’<br />
meeting of ….. , the Directors were granted the power to<br />
issue, at one or more times, up to a maximum of 100,000,000<br />
(onehundredmillion) ordinary shares, by April 30, 2008, to<br />
be granted to the managers and cadres of the Company and<br />
its subsidiaries and the subsidiaries of the latter, in Italy and<br />
abroad, pursuant to articles 2441 and/or 2349 of the Italian<br />
Civil Code.<br />
Article 6<br />
The shares are divided into ordinary shares and savings<br />
shares.<br />
Ordinary shares give the right to one vote per share; they<br />
may be either registered or bearer shares insofar as the law<br />
permits, and in this case may be converted, especially at the<br />
holder's request and expense, from one type to the other.<br />
Savings shares do not give the right to vote and, unless the<br />
law provides otherwise, are bearer shares.<br />
At the request and expense of the shareholder they may be<br />
converted into registered shares.<br />
As well as any rights and privileges provided for by law and<br />
in other parts of the present by-laws, savings shares shall<br />
have pre-emptive rights in the matter of paying-off of<br />
capital up to the full par value of same; in the event of a<br />
capital reduction due to loss, the par value of the saving<br />
shares will be reduced only by that part of loss exceeding<br />
the total par value of the other shares.<br />
Savings shares keep the rights and privileges foreseen by law<br />
and by the present by-laws even in the event of exclusion of<br />
ordinary shares and savings shares from trading.<br />
In order to ensure the common representative of the<br />
holders of savings shares, of adequate information about<br />
any transactions which might influence the trend in the<br />
market prices of the shares in that class, any<br />
communications concerning said transactions will promptly<br />
be sent to same, by the legal representatives.<br />
In the event of a share capital increase being carried out by<br />
issuing shares of only one class, same must be offered on<br />
option to the shareholders of all classes of shares.<br />
In the event of both ordinary shares and savings shares<br />
being issued:<br />
a) the holders of ordinary shares shall have the right to<br />
receive ordinary shares on option, and savings shares to<br />
make up any difference;<br />
b) the holders of savings shares shall have the right to<br />
receive savings shares on option, and ordinary shares to<br />
make up any difference.<br />
SHAREHOLDERS’ MEETING<br />
Article 7<br />
The convocation of the shareholders’ meeting, which may<br />
take place anywhere in Italy including in a place other than<br />
the registered office, the right to attend meetings and<br />
representation at same are all governed by law.<br />
In view of the nature of the Company's business and the<br />
special requirements arising therefrom, the ordinary<br />
shareholders’ meeting may be convened within six months<br />
of the end of the financial period.<br />
Article 8<br />
The due convocation of the meeting and the validity of its<br />
resolutions are governed by law.<br />
The voting quorum for the appointment of Directors is<br />
established as a relative majority of the votes.<br />
Article 9<br />
The meeting shall be presided over by the Chairman of the<br />
Board of Directors, by a Deputy Chairman or by a Managing<br />
Director, in that order; whenever there are two or more<br />
Deputy Chairmen or Managing Directors, the chair shall be<br />
taken respectively by the senior in age. In the event of the<br />
absence of the above-indicated individuals, the chair shall<br />
be taken by another person chosen by the shareholders’<br />
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Preliminary Information Directors’ <strong>Report</strong> Consolidated Financial Statements Extraordinary Session<br />
meeting among the shareholders present.<br />
The Chairman is assisted by a Secretary appointed by the<br />
meeting; there is no need to appoint a Secretary when the<br />
minutes of the meeting are drawn up by a notary public.<br />
It is the duty of the Chairman of the meeting to verify the<br />
right to attend the meeting, including by means of proxy; to<br />
ascertain whether or not the meeting has been duly<br />
constituted and has achieved the quorum required in order<br />
to pass resolutions; to conduct and moderate the<br />
discussion; to establish the order and manner of voting as<br />
well as announce the results thereof.<br />
The resolutions of the meeting shall be recorded in the<br />
minutes, which shall be signed by the Chairman and the<br />
Secretary of the meeting or the notary public.<br />
The minutes of the extraordinary shareholders’ meeting<br />
must be drawn up by a notary public appointed by the<br />
Chairman.<br />
Any copies and extracts thereof, that have not been drawn<br />
up by a notary public, shall be certified as true copies by<br />
the Chairman of the Board of Directors.<br />
MANAGEMENT OF THE COMPANY<br />
Article 10<br />
The Company is managed by a Board of Directors<br />
composed of between seven and twenty-three members<br />
who shall remain in office for three years (unless the<br />
meeting fixes a shorter term of office at the time of making<br />
