REPORT ON GROUP OPERATIONS FOR THE FIRST SIX MONTHS OF 2005

Transcription

1 REPORT ON GROUP OPERATIONS FOR THE FIRST SIX MONTHS OF 2005

2 THE ACOTEL GROUP Acotel Group S.p.A. is the leader of a Group of companies operating in the ICT sector, based on a single business project. The main companies in the Acotel Group, in addition to Acotel Group S.p.A., which basically performs management functions and manages the Acotel Platform, through which it operates directly on the market as an Application Service Provider, are: - Acotel S.p.A., which markets the multimedia services for Italy; - A.E.M. S.p.A., which deals with the design and production of security systems; - Acotel Participations S.A. which acts as a sub-holding and controls the Group s foreign companies responsible for business development in their local markets; - Jinny Software Ltd, acquired in 2001, deals with the design, production and development of high-technology ICT equipment; - Info2cell.com FZ-LLC, which operates as a Wireless Application Services Provider in partnership with leading Middle-eastern mobile telephone operators; - Acotel Group (Northern Europe) Ltd, which supplies value-added services in Ireland and other countries in northern Europe; - Acotel do Brasil Ltda, which markets multimedia services to Brazilian operators; - Flycell Inc., which has been providing consumer services in the United States since the early months of

3 OPERATING AND FINANCIAL REVIEW RESULTS OF OPERATIONS RECLASSIFIED CONSOLIDATED INCOME STATEMENT (thousands of euros) Jan 1 - June Jan 1 - June change Total revenues 11,152 10, Materials and service costs 6,932 4,825 2,107 Gross margin 4,220 5,589 (1,369) Labor costs 4,956 4, EBITDA (736) 1,232 (1,968) -6.60% 11.83% Depreciation (217) Amortization 1,077 1,072 5 Provisions for doubtful accounts (30) EBIT (2,151) (425) (1,726) % -4.08% Net financial income (expense) Income (loss) from ordinary activities (1,698) (163) (1,535) % -1.57% Adjustments to financial assets - (83) 83 Extraordinary income (loss), net Income (loss) for the period (1,609) (*) (237) (*) (1,372) % -2.28% Minority interest in income (loss) Group interest in income (loss) (1,609) (*) (237) (*) (1,372) % -2.28% (*) Results for the period are pre-tax The Acotel Group s accounts for the period ended June 30, 2005 report total revenues of 11,152 thousand euros, representing an increase of 7%, whilst compared with the first six months of 2004, the loss widened to 1,609 thousand euros. Total revenues include revenues from sales and services, broken down in the tables below by business area and geographical market: 3

4 (thousands of euros) Jan 1 - June % Jan 1 - June % SERVICES TO NETWORK OPERATORS 7, % 6, % DESIGN OF ICT EQUIPMENT 1, % 1, % CORPORATE SERVICES % % DESIGN AND OPER. OF SECURITY SYSTEM % % MEDIA SERVICES % % B2C SERVICES % - 0.0% OTHER REVENUES - 0.0% 1 0.0% 10, % 8, % (thousands of euros) Jan 1 - June % Jan 1 - June % ITALY 5, % 6, % MIDDLE EAST 2, % 1, % LATIN AMERICA 1, % % OTHER EUROPAN COUNTRIES % % ASIA % % AFRICA % % NORTH AMERICA % - 0.0% 10, % 8, % SERVICES TO NETWORK OPERATORS Value added services (VAS) provided to network operators generated revenues of 7,143 thousand euros, up 5.5% compared with the same period in This continues to represent the Group s principal revenue source, contributing 65% of the total. Thanks to a long-term contract in place with Acotel S.p.A., Telecom Italia Mobile is the main source of revenues, accounting for a total of 4,849 thousand euros. In connection with the relationship with the Telecom Group, attention is called to the increase in revenues generated in Brazil with TIM Celular, TIM Sul, Maxitel and TIM Nordeste Telecomunicaçoes. In fact, in the first half of 2005, Acotel do Brasil, which operates on the basis of a contract similar to that in place in Italy, had total revenues of 1,128 thousand euros. Several factors contributed to this growth process. Besides the increase in the number of subscribers of the services of the four operators, which underlies the business s organic growth, agreements were entered into with Universal Mobile, one of the world s most important music-content providers, and Vola for the distribution of Java games. The quality of the games marketed by this company, together with the special features of Acotel do Brasil s technology platform for the download, caused the sale of the number of items sold to increase by 150% in a few months. 4

5 The subsidiary, Info2cell, contributed to the development of this line of business thanks to revenues for the period under review of 688 thousand euros, basically in line with the first half of Significant activities carried out during the period included the launch of such portals as Abwab, on behalf of STC of Saudi Arabia, Freedom, on behalf of Qtel of Qatar, and Aiwah, on behalf of Batelco of Bahrain. Through these, 12 million customers can activate alert services in push mode. Still in the Network Operator Services segment, Acotel Group (Northern Europe) Ltd. had total revenues of 456 thousand euros. This company operates mainly as an application service provider for Vodafone Ireland, on the basis of a long-standing contract that continues to provide a positive contribution to the Group s performance. DESIGN OF ICT EQUIPMENT Jinny Software Ltd., our Irish subsidiary engaged in this business area, had revenues of 1,565 thousand euros, up more than 40% on the same period of last year. Thanks to this performance, the company firmed up its position in the market for messaging equipment for so-called second tier operators, i.e. small and medium operators. On the commercial front, in addition to strengthening its sales network, which now covers the five continents, the company continued to invest in communication activities by participating in three fairs - 3GSM World Congress (Cannes in February), 3GSM Russia (Moscow in June) and Global Messaging Congress (London in June), upgraded its web site and launched a direct marketing campaign. The most significant event was the acquisition of the Multimedia Message Service Center business unit from Tecnomen of Finland. Following this deal, Jinny Software is now the world s fourth supplier of this kind of equipment. Finally, attention is drawn to the three contracts obtained to expand the capabilities of the SMS-C and MMS-C of three operators in Jordan, Yemen and Sudan, as well as the contract received to upgrade a new SMS-C in Iran. CORPORATE SERVICES Performance in this area was impressive as revenues grew by nearly 400% on the comparable period of last year to 996 thousand euros. Most services are rendered on behalf of large consumer brands, involving mainly mobile marketing campaigns. Among these, Pepsi Cola s campaign in Saudi Arabia, Kuwait, Qatar, Bahrain and United Arab Emirates was a great economic, commercial and image-related success: this was a prize contest for mobile telephones which drew more than three million participants, who generated traffic of more than 15 million SMS. The campaign will run until September 30, Acotel S.p.A. also worked with Procter & Gamble Italia on a mobile marketing campaign to launch a new product during the period. Digital gadgets for mobile telephones will be distributed during the campaign. 5

6 DESIGN AND OPERATION OF SECURITY SYSTEMS During the six-month period under review, AEM, the company engaged in the security business, had revenues of 520 thousand euros, down from the comparable amount of one year earlier. It should be noted that most revenues derive from contracts involving a monthly flat fee plus a variable component linked to any extraordinary activity planned for the year. Revenues fell basically because most extraordinary activities have been scheduled for the second half of 2005, and therefore are expected to pick up during the remainder of the year. In the first half of 2005 AEM extended the contract with Telecom Italia which covers the maintenance of the remote controlled CS9000 (manufactured by AEM) and UGM2020 (manufactured by Bosch) surveillance systems. Thanks to this extension, AEM is still among the leading companies for the maintenance of remote surveillance systems handled by Telecom Italia. During the period under review, AEM extended until 2007 the contract signed with the Bank of Italy in In May, AEM obtained ISO quality certification, thanks to which it will be able to participate in tenders both directly and through temporary consortia. Lastly, to increase profitability AEM started a program to internalize many installation maintenance activities which were previously outsourced. The company will continue to utilize sub-contractors only in cases where direct maintenance proves uneconomical. MEDIA SERVICES Positive expectations for this area were fully met, as revenues for the period amounted to 428 thousand euros, a nearly sevenfold increase on a year earlier. Most activities are carried out by Acotel S.p.A. and concern mainly services provided to broadcasting companies, especially RAI, MTV and La7. A large number of services were provided to RAI in connection with successful programs. Most of all, an important agreement was entered into to distribute information from RAI News 24, RAI s all news channel to mobile terminals. The program is expected to be launched in the second half of Furthermore, Acotel SpA signed an agreement with Beatz to co-produce entertainment services on UMTS networks. The other Group company that provides a significant contribution to revenues in this area is Acotel do Brasil. This company supplies services to TV Globo, thanks to an agreement entered into in the first half of 2005 to set up a voting system for such programs as Big Brother and Fame. B2C SERVICES Total revenues for the period amounted to 302 thousand euros, generated through the activities carried out by Acotel Group (Northern Europe) Ltd. in Ireland and Flycell Inc. in the USA. No 6

7 comparison with past performance can be made, since the Acotel Group began engaging in B2C (Business to Consumers) services at the end of The decision to enter the B2C arena was made to enter new markets, such as the US where B2C is the prevailing business model, and to take advantage of new business opportunities in the markets where the Group is already present, such as Ireland. B2C services are also expected to be implemented in the near future in other countries. B2C services will be provided under the Flycell brand name, which was created specifically to raise consumer awareness in advertising campaigns. The offering designed for the consumer market is intended to build consumer loyalty to the Flycell brand. To this end, a portfolio was developed where emphasis is placed on services requiring subscriptions, not based on impulse buying. After a few months from the launch of B2C, this strategy seems to be working, as the number of subscribers is increasing, while the correlation between advertising expenditure and revenues is decreasing. As to content, agreements were entered into with important content providers to obtain exclusive rights so as to differentiate the offering from that of competitors. Overall, Flycell s B2C catalog has more than 5,000 entries covering ringtones, games and wallpapers. Operating costs totalled 11,888 thousand euros, compared with 9,277 thousand euros in the first half of The item Raw and ancillary materials, consumables and finished goods totaled 454 thousand euros and refers primarily to the procurement of materials for the construction of telecommunications equipment, in connection essentially with the operations of Jinny Software. Service costs for the period amounted to 5,375 thousand euros, compared with 3,892 thousand euros in the corresponding period in The most significant increase in this item regarded the costs of services purchased from external content providers, which totaled 1,504 thousand euros, compared to 1,049 thousand euros a year earlier. The second most important component of the increase is represented by the costs related to the agreement signed by I2C with Pepsi Cola and the consultants fees for management, tax, legal and commercial consultancy and technical assistance provided to Group companies to support their activities, as well as the advertising costs to increase the visibility of services provided. Labor costs rose from 4,357 thousand euros during the first six months of 2004 to 4,956 thousand euros in the first half of 2005, due essentially to a headcount increase by companies operating in Italy and, most of all, abroad. Amortization of intangible assets mainly relates to goodwill arising on consolidation of equity investments in the subsidiaries AEM, Jinny Software, Millenium Software, Info2cell and EITCO. Information regarding the value of goodwill arising on consolidation and the related amortization are provided in the notes to the respective items. Depreciation of tangible assets relates to telecommunications equipment and the infrastructure needed to carry out the Group s activities. 7

8 Treasury management reported a profit of 453 thousand euros, up 191 thousand euros from the corresponding period in This item also includes 348 thousand euros in interest income earned on the short-term investment of liquidity in bonds, insurance products or repurchase agreements. 8

