Consolidated Financial Statements of the Freedomland Group as at June 30, 2002

Transcription

1 Freedomland ITN Spa Freedomland Internet Television Network S.p.A. Registered office: Milan, Via Manfredonia n, Milano Share capital Euro 7,493, fully paid-in Company s Register Office Milan no /1999 Register no VAT no./tax no.: Consolidated Financial Statements of the Freedomland Group as at June 30, 2002 Directors' Report on operations Company Year 2001/2002 1

2 Freedomland ITN S.p.A. Freedomland Internet Television Network S.p.A. Registered office: Milan, Via Manfredonia n, Milano Share capital Euro 7,493, fully paid-in Company s Register Office Milan no /1999 Register no VAT no./tax no.: Directors Report on operations of the consolidated financial statements of the Freedomland Group As at June 30, 2002 Relazione sulla gestione Consolidato Esercizio 2001/2002 1

3 Freedomland ITN S.p.A. INDEX 1. The Freedomland Group 2. Introduction 3. Factors that have influenced the operations in the period 4. Comments on the results of the Group 5. Corporate Governance 6. Transactions with subsidiaries, associate and related companies 7. Treasury shares 8. Investments held by directors, statutory auditors and general manager stock option plan 9. Significant events subsequent to the year-end and future prospects 10. Future prospects Relazione sulla gestione Consolidato Esercizio 2001/2002 2

4 Freedomland ITN S.p.A. 1. The Freedomland Group The Group s corporate structure is shown in the diagram below. Relazione sulla gestione Consolidato Esercizio 2001/2002 3

5 Freedomland ITN S.p.A. 2. Introduction The events influencing the Parent Company in the year ended June 30, 2002 also conditioned the activity of the foreign subsidiaries. The restructuring activity, that for the large part involved the operating subsidiaries in Spain, and in Germany which saw the complete interruption of the marketing activity of the product with the business to consumer activity concentrating on the block disposal of the inventory of set top boxes; resulted in a substantial reduction in costs. With regard to the subsidiary operating in the United Kingdom, the subsidiary continued its operations with the previous model although also undertaking operations of block selling of set-top-boxes to specific communities and requirements. In compliance with a Board resolution the foreign corporate structure has been simplified with the liquidation of one of the two Luxembourg sub-holdings, Freedomland-ITN S.A. The corporate structure is presently as per the diagram shown above. The Board of Directors of the Parent Company also availed of the assistance of a specialised company, KPMG Corporate Finance, who conducted a verification of the costs connected to the liquidation of the foreign subsidiaries and an analysis of the feasibility of alternative options. This activity was completed in September On the basis of the results of this verification and considering the operating implications of the New Strategic Development Plan that focuses the activity of the company on the new business lines of: - creation and production of multimedia video content and, thereafter interactive - supply of applications and application services (multimedia and interactive) for the management of contents for their transmission on different communication channels, confirming the Group mission to become the leading operator, first in Italy and then in Europe in these fields, the new Board resolved the re-capitalisation of the operating subsidiaries, largely based on loans already paid or through reduced integrations. Finally, it should be underlined that the events affecting the company largely limited the interventions to the sole tasks of restructuring and containment of the costs and that, with the probable change in the shareholder base due to the Public Offer to Purchase in course, wider operational choices will be the subject for analysis by the next management. 3. Factors that have influenced the operations in the period Below is summarised the events that had the greatest influence on recent operations, that is the Public Offer to Purchase. With a communication dated June 24, 2002, the company Interactive Group s.p.a. (hereafter Interactive ) transmitted to Freedomland and at the same time to the Market, a statement drawn up pursuant to Article 102 of the Legislative Decree of February 24, 1998, no.58 and Article 37 of the CONSOB Regulation of May 14, 1999 no.11971, containing the essential elements of a voluntary Public Offer to Purchase the entire share capital of Freedomland. With the decision of July 10, 2002, CONSOB granted the authorisation for the publication of the Offer Document pre-announced by the Offerer. Relazione sulla gestione Consolidato Esercizio 2001/2002 4

6 Freedomland ITN S.p.A. On July 17, 2002, the Parent Company publicly issued a statement pursuant to Article 103, of the T.U.F. and Article 39 of the aforesaid Regulation, containing the official position of the Company in relation to the Public Offer. On August 1, 2002, CONSOB informed the Company that it had given authorisation in accordance with Article 102, of the T.U.F., to the publication of the Supplement to the Offer Document in relation to the Public Offer. On August 6, 2002 in accordance with Article 103 of the T.U.F the Company publicly made its position known in relation to the aforesaid Supplement to the Offer Document. On August 8, 2002, Consob informed the Company in accordance with Article 7 of the Law no. 241 of August 7, 1990, that it had commenced as of August 1, 2002 an administration procedure relating to the Public Offer to Purchase launched, pursuant to Article 102 of the Legislative Decree of February 24, 1998, no.58, by the Company Content S.r.l.. With the decision of August 14, 2002, CONSOB granted the authorisation for the publication of the Offer Document pre-announced by the Offerer Content S.r.l.. On August 21, 2002, in accordance with Article 103, of the T.U.F., the company publicly made known its position in relation to the aforesaid Supplement Offer Document. With a communication dated September 5, 2002 Content transmitted to the market and to the company an integration to the Offer Document in accordance with Article 43 of the Consob Regulation, containing an integration in relation to the offer price, increased to Euro from Euro and the information of new agreements between the offerer and the majority shareholder of the company Mr. Degiovanni. On September 11, 2002, in accordance with Article 103, of the T.U.F., the company publicly made known its position in relation to the aforesaid integrations. Relazione sulla gestione Consolidato Esercizio 2001/2002 5

7 Freedomland ITN S.p.A. 4. Comments on the results of the Group A summary of the economic reports of the Group are shown below: INCOME STATEMENT Euro/000 June 30, 2002 June 30, months 12 months Revenues from sales and services 6,153 6,964 Other revenues and income Total revenues 6,694 7,056 Costs of production 24,578 49,314 Gross Operating Margin (17,884) (42,258) Depreciation, amortization and write-downs 7,476 72,725 Operating Result (25,360) (114,983) Net financial income (charges) 10,465 8,916 Adjustments to the values of financial assets (114) (65) Extraordinary income (charges) 3, Result before taxes (11,952) (105,950) Deferred taxes (4,608) Net result (11,952) (110,558) The decreasing trend in normal operating sales reflects the block on the commercial activity relating to b2c since September It is recalled, with regard to this, that the sales agent I@T Italia informally communicated that it had suspended the distribution of Freedomland services since August The first intervention, in implementation of the new business model, related to reorganisation of the distribution methods of the service; firstly, with the discontinuance of its marketing to the end user by means of the closure of the Organised Distribution to retailers, typically the foreboding of significant marketing and advertising costs uncertain to be recovered; secondly, with the abandonment of the subscription model for services, due to the extremely onerous management process, as well as the high inherent level of bad debts. The decision to re-position the outlet market for the services offered by the Company from b2c (business to consumer) to b2b (business to business) resulted in a substantial company reorganisation, with a reduction in the workforce, that decreased from 100 employees, including temporary workers as of October 2001, to 45 employees at the time of the drawing up of this report; the downsizing of the workforce also took place through trade union negotiations. Relazione sulla gestione Consolidato Esercizio 2001/2002 6

8 Freedomland ITN S.p.A. The Company has also adopted the new company organisational chart that provides for the direct reporting to the Managing Director of the General Operations Office, the Finance, Administration and Control Office and Investor Relations. Similarly to the Parent Company, the foreign subsidiaries were subject to restructuring: firstly the Group structure was redefined through the liquidation of one of the two Luxembourgbased companies (Freedomland-ITN S.A.) and the allocation to the Parent Company of the investments in the operating branches, secondly by means of a significant reduction in the workforce and in operating costs. The current operating structure of the foreign subsidiaries, although reduced, permits the maintenance of a commercial presence in the respective markets for the new product lines. For the year ended June 30, 2002 the production and operating costs reduced by approximately 50% compared to the previous year and approximately 36% in the last quarter compared to the same period in the previous year, without substantial changes to the level of service provided to the clientele. Numerous supply contracts were re-negotiated, with the attainment of reductions ranging between 10 and 20%, and numerous out-of-court transactions have been settled with employees, consultants and professionals giving rise to costs amounting to approximately one million euro. Comparing the results of the year ended June 30, 2002 with those in the previous year, the largest savings have been obtained in the following expenditure items: expenses for the production of content and application services for the TV portal 62 % approximately; expenses for outsourcing services 48% approximately; personnel costs 15% approximately; marketing and advertising expenses 85% approximately. Mention should also be made of the result of the management of liquid funds, with the realisation of significant gains, as a consequence of the redemption of the fund units, that amounted to approximately Euro 5.6 million in the year, of which approximately Euro 0.3 million realised in the last quarter, and the satisfactory results of the current prudential management, which has resulted in the company avoiding the negative performances in the share and bond markets. The composition of revenues by geographical area is shown below: Euro/000 Italy Spain UK Germany Total July 1, June 30, 2002 Revenues form set-top boxes Subscriptions 4, ,737 Connection revenues Advertising E-Commerce Other Total 12 months 4, ,153 Relazione sulla gestione Consolidato Esercizio 2001/2002 7

9 Freedomland ITN S.p.A. Financial situation The following table shows the financial situation for the years under consideration:: CONSOLIDATED BALANCE SHEET Euro/000 June 30, 2002 June 30, 2001 Fixed assets Intangible assets 13,759 18,509 Tangible assets 1,709 4,818 Financial assets (a) Total fixed assets 15,785 23,644 Net working capital Inventory 1, Trade receivables 2,169 8,349 Other assets 15,410 14,899 Trade payables 10,865 14,831 Provision for risk and charges 362 3,230 Other liabilities 2,961 3,042 (b) Total working capital 4,907 2,393 (c) Net capital invested before employee leaving indemnity (a)+(b) 20,692 26,037 (d) Employee leaving indemnity (e) Net capital invested 20,405 25,761 (f) Net equity 219, ,406 (g) Net financial position 198, ,645 (h) Total source of financing (f)+(g) 20,405 25,761 G oing concern In the preparation of the present consolidated financial statements, as for the first half-year report for , consideration was made of the going concern of the business. With regard to this, reference was made to the application of article 2423 of the civil code, the accounting principles of the National Board of Accountants and in the absence of accounting principles laid down by this latter, by accounting principles issued by the International Accounting Standards Committee (IASC). T angible assets Set-up and expansion costs Quotation costs. The straight-line basis of amortization has not changed The quota of amortization is adequately covered by the financial returns generated by the liquidity deriving from the quotation. Relazione sulla gestione Consolidato Esercizio 2001/2002 8

10 Tangible assets Freedomland ITN S.p.A. With particular reference to the item Industrial and commercial equipment, consisting of Set top boxes held in the warehouse of the Company and held by customers on a gratuitous usage basis, it is recalled that the Board of Directors in office at June 30, 2001 deemed it necessary to effect a significant write-down of these assets, in compliance with that established by the International Accounting Principle IAS 36 (in absence of an Italian Accounting Principle ). The Company, based on the decision in relation to the change in commercial policy, that now provides for the sale of the Set Top Boxes in place of the formula subscription with free use, reclassified the Set Top Boxes to the item Inventory, maintaining the net book value at the quarter ending March 31, In addition, the full write-down has been made of the residual value of the Set Top Boxes returned by customers under subscription and classified within tangible assets. D eferred taxes Deferred taxes arise from the temporary timing variations in the fiscal taxable base. The deferred tax asset includes fiscal losses, presently matured and which can be indefinitely carried forward, based on fiscal legislation in force. In consideration of the events arising during the last quarter in the previous year and the consequential necessity to focus the projections from which there can be established, with reasonable certainty, the existence of taxable income sufficient to guarantee the fiscal benefit presently matured, in pursuant of Accounting Principle 25 (National Board for Accountants), the deferred tax asset continues not to be shown. The deferred tax assets, even if they are not recorded at the present moment, can however be written back to the assets the moment in which the reasons for their write-down no longer exist ( reasonable certainty ). The available liquidity at the end of the period is as follows: June 30, 2002 March 31,2002 December 31,2001 June 30, 2001 Financial assets Euro/000 Short-term financial receivables Medium/long term financial receivables Short-term investments 197, ,829 71,439 78,570 Cash and banks 6780,782 19,685 1, Time deposits 6,218 2, , ,876 Total financial assets 203, , , ,518 Financial liabilities Medium/long term financial payables (2,642) (3,131) (3,816) (5,162) Short -term financial payables (2,516) (2,710) (2,703) (2,711) Total financial liabilities (5,158) (5,841) (6,519) (7,873) Net financial position 198, , , ,645 Relazione sulla gestione Consolidato Esercizio 2001/2002 9

11 Freedomland ITN S.p.A. The above financial situation has resulted in the following effects on the income statement: June 30, 2002 June 30, 2001 Euro/000 Financial income Income from trading 5, Short term commercial paper 2,534 1,333 Interest income from banks 3,592 7,650 Other financial income Total financial income 11,910 9,665 Financial expenses lease financing (415) (546) Loss on trading (203) Write-down of securities in portfolio (54) Other (18) (5) Total financial expenses (690) (551) Net financial income (charge) 11,220 9,114 The net financial position of approximately Euro198.6 million (Euro million at June 30, 2001), compares with approximately Euro 197 million at March 31, 2002, showing an improvement in the trend of costs and the receipt of overdue receivables. The prudent management of the available liquidity continued during the year, through interbank deposits, time deposits and short-term Government bonds. The redemption of the quota in the mutual investment fund was completed, with a gain of approximately Euro 5.6 million. The average return of the available liquidity in the twelve months of the year was equal to approximately 3.66%, compared to an average Euribor at three months in the period of approximately 3.63%. The net financial position at the end of the period does not include an amount of approximately Euro 0.7 million relating to interest realised in the period, but not yet liquidated, on time deposits and securities. 5. Corporate Governance The Company adopted the Code of Self-Discipline of listed companies (hereinafter Code ), recommended by Borsa Italiana S.p.A. (amended version of July 2002) in compliance with the Instructions for the Regulations of the markets organised and managed by Borsa Italiana. For all further information reference should be made to the directors report on the operations of the Parent Company. 6. Transactions with subsidiaries, associated and related companies With reference to the disclosure required by Consob Communications No of February 20, 1997 and No of February 27, 1998 which deal with related party transactions among Group companies, the effects of such transactions on the consolidated balance sheet and income statement as at June 30, 2002 are presented below. Relazione sulla gestione Consolidato Esercizio 2001/

12 Freedomland ITN S.p.A. The effects of transactions between Freedomland ITN S.p.A. and its subsidiaries are shown in the financial statements and in the notes of the Parent Company and eliminated for the purposes of the consolidated financial statements. All of the transactions, including those between the Parent Company and its subsidiaries, and among subsidiaries, fall within the ordinary operations of the Group, and are carried out at arm s length and there are no transactions of an unusual or exceptional natures, or constituting a potential conflict of interests. In relation to the operations with related parties it is noted that the definition based on which operations are considered related parties has been taken from the international accounting principle (IAS 24) and from Article 11 of the Code. The Board of Director s also note that since the year a procedure is in place through which all operations (of commercial or financial nature) with related parties are subject to the prior control of the Audit Committee Below are shown the transactions with related companies at group level providing in two separate tables the income statement effects in the 12 months and the balance sheet positions at the period end. Company Revenues Cost Prior Year Prior Year Amounts in Euro/000 Sales Interests Purchases Commissions Over-accruals Under-accruals Related Parties I&T SpA Gruppo I@T Web Business Europe S.p.A Virgilio Degiovanni Editore S.r.l Total related parties , Company I&T S.p.A. Gruppo I@T WDC S.r.l Web business Europe S.p.A. Trade receivables "Other" receivables 3, Interest income Financial receivables Deposits (207) Trade payables (225) (314) (18) - Payables for commissions (4,552) (2,354) - - Total (858) (2,163) The Group I@T, after an internal rationalisation, has decided to discontinue its activities in the English and German markets; therefore, the distribution method to the final customer of the typical product of these organisations no longer has a strategic interest for the Group that interrupted the distribution agreement in force for these markets as well as for the Spanish market. In Germany and in the United Kingdom the respective subsidiaries reached an amicable transaction in relation to the receivables and payables with the payment of approximately GBP 10.2 thousand to the company I@T UK and approximately Euro 110 thousand to the company I@T GMBH, amounts for this latter relating to commissions on sales. With regard to Spain the subsidiary Freedomland Espana S.L. still has legal proceedings in course with I&T España relating to the payment of commission on contentious sales. Relazione sulla gestione Consolidato Esercizio 2001/

13 Freedomland ITN S.p.A. In relation to the company Web Business Europe S.p.A., previously Sportcentre.com S.p.A., following the execution by the Cassa di Risparmio of Bologna of a guarantee equal to Euro thousand given by the Parent Company to this latter on behalf of Web Business Europe, Freedomland has recorded a receivable for a similar amount. The guarantee is counter-guaranteed by a guarantee given in favour of Freedomland by the majority shareholder Virgilio Degiovanni and collectable since April 20, The receivable from this related company also includes an amount of approximately Euro thousand for a loan given to this latter by the Parent Company and for which a repayment schedule has been agreed; the payment of the instalments was interrupted with the payment due on August 31, Following this the Parent Company, on November 30, 2001 and on December 21, 2001, requested the payment of the guarantee given in its favour by the majority shareholder Virgilio Degiovanni in relation to Web Business Europe as guarantee for these receivables. Against a situation of continual non-payment the Parent Company, on March 27, 2002 and on June 3, 2002 brought a court action against the company Web Business Europe and Virgilio Degiovanni. Finally, it is mentioned, that with the prior approval of the Audit Committee a general contract agreement was concluded with Arcadia S.p.A., a company controlled by the family of the Managing Director Willy Burkhardt that, without minimal contractual obligations or other continuative commitments, provides for the provision of consulting services for data processing and information solutions. During the year a total amount of Euro 40 thousand was paid for consulting services. 7. Treasury shares The company or its subsidiaries do not hold any of its own shares, either through trust companies or through third parties. 8. Investments held by Directors, Statutory Auditors and General Manager stock option plan Reference should be made to the relative section in the Directors Report on operations of the Parent Company. 9. Significant events subsequent to the year end and future prospects The company communicated to the public on September 13, 2002 that the company Intertainer Inc. withdrew from the negotiations in course. The letter of intent provided, in fact, that the definitive and binding agreement should be stipulated within a defined period. The passivity rule of which Freedomland is subject to by law in consequence of the Public Offer to Purchase, results incompatible with the requirements of Intertainer to commence rapidly their activity in Europe and which prevented the reaching of an agreement within the necessary time frame. It should be noted that, following the transaction with Wind S.p.A. (formerly Infostrada), the Parent Company sub-entered into the management of the subscriptions. The verifications made evidenced, in addition to over the 27 thousand customers managed, positions with subscribers not processed by Wind due to the absence of certain formal requisites and Relazione sulla gestione Consolidato Esercizio 2001/

14 Freedomland ITN S.p.A. which over time were integrated. This resulted, commencing from July 2002, in an action by the Company towards the receipt of amounts matured. This action consisted in the emission of postal billings in the first instance at the end of June 2002 with due date for payment July 15, Due to the considerable aging of these receivables at the moment the Company took responsibly and in order to show in the income statement only income components realised and certain, using prudential criteria in the preparation of the financial statements, the revenues relating to the subscriptions are recorded in the income statement only on the receipt of the receivables matured. 10. Future prospects The future prospects, as already highlighted in the communications issued by this Board in relation to the Public Offer to Purchase, is strongly conditioned by the development plans that will be adopted by the new shareholders. The Board is not currently able to evaluate the integration of theses plans with the plan adopted by the Board as mentioned previously. The prolonged passivity rule phase (over 3 months) has in any case prevented the external development of the company through acquisitions of investments and corporate agreements, rendering impossible, at least in the short term, the attainment of the objectives of the development in turnover and presence in the market that the Board has set at the beginning of the plan. Milan, September 17, 2002 For the Board of Directors The President Relazione sulla gestione Consolidato Esercizio 2001/

15 Freedomland ITN S.p.A. Freedomland Internet Television Network S.p.A. Registered office: Milan, Via Manfredonia n, Milano Share capital Euro 7,493, fully paid-in Company s Register Office Milan no /1999 Register no VAT no./tax no.: Freedomland Group Consolidated Financial Statements as at June 30, 2002 Consolidated Financial Statements 2001/2002 1

16 Freedomland ITN S.p.A. BALANCE SHEET - ASSETS Amounts in Euro June 30, 2002 June 30, 2001 A) RECEIVABLES FOR CAPITAL TO BE PAID IN B) FIXED ASSETS I Intangible assets: 1) set-up and expansion costs 12,730 17,356 2) research, development and advertising costs 3) patents and right to use intellectual property ) Concessions, licenses, trademarks and similar rights ) Assets under construction and payments on account 48 7) Other Total 13,759 18,509 II Tangible assets: 2) plant and machinery 1, ) industrial and trade equipment 409 3,749 4) other assets Total 1,709 4,818 III Financial assets 1) Investments in: d) other companies ) Receivables: Due over 12 months: June 30, 2002 June 30, 2001 d) others 51 Total Total fixed assets 15,785 23,695 C) ACURRENT ASSETS June 30, 2002 June 30, 2001 I Inventory: 4) finished products and goods 1, Total 1, II Receivables: Due over 12 months: June 30, 2002 June 30, ) trade receivables 2,169 8,349 5) others ,638 13,286 Total ,807 21,635 III Current financial assets 6) other securities 197,056 78,570 Total 197,056 78,570 IV Cash and banks: 1) bank and postal accounts 6, ,668 3) cash and cash equivalent 1 1 Total 6, ,669 Total current assets 221, ,122 D) PREPAYMENTS AND ACCRUED INCOME Prepayments and accrued income 1,772 1,841 Total 1,772 1,841 TOTAL ASSETS 238, ,658 Consolidated Financial Statements 2001/2002 2

17 Freedomland ITN S.p.A. BALANCE SHEET - LIABILITIES Amounts in Euro June 30, 2002 June 30, 2001 A) SHAREHOLDERS' EQUITY: Of the Group: I Share capital 7,494 7,443 II Share premium reserve 223, ,791 g) Reserve for difference on translation 450 (186) VIII Retained earnings (losses) (31,084) IX Net profit (loss) for the year (11,952) (110,558) Total Group shareholders' equity 219, ,406 Total minority interest shareholders' equity Total shareholders' equity 219, ,406 B) RESERVES FOR RISKS AND CHARGES 3) other 362 3,230 Total 362 3,230 C) PROVISION FOR EMPLOYEE LEAVING INDEMNITY Due over 12 months: D) PAYABLES June 30, 2002 June 30, ) due to other financiers ,158 7,873 5) advances 211 6) trade payables 90 10,865 14,831 11) taxes payables ) due to social security authorities ) other payables 1,985 1,715 Total 2,732 5,162 18,482 25,173 E) ACCRUED LIABILITIES AND DEFERRED INCOME Accrued liabilities and deferred income Total TOTAL PAYABLES 238, ,658 MEMORANDUM ACCOUNTS June 30, 2002 June 30, 2001 A) Guarantees given: 1) to third parties: a) sureties 834 9,380 Total 834 9,380 B) Other memorandum accounts: 1) Leasing commitments 976 2,600 2) Third party assets held 57 Total 976 2,657 C) Guarantees received: 1) sureties 1,394 1,394 Total 1,394 1,394 Consolidated Financial Statements 2001/2002 3

