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<strong>Pirelli</strong> S.p.A. Milan Annual Report 1998
<strong>Pirelli</strong> S.p.A.<br />
Viale Sarca 222<br />
20126 Milan<br />
The shareholders of <strong>Pirelli</strong> Società per Azioni are called<br />
to the ordinary and extraordinary shareholders’<br />
meeting to be held in Milan at the Associazione<br />
Industriale Lombarda in Via Pantano 9 at 3:30 P.M.<br />
• on Friday, May 21, 1999 in first call<br />
• on Monday, May 24, 1999 in second call<br />
to pass resolutions on the following<br />
Agenda<br />
Ordinary Part<br />
1. The Board of Directors’ report on operations, the<br />
Board of Statutory Auditors’ report, financial<br />
statements at December 31, 1998, appropriation of<br />
net income.<br />
2. Election of the Directors after establishing the<br />
number of members on the board.<br />
3. Election of the Board of Statutory Auditors and its<br />
Chairman; determination of the emolument for the<br />
standing statutory auditors.<br />
4. Appointment of the audit firm, pursuant to the<br />
provisions of art. 159 of Legislative Decree No. 58 of<br />
February 24, 1998 and the recommendation<br />
contained in the Consob Communiqué No. 97001574<br />
of February 20, 1997, for the audit of the statutory<br />
financial statements, the consolidated financial<br />
statements and the interim six-month financial<br />
statements for the years ending December 31, 1999,<br />
2000 and 2001.<br />
Extraordinary Part<br />
1. Proposal of the merger by incorporation in <strong>Pirelli</strong><br />
S.p.A. of Société Internationale <strong>Pirelli</strong> S.p.A.<br />
according to the merger plan drawn up in<br />
compliance with the provisions of art. 2501 bis of the<br />
Italian Civil Code, by exchanging 83 <strong>Pirelli</strong> S.p.A.<br />
ordinary shares, with dividend rights from January 1,<br />
1999, for each Société Internationale <strong>Pirelli</strong> S.p.A.<br />
share, without increasing the share capital of the<br />
merging company since, in the share capital of the<br />
latter company following the same merger, there will<br />
be a sufficient number of <strong>Pirelli</strong> S.p.A. shares to<br />
service the exchange.<br />
Inherent and consequent resolutions. Conferring of<br />
powers.<br />
2. Procedures for the disposition of treasury shares.<br />
Inherent and consequent resolutions. Conferring of<br />
powers.<br />
3. Translation of share capital into euro as set forth in<br />
article 17.6 of Legislative Decree No. 213 of June 24,<br />
1998, and rounding up the par value of the shares<br />
from Lire 1,000 to euro 0.52; consequent increase in<br />
the share capital through the utilization of the share<br />
premium reserve.<br />
Consequent amendment to article 5 of the articles of<br />
association.<br />
Inherent and consequent resolutions. Conferring of<br />
powers.
Contents<br />
Board of Directors; Board of Statutory Auditors;<br />
General Managers; Independent Auditors 3<br />
Structure of <strong>Pirelli</strong> Group 4<br />
<strong>Pirelli</strong> S.p.A. on the Stock Market 5<br />
Five-year Summary of Selected Consolidated Financial Data 6<br />
Directors’ Report on Operations 7<br />
The Group 11<br />
Cables and Systems Sector 16<br />
Tyres Sector 27<br />
Finance 36<br />
Information Systems 38<br />
Ecology and the Environment 40<br />
Personnel 42<br />
Related Party Disclosures 43<br />
Investments held by Directors, Statutory Auditors and General Managers 45<br />
Corporate Governance 46<br />
<strong>Pirelli</strong> S.p.A. - Condensed financial statements 47<br />
Shareholders’ Resolutions 49<br />
Consolidated Financial Statements at December 31, 1998<br />
Consolidated balance sheets 52<br />
Consolidated statements of income 56<br />
Notes to consolidated financial statements 57<br />
Supplementary information (*) 77<br />
Board of Statutory Auditors’ report 93<br />
Independent Auditors’ report 95<br />
Extraordinary part of shareholders’ meeting<br />
Directors’ report 96<br />
Amendment of the by-laws 116<br />
Merger plan pursuant to art. 2501-bis of the Italian Civil Code 117<br />
Board of Statutory Auditors’ report on the extraordinary part of the shareholders’ meeting 133<br />
(*) Included therein are the financial statements in Euro (balance sheets and statements of income)<br />
calculated by applying the fixed translation rate to the Italian lire financial statements.<br />
page<br />
2
<strong>Pirelli</strong> S.p.A.<br />
Board of Directors<br />
Chairman and Chief Executive Officer<br />
Deputy Chairman<br />
Directors<br />
Secretary to the Board<br />
Marco Tronchetti Provera<br />
Alberto <strong>Pirelli</strong><br />
Carlo Buora<br />
Eugenio Coppola di Canzano<br />
Carlo De Benedetti<br />
Alberto Falck<br />
Giovanni Ferrario<br />
Giuseppe Gazzoni-Frascara<br />
Georg F. Krayer<br />
Angelo Marchiò<br />
Giuseppe Morchio<br />
Luigi Orlando<br />
Riccardo Perissich<br />
Giampiero Pesenti<br />
Ennio Presutti<br />
Carlo Alessandro Puri Negri<br />
Vincenzo Sozzani<br />
Adalberto Castagna<br />
Board of Statutory Auditors<br />
Chairman<br />
Standing members<br />
Alternate members<br />
Luigi Guatri<br />
Mario Brughera<br />
Giorgio Oggioni<br />
Paolo Francesco Lazzati<br />
Alessandro Manusardi<br />
General Managers<br />
Finance and Administration<br />
Tyres Sector<br />
Cables and Systems Sector<br />
Carlo Buora<br />
Giovanni Ferrario<br />
Giuseppe Morchio<br />
Independent Auditors<br />
Reconta Ernst & Young S.p.A.<br />
Note: with respect to the powers conferred to the Chairman and CEO and General Managers, see page 46<br />
under “Corporate governance”.<br />
i<br />
3
Structure of <strong>Pirelli</strong> Group<br />
at December 31, 1998<br />
<strong>Pirelli</strong> & C.<br />
67.51%<br />
6.53%<br />
Société<br />
Internationale<br />
<strong>Pirelli</strong> Ltd<br />
39.49%<br />
99.81%<br />
<strong>Pirelli</strong> S.p.A.<br />
0.19%<br />
<strong>Pirelli</strong><br />
Tyre Holding N.V.<br />
100 %<br />
<strong>Pirelli</strong><br />
Cavi e<br />
Sistemi S.p.A.<br />
90%<br />
90%<br />
Tyres<br />
Cables and Systems<br />
10 %<br />
10 %<br />
Minority interests<br />
(*) <strong>Pirelli</strong> & C. esercita il diritto di voto su un ulteriore 5,188% detenuto da azionisti terzi, che porta ad un totale pari al 50,003%.<br />
Tyres<br />
Argentina<br />
Brazil<br />
Germany<br />
Italy<br />
Spain<br />
Turkey<br />
United Kingdom<br />
United States<br />
Venezuela<br />
4<br />
i<br />
Cables<br />
and Systems<br />
Argentina<br />
Australia<br />
Brazil<br />
Canada<br />
China<br />
France<br />
Germany<br />
Hungary<br />
Indonesia<br />
Italy<br />
Ivory Coast<br />
Portugal<br />
Rumania<br />
South Africa<br />
Spain<br />
Turkey<br />
United Kingdom<br />
United States
<strong>Pirelli</strong> S.p.A. on the Stock Market<br />
Shares outstanding at December 31, 1998<br />
Number<br />
Par<br />
value<br />
Ordinary shares 1,895,117,473 Lire 1000<br />
Savings shares 88,006,016 Lire 1000<br />
1,983,123,489<br />
140<br />
135<br />
130<br />
125<br />
120<br />
115<br />
110<br />
105<br />
100<br />
95<br />
90<br />
Shares outstanding after the resolution of February 2, 1999<br />
Market trading on the Milan stock exchange<br />
Number<br />
Number of shares<br />
traded<br />
Par<br />
value<br />
Ordinary shares 1,896,552,473 Lire 1000<br />
Savings shares 88,006,016 Lire 1000<br />
1,984,558,489<br />
Amount<br />
(Billions of lire)<br />
Stock market 144,218,359,744 818,962<br />
<strong>Pirelli</strong> S.p.A. - ordinary shares 2,122,129,500 11,473<br />
<strong>Pirelli</strong> S.p.A. - savings shares 103,107,000 423<br />
85<br />
J F M A M J J A S O N D<br />
1998<br />
MIB index (monthly average)<br />
Market price of ordinary shares<br />
(monthly average)<br />
250<br />
245<br />
240<br />
235<br />
230<br />
225<br />
220<br />
215<br />
210<br />
205<br />
200<br />
195<br />
190<br />
185<br />
180<br />
175<br />
170<br />
165<br />
160<br />
155<br />
150<br />
145<br />
140<br />
135<br />
130<br />
125<br />
120<br />
115<br />
110<br />
105<br />
100<br />
95<br />
90<br />
85<br />
80<br />
J F M A M J J A S O N D<br />
1998<br />
Number of ordinary shares traded<br />
on the Milan stock exchange (in millions)<br />
i<br />
5
Five-year Summary of Selected Consolidated Financial Data<br />
Sales revenues<br />
in billions of lire<br />
1996 1997 1998<br />
12000<br />
11000<br />
10000<br />
9000<br />
8000<br />
7000<br />
Gross operating profit<br />
in billions of lire<br />
1996 1997 1998<br />
1500<br />
1400<br />
1300<br />
1200<br />
1100<br />
1000<br />
Net income<br />
in billions of lire<br />
1996 1997 1998<br />
600<br />
500<br />
(in billions of lire) 1994 1995 1996 1997 1998 (1) 1998 (2)<br />
Sales revenues 9,790 10,893 10,240 11,265 10,624) 10,624) (1)<br />
Gross operating profit 975 1,186 1,208 1,329 1,397) 1,397) (1)<br />
Operating profit 433 636 680 760 798) 798) (1)<br />
Net income 147 304 436 512 534) 534) (1)<br />
Net income attributable to <strong>Pirelli</strong> S.p.A. 110 257 387 460 482) 482) (1)<br />
Earnings per share (in lire) 72 165 249 263 243) 243) (3)<br />
Fixed assets 4,405 4,360 4,098 4,373 4,533) 4,699) (1)<br />
Net working capital 1,625 1,912 1,706 1,832 1,773) 1,962) (1)<br />
Net invested capital 6,030 6,272 5,804 6,205 6,306) 6,661) (1)<br />
Shareholders’ equity 3,483 3,784 3,714 4,421 4,836) 4,750) (1)<br />
Provisions 1,041 1,082 1,075 1,306 1,227) 1,398) (1)<br />
Net financial debt 1,506 1,406 1,015 478 243) 513) (1)<br />
Shareholders’ equity attributable to <strong>Pirelli</strong> S.p.A. 2,876 3,266 3,273 4,045 4,507) 4,421) (1)<br />
Net equity per share (in lire) 1,889 2,098 2,102 2,314 2,273) 2,229) (3)<br />
Free cash flows 498 371 607 519 617) 347) (1)<br />
Net cash flows 477 38 347 47 (221) (491) (1)<br />
R&D expenditures 287 303 315 355 379) 379) (1)<br />
Capital expenditures 422 485 541 619 699) 804) (1)<br />
400<br />
300<br />
200<br />
100<br />
Shareholders’ equity<br />
in billions of lire<br />
1996 1997 1998<br />
5000<br />
4500<br />
Gross operating profit /<br />
Sales revenues<br />
Operating profit /<br />
Sales revenues<br />
Net income /<br />
Net equity*<br />
Operating profit /<br />
Net invested capital*<br />
Net financial debt /<br />
Net equity<br />
9.96% 10.89% 11.79% 11.80% 13.15% 13.15% (1)<br />
4.42% 5.84% 6.64% 6.74% 7.52% 7.52% (1)<br />
4.42% 8.37% 11.63% 12.58% 11.54% 11.65% (1)<br />
6.93% 10.34% 11.26% 12.65% 12.76% 12.41% (1)<br />
0.43 0.37 0.27 0.11 0.05 )<br />
0.11 )<br />
(1)<br />
4000<br />
3500<br />
3000<br />
2500<br />
Capital expenditures<br />
in billions of lire<br />
1996 1997 1998<br />
900<br />
800<br />
700<br />
600<br />
500<br />
400<br />
<strong>Pirelli</strong> S.p.A. ordinary shares (No. in millions) 1,435 1,469 1,469 1,660 1,895) 1,895) (3)<br />
<strong>Pirelli</strong> S.p.A. savings shares (No. in millions) 88 88 88 88 88) 88) (3)<br />
Total <strong>Pirelli</strong> S.p.A. shares (No. in millions) 1,523 1,557 1,557 1,748 1,983) 1,983) (3)<br />
Factories (number) 74 74 71 72 70) 73) (1)<br />
Personnel (number at 12.31) 38,485 38,106 36,534 36,211 36,226) 38,209) (1)<br />
Sales revenues per employee (in millions of lire) 241 278 271 307 291) 289) (1)<br />
(1) Considering the same companies in consolidation, excluding the effects of the acquisition of the Power Cables Division from<br />
Siemens A.G..<br />
(2) The 1998 consolidated financial statements include the acquisition from Siemens A.G. of the companies in Germany,<br />
consolidated line-by-line in the balance sheet, and the companies in the following countries valued at cost: Hungary, Turkey,<br />
Rumania and South Africa (additional information is disclosed in the notes to consolidated financial statements).<br />
(3) The reduction in the earnings and equity per share attributable to <strong>Pirelli</strong> S.p.A. is due to the conversion of convertible bonds<br />
1994-1998 and the bonus shares assigned to employees.<br />
* Average amounts<br />
6<br />
i
Directors’ Report on Operations<br />
Shareholders,<br />
The consolidated financial statements of <strong>Pirelli</strong> S.p.A. at December 31, 1998 show a<br />
net income of Lire 534 billion, after extraordinary expenses, net, of Lire 15 billion,<br />
compared to Lire 512 billion, after extraordinary expenses, net, of Lire 57 billion, in 1997.<br />
Net income attributable to <strong>Pirelli</strong> S.p.A. is Lire 482 billion (with earnings per share of<br />
Lire 243) compared to Lire 460 billion in 1997 (with earnings per share of Lire 263). The<br />
reduction in earnings per share is due to the conversion of 1994-1998 convertible bonds<br />
and the bonus shares assigned to employees which increased the number of ordinary<br />
shares from 1,660,202,476 at December 31, 1997 to 1,895,117,473 at December 31, 1998.<br />
Net sales revenues amount to Lire 10,624 billion and show a reduction of 5.7 percent<br />
compared to 1997, owing principally to a fall in prices (-7.5 percent) which was only partly<br />
compensated by the increase in volumes and mix (+2.2 percent). The currency exchange<br />
effect produced by translating into Italian lire is almost negligible (-0.4 percent).<br />
Gross operating profit totals Lire 1,397 billion compared to Lire 1,329 billion in 1997,<br />
representing an increase as a percentage of sales revenues (13.1 percent) compared to the<br />
prior year (11.8 percent).<br />
Operating profit totals Lire 798 billion or 7.5 percent of sales revenues, compared to<br />
Lire 760 billion in 1997 (6.7 percent).<br />
In 1998, net cash flows show a negative figure of Lire 491 billion (a positive figure of<br />
Lire 47 billion in 1997). This is due mainly to dividend payments, the first part of the<br />
acquisition of the power cables business from Siemens and the purchase of treasury<br />
shares.<br />
The net debt position went from Lire 478 billion at year-end 1997 to Lire 513 billion. This<br />
amount also reflects the acquisition of the power cables division from Siemens A.G.<br />
(Lire 270 billion) and the purchase of treasury shares (Lire 276 billion), which was partly<br />
compensated by the conversion of <strong>Pirelli</strong> 1994-1998 bonds during the year for Lire 505 billion.<br />
The financial statements at December 31, 1998 of <strong>Pirelli</strong> S.p.A., the group holding<br />
company, show a net income of Lire 391 billion, an increase of 37 percent compared to<br />
Lire 285 billion of net income in 1997.<br />
The economic scenario<br />
1998 brought a strong slowdown in the world economy. The overall GDP grew by less<br />
than 2 percent, and trading dynamics were down by half, from about 10 percent in 1997<br />
to 4 percent.<br />
All the data taken together show differing situations in the main world areas. The United<br />
States, thanks to a strong growth in domestic demand, maintained a growth in GDP equal<br />
to 3.9 percent.<br />
i<br />
7
Gross Domestic Product of the main<br />
geographic areas of the world:<br />
1996-98 trend and 1999 forecast (1996=100).<br />
Inflation rate in the main geographic areas<br />
of the world: 1996-98 trend and 1999 forecast<br />
(1996=100).<br />
130<br />
125<br />
120<br />
115<br />
110<br />
105<br />
100<br />
95<br />
1996 1997 1998 1999<br />
Western Europe North America Latin America<br />
Japan China Other Asian Countries<br />
135<br />
130<br />
125<br />
120<br />
115<br />
110<br />
105<br />
100<br />
95<br />
1996 1997 1998 1999<br />
Western Europe North America Latin America<br />
Japan China Other Asian Countries<br />
The European Union has practically confirmed an average growth rate of 2.8 percent, as<br />
in 1997, with improvements in Germany, France and Spain, a slowdown in the United<br />
Kingdom and a moderate gain in Italy.<br />
The Central European countries like Hungary, Poland and Slovakia have maintained a growth<br />
rate of over 5 percent, while a reduction of 2 percent has been confirmed for the Czech economy.<br />
The financial crisis which in 1998 hit Asia, the former Soviet Republics and Brazil is the<br />
cause of the contractions, sometime significant, suffered by the economies of those areas.<br />
In Asia, Japan reports a reduction in GDP of almost 3 percent, but the falloff is quite a<br />
bit higher in the Southeast Asian countries, especially in Indonesia (-13/14 percent).<br />
Although lower than in the past, the economic growth is nevertheless significant for India<br />
(+5 percent) and China (+8 percent) where, notwithstanding, various financial risk<br />
situations are starting to emerge.<br />
In South America, Brazil, being affected by the financial crisis, fell to a level of zero<br />
growth and Argentina has almost reduced its growth rate by half, bringing it to 4 percent.<br />
Venezuela experienced a drop of around 1 percent in GDP largely as a consequence of the<br />
slump in oil prices.<br />
Australia, thanks to strong expansion in consumption and investments, reported a growth<br />
of 5 percent in 1998.<br />
Mention, lastly, should also be made of the reductions in GDP in the East Europe<br />
countries, especially Russia (-5.5 percent), Rumania and the Ukraine.<br />
Over the course of 1998, the developed countries, particularly those in the European<br />
Monetary Union, registered a substantial decline in inflation thanks to the stabilization<br />
policies, the actions undertaken by corporations to improve efficiency, the gradual<br />
reduction in interest rates and the significant drop in the prices of raw materials and oil.<br />
Prices in Brazil and Argentina were more or less stable, while Venezuela registered an<br />
approximate 30-35 percent increase.<br />
In Southeast Asia and Russia, where the financial crisis has caused a sharp devaluation in<br />
currency, prices posted significant increases.<br />
The selection of the eleven countries to join the European Monetary Union and the start of<br />
the single currency concentrated the activities of government and Community institutions<br />
and caught the attention of other world economic powers, particularly the United States<br />
and Japan.<br />
* * *<br />
In 1999, the world economy should post only a moderate growth owing to the crisis<br />
situations in South America, Asia and Russia and a slowdown in the European Union.<br />
Positive performance, instead, is again confirmed for the United States economy.<br />
In the European Union, forecasts are for an economic slowdown caused by both a reduction<br />
in exports to the crisis areas and a deceleration of domestic demand. In terms of figures, the<br />
European Union should post a GDP growth of around 2 percent against 2.8 percent in 1998.<br />
France and Germany are showing slowdowns in the pace of expansion; the United<br />
8<br />
i
Worldwide sale of goods: annual growth<br />
in volume (%).<br />
Kingdom should report a higher decline; for Italy, expectations are for growth of not more<br />
than 1.5 percent, as in 1998.<br />
Europe opened the year 1999 with a new and a no less demanding horizon: to proceed<br />
until the single currency achieves full success according to the established plan and to<br />
favor the integration of the economies and sustain the growth according to the<br />
commitments assumed under the Stability Pact.<br />
At the same time, the goal of augmenting the competitiveness of European corporations,<br />
and the Union as a whole, will be vigorously pursued.<br />
The corporations, in particular, will have to implement the changes needed to gain an edge<br />
over the competition which is becoming ever-more widespread within the Union and<br />
increasingly fiercer in other economic areas.<br />
Governments are called upon to complete the liberalization of the markets for products,<br />
services, employment and the professions from which impetus could arise to create new<br />
activities.<br />
According to recent indications by the European Central Bank, the State’s presence in the<br />
economy of Euroland is equal to 49 percent of GDP, compared to 35 percent in the United<br />
States and 39 percent in Japan. The public presence in its various forms and restrictions<br />
which fall upon citizens and corporations alike needs to be reduced to encourage new<br />
business initiatives and new employment opportunities and raise the level of the Union’s<br />
competitiveness.<br />
In Europe, there is a very strong need to increase economic growth, also to render<br />
integration easier. The low interest rate policy practiced by the European Central Bank is<br />
not enough; besides liberalization, as mentioned before, important infrastructure projects<br />
have to be launched to sustain investments and employment, also through the use of new<br />
forms of financing.<br />
Inflation should remain at 1-1.5 percent throughout most of the euro countries, one of the goals<br />
of the European Central Bank, and similar to the figure for the European Union as a whole.<br />
In Central Europe, Hungary and Poland should post growth of around 4 percent in 1999,<br />
Slovakia somewhat lower figures, and for the Czech Republic, lastly, forecasts are for a<br />
stagnant economy.<br />
The outlook for the United States is for a continuation, although at a slower pace, of the<br />
positive performance seen in 1998. The GDP should again exceed 3 percent, with inflation<br />
around 2 percent.<br />
The forecasts for Asia are not favorable. In Japan, another moderate falloff in GDP<br />
is expected (-1 percent) after the significant drop of 1998. The recently approved fiscal<br />
package should aid in creating a positive turnaround during the course of the year, but<br />
there still remain queries over the widespread financial imbalances. India should post a<br />
growth of around 5 percent like in 1998. China, which is forecast to register growth of<br />
roughly 7 percent, is being affected by the instability of the financial institutions and the<br />
difficulties in shoring up the exchange rate against a slowdown in exports. As far as the<br />
other Southeast Asian countries are concerned, any possible economic improvements<br />
after the 1997-1998 crisis are in any case influenced by unstable political-social<br />
scenarios.<br />
In South America, the crisis in Brazil is producing its effects on the other South American<br />
countries, especially Argentina. Expectations for Brazil are directed to a substantial drop<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
1996 1997 1998<br />
i<br />
9
1997-1998 trend in raw materials prices,<br />
compared to that of Brent oil.<br />
110<br />
100<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
1997 1998 1999<br />
All items<br />
Brent oil<br />
in GDP and a rise in inflation. The stability plan will generate negative effects on domestic<br />
demand but a weaker currency will help exports. For the Argentine economy, which trades<br />
heavily with Brazil, a drop in GDP is forecast, with inflation remaining at limited levels. In<br />
Venezuela, the trends in internal demand and exports remain negative and GDP is again<br />
expected to fall.<br />
After the strong expansion of 1998, Australia is being affected by the crisis in Asia and<br />
South America, with growth tending toward a more moderate figure of 2.5 percent.<br />
In East Europe, finally, the forecasts are still negative for Russia, which up to now has<br />
not initiated any real stabilization plan such as to justify the investment of resources by<br />
international institutions. Russia should record a new reduction in GDP of an estimated<br />
6 percent. As for the other major former Soviet countries, a falloff in activities or a<br />
moderate growth are forecast.<br />
10<br />
i
The acquisition of the Siemens energy cables<br />
division has provided <strong>Pirelli</strong> Cables and<br />
Systems with the advanced R&D laboratories<br />
in Berlin.<br />
A P6000 Powergy in the semi-anechoic room<br />
to test its levels of silence.<br />
The Group<br />
1998 economic and financial performance<br />
1998 saw fiercer price pressure and strong competition on all markets in which the Group<br />
operates.<br />
The strategic and operating guidelines outlined in the 1997 annual report continued to be<br />
applied into 1998 and significant improvements in efficiency were achieved, which were<br />
reflected in the level of variable and fixed costs. The development objectives were also<br />
pursued, which led to the acquisition, among other things, of the Power Cables Division of<br />
Siemens A.G., announced on October 30, 1998, and described in the six-month report on<br />
the financial statements at June 30, 1998 as a significant subsequent event. The German<br />
units were consolidated line-by-line in the 1998 balance sheet, while the units in Hungary,<br />
Turkey, Rumania and South Africa were valued at cost in the consolidated financial<br />
statements since effective control was only obtained during the last days of 1998.<br />
The results of the consolidated financial statements can be summarized as follows:<br />
(in billions of lire) 1998) 1998) (1) 1997)<br />
• Sales revenues 10,624) 10,624) 11,265)<br />
• Gross operating profit 1,397) 1,397) 1,329)<br />
% of sales 13.1%) 13.1%) 11.8%)<br />
• Operating profit 798) 798) 760)<br />
% of sales 7.5%) 7.5%) 6.7%)<br />
• Extraordinary items, net (15) (15) (57)<br />
• Net income 534) 534) 512)<br />
% of sales 5.0%) 5.0%) 4.5%)<br />
• Shareholders’ equity 4,750) 4,836) 4,421)<br />
• Net financial debt 513) 243) 478)<br />
• Capital expenditures 804) 699) 619)<br />
• R&D expenditures 379) 379) 355)<br />
• Personnel (number) 38,209) 36,226) 36,211)<br />
• Factories (number) 73) 70) 72)<br />
(1) Considering the same companies in consolidation, excluding the effect of the acquisition of the Power Cables Division<br />
from Siemens A.G..<br />
• Sales revenues – the decrease of 5.7 percent can be explained as follows:<br />
– Currency exchange effect (0.4%)<br />
– Prices (7.5%)<br />
– Volumes (1.1%<br />
– Mix and other (1.1%<br />
i<br />
11
Distribution of <strong>Pirelli</strong> Group 1998 sales<br />
by sector and geographic area.<br />
The breakdown of sales revenues by Sector and geographic area is as follows:<br />
Tyres<br />
Cables and<br />
Systems<br />
Sector 1998 1997<br />
Cables and Systems 51% 52%<br />
Tyres 49% 48%<br />
Geographic area 1998 1997<br />
Italy 15.0% 13.4%<br />
Other European countries 39.5% 37.9%<br />
North America 13.9% 13.5%<br />
Central and South America 22.5% 23.9%<br />
Australia, Africa and Asia 9.1% 11.3%<br />
Italy<br />
Other European<br />
Countries<br />
North America<br />
Central and<br />
South America<br />
Australia, Africa<br />
and Asia<br />
• The operating profit of Lire 798 billion shows an increase over Lire 760 billion in 1997;<br />
it represents 7.5 percent of sales revenues (6.7 percent in 1997). Although prices<br />
decreased, there was a reduction in variable costs, raw materials in particular, and fixed<br />
costs.<br />
• The balance of extraordinary items shows a net expense of Lire 15 billion compared<br />
to a net expense of Lire 57 billion in 1997.<br />
Details are provided in the notes to consolidated financial statements.<br />
• Net income reached Lire 534 billion compared to Lire 512 billion in 1997, an increase of<br />
Lire 22 billion.<br />
The gain over the previous year at the level of gross operating profit (+Lire 68 billion),<br />
has been reduced due to higher depreciation and amortization (+Lire 30 billion) and tax<br />
charges which, owing to the higher results and having utilized tax loss carryforwards,<br />
increased by Lire 76 billion, from Lire 173 billion to Lire 249 billion. In contrast,<br />
compared to 1997, the net balance of financial income and expenses improved<br />
by Lire 18 billion, as did the net balance of extraordinary items, by Lire 42 billion.<br />
• Shareholders’ equity rose from Lire 4,421 billion at the end of 1997 to Lire 4,750 billion<br />
at the end of 1998 despite a negative translation adjustment of over Lire 267 billion; the<br />
increase of Lire 329 billion is due to:<br />
– Translation adjustment (267)<br />
– Net income for the year 534<br />
– 1994-1998 bond conversions 505<br />
– Dividends to third parties:<br />
• <strong>Pirelli</strong> S.p.A. (234)<br />
• Other Group companies (64) (298)<br />
– Effect of consolidating Power Cables Division<br />
in Germany acquired from Siemens A.G. (86)<br />
– Other changes (59)<br />
329)<br />
12<br />
i
Comfort, silence and low rolling resistance<br />
characterise the new high performance P6000<br />
Powergy.<br />
In the USA, research continued into<br />
superconductivity, the new technological<br />
frontier in power transmission.<br />
• Net financial debt rose from Lire 478 billion at December 31, 1997 to Lire 513 billion at<br />
December 31, 1998; the increase of Lire 35 billion is composed as follows:<br />
– Exchange difference 50) (*)<br />
– Operating profit (798)<br />
– Depreciation and amortization (599)<br />
– Net investments: 879<br />
• Intangible assets and property,<br />
plant and equipment 793<br />
• Financial assets 86<br />
– Change in working capital 151<br />
– Change in provisions (30)<br />
– Other changes 50<br />
– Free cash flows (347) (*)<br />
– Dividends paid 298 (*)<br />
– Purchase of treasury shares 276 (*)<br />
– Income taxes 249 (*)<br />
– Extraordinary items, net 15 (*)<br />
– Net cash flows 491) (*)<br />
– Bond conversions (505) (*)<br />
– Other changes in shareholders’ equity (1) (*)<br />
35) (*)<br />
(*) Includes the effect of the acquisition of the Power Cables Division from Siemens A.G. for Lire 270 billion.<br />
• The debt to equity ratio has remained unchanged compared to 1997 at 0.11. It was<br />
affected by the investment for the acquisition of the business from Siemens A.G.,<br />
without which the ratio would have been 0.05.<br />
• Capital expenditures reached Lire 699 billion during the year compared to<br />
Lire 619 billion in 1997, considering the same companies in consolidation. The capital<br />
expenditures to depreciation ratio is 1.27 (1.19 in 1997). Investments were mainly<br />
concentrated in Europe in the Telecommunications and Submarine Systems business for<br />
the Cables and Systems Sector and in the car area for the Tyres Sector.<br />
1998 saw a further increase in net property, plant and equipment for Lire 105 billion<br />
following the consolidation of the Power Cables Division acquired from Siemens A.G.,<br />
which brings the total to Lire 804 billion.<br />
• R&D expenditures were completely charged to the profit and loss account for<br />
Lire 379 billion compared to Lire 355 billion in 1997 and represent 3.6 percent of sales<br />
(3.2 percent in 1997).<br />
• Personnel number almost the same as in 1997, with an increase of 15 units reaching a<br />
total of 36,226 (+560 personnel hired under temporary labor contracts with a reduction<br />
in the permanent work force of 545 units), without considering the employees of the<br />
German units acquired from Siemens, consolidated line-by-line in the balance sheet; if<br />
i<br />
13
The added value of submarine systems,<br />
laid mainly by <strong>Pirelli</strong>’s cableship Giulio Verne,<br />
has increased.<br />
The strategic alliance with Cooper Tire<br />
will increase competitiveness in the American<br />
replacement market.<br />
the German units are counted, the consolidated work force rises to 38,209 units. Sales<br />
per person, considering the same companies in consolidation, equal Lire 291 million.<br />
• Factories went from 72 at the end of 1997 to 70 at the end of 1998. The reduction is due<br />
to the Tyres Sector for the sales of the Tivoli factory to Trelleborg Wheel Systems S.p.A.<br />
and the San Pietro all’Olmo (Mi) factory; with the acquisition of the German units bought<br />
from Siemens and consolidated line-by-line, the number of factories becomes 73.<br />
• Economic value added has for a number of years now been included by <strong>Pirelli</strong> Group<br />
among its measurements of operating results. It is defined as the difference between the<br />
net return on capital invested and its cost.<br />
During 1998, the economic value added remained at levels similar to 1997, considering<br />
the same companies in consolidation, excluding the acquisition of the business segment<br />
from Siemens.<br />
(billions of lire) 1998 1997<br />
• Economic value added 30 24<br />
Economic value added in 1998 was affected by higher tax charges compared to 1997,<br />
which reduced the net return on capital invested.<br />
Significant subsequent events<br />
During 1999, the process continued for the acquisition of Siemens A.G.’s world power<br />
cables business, in compliance with the resolution passed by the Board of Directors of<br />
<strong>Pirelli</strong> S.p.A. on July 15, 1998. In particular, the acquisition has been completed for OEKW<br />
Montagegesellschaft der Österreichischen Kabelwerke GmbH in Austria, Codelca Due<br />
S.p.A. in Italy, Fercable S.A. in Spain.<br />
During the same month of January, <strong>Pirelli</strong> Cavi e Sistemi S.p.A., through its 51 percentowned<br />
Australian subsidiary, <strong>Pirelli</strong> Cables Australia Limited, concluded the agreement by<br />
which <strong>Pirelli</strong> Cables Australia Limited will purchase the Power Cables and Construction<br />
Division of the Australian company Metal Manufacturers Ltd. The total amount of the deal,<br />
which is subject to the approval of the authorities according to the normal procedures<br />
existing in these cases, is about Australian $65 million (about Lire 65 billion). The Cables<br />
and Systems Sector will thus further strengthen its position on the Australian market with<br />
this purchase, and complete the offering of its products and expand its customer portfolio.<br />
On February 9, 1999, <strong>Pirelli</strong> Pneumatici S.p.A., through its american subsidiary, <strong>Pirelli</strong> Tire<br />
LLc, and Cooper Tire & Rubber Company entered into a strategic alliance which will allow<br />
both companies to effectively pool their respective resources, with the objective of<br />
increasing the competitive position on the replacements market in North and South America.<br />
The alliance, which is only based on contractual agreements and does not call for any joint<br />
stock ownership, will create synergies founded upon the strong points of both companies.<br />
<strong>Pirelli</strong> will contribute its state-of-the-art technology in premium tyres and its well-known<br />
brand name and Cooper will contribute not only its extensive sales network, acting as a<br />
sales agent for <strong>Pirelli</strong> Tire LLc, but also its experience in the production of low cost tyres<br />
for the replacements market. The new venture will also bring synergies in the area of raw<br />
materials purchases.<br />
14<br />
i
A co-operation agreement has been signed<br />
between <strong>Pirelli</strong> and Michelin for the joint<br />
development of the Pax System.<br />
Following page: <strong>Pirelli</strong> Cables and Systems<br />
Sector’s manufacturing presence.<br />
On February 22, 1999, in the Tyres Sector, <strong>Pirelli</strong> and Michelin signed a cooperation<br />
agreement to further develop the Pax System together, with <strong>Pirelli</strong> adding its greater<br />
technological experience in the area of Total Mobility and high performance to the<br />
Michelin project.<br />
As from January 1, 1999, the <strong>Pirelli</strong> Group has decided to adopt the euro as its currency of<br />
account and settlement; after approval of the 1998 financial statements, the euro will<br />
become the currency of account for the Group companies operating in the eleven<br />
countries that are part of the European Monetary Union.<br />
A great deal of attention is being paid to customer relations; as far as invoicing is<br />
concerned, the companies operating in EMU countries have sent their customers a letter<br />
advising them of the Group’s position to adopt euro from the start of the transition period<br />
and to find out the choice made by the counterpart, under the neither-nor principle of<br />
“neither compulsion, nor prohibition”; the same letter has also been sent to suppliers.<br />
Consistent with the accounting system, in 1999 the internal reporting cycle and the<br />
consolidated financial statements of the Group will also be expressed in euro.<br />
As regards the information systems, the SAP system which was introduced over the last<br />
few years at the Group companies, has allowed the use of Release 3.1.I, updated for the<br />
conversion of the euro within the framework of corporate procedures.<br />
The installation of this system made it possible to cope with the problems associated with<br />
the year 2000 with greater clarity and timeliness.<br />
The Board of Directors of <strong>Pirelli</strong> S.p.A., on February 2, 1999, with the power vested in it by<br />
the shareholders’ meeting of May 15, 1998, passed a resolution for the increase of share<br />
capital for Lire 1,435,000,000 through the issue of shares with a nominal value of Lire 1,000<br />
each to be assigned to management of the Group. The resolution was approved by the<br />
Milan Courts on March 3, 1999 and therefore the share capital of <strong>Pirelli</strong> S.p.A. amounts to<br />
Lire 1,984,558,489,000 consisting of 1,896,552,473 ordinary shares and 88,006,016 savings<br />
shares, of nominal value Lire 1,000 each.<br />
Future outlook<br />
The outlook for the current year will be affected by contrasting factors. On the one hand,<br />
the cost reduction and efficiency improvement programs are rapidly being implemented,<br />
together with the recent acquisitions and strategic agreements, will begin to show the first<br />
positive results in the second half of the year. On the other hand, the weakness of the<br />
world markets, with the exception of the United States, connected above all to the<br />
turbulence of the South American, Asian, and former Soviet Union markets, will constitute<br />
an element of instability.<br />
Taking into account the above, and while it is still too early to have a precise picture<br />
concerning the possible results for the current year, we do estimate, however, that<br />
operating profit, and, therefore, the results before financial expenses and the tax charge,<br />
can be kept in line with the previous year.<br />
i<br />
15
Cables and Systems Sector<br />
Overall performance<br />
As in the last few years, the operating profit for 1998 again rose over the prior year.<br />
All sectors of activity showed a fall in prices, set against higher volumes, a reduction in the<br />
unit cost of materials and improved efficiency in transformation costs. However, trends in<br />
the various segments varied considerably.<br />
In general, in 1998, the cables and systems for telecommunications business recorded<br />
lower selling prices, especially in fiber optic cables, although total sales remained much<br />
the same as the previous year.<br />
In the field of fiber optics, the investments decided in previous years generated an<br />
increase in volumes, within a framework of falling international prices, especially in the<br />
second half of the year.<br />
As far as photonics are concerned, despite the recovery begun in the last part of the year,<br />
the levels of sales of the previous year were not equaled; however, this business acquired a<br />
large order portfolio at the end of the year.<br />
There was a slight increase in sales for power cables as a result of a gradual fall in the quotation<br />
of copper and the erosion of prices, while volumes rose. The operating result improved as a<br />
result of the positive efficiency of production and a fall in the price of raw materials.<br />
The submarine systems business has maintained a good level of profitability.<br />
As regards the telecommunications submarine systems business, work was completed on<br />
the Seamewe3, Lev, Pomezia-Golfo Aranci connections, while production was started for<br />
the Atlantis 2, Columbus 3 and Mazara-Tripoli contracts.<br />
As far as submarine power systems are concerned, Italy and Greece signed a contract<br />
(scheduled for completion in 2000), for which the production of land cables has already<br />
been completed and the production of submarine cables has already begun.<br />
Still on the power front, the laying of the cables at Kansai in Japan was completed, thanks<br />
to our cable-laying vessel “Giulio Verne”.<br />
Exports showed an increase in volumes thanks to important contracts concluded in<br />
Southeast Asia, India and Africa. This expansion of activity compensated for the fall in<br />
prices which occurred during the year.<br />
In the area of joint ventures, the economic crisis that affected much of Southeast Asia<br />
particularly influenced Indonesia, where the internal market remains stagnant. The<br />
activity of PT <strong>Pirelli</strong> Cables Indonesia was thus totally focused on the export market.<br />
In China, the process of consolidation of our presence on the telecommunications cables<br />
market continued, with a selective approach towards customers, favoring reliability over<br />
the expansion of sales volumes.<br />
16<br />
i
Aerial picture of the Berlin factory,<br />
to which <strong>Pirelli</strong> has transferred the German<br />
headquarters of Cables and Systems.<br />
A section of submarine optical amplifier.<br />
Having obtained the necessary approval from the EU authorities and the antitrust bodies,<br />
and after the completion of the due diligence review, in the last quarter of 1998 the<br />
acquisition began of the Power Cables Division of Siemens, as announced in July. The units<br />
are located in Germany, Hungary, Slovakia, South Africa, Turkey, Rumania, Italy, Spain,<br />
Austria, China and Russia. The new activities will generate strong synergies, starting with<br />
the integration of the markets, and will bring hi-tech production capacity, advanced<br />
research laboratories and top quality products.<br />
At December 31, 1998, the acquisitions of the companies in the following countries had<br />
been finalized: Germany, Hungary, South Africa, Turkey and Rumania. These companies<br />
were consolidated in the financial statements of the Cables and Systems Sector at<br />
December 31, 1998, line-by-line in the balance sheet for the German units and at purchase<br />
cost as far as the Hungarian, Turkish, Rumanian and South African units are concerned.<br />
Furthermore, in February 1999, the acquisition of companies located in Austria, Italy and<br />
Spain was finalized; the acquisition of the remaining activities is scheduled to take place<br />
during 1999.<br />
The following tables summarize the companies of the Siemens Group:<br />
Subsidiaries consolidated line-by-line in the balance sheet at December 31, 1998<br />
Company<br />
<strong>Pirelli</strong> Kabel und Systeme Holding GmbH<br />
<strong>Pirelli</strong> Kabel Grundstücksverwaltungs GmbH<br />
<strong>Pirelli</strong> Kabel und Systeme Beteiligungs GmbH<br />
Bergmann Kabel und Leitungen GmbH<br />
<strong>Pirelli</strong> Kabel und Systeme GmbH & Co. KG<br />
<strong>Pirelli</strong> Kabel und Systeme Verwaltungs GmbH<br />
Country<br />
Germany<br />
Germany<br />
Germany<br />
Germany<br />
Germany<br />
Germany<br />
Subsidiaries valued at purchase cost in the balance sheet at December 31, 1998<br />
Company<br />
MKM Magyar Kabel Muvek RT.<br />
"Kabel" Gepgyarto Epitoipari Es Szolgaltato KFT.<br />
MKM Balassagyarmati Kabelgyar KFT.<br />
MKM Erosaramu Kabelgyar KFT.<br />
MKM Kisteleki Kabelgyar KFT.<br />
MKM Szegedi Kabelgyar KFT.<br />
Kabel Keszletertekesito BT.<br />
S.C. Elcaro S.A.<br />
Turk Siemens Kablo ve Elektrik Sanayii A.S.<br />
AFCAB Holdings (Proprietary) Ltd<br />
African Cables Ltd<br />
Country<br />
Hungary<br />
Hungary<br />
Hungary<br />
Hungary<br />
Hungary<br />
Hungary<br />
Hungary<br />
Rumania<br />
Turkey<br />
South Africa<br />
South Africa<br />
Subsidiaries purchased after year-end 1998<br />
Company<br />
Oekw Montagegesellschaft der Österreichischen Kabelwerke GmbH<br />
Codelca Due S.p.A.<br />
Fercable S.A.<br />
Country<br />
Austria<br />
Italy<br />
Spain<br />
i<br />
17
Distribution of 1998 Cables and Systems sales<br />
by geographic area and product category.<br />
At the beginning of January 1999, an agreement was also signed on the basis of which the<br />
Australian subsidiary <strong>Pirelli</strong> Cables Australia Ltd. will acquire the Power Cables and Construction<br />
Division of the Australian company Metal Manufacturers Ltd.. The acquisition is scheduled for<br />
completion by March 31, 1999, once the necessary local authorizations have been secured.<br />
The key figures of the consolidated financial statements of the Cables and Systems Sector<br />
are as follows:<br />
(in billions of lire) 1998) 1998) (1) 1997)<br />
• Sales revenues 5,397) 5,397) (1) 5,843)<br />
• Gross operating profit 758) 758) (1) 720)<br />
% of sales 14%) 14%) (1) 12.3%)<br />
• Operating profit 496) 496) (1) 491)<br />
% of sales 9.2%) 9.2%) (1) 8.4%)<br />
• Extraordinary items, net (24) (24) (1) (53)<br />
• Net income 280) 280) (1) 260)<br />
% of sales 5.2%) 5.2%) (1) 4.4%)<br />
• Net financial debt 771) 501) (1) 488)<br />
• Capital expenditures 404) 299) (1) 270)<br />
• R&D expenditures 180) 180) (1) 168)<br />
• Personnel (number) 16,906) 14,923) (1) 14,245)<br />
• Factories (number) 52) 49) (1) 49)<br />
(1) With the same companies in consolidation as in 1997, excluding the effect of the acquisition of the Power Cables Division<br />
of Siemens A.G.<br />
Sales revenues show a drop of 7.6 percent compared to 1997, with the exchange effect<br />
being equal to a negative 0.2 percent. The reduction is due to a 4.7 percent decrease in the<br />
price of copper and 5.5 percent decline in other prices while the volumes and mix have<br />
presented a gain of 2.8 percent.<br />
Europe (of which<br />
Italy: 14.8%)<br />
The breakdown of sales revenues by geographic area and product is as follows:<br />