9 FINANCIAL POSITION AND CASH FLOWS RECLASSIFIED CONSOLIDATED BALANCE SHEET (thousands of euros) June 30, 2005 December 31, 2004 Change ASSETS Fixed assets 16,330 16,387 (57) Intangible assets 11,293 12,127 (834) Tangible assets 1,163 1, Investments 3,874 3, Current assets 42,676 42,734 (49) Inventories Accounts receivable 13,283 10,953 2,339 Marketable securities 21,148 17,767 3,381 Cash and cash equivalents 8,155 13,926 (5,771) Accrued income and prepaid expenses Total assets 59,881 59, LIABILITIES Shareholders' equity 51,298 52,578 (1,280) Group shareholders' equity 51,268 52,548 (1,280) Share capital 1,084 1,084 - Share premium reserve 51,731 52,398 (667) Legal reserve Reserve for treasury stock in portfolio 3,873 3, Other reserves Retained earnings (accumulated losses) (4,978) (3,506) (1,472) Group net income (loss) for the period (1,609) (*) (1,420) (189) Minority interest Allowances for risks and charges Employee severance indemnities Accounts payable 6,911 5,758 1,152 debt - payable within 12 months (49) - payable beyond 12 months other lenders - payable within 12 months payable beyond 12 months advances trade payables 4,402 3,227 1,175 taxes due due to social security agencies (91) other 1,358 1, Accrued expenses and deferred income Total liabilities 59,881 59, (*) As of June 30, 2005, the Company exercised the option to report pre-tax data The changes in the financial position compared with December 31, 2004 are essentially due to the investment of liquidity in short-term transactions, mutual investment funds, insurance products, 9

10 corporate bonds and in a share buyback by Acotel Group S.p.A. pursuant to the shareholder resolution adopted on April 30, Fixed assets, amounting to 16,330 thousand euros, registered a net decrease of 57 thousand euros. Besides the increase in investments determined by the share buyback, the most significant change regards intangible assets, which decreased due to amortization of goodwill arising on consolidation. Further details of changes in fixed assets are provided in the relevant annexes. Changes in current assets are due to the investment of excess cash, which is discussed at a later stage in connection with the remarks on the net financial position and the changes in financial position, as well as to the increase in accounts receivable. However, the increase in receivables is to be considered an isolated event, as Acotel S.p.A. alone collected more than 4 million euros from customers at the beginning of July. As to changes in liabilities, the most significant change occurred during the period under review is related to accounts payable. However, this item follows the same pattern as accounts receivable, so the same considerations apply. ANALYSIS OF NET LIQUIDITY/(DEBT) (thousands of euros) June 30, 2005 June 30, 2004 Short-term investments 21,148 17,767 Cash and cash equivalents 8,155 13,926 Short-term bank debt and current portions of long-term bank debt (63) (112) Net cash and cash equivalents (A) 29,240 31,581 Medium-to long-term debt (221) (256) Medium- to long-term indebtedness (B) (221) (256) Net liquidity/(debt) (A)+(B) 29,019 31,325 Net liquidity amounts to 29,019 thousand euros, a decrease of 2,306 thousand euros from the comparable amount as at December 31, However, liquidity surged as a result of the receivables collected immediately after the end of the six-month period. 10

11 CONSLIDATED CASH FLOW STATEMENT (thousands of euros) Jan 1 - June Jan 1 - Dec Jan 1 - June A. NET CASH AT THE BEGINNING OF THE PERIOD 31,581 33,982 33,982 B. CASH FLOWS FROM (FOR) OPERATING ACTIVITIES (1,299) 1, Cash flows from operating activities before changes in working capital (71) 1,739 1,490 Net income for the period (pre-tax)* (1,609) (1,420) (237) Amortization, depreciation and write-downs 1,415 3,043 1,657 Write-downs of long-term financial assets Net change in employee severance indemnities Net change in allowances for risks and charges - (99) (71) (Increase) / decrease in accounts receivable (2,352) 813 1,494 (Increase) / decrease in inventories (2) (5) (13) Increase / (decrease) in accounts payable 1,237 (83) (2,308) Changes in other items of working capital (111) (1,279) (44) C. CASH FLOWS FROM (FOR) INVESTING ACTIVITIES (1,336) (3,292) (568) (Investments)/disposals of fixed assets - Intangibles (243) (193) (222) - Tangibles (426) (478) (276) - Financial (667) (2,621) (70) D. CASH FLOWS FROM (FOR) FINANCING ACTIVITIES 294 (294) (103) Increase/ (decrease) in medium- to long-term debt (35) (255) (158) Other changes in shareholders' equity 329 (39) 55 E. CASH FLOW FOR THE PERIOD (B+C+D) (2,341) (2,401) (52) F. NET CASH AT THE END OF THE PERIOD (A+E) 29,240 31,581 33,930 (*) As of June 30, 2005 and June 30, 2004 the Company exercised the option to report pre-tax data The Company had negative cash flow of 2,341 thousand euros, compared with negative cash flow of 2,401 thousand euros for fiscal year 2004 as a whole. This was affected by the collection in the early days of the second half of 2005 of part of Acotel S.p.A. s claims on TIM, by the Parent Company s share buyback and by the costs related to the launch of B2C activities by certain foreign subsidiaries. 11

12 RELATED PARTY TRANSACTIONS Relations with associated companies As of June 30, 2005, the Group does not hold equity investments in associated companies. Shareholdings of Directors and Statutory Auditors The following table shows a breakdown of Directors holdings in the Group: NAME GROUP COMPANY NO. OF SHARES HELD AT NO. OF SHARES PURCHASED NO. OF SHARES SOLD NO. OF SHARES HELD AT Claudio Carnevale (a) Acotel Group S.p.A Andrea Morante Acotel Group S.p.A Claudio Carnevale Acotel S.p.A Claudio Carnevale AEM S.p.A (a) Ownership is exercised via Clama S.A. of which Claudio Carnevale owns 99.9% of the share capital Claudio Carnevale and Margherita Argenziano each hold 25% of the share capital of Clama S.r.l., which, in turn, holds 1,800,000 shares in Acotel Group S.p.A. No shareholdings are owned by Statutory Auditors. Remuneration of shareholders for membership in corporate bodies Claudio Carnevale earned the following fees during the first half of 2005: thousand euros as Chairman of the Board of Directors of Acotel Group S.p.A.; - 25 thousand euros as Chairman of the Board of Directors of Acotel S.p.A.; - 25 thousand euros as Chairman of the Board of Directors of AEM S.p.A. Margherita Argenziano earned the following fees during the first half of 2005: - 5 thousand euros as a member of the Board of Directors of Acotel Group S.p.A.; - 25 thousand euros as the CEO of Acotel S.p.A.; - 25 thousand euros as the CEO of AEM S.p.A. Andrea Morante earned 5,000 euros during the first half of 2004 as a member of the Board of Directors of Acotel Group S.p.A. OTHER INFORMATION As of June 30, 2005 Acotel Group S.p.A. owns 254,500 of its own shares, of which 28,320 purchased in accordance with the mandate granted by the General Meeting of April 24, 2002 and 226,180, net of sales, pursuant to the authorization granted by the General meeting of April 30, The shares, which are carried at a value of 3,873 thousand euros, equal to an average unit cost of euros, have a nominal value of 66,170 euros and represent 6.10% of the share capital. An appropriate equity reserve of the same value has also been posted. 12

13 Other Group companies do not own shares in Acotel Group S.p.A., either directly or through a trust company or proxy, nor did they buy or sell such shares during the period. As of June 30, 2005 Acotel Group S.p.A. does not hold shares or units of controlling companies, directly or indirectly through a trust company or a proxy, nor did it buy or sell such shares during the period. As of June 30, 2005 the company had no secondary place of business. In June 2005 Acotel Group S.p.A. was served with a shareholder lawsuit initiated by Media Project S.A. which requested the Court of Rome to void or, in alternative, to cancel the resolution adopted by the Annual General Meeting of April 29, 2005 approving the financial statements for the year ended December 31, 2004 and the accompanying documents. Based on the opinion of the Company s legal counsel, the Board of Directors regards the lawsuit by Media project S.A. as groundless. ADOPTION OF INTERNATIONAL ACCOUNTING STANDARDS Articles 81 and 82 of Consob Regulation no , which govern the preparation of interim accounts, as restated in Consob Resolution no dated April 14, 2005, call for six-monthly and quarterly reports to be drawn up in accordance with IAS/IFRS (International Accounting Standards/International Financial Reporting Standards). According to the transitory regime designed by article 81-bis of the cited Regulation, and observed by Acotel Group, the six-monthly financial statements may be prepared in accordance with the accounting standards adopted to draw up the accounts for the preceding fiscal year (Italian GAAP). The annexes herewith provide: Annex 1 the reconciliation required by IFRS 1, paragraphs 39 and 40 (shareholders equity as of January 1, 2004 and December 31, 2004 and results of operations for 2004), complete with explanatory notes on the basis of preparation and the items in the statements of reconciliation; Annex 2 a quantitative reconciliation of shareholders equity and the results of operations as at June 30, 2005 as determined in accordance with the basis of preparation and accounting policies adopted for the accounts of the preceding fiscal year vis-à-vis their amount as determined in accordance with IAS/IFRS, highlighting the nature and amount of the most significant adjustments to shareholders equity and results of operations for the period. 13

14 CONSOLIDATED ACCOUNTS 14

15 CONSOLIDATED BALANCE SHEET ASSETS (thousands of euros) June 30, 2005 December 31, 2004 June 30, 2004 Unpaid, called up share capital due from shareholder Fixed assets: Intangible assets: - incorporation and expansion costs research, development and advertising costs industrial patents and intellectual property rights concessions, licenses, trademarks and similar rights goodwill arising from consolidation intangibles in process and advances other Total Tangible assets: - plant and machinery industrial and commercial equipment other work in progress and advances Total Long-term financial assets: - accounts receivable: from others: due beyond 12 months treasury stock: Total Total fixed assets Current assets: Inventories: - raw and ancillary materials and consumables work in progress and semi-finished goods finished goods and goods for resale Total Accounts receivable: - trade: receivable within 12 months due from tax authorities: deferred tax assets other: receivable within 12 months receivable beyond 12 months Total Marketable securities: - other securities Total Cash at bank and on hand: - bank and post office deposits cash and notes on hand Total Total current assets Accrued income and prepaid expenses - other TOTAL ASSETS

16 CONSOLIDATED BALANCE SHEET LIABILITIES AND SHAREHOLDERS' EQUITY (thousands of euros) June 30, 2005 December 31, 2004 June 30, 2004 Shareholders' equity: Share capital Share premium reserve Legal reserve Reserve for treasury stock in portfolio Other reserves: - Consolidation reserve Reserve for exchange rate differences (7) (336) (242) Retained earnings (accumulated losses) (4.978) (3.506) (3.506) Net income (loss) for the period (1.609) (*) (1.420) (237) (*) Total Minority interest: Minority interest in shareholders' equity Minority interest in net income (loss) for the period Total Total shareholders' equity Allowances for risks and charges: other Total Employee severance indemnities Accounts payable: - bonds payable within 12 months banks: payable within 12 months payable beyond 12 months other lenders payable within 12 months payable beyond 12 months advances payable within 12 months trade: payable within 12 months taxes: payable within 12 months social security agencies: payable within 12 months other: payable within 12 months payable beyond 12 months Total Accrued expenses and deferred income - other TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (*) As of June 30, 2005 and June 30, 2004 the Company exercised the option to report pre-tax data 16

17 MEMORANDUM ACCOUNTS June 30, 2005 Dec 31, 2004 June 30, 2004 General guarantees granted General guarantees in favor of others Other memorandum accounts: Third-party assets held by the Company 3 3 6,200 Total ,446 17