18 Freedomland ITN S.p.A. INCOME STATEMENT Amounts in Euro June 30, 2002 June 30, 2002 A) (+) Value of production 1) revenues from sales and services 6,153 6,965 5) other revenues and income B) (-) Costs of production: Total 6,694 7,057 6) for raw materials, ancillary consumables and goods (225) (3,061) 7) services (13,219) (34,049) 8) use of third party assets (1,884) (1,770) 9) personnel: a) wages and salaries (5,079) (5,543) b) social security contributions (1,309) (1,614) c) employee leaving indemnity (192) (240) d) pension and similar costs (19) e) other costs (246) (624) 10) depreciation, amortization and write-downs: a) amortization of intangible assets (5,351) (8,033) b) depreciation of tangible assets (1,918) (13,633) c) other write-down of non-current assets (207) (51,059) d) write-down of receivables in current assets (738) (302) 11) changes in inventory of raw materials, ancillary consumables and goods (209) ) provisions for risks (362) (1,477) 13) other provisions (13) (9) 14) other operating costs (1,083) (779) Total (32,054) (122,040) (A - B) Difference between value of production and production costs (25,360) (114,983) C) Financial income and charges: 16) (+) Other financial income c) from securities under current assets which do not constitute equity investments 8,163 1,891 d) other income i) from third parties 3,747 7,888 17) (-) interest and other financial charges a) from third parties (1,445) (863) Total 10,465 8,916 D) Adjustment to the value of financial assets 19) (-) write-downs: a) of investments (60) c) from securities under current assets which do not constitute equity investments (54) (65) Total adjustments (114) (65) E) Extraordinary income (charges) 20) (+) extraordinary income: a) income 4, ) (-) extraordinary charges: a) charges (1,189) (274) Total extraordinary items 3, Profit (loss) before taxes (11,952) (105,950) 22) (-) deferred taxes: b) diferred taxes (4,608) 23) Total profit (loss) for the year (11,952) (110,558) Minority interest profit (loss) for the year Group profit (loss) for the year (11,952) (110,558) Consolidated Financial Statements 2001/2002 4

19 Freedomland ITN S.p.A. CASH FLOW STATEMENT Amounts in Euro CASH FLOWS GENERATING FROM OPERATING ACTIVITIES: June 30, 2002 June 30, 2001 Loss for the year (11,952) (110,558) Adjustments on items that do not have an effect on cash flow: Depreciation, amortisation and write-downs 7,476 72,725 Employee leaving indemnity provided during the year Employee leaving indemnity paid during the year (181) (76) Provisions (utilizations) of reserve for risk and charges (2,868) 31 Other non-monetary accounts Changes in current assets and liabilities: (7,333) (37,638) Short term receivables 6,243 (7,797) Inventory 209 (153) Prepayments and accrued income Trade payables (4,056) (6,624) Other payables (215) 457 Accrued liabilities and deferred income (71) (23) Taxes payable 11 6,809 (77) 59,360 Cash flow generated from operating activity (5,143) (51,198) CASH FLOW FROM INVESTING ACTIVITIES Net book value assets disposed of Tangible asset acquisitions (585) (29,192) Increase in intangible assets (603) (2,620) Other movements (1,024) Increase in other securities (118,484) (78,563) (Increase) decrease in investments (119,581) (111,106) CASH FLOW FROM FINANCING ACTIVITIES Net changes in loans (2,520) (2,201) Change in consolidation area provision for risks Reduction (increase) receivables over 12 months (364) 6,818 Increase (reduction) other medium/long term liabilities 90 (2,794) (1,255) 3,362 Difference in translation foreign currency financial statements 636 (186) INCREASE (DECREASE) IN CASH AND BANKS (126,882) (159,128) CASH AND BANKS AT THE BEGINNING OF THE YEAR 133, ,797 CASH AND BANKS AT THE END OF THE YEAR 6, ,669 Milan, September 17, 2002 For the Board of Directors The President Consolidated Financial Statements 2001/2002 5

20 Freedomland ITN S.p.A. Freedomland Internet Television Network S.p.A. Registered office: Milan, Via Manfredonia n, Milano Share capital Euro 7,493, fully paid-in Company s Register Office Milan no /1999 Register no VAT no./tax no. : Notes to the consolidated financial statements of the Freedomland Group for the year ended June 30, 2002

21 CONSOLIDATION PRINCIPLES Freedomland ITN S.p.A. The Consolidated Financial Statements of the Freedomland - ITN Group includes the Financial Statements of the Parent Company Freedomland ITN S.p.A and the foreign subsidiaries held directly and indirectly. All of the statements utilized for the consolidation are those prepared by the Directors, reclassified and adjusted where necessary in order that they comply with the accounting principles and valuation criteria of the Parent Company, which are in line with those required by articles 2423 and subsequent of the civil code and those recommended by CONSOB. In the preparation of the consolidated Financial Statements all the asset and liability elements as well as the revenues and charges of the companies included in the consolidation area are included line by line in accordance with the integral method. In accordance with this method the receivables and payables, income and charges, gains and losses arising from companies in the consolidation area are eliminated. The carrying value of the investments in the companies included in the consolidation area are eliminated against the corresponding fraction of net equity of the investment. The difference between the book value of the investments, that have been eliminated, and the corresponding quota of net equity, is attributable to the consolidated net equity. In the case of acquisitions the above difference is attributed to the assets and liabilities of the companies included in the consolidation. Any residual amount, if negative, is recorded in an account denominated consolidation reserve, or, where it refers to unfavourable economic forecasts, in an account denominated "consolidation provision for risks and future charges"; if positive it is recorded in an account under assets denominated "differences on consolidation". The amount of capital and reserves of the subsidiary companies corresponding to third parties is recorded, if existing, in an account in net equity denominated "Minority interest capital and reserves"; the part of the consolidated economic result corresponding to third parties is recorded, if existing, in the account "minority interest profits (losses) for the year". TRANSLATION OF FINANCIAL STATEMENTS EXPRESSED IN FOREIGN CURRENCIES The Balance Sheet items are converted to Euro utilizing the exchange rate at the end of the year, while the income statement items are converted to Euro utilizing the average exchange rate for the year. The difference between the result for the year based on the conversion using the average rate and the conversion at the end of the year and the effect on the assets and liabilities on the changes in exchange rates between the beginning and end of the year, are recorded in net equity in the account denominated "Reserve for difference on translation". The exchange rates utilized in the consolidation were as follows: Currency Year-end Average for the year o GBP Notes to the consolidated financial statements Year Page 1

22 REFERENCE DATE Freedomland ITN S.p.A. The Consolidated Financial Statements are prepared based on the Financial Statements prepared by the Directors of the companies of the Group and refer to those as at June 30, ACCOUNTING PRINCIPLES General criteria The accounting principles and valuation criteria have been applied in a uniform manner for all of the companies consolidated. The accounting principles adopted in the Consolidated Financial Statements are those utilized by the parent company Freedomland ITN S.p.A. and are in accordance with the legislative regulations as previously cited, integrated and interpreted by the accounting principles of the National Board of Accountants and by the International Accounting Standards Committee (IASC). The valuations of the amounts in the financial statements have been made with consideration to the general criteria of prudence and accruals, in accordance with the going concern concept. The profits have been included only if realized within the closing date of the consolidated financial statements, while consideration of risks and losses are taken into account even if known subsequently. Similar elements included in the same accounts in the consolidated financial statements have been valued separately. Asset items held on a permanent basis are classified under fixed assets. Adjustment to values and write backs The values of intangible and tangible assets whose duration is limited over time are adjusted through a straight-line basis of amortization and depreciation. These assets and other assets are written-down if there is a permanent impairment in their value; the original value is written back where the reasons for the write-down no longer exist. The analytical methods of the amortisation and write-downs adopted are described in the following notes. Revaluations No revaluations have been made. INTANGIBLE ASSETS The intangible assets are recorded at purchase or production cost, including incidental charges, and amortised on a straight-line basis. The set-up and expansion costs are recorded in assets, with the consensus of the Statutory Auditors, and amortized on a straight-line basis over their expected economic life. The quotation expenses are amortized over five years commencing from the moment they commenced to produce benefits (from April 2000). Notes to the consolidated financial statements Year Page 2

23 Freedomland ITN S.p.A. The research, development and advertising costs are fully charged to the income statement in the year they are incurred; with the exception of the advertising costs relating to the Freedomland brand which are amortized on a straight-line basis over three years. The Industrial patent rights and copyright utilization rights are amortized based on their estimated utilization, which in any case is not superior to that fixed by the relative contracts. The concessions, licenses, trademarks and similar recorded in the assets are amortized based on their estimated utilization, and in any case not superior to that fixed in the relative acquisition contract; where this cannot be determined by the period of utilization or there does not exist a contract, the duration is for a period of five years. The difference on consolidation arises in the preparation of the Consolidated Financial Statements following the elimination of the book value of the investments against the corresponding fraction of the net equity in the investments. Any excess, not attributable to the individual items in the assets of the companies included in the consolidation, is recorded as an adjustment to the consolidated net equity, or, in the presence of the necessary requisites under assets as "differences on consolidation"; this amount is amortized over the period of time economic benefit is expected to be produced, with a maximum of five years. The amortization rates utilized are as follows L: Category Sub-category Rate Set-up and expansion costs Research, development and advertising Industrial patent rights and copyright util. Concessions, licences and trademarks Assets under construction Other Set-up and expansion costs Advertising Web Site Software Management Software Patents Other Concessions, licences and similar Trademarks Assets under construction Improvements to leasehold assets 20% 33.3% 33.3% 33.3% 33.3% 33.3% Duration contract 10% Duration contract FIXED ASSETS AND DEPRECIATION Tangibles assets are valued at purchase or construction cost, including directly imputable incidental charges. Tangible assets (including assets with a value less than one million lire) are depreciated on a straight-line basis, from the moment the asset is available and ready for use, on the basis of the asset s economic/technical future residual utilization. Fixed assets whose economic value at the end of the year have incurred permanent impairment below the carrying value of the asset as per the above-mentioned criteria are written down to their economic residual value. Notes to the consolidated financial statements Year Page 3

24 Freedomland ITN S.p.A. The ordinary rates of depreciated utilized are as follows: Category Rate General plant Specific plant Furniture and office machines EDP Hardware for the structure Hardware for the site Telephone system Mobile phone equipment Motor vehicles Specific equipment (Set Top Boxes) Other equipment 8% 13% 12% 20% 20% 20% 20% 20% 25% 33% 25% On-going maintenance costs are charged in full to the income statement in the year in which they are sustained. Maintenance costs having an added value nature are attributed to the tangible assets to which they refer and depreciated over the expected useful lives of the assets. For the remaining part, relatively marginal, consisting of machinery owned, the rate utilized, equal to 20%, was considered adequate in representing its future economic life. FINANCIAL ASSETS Investments in subsidiary companies not consolidated At the reporting date, there were no subsidiary companies not consolidated. Other investments, Non-current securities and Financial receivables The other investments and non-current securities are valued at cost. In the case of permanent impairment in values, also deriving from stock market quotations of securities, a write-down is made and, in the year that the reasons for the write-down no longer exist, the original value is written back. The non-current financial receivables are valued at their net realizable value. INVENTORY Inventories are valued at the lower of purchase price or production, including incidental charges, and the estimated realizable value at the end of the period. The inventories of obsolete or articles are written down taking into account the possibility of future use or sale. The calculation method utilized in determining cost is the weighted average cost. Notes to the consolidated financial statements Year Page 4

25 Freedomland ITN S.p.A. RECEIVABLES Receivables are recorded at their realisable value, taking into consideration the solvency of the debtor, the period overdue and the guarantees exercisable. The nominal value of receivables is adjusted by a specific doubtful debt provision in direct deduction of the amount recorded in the assets. CURRENT FINANCIAL ASSETS Current financial assets are values at cost, or, if lower, at realisable value, using the market price where relating to quoted securities. This lower value is not maintained where the reasons for their write-down no longer exist. Cost is calculated by using the weighted average cost in the event the securities are fungible assets. PREPAYMENTS AND ACCRUALS Prepayments and accruals are recorded based on the accruals principle of costs and revenues covering more than one accounting period. RESERVE FOR RISKS AND CHARGES Provisions for risks and charges are recorded in respect of certain or probable losses or liabilities, the amount or due date of which could not be determined at year-end. The amounts provided represent a best possible estimate on the basis of available information. It includes the provision for deferred taxation liability which is provided in the case of deferred taxation on significant components of income. INCOME TAXES The current income taxes are calculated on the basis of taxable income; the payable due is recorded in the account Taxes payable. EMPLOYEE LEAVING INDEMNITY The employee leaving indemnity is provided during the period of employment in compliance with employment legislation and contracts in force, net of advances paid. The amount recorded in the consolidated financial statements reflects the amount payable to employees that has matured net of the advances. Notes to the consolidated financial statements Year Page 5

26 Freedomland ITN S.p.A. PAYABLES Payables are recorded at their nominal value. OPERATIONS IN FOREIGN CURRENCIES The operations in currencies other than the EMU currency are converted to Euro at the exchange rate at the date in which they originate, with an adjustment at the end of the period to the exchange rate at that date. The profits and losses deriving from the conversion (exchange differences) of the individual receivables and payables at June 30, 2002 are charged to the income statement under financial items. GUARANTEES AND MEMORANDUM ACCOUNTS They represent the risks and commitments of the company with third parties and are shown at their contractual values. The guarantees are recorded at the end of the balance sheet for the nominal amount of the guarantee given. The guarantees and other memorandum accounts in foreign currencies are recorded applying the exchange rate at the year-end. REVENUES The revenues from sales and services are recorded on the transfer of the property or the provision of the service. Revenues are shown in the income statement net of returns, discounts, allowances and premiums, as well as direct taxes connected to the sale of products and provision of services in accordance with the accruals concept COSTS As for revenues, costs are shown in the income statement net of returns, discounts, allowances and premiums, as well as direct taxes connected to the purchase of products and provision of services in accordance with the accruals concept. OTHER INFORMATION Departures from requirements in accordance with Article 2423, fourth paragraph of the Civil Code. It should be noted that, following the transaction with Wind S.p.A. (formerly Infostrada), the Parent Company sub-entered into the management of the subscriptions. The verifications made evidenced, in addition to over the 27 thousand customers managed, positions with subscribers not processed by Wind due to the absence of certain formal requisites and which over time were integrated. This resulted, commencing from July 2002, in an action by the Company towards the receipt of amounts matured. This action consisted in the emission of postal billings in the first instance at the end of June 2002 with due date for payment July 15, Due to the considerable aging of these receivables at the moment the Company took responsibly and in order to show in the income statement only income components realised and certain, using prudential criteria in the preparation of the financial statements, the Notes to the consolidated financial statements Year Page 6

27 Freedomland ITN S.p.A. revenues relating to the subscriptions are recorded in the income statement only on the receipt of the receivables matured. Reporting of amounts The amounts are expressed in thousands of Euro, where not otherwise specified. The values at June 30, 2002 are comparable with the financial statements for the year ended June 30, Deferred taxes The deferred tax asset is represented by fiscal losses, presently matures based on fiscal legislation in force. In consideration of the events arising during the course of the previous year and the consequential necessity to focus the projections from which there can be established, with reasonable certainty, the existence of taxable income sufficient to guarantee the fiscal benefit presently matured, a total write-down of the deferred tax asset has been made pursuant to Accounting Principle 25 (National Board for Accountants), equal to Euro 4.6 million and the amount matured in the years and 2001/2002 have not been recorded. The deferred tax assets, even if they are not recorded at the present moment, can however be written back to the assets the moment in which the reasons for their write-down no longer exist ( reasonable certainty ). PROVISION FOR TAX RISKS A fiscal control on Vat, income taxes and other taxes at the offices of the company Freedomland ITN SpA by the Tax Police has been completed. In relation to this it has not been considered necessary to make any provisions covering possible and/or potential risks. Notes to the consolidated financial statements Year Page 7

28 Freedomland ITN S.p.A. ASSETS A) RECEIVABLES FOR CAPITAL TO BE PAID IN At the date of the preparation of the consolidated financial statements there are no receivables due from shareholders for share capital to be paid in. B) FIXED ASSETS I INTANGIBLE ASSETS The movements of intangible assets in the course of the year can be summarised as follows: BALANCE Revaluations Other BALANCE CATEGORY 30/06/2001 Increases (write-downs) Movements Amortization 30/06/2002 set-up and expansion costs 17,356 (4,626) 12,730 research, development and advertising costs patents and right to use intellectual property (517) 487 Concessions, licenses, trademarks and similar rights (3) (121) 184 Assets under construction and payments on account 48 (48) Other (87) 358 Total 18, (3) 1 (5,351) 13,759 The composition of intangible assets reflects the evolution of the company since its incorporation. The Set-up and expansion costs comprise prevalently the quotation costs of the Parent Company Freedomland ITN S.p.A. and are amortized over five years. The item Industrial patent rights and copyright utilization rights relates prevalently to the costs in developing the Portal and the management software costs. It should be noted that the development costs of the Portal relate to specific software applications with future utility and that the contents and the graphic/editorial costs are charged directly to the income statement. The increase in the year is attributable to implementation and development costs of the new management information system. Set-up and expansion costs June 30, 2002 June 30, 2001 Change Incorporation costs of the company 3 ( 3) Increase in share capital costs (11) Quotation expenses 12,702 17,311 (4,609) Other 5 8 (3) Total 12,730 17,356 (4,626) Notes to the consolidated financial statements Year Page 8

29 Freedomland ITN S.p.A. The item Concessions, licenses and trademarks include the charges incurred for the registration of the Freedomland brand at an international level and are amortized over ten years, in addition to software licenses for operating programmes. The Assets under construction, at June 30, 2001 related to the new management information system; at the end of the year these costs have been reclassified into the item Industrial patent rights and copyright utilization rights. The item "Other intangible assets" contains improvements to third party assets, relating principally to the offices and warehouse where the Parent Company is located. II TANGIBLE ASSETS The following tables show the movements, respectively, of the cost of tangible assets, accumulated depreciation provisions and the net book value of tangible assets: COST BALANCE Other BALANCE 30/06/01 Increases Reclassifications Movements Disposals 30/06/02 terreni e fabbricati plant and machinery 1, (1) (74) 1,488 industrial and trade equipment 65,236 8 (41,863) (914) 22,467 other assets (36) 411 immobilizzazioni in corso e acconti Total 66, (41,864) (1,024) 24,366 In relation to Plant and machinery, it should be noted that the most significant investments relate to the hardware of the company structure and pertain to the continual development of the activities of the Group and to the consequential necessity of support of this development from a qualitative and quantitative viewpoint. With particular reference to the item Industrial and commercial equipment, consisting of Set top boxes held in the warehouse of the Company and held by customers on a gratuitous usage basis, the following information is recalled, already noted in the notes to the financial statements for the year ended June 30, As already noted in the comments to the financial statements for the year ended June 30, 2000, the Company s commercial policy was, from January 2000, focused on the obtaining of subscriptions for the use of the Freedomland portal. This policy involved the granting of Set top boxes to customers free of charge. Although this policy has, in principle, remained commercially viable and the notable market potential of interactive television (confirmed by the recent agreements between multinationals in the sector and other similar initiatives in Italy), due to the particular situation of the Company it was deemed necessary to effect a significant write-down of these assets, in compliance with that established by the International Accounting Principle IAS 36 (in absence of an Italian Accounting Principle). Analytical calculations were made based on I.A.S. 36 (Impairment of assets), as follows: cash flow projections based on reasonable and sustainable assumptions that reflect the use of the assets and represent the best estimate of management of the overall economic conditions throughout the economic life of the assets; discounting rate before taxes that reflect current market rates for the cost of funding. Notes to the consolidated financial statements Year Page 9

30 Freedomland ITN S.p.A. The decision to write-down the Set top boxes does not prevent the possibility of the Company to write back the cost, even partial, if and when management plans would consent this (within the terms of the original depreciation schedules). For the 339 thousand Set top boxes recorded in tangible assets the residual value was estimated at June 30, 2001 as Euro 3.7 million (equal to Lire 7.2 billion) with a total writedown equal to Euro 45.3 million (the Set Top Boxes of the English and German subsidiaries were fully written-down). During the final quarter of the year , given the change in the commercial policy of the Company that now provides for the sale of the Set Top Boxes in place of the concession for free use, the decoders in the warehouse have now been reclassified to the item Inventory. The reclassification related to approximately 220 thousand Set Top Boxes for a net value of approximately Euro 1.4 million (resulting from an historical cost of approximately Euro 41.4 million and accumulated depreciation of approximately Euro 40 million including depreciation and write-downs as per the accounting records as at April 1, 2002). Approximately 105 thousand Set Top Boxes included in the balance as at June 30, 2002 of the item commercial and industrial equipment represent the decoders that, over time, were subject to subscription contracts through the free usage formula. The write-down in the period relates to the Set Top Boxes returned by customers at the termination of the subscription period. The "Other assets" include the investments in office furniture and other assets for the operating activities of the companies of the Group. ACCUMULATED DEPRECIATION BALANCE Other BALANCE 30/06/01 Depreciation Write-downs Movements Disposals 30/06/02 terreni e fabbricati plant and machinery (33) 470 industrial and trade equipment 61,487 1, (40,385) (874) 22,058 other assets (24) 129 immobilizzazioni in corso e acconti Total 61,851 1, (40,385) (931) 22,657 The depreciation is calculated utilizing the rates as previously outlined and are applied based on the number of days the assets are held. A summary of the composition and movements of tangible assets is shown below. Notes to the consolidated financial statements Year Page 10

31 Freedomland ITN S.p.A. NET VALUE BALANCE Net Depreciations Other BALANCE 30/06/01 increases and write-downs Movements Disposals 30/06/02 terreni e fabbricati plant and machinery (230) (1) (41) 1,018 industrial and trade equipment 3,749 8 (1,830) (1,478) (40) 409 other assets (62) (12) 282 immobilizzazioni in corso e acconti Total 4, (2,122) (1,479) (93) 1,709 III - FINANCIAL ASSETS The analysis of financial assets is as follows: June 30, 2002 June 30, 2001 Change Investments in: subsidiary companies not consolidated other companies Receivables: subsidiary companies not consolidated others 51 (51) Total (51) The balance Subsidiary companies not consolidated is equal to zero as all of the companies controlled directly or indirectly by Freedomland-ITN S.p.A. are included in the consolidation area. Le Investments in other companies includes an investment (Euro million equal to 4.59% of the share capital) in the company Finger Lakes Production International, INC.. The company, in the course of the year was assigned the radio network denominated Radio Voyager becoming exclusive agent of World Space, world leader in digital communication services, in relation to marketing and sponsorship. The valuation of the investment is at cost value. The remaining investments relate to the quota in the consortium ATVEF (Euro 2.5 thousand) that has its registered offices in Eldorado Springs (USA) and has the objective of studies and realization of technical solutions relating to the use of television in the Internet environment. The consortium consents its members to benefit from the rights and licenses relating to standards, protocols, technology and whatever else the consortium might produce. The Financial receivables from others comprises at June 30, 2001 a time bank deposit that was closed in the year. C) CURRENT ASSETS I - INVENTORY The analysis of inventory is as follows: Notes to the consolidated financial statements Year Page 11

32 Freedomland ITN S.p.A. June 30, 2002 June 30, 2001 Cost Write-down Net value Cost Write-down Net value Set-top boxes 42,682-41,213 1, E-Commerce Competition prizes Merchandising products Gadgets Promotional items Total 42,806-41,290 1, The balance comprises essentially inventory of Set Top Boxes. The increase in the year relates to, as commented upon in Tangible assets, to the reclassification of the decoders for sale. The "Write-down provision" relates principally to the accumulated depreciation provision and the write-down provision of the Set Top Boxes reclassified from tangible assets. For further information reference should be made to the comments in tangible assets. II - RECEIVABLES The receivables are comprised of: Receivables: June 30, 2002 June 30, 2001 Change trade 2,169 8,349-6,180 subsidiary companies not consolidated other 13,638 13, Total 15,807 21,635-5,828 The trade receivables are analysed as follows: June 30, 2002 June 30, 2001 Change Customers - Third parties 8,841 15,836-6,995 Related parties 1,660 1, Provision for doubtful debts -8,332 (9,005) 673 Total 2,169 8,349 (6,180) The "Trade receivables are due within 12 months. Reference should be made to the notes to the financial statements of the Parent Company for the analysis of Customers third parties as the balance is principally composed of amounts referring to the Italian Company. The item "Related parties" relates to receivables of a commercial nature for a value of Euro 1.6 million principally from the company I&T S.p.A. and from I@T Italia S.p.A.. For further information reference should be made to the information contained in the "Directors Report on operations". There are no receivables with a residual duration greater than five years. Notes to the consolidated financial statements Year Page 12