South America<br />
North America<br />
Asia<br />
Other areas (of which<br />
Oceania: 3%)<br />
Geographic area 1998 1997<br />
Europe (of which Italy: 14.8%) 48% 47%<br />
South America 21% 22%<br />
North America 21% 19%<br />
Oceania 3% 3%<br />
Asia 5% 8%<br />
Other areas 2% 1%<br />
Product category 1998 1997<br />
Power 28% 23%<br />
Telecommunications 29% 27%<br />
Building wires, special cables,<br />
enameled wires 32% 34%<br />
Accessories, installation,<br />
other activities 11% 16%<br />
Telecommunications<br />
Power<br />
Bulding wires,<br />
special cables,<br />
enameled wires<br />
Accessories,<br />
installation,<br />
other activities<br />
Operating profit rose from 8.4 percent to 9.2 percent of sales.<br />
Extraordinary items show a net expense balance of Lire 24 billion in 1998 (Lire 53 billion<br />
in 1997) as a result of the costs for the continuation of productive rationalization in some<br />
countries, particularly France.<br />
Net income posted a 7.7 percent increase over the prior year, reaching an amount of<br />
Lire 280 billion, equal to 5.2 percent of sales (4.4 percent in 1997).<br />
18<br />
i
Detail of the production of active optical fiber<br />
for submarine optical amplifiers.<br />
The new DeskWave TM cables, which made<br />
their debut in 1999, improve the efficiency<br />
of buildings’infrastructures.<br />
Net financial debt totals Lire 771 billion at December 31, 1998, a change of Lire 283<br />
billion compared to Lire 488 billion at year-end 1997. The increase in debt is essentially due<br />
to the financing secured by <strong>Pirelli</strong> S.p.A., at the best market terms, to purchase Siemens.<br />
At the end of 1998, considering the same companies in consolidation, the number of<br />
factories totaled 49, the same as the prior year: 32 in Europe, 6 in North America, 6 in<br />
South America and 5 in Australia, Asia and Africa. To these must be added the 3 factories<br />
acquired from Siemens A.G. in Germany and consolidated line-by-line, bringing the total to<br />
52. The factories of the other units include 3 in Hungary, 1 in Turkey, 1 in South Africa and<br />
1 in Rumania.<br />
During 1999, following the conclusion of the process to acquire the Power Cables Division<br />
from Siemens A.G., the number of factories will increase by another 5, bringing the total<br />
number of production units of the Cables and Systems Sector to 63.<br />
During the year, while producing much higher volumes than in the previous year, the<br />
factories have continued to limit product costs by steadily improving productivity and<br />
materials efficiency.<br />
According to corporate strategic guidelines, in 1998 there were significant improvements<br />
in the quality of the product and the level of service, as a tangible sign of the considerable<br />
degree of attention being focused on the customer.<br />
The process to obtain the ISO 14001 Environmental Certification, begun last year in the<br />
various subsidiaries, is proceeding according to schedule; in 1998, 7 factories were<br />
awarded certification, which, with the 3 certified in 1997, brings the total to 10 factories.<br />
The overall work force of the Sector at December 31, 1998, considering the same<br />
companies in consolidation, numbered 14,923 (including 1,877 under temporary<br />
employment contracts). Compared to the end of the prior year, this corresponds to an<br />
increase of 678 units, equal to 4.7 percent of the total. The acquisition of the Power Cables<br />
Division from Siemens A.G. led to an increase of 1,983 units for the companies in Germany,<br />
hence reaching a consolidated total of 16,906 persons. The employees of the companies in<br />
Hungary, Turkey, Rumania and South Africa number 3,026 units; when the acquisitions are<br />
completed, this will bring additions to the work force of approximately 1,590 units.<br />
The organizational structures of the Sector have been further strengthened to cope with<br />
evolving markets and specialization.<br />
The integration of the organization of the Power Cables Business acquired from Siemens<br />
was started immediately, which will enable further rationalization on a regional basis to<br />
take place in 1999.<br />
At December 31, 1998, the breakdown of the work force was as follows:<br />
1998 1998 1997<br />
excluding<br />
Siemens<br />
• Management 1.8% 1.9% 2.1%<br />
• Staff 30.3% 30.3% 30.9%<br />
• Operatives 67.9% 67.8% 67.0%<br />
Capital expenditures in 1998 amounted in total to Lire 299 billion (+11 percent compared<br />
to 1997), and are equivalent to 126 percent of depreciation.<br />
i<br />
19
Advanced studies within the laboratories<br />
of CoreCom, a consortium formed between<br />
<strong>Pirelli</strong> and the Milan Politecnico.<br />
<strong>Pirelli</strong> is to supply its maximum safety cables<br />
for the new home of the Guggenheim Museum<br />
in the historic Villa Panza di Biumo at Varese<br />
(Italy).<br />
Capital expenditures in the “Telecommunications” and “Submarine Systems” business<br />
areas were particularly significant, and may be analyzed as follows:<br />
Geographic area 1998 1997<br />
Europe 66% 72%<br />
South America 13% 12%<br />
North America 17% 11%<br />
Oceania, Asia, Other 4% 5%<br />
As far as materials are concerned, purchase prices fell during 1998 compared to 1997,<br />
especially with regard to products derived from the petrochemical sector.<br />
Similarly, as far as non-ferrous metals were concerned, there was a net fall in the average<br />
quotations of copper (-28 percent), aluminum and lead (-15 percent).<br />
Since a slight rise in quotations is anticipated in the second half of the year, provided that<br />
there are no substantial changes in the international economic scenario and in supply and<br />
demand, the average prices for the current year should settle around values no higher than<br />
those of the previous year.<br />
R&D activities, coordinated at the worldwide level, are conducted by an integrated<br />
structure of research centers and development and engineering units located in various<br />
countries.<br />
For the year just ended, these activities involved 767 people and entailed Lire 180 billion of<br />
expenditures, equal to 3 percent of total sales, much the same as in 1997.<br />
The distribution of R&D expenditures by geographic area is as follows:<br />
1998 1997<br />
• Europe 89% 83%<br />
• South America 4% 7%<br />
• North America 6% 9%<br />
• Australia 1% 1%<br />
Among the most important research activities during the year are:<br />
in the field of power cables:<br />
• the development, qualification and marketing of a new family of low-voltage cables and<br />
building wires, characterized by the absence of toxic and corrosive emissions in the case<br />
of fire;<br />
• the production and installation of a prototype medium-voltage cable with expanded<br />
polymer protection;<br />
• the continuation of research on superconductivity and on direct current high-voltage<br />
cables for submarine applications.<br />
in the photonics sector:<br />
• the development and supply, for the telecom network of American customers, of a new<br />
dense wavelength division multiplexing system (DWDM) for optic communications,<br />
20<br />
i
Another step forward was taken in WDM<br />
photonics systems with the launch of the 128<br />
channel WaveMux TM .<br />
Production has begun of the new submarine<br />
telecom network between Italy and Libya.<br />
capable of transmitting up to 128 channels, each of which can carry a transmission<br />
signal with a speed of up to 10 Gbit/s, reaching a capacity of more than 16 million<br />
simultaneous phone calls.<br />
• the development and installation, on the Corfu-Bar section, of an optical system for<br />
submarine transmission with remote pumping for links up to 350 km long without<br />
submerged active repeaters.<br />
in the telecommunications cables and fiber optics sector:<br />
• the introduction of high-capacity ribbon fiber optic cables (with up to 864 fibers) with a<br />
compact design to optimize performance in the access network;<br />
• the first deliveries of fibers with a highly advanced design, specially created for the latest<br />
systems with high transmission capacity.<br />
Cables and Systems Sector holding company<br />
The unconsolidated balance sheet and statement of income of <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
are presented as follows:<br />
Mazara<br />
Balance sheet (in billions of lire)<br />
1998 1997<br />
Intangible assets 25.3 19.8<br />
Property, plant and equipment, net 232.6 144.1<br />
Financial assets 1,484.3 1,478.9<br />
Net working capital 185.1 121.0<br />
1,927.3 1,763.8<br />
Shareholders’ equity 1,148.1 1,083.7<br />
Provisions 121.3 105.4<br />
Net financial position 657.9 574.7<br />
1,927.3 1,763.8<br />
Tripoli<br />
Statement of income (in billions of lire)<br />
1998) 1997)<br />
Production value 1,422.6) 1,182.4)<br />
Production costs:<br />
• Raw materials and services (1,175.4) (897.1)<br />
• Personnel (246.1) (211.9)<br />
• Depreciation (50.7) (39.8)<br />
• Other 28.7) (2.4)<br />
Operating profit (20.9) 31.2)<br />
Financial income and expenses 256.9) 134.2)<br />
Income before extraordinary items and income taxes 236.0) 165.4)<br />
Extraordinary items, net 5.0) 4.8)<br />
Income taxes (21.8) (13.6)<br />
Net income for the year 219.2) 156.6)<br />
i<br />
21
The first submarine optical amplifier, being<br />
loaded aboard a cable-laying ship for<br />
installation between Rome and Palermo.<br />
Trégastel factory (France): the white room<br />
where integrated photonics components are<br />
finished.<br />
Performance by geographic area<br />
Sales of <strong>Pirelli</strong> Cavi e Sistemi S.p.A. in Italy were down compared to the previous year,<br />
both because of the lower value of copper contained in cables and because of lower prices<br />
and volumes. The various segments showed markedly different trends.<br />
In the power cables sector, volumes increased considerably, especially in the second half<br />
of the year, as a result of the decision by ENEL to invest in medium- and low-voltage lines<br />
to bring the national network in line with European quality and safety standards.<br />
Prices fell yet again; volumes sent to installers, contractors and other industrial customers,<br />
like export sales, remained around the levels of the previous year; actions continued to<br />
promote innovative products and laying techniques.<br />
In the general market, the demand was heavy for the first half of the year, but showed<br />
signs of falling in the second half; prices fell constantly, both as a result of the drop in the<br />
prices of raw materials, and because of ever-fiercer competition. The end of the year saw<br />
the launch of the new AFUMEX cables of the LSOH range.<br />
For enameled wires, the year was characterized by a great deal of discontinuity on the<br />
market, which affected volumes and prices, especially in the second half of the year.<br />
Telecommunications cables were affected negatively by the total halt called on the<br />
SOCRATE project by Telecom Italia, as well as by the reduction to minimum maintenance<br />
program levels for the fixed network. As a consequence of the lower market volumes,<br />
there was a marked fall in prices. There was a positive start to the activities of the new<br />
telephone operating companies, which are equipping their own infrastructures and which<br />
see the Company as one the major partners contributing new technologies.<br />
The affiliate FOS (Fibre Ottiche Sud — F.O.S. S.p.A.) recorded a fall in sales due mainly to<br />
the drop in prices which occurred on international markets.<br />
The current year began with a performance similar to the second half of 1998 and<br />
described above, with prices gradually declining even further.<br />
In France, the affiliate Câbles <strong>Pirelli</strong> S.A. is still passing through a phase of stabilization<br />
on the main traditional markets in which it operates, maintaining the levels of profitability<br />
of the previous year.<br />
In the general market, there was a climate of extreme pressure over prices, with copper<br />
prices falling compared to the previous year; the global sales remained around the levels of<br />
1997, thanks to an increase in volumes.<br />
The power utilities market, despite the persisting recession that has lasted for many<br />
years, allowed the affiliate to fulfill its expectations completely, with exports making a<br />
considerable contribution and good results.<br />
The special cables business was positively affected by the restructuring process still in<br />
progress.<br />
The level of activity on the telecommunications market recorded considerable growth,<br />
particularly in optic cables, however this was accompanied by substantial price pressure.<br />
The profitability trends of car cables and connections remained stable. During the year,<br />
Câbles <strong>Pirelli</strong> began to shift its accessory production from the factory at Marne la Vallée<br />
and concentrate them in the cable factories at Sens.<br />
Photonics manufacturing, which takes place at the Tregastel factory, operate in a context<br />
that is totally integrated with the units in the United States and Italy.<br />
Actions continued to monitor working capital, which had a positive effect on the financial<br />
position of the affiliate.<br />
In the United Kingdom, <strong>Pirelli</strong> General Plc continues, through its operating units, to<br />
22<br />
i
In 1998, <strong>Pirelli</strong> received the Investing in<br />
Excellence award from British Telecom for<br />
its progress in technology and services.<br />
An agreement was signed with the University<br />
of Southampton in the United Kingdom<br />
for joint research on photonics.<br />
produce, market and install telecommunications and power cables on both the domestic<br />
and foreign markets.<br />
As to the telecommunications cable sector, demand in 1998 was very strong in all<br />
market segments.<br />
With respect to <strong>Pirelli</strong> Cables Ltd., the domestic telecommunications sector recorded a<br />
stable demand in 1998 and the affiliate maintained its market position, despite increasing<br />
pressure from competition. The export markets, particularly those in the Far East,<br />
weakened following the general economic trend of the region and, for 1999, these<br />
conditions are expected to persist.<br />
As far as power cables are concerned, there was a growth in the demand for high-voltage<br />
cables and accessories. Important contracts were concluded in the U.K., Thailand,<br />
Singapore and Lebanon. The demand for other cables destined for “Utilities” remained<br />
stable.<br />
As for the general market, in 1998, the affiliate strengthened its position on the domestic<br />
market, while exports weakened as a result of the instability seen in the Far East.<br />
In the field of installations, <strong>Pirelli</strong> Construction Co. operates on both the domestic and<br />
foreign markets. Its specific activities are directed to the development and management of<br />
a wide range of installation projects relating to power and telecommunications networks.<br />
Sales, spread across 20 countries, rose compared to the previous year, despite the<br />
persisting problems of the market, and were accompanied by a high level of profitability.<br />
In the power cables segment, in Great Britain the contract was completed with Northern<br />
Ireland Electricity to lay 110 kV XLPE cables, which led to the replacement of aerial cables<br />
by underground cables.<br />
Work also began at Manchester Airport to replace aerial lines with sections of<br />
underground 400 kV lines using laminated polypropylene (PPL) cables which ensure high<br />
performance. A similar installation was completed in Singapore.<br />
British Telecom awarded <strong>Pirelli</strong> its award for the best supplier, within the framework of<br />
the three-year contract stipulated last year.<br />
As far as exports of telecommunications cables are concerned, the company acquired a<br />
contract in Hungary.<br />
At the end of 1998, the order portfolio of the affiliate was considerable, both in terms of<br />
the domestic and export market.<br />
Despite an increase in sales, the Spanish affiliate <strong>Pirelli</strong> Cables y Sistemas S.A. was<br />
affected by the fall in prices.<br />
The telecommunication cables segment showed a marked increase, especially connected<br />
to the exports of OPGW cables; there was also a considerable increase in the sale of fiber<br />
optic cables. The Spanish affiliate continues to be the main supplier of fiber optic cables<br />
for Telefonica de España.<br />
On the power cables market, the lower demand from Utilities was compensated by the<br />
growth of the general market and exports. In 1999, once the electricity companies have<br />
finished investing in the diversification and the privatization processes which constituted<br />
their priorities in 1998, they are expected to return to their normal levels of activity.<br />
In North America, for the second year running, <strong>Pirelli</strong> Cables and Systems LLc in the<br />
United States and <strong>Pirelli</strong> Cables and Systems Inc. in Canada reached satisfactory<br />
results.<br />
The net financial position was also positive as a result of greater profitability and careful<br />
management of working capital.<br />
In North America, the telecommunications market continued its expansion, characterized<br />
i<br />
23
In Iceland, <strong>Pirelli</strong> installed 150 kilometres<br />
of optical Ground Wires with 24 fibres.<br />
by the acquisition of a number of new customers during 1998. This made it possible for the<br />
telecommunications division to post never-before-reached sales, despite the marked fall in<br />
prices; the satisfactory results are much in line with those of the previous year.<br />
As for the power cables market, the trend in 1998 was similar to that of the previous year,<br />
both in terms of prices and volumes. Continuous progress on the front of internal<br />
production efficiency and a greater market share allowed the power cables division to<br />
improve profitability considerably compared to 1997.<br />
In the photonics business, the patent infringement lawsuit with the American competitor<br />
Ciena was positively concluded.<br />
The telecommunications cables market will continue to grow in 1999, albeit at more<br />
moderate levels than in 1998. Prices are expected to continue to erode.<br />
In 1999, the power cables market will grow slowly, and will also suffer from a continuous<br />
reduction in prices, due to the generalized increase of production capacity. The efforts of<br />
the power cables division will be concentrated on developing new products and on<br />
achieving continuous improvement in levels of service.<br />
On the other hand, considerable growth is forecast for photonics products, since<br />
important supply contracts were signed with new customers at the end of 1998.<br />
In Brazil, where <strong>Pirelli</strong> Cabos S.A. operates, 1998 was affected by the fluctuations of the<br />
world economy and by government action to control the fiscal deficit (8 percent of GDP).<br />
The reduction of international credit after the Asian crisis and, especially after the Russian<br />
moratorium, led to a considerable increase in the effective interest rate in an attempt to<br />
stem capital outflows. In the last quarter, there was also a marked fall in economic activity.<br />
Despite the rather unfavorable context, the profitability of the company improved<br />
considerably compared to the prior year. The growth in sales and the reduction of costs<br />
compensated at least in part for the fall in the prices of products.<br />
There were appreciable improvements in the market share in the sectors of power, general<br />
wiring and enameled wires. In the automotive and telecom sectors, the market share<br />
remained steady, in the presence of a marked fall in prices.<br />
The first phase of expansion of the optic system for the Rio de Janeiro - Natal link using<br />
<strong>Pirelli</strong> WDM 5 Gbit/sec technology was completed. This is the first system in South<br />
America to use this technology, which allows 60,000 phone calls to be made<br />
simultaneously with a single pair of optical fibers.<br />
<strong>Pirelli</strong> Cabos S.A. is the first Brazilian conductor company to be awarded the ISO 14000<br />
quality certification for two factories, testifying to its commitment to environmental<br />
management.<br />
Changes are forecast in 1999 in the Brazilian economic policy with the aim of stabilizing<br />
economic growth and reducing unemployment. The Government will probably increase<br />
fiscal pressure and reduce public expenditures to limit the deficit, with negative effects on<br />
the growth of GDP, which is expected to drop by 2 percent.<br />
Marked falls in prices are expected, especially in the telecommunications segment. The<br />
continuous drive to achieve greater efficiency will be a decisive factor in maintaining<br />
profitability and market position.<br />
In Argentina, where <strong>Pirelli</strong> Cables SAIC operates, in the second half of 1998, economic<br />
activity, which has been growing significantly in the last three years, came to a sudden<br />
standstill as a result of the international financial crisis.<br />
Despite this, even in a context of a marked fall in prices, the volumes of the affiliate were<br />
higher than the prior year, thanks to the demand for telecommunications cables, in<br />
continuous growth, and the contribution made by the general market.<br />
24<br />
i
<strong>Pirelli</strong> was at the 1998 World Cup Final:<br />
320 kilometres of energy transmission cables<br />
were installed at the new Stade de France<br />
in Paris.<br />
Bathymetric profile of the submarine energy<br />
link between Italy and Greece, to be laid at the<br />
record depth of 1,000 metres under the sea.<br />
The negative effects of the Brazilian crisis are expected to influence results in 1999, and<br />
will presumably lead to an increase in imports.<br />
With the current market conditions, it is essential to improve global efficiency in order to<br />
maintain a high level of competitiveness.<br />
In Australia, where <strong>Pirelli</strong> Cables Australia Ltd. operates, 1998 was characterized by<br />
radical changes within the cables industry, especially among manufacturers, and by<br />
market conditions which were not particularly favorable. However, the Australian affiliate<br />
achieved levels of profitability which were comparable to those of the prior year.<br />
<strong>Pirelli</strong> won the contract for the exclusive supply of telecommunications cables to Telstra<br />
until June 2001. Moreover, the continuous attention to reducing production costs will<br />
make it possible to secure an ever more dominant market position.<br />
As far as power cables are concerned, the introduction of new products allowed entry into<br />
new markets, compensating for the fall in exports.<br />
The acquisition of the Power Cables and Construction Division of Metal Manufacturers Ltd.,<br />
announced recently, will allow the affiliate to assume a leadership position on the<br />
Australian cables market.<br />
0<br />
100<br />
200<br />
300<br />
400<br />
500<br />
600<br />
700<br />
800<br />
900<br />
1000<br />
1100<br />
Italy<br />
Greece<br />
0 25 50 75 100 125 150 Km.<br />
Performance of the main companies in the Sector<br />
The most significant figures as they appear in the financial statements prepared by the<br />
boards of directors and approved or being approved by the respective shareholders’<br />
meetings are given below.<br />
The amounts are expressed in local currency and are compared to those of the preceding<br />
year:<br />
Câbles <strong>Pirelli</strong> S.A. - France (in thousands of FF) 1998) 1997)<br />
• Sales revenues 3,220,336) 3,360,477)<br />
• Net income 74,181) 95,250)<br />
• Net financial position (77,822) 52,345)<br />
• Shareholders’ equity 1,261,781) 1,137,616)<br />
<strong>Pirelli</strong> Cables y Systemas S.A. - Spain - consolidated (in millions of Pesetas) 1998) 1997)<br />
• Sales revenues 29,257) 24,753)<br />
• Net income 1,567) 1,183)<br />
• Net financial position (913) (783)<br />
• Shareholders’ equity 8,549) 9,517)<br />
<strong>Pirelli</strong> General plc - U.K. - consolidated (in thousands of £) 1998) 1997)<br />
• Sales revenues 349,193) 267,517)<br />
• Net income 22,887) 13,134)<br />
• Net financial position 24,570) 43,465)<br />
• Shareholders’ equity 133,622) 143,297)<br />
<strong>Pirelli</strong> Cables and Systems LLC - U.S.A. (in thousands of US$) 1998) 1997)<br />
• Sales revenues 524,922) 545,115)<br />
• Net income 61,805) 20,280)<br />
• Net financial position 26,638) 16,253)<br />
• Shareholders’ equity 95,050) 76,001)<br />
i<br />
25
The rotating platform of the <strong>Pirelli</strong> cable-laying<br />
ship Giulio Verne, which in 1998 completed<br />
the laying of Kansai cables in Japan.<br />
A detail of the installation of a line of optical<br />
Ground Wires produced by <strong>Pirelli</strong> in Spain.<br />
Following page: <strong>Pirelli</strong> Tyre Sector’s<br />
manufacturing presence and distribution<br />
of 1998 sales by geographic area and product<br />
category.<br />
<strong>Pirelli</strong> Cables and Systems Inc. - Canada (in thousands of $ Canadian) 1998) 1997)<br />
• Sales revenues 240,493) 207,699)<br />
• Net income 15,674) 14,273)<br />
• Net financial position (13,933) 8,452)<br />
• Shareholders’ equity 46,398) 47,129)<br />
<strong>Pirelli</strong> Cabos S.A. - Brazil - consolidated (in thousands of Brazilian reais) 1998) 1997)<br />
• Sales revenues 523,113) 609,767)<br />
• Net income 56,049) 44,698)<br />
• Net financial position (68,071) (54,996)<br />
• Shareholders’ equity 221,267) 213,265)<br />
<strong>Pirelli</strong> Cables SAIC - Argentina (in thousands of Pesos) 1998) 1997)<br />
• Sales revenues 189,765) 138,032)<br />
• Net income 7,329) 4,267)<br />
• Net financial position (39,471) (31,020)<br />
• Shareholders’ equity 94,161) 90,358)<br />
<strong>Pirelli</strong> Cables Australia Ltd - consolidated (in thousands of $ Australian) 1998) 1997)<br />
• Sales revenues 137,454) 128,900)<br />
• Net income 5,018) 4,659)<br />
• Net financial position (2,388) (3,467)<br />
• Shareholders’ equity 44,484) 51,972)<br />
Future outlook<br />
The instability of the markets and economic growth that was lower than expected,<br />
resulting in ever fiercer competition in terms of prices, will affect the activities of the<br />
Cables and Systems Sector.<br />
These negative factors will be countered by curbing structural costs, reducing product<br />
costs by means of continuous improvements in production efficiency, launching new<br />
products and offering better service.<br />
1999 will also bring the integration of the business acquired from Siemens with foreseeable<br />
advantages in terms of synergies, and the conclusion of the acquisition of the Power<br />
Cables and Construction Division from Metal Manufacturers Limited in Australia.<br />
26<br />
i
Tyres Sector<br />
In 1998, the world automotive market showed a slight gain, but with very varied trends in<br />
the different geographic areas.<br />
In Europe, the increase in the market was the result of the satisfactory trend by Spain,<br />
followed by France, Germany and the United Kingdom; however this was set against the<br />
negative performance of Italy, owing to the end of the program of government incentives<br />
for the purchase of new cars.<br />
In North America, the market remained fairly stable, while the South American market<br />
showed a slight fall, being affected by the crisis in Brazil during the second half of the year.<br />
Finally, in Turkey, after two years of sustained growth, the economic and political crisis in<br />
the country led to a marked fall in internal demand.<br />
Overall performance<br />
The consolidated balance sheet and statement of income of the Tyres Sector are presented<br />
as follows:<br />
(in billions of lire) 1998 1997)<br />
• Sales revenues 5,218 5,417)<br />
• Gross operating profit 657 626)<br />
% of sales 12.6% 11.6%)<br />
• Operating profit 340 313)<br />
% of sales 6.5% 5.8%)<br />
• Extraordinary items, net 16 28)<br />
• Net income 231 233)<br />
% of sales 4.4% 4.3%)<br />
• Net financial debt 602 425)<br />
• Capital expenditures 373 336)<br />
• R&D expenditures 199 187)<br />
• Personnel (number) 20,697 21,361)<br />
• Factories (number) 21 23)<br />
Sales revenues, in nominal terms, have registered a drop of 3.7 percent from 1997 due to<br />
price reductions (-4.6 percent) that were only partly compensated by the positive gains in<br />
volumes and mix (+1.5 percent); the exchange effect is only marginal (-0.6 percent).<br />
The breakdown of sales revenues by geographic area and product is as follows:<br />
Italy<br />
Other European<br />
Countries<br />
North America<br />
South America<br />
Asia<br />
Other areas<br />
Geographic area 1998 1997<br />
Italy 15% 13%<br />
Other European countries 45% 42%<br />
North America 7% 8%<br />
South America 24% 26%<br />
Asia 7% 9%<br />
Other areas 2% 2%<br />
Product 1998 1997<br />
Car tyres 52% 51%<br />
Industrial and comm. vehicle tyres 30% 30%<br />
Motorcycle tyres 7% 7%<br />
Agriculture tyres 4% 5%<br />
Other tyres 7% 7%<br />
Car tyres<br />
Industrial and<br />
commercial<br />
vehicles tyres<br />
Motorcycle tyres<br />
Agriculture tyres<br />
Other tyres<br />
i<br />
27
The new Audi TT is fitted with ultra-low<br />
profile P6000 and PZero tyres: a further step<br />
forward in collaboration between <strong>Pirelli</strong><br />
and the Volkswagen Group.<br />
In 1998, a commercial vehicle tyre made<br />
its debut with its sidewalls decorated<br />
by a designer.<br />
Operating profit rose by 8.6 percent, with a gain also in terms of the percentage of sales<br />
(from 5.8 percent in 1997 to 6.5 percent in 1998), where the positive mix of products sold,<br />
the reduction in raw materials prices and the effects of the steps taken to reduce costs<br />
have more than compensated for the negative variation in the sales prices.<br />
Contributing to this result are, in South America, the buoyant performance of Brazil and<br />
Argentina, with Venezuela still in a loss position owing to the persistence of an unfavorable<br />
local economic picture, whereas, in Europe, Spain led with a good showing.<br />
Extraordinary items registered a net balance of extraordinary income of Lire 16 billion.<br />
The income includes gains of Lire 34 billion realized on the sale of the Tivoli factory to a<br />
joint venture with Trelleborg Wheel Systems S.p.A. for the agriculture tyre business<br />
purpose, in which <strong>Pirelli</strong> has a 40 percent investment. The favorable conclusion to the<br />
lawsuit with Titan in North American brought extraordinary income of Lire 11 billion.<br />
Extraordinary expenses of Lire 29 billion include Lire 24 billion referring to actions taken<br />
to restructure the operational processes of certain functions of the Sector so as to more<br />
effectively respond to the continual evolution of the competitive scenario, and<br />
Lire 5 billion to land reclamation.<br />
Net income, Lire 231 billion, was affected by the significant increase in tax charges<br />
compared to 1997, and is therefore basically the same as that in 1997.<br />
Net financial debt records an increase of Lire 177 billion, which, net of the negative<br />
exchange effect of Lire 38 billion, is attributed to higher investments and a higher average<br />
balance of receivables from customers.<br />
Capital expenditures in 1998 were Lire 373 billion, representing 123 percent of<br />
depreciation and 7.1 percent of sales. This is an increase of 11 percent over the prior year.<br />
As far as industrial investments are concerned, about 70 percent of them are in Europe<br />
and Turkey, 25 percent in South America and the remaining 5 percent in North America.<br />
Overall production, in tons, reported an increase of 0.9 percent. While production was a<br />
good levels in Europe (+4.4 percent), negative trends were posted by Brazil (-1.6 percent)<br />
owing to the effects of a contraction in demand in the second half and by Venezuela<br />
(-18 percent) on account of the continuing negative local economic situation.<br />
The production breakdown by geographic area and product is as follows:<br />
1998 1997<br />
Europe + Turkey 57% 55%<br />
North America 5% 5%<br />
South America 38% 40%<br />
Total 100% 100%<br />
R&D expenditures totaled Lire 199 billion in 1998, representing 3.8 percent of sales<br />
revenues.<br />
As a result of the measures taken in 1997, the improved efficiency and the higher degree of<br />
integration among the research centers in the Sector made it possible to speed up projects<br />
to renew and broaden the product range, with Italy increasingly playing the leading role in<br />
28<br />
i
The new asymmetric Snow Sport tyre has been<br />
developed for winter use.<br />
A futuristic prototype of an ultra-high<br />
performance car, shod with <strong>Pirelli</strong> PZero<br />
in the extreme diameter of 19 inches.<br />
basic research and advanced development. In this sense, cooperation programs have been<br />
developed with universities and research institutes.<br />
In Brazil, 1998 saw the launch of the P3000 Energy, the top product in the standard<br />
segment of the new generation of car tyres with low rolling resistance, achieving a high<br />
level of appreciation from the market. With the increasing success of new type-testing and<br />
thanks to its continuous technological development, the P3000 has become an important<br />
benchmark for leading car manufacturers.<br />
In the premium market segment, the range of sizes of the products launched in 1997 (the<br />
P5000 Drago and the P6000 Sport Veloce) was extended, consolidating a competitive<br />
position in the replacement market. The new technological version of the P6000, now with<br />
improved comfort, lower noise levels and low rolling resistance, has strengthened its<br />
competitiveness in the original equipment segment.<br />
The PZero, in its category, is consolidating its image as a benchmark tyre thanks to<br />
constant and innovative technological development, which, together with the P7000, has<br />
made it possible to recently launch a new series of “super” tyres in the 19” and 20”<br />
diameters destined for the sophisticated cars of the “tuners”’ as well as the “concept cars”<br />
of the car manufacturers.<br />
In the Winter segment, the new asymmetrical SnowSport was developed during the year,<br />
scheduled for presentation on the market in the first months of 1999.<br />
At December 31, 1998, the work force numbered 20,697, a reduction of 664 units<br />
compared to the prior year. The work force includes 332 persons under temporary<br />
employment contracts.<br />
Measures aimed at improving the efficiency of the structure led to a significant reduction<br />
in staff and management (-4 percent). Within the framework of the joint venture with<br />
Trelleborg, relating to the sale of activities associated with the production and sale of tyres<br />
for agriculture equipment, there was also a further reduction of 478 units, effective<br />
January 1, 1999.<br />
In parallel to this, numerous university graduates were hired, mainly in the industrial,<br />
R&D, commercial and marketing areas.<br />
Actions have continued to renew management, especially by promoting young staff and<br />
hiring from outside.<br />
The breakdown of the work force at December 31, 1998 is as follows:<br />
1998 1997<br />
Management 1.2% 1.2%<br />
Staff 26.1% 26.3%<br />
Operatives 72.7% 72.5%<br />
The prices of raw materials remained about 10 percent below the average of 1997, in a<br />
similar way in the various geographic areas. By type of product, the fall was mainly<br />
concentrated on natural rubber (-33 percent), with other materials showing a reduction of<br />
5 percent on average, while, in contrast, the prices of reinforcing textile materials rose by<br />
1 percent, owing to a scarcity of rayon.<br />
i<br />
29
The Lamborghini Diablo is among<br />
the reference cars for the ultra-low profile<br />
<strong>Pirelli</strong> PZero.<br />
The new <strong>Pirelli</strong> tyre distribution centre<br />
at Novara, Italy, is the biggest of its kind<br />
in Europe.<br />
Tyres Sector holding company<br />
The unconsolidated balance sheet and statement of income of <strong>Pirelli</strong> Tyre Holding N.V. are<br />
presented as follows:<br />
Balance sheet (in millions of Dutch guilders)<br />
1998) 1997)<br />
• Intangible assets 0.8) 2.3)<br />
• Financial assets 1,921.1) 2,750.6)<br />
• Net working capital 8.0) 9.9)<br />
1,929.9) 2,762.8)<br />
• Shareholders’ equity 1,835.8) 2,192.0)<br />
• Net financial position 94.1) 570.8)<br />
1,929.9) 2,762.8)<br />
Statement of income (in millions of Dutch guilders)<br />
1998) 1997)<br />
• Net income of subsidiaries 237.1) 245.9)<br />
• Other income and expenses (22.7) (23.9)<br />
• Net income for the year 214.4) 222.0)<br />
Performance by geographic area and business unit<br />
In Europe, the positive trend in demand continued. Vehicle production and the<br />
replacements and original equipment tyre markets recorded significant increases. Within<br />
the individual segments, the premium range was again dynamic, while sport/recreational<br />
tyres recorded higher than average increases. The demand for tyres for commercial<br />
vehicles remained at the good levels seen in 1997. Levels in 1999 are expected to grow<br />
moderately, depending on the impact of the turbulence of the financial markets in the<br />
general economic scenario.<br />
The closing estimate for 1998 and the forecast for 1999 are the following:<br />
Size of European market 1995 1996 1997 1998 1999<br />
(in millions of units sold) (estimate) (forecast)<br />
Car tyres:<br />
• original equipment 66.1 69.5 74.2 76.8 78.0<br />
• replacements 138.9 141.5 147.3 154.9 158.0<br />
total 205.0 211.0 221.5 231.7 236.0<br />
Truck tyres:<br />
• original equipment 3.3 3.0 3.3 3.7 3.7<br />
• replacements 10.8 10.3 10.4 10.8 10.9<br />
total 14.1 13.3 13.7 14.5 14.6<br />
30<br />
i
Outdoor research at <strong>Pirelli</strong>’s Vizzola Ticino<br />
test track.<br />
Sales showed positive results in all product lines, with further improvements in the<br />
product and customer mix.<br />
In car tyres, the replacement market share improved, not only for <strong>Pirelli</strong> itself, but also<br />
with a considerable contribution from other brand names (Ceat, Courier and Armstrong).<br />
The new P3000E is well established in the standard segment, while the renovated P6000,<br />
with more than 20 million units sold in the world and its use on the most prestigious cars,<br />
confirms the brand-name/product’s high market level recognition. In the Sport Utility<br />
Vehicles/Recreational segment a good gain was recorded thanks to the Scorpion line,<br />
which was recently expanded by the introduction of the Scorpion Zero. In truck tyres, the<br />
positive trend was accompanied by an appreciable improvement in profitability.<br />
In the original equipment segment, in a scenario of growth in the manufacture and sale of<br />
cars, <strong>Pirelli</strong> increased its market shares, achieving a new and prestigious presence in<br />
Ford/Jaguar Group (Focus/S Type), PSA (new 206), Volvo (S 80), Mercedes Benz (A Class)<br />
and VW Audi (TT). Market shares in the most successful models of the main car<br />
manufacturers were also maintained and consolidated.<br />
In Turkey, after the slowdown in the last quarter following the marked growth of activity in<br />
the automotive sector, <strong>Pirelli</strong> succeeded in consolidating its traditional position.<br />
The demand in North America again showed a positive trend in a market rendered even<br />
more competitive by importers who, with their low-price products, continue their policy of<br />
attacking market shares.<br />
The local unit, now that its restructuring program has started, is focusing increasingly on<br />
the <strong>Pirelli</strong> brand name in the premium and sports utility vehicles segments, by operating<br />
through specialized dealers.<br />
Size of North American market 1995 1996 1997 1998 1999<br />
(in millions of units sold) (estimate) (forecast)<br />
Car tyres:<br />
• original equipment 46.1 44.2 43.5 43.7 43.4<br />
• replacements 164.6 174.3 175.4 179.9 182.5<br />
total 210.7 218.5 218.9 223.6 225.9<br />
In South America, the effects of the turbulence on the financial markets suggest a period<br />
of slowdown in growth rates in the medium-term and, even in the short-term, a certain<br />
weakness in internal demand caused by the liquidity crisis.<br />
Despite the difficulties of the local scenario, in the second half of the year, in Brazil, the<br />
results overall were positive, with market shares at the usual high levels and with<br />
satisfactory economic results, thanks partly to solid customer relationships. The recent<br />
devaluation of the real, with the effect of a generally better level of competitiveness of<br />
local industry, should further strengthen <strong>Pirelli</strong>’s operations.<br />
Initiatives in the commercial field, aimed at consolidating and developing the main<br />
markets of the area, include two new units which became operative during the year: <strong>Pirelli</strong><br />
Neumaticos Chile Ltda (Chile) and Pirelmex S.A. de CV (Mexico).<br />
In original equipment, <strong>Pirelli</strong> was able to expand its presence by providing tyres for local<br />
manufacturers, despite the difficulties being experienced by the automotive industry, with<br />
vehicle manufacture and registration levels well below those originally planned.<br />
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31
The trend of truck tyres in Brazil was positive.<br />
The joint venture agreement between <strong>Pirelli</strong><br />
and Abe Shokai has strengthened the Group’s<br />
activities in Japan, optimising commercial<br />
efficiency.<br />
The market trend for the whole area is as follows:<br />
Size of South American market 1995 1996 1997 1998 1999<br />
(in millions of units sold) (estimate) (forecast)<br />
Car tyres:<br />
• original equipment 11.5 12.9 14.9 12.6 12.4<br />
• replacements 27.5 29.4 29.9 29.5 30.2<br />
total 39.0 42.3 44.8 42.1 42.6<br />
Truck tyres:<br />
• original equipment 0.7 0.5 0.8 0.7 0.7<br />
• replacements 8.8 8.9 9.5 9.0 9.0<br />
total 9.5 9.4 10.3 9.7 9.7<br />
Specifically, in Brazil, the economy recorded a slight growth in GDP, close to zero,<br />
compared to 3.7 percent in 1997, and was affected by the generalized fall of the third<br />
quarter (Agriculture: -7.7 percent, Industry: -5.5 percent and Services: -0.4 percent)<br />
compared to the previous one.<br />
Consequently, sales volumes on the internal market fell sharply by 4 percent compared to<br />
the prior year, albeit with very different trends in the various segments.<br />
In replacements, sales of car and light vehicle tyres increased by more than 8.5 percent, while<br />
sales of tyres for trucks and buses remained around the levels of the previous year.<br />
Sales of original equipment fell by approximately 18 percent, mainly in passenger car tyres,<br />
which were affected by the fall in car manufacturing in the second half of the year. In contrast,<br />
there was a positive (+7 percent) trend in tyre sales in the truck and bus segment. Exports<br />
were 10 percent higher than in 1997, partly compensating for the fall in original equipment.<br />
In 1998, the economy in Argentina fluctuated, with a first half showing good levels of growth,<br />
and signs of a slowdown appearing in the second half of the year, in harmony with the crisis<br />
which gradually encompassed developing countries, including Brazil, its main trading partner.<br />
Overall, the tyre market showed a trend in line with the prior year, with growth in original<br />
equipment following the trend in vehicle manufacturing, but with a slight reduction in<br />
replacements, which suffered from the marked growth in imported products.<br />
The trend in sales was very similar to that of 1997, with market shares which, in<br />
replacements, showed a modest fall in passenger cars, while tyres for trucks remained<br />
much in line with the previous year.<br />
For Venezuela, the macroeconomic scenario did not present substantial variations<br />
compared to 1997. With inflation slightly lower (down from 38 percent to 30 percent), the<br />
local currency still remained overvalued, with devaluation of only 12 percent against the<br />
dollar. Overall, the economy took a downturn, with the fall in GDP concentrated in the<br />
first half of the year.<br />
In this scenario, with the internal market demand heavily penalized by a further reduction<br />
in purchasing power, the local volume of manufacturing and sales was lower than in 1997<br />
(-17 percent and -22 percent respectively), affected in part by the high volumes of imported<br />
products made competitive by the persisting overvaluation of the bolivar.<br />
As a result of this, the demand for car tyres in the replacements segment fell by 26 percent,<br />
while the light/derivative segment showed a growth led by the gains in the number of cars<br />
in circulation in the two-year period 1997-1998.<br />
32<br />
i
Motorcycle tyres celebrate 100 years: a history<br />
of technological development in the name<br />
of sportiness, as the new-born Dragon Evo<br />
and Dragon GTS demonstrate.<br />
In line with the generalized slowdown of production, the demand for commercial vehicles<br />
also fell by approximately 10 percent.<br />
Exports to countries in the area, particularly to Columbia and Ecuador, also fell sharply.<br />
