Italian Financial Statements reclassified in accordance with International Format

Transcription

1 Italian Financial Statements reclassified in accordance with International Format FINMECCANICA S.p.A. and Subsidiaries CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2001 and 2000 The attached Consolidated Financial Statements (following The Financial Statements ) are derived from the consolidated financial statements prepared for the Italian legal and statutory purposes, reclassified in order to present them in a format that follows international practice. The Financial Statements include substantially the same information included in the consolidated financial statements prepared for the Italian legal and statutory purposes of yearend PREPRINT

2 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page 1. Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2001 and 2000 F - 2 Consolidated Statements of Income for the years ended December 31, 2001 and 2000 F - 4 Consolidated Statements of Cash Flows for the years ended December 31, 2001 and 2000 F - 5 Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2001 and 2000 F Notes to the Consolidated Financial Statements F Reconciliation from International and Reclassified financial statements, December 31, 2001 Balance Sheet 4. Reconciliation from International and Reclassified financial statements, December 31, 2001 Profit & Loss items F- 1

3 ASSETS (billions of Lire) (millions of Euro) (1) CURRENT ASSETS Cash and cash equivalents (Note 7) 2,198 4,255 2,504 Accounts receivable: Trade, net of allowance for doubtful accounts of Lire 243 billion in 2001 and Lire 256 in ,286 4,426 4,294 Related parties (Note 8) 537 1,039 1,614 Taxes 551 1, Inventories (Note 9) 2,555 4,948 4,554 Contracts in progress (Note 9) 2,417 4,680 4,453 Prepaid expenses (Note 10) Financial receivables from the shareholders of JVC (Note 11) Other current assets (Note 10) 558 1, Total current assets 11,787 22,822 19,802 PROPERTY, PLANT AND EQUIPMENT (Note 12) Land and buildings 1,151 2,229 2,215 Machinery, equipment and other 1,771 3,428 3,472 2,922 5,657 5,687 Accumulated depreciation (1,609) (3,116) (3,230) Construction in progress Property, plant and equipment, net 1,372 2,656 2,589 INTANGIBLE ASSETS, at amortized cost (Note 13) 965 1,869 1,152 INVESTMENTS AND SECURITIES (Note 14) 1,272 2,462 3,153 TREASURY SHARES NON CURRENT TERM RECEIVABLES FROM RELATED PARTIES (Note 15) OTHER ASSETS (Note 16) TOTAL ASSETS 15,646 30,294 27,016 See accompanying notes F- 2

4 LIABILITIES AND SHAREHOLDERS EQUITY (billions of Lire) (millions of Euro) (1) CURRENT LIABILITIES Short term borrowings (Note 17) ,100 Current portion of long term debt (Note 17) Other financial liabilities (Note 18): Third parties Related parties Advances from customers 3,864 7,481 4,287 Payables: Trade 2,119 4,103 3,959 Related parties Taxes, other income taxes Provisions for risks and contingencies (Note 20) Investments Taxes Other 1,020 1,975 1,756 Liabilities for payroll and social contributions Accrued liabilities Other current liabilities (Note 21) 1,135 2,198 2,261 Total current liabilities 10,556 20,440 16,115 LONG-TERM DEBT, less current portion (Note 17) 1,139 2,205 3,179 EMPLOYEE BENEFIT OBLIGATIONS, less current portion (Note 19) 604 1,169 1,267 DEFERRED INCOME, unearned portion MINORITY INTEREST (12) (24) 27 SHAREHOLDERS EQUITY (Note 22): Share capital 8,423.8 million ordinary shares in 2001 (8,395 million 1,871 3,622 3,610 ordinary shares in 2000), authorized, issued and outstanding, par value Lire 430 in 2001 and 2000 Legal reserve Reserve for treasury shares Retained Earnings 1,257 2,433 2,321 Total shareholders equity 3,189 6,175 6,014 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 15,646 30,294 27,016 See accompanying notes F- 3

5 (billions of Lire) (millions of Euro) (1) NET REVENUE (Note 23 and 24) 6,619 12,816 11,643 COST AND EXPENSES: Purchases, services and other operating costs (Note 25) 4,278 8,283 7,397 Change in inventory (119) (231) (375) Labor 1,824 3,532 3,484 Depreciation and amortization ,208 12,020 10,935 INCOME FROM OPERATIONS, before non recurring costs NON RECURRING COSTS (Note 6) (840) (1,626) (201) INCOME (LOSS) FROM OPERATIONS, after non-recurring costs (429) (830) 507 OTHER INCOME (EXPENSES) Equity in earnings of investee ST Microelectronics N.V , Interest income Interest expenses (166) (321) (364) Other income (expense), net (Note 26) (98) (190) (143) 746 1, INCOME BEFORE INCOME TAXES INCOME TAXES (Note 27) Current (150) (291) (300) Deferred (129) (250) (233) NET INCOME BEFORE MINORITY INTERESTS MINORITY INTERESTS IN LOSS NET INCOME See accompanying notes F- 4