18 CONSOLIDATED INCOME STATEMENT (thousands of euros) Jan 1 - June Jan 1 - Dec Jan 1 -June Total revenues: - revenues from the sale of goods and services change in work in progress, semi-finished goods and finished goods (5) other revenues and income Total Operating costs: - raw and ancillary materials and consumables service costs lease expense labor costs: wages and salaries social security contributions employee severance indemnities other amortization, depreciation and write-downs: amortization of intangible fixed assets depreciation of tangible fixed assets other write-downs of fixed assets provisions for doubtful accounts change in raw and ancillary materials, consumables and goods for resale (7) other expenses Total Operating income (2.151) (587) (498) Financial income and expense: - other financial income: from marketable securities other: from others expense to others (68) (137) (59) - Gains and losses on foreign exchange transactions 2 (218) 65 Financial income (expense), net Adjustments to financial assets: - write-downs of equity investments - (10) (10) - write-downs of marketale securities - (79) - Adjustments to financial assets - (89) (10) Extraordinary income and expense: - income expense (15) (101) (44) Extraordinary income (expense), net Income (loss) before taxes (1.609) (330) (237) - current taxes and deferred tax assets and liabilities for the period (1.090) Net income (loss) before minority interest (1.609) (*) (1.420) (*) (237) (*) Minority interest Group net income (loss) (1.609) (*) (1.420) (*) (237) (*) * The net result reported as of December 31, 2004 is shown after taxes, whilst in the case of the half-year data the Company has exercised the option to report pre-tax data 18

19 NOTES TO THE CONSOLIDATED ACCOUNTS 19

20 The consolidated accounts as of June 30, 2005 have been prepared on the basis of the accounting policies established by the Italian Regulatory Commission for Companies and the Stock Market (CONSOB) in resolution no of May 14, 1999, and in accordance with the Regulations of the New Market Organized and Managed by Borsa Italiana S.p.A.. The Company exercised the option, granted by the cited CONSOB resolution, to report pre-tax data. The accounts as of June 30, 2005 used as the basis for the consolidated financial statements were prepared on the basis of the accounting records at such date, integrated by the adjustments necessary to comply with the accruals principle. The consolidated six-monthly accounts include the accounts of Acotel Group S.p.A. and those of the Italian and foreign registered companies over which Acotel Group S.p.A. exercises direct or indirect control via control of a majority of the voting rights or of sufficient voting rights to have a dominant influence at ordinary general meetings. The following companies have been consolidated as of June 30, 2005: Company Date of acquisition Group s ownership (%) Registered office Share capital Acotel S.p.A. April 28, % (4) Rome EURO 13,000,000 AEM Advanced Electronic Microsystems S.p.A. April 28, % Rome EURO 858,000 Acotel Participations S.A.. April 28, % Luxembourg EURO 1,200,000 Acotel Chile S.A. April 28, % (5) Santiago, Chile USD 17,310 Acotel Espana S.L. April 28, % (5) Madrid EURO 3,006 Acotel Do Brasil LTDA August 8, 2000 (1) 100% (5) Rio de Janeiro BRL 1,868,250 Acotel France S.A.S. October 22, 2002 (1) 100% (5) Paris EURO 40,000 Jinny Software Ltd. April 9, % (5) Dublin EURO 2,972 Millennium Software SAL April 9, % (6) Beirut LBP 30,000,000 Info2cell.com FZ-LLC January 29, 2003 (3) 100% (5) Dubai AED 18,350,000 Emirates for Information Technology Co. January 29, % (7) Amman JOD 710,000 Flycell Media S.p.A. July 10, 2002 (2) 100% Rome EURO 400,000 Flycell Inc. June 28, 2003 (1) 100% (5) Wilmington USD 100,000 Acotel Group (Northern Europe) Ltd May 27, 2004 (1) 100% Dublin EURO 101,000 (1) The date of the company s entry into the Group coincides with its incorporation. (2) Prior to such date the Group already held 50% of the company s share capital under equity investments in associated companies. (3) Prior to such date the Group already held 33% of the company s share capital under equity investments in associated companies. (4) AEM owns 1.92% of the share capital. (5) Controlled via Acotel Participations S.A. (6) Controlled via Jinny Software Ltd. (7) Controlled via Info2cell.com FZ-LLC. It should be noted that in April 2005 the liquidation of Acotel Greece was completed. 20

21 CONSOLIDATION PRINCIPLES The assets and liabilities of consolidated companies are recorded on a line-by-line basis, eliminating the book value of the shareholdings consolidated against the shareholders equity of subsidiaries. The difference between the cost of acquisition and the fair value of the shareholders equity of subsidiaries on the date of acquisition is recorded as Goodwill arising on consolidation under intangible assets and amortized, or under shareholders equity at Consolidation reserve, if the cost of acquisition is lower than the value of the adjusted net assets. The Consolidated Balance Sheet and Income Statement also reflect the elimination of all intercompany payables, receivables, costs and revenues, in addition to the elimination of inter-company profits. The minority interest in shareholders equity and in net income for the period is shown under the specific items in the Consolidated Balance Sheet and Income Statement. ACCOUNTING POLICIES Intangible assets These are stated at purchase price or production cost, including incidental expenses. They are systematically amortized over their estimated useful lives. In the event of a permanent impairment in value, the asset is written down accordingly. The incorporation and expansion costs of the companies and the related subsequent expenses, concessions, licenses and trademarks and similar rights are amortized on a straight-line basis over five years. Research and development costs are capitalized, if identifiable and measurable, after assessing their recoverability as a result of the economic benefits expected from the projects to which they refer, and which are expected to be completed. These costs are amortized in five years. Industrial patents and intellectual property rights, related to software acquired or developed by the Company, are capitalized after assessing their recoverability as a result of the economic benefits expected from the projects to which they refer, and which are expected to be completed. These costs are amortized over three years, in view of the rapid technological deterioration to which they may be subject. Concessions, licenses, trademarks and similar rights are amortized on a straight-line basis over a period of 10 years. Goodwill arising on consolidation is amortized on a straight-line basis over a period of 10 years, taking into account future cash flows deriving from the investment to which the item refers. In the case of a permanent impairment in value, the asset is written down accordingly. Leasehold improvements are amortized on the basis of the duration of the related rental contracts. 21

22 Tangible assets These are stated at purchase price or production cost, including directly attributable incidental expenses. They are systematically depreciated on a straight-line basis at a rate reflecting the estimated useful life of the relevant asset. Depreciation starts when the asset comes into operation and is reduced to 50% for the first year. Routine maintenance and repair costs are expensed as incurred. No monetary or economic revaluations or capitalization of interest expense was carried out. The rates of depreciation applied for the different categories of assets are as follows: ICT platform 50% Specific plant 10-20% Other plant and machinery 15-20% Computers 20% Other equipment 15-25% Vehicles 25% Furniture, fixtures and fittings 12% In the event of a permanent impairment in value, the asset is written down accordingly, regardless of the depreciation already charged. If, in subsequent periods, the reasons for the write down are no longer valid, the original value is reinstated, adjusted solely to take account of depreciation. Long-term investments Equity investments in associated companies are valued in accordance with the equity method. Equity investments in other companies are valued at cost, and may be reduced in order to reflect a permanent impairment in value. Inventories Inventories of finished and semi-finished goods, raw materials and goods for resale are shown at the lower of their purchase or production cost and their estimated realizable value, based on market prices Accounts receivable Accounts receivable are entered at nominal value, reduced by provisions for doubtful accounts in order to reflect their estimated realizable value. 22

23 Marketable securities Such assets are stated at the lower of purchase cost and market value. Cash at bank and on hand Such items are stated at nominal value at the end of the period. Accruals and deferrals Accruals and deferrals include the portion of revenues and expenses covering two or more periods, allocated on an accruals basis. Employee severance indemnities Severance indemnities are stated in accordance with the provisions of the national collective labor contract for the category, with supplementary company agreements and in compliance with the regulations in force. It corresponds to the effective commitment to each employee at June 30, 2005, net of any advances paid. Accounts payable These are stated at nominal value. Accounts receivable and payable expressed in foreign currency Receivables and payables expressed in foreign currency are translated at historical exchange rates. They are adjusted on the basis of closing exchange rates as of the date of the financial statements. The exchange rate differences resulting from the conversion are charged to the Income Statement. Revenues These are recognized in accordance with the prudence and matching principles. Revenue relating to the services rendered to Network Operators and Corporate Customers is recognized on the basis of the services effectively performed during the period. Revenue relating to the sale of software licenses is recognized at the moment the transfer of title takes place. Revenue relating to the design, production and installation of electronic equipment is recognized at the moment the service is supplied or at the time of delivery, subject to acceptance by the customer. Memorandum accounts These are stated at nominal value, including the existing commitments and risks at the end of the period. 23

24 NOTES TO THE BALANCE SHEET ASSETS FIXED ASSETS Intangible assets Net intangible assets as of June 30, 2005 amount to 11,293 thousand euros. The item Incorporation and expansion costs totals 39 thousand euros and includes costs related to amendments to Group companies articles of association. The costs of research and development total 105 thousand euros and include 95 thousand euros in costs relating to technical and IT development incurred in past years by the subsidiary, Info2cell. The balance reflects the costs incurred in past years by AEM for two different research projects for which the Group has received subsidized loans, duly posted to liabilities. Industrial patent and intellectual property rights, totaling 189 thousand euros, consist of the specific software purchased from third parties and used by the Group in the provision of computerized services and for the internal information system utilized by Group companies. The increase compared with December 31, 2003 is essentially due to the acquisition of software to upgrade the capacity of the ICT platform owned by Acotel Group S.p.A. The item Concessions, licenses, trademarks and similar rights, totaling 856 thousand euros, includes the costs of the software used by the subsidiary, Info2cell, for the supply of value added services. The item Goodwill arising on consolidation comprises the difference arising between prices paid for the purchase of equity investments and the corresponding value of the subsidiaries shareholders equity on the date of acquisition. This item breaks down as follows: (in thousands of euros) Company Price Shareholders' equity Goodwill arising from consolidation Amortization as of June 30, 2005 Book value as of June 30, 200 AEM 1,549 1, (238) 225 Jinny Software 12,324 (1,109) 13,433 (5,709) 7,724 Millenium Software (21) 23 Info2Cell 6,150 2,784 3,366 (1,354) 2,012 Eitco (144) 78 Total 20,930 3,403 17,528 (7,466) 10,062 The item Other essentially includes leasehold improvements, consisting of the costs incurred during recent years in order to renovate the building located in Rome, which is rented from third parties and used as the registered offices and operational headquarters of the Group s Italian companies. The relevant lease expires in 2006 and can be extended for additional six years. 24

25 Changes in intangible assets during the period ended June 30, 2005 are shown in an annex. Tangible assets Net tangible assets as of June 30, 2005 amounted to 1,163 thousand euros, representing a net increase of 110 thousand euros on the comparable amount as of December 31, 2004 due to investments during the period. Plant and machinery mainly consists of data transmission platforms installed in Rome, Dubai, Dublin, Rio De Janeiro and New York, used by the Group to provide value added services and equipment for the production of security equipment. Industrial and commercial equipment includes the computers used by the Group for development and maintenance of hardware and software products, for use by the Company or for sale to third parties, relating to the development and management of value added services and internal operating activities. The item Other primarily regards furniture, fixtures and fittings and company vehicles. Changes in tangible assets during the period between January 1 and June 30, 2005 are shown in an annex. Long-term financial assets As of June 30, 2005 the Group does not hold equity investments in associated companies. As of June 30, 2005 the Group reports treasury stock amounting to 3,873 thousand euros. Such shares, which were purchased by Acotel Group S.p.A., have a nominal value of 66,170 euros and represent 6.10% of the share capital. An appropriate equity reserve of the same value has also been posted. The treasury stock consists of 254,500 ordinary shares of Acotel Group S.p.A. purchased on the stock market. The shares have been bought with a view to future acquisitions of other companies and for this reason posted to long-term financial assets at an average cost of euros. The corresponding reference price as of June 30, 2005 is euros while the average price for the sixmonth period is euros. The amount as of June 30, 2005 does not seem to require any adjustment, also in light of the share performance in the last few days. CURRENT ASSETS Inventories Inventories, totaling 90 thousand euros, are valued according to the weighted average cost method and stated net of the allowance for stock write-downs of 568 thousand euros, provided to adjust them to their estimated market value. In detail: 25