In other geographic areas, <strong>Pirelli</strong> marketed its car and recreational tyre ranges by<br />
constantly expanding distribution networks and by lending support for marketing, logistics<br />
and technical assistance to the representative offices in the main markets (Beijing, Dubai,<br />
Hong Kong, Moscow, Sydney, Singapore, East and West Africa and India).<br />
Despite the difficulties caused by the economic situation, volumes and sales maintained<br />
satisfactory levels, thanks to the complete range of products and the strong image of the<br />
brand name. One of the initiatives designed to support a further growth of volumes and<br />
presence took off in January 1999, in Japan, in the form of a joint venture, in which <strong>Pirelli</strong><br />
has a majority interest, with Abe Shokai, formerly the local distributor for <strong>Pirelli</strong> products.<br />
Activities in the Business Units can be described as follows:<br />
• In the Agriculture Tyre B.U., 1998 saw the finalization of the incorporation of the new<br />
company Trelleborg Wheel Systems S.p.A., between the Swedish industrial group of the<br />
same name and <strong>Pirelli</strong>, which holds 40 percent of the capital. The initiative has the aim<br />
of creating a wider coverage of the various potential segments of the European market,<br />
through the integration of the <strong>Pirelli</strong> radial tyre range with the Trelleborg line, for use<br />
with farming and forestry equipment and industrial lifts.<br />
• Sales of the Motorcycle Tyre B.U. maintained the same levels as the previous year. The<br />
favorable trend in sales volumes on markets in general was neutralized by the fall in sales in<br />
Germany, caused by the unfavorable weather conditions. Although sales remained largely<br />
unchanged, the net result improved, drawing benefit from the effects of measures in the<br />
area of manufacturing, with generalized cost efficiencies and the adoption of a new kind of<br />
“lean factory” organization. Investments, aimed at revitalizing the product portfolio and<br />
processes, remained high. New products include: for high-performance motorcycles, the<br />
Dragon EVO and the Dragon GTS, in the recent Zero degree technology and with innovative<br />
materials behind a decisive improvement in performance; in the Enduro segment, the<br />
Metzeler Tourance and the new <strong>Pirelli</strong> Scorpion line; in Touring, the Metzeler Marathon ME<br />
880; in moto-cross, the new <strong>Pirelli</strong> MT 480 Super Cross. In the context of sporting activities,<br />
there were important results, including a first place in the World Moto Cross Championship<br />
in the 500-cc category and first place in the European Supersport 600 Championship.<br />
• The Industrial Projects and Licenses B.U. acquired contracts to supply machines to<br />
licensed dealers in Egypt and Tunisia. A new contract has also come into force to double<br />
the capacity of the Hualin factory in China, supplied by us in the early 90’s. Considerable<br />
effort has also been devoted to preparing an industrial design to expand the Alexandria<br />
Tyre plant which involves doubling truck production and the introduction of car<br />
manufacture. Activities associated with existing contracts in China and India (car<br />
projects) and in Egypt (trucks) continued.<br />
• In 1998, the Steel Cord B.U. operated in a world market which showed a slight growth<br />
(+2.5 percent), characterized by stability in Europe and North America. Within this<br />
scenario it proved possible to seize market opportunities associated with the departure<br />
of small manufactures.<br />
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33
New types and sizes of the “Scorpion” line<br />
have enriched the 4x4 range.<br />
Testing <strong>Pirelli</strong> high performance tyres<br />
in the wet.<br />
Performance of the main companies in the Sector<br />
The most significant figures as they appear in the financial statements prepared by the<br />
boards of directors and approved or being approved by the respective shareholders’<br />
meetings are given below.<br />
The amounts are expressed in local currency and are compared to those of the preceding<br />
year:<br />
<strong>Pirelli</strong> Pneumatici S.p.A. - Italy (in millions of Lire) 1998) 1997)<br />
• Sales revenues 1,517,733) 1,479,443)<br />
• Net income 100,479) 82,874)<br />
• Net financial position (197,670) (152,066)<br />
• Shareholders’ equity 615,252) 586,197)<br />
<strong>Pirelli</strong> Reifenwerke GmbH & Co. K.G. - Germany (in thousands of DM) 1998) 1997)<br />
• Sales revenues 943,792) 921,362)<br />
• Net income 17,710) 25,520)<br />
• Net financial position 54,981) 22,764)<br />
• Shareholders’ equity 79,318) 87,128)<br />
<strong>Pirelli</strong> UK Tyres Ltd - consolidated (in thousands of £) 1998) 1997)<br />
• Sales revenues 248,011) 245,065)<br />
• Net income 4,706) 12,597)<br />
• Net financial position 14,325) 4,191)<br />
• Shareholders’ equity 65,273) 70,168)<br />
<strong>Pirelli</strong> Neumaticos S.A. - Spain (in millions of Pesetas) 1998) 1997)<br />
• Sales revenues 35,958) 32,936)<br />
• Net income (loss) 346) (5)<br />
• Net financial position (2,548) (1,235)<br />
• Shareholders’ equity 11,614) 12,266)<br />
Metzeler Reifen GmbH - Germany (in thousands of DM) 1998) 1997)<br />
• Sales revenues 189,078) 191,215)<br />
• Net income 10,813) 19,446)<br />
• Net financial position 9,211) 4,963)<br />
• Shareholders’ equity 42,813) 51,446)<br />
Türk <strong>Pirelli</strong> Lastikleri S.A. - Turkey (in thousands of US$) 1998) 1997)<br />
• Sales revenues 220,726) 251,165)<br />
• Net income 32,426) 33,648)<br />
• Net financial position (36,798) (23,160)<br />
• Shareholders’ equity 72,413) 60,823)<br />
<strong>Pirelli</strong> Pneus S.A. - Brazil - consolidated (in thousands of Brazilian reais) 1998) 1997)<br />
• Sales revenues 756,556) 746,480)<br />
• Net income 101,519) 78,434)<br />
• Net financial position (124,414) (156,501)<br />
• Shareholders’ equity 366,892) 350,941)<br />
34<br />
i
The poster which shows Ronaldo at Rio on the<br />
Corcovado is the subject of numerous<br />
imitations and quotations across the world.<br />
<strong>Pirelli</strong> Tire LLC - USA (in thousands of US$) 1998) 1997)<br />
• Sales revenues 197,498) 222,656)<br />
• Net loss (8,501) (12,370)<br />
• Net financial position (8,321) (19,051)<br />
• Shareholders’ equity 41,509) 50,010)<br />
<strong>Pirelli</strong> Neumaticos S.A.I.C. - Argentina (in thousands of pesos) 1998) 1997)<br />
• Sales revenues 138,831) 145,443)<br />
• Net income 7,962) 4,826)<br />
• Net financial position (6,193) (3,959)<br />
• Shareholders’ equity 60,544) 57,083)<br />
<strong>Pirelli</strong> de Venezuela C.A. - Venezuela (in thousands of US$) 1998) 1997)<br />
• Sales revenues 70,409) 100,868)<br />
• Net loss (9,690) (5,478)<br />
• Net financial position 4,762) 18,155)<br />
• Shareholders’ equity 63,700) 53,700)<br />
Future outlook<br />
The economic trend for 1999 is difficult to quantify, because of the complexity of the<br />
current world economic scenario. In fact, the growth of market demand seems to be<br />
conditioned inevitably by the persisting crisis among the developing countries which were<br />
harder hit by the turbulence on the financial markets.<br />
The strategy of the Sector can only be directed towards internal efficiency programs,<br />
which must be pursued through a selective investment policy oriented towards innovating<br />
products and processes and by restructuring operational, central and peripheral functions.<br />
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35
<strong>Pirelli</strong> supplied the Berlin electricity utility<br />
with a 380 kV superjoint.<br />
<strong>Pirelli</strong> and Porsche strengthened their<br />
technical collaboration in the International<br />
Grand Touring Championship.<br />
Finance<br />
The net financial debt position of Lire 513 billion can be analyzed as follows:<br />
• medium- and long-term debt of Lire 2,112 billion, equal to 68 percent of gross financial debt;<br />
• short-term debt of Lire 979 billion, including the current portion of long-term debt of<br />
approximately Lire 432 billion;<br />
• liquidity and financial receivables of Lire 2,578 billion, represented by Lire 994 billion<br />
of available liquidity of the Group and Lire 1,584 billion of financial receivables.<br />
Available liquidity is concentrated in Europe for an amount of about Lire 919 billion,<br />
in South America for Lire 52 billion, in North America for Lire 13 billion, in Turkey for<br />
Lire 4 billion and in other countries for Lire 6 billion.<br />
On October 21, 1998, <strong>Pirelli</strong> S.p.A. issued non-convertible bonds for Euro 500 million,<br />
maturing on October 21, 2008, at a fixed yield of 4.88 percent per year.<br />
On December 10, 1998, <strong>Pirelli</strong> S.p.A. received a loan of Lire 290 billion from Mediocredito<br />
Lombardo S.p.A. coming from the issue of “indirect” bonds for the same amount issued by<br />
Mediocredito Lombardo S.p.A. itself, placed by Caboto Holding Sim, and subscribed to by<br />
Fondazione Cariplo Iniziative Patrimoniali S.p.A. (a company owned 100 percent by<br />
Fondazione Cariplo). Each bond will carry a warrant to subscribe, in the next five years,<br />
up to a maximum number of 46,154,000 <strong>Pirelli</strong> S.p.A. ordinary shares. The bonds, which<br />
mature in five years, yield interest of 2.20 percent per year. The bond regulation contains a<br />
so-called cash equivalent clause under which <strong>Pirelli</strong> S.p.A. shall have the right, should<br />
Fondazione Cariplo exercise the warrants, to choose between delivery of the shares or<br />
payment of the difference between the listed price of the shares at the date the warrants<br />
are exercised and the price to exercise the warrants.<br />
Medium-term financing was obtained during the year to cover R&D expenditures<br />
for Lire 10 billion.<br />
The Italian companies of the Group have received capital grants under laws 46/82, 64/86<br />
and 488/92 for Lire 11 billion.<br />
Risk Management<br />
The annual volume of insurance premiums paid by the Group has been reduced by 9 percent.<br />
One of the largest premium reductions in 1998 (-17 percent) was for the Group insurance<br />
plan for Property Damage and Business Interruption. Just to underscore the positive effect<br />
of the efforts undertaken in the last five years in the area of loss prevention, the overall<br />
reduction for this plan during that period was about 50 percent of the starting premium.<br />
Furthermore, as in prior years, all the reductions were obtained while maintaining at least<br />
the same coverage, and, in many cases, with better terms of coverage in relation to the<br />
deductibles, ceilings and conditions.<br />
36<br />
i
In Europe, truck tyres recorded a positive<br />
commercial trend.<br />
Activities for loss prevention have continued and include, among other things, the<br />
completion of some important installations of automatic fire-fighting systems and an<br />
overall reduction in risk which is measured by the HPR Rating, a parameter recognized by<br />
insurers internationally used to quantify risk in relation to the level of protection available.<br />
As part of the due diligence review carried out for the acquisition of the Siemens business<br />
segment, the risks and insurance coverage were analyzed, laying the groundwork for the<br />
integration of the new acquisition into the Group’s insurance plan.<br />
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37
The <strong>Pirelli</strong> Corporate Web, the Intranet network<br />
for the distribution of information within the<br />
Group, has been further developed.<br />
Information Systems<br />
1998 saw the completion of the first cycle of the innovation process for the <strong>Pirelli</strong> Group<br />
information technology which was based on the framework of the diffusion of SAP, the<br />
shift to a client/server-type architecture and the expansion of the network.<br />
The state-of-the-art reached in information systems constitutes a solid base on which to<br />
build to create a competitive advantage (development of electronic marketing, advanced<br />
systems of reporting and decision support).<br />
This level of excellence was also confirmed by the International Innovation Award<br />
awarded to <strong>Pirelli</strong> by Gartner Group for 1998; this was the first time in 13 years that the<br />
award has been bestowed on a non-American company.<br />
In 1998, the use of the SAP platform, as the main vehicle for a gradual standardization and<br />
functional integration was expanded to the following Operating Units:<br />
– Tyres : <strong>Pirelli</strong> Reifenwerke GmbH & Co. K.G. (Germany);<br />
<strong>Pirelli</strong> Neumaticos S.A.I.C. (Argentina);<br />
Turk <strong>Pirelli</strong> Lastikleri A.S. (Turkey);<br />
<strong>Pirelli</strong> UK Tyres Ltd (Great Britain);<br />
– Cables and Systems : <strong>Pirelli</strong> Cables and Systems LLc (North America);<br />
Cables <strong>Pirelli</strong> S.A. (France);<br />
<strong>Pirelli</strong> Cavi e Sistemi S.p.A. - Photonics Business.<br />
In addition, in the areas that are also involved in the program, new applications modules<br />
were developed:<br />
– Tyres : Logistics/Commercial in Brazil and Production in Spain;<br />
– Cables and Systems : Logistics/Commercial in Brazil and Australia.<br />
In 1998, the basic prototypes were completed relating to the SAP PP model for Production<br />
systems and the SAP PM model for Maintenance systems for both Sectors.<br />
A boost was given to the spread of the standard infrastructure based on Client/Server<br />
framework and open systems (APIS Project - Advanced <strong>Pirelli</strong> Information System) which<br />
has the goal of simplifying the information flow and reducing the paper support.<br />
At December 31, 1998 the total number of APIS users is equal to 7,000 units, compared to<br />
4,700 at December 31, 1997.<br />
During the year, a new kind of international link (frame-relay solutions) was created which<br />
enabled higher speed in the communications network (at the same cost) and a further<br />
increase in the number of connected localities (163 compared to the 125 of the previous year).<br />
During the last quarter, intensive support was given to the completion of the due diligence<br />
review associated with the acquisition of the Power Cables Division from Siemens A.G. in<br />
10 different countries.<br />
The Group made a great effort to improve the efficiency of its activities, which led to a<br />
reduction in costs over and beyond those that had been estimated.<br />
Particular emphasis was given to two very topical themes in 1998: the introduction of the<br />
euro and the prevention of risks associated with the change of the century. These are<br />
described in the following paragraphs.<br />
38<br />
i
Since 1 January 1999, the Euro has been the<br />
currency of the <strong>Pirelli</strong> Group accounts. A new<br />
EuroWeb site on the Intranet gives a constant<br />
internal flow of information on the subject.<br />
Introduction of the euro<br />
The SAP systems in European countries affected by the introduction of the single<br />
European currency were successfully converted to accommodate the euro by means of the<br />
Release SAP 3.1.I.<br />
Work on the <strong>Pirelli</strong> Information System will be completed for the conversion of accounting<br />
systems from the local currency to the euro after the approval of the financial statements<br />
at December 31, 1998.<br />
The “Year 2000” problem<br />
In mid-1997, <strong>Pirelli</strong> initiated the “Year 2000” Plan for all its subsidiaries, to be<br />
coordinated by the Group holding company, with the aim of pinpointing and solving the<br />
problems associated with the year 2000.<br />
The activities, which directly involved all the Directors of the affiliates and their<br />
operational structures, including information technology managers, involved both the<br />
areas traditionally associated with information systems and non-information technology<br />
areas, with special attention being paid to the activities of administration, factory<br />
operations, R&D, procurement and logistics.<br />
Many of the requirements for the adjustment to the year 2000 were included within the<br />
context of a highly diversified process, already begun in previous years, to re-define the<br />
most important software applications used by the Group holding company and its<br />
subsidiaries. Over the last three years, this same process has led to a complete update of<br />
the whole basic infrastructure of information technology, including the data-transmission<br />
network, telephone switchboards and personal computers.<br />
In 1998:<br />
– all the analysis and verification activities to ensure conformity by the operating and<br />
factory systems were completed;<br />
– all the necessary measures were begun, and are in the process of completion;<br />
– a certificate of compatibility was awarded to all the important suppliers, with the aim<br />
of ensuring the minimum impact possible on the business operations of its affiliates.<br />
During the second quarter of 1999, tests will take place to verify the efficacy of the action<br />
that has been taken; in addition, a plan will be drawn up to ensure the continuity of<br />
business, even in the presence of critical situations at the beginning of the new year.<br />
In 1998, costs incurred were equal to approximately Lire 7 billion; in 1999, approximately<br />
Lire 20 billion more will be needed to reach the conclusion of the plan. The write-downs<br />
made to property, plant and equipment sold in 1998 had no significant impact.<br />
On the basis of analyses carried out in-house, as well as external surveys and a careful<br />
cost-benefit analysis, in 1998, extending insurance to cover the risks connected with the<br />
passing into 2000 was not thought to be advisable. This problem is still being carefully<br />
assessed and the correct decision will be reached in the course of the current year.<br />
Overall, internal and external costs incurred for the activities associated with the “Year<br />
2000” project have been directly charged to the statement of income. In accordance with<br />
the concepts of prudence and accrual basis accounting, amounts capitalized — as is the<br />
practice — refer only to the part of the cost relating to the replacement of assets made<br />
necessary to comply with this singular event.<br />
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39
Certification activities in line with ISO 14001<br />
standard are proceeding.<br />
Ecology and the Environment<br />
The activities to implement an Environmental Management System (EMS) according to the<br />
ISO 14001 standard and according to a homogeneous approach within the whole Group,<br />
begun in 1997, continued in 1998 according to schedule, with the aim of acquiring<br />
certification for all sites by the year 2000.<br />
In 1998, the following factories in the Tyres Sector were awarded the ISO 14001<br />
certification: Santo André, Campinas, Izmit, Carlisle; in the Cables and Systems Sector: the<br />
factories at Sorocaba (fiber optics), Solac, Giovinazzo, Minto, Southampton and<br />
Bishopstoke (power cables and fiber optics).<br />
In 1999, 24 more companies are expected to be certified, while the remainder will be<br />
certified in 2000.<br />
In organizational terms, the institution of the Environmental Steering Committee,<br />
composed of the ecology departments of <strong>Pirelli</strong> S.p.A. and the two Sectors, ensures<br />
effective co-ordination in defining and controlling the activities realized by means of a<br />
centralized audit system.<br />
The implementation of an EMS has resulted in a great effort both to involve people<br />
through information and training activities, and in terms of action to improve the<br />
environmental performance of operational units, which, in some cases, has made it<br />
possible to highlight areas where savings can be made, for example, through a better<br />
exploitation of the waste produced.<br />
Another activity which is part of the implementation of the EMS was the introduction of an<br />
environmental performance evaluation of the main suppliers of the two Sectors, in order<br />
to assess already existing procedures (vendor rating). In this way, <strong>Pirelli</strong> is playing an<br />
important proactive role with regard to the market.<br />
In synergy with the ISO 14001 standard initiative, a series of data and information is being<br />
collected with the aim of systematizing the various types of indicators of eco-efficiency at<br />
Group level, so that comparisons can be made between the various situations, over the<br />
years, and to enable management of the company to identify areas requiring improvement<br />
where action must be taken.<br />
The protocol agreement between <strong>Pirelli</strong> and the Italian Ministry for the Environment, signed<br />
on December 16, 1998, with the aim of creating a series of joint initiatives to protect the<br />
environment, is further proof of <strong>Pirelli</strong>’s commitment to sustainable development, allowing it<br />
not to lose sight of, but, indeed to highlight the economic value of given initiatives.<br />
An increase in the production of tyres with low rolling resistance, the production of power<br />
cables with low transmission loss, the reduction of the use of raw materials and the<br />
adoption of other materials with low environmental impact are some of the initiatives with<br />
a high level of ecological compatibility, involving both production processes and products,<br />
which <strong>Pirelli</strong> intends to realize in the near future.<br />
In 1998, research continued into the environmental impact of products throughout their<br />
life cycle according to the ISO 14040 standard. Original studies were conducted on some<br />
medium- (ARE4H1RX 12-20 kV) and low-voltage (FG7OR 0.6-1 kV) power cables and on<br />
steel cord (7x4x0.75). During the year, the process of integration between this<br />
40<br />
i
The Burial of Santa Petronilla by Guercino: the<br />
most representative picture of the Capitolina<br />
Gallery in Rome, entirely restored thanks<br />
to <strong>Pirelli</strong> support.<br />
Almost 10,000 people visited the <strong>Pirelli</strong><br />
Calendar Exhibition at the Carrousel<br />
du Louvre in Paris in December.<br />
methodology and engineering design led to further development and the planning of a<br />
series of initiatives including studies and analyses of a wide range of products.<br />
With reference to the acquisition of the Power Cables Division of the Siemens Group,<br />
<strong>Pirelli</strong> has defined an extremely detailed program to verify the environmental conditions of<br />
the various sites acquired, as well as a summary of the action required to bring them up to<br />
the <strong>Pirelli</strong> standard.<br />
Finally, in 1998, there was greater and more systematic participation in various<br />
associations, institutions and working groups on a national and international level to<br />
enable <strong>Pirelli</strong> to make its own contribution to the cultural evolution and development of<br />
standards now in progress, and to act in a proactive way.<br />
i<br />
41
Distribution of Group personnel by sector<br />
and geographic area.<br />
Tyres<br />
Cables and<br />
Systems<br />
Others<br />
Europe (of which<br />
Italy: 23%)<br />
North America<br />
South America<br />
Australia, Africa, Asia<br />
Personnel<br />
The effective work force of the Group at December 31, 1998, considering the same<br />
companies in consolidation, and thus excluding the acquisition of the Power Cables<br />
Division of Siemens A.G., numbered 36,226, with an increase of 15 units compared to the<br />
same date in the prior year.<br />
The distribution of the work force by sector and geographic area is as follows:<br />
Sector<br />
Cables and Systems 41%<br />
Tyres 57%<br />
Others 2%<br />
Geographic area<br />
Europe (of which Italy 23%) 60%<br />
North America 7%<br />
South America 27%<br />
Australia, Africa, Asia 6%<br />
The breakdown of work force by category is as follows:<br />
Management 598 2%<br />
Staff 10,240 28%<br />
Operatives 23,177 64%<br />
Temporary employment 2,211 6%<br />
Total 36,226<br />
Personnel costs for the year totaled Lire 2,585 billion, an increase of 1.2 percent<br />
compared to the prior year, representing 24.3 percent of total sales revenues (22.7 percent<br />
in 1997).<br />
If we also consider the work force of the operational units in Germany, purchased from<br />
Siemens and consolidated line-by-line in <strong>Pirelli</strong> Group, the total number rises to 38,209<br />
units.<br />
Training activities in the Group grew for all personnel in both Sectors, particularly in the<br />
industrial area. Two new initiatives were started at management level: the “Leadership for<br />
Development” seminar and the workshop entitled “Developing Managerial Excellence”,<br />
which constitutes the highest level of international training and involves young executives<br />
with high development potential.<br />
Despite considerable reductions in staffing, many young university graduates (especially in<br />
the Tyres Sector and in <strong>Pirelli</strong> S.p.A.) and specialists (especially in the Cables and Systems<br />
Sector) were recruited. A significant number of executives were also hired as a result of a<br />
corresponding outflow of staff.<br />
A survey was carried out among the young university graduates hired by the Group in the<br />
last few years to verify the quality of work and to obtain useful suggestions that will help<br />
to improve policies and programs for professional development.<br />
42<br />
i
Related party disclosures<br />
Required disclosures according to article 2359 of the Italian Civil code referring to Consob<br />
Communication No. 97001574 of February 20, 1997 and No. 98015375 of February 27, 1998,<br />
which deal with related party transactions among Group companies, are listed below<br />
according to the effects of such transactions on the balance sheet and statement of income<br />
of the consolidated financial statements at December 31, 1998.<br />
As allowed by IAS 24, no disclosure is made of the effects deriving from the transactions<br />
between <strong>Pirelli</strong> S.p.A. and its subsidiaries since they are already eliminated upon the<br />
preparation of the consolidated financial statements.<br />
All the transactions fall within the ordinary operations of the Group, governed by market<br />
terms, and there are no transactions of an unusual and exceptional nature.<br />
The following table presents the major transactions at December 31, 1998 that <strong>Pirelli</strong> S.p.A.<br />
Group has entered into with the parent companies (<strong>Pirelli</strong> & C. A.p.A., <strong>Pirelli</strong> & C.<br />
Luxembourg S.A., Société Internationale <strong>Pirelli</strong> S.p.A., <strong>Pirelli</strong> Partecipazioni Limited) and<br />
the subsidiaries of the latter companies, which are included in the consolidation area of<br />
<strong>Pirelli</strong> & C..<br />
(in billions of lire)<br />
Type of transaction With parent With subsidiaries Total<br />
companies<br />
of<br />
<strong>Pirelli</strong> & C. A.p.A.<br />
• Trade receivables and other 23.7) 0.4) 24.1)<br />
• Trade payables and other (0.0) (7.1) (7.1)<br />
• Financial receivables 501.2) 150.8) 652.0)<br />
• Financial payables (57.5) (88.4) (145.9)<br />
• Revenues for goods and services 2.0) 0.7) 2.7)<br />
• Costs for goods and services (3.9) (14.8) (18.7)<br />
• Financial income 5.3) 5.9) 11.2)<br />
• Financial expenses (23.4) (3.5) (26.9)<br />
Transactions of <strong>Pirelli</strong> S.p.A. and its subsidiaries with the parent companies mainly refer<br />
to the following:<br />
• trade receivables and other, relating to the transfer of tax receivables by <strong>Pirelli</strong> S.p.A.<br />
and some of its subsidiaries to <strong>Pirelli</strong> & C. A.p.A., for purposes of compensation as<br />
allowed by tax laws;<br />
• financial receivables, relating to loans receivable by <strong>Pirelli</strong> Finance Holding N.V.<br />
(subsidiary of <strong>Pirelli</strong> S.p.A.) from <strong>Pirelli</strong> & C. Luxembourg S.A. and receivables from<br />
transactions on the current account by <strong>Pirelli</strong> Servizi Finanziari S.p.A. (subsidiary of<br />
<strong>Pirelli</strong> S.p.A.) from <strong>Pirelli</strong> & C. A.p.A. and <strong>Pirelli</strong> Partecipazioni Limited and by <strong>Pirelli</strong><br />
Finance Holding N.V. from Société Internationale <strong>Pirelli</strong> S.p.A.;<br />
• financial payables, relating to a deposit made by Société Internationale <strong>Pirelli</strong> S.p.A. to<br />
<strong>Pirelli</strong> Finance Holding N.V. (subsidiary of <strong>Pirelli</strong> S.p.A.);<br />
i<br />
43
• revenues for goods and services, relating to the performance of various services<br />
rendered by <strong>Pirelli</strong> S.p.A. to <strong>Pirelli</strong> & C. A.p.A.;<br />
• costs for goods and services, relating to costs for the corporate secretarial services<br />
rendered by <strong>Pirelli</strong> & C. A.p.A. on behalf of <strong>Pirelli</strong> S.p.A.;<br />
• financial income and expenses, relating to interest income and expense on the<br />
aforementioned current account transactions and loans, as well as costs and revenues<br />
for hedging transactions carried out by <strong>Pirelli</strong> Finance Holding N.V. (subsidiary of<br />
<strong>Pirelli</strong> S.p.A.) on behalf of <strong>Pirelli</strong> & C. A.p.A..<br />
Transactions of <strong>Pirelli</strong> S.p.A. and its subsidiaries with the subsidiaries of <strong>Pirelli</strong> & C.<br />
A.p.A. mainly refer to the following:<br />
• trade receivables and other, relating to commercial transactions between <strong>Pirelli</strong><br />
Reifenwerke GmbH & Co. K.G. (indirect subsidiary of <strong>Pirelli</strong> S.p.A.) and <strong>Pirelli</strong> Energie<br />
Deutschland GmbH (indirect subsidiary of <strong>Pirelli</strong> & C. A.p.A.);<br />
• trade payables and other, relating to services rendered by companies in the Group of<br />
Milano Centrale S.p.A. (subsidiary of <strong>Pirelli</strong> & C. A.p.A.) to <strong>Pirelli</strong> S.p.A. and its<br />
subsidiaries;<br />
• financial receivables, relating to receivables from transactions on the current account<br />
by <strong>Pirelli</strong> Servizi Finanziari S.p.A. from companies of the group of Milano Centrale S.p.A.<br />
(subsidiary of <strong>Pirelli</strong> & C. A.p.A.);<br />
• financial payables, relating to payables from transactions on the current account by<br />
<strong>Pirelli</strong> Servizi Finanziari S.p.A. to companies of the group of Milano Centrale S.p.A.<br />
(subsidiary of <strong>Pirelli</strong> & C. A.p.A.);<br />
• revenues from goods and services, relating to leases payments made by Milano<br />
Centrale e Servizi S.p.A. (subsidiary of <strong>Pirelli</strong> & C. A.p.A.) to <strong>Pirelli</strong> S.p.A. and the<br />
recovery of telephone charges by <strong>Pirelli</strong> Informatica S.p.A. (subsidiary of <strong>Pirelli</strong> S.p.A.)<br />
from Milano Centrale e Servizi S.p.A.;<br />
• costs for goods and services, relating to costs for property management services<br />
incurred by <strong>Pirelli</strong> S.p.A. and its subsidiaries against the services rendered by companies<br />
of the group of Milano Centrale S.p.A. (subsidiary of <strong>Pirelli</strong> & C. A.p.A.);<br />
• financial income and expenses, relating to interest income and expense on the<br />
aforementioned current account transactions.<br />
Furthermore, <strong>Pirelli</strong> S.p.A. acquired the investment in <strong>Pirelli</strong> Finance (Luxembourg) S.A.<br />
from <strong>Pirelli</strong> & C. A.p.A. and sold the investment in <strong>Pirelli</strong> Prodotti Diversificati S.p.A. to a<br />
company in <strong>Pirelli</strong> & C. A.p.A. Group.<br />
44<br />
i
Investments held by Directors, Statutory Auditors<br />
and General Managers<br />
Pursuant to article 33 of Consob Regulation No. 11520 of July 1, 1998 and Legislative<br />
Decree No. 58 of February 24, 1998, the following information is provided as regards the<br />
investments held in the company <strong>Pirelli</strong> S.p.A., and its subsidiaries, by the Directors,<br />
Statutory Auditors and General Managers, either directly or through subsidiaries, trustee<br />
companies or individual persons, as resulting from the shareholders’ register at December<br />
31, 1998, from notices received or other information acquired from the same Directors,<br />
Statutory Auditors and General Managers.<br />
Name Company No. of shares No. of No. of No. of shares<br />
in which held at prior shares shares held at<br />
investment year-end acquired sold current<br />
held<br />
year-end<br />
• <strong>Pirelli</strong> Alberto <strong>Pirelli</strong> spa 0 682,517 (*) 0 682,517<br />
• Buora Carlo <strong>Pirelli</strong> spa 0 2,390,517 (*) 648,000 1,742,517<br />
• Coppola<br />
di Canzano Eugenio <strong>Pirelli</strong> spa 39,152 0 (*) 0 39,152<br />
• Ferrario Giovanni <strong>Pirelli</strong> spa 0 1,227,517 (*) 0 1,227,517<br />
• Morchio Giuseppe <strong>Pirelli</strong> spa 0 2,390,517 (*) 1,088,000 1,302,517<br />
• Perissich Riccardo <strong>Pirelli</strong> spa 0 577,517 (*) 0 577,517<br />
• Presutti Ennio <strong>Pirelli</strong> spa 30,000 0 (*) 0 30,000<br />
• Puri Negri<br />
Carlo Alessandro <strong>Pirelli</strong> spa 0 430,000 (*) 0 430,000<br />
• Sozzani Vincenzo <strong>Pirelli</strong> spa 32,483 0 (*) 0 32,483<br />
• Castagna Adalberto <strong>Pirelli</strong> spa 1 802,517 (*) 325,000 477,518<br />
• Guatri Luigi (**) <strong>Pirelli</strong> spa 60,000 30,000 (*) 30,000 60,000<br />
(*) Bonus shares assigned by Company.<br />
(**) Shares held by spouse.<br />
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45
Corporate Governance<br />
As represented in the previous two years, the Board of Directors, at the proper time,<br />
conferred to the Chairman-CEO the powers necessary to carry out all the acts pertaining<br />
to corporate activity, to have single signature powers, with the exception of the power to<br />
issue guarantees for obligations of the Company and the subsidiaries in excess of single<br />
amounts of Lire 50 billion or guarantees in the interest of third parties for obligations in<br />
excess of single amounts of Lire 20 billion; in these last cases, a joint signature with the<br />
General Manager of the Finance and Administration Department is required.<br />
Specific and more limited powers were conferred to the General Managers and<br />
Management, to be used in carrying out their specific responsibilities.<br />
Also during 1998, the Chairman, the General Managers and Management used the powers<br />
conferred to them to carry out the normal operations of the company (of which the<br />
Directors of the company were periodically informed), waiving such powers in the case of<br />
significant transactions in terms of quality or value from an economic and financial<br />
standpoint, and submitting them to the same Board of Directors. By resolution of the<br />
extraordinary shareholders’ meeting of December 22, 1998, the by-laws were amended to<br />
include the procedures which up to then had been adopted, by which the directors advise<br />
the board of statutory auditors concerning the activities and any important economic,<br />
financial or equity transactions carried out by the company or the subsidiaries as well as<br />
transactions involving any potential conflict of interest.<br />
It should also be considered that in view of the organization structure of the Group,<br />
characterized by the existence of autonomous companies in several countries operating in<br />
the two main business segments, individual acts are not frequently carried out - within the<br />
Group holding company taken alone - which have a considerable impact on the economicequity<br />
situation of the Group itself; instead, at this level, strategic and operating guidelines<br />
are carried out, as well as the coordination of the specific segments and functions of the<br />
Group.<br />
Both the Group holding company and the subsidiary companies, however, are required to<br />
follow the policies and rules which govern the main areas of business, in addition to the<br />
administrative principles and rules of the Group governing the accounting treatment of<br />
administrative events and the preparation of the consolidated financial statements and<br />
period statements.<br />
Within the internal control system of the Group, organized in such a way as to ensure<br />
proper disclosure and an adequate system of control of all its activities and, in particular,<br />
in the major areas of corporate risk, there is also a planning and control system, by sector<br />
and operating unit, which monthly produces a detailed report to the General Managers - so<br />
that they have a useful instrument with which to monitor specific activities.<br />
In order to follow through on the strategies and guidelines adopted by the Group holding<br />
company, the General Managers of the Sectors and Management also sit on the boards of<br />
directors of the largest subsidiaries.<br />
Finally, reporting directly to the Chairman-CEO is the Auditing Department (not involved<br />
in financial operating activities and in the preparation of the financial statements and<br />
period statements) which has the main responsibility for seeing that the system of internal<br />
control is functioning and is adequate in terms of effectiveness and efficiency.<br />
46<br />
i
<strong>Pirelli</strong> S.p.A.<br />
Condensed financial statements<br />
(in billions of lire) 1998) 1997)<br />
BALANCE SHEET<br />
• Intangible assets 21.7) 14.6)<br />
• Property, plant and equipment 60.5) 61.9)<br />
• Investments 3,695.5) 3,118.5)<br />
• Net working capital 295.2) 330.6)<br />
4,072.9) 3,525.6)<br />
• Shareholders’ equity 4,054.5) 3,393.8)<br />
• Provisions 90.9) 100.0)<br />
• Net financial position (72.5) 31.8)<br />
4,072.9) 3,525.6)<br />
STATEMENT OF INCOME<br />
• Financial income and expenses 492.0) 413.1)<br />
• Value adjustment to financial assets (10.2) (7.8)<br />
• Other operating expenses (10.9) (30.2)<br />
Income before extraordinary items and income taxes 470.9) 375.1)<br />
• Extraordinary items, net (6.8) (33.1)<br />
• Income taxes (73.2) (57.5)<br />
Net income for the year 390.9) 284.5)<br />
Financial position<br />
The financial position of the company shows the following changes between December 31,<br />
1997 and December 31, 1998:<br />
• net invested capital rose compared to the prior year mainly due to the increase in the<br />
investment in <strong>Pirelli</strong> Finance (Luxembourg) S.A., purchased from <strong>Pirelli</strong> & C. A.p.A..<br />
As per the shareholders’ resolution of May 12, 1997 and in observance of the procedures<br />
established therein, during the year, 53,495,000 ordinary treasury shares were<br />
purchased on the market for Lire 269.4 billion. On December 31, 1998, a total of<br />
58,872,500 ordinary shares, equal to 2.969 percent of share capital, were purchased for<br />
Lire 292.6 billion at a weighted average price of Lire 4,969.3 per share.<br />
• shareholders’ equity increased by the net income for the year (Lire 390.9 billion) and<br />
by the conversion, before the redemption date, of the remaining 5% 1994-1998<br />
convertible debentures (Lire 505.5 billion).<br />
These movements had a consequent effect on the net financial position, which went from<br />
a debt position of Lire 31.8 billion at December 31, 1997 to a liquidity position of<br />
Lire 72.5 billion at December 31, 1998.<br />
i<br />
47
Results of operations<br />
The 1998 results of <strong>Pirelli</strong> S.p.A., the Group holding company, show a net income of<br />
Lire 390.9 billion, compared to Lire 284.5 billion in the prior year. The improvement is<br />
mainly due to the increase in investment income, revenues from services and<br />
extraordinary income, counterbalanced by an increase in the income tax charge.<br />
Components of the results of operations<br />
• Financial income and expenses of Lire 492 billion (Lire 413.1 billion in 1997) is<br />
composed of investment income of Lire 458.4 billion (Lire 376 billion in 1997) and by<br />
interest income, net, of Lire 33.6 billion (Lire 37.1 billion in 1997).<br />
• Extraordinary items, net, includes extraordinary income of Lire 27.9 billion and<br />
extraordinary expenses of Lire 34.7 billion.<br />
Board of Directors and Board of Statutory Auditors<br />
The Board of Directors was elected by the shareholders’ meeting on May 20, 1996<br />
and its term of office is thus about to expire.<br />
The shareholders’ meeting is therefore asked to elect a new Board after determining<br />
the number of its members.<br />
For the same reasons, the shareholders’ meeting is also called to elect a new Board<br />
of Statutory Auditors and set the remuneration for the standing members.<br />
48<br />
i
Shareholders’ Resolutions (°)<br />
Appropriation of net income<br />
The year ended December 31, 1998 shows a net income of Lire 390,934,995,321.<br />
The Board of Directors proposes the distribution of a dividend, before withholding taxes, of:<br />
• Lire 140 for each ordinary share<br />
and<br />
• Lire 160 for each savings share.<br />
The proposed dividends carry a tax credit equal to 58.73 percent. Specifically, the tax<br />
credit amounts to:<br />
• Lire 82.222 for the proposed dividends on ordinary shares;<br />
• Lire 93.968 for the proposed dividends on savings shares.<br />
The small amount of taxes available according to art. 105, paragraph 1, letter a) of D.P.R.<br />
917/86 does not permit the assignment of a tax credit with the right of refund (ordinary<br />
credit) for a significant amount; therefore, a proposal is made for the assignment of the tax<br />
credit without the right of refund (limited credit) for the entire amount of the credit due.<br />
If in agreement with our proposal, we ask you to pass the following<br />
Resolution<br />
The shareholders' meeting:<br />
• having taken note of the directors’ report to the financial statements;<br />
• having taken note of the board of statutory auditors’ report;<br />
• having examined the financial statements at December 31, 1998 which show a net<br />
income of Lire 390,934,995,321;<br />
Passes a resolution<br />
a) to approve:<br />
• the directors’ report to the financial statements;<br />
• the balance sheet, statement of income, the notes to financial statements for the year ended<br />
December 31, 1998 which show a net income of Lire 390,934,995,321 as presented by the<br />
Board of Directors in their entirety and in the individual entries, with the proposed accruals;<br />
b)to appropriate the net income for the year of Lire 390,934,995,321 as follows:<br />
Lire<br />
• 5 percent to the legal reserve 19,546,749,766<br />
• to the shareholders:<br />
Lire 140 to each of the 1,836,810,538 ordinary shares for a total of (*) 257,153,475,320<br />
Lire 160 to each of the 88,006,016 savings shares for a total of 14,080,962,560<br />
• to the directors, 1 percent of the amount established<br />
in art. 23 of the by-laws 2,704,002,008<br />
• an additional appropriation to the legal reserve<br />
in order to reach 20 percent of share capital 27,436,249,634<br />
• to retained earnings 70,013,556,033<br />
(*) Net of 58,872,500 treasury shares held by the Company at December 31, 1998, as well as a further<br />
869,435 shares purchased up to today’s date.<br />
c) to assign the following tax credits to the profits distributed:<br />
• to the ordinary shares, a limited tax credit (art. 105, paragraph 1, letter b)<br />
of D.P.R. 917/86) of Lire 82.222;<br />
• to the savings shares, a limited tax credit (art. 105, paragraph 1, letter b)<br />
of D.P.R. 917/86) of Lire 93.968.<br />
i<br />
49
Appointment of the audit firm<br />
Upon issuance of the audit report on the financial statements for the current year, the<br />
appointment will expire for the audit and certification of the financial statements of our<br />
company which had been renewed for a second time with Reconta Ernst & Young S.p.A.<br />
(formerly Reconta Ernst & Young S.a.s. di Bruno Gimpel).<br />
Therefore, in accordance with art. 159 of the “Draghi Law”, it becomes necessary to appoint<br />
the firm for the audit of the statutory financial statements, the consolidated financial<br />
statements, and, in compliance with the Consob recommendation of February 20, 1997, the<br />
interim six-month financial statements for the years ending December 31, 1999, 2000 and 2001.<br />
As you will recall, last year, a proposal was set forth to make this appointment but,<br />
following Consob’s recommendation, in view of changes in the procedures that would<br />
have been shortly introduced by the so-called “Draghi Law”, it was decided to refrain from<br />
passing a resolution; however, it was disclosed that the choice made by the Board of<br />
Directors fell upon Price Waterhouse S.p.A..<br />
We therefore now confirm the choice made by the Board, taking note of the favorable opinion of<br />
the Board of Statutory Auditors, after having examined the revised proposal drawn up according<br />
to the criteria established by Consob in its communication No. 96003556 of April 18, 1996.<br />
The annual fee requested amounts to a total of Lire 381 million, of which Lire 72 million is for<br />
the statutory financial statements, Lire 206 million for the consolidated financial statements of<br />
the Group and Lire 103 million for the limited review of the interim six-month financial statements.<br />
We would also like to inform you that the major subsidiaries will appoint the same audit<br />