33 Freedomland ITN S.p.A. The "Provision for doubtful debt" is principally comprised of values relating to the Parent Company to which reference should be made to the notes to the financial statement of the parent company. The movement in the provision includes an amount of Euro 1.6 million recorded in the item Surpluses from prior year activities as the provision was excessive compared to the estimate of receivables at risk. Within the Provision for doubtful debts, in order to clearly identify the amount of the net receivable, there has been included the Provision for withdrawal risks and the Provision for future dispute risks. These provisions were previously classified in liabilities under the item Reserve for risks and charges and the relative residual amounts are respectively approximately Euro 0.2 million and Euro 0.6 million. The reclassification was made necessary in that the previous classification in the financial statements was no longer considered relevant being based on elements calculated in previous years and no longer representative of those specific risks. Currently these amounts can only represent adjusting elements on the values in the assets. The analysis of other receivables is as follows: June 30, 2002 June 30, 2001 Change due within 12 months Other receivables - related parties 3,371 3, VAT receivable 9,511 9, Other receivables ,931 12, due over 12 months From tax authorities for withholding taxes Receivables from related parties Deferred taxes Deposits Other receivables Totale 13,638 13, The "receivable from tax authorities for withholding taxes" relate to withholdings on interest income and are considered as receivable over 12 months. In the item Other receivables related parties, represents, for an amount equal to Euro million, the receivable position from the company I&T S.p.A. for receipts collected on behalf of the Parent Company, in relation to the mandate conferred No adjustment has been made as there is a total payable recorded in liabilities for a greater amount due to this company. The same item includes a receivable of Euro million from the related party Web Business Europe relating to the execution of a guarantee given by the company and counter-guaranteed Mr. Virgilio De Giovanni for a nominal amount of Euro million. Also include in this category is an amount of Euro million, fully covered by a specific doubtful debt provision, relating to a loan given by the parent company to the same company and guaranteed, similarly, by Mr. Degiovanni. III - CURRENT FINANCIAL ASSETS Notes to the consolidated financial statements Year Page 13

34 Freedomland ITN S.p.A. Current financial assets June 30, 2002 June 30, 2001 Change investments in associated companies other investments other securities 197,056 78, ,486 Total 197,056 78, ,486 The other securities were comprised of: June 30, 2002 June 30, 2001 Change Government bonds 54,917 9,490 45,427 Other bonds 1,942 16,829-14,887 Mutual funds 51,672-51,672 Other bonds 140, ,618 Total 197,056 78, ,486 The management of the liquidity and the relative investment in securities is made by the Parent Company. During the course of the year the portfolio of securities was reallocated resulting in a final composition which was exclusively made up of Government Bonds, other bonds and time deposits (classified above under Others ). The BIIS mutual fund was reimbursed and realized a gain of approximately Euro 5.5 million. IV - CASH AND BANKS Cash and banks are comprised of: June 30, 2002 June 30, 2001 Change Cash and banks: Bank and postal accounts 6, ,668 (126,882) Cheques Cash and cash equivalents 1 1 Total 6, ,669 (126,882) The liquidity available at June 30, 2002 was represented prevalently by short-term deposits held by the Parent Company at primary Italian credit institutions. D) PREPAYMENTS AND ACCRUED INCOME The composition of prepaid expenses and accrued income are as follows:: Notes to the consolidated financial statements Year Page 14

35 Freedomland ITN S.p.A. June 30, 2002 June 30, 2001 Change Accrued income: interest accrued on securities, time deposits and others Total accrued income Prepaid expenses: Web-housing (146) Interest on leasing and use of licenses (417) Commissions Rent and pre-paid expenses Other prepayments Totale risconti attivi 1,068 1,458 (390) Total 1,772 1,841 (69) The "accrued income" relates to the interest matured on government bonds, other bonds, and time deposits. The "Prepayments for interest on leasing and use of licensing" relate to the interest invoiced in advance on the loan received from IBM for tangible assets relating to the functioning of the Portal. The "Prepayments for commissions", relate to commissions payable to the companies of the Group related to the subscription contracts. These commissions are recorded in the income statement on an accruals basis together with the relative revenues. The "Prepayments for web housing" are related to the housing of the servers supplied by the company I.Net S.p.A.. Notes to the consolidated financial statements Year Page 15

36 Freedomland ITN S.p.A. LIABILITIES A) SHAREHOLDERS EQUITY The table below shows the movements in net equity in the year. Balance Allocation of Dividends Translation Other Balance SHAREHOLDERS' EQUITY: 30/06/2001 result distributed difference movements 30/06/2002 Of the Group: Share capital 7, ,494 Share premium reserve 364,791 (141,693) 223,098 Reserve for difference on translation (186) Retained earnings (losses) (31,084) (110,558) 141,642 Net profit (loss) for the year (110,558) 110,558 (11,952) (11,952) Total Group shareholders' equity 230, (11,952) 219,090 Total shareholders' equity 230, (11,952) 219,090 In the course of the year the conversion of the share capital into Euro of the Parent Company was made. The new nominal value of each share was determined as Euro 0.52 resulting in a share capital of Euro 7,493, equal to Lire 14,509,981,013 with an increase in share capital equal to Lire 98,866,013 through a decrease in the item Share premium reserve. RECONCILIATION SCHEDULE BETWEEN FINANCIAL STATEMENTS OF PARANT COMPANY AND CONSOLIDATED FINANCIAL STATEMENTS The following schedule shows a summary of the differences between the Financial Statements of the parent company and the Consolidated Financial Statements. Reconciliation schedule between financial statements of parent company and consolidated financial statements Current year Previous year Net Result Net equity Net Result Net equity BALANCES AS PER FINANCIAL STATEMENTS OF PARENT COMPANY (11,952) 218,640 (110,784) 230,592 - internal profits on tangible assets 45 Carrying value of subsidiaries consolidated (4,179) (7,480) Net equity and result for the period of the subsidiaries consolidated (9,329) (36,559) (29,443) (27,097) Reversal of provision for losses on investments 9,329 41,188 29,399 4,766 Difference in accounting principles from Parent Company ,625 BALANCES AS PER CONSOLIDATED FINANCIAL STATEMENTS (11,952) 219,090 (110,558) 230,406 Notes to the consolidated financial statements Year Page 16

37 Freedomland ITN S.p.A. B) RESERVE FOR RISKS AND CHARGES Fondo Oneri spese legali BALANCE 30/06/2001 PROVISION UTILIZATION OTHER MOVEMENTS BALANCE 30/06/2002 Provision for discounts and competitions 9 13 (22) 0 Total Reserve for charges 9 13 (22) 0 RESERVE FOR RISKS Provision for future dispute risks 935 (382) (553) Provision for lawsuit risks 257 (257) Provision for withdrawal risks 284 (92) (192) Provision for Infostrade receivable risks 1,745 (1,745) Provision for execution of guarantees Total 3, (2,476) (745) 362 Totale 3, (2,498) (745) 362 The reserves for risks and charges are analysed as follows: The "Provision for discounts and competitions": represents the contractual obligations assumed by the company in relation to customers for transactions involving prizes; this activity was terminated during the year. The "Provision for lawsuit risks ": included a provision relating to a litigation with a former executive, that was resolved during the year with a surplus recorded in the income statement following an over-accrual in the prior year of approximately Euro 64 thousand. The "Provision for withdrawal risks": this provision made in previous years related to the estimate of potential withdrawals relating to the instalment sales. The residual amount of this provision was reclassified to the item Trade receivables where reference should be made for the relative comments. The "Provision for future dispute risks" this provision made in previous years, represents the estimate of potential liabilities connected to those customers who might initiate disputes and support their cases with reasonable evidence. The amount refers almost exclusively to customers who adhered in the past to the instalment payments formula; the residual amount of this provision was reclassified to the item Trade receivables where reference should be made for the relative comments. The "Provision for Infostrada receivable risk": this provision was provided on the basis of the obligations undertaken in the concession contract of sales through the company Infostrada in which Freedomland would render concessionaire without recourse of the receivables generated from the marketing and sales of its own subscription but not actually received by Infostrada. During the year a settlement was reached with Wind (formerly Infostrada) through which a final payment was made freeing both parties from reciprocal obligations. This agreement resulted in the utilization of the reserve for an amount similar to that provided for in previous years generating the recording of a surplus on prior year accruals in the income statement, relating to the sole utilization of the reserve under analysis, equal to Euro million. Notes to the consolidated financial statements Year Page 17

38 Freedomland ITN S.p.A. In relation to the "Provision for execution of guarantees reference should be made to the comments in Other receivables. C) EMPLOYEE LEAVING INDEMNITY The following schedule shows the movements in the period: BALANCE PROVISION UTILIZATION OTHER BALANCE 30/06/2001 MOVEMENTS 30/06/2002 Operai Intermedi Employee leaving indemnity (181) 287 Dirigenti Total (181) 287 The employee leaving indemnity relates only to the parent company. The changes in the period are in line with the variations in the workforce. D) PAYABLES The analysis of payables is shown in the table below, of which there are no payables over five years, or collateral guarantees given in relation to payables. June 30, 2002 June 30, 2001 Change bonds convertible bonds payables to banks due to other financiers - short term quota 2,516 2, due to other financiers - medium/long term quota 2,642 5,162-2,520 advances trade payables 3,402 7,891-4,489 related party companies 7,463 6, taxes payable due to social security authorities other payables 1,985 1, Total 18,482 25,173-6,691 The Payables to other financiers are principally relating to financing received from IBM Semea Servizi Finanziari, in relation to the acquisition of hardware for operations and marketing of the activities of the Companies of the Group. The repayment schedule of the financing is over a period of five years. The balances include the capital and interest quota of the financing received. The balance Advances, relative principally to amounts invoiced relating to future periods, received from Banca Popolare di Milano relating to an advertising contract, was nil at June 30, 2002 following the completion of the contractual period. Notes to the consolidated financial statements Year Page 18

39 Freedomland ITN S.p.A. The "Trade payables" are all payable within 12 months. For an analysis of "Payables from related party companies" reference should be made to the information in the directors report on operations, noting that it relates principally to commissions. It is also mentioned that this payable, for an amount of approximately Euro 2.8 million is not at the moment payable to the sales agents. This amount will be liquidated at the moment of the receipt of the corresponding receivable from customers and after the completion of all the contractual obligations. The taxes payable are comprised of: June 30, 2002 June 30, 2001 Change Imposte sul reddito - IRPEG Payables to tax authorities for withholding taxes Other taxes payable Total The other payables are comprised of: June 30, 2002 June 30, 2001 Change Fees payable to Directors Fees payable to Statutory Auditors Due to employees Due to social security institutions Other payables 1, Total 1,985 1, The item "Due to employees" principally comprises payables for vacation days due and thirteenth month matured but not yet paid. The item Other payables is composed of Euro 207 thousand deposit received from the company I&T S.p.A. against the delivery of set top boxes based on contractual agreements and for Euro 328 thousand a payable for a credit note issued to BPM. The residual payable is principally composed of indemnity and compensation to be paid to employees as leaving incentives or settlements. E) ACCRUED LIABILITIES AND DEFERRED INCOME The composition of accrued liabilities and deferred income is as follows: June 30, 2002 June 30, 2001 Change Interest receivable 4 ( 4) Subscriptions (72) Others Total deferred income (71) Total (71) Notes to the consolidated financial statements Year Page 19

40 Freedomland ITN S.p.A. The "deferred income relative to subscriptions" relates to invoices issued in advance for which the maturity of the revenues will be in a future period and will be recorded in the income statement on the accruals basis. MEMORANDUM ACCOUNTS The memorandum accounts are composed of Guarantees given (Euro 834 thousand), guarantees received (Euro million) and leasing and rental payments due in the future (Euro 976 thousand). The item Future lease payments comprise the residual instalments due on operating lease contracts and rental for the acquisition, respectively, of hardware and software and of motor vehicles. The item "Guarantees given to third parties" refer to: - guarantee for competition and prizes (Euro million) given to the Finance Ministry; - guarantees given to Colt Telecom GmbH. (Euro million) for connectivity services; The item Guarantees received from third parties refer to: - guarantee received from the majority shareholder V.Degiovanni guaranteeing the extended payment (approximately Euro million) given to Web Business Europe S.p.A.; the payment was requested for an amount equal to Euro million (value of the existing amount of the loan); - guarantee received (nominal value approximately Euro million) in counterguarantee of the guarantee given by the Company in favour of a banking institution on behalf of the related party Web Business Europe, as commented upon in the item Other receivables. It is noted the execution of the guarantee by the Bank for an amount equal to Euro million. Notes to the consolidated financial statements Year Page 20

41 Freedomland ITN S.p.A. INFORMATION ON THE INCOME STATEMENT A) VALUE OF PRODUCTION ANALYSIS OF SALES AND SERVICES June 30, 2002 June 30, 2001 Change Revenues form set-top boxes Subscriptions 5,737 5,920 (183) Connection revenues (297) Internet advertising revenues 40 (40) Advertising (182) E-Commerce (192) Other Total 6,153 6,965 (812) The "revenues from subscriptions" are a periodic component of revenues (monthly) deriving from subscriptions. In the case of advance billing for the total amount, the revenue is recorded under deferred income and recorded on the accruals basis. The "Connection revenues" relate to amounts recognised from telephone operators for the activation of the telephone lines and the period of connection of the users. The "Advertising revenues" are recorded in the income statement on the accruals basis based on the relative contracts and relate principally to Banca Popolare di Milano. Sub-division of revenues by geographic area June 30, 2002 June 30, 2001 Change Italy 4,630 4, Spain UK Germany Total 6,153 6, The Other revenues and income included in the financial statements for Euro million, refer principally, for Euro 449 thousand, to the gain on the sale of Set Top Boxes, classified here before the change in commercial policy that resulted in the change in the subscription offer (with free usage of the decoder) to the sale of decoders. The division of these revenues is not at the moment very significant. Notes to the consolidated financial statements Year Page 21

42 Freedomland ITN S.p.A. B) COSTS OF PRODUCTION The following exposition of the values included in the costs of production highlight the wish of the Parent Company and its subsidiaries to reduce significantly the costs realizing substantial savings while maintaining a level of service offered to customers substantially similar to that provided in the previous years. This effort was concentrated through the almost total reduction of marketing expenses, given the current repositioning phase of the strategy of the Group, the re-definition of the elements of expenses defined as technical referring to hardware and software costs based on the change in management requirements and a reflection on the nature and type of costs for contents and consultants. PURCHASES OF RAW MATERIALS,ANCILLARY, CONSULMABLES AND GOODS The analysis of purchases is as follows: June 30, 2002 June 30, 2001 Change Set-top boxes and accessories E-commerce products Competition prize goods Consumables Packaging Printing Advertising materials Transport 1,052-1,052 Other purchases Total 225 3,061-2,836 COMPOSITION OF SERVICE EXPENSES The analysis and the composition of services is as follows: Service expenses June 30, 2002 June 30, 2001 Change Advertising, marketing, entertainment and commercial expenses 1,275 11,175-9,900 Call centre/customer care 2,073 3,966-1,893 Data processing and software 1,445 3,796-2,351 Administration/legal services 1,099 3,244-2,145 Commissions 1,663 3,115-1,452 Consulting and corporate expenses 1,805 2, Directors and statutory auditors fees 1,156 1, Site content services 1,042 1, W eb housing Transport and warehousing Electricity and utilities Personnel search costs Maintenance Insurance Other Total 13,219 34,049-20,830 Notes to the consolidated financial statements Year Page 22

43 Freedomland ITN S.p.A. The "commissions" relate to, substantially, the amount recognised to the companies of the group relating to the marketing and selling of the products of the Group. The decrease in these costs, compared to the previous year, is attributable principally to the unilateral interruption by the agent in the marketing and selling of the products of the companies of the Group. It is noted that the accounting treatment of the commissions provide that the cost matures on the recording of the correlated revenues and that the payable is considered to be liquidated on the receipt from the customer. The "advertising, marketing, entertainment and commercial expenses" relate to the economic commitment sustained by the companies of the Group for communication and maintenance policies. As can be seen from the comparison with the previous year, the total commitment has decreased significantly, given the current containment phase of costs and redefinition of the strategic positioning of the Group. The services for "Site Content" and Data processing and software services were the subject of an incisive reappraisal with the intention, with a view to continuation of the service offered, to implement a substantial decrease in the costs. In relation to this some contracts were re-negotiated and the resources available were optimised. The compensation of Directors and Statutory Auditors were composed as follows: June 30, 2002 June 30, 2001 Change COMPENSATION OF DIRECTORS 1,042 1, COMPENSATION OF STATUTORY AUDITORS Total 1,156 1, The directors and statutory auditors of the parent company have not received compensation for the performance of their functions in companies included in the consolidation area. USE OF THIRD PARTY ASSETS The composition of the item is as follows: Use of third party assets June 30, 2002 June 30, 2001 Change Machinery leasing 1,142 1, Vehicle rent Rental and additional costs Other Totale 1,884 1, PERSONNEL COSTS The division of these costs is shown in the income statement account. The average number of employees by category is shown below. Notes to the consolidated financial statements Year Page 23

44 Freedomland ITN S.p.A. June 30, 2002 June 30, 2001 Change Temporary employees Staff Managers Executives Total At the end of the present year the total number of employees of the Group amounted to 76 and five temporary works divided between the following countries: 42 employees in Italy, 11 employees in Spain, 11 employees in the UK and 12 employees in Germany. AMORTIZATION, DEPRECIATION AND WRITE-DOWNS The sub-division is as per that shown in the income statement. PROVISIONS FOR AMOUNTS IN CURRENT ASSETS Represents for an amount equal to Euro 193 thousand the write-down in the receivable from the company Web Business Europe; for the remaining part it relates to the provision in the Doubtful debt provision. RESERVES FOR RISKS AND CHARGES For the reserves for risks, relating to the amount of Euro 361,519 in the year, reference should be made, together with the Other provisions to the tables and comments shown in the item Reserve for risks. COMPOSITION OF OTHER OPERATING CHARGES The composition of the item is as follows: June 30, 2002 June 30, 2001 Change Other taxes Building expenses Corporate costs Loss on ordinary fixed assets Loss on receivables not covered by provisions Postal expenses Fines and penalties Various expenses Total 1, Notes to the consolidated financial statements Year Page 24

45 Freedomland ITN S.p.A. C) FINANCIAL INCOME AND CHARGES Financial income is analysed as follows: The income from trading relates to the gains realised in the management of the liquidity and principally, the BIIS mutual fund. The "bank interest income" is the returns of the investment activity on the liquidity received on the quotation. The time period of these investments is short term and with no financial risk. The composition of "interest payable and other financial charges" is as follows: June 30, 2002 June 30, 2001 Change Financial charges on : interest payable on bank overdrafts 5-5 interest from other financiers Other financial charges: loss on security trading foreign exchange losses commissions and bank charges others Total 1, D) ADJUSTMENT TO FINANCIAL ASSETS This item includes the write-down in financial assets. The write-down equal to Euro 54 thousand, in particular, is comprised of the difference between the market value of the bonds and the corresponding purchase price. The amount of Euro 60 thousand refers to the write-down in the investment in Freedomland-ITN S.A.. This company was subsequently liquidated and all of the assets and liabilities have been assigned to the sole shareholder corresponding to the Parent Company. E) EXTRAORDINARY INCOME AND CHARGES The extraordinary income equal to Euro million (Euro million in the previous year) refers principally to the Parent Company as follows: - surplus from prior years of Provision for doubtful debts for Euro million; - surplus from prior years deriving from the termination of the licensing agreement of sales with Infostrada for Euro million attributable to surpluses on the Provision for Infostrada receivables risk for Euro million and for Euro million for surplus on other adjustments; - surplus from prior years on the reversal of commissions for Euro million related principally to the termination of the Infostrada contract; - surplus from prior years for the renouncement or non-assignment of compensation for the Board of Directors deliberated in previous years for an amount equal to Euro million; - surplus from prior years for transactions with suppliers in relation to payables for an amount equal to Euro million. Notes to the consolidated financial statements Year Page 25

46 Freedomland ITN S.p.A. The Extraordinary charges equal to Euro million (Euro million in the previous year) relates principally to leaving incentives for employees and executives in the year and for the closing of several controversies with employees for Euro million. Notes to the consolidated financial statements Year Page 26

47 Freedomland ITN S.p.A. OTHER INFORMATION Information relating to employees average number of employees June 30, 2002 June 30, 2001 Change Temporary employees Staff Managers Executives Total Compensation of Directors, Statutory Auditors and General Manager For the compensation of Directors, Statutory Auditors and General Manager of the Parent Company reference should be made to the notes of the Parent Company. CONSOLIDATION AREA The Consolidated Situation of the Freedomland ITN S.p.A. Group includes the financial statements of the Parent Company and those companies in which Freedomland ITN S.p.A. directly or indirectly controls the majority voting rights at an ordinary shareholders meeting. The company Freedomland-ITN S.A., a Luxembourg company, left the consolidation area as it was liquidated in the course of the year and all assets and liabilities were assigned to the sole Italian shareholder. Subsidiary companies included in the consolidation area by the full integration method Name Registered office Currency Share capital % held Indirect Direct Freedomland - ITN S.p.A. Milan Euro 7,493,780 Parent Company Freedomland - ITN Investments S.A. Luxembourg Euro 100,000 99,9% 0,1% Freedomland - ITN Espana S.L. Barcelona Euro 2,085,000 99% 1% Freedomland - ITN Deutschland GmbH Frankfort Euro 500,000 99% 1% Freedomland - ITN UK Limited Londron GBP 900,000 99% 1% Associated companies Name Registered office Currency Share capital % held Direct Indirect Consortium Eurocom (in liquidation) Milan Euro 21, % The quota in the consortium Eurocom is not shown as the consortium is in liquidation and the relative value was already written down in the financial statements as at June 30, Notes to the consolidated financial statements Year Page 27

48 Freedomland ITN S.p.A. ANALYSIS OF THE CONSOLIDATED SITUATION In order to facilitate a better understanding of the consolidated financial statements as a whole, the tables below present a short analysis of the reclassified balance sheet and reclassified income statement. The balance sheet was reclassified in accordance with the criteria of increasing liquidity and shows the total of current assets and current liabilities in order to permit a correct evaluation of the overall financial position. The income statement was prepared in descending order and shows the aggregates that forms the gross operating margin and different cost items. Notes to the consolidated financial statements Year Page 28

49 Freedomland ITN S.p.A. RECLASSIFIED BALANCE SHEET Amounts in thousands of Euro ASSETS 30/06/2002 % 30/06/2001 % change change% CURRENT ASSETS Cash and banks 6, , , % Trade receivables 15,100 21,343-6, % Inventory 1, , % Prepayments and accrued income 1,772 1, % Other current assets 197,056 78, , % Total current assets 222, % 235, % -13, % NON CURRENT ASSETS Tangible assets 1,709 4,818-3, % Intangible assets 13,759 18,509-4, % Investments and securities Other non-current assets % Total non current assets 16, % 23, % -7, % TOTAL ASSETS 238, % 259, % -20, % LIABILITIES AND 30/06/2002 % 30/06/2001 % change change% SHAREHOLDERS' EQUITY CURRENT LIABILITIES Banks Trade payables 10,775 14,831-4, % Other payables 4,667 4, % Accrued liabilities and deferred income % Taxes payable % Total current liabilities 16, % 20, % -4, % MEDIUM/LONG TERM LIABILITIES Medium/short term loans 2,642 5,162-2, % Provision for employee leaving ind % Other medium/long term liabilities 452 3,230-2, % Total medium/long term liabilities 3, % 8, % -5, % Total liabilities 19, % 29, % -9, % SHAREHOLDERS' EQUITY Share capital 7,494 7, % Reserves 223, , , % Net loss -11, ,558 98, % Total shareholders' equity 219, % 230, % -11, % Total 219, % 230, % -11, % TOTAL 238, % 259, % -20, % Notes to the consolidated financial statements Year Page 29

50 Freedomland ITN S.p.A. RECLASSIFIED INCOME STATEMENT Amounts in thousands of Euro INCOME STATEMENT 30/06/2002 % 30/06/2001 % change change% Net sales 6, % 6, % % opertaing costs: purchases % -3, % 2, % services -13, % -34, % 20, % personnel costs -6, % -8, % 1, % increase (decrease) inventory % % % other operating costs -4, % -4, % % Gross operating result -18, % -42, % 23, % Depreciation, amortization and write-down -7, % -72,725-1,044.15% 65, % Operating result -25, % -115,075-1,652.19% 89, % financial income 11, % 9, % 2, % financial charges -1, % % % other income 4, % % 4, % other charges -1, % % % result before charges -11, % -105,950-1,521.18% 93, % income taxes: current taxes deferred taxes -4, % 4, % Result before minority interest result -11, % -110,558-1,587.34% 98, % Minority interest result NET LOSS -11, % -110,558-1,587.34% 98, % Notes to the consolidated financial statements Year Page 30