the appointment) and may be re-elected.<br />
A Chairman, and if necessary, one or more Deputy Chairmen<br />
shall be appointed from amongst the members of the Board.<br />
In the event of the Chairman being absent, the chair shall<br />
be taken by a Deputy Chairman or a Managing Director, in<br />
that order; if there should happen to be two or more<br />
Deputy Chairmen or Managing Directors, the chair shall be<br />
taken respectively by the senior in age.<br />
The Board shall appoint a Secretary, who is not necessarily<br />
a member of the Board.<br />
Unless otherwise decided by the shareholders’ meeting, the<br />
Directors are not bound over by the prohibition mentioned<br />
under art. 2390 of the Italian Civil Code.<br />
Article 11<br />
The Board is empowered with the management of the<br />
Company and, for this purpose, is invested with the fullest<br />
powers for administration, except those, which according<br />
to the by-laws or by law, are reserved for the shareholders’<br />
meetings.<br />
The Board of Directors, also through delegated bodies,<br />
informs the Board of Statutory Auditors on a timely basis<br />
about the activities conducted and the most important<br />
economic, financial and equity transactions carried out by<br />
the Company and its subsidiaries; it specifically makes<br />
reference to transactions with potential conflicts of interest.<br />
The information is provided, at least quarterly, at the board<br />
meetings or Executive Committee meetings or by written<br />
communication to the Board of Statutory Auditors.<br />
The Board is authorized to delegate those powers it wishes<br />
to confer on one or more of its members, eventually<br />
through the positions of Managing Directors, attributing<br />
single or collective signature powers as it deems to<br />
establish for the administration of the Company.<br />
It may also delegate its competence to an Executive Committee<br />
composed of some of its members, whose compensation shall<br />
be established by the shareholders’ meeting.<br />
It may also nominate one or more committees with<br />
consulting functions, also for purposes of updating the<br />
corporate governance structure to the recommendations<br />
issued from time to time by the competent authorities.<br />
Lastly, the Board may appoint General Managers, Deputy<br />
General Managers, Managers and Deputy Managers and<br />
persons with power of attorney for single acts or categories<br />
of acts, establishing powers and competence. The<br />
appointment of Managers, Deputy Managers and persons<br />
with power of attorney for individual acts or categories of<br />
acts, can also be referred by the Board to the Managing<br />
Directors and the General Managers.<br />
Article 12<br />
The Board shall meet at the invitation of the Chairman or<br />
whomsoever is acting on his behalf, at the registered office<br />
of the Company or in any other place stated in the letter of<br />
convocation, every time he considers it in the best interests<br />
of the Company, or whenever a meeting has been requested<br />
by one of the Managing Directors or by at least two<br />
standing statutory auditors.<br />
However, the Board may validly pass resolutions, even<br />
failing any formal convocation, if all the board members and<br />
all the standing statutory auditors in office are present.<br />
Board meetings shall be convened by means of a letter,<br />
telegram, telex or fax sent to the address of each Director<br />
and each Standing Statutory Auditor, at least five days<br />
before (or in urgent cases at least six hours before) the day<br />
set for the meeting.<br />
Meetings of the Board and of the Executive Committee may<br />
be held by teleconference or videoconference. In this case<br />
the following must be guaranteed:<br />
a) identification of all the participants at each point in the<br />
connection;<br />
b) the possibility for each participant to intervene, to orally<br />
put forward same’s own opinion, to view, receive and<br />
transmit all documentation, as well as the contextuality<br />
of considerations and resolutions.<br />
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Meetings of the Board of Directors and of the Executive<br />
Committee are considered to be held in the place in which<br />
the Chairman and the Secretary must be simultaneously.<br />
The presence of at least half the members plus one is<br />
necessary for the resolutions of the Board to be deemed<br />
valid, and the favorable vote of the majority of those<br />
present is required. In the event of a tie in votes, the casting<br />
vote shall be that of the Chairman.<br />
The resolutions of the Board, even when passed by meetings<br />
held by teleconference or by videoconference, are recorded in<br />
a special book signed by the Chairman and the Secretary. Any<br />
copies and extracts thereof, that have not been drawn up by a<br />
notary public, shall be certified as true copies by the Chairman.<br />
Article 13<br />
Legal representation of the Company vis-à-vis third parties<br />
and in court proceedings shall be the duty, with separate<br />
and several signatory powers, of the Chairman of the Board<br />
of Directors and, if appointed, of the Deputy Chairmen and<br />
Managing Directors, within the limits of the powers granted<br />