firm of Price Waterhouse S.p.A. for the audit of their financial statements and directly bear<br />
the costs of the audits which will amount to Lire 710 million for the Italian subsidiaries and<br />
Lire 2,533 million for the foreign subsidiaries.<br />
If in agreement with our proposals, we ask you to pass the following<br />
Resolution<br />
The shareholders’ meeting:<br />
• having taken note of the proposal by the Board of Directors;<br />
• having taken note of the favorable opinion of the Board of Statutory Auditors regarding<br />
the proposal of the audit firm of Price Waterhouse S.p.A.;<br />
Passes a resolution<br />
• to appoint Price Waterhouse S.p.A., pursuant to art. 159 of Legislative Decree No. 58 of<br />
February 24, 1998, and taking into consideration the recommendation made by Consob<br />
on February 20, 1997, auditors of the annual statutory and consolidated financial<br />
statements and interim six-month financial statements of the Company for the years<br />
ending December 31, 1999, 2000 and 2001;<br />
• to fix, on the basis of the estimate prepared in accordance with the criteria established<br />
by Consob in its communication No. 96003556 of April 18, 1996, the annual fee due to the<br />
appointed audit firm in Lire 381 million, of which Lire 72 million for the statutory<br />
financial statements, Lire 206 million for the consolidated financial statements and<br />
Lire 103 million for the limited review of the interim six-month financial statements.<br />
The hourly rates upon which the above fees are based are valid up to June 30, 2000. On<br />
July 1, 2000, and on every July 1 thereafter, they will be adjusted on the basis of the total<br />
variation in the ISTAT cost of living index, if higher than 3 percent.<br />
Furthermore the fees will be adjusted in the event of any exceptional or unforeseen<br />
circumstances, including significant changes in the structure and operations of the<br />
company, which could require additional time to carry out the engagement.<br />
The Board of Directors<br />
Milan, March 29, 1999<br />
50<br />
i
Consolidated Financial Statements at December 31, 1998<br />
i
Consolidated balance sheets<br />
Assets<br />
(in millions of lire)<br />
12.31.1998 12.31.1997<br />
A) Capital subscription rights<br />
Portion uncalled 39 40<br />
B) Fixed assets<br />
I) Intangible assets<br />
Formation costs 11,484 6,103<br />
Patents and design patent rights 13,733 8,177<br />
Concessions, licenses, trademarks and similar rights 1,156 598<br />
Goodwill 25,152 35,116<br />
Intangible assets in progress and payments on account 13,478 2,834<br />
Other intangible assets 85,292 80,476<br />
Total intangible assets 150,295 133,304<br />
II) Property, plant and equipment<br />
Land and buildings 1,158,009 1,174,226<br />
Plant and machinery 2,170,484 2,157,948<br />
Industrial and commercial equipment 220,823 166,818<br />
Other property, plant and equipment 173,206 187,522<br />
Assets under construction and payments on account 269,270 313,711<br />
Total property, plant and equipment 3,991,792 4,000,225<br />
III) Financial assets<br />
Investments in:<br />
a) Subsidiaries 48,678 –<br />
b) Associated companies 62,237 64,279<br />
c) Other companies 153,500 152,376<br />
Financial receivables:<br />
b.2) Associated companies due beyond 1 year 390 234<br />
d.1) Other companies due within 1 year – 150<br />
d.2) Other companies due beyond 1 year 111,887 100,425<br />
Other securities 34,747 14,142<br />
Treasury shares 292,556 23,143<br />
Total financial assets 703,995 354,749<br />
Total fixed assets 4,846,082 4,488,278<br />
C) Current assets<br />
I) Inventories<br />
Raw materials, auxiliaries and consumables 373,493 312,927<br />
Work in process and semifinished products 317,245 275,907<br />
Work in progress against orders 471,636 69,874<br />
Finished products and goods for resale 968,047 707,417<br />
Advances 13,705 14,957<br />
Total inventories 2,144,126 1,381,082<br />
II) Receivables<br />
Trade 2,477,375 2,648,608<br />
Subsidiaries 11,025 –<br />
Associated companies 92,773 22,088<br />
Parent companies 524,905 113,479<br />
Other receivables 1,357,198 1,366,195<br />
Total receivables 4,463,276 4,150,370<br />
III) Current financial assets<br />
Other securities 581,677 815,243<br />
Total current financial assets 581,677 815,243<br />
52<br />
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Assets (continued)<br />
(in millions of lire)<br />
12.31.1998 12.31.1997<br />
IV) Cash and banks<br />
Bank and postal deposits 968,417 817,317<br />
Checks 11,727 1,624<br />
Cash on hand 13,600 8,118<br />
Total cash and banks 993,744 827,059<br />
Total current assets 8,182,823 7,173,754<br />
D) Accrued income and prepaid expenses<br />
Accrued income 306,169 54,156<br />
Prepaid expenses 41,400 38,882<br />
Total accrued income and prepaid expenses 347,569 93,038<br />
Total assets 13,376,513 11,755,110<br />
i<br />
53
Liabilities and shareholders’ equity<br />
(in millions of lire)<br />
12.31.1998 12.31.1997<br />
A) Shareholders’ equity<br />
– of <strong>Pirelli</strong> S.p.A. 4,420,691 4,045,476<br />
I) Share capital 1,983,123 1,748,208<br />
II) Share premium reserve 894,027 835,252<br />
III) Revaluation reserves 5,528 5,528<br />
IV) Legal reserve 349,642 311,418<br />
V) Reserve for treasury shares in portfolio 292,556 23,143<br />
VI) Statutory reserves – –<br />
VII) Other reserves:<br />
a) Consolidation reserve 275,580 476,094<br />
b) Sundry reserves 83,264 83,264<br />
VIII) Retained earnings 55,446 102,474<br />
IX) Net income for the year 481,525 460,095<br />
– Minority interest 329,520 375,229<br />
a) Capital and reserves 276,760 323,628<br />
b) Net income for the year 52,760 51,601<br />
Total shareholders’ equity 4,750,211 4,420,705<br />
B) Provisions for liabilities and expenses<br />
Pensions and similar obligations 489,352 408,298<br />
Income taxes 270,008 292,064<br />
Other 330,342 271,834<br />
Total provisions for liabilities and expenses 1,089,702 972,196<br />
C) Provision for employees’ leaving indemnity 308,056 333,654<br />
D) Payables<br />
Bonds 968,173 2,202<br />
Convertible bonds – 507,409<br />
Bank borrowings 1,762,450 1,696,917<br />
Other financial companies 265,799 196,953<br />
Advances from customers 708,851 598,144<br />
Trade 1,788,360 1,540,648<br />
Associated companies 23,938 22,077<br />
Parent companies 57,481 63,826<br />
Taxes 447,271 451,012<br />
Social security 89,297 100,160<br />
Other payables 482,399 452,643<br />
Total payables 6,594,019 5,631,991<br />
E) Accrued liabilities and deferred income<br />
Accrued liabilities 607,158 370,026<br />
Deferred income 27,367 26,538<br />
Total accrued liabilities and deferred income 634,525 396,564<br />
Total liabilities and shareholders’ equity 13,376,513 11,755,110<br />
54<br />
i
Memorandum accounts<br />
(in millions of lire)<br />
12.31.1998 12.31.1997<br />
Personal guarantees<br />
– Guarantees on behalf of other companies 2,243 23,408<br />
2,243 23,408<br />
Third party assets held in deposit<br />
– Securities held in deposit 860,907 829,464<br />
– Goods in process 2,682 1,482<br />
863,589 830,946<br />
Assets held by third parties<br />
– Securities held as guarantees and sureties 24,678 25,783<br />
– Securities held in deposit 1,773,490 1,900,407<br />
– Goods in process 7,308 10,623<br />
1,805,476 1,936,813<br />
Commitments<br />
– Capital expenditures 31,515 79,708<br />
– Lease obligations – 623<br />
– Other commitments – 126<br />
31,515 80,457<br />
Other memorandum accounts<br />
– Potential losses for risk of default on discounted bills 3,442 30,460<br />
3,442 30,460<br />
2,706,265 2,902,084<br />
i<br />
55
Consolidated statements of income<br />
(in millions of lire)<br />
1998) 1997)<br />
A) Production value<br />
Revenues from sales and services 10,623,504) 11,265,227)<br />
Changes in inventories of work in process, semifinished and finished products 194,678) (29,044)<br />
Changes in work in progress against orders 200,165) (22,136)<br />
Increase in property, plant and equipment 19,864) 23,378)<br />
Other revenues and income:<br />
a) Miscellaneous 226,036) 152,956)<br />
b) Government grants 8,160) 11,116)<br />
Total production value 11,272,407) 11,401,497)<br />
B) Production costs<br />
Raw materials, auxiliaries, consumables and goods for resale (5,017,504) (5,125,160)<br />
Service expenses (1,915,688) (1,860,140)<br />
Lease and rent expenses (112,241) (108,566)<br />
Personnel costs (2,585,069) (2,553,360)<br />
Amortization, depreciation and write-downs:<br />
a) Amortization of intangible assets (47,371) (50,523)<br />
b) Depreciation of property, plant and equipment (550,790) (519,411)<br />
c) Other write-downs of fixed assets (218) (1,084)<br />
d) Write-downs of receivables included in current assets and cash and banks (24,913) (18,440)<br />
Changes in inventories of raw materials, auxiliaries, consumables and goods for resale 75,395) (41,060)<br />
Other accruals (23,830) (17,114)<br />
Other operating expenses (271,746) (347,077)<br />
Total production costs (10,473,975) (10,641,935)<br />
Difference between production value and production costs 798,432) 759,562)<br />
C) Financial income and expenses<br />
Investment income 15,226) 16,837)<br />
Other financial income:<br />
a) from receivables included in fixed assets 1,231) 96)<br />
b) from securities included in fixed assets 6,940) 10,642)<br />
c) from securities included in current assets 88,825) 86,221)<br />
d) Income other than the above 427,913) 316,909)<br />
Interest and other financial expenses (529,590) (436,979)<br />
Total financial income and expenses 10,545) (6,274)<br />
D) Valuation adjustments to financial assets<br />
Revaluations 1,530) 1,533)<br />
Write-downs (12,527) (13,018)<br />
Total adjustments (10,997) (11,485)<br />
E) Extraordinary items<br />
Extraordinary income 102,058) 60,532)<br />
Extraordinary expenses (117,110) (117,401)<br />
Total extraordinary items (15,052) (56,869)<br />
Income before income taxes 782,928) 684,934)<br />
Income taxes (248,643) (173,238)<br />
Net income for the year 534,285) 511,696)<br />
<strong>Pirelli</strong> S.p.A. 481,525) 460,095)<br />
Minority interest 52,760) 51,601)<br />
56<br />
i
Notes to consolidated financial statements<br />
at December 31, 1998<br />
Form and content<br />
The consolidated financial statements for the year ended December 31, 1998 have been drawn up in accordance with the<br />
provisions introduced by Legislative Decree No. 127 of April 9, 1991 which incorporate those of the VII directive of the EC.<br />
The consolidated financial statements include the financial statements of <strong>Pirelli</strong> S.p.A., the Group holding company,<br />
and the Italian and foreign companies in which <strong>Pirelli</strong> S.p.A. holds, directly or indirectly, control as defined by Legislative<br />
Decree 127/91, art. 26.<br />
A list of the companies included in consolidation is provided on pages to 86, and is considered an integral part of these notes.<br />
The co-ordination of the audits and the aggregation of the audit reports have been carried out by Reconta Ernst & Young S.p.A..<br />
The audit report on the consolidated financial statements has been issued by Reconta Ernst & Young S.p.A. for a fee of<br />
Lire 58 million.<br />
The fees for the audit of the individual Group companies have been borne directly by the companies concerned; the fees for<br />
the year 1998 have amounted to approximately Lire 3,544 million, including the fees for the limited review of the six-month<br />
financial statements.<br />
Principles of consolidation<br />
The financial statements used in consolidation are those at December 31, 1998 prepared locally for approval by the<br />
shareholders of the individual companies adjusted, where necessary, to agree with the "Common Accounting Principles" of the<br />
Group which conform to those established by Legislative Decree 127/91 and those issued by the I.A.S.C. (International<br />
Accounting Standards Committee) and the National Boards of Dottori Commercialisti and Ragionieri.<br />
The financial statements of subsidiaries operating in high-inflation countries have been adjusted to take into account the<br />
changed purchasing power of the local currency, in accordance with the principles for inflation accounting.<br />
The financial statements expressed in foreign currency have been translated into Italian lire at rates prevailing at year-end for<br />
the balance sheet and at average exchange rates for the statement of income, with the exception of the financial statements of<br />
companies operating in high-inflation countries, whose statements of income have been translated at rates ruling at year-end.<br />
The differences arising from the translation of beginning shareholders' equity at year-end exchange rates have been recorded<br />
in the consolidation reserve.<br />
The exchange rates which have been applied are presented under "Other information" in the notes.<br />
All the subsidiaries in consolidation have been consolidated on the line-by-line consolidation method, which may be<br />
summarized as follows:<br />
– the assets, liabilities, revenues and costs are consolidated in full and the share of net equity and results of operations<br />
attributable to minority interest are shown separately;<br />
– the carrying value of companies consolidated have been eliminated against the related underlying net equity;<br />
– the gains and losses arising from transactions between consolidated companies, if not yet realized through transactions<br />
with third parties, have been eliminated if the amount is significant, just as receivables, payables, revenues and costs<br />
related to transactions between consolidated companies have been eliminated, if the amount is significant.<br />
For investments in consolidated companies and for those valued using the equity method, the differences between the<br />
carrying value of the investments and the corresponding share of net equity are accounted for as follows:<br />
– negative differences have been recorded in the consolidation reserve;<br />
i<br />
57
– positive differences, where not attributable to the assets or liabilities of the investee companies, have been recorded as a<br />
reduction of the consolidation reserve.<br />
The reconciliation between the net results and shareholders' equity of <strong>Pirelli</strong> S.p.A. at December 31, 1998 and the<br />
corresponding consolidated figures is presented on page 80.<br />
Summary of significant accounting policies<br />
The accounting principles applied in the valuation of the components of the consolidated financial statements are in<br />
conformity with those adopted in the financial statements of the Group holding company and consistent with those applied in<br />
the prior year, except for the change in accounting principle used in the determination of the deferred income taxes whose<br />
effects are disclosed on page 66.<br />
• Intangible assets<br />
"Formation costs" relate to the capital increase costs of consolidated companies and are amortized over a period of five years.<br />
"Research and development expenditures and advertising costs" are charged to the statement of income in the year<br />
incurred.<br />
"Patents and design patent rights", "concessions, licenses, trademarks and similar rights" are amortized over their expected<br />
economic lives, estimated in a period of five years.<br />
"Goodwill" related to the acquisition of equity investments is amortized over the future period of utilization, considered to<br />
be a period of ten years.<br />
The caption "other intangible assets" includes sundry costs benefiting future periods, and in particular refers to:<br />
– applied software acquisition costs, amortized over a period of five years;<br />
– leasehold improvements, amortized over the duration of the lease and, in any case, not more than five years;<br />
– image awareness costs benefiting future periods, amortized over the duration of the contract and, in any case, not more<br />
than five years;<br />
– loan acquisition costs, amortized over a period not exceeding the duration of the loan and, in any case, not more than five years.<br />
• Property, plant and equipment<br />
Property, plant and equipment are stated at purchase or production cost including directly attributable incidental expenses<br />
and increased by revaluations effected in accordance with specific laws.<br />
Depreciation is calculated starting from the month in which the asset is available and ready for use or potentially able to<br />
provide economic benefits.<br />
Depreciation is calculated on the straight-line method on a monthly basis at rates designed to completely write-off the<br />
assets over their estimated useful lives or, for disposals, up to the last month of utilization, as follows:<br />
– Buildings 3% - 10%<br />
– Plant 7% - 10%<br />
– Machinery 5% - 10%<br />
– Tools and equipment 10% - 33%<br />
– Furniture 10% - 33%<br />
– Vehicles 10% - 25%<br />
58<br />
i
In addition, property, plant and equipment are written down when there is a permanent diminution in their net book value,<br />
in accordance with article 2426, point 3 of the Italian Civil Code.<br />
Ordinary maintenance costs are expensed in the year incurred.<br />
Government investment grants relating to land, buildings, plant and machinery are recorded in a special provision under<br />
liabilities and are released to income in proportion to the future depreciation of the assets to which they refer.<br />
Assets acquired under financial leasing contracts are accounted for as property, plant and equipment and are therefore<br />
capitalized and depreciated over their estimated useful lives; the additional cost of the lease is considered as a financial<br />
expense and residual lease payments are recorded as a financial liability.<br />
• Investments<br />
Equity investments in subsidiaries are valued at cost, reduced for any permanent diminution in value, in accordance with<br />
art. 2359 of the Italian Civil Code.<br />
Equity investments in associated companies are valued using the equity method, in accordance with article 2359 of the<br />
Italian Civil Code.<br />
Equity investments in other companies are valued at cost and reduced for any permanent diminution in value.<br />
• Receivables and payables<br />
Receivables (under both fixed assets and current assets) are stated at estimated realizable value. Payables are stated at<br />
nominal value.<br />
Receivables and payables in foreign currencies other than the recording currency of the individual companies are adjusted<br />
to the year-end exchange rates or the agreed exchange rates under hedging contracts; related exchange gains or losses are<br />
recorded in the statement of income.<br />
• Other securities<br />
Other securities are stated at the lower of cost and estimated realizable value.<br />
• Inventories<br />
Inventories are stated at the lower of cost, determined on the FIFO basis, and estimated realizable value. Work in process<br />
on long-term contracts is stated in proportion to the stage of completion of the work on the basis of agreed prices and<br />
taking into account estimated losses.<br />
• Provisions for pensions and similar obligations<br />
These provisions refer to pensions, health care and other benefits in favor of employees, not included in specific laws but<br />
covered by local labor agreements, and benefit plans operating at some Group companies.<br />
The principle applied is that of allocating the entire cost at maturity over the service lives of the employees based on<br />
entitlement earned, using actuarial methods.<br />
In accordance with FAS 106, which states that United States companies which in the past recorded such costs on a cash<br />
basis must set up or adjust existing provisions in the financial statements so that adequate funds exist at retirement to<br />
cover the payment of future benefits, <strong>Pirelli</strong> Group has decided to amortize the amount prospectively over a period<br />
of 20 years starting from the year 1993.<br />
i<br />
59
• Provision for income taxes<br />
The provision for income taxes includes the liabilities for income taxes likely to be incurred but uncertain as to amount or<br />
as to the date on which they will arise; definite income tax liabilities are recorded separately in a specific caption of the<br />
balance sheet.<br />
The provision also includes deferred income taxes on the timing differences arising between the results in the financial<br />
statements for tax purposes of the individual companies and the results in the financial statements used for their consolidation.<br />
Prudent accounting policy dictates that no account should be taken of deferred tax assets in excess of deferred tax<br />
liabilities, and the tax benefits arising from the utilization of tax losses carried forward from prior years or the current year<br />
should be credited to the statement of income in year utilized.<br />
• Provision for employees’ leaving indemnity<br />
The provision for employees' leaving indemnity includes amounts payable to employees accrued on their behalf in<br />
accordance with specific laws or national labor contracts.<br />
• Financial instruments<br />
Financial instruments used for hedging, and derivatives, are recorded under commitments at the time the contract is<br />
stipulated, for the notional amount. Income and expenses, as well as any effects, corresponding to the difference between<br />
the original contract amount and the fair value at the end of the year, are accounted for on the accrual basis.<br />
BALANCE SHEET<br />
Assets<br />
B) Fixed assets<br />
I) Intangible assets<br />
Intangible assets may be analyzed as follows:<br />
(in millions of lire)<br />
12.31.1997 Translation Increase Decrease Amortization 12.31.1998<br />
difference<br />
• Formation costs 6,103 12) 9,864 (34) (4,461) 11,484<br />
• Patents and design patent rights 8,177 –) 8,830 –) (3,274) 13,733<br />
• Concessions, licenses, trademarks<br />
and similar rights 598 (28) 866 (161) (119) 1,156<br />
• Goodwill 35,116 (1,017) 139 (41) (9,045) 25,152<br />
• Other 83,310 (2,116) 51,086 (3,038) (30,472) 98,770<br />
133,304 (3,149) 70,785 (3,274) (47,371) 150,295<br />
"Formation costs" refer to the corporate formation expenses and capital increase costs of subsidiaries. The increase is<br />
principally due to the transfer fee on the conversion of 5% bonds 1994-1998 (Lire 5.7 billion) and partly to the effect of the<br />
inclusion in consolidation of the Power Cables Germany Division (Lire 0.7 billion), purchased from Siemens A.G..<br />
The increase in “patents and design patent rights” refers mainly to the acquisition by <strong>Pirelli</strong> Cavi e Sistemi S.p.A. of the<br />
utilization rights to the patents relating to fiber optics and fiber optic cables.<br />
The major items included in "other" refer to software applications costs, corporate reorganization expenses, loan acquisition<br />
costs, leasehold improvements, image awareness costs etc.. The effect of the Power Cables Germany Division, purchased<br />
from Siemens A.G., is Lire 0.6 billion.<br />
60<br />
i
II) Property, plant and equipment<br />
The movements in property, plant and equipment during the year are as follows:<br />
(in millions of lire)<br />
12.31.1998) 12.31.1997)<br />
Gross value<br />
Opening balances 10,189,150) 9,748,903)<br />
Translation difference (465,871) 502,447)<br />
Additions 804,158) 619,403)<br />
Disposals (419,801) (681,603)<br />
10,107,636) 10,189,150)<br />
Accumulated depreciation<br />
Opening balances 6,188,925) 5,997,823)<br />
Translation difference (333,282) 300,388)<br />
Depreciation charge for the year 550,790) 519,411)<br />
Disposals (290,589) (628,697)<br />
6,115,844) 6,188,925)<br />
Net values 3,991,792) 4,000,225)<br />
The net decrease in comparison with the prior year is due to the combination of the following:<br />
– translation differences, in reference to property, plant and equipment included in the financial statements of foreign companies,<br />
and due to the revaluation of the Italian lira against the currencies of the countries in which the Group companies operate;<br />
– additions, higher than those of the prior year by Lire 185 billion and including Lire 105 billion due to the effect of the<br />
inclusion in consolidation of the Power Cables Germany Division purchased from Siemens A.G.; capital expenditures,<br />
considering the same companies in consolidation as in 1997, are equal to 127 percent of depreciation;<br />
– disposals, mainly in reference to plants as a consequence of production rationalization;<br />
– depreciation increased by 6 percent over 1997.<br />
Gross values include Lire 181 billion of assets which are no longer in use and are being held for transfer to other Group<br />
companies or disposal.<br />
III) Financial assets<br />
“Investments in subsidiaries” amount to Lire 48,678 million and refer to the following:<br />
(in millions of lire)<br />
Company Country % of holding Amount<br />
<strong>Pirelli</strong> Exploitation S.A. France 99.76% 74<br />
<strong>Pirelli</strong> Kabelwerke und Systeme G.m.b.H. Austria 100.00% 70<br />
MKM Magyar Kabel Muvek RT. Hungary 80.51% 13,881<br />
Turk Siemens Kablo ve Elektrik Sanayii A.S. Turkey 55.88% 32,358<br />
AFCAB Holdings (Proprietary) Ltd South Africa 50.00% 2,295<br />
Total 48,678<br />
The above subsidiaries, of which MKM Magyar Kabel Muvek RT., Turk Siemens Kablo ve Elektrik Sanayii A.S., AFCAB<br />
Holdings (Proprietary) Ltd were purchased from Siemens A.G., have not been consolidated line-by-line in the financial<br />
statements at December 31, 1998, as allowed by art. 28, paragraph 2c of Legislative Decree No. 127/91, since they were<br />
acquired at the end of the year 1998.<br />
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"Investments in associated companies" amount to Lire 62,237 million and show a reduction compared to<br />
Lire 64,279 million at the end of the prior year; they are primarily composed of the following:<br />
(in millions of lire)<br />
• Drahtcord Saar GmbH & Co. K.G. (Germany) 11,974<br />
• Upper Bright Ltd (British Virgin Islands) 9,383<br />
• K.M.P. Cabos Especiais e Sistemas Ltda (Brazil) 6,542<br />
• SICREM S.p.A. (Italy) 7,055<br />
• Rodco Ltd (United Kingdom) 8,522<br />
• SMP Melfi S.r.l. (Italy) 5,344<br />
• Kabeltrommel Gesellschaft mbH & Co K.G. (Germany) 5,972<br />
• Eurofly Service S.p.A. (Italy) 4,903<br />
• Maristel S.p.A. (Italy) 989<br />
• Trelleborg Wheel Systems S.p.A. (Italy) 800<br />
• Other minor amounts 753<br />
62,237<br />
The principal movements during the year regard the acquisition of the investment in Kabeltrommel Gesellschaft mbH & Co<br />
K.G. from Siemens A.G. and the sale of the investment in ABF Factoring S.p.A. by <strong>Pirelli</strong> S.p.A..<br />
"Investments in other companies" include Lire 68.6 billion of stocks owned in companies listed on the stock exchange and<br />
held in the portfolios of <strong>Pirelli</strong> S.p.A., Trefin S.r.l. and <strong>Pirelli</strong> Cavi e Sistemi S.p.A.. The stocks refer to Mediobanca, Sirti, Cartiere<br />
Burgo, Impregilo, Società Metallurgica Italiana, Generale Industrie Metallurgiche, Compagnia Finanziaria De Benedetti.<br />
“Financial receivables from other companies” amount to Lire 111,887 million and include:<br />
– Lire 8,480 million of fixed rate loans; the carrying value approximates fair value at the end of the year;<br />
– Lire 94,095 million of fixed rate obligatory deposits;<br />
– Lire 269 million of floating rate loans;<br />
– Lire 5,754 million of non-interest bearing guarantee deposits;<br />
– Lire 3,289 million of non-interest bearing loans.<br />
"Other securities" total Lire 34,747 million and largely relate to long-term securities held by <strong>Pirelli</strong> Financial Services<br />
Company N.V..<br />
“Treasury shares” amount to Lire 292.6 billion, compared to Lire 23.1 billion in the prior year. They refer to the purchase of<br />
58,872,500 ordinary shares, equal to 2.969 percent of share capital (3.106 percent of ordinary shares), at a weighted average price of<br />
Lire 4,969.3 per share, according to the procedures set forth in the resolution passed by the shareholders’ meeting of May 12, 1997. As<br />
provided by art. 2357-ter of the Italian Civil Code, a “reserve for treasury shares in portfolio” has been established for the same amount.<br />
C) Current assets<br />
I) Inventories<br />
Inventories total Lire 2,144.1 billion, compared to Lire 1,381.1 billion in the prior year, and may be analyzed as follows:<br />
(in millions of lire)<br />
12.31.1998 12.31.1997<br />
• Cables and Systems 1,421,550 612,996<br />
• Tyres 722,565 768,067<br />
• Other 11 19<br />
Total 2,144,126 1,381,082<br />
62<br />
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The increase in the inventories of the Cables and Systems Sector also reflects the consolidation of the Power Cables Germany<br />
Division acquired from Siemens A.G. for Lire 192.5 billion.<br />
II) Receivables<br />
Receivables rose from Lire 4,150.4 billion in the prior year to Lire 4,463.3 billion in 1998, and can be analyzed as follows:<br />
(in millions of lire)<br />
12.31.1998 12.31.1997<br />
Financial Commercial and other Financial Commercial and other<br />
• Trade 2,477,375 2,648,608<br />
• Subsidiaries 11,025<br />
• Associated companies 13,560 79,213 18,800 3,288<br />
• Parent companies 501,238 23,667 112,974 505<br />
• Other receivables 315,118 1,042,080 144,402 1,221,793<br />
829,916 3,633,360 276,176 3,874,194<br />
The consolidation of the Power Cables Germany Division acquired from Siemens A.G. led to an increase in commercial and<br />
other receivables of Lire 123.6 billion.<br />
Specifically:<br />
– Trade receivables from customers<br />
These may be analyzed by due as follows:<br />
(in millions of lire)<br />
12.31.1998) 12.31.1997)<br />
• due within 12 months 2,597,757) 2,755,898)<br />
• due beyond 12 months 19,724) 18,377)<br />
• less: allowance for doubtful receivables (140,106) (125,667)<br />
2,477,375) 2,648,608)<br />
No receivables are due after five years.<br />
The carrying value of receivables, adjusted for probable future losses, approximates estimated fair value at the end of the year.<br />
– Receivables from associated companies<br />
With respect to financial receivables, these receivables refer to Drahtcord Saar & Co. K.G. (Lire 17,617 million<br />
at December 31, 1997) consequent to transactions with <strong>Pirelli</strong> Deutschland A.G..<br />
As for commercial receivables, the most significant refer to Maristel S.p.A. (Lire 44,780 million compared to<br />
Lire 2,878 million at December 31, 1997) consequent to transactions with <strong>Pirelli</strong> Cavi e Sistemi S.p.A., and Trelleborg<br />
Wheel Systems S.p.A. (Lire 33,995 million) as a result of transactions with <strong>Pirelli</strong> Pneumatici S.p.A..<br />
All amounts are receivable within one year.<br />
– Receivables from parent companies<br />
These amount to Lire 524,905 million and mainly relate to financial receivables of <strong>Pirelli</strong> Finance Holding N.V. from<br />
<strong>Pirelli</strong> & C. Luxembourg S.A. (Lire 385,108 million), and <strong>Pirelli</strong> Servizi Finanziari S.p.A. from <strong>Pirelli</strong> & C. A.p.A.<br />
(Lire 71,202 million).<br />
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63
– Other receivables<br />
Other receivables include financial receivables of Lire 315,118 million primarily consisting of receivables from banks on<br />
forward exchange transactions and receivables from companies in the <strong>Pirelli</strong> & C. A.p.A. Group; the carrying value<br />
approximates the estimated fair value at the end of the year.<br />
Other receivables also include Lire 1,042,080 million of sundry receivables representing amounts due from the tax<br />
authorities of Lire 575,500 million, dividends receivable of Lire 4,168 million, receivables from the sale of fixed assets of<br />
Lire 2,834 million, advances to suppliers of Lire 35,600 million, receivables from employees of Lire 12,305 million and<br />
receivables from social security agencies, export refunds and other minor amounts of Lire 411,673 million.<br />
The amount due beyond one year and within five years is Lire 166,882 million, while receivables due beyond five years total<br />
Lire 19,589 million.<br />
III) Current financial assets<br />
– Other securities<br />
Other securities amount to Lire 581,677 million and consist of:<br />
• Lire 170,113 million of floating rate securities issued and guaranteed by banking institutions;<br />
• Lire 48,759 million of floating rate securities issued and guaranteed by governments of various countries;<br />
• Lire 19,433 million of fixed rate securities issued and guaranteed by governments of various countries;<br />
• Lire 22,208 million of equity shares intended for sale;<br />
• Lire 313,395 million of fixed rate securities issued and guaranteed by banking institutions;<br />
• Lire 7,706 million of fixed rate bonds;<br />
• Lire 63 million of warrants.<br />
The securities are held in safe-keeping at leading banking institutions.<br />
IV) Cash and banks<br />
– Bank and postal deposits<br />
Bank and postal deposits are concentrated in the financial companies, holding companies and subholding companies of the<br />
Group. Available liquidity is mainly invested in the short-term deposit market at leading banking counterparts primarily at<br />
interest rates reflecting the market rates at year-end.<br />
The consolidation of the Power Cables Germany Division acquired from Siemens A.G. increased the amount of available<br />
liquidity by Lire 35.7 billion.<br />
D) Accrued income and prepaid expenses<br />
– Accrued income<br />
Accrued income is determined on the accrual principle and shows an increase from Lire 54.2 billion to Lire 306.2 billion.<br />
Accrued income mainly relates to the portion of exchange gains on hedging transactions (Lire 261.3 billion), interest<br />
income, insurance, rent, hedging revenues.<br />
– Prepaid expenses<br />
Prepaid expenses rose from Lire 38.9 billion at December 31, 1997 to Lire 41.4 billion at December 31, 1998 and mainly<br />
refer to prepaid insurance, property rent, etc..<br />
64<br />
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Liabilities and shareholders’ equity<br />
A) Shareholders’ equity<br />
Of <strong>Pirelli</strong> S.p.A.<br />
“Share capital” totals Lire 1,983,123 million and consists of 1,895,117,473 ordinary shares and 88,006,016 savings shares, all<br />
with a par value of Lire 1,000 per share and normal dividend rights.<br />
The “share premium reserve” went from Lire 835,252 million to Lire 894,027 million; the change can principally be ascribed<br />
to the withdrawal of Lire 252,351 million to integrate the “Reserve for treasury shares in portfolio” for the purchase of shares<br />
made during the year and the increase of Lire 311,064 million for the conversion of <strong>Pirelli</strong> S.p.A. convertible bonds.<br />
The “revaluation reserves”, ex law No. 413/1991, have remained unchanged compared to the prior year.<br />
The “consolidation reserve” amounts to Lire 275,580 million (Lire 476,094 million in the prior year) and represents the<br />
difference between the carrying value of equity investments in consolidated companies and the underlying share of net equity.<br />
The changes in shareholders' equity are presented on page 79.<br />
Minority interest<br />
The minority interest in shareholders' equity of Lire 329,520 million shows a reduction compared to the prior year<br />
(Lire 375,229 million at December 31, 1997), due to the difference between translation adjustment for the foreign currency<br />
financial statements and the increase in the net income for the year.<br />
The percentage ownership of investments held by the minority interest is as follows:<br />
12.31.1998 12.31.1997<br />
Celikord A.S. (Turkey) 49.00% 49.00%<br />
Sicable S.A. (Ivory Coast) 49.00% 49.00%<br />
<strong>Pirelli</strong> Cables Australia Ltd (Australia) 49.00% 49.00%<br />
Turk <strong>Pirelli</strong> Lastikleri S.A. (Turkey) 37.81% 37.78%<br />
<strong>Pirelli</strong> Pneus S.A. (Brazil) 13.23% 13.23%<br />
<strong>Pirelli</strong> Cabos S.A. (Brazil) 15.08% 15.08%<br />
<strong>Pirelli</strong> Tyre Holding N.V. (The Netherlands) 0.19% 0.26%<br />
<strong>Pirelli</strong> de Venezuela C.A. (Venezuela) 3.78% 3.78%<br />
Solac Soc. Laminadora Ltda (Brazil) 11.00% 11.00%<br />
PT <strong>Pirelli</strong> Cables Indonesia (Indonesia) 50.00% 50.00%<br />
B) Provisions for liabilities and expenses<br />
Provisions for pensions and similar obligations<br />
These provisions include accruals for pensions, health care and other benefits in favor of employees, not governed by specific<br />
laws but covered by local labor agreements and benefit plans operating at some Group companies.<br />
The consolidation of the Power Cables Germany Division acquired from Siemens A.G. had the effect of increasing these<br />
provisions by Lire 66.2 billion.<br />
They also include, in accordance with FAS 106, funds to cover the payment of future benefits which United States companies<br />
must set aside that are being amortized prospectively over a period of 20 years. At December 31, 1998, the liabilities still to be<br />
accrued for this purpose amount to Lire 22 billion.<br />
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65
Provisions for income taxes<br />
The provisions for income taxes include accruals relating to income taxes likely to be incurred but uncertain as to the amount<br />
or as to the date on which they will arise, as well as deferred taxation, as follows:<br />
(in millions of lire)<br />
12.31.1998 12.31.1997<br />
• Provision for current taxes 58,725 68,523<br />
• Provision for deferred taxes 211,283 223,541<br />
270,008 292,064<br />
The tax charge for the year is composed of the following:<br />
(in millions of lire)<br />
1998 1997)<br />
• Current taxes 235,547 175,924)<br />
• Deferred taxes 13,096 (2,686)<br />
248,643 173,238)<br />
When considering only companies which closed the year with a net income, income taxes represented 26 percent of pre-tax<br />
income (compared to 23 percent last year), generally less than the average tax rate in the various countries in which the<br />
Group operates, mainly made possible by the utilization of tax loss carryforwards.<br />
Furthermore, by using dividend tax credits it was possible to recover a part of the income taxes payable by subsidiary companies.<br />
Current income taxes which are definite and certain in amount are shown under income taxes payable, whereas the income<br />
taxes paid in advance are shown under taxes receivable.<br />
The tax rates in the principal countries in which the Group operates are as follows:<br />
Europe: United States 35%<br />
Italy 41% Canada 38%<br />
France 42% Australia 36%<br />
Spain 35% South America:<br />
Germany 45% Argentina 34%<br />
United Kingdom 33% Brazil 33%<br />
Turkey 43% Venezuela 34%<br />
Potential tax savings to the Group in future years as a result of tax loss carryforwards amount to approximately<br />
Lire 155 billion.<br />
As for deferred taxes, as described in the financial statements at December 31, 1997, the method of calculation was changed<br />
in order to conform to international practice. The change in accounting principle resulted in a higher tax charge for the<br />
current year of approximately Lire 13 billion, whereas no adjustment was made to the provision for deferred taxation since<br />
effect was given in the financial statements at December 31, 1997.<br />
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Other provisions<br />
The movements during the year in other provisions are as follows:<br />
(in millions of lire)<br />
Provision for restructuring costs) Other) Total<br />
Balance at December 31, 1997 94,978) 176,856) 271,834)<br />
Translation difference (1,840) (4,331) (6,171)<br />
Utilizations (67,790) (85,719) (153,509)<br />
Increases 157,377) 60,811) 218,188)<br />
Balance at December 31, 1998 182,725) 147,617) 330,342)<br />
Utilizations of the provision for restructuring costs were in respect of the Cables and Systems Sector for<br />
Lire 21,870 million and the Tyres Sector for Lire 45,920 million. The balance of the provision relates to the Cables and Systems<br />
Sector for Lire 137,030 million and the Tyres Sector for Lire 45,695 million.<br />
The increase in the provision for restructuring costs is mainly in reference to the reorganization plan for the industrial<br />
structures of the companies in the Cables and Systems Sector, particularly in Germany, due to the acquisition of the Power<br />
Cables Division from Siemens A.G..<br />
The total of other provisions of Lire 147,617 million consists of accruals for litigation, industrial and commercial risks,<br />
product warranties, and other contingencies.<br />
D) Payables<br />
Payables show an increase from Lire 5,632.0 billion to Lire 6,594.0 billion and may be analyzed as follows:<br />
(in millions of lire)<br />
12.31.1998 12.31.1997<br />
Financial Commercial and other Financial Commercial and other<br />
• Bonds 968,173 2,202<br />
• Convertible bonds 507,409<br />
• Banks borrowings 1,762,450 1,696,917<br />
• Other financial companies 265,799 196,953<br />
• Advances from customers 708,851 598,144<br />
• Trade 1,788,360 1,540,648<br />
• Associated companies 3,420 20,518 2,900 19,177<br />
• Parent companies 57,460 21 62,762 1,064<br />
• Taxes 447,271 451,012<br />
• Social security 89,297 100,160<br />
• Other payables 482,399 452,643<br />
3,057,302 3,536,717 2,469,143 3,162,848<br />
The effect of the consolidation of the Power Cables Germany Division acquired from Siemens A.G. is Lire 127.4 billion on<br />
commercial and other payables and Lire 27.2 billion on financial payables.<br />
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An analysis of payables by due date is as follows:<br />
Financial payables<br />
(in millions of lire)<br />
12.31.1998 12.31.1997<br />
within beyond within beyond<br />
1 year 1 year 1 year 1 year<br />
• Bonds 38 968,135 2,202<br />
• Convertible bonds 507,409<br />
• Bank borrowings 650,624 1,111,826 504,046 1,192,871<br />
• Other financial companies 234,116 31,683 145,940 51,013<br />
• Associated companies 3,420 1,200 1,700<br />
• Parent companies 57,460 62,762<br />
945,658 2,111,644 1,223,559 1,245,584<br />
Financial payables are covered by liens and mortgages for Lire 893,106 million.<br />
Financial payables due beyond five years total Lire 1,156,560 million.<br />
Additional disclosure is provided as follows:<br />
Bonds<br />
These refer to the <strong>Pirelli</strong> S.p.A. 1998-2008 bonds of Euro 500 million, issued on October 21, 1998 and yielding 4.875 percent.<br />
Following the early redemption of 5% 1994-1998 convertible bonds, 742,358 bonds were redeemed for Lire 1.9 billion and<br />
194,414,997 ordinary shares were issued for Lire 505.5 billion.<br />
Bank borrowings<br />
Bank borrowings due within one year amount to Lire 650,624 million, and include the current portion of long-term debt for<br />
Lire 431,902 million.<br />
Bank borrowings due beyond one year amount to Lire 1,111,826 million and consist of floating rate loans for<br />
Lire 1,079,564 million and fixed rate loans for Lire 32,262 million.<br />
Payables to other financial companies<br />
The amount due beyond one year includes an amount of Lire 24,314 million payable after five years.<br />
Payables to associated companies<br />
As regards financial payables, the most significant amount refers to loans payable by <strong>Pirelli</strong> Pneumatici S.p.A. to SMP Melfi<br />
S.r.l. (Lire 2,350 million) and by <strong>Pirelli</strong> Cavi e Sistemi S.p.A. to Maristel S.p.A. (Lire 1,070 million).<br />
Payables to parent companies<br />
These primarily refer to a deposit by Société Internationale <strong>Pirelli</strong> S.p.A. with <strong>Pirelli</strong> Finance Holding N.V.<br />
(Lire 56,484 million).<br />
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Commercial and other payables<br />
(in millions of lire)<br />
12.31.1998 12.31.1997<br />
within beyond within beyond<br />
1 year 1 year 1 year 1 year<br />
• Advances from customers 708,851 598,144<br />
• Trade 1,788,360 1,540,648<br />
• Associated companies 20,518 19,177<br />
• Parent companies 21 1,064<br />
• Taxes 384,214 63,057 387,120 63,892<br />
• Social security 89,297 96,807 3,353<br />
• Other payables 447,565 34,834 427,666 24,977<br />
3,438,826 97,891 3,070,626 92,222<br />
Payables to associated companies<br />
As for commercial payables, the most significant amounts refer to SICREM S.p.A. (Lire 15,570 million), Drahtcord Saar & Co.<br />
K.G. (Lire 3,858 million), Servizio Titoli S.r.l. (Lire 318 million), Eurofly Service S.p.A. (Lire 208 million) and Maristel S.p.A.<br />
(Lire 499 million).<br />
Payables to parent companies<br />
These mainly refer to amounts payable by <strong>Pirelli</strong> S.p.A. to <strong>Pirelli</strong> & C. A.p.A. for corporate secretarial services.<br />
Other payables<br />
These amount to Lire 482,399 million and include Lire 116,022 million of payables to employees, Lire 29,165 million for<br />
guarantee deposits from customers for packaging, Lire 13,532 million for legal and consulting fees, Lire 57,883 for purchases<br />
of fixed assets and Lire 265,797 million for other minor items.<br />
E) Accrued liabilities and deferred income<br />
Accrued liabilities<br />
Accrued liabilities rose from Lire 370 billion to Lire 607.2 billion and include the portion of exchange differences on hedging<br />
transactions (Lire 267 billion), property rent expenses, insurance premiums, hedging costs, etc..<br />
Deferred income<br />
Deferred income rose from Lire 26.5 billion to Lire 27.4 billion and refers to deferred revenues and insurance premiums.<br />
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69
MEMORANDUM ACCOUNTS<br />
Memorandum accounts total Lire 2,706.3 billion compared to Lire 2,902.1 billion in the prior year.<br />
Personal guarantees<br />