51 Freedomland ITN S.p.A. LIST OF INVESTMENTS List of subsidiary, associate and other companies Type Name Registered Office held % Parent company Freedomland - ITN S.p.A. Italy n.a. Subsidiary Freedomland - ITN Investments S.A. Luxembourg 100% Freedomland - ITN Espana S.L. Barcelona 100% Freedomland - ITN Deutschland GmbH Frankfort 100% Freedomland - ITN UK Limited London 100% Associate Consorzio Eurocom (in liquidazione) Milan 28.6% Other investments ATVEF Colorado Springs 0.01% Finger Lakes Production International, INC. New York 4.59% Milan, September 17, 2002 For the Board of Directors The President Notes to the consolidated financial statements Year Page 31

52 FREEDOMLAND ITN SPA Registered office: Milan, Via Manfredonia n. 4 Company s Register Office Milan No Fiscal and Vat code No Share capital Euro 7,493, * * * * * STATUTORY AUDITORS REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS AS AT JUNE 30, 2002 Dear Shareholders, the Board of Directors meeting of September 17, 2002 approved the consolidated financial statements, together with the Director s Report on the operations for the year ended June 30, The result shows a Group loss of Euro 11,952 million compared to Euro 110,558 million for the year ended June 30, CONSOLIDATION AREA The financial statements relate to the aggregated result of the consolidation of the financial statements of the parent company Freedomland ITN Spa and the financial statements of the subsidiary companies held 99.9%: - Freedomland ITN Deutschland G.M.B.H. Germany; - Freedomland ITN Espana S.L. Spain; - Freedomland ITN UK Ltd. United Kingdom. The principal data of the subsidiary companies, referring to June 30, 2002, have been correctly shown in the financial statements prepared by the administrative body. It is mentioned that during the year the Board of Director s approved the liquidation of the company Freedomland ITN Luxembourg S.A. and the direct acquisition of the participations by the Parent company. CONSOLIDATION METHOD The consolidation of the Financial Statements of the Subsidiary companies with the financial statements of the parent company, considering the percentage held in the

53 participations, is through the full integration method, in order to show the complete financial and economic structure of the group. The consolidated financial statements therefore represent the financial and economic situation of a sole entity, and the receivables and payables, revenues and costs between subsidiary companies in the consolidation area are eliminated and therefore the economic result of the group is the activity generated with third parties. CONFORMITY OF THE VALUATIONS WITH LEGISLATION We certify that we are in agreement with the criteria utilized in the valuation of the various accounts in the consolidated financial statements indicated in the notes to the accounts, having also read the report of the audit firm Deloitte & Touche Spa. CONCLUSIONS We believe that the information contained in the Notes and the Directors Report on the operations, illustrates in an exhaustive manner the various accounts in the Balance Sheet and Income Statement. Milan, October 14, 2002 THE BOARD OF STATUTORY AUDITORS Gianfranco Meroni Michele Carpaneda Cesare Gerla

54 Deloitte & Touche S.p.A. Revisione e organizzazione contabile Palazzo Carducci Via Olona, Milano Italia Tel Fax AUDITOR'S REPORT IN ACCORDANCE WITH ARnCLE 156 OFLEGISLAnvEDECREEOFFEBRUARY24, 1998, N. 58 To the Shareholders of Freedomland ITN S.p.A. We have audited the consolidated financial staternents of Freedomland ITN S.p.A. and subsidiaries ("the Group") as of June 30, These consolidated financial staternents are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the Auditing Standards recommended by Consob, the ltalian Stock Exchange Commission. Those standards require that we plan and perfonn the audit to obtain reasonable assurance about whether the consolidated financial statements are ftee of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates rnade by rnanagement, as well as evaluating the overal1 consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. For the opinion on the consolidated financial statements of the prior year of Freedomland 11N S.p.A., presented for comparison in accordance with legal requirements, reference should be made to the auditor's report issued by us on September 18,2001. In our opinion, the consolidated financial statements of Freedom1and ITN S.p.A. present fairly the Group's fmancial position as of June 30, 2002, and the resu1ts of its cperations for the year then ended, and comply with the principles which regulate the preparation of financia1 statements in Ita1y. DELOITTE & TOUCHE S.p.A Signed in originai Jarnes R. Noble Partner Milan, October 14, 2002 This report has been transjated into the English language solely for the convenience of intemational readers. Oeloitte Touche Tohmatsu Milano Ancona Bari Bergamo Bologna Cagliari Firenze Genova Napoli Parma Padova Roma Torino Treviso Vicenza Sede legale. Palazzo Carducci -Via Olona, Milano -Capitale Sociale Euro ,80 i.v. Partita IVA I Codice Fiscalel Registro delle Imprese Milano n R.EA Milano n

55 Freedomland ITN Spa INDEX 1. Introduction 2. Factors that have influenced the operations in the period a) the seizure of the shares and the nomination of the new Board of Directors b) The new strategic development plan c) Public Offer to Purchase d) Summary of the recent activities of the Directors and the objectives achieved 3. The results for the year 4. Corporate Governance 1) The Board of Directors 2) Granting of power. Information to the Board of Directors 3) Internal control 4) The Board Statutory Auditors 5) Shareholders meetings 6) Relations with investors and other shareholders 7) Treatment of confidential information 5. Personnel and organisation 6. Transactions with subsidiaries, associate and related companies 7. Treasury shares 8. Investments held by Directors, Statutory Auditors and General Manager 9. Information relating to stock option plans 10. Research and development activity 11. Significant events subsequent to the year-end 12. Future prospects 13. Proposal to shareholders meeting Directors' Report on operations Company Year 2001/2002 2

56 Freedomland ITN Spa 1. Introduction Dear Shareholders, The year July 1, 2001 June 30, 2002 on which you are called to approve ended with a negative result of approximately Euro 11,952 thousand compared to a negative result of approximately Euro 110,784 thousand in the previous year; despite this substantial and radical improvement it is necessary to highlight how the performance of the Company was again significantly and negatively influenced by a series of events that affect the results, prospects and strategies and which appear to have been finally resolved as a result of the most recent events of which further information is contained herein. In relation to this we believe it necessary to summarise the principal events that have characterised the year ended June 30, * * * 2. Factors that have influenced the operations in the period a) The seizure of the shares and the nomination of the new Board of Directors With a ruling passed on July 9, 2001, the Investigating Judge of the Milan Law Court Mr. Fabio Paparella ordered, for reasons unrelated to the operations of the Group, the preventive seizure of all the shares of Freedomland S.p.A. in the possession of Mr. Virgilio Degiovanni (9,465,444 shares in total representing 65.68% of the company s share capital). On July 11, 2001 the Court appointed Mr. Edoardo Ricci to act as Receiver of the aforesaid shares with the powers to perform: every act or activity without exception deemed useful or necessary for their preservation, including the exercising of voting rights at ordinary and extraordinary meetings of shareholders. As soon as they were informed of the ruling, the majority (6 out of 7) of the directors of the Parent Company resigned as directors. The consequential lapse of the entire Board resulted in the necessity to convene a shareholders meeting for the nomination of a new Board of Directors. The shareholders meeting was held on September 20, On that date 7 Independent Directors were proposed and nominated, including Prof. Fabrizio Gardi, appointed as President, and in addition substitutions were made of two of the standing statutory auditors and two of the alternate statutory auditors, who had also resigned. Subsequently, the Board of Directors, meeting on September 27 and October 30, nominated two Managing Directors, respectively Mr. Willy Burkhardt and Mr. Roberto Nardini and re-instated the committees as required by the Self Discipline Code for quoted companies. On December 13, 2001 the Company was informed by the lawyers of Mr. Virgilio Degiovanni that the Supreme Court ruled, following the recourse of the majority shareholder, on the order with which the Milan Court confirmed the preventive seizure of the shares owned by the majority shareholder, overruling it and declaring the seizure invalid. As a consequence of the pronouncement of the Supreme Court, all of the Directors considered it appropriate, on the occasion of the Board meeting held on December 14, 2001, to resign as directors effective from the date of the shareholders meeting convened for January 31, 2002, called to nominate a new Board of Directors, expressing the free choice of the shareholders. On January 14, 2002 the ordinary shareholders meeting, in second convocation, approved the Annual Accounts for the year ended June 30, Directors' Report on operations Company Year 2001/2002 3

57 Freedomland ITN Spa On January 31, 2002 the shareholders meeting nominated the new Board of Directors, confirming five of the seven directors (in their independent role) of the previous Board (including Prof. Fabrizio Gardi as President) and nominated two new Directors, designated by the two principal shareholders of the Parent Company. Subsequently, on February 5, 2002 the Board of Directors nominated Mr. Willy Burkhardt as Managing Director. The resulting legal position as a consequence of an exceptional order for a company quoted on the stock exchange has undoubtedly influenced the time frame in preparing and developing a more adequate management plan by the new directors. Despite this, the Board of Directors, nominated by the receiver, maintaining belief in the declared programmes, completed its analysis and on January 21, 2002 approved the guidelines for the new Strategic Development Plan. This plan integrated and substituted the previous Plan elaborated, which in practice had not found concrete application. The confirmation of the composition of the previous Board in its almost complete entirety permitted the Company and the entire Group the managerial continuity necessary for the realisation of the plan. b) The new Strategic Development Plan The aforesaid plan was elaborated with the assistance of management and a leading international consulting firm. A detailed analysis of the current business highlighted the untenability of the company s fundamental core activities in the medium-long term: in fact it was evident the significant high cost of the decoder and the insufficient attractiveness of the services offered to the customer. The analysis showed how it was not economical, on a large scale, the re-positioning towards the market of companies and the initiatives of co-branding towards the distribution companies of household goods, on the one hand, and television operators, on the other: both for the high costs involved in the realisation of offering attractive services and for the transitory tarnishing of the brand. The reformulation of the strategies have, appropriately, found their origins in the distinctive expertise matured by the Group and its management since the commencement of its activities: - knowledge of customers in relation to purchase behaviour and attitudes; - experience in various types of content, such as entertainment, information and public utility; - uniqueness in the Italian scenario of experience in interactive TV; - expertise on transmission standards and protocols; - experience in the management of interactive services; - knowledge of the characteristics in terms of strengthens and limitations of the different platforms and applications of delivery of the contents; - knowledge of the usage requirements of the customers. Considering this, the Board proposed the focus of the company activities on two business lines: 1. creation and production of multimedia video content and, thereafter interactive; 2. supply of applications and application services (multimedia and interactive) for the management of contents for their transmission on different communication channels. The Board considered, in fact, that one of the development paths of a market characterised by radical transformation was the capacity to supply original and technologically advanced content, together with the capacity to supply the services necessary for the management and transmission Directors' Report on operations Company Year 2001/2002 4

58 Freedomland ITN Spa of this content. This is due to the fact that the transmission channels evolve quickly for all communication means (TV, PC, portal telephones and hand-held), but require the significant existence of content capable of generating interest and the availability of the know-how for the necessary applications. The Board also considered that the synergies between the expertise currently existing within the Group will facilitate its positioning as an independent player in the market of content and in that of multimedia and interactive services. The positioning of Freedomland as supplier of interactive multimedia solutions was recognised as being attractive for both the size and growth in the market (over Euro 500 Million in 2001 and growth superior to 20% per year, according to the estimates of IDC and Data Manager) and for a fragmented competition. The development of these services would guarantee strong synergies with the contents production area, improving the distinctiveness and competitiveness of the offer, accelerating the time-to-market, and guaranteeing content more and more in line with the most advanced technologies and services. The development of expertise in multimedia and interactive services would be, in principle, coherent with the positioning in the contents market: - in the short term the Group would be concentrated on the development of applications and services of delivery content (Content Management System), on the development of solutions of managing the relationships with the customer (Customer Relationship Management), on the registration and management of multimedia formats and on solutions for multimedia interactive communications (internet sites and interactive advertising); - in the medium-long term period the Group would have to direct itself towards the progressive integration with the production of interactive video formats (streaming on internet broadband and UMTS, interactive-tv) The plan would be realised: - under the human resources profile, through the rationalisation and simplification of the current corporate and organisational structure and the research for adequate professionalism in the creative market; - under the industrial profile, through the acquisition of companies, already operating and already identified and the stipulation of joint-venture agreements with operators equipped with specific expertise. c) Public Offer to Purchase With a communication dated June 24, 2002, the company Interactive Group s.p.a. (hereafter Interactive ) transmitted to Freedomland and at the same time to the Market, a statement drawn up pursuant to Article 102 of the Legislative Decree of February 24, 1998, no.58 and Article 37 of the CONSOB Regulation of May 14, 1999 no.11971, containing the essential elements of a voluntary Public Offer to Purchase the entire share capital of Freedomland. With the decision of July 10, 2002, CONSOB granted the authorisation for the publication of the Offer Document pre-announced by the Offerer. On July 17, 2002, the Parent Company publicly issued a statement pursuant to Article 103, of the T.U.F. and Article 39 of the aforesaid Regulation, containing the official position of the Company in relation to the Public Offer. Directors' Report on operations Company Year 2001/2002 5

59 Freedomland ITN Spa On August 1, 2002, CONSOB informed the Company that it had given authorisation in accordance with Article 102, of the T.U.F., to the publication of the Supplement to the Offer Document in relation to the Public Offer. On August 6, 2002 in accordance with Article 103 of the T.U.F the Company publicly made its position known in relation to the aforesaid Supplement to the Offer Document. On August 8, 2002, Consob informed the Company in accordance with Article 7 of the Law no. 241 of August 7, 1990, that it had commenced as of August 1, 2002 an administration procedure relating to the Public Offer to Purchase launched, pursuant to Article 102 of the Legislative Decree of February 24, 1998, no.58, by the Company Content S.r.l.. With the decision of August 14, 2002, CONSOB granted the authorisation for the publication of the Offer Document pre-announced by the Offerer Content S.r.l.. On August 21, 2002, in accordance with Article 103, of the T.U.F., the company publicly made known its position in relation to the aforesaid Supplement Offer Document. With a communication dated September 5, 2002 Content transmitted to the market and to the company an integration to the Offer Document in accordance with Article 43 of the Consob Regulation, containing an integration in relation to the offer price, increased to Euro from Euro and the information of new agreements between the offerer and the majority shareholder of the company Mr. Degiovanni. On September 13, 2002, in accordance with Article 103, of the T.U.F., the company publicly made known its position in relation to the aforesaid integrations. d) Summary of the recent activities of the Directors and the objectives achieved The Board consider that the aforesaid Public Offer to Purchase launched by the Company Content S.r.l., will determine substantial changes in the shareholder base (probably a change in the majority shareholder), with possible changes also in the composition of the administrative bodies. For this reason, and due to the complex circumstances in which the Company has operated under in this period, a summary of the activities performed by the directors since their taking office is considered necessary. As it will be recalled, in the ordinary shareholders meeting of September 20, 2001 on the proposal of the Official Receiver appointed by the Court of Milan, seven independent directors were appointed, following the seizure of the shareholding belonging to the majority shareholder. Five of these directors were re-appointed in the ordinary shareholders meeting of January 31, 2002 with the integration of two directors designated by the two majority shareholders. Following the resignation of one director, the Board appointed a new director by co-optation. The appointments were performed in particularly difficult conditions, due to the critical situation both internally and externally, related to the serious market crisis in which the company operates, limiting its operative capacity and development, and to the extremely difficult stock market conditions worldwide. The activity of the directors was performed in close liaison with the management of the company, which has also being partially renewed. Directors' Report on operations Company Year 2001/2002 6

60 Freedomland ITN Spa d.1) The Development Plan over the medium-term The Board has completed, with the help of management and also availing of a leading international consulting firm, the definition of the new Strategic Plan. The directors have pursued with determination the core business, choosing, in the absence of adequate internal capacity, growth by means of the acquisition of companies suitable for a balanced and rapid development. The reformulation of the strategies have, appropriately, found their origins in the distinctive expertise matured by the Group and its management since the commencement of its activities: Consequently, the Board of Directors has taken note, in subsequent meetings, that the previous business model, based on the preparation and maintenance of a TV compatible horizontal portal and on several vertical solutions container therein, should evolve in a more structured activity for the creation and production of format and video content and multimedia and interactive advertising, and in a synergic activity of the development of services and applications also destined for multimedia and interactive usage. The Group mission has therefore become that of positioning itself in the market as the leading operator, first in Italy and then in Europe, in the creation and production of multimedia and interactive content and applications. The pursuit of this objective has determined the commencement of negotiations, supported by indepth legal, accounting and fiscal due diligence, of several companies with adequate characteristics. These activities, at present, are suspended, due to the passivity rule, in compliance with Article 104, of the T.U.F. as a consequence of point C, or rather the Public Offer to Purchase. d.2) Company reorganisation The first measure concerned the reorganisation of the distribution methods of the service; firstly, with the discontinuance of its marketing to the end user by means of the closure of the Organised Distribution to retailers, typically the foreboding of significant marketing and advertising costs uncertain to be recovered; secondly, with the abandonment of the subscription model for services, due to the extremely onerous management process, as well as the high inherent level of bad debts. Company reorganisation and significant operating events. The decision to re-position the outlet market for the services offered by the Company resulted in a substantial company reorganisation, with a reduction in the workforce, that decreased from 100 employees, including temporary workers as of October 2001, to 45 employees at the time of the drawing up of this report; the downsizing of the workforce also took place through trade union negotiations. The Company has also adopted the new company organisational chart that provides for the direct reporting to the Managing Director of the General Operations Office, the Finance, Administration and Control Office and Investor Relations. Similarly to the Parent Company, the foreign subsidiaries were subject to restructuring: firstly the Group structure was redefined through the liquidation of one of the two Luxembourg-based companies (Freedomland-ITN S.A.) and the allocation to the Parent Company of the investments in the operating branches, secondly by means of a significant reduction in the workforce and in operating costs. The current operating structure of the foreign subsidiaries, although reduced, Directors' Report on operations Company Year 2001/2002 7

61 Freedomland ITN Spa permits the maintenance of a commercial presence in the respective markets for the new product lines. Also due to the repositioning and operating reorganisation, in the year ended June 30, 2002, the production and operating costs reduced by approximately 57% compared to the previous year. Numerous supply contracts were re-negotiated, with the attainment of reductions ranging between 10 and 20%, and numerous out-of-court transactions have been settled with employees, consultants and professionals giving rise to costs amounting to approximately one million euro. Comparing the results of the year ended June 30, 2002 with those in the previous year, the largest savings have been obtained in the following expenditure items: expenses for the production of content and application services for the TV portal 66 % approximately; expenses for outsourcing services 74% approximately; personnel costs 24% approximately; marketing and advertising expenses 93% approximately. Mention should also be made of the result of the management of liquid funds, with the realisation of significant gains, as a consequence of the redemption of the fund units, that amounted to approximately Euro 5.6 million in the year, and the satisfactory results of the current prudential management, which has resulted in the company avoiding the negative performances in the share and bond markets. The project for the installation of the new integrated computer system (ERP) was completed, which will permit a simpler and more effective management with customers, especially in the area of subscription handling, which required the use of many employees. By mutual consent the connection agreement for the sale of its Internet TV service with the Company Wind was terminated (formerly Infostrada); this resulted in the receipt of overdue receivables of approximately Euro 6 million and the return to the direct management of approximately 27,500 customers, previously handled by the telephone operator. A potential dispute with the French company Netgem, supplier of the Set Top Box utilised by Freedomland, was settled through amicable means, with an agreement which guarantees to the Company the support of Netgem for the up-grade of the software, where necessary, consenting the possibility of personalising the service to the community of end users. With the assistance of external professionals, in and out of court activities proceeded for the recovery of outstanding receivables, with satisfactory results. Negotiations continued for the amicable settlement of the payable and receivable items with the related parties (referring to the majority shareholder Mr. V. Degiovanni), which at the date of the current report have not yet been settled. The investigation made by the Tax Police was concluded; the Board, along with the support of professional opinions, believe that the conclusions made will not have significant impact on the equity of the Company. The Company has already delivered its contesting conclusions to the competent tax authorities. Interactive TV services and applications on Set Top Box bases. The Parent Company has continued in the development of services and applications utilizable by its decoder, among which we can mention E-Government services usable by means of the television and supplied by territorial bodies such as municipalities and other public bodies and vertical applications, that is specific realisations for defined communities or specific requirements, including services for Directors' Report on operations Company Year 2001/2002 8

62 Freedomland ITN Spa connection to the Internet for hotels, on-line betting, integrated communications service through the TV ( , SMS/logos and fax), adult content, telemedicine and TV banking. Business Development activities. Numerous initiatives have been developed for re-launching the expertise relating to the interactive TV, finalising agreements with high profile partners involved in the development of new content delivery technologies via the television. Mention is made of those with Philips in Italy, Panasonic and the publisher Axel Springer in Germany for the development of T-Government interactive applications and more generally the services of public utility and entertainment in relation to digital land-base TV, and with Alenia Spazio in relation to digital satellite technology, involving the consequential investment by Freedomland in the Skyplexnet system, developed by Alenia, which permits the interactive management of satellite transmissions, utilising the Internet protocol, with potential applications in Corporate TV and remote training. Continuing with delivery content and technologies, it is recalled the letter of intent signed with the American company Intertainer Inc. for the management in Europe of the technology platform for the distribution of Video on Demand, again utilizing the Internet protocol, cinematography libraries of the leading American producers as well as local productions utilizable by personal computer or TV with DSL technology. In relation to this it is noted, as reported in the subsequent events after the year-end, that the company Intertainer has withdrawn from the negotiations, as the letter of intent stated that the binding agreement must be stipulated within a certain time period. The passivity rule, to which Freedomland is still subject to, is incompatible with the requirements of Intertainer to commence rapidly its operations in Europe and prevented the reaching of an agreement in the necessary time period. Finally, it should be recalled that with the preliminary agreement signed with Pay per Moon, a recently incorporated Company, but already involved in the creation of innovative format for the television, the company intents to carry out, albeit prudently, its direct entry into the field of contents creation, an area which comprises one of the most important basis for the new development plan. At the present moment the agreement has not been completed due to the obligations in observing the passivity rule. 3. The results for the year Below is shown a summary of the most important economic data from which emerges the rationalisation of the activities and the reduction of costs as also shown in the table relating to production costs: Directors' Report on operations Company Year 2001/2002 9

63 Freedomland ITN Spa INCOME STATEMENT Euro/000 June 30,2002 June 30, months 12 months Revenues from sales and services 4,630 4,919 Other revenues and income Total revenues 5,603 5,455 Costs of production 16,827 38,883 Gross Operating Margin (11,224) (33,428) Depreciation, amortization and write-downs 7,116 53,556 Operating Result (18,340) (86,984) Net financial income (charges) 12,868 9,906 Adjustments to the values of financial assets (9,443) (29,463) Extraordinary income (charges) 2,963 (34) Result before taxes (11,952) (106,575) Deferred taxes (4,209) Net result (11,952) (110,784) In relation to the revenues it is possible to confirm the substantial comparability in the two years; however it should be noted that as the product is no longer distributed to the public the revenues deriving exclusively from the current subscription base are decreasing. The most significant component in the year is in relation to the financial gains for an amount of approximately Euro 5.6 million relating to resources held in investment funds; the net financial operations has, in addition, contributed to the realisation of net interest income of approximately Euro 6.1 million. The average return deriving from the financial operations was equal to approximately 3.66% compared to the average Euribor at three months in the period of 3.63%. The amortization and write-down data is not comparable as in the year ended June 30, 2001 writedowns on set-top-boxes were made for Euro 31.2 million and on advertising investments for approximately 3.9 million. The adjustment to financial assets relate to the adjustment to the value of investments in the subsidiaries calculated in accordance with the net equity method. Extraordinary income relates principally for approximately Euro 1.6 million to over-provisions on the doubtful debt reserve, for approximately Euro 0.7 million to the operation settled with the company Wind (formerly Infostrada), for approximately Euro 296 thousand to the renouncement of emoluments by members of the Board of Directors, who resigned in July 2001, and for approximately Euro 832 thousand transactions with suppliers of the Group. Included in extraordinary costs are Euro 839 thousand for leaving incentives and other transactions with personnel. Below is shown the division of revenues by business area: Directors' Report on operations Company Year 2001/

