UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
FOR THE MONTH OF MAY 2003
TELECOM ITALIA S.p.A.
(Translation of registrant's name into English)
CORSO D'ITALIA 41
ROME, ITALY 00198
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
FORM 20-F [X] FORM 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): [ ]
Indicate by check mark whether by furnishing the information contained in this
Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
YES [ ] NO [X]
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82- _______
The merger described herein relates to the securities of two foreign companies.
The merger in which Telecom Italia ordinary shares will be converted into
Olivetti ordinary shares is subject to disclosure and procedural requirements
of a foreign country that are different from those of the United States.
Financial statements included in the document, if any, were prepared in
accordance with foreign accounting standards that may not be comparable to the
financial statements of United States companies. It may be difficult for you to
enforce your rights and any claim you may have arising under the federal
securities laws, since Olivetti and Telecom Italia are located in Italy, and
some or all of their officers and directors may be residents of Italy or other
foreign countries.
You may not be able to sue a foreign company or its officers or directors in a
foreign court for violations of the U.S. securities laws. It may be difficult
to compel a foreign company and its affiliates to subject themselves to a U.S.
court's judgment. You should be aware that Olivetti may purchase securities of
Telecom Italia otherwise than under the merger offer, such as in open market or
privately negotiated purchases.
--------------------------------------------------------------------------------
Cautionary Statement for Purposes of the "Safe Harbor" Provision of the United
States Private Securities Litigation Reform Act of 1995.
The Private Securities Litigation reform Act of 1995 provides a "safe harbor"
for forward-looking statements. The documents included in this Form 6-K
contains certain forward looking statements and forecasts reflecting
management's current views with respect to certain future events. The ability
of the Telecom Italia Group to achieve its projected results is dependant on
many factors which are outside of management's control. Actual results may
differ materially from those projected or implied in the forward-looking
statements. Such forward-looking information involves risks and uncertainties
that could significantly affect expected results and are based on certain key
assumptions.
The following important factors could cause the Telecom Italia Group's actual
results to differ materially from those projected or implied in any forward-
looking statements:
- the continuing impact of increased competition in a liberalized market,
including competition from global and regional alliances formed by other
telecommunications operators in the core domestic fixed-line and wireless
markets of the Telecom Italia Group;
- the ability of the Telecom Italia Group to introduce new services to
stimulate increased usage of its fixed and wireless networks to offset
declines in its fixed-line business due to the continuing impact of
regulatory required price reductions, market share loss and pricing
pressures generally;
- the ability of the Telecom Italia Group to achieve cost-reduction targets
in the time frame established or to continue the process of rationalizing
its non-core assets;
- the impact of regulatory decisions and changes in the regulatory
environment;
- the impact of the slowdown in Latin American economies and the slow
recovery of economies generally on the international business of the
Telecom Italia Group focused on Latin America and on its foreign
investments and capital expenditures;
- the continuing impact of rapid changes in technologies;
- the impact of political and economic developments in Italy and other
countries in which the Telecom Italia Group operates;
- the impact of fluctuations in currency exchange and interest rates;
- Telecom Italia's ability to continue the implementation of its 2002-2004
Industrial Plan, including the rationalization of its corporate structure
and the disposition of Telecom Italia's interests in various companies;
- the ability of the Telecom Italia Group to successfully achieve its debt
reduction targets;
- Telecom Italia's ability to successfully roll out its UMTS networks and
services and to realize the benefits of its investment in UMTS licenses
and related capital expenditures;
- Telecom Italia's ability to successfully implement its internet strategy;
- the ability of the Telecom Italia Group to achieve the expected return on
the significant investments and capital expenditures it has made in Latin
America and in Europe;
- the amount and timing of any future impairment charges for Telecom
Italia's licences, goodwill or other assets; and
- the impact of litigation or decreased mobile communications usage arising
from actual or perceived health risks or other problems relating to mobile
handsets or transmission masts.
The foregoing factors should not be construed as exhaustive. Due to such
uncertainties and risks, readers are cautioned not to place undue reliance on
such forward-looking statements, which speak only as of the date hereof.
Accordingly, there can be no assurance that the group will achieve its projected
results.
ITEM I
[Graphic Appears Here]
olivetti [logo] TELECOM ITALIA [logo]
Information Document
pursuant to Article 70(4) of
Consob Regulation 11971/1999, as amended,
concerning
THE MERGER BY INCORPORATION
OF
TELECOM ITALIA S.p.A.
INTO
OLIVETTI S.p.A.
[PAGE INTENTIONALLY LEFT BLANK]
Except as provided below, any offer to purchase or sell securities described
herein is not being made, directly or indirectly, in or into, or by the use of
the mails of, or by any means or instrumentality (including, without
limitation, by mail, telephonically or electronically by way of internet or
otherwise) of interstate or foreign commerce, or any facility of any securities
exchange, of the United States of America and any such offer will not be
capable of acceptance by any such use, means, instrumentality or facility.
The information contained herein does not constitute an offer of securities for
sale in the United States or offer to acquire securities in the United States.
The Olivetti securities referred to herein have not been, and are not intended
to be, registered under the U.S. Securities Act of 1933 (the "Securities Act")
and may not be offered or sold, directly or indirectly, into the United States
except pursuant to an applicable exemption. The Olivetti ordinary shares and
Olivetti savings shares are intended to be made available within the United
States in connection with the merger pursuant to an exemption from the
registration requirements of the Securities Act.
The proposed cash tender offer for a portion of the Telecom Italia ordinary
shares described herein is intended to be made available in or into the United
States pursuant to an exemption from the tender offer rules available pursuant
to the Securities Exchange Act of 1934 (the "Securities Exchange Act").
The proposed cash tender offer for a portion of the Telecom Italia savings
shares described herein is not being made and will not be made, directly or
indirectly, in or into the United States and will not be capable of acceptance,
directly or indirectly, in or from the United States or by the use of the mails
of, or by any means or instrumentality (including, without limitation, by mail,
telephonically or electronically by way of internet or otherwise) of interstate
or foreign commerce, or any facility of any securities exchange, of the United
States.
Olivetti will be considered a successor registrant with respect to the
registration of Telecom Italia's ordinary and savings shares under the
Securities Exchange Act and will consequently be subject to the requirements
applicable to a reporting foreign private issuer under the Securities Exchange
Act.
Application will be made to the New York Stock Exchange for the ordinary and
savings shares of Olivetti to be listed in the form of American Depositary
Recipts (ADRs) from the date the Merger becomes effective.
* * *
The merger described herein relates to the securities of two foreign companies.
The merger in which Telecom Italia ordinary shares will be converted into
Olivetti ordinary shares is subject to disclosure and procedural requirements
of a foreign country that are different from those of the United States.
Financial statements included in the document, if any, were prepared in
accordance with foreign accounting standards that may not be comparable to the
financial statements of United States companies.
It may be difficult for you to enforce your rights and any claim you may have
arising under the federal securities laws, since Olivetti and Telecom Italia
are located in Italy, and some or all of their officers and directors may be
residents of Italy or other foreign countries. You may not be able to sue a
foreign company or its officers or directors in a foreign court for violations
of the U.S. securities laws. It may be difficult to compel a foreign company
and its affiliates to subject themselves to a U.S. court's judgment.
You should be aware that Olivetti may purchase securities of Telecom Italia
otherwise than under the merger offer, such as in open market or privately
negotiated purchases
3 | Information Document
Introduction
This information document ("Information Document") has been prepared and
published jointly by Olivetti S.p.A. ("Olivetti", which, once the merger that
is the subject of this | Information Document becomes effective, is also
referred to as the "Company Resulting from the Merger") and Telecom Italia
S.p.A. ("Telecom Italia") in accordance with Article 70(4) of Consob Regulation
11971/1999 as amended (the "Consob Regulation") in connection with the merger
of Telecom Italia into Olivetti (the "Merger") to provide shareholders and the
market with adequate and detailed information on the merger between Olivetti
and Telecom Italia.
The Merger, approved by the Boards of Directors of Olivetti and Telecom Italia
on 15 April 2003, comprises the merger of Telecom Italia, a subsidiary of
Olivetti, into Olivetti pursuant to Article 2501 et seq. of the Civil Code.
Since the Merger involves companies with financial instruments listed on an
Italian regulated market, it is also subject to Legislative Decree 58/1998 (the
"Consolidated Law") and the Consob Regulation.
Overview of the Merger
From the legal standpoint, the Merger will lead to the Company Resulting from
the Merger being the universal successor to Telecom Italia, so that, from the
date on which the merger becomes effective, the Company Resulting from the
Merger will assume all the assets and liabilities, rights and obligations of
Telecom Italia, thus including, but not limited to, the title to all the
related tangible and intangible fixed assets, receivables and payables accrued
and accruing, and, more generally, the entirety of Telecom Italia without any
exclusions or limitations whatsoever.
For the purposes of the Merger reference has been made, pursuant to Article
2501-ter of the Civil Code, to the balance sheets in the draft financial
statements of Olivetti and Telecom Italia for the year ended 31 December 2002.
The Boards of Directors of Olivetti and Telecom Italia, assisted by their
respective financial advisors -- JP Morgan Chase Bank ("JP Morgan") for
Olivetti; Lazard & Co. S.r.l. ("Lazard") and Goldman Sachs SIM S.p.A. ("Goldman
Sachs") for Telecom Italia -- and in view of the outcome of the discussions
concerning the determination of the exchange ratio have established, taking
into account the analyses of their respective advisors, the exchange ratio at 7
Olivetti ordinary (savings) shares with a par value of Euro 1 each for every
Telecom Italia ordinary (savings) share with a par value of Euro 0.55 each. The
manner of determining the exchange ratio is described in Section 2.1.
Since the Merger will involve the merger into Olivetti of a subsidiary, it will
result in the cancellation of Olivetti's interest in Telecom Italia when the
merger becomes effective and the assignment to the holders of Telecom Italia
ordinary and savings shares other than Olivetti of ordinary and savings shares
issued by the Company Resulting from the Merger and the assignment to the
holders of Olivetti shares of ordinary shares newly issued by the Company
Resulting from the Merger on the basis of assignment ratios determined at the
time of the signing of the merger instrument and corresponding to the exchange
ratio. For the most part the assignment will be carried out by redistributing
the share capital of the Company Resulting from the Merger and having recourse
to the issue of new shares only insofar as this is necessary to keep the share
capital of the Company Resulting from the Merger at the level of Olivetti's
share capital as attested on 15 April 2003.
For more details, see Section 2.1.2(c).
4 | Information Document
In order to give effect to the exchange ratio for Telecom Italia savings
shares, provision has been made for the Company Resulting from the Merger to
issue savings shares to be assigned to the holders of Telecom Italia savings
shares. Application will be made to Borsa Italiana S.p.A. ("Borsa Italiana")
for these new savings shares to be listed on its electronic share market
("MTA"). The effectiveness of the Merger will be subject to such listing.
The Merger will be submitted for approval by the shareholders' meetings of
Olivetti and Telecom Italia called respectively on 24, 25 and 26 May 2003 and
24 and 25 May 2003. It is the intention of the companies participating in the
Merger to complete it as soon as possible, and specifically to render the
Merger effective in the first half of August 2003.
The Company Resulting from the Merger will adopt new bylaws that will be almost
the same as those of Telecom Italia, especially as regards the rules of
corporate governance -- so that minority shareholders will enjoy basically the
same protection as that provided by Telecom Italia's bylaws -- and the
corporate purpose. In particular, the change in Olivetti's corporate purpose
will result in Olivetti shareholders who are absent from the meeting or vote
against the resolution approving such change having the right to withdraw from
the company in accordance with Article 2437 of the Civil Code.
For a description of the bylaw changes in consequence of the Merger, see
Section 2.1.2(f).
In order to meet the needs deriving from the settlement of possible
withdrawals, Olivetti will draw on lines of credit provided by a group of banks
amounting to Euro 9,000,000,000.
At the end of the Merger the ordinary shares of the Company Resulting from the
Merger will continue to be listed on MTA. Nor will the Merger affect the
listing of the Olivetti ordinary shares on the Frankfurt Stock Exchange; it is
not intended to apply for the savings shares issued by the Company Resulting
from the Merger to be listed on that exchange. Application will be made to the
New York Stock Exchange for the ordinary and savings shares to be listed in the
form of American Depositary Receipts (ADRs) from the date the Merger becomes
effective, thus maintaining the existing situation with regard to Telecom
Italia's ordinary and savings shares. As mentioned earlier, application will
also be made for the savings shares to be listed on MTA.
The Tender Offer
As part of the Merger and before its completion, provision has been made for
Olivetti to make a voluntary partial tender offer (the "Tender Offer") for
Telecom Italia ordinary and savings shares. In addition to having an investment
rationale, the Tender Offer is also intended to provide a way for Telecom
Italia shareholders who do not wish to keep their holding in the Company
Resulting from the Merger to liquidate part of it, in a similar way to the
possibility Olivetti shareholders will have to exercise their de jure right of
withdrawal. The Tender Offer will be made only at the end of the period allowed
for Olivetti shareholders to exercise their right of withdrawal following the
approval of the merger plan and the adoption of the new bylaws with the amended
corporate purpose and no minimum threshold will be set for acceptances. The
entire amount of the Euro 9,000,000,000 credit not used to finance Olivetti
shareholders' exercise of their right of withdrawal will be allocated to the
Tender Offer. See also Section 2.1.
This Information Document is available to the public at Olivetti's registered
office at 77 Via Jervis, Ivrea, at Telecom Italia's registered office at 2
Piazza degli Affari, Milan, and its headquarters at 41 Corso d'Italia, Rome,
and at Borsa Italiana's registered office at 6 Piazza degli Affari, Milan. It
has also been posted on the websites of Olivetti and Telecom Italia, at
respectively www.olivetti.it and www.telecomitalia.it.
