Annual Report 2003 ANNUAL REPORT 2003

Transcription

1 ANNUAL REPORT

2 1.1 CORPORATE BODIES BOARD OF DIRECTORS Claudio Carnevale Chairman and CEO Francesco Ago Director Margherita Argenziano Director Luca De Rita Director Giovanni Galoppi Director Berardino Libonati Director Andrea Morante Director BOARD OF STATUTORY AUDITORS Antonio Mastrangelo Chairman Maurizio Salimei Statutory auditor Umberto Previti Flesca Statutory auditor INDEPENDENT AUDITORS DELOITTE & TOUCHE S.P.A. 2

3 The General Meeting of the shareholders of Acotel Group S.p.A., held in Rome on April 30, 2003, reappointed both the Board of Directors and the Board of Statutory Auditors. The General Meeting appointed the following as directors: Claudio Carnevale, who was appointed Chairman of the Board of Directors, Margherita Argenziano, Francesco Ago, Luca De Rita, Giovanni Galoppi, Berardino Libonati and Andrea Morante. Antonio Mastrangelo, Maurizio Salimei and Umberto Previti Flesca were appointed as the Company s statutory auditors, whilst Gabriele Perrotti and Paola Piscopello were appointed as alternate auditors. The Board of Directors and the Board of Statutory Auditors will remain in office until the General Meeting of shareholders called to approve the Annual Report The General Meeting of April 30, 2003 also engaged Deloitte & Touche Italia S.p.A., which subsequently became Deloitte & Touche S.p.A., to audit the consolidated and statutory financial statements for the years 2003, 2004 and The Board of Directors resolution of May 13, 2003 appointed Claudio Carnevale as CEO, and all the powers of routine and extraordinary administration to be delegated in accordance with the law and the articles of incorporation were conferred on him. The same board meeting of May 13, 2003 appointed Francesco Ago and Berardino Libonati as members of the Internal Audit Committee and the Remuneration Committee. 3

4 1.2 THE GROUP 4

5 CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,

6 DIRECTORS REPORT ON OPERATIONS 6

7 2.1 MARKET ENVIRONMENT VAS services The following events affected the Value Added Services (VAS) market, in which several Group companies operate, during VAS services are increasingly the key to revenue growth for mobile telecommunications operators, whilst their constant renewal represents the sole differentiating element given that they can be so rapidly copied. The growing complexity of the technologies and services demanded by the market have led telephone carriers to forge preferential relationships with Application Service Providers. Above all, this means ASPs with the most reliable and creative track records and those capable of staying ahead of rapid changes in the market, guaranteeing reduced lead times and costs, and of ensuring the competitive advantage that derives from being the first mover. Whilst SMS revenues continue to account for 64% of total revenues generated by the VAS market (estimated to be worth approximately 400 million euros in Italy), new services based on multimedia technologies and internet protocols are beginning to have a greater impact. Micro-browsing, for example, is the true innovation in this sector, enabling both the launch of the Vodafone Live!, 3 and Wind i-mode portals, and the introduction of navigation charges, based on the pay-per-view or flat formulas. Services enabling the download of ringtones, wallpapers, videos and Java games represent 14% of the market whilst the contribution from MMS remains marginal at 2%. More than eighteen months on from their launch, MMS have failed to take off with consumers, who have been slow to be convinced that they represent real value for money. In terms of the type of service provided, infotainment accounts for 34% of the total, whilst handset personalization services that supply logos, ringtones and wallpapers represent 27%. These are followed by chat and community services (17%), games (15%) and the increasingly important voting services (4%). The market for SMS services has witnessed a high degree of concentration with the number of suppliers falling to less than a third of the 340 operating at the end of This is essentially due to the almost total withdrawal from mobile services by the large number of web portals, which primarily offered the chance to download logos and ringtones. Traditional media companies have shown growing interest in the mobile channel and, at least in this initial phase, have opted not to invest in their own specific units, preferring to engage leading Wireless Application Service Providers to resolve specific technical and operating problems. The providers have in turn seen an extension of their role both as facilitators of access to mobile services for well-known, content-rich businesses, and as generators of traffic for telephone carriers. The trend towards greater market concentration and the resulting progressive reduction in the number of players, partly due to mergers and acquisitions, has also been seen at international level. This has led to the gradual emergence of companies capable of offering 7

8 their customers fully outsourced applications, from the point of view of technology, content and billing. Businesses have been obliged to opt for greater concentration, resulting in the birth of larger cross-border companies. This is due to the need to operate in several markets in order to optimize cost structures increasingly burdened by both developments in technology, and by the reduced time available before competitors begin to copy the innovations introduced. Leading Application Service Providers are increasingly looking to forge preferential relationships with owners of content and well-known brands, including TV and radio broadcasters, record companies, sports associations and multinational consumer goods companies. Network infrastructures The following macro-trends can be observed in the network infrastructure market. The financial resources accumulated by mobile operators over recent years have enabled them to start investing again in improvements to the quality and quantity of the services provided. Although a growing proportion of investment is directed towards the rollout of 3G networks, operators are also continuing to invest in their 2G and 2.5G networks. Emerging country demand is high due to the rapid increase in the number of subscribers and the need to make services available to ever growing areas. Thanks to the above, 2003 witnessed encouraging signs of a recovery in the network infrastructure market, which intensified during the final quarter of the year. Suppliers in the euro zone, however, began to feel the impact of a weakening dollar. The ability to offer integrated product and application solutions would appear to be the key to winning business from both telecommunications companies and corporate customers, who are increasingly keen on deals based around the active involvement of suppliers and their operational and financial contribution to the success of the projects undertaken. 8

9 2.2 OPERATING REVIEW The activities of the Acotel Group s operating companies during 2003 are best described by maintaining the differentiation between VAS services and the sale of network infrastructure, and by making reference to the above market trends. VAS services Activities in this area can be analyzed in terms of the launch of new services, agreements with new customers, the acquisition of new content and entry into new markets. All Group companies gave priority to increasing the number and quality of the services offered both through the consolidated SMS channel and thanks to new opportunities created by recent technological developments. Within the context of its long-term agreement with TIM, the subsidiary, Acotel S.p.A., introduced over 50 new services, with around 75% available via the SMS channel, 11% via WAP, 11% via MMS and the remaining 2% in voice form. Information and entertainment represented the lion s share of the new services. With regard to information services, a direct agreement with the Holy See saw the Group begin supplying services with religious content and backup to the Vatican Press Office, via the TIM network, on January 15, One service in particular, involving the transmission of the Pope s thought for the day, has had wide coverage in the national and international press. At noon each day subscribers to the service are sent an SMS containing a religious message from the Pope direct to their mobile phone. The agreement with the Holy See was subsequently extended to allow other Group companies to make the prestigious content supplied by the Vatican Press Office available to Catholics in other countries. In particular, in June Jinny Software and Acotel do Brasil began to offer extracts from the Pope s thoughts to customers in Ireland and Brazil, respectively. The Group joined with ANSA during the third quarter to launch a service that enables customers to receive SMS messages with a thought from Padre Pio, taken from one of his sermons or speeches. The Group s partnership with ANSA also gave rise to a regional news service via SMS, enabling users to keep abreast of news about their region. The long-term agreement with Telecom Italia Mobile also led to the release of new MMS services, enabling users to receive news with pictures, text and sound, soap operas developed in cooperation with specialist producers (the Lancio Group) and cartoons produced together with the creators of, among others, Diabolik and Peanuts. Given the restriction in Italy represented by the exclusive nature of the agreement with TIM, the goal of negotiating agreements with the greatest possible number of mobile operators in different countries, in order to spread the growing cost of developing and standardizing 9

10 services among a number of customers, was pursued essentially via the subsidiaries, Jinny Software and Info2cell. During 2003 Jinny Software boosted its role as an Application Service Provider for operators in English-speaking countries and northern Europe, reaching revenue sharing agreements with 11 new operators and 2 service providers. In addition to launching the service based on the Pope s thoughts, Jinny Software s longterm relationship with Ireland s leading mobile operator (which began when the operator was called Eircell and has continued after its acquisition by the Vodafone Group and subsequent transformation into Vodafone Ireland) led to the launch of a range of new services, including the download of polyphonic ringtones. This has allowed the Acotel Group to become the first Application Service Provider to be directly linked to Vodafone Ireland s MMS-C. Jinny also continued to expand and build on its relations with mobile operators in northern Europe, reaching agreements with Vodafone Holland and Meteor Mobile Communications, Ireland s third biggest mobile company, for the supply of MMS content. By reaching agreements with Spacetel Yemen and Spacetel Syria for the supply of VAS and information services, Info2cell increased the number of mobile operators with whom it works to 10. Moreover, the commercial launch of MMS services for Wataniya, the leader in Kuwait, and Pull SMS services for Jawal, a Palestinian operator, and the creation of a portal for the download of monophonic ringtones for Fastlink, a Jordanian company, the subsidiary confirmed its role as a provider of state-of-the-art services in the Middle East. Within the context of the above-mentioned supply of services to other Service Providers, the Group negotiated an outsourcing contract with the Dutch company, Trees, a company established with the aim of developing multimedia chat lines for the general public in Holland, and creating communities of users linked to television or radio programs or events designed to bring together people with the same interests. The Group has entered the media segment, above all targeting TV and radio stations and press publications. A new software platform, dubbed the Media Platform, has been developed entirely in-house for this purpose. Having been suitably integrated with the production systems used by the media customer, the new software activates return communication channels providing for the creation of new formats and/or services, based on real interaction with the audience. One of the first results of this decision to diversify into the media segment is the agreement with RTL and its satellite TV channel, HIT-Channel, which aims to develop new services by combining the Acotel Group s technological know-how with the content produced by the RTL Group. An framework agreement was reached with Universal Studios regarding the creation of interactive formats designed to exploit the US movie company s library. The agreement has led to the development of services enabling users to download games and ringtones linked to the telefilm, Bikini Bandits, which is shown on Sky s satellite channels. 10

11 Thanks to an agreement with the record company, BMG, purchasers of a compilation aimed at the Italian market were given the chance to download polyphonic ringtones based on the tracks on the CD. The Group s diversification into the media segment also resulted in agreements with the Dublin Daily, an Irish newspaper that has granted Jinny Software the role of exclusive partner for the design and creation of mobile information services, and Wanadoo, France s leading internet provider with 8.8 million subscribers, to which Acotel France supplies a "turnkey" service enabling French internet users to download content and games on to their mobile phones. The Group pursued its aim of providing prime content capable of differentiating the services supplied. This has involved negotiating, or renewing, agreements with press agencies such as ANSA for Italy and Reuters, Al-Arabia News Agency, WAM and BBC Arabic for overseas content, with specialist publications such as Il Sole 24Ore and Lancio, with the owners of the rights to cartoon characters including Diabolik or Peanuts, with the producers of TV series such as the above-mentioned Bikini Bandits, and with world leading Java game producers such as AnfiTeam and DS Effect. The Group pursued its strategy of expanding its overseas presence primarily through the acquisition of the entire share capital of Info2cell.com LLC-FZ and the incorporation of Acotel USA Inc. On January 29, 2003 the Group completed the acquisition of 67% of the share capital of Info2cell.com, in which Acotel Participations S.A. already held the other 33%. The company, which is based in Dubai, operates as a Wireless Application Services Provider in partnership with leading Middle-eastern GSM operators. From a financial point of view, the transaction was completed at a cost to the Group of approximately 2 million US dollars, 1.8 million in cash and the remainder in the form of interest-free bonds maturing after 24 months, and subscribed by the subsidiary s previous shareholders, who continue to be involved in the company s management. The acquisition has enabled the Acotel Group to reinforce its presence in the Middle East, currently and expected to remain one of the world s fastest growing markets for value added mobile services. The Group s strategy of expanding its presence in high-growth markets also led to the incorporation of Acotel USA Inc. during the third quarter of The company completed its commercial launch in October via its participation at CTIA Wireless IT & Entertainment 2003 in Las Vegas. The establishment of a US subsidiary, based in Boston and New York, enables the Acotel Group both to replicate its business model, designed around the offer of services to mobile operators, in a market with 150 million mobile users, and to gain access to a market in which the world s largest TV and radio production companies operate. Acotel plans to partner US media companies both in the creation of programs built around their customers real interests, attracting the attention of listeners and viewers for longer periods of time and thereby boosting advertising revenues, and in the provision of services able to generate extra revenues from alternative uses of TV content. 11

12 Other events relating to the supply of services include the creation of a platform for downloading Java games and ringtones for Tiscali, the Internet Service Provider, the establishment of a portal called Cinecittando designed to support the film promotion activities of Cinecittà Holding, and a direct marketing project on behalf of Procter & Gamble involving a specially devised Java game to promote the Pringles brand of potato chips. Network equipment Within the Acotel Group the design, development, installation and maintenance of network infrastructures is the sole responsibility of the subsidiary, Jinny Software Ltd, which receives exclusive backup from a software development center based in Beirut (Millennium Software Sal). In common with our discussion of VAS services, we intend to analyze the activities of Jinny Software in this sector by taking account of the principal market trends described in the first section of this report, as they provide potential for the development of new solutions and capacity improvements, for access to new markets, and for new commercial strategies and new customers. During 2003 development of a platform that enables different protocols to be connected, known as the Application Router & Protocol Converter, was completed. The system, which has already been sold to the Lebanese operator, Libancell, allows the different protocols (SMS and MMS) used by third-party solution providers to engage in real-time dialogue with the network equipment used by the telephone carrier. In relation to boosting the capacity of the equipment produced, Jinny Software reached agreement with Sabafon, the Yemen s leading mobile operator, for an updated and improved version of the SMS-C system earlier provided. As a result of the upgrade, the network will have a throughput capability of 160 messages a second. The emphasis on developing a presence in emerging markets is borne out by the fact that more than 75% of Jinny s turnover is generated from the sale of network infrastructures to Middle-eastern and African customers. In 2003 this included the supply of an SMS-C platform to Mobitel, Sudan s leading mobile operator, and the sale of an MMS-C to Fastlink, the number one Jordanian operator. As a result of the positive outcome of the numerous tests carried out on the buyer s network, this second transaction was followed by the sale of a WAP Gateway and various innovative SMS applications. In an effort to boost sales of solutions the Group agreed a series of revenue sharing agreements for the supply of hardware, maintenance and consulting, whilst entering into commercial partnerships with a number of leading players in the market such as Tecnomen, Ericsson and Cisco. The agreement with Tecnomen means that the Finnish producer, which specializes in the construction of Voice and Unified Messaging platforms, includes the SMS-C developed by Jinny Software in the package offered to mobile operators in over 40 countries. 12