26 (thousands of euros) Gross value Write-downs Book value as of June 30, 2005 Book value as of Dec 31, 2004 Book value as of June 30, 2004 Raw and ancillary materials, and consumables 223 (168) Work in progress and semi-finished goods 283 (268) Finished goods and goods for resale 152 (132) Total 658 (568) Accounts receivable These consist of trade receivables net of write-downs carried out to bring them into line with their estimated realizable value, as follows: (thousands of euros) June 30, 2005 Dec 31, 2004 June 30, 2004 Trade receivables Provisions for doubtful accounts (273) (259) (210) Total All trade receivables for which provisions have not been made are held to fall due within 12 months. A total of 57.2% of all trade receivables relate to receivables due from Telecom Italia Mobile. Due from tax authorities VAT credits are nearly all attributable to Flycell Media S.p.A. Amounts due from tax authorities on account of income taxes include mainly advance IRES and IRAP payments by Acotel Group S.p.A., Acotel S.p.A. and A.E.M. S.P.A. during the period. (thousands of euros) June 30, 2005 Dec 31, 2004 June 30, 2004 VAT credits 1,014 1,003 1,243 Advance income tax payments ,141 Total 1,362 1,211 2,384 Deferred tax assets Deferred tax assets, amounting to 442 thousand euros, arise from temporary differences between the book value of assets and liabilities and their tax base. Of these, 233 thousand euros are attributable to AEM S.p.A., 132 thousand euros to Acotel Group S.p.A. and 77 thousand euros to Acotel S.p.A.. Details of the temporary differences giving rise to deferred tax assets are shown in the following table: 26

27 (thousands of euros) June 30, 2005 December 31, 2004 Temporary Tax Temporary Tax differences effect differences effect Deferred tax assets: Write-downs of equity investments 55 33% 55 33% Recovery on taxed provisions for doubtful accounts 88 33% 88 33% Write-downs of inventories ,25% - 36,75% ,25% - 36,75% Undeducted entertainment expenses 16 37,25% 16 37,25% Undeducted maintenance costs 1 37,25% 1 37,25% Recovery on taxed provisions for ordinary 12 37,25% 12 37,25% depreciation Taxed provisions for remuneration of Directors 15 33% 15 33% Sub-Total Deferred tax assets deriving from tax losses for previous periods 49 33% 49 33% Total Other receivables As of June 30, 2005 other receivables amounted to 123 thousand euros due within 12 months and 84 thousand euros due beyond 12 months. The portion of receivables due beyond 12 months includes guarantee deposits given to third parties in relation to lease and utility contracts entered into by Group companies. To complete the disclosure required by the Civil Code, as amended following the reform of corporate law pursuant to Legislative Decree no. 6 dated January 17, 2003, a geographical breakdown of current receivables in the consolidated balance sheet as of June 30, 2005 is provided below: (thousands of euros) ITALY OTHER EUROPEAN COUNTRIES MIDDLE EAST LATIN AMERICA NORTH AMERICA Total Receivables: Trade 8, , ,272 Other 1, ,011 Total 9, , ,283 27

28 Marketable securities This item, amounting to 21,148 thousand euros, refers to the short-term investment of a part of the Group s liquidity. Investments in bonds issued by Banca Nazionale del Lavoro and by Monte dei Paschi di Siena amount to 10,750 thousand euros, while investments in bonds managed by Bank Insinger de Baufort amount to 4,817 thousand euros. The remaining amount includes 3,657 thousand euros in insurance products issued by Monte dei Paschi di Siena, and comprises interest accrued to June 30, 2005, 1,150 thousand euros in repurchase agreements with Monte dei Paschi di Siena and 774 thousand euros in government securities held by the Brazilian subsidiary. Cash at bank and on hand This item includes bank deposits of 8,116 thousand euros and cash and notes on hand totaling 39 thousand euros. Bank deposits represent the balances held at various institutes as of June 30, ACCRUED INCOME AND PREPAID EXPENSES The balance of 875 thousand euros as of June 30, 2005 refers to accrued income deriving from short-term investments (99 thousand euros) and the prepaid expenses on service contracts, insurance and other costs (776 thousand euros). 28

29 LIABILITIES AND SHAREHOLDERS EQUITY SHAREHOLDERS EQUITY Group interest As of June 30, 2005 this item was as follows: (thousands of euros) Share capital Share premium reserve Legal reserve Reserve for treasury stock in portfolio Consolidation reserve Reserve for exchange rate differences Retained earnings Net income for the period TOTAL Balances at Dec. 31, (297) (4.986) Allocation of net income for 2003 (4.986) Share buyback (2.708) Other changes (39) (39) Net income for 2004 (1.420) (1.420) Balances as at December 31, (336) (3.506) (1.420) Allocation of net income for (1.472) Share buyback (667) Other changes Net income for the period (*) (1.609) (1.609) Balances as of June 30, (7) (4.978) (1.609) As of June 30, 2005 the entirely paid-up share capital of Acotel Group S.p.A. consists of 4,170,000 ordinary shares with a nominal value of 0.26 euros each. The table below shows the composition of shareholders equity with reference to available and distributable reserves as of June 30,

30 (thousands of euros) Item/description Amount Possible uses Amount available Summary of uses in the last thee years: to cover losses Other reasons Capital 1,084 Capital reserve: Share premium reserve 51,731 A, B, C 51, Earning reserves: Legal reserve 265 B Reserve or treasury stock 3, Reserve for exchange rate differences (7) Consolidation reserve Retaind earnings (4,978) (525) (3,889) Total 51,731 Non-distributable amount - Distributable amount 51,731 Key: A: for capital increases B: to cover losses C: for dividends Minority interest As of June 30, 2005 this item amounts to 30 thousand euros, net of the result for the first half of 2004, and represents the share of shareholders equity attributable to minority shareholders in subsidiaries Acotel S.p.A., AEM S.p.A. and Millennium Software SAL. Reconciliation of the Parent Company s net income and shareholders equity with consolidated net income and shareholders equity The reconciliation of the shareholders equity of Acotel Group S.p.A. and the corresponding consolidated items is as follows: 30

31 (thousands of euros) Shareholders' equity Result for the period positive/(negative) income / (loss) Shareholders' equity and result for the period as reported in the Parent Company's accounts 57, Effect of consolidation of Group companies 66 (1,442) Consolidation reserve Reserve for exchange rate differences (7) - Amortization of goodwill arising from consolidation (7,301) (863) Effect of deconsolidation of Acotel Greece S.A Elimination of intercompany (gains) and losses (337) - Group shareholders' equity and result for the period 51,268 (1,609) Minority interest in shareholders' equity and result for the period 30 - Consolidated shareholders' equity and result for the period 51,298 (1,609) EMPLOYEE SEVERANCE INDEMNITIES The total balance includes the amounts due as severance indemnities, net of advances already paid to employees. The following table shows changes during the first half of 2005: (thousands of euros) Jan 1 - June Jan 1- Dec Jan 1 - June Opening balance Provisions Releases (101) (169) (63) Closing balance

32 ACCOUNTS PAYABLE Banks Bank debt as of June 30, 2005, amounting to 35 thousand euros, is due within 12 months. It refers to the loan granted by S.Paolo-IMI to the subsidiary, AEM S.p.A., to finance the research and development costs relating to remote surveillance and household automation systems. This loan is unsecured and carries a 3.7% interest rate. Its final maturity is at the end of Other lenders A loan granted for the same purposes as above by the Ministry of Industry, amounting to 276 thousand euros, is classified under this item. 28 thousand euros is due in the short-term and 221 thousand euros is due beyond 12 months. Repayment began in 2003 and will be completed by the end of This loan is unsecured and carries a 3.625% interest rate. Advances This item regards amounts received on account by the subsidiary, Acotel do Brasil, for services rendered to Brazilian telecommunication operators. Trade This item, which amounts to 4,402 thousand euros, compared with 3,227 thousand euros as of December 31, 2004, is made up of trade payables due within 12 months. These essentially regard the purchase of content from providers outside the Group. Taxes As of June 30, 2005 this item breaks down as follows: (thousands of euros) June 30, 2005 Dec 31, 2004 June 30, 2004 Income tax payables VAT payable Withholding taxes Other Total

33 This item includes amounts payable for income taxes, net of advances paid, and amounts payable for VAT by Acotel Group companies, as well as amounts due for taxes withheld from employees and freelancers in the capacity of withholding agent and payable to tax authorities. No Group company is in dispute with tax authorities, nor are any tax audits in progress. Social security agencies As of June 30, 2005, this item amounts to 334 thousand euros and includes social security contributions to be paid. Other This item, totaling 1,358 thousand euros, is made up as follows: (thousands of euros) June 30, 2005 Dec 31, 2004 June 30, 2004 Due to employees Due to directors Other Total Amounts payable to employees relate to wages and salaries, bonuses and outstanding vacation pay. Amounts due to Directors regard fees yet to be paid. To complete the disclosure required by the Civil Code, as amended following the reform of corporate law pursuant to Legislative Decree no. 6 dated January 17, 2003, the following table shows a geographical breakdown of accounts payables recorded in the Consolidated Balance Sheet as of June 30, 2005: (thousands of euros) ITALY OTHER EUROPEAN COUNTRIES MIDDLE EAST LATIN AMERICA NORTH AMERICA Total Payables: Banks Other lenders Advances Trade 1, , ,402 Taxes Social security agencies Other 1, ,358 Total 3, , ,911 33

34 ACCRUED EXPENSES AND DEFERRED INCOME This item, amounting to 711 thousand euros, regards accrued expenses (249 thousand euros) linked to the day-to-day operations of Group companies and deferred income (462 thousand euros) attributable to Acotel Group S.p.A., for services invoiced but yet to be rendered to Acea S.p.A., and to the subsidiary Jinny Software, in connection with amounts collected for works yet to be accepted by the final customer. MEMORANDUM ACCOUNTS This item breaks down as follows as of June 30, 2005: (thousands of euros) June 30, 2005 Dec 31, 2004 June 30, 2004 General guarantees granted Guarantees in favor of others Other memorandum accounts: Third-party assets held by the Company Total Guarantees comprise 175 thousand euros related to the security given to the owner of the building rented by the Parent Company, where all the Italian companies of the Group have their headquarters and 111 thousand euros to the bond posted with the Bank of Italy in accordance with a service contract extended for additional three years by the subsidiary, AEM S.p.A.. The remaining amount regards guarantees given in accordance with contracts with third parties. Third-party assets include equipment granted free of charge to Acotel S.p.A. by the provider, Il Sole 24 ore, for connection to its information network. 34

35 NOTES TO THE INCOME STATEMENT TOTAL REVENUES The Acotel Group s total revenues for the period amounted to 11,152 thousand euros. Revenues from goods and services rendered break down as follows by segment: (thousandsof euros) Jan 1 - June 30, 2005 Jan 1 - Dec 31, 2004 Jan 1 - June 30, 2004 Services to network operators 7,143 14,943 6,771 Design of ICT equipment 1,565 3,523 1,115 Corporate services Design of electronic security equipment 520 1, Media services B2C services Software deveopment Other revenues Total 10,953 21,019 8,911 Revenues from value added services (VAS) provided to network operators, amounting to 7,143 thousand euros, rose by nearly 5.5% on a year earlier. They include revenues from services rendered by Acotel S.p.A. to Telecom Italia Mobile, which amounted to 4,849 thousand for the period, revenues from services rendered by the Brazilian subsidiary, Acotel do Brasil, to Brazilian operators TIM Celular, TIM Sul, Maxitel and TIM Nordeste Telecomunicaçoes, which amounted to 1,128 thousand euros, revenues for services rendered by Info2cell to the main mobile telephony operators in the Middle East, amounting to 688 thousand euros, and revenues generated by Acotel Group (Northern Europe) for services to European operators for 456 thousand euros. Revenues from ICT equipment in the first half of 2005 totaled 1,565 thousand euros, compared with 1,115 thousand euros for the first half of Revenues in this area were generated by Jinny Software, particularly in connection with the supply and maintenance contracts in place with mobile companies operating in Latin America, Africa, Europe, Asia and Middle East. The significant increase on a year earlier is due to the agreements signed with Channel Partners, which determined an increase in the external sales force, and the provision of innovative VAS platforms with distributed architecture that made it possible for Jinny Software to gain a stronger foothold in the network equipment business. Revenues from corporate services amounted to 996 thousand euros. The significant increase on a year earlier was due mainly to the agreement signed by the subsidiary I2C with Pepsi-Cola International. This agreement calls for the provision of ICT services to support the soft drinks company s promotional campaigns in Saudi Arabia, Kuwait, Qatar, Oman, Bahrain and United Arab Emirates between June 1 and September 30, For the month of June alone, revenue 35