Guarantees on behalf of other companies<br />
These are mainly given to guarantee loans received and job orders in the process of being delivered or tested.<br />
Third party assets held in deposit<br />
Securities held in deposit<br />
These include securities stated at par value, owned by third parties and held in deposit by <strong>Pirelli</strong> S.p.A., in addition to<br />
securities entrusted for administration.<br />
Assets held by third parties<br />
Securities held as guarantees and sureties<br />
These include securities owned by the Group and held by third parties in deposit as guarantees or entrusted for<br />
administration, and sureties against commitments and contractual obligations given by <strong>Pirelli</strong> S.p.A..<br />
FINANCIAL INSTRUMENTS<br />
It is the Group's policy to reduce financial risks deriving from international activities conducted in research, manufacturing<br />
and distribution through operating and financial management decisions.<br />
To this end, the Group uses foreign exchange contracts and derivatives to protect its operating results from fluctuations in<br />
exchange and interest rates and in the prices of raw materials. The Group has a policy of being party to financial instruments<br />
in the normal course of business and not for speculative purposes. With an overall view towards reducing exposure to risk the<br />
Group deals exclusively with leading bank counterparts and in highly liquid instruments.<br />
Outstanding financial instruments and related fair values at December 31, 1998 are presented in the following table together<br />
with maturity dates:<br />
(in billions of lire)<br />
Gross contractual amounts Fair value Maturing within Maturing beyond<br />
(at year-end exchange rates) one year one year<br />
Exchange rate risk<br />
• Forward contracts 8,640 8,693 8,613 80<br />
• Swaps contracts 270 270 270 –<br />
Interest rate risk<br />
• Cross currency rate interest rate swaps 43 – – –<br />
• Interest rate swaps 20 1 1 –<br />
Raw materials price risk<br />
• Futures contracts 82 81 81 –<br />
The fair value of the financial instruments used to hedge exchange, interest rate and materials price risks approximates the<br />
fair value of the positions being hedged.<br />
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CONSOLIDATED STATEMENTS OF INCOME<br />
A) Production value<br />
Revenues from sales and services<br />
Sales by geographic area of destination and industry sector are reported in the following table.<br />
(in millions of lire)<br />
1998 1997<br />
Geographic area<br />
Europe:<br />
• Italy 1,589,205) 14.96%) 1,509,980) 13.40%)<br />
• Other European countries 4,196,608) 39.50%) 4,269,749) 37.90%)<br />
North America 1,477,134) 13.90%) 1,515,026) 13.45%)<br />
Central and South America 2,394,227) 22.54%) 2,695,343) 23.93%)<br />
Oceania, Africa and Asia 966,330) 9.10%) 1,275,129) 11.32%)<br />
10,623,504) 100.00%) 11,265,227) 100.00%)<br />
Sector<br />
Cables and Systems 5,396,582) 50.80%) 5,842,567) 51.86%)<br />
Tyres 5,217,537) 49.11%) 5,416,964) 48.09%)<br />
Other sectors 158,999) 1.50%) 119,801) 1.06%)<br />
Inter-eliminations (149.614) (1.41%) (114,105) (1.01%)<br />
10,623,504) 100.00%) 11,265,227) 100.00%)<br />
The distribution of sales by destination and by major product category for the two sectors has been commented on in the two<br />
sections of the report which discuss the performance of the sectors.<br />
Other revenues and income<br />
The caption "miscellaneous" includes rent income, commissions, insurance indemnities and refunds, gains from the ordinary<br />
disposal of property, plant and equipment and other minor items.<br />
B) Production costs<br />
Service expenses<br />
Service expenses total Lire 1,915.7 billion and include selling expenses of Lire 717.7 billion, ordinary maintenance of<br />
Lire 137.9 billion, electrical power of Lire 206.2 billion, travel of Lire 107.7 billion, insurance of Lire 54.3 billion, consulting<br />
fees of Lire 52.7 billion, technical assistance, etc..<br />
Lease and rent expenses<br />
Lease and rent expenses mainly consist of rent expenses of Lire 74.5 billion and operating lease expenses of Lire 28.2 billion<br />
and patent utilization rights.<br />
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71
Personnel costs<br />
Personnel costs consist of the following:<br />
(in millions of lire)<br />
1998 1997<br />
Salaries and wages 2,003,070 1,949,665<br />
Social security costs 426,726 439,571<br />
Leaving indemnity 60,697 60,730<br />
Pension and similar costs 35,970 44,255<br />
Other costs 58,606 59,139<br />
2,585,069 2,553,360<br />
Amortization, depreciation and write-downs<br />
The depreciation charge for property, plant and equipment may be analyzed as follows:<br />
(in millions of lire)<br />
1998 1997<br />
Buildings 66,495 56,163<br />
Plant and machinery 364,908 353,360<br />
Commercial and industrial equipment 62,145 51,197<br />
Other assets 57,242 58,691<br />
550,790 519,411<br />
Other operating expenses<br />
Other operating expenses went from Lire 347.1 billion to Lire 271.7 billion and mainly include administrative expenses of<br />
Lire 33.6 billion, revenue stamps and local taxes of Lire 49.0 billion, losses on the elimination of property, plant and<br />
equipment of Lire 2.3 billion, legal fees of Lire 20.8 billion, association dues of Lire 16.0 billion, entertainment, audit fees, etc..<br />
C) Financial income and expenses<br />
Investment income<br />
Investment income refers to dividends received from equity investments in other companies.<br />
Other financial income<br />
“Income other than the above” consists of the following:<br />
(in millions of lire)<br />
1998 1997<br />
Interest from associated companies 762 2,489<br />
Interest from parent companies 5,007 3,439<br />
Bank interest 118,264 95,503<br />
Other financial income from parent companies 289 –<br />
Miscellaneous financial income 143,528 105,876<br />
Gains on exchange 160,063 109,602<br />
427,913 316,909<br />
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i
Miscellaneous financial income includes revenues on forward contracts, gains on the sale of fixed rate securities, interest<br />
on receivables to be collected from the tax authorities, etc..<br />
Interest and other financial expenses<br />
These expenses include:<br />
(in millions of lire)<br />
1998 1997<br />
Interest to associated companies 219 226<br />
Interest to parent companies 2,162 13,730<br />
Bond interest 9,177 4,439<br />
Bank interest 166,995 161,797<br />
Other financial interest to parent companies 21,263 –<br />
Miscellaneous financial expenses 144,340 118,842<br />
Losses on exchange 185,434 137,945<br />
529,590 436,979<br />
Miscellaneous financial expenses include costs on forward contracts, losses on the sale of fixed rate securities, bank<br />
commissions, etc..<br />
Financial expenses, net, with specific reference to currency transactions, reflect increased currency operations by Group<br />
companies in 1998, which led to an increase in losses on exchange and a corresponding increase in related gains on exchange,<br />
as seen in the preceding table.<br />
Financial expenses, net, excluding amounts not directly associated with receivables and payables, amount to Lire 54.5 billion.<br />
E) Extraordinary items<br />
Extraordinary income<br />
Extraordinary income amounts to Lire 102.1 billion compared to Lire 60.5 billion in the prior year, and may be analyzed<br />
as follows:<br />
(in millions of lire)<br />
1998 1997<br />
Gains on disposals 21,985 28,280<br />
Miscellaneous 80,073 32,252<br />
102,058 60,532<br />
"Gains on disposals" include gains on the sale of land by <strong>Pirelli</strong> Cabos S.A. for Lire 11.7 billion, the sale of a building located<br />
in Athens by <strong>Pirelli</strong> Hellas S.A. for Lire 2 billion, the sale of a warehouse by Turk <strong>Pirelli</strong> Lastikleri A.S. for Lire 2.2 billion, the<br />
sale of the investments in Olivetti S.p.A., ABF Factoring S.p.A., <strong>Pirelli</strong> Prodotti Diversificati S.p.A. (sold to a <strong>Pirelli</strong> & C. A.p.A.<br />
Group company) for Lire 5.2 billion realized by <strong>Pirelli</strong> S.p.A. and other minor items for Lire 0.9 billion.<br />
"Miscellaneous" includes a gain of Lire 34 billion on the sale by <strong>Pirelli</strong> Pneumatici S.p.A. of the agriculture tyre<br />
manufacturing and marketing activities to Trelleborg Wheel Systems S.p.A., a gain of Lire 17.4 billion on the reimbursement of<br />
the share capital of <strong>Pirelli</strong> Finance (Holding) N.V. to <strong>Pirelli</strong> S.p.A., an amount of Lire 17.2 billion released from the provisions<br />
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73
for liabilities and expenses accrued in prior years considered in excess of the current valuation of requirements for the<br />
affiliates in the United States, Brazil, Australia and Italy and the remaining Lire 11.5 billion relates to the capital<br />
reimbursement by Muriaé S.A. to <strong>Pirelli</strong> S.p.A., the sale of Olivetti S.p.A. warrants by <strong>Pirelli</strong> S.p.A. and other minor items.<br />
Extraordinary expenses<br />
Extraordinary expenses amount to Lire 117.1 billion compared to Lire 117.4 billion in the prior year, and may be analyzed<br />
as follows:<br />
(in millions of lire)<br />
1998 1997<br />
Losses on disposals 7,368 7,347<br />
Miscellaneous 109,742 110,054<br />
117,110 117,401<br />
"Losses on disposals" mainly include losses on the disposal of property, plant and equipment of Lire 6.6 billion and<br />
Lire 0.8 billion of losses on the disposal of investments.<br />
The caption "miscellaneous" includes Lire 58.6 billion of reorganization and restructuring costs, Lire 10.7 billion connected<br />
to land reclamation of abandoned areas, Lire 30 billion for the special bonus paid to the Chairman-CEO and Lire 10.4 billion<br />
for claims, sales commissions and other minor items.<br />
Other information<br />
Directors’ and statutory auditors’ fees<br />
Fees to the directors and statutory auditors of <strong>Pirelli</strong> S.p.A., who also carry out these functions in other companies included in<br />
consolidation, are as follows:<br />
(in millions of lire)<br />
Directors 39,571<br />
Statutory auditors 280<br />
39,851<br />
Employees<br />
The average number of employees by category in companies included in consolidation is as follows:<br />
Management 617<br />
Staff 10,472<br />
Operatives 23,414<br />
Temporary employment 2,203<br />
36,706<br />
74<br />
i
Exchange rates (against Italian lire)<br />
Average<br />
Year-end<br />
Change<br />
Change<br />
1998 1997 in % 12.31.1998 12.31.1997 in %<br />
Europe<br />
Swiss franc 1,198.74 1,175.64 1.96%) 1,208.41 1,209.90 (0.12%)<br />
German mark 986.88 984.47 0.24%) 990.00 981.69 0.85%)<br />
British pound 2,886.25 2,787.96 3.53%) 2,763.16 2,913.04 (5.15%)<br />
Dutch guilder 875.48 874.71 0.09%) 878.64 871.06 0.87%)<br />
French franc 294.41 292.53 0.64%) 295.18 293.44 0.59%)<br />
Spanish peseta 11.62 11.64 (0.14%) 11.64 11.60 0.34%)<br />
Belgian franc 47.84 47.71 0.27%) 48.00 47.59 0.87%)<br />
Greek drachma 5.88 6.24 (5.76%) 5.80 6.22 (6.75%)<br />
North America<br />
American dollar 1,737.71 1,697.03 2.40%) 1,653.10 1,759.19 (6.03%)<br />
Canadian dollar 1,168.51 1,223.44 (4.49%) 1,066.17 1,222.85 (12.81%)<br />
South America<br />
Brazilian real 1,497.87 1,575.56 (4.93%) 1,368.12 1,576.34 (13.21%)<br />
Argentine peso 1,737.71 1,697.03 2.40%) 1,653.10 1,759.19 (6.03%)<br />
Oceania<br />
Australian dollar 1,095.83 1,255.11 (12.69%) 1,013.35 1,151.39 (11.99%)<br />
Africa<br />
Ivory Coast franc 2.94 2.93 0.48%) 2.95 2.93 0.59%)<br />
Net financial position<br />
The composition of the net debt position presented below, which shows an increase compared to the prior year, was<br />
commented on in the introduction to the report:<br />
(in millions of lire)<br />
12.31.1998) 12.31.1997)<br />
Short-term financial payables 945,658) 1,223,559)<br />
Accrued interest expenses 34,001) 60,972)<br />
Cash and banks (993,744) (827,059)<br />
Other securities (581,677) (815,243)<br />
Short-term financial receivables (829,916) (276,326)<br />
Accrued interest income (25,606) (18,155)<br />
Capital subscription rights - portion called up (39) (40)<br />
Net short-term financial position (1,451,323) (652,292)<br />
Medium/long-term financial payables 2,111,644) 1,245,584)<br />
Medium/long-term financial receivables (112,277) (100,659)<br />
Other securities (34,747) (14,142)<br />
Net medium/long-term financial position 1,964,620) 1,130,783)<br />
Net financial debt position 513,297) 478,491)<br />
i<br />
75
R&D expenditures<br />
In 1998 the Group incurred research and development expenditures and technical management costs for a total of<br />
Lire 379 billion, entirely charged to operating expenses, compared to Lire 355 billion in the prior year. 1998 expenditures<br />
represent 3.6 percent of consolidated sales revenues.<br />
The geographical breakdown of these expenditures is as follows:<br />
Europe 87% South America 7%<br />
North America 5% Oceania 1%<br />
A number of research programs are subsidized by the governments of various countries. In particular, in Italy, where the<br />
research activities are mainly concentrated, the projects financed under the various laws are numerous and apply, in differing<br />
proportions, to all sectors of activity.<br />
76<br />
i
Supplementary information<br />
i
Consolidated statements of cash flow<br />
1998 1997<br />
Net debt at beginning of year (478,491) (1,014,915)<br />
Translation adjustment (50,380) (14,718)<br />
Operating profit 798,432) 759,562)<br />
Depreciation and amortization 598,161) 569,934)<br />
Increase in intangible assets (70,785) (77,511)<br />
Increase in property, plant and equipment (804,158) (619,403)<br />
Increase in financial assets (89,147) (154,609)<br />
Disposal of intangible assets 136) –)<br />
Disposal of property, plant and equipment 82,279) 27,934)<br />
Disposal of financial assets 3,047) 12,958)<br />
Net investments (878,628) (810,631)<br />
Changes in inventories (844,233) 113,189)<br />
Changes in trade and other accounts receivable/payable 693,489) (131,300)<br />
Changes in working capital (150,744) (18,111)<br />
Changes in provisions for liabilities and expenses 30,339) 14,426)<br />
Other changes (50,746) 3,632)<br />
Free cash flow 346,814) 518,812)<br />
Extraordinary items, net (15,052) (56,869)<br />
Financial income/expenses (4,218) (19,486)<br />
Income taxes, net (248,643) (173,238)<br />
Treasury share investments (276,482) (23,143)<br />
Other 5,074) 25,030)<br />
Cash flow before dividends (192,507) 271,106)<br />
Dividends paid (298,086) (224,597)<br />
Net cash flow (490,593) 46,509)<br />
Share capital increase <strong>Pirelli</strong> S.p.A. for conversion of bonds 505,479) 496,909)<br />
Share capital increase (minority interest) 688) 7,724)<br />
Changes in share capital 506,167) 504,633)<br />
(in millions of lire)<br />
Changes in net debt (*) (34,806) 536,424)<br />
Net debt at end of year (513,297) (478,491)<br />
(*) Financed by:<br />
Increase (decrease) in long-term loans 833,837) (930,512)<br />
Increase (decrease) in short-term loans (865,912) 479,154)<br />
Decrease (increase) in cash and banks 66,881) (85,066)<br />
34,806) (536,424)<br />
78<br />
i
Consolidated statements of changes in shareholders’ equity<br />
(in millions of lire)<br />
Legal reserve<br />
Share Share premium Consolidation other reserves<br />
capital reserve reserve retained earnings Total<br />
and net income<br />
for year<br />
Balance at December 31, 1996 1,557,089 537,836) 350,310) 827,702) 3,272,937)<br />
Profit distribution, as per resolution of May 12, 1997:<br />
• dividends to shareholders (173,495) (173,495)<br />
• to directors (1,738) (1,738)<br />
Conversion of bonds:<br />
• 5% Lire 1,011,309,130,000 191,119 305,790) 496,909)<br />
Withdrawal for tax on equity 1997 (8,374) (8,374)<br />
Withdrawal for substitute equalization tax on reserves 1997 (786) (786)<br />
Adjustment of net equities of subsidiary companies (129,274) (125,856) (255,130)<br />
Translation adjustment 255,058) 255,058)<br />
Net income for the year 460,095) 460,095)<br />
Balance at December 31, 1997 1,748,208 835,252) 476,094) 985,922) 4,045,476)<br />
Profit distribution, as per resolution of May 15, 1998:<br />
• dividends to shareholders (234,068) (234,068)<br />
• to directors (1,714) (1,714)<br />
Conversion of bonds:<br />
• 5% Lire 1,011,309,130,000 194,415 311,064) 505,479)<br />
Assignment of bonus shares to employees 40,500 (40,500)<br />
Reinstatement of share premium reserve for tax on equity 1997 62) 62)<br />
Withdrawal from share premium reserve to set up reserve<br />
for treasury shares in portfolio (252,351) 252,351)<br />
Adjustment of net equities of subsidiary companies 35,449) (175,555) (140,106)<br />
Translation adjustment (235,963) (235,963)<br />
Net income for the year 481,525) 481,525)<br />
Balance at December 31, 1998 1,983,123 894,027) 275,580) 1,267,961) 4,420,691)<br />
i<br />
79
Reconciliation of net results and shareholders’ equity of <strong>Pirelli</strong> S.p.A.<br />
and corresponding consolidated figures<br />
(in millions of lire)<br />
Share<br />
Consolidation<br />
capital Reserves reserve Net income Total<br />
<strong>Pirelli</strong> S.p.A. 1,983,123 1,680,463 390,935) 4,054,521)<br />
Earnings for the year of consolidated companies<br />
(before consolidation adjustments) 491,803) 491,803)<br />
Capital and reserves of consolidated companies<br />
(before consolidation adjustments) 3,502,816) 3,502,816)<br />
Consolidation adjustments:<br />
– carrying value of investments in consolidated companies (3,561,869) (3,561,869)<br />
– intragroup dividends 403,354) (403,354) –)<br />
– other (68,721) 2,141) (66,580)<br />
Consolidated 1,983,123 1,680,463 275,580) 481,525) 4,420,691)<br />
80<br />
i
Consolidated balance sheets (in thousands of euro)<br />
Assets<br />
(in thousands of euro)<br />
12.31.1998 12.31.1997<br />
A) Capital subscription rights<br />
Portion uncalled 20 21<br />
B) Fixed assets<br />
I) Intangible assets<br />
Formation costs 5,931 3,152<br />
Patents and design patent rights 7,093 4,223<br />
Concessions, licenses, trademarks and similar rights 597 309<br />
Goodwill 12,990 18,136<br />
Intangible assets in progress and payments on account 6,961 1,464<br />
Other intangible assets 44,050 41,562<br />
Total intangible assets 77,622 68,846<br />
II) Property, plant and equipment<br />
Land and buildings 598,062 606,437<br />
Plant and machinery 1,120,961 1,114,487<br />
Industrial and commercial equipment 114,046 86,154<br />
Other property, plant and equipment 89,453 96,847<br />
Assets under construction and payments on account 139,066 162,018<br />
Total property, plant and equipment 2,061,588 2,065,943<br />
III) Financial assets<br />
Investments in:<br />
a) Subsidiaries 25,140 –<br />
b) Associated companies 32,143 33,197<br />
c) Other companies 79,276 78,696<br />
Financial receivables:<br />
b.2) Associated companies due beyond 1 year 201 121<br />
d.1) Other companies due within 1 year – 77<br />
d.2) Other companies due beyond 1 year 57,785 51,865<br />
Other securities 17,945 7,304<br />
Treasury shares 151,093 11,952<br />
Total financial assets 363,583 183,212<br />
Total fixed assets 2,502,793 2,318,001<br />
C) Current assets<br />
I) Inventories<br />
Raw materials, auxiliaries and consumables 192,893 161,613<br />
Work in process and semifinished products 163,843 142,494<br />
Work in progress against orders 243,580 36,087<br />
Finished products and goods for resale 499,955 365,350<br />
Advances 7,078 7,725<br />
Total inventories 1,107,349 713,269<br />
II) Receivables<br />
Trade 1,279,457 1,367,892<br />
Subsidiaries 5,694 –<br />
Associated companies 47,913 11,407<br />
Parent companies 271,091 58,607<br />
Other receivables 700,934 705,581<br />
Total receivables 2,305,089 2,143,487<br />
III) Current financial assets<br />
Other securities 300,411 421,038<br />
Total current financial assets 300,411 421,038<br />
i<br />
81
Assets (continued)<br />
(in thousands of euro)<br />
12.31.1998 12.31.1997<br />
IV) Cash and banks<br />
Bank and postal deposits 500,146 422,109<br />
Checks 6,056 839<br />
Cash on hand 7,024 4,193<br />
Total cash and banks 513,226 427,141<br />
Total current assets 4,226,075 3,704,935<br />
D) Accrued income and prepaid expenses<br />
Accrued income 158,123 27,969<br />
Prepaid expenses 21,381 20,081<br />
Total accrued income and prepaid expenses 179,504 48,050<br />
Total assets 6,908,392 6,071,007<br />
82<br />
i
Liabilities and shareholders’ equity<br />
(in thousands of euro)<br />
12.31.1998 12.31.1997<br />
A) Shareholders’ equity<br />
– of <strong>Pirelli</strong> S.p.A. 2,283,097 2,089,314<br />
I) Share capital 1,024,198 902,874<br />
II) Share premium reserve 461,726 431,372<br />
III) Revaluation reserves 2,855 2,855<br />
IV) Legal reserve 180,575 160,834<br />
V) Reserve for treasury shares in portfolio 151,093 11,952<br />
VI) Statutory reserves – –<br />
VII) Other reserves:<br />
a) Consolidation reserve 142,325 245,882<br />
b) Sundry reserves 43,003 43,003<br />
VIII) Retained earnings 28,635 52,923<br />
IX) Net income for the year 248,687 237,619<br />
– Minority interest 170,183 193,790<br />
a) Capital and reserves 142,935 167,140<br />
b) Net income for the year 27,248 26,650<br />
Total shareholders’ equity 2,453,280 2,283,104<br />
B) Provisions for liabilities and expenses<br />
Pensions and similar obligations 252,729 210,868<br />
Income taxes 139,447 150,838<br />
Other 170,607 140,391<br />
Total provisions for liabilities and expenses 562,783 502,097<br />
C) Provision for employees’ leaving indemnity 159,098 172,318<br />
D) Payables<br />
Bonds 500,020 1,137<br />
Convertible bonds – 262,055<br />
Bank borrowings 910,229 876,384<br />
Other financial companies 137,274 101,718<br />
Advances from customers 366,091 308,916<br />
Trade 923,611 795,678<br />
Associated companies 12,363 11,402<br />
Parent companies 29,686 32,963<br />
Taxes 230,996 232,928<br />
Social security 46,118 51,728<br />
Other payables 249,138 233,771<br />
Total payables 3,405,526 2,908,680<br />
E) Accrued liabilities and deferred income<br />
Accrued liabilities 313,571 191,102<br />
Deferred income 14,134 13,706<br />
Total accrued liabilities and deferred income 327,705 204,808<br />
Total liabilities and shareholders’ equity 6,908,392 6,071,007<br />
i<br />
83
Memorandum accounts<br />
(in thousands of euro)<br />
12.31.1998 12.31.1997<br />
Personal guarantees<br />
– Guarantees on behalf of other companies 1,158 12,089<br />
1,158 12,089<br />
Third party assets held in deposit<br />
– Securities held in deposit 444,621 428,382<br />
– Goods in process 1,385 765<br />
446,006 429,147<br />
Assets held by third parties<br />
– Securities held as guarantees and sureties 12,745 13,316<br />
– Securities held in deposit 915,931 981,478<br />
– Goods in process 3,774 5,486<br />
932,450 1,000,280<br />
Commitments<br />
– Capital expenditures 16,276 41,166<br />
– Lease obligations – 322<br />
– Other commitments – 65<br />
16,276 41,553<br />
Other memorandum accounts<br />
– Potential losses for risk of default on discounted bills 1,778 15,731<br />
1,778 15,731<br />
1,397,668 1,498,800<br />
84<br />
i
Consolidated statements of income (in thousands of euro)<br />
(in thousands of euro)<br />
1998) 1997)<br />
A) Production value<br />
Revenues from sales and services 5,486,582) 5,818,004)<br />
Changes in inventories of work in process, semifinished and finished products 100,543) (15,000)<br />
Changes in work in progress against orders 103,377) (11,432)<br />
Increase in property, plant and equipment 10,259) 12,074)<br />
Other revenues and income:<br />
a) Miscellaneous 116,738) 78,995)<br />
b) Government grants 4,213) 5,741)<br />
Total production value 5,821,712) 5,888,382)<br />
B) Production costs<br />
Raw materials, auxiliaries, consumables and goods for resale (2,591,325) (2,646,924)<br />
Service expenses (989,370) (960,682)<br />
Lease and rent expenses (57,968) (56,070)<br />
Personnel costs (1,335,077) (1,318,700)<br />
Amortization, depreciation and write-downs:<br />
a) Amortization of intangible assets (24,465) (26,093)<br />
b) Depreciation of property, plant and equipment (284,459) (268,253)<br />
c) Other write-downs of fixed assets (113) (560)<br />
d) Write-downs of receivables included in current assets and cash and banks (12,866) (9,523)<br />
Changes in inventories of raw materials, auxiliaries, consumables and goods for resale 38,938) (21,206)<br />
Other accruals (12,307) (8,839)<br />
Other operating expenses (140,345) (179,251)<br />
Total production costs (5,409,357) (5,496,101)<br />
Difference between production value and production costs 412,355) 392,281)<br />
C) Financial income and expenses<br />
Investment income 7,864) 8,696)<br />
Other financial income:<br />
a) from receivables included in fixed assets 636) 50)<br />
b) from securities included in fixed assets 3,584) 5,496)<br />
c) from securities included in current assets 45,874) 44,529)<br />
d) Income other than the above 220,999) 163,670)<br />
Interest and other financial expenses (273,511) (225,681)<br />
Total financial income and expenses 5,446) (3,240)<br />
D) Valuation adjustments to financial assets<br />
Revaluations 790) 792)<br />
Write-downs (6,470) (6,723)<br />
Total adjustments (5,680) (5,931)<br />
E) Extraordinary items<br />
Extraordinary income 52,709) 31,262)<br />
Extraordinary expenses (60,482) (60,633)<br />
Total extraordinary items (7,773) (29,371)<br />
Income before income taxes 404,348) 353,739)<br />
Income taxes (128,413) (89,470)<br />
Net income for the year 275,935) 264,269)<br />
Group 248,687) 237,619)<br />
Minority interest 27,248) 26,650)<br />
i<br />
85
List of investments<br />
Companies consolidated using the full consolidation method<br />
Percentage<br />
Company Activity Headquarters Share Capital ownership Held by<br />
Subsidiaries<br />
Europe<br />
Austria<br />
<strong>Pirelli</strong> Gesellschaft mbH Tyres Vienna AS/000 10,000 100.00% Lunares S.A.<br />
Belgium<br />
<strong>Pirelli</strong> Tyres Belux S.A.<br />
(formerly <strong>Pirelli</strong> Tyres Benelux S.A.) Tyres Brussels B.F./000 28,000 100.00% Lunares S.A.<br />
France<br />
Cables <strong>Pirelli</strong> S.A. Cables and Systems Saint Maurice FF/000 900,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
Eurelectric S.A. Cables and Systems La Bresse FF/000 26,325 100.00% Cables <strong>Pirelli</strong> S.A.<br />
Pneus <strong>Pirelli</strong> S.A. Tyres Puteaux FF/000 20,064 100.00% Lunares S.A.<br />
Germany<br />
Bergmann Kabel und Leitungen GmbH Cables and Systems Schwerin DM/000 2,000 100.00% <strong>Pirelli</strong> Kabel und Systeme Holding GmbH<br />
Deutsche <strong>Pirelli</strong> Reifen Holding GmbH Financial Breuberg/Odenwald DM/000 15,050 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
ISO Ind. Spedition Odenwald GmbH Tyres Breuberg/Odenwald DM/000 50 100.00% <strong>Pirelli</strong> Reifenwerke GmbH & Co. K.G.<br />
Materialverwertungsgesellschaft<br />
Breuberg GmbH Tyres Breuberg/Odenwald DM/000 50 100.00% Deutsche <strong>Pirelli</strong> Reifen Hold. GmbH<br />
Metzeler Reifen GmbH Tyres Breuberg/Odenwald DM/000 32,000 100.00% <strong>Pirelli</strong> Deutschland A.G.<br />
<strong>Pirelli</strong> Deutschland A.G. Tyres Breuberg/Odenwald DM/000 51,000 98.94% Deutsche <strong>Pirelli</strong> Reifen Hold. GmbH<br />
<strong>Pirelli</strong> Elektrik GmbH Cables and Systems Breuberg/Odenwald DM/000 200 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Kabel und Systeme Holding GmbH<br />
(formerly Elvira 98<br />
Vermögensverwaltungs GmbH) Cables and Systems Berlin DM/000 50 99.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
1.00% <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
<strong>Pirelli</strong> Kabel Grundstücksverwaltungs GmbH<br />
(formerly Betty 98<br />
Vermögensverwaltungs GmbH) Cables and Systems Berlin DM/000 50 100.00% <strong>Pirelli</strong> Kabel und Systeme Holding GmbH<br />
<strong>Pirelli</strong> Kabel und Systeme Beteiligungs GmbH<br />
(formerly Daisy<br />
Vermögensverwaltungs GmbH) Cables and Systems Berlin DM/000 50 100.00% <strong>Pirelli</strong> Kabel und Systeme Holding GmbH<br />
<strong>Pirelli</strong> Quante GmbH Cables and Systems Wuppertal DM/000 6,050 70.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Reifenwerke GmbH & Co. K.G. Tyres Breuberg/Odenwald DM/000 70,000 100.00% <strong>Pirelli</strong> Deutschland A.G.<br />
<strong>Pirelli</strong> Reifenwerke Geschaeftsfuehrungs GmbH Services Breuberg/Odenwald DM/000 50 100.00% <strong>Pirelli</strong> Deutschland A.G.<br />
Pneumobil GmbH Tyres Breuberg/Odenwald DM/000 507 99.62% <strong>Pirelli</strong> Reifenwerke GmbH & Co. K.G.<br />
<strong>Pirelli</strong> Kabel und Systeme GmbH & Co. KG<br />
(formerly Siemens Starkstromkable<br />
GmbH & Co. KG) Cables and Systems Berlin DM/000 10,000 100.00% <strong>Pirelli</strong> Kabel und Systeme Beteiligungs GmbH<br />
<strong>Pirelli</strong> Kabel und Systeme Verwaltungs GmbH<br />
(formerly Siemens Starkstromkable<br />
Verwaltungsgesellschaft mbh) Cables and Systems Berlin DM/000 50 100.00% <strong>Pirelli</strong> Kabel und Systeme Beteiligungs GmbH<br />
Veith Wohnungsbau GmbH Real Estate Breuberg/Odenwald DM/000 250 100.00% <strong>Pirelli</strong> Deutschland A.G.<br />
Greece<br />
Antem Representations & Trading Co.<br />
Ltd in liquidation Tyres Athens Drs./000 1,000 95.00% <strong>Pirelli</strong> Hellas S.A.<br />
Diafimisis Roda Ltd (in liquidation) Advertising Athens Drs./000 3,000 99.33% Elastika <strong>Pirelli</strong> S.A.<br />
0.33% Antem Repr.&Trading Co Ltd<br />
Elastika <strong>Pirelli</strong> S.A. Tyres Athens Drs./000 557,000 99.90% Lunares S.A.<br />
0.10% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
<strong>Pirelli</strong> Hellas S.A. in liquidation Tyres Athens US$/000 22,050 79.86% <strong>Pirelli</strong> Tyre Holding N.V.<br />
Hungary<br />
<strong>Pirelli</strong> Construction Hungary Limited Cables and Systems Budapest HF/000 1,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Hungary Tyre Trading<br />
and Services Limited Tyres Budaors HF/000 1,000 100.00% Lunares S.A.<br />
86<br />
i
Percentage<br />
Company Activity Headquarters Share Capital ownership Held by<br />
Italy<br />
Centro Servizi Amministrativi <strong>Pirelli</strong> S.r.l. Services Milan Lire/mill. 100 100.00% <strong>Pirelli</strong> S.p.A.<br />
Cerrini Gomme S.r.l. Tyres Genoa Lire/mill. 536 70.00% Sistema Puntogomme S.p.A.<br />
Fibre Ottiche Sud - F.O.S. S.p.A. Optical fibers Battipaglia (SA) Lire/mill. 10,000 50.00% <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
Fintheta S.p.A. Real estate Milan Lire/mill. 500 100.00% Steelcord S.p.A.<br />
Kallithea Immobiliare S.r.l. Real estate Milan Lire/mill. 20 100.00% <strong>Pirelli</strong> S.p.A.<br />
Istituto Piero <strong>Pirelli</strong> S.p.A. Training Milan Lire/mill. 400 80.00% <strong>Pirelli</strong> S.p.A.<br />
10.00% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
10.00% <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
Italagom S.r.l. Tyres Varese Lire/mill. 100 98.00% Agom S.A. Bioggio<br />
Neri Gomme & C. S.r.l. (in liquidation) Tyres Milan Lire/mill. 20 100.00% Sistema Puntogomme S.p.A.<br />
Operazione Zara S.r.l. Real estate Milan Lire/mill. 20 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Cavi e Sistemi S.p.A. Cables and Systems holding comp. Milan Lire/mill. 351,335 98.75% <strong>Pirelli</strong> S.p.A.<br />
1.25% <strong>Pirelli</strong> Société Générale S.A.<br />
<strong>Pirelli</strong> Informatica S.p.A. Inform. systems Milan Lire/mill. 1,000 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Metzeler Motovelo S.r.l. Tyres Milan Lire/mill. 9,000 100.00% Metzeler Reifen GmbH<br />
<strong>Pirelli</strong> Nastri Tecnici S.p.A. Sundry Milan Lire/mill. 754 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
(formerly <strong>Pirelli</strong> Pneumatici Holding<br />
Italia S.r.l.) Financial Milan Lire/mill. 115,000 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
<strong>Pirelli</strong> Pneumatici S.p.A. (formerly<br />
<strong>Pirelli</strong> Coordinamento Pneumatici S.p.A.) Tyres Milan Lire/mill. 366,000 100.00% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
<strong>Pirelli</strong> Servizi Finanziari S.p.A. Financial Milan Lire/mill. 3,800 100.00% <strong>Pirelli</strong> S.p.A.<br />
P S F S.r.l. (in liquidation) Cables and Systems Milan Lire/mill. 198 51.00% <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
Polo Viaggi S.r.l. Travel Agency Milan Lire/mill. 90 100.00% <strong>Pirelli</strong> S.p.A.<br />
Servizi Aziendali <strong>Pirelli</strong> S.C.p.A. Services Milan Lire/mill. 200 93.00% <strong>Pirelli</strong> S.p.A.<br />
1.00% <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
1.00% <strong>Pirelli</strong> Pneumatici S.p.A.<br />
1.00% Polo Viaggi S.r.l.<br />
1.00% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
Soc. Italiana Cavi Elettrici - Sice S.p.A.<br />
(in liquidation) Cables and Systems Milan Lire/mill. 10,000 100.00% <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
Sistema Puntogomme S.p.A. Tyres Milan Lire/mill. 6,000 100.00% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
Steelcord S.p.A. Financial Milan Lire/mill. 1,000 100.00% <strong>Pirelli</strong> S.p.A.<br />
Tortona Test Area S.p.A. (in liquidation) Tyres Milan Lire/mill. 1,000 100.00% <strong>Pirelli</strong> Pneumatici S.p.A.<br />
Trefin S.r.l. Financial Milan Lire/mill. 8,159 100.00% <strong>Pirelli</strong> S.p.A.<br />
Luxembourg<br />
Gamirco S.A. Financial Luxembourg SF/000 2,100 99.99% <strong>Pirelli</strong> Société Générale S.A.<br />
<strong>Pirelli</strong> Finance (Luxembourg) S.A.<br />
(formerly <strong>Pirelli</strong> & C. International<br />
(Luxembourg) S.A.) Financial Luxembourg Lire/mill. 460,000 100.00% <strong>Pirelli</strong> S.p.A.<br />
The Netherlands<br />
<strong>Pirelli</strong> Cable Holding N.V. Cables and Systems holding comp. Breukelen Nlg/000 405,490 100.00% <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
<strong>Pirelli</strong> Finance (Holding) N.V. Financial Breukelen Nlg/000 53,966 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Tyre Holding N.V. Tyre holding comp. Amsterdam Nlg/000 1,240,880 99.81% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Tyres Nederland B.V. (formerly<br />
<strong>Pirelli</strong> UK International Finance B.V.) Tyres Breukelen Nlg/000 40 100.00% Lunares S.A.<br />
Sipir Finance N.V. Financial Rotterdam Nlg/000 139,500 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
Poland<br />
<strong>Pirelli</strong> Polska Sp.zo.o. Tyres Warsaw Zloty 6,257,708,500 100.00% Lunares S.A.<br />
i<br />
87
Percentage<br />
Company Activity Headquarters Share Capital ownership Held by<br />
Portugal<br />
Desco Fabrica Portuguesa de Material<br />
Electrico e Electronico S.A. Cables and Systems Arcozelo Vngaia Escudos/000 309,000 70.91% Cables <strong>Pirelli</strong> S.A.<br />
29.09% Eurelectric S.A.<br />
Spain<br />
<strong>Pirelli</strong> Cables y Systemas S.A.<br />
(formerly Cables <strong>Pirelli</strong> S.A.) Cables and Systems Barcelona Ptas./000 5,700,000 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
Omnia Motor S.A. Tyres Barcelona Ptas./000 250,000 100.00% <strong>Pirelli</strong> Neumaticos S.A.<br />
<strong>Pirelli</strong> Neumaticos S.A. Tyres Barcelona Ptas./000 7,500,000 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
<strong>Pirelli</strong> Esmar S.A. Cables and Systems Torredembarra Ptas./000 1,450,000 100.00% <strong>Pirelli</strong> Cables y Sistemas S.A.<br />
Sweden<br />
<strong>Pirelli</strong> Scandinavia AB Tyres Stockholm SK/000 950 100.00% Lunares S.A.<br />
Switzerland<br />
Agom S.A. Tyres Conthey SF/000 50 51.00% Lunares S.A.<br />
Agom S.A. Bioggio Tyres Bioggio SF/000 250 51.00% Lunares S.A.<br />
Agom S.A. Locarno Tyres Locarno SF/000 50 51.00% Lunares S.A.<br />
Agom S.A. Lugano Tyres Lugano SF/000 102 51.00% Lunares S.A.<br />
Biasi S.A. Tyres Lugano SF/000 250 51.00% Lunares S.A.<br />
Lunares S.A. Tyre holding comp. Basel SF/000 10,000 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
<strong>Pirelli</strong> Cables and Systems S.A. Cables and Systems Basel SF/000 500 95.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
5.00% <strong>Pirelli</strong> Société Générale S.A.<br />
<strong>Pirelli</strong> Produkte A.G. Cables and Systems Basel SF/000 9,500 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Société de Services S.a.r.l. Financial Basel SF/000 50 100.00% <strong>Pirelli</strong> Société Générale S.A.<br />
<strong>Pirelli</strong> Société Générale S.A. Financial Basel SF/000 140,000 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Tyre (Europe) S.A. Tyres Basel SF/000 1,000 100.00% Lunares S.A.<br />
RTS Ring Tread System (Suisse) S.A. Tyres Bioggio SF/000 50 51.00% Lunares S.A.<br />
Turkey<br />
Celikord A.S. Tyres Istanbul TL/mil. 2,100,000 50.47% <strong>Pirelli</strong> Tyre Holding N.V.<br />
0.27% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
0.27% <strong>Pirelli</strong> Deutschland A.G.<br />
Turk-<strong>Pirelli</strong> Lastikleri A.S. Tyres Istanbul TL/mil. 9,300,000 61.58% <strong>Pirelli</strong> Tyre Holding N.V.<br />
0.08% <strong>Pirelli</strong> Deutschland A.G.<br />
0.08% <strong>Pirelli</strong> UK Tyres Ltd<br />
0.08% <strong>Pirelli</strong> Pneumatici S.p.A.<br />
0.08% Lunares S.A.<br />
0.08% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
0.08% Metzeler Reifen GmbH<br />
0.08% <strong>Pirelli</strong> Reifenwerke GmbH & Co. K.G.<br />
0.08% <strong>Pirelli</strong> Neumaticos S.A.<br />
United Kingdom<br />
Aberdare Cables Ltd Cables and Systems London £/000 610 100.00% <strong>Pirelli</strong> General plc<br />
CTC 1994 Limited Tyres London £ 984 100.00% Central Tyre Ltd<br />
Central Tyre Ltd Tyres London £/000 100 100.00% <strong>Pirelli</strong> UK Tyres Ltd<br />
Courier Tyre Company Ltd Tyres London £/000 10 100.00% <strong>Pirelli</strong> UK Tyres Ltd<br />
CPK Auto Products Ltd Tyres London £/000 10 100.00% <strong>Pirelli</strong> UK Tyres Ltd<br />
P&AJ Limited (formetly E.W. Avent Ltd)<br />
in liquidation Cables and Systems London £/000 6,250 100.00% <strong>Pirelli</strong> General plc<br />
Focom Systems International Ltd Cables and Systems London £/000 10 100.00% <strong>Pirelli</strong> General plc<br />
<strong>Pirelli</strong> Cables Ltd Cables and Systems London £/000 100 100.00% <strong>Pirelli</strong> General plc<br />
<strong>Pirelli</strong> Construction Company Ltd Cables and Systems London £/000 8,000 100.00% <strong>Pirelli</strong> General plc<br />
<strong>Pirelli</strong> Focom Ltd Cables and Systems London £/000 6,447 100.00% <strong>Pirelli</strong> General plc<br />
<strong>Pirelli</strong> Focom Networks Ltd Cables and Systems London £ 2 100.00% <strong>Pirelli</strong> General plc<br />
88<br />
i
Percentage<br />
Company Activity Headquarters Share Capital ownership Held by<br />
<strong>Pirelli</strong> General plc Cables and Systems London £/000 102,100 100.00% <strong>Pirelli</strong> UK plc “B”<br />
<strong>Pirelli</strong> Tyres Ltd Tyres London £/000 16,000 100.00% <strong>Pirelli</strong> UK Tyres Ltd<br />
<strong>Pirelli</strong> UK Employee Share Trustee Limited Financial London £ 2 100.00% <strong>Pirelli</strong> UK plc “C”<br />
<strong>Pirelli</strong> UK Finance Ltd Financial London £/000 6,969 100.00% <strong>Pirelli</strong> UK plc “C”<br />
<strong>Pirelli</strong> UK plc “A” Tyre holding comp. London £/000 57,354 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
<strong>Pirelli</strong> UK plc “B” Cables and Systems holding comp. London £/000 54,299 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> UK plc “C” Finance holding comp. London £/000 11,626 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> UK Tyres Ltd Tyres London £/000 56,819 100.00% <strong>Pirelli</strong> UK plc “A”<br />
North America<br />
Canada<br />
<strong>Pirelli</strong> Cables and Systems Inc.<br />
(formerly <strong>Pirelli</strong> Canada Inc.) Cables and Systems St Jean sur Richelieu Can$/000 2,800 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Tire Inc. Tyres Ottawa Can$/000 6,000 100.00% Lunares S.A.<br />
U.S.A.<br />
Metzeler Motorcycle Tire<br />
North America Corp. Tyres Seattle (Washington) US$/000 150 100.00% Metzeler Reifen GmbH<br />
<strong>Pirelli</strong> Cables and Systems LLC Cables and Systems Wilmington (Delaware) US$ 1 100.00% <strong>Pirelli</strong> North America Inc. “B”<br />
<strong>Pirelli</strong> Construction Services Inc. Cables and Systems Dover (Delaware) US$/000 1 100.00% <strong>Pirelli</strong> Cables and Systems LLC<br />
<strong>Pirelli</strong> Jacobson Inc. Cables and Systems Dover (Delaware) US$/000 2 100.00% <strong>Pirelli</strong> Cables and Systems LLC<br />
<strong>Pirelli</strong> Newco, Inc. Cables and Systems Wilmington (Delaware) US$ 0.1 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> North America Inc. “A” Tyres Wilmington (Delaware) US$ 3 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
<strong>Pirelli</strong> North America Inc. “B” Cables and Systems Wilmington (Delaware) US$ 7 100.00% <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
<strong>Pirelli</strong> Tire LLC Tyres Wilmington (Delaware) US$ 1 100.00% <strong>Pirelli</strong> North America Inc. “A”<br />
Central/South America<br />
Argentina<br />
Fipla S.A. Cables and Systems Buenos Aires Peso 1 66.97% <strong>Pirelli</strong> Cons. Cond. Inst. SAIC<br />
<strong>Pirelli</strong> Consultora Conductores<br />
e Instalaciones S.A.I.C. Cables and Systems Buenos Aires Peso 2,227 100.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
<strong>Pirelli</strong> Argentina de Mandatos S.A. Services Buenos Aires Peso/000 500 100.00% <strong>Pirelli</strong> Société Générale S.A.<br />
<strong>Pirelli</strong> Cables S.A.I.C. Cables and Systems Buenos Aires Peso/000 46,588 69.45% <strong>Pirelli</strong> Cons. Cond. Inst. SAIC<br />
23.59% <strong>Pirelli</strong> Cable Holding N.V.<br />
4.46% <strong>Pirelli</strong> Cables S.A.I.C.<br />
1.85% <strong>Pirelli</strong> Financ. Services Co NV<br />
<strong>Pirelli</strong> Neumaticos S.A.I.C. Tyres Buenos Aires Peso/000 19,017 99.02% <strong>Pirelli</strong> Tyre Holding N.V.<br />
0.98% <strong>Pirelli</strong> Pneum. Hold. S.p.A.<br />
Tel 3 S.A. Cables and Systems Buenos Aires Peso/000 11,075 51.00% <strong>Pirelli</strong> Cables S.A.I.C.<br />
Brazil<br />
Muriae’ Ltda Financial Santo Andrè Real 52,000 100.00% <strong>Pirelli</strong> Pneus S/A<br />
<strong>Pirelli</strong> Pneus Nordeste Ltda<br />
(formerly Brasildocks Ltda) Tyres Feira de Santana Real 4,784,343 100.00% <strong>Pirelli</strong> Pneus S/A<br />
<strong>Pirelli</strong> Produtos Especiais Ltda Cables and Systems Cerquilho Real 42,020,506 100.00% <strong>Pirelli</strong> Cabos S/A<br />
<strong>Pirelli</strong> S.A. Financial Santo Andrè Real 29,545,309 100.00% <strong>Pirelli</strong> S.p.A.<br />
<strong>Pirelli</strong> Componentes Industriais Ltda Tyres Sao Paulo Real 99,927,547 100.00% <strong>Pirelli</strong> Pneus S/A<br />
<strong>Pirelli</strong> Pneus S/A Tyres Santo Andrè Real 264,618,982 42.45% <strong>Pirelli</strong> Pneumatici S.p.A.<br />
41.32% <strong>Pirelli</strong> Tyre Holding N.V.<br />
3.00% <strong>Pirelli</strong> S.A.<br />
<strong>Pirelli</strong> Cabos S/A Cables and Systems Santo Andrè Real 153,367,981 73.81% <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
11.11% <strong>Pirelli</strong> S.A.<br />
Pneuac Comercial e Importadora Ltda Tyres Sao Paulo Real 13,929,454 100.00% <strong>Pirelli</strong> Pneus S/A<br />
i<br />
89
Percentage<br />
Company Activity Headquarters Share Capital ownership Held by<br />
Same da Amazonia S/A Cables and Systems Manaus Real 45,558,000 99.99% <strong>Pirelli</strong> Cabos S/A<br />
0.01% Pneuac Com. e Import. Ltda<br />
Solac - Sociedade Laminadora<br />
de Cobre Ltda Cables and Systems Jacarei Real 8,346,000 89.00% <strong>Pirelli</strong> Cabos S/A<br />
Chile<br />
<strong>Pirelli</strong> E y T S.A. Cables and Systems Santiago Ch.Peso/000 600,000 60.00% <strong>Pirelli</strong> Instalaciones Chile S.A.<br />
<strong>Pirelli</strong> Instalaciones Chile S.A. Cables and Systems Santiago Ch.Peso/000 918,707 90.00% <strong>Pirelli</strong> Cons. Cond. Inst. SAIC<br />
10.00% Cite S.A.<br />
<strong>Pirelli</strong> Neumaticos Chile Limitada Tyres Santiago US.$/000 20 95.00% <strong>Pirelli</strong> Pneus S/A<br />
5.00% Pneuac Com. e Import. Ltda<br />
Dutch Antilles<br />
<strong>Pirelli</strong> Financial Services<br />
Company N.V. Financial Curaçao US$/000 11,000 100.00% <strong>Pirelli</strong> Société Générale S.A.<br />
<strong>Pirelli</strong> Insurance & Reinsurance<br />
Company N.V. Insurance Curaçao US$/000 10,000 100.00% <strong>Pirelli</strong> Financ. Services Co NV<br />
Mexico<br />
Pirelmex S.A. de C.V. Tyres Mexico City Mex. Peso 425,000 98.00% <strong>Pirelli</strong> Pneus S.A.<br />
2.00% Pneuac Comercial e Importadora Ltda<br />
Uruguay<br />
Cite S.A. Cables and Systems Montevideo Ur. Peso/000 4,900 100.00% <strong>Pirelli</strong> Cables S.A.I.C.<br />
Venezuela<br />
Neumaticos de Venezuela C.A. Tyres Caracas Bol. 4,650,980 96.21% <strong>Pirelli</strong> Tyre Holding N.V.<br />
<strong>Pirelli</strong> de Venezuela C.A. Tyres Valencia Bol./000 9,429,570 96.22% <strong>Pirelli</strong> Tyre Holding N.V.<br />
Africa<br />
Ivory Coast<br />
SICABLE - Société Ivoirienne<br />
de Cables S.A. Cables and Systems Abidjan Fr.CFA/mil. 740 51.00% Cables <strong>Pirelli</strong> S.A.<br />
Oceania<br />
Australia<br />
<strong>Pirelli</strong> Cables Australia Ltd Cables and Systems Minto - N.S.W. Austr.$/000 21,500 51.00% <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
<strong>Pirelli</strong> Tyres Australia Pty Ltd Tyres Pymble - N.S.W. Austr.$/000 150 100.00% Lunares S.A.<br />
New Zealand<br />
<strong>Pirelli</strong> Cables NZ Ltd Cables and Systems Auckland nz$/000 10 100.00% <strong>Pirelli</strong> Cables Australia Ltd<br />
<strong>Pirelli</strong> Tyres (NZ) Ltd Tyres Wellington nz$ 100 100.00% <strong>Pirelli</strong> Tyres Australia Pty Ltd<br />