13 The cooperation agreement with Ericsson regards the joint promotion of Acotel s value added MMS services to mobile operators, as well as games developed in J2ME, and other services enabling users to download polyphonic ringtones and animated images. The supply of solutions to mobile operators also saw Jinny sign a contract with Cable and Wireless, Guernsey, for the supply of an MMS-C platform, a WAP Gateway and services to be supplied on a revenue sharing basis. Other activities The Acotel Group also operates in the security systems and interactive television markets. In the security sector, AEM has won orders for video surveillance equipment and the development and personalization of operating software for access control. Orders for video surveillance equipment include the contract signed with the Rome Business Association, covering the installation of equipment at the Association s premises in Via Po, and the contract to maintain security systems at 31 of the Bank of Italy s provincial offices (around a third of the total). The subsidiary also has an agreement with Telecom Italia to provide maintenance of the remote surveillance system installed at Rome s Police Headquarters. In the access control segment, the company reached an agreement with 3M allowing AEM to install its KeyOne visitor control software in the American producer s impax hardware. Further orders for access control systems designed to protect offices adjudged to be potentially high-risk objectives were received from the Italian Air Force. In the interactive television sector, the Group signed a preliminary agreement with the British company, NDS Group Plc, a provider of technological solutions and encryption systems for digital pay-tv. The agreement regards the joint supply of interactive TV and mobile content protection services. The agreement means that NDS and Acotel will shortly produce a series of practical applications allowing TV viewers to interact with both unencrypted and encrypted digital TV systems via mobile phone. The services planned include the purchase of films and pay-per-view events via mobile phone and live interactive participation in programs by sending comments and requests. 13

14 2.3 FINANCIAL REVIEW RESULTS OF OPERATIONS RECLASSIFIED CONSOLIDATED INCOME STATEMENT (thousands of euros) % change Total revenues 18,022 16,518 1, % Materials and service costs 10,237 8,222 2, % Gross margin 7,785 8,296 (511) (6.16%) Labor costs 7,086 6, % EBITDA 699 2,207 (1,508) (68.33%) 3.88% 13.36% Depreciation 1, % Amortization 2,198 1, % Provisions for doubtful accounts 2, , % EBIT (4,924) (785) (4,139) % % -4.75% Net financial (expense) income 246 1,145 (899) (78.52%) Adjustments to financial assets - (3,131) 3,131 Income (loss) from ordinary activities (4,678) (2,771) (1,907) 68.82% % % Extraordinary income (loss), net (848) 2,671 (3,519) (131.75%) Income (loss) before taxes (5,526) (100) (5,426) 5,426.00% % -0.61% % 59,592.20% Income taxes 537 (454) 991 (218.28%) Net income (loss) for the period (4,989) (554) (4,435) % % -3.35% Minority interest in net income (loss) (3) (29) 26 (89.66%) Group interest in net income (loss) (4,986) (525) (4,461) % % -3.18% The Acotel Group reports a weakening of its performance in its fourth year of activity with respect to the previous year. This was essentially due to increased operating costs, which were not adequately compensated for by a corresponding rise in revenues from sales and services, to the prudent write-down of a portion of trade receivables, reduced interest income and substantial extraordinary expense. EBITDA before extraordinary items of 699 thousand euros represents an EBITDA margin of 3.9%, whilst EBIT after depreciation, amortization and write-downs, but before extraordinary items, reported a negative balance of 4.9 million euros (representing a margin of %). 14

15 After extraordinary items, income taxes and the minority interest, the Group reports a net loss of 4.9 million euros in Revenues The Acotel Group s total revenues for 2003 amounted to 18,022 thousand euros, representing an increase of 9% on the previous year, whilst revenues from sales and services totaled 18,007 thousand euros compared with 16,471 thousand euros in Business segment analysis (thousands of euros) 2003 % 2002 % SERVICES TO NETWORK OPERATORS 13, % 11, % CORPORATE SERVICES % % SOFTWARE DEVELOPMENT % % DESIGN OF ICT EQUIPMENT 2, % 2, % DESIGN AND OPER. OF SECURITY SYSTE % % OTHER % 18, % 16, % The above segment analysis shows that there was an increase in the contribution from the supply of VAS services to mobile operators, which rose by approximately 1.9 million euros compared with 2002 (up 16%), and substantial stability in revenues from other areas of the business. VAS services to network operators continued to represent the Group s most important area of business in 2003, with revenues of 13,369 thousand euros, equal to 74% of total revenues and up on the 11,487 thousand euros of The main component of this item regards revenues generated by the long-term agreement with Telecom Italia Mobile, which resulted in revenues of 11,270 thousand euros in 2003, substantially in line with the 11,375 thousand euros of VAS services to network operators include the revenues earned by Info2cell and Jinny Software, amounting to 1,088 and 988 thousand euros, respectively. Info2cell s revenues derived from the supply of information and entertainment services to mobile operators in the United Arab Emirates, Jordan, Kuwait, Bahrain, Egypt, Qatar and other Middleeastern countries. 15

16 The revenues earned in this sector by Jinny Software, regarding services provided to mobile operators in Ireland, Hungary, Sweden, Croatia, Holland, Denmark and Poland, rose significantly to 988 thousand euros compared with the 97 thousand euros of the previous year. Revenues from the provision of corporate services, consisting of value added information services supplied to companies that request mobile telephony services to use as a further means of accessing and extending their commercial services, totaled 385 thousand euros, compared with 608 thousand euros in Revenues from the development of software applications totaled 520 thousand euros, and were earned by Acotel Group S.p.A. within the context of the contract with Voinoi S.p.A., an Acea Group company. Revenues from the design and implementation of ICT equipment, totaling 2,777 thousand euros, relate entirely to the Irish subsidiary, Jinny Software. This segment s customers are mobile telephone operators and companies that opt to develop value added multimedia services autonomously and then provide them directly to their own customers. The Group supplies them with high-tech ICT equipment and is able to offer multiple personalized versions based on the requirements of the client company. Revenues from the design of ICT equipment were earned in Sudan, Ireland, Jordan, Kuwait, Italy, Denmark and in other European and Middle-eastern countries. Revenues from the design and production of electronic security equipment relate mainly to the activities of design, construction and installation of peripheral security stations and of the supply, installation and maintenance of hardware and software for remote surveillance. This activity, carried out by the Group via the subsidiary, AEM S.p.A., primarily covers technical assistance and maintenance services regarding remote surveillance systems installed at police headquarters in Italy, and at a number of provincial branches of the Bank of Italy. This segment generated revenues of 956 thousand euros during 2003, up 34% on A geographical breakdown of the Group s revenues is as follows: Revenues by geographical area (thousands of euros) 2003 % 2002 % ITALY 13, % 15, % OTHER EUROPEAN COUNTRIES 1, % % MIDDLE EAST 2, % % LATIN AMERICA - 0.0% 4 0.0% AFRICA % - - OTHER 5 0.0% , % 16, % 16

17 The geographical breakdown of revenues for 2003 shows renewed impetus in the process of internationalizing revenue sources, essentially due to the improved results achieved by Jinny Software and the consolidation of Info2cell. Materials and service costs The details of such costs are set out below: (thousands of euros) % change Raw and ancillary materials and consumables (10.8%) Services 7,365 6, % Lease expense 1,391 1, % Other operating expenses % Total 10,237 8, % The cost of raw and ancillary materials and consumables amounted to 595 thousand euros, substantially in line with the figure for The most significant increase regards service costs, which rose from 6,184 thousand euros in 2002 to the 7,365 thousand euros of As further explained in the notes to the consolidated accounts, this item reflects the increase in the cost of the services purchased from external content providers, which rose from 1,577 to 2,467 thousand euros. Such a rise is essentially due to the fact that during the first eight months of 2002 the provider, ANSA, was contracted to and consequently paid by TIM, whilst from September 2002 such expense is incurred directly by the Group. The other important component of the increase in service costs is represented by the inclusion of Info2cell, Acotel France and Acotel USA in the basis of consolidation. Service costs also include direct costs of production such as promotional expenditure (543 thousand euros), travel expenses for commercial and technical staff (522 thousand euros) and the cost of land and satellite connections (489 thousand euros). Consultants fees regarding management consultancy and tax, legal, commercial and technical assistance amounted to 1,204 thousand euros, compared with 1,431 thousand euros in The other significant service cost components regard the cost of servicing the buildings in which the Group s companies operate, amounting to 197 thousand euros, utilities, totaling 468 thousand euros, and the fees paid to directors and statutory auditors, which totaled 531 thousand euros. Lease expense of 1,391 thousand euros primarily includes rentals on the buildings in which Group companies operate, totaling 833 thousand euros, and lease rentals on electronic equipment, amounting to 131 thousand euros. The increase with respect to 2002 is primarily due to the costs incurred by newly consolidated companies. Other operating expenses of 886 thousand euros comprise other components of overhead that are not classifiable among the foregoing categories, including the net effect, totaling 610 thousand 17

18 euros, of the settlement with Telecom Italia Mobile in June 2003 following the definition, in agreement with the operator, of the method of measuring both the volume and the type of traffic served by the Group s proprietary platform. Other operating expenses also include 65 thousand euros representing the periodic fee due to the Ministry of Communications for the fixed telephony license issued to Millennium Communications. Other operating costs also include the cost of the ambulance donated, complete with all the necessary modern emergency equipment, to Rome s 118 Service. Such a donation is a further demonstration of the Acotel Group s long-term commitment to social causes. Labor costs Analysis of labor costs (thousands of euros) % change Labor costs 7,086 6, % Headcount Managers % Supervisors % White-collar % Blue-collar % Headcount (annual average) % Average unit cost % Labor costs amounted to 7,086 thousand euros, representing an increase in absolute terms compared with the 6,089 thousand euros of the previous year. There was, however, a reduction in the average unit cost due to ongoing attempts to optimize the location of personnel in relation to labor costs in the various countries in which the Group operates. The following table shows a breakdown of personnel by geographical area: Italy Ireland Lebanon United Arab Emirates 12 3 Jordan 24 - Brazil 7 2 France 2 - USA 5 - Total

19 The increase in staff located in the United Arab Emirates and Jordan is entirely due to the consolidation of the subsidiary, Info2cell. Amortization, depreciation and write-downs Amortization of intangible assets, totaling 2,198 thousand euros, relates to amortization of goodwill arising from consolidation of the equity investments in the subsidiaries Jinny Software, Millenium Software, Info2cell, Eitco and AEM. Information regarding the value of goodwill arising from consolidation and the related amortization are provided in the notes to the consolidated financial statements. The remaining amount regards the amortization of the cost of licenses, software, the incorporation and start-up of Group companies and the research and development costs incurred by AEM for activities connected with household automation and remote surveillance. Depreciation of tangible assets, totaling 848 thousand euros, relates to telecommunications equipment, other plant, equipment and infrastructure used by Group companies. The increase is essentially due to the inclusion of Info2cell in the basis of consolidation. Provisions for doubtful accounts include 1,984 thousand euros regarding the Directors decision to fully write down accounts receivable due to Acotel Group S.p.A. from Voinoi S.p.A., following the Acea Group s decision to place its subsidiary in liquidation. The above write-down was carried out on a prudential basis given that negotiations are still underway regarding the resolution of the existing service contract with Voinoi and the form that future relations between the Acea Group and the Acotel Group are to take. Further write-downs of 216 thousand euros regard adjustments to the value of trade receivables and inventories to reflect their estimated realizable values. Financial management The Group earned net financial income of 246 thousand euros, representing the balance of returns on investment of the Group s liquidity (715 thousand euros), foreign exchange losses incurred by the Group following the devaluation of the US dollar versus the euro (304 thousand euros) and interest expense on the Group s borrowing (165 thousand euros). Adjustments to financial assets This item amounts to zero for 2003 in that the Group does not hold equity investments in unconsolidated companies. Extraordinary items Net extraordinary expense totaled 848 thousand euros in Expense includes 262 thousand euros representing the cost of the tax amnesties introduced by Law 289 of December 27, 2002 and Law 350 of December 24, 2003, which Acotel Group S.p.a., Acotel S.p.a, AEM S.p.a and Acomedia 19

20 S.r.l. took and intend to take advantage of. A further 79 thousand euros regards the loss incurred on the sale of the equity investment in Urone Media S.p.A. Other items essentially regard charges incurred by overseas subsidiaries. After the income taxes payable by each Group company, which were more than offset by deferred tax assets, and the minority interest, the Group reports a net loss for the period of 4,986 thousand euros. Further details of the above events are provided in the notes to the consolidated financial statements. 20

21 2.3.2 FINANCIAL POSITION RECLASSIFIED CONSOLIDATED BALANCE SHEET (thousands of euros) December 31, 2003 December 31, % change ASSETS Fixed assets 16,105 16,545 (440) (2.66%) Intangible assets 14,081 11,770 2, % Tangible assets 1,438 1,745 (307) (17.59%) Long-term financial assets 586 3,030 (2,444) - Current assets 45,938 51,716 (5,778) (11.17%) Inventories % Accounts receivable 11,799 14,402 (2,603) (18.07%) Short-term investments 16,466 21,660 (5,194) (23.98%) Cash at bank and on hand 17,590 15,600 1, % Accrued income and prepaid expenses (270) (50.19%) Total Assets 62,311 68,799 (6,488) (9.43%) LIABILITIES AND SHAREHOLDERS' EQUITY Shareholders' Equity 54,037 60,768 (6,731) (11.08%) Group interest in shareholders' equity 54,007 60,660 (6,653) (10.97%) Share capital 1,084 1, % Share premium reserve 55,106 55, % Legal reserve % Reserve for treasury stock Other reserves % Retained earnings (accumulated losses) 1,480 4,226 (2,746) (64.98%) Group interest in net income (loss) for the period (4,986) (525) (4,461) % Minority interest in shareholders' equity (78) (72.22%) Allowances for risks and charges Employee severance indemnities % Accounts payable 6,058 6,135 (77) -1.26% bonds - payable within 12 months (925) (100.00%) - payable beyond 12 months debt - payable within 12 months (15) (24.19%) - payable beyond 12 months (341) (76.63%) other lenders - payable within 12 months payable beyond 12 months advances % trade payables - payable within 12 months 2,993 2, taxes due 1, % due to social security agencies % other (22) (2.99%) Accrued expenses and deferred income 1,494 1, % Total liabilities and shareholders' equity 62,311 68,799 (6,488) (9.43%) 21