to them by the Board of Directors.<br />
Each one of the aforesaid shall in any case have full powers<br />
to take legal action and file appeals before any judicial<br />
authority and any court of any degree, including in<br />
revocation or cassation (supreme court) proceedings, to file<br />
statements and prosecute in criminal cases, to sue on behalf<br />
of the Company in criminal proceedings, to begin legal<br />
proceedings and file petitions before all administrative<br />
jurisdictions, to intervene and protect the Company's<br />
interests in case of proceedings and claims against the<br />
Company, granting for this purpose all necessary mandates<br />
and powers of attorney ad litem.<br />
The Board of Directors and, within the limits of the powers<br />
granted to them by said Board, the Chairman of the Board and,<br />
if appointed, the Deputy Chairmen and the Managing Directors,<br />
are authorized to grant Managers and staff in general, and<br />
when necessary third parties, the power to represent the<br />
Company vis-à-vis third parties and in court proceedings.<br />
Article 14<br />
The members of the Board of Directors are entitled to<br />
annual compensation established by the shareholders’<br />
meeting and shall be reimbursed for all expenses incurred<br />
during the course of their duties.<br />
The compensation to Directors invested with special duties is<br />
established by art. 2389, paragraph 2, of the Italian Civil Code.<br />
Article 15<br />
If, due to resignation or any other cause, more than half the<br />
Directors should leave office, then the entire Board of<br />
Directors is considered to have resigned with effect as from<br />
the time of its re-constitution.<br />
BOARD OF STATUTORY AUDITORS<br />
Article 16<br />
The Board of Statutory Auditors is composed of three<br />
standing statutory auditors and two alternate statutory<br />
auditors who must hold the requisites required by existing<br />
laws and regulations; to this end, account will be taken that<br />
the matters and sectors of business strictly inherent to<br />
those of the Company are those indicated in the corporate<br />
business purpose with particular reference to companies or<br />
entities operating in the industrial, banking, insurance, real<br />
estate and services sectors in general.<br />
The ordinary shareholders’ meeting shall elect the Board of<br />
Statutory Auditors and determine its compensation. The<br />
minority shareholders shall appoint one standing statutory<br />
auditor and one alternate statutory auditor.<br />
With the exception of the provisions of the second last<br />
paragraph of the present article, the appointment of the<br />
Board of Statutory Auditors shall be made on the grounds of<br />
lists put forward by the shareholders in which candidates<br />
are listed under progressive numbers.<br />
Each list shall contain a number of candidates which does<br />
not exceed the number of members to be appointed. All<br />
shareholders who, alone or together with other<br />
shareholders, represent at least 2 percent of the shares with<br />
voting rights in the ordinary shareholders’ meeting, have the<br />
right to put forward a list.<br />
The lists of candidates, undersigned by the parties<br />
presenting them, must be filed at the Company’s registered<br />
office at least ten days before the day fixed for the meeting<br />
in first call. A description of the professional résumé of the<br />
individuals standing for election must be enclosed with the<br />
lists together with statements whereby the single candidates<br />
accept the nomination and attest, under their own personal<br />
responsibility, that no circumstances exist for ineligibility or<br />
incompatibility, and that they comply with requirements<br />
prescribed by law or by the articles for the position.<br />
Any lists put forward which do not comply with the<br />
aforesaid provisions shall be considered not to have been<br />
put forward.<br />
Each candidate may be included on only one list, under<br />
penalty of ineligibility.<br />
Likewise, any individuals who are not in possession of the<br />
requisites established by the applicable rules and regulations<br />
or who already hold the position of statutory auditor in more<br />
than five companies with stocks listed on regulated Italian<br />
markets, with the exception of the subsidiaries of <strong>Pirelli</strong> & C.<br />
may not be appointed as statutory auditors.<br />
Each individual with voting rights may vote for only one list.<br />
The election of the members of the Board of Statutory<br />
Auditors is performed as follows: two standing statutory<br />
members and one alternate member are taken from the list<br />
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which has obtained the highest number of votes, in the<br />
progressive order in which they are listed thereon; the<br />
remaining standing statutory member and the other<br />
alternate member are taken from the list which has<br />
obtained the highest number of votes from the meeting after<br />
the first list, again in the progressive order in which same<br />
are listed thereon; in the event of several lists obtaining the<br />
same number of votes, a new run-off vote between the said<br />
lists will be cast by all the shareholders present at the<br />