6 (billions of Lire) (millions of Euro) (1) CASH FLOW FROM OPERATING ACTIVITIES NET INCOME: Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Minority interests (24) (47) (123) Non recurring costs 796 1, Depreciation and amortization Provision for employee benefit obligation ST Microelectronics gain and equity in earnings (878) (1,700) (661) Write-off of investments, securities and other (Gain) loss on sale of investments and fixed assets (34) (66) (5) Payment of employee benefit obligations (73) (141) (293) Change in operating assets and liabilities: Trade receivables (24) (46) (164) Inventory and contracts in progress (92) (178) (725) Trade payables (57) (111) 30 Advances from customers 544 1, Legal financial settlements related to Law 184/SAFIM (156) (302) (116) Receivables and payables towards related parties (135) (262) 191 Other, net (281) (545) 73 NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOW FROM INVESTING ACTIVITIES Additions to property, plant and equipment (158) (305) (249) Net additions to intangible assets (46) (90) (67) Acquisition of MBDA, net of cash acquired (245) (474) - Acquisition of investments, net of cash acquired and coverage of losses of investees (246) (476) (67) Proceeds from disposal of property, plant and equipment Dividends received from STM 1,060 2, Net proceed from disposal of other investments (48) (93) 167 Proceeds from government grants NET CASH PROVIDED BY INVESTING ACTIVITIES CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from capital increase, net of related expenses Cash payment to Ansaldo Trasporti shareholders for merger in Finmeccanica (5) (10) - Proceeds from long-term debt ,741 Payment of long-term debt (92) (178) (2,256) Net change in short term borrowings and other financial payables (1,451) NET CASH PROVIDED (USED IN) FINANCING ACTIVITIES (1,965) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 904 1,751 (1,425) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,294 2,504 3,929 CASH AND CASH EQUIVALENTS AT END OF YEAR 2,198 4,255 2,504 F- 5

7 Number of shares (million) Share capital Legal reserve Reserve for Treasury shares Other reserves (including foreign currency translation adjustments) Total BALANCE AS AT JANUARY 1, , , ,463 5,147 ALLOCATION OF 1999 PROFIT 8 (8) - FOREIGN CURRENCY TRANSLATION ADJUSTMENTS AND OTHER INCREASE OF SHARE CAPITAL FOR STOCK OPTION 2,7 1 1 NET INCOME BALANCE AS AT DECEMBER 31, ,395 3, ,321 6,014 ALLOCATION OF 2000 PROFIT 37 (37) - FOREIGN CURRENCY TRANSLATION ADJUSTMENTS AND OTHER (262) (262) INCREASE OF SHARE-CAPITAL FOR STOCK, OPTIONS MERGER WITH ANSALDO TRASPORTI S.P.A. (effect of merger) NET INCOME BALANCE AS AT DECEMBER 31, , , ,433 6,175 BALANCE AS AT DECEMBER 31, 2001 (in million of Euro) 1, ,257 3,189 See accompanying notes F- 6

8 1. DESCRIPTION OF THE ORGANIZATION AND THE BUSINESS Finmeccanica SpA (together with its subsidiary companies, the Company, the Group or Finmeccanica ) is a holding company that at December 31, 2001 is % owned by the Italian Treasury Ministry, while the remaining percentage is publicly held. The Company operates in various business segments. A brief description of the nature of the business in each industry sector in which the Company operates follows: Aeronautics - Operations include design, engineering, production and sale of civil and military aircraft (primarily in conjunction with prime global aircraft manufacturers), overhaul and maintenance of many different types of commercial and military aircraft and the supply of components for large commercial aircraft and executive jet aircraft. Space - Operations include the development of logistical systems for space stations, development and sale of on-board equipment for commercial satellites, the manufacturing of sensors for satellite observation and the transmission of images. Helicopters - Operations include the design, engineering, manufacturing and sale of helicopters and non-fixed wing aircraft. Defense - Operations include the design and development of integrated air defense systems, ground and naval missiles and weapons systems, radar command and control, flight simulators, avionics, electro-optics and electronic warfare systems, military communications systems, underwater naval defense systems, armored vehicles, antitank systems, naval and anti-aircraft guns and field artillery. Information technology - Operations include design, integration and supply of hardware and software to improve production processes of manufacturing activities, banks, services and utilities, supply of outsourcing services for information systems and information technologies, maintenance and management of information equipment and systems, supply of management and personnel services. Transportation - Operations include the design, manufacturing and distribution of rolling stock and of mass transit systems, manufacturing of diesel and electrical locomotives, business and light rail vehicles, and the construction and supply of electrified transport systems and signaling systems for rail networks and metropolitan underground systems. Energy - Operations include manufacture of power generation components and thermal power stations, and steam turbines, the design, construction and distribution of electrical systems and automation, power transmission and distribution, cogeneration and waste to energy plants, technological plants and systems, and a general contractor for turnkey plants for generating electricity. Microelectronics Operations include design, manufacturing and distribution of a broad range of products relating to the semiconductor segment, such as discrete, memories and standard commodity components and to the subsystem segment, including modules for the telecom, automotive and industrial markets like mobile phone accessories, ISDN power supplies and in-vehicle equipments for electronic toll payment. Other operations This category includes Corporate activities, subsidiaries that are not part of the core business (for which the Company is acting or planning a restructuring process oriented to the search of potential buyers) and subsidiaries that carry out auxiliary services for the other business segments, such as real estate and financial services companies. The main companies belonging to this category are Otto SpA, BredaMenariniBus SpA, Asterisque S.A. and Elsacom N.V. Selected key data by business sector and geographic areas for each of the fiscal years ended December 31, 2001 and 2000 are presented in Notes 23 and 24. F- 7