22 The changes resulting from a comparison of the balance sheets as of December 31, 2002 and 2003 are essentially due to the acquisitions of equity investments completed during the year and the write-down of trade receivables described above. Fixed assets, amounting to 16,105 thousand euros, register a net decrease of 440 thousand euros compared with The movement in intangible fixed assets is primarily due to the increase in goodwill arising from consolidation, following the acquisition of control of Info2cell and the consolidation of its assets on a line-by-line basis. The reduction in long-term financial assets is also due to the increase in the equity investment in the Dubai-based company, in which the Group held a 33% interest as of December 31, Further details of movements in fixed assets are provided in the relevant annexes. In addition to the decision to fully write down accounts receivable from Voinoi, changes in current assets reflect the use of liquidity. Further details are therefore provided below in the section dealing with net debt and cash flow. The most significant movements in liabilities during the year regarded redemption of the remaining bonds issued by Acotel Participations in 2001 in relation to the commitments assumed at the time of the acquisition of Jinny Software, the value of which as of December 31, 2002 had already fallen to 925 thousand euros. In addition to the loss for the year, shareholders equity was affected by payment of a dividend totaling 1,668 thousand euros to the shareholders of Acotel Group S.p.A., in accordance with the resolution passed by the Ordinary General Meeting called to approve the financial statements for CASH FLOW AND DEBT An examination of the Statement of Cash Flows and an analysis of net debt as of December 31, 2003 provide further confirmation of certain above-mentioned aspects of the Acotel Group s performance during the year. The Group reports a net cash outflow for the period of 2,291 thousand euros compared with a figure of 12,137 thousand euros for Despite being negative, this result reflects operating cash flow of 2,435 thousand euros (-777 thousand euros in 2002) used to finance the acquisition of fixed assets, above all the residual 67% of Info2cell, and to pay dividends. In spite of the loss reported for 2003, the Group s financial position remains strong and substantially stable with net cash of 33,982 thousand euros and net liquidity of 33,471 thousand euros, the latter being almost unchanged with respect to the previous year. 22

23 CONSOLIDATED STATEMENT OF CASH FLOWS (thousands of euros) A. NET CASH AT THE BEGINNING OF THE PERIOD 36,273 48,410 B. CASH FLOWS FROM OPERATING ACTIVITIES 2,435 (777) Cash flows from operating activities before changes in working capital 2,435 (777) Net result for the period (4,986) (525) Amortization and depreciation 5,623 2,487 Write-down of equity investments in other companies - 2,582 (Increase) / decrease in accounts receivable 467 (5,687) (Increase) / decrease in inventories (29) 214 Increase / (decrease) in accounts payable Changes in other items of working capital 276 (338) Net change in employee severance indemnities Net changes in allowances for risks and charges 99 - C. CASH FLOWS FROM (FOR) INVESTING ACTIVITIES (3,047) 753 (Investments in)/disposal of fixed assets: - Intangibles (209) (35) - Tangibles (222) (372) - Financial (586) 1,160 - Net effect on fixed assets of consolidation of Info2cell (2,030) - D. CASH FLOWS FROM (FOR) FINANCING ACTIVITIES (1,679) (12,113) Increase / (decrease) in long-term debt 66 (10,270) Dividends paid (1,668) (1,668) Other changes in shareholders' equity 1 (244) Change in minority interest (78) 69 E. CASH FLOW FOR THE PERIOD (B+C+D) (2,291) (12,137) F. NET CASH AT THE END OF THE PERIOD (A+E) 33,982 36,273 23

24 ANALYSIS OF CONSOLIDATED NET DEBT AS OF DECEMBER 31, 2003 (thousands of euros) Short-term investments 16,466 21,660 Cash and cash equivalents 17,590 15,600 Short-term bank debt and current portions of long-term bank debt (74) (62) Bonds issued maturing within 12 months - (925) Net cash and cash equivalents (A) 33,982 36,273 Bonds issued maturing beyond 12 months (a) (158) - Medium- to long-term debt (353) (445) Medium- to long-term indebtedness (B) (511) (445) Net liquidity (A)+(B) 33,471 35,828 (a) Bonds maturing beyond 12 months regard the bonds issued by Acotel Participations in relation to the commitments assumed on the acquisition of Info2cell. Such bonds were subscribed by the previous owners of the company who have continued to play a managerial role in this Middle-eastern subsidiary. 2.4 RELATED PARTY TRANSACTIONS The following section provides the related party information required by the CONSOB. Shares held by Directors and Statutory Auditors NAME COMPANY INVESTED IN NO. OF SHARES AT BEGINNING OF YEAR NO. OF SHARES PURCHASED NO. OF SHARES SOLD NO. OF SHARES HELD AT END OF 2003 Claudio Carnevale (a) Acotel Group S.p.A. 691, ,730 Andrea Morante Acotel Group S.p.A. 109,827-10,000 99,827 Claudio Carnevale Acotel S.p.A. 20, ,000 Claudio Carnevale AEM S.p.A. 16, ,500 (a) Ownership is exercised via Clama S.A., which is 99.9% owned by Claudio Carnevale. 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. Purchase of shares by shareholders During 2003 no shares were traded between Acotel Group companies and their shareholders. 24

25 Remuneration of shareholders for membership of corporate bodies Claudio Carnevale earned the following fees during 2003: - 216,667 euros as Chairman and CEO of Acotel Group S.p.A.; - 50,000 euros as Chairman of the Board of Directors of Acotel S.p.A.; - 50,000 euros as Chairman of the Board of Directors of AEM S.p.A. Margherita Argenziano earned the following fees during 2003: - 6,667 euros as a member of the Board of Directors of Acotel Group S.p.A.;. - 50,000 euros as CEO of Acotel S.p.A.; - 50,000 euros as CEO of AEM S.p.A. Andrea Morante earned 6,667 euros during 2003 as a member of the Board of Directors of Acotel Group S.p.A.. As of December 31, 2003 the above Directors are owed a total of 31,482 euros. Transactions with subsidiaries Transactions between Acotel Group and consolidated subsidiaries are described in the Directors Report on Operations for the Parent Company. Transactions with associated companies Following the acquisition of the entire share capital of Info2cell.com FZ-LLC on January 29, 2003, the Group does not, at the balance sheet date, hold equity investments in associated companies. 2.5 OTHER INFORMATION As of December 31, 2003 Acotel Group S.p.A. owns 28,320 of its own shares purchased in accordance with the mandate granted by the General Meeting of April 24, The shares, which are recorded at a value of 498 thousand euros, equal to an average unit cost of euros, have a nominal value of 7, euros and represent 0.68% of the share capital. An appropriate equity reserve of the same value has also been posted. 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 December 31, 2003 Acotel Group S.p.A. does not own shares or holdings in parent companies, either directly or through a trust company or proxy, nor did it buy or sell such shares or holdings during the period. As of December 31, 2003, no branch offices of the Company had been set up. 25

26 2.6 ADOPTION OF INTERNATIONAL ACCOUNTING STANDARDS The Acotel Group is beginning the diagnostic phase of the planned conversion to International Accounting Standards (I.A.S. now I.F.R.S. International Financial Reporting Standards), which must be adopted, as of the consolidated financial statements for 2005, by European companies whose shares are listed on a regulated market, as required by European Regulation no of July The diagnostic phase aims to identify the main differences between the accounting standards adopted by the Group and international ones. At the end of this phase, and during the subsequent phases, we shall evaluate the impact on the financial statements of the adoption of international accounting standards, which will be applied to the financial statements from 2005, in accordance with the procedures established by IFRS1 First Time Adoption of International Financial Reporting Standards. The necessary actions (involving business and IT processes, etc.) will be identified and implemented prior to adoption of the new standards. 2.7 SUBSEQUENT EVENTS The Group has begun collaborating with Lazio s 118 service with a view to equipping the organization s ambulances with computers linked to the Global Positioning System and the GSM/GPRS networks. Thanks to the computer link between the ambulances located throughout the region and Acotel s service center, the project will make it easier to localize the nearest vehicle, find the hospital equipped with the most suitable facilities and with available space, identify the best route to take and transmit details of the medical treatment given at the site of the accident and in the ambulance to the waiting medical team. Immediate access to this information will enable the 118 operations center to save time and resources and make the emergency services more effective and efficient. We have reached two separate agreements with Fastlink regarding expansion of the SMS-Center owned by Jordan s leading mobile operator, and the updating of its VAS platform to carry the latest versions of MMS. These agreements are proof of customers growing interest in SMS and MMS in both Jordan and the rest of the Middle East. The Group has also signed an agreement with NDS Group Plc (a member of the News Corporation Group) regarding the technological development and marketing of joint solutions. The agreement, which follows on from the preliminary accord with NDS entered into last October, was announced at the 3GSM Show in Cannes (between February 23 and 26, 2004), timed to coincide with the commercial presentation of the first joint solution to be developed by the two companies. This solution, which uses Acotel s multimedia platform and NDS s DRM (Digital Right Management) system, protects content rights, as the rights are downloaded on to handsets in encrypted form and may then only be used by the owner of the phone. 26

27 2.8 OPERATING OUTLOOK 2003 saw the Group continue to penetrate the world s most important markets via a precise strategy based on setting up new companies, recruiting the best available personnel and duplicating technological platforms at low cost given that the software is the intellectual property of the Group. The transition period is now drawing to a close. Acotel is an international group present in Europe, the Middle East and the United States, benefiting from organizational structures that have been culturally designed to best serve the various markets they operate in. In view of this positive increase in size, the loss reported by the Group for 2003 is, as extensively described in other sections of this document, due to one-off, non-recurring events. We therefore believe that 2004 will see the Group return to the levels of profitability witnessed in previous years. We expect the services provided to network operators to make a positive contribution to the improvement in performance, along with the increased volume of traffic deriving from our contract with TIM, and the activities of Jinny Software and Info2cell, who have demonstrated their ability to operate in partnership with European and Middle-eastern mobile operators and Internet Service Providers. The start of a new investment cycle, as confirmed by various industry observers, should allow Jinny Software to achieve satisfactory results in the sale of ICT equipment to mobile operators. Further impetus should be provided by our partnership agreements with a number of major names in the sector, who are interested in completing the range of services they offer without having to incur the costs of developing highly specific products on their own. We also expect to see growth in the design and production of electronic security systems thanks to the opportunities deriving from the positive outcome of public tenders involving AEM, and the commercial offerings presented by the subsidiary. 27

28 CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT 28

29 CONSOLIDATED BALANCE SHEET ASSETS (thousands of euros) December 31, 2003 December 31, 2002 Unpaid, called-up share capital due from shareholders - - Fixed assets: Intangible assets: - incorporation and expansion costs research, development and advertising costs industrial patents and intellectual property rights concessions, licences, trademarks and similar rights goodwill arising from consolidation 12,690 11,457 - intangibles in process and advances 5 - other Total 14,081 11,770 Tangible assets: - plant and machinery 820 1,209 - industrial and commercial equipment other work in progress and advances 1 - Total 1,438 1,745 Long-term financial assets: - equity investments in: associated companies - 3,030 - accounts receivable:. from others:. due within 12 months other securities - treasury stock Total 586 3,030 Total fixed assets 16,105 16,545 Current assets: Inventories: - raw and ancillary materials and consumables work in progress and semi-finished goods finished goods and goods for resale 5 - Total Accounts receivable: - trade: receivable within 12 months 7,041 11,038 - associated companies: receivable within 12 months other: receivable within 12 months 4,711 17,648 receivable beyond 12 months Total 11,799 28,872 Marketable securities: - other securities 16,466 7,190 Total 16,466 7,190 Cash at bank and on hand: - bank and post office deposits 17,538 15,556 - cash and notes on hand Total 17,590 15,600 Total current assets 45,938 51,716 Accrued income and prepaid expenses - other TOTAL ASSETS 62,311 68,799 29

30 CONSOLIDATED BALANCE SHEET LIABILITIES AND SHAREHOLDERS' EQUITY (thousands of euros) December 31, 2003 December 31, 2002 Shareholders' equity: Share capital 1,084 1,084 Share premium reserve 55,106 55,106 Revaluation reserve - - Legal reserve Reserve for treasury stock Statutory reserves - - Other reserves: - Consolidation reserve Reserve for exchange rate differences (297) (298) Retained earnings (accumulated losses) 1,480 4,226 Net income (loss) for the period (4,986) (525) Total 54,007 60,660 Minority interest: Minority interest in shareholders' equity Minority interest in net income (loss) for the period (3) (29) Total Total shareholders' equity 54,037 60,768 Allowances for risks and charges: other 99 - Total 99 - Employee severance indemnities Accounts payable: - bonds payable within 12 months payable beyond 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 2,993 2,813 - taxes payable within 12 months 1, social security agencies payable within 12 months other payable within 12 months payable beyond 12 months 27 - Total 6,058 6,135 Accrued expenses and deferred income - other 1,494 1,488 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 62,311 68,799 30

31 MEMORANDUM ACCOUNTS (thousands of euros) December 31, 2003 December 31, 2002 General guarantees granted - Guarantees in favor of others Commitments - To purchase equity interests - 1,882 - Lease rentals Other memorandum accounts - Third party assets held by the Group 6,200 6,234 TOTAL MEMORANDUM ACCOUNTS 6,605 8,478 31

32 CONSOLIDATED INCOME STATEMENT (thousands of euros) Total revenues: - revenues from the sale of goods and services 18,007 16,471 - change in work in progress, semi-finished goods and finished goods 1 (33) - other revenues and income Total 18,022 16,518 Operating costs: - raw and ancillary materials and consumables service costs 7,365 6,184 - lease expense 1,391 1,238 - labor costs: 7,086 6,089 wages and salaries 5,264 4,664 social security contributions 1,168 1,040 employee severance indemnities other amortization, depreciation and write-downs 5,623 2,992 amortization of intangible fixed assets 2,198 1,639 depreciation of tangible fixed assets 1, provisions for doubtful accounts 2, change in raw and ancillary materials, consumables and goods for resale (17) other expenses Total 22,946 17,303 Operating income (4,924) (785) Financial income and expense: - other financial income:. from marketable securities other: from others 411 1,754 - expense to others (469) (898) Financial income (expense), net 246 1,145 Adjustments to financial assets: - write-downs of equity investments - (3,131) Adjustments to financial assets - (3,131) Extraordinary income and expense: - income 208 2,878 - expense (1,056) (207) Extraordinary income (expense), net (848) 2,671 Income (loss) before taxes (5,526) (100) - income taxes 537 (454) Net income (loss) before minority interest (4,989) (554) Minority interest (3) (29) Group interest in net income (loss) (4,986) (525) 32

33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 33

34 4.1 FORM AND CONTENT The consolidated financial statements as of December 31, 2003 were drawn up in accordance with the regulations laid down in Legislative Decree no. 127/1991, integrated by the accounting principles established by the Italian Accounting Profession. All the supplementary information deemed necessary to give a true and fair view is also supplied, even if not required by specific provisions of the law. The consolidated financial statements aim to show financial position, results of operations and changes in the financial position of Acotel Group S.p.A. (the Parent Company) and the companies directly or indirectly controlled by it. As of December 31, 2003, in addition to Acotel Group S.p.A., the Parent Company, the following directly or indirectly controlled subsidiaries of the Acotel Group were consolidated: Company Date of acquisition Group s interest (%) 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 Acomedia S.r.l. April 28, % Rome EURO 15,600 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 3,000 Acotel Greece S.A. April 28, % (5) Athens EURO 58,600 Acotel Do Brasil LTDA August 8, 2000 (1) 100% (5) Rio de Janeiro BRL 50,000 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, % (4) (7) Beirut LPD 30,000,000 Info2cell.com LLC-FZ January 29, 2003 (3) 100% (5) Dubai Dh 18,350,000 Emirates for Information Technology Co. January 29, % (8) Amman JD 710,000 E-Seed Telecommunications S.p.A. July 10, 2002 (2) 100% Rome EURO 400,000 Millenium Luxembourg S.A. April 28, % (5) Luxembourg EURO 38,850 Millenium Communications S.A. April 28, % (6) Luxembourg EURO 199,800 Publimedia S.A. April 28, % Luxembourg EURO 38,850 Acotel USA Inc. June 28, 2003 (1) 100% (5) Wilmington USD 100,000 (1) The date of the company s entry into the Group coincides with its incorporation. (2) Prior to such date the Group held 50% of the company s share capital, posted to equity investments in associated companies. (3) Prior to such date the Group held 33% of the company s share capital, posted to equity investments in associated companies. (4) AEM owns 1.92% of the share capital. (5) Controlled via Acotel Participations S.A. (6) Controlled via Millenium Luxembourg S.A. (7) Controlled via Jinny Software Ltd. (8) Controlled via Info2cell.com LLC-FZ. 34