meeting, and the candidates on the list which obtains the<br />
simple majority of the votes will be appointed.<br />
The Chairman of the Board of Statutory Auditors shall be<br />
the statutory member indicated as the first candidate on the<br />
list which obtained the highest number of votes.<br />
In case of death, waiver or resignation of a Statutory Auditor,<br />
the alternate belonging to the same list as the resigned<br />
statutory auditor shall replace him. In the event of<br />
replacement of the Chairman the Board of Statutory Auditors,<br />
the chair shall be taken by the other statutory member on the<br />
list to which the resigning chairman belonged; if it is not<br />
possible to perform substitutions and replacements as set out<br />
hereinabove, then a meeting shall be convened to integrate<br />
and complete the Board of Statutory Auditors and which<br />
shall pass resolutions with a relative majority.<br />
When the meeting has to make provisions, pursuant to the<br />
terms of the aforegoing paragraph or to the terms of law, for<br />
the appointment of statutory auditors and/or alternates<br />
needed to complete the Board of Statutory Auditors, it shall<br />
proceed as follows: if statutory auditors appointed from the<br />
majority list have to be replaced, then the appointment is<br />
made with a relative majority vote without being tied to any<br />
list; if, on the other hand, statutory auditors appointed by<br />
the minority shareholders have to be replaced, the meeting<br />
shall replace them with a relative majority vote choosing<br />
names where possible from amongst the candidates<br />
indicated on the list on which the statutory auditor to be<br />
replaced appeared.<br />
If only one single list has been put forward, then the meeting<br />
shall cast its vote in relation to that list; if the list obtains a<br />
relative majority, then the first three candidates on the list in<br />
progressive order shall be appointed as the standing<br />
statutory auditors, and the fourth and fifth candidate shall be<br />
appointed as alternate statutory auditors; Chairman of the<br />
Board of Statutory Auditors shall be the person indicated at<br />
the top of the list put forward; in case of death, waiver or<br />
resignation of a statutory auditor, and in the event of<br />
substitution of the Chairman of the Board of Statutory<br />
Auditors, they shall be replaced respectively by an alternate<br />
statutory auditor and a standing statutory auditor in the<br />
order arising from the progressive numbering of the said list.<br />
Failing any lists, the Board of Statutory Auditors and its<br />
Chairman shall be appointed by the shareholders’ meeting<br />
with the majorities prescribed by law.<br />
Resigning statutory auditors may be re-elected.<br />
FINANCIAL STATEMENTS - DISTRIBUTION OF PROFITS<br />
Article 17<br />
The Company's financial period shall end on the December<br />
31 each year.<br />
Article 18<br />
After all the appropriations to the reserves prescribed by<br />
law have been carried out, the annual profits shall be<br />
distributed as follows:<br />
a) savings shares shall be attributed an amount of up to<br />
seven per cent of their par value; if, in any financial<br />
period, a dividend of less than seven per cent of the par<br />
value has been distributed to the savings shares, the said<br />
difference is calculated as an increase to be added to the<br />
preference dividend during the following two financial<br />
periods; any profits remaining after the aforesaid<br />
appropriations and provisions and which the meeting<br />
resolves to distribute, shall be distributed amongst all<br />
the shares in such a manner that the savings shares shall<br />
receive a total dividend which is increased, compared to<br />
the dividend received by the ordinary shares, by an<br />
amount equivalent to two percent of their par value;<br />
b) aside from what has been established above in respect of<br />
the total higher dividends attributed to the savings<br />
shares, the ordinary shares shall be attributed an amount<br />
up to five percent of their par value.<br />
The profits remaining shall be distributed among all the<br />
shares, in addition to the attribution described in the<br />
preceding letters a) and b), unless the shareholders’<br />
meeting, based upon the proposal of the Board of Directors,<br />
votes special appropriations to the extraordinary reserves,<br />
or other destination or decides to appropriate a part of such<br />
profits to retained earnings.<br />
In the event of distribution of reserves, savings shares shall<br />
have the same rights as the other shares.<br />
Interim dividends can be paid, in observance of the law.<br />
GENERAL PROVISIONS<br />
Article 19<br />
Insofar as their relationships with the Company are concerned,<br />
the domicile of the shareholders is understood, for all legal<br />
purposes, to be that shown in the Shareholders’ Register.<br />
Article 20<br />
All matters not provided for in the present by-laws shall be<br />
governed by the provisions of law.<br />
Web site: http://www.pirelli.com E-mail: ir@pirelli.com 191
Graphic project Ippolito Fassati, CRM S.r.l. - www.crm.it<br />
Lucini printig, <strong>Milan</strong><br />
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