Asia<br />
India<br />
<strong>Pirelli</strong> Cables (India) Private Limited Cables and Systems New Delhi Ind. Rupie1,954,940 99.99% <strong>Pirelli</strong> Cable Holding N.V.<br />
0.01% <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
Indonesia<br />
PT <strong>Pirelli</strong> Cables Indonesia Cables and Systems Jakarta US$/000 35,000 50.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
Japan<br />
P & A Y.K. (formerly Saoki International Y.K.) Tyres Tokyo Yen/000 6,000 50.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
<strong>Pirelli</strong> K.K. Tyres Tokyo Yen/000 40,000 100.00% Lunares S.A.<br />
Malaysia<br />
Submarine Cable Installation Sdn Bhd Cables and Systems Kuala Lumpur Ringgit/000 10 99.00% <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
1.00% <strong>Pirelli</strong> Cable Systems Pte Ltd<br />
Singapore<br />
Materials Purchasing Pte Ltd Tyres Singapore Sing. $/000 250 100.00% <strong>Pirelli</strong> Tyre Holding N.V.<br />
<strong>Pirelli</strong> Asia Pte Ltd Tyres Singapore Sing. $ 2 100.00% Lunares S.A.<br />
<strong>Pirelli</strong> Cable Systems Pte Ltd Cables and Systems Singapore Sing. $/000 25 50.00% <strong>Pirelli</strong> General plc<br />
50.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
90<br />
i
Investments accounted for using the equity method<br />
Percentage<br />
Company Activity Headquarters Share Capital ownership Held by<br />
Associated companies<br />
Europe<br />
Germany<br />
Drahtcord Saar Geschäftsführungs GmbH Tyres Merzig DM/000 60 50.00% <strong>Pirelli</strong> Deutschland A.G.<br />
Drahtcord Saar GmbH & Co. K.G. Tyres Merzig DM/000 9,000 50.00% <strong>Pirelli</strong> Deutschland A.G.<br />
Kabeltrommel Gesellschaft mbH & Co. K.G. Cables and Systems Cologne DM/000 20,000 27.48% <strong>Pirelli</strong> Kabel und Systeme GmbH & Co. KG<br />
Italy<br />
Axxium Italia S.r.l. (formerly CEN.SER. S.r.l.) Tyres Acqui Terme (AL) Lire/mill. 90 49.00% Sistema Puntogomme S.p.A.<br />
Bologna Gomme S.r.l. Tyres Bologna Lire/mill. 510 40.00% Sistema Puntogomme S.p.A.<br />
Eurofly Service S.p.A. Services Caselle Torinese (TO) Lire/mill. 1,750 43.17% <strong>Pirelli</strong> S.p.A.<br />
Incubatore Tecnologico Bicocca S.r.l.<br />
(in liquidation) Services Milan Lire/mill. 100 40.00% <strong>Pirelli</strong> S.p.A.<br />
Maristel S.p.A. Cables and Systems Milan Lire/mill. 2,000 50.00% <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
Servizio Titoli S.r.l. Services Turin Lire/mill. 100 25.00% <strong>Pirelli</strong> S.p.A.<br />
SMP Melfi S.r.l. Tyres Melito (NA) Lire/mill. 6,800 50.00% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
Sicrem S.p.A. Tyres Pizzighettone (CR) Lire/mill. 18,000 33.33% <strong>Pirelli</strong> Pneumatici Holding S.p.A.<br />
Trelleborg Wheel System S.p.A. Tyres Milan Lire/mill. 2,000 40.00% <strong>Pirelli</strong> Pneumatici S.p.A.<br />
Spain<br />
Optiwire S.L. Cables and Systems Barcelona Ptas./mil. 1 50.00% <strong>Pirelli</strong> Cables y Sistemas S.A.<br />
United Kingdom<br />
Rodco Ltd Cables and Systems Gravesend £/000 5,000 40.00% <strong>Pirelli</strong> General plc<br />
Central/South America<br />
Argentina<br />
Lineas de Transmision de Buenos Aires S.A. Cables and Systems Buenos Aires Peso/000 12 20.00% <strong>Pirelli</strong> Argentina de Mandatos S.A.<br />
Brazil<br />
K.M.P. Cabos Especiais e Sistemas Ltda Cables and Systems Sao Paulo Real 6,600,916 40.00% <strong>Pirelli</strong> Cabos S.A.<br />
Milano Centrale Mercosul Ltda Real estate Barueri Real 2,000,000 30.00% <strong>Pirelli</strong> S.A.<br />
British Virgin Islands<br />
Upper Bright Ltd Cables and Systems Tortola US$/000 17,100 50.00% <strong>Pirelli</strong> Produkte A.G.<br />
Asia<br />
China<br />
Wuxi Tong Ling Cable Company Ltd Cables and Systems Xuelang Town US$/000 25,141 68.02% Upper Bright Ltd<br />
Saudi Arabia<br />
Sicew-Saudi Italian Co.<br />
for Electrical Works Ltd Cables and Systems Jeddah Saudi Rials/000 1,000 34.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
i<br />
91
Other investments in subsidiaries and associated companies<br />
Percentage<br />
Company Activity Headquarters Share Capital ownership Held by<br />
Europe<br />
Austria<br />
<strong>Pirelli</strong> Kabelwerke und Systeme Gmbh Cables and Systems Traiskirchen AS/000 500 100.00% <strong>Pirelli</strong> Cavi e Sistemi S.p.A.<br />
France<br />
LDS France - Soc. de Transport<br />
et Distribution S.A. Distribution La Courneuve FF 657,500 100.00% Steelcord S.p.A.<br />
<strong>Pirelli</strong> Exploitation S.A. Cables and Systems Saint Maurice FF/000 250 99.76% Cables <strong>Pirelli</strong> S.A.<br />
S.T.L. France S.a.r.l. Diversified Prod. Saint Maurice FF 56,600 70.67% Eurelectric S.A.<br />
29.33% Cables <strong>Pirelli</strong> S.A.<br />
Hungary<br />
“Kabel” Gepgyarto Epitoipari<br />
Es Szolgaltato KFT. Cables and Systems Budapest HF/000 328,330 100.00% MKM Magyar Kabel Muvek Rt.<br />
MKM Balassagyarmati Kabelgyar KFT. Cables and Systems Balassagyarmat HF/000 3,000 100.00% MKM Magyar Kabel Muvek Rt.<br />
MKM Erosaramu Kabelgyar KFT. Cables and Systems Budapest HF/000 3,000 100.00% MKM Magyar Kabel Muvek Rt.<br />
MKM Kisteleki Kabelgyar KFT. Cables and Systems Kistelek HF/000 3,000 100.00% MKM Magyar Kabel Muvek Rt.<br />
MKM Magyar Kabel Muvek RT. Cables and Systems Budapest HF/000 7,407,920 80.51% <strong>Pirelli</strong> Cable Holding N.V.<br />
MKM Szegedi Kabelgyar KFT. Cables and Systems Szeged HF/000 3,000 100.00% MKM Magyar Kabel Muvek Rt.<br />
MKM-Eldra Zomanchuzal Gyarto KFT. Cables and Systems Budapest HF/000 1,534,800 43.40% MKM Magyar Kabel Muvek Rt.<br />
Ipoly Kabeldob KFT. Cables and Systems Szecseny HF/000 36,330 25.16% MKM Magyar Kabel Muvek Rt.<br />
Kabel Keszletertekesito BT. Cables and Systems Budapest HF/000 1,239,841 100.00% MKM Magyar Kabel Muvek Rt.<br />
Rumania<br />
S.C. Elcaro S.A. Cables and Systems Slatina RL/000 42,221,625 53.61% Turk Siemens Kablo ve Elektrik Sanayii A.S.<br />
Turkey<br />
Turk Siemens Kablo<br />
ve Elektrik Sanayii A.S. Cables and Systems Bursa TL/mil. 1,260,000 55.88% <strong>Pirelli</strong> Cable Holding N.V.<br />
Africa<br />
South Africa<br />
AFCAB Holdings (Proprietary) Ltd Cables and Systems Sandton Rands 4,000 50.00% <strong>Pirelli</strong> Cable Holding N.V.<br />
African Cables Ltd Cables and Systems Vereeniging Rands 9,886,098 100.00% AFCAB Holdings (Proprietary) Ltd<br />
ATC (Proprietary) Ltd Cables and Systems Brits Rands 632,912 21.00% African Cables Ltd<br />
92<br />
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Board of Statutory Auditors’ Report<br />
The Board of Directors has presented us with the draft financial statements of the Group<br />
holding company, <strong>Pirelli</strong> S.p.A., together with the consolidated financial statements of the<br />
Group at December 31, 1998, prepared in accordance with the provisions of Legislative<br />
Decree No. 127 of April 9, 1991.<br />
The consolidated financial statements show a net income for the year of Lire 534,285<br />
million compared to a net income of Lire 511,696 million for the prior year.<br />
The Board of Directors in its report has commented on the consolidated operations of the<br />
Group and has disclosed, by summarizing the global profit components, the performance<br />
of the Group for the year.<br />
The report also discloses the activities and results of the major Group companies included<br />
in consolidation, R&D activities, significant subsequent events as well as the future<br />
outlook on operations.<br />
The consolidated financial statements have been audited by Reconta Ernst & Young S.p.A..<br />
Based on the procedures carried out, as agreed with the audit firm in accordance with the<br />
provisions of D.P.R. No. 136/1975, as far as our responsibilities are concerned, we would<br />
like to state the following:<br />
– the determination of the companies to be included in consolidation is in compliance<br />
with articles 26 and 28 of Legislative Decree No. 127/1991;<br />
– the investments in subsidiary companies have been consolidated on the line-by-line<br />
consolidation method and the related assets and liabilities have been eliminated against<br />
the underlying net equities, with the exception of the companies of the business<br />
acquired from Siemens that are located in Hungary, Turkey, Rumania and South Africa<br />
which are included in the consolidated financial statements at cost since effective<br />
control was only acquired during the last days of 1998;<br />
– receivables and payables and economic transactions between Group companies have<br />
been eliminated;<br />
– all the financial statements and information used in consolidation refer to the calendar<br />
year 1998;<br />
– the principles adopted in the valuation of the various components of the consolidated<br />
financial statements have been disclosed in the notes, with which we agree. In<br />
particular:<br />
• investments in associated companies are stated using the equity method;<br />
• investments in other companies are stated at cost, reduced by any permanent<br />
diminution in value;<br />
• intangible assets are stated at cost less amortization; amortization is generally<br />
calculated at 20 percent per year, whereas image awareness costs, leasehold<br />
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improvements and loan acquisition costs are amortized over the duration of the<br />
related contract (in any case, not more than 5 years) and patents, concessions,<br />
licenses, trademarks and goodwill are amortized over the residual period to be<br />
benefited (in any case, not more than 10 years);<br />
• deferred taxes have been accounted for by adopting the full allocation method<br />
according to international accounting principles.<br />
The change in accounting principle resulted in a tax charge for the current year of<br />
approximately Lire 13 billion, whereas no adjustment was made to the provision for<br />
the deferred taxation for the deferred taxes of previous years since effect was given in<br />
the financial statements at December 31, 1997;<br />
• exchange differences deriving from the translation into euro of the monetary elements<br />
expressed in the currencies of the countries participating in the euro have been<br />
recorded in the statement of income;<br />
• the amounts shown under the various captions of the consolidated financial<br />
statements are taken from the accounting records of the Group holding company and<br />
from the information transmitted by the investee companies, as verified by the audit<br />
firm of Reconta Ernst and Young S.p.A., which coordinated the audit work and the<br />
aggregation of the audit reports.<br />
Milan, April 26, 1999<br />
The Board of Statutory Auditors<br />
Luigi Guatri - Mario Brughera - Giorgio Oggioni<br />
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Independent Auditors’ Report<br />
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95
Extraordinary part of the shareholders’ meeting<br />
Dear shareholders,<br />
You have been convened to the extraordinary part of the shareholders’ meeting to<br />
discuss three proposed resolutions: the first relating to the merger of Société<br />
Internationale <strong>Pirelli</strong> S.p.A. in our company, the second relating to the procedures for the<br />
disposition of treasury shares and the third relating to the translation of share capital<br />
from Italian lire to euro.<br />
1. Merger<br />
1.a - Illustration and reasons for the merger – Operational objectives<br />
The proposed merger of Société Internationale <strong>Pirelli</strong> S.p.A. in <strong>Pirelli</strong> S.p.A. is part of<br />
broader plan to simplify the corporate structure of the Group.<br />
This plan is being followed according to guidelines outlined and announced in the press<br />
release of the Company on December 3 of the prior year.<br />
In particular, <strong>Pirelli</strong> Partecipazioni, a subsidiary of Société Internationale <strong>Pirelli</strong> and a<br />
shareholder of <strong>Pirelli</strong> S.p.A., was merged by incorporation in Société Internationale <strong>Pirelli</strong><br />
on January 26, 1999 so that the latter would then hold a direct interest in <strong>Pirelli</strong> S.p.A..<br />
Société Internationale <strong>Pirelli</strong> S.p.A. has transferred its own registered office to Milan and<br />
was recorded on the Companies’ Register at file No. 247693.<br />
The merger, upon which you are now called to pass a resolution, will be effected through<br />
the merger by incorporation of Société Internationale <strong>Pirelli</strong> S.p.A. in the subsidiary<br />
<strong>Pirelli</strong> S.p.A..<br />
Therefore this is a so-called inverse merger between a party listed on the Italian stock<br />
exchange (<strong>Pirelli</strong> S.p.A., the merging company, the subsidiary) and a subject that has<br />
shares that are not listed on markets regulated by the European Union (Société<br />
Internationale <strong>Pirelli</strong> S.p.A., the company to be merged, the parent company).<br />
The strategic objective of the plan to simplify the corporate structure, of which the merger<br />
is a part, consists not only of optimizing financial flows but also reducing costs.<br />
The merger, therefore, has a neutral effect on the objectives regarding the industrial<br />
operations of the Group which is headed by <strong>Pirelli</strong> S.p.A. and constitutes, instead, a pure<br />
simplification of the corporate chain that links <strong>Pirelli</strong> S.p.A. to the group holding company<br />
<strong>Pirelli</strong> & C. Accomandita per Azioni.<br />
Since the main business of Société Internationale <strong>Pirelli</strong> S.p.A. is constituted by the same<br />
merging company <strong>Pirelli</strong> S.p.A., it would be appropriate to summarize the prospects of the<br />
latter company for the current year.<br />
<strong>Pirelli</strong> S.p.A. coordinates the management of an industrial Group that has traditionally<br />
been engaged in the cables and systems sector and in the tyres sector.<br />
Generally speaking, the acquisitions made over the last few months (the Power Cables<br />
Divisions of Siemens A.G. and the Australian company Metal Manufacturers Limited)<br />
should begin to contribute to the Group’s results in the second half of the year, thus<br />
lending a balancing effect to the instability caused by the evolution of the crisis in South<br />
America and the recession in the Far East.<br />
As regards the Cables and Systems Sector, in particular, market instability and lower<br />
economic growth below expectations could affect the business. In this context, a<br />
continuation of the decline in prices is also to be expected. The curbing of structure costs,<br />
the reduction of product costs through continual gains in product efficiency, the launch of<br />
new products and the improvement in service will counter the negative factors.<br />
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During 1999, the Company will proceed with the integration of the business bought from<br />
Siemens, with predictable synergic advantages, and the execution of the acquisition of the<br />
Power Cables and Construction Division of Metal Manufacturers Limited in Australia.<br />
As far as the Tyres Sector is concerned, the economic outlook for 1999, although positive,<br />
remains difficult to quantify in view of the complex world economic scenario. The growth<br />
of market demand, in fact, appears inevitably influenced by the persisting crisis in the<br />
emerging nations most affected by the turbulence of the financial markets.<br />
The Sector’s strategy cannot but be directed towards valid programs for internal efficiency,<br />
to be pursued together with a selective investment policy aimed at product and process<br />
innovation and through a decisive restructuring of the operational, corporate and<br />
peripheral functions.<br />
1.b - Value attributed to the companies for the purpose of the exchange – Existence<br />
of appraisals<br />
For purposes of determining the exchange ratio, the companies involved in the merger<br />
were attributed the following values:<br />
Method/Company Earnings Financial<br />
Total value Per unit value Total value Per unit value<br />
(Billions of lire) (Lire) (Billions of lire) (Lire)<br />
Société Internationale<br />
<strong>Pirelli</strong> S.p.A. 13,896 474,415 13,797 462,383<br />
<strong>Pirelli</strong> S.p.A. 11,484 115,718 11,219 115,586<br />
The exchange ratio was determined on the basis of the indications contained in the<br />
appraisal report drawn up by two independent experts, Prof. Angelo Miglietta and Prof.<br />
Paolo Vantellini charged by the companies to the merger to conduct the appraisal.<br />
1.c - Exchange ratio and criteria followed in determining it<br />
The choice of the valuation method used to determine the exchange ratio was founded on<br />
these following considerations implied by the specifics of the merger: the need to arrive at<br />
the definition of the theoretical exchange ratio, the particular relationship which binds the<br />
merging company to the company to be merged, the opportunity to obtain share values<br />
that also reflect the “pure” value, the need to verify that the homogeneity of the estimates<br />
is respected, the opportunity to resort to more than one valuation method to estimate the<br />
exchange ratio and verification methods to control the results reached.<br />
The need to arrive at a theoretical exchange ratio can be explained by the specifics<br />
relating to the control structure of the companies involved in the merger. Société<br />
Internationale <strong>Pirelli</strong> S.p.A. is, in fact, the controlling shareholder of <strong>Pirelli</strong> S.p.A., and its<br />
capital is to a large degree controlled by the group holding company <strong>Pirelli</strong> & C. A.p.A..<br />
<strong>Pirelli</strong> S.p.A. is, however, a company with a large amount of shares traded on the market<br />
(about 51% of ordinary share capital is held by minority interests); therefore this category<br />
of shareholders clearly needs to be protected by determining an exchange ratio that is<br />
both fair and congruous.<br />
The particular relationship which binds the merging company to the company to be<br />
merged is quite important in this case. The latter company, as previously mentioned, holds<br />
the controlling interest in <strong>Pirelli</strong> S.p.A., the merging company, and this investment<br />
constitutes the predominant amount of its assets. From the standpoint of substance, it<br />
should be pointed out that there is a particularly strong relationship between the value of<br />
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97
the two companies, given that that of Société Internationale <strong>Pirelli</strong> S.p.A. is substantially<br />
dependent upon that of <strong>Pirelli</strong> S.p.A., being its predominant asset.<br />
This means that the value of Société Internationale <strong>Pirelli</strong> S.p.A. is less susceptible to<br />
factors than is <strong>Pirelli</strong> S.p.A.; thus, this makes it possible to point out that the variations<br />
in such value (due to different elements, such as the choice of valuation method or the<br />
definition of size to be used) do not lead to any appreciable changes in the exchange<br />
ratio, the congruity of which is almost automatically guaranteed by the roughly<br />
proportional link between the value of Société Internationale <strong>Pirelli</strong> S.p.A. and that of<br />
<strong>Pirelli</strong> S.p.A..<br />
It has also been observed that, if possible, methods should be used which allow the<br />
“pure” value of the company to be reflected. Of course, this does not mean that the<br />
principles upon which the estimates are based for determining the exchange ratio should<br />
be disregarded, but simply that these principles should be respected as much as possible<br />
in the methods that are considered suitable for best reflecting the value of the company.<br />
This need can be explained by the fact that the two companies are listed. Although it is<br />
clear that the values of the shares that will be arrived at do not have the purpose of<br />
expressing an opinion as to the congruity of their value but only on that of their<br />
exchange ratio, it is also clear that this measurement should be provided for the factor<br />
of congruity, by primarily using those methods which also reflect the value.<br />
The need to verify the observance of the principle of homogeneity of the estimates is, as<br />
previously stated, a condition not be ignored in ensuring the congruity of the exchange<br />
ratio. In these circumstances, a particular case of the principle of homogeneity applies:<br />
the need to use different methods for the estimates of the two companies because the<br />
vectors generating the value of in the two cases are different. Without yet identifying the<br />
choice of the methods employed, it should be emphasized that while <strong>Pirelli</strong> S.p.A. has<br />
the characteristics of an industrial holding company diversified into two separate<br />
sectors, in which there is also a component of financial service activities, Société<br />
Internationale <strong>Pirelli</strong> S.p.A. is practically only an investment holding company, and the<br />
holding in <strong>Pirelli</strong> S.p.A. is such as to render the percentage held in other investments<br />
only modest. These considerations, which are quite apparent in view of the economic<br />
structure of the two companies, will have important implications in terms of the choice<br />
of valuation method used in the estimates. However, it can be seen that the two methods<br />
need to be different in order to guarantee the homogeneity of the comparison of the<br />
values, a homogeneity that can be interpreted as the capacity of the pre-chosen methods<br />
to reflect the diverse economic rationales which lead to the formation of the value in the<br />
two cases.<br />
The need to resort to more than one valuation method can be explained by the exigency to<br />
arrive at a pure exchange ratio. Since, in our case, it can be demonstrated that even by<br />
adopting different methods the exchange ratio converges into a tight range, it can be<br />
verified that the pre-chosen ratio represents a “general” value which is almost independent<br />
of the method chosen. In these circumstance, the use of different valuation methods can<br />
only be applied to the case of <strong>Pirelli</strong> S.p.A. since its profitability can be examined from the<br />
various aspects of its vectors of value taken into account by the various methods. In the<br />
case of Société Internationale <strong>Pirelli</strong> S.p.A. it is not possible to contemplate a fruitful<br />
application of a number of methods since its value is defined almost exclusively by that of<br />
its subsidiary <strong>Pirelli</strong> S.p.A..<br />
It should also be recalled that <strong>Pirelli</strong> S.p.A. and Société Internationale <strong>Pirelli</strong> S.p.A. are<br />
listed companies. Consequently, there is a reference market for their value. This is an<br />
interesting fact to take into account, even though the purpose of the estimate is to<br />
determine the pure exchange ratio, that only occasionally can it coincide with the market<br />
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i
prices, in carrying out verification checks. However, it should be pointed out that even<br />
in this application of the principle of homogeneity in the comparison of the two methods<br />
the degree of importance of the market prices of the two stocks is quite different.<br />
<strong>Pirelli</strong> S.p.A., in particular, has a large amount of stock traded on the market, in terms of<br />
both the size of the share capital of the company and the percentage which is not part of<br />
the majority interest and is not concentrated in the hands of minority shareholders that<br />
carry a certain influence. Société Internationale <strong>Pirelli</strong> S.p.A., instead, is in a completely<br />
different situation, at least in its recent history over the last few years. Apart from the<br />
different capitalization of the two companies, for Société Internationale <strong>Pirelli</strong> S.p.A., equal<br />
to a fraction of that of <strong>Pirelli</strong> S.p.A., it should be emphasized that Société Internationale<br />
<strong>Pirelli</strong> S.p.A.’s stock on the market was practically cancelled by the creation of a minority<br />
stockholder base carrying considerable weight. The reduction in the amount of shares<br />
floated and the presence of a minority shareholder of such importance has effectively<br />
polarized the process of determining the market prices, which occur with trading that if<br />
often discontinuous because of the quantity traded. This market situation signifies that the<br />
use of the market price for Société Internationale <strong>Pirelli</strong> S.p.A. is not meaningful. The use<br />
of the market price method, in observing the need for homogeneity, can only be applied to<br />
data regarding <strong>Pirelli</strong> S.p.A. ordinary shares.<br />
Société Internationale <strong>Pirelli</strong> S.p.A. was valued solely by using the equity method, thus<br />
without resorting to a number of methods. To be precise, different values of Société<br />
Internationale <strong>Pirelli</strong> S.p.A. can only be generated in the event that different values are<br />
assumed for the holding in <strong>Pirelli</strong> S.p.A.. This choice was decided, as already<br />
mentioned, by the need to choose a method capable of representing the vectors of value<br />
which characterize the economic structure of the company. Société Internationale<br />
<strong>Pirelli</strong> S.p.A., in fact, is an investment holding company and its predominant asset is the<br />
investment held in <strong>Pirelli</strong> S.p.A.. Changes to the value of the investment can be<br />
translated into almost proportional changes in the value of Société Internationale<br />
<strong>Pirelli</strong> S.p.A..<br />
In order to determine the economic capital of Société Internationale <strong>Pirelli</strong> S.p.A., it is<br />
also important to indicate the potential tax treatment arising on gains generated from the<br />
investments. In this respect, a distinction has to be made between the position generated<br />
by the investment in <strong>Pirelli</strong> S.p.A. and that connected to the other equity investments. For<br />
the latter, the general principle is followed which calls for the determination of a<br />
potential tax charge that is connected to the right to tax the gains at the time of recording<br />
the merger deficit pursuant to the provisions of art. 6 of Legislative Decree No. 358 of<br />
October 8, 1997. In particular, the law grants the right to tax the deficit charged to the<br />
investment account by paying a rate of 27% on the gain over a five year period. This gives<br />
rise to a rounding off of the potential tax rate to 23%. There are no potential tax charges<br />
calculated on the potential gain on the investment in <strong>Pirelli</strong> S.p.A.. This choice is<br />
motivated by the characteristics of the merger transaction. In fact, the merger calls for<br />
the <strong>Pirelli</strong> S.p.A. shares held by Société Internationale <strong>Pirelli</strong> S.p.A. to be almost<br />
completely used for the exchange of the same shares which will be cancelled by the<br />
merger. In this way, the shares avoid being taxed for any reason whatsoever by being<br />
excluded from the assets of the company resulting from the merger, since the assignment<br />
of shares does not constitute taxable material as set forth by article 123 of D.P.R. No. 917<br />
of December 22, 1986.<br />
The valuation of <strong>Pirelli</strong> S.p.A. has been effected by aggregating the results of the valuation<br />
of the three macro areas of its business (Cables and Systems, Tyres and Finance) using the<br />
financial method and the earnings methods based on the consolidated figures. The choice<br />
of the method is justified by the need to give economic value to the factors which define<br />
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the formation of the value in this case, also considering the congruity of the exchange<br />
ratio. A group operating on fiercely competitive global markets, such as <strong>Pirelli</strong> S.p.A.,<br />
shows a value which is obviously strongly explained by competitive factors rather than<br />
elements outside the arena with which its competition operates. Since everyone knows<br />
that the effects of competition reverberate directly on flows — whether they be income or<br />
cash flows — the definition of the value of the group must clearly show how such factors<br />
affect the determination of the value. It is also clear that the choice of methods based on<br />
flows leads to the expression of potential values: but only the potential values carry a<br />
significance in the representation of today’s economic reality in the case of a company<br />
characterized by its participation in a competitive global context and one marked by fierce<br />
competition. In other words, it must be recognized that, in <strong>Pirelli</strong> S.p.A.’s case, estimates<br />
based on methods which make reference to values other than those determined by<br />
carrying out the competitive process, perhaps appropriate for the representation of<br />
economic capital, will lead to results that are not useful, since they do not take into<br />
account the determining value of a company introduced into a competitive global context:<br />
the competition.<br />
Unlevered discounted cash flows method<br />
The financial valuation methods are based on the concept by which the value of a<br />
company is equal to the present value of the cash flows that a company is able to generate<br />
in the future. In effect, different alternative methodologies were developed, among which<br />
the unlevered discounted cash flows analysis method received special attention.<br />
According to this method, used in the estimate for the exchange ratio, the value of the<br />
company can be obtained by adopting the following formula:<br />
n<br />
W = [ ∑ F t / (1 + K o ) t ] + TV + SA - D<br />
t = 1<br />
where:<br />
W = value of economic capital of the company<br />
F t = net operating cash flows during the period<br />
n = number of years in the period for the analytical forecast of cash flows<br />
K o = weighted average costs of capital (WACC)<br />
TV = present value of total final value<br />
D = net financial position<br />
SA = value of surplus assets<br />
In effect, according to such formula, the value of a company is equal to:<br />
– sum of operating net cash flows generated in each of the years assumed for the<br />
analytical forecast, brought to present value using a rate equal to the weighted average<br />
cost of capital, plus<br />
– the market value of the beginning net financial position,<br />
– the value of all the other “surplus assets”, if any, not inherent to operating management<br />
or in any case not considered, for other methodological reasons, among the factors which<br />
contribute to generating operating cash flows,<br />
– the total value, understood as the present value of the operating flows which the<br />
company will continue to generate in periods after those referring to the analytical<br />
forecast.<br />
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In particular, the single important parameters in the formula described are determined as<br />
follows:<br />
Net operating cash flows. These express the financial size of the operating management of<br />
the company and therefore are determined both by transforming the pertinent economic<br />
quantities (operating profit) into effective movements of monetary resources generated in<br />
the normal course of business operations and by considering the outlays made for<br />
investments. These can therefore be determined as follows:<br />
+ EBIT (Operating profit)<br />
- figurative tax effect on operating profit<br />
= NOPLAT (Operating profit net of figurative taxes)<br />
+ depreciation<br />
+ nonmonetary accruals<br />
± ∆ net working capital<br />
± ∆ other liabilities/assets<br />
- investments<br />
+ disposals net of tax effects<br />
= Net operating cash flows<br />
The sum of the present value of the net operating cash flows expresses, in fact, the total<br />
value of the total operating assets of a company and therefore the current value of<br />
operating invested capital. The difference between this value and the value of debt (net<br />
financial position) gives rise to the concise value of the capital attributable to<br />
shareholders.<br />
The net financial position. This expresses the present value of the net debt of the<br />
company and can be different from the simple accounting value when some of the forms<br />
of financing undertaken by the company show an effective cost which is different from the<br />
market terms. Since, in this case, the rate used for the present value calculations of the<br />
flows of remuneration of debt are different from the rate paid to the lender, there is a<br />
differential which emerges between the nominal value and the current value of the debt<br />
which affects the value of the economic capital of the company.<br />
Surplus assets. These are components of the invested capital of the company that are not<br />
inherent to the normal operations of the same and which, since they do not give rise to<br />
“operating cash flows”, have not been valued during the present value calculation of the<br />
same flows. Such assets must therefore be valued separately using specific and<br />
appropriate methodologies. In this specific case, reference is being made to the current<br />
value of unconsolidated investments.<br />
Residual value. Since the operating cash flows which can be generated by a company do<br />
not end at the end of the period used for the analytical forecast, the residual value<br />
expresses the concise present value of all those flows which will in any case be generated<br />
by the company itself later in time. Since this is a concise component, even though its<br />
manifestation is postponed in time, the residual value, expressed at present value, should<br />
not take on excessive importance in the total value so as not to augment the uncertainties<br />
surrounding the valuation process and not to curtail its reliability. Such residual value is<br />
determined as follows:<br />
TV = [ F n+1 / (K o -g)] / (1+K o ) n<br />
where g expresses the nominal rate of average growth sustainable perpetually by the net<br />
operating cash flow F n+1 in the first year after the explicit period of the forecast.<br />
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The weighted average cost of capital. This expresses the rate used to calculate the present<br />
value of the operating cash flows and the residual value. Since such flows are used to<br />
determined the total value of the operating assets of the company, set against the net<br />
financial position and own capital, they will be calculated at present value using a rate<br />
which expresses the weighted average between the costs of both such components. In<br />
relation to the purpose of this present work, the calculation of the weighted average cost<br />
of capital (K o = WACC) is carried out in the following manner:<br />
K o = [D/(D+E)]*K d *(1-t) + [E+(D+E)]*K e<br />
where:<br />
D = net debt position<br />
E = current value of net equity<br />
K d *(1-t) = cost of debt net of the tax effect generally calculated using the weighted average<br />
effective costs for the specific sources of financing<br />
K e = cost of own capital.<br />
The structure of capital, intended as the debt ratio, is calculated based on the current<br />
value of debt and shareholders’ equity at the time of valuation.<br />
The cost of own capital, assumed to be the same as the rate of return on the same, can<br />
easily be determined on the theoretical level of the relationship: K e = R f + s, where R f<br />
expresses the rate of return on the assets without risk and s is the premium for the specific<br />
risk of the investment in capital of the company in question.<br />
In this case, the rate of return is determined for the assets without risk as the gross annual<br />
yield on medium/long-term government securities.<br />
The second component (s) of the cost of own capital (K e ) expresses the premium for the<br />
specific investment under consideration and therefore it should represent a concise<br />
measure of the risk of the sector and the company under examination. Such component is<br />
usually quantified by making reference to the following relationship:<br />
s = β (R m - R f )<br />
where:<br />
R m = average rate of return of the stock market<br />
R f = average rate of return on assets without risk<br />
β = coefficient expressing the variability of the specific security compared to the market.<br />
In conclusion, it is assumed that the difference (R m - R f ), which expresses the premium for<br />
stock risk, is multiplied by the beta of the specific company to take into account the risk<br />
component which cannot be diversified, that is, the risk which cannot be eliminated by the<br />
investor through an adequate diversification of his own portfolio.<br />
102<br />
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Earnings method<br />
In the case under examination, the earnings method was used in the version which calls<br />
for recourse to the earnings flows that result from a detailed forecast, at least for the first<br />
years, starting from the end of the period of the plan an estimate is determined of a final<br />
value which is connected to the normal earnings sustainable starting from that moment.<br />
The following formula illustrates the method:<br />
n<br />
W = [ ∑ R t / (1 + K e ) t ] + TV<br />
t = 1<br />
where:<br />
R t = normal net earnings of explicit period<br />
K e = cost of own capital<br />
TV = present value of residual value, intended as the present value of the earnings which<br />
the company will continue, through or according to a determined rate of expected average<br />
growth, to generate in periods successive to those in the analytical forecast.<br />
Equity method<br />
The equity method of valuation expresses the value of a company in relation to its equity,<br />
that is, it analyzes the values of the single asset and liability elements from which the<br />
entity of net equity arises. This method offers, by its very nature, a vision of the company<br />
founded on a representation of its equity components, the estimated valuation of which<br />
takes place using appropriate methodologies in relation to the nature and the<br />
characteristics of the same.<br />
The equity method is applied at certain fundamental times:<br />
1) Calculation of the Net Capital of the financial statements.<br />
This derives from the sum of share capital and reserves (composed of profits or<br />
revaluations), less any amounts for which it was decided to distribute dividends or<br />
emoluments to directors. In the event that reference is made to an interim date, the<br />
results for that period should also be considered, net of the tax charge. Lastly, any<br />
adjustments for potential tax charges should be determined.<br />
2) Revaluation of the nonmonetary asset elements (property, plant and equipment,<br />
inventories, investments, marketable securities, etc.) to current values and calculation<br />
of the present value of receivables and payables.<br />
It is important to emphasize how the verification of the values inherent to fixed assets<br />
can give rise to gains or losses due to the fact the fixed assets will be valued on the<br />
basis of a realistic market value or the cost or reproduction or replacement. To this end,<br />
these extraordinary items, if recorded, can occasionally be subject to an eventual later<br />
figurative tax charge. The expressive rate of potential tax charges, if any, varies around<br />
the value determined by calculating the present value of the tax rate which can<br />
effectively be applied depending on the nature of the gain.<br />
In general, in the application of the equity method, the determination of adjusted capital<br />
(K) is obtained using the following formula:<br />
K = C + [(P 1 +P 2 +...) - (M 1 +M 2 +...)]* (1 - t)<br />
where C indicates the Net Accounting Capital, P and M indicate, respectively, the gains and<br />
the losses and t the potential rate of tax charges.<br />
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Result of the valuation and the share exchange ratio<br />
Based on the calculations carried out in the application of the methods used, the following<br />
conclusions were reached:<br />
Method/Company Earnings Financial<br />
Total value Per unit value Total value Per unit value<br />
(Billions of lire) (Lire) (Billions of lire) (Lire)<br />
Société Internationale<br />
<strong>Pirelli</strong> S.p.A. 13,896 474,415 13,797 462,383<br />
<strong>Pirelli</strong> S.p.A. 11,484 115,718 11,219 115,586<br />
If the earnings method is applied, the exchange ratio is equal to 82.97 <strong>Pirelli</strong> S.p.A.<br />
ordinary shares for every Société Internationale <strong>Pirelli</strong> S.p.A. share; if the financial method<br />
is used the ratio is 82.78 <strong>Pirelli</strong> S.p.A. ordinary shares for every Société Internationale<br />
<strong>Pirelli</strong> S.p.A. share. The proposal is made to use the rounded up exchange ratio indicated<br />
by the appraisers equal to 83 <strong>Pirelli</strong> S.p.A. ordinary shares for every Société Internationale<br />
<strong>Pirelli</strong> S.p.A. share. A simple comparison shows that the share exchange ratio was rounded<br />
up by 0.03 from 82.97 (using the earnings method) and 0.22 from 82.78 (using the financial<br />
method).<br />
1.d - Procedures for assigning the shares of the incorporating company – Date from<br />
which dividend rights accrue<br />
The exchange ratio, determined on the basis of the balance sheets at December 31, 1998<br />
for both companies, is established as:<br />
No. 83 <strong>Pirelli</strong> S.p.A. ordinary shares for each Société Internationale <strong>Pirelli</strong> S.p.A. ordinary share.<br />
There will be no payment differences in cash.<br />
At the time the merger is perfected, <strong>Pirelli</strong> S.p.A. will proceed to cancel all the shares of<br />
the capital of Société Internationale <strong>Pirelli</strong> S.p.A. and replace them, at the exchange ratio<br />
reported in the preceding point, with <strong>Pirelli</strong> S.p.A. shares, by utilizing the <strong>Pirelli</strong> S.p.A.<br />
shares that shall, after the merger, be held by the same <strong>Pirelli</strong> S.p.A..<br />
Accordingly, there will be no increase in share capital.<br />
The <strong>Pirelli</strong> S.p.A. ordinary shares assigned in the exchange will have dividend rights as<br />
from January 1, 1999, and therefore will have the right to the dividends declared by<br />
<strong>Pirelli</strong> S.p.A. for the year ending December 31, 1999.<br />
1.e -Date of recording the merger between the two companies in the financial statements<br />
of the merging company<br />
1.f -Tax considerations regarding the merger<br />
Generally speaking, Italian law, in harmony with Community law, considers a merger<br />
within the context of a corporate reorganization. Such transactions are not subject to<br />
taxes since they do not give rise, in effect, to any assumptions for realization, or the<br />
distribution of gains and losses of the assets of the merged companies.<br />
Considering the basic principle, which is therefore applicable in cases of both direct<br />
mergers and inverse mergers, it follows that the amounts fiscally recognized for the assets<br />
of the merged company are maintained in the merging company.<br />
It may however occur that the merger gives rise to deficits. Under civil laws, should this be<br />
the case, such merger differences can be absorbed by revaluing the assets of the merged<br />
company.<br />
104<br />
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For purposes of the recognition of all or a part of such values in question, also for fiscal<br />
purposes, Legislative Decree No. 358 of October 8, 1997 calls for the possibility of<br />
subjecting the higher value recorded to cover the deficit, to the substitute tax, as set forth<br />
by art. 1 of the law in question at a rate of 27%. Such higher values may be given tax<br />
status, without paying the tax of 27%, only when the shares of the merged company,<br />
cancelled upon the merger, gave rise to gains that were previously subjected to ordinary<br />
taxation.<br />
In particular, the above-mentioned higher values are not taxable to the extent of the total<br />
net amount:<br />
a) of the gains net of the losses subjected to the substitute tax;<br />
b) the higher and lower values, compared to the relative acquisition values, deriving from<br />
the sale of the shares or quotas, which formed part of the earnings of a resident<br />
company (the higher or lower values are important only for the reason that they<br />
formed part of the earnings of the company and are therefore independent of a tax<br />
payment);<br />
c) the write-downs as well as the revaluations of the shares or quotas that formed part of<br />
the earnings of a resident company or which by law do not form part of it, not even in<br />
the case of later realization.<br />
The possibility of not subjecting the deficit to the substitute tax, up to the amount of the<br />
sum of the higher or lower values referred to in the preceding letters a), b), c), is<br />
conditioned by the demonstration, through suitable documentation, by the merging<br />
company or beneficiary, of the positive and negative components of earnings relating to<br />
the cancelled shares or quotas realized by the same company and by the previous<br />