35 The financial statements of consolidated companies were drawn up on the basis of the accounting principles and policies established by art of the Italian Civil Code and subsequent, in line with those laid down by the Italian Accounting Profession. Such principles and policies are applied in accordance with those adopted by the Parent Company. The basis of consolidation changed during the year following Acotel Participations s acquisition of the residual share capital (67%) of Info2cell, the incorporation of the subsidiaries, Acotel USA and Acotel France, and the sale of the equity investment in Urone Media S.p.A. Consolidation was based on the balance sheets and income statements of the Parent Company and all subsidiaries as of December 31, All the financial statements of Group companies had already been approved by their respective management bodies at the time of consolidation. 4.2 ACCOUNTING POLICIES Principles of consolidation The assets and liabilities of consolidated companies are recorded on a line-by-line basis, eliminating the book value of the shareholdings consolidated in relation to 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 from 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 value of shareholders equity. The consolidation process also involves the elimination of all inter-company payables, receivables, costs and revenues. 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. 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, regardless of the amortization already charged. 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. These costs are amortized in five years. 35

36 Industrial patents and intellectual property rights, essentially 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 can be subject. Leasehold improvements are amortized on the basis of the duration of the related rental contracts. Goodwill arising from consolidation of equity investments is amortized on a straight-line basis over a period of ten years, taking into account future cash flows from the investment to which the goodwill refers. In the event of a permanent impairment in the value of the equity investments to which the goodwill refers, the item is written down accordingly. Tangible assets These are stated at purchase price or production cost, including 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 half for the first year, in accordance with Italian law. Ordinary 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 asset 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. 36

37 Long-term financial assets Equity investments in associated companies are valued according to the equity method. Equity investments in other companies are valued at cost, where appropriate written down in order to reflect a permanent impairment in value. Inventories In these financial statements inventories of finished and semi-finished goods, raw materials and goods for resale are stated at the lower of their weighted average purchase or production cost and their estimated realizable value, based on market prices. Accounts receivable Accounts receivable are entered at nominal value, reduced where necessary by provisions for doubtful accounts in order to reflect their estimated realizable value. 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 as calculated at year end. 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 December 31, 2003, net of any advances paid. Taxes Income taxes are recorded on the basis of estimated taxable income in accordance with Italian law, taking into account applicable exemptions and tax credits due. In addition, deferred tax assets and liabilities are recognized on the basis of temporary differences between the carrying value of assets 37

38 or liabilities and their tax base. Deferred tax assets are recorded subject to verification of their recoverability. Accounts payable These are stated at nominal value. Receivables and payables expressed in foreign currency Receivables and payables denominated in foreign currency are translated at exchange rates on the date of the original transaction and adjusted on the basis of closing exchange rates. 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. Revenues relating to the services rendered to Network Operators and Corporate Customers are recognized on the basis of the services effectively performed during the period. Revenues relating to the sale of software licenses are recognized at the moment the transfer of title takes place. Revenues relating to the design, production and installation of electronic equipment are 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. 38

39 4.3 NOTES TO THE BALANCE SHEET ASSETS FIXED ASSETS Intangible assets Details of intangible assets as of December 31, 2003 are as follows: (thousands of euros) Historical cost Accumulated Net value Net value amortization at at Incorporation and expansion costs 91 (23) Research, development and advertising costs 351 (142) Industrial patents and intellectual property rights 290 (147) Concessions, licences, trademarks and similar rights 1,263 (341) Goodwill arising from consolidation 17,528 (4,838) 12,690 11,457 Intangibles in process and advances - 5 Other 175 (126) Total 19,698 (5,617) 14,081 11,770 The item Incorporation and expansion costs includes the costs relating to the incorporation of Group companies and amendments to their articles of association. Such costs have risen due to the capitalization of costs linked to the incorporation of new companies and capital increases carried out in The costs of research and development include the costs incurred by AEM in past years for two different research projects, which the subsidiary has financed with the help of subsidized loans duly posted among liabilities. Such costs also include technical and IT development costs, with a net total of approximately 189 thousand euros, incurred by the subsidiary, Info2cell, in past years and included in the basis of consolidation as of Industrial patents and intellectual property rights 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 used by Group companies. The increase compared with December 31, 2002 is essentially due to the purchase of software designed to expand the capacity of the ICT platform owned by Acotel Group S.p.A. 39

40 The increase in Concessions, licenses, trademarks and similar rights is essentially due to the consolidation of the subsidiary, Info2cell, which reports the cost of the license for the software used in the supply of VAS services, amounting to a net value of 913 thousand euros, in the financial statements as of December 31, The item Goodwill arising from consolidation is composed of the difference arising between the prices paid by the Parent Company 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: (thousands of euros) Company Price Shareholders' equity Goodwill arising from consolidation Amortization Book value as of AEM 1,549 1, (169) 294 Jinny Software 12,324 (1,109) 13,433 (3,694) 9,739 Millenium Software (14) 30 Info2Cell 6,150 2,784 3,366 (850) 2,516 Eitco (111) 111 Total 20,930 3,403 17,528 (4,838) 12,690 During 2003 the item increased due to the purchase by the subsidiary, Acotel Participations, of further interests in Info2cell and consequently Eitco, a wholly owned subsidiary of Info2cell. 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 contract was renewed in November 2000 for a further renewable period of 6 years. During the year no intangible asset was the subject of revaluations. Movements in intangible assets during the year are shown in an annex. Tangible assets Details of tangible assets are as follows: (thousands of euros) Historical cost Allowances for depreciation Net value at Net value at Plant and machinery 3,774 (2,954) 820 1,209 Industrial equipment 1,389 (989) Other 441 (224) Work in progress and advances Total 5,605 (4,167) 1,438 1,745 40

41 Plant and machinery mainly consists of the data transmission platforms installed in Rome, Dublin and Rio De Janeiro, 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 operations. The consolidation of Info2cell, Acotel France and Acotel USA has resulted in an increase of approximately 98 thousand euros, net of the related allowances. The item Other primarily regards furniture, fixtures and fittings and company vehicles. During the year no tangible asset was the subject of revaluations or write-downs. Movements in tangible assets during the year are shown in an annex. Long-term financial assets As of December 31, 2003 the Group does not hold equity investments in associated companies following its acquisition of the entire share capital of Info2cell, of which it previously held 33% as reported in the accounts as of December 31, Accounts receivable included among long-term financial assets include non-interest bearing advances granted to the technological partner with whom the Group is currently testing new services. As of December 31, 2003 the Group reports treasury stock amounting to 498 thousand euros. Such shares, which were purchased by Acotel Group S.p.A., have a nominal value of 7, euros and represent 0.68% of the share capital. An appropriate equity reserve of the same value has also been posted. The treasury stock consists of 28,320 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 December 31, 2003 is euros. CURRENT ASSETS Inventories The following table shows a breakdown of inventories, valued according to the weighted average cost method, and the related provisions made in order to reflect estimated realizable values as of December 31, 2003: 41

42 (thousands of euros) Gross value Write-downs Book value at Book value at Raw materials, ancillary materials and consumables 211 (168) Work-in-progress and semi-finished goods 303 (268) Finished goods and goods for resale 255 (250) 5 - Total 769 (686) Trade receivables This item reports trade receivables after deducting provisions for doubtful accounts in order to reflect their estimated realizable value. This item breaks down as follows: (thousands of euros) Trade receivables 9,235 11,626 (2,401) Provisions for doubtful accounts (2,194) (588) 378 Total 7,041 11,038 (2,023) 45% of trade receivables are due from Telecom Italia Group companies. Provisions for doubtful accounts include 1,984 thousand euros regarding the prudent write-down of accounts receivable from Voinoi S.p.A. All trade receivables for which provisions have not been made are held to fall due within 12 months. Due from associated companies This item has been reduced to zero as of December 31, 2003 following the acquisition of 100% of Info2cell, the sole associated company reported in the previous year s financial statements. Other receivables As of December 31, 2003 the portion falling due within 12 months totals 4,389 thousand euros, whilst receivables due beyond 12 months amount to 47 thousand euros. The following table shows the main items making up the balance: 42

43 (thousands of euros) Banks in the process of collection - 14,470 (14,470) VAT credits 2,326 1,255 1,071 Income tax credits 1, Deferred tax assets 1, Other (264) Total other receivables falling due within 12 months 4,711 17,648 (12,937) Guarantee deposits receivable beyond 12 months (26) Total other receivables 4,758 17,721 (12,963) Income tax credits include the balance of IRPEG and IRAP credits due to Acotel Group and AEM, reflecting the fact that the advances paid during the year exceeded the income tax effectively due. Deferred tax assets derive from temporary differences between the book values of assets and liabilities and their tax bases. Other receivables include 77 thousand euros regarding advances paid to suppliers. The part receivable beyond 12 months includes guarantee deposits given to third parties in relation to lease and utility contracts entered into by Group companies. Marketable securities This item, amounting to 16,466 thousand euros, refers to the investment of a part of the Group s liquidity as of December 31, This regards investments in insurance products issued by Monte dei Paschi di Siena (3,026 thousand euros), and bonds issued by Banca Nazionale del Lavoro (9,390 thousand euros), providing an average yield of 2.29%, and Monte di Paschi di Siena (4,050 thousand euros), providing an average yield of 2.18%. The above investments generate average returns of % Cash at bank and on hand This item includes bank deposits of 17,538 thousand euros and cash and notes on hand totaling 52 thousand euros. At the end of the previous year the above items amounted to 15,556 and 44 thousand euros, respectively. Bank deposits represent the balances of Group companies current accounts as of December 31,

44 ACCRUED INCOME AND PREPAID EXPENSES This item breaks down as follows: (thousands of euros) Accrued income (295) Prepaid expenses Total (270) Accrued income includes interest due on short-term investments held on December 31, 2002, whilst prepaid expenses relate to insurance premiums, periodic rentals and other expenses pertaining to the next year. 44

45 4.3.2 LIABILITIES AND SHAREHOLDERS EQUITY SHAREHOLDERS EQUITY Group interest As of December 31, 2003 the paid-up share capital of Acotel Group S.p.A. consisted of 4,170,000 ordinary shares with a nominal value of 0.26 euros each. The share premium reserve and the legal reserve amount to 55,106 thousand euros and 213 thousand euros, respectively. The consolidation reserve, equal to 909 thousand euros, is the result of the difference between the book value of subsidiaries as stated in the Parent Company s Balance Sheet and the corresponding interest in shareholders equity on the date of acquisition. The reserve for exchange rate differences is 297 thousand euros in deficit following the conversion of the accounts of foreign subsidiaries expressed in non-euro currencies at closing rates. The following exchange rates were used: Closing rate Average rate Company Currency Info2Cell Dh Eitco JD Millenium Software LPD 1, , Acotel USA USD Acotel Cile USD Acotel do Brasil BRL Shareholders equity items are converted using the relevant historical rates. Retained earnings total 1,480 thousand euros. In application of the resolution approved by the General Meeting of Acotel Group S.p.A. s shareholders called to approve the Annual Report 2002, the Company paid total dividends of 1,668 thousand euros during The statement of movements in shareholders equity during the year is attached. Minority interest This is the share of shareholders equity attributable to minority shareholders in subsidiaries. As of December 31, 2003 this item totals 30 thousand euros and relates to the minority interest in the subsidiaries, Acotel, AEM and Millennium Software. 45

46 Reconciliation of the Parent Company s net income and shareholders equity with consolidated net income and shareholders equity The reconciliation between the shareholders equity, including net income, of Acotel Group S.p.A. as stated at December 31, 2003, and the corresponding consolidated items is as follows: Inc. St. TOTAL 2003 at Result for the period Shareholders' equity net income / (loss) positive/(negative) Parent Company's shareholders' equity and result for the period (892) 56,220 Effect of consolidation of Group companies (1,541) 1,864 Elimination of dividends (980) - Consolidation reserve 909 Reserve for exchange rate differences (297) Valuation of associated companies according to the equity method - Amortization of goodwill arising from consolidation (1,726) (4,713) Effect of deconsolidation of Urone Media Restoration of intercompany sale of tangible assets Group shareholders' equity and result for the period (4,986) 54,007 Minority interest in shareholders' equity and result for the period (3) 30 Consolidated shareholders' equity and result for the period (4,989) 54,037 EMPLOYEE SEVERANCE INDEMNITIES As of December 31, 2003 this item amounts to 623 thousand euros and includes the amounts due as severance indemnities, calculated in accordance with established regulations, net of advances already paid to employees. The following table shows movements during the year: 46

47 (thousands of euros) December 31, 2003 December 31, 2002 Opening balance Increases due to newly consolidated companies 31 - Provisions Releases (142) (26) Closing balance ACCOUNTS PAYABLE Bonds This item, totaling 158 thousand euros, regards the bonds issued by Acotel Participations in relation to the commitments assumed on acquisition of a further interest in Info2cell. Such bonds were subscribed by the previous owners of the company who have continued to play a managerial role in the company. The nominal value of the loan, which does not involve the payment of any form of interest to the subscribers, is 200 million US dollars. The bonds are redeemable in a lump sum on maturity on February 28, The outstanding bonds reported as of December 31, 2002 were fully redeemed at maturity in Banks Bank debt breaks down as follows: (thousands of euros) Banks due within 12 months Banks due beyond 12 months (66) Total (150) With the exception of 10 thousand euros, relating to temporary current account overdrafts, both categories refer to part of the medium/long-term loans granted by San Paolo-IMI and the Industry Ministry to the subsidiary, AEM S.p.A., to finance the research and development costs incurred by the company for two products aimed at creating remote surveillance and household automation systems. The above loan is subject to interest at 3.7%, is not secured by any form of guarantee and matures at the end of

48 Other lenders The part of the loan described above given by the Industry Ministry, which amounts to 276 thousand euros, is classified under this item. (thousands of euros) Other lenders due within 12 months Other lenders due beyond 12 months (27) Total (26) Portion due beyond 5 years (27) The repayment schedule established by the contract starts in 2003 and will be completed by the end of This loan is subject to interest at 3.625% and is not secured by any form of guarantee. Advances This item regards amounts received by the subsidiary, Acotel do Brasil, on account for services rendered to the Brazilian subsidiary of the Telecom Group in view of the expected formalization of the related contract for VAS services. Trade This item, which amounts to 2,993 thousand euros, compared with 2,813 thousand euros at the end of 2002, is entirely made up of trade payables due within 12 months. These essentially regard the purchase of content from providers outside the Group. Taxes The item is made up as follows: (thousands of euros) Income tax payables (423) VAT payable 1, Employee witholding taxes Other Total 1, The 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 freelances in the capacity of withholding agent and payable to tax authorities. 48