5 | Information Document
Summary of data and indicators per share for Oivetti and Telecom Italia for the
2002 fiscal year (on a consolidated basis)
Telecom Italia Olivetti
Group Group
---------------- ----------------------------------------
2002 fiscal year 2002 fiscal year 2002 fiscal year
(in millions of euros) (historical) (historical) (pro forma) (o)
---------------------------------------------- ---------------- ---------------- ---------------
Income statement data
Sales and service revenues 30,400 31,408 31,408
Gross operating profit 13,964 14,023 14,023
Operating income 7,381 6,016 5,853
Net income (loss), before minority interest 297 (306) (1,892)
Net income (loss) (322) (773) (2,511)
---------------------------------------------- ------------ ------------ ---------------
(in millions of euros)
---------------------------------------------- ------------ ------------ ---------------
Balance sheet and financial data
Invested capital, net 30,941 54,022 61,546
Shareholders' equity (1): 12,823 20,623 17,970
of which:
Parent Company interest 9,049 11,639 14,236
Minority interest (1) 3,774 8,984 3,734
Net financial debt 18,118 33,399 43,576
Cash flow (2) 6,174 6,963 5,540
---------------------------------------------- ------------ ------------ ---------------
(in euros)
---------------------------------------------- ------------ ------------ ---------------
Per-share indicators (*)
Net income (loss) on ordinary operations,
after minority interest per share(3):
Ordinary 0.1709 (0.1458) (4) (0.0653)
(0.0802) (5)
Savings 0.1819 (0.0543)
Net income (loss), after minority interest
per share
Ordinary (0.0474) (0.0896) (4) (0.1614)
(0.0493) (5)
Savings (0.0364) (0.1504)
Cash flow per share 0.8498 0.8068 (4) 0.3469
0.4437 (5)
Shareholders' equity, after minority
interest per share 1.2455 1.3485 (4) 0.8914
0.7417 (5)
---------------------------------------------- ------------ ------------ ---------------
(*) Number of shares considered:
Ordinary 5,257,628,131 8,630,811,002 (4) 9,923,320,999
15,692,383,640 (5)
net of treasury stock (ordinary shares) 5,280,500 214,628,828 (4) 112,108,258
390,234,232 (5)
Savings 2,007,475,025 6,047,366,234
net of treasury stock (savings shares) 45,647,000
---------------------------------------------- ------------ ------------ ---------------
1. Net of "Receivables from shareholders for capital contributions", equal to
Euro 4 million.
2. Net income (loss) before minority interest plus depreciation and
amortization.
3. Net income (loss) on ordinary operations, after minority interest,
calculated on the basis of the result for ordinary operations net of the
related taxes with reference to the number of ordinary and savings shares
outstanding at the end of the year. In making the calculation for the
Telecom Italia Group and the Olivetti Group (pro forma column), account
was taken of the bylaw requiring the dividend per share for savings shares
to be higher than that for ordinary shares by 2% of the share's par value
(Euro 0.0110).
4. Historical number of shares.
5. Pro forma number of shares taking account of the change in the par value
from Euro 1.00 to Euro 0.55.
(o) The assumptions made in preparing the pro forma column are described in
Section 5.
6 | Information Document
Contents
INTRODUCTION 4
1. RISK FACTORS 9
2. INFORMATION REGARDING THE MERGER 15
2.1 Summary description of the procedures and time limits for the Merger 15
2.1.1 Description of the companies involved in the Merger 21
2.1.2 The Merger 30
2.1.3 Forecasts of the composition of major shareholders and of the control structure
of the Absorbing Company following the Merger 43
2.1.4 Effects of the Merger on shareholders' agreements falling within the scope of
Article 122 of the Consolidated Law involving the shares of the companies
participating in the Merger 45
2.2 Aims of the Merger 45
2.2.1 Aims of the Merger with special reference to operating objectives 47
2.2.2 Plans drawn up by the companies participating in the Merger with special reference
to the outlook for operations and to restructurings and/or reorganizations 47
2.3 Documents made available to the public and the places in which they can be consulted 48
3. SIGNIFICANT EFFECTS OF THE MERGER 49
3.1 Significant effects of the Merger on the key factors that influence and characterize the
activity of the companies participating in the Merger and the type of business engaged in 49
3.2 Implications of the Merger for the strategies concerning business and financial dealings
between Group companies or the centralized supply of services 42
4. ECONOMIC AND FINANCIAL PERFORMANCE OF THE TELECOM ITALIA GROUP 51
4.1 Comparison of the reclassified consolidated income statements and balance sheets of the
Telecom Italia Group for 2002 and 2001 and accompanying notes 51
4.1.1 Reclassified Telecom Italia Group income statements for 2002 and 2001 and
accompanying notes 51
4.1.2 Reclassified consolidated balance sheets of the Telecom Italia Group at 31 December
2002 and 2001 and accompanying notes 58
4.1.3 Telecom Italia Group consolidated statements of cash flows in 2002 and 2001 and
net financial position at 31 December 2002 and 2001 62
4.2 The external auditor's report on the consolidated financial statements for 2001 and 2002 63
7 | Information Document
5 . PRO FORMA INCOME STATEMENTS AND BALANCE SHEETS OF THE ABSORBING COMPANY 65
5.1 Pro forma consolidated balance sheets and income statements for the year ended 31.12.2002 66
5.1.1 Description of the pro forma adjustments to the historical amounts for 2001 and 2002 70
5.1.2 Assumptions made for the preparation of the pro forma data 71
5.1.3 Main effects on the income statements and balance sheets of changing the
assumptions made in preparing the pro forma data 72
5.2 Historical and pro forma amounts and per-share indicators 73
5.3 Report of the auditing firm on the pro forma income statement, balance sheet and financial
data 74
5.3.1.Description of the pro-forma adjustments to the historical company amounts at
31 December 2002 and for the year ended 31 December 2002 78
5.3.2.Main effects on the income statements and balance sheets of changing the
percentage of withdrawals assumed in preparing the pro-forma data 78
5.4. Report of the auditing firm on its examination on the pro-forma figures 79
6 . OUTLOOK FOR THE ABSORBING COMPANY AND FOR THE GROUP IT HEADS 81
6.1 General indications regarding business since the close of the 2002 fiscal year 81
6.2 Information permitting a reasonable forecast of the results for the current year 81
ANNEXES 83
8 | Information Document
1. Risk factors
The principal factors of risk or significant uncertainty regarding the Merger
covered by this Information Document and the activity of the Company Resulting
from the Merger are indicated below.
Activity of the Company Resulting from the Merger
From the date on which the Merger becomes effective and as a consequence
thereof, the Company Resulting from the Merger will assume the rights and
obligations of Telecom Italia, continuing the latter's activity. In particular,
the Company Resulting from the Merger will succeed to Telecom Italia in all the
concessions, licences and administrative authorizations granted thereto, in the
ways established by the law in force, obtaining the assent of the competent
authorities where required. The activity of the Company Resulting from the
Merger will coincide substantially with that previously performed by Telecom
Italia and the Company Resulting from the Merger will adopt the same corporate
purpose as Telecom Italia. The bylaws of the Company Resulting from the Merger
will be amended to incorporate Telecom Italia's current bylaws; among other
things, these permit the provision of telecommunications services and require
that the principal activity not be that of a holding company, which up to now,
by contrast, has been the principal activity of Olivetti. In addition to these
changes, there will be a substantial change in the risk profile associated with
investment in Olivetti since, as a consequence of the Merger, the Company
Resulting from the Merger will no longer have the characteristics established
by the Ministry of the Treasury in implementing Article 113 of Legislative
Decree 385/1993 to define the concept of "engaging as the principal activity,
without dealings with the public, in the acquisition of equity interests".
As a consequence of the change of corporate purpose the Olivetti shareholders
who vote against the merger resolution and those who are absent from the
meeting may exercise the right of withdrawal under Article 2437 of the Civil
Code. In this regard, see Section 2.1.2(d).
Development of the strategic guidelines
This Information Document contains some operating objectives for the Company
Resulting from the Merger, agreed by the companies participating in the Merger
and basically coinciding with those of Telecom Italia approved by its Board of
Directors on 13 February 2003.
The above-mentioned objectives confirm the guidelines and objectives of the
Telecom Italia Group's business plan for the three years 2002-2004 ("Business
Plan").
The Business Plan's main guidelines concerning industrial restructuring are:
(i) enhancing the position of leadership in the domestic market in the core
business of fixed and mobile telephony; (ii) upgrading the portfolio of
products and services; (iii) a new focus on international activities; and (iv)
improvement of operating efficiency, with a stringent cost control policy.
Operations in 2002 confirmed the ability of the Telecom Italia Group to pursue
these goals. In particular, the efficiency objectives envisaged for the period
2002-2004 have already been partly achieved and the plan of disposals carried
out so far has had a positive impact on the level of debt.
Action to strengthen the Telecom Italia Group's ability to innovate, launch
high value-added services and supply innovative core business services rapidly
in all the countries in which it operates is continuing in the current year and
will be continued in the coming years.
The achievement of the objectives of the Company Resulting from the Merger
could be influenced by the following factors:
9 | Information Document
o the ability of the Company Resulting from the Merger to manage costs;
o the ability of the Company Resulting from the Merger to attract and retain
highly qualified personnel;
o the ability of the Company Resulting from the Merger to dispose of
non-core assets;
o the ability of the Company Resulting from the Merger to provide
telecommunications services following alliances concluded with partners
such as other operators or information technology providers;
o the general economic conditions of the principal markets in which the
Company Resulting from the Merger does business;
o the effects of interest rate and exchange rate fluctuations;
o the entry of new competitors in the completely liberalized
telecommunications market and their impact on the Company Resulting from
the Merger's market share of domestic and international traffic.
Furthermore, the achievement of the objectives may also be subject to factors
beyond the control of the Company Resulting from the Merger, including economic
and market developments. Nor is there any guarantee that the Company Resulting
from the Merger will actually achieve the objectives identified by management
in the ways and according to the timetable envisaged.
Debt
The Merger described in this Information Document will cause the debt of the
Company Resulting from the Merger to be greater than the present total debt of
Olivetti and Telecom Italia, since this will be temporarily increased by the
transactions related to the Merger (withdrawals and the Tender Offer). It is
the opinion of Olivetti and Telecom Italia that the level of debt in question
is consistent and compatible with the range of activities of the Company
Resulting from the Merger and with the prospective cash flows deriving from the
implementation of the strategic guidelines, and that the Merger permits the
Company Resulting from the Merger to benefit from the positive effects of
unified debt management, including the lengthening of maturities and optimal
correlation with corporate requirements (on this point, see also Section 2.2).
Debt is projected to decrease over a span of between 18 and 24 months from the
effectiveness of the Merger, partly by using the proceeds of the sale of other
non-strategic assets for this purpose. However, there is no guarantee that
factors now unforeseeable, including, but not limited to, the deterioration of
the general situation of the economy, will not significantly affect the
reduction of debt on the part of the Company Resulting from the Merger.
Sale of non-strategic assets
The continuation, completion, full or partial non-implementation or delayed
execution of the programme of disposals of equity interests in companies that
operate in sectors considered non-strategic could cause results to diverge from
the objectives set. Furthermore, in the case of non-disposal or delayed
disposal of such assets, the assets and liabilities, financial position and
profits and losses of the companies earmarked for sale could have negative
effects on the profitability, assets and liabilities and financial position of
the Company Resulting from the Merger.
10 | Information Document
Investments in Europe and Latin America
In the past few years Telecom Italia has pursued a programme of strategic
acquisitions in Latin America and in Europe, with the aim of establishing a
more competitive position and balancing the diminution of its domestic market
share. Recently, Telecom Italia has re-examined this strategy and sought to cut
back its investments in non-strategic areas. Various factors, including, but
not limited to, current market conditions and the general situation of the
economy, could give rise to difficulties in the implementation of this plan by
the Company Resulting from the Merger.
Changes in the legislative, regulatory and tariff framework - Effects of the
liberalization of the telecommunications sector
The activities currently performed by Telecom Italia, which at the end of the
Merger will be undertaken by the Company Resulting from the Merger, and by TIM,
a subsidiary of Telecom Italia, are performed in the context of the legislative
and regulatory framework in force in the European Union and Italy. The
regulation of the telecommunications sector is subject to continuous evolution,
on the basis of technological innovation and market developments. Consequently,
changes in legislation, government policy or the interpretation of the current
rules regarding operators and the telecommunications market could have a
significant influence on the operations of the Company Resulting from the
Merger and TIM. The Italian telecommunications sector has now been fully
liberalized for more than five years (since 1 January 1998). Consequently,
Telecom Italia has been faced with open competition in some sectors (for
example, supply of some telecommunications services) since 1990 and has
accordingly changed its own market approach to take account of the activities
of competitors that have gradually extended their services to sectors in which
Telecom Italia once had exclusive rights (before 1 January 1998 Telecom Italia
had the exclusive right to provide public fixed telephony services and operate
telecommunications networks supplying such services.) The entry of new
operators following the liberalization of the sector has affected revenues from
the supply of fixed telephony services and could affect future revenues
therefrom for the Company Resulting from the Merger.
It should be noted that the current legislative framework, consisting of
Presidential Decree 318/1997, Law 249/1997 and the related implementing
measures, may shortly undergo a wholesale revision in connection with the
transposition into Italian law of the Community directives referred to in the
so-called "99 Review" aimed at creating a new regulatory framework for the
electronic networks and communications sector based on the transposition into
Italian law of a number of EU directives adopted in 2002 (the Framework
Directive, the Access Directive, the Authorizations Directive, the Universal
Service Directive and the Directive on Privacy and Electronic Communications)
and set to come into force on 25 July 2003. The new framework is intended to
bring harmonized regulation throughout the European Union, reduce entry
barriers where they exist and foster competition to the benefit of consumers.
Effects of consolidation and globalization of the telecommunications industry
on competitive positioning
The consolidation and globalization of the telecommunications industry in
Europe and elsewhere may lead to a further increase in competition in the
Italian market. Consolidation is increasing rapidly and competition is expected
to rise at all levels in the future. The use of the single European currency
could further intensify competition by facilitating international operators'
entry into the Italian market and
11 | Information Document
direct competition with the Company Resulting from the Merger and with TIM in
fixed and mobile telephony and in the local and long-distance markets.
Technological evolution and development of services in the telecommunications
sector
The telecommunications industry is subject to rapid, significant changes in
both technology and services. The Company Resulting from the Merger and its
subsidiaries will have to contend with heightened competition arising from the
technologies and services that may be introduced in the future. The telephone
networks of the Company Resulting from the Merger and TIM will require an
adequate capacity to adapt to meet both customer demand and continual
technological change. They will also have to permit the provision of innovative
services and/or traditional services using new technologies.
In order to face a possible reduction in revenues as a result of greater
competition and the steady reduction in tariffs, the plan is for the group
headed by the Company Resulting from the Merger to introduce new value-added
services in both fixed and mobile telecommunications, so as to augment its own
networks' traffic and develop new business opportunities. The success of these
initiatives may depend on factors beyond the control of the Company Resulting
from the Merger, and the revenues of the Company Resulting from the Merger
could be affected by the failure of alternative services to develop in the
fixed and mobile telecommunications mobile sector.