9 2. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation - The accompanying financial statements are derived from the consolidated financial statements presented for the Italian legal and statutory purposes, reclassified in order to present them in a format that follows international practice. The reclassification, however, does not affect consolidated net income and consolidated shareholders equity in any of the years presented, except for the reclassification of minority interest from equity to liabilities. In addition, the notes to the consolidated financial statements include a level of detail as is customary for international reporting which is considered equivalent to the information contained in the notes to the consolidated financial statements presented for the Italian legal and statutory practice. Principles of consolidation - The consolidated financial statements of the Company include the financial statements of Finmeccanica, its majority-owned subsidiaries and the financial statements of the 50% joint ventures Alenia Marconi Systems N.V. ( AMS ), AgustaWestland NV and of the 25% joint venture MBDA Sas. The financial statements of AMS, AgustaWestland and MBDA are consolidated using the proportional method, thus including assets and liabilities on the basis of the percentage of the owned interest. The consolidated income statements include, with respect to MBDA Sas, only the effect of the transactions following the date of completion (December 18, 2001). Certain majority-owned subsidiaries, including those in liquidation, have not been consolidated because in aggregate they are not significant to the consolidated financial statements or the investment was a temporary investment. In the consolidation process: a) All intercompany transactions and balances have been eliminated. Unrealized intercompany profits and the gains and losses arising from transactions between Group companies (other than those related on contract in progress for long-term contracts or programs) have also been eliminated. b) The financial statements used for the consolidation are those approved or prepared for approval at the shareholders meetings of the respective Group companies. They are adjusted, where necessary, to conform with the Company s accounting policies, which are in conformity with accounting principles issued by the Italian Accounting Profession (Consiglio Nazionale dei Dottori Commercialisti e dei Ragionieri). c) Business combinations (acquisitions from third parties) are accounted for by the purchase method of accounting: i) Goodwill is recognized for the excess of the purchase cost of the acquisition over the fair value of the identifiable tangible and intangible assets acquired, less liabilities assumed. Goodwill includes amounts allocated to in-process technology acquired. ii) If the fair value of the acquired net assets is higher than the purchase cost, after reducing the value of long-term assets, if applicable, the remaining difference is accrued to cover risks and expected future losses; in case the expected losses are not expected to occur, the remaining difference (negative goodwill) is recorded as a deferred credit and amortized to income. Use of estimates in preparation of financial statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. The use of estimates is an integral part of applying percentage-of-completion accounting for contracts and programs. Foreign currency translations - The financial statements of foreign subsidiaries are translated into lire using the year-end exchange rate for balance sheet items and the average rate of the year for statement of income items. The translation differences are recorded in a separate component of shareholders equity. Foreign currency transactions - Monetary assets and liabilities denominated in foreign currencies have been recorded at the exchange rate in effect at the date of the transaction. Individual F- 8

10 monetary assets and liabilities expressed in non-euro currencies have been remeasured to the current exchange rates at year end, except for those receivables related to long term contracts covered by specific hedges, which are recorded at the hedged rate. Any resulting short-term gain or loss is credited or charged to income, whereas any eventual gain resulting from the re-measurement of long-term assets and liabilities expressed in non-euro currencies, is deferred. Marketable securities - Marketable securities consisting of government bonds are stated at the lower of cost or market value. Inventory valuation and revenue recognition a. Inventory valuation Inventories of raw materials, supplies and finished products are stated at the lower of cost or market. Cost is determined using the weighted average cost method or the first in first out (FIFO) method. b. Product and service revenues Product and service revenues are recognized upon shipment of product or when services are performed. c. Long-term contracts and program accounting A significant portion of the Company s revenues is related to long-term contracts and programs. i) Long-term contracts The Company uses the percentage-of-completion method in recognizing revenue of long-term contracts. Under this method, income is recognized as work progresses on the contracts. The percentage of work completed is determined principally by comparing the accumulated costs incurred to date with management s current estimate of total costs to be incurred at contract completion. Revenue from contracts accounted for under the percentage-of-completion method is recognized on the basis of actual costs incurred plus the portion of income earned. Contract costs include all direct material, subcontractor costs, and labor costs and those indirect costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. Revisions in profit estimates during the period of a contract are reflected in the accounting period in which the revised estimates are made. If estimated total costs on a contract indicate a loss, the entire amount of the estimated loss is provided for currently. Contracts are considered complete when all essential contract work, including support to integrated testing and customer acceptance is completed. ii) Programs Contracts in progress costs include material, labor, production costs incurred in the early stages of a program, and they also comprise related pre-operating development and tooling costs. The relative pre-operating costs of products and specific projects are capitalized into contracts in progress and absorbed in the valuation of contracts in progress. The absorption is determined on the basis of plans of production and sales in relation to the type of product, generally within 10 years from the start of normal production. iii) Progress billings and advances Progress billings issued on contracts and programs are shown as deducted from the related carrying value of the contracts in progress. Advances are shown as liabilities. Estimates of revenues, cost of sales and delivery periods associated with forecasted orders are an integral component of program and long-term contracts accounting, and the ability to reasonably F- 9