49 No Group company is in dispute with the tax authorities, nor are any tax audits in progress. Social security agencies As of December 31, 2003, this item amounts to 314 thousand euros (257 thousand euros as of December 31, 2002) and includes social security contributions to be paid. Other The item is made up as follows: (thousands of euros) Due to employees (86) Due to Directors Other Total (22) Amounts payable to employees basically relate to wages and salaries, bonuses and outstanding vacation pay. Other accounts payable include sundry amounts, totaling 27 thousand euros, payable beyond 12 months. ACCRUED EXPENSES AND DEFERRED INCOME Deferred income, amounting to 1,494 thousand euros, primarily regards the subsidiary, Jinny Software, and relates to annual fees due in return for technical assistance for the ICT equipment sold, on the basis of existing contracts. At the end of the previous year this item amounted to 1,488 thousand euros. 49

50 4.3.3 MEMORANDUM ACCOUNTS At period end the memorandum accounts were made up as follows: (thousands of euros) General guarantees granted Guarantees granted in favor of others Commitments To purchase equity investments - 1,882 Lease rentals Other memorandum accounts: Third party assets held by the Company 6,200 6,234 Total 6,447 8,478 Guarantees totaling 175 thousand euros relate to the guarantee given to the owner of the building rented by the Parent Company, where all the Italian companies of the Group have their headquarters. The remaining amount regards guarantees given in accordance with contracts with third parties. Third party assets include 6,197 thousand euros relating to the ICT equipment supplied to Voinoi, but which the customer has requested initially to install on the premises of Acotel Group S.p.A., whilst the customer s own facilities designed to house the equipment are being prepared. The residual amount, totaling 3 thousand euros, regards equipment granted free of charge to Acotel S.p.A. by the provider, Sole 24 Ore, for connection to its information network. 4.4 NOTES TO THE INCOME STATEMENT TOTAL REVENUES The Acotel Group s total revenues amounted to 18,022 thousand euros in 2003 and break down as follows. (thousands of euros) 50

51 Revenues from sales and services 18,007 16,471 1,536 Change in inventories of semi-finished and finished goods 1 (33) 34 Other revenues and income (66) Total 18,022 16,518 1,504 Revenues from goods sold and services rendered break down as follows by segment: (thousands of euros) Services to network operators 13,369 11,487 1,882 Corporate services (223) Software development 520 2,707 (2,187) Design of ICT equipment 2, ,903 Design of electronic security equipment Other - 79 (79) Total 18,007 16,471 1,536 Revenues from value added services (VAS) provided to network operators, amounting to 13,369 thousand euros, mainly regard revenues (11,269 thousand euros) deriving from the provision of services to Telecom Italia Mobile. The newly acquired Info2cell contributed to the Group s earnings in this sector by generating revenues of approximately 1,088 thousand euros from the supply of W-VAS services to mobile operators in the United Arab Emirates, Jordan, Kuwait, Bahrain, Egypt, Qatar and other Middleeastern countries. There was a substantial increase in sales in this sector reported by the subsidiary, Jinny Software, which earned revenues of 988 thousand euros in 2003 compared with 97 thousand euros in The company provides services to mobile operators in Ireland, Hungary, Sweden, Croatia, Holland, Denmark and Poland. Revenues from corporate services amounted to 385 thousand euros and derived entirely from the Italian activities of Acotel S.p.A. The Acotel Group also supplies ICT equipment, tailor-made to customer requirements, and also develops the related software applications. In addition to sales of equipment and concession of user licenses, the Group also provides ongoing technical assistance and upgrading of the equipment, remotely and on-site, in return for annual fees. Revenues from the design of ICT equipment during 2003, totaling 2,777 thousand euros, relate to the activities of Jinny Software, which earned revenues in Sudan, Jordan, Ireland, the Yemen, Italy, Kuwait, Holland, Bahrain, the United Kingdom, Belgium and Lebanon. 51

52 Revenues from software development derive from relations with the Acea Group company, Voinoi S.p.A., and regard the development of vertical customer care applications for the Rome-based multiutility. The relevant amounts have been posted on the basis of the terms of the existing contract between Voinoi and Acotel Group, but prudently written down via provisions for doubtful accounts until agreement is reached with the Acea Group regarding the provision of support services. Revenues from the design and production of electronic security equipment, amounting to 956 thousand euros compared with the 716 thousand euros of 2002, regard the design, construction and installation of peripheral security systems and the supply, installation and maintenance of remote surveillance hardware and software. The geographical distribution of revenues is as follows: (thousands of euros) Italy 13,128 15,192 (2,064) Europe 1, ,575 Middle East 2, ,145 Latin America - 4 (4) Africa Other 5-5 Total 18,007 16,471 1,536 Margins by business segment are not given as there were no important differences between the activities carried out by the Group in terms of the resources employed. In fact, a large part of the costs incurred concerned, without distinction, all the services rendered and therefore the revenues generated. In particular, labor costs, consultants fees and technological resources were used for the joint development of all the various businesses. Change in semi-finished and finished goods This item is positive (1 thousand euros), whilst it was negative to the amount of 33 thousand euros in It is mainly affected by the adjustment of inventories to reflect their estimated realizable value at the end of the period. Other revenues and income Other revenues amounted to 13 thousand euros, compared with 80 thousand euros in OPERATING COSTS Materials, service costs and lease expense 52

53 This item includes the following costs: (thousands of euros) Raw and ancillary materials and consumables (72) Service costs 7,365 6,184 1,181 Lease expense 1,391 1, Total 9,351 8,089 1,262 The costs of raw and ancillary materials, consumables and goods for resale mainly relate to the purchase of the materials used in the construction of telecommunications equipment (492 thousand euros) and electronic security equipment (86 thousand euros). Service costs, amounting to 7,365 thousand euros, rose 1,181 thousand euros with respect to Such an increase was caused by both a rise in the cost of content supplied by external providers (up from 1,374 thousand to 2,118 thousand euros), primarily due to a change in the terms of the Group s contract with the content provider, ANSA, and the enlargement of the basis of consolidation. Other significant items regard consultancy fees, amounting to 1,203 thousand euros, Directors fees of 531 thousand euros, advertising and promotions of 543 thousand euros, travel and transport expenses totaling 522 thousand euros, the cost of connection to land and satellite transmission networks totaling 489 thousand euros, utilities of 468 thousand euros, and the costs of managing buildings rented by Group companies, totaling 197 thousand euros. Lease expense of 1,391 thousand euros primarily includes rentals on the buildings in which Group companies operate, totaling 1,067 thousand euros, and lease rentals on electronic equipment, amounting to 95 thousand euros. Labor costs Labor costs break down as follows: (thousands of euros) Wages and salaries 5,264 4, Social security contributions 1,168 1, Employee severance indemnities Other costs Total 7,086 6, Other labor costs include the cost of the staff canteen and luncheon vouchers, training and refresher courses, and health and safety initiatives. The following table shows the number of staff by category on December 31,

54 Average 2003 Average 2002 Managers Supervisors White-collar Blue-collar Total Amortization, depreciation and write-downs Amortization, depreciation and write-downs relate to: (thousands of euros) Amortization of intangible assets 2,198 1, Depreciation of tangible assets 1, Provisions for doubtful accounts 2, ,631 Total 5,623 2,992 2,631 Amortization of intangible assets relates primarily to amortization of goodwill arising from consolidation following the acquisition of holdings Jinny Software, Millenium Software, Info2cell (from 2003), Eitco and AEM. The relevant sums amount to 1,343 thousand euros, 5 thousand euros, 337 thousand euros, 25 thousand euros and 46 thousand euros, respectively. The residual part relates to the research and development costs incurred by AEM for activities connected with household automation and remote surveillance. Depreciation of tangible assets mainly relates to telecommunications equipment and the infrastructure used by Group companies. Provisions for doubtful accounts include 1,984 thousand euros regarding the full write-down of accounts receivable from Voinoi S.p.A. Change in raw and ancillary materials, consumables and goods for resale Inventories decreased by 17 thousand euros. This reduction is mainly due to their adjustment to reflect their estimated realizable value calculated at the end of the year. Other operating costs This item amounts to 886 thousand euros and refers to other costs deriving from the Group s ordinary activities, including 609 thousand euros deriving from the settlement reached in June 2003 with Telecom Italia Mobile. 54

55 This item also includes 65 thousand euros representing the periodic fees due for the fixed telephony license held by Millenium Communications, and 61 thousand euros relating to the cost of the ambulance, complete with all the necessary modern emergency equipment, donated to Rome s 118 Service. FINANCIAL INCOME AND EXPENSE Net financial income of 246 thousand euros breaks down as follows: (thousands of euros) Interest income on financial investments (288) Bank interest (286) Profits on foreign exchange transactions (852) Other interest income Total financial income 715 2,043 (1,328) Interest expense and bank charges (164) (353) 189 Losses on foreign exchange transactions (304) (541) 237 Other interest expense (1) (4) 3 Total financial expense (469) (898) 429 Financial income (expense), net 246 1,145 (899) Financial investments regard short-term investment of the Group s liquidity in repurchase agreements, shares in mutual funds and bonds. The average rate of return on such investments was around 1.95%. Interest expense includes interest on loans received and on the bonds issued by Acotel Participations S.A. and redeemed on April 9, As mentioned in the Directors Report on Operations for the Group, the balance of foreign exchange transactions reflects the negative impact of exchange rate movements on the Group s investments in dollars or dollar-linked currencies. ADJUSTMENTS TO FINANCIAL ASSETS This item amounts to zero for 2003 in that the Group does not hold equity investments in unconsolidated companies, following the acquisition of the entire share capital of Info2cell, to which the write-down reported in 2002 referred. EXTRAORDINARY INCOME AND EXPENSE Net extraordinary expense totaled 848 thousand euros in Expense includes 262 thousand euros representing the cost of the tax amnesties introduced by Law 289 of December 27, 2002 and Law 350 of December 24, 2003, which Acotel Group S.p.a., Acotel S.p.a, AEM S.p.a and Acomedia 55

56 S.r.l. took and intend to take advantage of. A further 79 thousand euros regards the loss incurred on the sale of the equity investment in Urone Media S.p.A. Other items essentially regard charges incurred by overseas subsidiaries. TAXES Taxes for the year 2003 are made up as follows: (thousands of euros) Income taxes for the period (881) Deferred tax liabilities (assets) (537) (427) (110) Total (537) 454 (991) Deferred tax assets and liabilities are calculated on the basis of the temporary differences between the book values of assets and liabilities and their tax bases, subject to verification of their recoverability. 56

57 4.5 REMUNERATION OF DIRECTORS AND STATUTORY AUDITORS The following tables give the information required by CONSOB resolution no of May 14, ACOTEL GROUP SPA Name Position Period in which position held Expiry of term of office Remunration for position held in Parent Company Non-cash bonuses Bonuses and other incentives Other remuneration Claudio Carnevale Chairman / CEO 01/01/03-12/31/03 04/30/ , Francesco Ago Director 01/01/03-12/31/03 04/30/2006 6, Margherita Argenziano Director 01/01/03-12/31/03 04/30/2006 6, Luca De Rita Director 04/30/03-12/31/03 04/30/2006 6, , Giovanni Galoppi Director 04/30/03-12/31/03 04/30/2006 6, Berardino Libonati Director 01/01/03-12/31/03 04/30/2006 6, Andrea Morante Director 01/01/03-12/31/03 04/30/2006 6, Antonio Mastrangelo Chairman Board of Stat. Aud. 01/01/03-12/31/03 04/30/ , Paola Piscopello Statutory Auditor 01/01/03-04/29/03-3, Umbero Previti Flesca Statutory Auditor 01/01/03-12/31/03 04/30/ , Maurizio Salimei Statutory Auditor 01/01/03-12/31/03 04/30/2006 6, AEM SPA Name Position Period in which position held Expiry of term of office Remunration for position held in Parent Company Non-cash bonuses Bonuses and other incentives Other remuneration Claudio Carnevale Chairman 01/01/03-12/31/03 10/30/ , Margherita Argenziano CEO 01/01/03-12/31/03 10/30/ , Antonio Mastrangelo Chairman Board of Stat. Aud. 01/01/03-12/31/03 10/30/2005 5, Umbero Previti Flesca Statutory Auditor 01/01/03-12/31/03 10/30/2005 3, ACOTEL SPA Name Position Period in which position held Expiry of term of office Remunration for position held in Parent Company Non-cash bonuses Bonuses and other incentives Other remuneration Claudio Carnevale Chairman 01/01/03-12/31/03 03/09/ , Margherita Argenziano CEO 01/01/03-12/31/03 03/09/ , Antonio Mastrangelo Chairman Board of Stat. Aud. 01/01/03-12/31/03 10/30/2005 7, Umbero Previti Flesca Statutory Auditor 01/01/03-12/31/03 10/30/2005 5, E-SEED SPA Name Position Period in which position held Expiry of term of office Remunration for position held in Parent Company Non-cash bonuses Bonuses and other incentives Other remuneration Claudio Carnevale Chairman 01/01/03-12/31/03 01/10/2005 Margherita Argenziano CEO 01/01/03-12/31/03 01/10/2005 Giovanni Galoppi Director 02/26/03-12/31/03 01/10/2005 Antonio Mastrangelo Chairman Board of Stat. Aud. 01/01/03-12/31/03 10/30/2005 3, Umbero Previti Flesca Statutory Auditor 01/01/03-12/31/03 10/30/2005 2,

58 In addition to the above, it should be noted that Mr. Giovanni Galoppi acted as legal council for Group companies in return for fees 70,062 euros. 58