Golden Share
As regards the clauses of Telecom Italia's bylaws concerning the special powers
attributed to the Minister for the Economy and Finance (the so-called Golden
Share), the Minister for the Economy and Finance has informed Telecom Italia
that he considered the conditions did not exist for exercising his veto right
in the event of the adoption by Telecom Italia's shareholders' meeting of the
resolution approving the Merger. As for the amendments to the bylaws connected
with the Merger, the Minister for the Economy and Finance has informed Telecom
Italia that he considered it necessary to maintain in the bylaws of the Company
Resulting from the Merger the power of assenting to the acquisition of major
shareholdings in the company's capital and the power of veto as set out in the
current bylaws of Telecom Italia, but that he considered it was not necessary
to maintain in such bylaws the power attributed to the Minister for the Economy
and Finance in the current Telecom Italia bylaws of assenting to significant
shareholders' agreements and that of appointing a member of the Board of
Directors and a member of the Board of Auditors. The Minister for the Economy
and Finance has indicated that the findings referred to above were issued in
agreement with the Minister for Productive Activities.
Pending the formalization of the measure best suited to the findings and any
opinion the competent Community authorities might express on the matter, the
Minister for the Economy and Finance requested that the bylaws to be submitted
to the shareholders' meetings of the companies participating in the Merger
conform with the indications provided.
Accordingly, the extraordinary shareholders' meetings of Olivetti and Telecom
Italia called to approve the Merger are invited to approve a clause in the
bylaws of the Company Resulting from the Merger providing for the special
powers referred to in Telecom Italia's current bylaws in accordance with the
findings of the Minister for the Economy and Finance. The bylaws that will be
adopted by the Company Resulting from the Merger provide, in Article 22, for
the special powers as specified above (see Annex III).
12 | Information Document
Investor initiatives
According to media reports, Liverpool Limited Partnership ("Liverpool") has
announced that on 13 May 2003 it had filed an application with the Court of
Milan for a restraining order suspending the voting rights of Olimpia in
Olivetti and those of Olivetti in Telecom Italia before the extraordinary
shareholders' meetings convened by the two companies. The grounds for the
petition are the alleged overstepping of the threshold triggering the mandatory
tender offer requirement and hence, according to Liverpool, the suspension of
the voting rights in question in the absence of compliance with the related
requirements.
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14 | Information Document
2. Information regarding the Merger
2.1 Summary description of the procedures and time limits for the Merger
General aspects of the Merger
The Merger described in this Information Document, which will be submitted for
approval by the shareholders' meetings of Olivetti and Telecom Italia, will
consist of the Merger of Telecom Italia into Olivetti under Article 2501 et
seq. of the Civil Code. Since the Merger involves companies with financial
instruments listed on an Italian regulated market, it is also subject to the
Consolidated Law and the Con-sob Regulation.
The Merger will lead to the Company Resulting from the Merger being the
universal successor to Telecom Italia, so that, from the date on which the
Merger becomes effective, the Company Resulting from the Merger will assume all
the assets and liabilities, rights and obligations of Telecom Italia, thus
including, but not limited to, the title to all the related tangible and
intangible fixed assets, receivables and payables accrued and accruing, and,
more generally, the entirety of Telecom Italia.
The Company Resulting from the Merger will assume the name "Telecom Italia
S.p.A." and will succeed to all the legal relationships of Telecom Italia,
including the concessions, licences and administrative authorizations granted
thereto in accordance with the procedures established by the legislation in
force, including the amendment of its corporate purpose.
The change in Olivetti's corporate purpose -- made necessary by the need,
pursuant to the provisions of the licences and related fee schedules issued by
the competent authorities in accordance with Presidential Decree 318/1997, for
the Company Resulting from the Merger to have a purpose that expressly includes
the regulated activities subject to administrative authorization currently
performed by Telecom Italia -- will result in Olivetti shareholders who are
absent from the meeting or vote against the resolution approving such change
having the right to withdraw from the company in accordance with Article 2437
of the Civil Code (see Section 2.1.2(d)). In order to meet the needs deriving
from the settlement of possible withdrawals, Olivetti will draw on lines of
credit provided by a group of banks amounting to Euro 9,000,000,000.
Since the Merger will involve the Merger into Olivetti of a subsidiary, it will
result in the cancellation of Olivetti's interest in Telecom Italia when the
Merger becomes effective and the assignment to the holders of Telecom Italia
ordinary and savings shares, other than Olivetti, of ordinary and savings
shares issued by the Company Resulting from the Merger and the assignment to
the holders of Olivetti shares of ordinary shares newly issued by the Company
Resulting from the Merger on the basis of assignment ratios corresponding to
the exchange ratio. For the most part the assignment will be carried out by
redistributing the share capital of Olivetti and having recourse to the issue
of additional shares only insofar as this is necessary to keep the share
capital of the Company Resulting from the Merger at the level of Olivetti's
share capital as attested on 15 April 2003. For more details, see Section
2.1.2(c).
As mentioned earlier, as a consequence of the Merger, Olivetti will cancel all
the Telecom Italia shares it holds at the time the Merger takes place. For the
purposes of the company's financial statements, the difference between the
carrying value of the cancelled Telecom Italia shares and the corresponding
portion of the shareholders' equity will be positive and will therefore give
rise to a cancellation deficit. This deficit, whose size will also depend on
the level of acceptances of the Tender Offer, will be allocated to Telecom
Italia's assets (in particular its holding of TIM shares) and any remaining
difference will be
15 | Information Document
entered under "goodwill". In view of the procedure for assigning the shares of
the Company Resulting from the Merger, it is reasonable to expect that an
exchange surplus will emerge. In Olivetti's consolidated financial statements
the consolidation difference that arose with the acquisition of Telecom Italia
in 1999 will be increased by the difference between the carrying value of any
Telecom Italia shares acquired in the Tender Offer and the corresponding
portion of the shareholders' equity.
It is the intention of the companies participating in the merger to complete
the Merger as soon as possible, and specifically to render the Merger effective
in the first half of August 2003.
At the end of the Merger the ordinary shares of the Company Resulting from the
Merger will continue to be listed on MTA. Application will be made for the
savings shares also to be listed on MTA before the Merger becomes effective and
as a condition of its effectiveness. The Merger will not affect the listing of
the Olivetti ordinary shares on the Frankfurt Stock Exchange. Application will
also be made to the New York Stock Exchange for the ordinary and savings shares
to be listed in the form of American Depositary Receipts (ADRs) from the date
the Merger becomes effective.
The development of the Merger
The Merger is part of the strategic plan pursued by the Olivetti-Telecom Italia
Group with the aim of focusing on core businesses, improving the corporate
structure and reducing debt. Since late in 2001 an important aspect of the
plan, intended to create value and protect the interests of all shareholders,
has been the simplification of the Group's corporate structure.
On 7 January 2003 a feasibility study was begun with the objective of drawing
up a plan for the combination of the two companies. In this connection Olivetti
retained JP Morgan and Telecom Italia retained Lazard to act as financial
advisors in evaluating and drawing up plans for the combination and, if it was
decided to go ahead with the project, in determining the exchange ratio for the
eventual merger. Subsequently, Telecom Italia retained Goldman Sachs to act as
a financial advisor as well.
On 21 February 2003 members of the managements of the two companies and their
respective financial and legal advisors began to discuss an operational plan
for the combination, to be submitted to the Boards of Directors of Olivetti and
Telecom Italia. Work on this plan and, in particular, on the valuations serving
to determine the exchange ratio continued intensively from the above-mentioned
date to early March 2003. In the same period, in view of the financial
resources that would be needed under the plan that was emerging in order to pay
for withdrawals by Olivetti shareholders and to finance a possible tender offer
for Telecom Italia ordinary and savings shares, Olivetti began to negotiate a
contract for a loan facility of Euro 9,000,000,000, which was signed on 24
April 2003 (for more details, see below).
The final proposal regarding the structure of the Merger and the exchange ratio
for the Merger, as developed by the managements of the two companies and their
respective advisors, was submitted on 11 March 2003 to the Boards of Directors
of Olivetti and Telecom Italia. In their meetings the Boards: (i) agreed that
the conditions had been created for the shortening of the control chain (i.e. a
stable ratio between the Olivetti and Telecom Italia share prices and the
achievement of certain targets announced in the 2002-2004 Business Plan); (ii)
examined and approved the broad outline of the Merger; (iii) approved the
exchange ratio for the Merger of Telecom Italia into Olivetti; and (iv)
resolved to set in motion the activities necessary for the finalization of the
plan to be submitted to their respective shareholders' meetings. They also
agreed to wait for one month before approving the Merger Plan, to
16 | Information Document
give holders of Olivetti convertible bonds the possibility to exercise their
conversion rights, as provided for in Article 2503-bis of the Civil Code.
In reaching its decisions on 11 March 2003, Telecom Italia's Board of Directors
examined the financial analyses and the valuations prepared by Goldman Sachs
and Lazard for the purposes of the Merger and the fairness opinions submitted
by each advisor regarding the proposed exchange ratio (Annexes XI and XIV). On
the same date Olivetti's Board of Directors examined the financial analyses and
the valuations prepared by JP Morgan for the purposes of the Merger and the
fairness opinion submitted by that advisor regarding the proposed exchange
ratio (Annex VIII). Olivetti's Board of Directors also took note of the
preliminary report issued by Professor Angelo Provasoli, who had been retained
by the company for this purpose, on his verification of the consistency and
appropriateness for the purposes of the Merger of the valuation methods used by
JP Morgan to analyze the exchange ratio for the Merger between Olivetti and
Telecom Italia. The report put forward by Professor Provasoli on 11 March 2003
was basically the same as the final report he submitted to Olivetti on 14 April
2003 (Annex XVI).
On 15 April 2003 the Boards of Directors of Olivetti and Telecom Italia
approved the plan for the Merger of Telecom Italia into Olivetti (Annex III).
The resolutions voted by the Board of Directors of Telecom Italia on 11 March
and 15 April 2003 were adopted unanimously except for the abstention of
Professor Francesco Denozza, who did not contest the Merger in itself, but
stressed the existence of a degree of uncertainty regarding the advantages for
Telecom Italia shareholders, some difficulties in determining the exchange
ratio and the asymmetry of information due to the fact the shareholders called
to make the final decision on the merits of the Merger will not receive an
evaluation by an independent expert of the views put forward in this respect by
some minority shareholders, in contrast with the procedure followed for the
directors' conclusions.
The reports drawn up by the Boards of Directors of Olivetti and Telecom Italia
pursuant to Article 2501-quater of the Civil Code are attached to this
Information Document (Annexes I and II). For the purposes of the Merger the
boards referred, pursuant to Article 2501-ter of the Civil Code, to the balance
sheets contained in the draft financial statements of Olivetti and Telecom
Italia for the year ended 31 December 2002 (Annexes IV and V).
Specifically, the Boards of Directors of Olivetti and Telecom Italia, in view
of the outcome of the discussions concerning the determination of the exchange
ratio and with account also taken of the analyses of their respective financial
advisors (JP Morgan for Olivetti, Goldman Sachs and Lazard for Telecom Italia),
established that the "natural" exchange ratio for the assignment of the shares
of the Company Resulting from the Merger was equal to 7 Olivetti ordinary
(savings) shares with a par value of Euro 1 each for every Telecom Italia
ordinary (savings) share with a par value of Euro 0.55 each.
In reaching its decisions in the meeting held on 15 April 2003, Olivetti's
Board of Directors took note that JP Morgan had written a letter (Annex X)
confirming the conclusions it had submitted on 11 March 2003 regarding the
fairness of the exchange ratio. In reaching its decisions in the meeting held
on the same date, Telecom Italia's Board of Directors examined the letter from
Lazard (Annex XIII) confirming the conclusions of the fairness opinion it had
submitted on 11 March 2003 (Annex XI) and the fairness opinion submitted by
Goldman Sachs on 15 April 2003 (Annex XIV). For more details on the
establishment of the exchange ratio and the fairness opinions and confirmation
letters sent to the Boards of Directors of Olivetti and Telecom Italia, see
Sections 2.1.2(a) and 2.1.2(b).
17 | Information Document
On 15 April 2003 the Boards of Directors of Olivetti and Telecom Italia also
convened the extraordinary meetings of their respective shareholders: that of
Olivetti on 24, 25 and 26 May 2003 on the first, second and third call, and
that of Telecom Italia on 24 and 25 May 2003 on the first and second call. In
order to obtain a report on the exchange ratios, Olivetti applied for the
appointment of an expert pursuant to Article 2501-quinquies of the Civil Code
and Article 158 of the Consolidated Law to the President of the Ivrea Tribunal,
who appointed the auditing firm Deloitte & Touche Italia S.p.A. For Telecom
Italia, the report on the exchange ratios required by law was issued by the
auditing firm Reconta Ernst & Young S.p.A., its external auditors. The experts
issued their respective reports on 22 April 2003 (Annexes VI e VII). On 24
April 2003, in order to pay for withdrawals, and with the amount remaining, the
Tender Offer, Olivetti entered into a contract, governed by English law, for a
loan of Euro 9,000,000,000 with a group of Italian and foreign banks. J.P.
Morgan plc, a company indirectly controlled by JP Morgan Chase Bank
(-Olivetti's financial advisor for the Merger), acted as Global Coordinator.
The loan will be disbursed in three tranches with maturities of, respectively,
12, 18 and 24 months (the maturities of the first two tranches can be extended
by 6 months and that of the third tranche by 12 months).
Savings shares
In order to give effect to the exchange ratio for Telecom Italia savings
shares, provision has been made for the Company Resulting from the Merger to
issue savings shares to be assigned to the holders of Telecom Italia savings
shares. Application will be made for these new savings shares to be listed on
MTA. The effectiveness of the Merger will be subject to such listing.
The savings shares issued by the Company Resulting from the Merger for the
holders of Telecom Italia savings shares will have identical property rights to
those of the Telecom Italia savings shares, including the possibility of
satisfying the preferential rights provided for in the bylaws by distributing
reserves (the addition of which to Telecom Italia's bylaws, with immediate
effect, has been proposed to the shareholders' meeting called to approve the
merger plan).
The maintenance of the preferential rights to which each savings share is
entitled by law will be accompanied by an improvement in the preferential
position of the Telecom Italia savings shareholders, since they will be
assigned, for each such share held, more than one savings share of the Company
Resulting from the Merger on the basis of the assignment ratio by means of
which the exchange will be implemented. For more details on the mechanism for
assigning the shares of the Company Resulting from the Merger, see Section
2.1.2(c).