11 estimate those amounts is a requirement for the use of the above mentioned accounting. Revenues, costs and earnings are determined, in part, based on estimates. Adjustments of such estimates are accounted for prospectively with the exception of anticipated losses on specific programs and contracts, which are recognized in the period when losses are reasonably assured. Inventories include amounts relating to programs and contracts with long-term production cycles, a portion of which will not be realized within one year. Investments - Investments in certain unconsolidated operating subsidiaries (see principles of consolidation) and significant affiliates (equity investees in which participation is between 20-50%, including ST Microelectronics Holding N.V.) are accounted for by the equity method. Accordingly, the carrying amount of the investment is increased or decreased in each reporting period to recognize the Group s share of profit or loss (after eliminating unrealized intercompany profits) after the date of the acquisition and to decrease the investment for the Group s share of dividends. Goodwill arising from the purchase of investments in equity investees is included in the carrying value of the investment and is amortized on a straight-line basis over a period of 5 years. Other long-term investments are accounted for by the cost method. Provisions for impairments are recorded when there is a decline, other than temporary, in the value of a long-term investment to recognize the decline. Research and development - The Group is engaged in research, development and general engineering programs. Self-funded research costs and those development costs, for which there is insufficient certainty that future economic benefits will flow to the Company as a result of the development costs, are recognized as an expense in the period in which they are incurred. Research and development costs are capitalized when it is probable that the costs will give rise to future economic benefits, and are amortized by the straight-line method over 5 years. Property, plant and equipment - Property, plant and equipment are recorded at cost, as adjusted by revaluations pursuant to various Italian revaluation laws. Cost includes interest charges capitalized over the period of construction, which are related to specific debt obtained to finance the construction of the asset. When property is sold or retired, the cost of the property and related accumulated depreciation are removed from the balance sheet and any gain or loss is recorded in income. Expenditures on fixed assets that improve the performance of the assets or extend the useful lives of the assets are capitalized. Other maintenance and repairs are expensed as incurred. Depreciation expense is computed using the straight-line method by applying depreciation rates which reflect the estimated useful lives of the related assets. The estimated useful lives are as follows: Buildings from 20 to 33 years Plant and machinery from 5 to 10 years Tools from 3 to 5 years Other assets from 5 to 8 years Goodwill - Goodwill, representing the excess of purchase cost of investments in consolidated subsidiaries over the fair value of the assets acquired, is amortized on a straight-line basis over a period ranging from 10 to 20 years. On an annual basis, management evaluates recorded goodwill for potential impairment. Derivative products - The Company uses derivative products to manage exposure to fluctuations in interest rates and foreign currency exchange rates. The interest differential on interest rate swap contracts used to hedge underlying debt obligations is reported as an adjustment to interest expense over the life of the swap. To hedge against exposure to changes in foreign currency exchange rates on borrowing arrangements, assets, liabilities, and purchase and sales commitments (related primarily to long-term contracts) denominated in currencies other than the functional currency, the Company enters into foreign currency forward contracts, swaps and options. Discounts or premiums on forward contracts (the difference between the current spot exchange rate and the forward exchange rate at the inception of the contract) are charged or credited to income over the contract lives using the straight-line method. F- 10

12 Income taxes - Income taxes are provided for on the basis of the estimated taxable income of the individual companies included in consolidation. Deferred income taxes are accounted for under the liability method and reflect the tax effects of significant differences between the tax basis of assets and liabilities and their reported amount in the financial statements, except that net deferred tax assets are recognized only if there exists evidence that the assets will be realized with reasonable certainty. Government grants - Capital grants received from the Italian government under its program to provide incentives for investments in certain areas and in certain activities are recorded as deferred income and amortized to income over the economic life of the assets acquired for which the grant was received. Grants related to research and development are credited to income. Treasury shares - Treasury shares are reported as an asset, at cost, in the balance sheet. Shareholders equity includes a reserve for treasury shares for an amount equal to the carrying value of treasury shares. Statement of cash flows - The Company s short-term borrowings arise primarily under its bank overdraft facilities. These short-term obligations are payable on demand. The cash flows from these items are included under the caption Net change in short-term borrowings and other financial liabilities in the Consolidated Statements of Cash Flows. Cash and cash equivalents - The Company considers cash deposits and state bonds collectible within three months as cash equivalents. Reclassifications - Certain amounts in the financial statements of the year 2000 have been reclassified in order to conform to the 2001 presentation. 3. DISPOSAL OF STM SHARES The chart below illustrates the shareholding structure as of December 31, 2000 of STMicroelectronics NV ( STM ). F- 11