59 ANNEXES TO THE CONSOLIDATED FINANCIAL STATEMENTS 59

60 60

61 61

62 62

63 63

64 PARENT COMPANY S FINANCIAL STATEMENTS 64

65 DIRECTORS REPORT ON OPERATIONS 65

66 5.1 FINANCIAL REVIEW RECLASSIFIED INCOME STATEMENT (in euros) % change Total revenues 6,912,670 8,679,545 (1,766,875) (20.36%) Materials and service costs 2,435,565 2,475,865 (40,300) (1.63%) Gross margin 4,477,105 6,203,680 (1,726,575) (27.83%) Labor costs 2,091,228 1,824, , % EBITDA 2,385,877 4,379,557 (1,993,680) (45.52%) 34.51% 50.46% Depreciation 210, ,187 (32,409) (13.33%) Amortization 110,462 48,836 61, % Provisions for doubtful accounts 1,919,991-1,919,991 EBIT 144,646 4,087,534 (3,942,888) (96.46%) 2.09% 47.09% Net financial (expense) income 360,136 (1,029,277) 1,389,413 (134.99%) Adjustments to financial assets (1,362,156) (1,250,007) (112,149) Income (loss) from ordinary activities (857,374) 1,808,250 (2,665,624) (147.41%) (12.40%) 20.83% Extraordinary income (loss), net (151,345) (700,517) 549,172 (78.40%) Income (loss) before taxes (1,008,719) 1,107,733 (2,116,452) (191.06%) (14.59%) 12.76% % % Income taxes 117,014 (1,954) 118,968 (6,088.43%) Net income (loss) for the period (891,705) 1,105,779 (1,997,484) (180.64%) (12.90%) 12.74% The following financial review regards Acotel Group S.p.A., the Group s Parent Company. It should be noted that the Company essentially operates as the holding company for a Group in which each company plays a role in implementing the Group s overall objectives and strategy. The management of the Company therefore aims to achieve the Group s objectives rather than maximize its own performance. The activities of Acotel Group S.p.A. during 2003 continued to focus on management of the Group s expansion, carrying out its role as provider of centralized strategic planning, administration, organization and control. The organizational model adopted ascribes specific functions to each Group company, with the aim of maximizing operating synergies and the efficiency of decision-making, operating and control procedures, thanks to the rapid circulation of information flows within the Group. 66

67 In addition to its role as the Group s holding company, Acotel Group S.p.A. also operated directly in the market, where business and strategic opportunities presented themselves. Total revenues amounted to approximately 6.9 million euros compared with approximately 8.7 million euros in (in euros) 2003 % 2002 % Revenues from sales and services 6,588, % 8,373, % Other revenues and income 324, % 306, % 6,912, % 8,679, % Business segment analysis (in euros) 2003 % 2002 % Services to Service Providers 6,068, % 7,499, % Software development 520, % 873, % 6,588, % 8,373, % The services provided to service providers are supplied to the subsidiary, Acotel S.p.A. and regard the acquisition, processing, management and transmission of data using Acotel s proprietary ICT platform. Revenues from the development of software applications regard the existing contract with Voinoi, an Acea Group company, for the development of software applications to be used for the Roman multi-utility s customer care activities. As extensively described in the report on the consolidated results, the Directors have prudently decided to fully write down accounts receivable from Voinoi S.p.A., following Acea S.p.A. s decision to place its subsidiary in liquidation and given that negotiations are still underway regarding the form that future relations between the Acea Group and the Acotel Group are to take. Other revenues and income of 324 thousand euros represent charges billed to the Group s other Italian companies for their share of administrative costs, lease expense and related expenses. The following table shows a breakdown of costs: 67

68 (in euros) Raw and ancillary materials and consumables 21,871 39,657 (17,786) Services 1,642,211 1,848,168 (205,957) Lease expense 658, , ,896 Other operating expenses 113,427 37,880 75,547 Total 2,435,565 2,475,865 (40,300) The cost of raw and ancillary materials and consumables regard the components used in the development of software and consumables. Service costs of 1,642 thousand euros were down 206 thousand euros on the previous year. One of the most important items, amounting to 292 thousand euros, relates to Directors and Statutory Auditors fees, whilst 245 thousand euros regards fees paid to management, accounting and legal consultants, 213 thousand euros to advertising and promotional expenditure designed to increase the Group s visibility in its Italian and international markets, 201 thousand euros to travel expenses for commercial and technical staff, and 178 thousand euros to the cost of land and satellite connections. The running costs of the building in which the Group s Italian companies operate totaled 188 thousand euros, a portion of which is charged to the various companies in the Group. Lease expense on the building in Rome where the Group s Italian companies operate totaled 576 thousand euros, a portion of which is charged to the various companies in the Group based on the surface area used by each one. Other operating costs include 61 thousand euros representing the cost of the ambulance donated, complete with all the necessary modern emergency equipment, to Rome s 118 Service. Labor costs rose to 2,091 thousand euros from the 1,824 thousand euros of 2002 following the recruitment of new staff. (in euros) Wages and salaries 1,433,038 1,272, ,801 Social security contributions 502, ,700 58,804 Employee severance indemnities 109,124 89,887 19,237 Other costs 46,562 18,299 28,263 Total 2,091,228 1,824, ,105 The amortization of intangible assets essentially regard software acquired from external suppliers and used in the ICT platform and for office applications. Depreciation of tangible assets includes 127 thousand euros regarding the Company s ICT platform and 41 thousand euros relating to equipment used for the processing of content and development of operating software. 68

69 As mentioned elsewhere in this document, provisions for doubtful accounts reflect the effect, after the recovery of provisions set aside in 2002, of the decision to fully write down accounts receivable from Voinoi S.p.A. totaling 1,984 thousand euros. Net financial income amounted to 360 thousand euros. Financial income derives from dividends paid by subsidiaries, totaling 1,531 thousand euros, income from the short-term investment of liquidity, amounting to 491 thousand euros, and interest income on the loans issued to other Group companies, totaling 497 thousand euros. Such interest is charged on the basis of market rates (interbank rate plus a spread of 0.50%). Foreign exchange movements generated a net loss of 2,059 thousand euros, following the translation of bank current accounts and financial receivables denominated in dollars at closing rates. Bank charges totaled 99 thousand euros. Adjustments to financial assets of 1,362 thousand euros reflect the recapitalization of the subsidiary, Acotel Participations, in December (1,137 thousand euros), and the write-downs of equity investments in Publimedia and Millenium Luxembourg, totaling 139 and 86 thousand euros, respectively. Net extraordinary expense amounted to 151 thousand euros. Extraordinary income was generated from settlements with suppliers, totaling 61 thousand euros, and from other minor items. Extraordinary expense includes 112 thousand euros representing the cost of the tax amnesties introduced by Law 289 of December 27, 2002 and Law 350 of December 24, 2003, which Acotel Group S.p.a. took and intends to take advantage of, 15 thousand euros relating to taxes linked to the regulation of Controlled Foreign Companies as applied to the Lebanese subsidiary, Millenium Software, and expenses accruing in previous years. As a result of the above, Acotel Group S.p.A. reports an after-tax loss for 2003 of 892 thousand euros. The Balance Sheet as of December 31, 2003 shows substantial stability with respect to the previous year and confirms the Company s solid financial position and the correct balance between liabilities and assets. 69

70 RECLASSIFIED BALANCE SHEET (in thousands of euros) December 31, 2003 December 31, % change ASSETS Fixed assets 31,546,258 31,638,542 (92,284) (0.29%) Intangible assets 192,547 98,869 93, % Tangible assets 424, ,934 20, % Long-term financial assets 30,929,374 31,135,739 (206,365) - Current assets 35,583,285 38,637,207 (3,053,922) (7.90%) Accounts receivable 12,610,686 13,483,510 (872,824) (6.47%) Marketable securities 9,083,151 16,564,799 (7,481,648) (45.17%) Cash at bank and on hand 13,889,448 8,588,898 5,300, % Accrued income and prepaid expenses 67, ,173 (346,685) (83.71%) Total Assets 67,197,031 70,689,922 (3,492,891) (4.94%) LIABILITIES AND SHAREHOLDERS' EQUITY Shareholders' equity 56,220,410 58,780,115 (2,559,705) (4.35%) Share capital 1,084,200 1,084, % Share premium reserve 55,106,013 55,106, % Legal reserve 212, ,606 55, % Reserve for treasury stock in portfolio 497, ,745 Other reserves Retained earnings (accumulated losses) 211,262 1,326,517 (1,115,255) (84.07%) Net income (loss) for the period (891,705) 1,105,779 (1,997,484) (180.64%) Allowances for risks and charges 100,199 1,020,655 (920,456) (90.18%) Employee severance indemnities 232, ,449 82, % Accounts payable 10,619,429 10,739,703 (120,274) (1.12%) debt - payable within 12 months 3,454 4,187 (733) (17.51%) trade - payable within 12 months 791, ,375 65, % subsidiaries - payable within 12 months 8,812,376 9,178,112 (365,736) (3.98%) taxes - payable within 12 months , , % social security agencies - payable within 12 months ,319 5, % other - payable within 12 months 315, ,397 22, % Accrued expenses and deferred income 24,620-24,620 Total liabilities and shareholders' equity 67,197,031 70,689,922 (3,492,891) (4.94%) Changes in assets are essentially due to the reduction in accounts receivable, following the previously mentioned decision to write down amounts due from Voinoi, and the change in the Company s liquidity as fully described in the section dealing with cash flow. On the liabilities side debt remained substantially stable, whilst shareholders equity declined, following payment of dividends in May 2003 and the net loss for the period, and allowances for 70

71 risks and charges fell due to the release of provisions as a result of the above-mentioned recapitalization of Acotel Participations. An analysis of the Statement of Cash Flows on the following page confirms that the Company s operating cash flow is adequate to cover investment in fixed assets, provide support for subsidiaries and pay dividends to its shareholders. 71

72 CONSOLIDATED STATEMENT OF CASH FLOWS (thousands of euros) A. NET CASH AT THE BEGINNING OF THE PERIOD 25,150 36,185 B. CASH FLOWS FROM (FOR) OPERATING ACTIVITIES 978 (2,687) Cash flows from operating activities before changes in working capital 1,773 2,719 Net income for the period (892) 1,106 Amortization and depreciation 2, Write-down of equity investments in other companies 1, Net change in employee severance indemnities Net changes in allowances for risks and charges (1,021) 1,021 (Increase) / decrease in accounts receivable (1,046) (4,993) Increase / (decrease) in accounts payable (120) (16) Changes in other items of working capital 371 (397) C. CASH FLOWS FROM (FOR) INVESTING ACTIVITIES (1,491) (6,680) (Investments) / disposals of fixed assets: - Intangibles (204) (4) - Tangibles (231) (215) - Financial (1,056) (6,461) D. CASH FLOWS FROM (FOR) FINANCING ACTIVITIES (1,668) (1,668) Dividends distributed (1,668) (1,668) E. CASH FLOW FOR THE PERIOD (B+C+D) (2,181) (11,035) F. NET CASH AT THE END OF THE PERIOD (A+E) 22,969 25,150 72

73 5.2 RELATED PARTY TRANSACTIONS The following section provides information required by the CONSOB. Shares held by Directors and Statutory Auditors NAME COMPANY INVESTED IN NO. OF SHARES AT BEGINNING OF YEAR NO. OF SHARES PURCHASED NO. OF SHARES SOLD NO. OF SHARES HELD AT END OF 2003 Claudio Carnevale (a) Acotel Group S.p.A. 691, ,730 Andrea Morante Acotel Group S.p.A. 109,827-10,000 99,827 Claudio Carnevale Acotel S.p.A. 20, ,000 Claudio Carnevale AEM S.p.A. 16, ,500 (a) Ownership is exercised via Clama S.A., which is 99.9% owned by Claudio Carnevale. 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.. Purchase of shares by shareholders During 2003 no shares were traded between Acotel Group companies and their shareholders. Remuneration of shareholders for membership of corporate bodies Claudio Carnevale earned 216,667 euros in 2003 as Chairman and CEO of Acotel Group S.p.A.. Margherita Argenziano and Andrea Morante earned 6,667 euros each as members of the Board of Directors of Acotel Group S.p.A.. As of December 31, 2003 the above Directors are owed a total of 30,316 euros. Intercompany transactions The following table shows transactions between Acotel Group S.p.A. and its subsidiaries: 73

74 RELATIONS WITH OTHER GROUP COMPANIES (in euros) company acc. receivable acc. payable costs revenues AEM S.p.a. 319,089 8, ,794 Acotel S.p.A. 9,024,137 8,812,377 6,205,861 Acomedia S.r.l. 42,283 42,283 Acotel Participations S.A. 16,254,522 1,842, ,780 Millenium Communication S.A. Millenium Luxembourg S.A. 50, Publimedia S.A. 103,733 3,355 Acotel Do Brasil Ltda 19,241 5,125 Acotel Espana S.L. Jinny Software Ltd 46,747 8,645 E-Seed S.p.A. 29,689 4,900 Info2cell 56,492 5,633 Total 25,823,974 8,812,377 1,973,515 6,878,456 Amounts due from AEM, Acomedia and E-Seed represent the subsidiaries share of administrative costs, lease expense and running costs relating to the building used as the companies headquarters. In the case of AEM and E-Seed the balance also includes amounts due for Amounts due from Acotel regard, in addition to the company s share of the above overhead, the subsidiary s use of the technological platform in its role as service provider. Amounts due from Acotel Participations regard the loans granted in order to finance the subholding company s activities. The portion disbursed to finance the acquisition of equity investments and support the financial structures of overseas subsidiaries is classified among long-term financial assets and amounts to 14,926,792 euros. A further 1,327,730, disbursed in order to enable Acotel Participations to finance the operations of its subsidiaries is classified among current receivables. The reduction in the amount due compared with 2002 is linked to the waiver of receivables carried out as part of the subsidiary s recapitalization and the adjustment of portions of the loans made in foreign currency in line with closing exchange rates. Amounts due from Millenium Luxembourg essentially relate to financing provided to cover operating costs. The receivable due from Publimedia is primarily linked to a loan issued in 2002 to finance the acquisition of shares in Urone Media. Financial receivables earn interest at market rates (6-month dollar and euro LIBOR rates plus a spread of 0.5%). The amount payable to Acotel, totaling 8,779,762 euros, regards unpaid, subscribed share capital deriving from the capital increase carried out by the subsidiary and the Parent Company s share of costs yet to be paid to it. Amounts due to AEM regard charges for management of the buildings in which the Group s Italian companies operate. Such costs refer to the early months of the year given that the relevant contract was then renewed in the name of Acotel Group. 74

75 Amounts due to Acotel Participations, Acotel do Brasil, Jinny Software and Info2cell derive from foreign exchange losses resulting from the adjustment of the value of the dollar portion of the loans issued to these companies to reflect closing exchange rates. Revenues earned from Acotel include 6,068,631 euros relating to the amount charged in return for the data processing services supplied via the ICT platform, and 137,230 euros representing the subsidiary s share of administrative costs, lease expense and running costs relating to the building paid for by the Parent Company on behalf of its subsidiaries. Revenues earned from the other Italian subsidiaries, AEM, Acomedia and E-Seed, are of the same nature. Revenues earned from Acotel Participations, Publimedia and Millenium Luxembourg are represented by interest on the loans issued. 5.3 SHAREHOLDERS PACTS As of December 31, 2003 there are no existing pacts between shareholders of Acotel Group S.p.A., following the expiry of all previous pacts, which in any event did not involve any commitment or agreement regarding the exercise of voting rights at shareholder s meetings. 5.4 STOCK OPTION PLAN With a resolution of April 28, 2000, the General Meeting of Acotel Group S.p.A. s shareholders earmarked a portion of the approved capital increase from 1,680,000 euros (Lit. 1,500 million) 1 to 2,464,000 euros (Lit. 2,200 million) 1 for a stock option plan in favor of the employees of Acotel Group S.p.A. and its subsidiaries. The portion in question has a nominal value of 60,840 euros (Lit. 117 million at the date of the resolution) 1 and represents 5.31% of the approved capital increase. On the basis of general criteria approved by the Board of Directors, the Chairman of the Board of Directors, is charged with identifying the beneficiaries, determining the number of shares to be allocated to each of them and the period of duration of the options. The price is 45 euros for options allocated before the price for the stock market listing was fixed, while it is not less than the arithmetical average of the listed prices achieved by the Acotel Group s shares during the month preceding allocation, for options assigned after the date of listing. As of December 31, 2003, 61,300 options had been allocated, equal to 26.2% of the total amount earmarked for the incentive plan. The price is 45 euros for 57,300 shares and 116 euros for 4,000. Of the 8,500 options that became exercisable after the General Meeting called to approve the 2000 Financial Statements, 4,000 have been exercised at a price of 45 euros. None of the 13,200 options accruing in 2002 or of the 13,200 accruing in 2003 has been exercised. 1 Amounts were converted into euros on the basis of the nominal value of the shares, which was converted from Lit. 500 to 0.26 euros. 75