36 generated by this activity amounted to 828 thousand euros. The remaining amount is related to the activity carried out in Italy by Acotel S.p.A., amounting to 128 thousand euros, and by Acotel Group S.p.A., totaling 40 thousand euros, on the basis of a contract in place with Acea S.p.A.. Revenues from the design and production of electronic security equipment amounted to 520 thousand euros, relating essentially to the activities of the subsidiary, AEM S.p.A., in connection with installation, supply, assistance and maintenance services for remote surveillance equipment located in police stations throughout Italy and in some Bank of Italy provincial branches. Revenues from media services, amounting to 428 thousand euros, were generated mainly in connection with certain programs broadcast by MTV and LA7. Additional revenues were generated, in Italy, with radio stations RTL and Radio Company and, in Brazil, with Rete Globo. In 2005, the B2C segment commenced operations, engaging in the sale of services and mobile applications directly to consumers. Revenues in the first half of 2005 were attributable to the subsidiaries, Flycell and Acotel Group (Northern Europe), which generated 138 thousand euros and 112 thousand euros, respectively, through the Flycell brand, and to Info2cell, which accounted for a total of 48 thousand euros. The geographical distribution of revenues from sales and services is as follows: (thousands of euros) Jan 1 - June Jan 1 - Dec Jan 1 - June Italy 5,828 13,347 6,410 Middle East 2,470 3,360 1,252 Latin America 1,210 1, Europe 689 1, Asia Africa North America Total 10,953 21,019 8,911 OPERATING COSTS Materials, service costs and lease expense This item includes the following costs: (thousands of euros) Jan 1 - June Jan 1 - Dec Jan 1 - June Raw and ancillary materials and consumables Service costs 5,375 8,741 3,892 Lease expense 734 1, Total 6,563 10,878 4,727 36

37 The costs of raw and ancillary materials, consumables and goods for resale as of June 30, 2005 total 454 thousand euros and refer to the acquisition of materials used in the construction of telecommunications equipment by Jinny Software Ltd. Service costs in the first half of 2005 amounted to 5,375 thousand euros, up 38% on a year earlier. This increase was due basically to the above-mentioned agreement entered into between the subsidiary, Info2Cell, and Pepsi-Cola International, Cork. Such agreement calls for the payment of 95% of the revenues received by Info2Cell from the Middle Eastern mobile operators to Pepsi-Cola for its contribution in terms of advertising communication and distribution. The increase in service costs was also due to the rise in costs for content providers and for the advertising related to the development of the activities of the foreign subsidiaries, Acotel do Brasil, Info2Cell, Acotel Group (Northern Europe) and Flycell Inc. in the Network Operator and B2C segments. Specifically, the biggest expenditure item was the cost incurred to acquire publishing content from external content providers (1,540 thousand euros), accounting for 30% of the services purchased. Other significant costs included the payment to Pepsi by InfoCell, totaling approximately 785 thousand euros, the marketing, administrative, legal and technical consulting fees incurred by the Group companies to support their activities, amounting to 518 thousand euros, and advertising costs for 514 thousand euros. Moreover, service costs comprised travel and lodging expenses of 357 thousand euros, compensation to directors of 203 thousand euros, fair and exhibition expenses of 137 thousand euros, the costs of connecting to terrestrial and satellite transmission networks for the provision of value added services for 146 thousand euros. The balance reflects overhead (utilities, operation and management of buildings where Group companies operate, insurance, etc.). Lease expense, totaling 734 thousand euros, primarily includes costs related to the buildings in which Group companies operate. Labor costs Labor costs break down as follows: (thousands of euros) Jan 1 - June Jan 1 - Dec Jan 1- June Wages and salaries 3,610 6,557 3,221 Social security contributions 789 1, Employee severance indemnities Other costs Total 4,956 8,783 4,357 The increase in labor costs with respect to the first half of 2004 is due to the increase in headcounts, especially in foreign subsidiaries, as a result of the Group s expansion abroad. The following table shows the number of staff by category as of June 30, 2005 and the average for the period compared with full year 2004 and the first half of

38 June 30, 2005 average for first half 2005 average for full year 2004 average for first half of 2004 Managers Supervisors White-collar/Blue-collar Total Labor costs ( 000) 4,956 4,956 8,783 4,357 Average unit cost of labor The following table shows the geographical distribution of the Group s personnel compared with the end of the previous year: June 30, 2005 Dec 31, 2004 Italy Ireland France 2 4 Lebanon Brazil 13 9 United Arab Emirates Jordan USA 10 1 Total Amortization, depreciation and write-downs Amortization, depreciation and write-downs relate to: (thousands of euros) Jan 1 - June Jan 1 -Dec Jan 1 - June amortization of intangible assets 1,077 2,147 1,072 depreciation of tangible assets other write-downs of fixed assets provisions for doubtful accounts Total 1,415 3,043 1,730 The amortization of intangible assets mainly relates to amortization of goodwill arising on consolidation regarding holdings in the subsidiaries, AEM, Jinny Software, Millenium Software, Info2cell and EITCO. The relevant sums for the period amount to 23 thousand euros, 672 thousand euros, 2 thousand euros, 168 thousand euros and 11 thousand euros. Depreciation of tangible assets relates to telecommunications equipment, other plant and machinery and the infrastructure used by Group companies. 38

39 Provisions for doubtful accounts relate to provisions prudently allocated for possible doubtful receivables. Other operating costs In the first half of 2005, this item amounted to 376 thousand euros. This sum included 194 thousand euros for indirect taxes paid by Acotel do Brasil in accordance with local laws. The balance includes other general costs and expenses deriving from the Group s ordinary activities. FINANCIAL INCOME AND EXPENSE Net financial income amounts to 453 thousand euros and breaks down as follows: (thousands of euros) Jan 1 - June Jan 1 -Dec Jan 1 - June Interest income from investments Interest income on bank deposits Gains on foreign exchange transactions Other interest income Total financial income Interest expense and bank charges (67) (120) (57) Losses on foreign exchange transactions (15) (274) (19) Other interest expense (1) (17) (2) Total financial expense (83) (411) (78) Net financial income Investments refer to short-term transactions, repurchase agreements, shares in mutual funds and bonds purchased with the Group s surplus liquidity. EXTRAORDINARY INCOME AND EXPENSE Extraordinary items reported a net positive result of 89 thousand euros during the period under review. 39

40 SUBSEQUENT EVENTS On July 2, 2005 the incorporation of Flycell Telekomunikasyon Hizmetleri A.S. was completed. Acotel Group S.p.A. has subscribed 99% of the new company s share capital. This company is intended to sell the services of the Acotel Group in Turkey, both to consumers (B2C) and in partnership with Turkish mobile operators and media companies. OPERATING OUTLOOK With respect to the services rendered to mobile operators, performance in the near term is expected to improve. Such improvement will be determined both by the new services structured by Acotel do Brasil, which call for the distribution of new games designed in cooperation with a world-class company, the sale of real tones and the distribution of new wallpapers, designed with important local companies. In addition agreements entered into recently by Info2cell include the launch of services based on J2ME applications for STC of Saudi Arabia and the launch of interactive television services for Mobitel and Areeba, the two Sudanese operators. Revenues are expected to increase in the ICT design segment, due to the launch of two new products in the first half The Ringback Tone Server and the Messaging Spam Control Centre as well as to the effects of the agreement reached with Tecnomen of Finland. The Messaging Spam Control Centre, in particular, seems very promising because it addresses a major issue faced by operators, which demand tools capable of combating the growing problem of spamming in mobile telephony. In the security segment, as already noted above, the subsidiary, AEM, should benefit in the second half from the faster pace of activities in connection with the maintenance agreements in place. The outlook is favorable also in services to media companies, as Acotel S.p.A. has already entered into agreements with MTV and LA7 to launch new initiatives linked to two highly successful TV programs. Remaining in the media sector, agreements were reached recently by Info2cell with Rotana, for the distribution of this company s content which include ringtones, wallpapers and Java games in major Middle Eastern countries, and with the satellite channel Al Arabica, for the distribution of news as it happens and financial news. 40

41 41

42 PARENT COMPANY S ACCOUNTS 42

43 BALANCE SHEET OF THE PARENT COMPANY, ACOTEL GROUP S.p.A. ASSETS (in euros) June 30, 2005 December 31, 2004 June 30, 2004 Unpaid, called-up share capital due from shareholder Fixed assets: Intangible assets: - incorporation and expansion costs industrial patents and intellectual property rights concessions, licenses, trademarks and similar rights other Total Tangible assets: - plant and machinery industrial and commercial equipment other Total Long-term financial assets: - equity investments in: Subsidiaries accounts receivable: from subsidiaries:.. falling due within 12 months treasury stock: Total Total fixed assets Current assets: Accounts receivable: - trade: falling due within 12 months subsidiaries:. loans:.. falling due within 12 months other:.. Falling due within 12 months tax credits deferred tax assets other: falling due within 12 months falling due beyond 12 months Total Marketable securities: - other securities Total Cash at bank and on hand: - bank and post office deposits cash and notes on hand Total Total current assets Accrued income and prepaid expenses - other TOTAL ASSETS

44 BALANCE SHEET OF THE PARENT COMPANY, ACOTEL GROUP S.p.A: LIABILITIES AND SHAREHOLDERS' EQUITY (in euros) June 30, 2005 December 31, 2004 June 30, 2004 Shareholders' equity: Share capital Share premium reserve Legal reserve Reserve for treasury stock in portfolio Other reserves Retained earnings (accumulated losses) ( ) ( ) Net income (loss) for the period (*) (*) Total Allowances for risks and charges other Total Employee severance indemnities Accounts payable: - bonds - banks: payable within 12 months Trade payable within 12 months subsidiaries: payable within 12 months taxes: payable within 12 months social security agencies: payable within 12 months other: payable within 12 months Total Accrued expenses and deferred income - other accrued expenses and deferred income TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (*) For the six months ended June 30, 2005 and 2004 the Company elected to report pre-tax data 44

45 MEMORANDUM ACCOUNTS (in euros) June 30, 2005 December 31, 2004 June 30, 2004 General guarantees granted - Guarantees in favor of others 224, , ,361 Other memorandum accounts - Third party assets held by the Company - - 6,197,483 TOTAL MEMORANDUM ACCOUNTS 224, ,361 6,421,844 45

46 INCOME STATEMENT (EuroS) Jan 1 - June 30, 2005 Jan 1 -Dec 31, 2004 Jan 1 - June 30, 2004 Total revenues: - revenues from sales and services other revenues and income Total Operating costs: - raw and ancillary materials and consumables service costs lease expense labor costs: wages and salaries social security contributions employee severance indemnities other amortization, depreciatoin and write-downs: amortization of intangible fixed assets depreciation of tangible fixed assets other expenses Total Operating income Financial income and expense: - other financial income:. from long-term accounts receivable:.. subsidiaries from marketable securities other:.. from subsidiaries from others expense from others (48.300) (98.301) (34.031) - gains and losses on foreign exchange transactions (97) ( ) Financial income (expense), net Adjustments to financial assets: - write-downs of equity investments - (10.392) (83.475) - write-downs of marketable securities - (78.710) - Adjustments to financial assets - (89.102) (83.475) Extraordinary income and expense: - income expense (3.258) (1.383) (374) Extraordinary income (expense), net Income (loss) before taxes current taxes and deferred tax assets and liabilities for the period ( ) Net income (loss) for the period (*) (*) (*) (*): The net result reported as of December 31, 2004 is shown after taxes, whilst in the case of the half-year data, the Company has exercised the option to report pre-tax data. 46