Specifically, since each of the newly-issued savings shares of the Company
Resulting from the Merger will have a par value equal to the present par value
of the Telecom Italia savings shares (Euro 0.55) and will give the same
percentage preferential right calculated with reference to its par value, at
the time of the exchange each holder of Telecom Italia savings shares will
receive, as a consequence of the assignment ratio, a larger amount of the
nominal capital of the Company Resulting from the Merger than the amount
previously held and will therefore be entitled to a larger preferred dividend
in absolute terms. The Merger will therefore not prejudice the holders of
savings shares in any way. Consequently, lacking the preconditions referred to
in Article 2376 of the Civil Code and Article 146 of the Consolidated Law, the
Board of Directors of Telecom Italia determined that the conditions did not
exist for calling the special meeting of such shareholders. At the request of
savings shareholders, a special meeting thereof has been convened on 9, 10 and
11 June 2003, among other things to examine the resolutions adopted by
18 | Information Document
the Telecom Italia extraordinary shareholders' meeting convened, on the first
call, on 24 May 2003 and to approve, under Articles 146.1b) and 146.1e) of the
Consolidated Law, any resolutions that prejudice the rights of the category.
Olivetti Convertible bonds and warrants
On 11 March 2003 the Board of Directors of Olivetti approved the publication of
a notice in the Gazzetta Ufficiale della Repubblica Italiana (the Official
Gazette of the Italian Republic) regarding the rights of holders of "Olivetti
1.5% 2001-2004 convertible bonds with repayment premium" and "Olivetti 1.5%
2001-2010 convertible bonds with repayment premium" convertible bonds to
exercise the right of conversion pursuant to and for the purposes of Article
2503-bis, second paragraph, of the Civil Code. The notice appeared on 13 March
2003 and provided for such bondholders to have the right to apply for
conversion for a period of one month from the date of publication thereof (i.e.
from 13 March 2003 until at least 13 April 2003).
The above-mentioned right does not affect the terms of the issues in question,
which will therefore continue to apply in full. Accordingly, from the day
following the meeting of the Olivetti Board of Directors that approved the
calling of the shareholders' meeting (i.e. from 16 April 2003) until the day
such meeting is actually held (i.e. 24, 25 or 26 May 2003 as the case may be)
the convertible bonds of the above-mentioned issues may not be presented for
conversion owing to the period of suspension of convertibility established in
the related terms.
The holders of the above-mentioned Olivetti convertible bonds will again be
able, however, to exercise the conversion right in accordance with the terms
thereof after the date of the shareholders' meeting, without prejudice to the
periods of suspension provided for in the terms.
As a consequence of the Merger the ratio for the conversion of the convertible
bonds into Olivetti shares and that for the exercise of the "Warrants for
Olivetti ex Tecnost ordinary shares 1999-2004" will be adjusted, in accordance
with the related terms, to take account of the new par value of the shares of
the Company Resulting from the Merger and in relation to the assignment ratio,
as explained in more detail in Section 2.1.2(c). In particular, the adjustment
will be made to reflect the new fractional number of shares of the Company
Resulting from the Merger into which each bond and each warrant can be
converted at the end of the merger in view of the assignment ratio on the basis
of which the shares of the Company Resulting from the Merger will be assigned,
at the time of the exchange, to the shareholders of Olivetti who do not
withdraw.
The Tender Offer
As part of the Merger and before its completion, Olivetti will make a voluntary
partial tender offer for Telecom Italia ordinary and savings shares.
Olivetti intends to make available the proposed cash tender for a portion of
the Telecom Italia ordinary shares described herein in the United States,
pursuant to an exemption from the tender offer rules available pursuant to the
Securities Exchange Act, on the same terms and conditions as the Tender Offer
in Italy. The proposed cash tender offer for a portion of the Telecom Italia
saving shares described herein is not being made and will not be made, directly
or indirectly, in or into the United States and will not be capable of
acceptance, directly or indirectly, in or from the United States or by the use
of the mails of, or
19 | Information Document
by any means or instrumentality (including, without limitation, by mail,
telephonically or electronically by way of Internet or otherwise) of intestate
or foreign commerce, or any facility of any securities exchange, of the United
States.
The Tender Offer will be made for the amount, if any, not used to pay for
withdrawals of the Euro 9,000,000,000 made available by the group of banks
under the loan agreement referred to above. Consequently, the Tender Offer will
be made only at the end of the period allowed for the exercise of the right of
withdrawal following the approval of the merger plan and the adoption of the
new bylaws with the amended corporate purpose and no minimum threshold will be
set for acceptances. The number of Telecom Italia shares tendered for will be
established -- once the number of Olivetti shares for which the right of
withdrawal has been exercised is known -- by dividing the amount remaining of
the Euro 9,000,000,000 provided for the exercise by Olivetti shareholders of
their right of withdrawal by the offer price per Telecom Italia ordinary and
savings share (established in the manner described below), so that the offer
will be for the same percentage of ordinary shares and savings shares
(calculated in relation to the total number of shares of each class).
The offer price will be equal to the weighted average of the official prices
recorded on the stock exchange between 12 March 2003 and the date of the
Olivetti shareholders' meeting that approves the merger plan, plus a 20%
premium. At all events, the offer price will be between: (i) a maximum of Euro
8.40 and a minimum of Euro 7 per share for Telecom Italia ordinary shares and
(ii) a maximum of Euro 5.65 and a minimum of Euro 4.70 per share for Telecom
Italia savings shares.
Depending on the offer price established in the manner described above, and
assuming that the full amount of Euro 9,000,000,000 is available, the Tender
Offer will be for the minimum and maximum quantities of Telecom Italia ordinary
and savings shares shown below:
(i) assuming that the offer price is equal to the maximum price specified
above, the offer will be for about 16.1% of the ordinary shares and about 16.1%
of the savings shares;
(ii) assuming that the offer price is equal to the minimum price specified
above, the offer will be for about 19.4% of the ordinary shares and about 19.4%
of the savings shares; If, however, the acceptances of the Tender Offer fall
short of the maximum quantity for one class of shares but exceed it for the
other class, the amount not used to buy shares of the first class will be used
to buy shares of the second class, and the maximum quantity of shares of the
latter class will increase until all the funds available have been used, so
that the largest number of shareholders wishing to accept the offer can be
satisfied. In such case the percentages indicated in subparagraphs (i) and (ii)
will change. Following the attestation of Olivetti's share capital on 3 April
2003, applications were received for the conversion of 27,630 "Olivetti 1.5%
2001-2004 convertible bonds with repayment premium" and 5,597,674 "Olivetti
1.5% 2001-2010 convertible bonds with repayment premium". No applications were
received for the exercise of "Warrant for Olivetti ex Tecnost ordinary shares
1999-2004". Consequently there are convertible bonds and warrants in
circulation giving the right to acquire 3,045,204,454 Olivetti shares with a
par value of Euro 1.00 each. In addition, there are 30,330,000 stock options
outstanding, which, if exercised, would authorize the issue of an equal number
of shares. Considering that under the terms of the above-mentioned financial
instruments the related conversion/exercise rights are suspended until the date
of the Olivetti shareholders' meeting called to approve the Merger, so that the
shares to be issued for the convertible bonds and warrants still in circulation
cannot give rise to the exercise of the right of withdrawal, and considering
also that the shareholder Olimpia S.p.A. has announced it will not
20 | Information Document
exercise its right of withdrawal, the amount available for the Tender Offer --
assuming that the withdrawal price is approximately Euro 1.00 -- will be
approximately Euro 3,000,000,000, out of the original total financing of Euro
9,000,000,000 (insofar as the amount of the financing was calculated taking
account of all the outstanding instruments bearing conversion or option rights
that could give rise to the issue of shares by Olivetti under resolutions
already adopted by the company and not yet expired). The offer document will
establish that the transfer of ownership of the shares for which acceptances
are received in the Tender Offer will become immediately effective at the close
of the offer period or when the acceptances have been prorated. However, the
offer document will also establish that such transfer of the shares to Olivetti
will be ineffective if the Merger does not become effective by 31 December
2003, without prejudice to the intention of the companies participating in the
Merger to complete it as soon as possible and, specifically, in accordance with
the time limit referred to in Article 2503 of the Civil Code, in the first half
of August 2003.
Until the payment date, which will be fixed for a date immediately following
the date on which the Merger becomes effective, the Telecom Italia ordinary and
savings shares will be held in an escrow account in the name of Olivetti but on
behalf of the shareholders accepting of the Tender Offer. If the merger does
not become effective by 31 December 2003, the ownership of the shares for which
acceptances have been received in the Tender Offer will revert to the
shareholders accepting the offer and the shares in question will be released
from the escrow account and made available to them.
The above condition for the ineffectiveness of the Tender Offer is intended to
ensure that it depend on basically the same circumstances as the Olivetti
shareholders' right of withdrawal, which applies only if the Merger is
completed.
The Tender Offer will be evaluated by the Board of Directors of Telecom Italia
pursuant to and for the purposes of Article 39 of the Consob Regulation.
2.1.1 Description of the companies involved in the Merger
2.1.1(a) Olivetti
Name
The company's full name is "Ing. C. Olivetti & C. Societa per Azioni". The
company is free to use its full name or one of the following abbreviated
versions: "Ing. C. Olivetti & C., S.p.A." and "Olivetti S.p.A.".
Registered office
Ivrea (Turin), 77 Via Jervis.
Identity data
Olivetti is entered in the Turin Company Register. Its registration, tax and
VAT number is 00488410010.
Share capital
Olivetti's subscribed and fully paid up share capital as attested on 15 April
2003 (the date on which the Board of Directors approved the merger plan) was
equal to Euro 8,845,537,520, divided into
21 | Information Document
8,845,537,520 ordinary shares with a par value of Euro 1 each. Olivetti's
subscribed and fully paid up share capital as attested on 13 May 2003 was equal
to Euro 8,845,677,947, divided into 8,845,677,947 ordinary shares with a par
value of Euro 1 each. The company does not have any other class of shares
outstanding and there are no unpaid share instalments.
Olivetti's approved share capital (comprising both the subscribed and paid-up
share capital and that which can be issued on the basis of resolutions already
adopted by Olivetti's Board of Directors for the conversion of convertible
bonds and the exercise of warrants and stock options) is equal to Euro
11,926,697,278. There are no undertakings to increase the share capital or
mandates given to the directors authorizing them to approve further increases
in capital.
Olivetti's holding of treasury stock amounts to 2,697,500 shares.
For information on the composition of Olivetti's shareholders, see Section
2.1.3.
Corporate purpose
The company's corporate purpose is to engage, directly and/or indirectly, in
research, design, production and marketing in the fields of office equipment
and products, automation, electronic data processing, telecommunications,
information services and in activities related to the development of
information technology and other industrial, commercial, financial and service
activities. To achieve these objectives, the company may undertake any
transaction involving real and personal property and any financial transaction,
including the acquisition of equity holdings in undertakings, companies and
entities, the financing and technical coordination of the same, and provide
guarantees and real security in favour of third parties.
Governing bodies
Olivetti's Board of Directors, appointed by the ordinary shareholder's meeting
of 13 October 2001 (apart from Gian Carlo Rocco di Torrepadula and Paola
Pierri, co-opted by the Board of Directors on respectively 5 September 2002 and
7 November 2002), is as follows: (1)
Name Place and date of birth Position
-------------------------------- ----------------------------------------- -----------------------
Antonio Tesone* Ancona - 20 July 1923 Chairman
Marco Tronchetti Provera Milan - 18 January 1948 Deputy Chairman and CEO
Gilberto Benetton Treviso - 19 June 1941 Deputy Chairman
Carlo Buora Milan - 26 May 1946 Managing Director
Lorenzo Caprio* Milan - 19 November 1957 Director
Giorgio Cirla* Lanzo d'Intelvi (Como) - 29 February 1940 Director
Pier Luigi Fabrizi* Siena - 23 April 1948 Director
Cesare Geronzi* Marino (Rome) - 15 February 1935 Director
Gianni Mion Vo (Padua) - 6 September 1943 Director
Giampietro Nattino Rome - 9 June 1935 Director
Paola Pierri Turin - 25 March 1960 Director
Alberto Pirelli Milan - 1 July 1954 Director
Gian Carlo Rocco di Torrepadula Rome - 17 January 1943 Director
Carlo Alessandro Puri Negri Genoa - 11 July 1952 Director
Alberto Varisco Nova Milanese (Milan) - 20 October 1940 Director
-------------------------------- ----------------------------------------- -----------------------
* Independent director.
-----------
(1) Dario Trevisan, formerly a member of the Board of Directors, resigned from
the position of director with effect from the day following the Board
meeting that approved the merger plan, i.e. from 16 April 2003.
22 | Information Document
All the members of Olivetti's Board of Directors are domiciled for the purposes
of the position at the company's registered office at 77 via Jervis, Ivrea.
Olivetti's directors, recognizing that the post-Merger corporate reality will
be inherently different from that of Olivetti as it is now, considered it
appropriate that the direction of the Company Resulting from the Merger should
remain entrusted essentially to the directors of Telecom Italia. Accordingly,
deeming that their mandate had essentially come to an end, they resigned with
effect (except in the case of Dario Trevisan, as indicated above) from the date
on which the Merger will become effective and proposed that the meeting of
Olivetti's shareholders (in addition to amending the part of Article 13 of the
bylaws regarding the duration of the Board of Directors) should appoint a Board
of Directors of the Company Resulting from the Merger, with effect from the
date the Merger becomes effective and until the approval of the annual accounts
for 2003, almost exactly reproducing that of Telecom Italia (bearing in mind
that the Minister for the Economy and Finance had declared he did not consider
it necessary for the bylaws of the Company Resulting from the Merger to
maintain the power currently attributed to the Minister by Telecom Italia's
bylaws to appoint a director).
As of 1 January 2003 Olivetti has not had a General Manager; previously the
position was held by Corra-do Ariaudo. The company does not have an Executive
Committee. On 13 October 2001 Olivetti's Board established a remuneration
committee and an internal control committee and approved the rules for their
functioning.
Olivetti's Board of Auditors, appointed by the shareholders' meeting of 4 July
2000 and due to terminate its mandate with the approval of the annual accounts
for 2002, is as follows:
Name Place and date of birth Position
-------------------- ------------------------------ ---------
Angelo Fornasari Milan - 14 March 1936 Chairman
Vittorio Bennani Modena - 7 May 1938 Auditor
Franco Caramanti Mantua - 17 January 1943 Auditor
Sergio Lodi Milan - 19 March 1933 Alternate
Massimo Nuti La Spezia - 22 December 1963 Alternate
-------------------- ------------------------------ ---------
All the members of Olivetti's Board of Auditors are domiciled for the purposes
of the position at the company's registered office at 77 via Jervis, Ivrea.