76 Following the General Meeting called to approve the Annual Report 2003, 13,200 new options will be exercisable, with the same number exercisable in Based on the arithmetical average of the reference prices achieved by Acotel Group stock during the month of January 2004 (17.22 euros), there is no overall latent benefit in favor of the beneficiaries. Each employee beneficiary of the plan loses all rights if his employment is terminated by voluntary resignation or dismissal on justified grounds, with the result that all the options allocated to him and not yet exercised shall be considered immediately and automatically cancelled. Such employee will have no entitlement to any kind of indemnity or compensation. 5.5 OTHER INFORMATION As of December 31, 2003 Acotel Group S.p.A. owns 28,320 of its own shares purchased in accordance with the mandate granted by the General Meeting of April 24, The shares, which are recorded at a value of 498 thousand euros, equal to an average unit cost of euros, have a nominal value of 7, euros and represent 0.68% of the share capital. An appropriate equity reserve of the same value has also been posted. 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 December 31, 2003 Acotel Group S.p.A. does not own shares or holdings in parent companies, either directly or through a trust company or proxy, nor did it buy or sell such shares or holdings during the period. As of December 31, 2003, no branch offices of the Company had been set up. 5.6 SUBSEQUENT EVENTS Reference should be made to the Director s Report on Operations for the Group, given that no events of sole significance to Acotel Group S.p.A. have taken place in early OPERATING OUTLOOK In the light of the above and as the Group s holding company, Acotel Group S.p.A. will continue to carry out its management role within the Group, providing the other companies with strategic guidelines, coordinating their activities and supplying operating and financial support. 76

77 5.8 PROPOSED DISTRIBUTION OF NET RESULT FOR THE PERIOD The Board of Directors proposes to carry forward the net loss of 891,705 euros for the year ended December 31,

78 BALANCE SHEET AND INCOME STATEMENT 78

79 BALANCE SHEET ASSETS (in euros) December 31, 2003 December 31, 2003 Unpaid, called-up share capital due from shareholders - - Fixed assets: Intangible assets: - incorporation and expansion costs 3,198 6,397 - industrial patents and intellectual property rights 141,178 46,466 - concessions, licenses, trademarks and similar rights 2, other 45,759 46,006 Total 192,547 98,869 Tangible assets: - plant and machinery 191, ,081 - industrial and commercial equipment 142, ,182 - other 91,096 97,671 Total 424, ,934 Long-term financial assets: - equity investments in:. subsidiaries 15,431,362 14,356,565 - accounts receivable: subsidiaries: falling due beyond 12 months 14,926,792 16,779,174. from others: falling due beyond 12 months 73, treasury stock 497,745 - Total 30,929,374 31,135,739 Total fixed assets 31,546,258 31,638,542 Current assets: Inventories Accounts receivable: - trade: falling due within 12 months 19,381 1,214,477 - subsidiaries: loans: falling due within 12 months 1,481, ,657 other: falling due within 12 months falling due beyond 12 months 9,415,197 10,744,053 - associated companies: falling due within 12 months - 113,335 - other: falling due within 12 months 1,692,469 15,544,133 falling due beyond 12 months 1,654 1,654 Total 12,610,686 27,983,309 Marketable securities: - other securities 9,083,151 2,065,000 Total 9,083,151 2,065,000 Cash at bank and on hand: - bank and post office deposits 13,887,997 8,588,492 - cash and notes on hand 1, Total 13,889,448 8,588,898 Total current assets 35,583,285 38,637,207 Accrued income and prepaid expenses - other 67, ,173 TOTAL ASSETS 67,197,031 70,689,922 79

80 BALANCE SHEET LIABILITIES AND SHAREHOLDERS' EQUITY (in euros) December 31, 2003 December 31, 2002 Shareholders' equity: Share capital 1,084,200 1,084,200 Share premium reserve 55,106,013 55,106,013 Revaluation reserve - - Legal reserve 212, ,606 Reserve for treasury stock 497,745 - Statutory reserves - - Other reserves: Retained earnings (accumulated losses) 211,262 1,326,517 Net income (loss) for the period (891,705) 1,105,779 Total 56,220,410 58,780,115 Allowances for risks and charges other 100,199 1,020,655 Total 100,199 1,020,655 Employee severance indemnities 232, ,449 Accounts payable: - banks: payable within 12 months 3,454 4,187 - trade payable within 12 months 791, ,375 - subsidiaries - taxes payable within 12 months 8,812,376 9,178,112 payable within 12 months 546, ,313 - social security agencies - other payable within 12 months 149, ,319 payable within 12 months 315, ,397 Total 10,619,429 10,739,703 Accrued expenses and deferred income - other 24,620 - TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 67,197,031 70,689,922 80

81 MEMORANDUM ACCOUNTS (in euros) December 31, 2003 December 31, 2002 General guarantees granted - Guarantees in favor of others 224, ,003 Other memorandum accounts - Third party assets held by the Company 6,197,483 6,197,483 TOTAL MEMORANDUM ACCOUNTS 6,421,844 6,436,486 81

82 INCOME STATEMENT (in euros) Total revenues: - revenues from sales and services 6,588,632 8,373,029 - other revenues and income 324, ,516 Total 6,912,670 8,679,545 Operating costs: - raw and ancillary materials and consumables 21,871 39,657 - service costs 1,642,211 1,848,168 - lease expense 658, ,160 - labor costs: 2,091,228 1,824,123 wages and salaries 1,433,038 1,272,237 social security contributions 502, ,700 employee severance indemnities 109,124 89,887 other 46,562 18,299 - amortization, depreciation and write-downs 2,241, ,023 amortization of intangible fixed assets 110,462 52,192 depreciation of tangible fixed assets 210, ,831 provisions for doubtful accounts 1,919, other expenses 113,427 37,880 Total 6,768,024 4,592,011 Operating income 144,646 4,087,534 Financial income and expense: - other financial income: from subsidiaries 1,531, ,880 from marketable securities 156, ,464 other: from subsidiaries 496,618 73,649 from others 334, ,057 - expense to subsidiaries (1,965,290) - to others (193,937) (2,252,327) Financial income (expense), net 360,136 (1,029,277) Adjustments to financial assets: - write-downs of equity investments (1,362,156) (1,250,007) Adjustments to financial assets (1,362,156) (1,250,007) Extraordinary income and expense: - income 105,424 37,924 - expense (256,769) (738,441) Extraordinary income (expense), net (151,345) (700,517) Income (loss) before taxes (1,008,719) 1,107,733 - income taxes 117,014 (1,954) Net income (loss) for the period (891,705) 1,105,779 82

83 NOTES TO THE PARENT COMPANY S FINANCIAL STATEMENTS 83

84 6.1 FORM AND CONTENT The financial statements as of December 31, 2003 were drawn up in accordance with the regulations laid down in Legislative Decree no. 127/1991, integrated by the accounting principles established by the Italian Accounting Profession. The Balance Sheet and Income Statement are based on the formats established by articles 2424 and 2425 of the Italian Civil Code. All the supplementary information deemed necessary to give a true and fair view is also supplied, even if not required by specific provisions of the law. 6.2 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, regardless of the amortization already charged. The incorporation and expansion costs are amortized on a straight-line basis over five years, while capitalized costs directly related to the stock market listing were amortized over two years (in 2000 and 2001). 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. These costs are amortized over three years, in view of the rapid technological deterioration to which they can be subject. Tangible assets These are stated at purchase price or production cost, including 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 half for the first year, in accordance with Italian law. Ordinary 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 asset are as follows: 84

85 ICT platform 50% Specific plant 20% Other plant and machinery 20% Computers 20% Vehicles Furniture, fixtures and fittings 25% 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. Long-term financial assets Equity investments are stated at cost, the value stated in the financial statements is determined on the basis of the purchase or subscription cost. This cost is reduced in the event of any permanent impairment in value, when the investments have sustained losses and no profit is forecast for the immediate future that might absorb the losses incurred. Should the write-down exceed the value of the investment, where the investee company reports a capital deficit, the excess is posted in the financial statements via provisions of the same amount to an allowance for risks and charges. The original value is reinstated in future periods, should the reasons for the write-down no longer apply. Long-term accounts receivable are entered at their estimated realizable value. Accounts receivable Accounts receivable are entered at nominal value, reduced by provisions for doubtful accounts in order to reflect their estimated realizable value. 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, after conversion into euros at closing exchange rates where necessary. 85

86 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, and in compliance with the regulations in force. It corresponds to the effective commitment to each employee at December 31, 2003, net of any advances paid. Taxes Income taxes are recorded on the basis of estimated taxable income in accordance with Italian law, taking into account applicable exemptions and tax credits due. In addition, deferred tax assets and liabilities are recognized on the basis of temporary differences between the carrying value of assets or liabilities and their tax base. Deferred tax assets are recorded subject to verification of their recoverability. Accounts payable These are stated at nominal value. Receivables and payables in foreign currency Receivables and payables denominated in foreign currency are translated at exchange rates on the date of the original transaction and adjusted on the basis of closing exchange rates. Exchange rate differences resulting from the adjustment are charged to the Income Statement. Revenues These are recognized in accordance with the prudence and accruals principles. Revenues relating to the services rendered are recognized on the basis of the services effectively performed during the period. Revenues relating to the sale of software licenses are recognized at the moment the transfer of title takes place. Revenues relating to the design, production and installation of electronic equipment are recognized at the moment of completion 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. 86

87 6.3 NOTES TO THE BALANCE SHEET ASSETS FIXED ASSETS Intangible assets Details of the intangible assets as of December 31, 2003 are as follows: (in euros) Historical cost Accumulated amortization Net value at Net value at incorporation and expansion costs 4,715,258 (4,712,060) 3,198 6,397 industrial patents and intellectual property rights 287,925 (146,747) 141,178 46,466 concessions, licenses, trademarks and similar rights 3,617 (1,205) 2,412 - other 77,842 (32,083) 45,759 46,006 Total 5,084,642 (4,892,095) 192,547 98,869 The item Incorporation and expansion costs includes the cost of the Company s stock market listing in Industrial patents and intellectual property rights consist of the specific software purchased from third parties and used by the Group in the provision of computerized services and for its internal information system. Other intangible assets include leasehold improvements to the building where the Company s headquarters are located. 87

88 Tangible assets Details of tangible assets are as follows: (in euros) Historical cost Allowances for depreciation Net value at Net value at Plant and machinery 829,536 (638,467) 191, ,081 Industrial equipment 264,299 (122,127) 142, ,182 Other 136,991 (45,895) 91,096 97,671 Total 1,230,826 (806,489) 424, ,934 During the year no tangible asset was the subject of disposal, revaluation or write-down. Long-term financial assets The following table gives the information required by articles 2426 and 2427 of the Italian Civil Code. (in thousands of euros) Shareholders' equity 12/31/03 Net income (loss) 2003 name registered office share capital total amount Company's interest total amount Company's interest Group's interest Book value Difference (A) (B) (A) - (B) Acotel S.p.A. Rome - Via della Valle dei Fontanili 29 13,000 12,943 12, % 12, (a) AEM-Advanced Electronic Microsystems S.p.A. Rome - Via della Valle dei Fontanili 29/ (576) (570) 99% 1,549 (1,427) Acomedia S.r.l. Rome - Via della Valle dei Fontanili % Acotel Participations S.A. Luxembourg - 8 Bolulevard Royal 1,200 1,135 1, % 1,200 (65) Millenium Luxembourg S.A. Luxembourg - 8 Bolulevard Royal (128) (128) 100% - - Publimedia S.A. Luxembourg - 8 Bolulevard Royal (8) (8) 100.0% - (100) (b) 15,431 (a) This percentage is obtained by adding the 98% of the share capital held directly by Acotel Group S.p.A. and the 1.92% held via the subsidiary, AEM S.p.A (b) The Parent Company has made provisions for capital losses. 88

89 As of December 31, 2003 the Company holds equity investments in subsidiaries amounting to 15,431,362 euros, compared with 14,356,565 euros at the end of The change during the period is due to the recapitalization of Acotel Participations (1,200 thousand euros) and write-downs of the equity investments in Publimedia (39 thousand euros) and Millenium Luxembourg (86 thousand euros) to bring the book value into line with the subsidiaries shareholders equity to reflect what is other than a temporary impairment in value. The following table shows the effect on Acotel Group s Balance Sheet and Income Statement of the recapitalization of Acotel Participations. (in euros) Acotel Participations Shareholders' equity of Acotel Participations as of December 15, 2003 (2,157,409) Share capital to be recapitalized (1,200,000) Use of accounts receivable due to Acotel Group (3,357,409) Acotel Group Use of accounts receivable due from Acotel Participations 3,357,409 Use of provisions for risks made in ,020,655 Capitalization of cost of the equity investment 1,200,000 Write-down of equity investments 1,136,754 No other write-downs of equity investments in subsidiaries were carried out, as the negative differences between the book value and the corresponding interest in shareholders equity are due to temporary operating losses. The value of the equity investment in AEM S.p.A. was not written down in view of the results projected in the three-year business plan drawn up by the subsidiary s directors. All the subsidiaries closed their fiscal year on December 31, 2003 and the respective accounts had been approved by the various boards of directors at the time of preparation of the financial statements of Acotel Group S.p.A.. Financial receivables due from subsidiaries, totaling 14,926,792 euros, represent the loans granted to Acotel Participations and used by this company to acquire equity investments and finance the companies acquired. Given the use to which the finance was put, and the fact that the investments are not expected to be sold in the short term, it was considered appropriate to classify the relevant sum among long-term financial assets. The above loans are subject to annual interest indexed to 6-month euro and dollar LIBOR rates, according to whether the loan was issued in euros or dollars. Such interest accrues each calendar semester. The same item totaled 16,779,174 euros in 2002 and the difference is due to the method of the above-mentioned recapitalization of the subsidiary, Acotel Participations. 89