64 Freedomland ITN Spa Revenues by business activity June 30, 2002 June 30,2001 Euro/000 Revenues from set-top boxes Subscriptions 4,365 4,089 Connection revenues Internet advertising revenues 40 Advertising E-commerce Other 46 4 Total revenues 4,630 4,919 In relation to production costs, which have changed significantly from the previous year, further details are shown below: June 30, 2002 June 30, 2001 CHANGE Euro/000 % Euro/000 % Euro/000 % Purchases of goods and accessory charges 182 1% 2,540 6% (2,358) (93%) Commissions 1,271 8% 2,255 6% (984) (44%) Marketing and promotions 708 4% 8,794 23% (8,086) (92%) Contents of site, application services and web housing 1,726 10% 5,087 13% (3,361) (66%) Outsourcing services - call centre 553 3% 2,136 5% (1,583) (74%) Administration, organisational and legal services 764 5% 2,641 7% (1,877) (71%) Directors and statutory auditors fees 1,140 7% 1,836 5% (696) (38%) Consulting and corporate expenses 1,805 11% 2,682 7% (877) (33%) Leasing and rent 1,527 9% 1,508 4% 19 0,01% Personnel 4,501 27% 5,932 15% (1,431) (24%) Provisions for doubtful debts and for other risks and charges 568 3% 1,486 4% (918) (62%) Other operating costs 2,082 12% 1,986 5% 96 0,05% Total costs of production 16, ,0% 38, % (22,056) (57%) The following table shows the financial situation for the years under consideration: Directors' Report on operations Company Year 2001/

65 Freedomland ITN Spa BALANCE SHEET Euro/000 June 30, 2002 June 30, 2001 Fixed assets Intangible assets 13,700 18,420 Tangible assets 969 3,958 Financial assets 3 3 (a) Total fixed assets 14,672 22,381 Net working capital Inventory 1, Trade receivables 1,746 7,296 Other assets 14,777 13,833 Trade payables 9,579 12,392 Provision for risk and charges 37,412 31,875 Other liabilities 2,821 2,498 (b) Total working capital (32,136) (25,473) (c) Net capital invested before Employee leaving indemnity (a)+(b) (17,464) (3,092) (d) Employee leaving indemnity (e) Net capital invested (17,751) (3,368) (f) Net equity 218, ,592 (g) Net financial position 236, ,960 (h) Total source of financing (17,751) (3,368) Financial Management The net financial position of the company is summarised in the following table: Financial assets Euro/000 June 30,2002 June 30,2001 Short-term financial receivables Medium/long term financial receivables 37,930 29,751 Short-term investments 197,056 78,506 Cash and banks Time deposits 6, ,876 Total financial assets 241, ,798 Financial liabilities Medium/long term financial payables (2,641) (5,145) Short-term financial payables (2,504) (2,693) Total financial liabilities (5,145) (7,838) Net financial position 236, ,960 Directors' Report on operations Company Year 2001/

66 Freedomland ITN Spa The medium/long term financial receivables, equal to Euro 37.9 million, relate to payments made to subsidiary companies and are indirectly covered by the write-down provision of investments. The slow-down in the erosion in the net financial position which, net of Medium/long term financial receivables from subsidiaries, amount to approximately Euro 198 million at June 30, 2002 compared to approximately Euro 204 million at the end of the previous year, have felt the effects of the restructuring actions undertaken. The available liquidity is employed, at June 30, 2002 for approximately 69% in time deposits made with primary Italian banking institutions, for approximately 27% in Government Securities and the remaining 4% principally in bank deposits. For the current year returns in line with monetary markets are expected given the particular prudence in the choice of investments. June 30, 2002 June 30,2001 Financial income Euro/000 Income from trading 5, Interest income from banks 3,588 7,626 Interest income on receivables from subsidiaries 1,676 1,055 Interest income on time deposits 1,378 - Interest on governments bonds and other securities 1,156 1,333 Other financial income Total financial income 13,573 10,696 Financial expenses Interest expense on financial payables Loss on trading Write-down of securities in portfolio Interest expense from banks - 4 Interest expense on payables to subsidiaries - 8 Total financial expenses Net financial income (charge) 12,901 10,074 The above financial situation has resulted in the following effects on the income statement: 4. Corporate Governance The Company adopted the Code of Self-Discipline of listed companies (hereinafter Code ), recommended by Borsa Italiana S.p.A. (amended version of July 2002). In compliance with the Instructions for the Regulations of the markets organised and managed by Borsa Italiana, here below, the Company wishes to represent its corporate governance system, which has gradually come to be formed over time The Board of Directors 1.1 The role of the Board of Directors The Company is administered by a Board of Directors composed of from 3 (three) to 9 (nine) who serve for three years (unless a shorter period is established by the shareholders meetings when the directors are appointed) and can be re-elected (art. 16 of the by-laws). Directors' Report on operations Company Year 2001/

67 Freedomland ITN Spa Pursuant to the by-laws (art. 20), the Board is empowered with the management of the company, and, for this purpose, is vested with the fullest powers of administration, except those, which according to the by-laws or laws, are reserved for the shareholders meeting. The Board, in fact, exercises its powers in conformity with point 1.2 of the Code, that is: a) examine the corporate, industrial and financial plans of the company and the corporate structure of the Group which the Company heads; b) assigns and revokes the delegation of powers to the managing directors, establishing the limits and manner of exercising such power and the frequency of reporting, normally not less than three months, through which the appointed bodies must report to the directors on the activities performed in relation to the powers conferred; c) establishes, after examining the proposals of the specific remuneration committee and after having consulted the Board of Statutory Auditors, the fee to be paid to the Managing Directors and those who hold specific posts, as well as dividing the total fees to which the directors are entitled among the individual members of the board, if this has not already been decided by the shareholders meeting; d) monitors the general performance of operations, with special attention being paid to the conflicts of interest, taking into account, in particular, the information received from the Managing Directors and the audit committee, as well as periodically comparing the results with the budgets; e) examines and approve transactions that have a significant economic, financial or equity impact, with particular reference to related party transactions; f) verifies the adequacy of the general organizational and administrative structure of the company and group as organized by the Managing Directors; g) keeps the shareholders informed at the shareholders meetings. 1.2 The appointment of the Directors The appointment of the Board of Directors is made on the basis of lists presented by the shareholders at the shareholders meetings, or where there is no meeting through unanimous decision of all of the shareholders, on the basis of the following procedures: - A number of shareholders representing at least 2% of the shares having the right to vote at an ordinary shareholders meeting, can present a list of candidates in progressive order, deposited at least five days before the date set for the shareholders meeting in first convocation at the registered office of the company. - Each shareholder alone or together with other shareholders cannot contribute to the presentation or present, even through interposed persons or trust companies, of more than one list. Each candidate can be presented only in one list at the risk of being declared ineligible. Each assignee can only vote for one list. - Together with each list within the terms of depositing it at the registered office, a declaration in which the individual candidates accept their candidature must be deposited and there must also be attached exhaustive disclosure relating to the personal and professional characteristics of the candidates. The Board of Directors have considered it necessary to implement, with deliberation on July 27, 1999, an internal Committee for the nomination of directors (as indicated in art. 7 of the Code), composed of two non-executive directors, of whom one independent based on that prescribed in art. 3 of the Code. The members of this Committee are Salvatore D Amora (non-executive director and independent) who is President - and Donato Sagliaschi (non-executive director). The principal procedures for the functioning of this Committee provide that: - the members of the committee are nominated by the Board of Directors and the duration is for the same period as the Board that nominates them; - the participation at the meetings of the committee by the President of the Statutory Auditors; - the minutes of the meeting are noted in a special register; - the compensation of the members of the Committee will be established by the Board on appointment. Directors' Report on operations Company Year 2001/

68 Freedomland ITN Spa The Board of Directors have in addition deliberated, on July 27, 1999, the constitution of the Remuneration Committee (as indicated in the Code at art. 8) of the managing directors and those who hold specific posts, as well as on the indications of the managing directors, of the determination of the criteria for the remuneration of the senior management of the Company. The Committee is composed of two non-executive directors, one of which is independent. The members of this Committee are Salvatore D Amora (non-executive director and independent) - who is President - and Donato Sagliaschi (non-executive director). 1.3 The composition of the Board of Directors The Board of Directors is currently composed of: Fabrizio Gardi President Willy Burkhardt Managing Director Salvatore D Amora Stefano De Marchis Aris Malez Roberto Nardini Donato Sagliaschi (Independent director) (Independent director) (Independent director) (Independent director) (Independent director) (Independent director) Appointments of the directors in other quoted companies Fabrizio Gardi President Director in Maffei S.p.A. Therefore, the Board is currently composed of 7 directors of which 3 are executive, that is in accordance with point 2.1 of the Code the Managing Director, Willy Burkhardt, and Stefano De Marchis and Roberto Nardini who carries out management functions in the company (respectively Business Development Director and General Director of Operations). The Code provides, at point 3, that independent directors are those who: a) do not have an economic relationship, directly, indirectly or on behalf of third parties, or have recently done so, of such significance as to influence the autonomy of opinion of the company, its subsidiaries, the executive directors, shareholders or groups of shareholders which control the company; b) do not hold, directly or indirectly, or on behalf of third parties, stakes of such entity as to allow them to exercise control over the company, nor do they belong to shareholder pacts for the company of the same company; c) are not close family members of executive directors of the company or of subjects indicated in the preceding letters a) and b). The term of office of all the present directors expires on January 1, 2005, with the exception of Stefano De Marchis who remains in office until the next shareholders meeting (probably that for the approval of the financial statement ). This is obviously without considering any possible modifications to the executive bodies that Content S.r.l., the offerer, may effect, as per the information Document of the Public Offer to Purchase of August 14, 2002, which has already being commented upon. 1.4 The functioning and the meetings of the Board The Board, where this has not been performed at the shareholders meeting, appoints a President; and can also appoint a Vice President who will substitute the President in case of his absence or prohibition. The Board meets, either in the registered offices of the Company, or elsewhere, in the territory of the Italian State or in the European Union, every time the President considers it is in the interests of the Company, or whenever a meeting has been requested by at least two of its member, by the Statutory Auditors, or rather by at least two of its members, with indications of the agenda. Directors' Report on operations Company Year 2001/

69 Freedomland ITN Spa The Board is convened by the President or Vice President with notice in which it must be indicated the day, the hour, the location and the order of the day to be sent by registered letter or telegram, telex or fax to the address of each director or statutory auditor three days before the date fixed for the meeting, or, in case of urgency sent in the same manner as above 24 hours before the meeting. The Board may however validly pass resolutions, even failing any formal convocation, if all the board members and all the statutory auditors in office are present. The presence of at least half the member plus one is necessary for the resolutions of the Board to be deemed valid, and the favourable vote of the majority of those present is required. In the event of a tie in votes, the casting vote shall be that of the Chairman. The resolutions of the Board, are recorded in a special register signed by the President of the Board of Directors and the Secretary. The possibility that the meetings of the Board are held by video or teleconference is permitted on condition that all of the participants can be identified and that they can follow the discussions and intervene in real time in relation to the subject matters under discussion. Having verified these requisites, the Board meet in consideration of the location of the President and of the secretary thus permitting the preparation and signing of the minutes in the register. In relation to this, the statutes do not provide for a minimum number of meetings; however for the year under examination it has been normal practice that the board convenes at least once a month (in relation to the particular situation of Your Company as well as the examination of the annual, half-yearly and quarterly financial statements). In the year , 20 meetings of the Board were held. In the year already 9 meetings have been held. It is difficult to quantify the number of meetings that will be held in the year in course given the particular situation of the company and there is nothing within the statutes in relation to this. 1.5 The emoluments of the Directors The emoluments of the executive body is established, by the shareholders meeting (article 2389, paragraph 1 of the civil code), integrated, with article 2389, paragraph 2 of the civil code, in relation to special appointments of some of the directors vested with particular operative functions and/or powers. Below is shown a summary situation of the annual compensation deliberated. For the total compensation received by the individual directors and statutory auditors reference should be made to the notes to the financial statements. Table in thousands of Euro: Surname Office Emolument on annual basis for appointment Other compensation for special appointments Gardi President Burkhardt Managing Director Nardini (1) Director and General Director of Operations D Amora Director Malez Director Sagliaschi Director De Marchis (2) Director Romagnoni (3) General Manager and C.F.O Meroni President of Statutory Auditors Gerla Statutory Auditor Carpaneda Statutory Auditor Directors' Report on operations Company Year 2001/

70 Freedomland ITN Spa (1) The compensation for special appointments, indicated on an annual basis, commenced on February 1, 2002 and terminated on July 14, From July 15, 2002 remuneration as an employee on an annual basis for the appointment as General Director of Operations Euro (2) The compensation for special appointments terminates on December 31, (3) Euro from August 1, 2002, gross annual compensation as employee. In addition to this, the members of the Board shall be reimbursed for all expenses incurred by them during the course of their duties. The Board has internally set up the Remuneration Committee, established as per that outlined in paragraph 1.2 As regards its function: It meets every time the President considers it necessary; For the convocation, notice is given by telephone at least twenty-four hours beforehand. The President of the Statutory Auditors must be invited. The minutes of the meetings of the Committee are recorded in a special Register held by the President and Secretary Granting of power. Information provided to the Board of Directors. The Board of Directors have reserved to the Managing Director, Willy Burkhardt all the powers of ordinary administration, the most significant of which are listed below, in order to carry out and supervise the organisation and management of the company and its subsidiaries; with single signature 1. Purchase, exchange and sell, even through financial and/or operating lease operations, fixed assets in general, machines and equipment, furniture and dividing walls for the organisation of the offices of the company; 2. Registration and cancellation of mortgages; 3. Stipulation, modification and cancel rental or sub-rental contracts of companies, premises and sub-premises; 4. Stipulation, modification and cancel agency, concessions or commercial subconcessions, commissions, deposit contracts; 5. Purchase licences and intellectual property rights; 6. Stipulation, modification and cancel of tender contracts in general, for services, for works, or similar services; 7. Demand, collect and transfer receivables and in general any amount due to the company from any administration and public and private entity and for whatever reason, give a receipt, concede an extension and settle different accounts, with single signature; 8. Recruit, suspend and dismiss employees, including senior management, agree relative contracts, fix remuneration, functions and eventual cautions and measures in relation to the administration of relationships with employees; 9. Ensure adherence to all fiscal regulations that the Company must maintain in the performance of its activities; 10. Represent the company in relation to any administrative, political, military, trade union, fiscal authority, also in relation to the provisions of the Legislative Decree of July 22, 1998, no.322, signing applications and appeals, requesting and receiving reimbursements; 11. Represent the company before the Minister of Finance and its offices, including the bodies of the Investigating Police Court; 12. Represent actively and passively the company in front of the Civil and Penal Administration and Finance judicial authority, in every order and degree of jurisdiction, including appeal judges, nominating and annulling, as necessary lawyers, attorneys and experts, make denouncements. Settle and reconcile judgements as well relinquish actions; compromise with dispute arbitrators; Directors' Report on operations Company Year 2001/

71 Freedomland ITN Spa 13. Perform the normal banking operations, open, close and utilise current accounts at any Bank, Credit Institution, Cassa di Risparmio, and performing on these accounts lodgements, without limit to the amount, and operations of withdrawal against credit lines, issue cheques, payment orders and mandates on current accounts, against the available liquidity or in any case against the credit lines accorded to the company, up to an amount of two hundred million Lire for single operations; rent, open and have available safety boxes, deposit and withdraw sums, valuables and securities; 14. Endorse, either for discount or receipt bills of exchange, cheques and credit instruments and demand the relative amounts, protest and accept bills due, up to an amount of Euro 103, (one hundred three thousand and ninety one /38) for each operation; 15. Issue drafts in execution of contracts; 16. Issue postal transfers and cheques for all other matters and amounts, obtaining the relative indemnities and eventual reimbursements; 17. Demand, accept, endorse payment mandates, cheques, money orders, drafts issued in favour of the Company by any public Administration, including the Treasury of the Bank of Italy and for whatever reason, registering protests and ordering obligations; 18. Granting power and general and/or special proxy for certain acts or category of acts in relation to the powers transferred; with the signature of the General Manager and CFO,. Giovanni Romagnoni: 19. Perform withdrawal operations and use of the current account, up to the value of liquidity available or to the credit lines accorded to the company, issue cheques, transfers and mandates, for amounts not superior, for each single operation to Euro 774, (seven hundred thousand six hundred and eighty five /35); 20. Endorse, either for discount or receipt bills of exchange, cheques and credit instruments and demand the relative amounts, for amounts not superior, for each single operation to Euro 774, (seven hundred thousand six hundred and eighty five /35); 21. Perform treasury operations/management of available liquidity such as, as examples but are not exhaustive, opening/closing deposit accounts, time deposits, negotiation of interest rates, opening/closing of mandates and, in general, all similar operations without limit to the amount. Also during the year 2001, as in the past, the Managing Director, the General Managers and the Directors availed of powers attributed to them in the normal operations of the company s activities (in relation to which the Directors were periodically informed), renouncing on these powers in the case of significant operations, for quality and value, under economic-financial aspects and presenting the matters to the Board of Directors; also in compliance of article 20 of the statutes. In addition, matters were always referred to the Board and the Statutory Auditors on the activities performed concerning the most significant economic and financial operations made by the Company and its subsidiaries as well as operations of potential conflict of interests, providing all the necessary elements for a correct understanding of the operations. Both the parent company and the subsidiary companies are required to follow the policies and rules which govern the main areas of business, in addition to the financial and administrative principles and rules of the Group governing the accounting treatment of financial and administrative events and the preparation of the consolidated financial statements and periodic cash flow statements. The President, in the course of the year, invited the executive directors, despite the short time frame often characterised by the operations, to provide documentation, relating to the matters on the order of the day, a number of days before the pre-fixed date for the directors meetings. The members of the board thus had the documentation available in relation to the agenda items in sufficient time in order to make further detailed analysis. Directors' Report on operations Company Year 2001/

72 Freedomland ITN Spa Finally, as regards the information provided to the Board, the managing directors inform the directors and, if necessary, discuss any major new legislation and regulations that regard the company and the corporate boards Internal control The internal control system of the Group is organized in such a way as to ensure proper disclosure and an adequate system of control of all its activities and, in particular, in the major areas of corporate risk. There is also a planning and control system, which periodically produces a detailed report for the General Directors, so that they have an adequate instrument with which to monitor specific activities. The Board of Directors has internally set up, the Audit Committee establishing that: a) as regard its functions: advisory and proposal functions shall be provided to the Board of Directors and, in particular: evaluate the adequacy of the internal control system; evaluate the work plan prepared by those in charge of internal control and receive their reports periodically; evaluate the proposals formulated by the independent audit firms in order to be appointed as auditors as well as the audit work plan and the results expressed in the report and letter of recommendations; at least every six months, at the time of the approval of the annual financial statements and sixmonth financial statements, the Board shall be informed about the work carried out and the adequacy of the system of internal control; perform the additional tasks assigned by the Board of Directors, particularly with regard to relations with the independent audit firm; b) as regard its composition: it is exclusively composed of non-executive independent directors (in total two) who shall appoint a President and a Secretary, who need not necessarily be a member of the Board; at the meeting one or more representations of the Statutory Auditors and the person in charge of the Internal Auditing function shall attend; as well as, by invitation, the managing director and the general directors; c) as regards its working format: meetings are held at least twice a year, before the Board meetings for the approval of the annual financial statements and the six-month financial statements, or at any other time the President deems it necessary or a request has been made by another member or a managing director. The Audit Committee is currently composed of the Directors Salvatore D Amora, who is President and Aris Malez; in the year , 11 meetings were held. Also in the course of the Internal Audit function reported periodically to the President, the Audit Committee and the Statutory Auditors. The Audit Committee and the Board of Directors, also on the basis of indications received from the Board of Statutory Auditors, have maintained that the system of internal control is adequate. In addition, the Internal Audit function responds, directly to the President of the Board of the parent company Freedomland ITN S.p.A. (not involved in the financial and operating activities and in the preparation of the financial statements and cash flow statements) whose head, Francesco Albieri, is also in charge of internal control (article 150, paragraph 3 of Legislative Decree 58/98 and Article 9.4 of the code). The principal tasks of the Internal Audit function consist of: Ensure the respecting and verify the functioning of the procedures (operative and administrative-accounting) and the principles of internal control (review of the procedures relating to the principal operating cycles of the company; recommending the introduction of new procedures that will consent a rationalization of costs and an increase in efficiency of the operating processes). Directors' Report on operations Company Year 2001/

73 Freedomland ITN Spa Verify the reliability of the data processing of accounting and management information. Verify the efficiency of the internal control system in protecting the assets (material and nonmaterial) of the Parent Company and of its Subsidiary and Associate companies. Perform the role of interface between the Statutory Auditors (Legislative decree 58/98) and the Board of Directors Audit Committee - (Self-discipline Code) in relation to internal controls. Examine, in order to support and verify the advisability of investments, economic and financial valuations of the extraordinary operations on the capital of the company and on the acquisition/disposal of company divisions and participations also with regard to possible risks in relation to them. The Internal Audit function is co-ordinated operatively by the Audit Committee who intervene on a consistent basis. The attention of the Committee, since its constitution, has been directed at verifying the company processes most strictly correlated to safeguarding the company s assets. In particular, we mention some of the activities performed, in the course of the year, where were among the most significant: Support in redefining the instruments for the management of the considerable liquidity available to the Company; Support in the solution for the complete recovery of the receivables from WIND S.p.A. (formerly Infostrada S.p.A.); Recommendations in relation to the rationalisation of the Group structure, through the elimination of at least one Luxembourg company; Activity in the verification of the systems of internal control of the overseas subsidiaries, with particular attention to cash-flows; Activity in the verification of the management control and budgeting system of the Parent Company; Support and review of the definition of the receivable/payable situations, in the course of settlement, with the group I@T (related to the majority shareholder of the Company, V. Degiovanni, and thus a related party); Activity of review with several professionals, whose services were utilized by the previous management, and re-negotiations on relative emoluments with significant reduction in the costs already accrued. In relation to Legislative Decree 231/2001 the documentation has been distributed to the members of the Audit Committee in order to permit a detailed consideration of the preparation of an additional control plan of operating powers delegated with the possibility of producing an ethical code to be signed by the directors and senior management of the Company The Board of Statutory Auditors We consider it appropriate to mention here the most significant parts of article 24 of the statutes, which are: The Company is supervised by a Board of Statutory Auditors that is composed of three standing members and two alternate members, nominated and functioning in accordance with legislation. In order to ensure to the minority the election of one standing member and one alternate member, the nomination of the statutory auditors is based on the presentation of lists by the shareholders through which the candidates are elected by means of progressive number. The list is composed of two sections: one for the candidates as standing members, that cannot in any case be less than three, the other for the candidates as alternate members. Directors' Report on operations Company Year 2001/

74 Freedomland ITN Spa Only the shareholders that, alone or together with others, are the owners of shares that represent at least 2% of the shares having the right to vote at an ordinary shareholders meeting, have the right to present lists. Each shareholder alone or together with other shareholders cannot contribute to the presentation or present, even through interposed persons or trust companies, of more than one list. Each candidate can be presented only in one list at the risk of being declared ineligible. Each assignee can only vote for one list. Candidates cannot be inserted in the lists if they already cover the role of statutory auditor in five other quoted companies or they are not in possession of honour and professionalism requisites as established by applicable regulations. The outgoing statutory auditors are re-eligible. The lists presented must be deposited at the registered office of the company at least five days before the shareholders meeting in first convocation and this will be notified in the convocation notice detailed exhaustive information must be attached relating to the personal and professional characteristics of the candidates. Together with each list, within the terms as indicated above, a declaration in which the individual candidates accept their candidature must be deposited and they must testify, under their own responsibility, the inexistence of ineligibility and incompatibility, as well as the existence of the requisites required for the respective assignments in compliance with legislation in force. The shareholders meeting deliberates on the compensation for the Board of Statutory Auditors. In the case of no lists being presented, the voting is performed in accordance with the ordinary procedures. The outgoing statutory auditors are re-eligible. The current supervision board was nominated in the shareholders meeting of September 20, 2001; the duration of the office is three years. The statutory auditors are currently composed of: Gianfranco Meroni Michele Carpaneda Cesare Gerla Mario Venegoni Giorgio Pellati standing member (President) standing member standing member alternate member alternate member Offices held in other quoted companies: Gianfranco Meroni Meliorbanca S.p.A. alternate member Michele Carpaneda Ras S.p.A. alternate member Olcese alternate member Fin. Part. S.p.A. director Idra Presse S.p.A. director Cesare Gerla Mittel S.p.A. alternate member 4.5. Shareholders meetings It is the Company s consistent policy to use the shareholders meetings to provide the shareholders with information about the company and its prospects; this, obviously is complied with, in accordance with the rules governing price sensitive information and therefore, where necessary, by informing the market of such information. It is also the company s policy to call attention to the location, date and time of the meeting in order to facilitate the participation of the shareholders at the meetings; furthermore, where possible, all the directors and statutory auditors try to attend the shareholders meetings, in particular the directors who, because of the posts they hold, can make useful contributions to the discussion. Directors' Report on operations Company Year 2001/