47 ANNEX 1 TRANSITION TO IAS/IFRS (INTERNATIONAL ACCOUNTING STANDARDS / INTERNATIONAL FINANCIAL REPORTING STANDARDS) Following the entry into force of Regulation (EC) 1606/2002, passed by the European Parliament and the Council of the European Union in July 2002, the companies with securities admitted to trading in a regulated market of the Member States of the European Union are required to prepare their 2005 consolidated financial statements in accordance with IAS/IFRS, as issued by the International Accounting Standard Board (IASB) and endorsed by the EU. To describe the effects of the transition to IAS/IFRS, and to comply with the disclosure requirements laid down by paragraphs 39 a) and b) and 40 of IFRS 1 on the effects deriving from the first adoption of IAS/IFRSs, the following are provided: The reconciliations and related explanatory notes provided for by IFRS 1 First adoption of International Financial Reporting Standards: of equity as at the transition date (January 1, 2004); of consolidated equity and results of operations as at December 31, 2004; The international financial reporting standards and the policies adopted by the Acotel Group starting January 1, 2005 to prepare the IAS/IFRS reconciliation statements that are expected to be used in preparing the 2005 consolidated financial statements. The adjustments shown in the reconciliation statements have been prepared in accordance with the IAS/IFRS in force to date. The adoption process by the European Commission and the adaptation and interpretation activity by the competent official bodies is still under way. Thus, there might be new IAS/IFRS and IFRIC interpretations in place at the time the 2005 consolidated financial statements have to be prepared. This might determine a change in the statements and reconciliations hereunder, when they will be utilized for comparison purposes in the first consolidated financial statements prepared in accordance with IAS/IFRS. It should be noted that, since they are intended only for the transition to the first Group consolidated financial statements as of December 31, 2005, in accordance with IAS/IFRS as endorsed by the European Commission, the IAS/IFRS reconciliation statements do not show the comparable data and information and related explanatory notes that would be necessary to provide a true and fair view of the consolidated financial conditions and operating results of the Acotel Group in accordance with IAS/IFRS. Such additional information will be provided in the first IAS/IFRS consolidated financial statements as of December 31, The Acotel Group retained Deloitte & Touche S.p.A. to audit the reconciliation statements as of January 1, 2004 and December 31, The audit report will be made available shortly. 1

48 RECONCILIATIONS REQUIRED BY IFRS 1 In accordance with IFRS1, a consolidated balance sheet was prepared as of the date of transition to the new financial reporting standards (January 1, 2004) whereby: all assets and liabilities whose recognition is required by the new standards are recognized; all assets and liabilities have been measured and the relevant amounts entered as if the new standards had been applied retrospectively; certain items have been reclassified as required by IAS/IFRS. The effect of the adjustment to the new principles of the initial balances of the assets and liabilities has been recognized in shareholders equity in retained earnings - net of the relevant tax effects recognized as deferred tax assets and liabilities. The restatement of the financial situation as of the date of transition to the new accounting standards calls for first-time adopters to make some elections provided for by IFRS1. The Acotel Group made the following elections: business combinations: as a first-time adopter of IAS/IFRS, the Acotel Group elected not to retrospectively apply IFRS3 to the business combinations occurring prior to the date of transition to IAS/IFRS (January 1, 2004). Thus, the fair value of the assets and liabilities of the companies acquired by the Group has not been determined; valuation of property, plants and equipment and intangible assets: the Acotel Group elected to use historical cost (in alternative to fair value) to measure tangible and intangible assets after the initial recognition; employee benefits: with respect to post-employment benefits, the Acotel Group has decided not to retrospectively apply the so-called corridor approach, which calls for the full recognition of all cumulative actuarial gains and losses until the date of transition to IFRS, and to adopt instead the corridor approach for gains and losses after the date of transition; financial instruments: the Acotel Group has not elected to postpone the date of transition to IAS 32 and 39 to January 1, 2005, taking account of the relevant effects in preparing the opening balance sheet as of January 1, 2004; stock compensation: the Acotel Group has elected to apply IFRS 2 prospectively as of January 1, Thus, the effects of the transition to IAS/IFRS have not been recognized for stock options assigned prior to November 7,

49 EFFECTS OF THE APPLICATION OF IAS/IFRS TO THE OPENING BALANCE SHEET AS OF JANUARY 1, 2004 AND TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2004 The application of IAS/IFRS entailed a restatement of the financial statements prepared in accordance with Italian GAAP, the effects of which can be summarized as follows: Opening balance sheet as of January 1, 2004: (thousands of euros) Italian GAAP Adjustments IAS /IFRS Shareholders' equity: - Parent company (784) M inority interest Total (784) Consolidated financial statements as of December 31, 2004: (thousands of euros) Italian GAAP Adjustments IAS /IFRS Shareholders' equity: - Parent company 52,548 (2,841) 49,707 - M inority interest Total 52,578 (2,841) 49,737 N et income for the period: - Parent company (1,420) 655 (765) - M inority interest Total (1,420) 655 (765) Details of the adjustments are as follows: 3

50 (thousands of euros) TOTAL AMOUNTS ACCORDING TO ITALIAN GAAP Less: minority interest SHARE ATTRIBUTABLE TO PARENT COMPANY ACCORDNG TO ITALIAN GAAP Shareholders' equity as of January 1, 2004 Shareholders' equity as of December 31, (30) (30) ADJUSTMENTS: 1. reclassification of treasury shares (498) (3.206) 2. reversal of amortization of goodwill arising on consolidatio goodwill impairment - (1.160) 4. reversal of start-up and expansion costs (68) (44) 5. reversal of R&D costs (209) (128) 6. reversal of trademark costs - (56) 7. adjustment to employee termination indemnities (14) (16) Tax effect on reconciled items M inority interest in reconciled items SHARE ATTRIBUTABLE TO PARENT COMPANY ACCORDING TO IAS/IFRS (thousands of euros) TOTAL AMOUNT ACCORDING TO ITALIAN GAAP Less: minority interest PARENT COMPANY'S SHARE ACCORDING TO ITALIAN GAAP N et income for 2004 (1.420) - (1.420) ADJUSTMENTS: 1. reversal of gains/losses on trading of own shares reversal of amortization of goodwill arising on consolidation goodwill impairment (1.160) 4. reversal of start-up and expansion costs reversal of R&D costs reversal of trademark costs (56) 7. adjustment to employee termination indemnities (2) Tax effects on reconciled items M inority interest in reconciled items 12 - PARENT COMPANY'S SHARE ACCORDING TO IAS/IFRS (765) The individual adjustment items are shown in the table gross of taxes and inclusive of minority interest, while the relevant tax effects and effects on minority interest are shown cumulatively in two separate adjustment items. The main IAS/IFRS adjustments are discussed below: 4

51 1. Reclassification of treasury shares: according to Italian GAAP, treasury shares are entered as assets while a specific restricted reserve is established in the shareholders equity for the same amount. According to IAS/IFRS the amount of treasury shares is deducted from shareholders equity. The different accounting treatment has determined, as of January 1, 2004 and December 31, 2004, a decrease in shareholders equity for 498 and 3,206 thousand euros, respectively, as a result of the deduction of the amount of treasury shares. Furthermore, according to IAS/IFRS gains and losses on the trading of treasury shares cannot be recognized in the Income Statement but have to be taken to shareholders equity. This caused net income for 2004 to rise by 16 thousand euros, gross of the negative tax effect of 5 thousand euros. 2. Reversal of goodwill arising on consolidation: according to IAS/IFRS, goodwill arising on consolidation is no longer amortized on a regular basis but is subject to an impairment test, which is conducted at least once a year, to determine any permanent loss of value. The application of IFRS 3 has determined an increase of net income for 2004 (and of shareholders equity) by 1,752 thousand euros as a result of the elimination of goodwill; 3. Goodwill impairment: the impairment tests conducted on goodwill arising from consolidation determined a reduction in shareholders equity as of December 31, 2004 totaling 1,160 thousand euros, which was attributable mostly to the Irish subsidiary, Jinny Software Ltd.. The impairment test on goodwill as of January 1, 2004 did not determine any permanent loss of value. 4. Reversal of start-up and expansion costs: according to IAS/IFRS, start-up and expansion costs are deducted from shareholders equity on the transaction date, while according to Italian GAAP they can be capitalized. Such different accounting treatment determined the following impacts: as of January 1, 2004: a decrease in shareholders equity of 68 thousand euros, determined by the reduction in assets arising from the capitalization of such costs; as of December 31, 2004: a decrease in shareholders equity of 44 thousand euros, determined by the reduction in assets arising from the capitalization of such costs. The pretax result for the year thus increases by 10 thousand euros due to lower charges for amortization, gross of the negative tax effect of 1 thousand euros; 5. Reversal of R&D costs: according to IAS/IFRS, R&D costs are expensed as incurred while according to Italian GAAP they can be capitalized and recorded as assets. Such different treatment has determined the following impacts: as of January 1, 2004: a decrease in shareholders equity of 209 thousand euros, determined by the reduction in assets arising from the capitalization of such costs; as of December 31, 2004: a decrease in shareholders equity of 128 thousand euros, determined by the reduction in assets arising from the capitalization of such costs. The pretax result for the year thus increases by 74 thousand euros due to lower charges for amortization, gross of the negative tax effect of 3 thousand euros; 6. Reversal of trademark costs: according to IAS/IFRS, the cost of registering internally developed trademarks are expensed as incurred, while according to Italian GAAP they can be capitalized and recorded as assets. Such different treatment has determined, as of December 31, 2004, a decrease in shareholders equity of 56 thousand euros, determined by the reversal of assets arising from the capitalization of such costs. The pre-tax result for the year thus decreases by the same amount, net of amortization of 6 thousand euros, and inclusive of a positive tax effect of 21 thousand euros, as the costs incurred to register trademarks during 2004 were fully expensed. 5

52 7. Adjustment to employee severance indemnities: according to Italian GAAP, employee severance indemnities give rise to a liability equivalent to the nominal debt toward employees, as accrued in accordance with the provisions of the Civil Code in force at fiscal year end. According to IAS/IFRS, such indemnities are a defined-benefit plan and as such must undergo actuarial valuation (mortality, predictable salary changes, etc.) to reflect the present value of the benefit payable upon severance that has accrued to employees at the balance sheet date. Such different treatment determined the following impacts: as of January 1, 2004: a decrease in shareholders equity gross of a positive tax effect of 5 thousand euros (due to the recognition of deferred tax assets of the same amount) arising from the increase in the indemnities by 14 thousand euros; as of December 31, 2004: a decrease in shareholders equity of 16 thousand euros, gross of a positive tax effect of 5 thousand euros (due to the recognition of deferred tax assets of the same amount) arising from the increase in the indemnities by 16 thousand euros. The net result fell by 2 thousand euros due to the greater provisions made. IAS/IFRS CONSOLIDATED BALANCE SHEETS AS OF JANUARY 1, 2004 AND DECEMBER 31, 2004 IAS/IFRS CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2004 In addition to the reconciliations of shareholders equity as of January 1, 2004 and December 31, 2004, as well as of net income for 2004, together with the notes to the adjustments to the amounts determined in accordance with Italian GAAP, the Balance Sheets as of January 1, 2004 and as of December 31, 2004 are presented along with the Income Statement for These tables show for each item: the amounts determined according to Italian GAAP but shown according to IAS/IFRS formats; the reclassifications deriving from adjustments made according to IAS/IFRS; the changes deriving from adjustments made according to IAS/IFRS; the amounts adjusted according to IAS/IFRS. 6