90 CURRENT ASSETS Trade receivables This item breaks down as follows as of December 31, 2003: (in euros) Trade receivables 2,003,148 1,278, ,894 Provisions for doubtful accounts (1,983,767) (63,777) (1,919,990) Total 19,381 1,214,477 (1,195,096) Provisions for doubtful accounts are made in order to reflect the estimated realizable value. As mentioned elsewhere in this report, provisions for doubtful accounts reflect the effects of the decision to fully write down accounts receivable of 1,984 thousand euros due from Voinoi S.p.A. All other trade receivable fall due within 12 months. Receivables due from subsidiaries This item breaks down as follows: (euro) Financial receivables 1,481, ,657 1,116,328 Other 9,415,197 10,744,053 (1,328,856) Total 10,897,182 11,109,710 (212,528) Financial receivables refer to short-term loans granted to Group companies in order to finance operations. The loans granted are subject to annual interest indexed to the 6-month euro and dollar LIBOR rates, according to whether the loan was issued in euros or dollars. Such interest accrues each calendar semester. Other amounts due from subsidiaries primarily include 6,068,631 euros due from Acotel S.p.A. in return for services provided via the ICT platform, used by the subsidiary in its role as service provider. The remaining portion regards charges for overhead and administrative costs for 2003 passed on to subsidiaries, totaling 313,206 euros, and amounts already posted at the end of A table showing details of intercompany transactions is included in the Directors Report on Operations. Other receivables The following table shows the main items making up the balance: 90

91 (in euros) Banks in the process of collection - 14,469,999 (14,469,999) Income tax credits 785, , ,367 Deferred tax assets 743,600 41, ,434 Other 163,298 74,538 88,760 Total other receivables falling due within 12 months 1,692,469 15,169,907 (13,477,438) Guarantee deposits paid to suppliers receivable beyond 12 months 1,654 1,654 - Total other receivables 1,694,123 15,171,561 (13,477,438) Income taxes credits reflect the fact that IRPEG advances paid exceeded the income tax effectively due. This was positively influenced by the relief provided by Dual Income Tax legislation. Deferred tax assets derive from costs expensed in the period but deductible for tax purposes in the following year. Other receivables essentially consist of advances to suppliers. Marketable securities This item, amounting to 9,038,151 euros, reflects short-term investments of liquidity in bonds issued by Banca Nazionale del Lavoro (5,065 thousand euros) and Monte dei Paschi di Siena (2,000 thousand euros), and insurance products issued by Monte Paschi Vita. Such investments generate returns of 2.29%, 2.18% and 1.88%, respectively. Cash at bank and on hand This item includes bank deposits of 13,887,997 euros and cash and notes on hand totaling 1,451 euros. Bank deposits represent the balances of current accounts as of December 31, At the end of the previous year the above items amounted to 8,588,492 euros and 406 euros, respectively. ACCRUED INCOME AND PREPAID EXPENSES (in euros) Accrued income 54, ,370 (352,104) Prepaid expenses 13,222 7,803 5,419 Total 67, ,173 (346,685) 91

92 Accrued income regards coupon interest on bonds held by the Company. Prepaid expenses include prepayments of insurance, stamp duty and other expenses pertaining to the next year LIABILITIES AND SHAREHOLDERS EQUITY SHAREHOLDERS EQUITY Shareholders equity As of December 31, 2003 the paid-up share capital of Acotel Group S.p.A. consisted of 4,170,000 ordinary shares with a nominal value of 0.26 euros each. The share premium reserve and the legal reserve amount to 55,106,013 euros and 212,895 euros, respectively. The reserve for treasury stock represents the value of the own shares held by the Company at the end of the period and posted to long-term financial assets. Retained earnings total 211,262 euros. In application of the resolution approved by the General Meeting of Acotel Group S.p.A. s shareholders called to approve the Annual Report 2002, the Company paid total dividends of 1,668,000 euros during The statement of movements in shareholders equity is shown below. (thousands of euros) Share capital Share premium reserve Legal reserve Reserve for treasury stock Reserves and retained earnings Net income for the period TOTAL Balances at December 31, ,084 55, ,326 1,106 58,780 Appropriation of net income for ,051 (1,106) - Payment of dividends on May 29, 2003 (1,668) (1,668) Purchase of own shares 498 (498) - Loss for the period (892) (892) Balances at December 31, ,084 55, (892) 56,220 92

93 ALLOWANCES FOR RISKS AND CHARGES Allowances for risks and charges amount to 100,199 euros following the reduction of 1,020,665 euros after the release of the provisions made last year in order to recapitalize the subsidiary, Acotel Participations, and the increase in provisions to fund the recapitalization of Publimedia. EMPLOYEE SEVERANCE INDEMNITIES The total balance includes the amounts due as severance indemnities, net of advances already paid to employees. The following table shows movements during the period. (in euros) Opening balance 149,449 78,221 Provisions 109,124 89,887 Releases (26,200) (18,659) Closing balance 232, ,449 ACCOUNTS PAYABLE Payables due to subsidiaries Amounts due to subsidiaries total 8,812,376 euros (as of December 31, 2002 the figure was 9,178,112 euros). A large part of this item, amounting to 8,779,767 euros, relates to the payable due to Acotel S.p.A. as unpaid, called-up share capital for the capital increase, which enabled Acotel Group S.p.A. to acquire 98% of the subsidiary in The remaining amount regards trade payables, primarily represented by charges for administrative costs. A table showing details of intercompany transactions is included in the Directors Report on Operations Trade This item, which amounts to 791,954 euros, compared with 726,375 euros at the end of 2002, is entirely made up of trade payables due within 12 months. 93

94 Taxes The item is made up as follows: (in euros) Income tax payables - 138,054 (138,054) VAT payable 440, , ,665 Employee witholding taxes 65,005 50,984 14,021 Other 41,053 41,053 Total 546, , ,685 As of December 31, 2003 the Company reports taxes payable of 546,998 euros, including 440,940 euros of VAT due. The above table does not show income tax payables for 2003 in that such taxes have been offset by the advances paid during the year. Employee withholding taxes refer to withholding taxes due to the tax authorities on salaries, wages and remuneration paid to employees and consultants. Other taxes include the cost of the tax amnesty introduced by Law 350 of December 24, Social security agencies As of December 31, 2003, this item amounts to 149,495 euros and regards social security contributions to be paid on wages and remuneration paid to employees and consultants. The same item totaled 144,319 euros at the end of Other The item is made up as follows: (in euros) Due to employees 226, ,813 (19,277) Due to Directors 18,405-18,405 Other 70,211 46,584 23,627 Total 315, ,397 22,755 Amounts payable to employees relate to wages and salaries, bonuses and outstanding vacation pay. 94

95 6.3.3 MEMORANDUM ACCOUNTS The memorandum accounts consist of: - the general guarantee, with a value of 224,361 euros (originally issued with a value of 174,797 euros), in favor of the owner of the building where the Company operates; a general guarantee of 49,564 euros in favor of the subsidiary, Acotel France, to guarantee the lease contract entered into by the company; - third party assets include 6,197,483 euros relating to the ICT equipment supplied to Voinoi, but which the customer has requested initially to install on the premises of Acotel Group S.p.A., whilst the customer s own facilities designed to house the equipment are being prepared. 95

96 6.4 NOTES TO THE INCOME STATEMENT TOTAL REVENUES Total revenues for the period under consideration were 6,912,670 euros. Such amount breaks down as follows: (in euros) 2003 % 2002 % Revenues from the sale of goods and services 6,588, % 8,373, % Other revenues and income 324, % 306, % Total 6,912, % 8,679, % Revenues from sales of goods and services include income deriving from the provision of the data management service effected via the ICT platform to the subsidiary, Acotel S.p.A., in relation to its activity as an application service provider, and income generated by the development of software applications. As previously mentioned in other sections of this report, the relevant amounts deriving from the existing contract with Voinoi, an Acea Group company, have been prudently fully written down given that agreement has yet to be reached regarding the future provision of support services. Business segment analysis (in euros) 2003 % 2002 % Services to Service Providers 6,068, % 7,499, % Development of software applications 520, % 873, % 6,588, % 8,373, % Margins by business segment are not given as there were no important differences between the activities carried out by the Company, in terms of the resources employed. In fact, a large part of the costs incurred concerned, without distinction, the services rendered, and therefore the revenues generated. In particular, labor costs, consultants fees and technological resources were used for the joint development of all the various businesses. Revenues were earned entirely in Italy during Other revenues and income totaled 324,038 euros and include amounts charged to the subsidiaries, AEM, Acotel, Acomedia and E-Seed for the administrative services supplied and their share of lease expense and building running costs incurred. 96

97 OPERATING COSTS Materials, service costs and lease expense This item includes the following costs: (in euros) raw and ancillary materials and consumables 21,871 39,657 (17,786) service costs 1,642,211 1,848,168 (205,957) lease expense 658, , ,896 other 113,427 37,880 75,547 Total 2,435,565 2,475,865 (40,300) The costs of raw and ancillary materials and consumables mainly relate to the purchase of the materials and components used in software development, consumables and stationery. Service costs of 1,642 thousand euros fell 206 thousand euros with respect to The most significant components include administrative, accounting and legal consulting fees of 245 thousand euros, promotional and advertising expenditure, amounting to 213 thousand euros, designed to enhance the Group s visibility in national and international markets, travel and transport expenses of 201 thousand euros linked to commercial and technical initiatives, and 178 thousand euros for land-based and satellite connections. This item also includes the cost of managing the building from which the Group s Italian companies operate, totaling 188 thousand euros, which are in part recovered from other Group companies. Service costs also include the remuneration of Directors as shown in the following table, which gives the information required by CONSOB resolution no Name Position Period in which position held Expiry of term of office Remuneration for position held in Parent Company Non-cash bonuses Bonuses and other incentives Other remuneration Claudio Carnevale Chairman / CEO 01/01/03-12/31/03 04/30/ , Francesco Ago Director 01/01/03-12/31/03 04/30/2006 6, Margherita Argenziano Director 01/01/03-12/31/03 04/30/2006 6, Luca De Rita Director 04/30/03-12/31/03 04/30/2006 6, , Giovanni Galoppi Director 04/30/03-12/31/03 04/30/2006 6, Berardino Libonati Director 01/01/03-12/31/03 04/30/2006 6, Andrea Morante Director 01/01/03-12/31/03 04/30/2006 6, Antonio Mastrangelo Chairman Board of Stat. Aud. 01/01/03-12/31/03 04/30/ , Paola Piscopello Statutory Auditor 01/01/03-04/29/03-3, Umbero Previti Flesca Statutory Auditor 01/01/03-12/31/03 04/30/ , Maurizio Salimei Statutory Auditor 04/30/03-12/31/03 04/30/2006 6, The other remuneration paid to the Director, Luca De Rita, regard payment for his position within the Company where he is Administrative and Finance Director. 97

98 It should be noted that the Director, Giovanni Galoppi, acted as the Company s legal council in return for fees 63,036 euros. Lease expense includes rental costs related to the Rome-based building in which the Group s Italian companies operate. The annual cost of 576 thousand euros is partly recovered from the other companies in proportion to the surface areas effectively used by each one. Other operating costs include 61 thousand euros relating to the cost of the ambulance, complete with all the necessary modern emergency equipment, donated to Rome s 118 Service. Labor costs Labor costs relate to: (in euros) Wages and salaries 1,433,038 1,272, ,801 Social security contributions 502, ,700 58,804 Employee severance indemnities 109,124 89,887 19,237 Other costs 46,562 18,299 28,263 Total 2,091,228 1,824, ,105 The following table shows the number of staff, by category: Average 2003 Average 2002 Managers Supervisors White-collar Total The headcount continued to grow during 2003 as new technical and marketing staff were recruited in order to meet the needs of the Group s expanding businesses. Amortization, depreciation and write-downs Amortization of intangible assets amounted to 110,462 euros (48,836 euros in 2002) and primarily refers to software licenses owned by the Company. Depreciation of tangible assets, totaling 210,778 euros (243,187 euros in 2002), mainly regards the ICT platform, which was depreciated by 126,733 euros. The residual amount regards computers, furniture and fittings and vehicles. 98

99 Provisions for doubtful accounts reflect the effect, after the recovery of provisions set aside in 2002, of the full write-down of accounts receivable from Voinoi. Other operating costs Other operating costs totaling 113,427 euros, compared with the 37,880 euros of 2002, include 61,433 euros relating to the cost of the ambulance, complete with all the necessary modern emergency equipment, donated to Rome s 118 Service, non-income taxes of 26,200 euros, and membership dues totaling 18,776 euros. FINANCIAL INCOME AND EXPENSE Net financial income amounts to 360,136 euros, compared with net expense of 1,029,277 euros in Financial income includes the dividend distributed by the subsidiary, Acotel, totaling 1,531,250 euros including the tax credit, income from the short-term investment of liquidity, amounting to 490,301 euros, and accrued interest on loans to other Group companies, totaling 496,618 euros. Such interest is calculated on the basis of market rates (LIBOR plus a spread of 0.50%). Financial expense was influenced by foreign exchange transactions, which generated a net loss of 2,058,771 euros due to the translation of bank current accounts and financial receivables denominated in dollars at closing rates, and bank interest and charges of 99,262 euros. ADJUSTMENTS TO FINANCIAL ASSETS Net write-downs of 1,362,156 euros reflect the effects of the recapitalization of the subsidiary, Acotel Participations, in December (1,136,754 euros), and the write-downs of equity investments in Publimedia and Millenium Luxembourg, totaling 139,049 and 86,353 euros, respectively, in order to bring the book values into line with the value of shareholders equity. EXTRAORDINARY INCOME AND EXPENSE Net extraordinary expense amounted to 151,345 euros. Extraordinary income was generated from settlements with suppliers, totaling 60,978 euros, and from other minor items. Extraordinary expense includes 111,582 euros representing the cost of the tax amnesties introduced by Law 289 of December 27, 2002 and Law 350 of December 24, 2003, which Acotel Group S.p.a. took and intends to take advantage of, 14,607 euros relating to taxes linked to the regulation of Controlled Foreign Companies as applied to the Lebanese subsidiary, Millenium Software, and expenses accruing in previous years. TAXES Income taxes for 2003 amount to 20,834 euros for IRPEG and 187,869 euros for IRAP. Tax expense for 2002 was 152,938 euros for IRPEG and 252,422 euros for IRAP. 99

100 The Company also reports deferred tax assets totaling 325,717 euros deriving from costs expensed in the period but deductible for tax purposes in the following year. 100

101 ANNEXES TO THE PARENT COMPANY S FINANCIAL STATEMENTS 101

102 102

103 103

104 104

105 Declaration pursuant to Legislative Decree n 196/2003 The Company has opted to take advantage of the provisions of the Privacy Authority's communication of March 23, 2004 and, therefore, expects to finalise to satisfy requirements regarding the "Data Protection Policy Document" within the deadline of June 30,

106 REPORT OF THE BOARD OF STATUTORY AUDITORS TO THE GENERAL MEETING OF SHAREHOLDERS 106

107 107

108 108

109 109

110 110

111 REPORTS OF THE INDIPENDENT AUDITORS 111

112 112

113 113