13 F RENCH SHAREHOLDERS ITALIAN SHAREHOLDERS Areva FT1CI France Telecom 51% 49% Finmeccanica 50% STMicroelectronics Holding N.V. 50% 100% STMicroelectronics Holding II B.V. 44% STMicroelectronics N.V. STM s principal shareholder is STMicroelectronics Holding II BV ( ST II ), which owned 44% of the STM s issued common shares as of December 31, ST II is wholly owned by STMicroelectronics Holding I NV ( ST I ). ST I is a Dutch company, which is jointly (50%) owned by FT1CI - a company owned by two principal French shareholders, France Telecom and Areva - and Finmeccanica SpA. The French and Italian shareholders were party to a shareholders agreement entered into in April 1987, aimed to manage their interest in ST through ST I and jointly hold 100% of ST I s capital and voting rights. Finmeccanica indirectly owned through its investment in ST I 22% of the STM s issued common shares. In December 2001, ST II entered into a global offer to sell of up to 69,000,000 of the STM s common shares. The global offering was closed successfully at a price of per share. After this sale offering, ST II owns about 35.7% of STM s common shares. The position as of December 31, 2001 is as follows: F- 12

14 FRENCHSHAREHOLDERS ITALIAN SHAREHOLDERS Areva FT1CI France Telecom 51% 49% Finmeccanica 50% STMicroelectronicsHolding N.V. 50% 100% STMicroelectronics Holding II B.V. 35.7% STMicroelectronics N.V. In connection with the above mentioned offering: France Telecom offered notes redeemable by way of exchange for about 30 million existing common shares of STM, which shares are indirectly held, as said, by France Telecom; FT1CI, France Telecom, Areva and Finmeccanica signed, on December 10, 2001, a new shareholders agreement to restructure their holdings in ST I. Following the new agreement, Finmeccanica: indirectly sold 30 million STM ordinary shares through the subsidiary ST Microelectronics holding, realizing proceeds of Lire 2,035 and a capital gain of Lire 1,598; acquired the right to further reduce its holding in STM to 11% in the next two years; will be allowed to sell its entire stake in STM from December The divestiture do not need agreement of FT1C1; increased to 57% its stake ( fully diluted ) in ST I. The new agreement introduced a tracking stock mechanism both at ST I and at ST II level. Such a mechanism classifies the ST I and ST II shares as A Participating Shares (assigned to F1TCI) and B Participating Shares (assigned to Finmeccanica). In substance such mechanism, allowed under Dutch laws, equally separates the assets of ST II (i.e. STM s shares) to the A and B participating shares, allowing separate sale of the STM shares and separate destination of proceeds to the each of the selling shareholders. F- 13

15 4. SETTLEMENT OF LITIGATION RELATING TO LAW 184 In May 2001, the Company has settled the claim with the Ministry of Industry, concerning the repayments of the amounts received by the Company in accordance with Law 184/75. The settlement required the payment of Lire 302, inclusive of legal interest accrued up to the payment date, which had been completely accrued in previous years. 5. JOINT VENTURES, SPIN-OFFS AND ACQUISITIONS, ALLIANCES, GROUP REORGANIZATION In the years ended December 31, 2001 and 2000, the Company has been engaged to: i) search international alliances, ii) dispose non strategic investments and businesses, and iii) reduce general and administrative costs, in order to implement the restructuring plan, that was approved at the end of the year Year 2001 Acquisition of 25% share in MBDA and re-definition of the AMS Joint Venture agreement On April 26, 2001 an agreement with BAE Systems and the French-German-Spanish Group EADS was signed, leading to the establishment of a new company, MBDA (Matra Bae Dynamics Alenia), and the re-definition of the AMS Joint Venture agreement. Under this agreement, the Company contributed to MBDA Lire 1,314 in cash and the missile business which was part of the AMS joint venture in exchange of the 25% share in MBDA; BAE contributed to the AMS joint venture its ground and naval control system business (Bae Systems Combat and Radar Systems CaRS Division). On the basis of the agreement, Finmeccanica will maintain joint control in AMS, and joint control on MBDA, indirectly through the 50% owned holding company AMS Holdings NV, which also owns 100% of AMS. In connection with the above mentioned contribution to the MBDA joint venture and the redefinition of the AMS joint venture perimeter the Company recorded Lire 548 of non recurring charges: Lire 290 is the portion of the cash contribution which has been nominally attributed to the control premium paid to other shareholders; Lire 258 as partial write down of the original AMS goodwill, as the spin-off to MBDA of the missile business of AMS, resulted in a restructuring process of the AMS joint venture also leading to loss of operating synergies and the revision of the original plans of the AMS joint venture. Formation of AgustaWestland Joint Venture In February 2001, the joint venture agreement in the helicopter business between Finmeccanica and GKN was executed, leading to the formation of AgustaWestland NV which started its joint venture operations, following the completion of the joint-venture agreements. The Westland sub-group holds a 50% investment in a special purpose company jointly controlled with Boeing, which is engaged in training British Army personnel. At December 31, 2001 this investment was not consolidated due to the peculiarity of its activities and the sharing-up responsibilities in the joint venture. Merger with Ansaldo Trasporti- The reorganization process of the Transportation sector involved the internal group reorganization of the Vehicles division of Ansaldo Trasporti, F- 14