75 Freedomland ITN Spa Finally, the Board of Directors makes known that it does not feel at the present time that the Company has a need to establish rules for conducting shareholders meetings, deeming that what is envisaged in the by-laws is sufficient for the orderly functioning of the shareholders meetings Relations with investors and other shareholders The Company has always actively tried to establish a dialogue with its shareholders and institutional investors based on an understanding of the reciprocal roles. In addition, since 2000 the function Investor Relations within the Finance Administration and Control Office has been created, now entrusted to Giovanni Romagnoni. During the year ended June 30, 2002 a procedure was enacted for the management of external communications on price sensitive information. This procedure is currently in the process of being up-dated in order to include the indications contained in the Guide for information to the Market published by Borsa Italiana in June Treatment of confidential information The management of confidential information, with special reference to price sensitive information, is under the direct responsibility of the President and the Managing Director. External communications regarding documents and information about the Company and its subsidiaries are conducted always in agreement with the President and the Managing Director by the Secretary of the Board of Directors and by the Company Secretary for the communications to the authorities and shareholders, by the Investor Relations function for communications to the press and for those to institutional investors. The President, the Managing Director and those in charge of the aforementioned functions are invariably able to join together to issue any urgent external communications. 5. Personnel and organisation The personnel of the company as at June 30, 2002 was composed of 7 senior executives, 10 managers, 25 white-collar workers, in addition to 5 temporary workers, compared to 11 senior executives, 17 managers, 61 white-collar workers as at June 30, At the time of this Report the personnel numbers had reduced by a further 2 units. In the reorganisation plan of personnel the Company also availed of negotiations with the trade union and leaving incentives. At the present moment there are no further rationalisation or reorganisation plans of the organisational structure. The Company has also adopted the new company organisational chart that provides for the direct reporting to the Managing Director of the General Operations Office, the Finance, Administration and Control Office and Investor Relations. 6. Transactions with Subsidiaries, Associated and Related Companies With reference to the disclosure required by Consob Communications No of February 20, 1997 and No of February 27, 1998 which deal with related party transactions among Group companies, the effects of such transactions in the balance sheet and statement of income of the consolidated financial statements as at June 30, 2002 are presented below. Directors' Report on operations Company Year 2001/

76 Freedomland ITN Spa The effects of transactions between Freedomland ITN S.p.A. and its subsidiaries are shown in the financial statements and in the notes of the Parent Company and eliminated for the purposes of the consolidated financial statements. All of the transactions, including those between the Parent Company and its subsidiaries, and among subsidiaries, fall within the ordinary operations of the Group, and are carried out at arm s length and there are no transactions of an unusual or exceptional natures, or constituting a potential conflict of interests. The table below presents the major transactions at June 30, 2002 that Freedomland ITN S.p.A. entered into with subsidiary companies (Freedomland ITN Gmbh, Freedomland ITN UK, Freedomland ITN S.A and Freedomland Investment Lux S.A.). In relation to the operations with related parties it is noted that the definition based on which operations are considered related parties has been taken from the international accounting principle (IAS 24) and from Article 11 of the Code. The Board of Director s also note that since the year a procedure is in place through which all operations (of commercial or financial nature) with related parties are subject to the prior control of the Audit Committee, as mentioned in paragraph 3 of the chapter Corporate governance, in order to verify both in relation to the merits and substance so that they can then be Company Revenues Costs Over accruals Amounts in Euro/000 Sales Other rev. Interests Purchases Commissions Interests of prev. period (*) Subsidiary Freedomland Investment ITN SA Freedomland ITN E SL Freedomland ITN UK. Ltd Freedomland ITN D Gmbh Total subsidiaries , Related parties I&T SpA I@TItalia SpA Web Business Europe S.p.A Virgilio Degiovanni Editore S.r.l Total related parties , (*) For the related party companies it relates to the adjustment of commissions earned in previous years deliberated upon by the highest executive body of the company. Subsidiary Companies Transactions with subsidiary companies relate to: - centralised treasury management, giving rise to inter-company interest and which have created receivables from subsidiaries, as further detailed in the notes to the financial statements; - the provision of services relating to the technological structure, resulting in the re-charging to the subsidiaries of the quota of costs for management and maintenance. The investments made in foreign subsidiaries amounts to approximately Euro million compared to approximately Euro 23.4 million in the previous year that also included the investment for the set-top-boxes, and resulted in the value of financial receivables due from foreign Directors' Report on operations Company Year 2001/

77 Freedomland ITN Spa subsidiaries, at the end of the year, equal to approximately Euro 37.9 million, as shown in the notes to the financial statements. The transfer of financial resources during the year equal to approximately Euro 8.2 million is principally attributable, other than the above-mentioned investments, to the maintenance of the local operating structures. Within the context of containing costs and a reduction of the absorption of cash the Board of Directors approved the liquidation of one of the Luxembourg sub-holding companies, Freedomland Luxembourg S.A. in May 2002 as well as the rationalisation of the local cost structures largely relating to this company. Related party companies As already indicated by the previous Board in the Directors Report on the financial statements for the year ended June 30, 2001 the Group notes, although not having received any formal communication, the interruption of the execution of the agency contract in course by the Company I@T Italia S.p.A. and by its foreign subsidiaries, circumstances that contributed in a determining manner to the scarce growth in the consolidated revenues. The Parent Company appointed its lawyers to verify the possibility of an amicable solution to these transactions and for all the financial transactions still open with the above-mentioned related party. In particular the receivables are overdue and relate to receipts made in the name of and on behalf of Freedomland from acquirers of set top boxes for approximately Euro 3 million and trade receivables (principally relating to direct sales of set top box) for approximately Euro 1 million. The payables to the same company are connected to commissions payable only on the receipt of the corresponding amount from customers. Also included are payables of approximately Euro 0.5 million relating to marketing expenses and other commercial payables. In July of the present year the company I@T Italia spa notified the transfer, without recourse, of the receivables due from Freedomland spa to I@T spa. In relation to the company Web Business Europe S.p.A., previously Sportcentre.com S.p.A., following the execution by the Cassa di Risparmio of Bologna of a guarantee equal to Euro thousand given by the Parent Company to this latter on behalf of Web Business Europe, Freedomland has recorded a receivable for a similar amount. The guarantee is counter-guaranteed by a guarantee given in favour of Freedomland by the majority shareholder Virgilio Degiovanni and collectable since April 20, The receivable from this related company also includes an amount of approximately Euro thousand for a loan given to this latter by the Parent Company and for which a repayment schedule has been agreed; the payment of the instalments was interrupted with the payment due on August 31, Following this the Parent Company, on November 30, 2001 and on December 21, 2001, requested the payment of the guarantee given in its favour by the majority shareholder Virgilio Degiovanni in relation to Web Business Europe as guarantee for these receivables. Against a situation of continual non-payment the Parent Company, on March 27, 2002 and on June 3, 2002 brought a court action against the company Web Business Europe and Virgilio Degiovanni. Finally, it is mentioned, that with the prior approval of the Audit Committee a general contract agreement was concluded with Arcadia S.p.A., a company controlled by the family of the Managing Director Willy Burkhardt that, without minimal contractual obligations or other continuative commitments, provides for the provision of consulting services for data processing and information solutions. During the year a total amount of Euro 40 thousand was paid for consulting services. The receivables and payables at the year of the end are shown below: Directors' Report on operations Company Year 2001/

78 Freedomland ITN Spa Company I&T S.p.A. Italia S.p.A. WDC S.r.l Web Business Europe S.p.A. Euro/000 Trade receivables Other receivables 3,006 3 Interest income 306 Financial receivables 555 Deposits (207) Trade payables (225) (305) (18) Payables for commissions matured (1,910) (598) Payables for commissions paid (2,642) (1,218) Total payables for commissions (4,552) (1,816) - - Total (858) (1,898) Treasury shares The company does not hold any of its own shares, either through trust companies or through third parties. Furthermore, the company did not purchase or dispose during the year its own shares, either through trust companies or through third parties. 8. Investments held by Directors, Statutory Auditors and General Managers In compliance with article 79 of the Consob Regulation approved with deliberation no on May 14, 1999 the investments held, in the company Freedomland - ITN S.p.A. and in its subsidiaries by Directors, Statutory Auditors and by General Directors are indicated below, as well as spouses not legally separated and by minor children, directly or through controlled companies, trust companies or third parties, as resulting as at June 30, 2002 in the shareholders register, from communications received and other information acquired from the Directors, Statutory Auditors and by General Managers. Name Office Type of possession No. Of shares held Purchased Gardi Fabrizio President Board Directors (directly held) 0 1,000 1,000 Malez Aris Director (directly held) Giovanni Romagnoni General Manager (indirectly held) 72, , Information relating to stock option plans. Based on the recommendations received from Consob, Communication no of February 15, 2000, below is shown the information relating to the stock option plans. The table below shows only the rights assigned and exercisable (net of any surrender or not assigned due to lack of requisites or non-attainment of objectives). Directors' Report on operations Company Year 2001/

79 Freedomland ITN Spa Year ended June 30,2002 Year ended June 30,2001 Movement in stock option plans Amounts expressed in Euro Number of shares Average price in year Market price (*=val.average price) Number of shares Average price in year Market price Rights in existence at July 1, 2001 (tranche I) 10, , New rights assigned in the period (tranche II) 15, (*)11.51 New rights assigned in the period (tranche III) 73, (*)11.51 Rights exercised in the period, Rights expired in the period Rights in existence at July 1, , , of which exercisable as at June 30, , , All of the rights above are exercisable within June 30, 2003, thus the residual life of the rights assigned, at the date of the preparation of the present report, was less than 12 months (in substitution of Table 2 required by the afore-mentioned Communication). The company Stock Option plan relates to an Offer of shares for payment in compliance with article 2441 of the Civil Code. On December 29, 1999: the Extraordinary Shareholders meeting of Freedomland deliberated on an increase in the paid-in share capital, destined for the aforesaid Stock Option plan for a maximum amount of Lire 110 million with emissions in one or more tranches of a maximum of 110,000 new ordinary shares of nominal value of Lire 1,000 each with the same rights as those shares in circulation at the moment of subscription, with exclusion to the option rights held by shareholders and with share premium, to be destined to several directors, executives and employees with important operating functions in the organisational structure of the company and/or subsidiary companies. The same Meeting simultaneously delegated to the Board of Directors the power to determine the method, terms and conditions of the subscription Offer of the shares belonging to each of the tranches as well as performing all other activities necessary and appropriate for the emission and placing of the shares. The Stock Option plan, as deliberated by the board on November 29, finds justification in the consideration that the professional contribution of those persons in the management activity processes of the company is a significant element in the future growth of the company... The position of the Stock Option plan is as follows: 1 Tranche: on August 28, 2000 the Board of Directors approved the definitive assignation of 10,980 option rights for the subscription of an equal number of ordinary shares of the Issuing Company at a price of Euro 84 exercisable under the terms and conditions of the Regulations. None of these rights at present have been exercised. 2 Tranche: on December 14, 2001 the Board of Directors approved the assignation of option rights for the subscription of ordinary shares of the Issuing Company at a price of Euro 16.76, exercisable under the terms and conditions of the Regulations. In the following months of January and February 2002 formally 15,023 rights were assigned (20,565 initial rights become 15,023 due to the surrender by a beneficiary) for the subscription of an equal number of ordinary shares. None of these rights at present have been exercised. 3 Tranche: on April 11, 2002 the Board of Directors gave mandate to the Managing Director to define the assignment of option rights for the subscription of the remaining 78,455 ordinary shares at a price of Euro With deliberation on September 13, 2002 the Board of Directors formally assigned 73,319 rights for the subscription of an equal number of ordinary shares. None of these rights at present have been exercised. Directors' Report on operations Company Year 2001/

80 Freedomland ITN Spa 10. Research and development activity The company did not perform for the year ended June 30, 2002 any activity classified as research and development activity. 11. Significant events subsequent to the year end In addition to that reported in paragraphs C and D the company communicated to the public on September 13, 2002 that the company Intertainer Inc. withdrew from the negotiations in course. The letter of intent provided, in fact, that the definitive and binding agreement should be stipulated within a defined period. The passivity rule of which Freedomland is subject to by law in consequence of the Public Offer to Purchase, results incompatible with the requirements of Intertainer to commence rapidly their activity in Europe and which prevented the reaching of an agreement within the necessary time frame. It should be noted that, following the transaction with Wind S.p.A. (formerly Infostrada), the Parent Company sub-entered into the management of the subscriptions. The verifications made evidenced, in addition to over the 27 thousand customers managed, positions with subscribers not processed by Wind due to the absence of certain formal requisites and which over time were integrated. This resulted, commencing from July 2002, in an action by the Company towards the receipt of amounts matured. This action consisted in the emission of postal billings in the first instance at the end of June 2002 with due date for payment July 15, Due to the considerable aging of these receivables at the moment the Company took responsibly and in order to show in the income statement only income components realised and certain, using prudential criteria in the preparation of the financial statements, the revenues relating to the subscriptions are recorded in the income statement only on the receipt of the receivables matured. 12. Future prospects The future prospects, as already highlighted in the communications issued by this Board in relation to the Public Offer to Purchase, is strongly conditioned by the development plans that will be adopted by the new shareholders. The Board is not currently able to evaluate the integration of theses plans with the plan adopted by the Board as mentioned previously. The prolonged passivity rule phase (over 3 months) has in any case prevented the external development of the company through acquisitions of investments and corporate agreements, rendering impossible, at least in the short term, the attainment of the objectives of the development in turnover and presence in the market that the Board has set at the beginning of the plan. 13. Proposal to shareholders meeting We present for your approval the financial statements, with the accompanying reports, showing a loss of EURO 11,952,000. We propose to cover this loss utilising for a similar amount the Share premium reserve. Milan, September 17, 2002 For the Board of Directors The President Directors' Report on operations Company Year 2001/

81 Freedomland - ITN S.p.A. Freedomland Internet Television Network S.p.A. Registered office: Milan, Via Manfredonia n, Milano Share capital Euro 7,493, fully paid-in Company s Register Office Milan no /1999 Register no VAT no./tax no. : Freedomland ITN S.p.A. Financial Statements as at June 30, 2002 Financial Statements 2001/2002

82 Freedomland - ITN S.p.A. BALANCE SHEET- ASSETS Amounts in Euro June 30, 2002 June 30, 2001 A) RECEIVABLES FOR CAPITAL TO BE PAID IN B) FIXED ASSETS I Intangible assets: 1) Set-up and expansion costs 12,730,421 17,355,660 2) Research, development and advertising costs 3) Patents and right to use intellectual property 458, ,537 4) Concessions, licenses, trademarks and similar rights 161, ,285 5) Goodwill 6) Assets under construction and payments on account 47,566 7) Other 350, ,600 Total 13,700,194 18,419,648 II Tangible assets 1) land and buildings 2) plant and machinery 398, ,534 3) industrial and trade equipment 359,050 3,163,118 4) other assets 211, ,816 5) assets under construction and payments on accounts Total 968,653 3,958,468 III Financial assets 1) Investments in: d) other companies 2,581 2,581 2) Receivables: Due within 12 months June 30, 2002 June 30,2001 a) from group companies 37,929,671 29,733,263 Total 37,932,252 29,735,844 Total fixed assets 52,601,099 52,113,960 C) CURRENT ASSETS June 30, 2002 June 30, 2001 I I nventory: 4) finished products and goods 1,152, ,698 Total 1,152, ,698 II Receivables: Due over 12 months June 30, 2002 June 30, ) trade receivables 1,745,576 7,295,895 2) group companies 156,527 41,044 5) others 653, ,795 12,988,577 12,406,443 Total 653, ,795 14,890,680 19,743,382 III Current financial assets 6) other securities 197,056,314 78,505,675 Total 197,056,314 78,505,675 IV Cash and banks: 1) bank and postal accounts 6,549, ,328,996 3) cash and cash equivalents 969 1,622 Total 6,550, ,330,618 Total current assets 219,649, ,742,373 D) PREPAYMENTS AND ACCRUED INCOME prepayments and accrued income 1,632,193 1,615,655 Total prepayments and accrued income 1,632,193 1,615,655 TOTAL ASSETS 273,882, ,471,988 Financial Statements 2001/2002

83 Freedomland - ITN S.p.A. BALANCE SHEET - LIABILITIES Amounts in Euro June 30, 2002 June 30, 2001 A) SHAREHOLDERS' EQUITY I Share capital 7,493,780 7,442,720 II Share premium reserve 223,098, ,791,368 VIII Retained earnings (losses) (30,858,146) IX Net profit (loss) for the year (11,952,000) (110,783,595) Total shareholders' equity 218,640, ,592,347 B) RESERVES FOR RISKS AND CHARGES: 1) for pension and similar obligations 2) for taxes 3) other 37,411,641 31,875,325 Total reserves for risks and charges 37,411,641 31,875,325 C) PROVISION FOR EMPLOYEE LEAVING INDEMNITY 287, ,363 D) PAYABLES: Due over 12 months June 30, 2002 June 30, ) due to other financiers 2,640,855 5,145,268 5,145,257 7,838,002 5) advances 211,435 6) trade payables 9,578,808 12,391,593 11) taxes payable 246, ,643 12) due to social security authorities 159, ,439 13) other payables 1,918,564 1,649,463 Total payables 2,640,855 5,145,268 17,048,215 22,548,575 E) ACCRUED LIABILITIES AND DEFERRED INCOME accrued liabilities and deferred income 495, ,378 Total accrued liabilities and deferred income 495, ,378 TOTAL LIABILITIES 273,882, ,471,988 MEMORANDUM ACCOUNTS Amounts in Euro June30, 2002 June 30, 2001 A) GUARANTEES GIVEN: 1) to third parties: a) sureties 833,788 9,380,171 Total 833,788 9,380,171 B) OTHER MEMORANDUM ACCOUNTS - leasing commitments 905,259 2,476,656 - third party assets held 57,555 Total other memorandum accounts 905,259 2,534,211 C) GUARANTEES RECEIVED 1) from third parties and group companies: a) sureties 1,394,434 1,394,434 TTotal guarantees received 1,394,434 1,394,434 TOTAL MEMORANDUN ACCOUNTS 3,133,481 13,308,816 Financial Statements 2001/2002

84 Freedomland - ITN S.p.A. INCOME STATEMENT Amounts in Euro June 30, 2002 June 30, 2001 A) (+) VALUE OF PRODUCTION: 1) revenues from sales and services 4,629,580 4,919,202 5) other revenues and income 973, ,614 Total 5,603,491 5,454,816 B) (-) COSTS OF PRODUCTION: 6) for raw materials, ancillary consumables and goods (181,637) (2,539,623) 7) servicesù (8,872,907) (26,870,687) 8) use of third party assets (1,527,100) (1,507,837) 9) personnel a) wages and salaries (3,093,651) (3,808,632) b) social security contributions (1,018,572) (1,348,271) c) employee leaving indemnity (192,445) (239,538) e) other costs (196,134) (534,858) 10) depreciation, amortization and write-downs: a) amortization of intangible assets (5,311,518) (7,558,749) b) depreciation of tangible assets (1,596,876) (10,929,162) c) other write-down of non-current assets (206,915) (35,068,032) d) write-down of receivables in current assets (193,138) 11) changes in inventory of raw materials, ancillary consumables and goods (163,702) ) provisions for risks (361,519) (1,477,006) 13) other provisions (13,093) (9,271) 14) other operating costs (1,014,513) (614,957) Total (23,943,720) (92,438,425) (A - B) DIFFERENCE BETWEEN VALUE OF PRODUCTION AND PRODUCION COSTS (18,340,229) (86,983,609) C) FINANCIAL INCOME AND CHARGES 15) (+) income from investments: 16) (+) other financial income: a) from receivables in non-curent assets: - from group companies 1,675,867 1,054,825 c) from securities under current assets which do not constitute equity investments 8,163,037 1,890,850 d) other income: - from third parties 3,734,173 7,759,563 17) (-) iinterest and other financial charges: a) from third parties (705,392) (790,726) b) from group companies (7,917) Total 12,867,685 9,906,595 D) ADJUSTMENTS TO THE VALUE OF FINACIAL ASSETS 18) (+) revaluations: 19) (-) write-downs: a) of investments (9,388,820) (29,398,599) c) from securities under current assets which do not constitute equity investments (53,760) (64,832) Total adjustments (9,442,580) (29,463,431) E) EXTRAORDINARY INCOME (CHARGES) 20) (+) extraordinary income: a) income 4,101, ,629 b) gain on disposal of fixed assets 21) (-) extraordinary charges: a) charges (1,138,620) (474,032) Total extraordinary items 2,963,124 (34,403) Profit (loss) before taxes (11,952,000) (106,574,848) 22) b) deferred taxes (4,208,747) 23) PROFIT (LOSS) FOR THE YEAR (11,952,000) (110,783,595) Financial Statements 2001/2002

85 Freedomland - ITN S.p.A. CASH FLOW STATEMENT Amounts in Euro FLUSSI DI CASSA GENERATI DALL'ATTIVITA' OPERATIVA: June 30, 2002 June 30, 2001 Loss for the year (11,952) (110,784) Adjustments on items that do not have an effect on cash flow: Depreciation, amortisation and write-downs 7,116 53,556 Employee leaving indemnity provided during the year Employee leaving indemnity paid during the year (181) (76) Provisions (utilizations) of reserve for risk and charges 5, ,480 (29,584) Changes in current assets and liabilities: Short term receivables 5,291 (5,498) Inventory 164 (68) Prepayments and accrued income (17) 731 Trade payables (2,813) (8,580) Other payables (206) 478 Accrued liabilities and deferred income Taxes payable 22 15,421 (115) 68,179 Cash flow generated from operating activity 3,469 (42,605) CASH FLOW FROM INVESTING ACTIVITIES Net book value of assets disposed of Tangible asset acquisitions (47) (13.251) Investments in other securities (118,550) (78,499) Increase in intangible assets (595) (772) (Increase) decrease in investments (119,110) 132 (92,159) CASH FLOW FROM FINANCING ACTIVITIES Net changes in loans (2,504) (3,456) Increase in share capital Dividends distributed Reduction (increase) in other intangible assets (8,636) (11,140) (17,782) (21,238) INCREASE (DECREASE) IN CASH AND BANKS (126,781) (156,002) CASH AND BANKS AT THE BEGINNING OF THE YEAR 133, ,333 CASH AND BANKS AT THE END OF THE YEAR 6, ,331 Milan, September 17, 2002 For the Board of Directors The President Financial Statements 2001/2002

86 Freedomland - ITN S.p.A. Freedomland Internet Television Network S.p.A. Registered office: Milan, Via Manfredonia n, Milano Share capital Euro 7,493, fully paid-in Company s Register Office Milan no /1999 Register no VAT no./tax no. : Notes to the financial statements of Freedomland ITN S.p.A. for the year ended June 30, 2002

87 Freedomland - ITN S.p.A. STRUCTURE AND CONTENTS OF THE FINANCIAL STATEMENTS NOTES TO THE ACCOUNTS The financial statements have been prepared in accordance with the principles set forth in the Italian Civil Code and the regulations of Consob and consist of the balance sheet, income statement and notes to the accounts. In addition, all necessary additional information in order to provide a better understanding of the economic and financial position of the company has been included. ACCOUNTING PRINCIPLES The financial statements have been prepared in accordance with article 2426 of the Civil Code, integrated and interpreted by the accounting principles of the National Board of Accountants and, in the absence of accounting principles laid down by this latter, by accounting principles issued by the International Accounting Standards Committee (IASC). The valuations of the amounts in the financial statements have been made with consideration to the general criteria of prudence and accruals, in accordance with the going concern concept, as commented upon on in the notes to the financial statements for the year ended June 30, Intangible assets Intangible assets represent costs and expenses with future utility and are recorded at purchase or production cost, including incidental charges, and amortised on a straight-line basis, in relation to the future utility of the specific charges. The amortisation rates used are shown below: Category Sub-group Rate Set-up and expansion costs Research, development and advertising costs Industrial patent rights and copyright util. Concessions, licences and trademarks Other Set-up Quotation costs Advertising Software Concessions, licences and similar Trademarks Improvements to leasehold assets 20% 33.3% 33.3% Dur. contract 10% Dur. contract Tangible assets Tangibles assets are valued at purchase or production cost, including directly imputable incidental charges. Tangible assets (including assets with a value less than one million lire) are depreciated on a straightline basis, from the moment the asset is available and ready for use, on the basis of the asset s economic/technical future residual utilization. Tangible assets whose economic value at the end of the year have incurred permanent impairment below the carrying value of the asset as per the above-mentioned criteria are written down to their economic residual value. The ordinary rates of depreciated utilized are as follows: Category General plant Specific plant Furniture and office machines EDP Hardware Telephone system Rate 8% 13% 12% 20% 20% Notes to the financial statements of Freedomland-ITN S.p.A. Page 2