The meeting of Olivetti's shareholders called on 24, 25 and 26 May 2003 will be
asked to approve, with immediate effect, a new text of Article 20 of the bylaws
regarding the appointment of the Board of Auditors. One effect of this
amendment will be to increase the number of auditors from 3 to at least 5, so
as to allow minority shareholders to elect at least two auditors and an
alternate. The Chairman will be elected by majority vote by the auditors on the
Board.
Since the mandate of the Board of Auditors is due to expire, the meeting of
Olivetti's shareholders will be invited to appoint a new Board of Auditors to
raise the number of members thereof in accordance with Article 20 of the
bylaws, amended as above (to 5 or 7 auditors and 2 alternates).
23 | Information Document
Telecom Italia shares held directly or indirectly by members of the Board of
Directors, the Board of Auditors and the General Manager of Olivetti
The table below shows the Telecom Italia shares held directly or indirectly by
members of the Board of Directors, the Board of Auditors and the General
Manager of Olivetti at 31 December 2002.(2)
No. of shares No. of No. of No. of shares
held at Class Type Direct/ shares shares held at
31.12.2001(*) of share of possession Indirect bought sold 31.12.2002(**)
----------------------------- ------------- -------- ------------- -------- ------ ------ -------------
Board of Directors
Chairman
TESONE Antonio 0 - - - 0 0 0
Deputy Chairman and CEO
TRONCHETTI PROVERA Marco 0 - - 0 0 0
Deputy Chairman
BENETTON Gilberto 0 - - 0 0 0
Managing Director
BUORA Carlo 0 - - 0 0 0
Directors
CAPRIO Lorenzo 0 - - 0 0 0
CIRLA Giorgio 0 - - 0 0 0
FABRIZI Pier Luigi 0 - - 0 0 0
GERONZI Cesare 0 Ordinary Full ownership Direct 3,980 2,180 1,800
4,950 Savings Full ownership Direct 7,250 6,600 5,600
MION Gianni 0 - - - 0 0 0
NATTINO Giampietro 0 - - - 0 0 0
PIERRI Paola 0 - - - 0 0 0
PIRELLI Alberto 550 Ordinary Full ownership Direct 0 0 550
(***)
PURI NEGRI Carlo Alessandro 0 - - - 0 0 0
ROCCO di TORREPADULA Giancarlo 0 - - - 0 0 0
TREVISAN Dario 0 - - - 0 0 0
VARISCO Alberto - - - 0 0 0
Previous directors (****)
BONDI Enrico 0 - - 0 0 0
MODIANO Pietro 0 - - 0 0 0
Board of Auditors
Chairman
FORNASARI Angelo 0 - - 0 0 0
Auditors
BENNANI Vittorio 0 - - 0 0 0
CARAMANTI Franco 20,000 Savings Full ownership indirect 0 0 20,000
(***)
General Manager
ARIAUDO Corrado 50,000 Ordinary Full ownership Direct 0 0 50,000
200,000 Savings Direct 0 0 200,000
----------------------------- ------------- -------- ------------- -------- ------ ------ -------------
(*) Or at the date appointed if in 2002.
(**) Or at date of termination of the appointment.
(***) Transactions carried out by a portfolio management company under an
autonomous management mandate.
(****) At 31 December 2002.
--------------
(2) Corrado Ariaudo resigned from the position of General Manager of Olivetti
with effect from 31 December 2002. Dario Trevisan resigned from the
position of director of Olivetti with effect from 16 April 2003.
24 | Information Document
Activities
Olivetti, in accordance with its current corporate purpose, is entered in the
special section of the general register kept by the Italian Foreign Exchange
Office (UIC) of persons who engage "principally" in financial activities
"without dealings with the public" pursuant to and for the purposes of Articles
106 and 113 of Legislative Decree 385/1993.
Olivetti is a holding company. Its most important equity interest is that in
Telecom Italia (about 54.9% of the ordinary share capital and about 39.5% of
the total share capital), the parent company of the group of the same name.
Olivetti is also present in business sectors such as office products and
services and real estate, notably through its subsidiaries Olivetti Tecnost
S.p.A. (information technology and communications products and services) and
Olivetti Multiservices S.p.A. (real estate and related services).
Olivetti Tecnost S.p.A.
The Olivetti Tecnost Group provides office products and solutions (Divisione
Office), specialized applications for the banking industry and the retail
trade, and information systems for lotteries and other forms of gaming
(Divisione Vertical).
The Group operates in all the main regional markets abroad (where it generates
68% of its total revenues) and, although it is focused primarily on Europe
(29%), Asia (12%) and Latin America (15%), is also present in North America
(11%) via its subsidiary Royal Consumer Information Product Inc. and other
countries (1%).
In 2002 the revenues of the Olivetti Tecnost Group amounted to Euro 914 million
(of which Euro 906 million was generated by customers outside the Olivetti
Group), a reduction of 16.7% compared with 2001 (12.7% excluding exchange
differences). The breakdown was as follows: Euro 588 million of revenues from
hardware; Euro 154 million of revenues from accessories; Euro 73 million of
revenues from services and Euro 99 million of other revenues.
The contraction in revenues in 2002 was primarily attributable to the office
products division and to a lesser extent to the vertical applications division.
Revenues in the banking and retail sector remained basically unchanged,
confirming the importance of the Group's specialist products in the world
market. In June 2002 a reorganization plan was presented, the primary objective
of which is to return the Group to profitability through a series of
interventions tailored to the individual business areas.
Olivetti Multiservices S.p.A.
This company, a wholly-owned subsidiary of Olivetti operating in the
real-estate sector, saw a far-reaching change in its activity in 2002 following
the transfer on 1 September 2002 of 23 properties and 10 building areas as part
of the "Tiglio" project, aimed at enhancing the value of the real-estate owned
by the Pirelli, Olivetti and Telecom Italia Groups. On 4 April 2003 Olivetti
and Pirelli & C. Real Estate agreed the terms of the integration of their
facility management businesses, headed by Olivetti Multiservices S.p.A. and
Pirelli & C. RE Facility Management.
25 | Information Document
2.1.1(b) Telecom Italia
Name
Telecom Italia S.p.A.
Registered office
Milan, 2 Piazza degli Affari (Headquarters: Rome, 41 Corso d'Italia).
Identity data
Telecom Italia is entered in the Milan Company Register. Its registration, tax
and VAT number is 00471850016.
Share capital
On 15 April 2003 (the date on which the Board of Directors approved the merger
plan) Telecom Italia's fully paid-up share capital amounted to Euro
4,023,816,860.80, divided into 7,316,030,656 shares with a par value of Euro
0.55 each, comprising 5,262,908,631 ordinary shares and 2,053,122,025 savings
shares. On 13 May 2003 Telecom Italia's fully paid-up share capital amounted to
Euro 4,023,833,058.30 divided into 7,316,060,106 shares with a par value of
Euro 0.55 each, comprising 5,262,938,081 ordinary shares and 2,053,122,025
savings shares. There are no unpaid share instalments.
Under the plan to buy back the company's shares approved by Telecom Italia's
ordinary shareholders' meeting on 7 November 2001, by 7 May 2003, the
expiration date of the authorization, 54,309,500 savings shares had been bought
at an average price of Euro 5.24 per share, for a total consideration of about
Euro 285 million, and 6,195,500 ordinary shares at an average price of Euro
8.00 per share, for a total consideration of about Euro 50 million.
For information on the composition of Telecom Italia's shareholders, see
Section 2.1.3.
Corporate purpose
The company's purpose comprises:
- the installation and operation, using any technique, method or system, of
fixed and mobile equipment and plant, including space systems which use
artificial satellites, radio stations, including shipboard stations, links
for maritime wireless communications, and dedicated and/or integrated
networks, for the purpose of providing and operating, without territorial
restrictions, licensed telecommunications services for public use and
telecommunications services in a free-market environment, including those
resulting from technological progress, and the performance of activities
directly or indirectly related thereto, including the design,
construction, operation, maintenance and distribution of
telecommunications, remote-computing, online and electronic products,
services and systems;
- the performance of activities related to or otherwise serving the pursuit
of the corporate purpose, including publishing, advertising, information
technology, online and multimedia activities and, in general, all
commercial, financial, property, research, training and consulting
activities;
26 | Information Document
- the acquisition, provided it is not the Company's principal activity, of
equity interests in other companies and undertakings falling within the
scope of the corporate purpose or related, complementary or similar
thereto, including companies involved in manufacturing electronic products
and insurance;
- the control and the strategic, technical and administrative and financial
coordination of subsidiary companies and undertakings, and the financial
planning and management thereof, with the implementation of all related
transactions.
Activities reserved to persons entered in a professional register, activities
involving dealings with the public covered by Article 106 of Legislative Decree
385/1993, and those which are otherwise prohibited by applicable legislation
are expressly excluded.
Governing bodies
Telecom Italia's Board of Directors, appointed by the ordinary shareholder's
meeting of 7 November 2001 (apart from Pietro Modiano and Riccardo Ruggiero,
co-opted by the Board of Directors on respectively 25 July 2002 and 5 September
2002 and appointed by the shareholders' meeting of 12 December 2002) until the
approval of the annual accounts for 2003, is as follows:
Name Place and date of birth Position
--------------------------- ----------------------------------- -----------------
Marco Tronchetti Provera Milan - 18 January 1948 Chairman
Gilberto Benetton Treviso - 19 June 1941 Deputy Chairman
Carlo Buora Milan - 26 May 1946 Managing Director
Riccardo Ruggiero Naples - 26 August 1960 Managing Director
Umberto Colombo* Livorno - 20 December 1927 Director
Francesco Denozza* Turin - 5 October 1946 Director
Luigi Fausti* Ancona - 9 March 1929 Director
Guido Ferrarini* Genoa - 8 August 1950 Director
Natalino Irti* Avezzano (AQ) - 5 April 1936 Director
Gianni Mion Vo (Padua) - 6 September 1943 Director
Pietro Modiano Milan - 3 November 1951 Director
Massimo Moratti Boscochiesanuova (VR) - 16 May 1945 Director
Carlo Alessandro Puri Negri Genoa - 11 July 1952 Director
Pier Francesco Saviotti Alessandria - 16 June 1942 Director
Roberto Ulissi* Rome - 20 August 1962 Director
--------------------------- ----------------------------------- -----------------
* Independent director.
All the members of Telecom Italia's Board of Directors are domiciled for the
purposes of the position at the company's registered office at 2 Piazza degli
Affari, Milan.
Telecom Italia's Board of Auditors, appointed by the shareholders' meeting of 3
July 2000 and due to terminate its mandate with the approval of the annual
accounts for 2002, is as follows:
Name Place and date of birth Position
-------------------- ----------------------------------------- ----------
Paolo Germani Rome - 21 November 1939 Chairman
Mario Boidi Turin - 1 March 1930 Auditor
Paolo Golia Verona - 29 July 1944 Auditor
Fabrizio Quarta Campi Salentina (LE) - 20 September 1961 Auditor
Gianfranco Zanda Udine - 4 April 1941 Auditor
Enrico Bignami Milan - 7 May 1957 Alternate
Leonida Liuni Forenza (PZ) - 27 November 1929 Alternate
-------------------- ----------------------------------------- ----------
27 | Information Document
All the auditors are domiciled for the purposes of the position at the
company's registered office at 2 Piazza degli Affari, Milan.
Since the mandate of the Board of Auditors is due to expire, the meeting of
Telecom Italia's shareholders called on 24 and 25 May 2003 will be invited to
appoint a new Board of Auditors in the manner laid down in Article 17 of the
company's current bylaws.
At 31 December 2002 no member of Telecom Italia's Board of Directors or Board
of Auditors or the General Manager owned, directly or indirectly, any Telecom
Italia shares.
Activities
Telecom Italia, together with the group it heads, is one of the largest
international operators in the sector of telecommunications services and, more
in general, information and communication technology. Its companies, leaders in
fixed and mobile communications, the Internet and media, information technology
and research offer integrated and innovative services in Italy and abroad. Its
principal strength is its leadership in the domestic market in fixed and mobile
telecommunications and Internet services. The companies of the Group have
created broadband, fixed and mobile networks providing innovative services,
complex solutions for ICT, multimedia messaging, solutions for mobile business,
products for e-government and online banking. The Telecom Italia Group is the
leading wireline operator in Italy, with some 27.1 million lines installed, and
one of the largest in the world. Through Telecom Italia's subsidiary TIM, the
Group is also the leading mobile telephony operator in Italy and one of the
major players in the world, with more than 39.1 million lines attributable to
TIM and its affiliates abroad at the end of 2002.
The contributions of the individual Business Units / Operating Activities to
the main economic and operating indicators in 2002 are shown in the following
chart.
[GRAPHIC OMITTED -- Table below represents the graphic]
Gross
Service operating Operatng Industrial
Revenues margin income Investment Employees(*)
-------- --------- -------- ---------- ------------
Domestic Wireline 51.0% 55.8% 55.5% 59.9% 52.8%
Mobile 32.5% 35.3% 39.6% 36.8% 18.4%
South America 4.2% 3.1% 1.7% 4.6% 5.4%
Internet and Media 6.0% 4.1% 2.7% 1.7% 7.6%
IT Market 2.7% 0.7% 0.7% 0.6% 4.4%
IT Group 3.6% 1.0% (0.2)% 3.4% 7.2%
(*) The other activities of the Telecom Italia Group employ 4.2% of the
employees.
(1) The data refer to the Entel Chile and Entel Bolivia groups, the company
Telecom Italia America Latina and the South America business segment of
Telecom Italia.
28 | Information Document
Group strategy
With the entry of new management in July 2001 Telecom Italia's strategy was
substantially revised and in September 2001 a new business plan was announced.
The aim of the new strategy was to enhance the value of the existing activities
and strengthen the financial structure in order to sustain growth. The
management undertook to reduce debt and rationalize the investments abroad and
set the objectives of bringing net financial debt down to Euro 18.3 billion by
the end of 2002 and disposing of approximately Euro 5 billion of assets by
September 2003. These objectives were achieved in full, in terms of both
amounts and deadlines: by the end of 2002 net financial debt had been reduced
to Euro 18.1 billion and asset sales of Euro 5.2 billion had been made.
The key objective indicated by the management for the coming years will
continue to be the creation of value by putting to good use the Group's assets
and distinctive skills and by strengthening the financial structure in order to
sustain growth.