owners.<br />
The tax laws on mergers also provide that the funds in abeyance of taxes of the merged<br />
companies should form part of the earnings of the company resulting from the merger if<br />
and to the extent of which they were not re-established in its financial statements.<br />
This law is not applied for funds which can only be taxed in the event of distribution<br />
which, if and to the extent of any merger surplus or capital increase in excess of the total<br />
capital of the companies taking part in the merger net of the share of the capital of each of<br />
them already held by the same or by others, form part of the earnings of the company<br />
resulting from the merger or incorporation in the event of distribution of the surplus or the<br />
reduction of capital in excess.<br />
There is also a specific law regarding tax loss carryforwards. Such losses relating to the<br />
companies taking part in the merger, including the merging company, can be deducted<br />
from the earnings of the company resulting from the merger or incorporation for that part<br />
of the amount which does not exceed the amount of the respective net equities shown on<br />
the most recent financial statements or, if lower, shown on the balance sheets pursuant to<br />
article 2502 of the Italian Civil Code, without taking into account the contributions and<br />
payments made during the previous twenty-four months before the date of the same<br />
balance sheet.<br />
All of the above is upon condition that, in the income statement of the company which has<br />
loss carryforwards, in relation to the previous year to that in which the merger was<br />
approved, there is an amount of revenues, and an amount of personnel expenses and<br />
related social security contribution, in excess of 40% of the average that was shown in the<br />
last two prior years.<br />
As for indirect taxation, Italian law incorporates the Community law regarding the raising<br />
of capital. It provides for the application of a fixed registration tax for mergers.<br />
The law also allows that a date for the accounting and tax effects for a merger can be set<br />
before that established for civil compliance.<br />
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105
Entering into the merits of the merger in question, it is pointed out that:<br />
• the deficit that arises from the merger will be covered by revaluing, for statutory<br />
purposes, certain investments of the company to be merged which, instead, will<br />
maintain their fiscal value recognized at the time of merger;<br />
• the company to be merged does not have any funds in abeyance of taxes to be reestablished<br />
in the merging company;<br />
• the merging company and the company to be merged do not have tax loss<br />
carryforwards;<br />
• the registration tax is applicable in the fixed amount of Lire 250,000 at the time of<br />
registering the merger deed;<br />
• effect will be given to the merger for accounting and tax purposes starting from<br />
January 1, 1999.<br />
1.g - Estimated composition of the most important shareholders of the merging<br />
company subsequent to the merger<br />
The shareholders of <strong>Pirelli</strong> S.p.A. at March 29, 1999, as reported in the book of<br />
shareholders plus communications received by Consob, are composed of the following<br />
(holdings of more than two percent of share capital with voting rights are indicated):<br />
Shareholder No. of shares % of total % of ordinary<br />
share capital share capital<br />
Société Internationale <strong>Pirelli</strong> S.p.A. 748,324,035 (1) 37.71 39.46<br />
<strong>Pirelli</strong> & C. Accom. per Azioni 123,796,250 6.24 6.53<br />
<strong>Pirelli</strong> S.p.A. 59,741,935 (2) 3.01 3.15<br />
Others 964,690,253 48.61 50.86<br />
Total 1,896,552,473 (3) 95.57 100.00<br />
Shareholders of savings shares 88,006,016 4.43 –<br />
Grand total 1,984,558,489 100.00 100.00<br />
Note:<br />
1. Already registered to <strong>Pirelli</strong> Partecipazioni S.p.A. and coming from the above-mentioned merger<br />
by incorporation of <strong>Pirelli</strong> Partecipazioni in Société Internationale <strong>Pirelli</strong>.<br />
2. Treasury shares.<br />
3. Divided by major class of ownership, according to the book of shareholders:<br />
– 105 shareholders with over 1,000,000 shares represent 78.19% of capital;<br />
– 353 shareholders with shares of between 100,001 and 1,000,000 represent 6.01% of capital;<br />
– 3,106 shareholders with shares of between 10,001 and 100,000 represent 4.35% of capital;<br />
– 38,000 shareholders with shares of between 1,001 and 10,000 shares represent 7.38% of capital.<br />
106<br />
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The shareholders of <strong>Pirelli</strong> S.p.A. which will result after the merger of Société Internationale<br />
<strong>Pirelli</strong> S.p.A, simulating the mere corporate effect of the merger compared to the<br />
information at March 29, 1999 is the following (holdings of more than two percent of share<br />
capital with voting rights are indicated):<br />
Shareholder No. of shares % of total % of ordinary<br />
share capital share capital<br />
<strong>Pirelli</strong> & C. Luxembourg S.A. 417,278,101 (1) 21.03 22.00<br />
BZ Group Holding S.A. 179,374,537 (1) 9.04 9.46<br />
<strong>Pirelli</strong> & C. Accom. per Azioni 162,702,500 (2) 8.20 8.58<br />
<strong>Pirelli</strong> S.p.A. 126,412,949 (3) 6.37 6.67<br />
Others 1,010,784,386 (4) 50.93 53.29<br />
Total 1,896,552,473 95.57 100.00<br />
Shareholders of savings shares 88,006,016 4.43 –<br />
Grand total 1,984,558,489 100.00 100.00<br />
Note:<br />
1. Already shareholders of Société Internationale <strong>Pirelli</strong> S.p.A..<br />
2. Sum of the investment already held in Société Internationale <strong>Pirelli</strong> S.p.A. and the original<br />
investment in <strong>Pirelli</strong> S.p.A..<br />
3. Sum of the treasury shares coming from the inverse merger and the original treasury shares, net<br />
of the treasury shares used to service the exchange ratio.<br />
4. Sum of the investment already held in Société Internationale <strong>Pirelli</strong> S.p.A. by shareholders not in<br />
the <strong>Pirelli</strong> Group and BZ Group and the original investment in <strong>Pirelli</strong> S.p.A. held by shareholders<br />
not in the <strong>Pirelli</strong> Group.<br />
Two diagrams are shown on the following page which illustrate the Group structure at<br />
December 31, 1998 and the future structure.<br />
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107
Group structure<br />
at December 31, 1998<br />
<strong>Pirelli</strong> & C. A.p.A.<br />
100%<br />
BZ Group<br />
Holding S.A.<br />
24.87%<br />
<strong>Pirelli</strong> & C.<br />
Luxembourg S.A.<br />
67.51%<br />
Société Internationale<br />
<strong>Pirelli</strong> Ltd<br />
91.96%<br />
3.12% <strong>Pirelli</strong><br />
4.92%<br />
Partecipazioni Ltd<br />
39.49%<br />
<strong>Pirelli</strong> S.p.A.<br />
6.53%<br />
99.81%<br />
<strong>Pirelli</strong><br />
Tyre Holding N.V.<br />
100 %<br />
<strong>Pirelli</strong><br />
Cavi e Sistemi S.p.A.<br />
Future structure<br />
<strong>Pirelli</strong> & C. A.p.A.<br />
BZ Group<br />
Holding S.A.<br />
not less than<br />
30.01%<br />
10%<br />
<strong>Pirelli</strong> S.p.A.<br />
99.82%<br />
<strong>Pirelli</strong><br />
Tyre Holding N.V.<br />
100 %<br />
<strong>Pirelli</strong><br />
Cavi e Sistemi S.p.A.<br />
108<br />
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1.h - Effects of the merger on the shareholder pacts<br />
<strong>Pirelli</strong> S.p.A. is aware of the existence of three shareholder pacts, two of which are<br />
interconnected, that are considered important pursuant to article 122 of the Testo Unico<br />
with respect to the provisions regarding financial intermediation.<br />
The first of these, stipulated between <strong>Pirelli</strong> & C. Accomandita per Azioni and BZ Group<br />
Holding S.A., was published in the newspapers on March 28, 1998, in an extract form.<br />
The second and third, respectively, stipulated between <strong>Pirelli</strong> S.p.A. and Fondazione<br />
Cariplo Iniziative Patrimoniali S.p.A. and the same <strong>Pirelli</strong> S.p.A. and Mediocredito<br />
Lombardo S.p.A., were published in the newspapers on December 15, 1998, in an extract<br />
form.<br />
The above pacts, which were communicated to Consob and filed in the Companies’<br />
Register in accordance with the law, are herein attached in an extract form.<br />
As for the first pact, it should be pointed out that, as the simple effect of the merger by<br />
incorporation of Société Internationale <strong>Pirelli</strong> S.p.A., <strong>Pirelli</strong> & C. Accomandita per Azioni<br />
and BZ Group Holding S.A. would hold an interest in the ordinary share capital of<br />
<strong>Pirelli</strong> S.p.A. that is substantially in line with indications contained in the pact.<br />
Therefore, the part of the agreement referring to the exercising of the voting rights comes<br />
into force for the part – of the share of investment in the ordinary share capital of <strong>Pirelli</strong><br />
S.p.A which will be held by BZ Group Holding S.A. – equal to 5% of the same share capital.<br />
Likewise, the part comes into force regarding the sales options to <strong>Pirelli</strong> & C. A.p.A. given<br />
by this company to BZ Group Holding S.A., as well as parallel purchase options – always<br />
by BZ Group Holding S.A. – which are in reference to the same <strong>Pirelli</strong> & C. A.p.A., options<br />
which all refer to a number of shares equal to 5% of the share capital of <strong>Pirelli</strong> S.p.A. with<br />
voting rights.<br />
As far as the other pacts are concerned, it should be pointed out that they do not involve<br />
any limitation regarding the disposition of the shares by the same <strong>Pirelli</strong> S.p.A., nor any<br />
restrictions regarding their sale, except in the case that the treasury shares of <strong>Pirelli</strong> S.p.A.,<br />
by its express choice, should be used to service the holders of warrants.<br />
In this latter case, and always, therefore, under the assumption that <strong>Pirelli</strong> S.p.A. has not<br />
opted to fulfill its obligation by paying cash for equivalent amounts (the so-called cash<br />
equivalent clause), the net quantity of the shares coming from the merger (or the shares<br />
coming from the merger calculated net of those used to service the exchange) would be<br />
amply sufficient.<br />
There are no shareholder agreements involving the shares of the merging company Société<br />
Internationale <strong>Pirelli</strong> S.p.A..<br />
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109
Notice pursuant to art. 10, paragraph 4, Law No. 149 of February 18, 1992 and Consob resolution<br />
No. 7835 of March 8, 1994<br />
Agreement between <strong>Pirelli</strong> & C. and BZ Group Holding Limited reached as part of the corporate<br />
reorganization of <strong>Pirelli</strong> Group (announced March 24, 1998) at the conclusion of which the parties would<br />
hold an investment in the share capital of <strong>Pirelli</strong> S.p.A. expressed in ordinary shares, respectively, of not<br />
less than 30.01% and equal to 10%.<br />
<strong>Pirelli</strong> & C. and BZ Group Holding Limited have agreed, each to the extent of their powers in relation to their<br />
holdings, to act so that, at the conclusion of the corporate restructuring of the Group, Société Internationale<br />
<strong>Pirelli</strong> S.A. and <strong>Pirelli</strong> S.p.A. shall pass resolutions for the merger of the two companies.<br />
Furthermore, as to a 5% holding which BZ Group Holding Limited shall then have in <strong>Pirelli</strong> S.p.A., the following has<br />
been agreed:<br />
a) for a period of three years, the voting rights relating to the number of PIRELLI S.p.A. shares equal to 5% of capital<br />
with voting rights, shall be exercised according to the instructions provided by Mr. Marco Tronchetti Provera, on<br />
condition that, and up to the time in which, he shall maintain a significant personal interest in <strong>Pirelli</strong> Group. To this<br />
end, a number of PIRELLI S.p.A. shares equal to 5% of capital with voting rights, shall be deposited by BZ at the BZ<br />
Bank Limited, which shall exercise the voting rights to which they have a right on the basis of the instructions<br />
received from Mr. Marco Tronchetti Provera;<br />
b) PIRELLI & C. shall grant BZ a sales options on a number of PIRELLI S.p.A. shares equal to 5% of capital with<br />
voting rights having the following features:<br />
i. a first sales option, relating to a number of shares equal to 2.5% of capital with voting rights, can be exercised<br />
during the period between March 10, 1999 and March 10, 2003, at a price calculated on the average of the stock<br />
market prices of the shares in the ninety previous sessions prior to the date of exercising the option;<br />
ii. a second sales option, relating to a number of shares equal to 2.5% of capital with voting rights can be exercised<br />
on March 10, 2003, at a price calculated on the average of the stock market prices of the shares in the ninety<br />
previous sessions prior to the date of exercising the option;<br />
c) BZ shall grant PIRELLI & C. a purchase option on a number of PIRELLI S.p.A. shares which, added to those<br />
eventually already sold by BZ to PIRELLI & C. following the exercise of the rights referred to in point b), can not<br />
exceed 5% of the capital with voting rights. Such option can be exercised on March 13, 2003, at a price calculated<br />
on the average of the stock market prices of the shares in the ninety previous sessions prior to the date of<br />
exercising the option;<br />
d) should Mr. Marco Tronchetti Provera cease to hold a significant personal interest in <strong>Pirelli</strong> Group, the options<br />
described in points b) and c) can be exercised within thirty days of communication of such event, at a price<br />
calculated on the average of the stock market prices of the shares in the ninety previous sessions prior to the date<br />
of exercising the option. On his part, Mr. Marco Tronchetti Provera undertakes to communicate to PIRELLI & C.<br />
and BZ that he has less than a significant personal interest in <strong>Pirelli</strong> Group within 5 days of this taking place;<br />
e) should the agreement described in point a) relative to the exercise of the voting rights on the part of PIRELLI<br />
S.p.A. shares deposited by BZ in BZ Bank Limited not be renewed at least up to March 13, 2003 or, should there be<br />
a breach of the agreement, the voting rights are not exercised according to Mr. Marco Tronchetti Provera’s<br />
instructions, PIRELLI & C. shall have the right to acquire from BZ a number of ordinary shares which, together<br />
with those eventually already sold by BZ to PIRELLI & C. subsequent to the exercise of the option rights described<br />
in point b), can not exceed 5% of capital with voting rights. Such right of purchase can be exercised within the<br />
following thirty days subsequent to the expiration of the agreement, if before March 13, 2003, or the eventual<br />
breach of the agreement, at a price calculated on the average of the stock market prices of the shares in the ninety<br />
previous sessions prior to the date of exercising the option;<br />
f) for purposes of the preceding points, for capital with voting rights is meant the share capital expressed in ordinary<br />
shares calculated on the basis of the ordinary shares existing at the time of exercising the rights provided by this<br />
agreement;<br />
g) the parties shall not undertake any actions which can have a substantial effect on the price of the options<br />
described in the previous points for the entire period of the ninety sessions of the Stock Market preceding the date<br />
of exercise of the options.<br />
The entire agreement resolutely depends upon obtaining the necessary approval from the appropriate boards of the<br />
<strong>Pirelli</strong> Group companies involved in the reorganization.<br />
Milan, March 28, 1998<br />
110<br />
i
Notice pursuant to art. 10, paragraph 4, Law No. 149 of February 18, 1992 and Consob resolution<br />
No. 7835 of March 8, 1994<br />
<strong>Pirelli</strong> S.p.A. reached an agreement for a loan of about Lire 290 billion coming from the issue of “Mediocredito Lombardo S.p.A.<br />
1998/2003 2.2% special series bonds with warrants for <strong>Pirelli</strong> S.p.A. ordinary shares” (the “Loan”) issued by Mediocredito<br />
Lombardo S.p.A. (“Mediocredito”) and subscribed to by Fondazione Cariplo Iniziative Patrimoniali S.p.A. (“Fondazione”).<br />
Each bond carries a “Mediocredito Lombardo Warrant - <strong>Pirelli</strong> S.p.A. ordinary shares 1998-2003” (the “Warrants”) to<br />
acquire at pre-fixed prices, over the next five years, up to a maximum of 46,154,000 <strong>Pirelli</strong> S.p.A. ordinary shares (the<br />
“Shares”). The Shares will be made available by the same <strong>Pirelli</strong> S.p.A. which will draw them from the treasury shares.<br />
The Loan contains the so-called cash equivalent clause whereby <strong>Pirelli</strong> S.p.A. has the right, should Mediocredito<br />
declare that the holder of the Warrants intends to exercise them, to choose between delivering the shares or paying the<br />
difference, if positive, between the market price of the stock, in reference to the arithmetic average of the last three<br />
official prices available at the time the warrants are exercised, and the price of exercising the Warrants.<br />
Agreement between <strong>Pirelli</strong> S.p.A. and Mediocredito Lombardo S.p.A.<br />
1. Type of agreement and purpose<br />
Compendium agreement having the purpose of guaranteeing the issuer Mediocredito the amount of <strong>Pirelli</strong> S.p.A.<br />
ordinary shares or money needed to allow the same Mediocredito to fulfill its obligations to the carriers of<br />
Warrants at the time they are eventually exercised.<br />
2. Parties to the agreement<br />
The parties to the agreement are Mediocredito and <strong>Pirelli</strong> S.p.A..<br />
3. Financial instruments covered by the agreement<br />
The <strong>Pirelli</strong> S.p.A. ordinary shares covered by the agreement are a maximum of No. 46,154,000.<br />
They represent 2.44% of the ordinary share capital of <strong>Pirelli</strong> S.p.A. as of today’s date.<br />
4. The party, if any, which, through the agreement, can exercise control over the company<br />
There is no party which, through the agreement, can exercise control over <strong>Pirelli</strong> S.p.A..<br />
5. Restrictions to the sale of the shares<br />
There are no restrictions whatsoever on the Shares or destined in any way whatsoever to limit their disposition.<br />
6. Disposition of the shares<br />
The Shares remain at the disposition of <strong>Pirelli</strong> S.p.A..<br />
7. Bodies governing the agreement<br />
They are not envisaged by the agreement.<br />
8. Matters covered by the agreement<br />
Those covered in point 1.<br />
9. Duration, renewal and cancellation of the agreement<br />
The agreement runs until the expiry date for exercising the Warrants (July 31, 2003) and it is not renewable nor is<br />
it subject to cancellation or withdrawal.<br />
10. Penalties for non-fulfillment of the obligations contained in the agreement<br />
They are not envisaged by the agreement.<br />
Agreements between <strong>Pirelli</strong> S.p.A. and Fondazione Cariplo Iniziative Patrimoniali S.p.A.<br />
1. Type of agreement and purpose<br />
Pre-emptive agreement having the purpose of guaranteeing <strong>Pirelli</strong> S.p.A., or parties indicated by it, the<br />
pre-emptive right to acquire the Warrants (or the rights to the Warrants) assigned, at issue, to the Loan.<br />
2. Parties to the agreement<br />
The parties to the agreement are Fondazione and <strong>Pirelli</strong> S.p.A..<br />
3. Financial instruments covered by the agreement<br />
Warrants covered by the agreement are a maximum of No. 46,154,000.<br />
In the event the Warrants are exercised they give the right to acquire Shares representing 2.44% of the ordinary<br />
share capital of <strong>Pirelli</strong> S.p.A. as of today’s date.<br />
4. The party, if any, which, through the agreement, can exercise control over the company<br />
There is no party which, through the agreement, can exercise control over <strong>Pirelli</strong> S.p.A..<br />
5. Restrictions to the sale of the shares<br />
There are no restrictions whatsoever on the Warrants or destined in any way whatsoever to limit their disposition.<br />
The sale of the Warrants, or the rights to them, to subsidiaries as set forth by art. 2359, first paragraph, point l, of<br />
the Italian Civil Code and to the parent companies of the Fondazione, is freely permitted; to third parties it is<br />
allowed by pre-emption; to commercial competitors of <strong>Pirelli</strong> S.p.A. it is permitted with approval.<br />
6. Disposition of the shares<br />
The Warrants remain at the disposition of the holders.<br />
7. Bodies governing the agreement<br />
They are not envisaged by the agreement.<br />
8. Matters covered by the agreement.<br />
Those covered in points 1 and 5.<br />
9. Duration, renewal and cancellation of the agreement<br />
The agreement runs until August 1, 2003 and it is not renewable nor is it subject to cancellation or withdrawal.<br />
10. Penalties for non-fulfillment of the obligations contained in the agreement<br />
They are not envisaged by the agreement.<br />
Milan, December 15, 1998<br />
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1.i - Evaluations by the Board of Directors regarding the recurrence, if any, of the right<br />
to withdrawal.<br />
The Board of Directors states that there are no cases for the recurrence of the right to<br />
withdrawal covered by art. 131 of Legislative Decree No. 58 of February 24, 1998 and<br />
art. 2437 of the Italian Civil Code.<br />
2. Procedures for the disposition of treasury shares.<br />
As to the second matter of business on the agenda, we let it be known that, in the case the<br />
aforementioned merger plan is approved, the company will receive No. 748,324,035<br />
ordinary shares of the same; of these, 681,653,021 will be used for the exchange and<br />
66,671,014 will become part of the assets of the company.<br />
We also point out that the shareholders’ meeting held on May 15, 1998 passed a resolution,<br />
amongst other things, to assign bonus shares on the occasion of the celebration of the<br />
125 th anniversary of the founding of <strong>Pirelli</strong> to employees of the Group for No. 23,000,000<br />
new ordinary shares as well as No. 11,000,000 ordinary shares to be allocated as incentives<br />
to the managers of the Group companies, according to the incentive plan drawn up by the<br />
Board of Directors.<br />
It should be pointed out that as far as the shares assigned for the 125 th anniversary are<br />
concerned, the assignment was rejected with respect to 54,435 shares and, as for those<br />
utilized for the allocation of incentives, it is expected, as described during the course of<br />
the aforementioned meeting, that they will put at the disposition of those to whom they<br />
were assigned only in the case that the prefixed goals in the incentive plan are met; should<br />
they not be met or only partly met, the assigned shares will have to be sold gratis, in total<br />
or in part, to <strong>Pirelli</strong> S.p.A..<br />
This having been said, with regards to both the shares that are certain of becoming part of<br />
the assets of the company and those that might eventually become a part thereto, it<br />
becomes necessary to ask you to establish the procedures for their eventual disposition.<br />
To this end, we suggest that they should be established as indicated in the proposed<br />
resolution which, if you are in agreement, we ask you to approve.<br />
3. Translation of share capital into euro<br />
As to the third matter of business on the agenda, this refers to the adoption of the euro,<br />
covered by Legislative Decree No. 213 of June 24, 1998.<br />
The adoption of euro as the currency of account, in particular, is mandatory as from<br />
January 1, 2002.<br />
<strong>Pirelli</strong> S.p.A. has nevertheless decided to comply before it becomes mandatory and has<br />
chosen to adopt euro for its accounting records with effect from January 1, 1999.<br />
To this end, we propose that the share capital should be translated into euro by rounding<br />
up the par value of Lire 1,000 of the shares of which it is made up to Euro 0.52, according<br />
to the provisions of art. 17.6 of the above-cited legislative decree.<br />
The rounding up to Euro 0.52 of the par value of the shares of par value Lire 1,000 each<br />
(equal to Euro 0.516) fixes the total share capital in Euro 1,031,970,414.28 (equal to<br />
Lire 1,998,173,354,058, against a share capital up to now expressed in Italian lire<br />
and amounting to Lire 1,984,558,489,000).<br />
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As regard this increase, it is proposed that the corresponding amount of<br />
Lire 13,614,865,058 should be drawn from the share premium reserve.<br />
Besides the translation of share capital into euro, the Board of Directors proposes that the<br />
amounts represented in Italian lire in the articles of association should be changed to euro,<br />
with particular and exclusive regard to the present wording of the second and fourth<br />
paragraphs of article 5, describing the share capital, which refers to the rights granted to<br />
the Directors for the issue of shares and bonds.<br />
If you are in agreement on what has been proposed to you, we ask you to pass the<br />
following resolutions:<br />
First resolution<br />
Merger by incorporation in <strong>Pirelli</strong> S.p.A. of Société Internationale <strong>Pirelli</strong> S.p.A.<br />
“The shareholders’ meeting:<br />
• having taken note of the Board of Directors’ report;<br />
• having reviewed the merger plan drawn up according to article 2501 bis of the Italian<br />
Civil Code, which involves, amongst other things:<br />
1) cancellation without replacement of all the shares of the company to be merged;<br />
2) the assignment to the shareholders of the company to be merged of No. 83<br />
<strong>Pirelli</strong> S.p.A. ordinary shares of par value Lire 1,000 each (after the eventual approval<br />
of the translation into euro: Euro 0.52) with normal dividend rights from January 1,<br />
1999, for every Société Internationale <strong>Pirelli</strong> S.p.A. share of par value Euro 62.00;<br />
3) the utilization, for purposes of satisfying the exchange ratio, of a part of the<br />
No. 748,324,035 shares of the merging company held by the company to be merged<br />
and coming from the effect of the merger to the same merging company, which<br />
therefore will not increase its share capital,<br />
• given the balance sheets at December 31, 1998 of <strong>Pirelli</strong> S.p.A. and Société Internationale<br />
<strong>Pirelli</strong> S.p.A. prepared according to article 2501 ter of the Italian Civil Code and<br />
approved by the respective Boards of Directors in the meetings held on March 29, 1999;<br />
• having taken note of the recording of the merger plan in the Companies’ Register of<br />
Milan on April 6, 1999, as well as the deposit of the documentation required by article<br />
2501 sexies of the Italian Civil Code;<br />
• having taken note of the statement by the Board of Statutory Auditors that attests to the<br />
fact that the share capital of Lire 1,984,558,489,000 is fully subscribed to and paid-in;<br />
• having taken note concerning the opinions as to the congruity of the exchange ratio of<br />
the shares issued, for <strong>Pirelli</strong> S.p.A., in compliance with article 2501 quinquies of the<br />
Italian Civil Code, by Reconta Ernst & Young S.p.A. and, for Société Internationale<br />
<strong>Pirelli</strong> S.p.A., following the decree of March 13, 1999 by the President of the Milan<br />
Courts, by KPMG S.p.A.<br />
Passes a resolution<br />
1. to approve the merger plan (attached to the minutes) drawn up according to article<br />
2501 bis of the Italian Civil Code, and therefore the merger by incorporation in<br />
<strong>Pirelli</strong> S.p.A. of Société Internationale <strong>Pirelli</strong> S.p.A., with registered office in Milan and<br />
share capital of Euro 509,186,594, on the basis of the respective balance sheets at<br />
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December 31, 1998, with the cancellation — without replacement — of all the shares of<br />
the company to be merged and without a share capital increase by the merging<br />
company since, in the share capital of the latter following the same merger, there are<br />
sufficient <strong>Pirelli</strong> S.p.A. shares to service the exchange;<br />
2. to confer to the Chairman and Deputy Chairman all and every power, excluding none,<br />
separately, to fulfill all the requirements so that this resolution can be implemented and<br />
thus effect the merger and in particular stipulate the relative public deed, establishing<br />
every clause and the manner to implement them, proceed to cancel the shares, request<br />
transfers, registrations and notes also in the real estate registries and in the other public<br />
registers and however comply with all that is necessary and useful for completely<br />
implementing the resolution that was passed, also through special procurators, fulfill the<br />
formalities so that the resolution can be approved under law, with the right to introduce<br />
any changes required of a formal nature for this purpose, also at the time of homologation.”<br />
Second resolution<br />
Procedures for the disposition of treasury shares<br />
“The shareholders’ meeting:<br />
• having taken note of the Board of Directors’ report;<br />
• having taken note that, following the merger by incorporation of Société Internationale<br />
<strong>Pirelli</strong> S.p.A. in <strong>Pirelli</strong> S.p.A., the merger plan of which was just approved, the company<br />
will receive No. 66,671,014 <strong>Pirelli</strong> S.p.A. ordinary shares that were not used to service<br />
the exchange ratio;<br />
• having taken note that, following the bonus assignment of No. 23,000,000 ordinary<br />
shares by resolution of the shareholders’ meeting of May 15, 1998, No. 54,435 shares<br />
were rejected;<br />
• having taken note that, following the bonus assignment of No. 11,000,000 ordinary shares<br />
for designation as incentives to the managers of the Group, it was agreed with the same that<br />
the shares would be sold gratis to <strong>Pirelli</strong> S.p.A., in total or in part, in the event the goals that<br />
were assigned to them under the incentive plan were not reached or only partly reached;<br />
Passes a resolution<br />
1. to authorize the Board of Directors so that it can dispose, without any time limits, of the<br />
treasury shares as stated; the disposition can take place, at one or more times; the<br />
shares can be disposed of by sale (also through a public offer, to the shareholders, to<br />
employees) at a price of not less than 10% of the average reference price recorded on<br />
the Italian stock market in the thirty stock market sessions preceding each single sales<br />
transaction; they can also be disposed of by being attached to bonds or warrants to be<br />
exercised for the same;<br />
2. to confer to the Board of Directors, and on its behalf, to the Chairman and Deputy<br />
Chairman, all power, separately, necessary to effect the dispositions and however to<br />
implement the preceding resolution, also through procurators, fulfilling all that is<br />
eventually required by the competent authorities.”<br />
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Third resolution<br />
Translation of share capital into euro<br />
“The shareholders’ meeting:<br />
• having taken note of the Board of Directors’ report;<br />
Passes a resolution<br />
1. to translate into euro the par value of No. 1,984,558,489 shares of par value Lire 1,000<br />
each, constituting the present share capital with:<br />
• the rounding up, pursuant to art. 17.6 of Legislative Decree No. 213 of June 24, 1998,<br />
to Euro 0.52;<br />
• the corresponding increase in share capital, with a rounding up for a total<br />
of Euro 7,031,490.99, equal to Lire 13,614,865,058, by drawing from the share<br />
premium reserve;<br />
• the consequent translation of share capital, currently Lire 1,984,558,489,000 into<br />
Euro 1,031,970,414.28;<br />
2. to change any other reference to the term “lira” or “lire” in the articles of association to<br />
“euro”, by translating in like manner the amounts expressed in lire into amounts<br />
expressed in euro;<br />
3. to consequently change article 5, first paragraph (representation of share capital),<br />
second paragraph (assignment to the Directors of the right to issue shares for a<br />
maximum amount of par value Lire 500 billion), fourth paragraph (assignment to the<br />
Directors of the right to issue bonds that are also convertible for a maximum amount of<br />
face value Lire 1,000 billion), by adopting the following wording:<br />
first paragraph:<br />
“The share capital is Euro 1,031,970,414.28 divided into No. 1,896,552,473 ordinary<br />
shares and No. 88,006,016 savings shares, with a par value of Euro 0.52 each.”<br />
second paragraph:<br />
“With a resolution passed by the extraordinary general meeting held on the 15 May 1998<br />
the Directors were granted the power to increase the share capital, in one or more<br />
instances, by a maximum amount of Euro 258,228,449.54 and for a maximum time<br />
period of five years as from the date of the said resolution.”<br />
fourth paragraph:<br />
“With a resolution passed by the extraordinary general meeting held on the<br />
22 December 1998 the Directors were granted the power to issue bonds, in one or more<br />
instances, including bonds that are convertible both into ordinary shares or into savings<br />
shares, or with warrants valid for the underwriting of the said shares, for a maximum<br />
face value amount of Euro 516,456,899.08 and for a maximum time period of five years<br />
as from the date of the said resolution, with the consequent possible increase of the<br />
share capital serving the bond conversion”.<br />
4. to confer separately to the Chairman and Deputy Chairman all and every power to fulfill<br />
the formalities so that the resolution can be approved under law, with the right to<br />
introduce any changes required of a formal nature for this purpose, also at the time of<br />
homologation”.<br />
The Board of Directors<br />
Milan, March 29, 1999<br />
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115
Amendment of the by-laws<br />
Present wording<br />
Article 5<br />
The share capital is Italian lire 1,984,558,489,000<br />
divided into No. 1,896,552,473 ordinary shares<br />
and No. 88,006,016 savings shares, with a par<br />
value of Italian lire 1,000 each.<br />
With a resolution passed by the extraordinary<br />
general meeting held on the 15 May 1998 the<br />
Directors were granted the power to increase<br />
the share capital, in one or more instances, by a<br />
maximum amount of Italian lire 500 billion and<br />
for a maximum time period of five years as<br />
from the date of the said resolution.<br />
The share capital increase may be carried out<br />
by issuing, also with a premium, both ordinary<br />
and savings shares, with the same features as<br />
those already outstanding and must be<br />
reserved for shareholders and holders of<br />
convertible bonds.<br />
With a resolution passed by the extraordinary<br />
general meeting held on the 22 December 1998<br />
the Directors were granted the power to issue<br />
bonds, in one or more instances, including<br />
bonds that are convertible both into ordinary<br />
shares or into savings shares, or with warrants<br />
valid for the underwriting of the said shares, for<br />
a maximum face value amount of Italian lire<br />
1,000 billion and for a maximum time period of<br />
five years as from the date of the said<br />
resolution, with the consequent possible<br />
increase of the share capital serving the bond<br />
conversion.<br />
With a resolution passed by the shareholders’<br />
meeting held on the 15 May 1998 the Directors<br />
were granted the power to issue up to a<br />
maximum of No. 45 million ordinary shares, in<br />
one or more instances, by the date of 30 April<br />
2003 to be attributed to executives and cadres<br />
of the company and of the companies<br />
controlled by same and of those controlling<br />
same and likewise of the other companies<br />
controlled by the latter, both in Italy and<br />
abroad, pursuant to the terms of articles 2441<br />
and/or 2349 of the Civil Code.<br />
In the event of the issue of bonds which are<br />
convertible into shares, the amount of share<br />
capital will be determined according to the<br />
extent to which conversion rights on same are<br />
exercised.<br />
New wording<br />
Article 5<br />
The share capital is Euro 1,031,970,414.28<br />
divided into No. 1,896,552,473 ordinary shares<br />
and No. 88,006,016 savings shares, with a par<br />
value of Euro 0.52 each.<br />
With a resolution passed by the extraordinary<br />
general meeting held on the 15 May 1998 the<br />
Directors were granted the power to increase<br />
the share capital, in one or more instances, by<br />
a maximum amount of Euro 258,228,449.54<br />
and for a maximum time period of five years as<br />
from the date of the said resolution.<br />
The share capital increase may be carried out<br />
by issuing, also with a premium, both ordinary<br />
and savings shares, with the same features as<br />
those already outstanding and must be<br />
reserved for shareholders and holders of<br />
convertible bonds.<br />
With a resolution passed by the extraordinary<br />
general meeting held on the 22 December 1998<br />
the Directors were granted the power to issue<br />
bonds, in one or more instances, including<br />
bonds that are convertible both into ordinary<br />
shares or into savings shares, or with warrants<br />
valid for the underwriting of the said shares,<br />
for a maximum face value amount of Euro<br />
516,456,899.08 and for a maximum time<br />
period of five years as from the date of the said<br />
resolution, with the consequent possible<br />
increase of the share capital serving the bond<br />
conversion.<br />
With a resolution passed by the shareholders’<br />
meeting held on the 15 May 1998 the Directors<br />
were granted the power to issue up to a<br />
maximum of No. 45 million ordinary shares, in<br />
one or more instances, by the date of 30 April<br />
2003 to be attributed to executives and cadres<br />
of the company and of the companies<br />
controlled by same and of those controlling<br />
same and likewise of the other companies<br />
controlled by the latter, both in Italy and<br />
abroad, pursuant to the terms of articles 2441<br />
and/or 2349 of the Civil Code.<br />
In the event of the issue of bonds which are<br />
convertible into shares, the amount of share<br />
capital will be determined according to the<br />
extent to which conversion rights on same are<br />
exercised.<br />
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Merger plan pursuant to art. 2501-bis<br />
of the Italian Civil Code<br />
1. Companies involved in the merger<br />
a) Merging company<br />
• Type: joint stock company.<br />
• Name: <strong>Pirelli</strong> Società per Azioni.<br />
• Registered office: in Milan, Viale Sarca 222.<br />
• Share capital: Lire 1,984,558,489,000 fully paid-in (after the eventual approval for the<br />
translation into euro: euro 1,031,970,414.28), consisting of No. 1,896,552,473 ordinary<br />
shares and No. 88,006,016 savings shares of nominal value Lire 1,000 each (after the<br />
eventual approval for the translation in euro: euro 0.52).<br />
• Company recorded in the Companies’ Register under No. 15901.<br />
• Incorporated by the deed filed by the notary public Gerolamo Serina, in Milan, on<br />
November 3, 1920 file No. 18657.<br />
b) Company to be merged<br />
• Type: joint stock company.<br />
• Name: Société Internationale <strong>Pirelli</strong> S.p.A..<br />
• Registered office: in Milan, Viale Sarca 222.<br />
• Share capital: Euro 509,186,594 consisting of No. 8,212,687 ordinary shares of nominal<br />
value Euro 62.00.<br />
• Company recorded in the Companies’ Register under No. 247693/1985.<br />
• Incorporated by the deed filed by the notary public Max Vischer, in Basel (Switzerland),<br />
on December 1, 1937.<br />
2. Articles of association of merging company<br />
The articles of association in force of the merging company <strong>Pirelli</strong> S.p.A., herein attached,<br />
shall not undergo any changes as a consequence of the merger.<br />
Also attached to the merger plan are the revised articles of association containing the<br />
amendments to article 5 which would result should the shareholders’ meeting pass a<br />
resolution to translate share capital into euro, which is being proposed to the same<br />
shareholders’ meeting which will examine the merger plan.<br />
3. Exchange ratio<br />
The exchange ratio, determined by reference to the balance sheets at December 31, 1998<br />
for both companies, is set at:<br />
No. 83 <strong>Pirelli</strong> S.p.A. ordinary shares for every Société Internationale <strong>Pirelli</strong> S.p.A. ordinary share.<br />
There will be no payment differences in cash.<br />
4. Procedure for assigning shares<br />
At the time the merger is perfected, <strong>Pirelli</strong> S.p.A. will proceed to cancel all the shares of<br />
the capital of Société Internationale <strong>Pirelli</strong> S.p.A. and replace them, at the exchange ratio<br />
reported in the preceding point, with <strong>Pirelli</strong> S.p.A. shares, by utilizing the <strong>Pirelli</strong> S.p.A.<br />
shares that shall, after the merger, be held by the same <strong>Pirelli</strong> S.p.A..<br />
Accordingly, there will be no increase in share capital.<br />
5. Date from which the shares assigned in the exchange have rights to dividends<br />
The <strong>Pirelli</strong> S.p.A. ordinary shares assigned in the exchange will have dividend rights<br />
as from January 1, 1999, and therefore will have the right to the dividends declared by<br />
<strong>Pirelli</strong> S.p.A. for the year ending December 31, 1999.<br />
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6. Effects of the merger<br />
The transactions of the company to be merged Société Internationale <strong>Pirelli</strong> S.p.A. will be<br />
given effect to in the financial statements of the merging company <strong>Pirelli</strong> S.p.A. as from<br />
January 1, 1999.<br />
The tax effect of the merger will also come into force from that date.<br />
The merger documents will also establish the date of the effects of merger pursuant to ex<br />
article 2504 bis of the Italian Civil Code, which can also be after the date of the last of the<br />
registrations set forth by art. 2504 of the Italian Civil Code.<br />
7. Special treatment eventually reserved for specific categories of shareholders<br />
There is no special treatment reserved for specific categories of shareholders and/or<br />
holders of securities other than shares.<br />
8. Special advantages, if any, set aside for directors<br />
There are no special advantages set aside for the directors of the companies involved in<br />
the merger.<br />
Milan, March 29, 1999<br />
PIRELLI S.p.A.<br />
The Chairman and CEO<br />
Dott. Marco Tronchetti Provera<br />
SOCIETE INTERNATIONALE PIRELLI S.p.A.<br />
The Deputy Chairman<br />
Ing. Leopoldo <strong>Pirelli</strong><br />
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Attachment 1<br />
<strong>Pirelli</strong> S.p.A. - Milan<br />
Articles of association<br />
Company’s name, purpose, registered office and duration<br />
Article 1<br />
A joint stock Company is hereby incorporated under the name <strong>Pirelli</strong> Società per Azioni.<br />
Article 2<br />
The purpose of the Company is the following:<br />
a) the acquisition of participating interests in other companies or corporations, both in<br />
Italy and abroad;<br />
b) the financing, and the technical and financial co-ordination of the companies or<br />
corporations in which it has interests;<br />
c) the sale, ownership, management or placement of both government and private<br />
securities.<br />
The Company may carry out all transactions of any type whatsoever - excluding the<br />
collection of savings deposits from the public - connected to its corporate business<br />
purpose.<br />
Article 3<br />
The registered office of the Company is in Milan, at Viale Sarca No. 222.<br />
Article 4<br />
The duration of the Company is fixed until the 31 December 2100.<br />
Share Capital<br />
Article 5<br />
The share capital is Italian lire 1,984,558,489,000 divided into No. 1,896,552,473 ordinary<br />
shares and No. 88,006,016 savings shares, with a par value of Italian lire 1,000 each.<br />
With a resolution passed by the extraordinary general meeting held on the 15 May 1998 the<br />
Directors were granted the power to increase the share capital, in one or more instances,<br />
by a maximum amount of Italian lire 500 billion and for a maximum time period of five<br />
years as from the date of the said resolution.<br />
The share capital increase may be carried out by issuing, also with a premium, both<br />
ordinary and savings shares, with the same features as those already outstanding and must<br />
be reserved for shareholders and holders of convertible bonds.<br />
With a resolution passed by the extraordinary general meeting held on the 22 December<br />
1998 the Directors were granted the power to issue bonds, in one or more instances,<br />