88 Freedomland - ITN S.p.A. Mobile phone equipment Motor vehicles Specific equipment(set Top Boxes) Other equipment 20% 20% 25% 33.3% 25% On-going maintenance costs are charged in full to the income statement in the year in which they are sustained. Maintenance costs having an added value nature are attributed to the tangible assets to which they refer and depreciated over the expected useful lives of the assets. Financial assets The investments in directly or indirectly controlled companies are valued under the net equity method for an amount equal to the corresponding fraction of the net equity as at June 30, 2002, after the deduction of dividends and the application of adjustments required by accounting principles. The gains and losses from the application of the net equity method are recorded in the income statement under the items Revaluation of investments and Write-down of investments. The other investments and non-current securities are valued at cost. Inventory Inventories are valued at the lower of purchase price or production, including incidental charges, and the estimated realizable value at the end of the period. The calculation method utilized in determining cost is the weighted average cost. The inventories of obsolete or articles are written down taking into account the possibility of future use or sale. Receivables Receivables are recorded at their realizable value, taking into consideration the solvency of the debtor, the period overdue and the guarantees exercisable. The nominal value of receivables is adjusted by a specific doubtful debt provision in direct deduction of the amount recorded in the assets. Current financial assets Current financial assets are values at cost, or, if lower, at realizable value, using the market price where relating to quoted securities. This lower value is not maintained where the reasons for their write-down no longer exist. Cost is calculated by using the weighted average cost in the event the securities are fungible assets. Prepayments and accruals Prepayments and accruals are recorded based on the accruals principle of costs and revenues covering more than one accounting period. Reserve for risks and charges Provisions for risks and charges are recorded in respect of certain or probable losses or liabilities, the amount or due date of which could not be determined at year-end. The amounts provided represent a best possible estimate on the basis of available information. Employee leaving indemnity The employee leaving indemnity relates to the entire liability due to employees at the year-end in compliance with article 2120 of the Civil Code, and under employment legislation and contracts in force. Notes to the financial statements of Freedomland-ITN S.p.A. Page 3

89 Freedomland - ITN S.p.A. Payables Payables are recorded at their nominal value. Operations in foreign currencies The operations in currencies other than the EMU currency are converted to Euro at the exchange rate at the date in which they originate, with an adjustment at the end of the period to the exchange rate at that date. The profits and losses deriving from the conversion (exchange differences) of the individual receivables and payables at June 30, 2002 are charged to the income statement under financial items. Memorandum accounts They represent the risks and commitments of the company with third parties and are shown at their contractual values. Revenues Revenues are shown in the income statement net of returns, discounts, allowances and premiums, as well as direct taxes connected to the sale of products and provision of services in accordance with the accruals concept. The recognition, in the case of the sale of products, is the delivery of the goods sold. Costs As for revenues, costs are shown in the income statement net of returns, discounts, allowances and premiums, as well as direct taxes connected to the purchase of products and provision of services in accordance with the accruals concept. OTHER INFORMATION Changes to valuation principles There are no changes in valuation principles compared to the year ended June 30, Departures from requirements in accordance with Article 2423, fourth paragraph of the Civil Code. It should be noted that, following the transaction with Wind S.p.A. (formerly Infostrada), the Parent Company sub-entered into the management of the subscriptions. The verifications made evidenced, in addition to over the 27 thousand customers managed, positions with subscribers not processed by Wind due to the absence of certain formal requisites and which over time were integrated. This resulted, commencing from July 2002, in an action by the Company towards the receipt of amounts matured. This action consisted in the emission of postal billings in the first instance at the end of June 2002 with due date for payment July 15, Due to the considerable aging of these receivables at the moment the Company took responsibly and in order to show in the income statement only income components realised and certain, using prudential criteria in the preparation of the financial statements, the revenues relating to the subscriptions are recorded in the income statement only on the receipt of the receivables matured. Notes to the financial statements of Freedomland-ITN S.p.A. Page 4

90 Freedomland - ITN S.p.A. Provision for tax risks A fiscal control on Vat, income taxes and other taxes at the offices of the company by the Tax Police has been completed. In relation to this it has not been considered necessary to make any provisions covering possible and/or potential risks. Deferred taxes The deferred tax asset is represented by fiscal losses, presently matures based on fiscal legislation in force. In consideration of the events arising during the course of the previous year and the consequential necessity to focus the projections from which there can be established, with reasonable certainty, the existence of taxable income sufficient to guarantee the fiscal benefit presently matured, a total write-down of the deferred tax asset has been made pursuant to Accounting Principle 25 (National Board for Accountants), equal to Euro 4.2 million and the amounts matured in the years and 2001/2002 have not been recorded. The deferred tax assets, even if they are not recorded at the present moment, can however be written back to the assets the moment in which the reasons for their write-down no longer exist ( reasonable certainty ). Reporting of amounts The amounts are expressed in thousands of Euro, where not otherwise specified. The values at June 30, 2002 are comparable with the financial statements for the year ended June 30, Notes to the financial statements of Freedomland-ITN S.p.A. Page 5

91 Freedomland - ITN S.p.A. INFORMATION ON THE BALANCE SHEET Assets Fixed assets Intangible assets BALANCE Revaluations Altri BALANCE CATEGORY June 30, 2001 Increases (write-downs) Movimenti Amortization June 30, 2002 set-up and expansion costs 17,356-4,626 12,730 research, development and adv. costs patents and right to use intellectual property Conc., licenses, trademarks and similar right Goodwill Assets under construction and paym. on acc Other TOTAL 18, ,312 13,700 The composition and movements of intangible assets in the course of the year can be summarised as follows: The set-up and expansion costs recorded in the assets are amortized for the period of their economic life, equal to five years. They relate prevalently to the costs sustained for the quotation of the company on the Nuovo Mercato on the Italian Stock Exchange. There were no increases in the period. Industrial patent rights and copyright utilisation rights are amortized based on their estimated utilization, which in any case is not superior to that fixed by the relative contracts; they include, as the most significant part, the costs sustained in relation to the construction of the portal owned by the Company, specific entertainment software and management software. The increases in the year relate to the implementation of the new integrated information systems (ERP) that, apart from the adoption of the Euro as the accounting currency, consent a simpler management of relations with the customers, especially in the area of subscription handling. Concessions and licenses recorded in assets are amortized based on their estimated utilization corresponding to that fixed in the relative contract and relate principally to some software licenses. The costs sustained for the deposit of trademarks at international level are amortized over a period of ten years. The assets under construction, at June 30, 2001 related to the licenses of the new management information system; at the end of the year these costs have been reclassified into the item Industrial patent rights and copyright utilization rights. The other intangible assets comprise essentially the costs connected to the improvements of the building where the offices of the company are located. Notes to the financial statements of Freedomland-ITN S.p.A. Page 6

92 Freedomland - ITN S.p.A. Tangible assets The following tables show the movements, respectively, of the cost of tangible assets, accumulated depreciation and the net book value of tangible assets. COST BALANCE Other BALANCE 30/06/01 Increases Revaluations Movements (Disposals) 30/06/02 plant and machinery - general plant and machinery specific plant and machinery other plant and machinery industrial and trade equipment - equipment 47,092-26, ,597 47,092-26, ,597 other assets - general equipment furniture and fittings mobile phones Total 48, , ,639 ACCUMULATED DEPRECIATION BALANCE Other BALANCE 30/06/01 Depreciation Write-downs Movements Disposals 30/06/02 plant and machinery - general plant and machinery - specific plant and machinery other plant and machinery industrial and trade equipment - equipment 43,929 1, , ,238 43,929 1, , ,238 other assets - general equipment furniture and fittings mobile phones Total 44,205 1, , ,670 The item Plant and machinery consist of the investments, made principally in the previous years, relating to Hardware for the company business structures (the Hardware for the Internet technological platform was purchased under the operating lease format). With particular reference to the item Industrial and commercial equipment, consisting of Set top boxes held in the warehouse of the Company and held by customers on a gratuitous usage basis, the following information is recalled, already noted in the notes to the financial statements for the year ended June 30, Notes to the financial statements of Freedomland-ITN S.p.A. Page 7

93 Freedomland - ITN S.p.A. As already noted in the comments to the financial statements for the year ended June 30, 2000, the Company s commercial policy was, from January 2000, focused on the obtaining of subscriptions for the use of the Freedomland portal. This policy involved the granting of Set top boxes to customers free of charge. Although this policy has, in principle, remained commercially viable and the notable market potential of interactive television (confirmed by the recent agreements between multinationals in the sector and other similar initiatives in Italy), due to the particular situation of the Company it was deemed necessary to effect a significant write-down of these assets, in compliance with that established by the International Accounting Principle IAS 36 (in absence of an Italian Accounting Principle). Analytical calculations were made based on I.A.S. 36 (Impairment of assets), as follows: cash flow projections based on reasonable and sustainable assumptions that reflect the use of the assets and represent the best estimate of management of the overall economic conditions throughout the economic life of the assets; a discounting rate before taxes that reflect current market rates for the cost of funding. The decision to write-down the Set top boxes does not prevent the possibility of the Company to write back the cost, even partial, if and when management plans would consent this (within the terms of the original depreciation schedules). For the 244 thousand Set top boxes recorded in tangible assets the residual value was estimated at June 30, 2001 as Euro 3.1 million (equal to Lire 6.1 billion) giving a unit value to the Set top boxes equal to Euro (equal to Lire 25 thousand), that from all viewpoints is very prudential given that the previous carrying value was equal to approximately Euro (equal to Lire 265 thousand). During the final quarter of the year , given the change in the commercial policy of the Company that now provides for the sale of the Set Top Boxes in place of the concession for free use, the decoders in the warehouse have now been reclassified to the item Inventory. The reclassification related to approximately 144 thousand Set Top Boxes for a net value of approximately Euro 1.1 million (resulting from an historical cost of Euro 26.9 million and accumulated depreciation of Euro 25.8 million including depreciation and write-downs as per the accounting records as at April 1, 2002). Approximately 97 thousand Set Top Boxes included in the balance as at June 30, 2002 of the item commercial and industrial equipment represent the decoders that, over time, were subject to subscription contracts through the free usage formula. The write-down in the period relates to the Set Top Boxes returned by customers at the termination of the subscription period. The table below shows the movements with net values: Notes to the financial statements of Freedomland-ITN S.p.A. Page 8

94 Freedomland - ITN S.p.A. NET VALUE BALANCE Revaluations Depreciation BALANCE 30/06/01 Increases & other movements & write-downs Disposals 30/06/02 plant and machinery - general plant and machinery specific plant and machinery other plant and machinery industrial and trade equipment - equipment 3,163-1,153-1, ,163-1,153-1, other assets - general equipment furniture and fittings mobile phones Total 3, ,153-1, Financial assets Subsidiary companies June 30, 2002 June 30, 2001 Change Other companies Atvef The investments in subsidiary companies are valued under the net equity method, and given the negative value of this latter, the asset value is equal to zero, while the negative value is shown under liabilities. Also recorded under investments are Investments in other companies equal to Euro 2,581, constituting an investment in an international consortium of companies, operating in the sector of new technologies, which enable its partners to benefit from the rights deriving from anything that it might produce. I "Receivables from subsidiary companies relate to medium-long term loans given to direct or indirect subsidiary companies. FINANCIAL RECEIVABLES TRADE RECEIVABLES TOTAL within one year over one year within one year over one year SUBSIDIARY COMPANIES: Freedomland - ITN S.A. Freedomland - ITN Inv. S.A Freedomland - ITN Espana S.L. 15, ,682 Freedomland - ITN uk 9, ,852 Freedomland - ITN Deutschland 12, ,208 37, ,087 Notes to the financial statements of Freedomland-ITN S.p.A. Page 9

95 Freedomland - ITN S.p.A. The above loans represent the amounts transferred to the subsidiary companies in order to support the investments in the start up phase, which may be converted into share capital. As the investments were valued under the net equity method, the receivables from the subsidiaries were not adjusted, as all of the losses matured to June 30, 2002 were recorded in a specific account in liabilities. Current assets Inventory The details are as follows: June 30, 2002 June 30, 2001 Cost Write-down Net value Cost Write-down Net value Set-top boxes 28,116-26,969 1, E-Commerce Competition prizes Merchandising products Gadgets Promotional items Total 28,199-27,046 1, The item "Write-down provision " relates principally to the adjustment to the value of the Set Top Boxes. It should be noted in relation to this, as commented upon under the item Industrial and commercial equipment classified under tangible assets, that 144 thousand Set Top Boxes in the warehouse of the Company were reclassified, given the change in the commercial policy passing from the subscription formula with free use of the decoder to that of selling the decoder, to inventories at the net book value resulting as at April 1, Receivables Trade receivables relate solely to Italian customers, as the company does not have overseas customers and where not otherwise specified the receivables are due within 12 months. June 30, 2002 June 30, 2001 Change Due from customers - instalments 5,848 8,848-3,000 Due from customers - subscriptions 1,912 5,437-3,525 Due from customers - others Related party customers 1,378 1, Provision for doubtful debts -7,592-8,701 1,109 1,746 7,296-5,550 The item Due form customers - instalments includes the residual receivables relating to the 24- month repayment scheme before the company introduced the subscription based sales formula. For these receivables, in the second half of the year, recovery action has been instigated through specialised companies; this activity is still in course and it is expected that it will be terminated in the final months of Notes to the financial statements of Freedomland-ITN S.p.A. Page 10

96 Freedomland - ITN S.p.A. The item Due from customers subscriptions, that at June 30, 2001 was principally composed of receivables from Infostrada S.p.A for the sales and marketing, via Co-branding, of the service through a licensing agreement, now only includes receivables relating to direct subscription contracts. The change resulting from the above table is a consequence of the receipt of the receivable from Infostrada as further described in the Directors report on operations. For the overdue receivables relating to subscriptions, recovery action has also been instigated through specialised companies. For the quantification of the doubtful debt provision, in particular for the sales with the instalment formula, a calculation model was utilized in the previous years that was particularly prudent based principally on statistical results relating to credit recovery action through external companies. In the course of the year, the receivables deriving from the credit recovery company and those directly received by the Company resulted, while maintaining the application of prudential criteria, in an excess of Euro 1.6 million in the Provision for doubtful debts that were recorded in the income statement in the item Surpluses from prior year activities. Within the Provision for doubtful debts, in order to clearly identify the amount of the net receivable, there has been included the Provision for withdrawal risks and the Provision for future dispute risks. These provisions were previously classified in liabilities under the item Reserve for risks and charges and the relative residual amounts are respectively approximately Euro 0.2 million and Euro 0.6 million. The reclassification was made necessary in that the previous classification in the financial statements was no longer considered relevant being based on elements calculated in previous years and no longer representative of those specific risks. Currently these amounts can only represent adjusting elements on the values in the assets. It should however be noted that, if the conditions should arise for the passage of the residual receivables on the instalment and subscription sales as losses, the Company would record under surpluses from prior year activities the relative quota of commissions currently matured but not yet liquidated and recorded in liabilities. The item Related party customers relates to receivables of a commercial nature and is principally composed of receivables from the company I&T S.p.A, for an amount equal to Euro million for trade receivables and Euro million for interest, and from the company I@T Italia S.p.A. for Euro million for trade receivables. I Receivables from subsidiary companies relate to receivables of a commercial nature and are as shown below: June 30, 2002 June 30, 2001 Change Receivables from subsidiary companies Freedomland - ITN Espana S.L Freedomland - ITN uk Freedomland - ITN Deutschland The analysis of the item Receivables from others is as follows: Notes to the financial statements of Freedomland-ITN S.p.A. Page 11

97 Freedomland - ITN S.p.A. FINANCIAL TRADE BALANCE BALANCE BALANCE BALANCE due within 12 months June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 Other receivables from related parties 210 3,371 2,976 Other receivables 8,936 8,908 Other receivables ,335 11,981 due over 12 months Other receivables from related parties 18 Income tax receivable Deferred taxes Deposits The item Other receivables from related parties represents, for an amount equal to Euro million, the receivable position from the company I&T S.p.A. for receipts collected on behalf of Freedomland, in relation to the mandate conferred, and as resulting from the Directors Report on the operations of the Group, in the section Transactions with related companies. It is noted that, against these receivables (as well as those of a purely commercial nature, as previously noted), payables of a commercial nature are recorded in the financial statements of a greater amount (as further described in the Directors Report on the operations under the section Transactions with related companies ). It was therefore not considered necessary to adjust the value of those receivables, even though the receipt in uncertain. The same item includes a receivable of Euro million from the related party Web Business Europe relating to the execution of a guarantee given by the company and counter-guaranteed by a guarantee given by Mr. Virgilio De Giovanni for a nominal amount of Euro million. Also included in this category is an amount of Euro million, fully covered by a specific doubtful debt provision, relating to a loan given by the parent company to the same company and similarly, guaranteed by Mr. Degiovanni (as further described in the Directors Report on the operations under the section Transactions with related companies ). There are no receivables with a residual duration greater than five years. Current financial assets In relation to the item Other securities the details are as follows: BALANCE MOVEMENTS IN THE YEAR OTHER BALANCE June 30, 2001 INCREASES DISPOSALS REVALUATIONS MOVEMENTS June 30, 2002 OTHER SECURITIES Government bonds 9,490 59,919-14,492 54,917 Other bonds 16,829 3,578-18, ,942 Mutual funds 51,672 57, ,672 Time deposits 140, ,197 Other securities TOTAL 78, , , ,056 In relation to the item "Mutual funds" it relates to quotas acquired in the fund Balanced International Investment Strategies (BIIS) managed by ABN AMRO. In relation to this the Company requested and received the reimbursement of this investment realizing a gain of approximately Euro 5.5 million. Notes to the financial statements of Freedomland-ITN S.p.A. Page 12

98 Freedomland - ITN S.p.A. The investment policy is aimed at the minimizing of the financial risk and for quick liquidity. The average return in the period, excluding the gains on the mutual investment fund liquidated, was equal to 3.66% compared to Euribor at three months equal to 3.63%. Of note is the existence of an investment in the Consortium Eurocom, a non-profit organization having the objective of the management, in the common interest of the consortium companies, of the receipts deriving from the sales and marketing of their products and services. At June 30, 2001 the investment was written down as the Consortium was placed in liquidation. Cash and banks The details are as follows: June 30, 2002 June 30, 2001 Change Bank and postal accounts 6, , ,780 Cash and cash equivalents , , ,781 The liquidity available at June 30, 2002 was represented prevalently by short term deposits held at primary Italian credit institutions. Prepaid expenses and accrued income The composition of prepaid expenses and accrued income are as follows: 30/06/02 30/06/01 Change Change% Accrued income: interest accrued on securities, time deposits and others % Total accrued income % Prepaid expenses: Web-housing % Interest on leasing and use of licenses % Commissions % Rent and pre-paid expenses % Other prepayments % Total prepaid expenses: 928 1, % Total accrued income and prepaid income 1,632 1, % The accrued income relates to the interest on securities held in portfolio and time deposits as at June 30, The prepaid expenses for Interest on leasing and use of licenses and for Web housing are connected respectively to the loan received by IBM Semea Servizi Finanziari for the acquisition in leasing of tangible assets for the functioning of the Portal and the housing of the servers supplied by the company I.Net S.p.A.; in Rent and pre-paid expenses are included the rental for the year 2002 for the building from which the company operates. Notes to the financial statements of Freedomland-ITN S.p.A. Page 13

99 Freedomland - ITN S.p.A. Liabilities Shareholders equity The share capital is composed of. 14,411,115 shares of a nominal value of Euro 0.52 each. The movement in the various components of shareholders equity is shown below: BALANCE Allocation of Other Result for BALANCE June 30, 2001 result Dividends movements the period June 30, 2002 Share capital 7, ,494 Share premium reserve 364, , ,098 Retained earnings (losses) -30, , ,642 Net profit (loss) for the year -110, ,784-11,952-11,952 Total 230,592-11, ,640 In the course of the year the conversion of the share capital into Euro was made. The new nominal value of each share was determined as Euro 0.52 resulting in a share capital of Euro 7,493, equal to Lire 14,509,981,013 with an increase in share capital of Euro 51,060 equal to Lire 98,866,013 through a decrease in the item Share premium reserve. On January 14, 2002 the ordinary shareholders meeting deliberated, simultaneously to the approval of the financial statements , to cover the losses for the years and through the utilization of the Share premium reserve. Reserve for risk and charges The movement in the various components of the reserve for risks and charges are as follows: Balance 30/06/01 Provision Utilization Other Movements 30/06/2002 Reserve for charges Provision for discounts and competitions Reserve for risks Provision for lawsuit risks Provision for withdrawal risks Provision for future dispute risks Provision for Infostrade receivable risks 1,745-1,745-2 Provision for covering the losses in investments 28,644 9, ,050 Provision for execution of guarantees Total 31,875 9,764-2,745-1,482 37,412 The "Provision for discounts and competitions": represents the contractual obligations assumed by the company in relation to customers for transactions involving prizes; this activity was terminated during the year. The "Provision for lawsuit risks": comprises the provision relating to a litigation with a former executive, that was resolved during the year with a utilization of the provision of Euro million part of which was recorded in the surplus on prior year activities account for approximately Euro 64 thousand. The "Provision for withdrawal risks": this provision made in previous years related to the estimate of potential withdrawals relating to the instalment sales. The residual amount of this provision, equal to Notes to the financial statements of Freedomland-ITN S.p.A. Page 14

100 Freedomland - ITN S.p.A. Euro million, was reclassified to the item Trade receivables where reference should be made for the relative comments. The "Provision for future dispute risks" this provision made in previous years, represents the estimate of potential liabilities connected to those customers who might initiate disputes and support their cases with reasonable evidence. The amount refers almost exclusively to customers who adhered in the past to the instalment payments formula; the residual amount of this provision, equal to Euro million, was reclassified to the item Trade receivables where reference should be made for the relative comments. The "Provision for Infostrada receivable risk": this provision was provided on the basis of the obligations undertaken in the concession contract of sales through the company Infostrada in which Freedomland would render concessionaire without recourse of the receivables generated from the marketing and sales of its own subscription but not actually received by Infostrada. During the year a settlement was reached with Wind (formerly Infostrada) through which a final payment was made freeing both parties from reciprocal obligations. This agreement resulted in the utilization of the reserve for an amount similar to that provided for in previous years generating the recording of a surplus on prior year accruals in the income statement, relating to the sole utilization of the reserve under analysis, equal to Euro million. The Provision for the execution of guarantees, relating to the receivable from the company Web Business Europe, has already been commented upon in the analysis of Other receivables. SCHEDULE OF PROVISION OF LOSSES OF SHAREHOLDINGS Investment Loss as at Loss as at Loss as at Net equity June 30, 2000 June 30, 2001 June 30, 2002 Freedomland - ITN Inv. S.A. 100 (23) (41) (30) 6 Freedomland - ITN Espana S.L. 2,064 (1,266) (13,644) (2,183) (15,029) Freedomland - ITN uk 1,479 (642) (7,583) (3,102) (9,848) Freedomland - ITN Deutschland 495 (619) (8,041) (4,014) (12,179) Elimination on inter-company profits 0 4,138 (2,550) (29,309) (9,329) (37,050) The "Provision for covering the losses in investments" is comprised of the following: The company Freedomland-ITN S.A. was liquidated, and transferred to Freedomland-ITN S.p.A., as sole shareholder, all the assets and liabilities; including the investments in the operating subsidiaries in Spain, Germany, UK which are now held 99%, under the direct control of the Parent Company. The liquidation of the investment, being at book values, did not result in any gain/loss as the valuation under the Net Equity method already permitted the inclusion of the losses for the year in the item Write-down in investments within the income statement (Euro 60 thousand in the year). The Other movements shown in the movements of Provision for covering the losses in investments are attributable to the changes in the Group structure. Notes to the financial statements of Freedomland-ITN S.p.A. Page 15