16 Ansaldobreda, the Systems division and Ansaldo Trasporti Sistemi Ferroviari SpA. The reorganization was completed with the merger of the majority owned sub-holding Ansaldo Trasporti into Finmeccanica. Other intra-group reorganization Effective November 1, 2001, the business Divisione Avionica ed Equipaggiamenti was transferred to the wholly owned consolidated subsidiary Galileo Avionica SpA. Effective December 1, 2001, the business of Otobreda Division was transferred to the wholly owned consolidated subsidiary Oto Melara SpA. Information on alliances The establishment of a joint venture with EADS in the military aircrafts and aero-structure business, planned in 2000, was not carried out in Negotiations and preliminary due-diligence activities between Finmeccanica and EADS were interrupted following the September 11 events. Negotiations on the sale of Ansaldo Energia came to an end. However, the first half of 2001 has been characterized by the disposals of non-core business, such as the sale of the 60% interest in Ansaldo Caldaie (ex Termosud), the net assets of Componenti Speciali Milano and the subsidiary Ansaldo Superconduttori S.p.A. Year 2000 Disposals and spin-offs - Various businesses of the Group have been disposed of during the year. Such businesses, were mainly represented by Ganz Ansaldo RT and Temm, all the operating activities of Ansaldo Invest Denmark and the activities of Ansaldo Energia related to the factory of Legnano and the production of boilers. The spin-off of the activities of the Agusta division into Agusta S.p.A., and the spin-off of the activities of the Space division into Alenia Spazio SpA were respectively made January 1, 2000 and April 1, NON RECURRING COSTS The Company in the years ended December 31, 2001 and 2000 incurred the following net operating costs, representing: i) Risks for situations implying probable contingencies; ii) Costs connected with the disposal of subsidiaries or businesses; iii) Various costs identified as non recurring. Such identified costs have been allocated to the operating segments as follows: Euro Lire Aeronautics (131) (254) (36) Space (72) (139) (3) Defense (442) (856) (24) Energy (6) (12) 26 Transportation (24) (47) (52) F- 15

17 Helicopters (18) (34) - Information Technology (4) (7) (4) Other (Corporate, financial activities and non core business) (143) (277) (108) (840) (1,626) (201) The significant increase in the balance of non-recurring costs is due to the fact that the 2001 financial statements have been significantly affected by the following: risk situation in some of the group s countries/markets of operation and product outlook. This includes: - Lire 237 from the re-defintion of commercial relations with (and related investments in) higher-risk countries; - Lire 245 brought about by the events which took place in the last quarter of the year and reported in the legal group reorganization process, principally related to the reduced forecast of the regional ATR aircraft and other military business; - Lire 225 of write-off of assets related to the Fire Control System T72, following changes in the international political arena and contract changes imposed by a foreign customer; - Lire 79 of write-off of all Elsacom s assets, following the crisis of the satellite telephone sector and the complete redefinition of products offered; restructuring/reconfiguration of some manufacturing activities This includes the effects of the reorganization process, including exiting from non core businesses, the restructuring of certain businesses and rationalization of the group legal structure: - restructuring of the road transportation business (Lire 60), and of the transport division (Lire 63); - extraordinary costs relating to guarantees given by Finmeccanica in order to exit certain non-strategic businesses (Lire 70); - closure of production facilities (Lire 82), following the formation of the AgustaWestland joint-venture, the new configuration of AMS and the formation of MBDA; - other restructuring costs (Lire 57), relating to other personnel redundancies; - other direct cost (Lire 49) incurred in connection with the formation of the above mentioned Joint Ventures and the reorganization of the group legal structure; - non recurring costs and write offs in connection with the contribution to the MBDA joint venture and the redefinition of the AMS joint venture perimeter, as noted above. F- 16

18 7. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of: Euro Lire Cash Bank and postal deposits 2,091 4,049 2,487 Government bonds ,098 4,061 2,504 Deposits with financial institutions ,198 4,255 2,504 Bank and postal deposits increased as a result of the combined effect of the proceeds from the disposal of STM shares (Lire 2,035), and of the payment of Lire 474, net of cash acquired, following the completion of the MBDA agreement (see note 5). Government bonds represent investments that can be immediately liquidated (within 3 months). 8. RECEIVABLES FROM RELATED PARTIES Receivables from related parties consist of: Financial receivables in 2001 include Lire 7 (Lire 681 at December 31, 2000) related to Ansaldo Industria in liquidation ( AI ), Lire 31 related to SIAI Marchetti in liquidation (Lire 73 at December 31, 2000) and Lire 188 (Lire 176 at December 31, 2000) related to Alenia Marconi Systems, which is consolidated by the use of the proportional method (hence, the receivable is shown for the 50% of its Euro Lire Financial receivables ,195 Other receivables ,039 1,614 nominal amount). The decrease of financial receivables is due to the waiver of the receivables from AI. The Company did not incur any losses, since the whole amount had already been provided for in 2000 (see note 20). Other receivables include Lire 173 (Lire 123 at December 31, 2000) from Consortium GIE/ATR that sells the ATR planes and that is 50% owned by the Company. F- 17

19 9. INVENTORIES AND CONTRACTS IN PROGRESS Inventories consist of: Euro Lire Raw materials 861 1,668 1,320 Semi-finished products and contracts in progress 1,447 2,801 2,688 Finished products ,442 4,729 4,253 Less allowance for obsolete and slow moving items (226) (437) (201) 2,216 4,292 4,052 Advances to suppliers Total 2,555 4,948 4,554 Contracts in progress consist of: Euro Lire Long-term contracts and programs 9,383 18,169 16,160 Less progress billings (6,966) (13,489) (11,707) Total 2,417 4,680 4,453 Contracts in progress include projects for research and development finalized to the aeronautic and helicopter production, mainly financed by Law 808. The increase of long-term contracts and programs is influenced by the consolidation of MDBA, the net effect of the 50% consolidation of the AgustaWestland Joint Venture, (i.e. deconsolidation of 50% of Agusta SpA and consolidation of 50% of the Westland Group). F- 18