The priorities for operations established by the management are as follows:
(i) to consolidate the leadership in the domestic wireline market by increasing
customer loyalty through innovative offers and stimulating the market for value
added and broadband services, with special reference to ADSL technology; in the
mobile market, to increase traffic volumes and develop value added services in
line with user expectations (MMS, community videotelephony), in part through
the introduction of UMTS technology; in the Internet & Media sector, to
continue the development of broadband services and portals;
(ii) to expand the Group's presence abroad in markets in which it can
capitalize on its marketing and technological know-how: in mobile business, in
Latin America and especially Brazil; in wireline business, through the
development of the pan-European broadband network; (iii) to continue to manage
the Group according to rigorous criteria of efficiency, thanks to the synergies
deriving from the organizational model based on so-called "professional
families" and service centres, expenditure control systems, and the careful
selection of investment projects, aimed primarily at fostering innovation and
growth.
The Group will also further develop initiatives in relation to the concept of
sustainability, which is now an integral aspect of the plans drawn up by the
companies belonging to the Group.
Industrial investments will be directed towards reinforcing the following
strategy:
o focus on innovation
o leadership in the domestic market;
o development of value added services.
The industrial investments planned for the three years 2003-05 will be between
Euro 14 billion and Euro 16 billion, more or less in line with the forecast for
the three years 2002-04. The breakdown by sector of activity is shown in the
table below.
--------------------------- ---------
Domestic Wireline 45% circa
Mobile 40% circa
Internet and Media 2% circa
Other 13% circa
--------------------------- ---------
About two thirds of all industrial investments will be for innovation and
expansion.
29 | Information Document
Sales of assets
The effect of asset sales in 2001 and 2002 on the Telecom Italia Group's net
financial debt is summarized in the chart below.
[Graphic Omitted]
2.1.2 The Merger
2.1.2 (a) The values attributed to Olivetti and Telecom Italia on the basis of
various analyses
In carrying out the valuations serving to determine the exchange ratio, the
Board of Directors of Olivetti was assisted by JP Morgan as financial advisor,
while the Board of Directors of Telecom Italia was assisted by Lazard and
Goldman Sachs as financial advisors. The valuation methodologies applied by JP
Morgan in connection with its fairness opinion on the exchange ratio have been
verified by Professor Angelo Provasoli, advisor to Olivetti, with a view to
ascertaining their consistency and appropriateness with respect to the aims of
the Merger.
For details on the values attributed by the Boards of Directors of Olivetti and
Telecom Italia to the companies participating in the Merger, see their
respective reports on the Merger, which were approved on 15 April 2003 and are
attached to this Information Document (Annexes I and II).
As mentioned earlier, in view of the outcome of the discussions concerning the
determination of the exchange ratio and with account also taken of the analyses
of their respective financial advisors, the Boards of Directors of Olivetti and
Telecom Italia have determined and agreed the values of the companies
participating in the Merger for the purpose of fixing the exchange ratio and
established that the "natural" exchange ratio on the basis of which the shares
of the Company Resulting from the Merger will be assigned is equal to
respectively 7 Olivetti ordinary (savings) shares with a par value of Euro 1
each for respectively every Telecom Italia ordinary (savings) share with a par
value of Euro 0.55 each. For the valuation criteria and methods adopted to
determine the exchange ratio, see Section 2.1.2(b).
30 | Information Document
On 22 April 2003 the auditing firms appointed as experts to report on the
exchange ratio in accordance with Article 2501-quinquies of the Civil Code,
Deloitte & Touche Italia S.p.A., for Olivetti, and Reconta Ernst & Young, for
Telecom Italia, issued their reports (Annexes VI and VII).
2.1.2 (b) Valuation criteria and methods applied in determining the exchange
ratio
In order to determine the exchange ratio, the Boards of Directors of Olivetti
and Telecom Italia proceeded in accordance with the best valuation
methodologies and practices, taking account of the nature of the two companies
and the sector to which most of their activities refer.
In the valuation procedure followed, Olivetti's Board of Directors was in
agreement with both the methodologies adopted and the conclusions reached by
its financial advisor, JP Morgan. Similarly, Telecom Italia's Board of
Directors was in agreement with both the methods adopted and the conclusions
reached by its financial advisors, Goldman Sachs and Lazard.
More specifically, the Board of Directors of Olivetti chose the sum of parts
methodology as the fundamental methodology for valuing Telecom Italia and the
net asset value methodology (broadly equivalent to the sum of parts
methodology) as the fundamental methodology for valuing Olivetti.
As regards Telecom Italia's individual activities, in view of the complexity
and extensiveness of the structure of the Telecom Italia Group and the many
areas in which it operates, Olivetti's Board of Directors considered it
advisable to value the main businesses using principally the discounted cash
flow method, while the remaining assets, which are of limited importance for
the overall valuation, were valued on the basis of stock market prices, for
companies listed on regulated markets, and/or market multiples, with reference
made for testing and control purposes to balance sheet values and the values
published in analysts' research reports on such businesses, where available.
The table below summarizes the range of the estimates of the exchange ratio
calculated using the valuation methodologies and criteria described, as the
ratio of the estimated value of the Telecom Italia ordinary share to the
estimated value of the Olivetti share.
Minimum Mean Maximum
----------------------------------------------------------- ------- ---- -------
Olivetti ordinary shares per Telecom Italia ordinary share 6.6 6.9 7.2
Olivetti savings shares per Telecom Italia savings share 6.6 6.9 7.2
----------------------------------------------------------- ------- ---- -------
In order to verify the accuracy of the exchange ratio obtained in the manner
described above, Olivetti's Board of Directors made a check using the stock
market prices method. The following table shows the minimum, mean and maximum
values of the average exchange ratio (number of Olivetti ordinary shares per
Telecom Italia ordinary share) expressed by the stock market for the different
periods analyzed preceding 7 March 2003 (inclusive).
Minimum Mean Maximum
----------------------------------------------------------- ------- ---- -------
Olivetti ordinary shares per Telecom Italia ordinary share 6.7 6.9 7.1
----------------------------------------------------------- ------- ---- -------
To value Olivetti and Telecom Italia, the Board of Directors of Telecom Italia
chose, with an equal level of significance for the purposes of the valuation
procedure, to use relative stock market prices as its principal methodology and
the sum of parts methodology for control purposes.
31 | Information Document
In applying the sum of parts methodology, in view of the complexity of the
corporate structure of the Telecom Italia Group and the many areas in which it
operates, the principal businesses were valued on the basis of a discounted
cash flow methodology. The remaining assets and liabilities were valued on a
case-by-case basis mainly with reference to their book or market value, in view
of their limited importance in the overall valuation of Telecom Italia.
The table below shows the exchange ratios deriving from the application of the
valuation methodologies used by the Board of Directors of Telecom Italia.
Method Exchange ratio
----------------------------------------------------------------
Stock market prices
7 March 2003 6.7
Weighted averages:
1 month 7.0
3 months 6.9
6 months 7.1
12 months 6.9
----------------------------------------------------------------
Sum of parts method (average value) 6.9
----------------------------------------------------------------
For further details regarding the valuation criteria and methodologies used by
the Boards of Directors of Olivetti and Telecom Italia in determining the
exchange ratio, reference should be made to their respective merger reports
(Annexes I and II).
The summary descriptions of the analyses designed and carried out by the
financial advisors (JP Morgan for Olivetti and Lazard and Goldman Sachs for
Telecom Italia) and their respective fairness opinions and confirmation letters
are attached to this Information Document (Annexes VIII-XV).
The conclusions reached by Professor Angelo Provasoli, advisor to Olivetti,
with regard to the valuation methodologies applied by JP Morgan in connection
with its fairness opinion on the exchange ratio are also attached (Annex XVI).
2.1.2 (c) Procedure for assigning the shares of the Company Resulting from the
Merger and start of dividend entitlement
In view of the interest in maintaining a flexible capital structure of a size
suitable for corporate activities and with a view to limiting the effects of
the Merger on the future remuneration of the shares, it was considered
advisable to leave the nominal capital of Olivetti basically unchanged at the
conclusion of the Merger, inasmuch as the absolute increase in the nominal
capital by issuing as many new shares as would be necessary to satisfy the
exchange ratio of all the Telecom Italia shares to be exchanged would lead,
under current accounting rules, (i) to an increase in the shareholders' equity
consisting of capital, with a consequent significant (exchange) merger deficit
subject to amortization, obviously to the detriment of the remuneration of
shares in future years, and (ii) to a capital structure consisting almost
entirely of items not available for distribution.
It was therefore decided to carry out the share exchange primarily by
redistributing Olivetti's capital and to have recourse to the issue of
additional shares only insofar as this proved necessary to maintain the share
capital at the level attested at the time the merger plan was approved.
32 | Information Document
The redistribution technique consists in dividing the share capital of the
absorbing company and hence the shares composing it (in an equal, larger or
smaller number than that existing, depending on whether the intention is to
hold the par value of each share unchanged, decrease it or increase it) among
the shareholders of the absorbing company and those of the absorbed company,
according to what was referred to above as the "natural" exchange ratio between
the shares.
The redistribution naturally takes the share capital of the absorbing company
at the time the Merger is implemented as the baseline.
In the case in question, the share capital of Olivetti at the time the Merger
is implemented may vary from that attested on 15 April 2003 of Euro
8,845,537,520: (i) increasing as a consequence of the conversion of the
"Olivetti 1.5% 2001-2004 convertible bonds with repayment premium" and
"Olivetti 1.5% 2001-2010 convertible bonds with repayment premium", the
exercise of the "Warrants for Olivetti ex Tecnost ordinary shares 1999-2004"
and the exercise of Olivetti stock options ("Conversions") and (ii) decreasing
as a consequence of withdrawals by Olivetti shareholders who are absent from
the meeting or vote against the Merger. Olivetti's capital "to be
"redistributed" will therefore be the algebraic sum of the subscribed capital
at the time the Merger plan is approved and the subsequent variations up to the
implementation of the Merger.
Assuming the extreme cases of (i) the total exercise of Conversions and no
withdrawals and (ii) no Conversions and the exercise of the right to withdraw
by all the Olivetti minority shareholders except for Olimpia, Olivetti's share
capital at the time the Merger is completed can vary between a maximum of Euro
11,926,697,278 and a minimum of Euro 2,738,756,641.
Since it is assumed that the share capital of the Company Resulting from the
Merger must not be less than Euro 8,845,537,520 (the amount of Olivetti's share
capital as attested on 15 April 2003, the date the Merger plan was approved by
the Board of Directors), in the event that the decreasing effect of withdrawals
outweighs the increasing effect of Conversions so that the share capital at the
time the Merger is implemented is less than Euro 8,845,537,520, the
redistribution of the share capital will be accompanied by a simultaneous
capital increase for the purpose of the Merger to bring the share capital up to
the above-mentioned minimum figure, apart from roundings serving to eliminate
any resulting fractions of shares. In this latter connection Olivetti
International S.A. has announced that it stands ready to renounce such number
of shares or fractions of shares as will be necessary to complete the Merger.
In the light of the methods and principles described above, the share capital
will be established and the share exchange carried out according to the
following rules:
a) Olivetti will fix the par value of its shares -- in the amount resulting
after Conversions and withdrawals -- at Euro 0.55 (equal to the par value
of Telecom Italia shares), in place of the current par value of Euro 1.
Consequently, Olivetti's share capital will be divided into a larger
number of shares. Such shares will be divided into ordinary shares and
savings shares.
b) The new ordinary and savings shares with a par value of Euro 0.55 each
making up the share capital at the time of the Merger of Olivetti will be
redistributed, respectively, to the holders of Olivetti and Telecom Italia
ordinary shares and the holders of Telecom Italia savings shares according
to assignment
33 | Information Document
ratios reflecting, with reference to the actual number of shares to be
redistributed, the "natural" exchange ratio specified above of 7 Olivetti
ordinary or savings shares for every Telecom Italia ordinary or savings share.
In the redistribution only the Telecom Italia shares held by persons other than
Olivetti and Telecom Italia itself will be exchanged with shares of the Company
Resulting from the Merger. The number of shares of Telecom Italia held by
minority shareholders and actually to be exchanged will therefore vary,
depending on the outcome of the Tender Offer that Olivetti may make after the
shareholders' meeting called to approve the Merger and before the latter's
completion.
More precisely, where:
- No. OLI Euro 1 shares denotes the number of Euro 1 Olivetti shares
resulting after Conversions and withdrawals;
- No. OLI Euro 0.55 shares denotes the number of shares of the Company
Resulting from the Merger with a par value of Euro 0.55 each actually to
be redistributed following the operation referred to at point a);
- No. T.I. shares denotes the number of Telecom Italia shares held by
minority shareholders that must be exchanged;
(1) the holders of Olivetti ordinary shares will be assigned, for every share
held, a number of ordinary shares of the Company Resulting from the Merger
equal to:
No. OLI Euro 0.55 shares
---------------------------------------------
No. OLI Euro 1 shares + (No. T.I. shares x 7)
(2) the holders of Telecom Italia ordinary and savings shares will
respectively be assigned, for every ordinary or savings share held, a
number of ordinary or savings shares of the Company Resulting from the
Merger equal to:
seven times the number of shares assigned to Olivetti
shareholders for every share held by the latter
Assuming the extreme case in which all the Conversions were carried out, all
the shares reserved for the Telecom Italia stock-option plans were issued, no
withdrawals occurred and none of the holders of Telecom Italia ordinary and
savings shares accepted the Tender Offer, the redistribution would involve
21,684,904,141 shares of the Company Resulting from the Merger with a par value
of Euro 0.55 each and the Telecom Italia shares to be exchanged would total
(taking account of Olivetti's holding in the capital of Telecom Italia and of
the latter's holding of treasury stock at 15 April 2003) 4,459,575,170. In such
case, applying the formula above would give the following assignment ratios:
(i) 0.502620 new ordinary shares of the Company Resulting from the Merger with
a par value of Euro 0.55 each for every Olivetti ordinary share with a par
value of Euro 1 held at the date at which the merger becomes effective and
for which the right of withdrawal has not been exercised;
34 | Information Document
(ii) 3.518341 new ordinary or savings shares of the Company Resulting from the
Merger for every Telecom Italia ordinary or savings share, respectively,
held at the date at which the merger becomes effective by minority
shareholders other than Olivetti other than Olivetti and Telecom Italia
itself.
In light of the above, since the variables represented by Conversions, Telecom
Italia stock options exercised, withdrawals and acceptances of the Tender Offer
can only be quantified exactly at the time the Merger is implemented, it is
evident that the assignment ratio for the purposes of redistribution can be
established precisely only when the Merger is implemented.