including bonds that are convertible both into ordinary shares or into savings shares, or<br />
with warrants valid for the underwriting of the said shares, for a maximum face value<br />
amount of Italian lire 1,000 billion and for a maximum time period of five years as from the<br />
date of the said resolution, with the consequent possible increase of the share capital<br />
serving the bond conversion.<br />
With a resolution passed by the shareholders’ meeting held on the 15 May 1998 the<br />
Directors were granted the power to issue up to a maximum of No. 45 million ordinary<br />
shares, in one or more instances, by the date of 30 April 2003 to be attributed to executives<br />
and cadres of the company and of the companies controlled by same and of those<br />
controlling same and likewise of the other companies controlled by the latter, both in Italy<br />
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and abroad, pursuant to the terms of articles 2441 and/or 2349 of the civil code.<br />
In the event of the issue of bonds which are convertible into shares, the amount of share<br />
capital will be determined according to the extent to which conversion rights on same are<br />
exercised.<br />
Article 6<br />
The shares are divided into ordinary shares and savings shares.<br />
Ordinary shares give the right to one vote per share; they may be either registered or<br />
bearer shares insofar as the law permits, and in this case may be converted, especially at<br />
the holder’s request and expense, from one class to the other.<br />
Savings shares, unless the law provides otherwise, are bearer shares; at the request and<br />
expense of the shareholder they may be converted into registered shares.<br />
As well as any rights and privileges provided for by law and in other parts of the present<br />
articles of association, savings shares shall have pre-emptive rights in the matter of payingoff<br />
of capital up to the full par value of same; in the event of a capital reduction due to<br />
loss, the par value of the saving shares will be reduced only by that part of loss exceeding<br />
the total par value of the other shares.<br />
Savings shares keep the rights and privileges foreseen by law and by the present articles<br />
even in the event of exclusion of ordinary shares and savings shares from trading.<br />
In order to ensure the common representative of the holders of savings shares, of adequate<br />
information about any transactions which might influence the trend in quotations of the<br />
shares in that class, any communications concerning said transactions will promptly be<br />
sent to same through a legal representative.<br />
Article 7<br />
The share capital may be increased, by resolution of the extraordinary shareholders’<br />
meeting, by means of issuing new shares, including any having different rights, in<br />
compliance with the formalities prescribed by the present articles of association.<br />
In the event of a share capital increase being carried out by issuing shares of only one<br />
class, same must be offered on option to the shareholders of all classes of shares.<br />
In the event of both ordinary shares and savings shares being issued:<br />
a) the holders of ordinary shares shall have the right to receive ordinary shares on option,<br />
and savings shares to make up any difference;<br />
b) the holders of savings shares shall have the right to receive savings shares on option,<br />
and ordinary shares to make up any difference.<br />
General Shareholders’ Meeting<br />
Article 8<br />
The convocation of the general meeting, which may take place anywhere in Italy including<br />
in a place other than the registered office, the right to attend meetings and representation<br />
at same are all governed by law.<br />
Article 9<br />
The due convocation of the meeting and the validity of its resolutions are governed by law.<br />
The voting quorum for the appointment of directors is established as a relative majority of<br />
the votes.<br />
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Article 10<br />
In view of the nature of the Company’s business and the special requirements arising<br />
therefrom, the ordinary general meeting may be convened within six months of the end of<br />
the financial period.<br />
Article 11<br />
The meeting shall be presided over by the Chairman of the Board of Directors, by a Vice-<br />
Chairman or by a Managing Director, in that order; whenever there are two or more Vice-<br />
Chairmen or Managing Directors, the chair shall be taken respectively by the senior in age.<br />
The Chairman is assisted by a Secretary appointed by the meeting; there is no need to<br />
appoint a Secretary when the minutes of the meeting are drawn up by a notary public.<br />
It is the duty of the Chairman of the meeting to verify the right to attend the meeting,<br />
including by means of proxy; to ascertain whether or not the meeting has been duly<br />
constituted and has achieved the quorum required in order to pass resolutions; to conduct<br />
and moderate the discussion; and to establish the order and manner of voting as well as<br />
announce the results thereof.<br />
The resolutions of the meeting shall be recorded in the minutes, which shall be signed by<br />
the Chairman and the Secretary to the meeting or the notary public.<br />
The minutes of the extraordinary general shareholders’ meeting must be drawn up by a<br />
notary public appointed by the Chairman.<br />
Any copies and extracts thereof, that have not been drawn up by a notary public, shall be<br />
certified as true copies by the Chairman of the Board of Directors.<br />
Management of the Company<br />
Article 12<br />
The Company is managed by a Board of Directors composed of between seven and<br />
nineteen members who shall remain in office for three years (unless the meeting fixes a<br />
shorter term of office at the time of making the appointment) and may be re-appointed.<br />
Unless otherwise decided by the meeting the Directors are not bound by the prohibition<br />
mentioned under art. 2390 of the Civil Code of Law.<br />
If, due to resignation or any other cause, more than half the Directors should leave office,<br />
then the entire Board of Directors is considered to have resigned with effect as from the<br />
time of its re-election.<br />
The emoluments of the Board of Directors consist of the part-share of profits established<br />
under article 23 of the present articles.<br />
Furthermore, the shareholders’ meeting may assign a fixed annual amount to the members<br />
of the Board, to be recorded under general management expenses. This sum shall remain<br />
fixed and unchanged until such time as the meeting resolves otherwise.<br />
In addition to this, the members of the Board shall be reimbursed for all expenses incurred<br />
by them during the course of their duties.<br />
Article 13<br />
A Chairman, and if necessary, one or more Vice-Chairmen shall be appointed from<br />
amongst the members of the Board.<br />
In the event of the Chairman being absent, the chair shall be taken by a Vice-Chairman or a<br />
Managing Director, in that order; if there should happen to be two or more Vice-Chairmen<br />
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or Managing Directors, the chair shall be taken respectively by the senior in age.<br />
The Board shall appoint a Secretary who need not necessarily be a member of the Board.<br />
Article 14<br />
The Board shall meet at the invitation of the Chairman or whomsoever is acting for same,<br />
at the registered office of the Company or in any other place stated in the notice of<br />
convocation, every time same considers it best in the interests of the Company, or<br />
whenever a meeting has been requested by one of the Managing Directors or by at least<br />
two Statutory Auditors.<br />
Meetings of the Board and of the Executive Committee, as foreseen under article 19<br />
hereinunder, may be held through an audiovisual connection.<br />
In this case the following must be guaranteed:<br />
a) identification of all the participants at each point in the connection;<br />
b) the possibility for each participant to intervene, to orally put forward same’s own<br />
opinion, to view, receive and transmit all documentation, as well as the contextuality of<br />
considerations and resolutions.<br />
Meetings of the Board of Directors and of the Executive Committee are considered to be<br />
held in the place in which the Chairman and the Secretary must be simultaneously.<br />
Article 15<br />
Board meetings shall be convened by means of a letter, telegram, telex or fax sent to the<br />
address of each Director and each Statutory Auditor, at least five days before (or in urgent<br />
cases at least two days before) the day set for the meeting.<br />
The Board may however validly pass resolutions, even failing any formal convocation, if all<br />
the board members and all the statutory auditors in office are present.<br />
Article 16<br />
The presence of at least half the members plus one is necessary for the resolutions of the<br />
Board to be deemed valid, and the favorable vote of the majority of those present is<br />
required.<br />
In the event of a tie in votes, the casting vote shall be that of the Chairman.<br />
Article 17<br />
The resolutions of the Board, even when passed by meetings held through<br />
videoconference, are recorded in a special book signed by the Chairman and the Secretary.<br />
Any copies and extracts thereof, that have not been drawn up by a notary public, shall be<br />
certified as true copies by the Chairman.<br />
Article 18<br />
The Board shall undertake the management of the Company and for that purpose is<br />
invested with the fullest powers of administration, except for those which by provisions of<br />
law or the present Articles are reserved to the general shareholders’ meeting.<br />
The Board of Directors shall promptly refer back to the Board of Statutory Auditors,<br />
including through delegated bodies, about the business activities carried on and the<br />
transactions of greatest importance from an economical, financial and capital viewpoint,<br />
performed by the Company and its subsidiaries; in particular, it shall inform same of any<br />
transactions involving a potential conflict of interests. This information shall be supplied<br />
at least on a three monthly basis, on the occasion of board meetings or meetings of the<br />
Executive Committee, or by means of a written notice to the Board of Statutory Auditors.<br />
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Article 19<br />
The Board is authorized to confer such powers as it deems fit, for the management of the<br />
Company’s business activities, on one or more of its members who may hold the position<br />
of Managing Directors, granting same separate or joint signatory powers, on behalf of the<br />
Company, as appropriate.<br />
Furthermore, the Board may delegate its own attributions to an Executive Committee<br />
composed of some of its members, whose emoluments shall be established by the General<br />
Shareholders’ Meeting.<br />
The Board may also appoint General Managers, Vice General Managers, Managers and<br />
deputy Managers. The appointment of the Managers and deputy Managers may also be<br />
delegated, by the Board, to the Managing Directors and General Managers.<br />
Article 20<br />
Legal representation of the Company vis-à-vis third parties and in court proceedings shall<br />
be the duty, with separate signatory powers, of the Chairman of the Board of Directors<br />
and, if appointed, of the Vice Chairmen and Managing Directors, within the limits of the<br />
powers granted to them by the Board of Directors.<br />
Each one of the aforesaid shall in any case have full powers to take legal action and file<br />
appeals before any judicial authority and any court of any degree, including in revocation<br />
or cassation (supreme court) proceedings, to file statements and prosecute in criminal<br />
cases, to sue on behalf of the Company in criminal proceedings, to begin legal proceedings<br />
and file petitions before all administrative jurisdictions, to intervene and protect the<br />
Company’s interests in case of proceedings and claims against the Company, granting for<br />
this purpose all necessary mandates and powers of attorney ad litem.<br />
The Board of Directors and, within the limits of the powers granted to them by said Board,<br />
the Chairman of the Board and, if appointed, the Vice Chairmen and the Managing Directors,<br />
are authorized to grant Managers and staff in general, and when necessary third parties, the<br />
power to represent the Company vis-à-vis third parties and in court proceedings.<br />
Board of Statutory Auditors<br />
Article 21<br />
The Board of Statutory Auditors is composed of three statutory auditors and two deputy<br />
statutory auditors.<br />
The ordinary General Shareholders’ Meeting shall appoint the Board of Statutory Auditors<br />
and determine the fees thereof. The minority interest shall appoint one statutory auditor<br />
and one deputy statutory auditor.<br />
With the exception of the provisions of the second to last paragraph of the present article,<br />
the appointment of the Board of Statutory Auditors is made on the grounds of lists put<br />
forward by the shareholders in which candidates are listed under progressive numbers.<br />
Each list contains a number of candidates which does not exceed the number of members<br />
to be appointed. All shareholders who, alone or together with other shareholders,<br />
represent at least 2 per cent of the shares with voting rights in the ordinary general<br />
meeting, have the right to put forward a list.<br />
The lists of candidates, undersigned by the parties presenting them, must be filed at the<br />
Company’s registered office at least ten days before the day fixed for the meeting in first<br />
call. A description of the professional résumé of the individuals standing for election must<br />
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e enclosed with the lists together with statements whereby the single candidates accept<br />
the nomination and attest, under their own personal responsibility, to the non-existence of<br />
any reasons for ineligibility or incompatibility as well as to the existence of the requisites<br />
prescribed by law or by the articles for the position.<br />
Any lists put forward which do not comply with the aforesaid provisions shall be<br />
considered not to have been put forward.<br />
Each candidate may be included on only one list, under penalty of ineligibility.<br />
Likewise, any individuals who are not in possession of the requisites established by the<br />
applicable rules and regulations or who already hold the position of statutory auditor in<br />
more than five companies with stocks listed on official Italian markets, with the exception<br />
of controlling companies and subsidiaries of <strong>Pirelli</strong> S.p.A., may not be appointed as<br />
statutory auditors.<br />
Each individual with voting rights may vote for only one list.<br />
The election of the members of the Board of Statutory Auditors is performed as follows:<br />
two statutory members and one deputy are taken from the list which has obtained the<br />
highest number of votes, in the progressive order in which same are listed thereon; the<br />
remaining statutory member and the other deputy member are taken from the list which<br />
has obtained the highest number of votes from the meeting after the first list, again in the<br />
progressive order in which same are listed thereon; in the event of several lists obtaining<br />
the same number of votes, a new run-off vote between the said lists will be cast by all the<br />
shareholders present at the meeting, and the candidates on the list which obtains the<br />
simple majority of the votes will be appointed.<br />
The Chairman of the Board of Statutory Auditors shall be the statutory member indicated<br />
as the first candidate on the list which obtained the highest number of votes.<br />
In case of death, waiver or resignation of a statutory auditor, the deputy belonging to the<br />
same list as the resigned statutory auditor shall take the place of same. In the event of<br />
substitution of the Chairman of the Board of Statutory Auditors, the chair shall be taken by<br />
the other statutory member on the list to which the resigning chairman belonged; if it is<br />
not possible to perform substitutions and replacements as set out hereinabove, then a<br />
meeting shall be convened to integrate and complete the Board of Statutory Auditors and<br />
which shall pass resolutions with a relative majority.<br />
When the meeting has to make provisions, pursuant to the terms of the aforegoing<br />
paragraph or to the terms of law, for the appointment of statutory auditors and/or deputies<br />
needed to complete the Board of Statutory Auditors, it shall proceed as follows: if statutory<br />
auditors appointed from the majority list have to be replaced, then the appointment is made<br />
with a relative majority vote without being tied to any list; if on the other hand statutory<br />
auditors appointed by the minority have to be replaced, the meeting shall replace same with<br />
a relative majority vote choosing names where possible from amongst the candidates<br />
indicated on the list on which the statutory auditor to be substituted appeared.<br />
If only one single list has been put forward, then the meeting shall cast its vote regards same;<br />
if the list obtains a relative majority, then the first three candidates on the list in progressive<br />
order shall be appointed as statutory auditors, and the fourth and fifth candidate shall be<br />
appointed as deputy statutory auditors; Chairman of the Board of Statutory Auditors shall be<br />
the person indicated at the top of the list put forward; in case of death, waiver or resignation<br />
of a statutory auditor, and in the event of substitution of the Chairman of the Board of<br />
Statutory Auditors, same shall be replaced respectively by a deputy statutory auditor and a<br />
statutory auditor in the order arising from the progressive numbering of the said list.<br />
Failing any lists, the Board of Statutory Auditors and its Chairman shall be appointed by<br />
the general meeting with the majorities prescribed by law.<br />
Outgoing statutory auditors may be re-appointed.<br />
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Financial Statements - Distribution of profits<br />
Article 22<br />
The company’s financial period shall end on the 31st December each year.<br />
Article 23<br />
After all the appropriations to the reserves prescribed by law have been carried out, the<br />
annual profits shall be distributed as follows:<br />
- savings shares shall be attributed an amount of up to seven per cent of their par value; if,<br />
in any financial period, a dividend of less than seven per cent of the par value has been<br />
distributed to the savings shares, the said difference is calculated as an increase to be<br />
added to the preference dividend during the following two financial periods;<br />
- the Board of Directors is attributed an amount equivalent to 1% of the net profits<br />
remaining in excess of:<br />
a) the relevant appropriation to the legal reserve;<br />
b) the quota equivalent to 7% of the par value of the savings shares;<br />
c) the quota equivalent to 5% of the par value of paid-up share capital represented by<br />
ordinary shares;<br />
- any profits remaining after the aforesaid appropriations and provisions and which the<br />
meeting resolves to distribute, shall be distributed amongst all the shares in such a manner<br />
that the savings shares shall receive a total dividend which is increased, compared to the<br />
dividend received by the ordinary shares, by an amount equivalent to 2% of their par value.<br />
In the event of distribution of reserves, savings shares shall have the same rights as the<br />
other shares.<br />
General Provisions<br />
Article 24<br />
Insofar as their relationships with the Company are concerned, the domicile of the<br />
shareholders is understood, for all legal purposes, to be that shown in the Book of<br />
Shareholders.<br />
Article 25<br />
All matters not provided for in the present Articles of Association shall be governed by the<br />
provisions of law.<br />
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Attachment 2<br />
<strong>Pirelli</strong> S.p.A. - Milan<br />
Articles of association<br />
Company’s name, purpose, registered office and duration<br />
Article 1<br />
A joint stock Company is hereby incorporated under the name <strong>Pirelli</strong> Società per Azioni.<br />
Article 2<br />
The purpose of the Company is the following:<br />
a) the acquisition of participating interests in other companies or corporations, both in<br />
Italy and abroad;<br />
b) the financing, and the technical and financial co-ordination of the companies or<br />
corporations in which it has interests;<br />
c) the sale, ownership, management or placement of both government and private<br />
securities.<br />
The Company may carry out all transactions of any type whatsoever - excluding the<br />
collection of savings deposits from the public - connected to its corporate business<br />
purpose.<br />
Article 3<br />
The registered office of the Company is in Milan, at Viale Sarca No. 222.<br />
Article 4<br />
The duration of the Company is fixed until the 31 December 2100.<br />
Share Capital<br />
Article 5<br />
The share capital is Euro 1,031,970,414.28 divided into No. 1,896,552,473 ordinary shares<br />
and No. 88,006,016 savings shares, with a par value of Euro 0.52 each.<br />
With a resolution passed by the extraordinary general meeting held on the 15 May 1998 the<br />
Directors were granted the power to increase the share capital, in one or more instances,<br />
by a maximum amount of Euro 258,228,449.54 and for a maximum time period of five<br />
years as from the date of the said resolution.<br />
The share capital increase may be carried out by issuing, also with a premium, both<br />
ordinary and savings shares, with the same features as those already outstanding and must<br />
be reserved for shareholders and holders of convertible bonds.<br />
With a resolution passed by the extraordinary general meeting held on the 22 December<br />
1998 the Directors were granted the power to issue bonds, in one or more instances,<br />
including bonds that are convertible both into ordinary shares or into savings shares, or<br />
with warrants valid for the underwriting of the said shares, for a maximum face value<br />
amount of Euro 516,456,899.08 and for a maximum time period of five years as from the<br />
date of the said resolution, with the consequent possible increase of the share capital<br />
serving the bond conversion.<br />
With a resolution passed by the shareholders’ meeting held on the 15 May 1998 the<br />
Directors were granted the power to issue up to a maximum of No. 45 million ordinary<br />
shares, in one or more instances, by the date of 30 April 2003 to be attributed to executives<br />
and cadres of the company and of the companies controlled by same and of those<br />
controlling same and likewise of the other companies controlled by the latter, both in Italy<br />
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and abroad, pursuant to the terms of articles 2441 and/or 2349 of the civil code.<br />
In the event of the issue of bonds which are convertible into shares, the amount of share<br />
capital will be determined according to the extent to which conversion rights on same are<br />
exercised.<br />
Article 6<br />
The shares are divided into ordinary shares and savings shares.<br />
Ordinary shares give the right to one vote per share; they may be either registered or<br />
bearer shares insofar as the law permits, and in this case may be converted, especially at<br />
the holder’s request and expense, from one class to the other.<br />
Savings shares, unless the law provides otherwise, are bearer shares; at the request and<br />
expense of the shareholder they may be converted into registered shares.<br />
As well as any rights and privileges provided for by law and in other parts of the present<br />
articles of association, savings shares shall have pre-emptive rights in the matter of payingoff<br />
of capital up to the full par value of same; in the event of a capital reduction due to<br />
loss, the par value of the saving shares will be reduced only by that part of loss exceeding<br />
the total par value of the other shares.<br />
Savings shares keep the rights and privileges foreseen by law and by the present articles<br />
even in the event of exclusion of ordinary shares and savings shares from trading.<br />
In order to ensure the common representative of the holders of savings shares, of adequate<br />
information about any transactions which might influence the trend in quotations of the<br />
shares in that class, any communications concerning said transactions will promptly be<br />
sent to same through a legal representative.<br />
Article 7<br />
The share capital may be increased, by resolution of the extraordinary shareholders’<br />
meeting, by means of issuing new shares, including any having different rights, in<br />
compliance with the formalities prescribed by the present articles of association.<br />
In the event of a share capital increase being carried out by issuing shares of only one<br />
class, same must be offered on option to the shareholders of all classes of shares.<br />
In the event of both ordinary shares and savings shares being issued:<br />
a) the holders of ordinary shares shall have the right to receive ordinary shares on option,<br />
and savings shares to make up any difference;<br />
b) the holders of savings shares shall have the right to receive savings shares on option,<br />
and ordinary shares to make up any difference.<br />
General Shareholders’ Meeting<br />
Article 8<br />
The convocation of the general meeting, which may take place anywhere in Italy including<br />
in a place other than the registered office, the right to attend meetings and representation<br />
at same are all governed by law.<br />
Article 9<br />
The due convocation of the meeting and the validity of its resolutions are governed by law.<br />
The voting quorum for the appointment of directors is established as a relative majority of<br />
the votes.<br />
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Article 10<br />
In view of the nature of the Company’s business and the special requirements arising<br />
therefrom, the ordinary general meeting may be convened within six months of the end of<br />
the financial period.<br />
Article 11<br />
The meeting shall be presided over by the Chairman of the Board of Directors, by a Vice-<br />
Chairman or by a Managing Director, in that order; whenever there are two or more Vice-<br />
Chairmen or Managing Directors, the chair shall be taken respectively by the senior in age.<br />
The Chairman is assisted by a Secretary appointed by the meeting; there is no need to<br />
appoint a Secretary when the minutes of the meeting are drawn up by a notary public.<br />
It is the duty of the Chairman of the meeting to verify the right to attend the meeting,<br />
including by means of proxy; to ascertain whether or not the meeting has been duly<br />
constituted and has achieved the quorum required in order to pass resolutions; to conduct<br />
and moderate the discussion; and to establish the order and manner of voting as well as<br />
announce the results thereof.<br />
The resolutions of the meeting shall be recorded in the minutes, which shall be signed by<br />
the Chairman and the Secretary to the meeting or the notary public.<br />
The minutes of the extraordinary general shareholders’ meeting must be drawn up by a<br />
notary public appointed by the Chairman.<br />
Any copies and extracts thereof, that have not been drawn up by a notary public, shall be<br />
certified as true copies by the Chairman of the Board of Directors.<br />
Management of the Company<br />
Article 12<br />
The Company is managed by a Board of Directors composed of between seven and<br />
nineteen members who shall remain in office for three years (unless the meeting fixes a<br />
shorter term of office at the time of making the appointment) and may be re-appointed.<br />
Unless otherwise decided by the meeting the Directors are not bound by the prohibition<br />
mentioned under art. 2390 of the Civil Code of Law.<br />
If, due to resignation or any other cause, more than half the Directors should leave office,<br />
then the entire Board of Directors is considered to have resigned with effect as from the<br />
time of its re-election.<br />
The emoluments of the Board of Directors consist of the part-share of profits established<br />
under article 23 of the present articles.<br />
Furthermore, the shareholders’ meeting may assign a fixed annual amount to the members<br />
of the Board, to be recorded under general management expenses. This sum shall remain<br />
fixed and unchanged until such time as the meeting resolves otherwise.<br />
In addition to this, the members of the Board shall be reimbursed for all expenses incurred<br />
by them during the course of their duties.<br />
Article 13<br />
A Chairman, and if necessary, one or more Vice-Chairmen shall be appointed from<br />
amongst the members of the Board.<br />
In the event of the Chairman being absent, the chair shall be taken by a Vice-Chairman or a<br />
Managing Director, in that order; if there should happen to be two or more Vice-Chairmen<br />
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i
or Managing Directors, the chair shall be taken respectively by the senior in age.<br />
The Board shall appoint a Secretary who need not necessarily be a member of the Board.<br />
Article 14<br />
The Board shall meet at the invitation of the Chairman or whomsoever is acting for same,<br />
at the registered office of the Company or in any other place stated in the notice of<br />
convocation, every time same considers it best in the interests of the Company, or<br />
whenever a meeting has been requested by one of the Managing Directors or by at least<br />
two Statutory Auditors.<br />
Meetings of the Board and of the Executive Committee, as foreseen under article 19<br />
hereinunder, may be held through an audiovisual connection.<br />
In this case the following must be guaranteed:<br />
a) identification of all the participants at each point in the connection;<br />
b) the possibility for each participant to intervene, to orally put forward same’s own<br />
opinion, to view, receive and transmit all documentation, as well as the contextuality of<br />
considerations and resolutions.<br />
Meetings of the Board of Directors and of the Executive Committee are considered to be<br />
held in the place in which the Chairman and the Secretary must be simultaneously.<br />
Article 15<br />
Board meetings shall be convened by means of a letter, telegram, telex or fax sent to the<br />
address of each Director and each Statutory Auditor, at least five days before (or in urgent<br />
cases at least two days before) the day set for the meeting.<br />
The Board may however validly pass resolutions, even failing any formal convocation, if all<br />
the board members and all the statutory auditors in office are present.<br />
Article 16<br />
The presence of at least half the members plus one is necessary for the resolutions of the<br />
Board to be deemed valid, and the favorable vote of the majority of those present is<br />
required.<br />
In the event of a tie in votes, the casting vote shall be that of the Chairman.<br />
Article 17<br />
The resolutions of the Board, even when passed by meetings held through<br />
videoconference, are recorded in a special book signed by the Chairman and the Secretary.<br />
Any copies and extracts thereof, that have not been drawn up by a notary public, shall be<br />
certified as true copies by the Chairman.<br />
Article 18<br />
The Board shall undertake the management of the Company and for that purpose is<br />
invested with the fullest powers of administration, except for those which by provisions of<br />
law or the present Articles are reserved to the general shareholders’ meeting.<br />
The Board of Directors shall promptly refer back to the Board of Statutory Auditors,<br />
including through delegated bodies, about the business activities carried on and the<br />
transactions of greatest importance from an economical, financial and capital viewpoint,<br />
performed by the Company and its subsidiaries; in particular, it shall inform same of any<br />
transactions involving a potential conflict of interests. This information shall be supplied<br />
at least on a three monthly basis, on the occasion of board meetings or meetings of the<br />
Executive Committee, or by means of a written notice to the Board of Statutory Auditors.<br />
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Article 19<br />
The Board is authorized to confer such powers as it deems fit, for the management of the<br />
Company’s business activities, on one or more of its members who may hold the position<br />
of Managing Directors, granting same separate or joint signatory powers, on behalf of the<br />
Company, as appropriate.<br />
Furthermore, the Board may delegate its own attributions to an Executive Committee<br />
composed of some of its members, whose emoluments shall be established by the General<br />
Shareholders’ Meeting.<br />
The Board may also appoint General Managers, Vice General Managers, Managers and<br />
deputy Managers. The appointment of the Managers and deputy Managers may also be<br />
delegated, by the Board, to the Managing Directors and General Managers.<br />
Article 20<br />
Legal representation of the Company vis-à-vis third parties and in court proceedings shall<br />
be the duty, with separate signatory powers, of the Chairman of the Board of Directors<br />
and, if appointed, of the Vice Chairmen and Managing Directors, within the limits of the<br />
powers granted to them by the Board of Directors.<br />
Each one of the aforesaid shall in any case have full powers to take legal action and file<br />
appeals before any judicial authority and any court of any degree, including in revocation<br />
or cassation (supreme court) proceedings, to file statements and prosecute in criminal<br />
cases, to sue on behalf of the Company in criminal proceedings, to begin legal proceedings<br />
and file petitions before all administrative jurisdictions, to intervene and protect the<br />
Company’s interests in case of proceedings and claims against the Company, granting for<br />
this purpose all necessary mandates and powers of attorney ad litem.<br />
The Board of Directors and, within the limits of the powers granted to them by said Board,<br />
the Chairman of the Board and, if appointed, the Vice Chairmen and the Managing<br />
Directors, are authorized to grant Managers and staff in general, and when necessary third<br />
parties, the power to represent the Company vis-à-vis third parties and in court<br />
proceedings.<br />
Board of Statutory Auditors<br />
Article 21<br />
The Board of Statutory Auditors is composed of three statutory auditors and two deputy<br />
statutory auditors.<br />
The ordinary General Shareholders’ Meeting shall appoint the Board of Statutory Auditors<br />
and determine the fees thereof. The minority interest shall appoint one statutory auditor<br />
and one deputy statutory auditor.<br />
With the exception of the provisions of the second to last paragraph of the present article,<br />
the appointment of the Board of Statutory Auditors is made on the grounds of lists put<br />
forward by the shareholders in which candidates are listed under progressive numbers.<br />
Each list contains a number of candidates which does not exceed the number of members<br />
to be appointed. All shareholders who, alone or together with other shareholders,<br />
represent at least 2 per cent of the shares with voting rights in the ordinary general<br />
meeting, have the right to put forward a list.<br />
The lists of candidates, undersigned by the parties presenting them, must be filed at the<br />
Company’s registered office at least ten days before the day fixed for the meeting in first<br />
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call. A description of the professional résumé of the individuals standing for election must<br />
be enclosed with the lists together with statements whereby the single candidates accept<br />
the nomination and attest, under their own personal responsibility, to the non-existence of<br />
any reasons for ineligibility or incompatibility as well as to the existence of the requisites<br />
prescribed by law or by the articles for the position.<br />
Any lists put forward which do not comply with the aforesaid provisions shall be<br />
considered not to have been put forward.<br />
Each candidate may be included on only one list, under penalty of ineligibility.<br />
Likewise, any individuals who are not in possession of the requisites established by the<br />
applicable rules and regulations or who already hold the position of statutory auditor in<br />
more than five companies with stocks listed on official Italian markets, with the exception<br />
of controlling companies and subsidiaries of <strong>Pirelli</strong> S.p.A., may not be appointed as<br />
statutory auditors.<br />
Each individual with voting rights may vote for only one list.<br />
The election of the members of the Board of Statutory Auditors is performed as follows:<br />
two statutory members and one deputy are taken from the list which has obtained the<br />
highest number of votes, in the progressive order in which same are listed thereon; the<br />
remaining statutory member and the other deputy member are taken from the list which<br />
has obtained the highest number of votes from the meeting after the first list, again in the<br />
progressive order in which same are listed thereon; in the event of several lists obtaining<br />
the same number of votes, a new run-off vote between the said lists will be cast by all the<br />
shareholders present at the meeting, and the candidates on the list which obtains the<br />
simple majority of the votes will be appointed.<br />
The Chairman of the Board of Statutory Auditors shall be the statutory member indicated<br />
as the first candidate on the list which obtained the highest number of votes.<br />
In case of death, waiver or resignation of a statutory auditor, the deputy belonging to the<br />
same list as the resigned statutory auditor shall take the place of same. In the event of<br />
substitution of the Chairman of the Board of Statutory Auditors, the chair shall be taken by<br />
the other statutory member on the list to which the resigning chairman belonged; if it is<br />
not possible to perform substitutions and replacements as set out hereinabove, then a<br />
meeting shall be convened to integrate and complete the Board of Statutory Auditors and<br />
which shall pass resolutions with a relative majority.<br />
When the meeting has to make provisions, pursuant to the terms of the aforegoing<br />
paragraph or to the terms of law, for the appointment of statutory auditors and/or deputies<br />
needed to complete the Board of Statutory Auditors, it shall proceed as follows: if<br />
statutory auditors appointed from the majority list have to be replaced, then the<br />
appointment is made with a relative majority vote without being tied to any list; if on the<br />
other hand statutory auditors appointed by the minority have to be replaced, the meeting<br />
shall replace same with a relative majority vote choosing names where possible from<br />
amongst the candidates indicated on the list on which the statutory auditor to be<br />
substituted appeared.<br />
If only one single list has been put forward, then the meeting shall cast its vote regards<br />
same; if the list obtains a relative majority, then the first three candidates on the list in<br />
progressive order shall be appointed as statutory auditors, and the fourth and fifth<br />
candidate shall be appointed as deputy statutory auditors; Chairman of the Board of<br />
Statutory Auditors shall be the person indicated at the top of the list put forward; in case<br />
of death, waiver or resignation of a statutory auditor, and in the event of substitution of the<br />
Chairman of the Board of Statutory Auditors, same shall be replaced respectively by a<br />
deputy statutory auditor and a statutory auditor in the order arising from the progressive<br />
numbering of the said list.<br />
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Failing any lists, the Board of Statutory Auditors and its Chairman shall be appointed by<br />
the general meeting with the majorities prescribed by law.<br />
Outgoing statutory auditors may be re-appointed.<br />
Financial Statements - Distribution of profits<br />
Article 22<br />
The company’s financial period shall end on the 31st December each year.<br />
Article 23<br />
After all the appropriations to the reserves prescribed by law have been carried out, the<br />
annual profits shall be distributed as follows:<br />
- savings shares shall be attributed an amount of up to seven per cent of their par value; if,<br />
in any financial period, a dividend of less than seven per cent of the par value has been<br />
distributed to the savings shares, the said difference is calculated as an increase to be<br />
added to the preference dividend during the following two financial periods;<br />
- the Board of Directors is attributed an amount equivalent to 1% of the net profits<br />
remaining in excess of:<br />
a) the relevant appropriation to the legal reserve;<br />
b) the quota equivalent to 7% of the par value of the savings shares;<br />
c) the quota equivalent to 5% of the par value of paid-up share capital represented by<br />
ordinary shares;<br />
- any profits remaining after the aforesaid appropriations and provisions and which the<br />
meeting resolves to distribute, shall be distributed amongst all the shares in such a manner<br />
that the savings shares shall receive a total dividend which is increased, compared to the<br />
dividend received by the ordinary shares, by an amount equivalent to 2% of their par value.<br />
In the event of distribution of reserves, savings shares shall have the same rights as the<br />
other shares.<br />
General Provisions<br />
Article 24<br />
Insofar as their relationships with the Company are concerned, the domicile of the<br />
shareholders is understood, for all legal purposes, to be that shown in the Book of<br />
Shareholders.<br />
Article 25<br />
All matters not provided for in the present Articles of Association shall be governed by the<br />
provisions of law.<br />
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Board of Statutory Auditors’ report<br />
on the extraordinary part of the shareholders’ meeting<br />
Dear Shareholders,<br />
You have been convened to the extraordinary part of the meeting to pass a series of<br />
resolutions regarding the merger by incorporation in your company of the parent company<br />
Société Internationale <strong>Pirelli</strong> S.p.A.; the procedures for the disposition of the treasury<br />
shares which will remain available to your company, due to the both the effect of the<br />
above-mentioned merger and due to the rejection of the assignment of the bonus shares<br />
and, lastly, for the effect of not meeting, either totally or partially, the pre-fixed goals by<br />
those who were assigned shares under the incentive plan (as far as the last two cases are<br />
concerned, in compliance with the resolution passed in the shareholders’ meeting of<br />
May 15, 1998); the translation into euro of the share capital of your company, which results,<br />
due to rounding up as allowed by the law, to Euro 0.52 of the par value of Lire 1,000 of the<br />
shares which make up the share capital.<br />
As to the first point, the proposed exchange ratio, determined on the basis of the balance<br />
sheet at December 31, 1998 of <strong>Pirelli</strong> S.p.A. and Société Internationale <strong>Pirelli</strong> S.p.A. is fixed<br />
at 83 <strong>Pirelli</strong> S.p.A. shares for every Société Internationale <strong>Pirelli</strong> S.p.A. ordinary share.<br />
There will be no payment differences in cash.<br />
The Board of Directors arrived at the exchange ratio by considering the findings of the<br />
appraisals performed by independent experts. The Board of Statutory Auditors has<br />
examined the merger plan, the Directors’ report on operations and the prescribed opinions<br />
as the congruity of the ratio expressed by Reconta Ernst & Young S.p.A. for <strong>Pirelli</strong> S.p.A.<br />
and by KPMG S.p.A. for Société Internationale <strong>Pirelli</strong> S.p.A..<br />
As for the second point, procedures are proposed for the disposition of treasury shares<br />
coming to our company as a result of the comments made at the beginning of the report.<br />
In relation to the third point, consistent with the adoption of euro for the accounting<br />
records effective January 1, 1999, a proposal is made to translate into euro the share<br />
capital of your company and the consequent increase of the same, to Euro 1,031,970,414.28<br />
(equal to Lire 1,998,173,354,058 against a share capital as of today expressed in Italian lire<br />
and amounting to Lire 1,984,558,489,000) which derives from the adoption of Euro 0.52 as<br />
the per unit par value of the shares making up the share capital.<br />
The Board of Statutory Auditors states that the current share capital of <strong>Pirelli</strong> S.p.A., equal<br />
to Lire 1,984,558,489,000 has been fully paid-in and expresses its favorable opinion as to<br />
the three proposals.<br />
Milan, April 26, 1999<br />
The Board of Statutory Auditors<br />
Luigi Guatri - Mario Brughera - Giorgio Oggioni<br />
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