20 10. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of: Euro Lire Prepaid expenses: Financial Other Other current assets: Financial receivables Receivables from public entities Personnel Social contributions Other , Financial Prepaid expenses include the exchange differences related to hedging operations renewed ( rolling ) that have been deferred to neutralize the future economic effect of the hedged item. Other receivables included in non current assets, amounting to Lire 847, mainly refer to receivables due from other companies taking part to the European aeronautical program EFA, with respect to commercial relations with contractor Eurofighter (Lire 287). 11. FINANCIAL RECEIVABLES DUE FROM THE SHAREHOLDERS OF JOINT VENTURES Financial receivables due from joint ventures consist of: Euro Lire Receivables from GKN due to JV AgustaWestland Receivables from EADS due to JV MBDA Receivables from BAE Systems PLC due to MBDA Both of the Joint Ventures are consolidated using the proportional method. Therefore the above mentioned assets are included on the basis of the percentage of the owned interest (50% for AgustaWestland and 25% for MBDA). F- 19

21 12. PROPERTY, PLANT AND EQUIPMENT Gross property, plant and equipment consist of: Euro Lire Land and buildings: Residential Industrial 1,139 2,206 2,197 1,151 2,229 2,215 Plant, machinery and equipment 1,126 2,180 2,216 Tools Other ,771 3,428 3,472 Assets under construction and advances ,981 5,772 5,819 Accumulated depreciation consist of: Euro Lire Land and buildings: Residential (3) (6) (4) Industrial (326) (632) (650) (329) (638) (654) Plant, machinery and equipment (825) (1,598) (1,594) Tools (188) (364) (433) Other (267) (516) (549) (1,280) (2,478) (2,576) (1,609) (3,116) (3,230) 13. INTANGIBLE ASSETS Intangible assets consist of: Euro Lire Goodwill 817 1, Capitalized costs: Trademarks and licenses Research and development Other ,869 1,152 F- 20

22 14. INVESTMENTS AND SECURITIES Investments and securities consist of: Euro Lire Unconsolidated subsidiaries Affiliates 1,184 2,293 2,931 Government bonds and other securities Other ,272 2,462 3,153 Investments in affiliates at December 31, 2000 include investment in STMicroelectronics Holding N.V. for Lire 2,141 (Lire 2,782 at December 31, 2000), Government bonds are restricted to guarantee the execution of certain long-term programs of the segments Helicopters (Lire 47), and Other Activities. 15. NON CURRENT RECEIVABLES FROM RELATED PARTIES Non current receivables from related parties consist of: Euro Lire Loan receivable from Agusta S.p.A Receivables from AMS Others The most significant change relates to the 50% share of the loan to Agusta SpA, arisen in connection with the formation of the AgustaWestland joint-venture, which is consolidated under the proportional method. 16. OTHER ASSETS Other assets consist of: Euro Lire Financial loans to third parties issued by: Financial foreign subsidiaries Mediofactoring Other assets SHORT-TERM BORROWINGS AND LONG-TERM DEBT F- 21

23 Short-term borrowings Short-term borrowings consist of: Euro Lire Banks Other financial institutions ,100 At 31 December 31, 2001 and 2000, the Group s short-term lines of credit with banks amounted to approximately Lire 4,092 and 3,000 respectively, and the unused portion of these lines of credit were Lire 3,235 and 1,900 respectively, at December 31, 2001 and The lines of credit are unsecured and the amounts outstanding are principally payable upon demand. Long-term debt Long-term debt consists of: Euro Lire Premium redemption convertible notes 878 1,700 1,700 Euro 300 million debenture loan Loans with subsidized rates Japanese Yen debenture loan Efibanca, loan in Lire Mediocredito Lombardo Other long-term loans in various currencies Total long-term loans 1,606 3,109 3,302 Less: current portion (467) (904) (123) Total long-term debt less current portion 1,139 2,205 3,179 Loans in non-euro currencies, as reported below in the paragraph related to derivative products, are hedged. Accordingly the above reported amounts in Italian Lire are the amounts translated applying the rates of the hedging contract. Premium Redemption Convertible notes (convertible into ordinary shares of Finmeccanica SpA) In order to implement the Company s strategic plans, including making any necessary investments in the defense business, the extraordinary shareholders meeting of November 23, 1999 approved a proposal to authorize the board of directors to issue a debenture loan convertible into ordinary shares (following the Convertible ), to be issued for a maximum amount of Lire 1,700 and to increase the capital for a maximum amount of Lire 487, at par value, to service the conversion of the Convertible. According to the approved proposal, a number of 468,254,250 Convertible notes at a price of Euro 1,875 each have been issued on June 8, 2000, for a total amount of Euro 878 million or Lire 1,700. The proceeds, net of commissions, were Lire 1,675. The notes bear interest at 2% per annum of the issue price, from and including June 8, 2000, payable in cash annually in arrears on June 8, of each year. In addition, Finmeccanica will pay an accretion on the notes on an annual compound basis to those investor who will convert the notes if the market price of the ordinary shares of Finmeccanica SpA will be lower than so that the annual F- 22