101 Freedomland - ITN S.p.A. Employee leaving indemnity provision The following schedule shows the movements in the period: BALANCE Provision UTILIZATION OTHER BALANCE June 30, 2001 MOVEMENTS 30/06/02 Executives and staff Total Payables The analysis of payables is shown in the table below, of which there are no payables over five years, or collateral guarantees given in relation to payables. Where not otherwise specified they are payable within 12 months. 30/06/02 30/06/01 Amount payable Amount payable Within From 1-5 Total Within From 1-5 Total 12 months years payable 12 months years payable payables to banks due to other financiers 2,504 2,641 5,145 2,693 5,145 7,838 advances trade payables 9,579 9,579 12,392 12,392 taxes payable due to social security authorities other payables 1,918 1,918 1,650 1,650 14,407 2,641 17,048 17,404 5,145 22,549 The amounts included in Due to other financiers relates to financing received from IBM Semea Servizi Finanziari, in relation to the acquisition of hardware and Set Top Boxes. The item Advances included, in the previous year, principally income relating to the contract concluded with Banca Popolare di Milano for which the suspension conditions under the agreement had not yet matured. At June 30, 2002, the contract had expired and the relative advances repaid. The item Trade payables includes the payables to the related party companies I&T S.p.A. and I@T Italia Spa, relating to commissions payable for an amount of Euro million, and trade payables for an amount equal to Euro The commissions matured are directly related to receivables from customers and become therefore payable on the receipt of the same. The taxes payable are comprised of: Notes to the financial statements of Freedomland-ITN S.p.A. Page 16

102 Freedomland - ITN S.p.A. 30/06/02 30/06/01 Change Payables to tax authorities for withholding taxes Total The payables to social security authorities are comprised of contributions withheld in the month of June 2002, paid within the terms of the legislation. They are sub-divided as follows: June 30, giugno 2001 Change Social security institutions employees Social security institutions executives Others The item Other payables, are comprised of the payables to employees for compensation matured, but not yet paid, and the compensation of directors matured but not yet paid. The details are shown below: 30/06/02 30/06/01 Change Change% Fees payable to Directors % Fees payable to Statutory Auditors % Fees payable to Directors % Other payables 1, % Total 1,918 1, % The item Other payable shown in the table includes, guarantee deposits paid by the company I&T S.p.A. in relation to the depot contract signed on June 2, 2000 (Euro million) and a payable for a credit note to be issued in favour of BPM for Euro million. Accrued liabilities and deferred income There are no accrued liabilities at the year-end. The composition of deferred income is as follows: 30/06/02 30/06/01 Variazione Variazione % Accrued liabilities: Total accrued liabilities Deferred income: Interest receivable % Subscriptions % Revenues from advertising % Total deferred income % Notes to the financial statements of Freedomland-ITN S.p.A. Page 17

103 Freedomland - ITN S.p.A. The deferred income from subscriptions relates to amounts invoiced relating to future periods. MEMORANDUM ACCOUNTS The Guarantees given can be sub-divided as follows: June 30, 2002 June 30, 2001 Change Third party assets Future lease payments 905 2,476-1,571 Guarantees issued in favour of third parties 834 9,380-8,546 1,739 11,913-10,174 The item Future lease payments comprise the residual instalments due on operating lease contracts and rental for the acquisition, respectively, of hardware and software and of motor vehicles. The item "Guarantees given to third parties" refer to: - guarantee for competition and prizes (Euro million) given to the Finance Ministry; - guarantees given to Colt Telecom GmbH. (Euro million) for connectivity services; The item Guarantees received from third parties refer to: - guarantee received from the majority shareholder V.Degiovanni guaranteeing the extended payment period (approximately Euro million) given to Web Business Europe S.p.A.; the payment was requested for an amount equal to Euro million (value of the existing amount of the loan); - guarantee received (nominal value approximately Euro million) in counter-guarantee of the guarantee given by the Company in favour of a banking institution on behalf of the related party Web Business Europe, as commented upon in the item Other receivables. It is noted the execution of the guarantee by the Bank for an amount equal to Euro million. Notes to the financial statements of Freedomland-ITN S.p.A. Page 18

104 Freedomland - ITN S.p.A. INFORMATION ON THE INCOME STATEMENT Revenues from sales and services The composition is as follows: 30/06/02 30/06/01 Change Revenues form set-top boxes Subscriptions 4,365 4, Connection revenues Internet advertising revenues Advertising E-Commerce Other ,630 4, In relation to the activities in the year reference should be made to the Directors Report. Other revenues and income June 30, 2002 June 30, 2001 Change Gain on disposal of set-top boxes Re-charge to subsidiary companies Other revenue and income The composition of the item is as follows: Purchase costs The composition of the item is as follows: June 30, 2002 June 30, 2001 Change Set-top boxes and accessories E-commerce products Competition prize goods Consumables Advertising materials Transport Other accessory purchases 0 1,052-1,052 Other purchases ,540-2,358 Notes to the financial statements of Freedomland-ITN S.p.A. Page 19

105 Freedomland - ITN S.p.A. Service costs The composition of the item is as follows: June 30, 2002 June 30, 2001 Change Advertising, marketing, entertainment and commercial exp 708 8,794-8,086 Data processing and software 1,134 3,078-1,944 Consulting and corporate expenses 1,805 2, Web housing Call centre/customer care 553 2,136-1,583 Site content services 315 1, Commissions 1,271 2, Administration/legal services 764 2,641-1,877 Directors and statutory auditors fees 1,140 1, Electricity and utilities Maintenance Insurance Personnel search costs Other ,873 26,871-17,998 The analysis of the trend in costs for services and the comparison with the previous year shows the considerable efforts made in rationalizing the structure of operating costs with the intention, however, of maintaining unaltered the level of service offered to the clientele. The cost items that underwent the greatest changes were: - advertising, marketing, entertainment and commercial expenses: no investments in advertising were made and the amount shown is relative to commercial expenses and credit recovery; - the commissions to the sales network are directly proportional to the change in sales and the number of customers acquired; - the reduction of the expenses relating to administration and legal services are largely due to the positive definition of the civil right procedure as per article 2409 of the Civil Code resulting in the reduction in legal expenses; - in relation to the values shown for the Compensation of directors and the statutory auditors reference should be made to the relevant schedules included. Use of third party assets The composition of the item is as follows: June 30, 2002 June 30, 2001 Change Machinery and software leasing 1,056 1,057-1 Vehicle rent Rental and related costs Other ,527 1, Notes to the financial statements of Freedomland-ITN S.p.A. Page 20

106 Personnel costs Freedomland - ITN S.p.A. The division of these costs is shown in the income statement account. The trend in personnel costs, equal in the current year to Euro 4.5 million against Euro 5.9 million in the previous year, highlights the first results of the restructuring activity carried out in relation to the containment in the fixed operating costs, as shown in the analysis of the schedule denominated Information relating to employees contained in the section Attachments to the notes to the financial statements. In the year, in fact, a policy has been adopted of reducing the workforce relating to all of those positions where it is no longer a necessity to have internal personnel such as the marketing, content and customer care/call centre sectors. Amortization, depreciation and write-downs Depreciation and amortization of tangible and intangible assets The details are shown in the movement schedules of intangible and tangible assets, to which reference should be made Write-down of current asset receivables They represent the write-down of financial receivables from the company Web Business Europe. Reserves for risks and other provisions For the reserves for risks, relating to the amount of Euro 361,519 in the year, reference should be made, together with the Other provisions to the tables and comments shown in the item Reserve for risks. Other operating costs: The composition of the item is as follows: June 30, 2002 June 30, 2001 Change Other taxes Loss on receivables Loss on ordinary fixed assets Fines and penalties Various expenses , Financial income and charges Other financial income: The composition of the item is as follows: June 30, 2002 June 30, 2001 Change Income from receivables in non-current assets 1,676 1, Interest on government bonds, other bonds, time deposits 2,534 1,333 1,201 Income from sale of securities and mutual funds 5, ,071 Total income from securities in current assets 8,163 1,891 6,272 Bank interest from banks 3,588 7,626-4,038 Interest from other receivables Other financial income Total other income 3,734 7,760-4,026 Total financial income 13,573 10,706 2,867 Notes to the financial statements of Freedomland-ITN S.p.A. Page 21

107 Freedomland - ITN S.p.A. Interest and other financial charges: The composition of the item is as follows: Financial charges: June 30, 2002 June 30, 2001 Change Loss on securities interest payable on bank overdrafts 4-4 interest from other financiers Foreign exchange losses commissions and bank charges other Total financial charges Adjustment to the value of financial assets The write-downs correspond to the valuation of the subsidiary companies under the net equity method (Euro million) in addition to the write-down in securities in current assets, for Euro 54 thousand, made in order to adjust the carrying value to the market value. Extraordinary income and charges The extraordinary income equal to Euro million (Euro million in the previous year) refer principally to: - surplus from prior years of Provision for doubtful debts for Euro million; - surplus from prior years deriving from the termination of the licensing agreement of sales with Infostrada for Euro million attributable to surpluses on the Provision for Infostrada receivables risk for Euro million and for Euro million for surplus on other adjustments; - surplus from prior years on the reversal of commissions for Euro million related principally to the termination of the Infostrada contract; - surplus from prior years for the renouncement or non-assignment of compensation for the Board of Directors deliberated in previous years for an amount equal to Euro million; - surplus from prior years for transactions with suppliers in relation to payables for an amount equal to Euro million. The Extraordinary charges equal to Euro million (Euro million in the previous year) relate for Euro million to leaving incentives for employees and executives in the year and for the closing of several controversies with employees. Taxes for the year No calculation of current income taxes was made due to absence of taxable income. Similarly as illustrated in detail in the notes to the financial statements for the year ended June 30, 2001, the company has not recorded the deferred taxes, as more analytically commented upon in the initial part to the notes. Notes to the financial statements of Freedomland-ITN S.p.A. Page 22

108 Freedomland - ITN S.p.A. Attachments to the notes to the financial statements Information relating to employees AVERAGE TOTAL AVERAGE TOTAL TOTAL /06/ /06/01 30/06/00 TEMPORARY EMPLOYEES SEASONAL EMPLOYEES OFFICE EMPLOYEES EXECUTIVES Notes to the financial statements of Freedomland-ITN S.p.A. Page 23

109 Freedomland - ITN S.p.A. Compensation of Directors, Statutory Auditors and General Manager Name Position Start of term in office End of term in office Emoluments Benefits in kind Other compensation Directors in office as at June 30, 2002 Gardi President 21/09/01 31/01/ Burkhardt Managing Director 21/09/01 31/01/ Nardini (1) Director 21/09/01 31/01/ D'Amora Director 21/09/01 31/01/ Malez Director 01/02/02 31/01/ Sgliaschi Director 01/02/02 31/01/ De Marchis Director 13/05/02 Until shareholders'm eet. Directors in office during the year Luigi Guatri President 09/11/00 20/09/ Gianpio Bracchi Director 29/06/01 20/09/ Claudio Carlone Director 15/12/00 20/09/ Aldo Iacono Managing Director 23/01/01 20/09/ Enrico Valdani Director 29/06/01 20/09/ Marco Vitale Director 15/01/01 20/09/ Alberto Rittatore Vonwiller Director 29/12/01 20/09/ Ventafridda Director 21/09/01 13/05/02 45 Brambilla Director 21/09/01 31/01/02 13 Menesini Director 21/09/01 31/01/02 13 Compensation to be attributed (1) Director until February 1, 2002 Total compensation - Directors Board of statutory auditors in office at June 30, 2002 Gianfranco Meroni President 20/09/01 28/03/ Michele Carpaneda Standing Auditor 29/06/01 28/03/ Cesare Gerla Standing Auditor 20/09/01 28/03/ Data includes compensation for approval of the financial statements Board of statutory auditors in office during the year Fabio Maria Venegoni Standing Auditor 12/07/01 20/09/ Alberto Villani Standing Auditor 29/06/01 20/09/ Total compensation- Statutory Auditors General Manager in office as at June 30, 2002 Giovanni Romagnoni General Manager The table shows the emoluments in compliance with Consob regulation 11971/99 attachment 3C. There were no Bonuses and other incentives. Notes to the financial statements of Freedomland-ITN S.p.A. Page 24

110 Freedomland - ITN S.p.A. Stock options attributed to Directors and the General Manager Item Rights assigned or options attributed in the year Assignment of shares or exercise of options in the year Shares allocated free of charge Option to buy or take up stock Shares allocated free of charge Option to buy or take up stock Name Number of shares assigned Date assigned Number of shares available to buy or take up Strike price of option Exercise period Number of shares assigned Number of shares assigned or taken up Exercise period Giovanni Romagnoni 2, /8/00-30/6/03 (General Manager) 23, /9/02-30/6/03 List of investments held directly and indirectly in subsidiary and associated companies: (also in compliance with the requirements of article 120, Legislative Decree February 24, 1998, no. 58 and article 126, Consob deliberation no of May 14, 1999) The data shown refers to the financial statements prepared in accordance with the accounting principles and regulations in the various countries where the subsidiaries are located. Value of Result for the Quota held Name Registered office Currency Share capital net equity Period directly Indirectly. (Euro/000) Direct subsidiaries Freedomland ITN Investments S.A. Luxembourg 100,000 6 (30) 99.9% 0.1% Freedomland ITN Espana S.L. Barcellona 2,085,000 (13,501) (9,580) 99% 1% Freedomland ITN Deutschland Gmbh Frankfort 500,000 (11,992) (4,035) 99% 1% Freedomland ITN UK Limited London GBP 900,000 (6,097) (1,926) 99% 1% Direct associated companies Consortium Eurocom Milan 0 (1) 30.7% (1) quota relating to Freedomland as at June 30, 2002 (The consortium is in liquidation) Receivables and payables with related party companies as at June 30, 2002 Company I&T S.p.A. I@T Italia S.p.A. VDC S.r.l Web business Europe.S.p.A. Trade receivables Other receivables 3,006 3 Interest income 306 Financial receivables 555 Deposits (207) Trade payables (225) (305) (18) Payables for commissions (4,552) (1,816) Totale (858) (1,898) The receivable from the related party company Web European Business was written-down. Notes to the financial statements of Freedomland-ITN S.p.A. Page 25

111 Freedomland - ITN S.p.A. Further Analysis In order to facilitate the reading of the financial statements the financial data have been reclassified in the following tables, comprising the reclassified balance sheet and income statement. The balance sheet prepared in accordance with the statutory criteria have been reclassified in accordance with the criteria of increasing liquidity from the various account items. The statutory income statement was prepared in descending order, with highlighting of the gross operating margin and the operating result. Notes to the financial statements of Freedomland-ITN S.p.A. Page 26

112 Freedomland - ITN S.p.A. ANALYSIS - BALANCE SHEET Amounts in thousands of Euro ASSETS 30/06/02 % 30/06/01 % change CURRENT ASSETS Cash and banks 6, , ,781 Trade receivables 14,237 19,528-5,291 Inventory 1, Prepayments and accrued income 1,632 1, Other current assets 197,056 78, ,550 Total current assets 220, % 233, % -12,515 NON-CURRENT ASSETS Tangible assets 969 3,958-2,989 Intangible assets 13,700 18,420-4,720 Investments and securities 3 3 Other non-current assets 38,583 29,948 8,635 Total non-current assets 53, % 52, % 926 TOTAL ASSETS 273, % 285, % -11,589 LIABI.AND SHAREHOLDERS' EQUITY 30/06/02 % 30/06/01 % change CURRENT LIABILITIES Banks Trade payables 9,579 12,392-2,813 Other payables 4,582 4, Accrued liabilities and deferred income Taxes payable Total current liabilities 14, % 17, % -2,681 MEDIUM/LONG TERM LIABILITIES Medium/short term loans 2,641 5,145-2,504 Provision for employee leaving indemnity Reserves for risks and charges 37,412 31,875 5,537 Total medium-long term liabilities 40, % 37, % 3,044 Total liabilities 55, % 54, % 363 SHAREHOLDERS' EQUITY Share capital 7,494 7, Reserves 223, , ,835 Net loss -11, ,784 98,832 Total shareholders' equity 218, % 230, % -11,952 TOTAL 273, % 285, % -11,589 Notes to the financial statements of Freedomland-ITN S.p.A. Page 27

113 Freedomland - ITN S.p.A. INCOME STATEMENT SHEET ANALYSIS Amounts in thousands of Euro INCOME STATEMENT 30/06/02 % 30/06/01 % net sales 4, % 4, % operating costs: purchases % -2, % services -8, % -26, % Depreciation, amortization and write-downs -7, % -53, % personnel costs -4, % -5, % increase (decrease) inventory % % other operating costs -3, % -3, % operating result -19, % -87,521-1,779.24% financial income 13, % 10, % financial charges % % other income 5, % % other charges -10, % -29, % result before taxes -11, % -106,575-2, Income taxes: current taxes deferred taxes -4, % NET LOSS -11,952% % -110,784-2,252.17% Milan, September 17, 2002 For the Board of Directors The President Notes to the financial statements of Freedomland-ITN S.p.A. Page 28

114 FREEDOMLAND ITN SPA Registered office: Milan, Via Manfredonia n. 4 Company s Register Office Milan No Fiscal and Vat code No Share capital Euro 7,493, *** *** *** STATUTORY AUDITORS REPORT ON THE FINANCIAL STATEMENTS AS AT JUNE 30, 2002 IN COMPLIANCE WITH ARTICLE 153 OF LEGISLATIVE DECREE 58/1998 AND ARTICLE 2429 OF THE CIVIL CODE FOR THE ORDINARY SHAREHOLDDERS MEETING Dear Shareholders, the Board of Directors meeting of September 17, 2002 approved the financial statements and the consolidated financial statements as at June 30, 2002, providing simultaneously the documents to the Board of Statutory auditors with the Directors Reports on the operations. - the Board of Director s in the same meeting on September 17, 2002 also called the ordinary shareholders meeting, which will be published in the Official Gazzetta of September 27, 2002, page No. 227 second part. - It is recalled that the present Board of Director s was nominated at the ordinary shareholders meeting held on January 31, 2002, for a three year term, following the resignation of the previous Board of Director s in consequence of the seizure of the shares of the majority Shareholder on December 13, The resolution of the shareholders meeting of January 31, 2002 was contested by a shareholder and from the citation notified on April 26, The company will be a defendant in the court hearing of October 23, 2002 at the Court in Milan requesting to repel the request formulated by the said subject,.... 1

115 - On May 13, 2002 the Board of Director s, following the resignation of a director, coopted as per article 2386 of the civil code Stefano De Marchis. On October 10, 2002 the director Donato Sagliaschi resigned. The Board of Director s on October 14, 2002 co-opted as per article 2386 Stefano Valerio. At the termination of the aforesaid meeting the directors, in consideration of the future change in the majority shareholder, resigned from office. The shareholders meeting is therefore consequently called to deliberate. - The Board of Statutory Auditors, nominated by the shareholders meeting of September 20, 2001, in the period under consideration: - participated at the meetings of the Board of Director s as well as the meetings of the committees; - attended meetings with the person in charge of the internal control function; - attended meetings with the audit firm Deloitte & Touche, nominated by the ordinary shareholders meeting of December 29, 1999,... for the certification of the financial statements for the year and the relative half-yearly reports, consolidated financial statements for the three-year period 1999/ / / ; - examined the financial statements and the consolidated financial statements as at June 30, 2002 as well as the Directors Reports; - took note of the report of the audit firm dated October 14, 2002 from which there were no exceptions noted; - prepared the minutes of the meetings made by the Board of Statutory Auditors from which there is nothing to report to the shareholders meeting. This being noted, in relation to our responsibilities and our knowledge, we certify that: 2

116 1. we have examined and obtained information on the activities performed, and in particular on the criteria on the determination of the result as at June 30, The result shows a loss of Euro 11,952,000 against a loss at June 30, 2001 of Euro 110,783,595; 2. we have ascertained the substantial adequacy of the organization structure and the compliance of the correct administration principles also following the restructuring which resulted in a significant reduction in personnel and whose agreement were properly adhered to; 3. we have evaluated the adequacy of the system of internal controls which enabled transparency in management reporting; 4. we have verified the compliance with legislation in the preparation of the financial statements and the Directors report on the operations at June 30, 2002, that illustrates in a complete manner the operations as at June 30, 2002 and subsequent events; 5. in relation to the adherence to the Self-Discipline Code and the stock option plans, the Directors report on the operations provides adequate information. OTHER INFORMATION The verifications by the Tax Police opened on March 28, 2000 was closed on June 20, From the matters arising, the opinion of the legal experts, and in consideration of the fiscal credit deriving from losses carried forward, the Board of Directors did not consider it necessary to make any specific provision. It is also noted, as for the financial statements for the year ended June 30, 2001, the deferred tax asset was not recorded. On April 11, 2001, a shareholder cited your Company, as well as others before the Court of Milan. 3

117 The shareholder complained of direct damage as a result of the performance of the shares on the stock exchange. On June 18, 2002 the dispute was closed following the renouncement of the case and the compensation of the expenses. The share capital at June 30, 2002 was Euro 7,493,780 subscribed and paid-in, constituted by 14,411,115 shares of Euro 0.52 each. In relation to the stock option, as per the shareholders resolution of December 12, 1999, 110,000 shares were made available. The Board of Directors in the meeting of September 13, 2002 resolved deliberated in relation to the third tranche of 99,322 residual shares. In relation to the reorganisation, the following changes took place: at June 30, 2001 at June 30, 2002 executives 11 7 managers while-collar temporary == == The transactions previously carried out with the related parties relating to the ex majority shareholder, both of a commercial and financial nature, were monitored on a consistent basis by the Audit Committee and by the Board of Directors, as noted in their Report. The receivables of a financial nature are covered by specific provisions. The receivables of a commercial nature are covered by payables to the same counterparty. 4

118 The documents presented to you are expressed in Euro and comparable, in Euro, to June 30, INFORMATION ON SUBSEQUENT EVENTS TO THE YEAR END As noted by the company on June 24, 2002 a voluntary Public Offer to Purchase was made by the company Interactive Group Spa at Euro per share, subsequently increased to Euro Subsequently on August 8, 2002 a Public Offer to Purchase was received from the company Content Srl for Euro and subsequently adjusted to the price of Euro The Public Offer to Purchase on September 27, 2002 was closed in favour of the company Content Srl with 81.5% of the share capital. The Board of Directors intervened immediately in relation to these matters and publicly made known its position with reference to the individual offers and adjustment to price. CONCLUSIONS We believe that the information contained in the Notes and the Directors Report on the operations, illustrates in an exhaustive manner the various accounts in the Balance Sheet and Income Statement and therefore we express a favourable opinion for Your approval, and for the allocation of the result for the year. Milan, October 14, 2002 THE BOARD OF STATUTORY AUDITORS Gianfranco Meroni Michele Carpaneda Cesare Gerla 5

119 Deloitte & Touche S.p.A Revisione e organizzazione contabile Palazzo Carducci Via Olona, Milano Te!" Fax: AUDITOR'S REPORT IN ACCORDANCE WlTH ARnCLE 156 OFLEGISLATIVE DECREEOFFEBRUARY24, 1998, N. 58 To the Shareholders of Freedomland ITN S.p.A. We have audited the financial statements of Freedomland 11N S.p.A. as of June 30, These financial statements are the responsibility of the Company' s management. Our responsibility is to express an opinion on these fmancial statements based on our audit. We conducted our audit in accordance with the Auditing Standards recommended by Consob, the lta1ian Stock Exchange Commission. Those standards require that we plan and perfonn the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit a1so includes assessing the accounting principles used and significant estimates made by management, as we11 as evaluating the overa11 fmancial statement presentation. We believe that our audit provides a reasonable basis for our opinion. For the Opml0n on the financial statements of the prior year of Freedomland ITN S.p.A., presented for comparison in accordance with legai requirements, reference should be made to the auditor's report issued by us on September 18,2001. DELOI1TE & TOUCHE S.p.A. Signed in originai James R. Noble Partner Milan, October 14,2002 This report has been translated into the English language solely for the convenience of international readers. Deloitte Touche Tohmatsu Milano Ancona Bari Bergamo Bologna Cagliari Firenze Genova Napoli Parma Padova Roma Torino Treviso Vicenza Sede legale. Palazzo Carducci -Via Olona, Milano -Capitale Sociale Euro ,80 i.v. Partita IVA I Codice Fiscalel Registro delle Imprese Milano n R.E.A Milano n