In any event, at the end of the Merger the ratio between the shares assigned to
Olivetti shareholders and those assigned to Telecom Italia shareholders will be
exactly the same as the "natural" exchange ratio (1 to 7), as calculated above.
c) As already indicated, if at the time the Merger is implemented Olivetti's
share capital is less than the current figure of Euro 8,845,537,520
because the decreasing effect of withdrawals outweighs the increasing
effect of Conversions, the redistribution of the share capital just
described will be accompanied by the simultaneous issue of up to a maximum
of 11,103,237,962 new ordinary and saving shares of the Company Resulting
from the Merger with a par value of Euro 0.55 each for the purpose of the
share exchange, against the transfer to capital of the portion of Telecom
Italia's shareholders' equity belonging to minority interests, with the
possibility of an exchange deficit. These additional shares will be
assigned to all the shareholders of both Olivetti and Telecom Italia in
proportion to their respective shareholdings obtained by applying the
assignment ratios indicated at Point b).
Thus, even if such an event occurs, at the end of the Merger the ratio
between the shares assigned to Olivetti shareholders and those assigned to
Telecom Italia shareholders will be exactly the same as the "natural"
exchange ratio (1 to 7), as calculated above.
d) As part of the procedure for assigning the shares of the Company Resulting
from the Merger, a service will be provided to the minority shareholders
of both Olivetti and Telecom Italia, through authorized intermediaries, to
permit the rounding of the number of newly-issued shares owned down or up
to nearest whole number, at market prices and at no cost in terms of
expenses, stamp duty or commissions. In the event that the Olivetti shares
held do not entitle the holder to receive, in accordance with the
assignment mechanism, even one newly-issued share of the Company Resulting
from the Merger at the end of the Merger, maintenance of the position of
shareholder will be ensured by Olivetti International S.A. making
available to such persons, free of charge, one share of the Company
Resulting from the Merger.
e) The newly-issued shares to be utilized for the share exchange will be
assigned to the persons having entitlement by the respective authorized
intermediaries participating in Monte Titoli S.p.A. at the date the Merger
becomes effective. It will be possible to exchange Olivetti and Telecom
Italia shares which have not been dematerialized only by delivering them
to an authorized intermediary for dematerialized book-entry in the central
securities system.
Once the merger instrument has been signed and filed, Olivetti will
promptly publish notices in at least three newspapers with a national
circulation, of which one must be a financial newspaper, announcing the
amount of the capital of the Company Resulting from the Merger as a result
of the quantification of
35 | Information Document
the variables involved in the Merger (Conversions, the exercise of Telecom
Italia stock options, withdrawals from Olivetti, acceptances of the Tender
Offer), the exact assignment ratio in the overall and final measure resulting
from the outcome of the supplementary assignment described at Point c), if any,
and the detailed instructions on how to carry out the share exchange, trade and
obtain fractional rights as provided for at Point d).
2.1.2 (d) Right of withdrawal for Olivetti shareholders
Upon completion of the Merger the Company Resulting from the Merger will have
the same corporate purpose as Telecom Italia, with the integral substitution of
Olivetti's current corporate purpose.
Concerning the amendment of the corporate purpose, without prejudice to the
fact that the latter's extension to include the provision of services in the
telecommunications sector would by itself legitimate the right of withdrawal,
it was nonetheless considered desirable to take over Telecom Italia's corporate
purpose en bloc, in order to permit the Company Resulting from the Merger to
operate in all the sectors in which Telecom Italia is currently present, with
particular regard to the activities that Telecom Italia is authorized to engage
in pursuant to administrative measures. In fact Telecom Italia's activity
consists primarily in the installation and operation of telecommunications
equipment and in the supply of telecommunications services on the basis of
individual licences and general authorizations issued under Presidential Decree
318/1997. Whereas the corporate purpose of Telecom Italia laid down in its
bylaws provides expressly for all the activities referred to above, the
corporate purpose of Olivetti only mentions "production and marketing in the
field ... of telecommunications" and "services" as a merely secondary activity
(without further specification).
The change in the corporate purpose is also intended to allow the Company
Resulting from the Merger to engage in other activities covered by Telecom
Italia's bylaws, such as advertising and publishing, which are not envisaged in
Olivetti's current bylaws.
The adoption of Telecom Italia's corporate purpose means that the bylaws of the
Company Resulting from the Merger will contain the requirement that holding
equity investments should not be its principal activity, as it was for
Olivetti. In addition to this formal change, there will also be a substantial
change in the risk profile associated with investment in Olivetti since, as a
consequence of the Merger, the Company Resulting from the Merger will no longer
have the characteristics established by the Ministry of the Treasury in
implementing Article 113 of Legislative Decree 385/1993 to define the concept
of "engaging as the principal activity, without dealings with the public, in
the acquisition of equity interests".
Under Article 2437 of the Civil Code, the Olivetti shareholders who vote
against the merger resolution and those who are absent from the meeting may
exercise the right of withdrawal.
The right of withdrawal may be exercised by shareholders entitled to do so by
sending a registered letter that must reach Olivetti within 3 days of the date
of the shareholders' meeting that approved the Merger if sent by shareholders
who were present at the meeting and voted against the resolution or within 15
days of the filing of the resolution with the Company Register if sent by
shareholders who were not present at the meeting. The date on which letters are
received by Olivetti will count and not the date on which they were sent; it is
therefore up to the shareholders wishing to withdraw to ensure compliance with
the above-mentioned time limit since Olivetti takes no responsibility for
transmission or delivery delays due to causes beyond its control.
36 | Information Document
For the purpose of legitimizing the exercise of the right of withdrawal,
shareholders must also send Olivetti an appropriate certification, issued by
an authorized intermediary pursuant to the provisions governing dematerialized
financial instruments deposited with a central securities depository, attesting
in particular the ownership of the company's shares from the date of the merger
resolution. To this end shareholders will be considered to be eligible who,
having acquired Olivetti shares on the stock exchange, also took delivery of
them in the related settlement before the start of the shareholders' meeting.
For the purpose of establishing entitlement to the right of withdrawal,
Olivetti shareholders must be such on the date of the shareholders' meeting and
remain such until the right is exercised. As provided for by the regulations in
force, when certifications are issued the shares will be frozen by the
intermediary in question until they are redeemed.
Olimpia S.p.A. has announced that it will not exercise its right of withdrawal.
The amount due to Olivetti shareholders who exercise the right of withdrawal
will be based on the price per share calculated as the mean of the daily
official prices in the six months preceding the date the merger resolution is
adopted and will be announced in the shareholders' meeting called to approve
the Merger. Olivetti will inform shareholders in good time, as laid down by
law, regarding the procedure and time limits for exercising the right of
withdrawal by publishing appropriate notices in at least three newspapers with
a national circulation, of which one must be a financial newspaper.
The Olivetti shareholders who exercise their right of withdrawal will be
entitled to have their shares redeemed from the date on which the Merger
becomes effective, with the consequent right to be paid interest at the legal
rate from such date.
Accordingly, at the time the Merger becomes effective for civil law purposes
and simultaneously with the exchange of shares for the Olivetti shareholders
who did not exercise the right of withdrawal, Olivetti will redeem and cancel
the shares of the shareholders who exercised the right of withdrawal, with the
related payment planned at the latest within 90 days of the date on which the
Merger becomes effective.
The sums due to the shareholders who exercise the right of withdrawal will be
taxable profit for any part exceeding the subscription or purchase price paid
for the shares Olivetti cancels (Article 44(3) of the Italian "Income Tax
Code").
In the event that shareholders who are natural persons but not entrepreneurs or
qualified shareholders are assigned reserves other than capital reserves, even
if they were previously classified as share capital, the intermediary
participating in the Monte Titoli S.p.A. central securities depository (or
foreign central securities depositories participating therein) is required to
apply the 12.50% tax in lieu of income tax pursuant to Article 27-ter,
paragraph 1, of Presidential Decree 600/1973.
If, instead, the above-mentioned reserves were used to redeem non-residents,
the tax in lieu of income would be 27%, without prejudice to the rate reduction
provided for in double taxation agreements.
In the event that shareholders who are natural persons are qualified
shareholders or, not being qualified shareholders, elect not to be subject to
the tax in lieu of income referred to above, the taxable profit must be
indicated in their tax returns for an amount equal to the difference between
the withdrawal consideration and the subscription or purchase price for the
shares Olivetti cancels and will be subject to personal income tax (Irpef) or
separate taxation. At all events, for the part of the taxable profit determined
in this way corresponding to the reserves, other than capital reserves,
attributable to shareholders in relation to the shares cancelled, a tax credit
on the dividends will be recognized up to the amount of the taxes referred to
in Articles 105(1)(a) and 105(1)(b) of the Italian "Income Tax Code".
37 | Information Document
2.1.2 (e) Right of withdrawal for Telecom Italia shareholders
Olivetti's ordinary shares are listed on MTA (and the Frankfurt Stock
Exchange).
The absorbing company will continue to list the ordinary shares on MTA upon
completion of the Merger. Moreover, provision has been made for the Merger to
be subject to the listing on MTA of the savings shares to be assigned in
exchange to holders of Telecom Italia savings shares at the date the Merger
becomes effective.
Thus, there are no legal grounds for Telecom Italia shareholders to exercise
the right of withdrawal referred to in Article 131 of the Consolidated Law.
As noted above, the Company Resulting from the Merger will have the same
corporate purpose as Telecom Italia has today. Consequently, the shareholders
of Telecom Italia will not have the right to exercise the right of withdrawal
referred to in Article 2437 of the Civil Code.
2.1.2 (f) Bylaw amendments
It is intended that the Company Resulting from the Merger should adopt new
bylaws that will be largely the same as the current bylaws of Telecom Italia.
The amended bylaws will come into force on the date that the Merger becomes
effective, pursuant to Article 2504-bis of the Civil Code and the merger plan,
to which a copy of the new bylaws is attached (see Annex III).
Name of the company
Upon completion of the Merger the Company Resulting from the Merger will change
its name to "Telecom Italia S.p.A.", with the consequent amendment of Article
1 of the bylaws and of the other articles in which the name of the company
appears. The change meets the need to make the name of the Company Resulting
from the Merger consistent with the new organizational structure and the nature
of the activities it will acquire and perform at the end of the Merger,
although the intention is to continue to capitalize on the historic name of
"Olivetti", by itself or together with the other Group marks. The Company
Resulting from the Merger will be able to go on using its own corporate marks
as well as those of Telecom Italia.
Registered office
Article 2 of the bylaws, concerning the registered office, will be amended to
make Telecom Italia's present registered office at 2 Piazza degli Affari,
Milan, the registered office of the Company Resulting from the Merger. The
Company Resulting from the Merger will have its headquarters at 41 Corso
d'Italia, Rome. Ivrea will continue to be the strategic headquarters for the
activities of the Olivetti Group headed by Olivetti Tecnost.
Corporate purpose
Upon completion of the Merger, the Company Resulting from the Merger will have
taken over Telecom Italia's current corporate purpose en bloc, with the
integral substitution of Article 3 of Olivetti's current bylaws. For more
details, see Section 2.1.2(d).
38 | Information Document
Share capital
Article 5 of the bylaws of the Company Resulting from the Merger, concerning
the share capital, will incorporate a series of amendments to take account, in
particular, of the redistribution and the assignment of the shares issued for
the purpose of the exchange and of the adjustments necessary, in the light of
the new amount of the share capital following the merger, for the conversion of
the convertible bonds and the exercise of the warrants issued by Olivetti and
for the stock-option plans approved by Olivetti and Telecom Italia. In more
detail, Article 5 of the bylaws will be amended as follows:
a) a new maximum amount of Euro 492,726.30 will be established for the
variable capital increase for the exercise of the options already assigned
by Olivetti under the "Three-year Stock Option Plan 2002-2004" the
increase to be carried out by 15 December 2004, with an update of up to a
maximum of 895,866 shares of the Company Resulting from the Merger with a
par value of Euro 0.55 each, which will be offered to the holders of the
above-mentioned options on the basis of the exchange ratio for Olivetti
shareholders in the context of the Merger, at a price of Euro 3.308 per
option held;
b) a new maximum amount of Euro 10,743,649.40 will be established for the
variable increase in capital for the exercise of the options already
assigned by Olivetti under the "Three-year Stock Option Plan Feb-ruary
2002 December 2004", the increase to be carried out by 31 December 2004,
with an update of up to a maximum of 19,533,908 shares of the Company
Resulting from the Merger with a par value of Euro 0.55 to be offered to
the holders of the above-mentioned options on the basis of the exchange
ratio for Olivetti shareholders in the context of the Merger, at a price
of Euro 2.515 per option held;
c) a new maximum amount of Euro 103,622,863.85 will be established for the
increase in capital for the exercise of the "Warrants for Olivetti ex
Tecnost ordinary shares 1999-2004", the increase to be carried out by 20
June 2004, with an update of up to a maximum of 188,405,207 shares of the
Company Resulting from the Merger with a par value of Euro 0.55 to be
offered to the holders of the above-mentioned warrants on the basis of the
exchange ratio for Olivetti shareholders in the context of the Merger, at
a price already fixed by the governing bodies of Olivetti and included in
the warrant terms;
d) a new maximum amount of Euro 180,568,488.10 will be established for the
variable capital increase for the conversion of the "Olivetti 1.5%
2001-2004 convertible bonds with repayment premium" already issued by
Olivetti, the increase to be carried out by 1 January 2004, with an update
of up to a maximum of 328,306,342 shares of the Company Resulting from the
Merger with a par value of Euro 0.55 each, reserved for the holders of the
above-mentioned bonds at a conversion ratio equal to the exchange ratio
for Olivetti shareholders in the context of the Merger;
e) a new maximum amount of Euro 892,681,820.80 will be established for the
variable capital increase for the conversion of the "Olivetti 1.5%
2001-2010 convertible bonds with repayment premium" already issued by
Olivetti, the increase to be carried out by 1 January 2010, with an update
of up to a maximum of 1,623,057,856 shares of the Company Resulting from
the Merger with a par value of Euro 0.55 each, reserved for the holders of
the above-mentioned bonds at a conversion ratio equal to the exchange
ratio for Olivetti shareholders in the context of the Merger.