53 CONSOLIDATED BALANCE SHEET AS OF JANUARY 1, 2004 (*) (thousands of euros) Italian GAAP Effects of the conversion to IAS/IFRS Reclassifications Ajustments IAS/IFRS Non-current assets: Buildings, plant and equipment a) Goodwill arising on consolidation Other intangible assets a) (49) (277) Non-current financial assets 498 c) - (498) - Other non-current financal assets 88 d) Deferred tax assets - e) TOTAL NON-CURRENT ASSETS (770) NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS Current assets: Inventories Accounts receivable f) Other current assets f) (1.227) Current financial assets f) Cash and cash equivalents TOTAL CURRENT ASSETS (1.051) TOTAL ASSETS (770) Shareholders' equity: Share capital Share premium reserve Treasury shares - c) - (498) (498) - Cost of capital increases - a) - (59) (59) Other reserves g) (498) 825 Retained earnings (accumulated losses) g) 498 (227) Net income (loss) for the period (4.986) - - (4.986) Amount attributable to Parent Company (784) Amount attributable to minority interest TOTAL SHAREHOLDERS' EQUITY (784) Non-current liabilities: Non-current financial liabilities Employee severance indemnities and other allowances for staff 623 j) - i) (70) Allowances for risks and charges Other non-current liabilities TOTAL NON-CURRENT LIABILITIES (70) NON-CURRENT LIABILITIES HELD FOR SALE Current liabilities: Current financial liabilities Accounts payable j) Taxes payable Other current liabilities j) (1.361) TOTAL CURRENT LIABILITIES TOTAL LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (770) (*) The Balance Sheet was prepared in accordance with IAS/IFRS in force to date 7

54 CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2004 (*) (thousands of euros) Italian GAAP Effects of the conversion to IAS/IFRS Reclassifications Ajustments IAS/IFRS Non-current assets: Buildings, plant and equipment a) Goodwill arising on consolidation b) Other intangible assets a) (36) (228) 924 Non-current financial assets c) - (3.206) - Other non-current financal assets 1 d) Deferred tax assets - e) TOTAL NON-CURRENT ASSETS (2.825) NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS Current assets: Inventories Accounts receivable f) Other current assets f) (997) Current financial assets f) Cash and cash equivalents TOTAL CURRENT ASSETS (527) TOTAL ASSETS (2.825) Shareholders' equity: Share capital Share premium reserve g) Treasury shares - c) - (3.206) (3.206) - Cost of capital increases - a) - (59) (59) Other reserves g) - h) (3.206) (4) 782 Retained earnings (accumulated losses) (3.506) g) 498 (227) (3.235) Net income (loss) for the period (1.420) (765) Amount attributable to Parent Company (2.841) Amount attributable to minority interest TOTAL SHAREHOLDERS' EQUITY (2.841) Non-current liabilities: Non-current financial liabilities Emoployee severance and other allowances for staff 838 j) - i) (87) TOTAL NON-CURRENT LIABILITIES (87) NON-CURRENT LIABILITIES HELD FOR SALE Current liabilities: Current financial liabilities 112 j) Accounts payable j) Taxes payable Other current liabilities j) (523) TOTAL CURRENT LIABILITIES TOTAL LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (2.825)

55 CONSOLIDATED INCOME STATEMENT FOR 2004 (*) (thousands of euros) Italian GAAP Effects of the conversion to IAS/IFRS Reclassifications Ajustments IAS/IFRS Revenues Other income f) Total Cost of materials and external services (10.878) - - (10.878) Change in inventories Labor costs (8.783) a) 25 (2) (8.760) Amortization and depreciation (3.010) b) (1.159) Write-downs/write-backs of non-current ssets (89) c) - (1.160) (1.249) Other costs (538) f) - d) (101) (62) (701) Financial income Financial expense (411) a) - e) (25) 16 (420) Extrardinary income (expense) 14 f) (14) - - PRE-TAX RESULT FROM CONTINUING OPERATIONS (330) Income taxes for the period (1.090) g) - 12 (1.078) NET INCOME (LOSS) FROM CONTINUING OPERATIONS (1.420) (765) Net income (loss) from discontinued operations/held for sale NET INCOME (LOSS) FOR THE PERIOD (1.420) (765) Minority interest ( ) COMPANY (1.420) (765) (*) The Income Statement was prepared in accordance with IAS/IFRS in force to date. 9

56 NOTES TO THE IAS/IFRS ADJUSTMENTS AND RECLASSIFICATIONS IN THE BALANCE SHEETS AS OF JANUARY 1, 2004 AND AS OF DECEMBER 31, 2004 AND THE INCOME STATEMENT FOR 2004 The following notes discuss the adjustments and reclassifications as well as references to the adjustments included in the reconciliations of the shareholders equity and net results illustrated above (pages 5 and 6 of this annex). Balance Sheet - Assets a) Other intangible assets: this item reflects adjustments (down 277 thousand euros as of January 1, 2004 and down 228 thousand euros as of December 31, 2004) related to the elimination of start-up and expansion costs (see adjustment 4), R&D costs (see adjustment 5) and trademark costs (see adjustment 6) which, according to IAS/IFRS, cannot be capitalized, as well as to the reclassification (49 thousand euros as of January 1, 2004 and 36 thousand euros as of December 31, 2004) of leasehold improvements which, according to IAS/IFRS, must be recognized as buildings, plant and equipment and not as intangible assets, as allowed by Italian GAAP. It should be noted that the costs incurred (historical cost) to increase the share capital, including start-up and expansion costs, have been reclassified to a specific equity item, Cost of capital increases (59 thousand euros as of January 1, 2004 and December 31, 2004), while the associated accumulated amortization was reversed with a contra-entry in Retained earnings (accumulated losses) (9 thousand euros as of January 1, 2004 and December 31, 2004). b) Goodwill arising on consolidation: this adjustment (up 592 thousand euros as of December 31, 2004) concerns the elimination of amortization of goodwill arising on consolidation for 2004, totaling 1,752 thousand (see adjustment 2) and the recognition of the impairment of goodwill arising on consolidation, totaling 1,160 thousand euros (see adjustment 3). c) Non-current financial assets: these adjustments reflect the reversal of treasury shares, totaling 498 thousand euros as of January 1, 2004 and 3,206 thousand euros as of December 31, 2004, as according to IAS/IFRS their value should be deducted from shareholders equity. d) Other non-current assets: this reclassification (47 thousand euros as of January 1, 2004 and 85 thousand euros as of December 31, 2004) refers to guarantee deposits which, according to IAS/IFRS, have to be recognized as non-current assets, as opposed to Italian GAAP whereby they are entered as current assets (see f below); e) Deferred tax assets: in addition to deferred tax assets which, according to IAS/IRFS, must be classified as non-current assets (1,004 thousand euros as at January 1, 2004 and 442 thousand euros as of December 31, 2004), while according to Italian GAAP they can be entered as current assets (see f below), this item also reflects adjustments (up 5 thousand euros as of January 1, 2004 and up 17 thousand euros as of December 31, 2004) determined by the tax effects on the reconciled items. f) Receivables and current financial assets: these items reflect the reclassifications of guarantee deposits (see d) and deferred tax assets (see e), as well as the portion of accrued income and deferred expenses that, according to IAS/IFRS, may be recognized as trade receivables (77 thousand euros as of January 1, 2004 and 306 thousand euros as of December 31, 2004) and among current financial assets (99 thousand euros as of January 1, 2004 and 164 thousand euros as of December 31, 2004). 10

57 Balance Sheet Liabilities and shareholders equity g) Retained earnings (accumulated losses): this item reflects the following adjustments: January 1, 2004 December 31, 2004 Reversal of start-up and expansion costs (see adjustment 4), net of the historical cost of capital increases (see a above) (9) (9) Reversal of R&D costs (see adjustment 5) (209) (209) Adjustment to employee severance indemnities (see adjustment 7) (14) (14) Tax effects on reconciled items 5 5 Total (227) (227) Reclassification g) shown in the Balance Sheet highlights the different accounting treatment of treasury shares introduced by IAS/IFRS: the balance of the equity reserve established in accordance with Italian GAAP must be reclassified to a specific reserve and then allocated to Retained earnings (accumulated deficit) (498 thousand as at January 1, 2004 and December 31, 2004) and the Share premium reserve (2,708 thousand euros as of December 31, 2004). h) Other reserves: This adjustment reflects the net effect (down 4 thousand euros as of December 31, 2004) between the loss on treasury share trading (down 16 thousand euros) and the change in the adjustments made when IAS/IFRS were first applied at the exchange rates prevailing on December 31, i) Employee severance indemnities and other allowances for staff: these adjustments (up 14 thousand euros as at January 1, 2004 and up 16 thousand euros as at December 31, 2004) are related to the application of actuarial methodologies to employee severance indemnities, as required by IAS/IFRS (see adjustment 7). j) Current liabilities: these reclassifications are related to the portion of accrued expenses and deferred income that, according to IAS/IFRS, has to be classified among accounts payable (1,431 thousand euros as of January 1, 2004 and 585 thousand euros as at December 31, 2004) and among current financial liabilities (25 thousand euros as of December 31, 2004). Furthermore, certain payables related to the personnel of foreign subsidiaries (70 thousand euros as of January 1, 2004 and 87 thousand euros as of December 31, 2004), concerning definedcontribution plans, were reclassified under this caption. Items in the Consolidated Income Statement for 2004 a) Labor costs: the reclassification (25 thousand euros) concerned the imputed interest cost determined by actuarial calculations related to employee severance indemnities, which, according to IAS/IFRS, should be classified under other financial costs. The adjustment (up 2 thousand euros) reflects the greater provisions to employee severance indemnities on the basis of the actuarial calculations performed in accordance with IAS 19 (see adjustment 7). b) Amortization: this adjustment (down 1,851 thousand) concerns: the reversal of the amortization of goodwill arising on consolidation, totaling 1,752 thousand euros (see adjustment 2); the reversal of the amortization of start-up and expansion costs, totaling 19 thousand euros (see adjustment 4); the reversal of the amortization of R&D costs, totaling 74 thousand euros (see adjustment 5); 11

58 the reversal of the amortization of trademark costs, totaling 6 thousand euros (see adjustment 6). c) Write-downs/write-backs of current assets: this adjustment (1,160 thousand euros) resulted from the impairment test conducted on goodwill arising on consolidation, as commented above (see adjustment 3). d) Other costs: this adjustment (up 62 thousand euros) reflects the charges to the 2004 Income Statement of the costs incurred to register the trademarks developed internally by the Parent Company. According to Italian GAAP, these costs were capitalized and included among longlived assets (see adjustment 6). e) Financial charges (down 16 thousand euros): these adjustments reflect the reversal of the losses on the sale of treasury shares in According to IAS/IFRS, such losses must be deducted from shareholders equity (see adjustment 1). f) Extraordinary income (expense): such reclassification (14 thousand euros) reflects the different accounting treatment required by IAS/IFRS for extraordinary items. In fact, these can no longer be shown separately but have to be recognized under the revenue and cost items they refer to. g) Income taxes for the period: this decrease (down 12 thousand euros) reflects positive tax effects determined by the recognition in the Income Statement of trademark registration costs, totaling 21 thousand euros, negative tax effects on the reversal of the losses on the sale of treasury shares, amounting to 5 thousand euros, and negative tax effects related to the reversal of the amortization of start-up and expansion and R&D costs. ACCOUNTING STANDARDS AND POLICIES Below are the accounting policies adopted in preparing the IAS/IFRS accounts and which are expected to be utilized in preparing the consolidated financial statements for The consolidated financial statements are prepared in accordance with IFRS as issued by the IASB and endorsed by the European Union as of January 1, IFRS is taken to mean all the revised International Accounting Standards (IAS), all the interpretations of the International Financial Reporting Interpretations Committee (IFRIC), formerly known as Standing Interpretations Committee (SIC). These policies might not be in line with the IAS/IFRS requirements that will be effective December 31, 2005 as a result of future positions on the adoption of international accounting standards or the issue of new standards and their interpretation by the International Accounting Standards Board (IASB) or the International Financial Reporting Interpretations Committee (IFRIC). Amounts are in thousands of euros. Principles and scope of consolidation The consolidated financial statements include the financial statements of Acotel Group S.p.A. and those of the Italian and foreign companies on which Acotel Group S.p.A. exercises control, directly or indirectly. The book value of equity investments is eliminated against the corresponding fraction the investee companies shareholder equity and the individual assets and liabilities are recognized at fair value as at the date control was obtained. Any positive difference is entered under noncurrent assets as Goodwill arising on consolidation, while negative differences are recognized in the Income Statement. 12