24 yield to maturity of the note equals 3.25%. Finmeccanica will redeem the convertible notes on June 8, Finmeccanica has the faculty to redeem the convertible notes, in whole but not in part, at any time after June 8, 2003, subject to certain conditions (see the related offering circular for more details). The conversion rate is one ordinary share per each convertible note, subject to adjustment upon the occurrence of certain events. Euro 300 million-debenture loan - Asterisque S.A., a Luxemburg consolidated subsidiary, in March 1999 issued a debenture loan of Euro 300 million on the European market at the six months EURIBOR plus a spread of The interest rate at December 31, 2001 is 4.673% (5.711% at December 31, 2000). In connection with this debenture, Finmeccanica entered into certain interest rate swap agreements whereby the variable rate has been adjusted to a fixed rate of 3.865%. Subsidized loans - Certain capital expenditures for the construction and the improvement of the manufacturing plants, in addition to certain research and development programs are financed utilizing the Italian specific laws that contemplate investments grants and long-term loans at subsidized interest rates. Total long-term at subsidized rates ranging from 0.82% to 6%, in accordance with the laws described above, was Lire 234 at December 31, 2001 (Lire 422 at December 31, 2000). Japanese Yen debentures - The debentures were issued by a Luxembourg consolidated subsidiary, Asterisque S.A., and are guaranteed by Finmeccanica. Finmeccanica has entered into certain foreign exchange and interest rate swap agreements whereby the effective average interest rate in Lire as at December 31, 2001 is 4.4% (4.44% as at December 31, 2000). The debentures included a put option for the lenders to ask for the reimbursement when IRI or the Italian Treasury will cease to control Finmeccanica. Further to the Public Share Offering of Finmeccanica, Company shares were held by the market for about 63%. Hence, a number of investors exercised such put option, requesting a total payment of Japanese Yen 17.5 billion. On August 28, 2000, according to the reimbursement plan, the Company repaid Japanese Yen 19 billion. The original debt was Yen 72 billion. The outstanding debt at December 31, 2000 was Japanese Yen 20.5 billion. In 2001 the Company repaid Japanese Yen 3 billion, so that the outstanding debt at December 31, 2001 amounts to Japanese Yen 17.5 billion. Efibanca Loan in Lire - Loan of Lire 92, granted by a syndicate of banks led by Efibanca in December The term of the loan is for a period of 6.5 years and repayments are required starting 18 months after the granting date. Interest rate is based on EURIBOR plus 0.8. Early reimbursement is permitted. F- 23

25 At December 31, 2001 the maturities of the long-term debt, assuming that the Convertible will be entirely repaid on June 8, 2005, are as follows: Year Euro Lire ,006 1,948 Thereafter ,606 3,109 Derivatives At December 31, 2001 the Company has approximately Lire 3,587 (Lire 4,893 at December 31, 2000) of foreign exchange contracts outstanding with banks and other financial institutions, primarily in U.S. Dollars and Japanese Yen, to hedge certain foreign exchange transactions, principally long-term contracts and financial indebtedness, including the contracts for the debentures in Japanese Yen (Japanese Yen 17.5 in 2001 and Japanese Yen 20.5 in 2000). For these financial loans and for all financial loans in foreign currencies covered by hedges, the amount reported in the financial statements is the amount of the loan translated at the hedged rate. Certain long-term debts are hedged through short-term transactions that are periodically renewed and whose effects are recognized in the income statements based on the life of the loan. In addition, the Company entered into several interest rate swap agreements with banks and other financial institutions, in connection with certain of the above mentioned borrowing agreements in foreign currencies and in conjunction with foreign exchange swap contracts in order to minimize the cost associated with the loans. The agreements are entered into for the term of the loans, through the year 2007, for a total notional principal amount of approximately Lire 815 at December 31, 2001 (Lire 881 at December 31, 2000) whereby the effective interest rate will be adjusted for the difference between certain variables rates and certain fixed rates. These agreements involve the receipt of fixed (or variable) rate amounts of interest in exchange for variable (or fixed) rate interest payments over the life of the agreement without an exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rate changes and recognized as an adjustment to interest expense related to the debt. The related amount receivable from, or payable to, the counter parties is included in other current assets or liabilities. The fair value of the swap agreement, in accordance with Italian accounting principles, is not recognized in the financial statements. 18. OTHER FINANCIAL LIABILITIES Financial payables to related parties increased by lire 623 as a consequence of debts to MBDA Treasury Co. for Lire 688, following the creation of the JV MBDA. Other financial liabilities include also due to the other shareholder GKN from the JV AgustaWestland, for Lire EMPLOYEE BENEFIT OBLIGATIONS The employee benefit obligations are comprised of accruals made by the Group companies for the Italian termination severance indemnity plans that relates to employees of Italian operations in the Group. In accordance with Italian severance pay statutes, an employee benefit is accrued for service to date and is payable immediately upon separation. The termination indemnity liability is calculated in F- 24