59 Accounting policies The following is a summary of significant accounting policies adopted in preparing the consolidated financial statements. Buildings, plant and equipment Tangible assets utilized to manufacture or supply goods and services are recognized at historical cost, inclusive of any incidental expenses and the direct costs incurred to make the asset ready for use. Property, plants and equipment are depreciated on a straight-line basis every year, depending on their estimated useful life, at the following rates: ICT platform 50% Specific plant 10-20% Other plant and machinery 15-20% Computers 20% Other equipment 15-25% Vehicles 25% Furniture, fixtures and fittings 12% The recoverability of the value of assets is estimated in accordance with the criteria set out by IAS 36, as illustrated in the section Impairment of assets, below. Gains and losses on disposals are calculated as the difference between the proceeds from asset sales and the net book value of such assets and are recognized in the Income Statement for the period. Ordinary maintenance and repair costs are expensed as incurred. Improvements designed to increase the future economic benefits of tangible assets are capitalized and depreciated in accordance with their estimated useful lives. Leasehold improvements that qualify for recognition are entered as tangible assets and are depreciated on the basis of the term before the agreement expires or the remaining useful life of the assets, whichever comes first. Intangible assets Intangible assets are recognized at cost or production cost, inclusive of any direct incidental expenses incurred to make the asset ready for use. Intangible assets are amortized regularly as of the moment the asset is ready for use on the basis of their expected useful lives. The recoverability of the value of assets is estimated in accordance with the criteria set out by IAS 36, as illustrated in the section Impairment of assets, below. 13

60 R&D costs are expensed as incurred. Patents and software are recognized at cost and are amortized on a straight-line basis for the remaining useful life. Goodwill, goodwill arising on consolidation and other intangible assets with an indefinite useful life are not amortized on a regular basis. Instead they are tested for impairment at least once a year by the cash generating unit that has benefited from the synergies determined by the acquisition. These impairments are not reversed. Impairment of assets At every reporting date, the Group reviews the carrying value of its tangible and intangible assets to determine whether there are any indications of impairment. In the presence of such indications, the recoverable amount of these assets is estimated to calculate impairment charges. If the recoverable amount of an individual asset cannot be estimated, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. The recoverability of amounts for intangible assets with an indefinite useful life is verified every year or whenever there is an indication of possible impairments. The recoverable amount is the greater of fair value net of selling costs and value in use. In determining value in use, estimated future cash flows are discounted using a pre-tax discount rate that reflects the current market value of money and the risks specific to the business. If the recoverable amount of an asset (or of a cash generating unit) is estimated to be lower than the relevant carrying value, then it is reduced to such lower recoverable amount. Such loss is immediately recognized in the Income Statement. When an asset is no longer impaired, the carrying value of such asset (or of the cash generating unit), except goodwill, is increased to reflect the estimated recoverable amount, but only up to the amount it would have had if there had been no impairment charges. The write-back is immediately recognized in the Income Statement. Inventories Inventories are entered at the lower of cost and net realizable value. Cost includes direct materials and direct labor, where applicable, production overhead as well as shipping and maintenance costs. Cost is calculated using the weighted average cost method. Net realizable value reflects the selling price less any estimated completion and selling expenses. Accounts receivable Accounts receivable are recognized according to the their estimated realizable value. Accounts denominated in currencies other than the euro are translated at closing exchange rates. Current financial assets Current financial assets are carried at amortized cost according to the effective interest method. 14

61 Financial assets held for trading reflect their year-end fair value. Gains and losses arising from changes in fair value are recognized in the Income Statement. Treasury shares Treasury shares are measured at cost and deducted from shareholders equity. Gains and losses arising from trading in treasury shares are reported in an equity account. Cash and cash equivalents This item includes cash on hand, bank and other demand deposits, short-term highly liquid investments that may be readily converted into cash and are not subject to significant value fluctuation risk. Employee benefits According to IAS 19, employee severance indemnities are classifiable as a post-employment benefits equivalent to a defined-benefit plan. The amount accrued under this plan has to be projected to estimate the future liability at the time of employment severance and then discounted to present value by utilizing the projected unit credit method. This is an actuarial methodology based on demographic and financial assumptions, designed to arrive at a reasonable estimate of the benefits vested in employees for their years of service. Actuarial calculations determine current service cost, reflecting the benefits accrued to employees during the year, which is reported in the Income Statement as a labor cost, and interest cost, representing the imputed interest that the Company would have paid to lenders had it borrowed an amount equivalent to the indemnities. This is taken to Financial income (expense). The portion of unrealized gains and losses arising from changes in actuarial assumptions, to be recognized in the Income Statement for the period, is the amount in excess of 10% of the value of the indemnities (the so-called corridor method) divided over the average remaining working lives of employees. Accounts payable Trade payables are carried at nominal value. Payables denominated in currencies other than the euro are translated at closing exchange rates. Income taxes Current income taxes are recognized, for each Group company, on the basis of their estimated taxable income in accordance with tax rates and rules in force, or as approved at the close of the fiscal year in each country, taking account of applicable exemptions and tax credits. Deferred tax assets and liabilities are calculated on temporary differences between the book value of assets and liabilities and their tax bases, in accordance with the tax rates in force when the differences will reverse. When results are charged directly to equity, so are current taxes and deferred tax assets and liabilities. Dividends Dividends are accounted for in the fiscal period in which they are declared. 15

62 Earnings per share Earnings per share is calculated by dividing net income by the average weighted number of shares outstanding in the period. Diluted earnings per share is computed taking into account the average number of shares outstanding and the potential dilutive effect arising from the assignment of treasury shares to beneficiaries vested under stock option plans, without a corresponding capital increase. Revenues Revenues from sales and services are recognized upon transfer of the risks and benefits of ownership or upon performance of the service. In particular: revenues from services rendered are recognized on the basis of the actual service performance during the year; revenues from software licensing to third parties are recognized upon transfer; revenues from design, production and installation of electronic systems are recognized upon performance of the service and delivery of the relevant products to, and acceptance by, the customer. 16

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65 ANNEX 2 EFFECTS DERIVING FROM THE APPLICATION OF IAS/IFRS ON SHAREHOLDERS EQUITY AS OF JUNE 30, 2005 AND NET INCOME FOR THE FIRST HALF OF 2005 In accordance with the provisions of article 81-bis of Issuer Regulation no , governing the preparation of interim accounts, as amended by Consob Resolution no dated April 14, 2005, the following is a reconciliation of the amounts of shareholders equity as at the close of both the first half of 2005 and the previous fiscal year and net income for the first half of 2005, as determined on the basis of the accounting standards utilized for the previous fiscal years, and the amounts determined on the basis of IAS/IFRS. Consolidated shareholders equity as of June 30, 2005 and December 31, 2004: (thousands of euros) TOTAL AMOUNTS ACCORDING TO ITALIAN GAAP Less: M inority interest SHARE OF PARENT COMPANY ACCORDING TO GAAP Income taxes for the period Shareholders' Shareholders' equity as of equity as of June 30, December 31, (*) (30) (30) (380) - ADJUSTMENTS: 1. reclassification of treasury shares (3.873) (3.206) 2. reversal of amortization of goodwill arising on consolidation goodwill impairment (1.160) (1.160) 4. reversal of start-up and expansion costs (39) (44) 5. reversal of R&D costs (105) (128) 6. reversal of trademark costs (103) (56) 7. adjustment to employee severance indemnities (1) (16) Tax effect on reconciled items M inority interest in reconciled items - - SHARE ATTRIBUTABLE TO PARENT COMPANY ACCORDING TO IAS/IFRS (*) An analysis of the effects deriving from the application of IAS/IFRS on shareholders' equity as of December 31, 2004 is provided in annex 1 1

66 Net income for the first half of 2005: (thousands of euros) TOTAL AMOUNT ACCORDING TO ITALIAN GAAP Less: minority interest PARENT COMPANY'S SHARE ACCORDING TO ITALIAN GAAP Income taxes for the period Net income for H (1.609) - (1.609) (380) ADJUSTMENTS: 1. reversal of gains/losses on trading of own shares (86) 2. reversal of amortization of goodwill arising on consolidation reversal of start-up and expansion costs 8 5. reversal of R&D costs reversal of trademark costs (47) 7. adjustment to employee severance indemnities 15 Tax effects on reconciled items M inority interest in reconciled items 5 - PARENT COMPANY'S SHARE ACCORDING TO IAS/IFRS (1.182) In order to reconcile net income for the first half of 2005, determined in accordance with Italian GAAP, with net income as determined in accordance with IAS/IFRS, the above reconciliation statement shows income taxes for the first half of 2005 (380 thousand euros) The individual adjustment items are shown in the table gross of taxes and inclusive of minority interest, while the relevant tax effects and effects on minority interest are shown cumulatively in two separate adjustment items. The main IAS/IFRS adjustments are discussed below: 1. Reclassification of treasury shares: the different accounting treatment required by IAS/IFRS determined, as of June 30, 2005, a decrease in shareholders equity of 3,873 thousand vis-à-vis the reversal of treasury shares on the asset side for the same amount and a reduction of net income for the first half of 2005 of 86 thousand euros, inclusive of the relevant negative tax effect of 28 thousand euros, related to gains on the sale of treasury shares which, according to IAS/IFRS, may not be reported in the Income Statement; 2. Reversal of goodwill arising on consolidation: the application of IFRS 3 entailed an increase of 2,628 thousand euros in shareholders equity as of June 30, 2005 and a rise of 876 thousand euros in net income for the first half of 2005, entirely attributable to the elimination of goodwill; 4. Reversal of start-up and expansion costs: the different accounting treatment of start-up and expansion costs incurred by the Acotel Group required by IAS/IFRS has determined a decrease 2

67 of 39 thousand euros in shareholders equity as of June 30, 2005 and an increase of 8 thousand euros in net income for the first half of 2005, due to lower charges for amortization; 5. Reversal of R&D costs: the different accounting treatment of R&D costs incurred by the Acotel Group required by IAS/IFRS has determined a decrease of 105 thousand euros in shareholders equity as of June 30, 2005 and an increase of 36 thousand euros in net income for the first half of 2005, due to lower charges for amortization, inclusive of the relevant negative tax effect of 1 thousand euros; 6. Reversal of trademark costs: the different accounting treatment of trademark costs incurred by the Acotel Group required by IAS/IFRS has determined a decrease of 103 thousand euros in shareholders equity as of June 30, 2005 and a decrease of 47 thousand in net income for the first half of 2005, net of amortization of 6 thousand euros and inclusive of the related positive tax effect of 18 thousand euros, due to registration costs incurred in 2005; 7. Adjustment to employee severance indemnities: the different accounting treatment required by IAS/IFRS has determined, as of June 30, 2005, a decrease in shareholders equity of 1 thousand euros and an increase in net income for the first half of 2005 of 15 thousand euros, inclusive of the related negative tax effect of 5 thousand euros. 3

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