39 | Information Document
The Company Resulting from the Merger will also have to take over Telecom
Italia's stock-option plans and will therefore have to honour the stock options
already assigned thereunder. To this end, Olivetti will approve corresponding
increases in capital permitting the issue in relation to such stock options of
a number of shares updated in accordance with the exchange ratio and the
assignment ratio provided for in the merger plan, while the exercise price will
remain unchanged. In other words, the owner of Telecom Italia stock options
will maintain the right to subscribe, at the price already fixed, not for the
original number of Telecom Italia shares but the larger number of shares of the
Company Resulting from the Merger established on the basis of the assignment
ratio. Naturally, the exact quantification of the new quantities that can be
subscribed will be possible only when, at the time the merger instrument is
signed, the assignment ratio is established. At all events, the ratio of the
shares obtainable on the basis of the foregoing calculations to the number of
shares currently obtainable will be exactly the same as the "natural" exchange
ratio (1 to 7).
Specifically, Olivetti will approve an increase in capital of up to a maximum
amount of Euro 261,956,575.10 in total by means of the issue of up to a maximum
of 476,284,682 shares with a par value of Euro 0.55 each, divided into the
following variable tranches:
a) a tranche of up to a maximum of Euro 21,969,104.30 for the exercise of the
options already assigned by Telecom Italia under the "Stock Option Plan
1999", to be implemented by 31 January 2005 by the issue of up to a
maximum of 39,943,826 shares of the Company Resulting from the Merger with
a par value of Euro 0.55 each, which will be offered to the holders of the
above-mentioned options on the basis of the exchange ratio for Telecom
Italia shareholders in the context of the Merger, at a price of Euro 6.79
per option held;
b) a tranche of up to a maximum of Euro 53,421,890.50 for the exercise of the
options already assigned by Telecom Italia under the "Stock Option Plan
2000", to be implemented by 30 July 2008 by the issue of up to a maximum
of 97,130,710 shares of the Company Resulting from the Merger with a par
value of Euro 0.55 each, which will be offered to the holders of the
above-mentioned options on the basis of the exchange ratio for Telecom
Italia shareholders in the context of the Merger, at a price of Euro
13.815 per option held;
c) a tranche of up to a maximum of Euro 84,158,927.60 for the exercise of the
options already assigned by Telecom Italia under the "Stock Option Plan
2001", to be implemented by 30 April 2008 by the issue of up to a maximum
of 153,016,232 shares with a par value of Euro 0.55 each, which will be
offered to the holders of the above-mentioned options on the basis of the
exchange ratio for Telecom Italia shareholders in the context of the
Merger, at a price of Euro 10.488 per option held;
d) a tranche of up to a maximum of Euro 30,600,889.00 for the exercise of the
options already assigned by Telecom Italia under the "Stock Option Plan
Top 2002", to be implemented by 28 February 2010 by the issue of up to a
maximum of 55,637,980 shares of the Company Resulting from the Merger with
a par value of Euro 0.55 each, which will be offered to the holders of the
above-mentioned options on the basis of the exchange ratio for Telecom
Italia shareholders in the context of the Merger, at a price of Euro 9.203
per option held;
40 | Information Document
e) a tranche of up to a maximum of Euro 71,805,763.70 for the exercise of the
options already assigned by Telecom Italia in three distinct lots under
the "Stock Option Plan 2002", to be implemented for the three lots by
respectively 31 March 2008, 31 March 2009 and 31 March 2010 by the issue
of up to a maximum total of 130,555,934 shares of the Company Resulting
from the Merger with a par value of Euro 0.55 each, which will be offered
to the holders of the above-mentioned options on the basis of the exchange
ratio for Telecom Italia shareholders in the context of the Merger, at a
price for the three lots of respectively Euro 9.665, Euro 7.952 and Euro
7.721 per option held.
Other amendments to the bylaws
The bylaws that will be adopted by the Company Resulting from the Merger will
include an article (Article 6) with the provisions applicable to the savings
shares that will be issued by the Company Resulting from the Merger. In
accordance with Article 145 of the Consolidated Law, the new version of the
article will specify the substance of the preferential rights attaching to the
savings shares issued for the purpose of the exchange, the related conditions,
limits and procedures for the exercise thereof, and will describe the legal
treatment of this class of shares in the event of the delisting of the ordinary
or savings shares of the Company Resulting from the Merger. The preferential
rights of the savings shares to be issued in exchange will be the same as those
of the Telecom Italia savings shares, including the possibility of satisfying
the rights attaching to them by distributing reserves, whose introduction in
the Telecom Italia bylaws, with immediate effect, will be proposed at the
shareholders' meeting called to approve the Merger.
As regards corporate governance, the bylaws of the Company Resulting from the
Merger will provide for a Board of Directors with not less than 7 and not more
than 23 members, appointed by means of a slate mechanism taken over in large
part from Telecom Italia's current bylaws (see the text of the bylaws attached
to the merger plan; Annex III).
Lastly, it should be noted that Article 5 of Telecom Italia's current bylaws
contains clauses that give the Minister for the Economy and Finance certain
special powers, to be exercised in agreement with the Minister for Productive
Activities, in application of Article 2 of Law 474/1994. These powers, which
include the right to veto the adoption of merger resolutions and amendments to
the bylaws that would suppress or alter the powers themselves, were introduced
into Telecom Italia's bylaws under a Decree of the Prime Minister dated 21
March 1997 in the light of the sector of the company's operations
(telecommunications) and with a view to its privatization.
Following the meeting of its Board of Directors on 11 March 2003, Telecom
Italia requested that the Minister for the Economy and Finance indicate whether
he intended to exercise the powers in question. The Minister for the Economy
and Finance has informed Telecom Italia that he is of the view that the
conditions do not exist for the exercise of his veto power in the event of the
adoption by Telecom Italia's shareholders' meeting of the merger resolution. As
regards the question of the presence in the bylaws of the Company Resulting
from the Merger of the clauses giving the special powers, the Minister for the
Economy and Finance has indicated that he considers it necessary to maintain
the power of assenting to the acquisition of major shareholdings in the
company's capital and the power of veto as set out in the current bylaws of
Telecom Italia. The Minister for the Economy and Finance also stated that he
had reached agreement with the Minister for Productive Activities on the
decisions regarding these questions.
41 | Information Document
The bylaws of the Company Resulting from the Merger submitted to the
shareholders' meetings of the companies participating in the merger for their
approval contain the special powers specified above.
2.1.2 (g) Date from which Telecom Italia's transactions will be recorded, for
tax purposes as well, in the accounts of Olivetti
In accordance with Article 2504-bis, second paragraph, of the Civil Code, the
Merger will become effective on the date of the last filing of the merger
instrument provided for in Article 2504 of the Civil Code, or on such later
date as may be specified in that instrument.
The newly-issued shares of the Company Resulting from the Merger will have
regular dividend rights. In accordance with the combined effect of Articles
2504-bis, third paragraph, and 2501-bis, first paragraph, point 6, of the Civil
Code, the transactions of Telecom Italia will be recorded in the accounts of
the Company Resulting from the Merger starting from 1 January of the year in
which the merger becomes effective and thus, according to the planned
timetable, from 1 January 2003, for tax purposes as well, in accordance with
Article 123(7) of Presidential Decree 917/1986 (the "Income Tax Code").
Consequently, on the date the Merger becomes effective, the Company Resulting
from the Merger will assume all Telecom Italia's assets, rights and
obligations, including, but not limited to, all its tangible and intangible
fixed assets, movable and immovable property, licences, authorizations,
franchises, securities, current account assets and liabilities, loans, equity
investments, insurance policies, labour contracts and every other contractual
instrument.
2.1.2 (h) Tax effects of the Merger on Olivetti and Telecom Italia under
Italian law
Tax neutrality
Pursuant to Article 123 of the Income Tax Code and Article 27(1) of Law
724/1994, mergers are transactions that do not give rise to the realization or
distribution of capital gains or losses in respect of the assets of the company
being absorbed.
Merger differences
The Merger will make it necessary to include specific items in order to achieve
accounting balance between the assets and liabilities following the unification
of the patrimonies of the companies involved in the Merger. As mentioned
earlier, in fact, the Merger will give rise to a cancellation deficit and it is
reasonable to expect that an exchange surplus will emerge.
An exchange surplus does not constitute taxable income for the absorbing
company.
On the other hand, the cancellation deficit will be allocated to Telecom
Italia's assets (in particular to its holding of TIM shares, stated at cost)
and any difference will be included under "goodwill".
Under Article 6(1) of Legislative Decree 358/1997 such revaluations may also be
recognized for tax purposes if the 19% tax in lieu of income tax is paid.
Pursuant to paragraph 2 of the same article, revaluations in connection with
merger deficits may be recognized for tax purposes, even in the absence of
payment of the tax in lieu of income tax, if and to the extent that the equity
investments cancelled led to the previous owners being taxed on the resulting
capital gains, net of the related capital losses and writedowns.
42 | Information Document
Reserves with tax deferred
The reserves with tax deferred shown in the latest financial statements of the
company being absorbed will be included in the income of the absorbing company
if and to the extent that they are not reconstituted in its accounts.
This rule does not apply to reserves that are taxable only if they are
distributed (e.g. revaluation reserves), which have to be reconstituted in the
balance sheet of the absorbing company only if there is a merger surplus or an
increase in capital that exceeds the total capital of the companies
participating in the merger, net of the parts of the capital of each company
they already held. In this case the reserves will be included in the income of
the absorbing company in the event of a subsequent distribution of the surplus
or reduction in capital because it is surplus to requirements.
The reserves already allocated to capital by the company being absorbed are
considered to be transferred to the capital of the absorbing company and form
part of its income in the event of a reduction in capital because it is surplus
to requirements.
Effects on the shareholders of the company being absorbed
The exchange of the shares of the company being absorbed for shares of the
absorbing company is not material for tax purposes since for the shareholders
it does not constitute the realization of the cancelled shares.
The cost of the cancelled shares for tax purposes is automatically transferred
to the new shares received in the exchange.
2.1.3 Forecasts of the composition of major shareholders and of the control
structure of the absorbing company following the Merger
On 15 April 2003 the shareholders of Olivetti listed in the table below were
found, on the basis of the shareholders' register and the notifications of
major shareholdings pursuant to Article 120 of the Consolidated Law, to possess
more than 2% of the company's capital:
Number of %
Shareholders ordinary shares held of ordinary share capital
-------------------------------------- --------------------- ---------------------------
Olimpia S.p.A. * 2,524,127,813 28.54%
Caisse des Depots et Consignations ** 389,200,000 4.40%
Assicurazioni Generali S.p.A. *** 334,842,996 3.79%
Olivetti International S.A. **** 211,931,328 2.40%
Mediobanca S.p.A. 210,723,954 2.38%
-------------------------------------- --------------------- ---------------------------
* The number of Olivetti ordinary shares held by Olimpia S.p.A. has
increased to 2,525,094,364 as the net effect of the early redemption, with
the consideration in the form of Olivetti ordinary shares, of Olimpia 1.5%
2001-2007 bonds and the subsequent merger of Holy s.r.l. into Olimpia
S.p.A., which became effective on 9 May 2003. The number of Olivetti
ordinary shares held by Olimpia S.p.A. on 9 May 2003 corresponds to an
interest of 28.55% on the basis of the Olivetti share capital attested on
the same day, equal to Euro 8,845,677,947 (divided into 8,845,677,947
ordinary shares with a par value of Euro 1.00 each).
** Investment held via CDC Ixis Capital Market
*** Investment held through subsidiaries
**** Subsidiary of Olivetti S.p.A. Under Article 2359-bis of the Civil Code,
the voting rights of the shares held by Olivetti International S.A. may
not be exercised. The number of Olivetti ordinary shares held by Olivetti
International S.A. is unchanged.
43 | Information Document
The capital of Olimpia S.p.A. is held as follows: 50.40% by Pirelli S.p.A.,
16.80% by Edizione Finance International S.A., 16% by Hopa S.p.A., 8.40% by
Unicredito Italiano S.p.A. and the remaining 8.40% by Banca Intesa S.p.A.
(formerly IntesaBCI S.p.A.).
On 15 April 2003 the shareholders of Telecom Italia shown in the table below
were found, on the basis of the shareholders' register and the notifications of
major shareholdings pursuant to Article 120 of the Consolidated Law, to possess
more than 2% of the company's capital:
Number of %
Shareholders ordinary shares held of ordinary share capital
--------------------- ---------------------- ----------------------------
Olivetti S.p.A. 2,891,656,682 54.94%
--------------------- ---------------------- ----------------------------
Since the Merger will lead to the entry of Telecom Italia's shareholders into
the capital of the Company Resulting from the Merger and the consequent
absorption of Telecom Italia, the forecasts of the composition of major
shareholders at the end of the Merger refer to the Company Resulting from the
Merger. The shareholder composition of the Company Resulting from the Merger
upon completion of the Merger will be influenced by a series of variables and,
in particular, by the number of Conversions, the exercise of Telecom Italia
stock options, the number of withdrawals by Olivetti shareholders, and the
level of acceptances of the Tender Offer.
The table below shows the foreseeable composition of shareholders with holdings
of more than 2% of the ordinary share capital of the Company Resulting from the
Merger, assuming withdrawal and Tender Offer prices calculated on the basis of
the average prices that could be estimated on 9 May 2003. The withdrawal price
for Olivetti shareholders was estimated as the arithmetic mean of the official
prices of the Olivetti share between 26 November 2002 and 23 May 2003, with the
official price recorded on 9 May 2003 considered as unchanged until 23 May
2003. The Tender Offer prices for Telecom Italia shareholders were estimated as
the weighted averages of the official stock exchange prices in the period
between 12 March 2003 and 26 May 2003, the day of the third call of the
Olivetti shareholders' meeting, with the official price and the volume recorded
on 9 May 2003 considered as unchanged until 26 May 2003, plus a premium of 20%.
Specifically, it is assumed: (i) that there are no Conversions (apart from
those deriving from applications received by 15 April 2003) and that no Telecom
Italia stock options are exercised; (ii) that withdrawals involve 5% or 25% of
the shares held by shareholders other than Olimpia S.p.A. and that the price is
equal to Euro 0.9996, giving a total outlay of about Euro 305 million and Euro
1,527 million, respectively; and (iii) that the Tender Offer is made at a price
of Euro 7.958 per Telecom Italia ordinary share and Euro 4.812 per savings
share, giving a total outlay of about Euro 8,695 million and about Euro 7,473
million, respectively, so that the Tender Offer is made for, respectively,
about 16.8% or 14.4% of the ordinary shares and savings shares in the event of
full acceptance.
% of % of
ordinary share ordinary share
capital assuming capital assuming
Shareholders 5% withdrawals 25% withdrawals
------------------------------------- ---------------- ----------------
Olimpia S.p.A. * 13.35% 13.60%
Caisse des Depots et Consignations ** 2.06% 2.10%
------------------------------------- ---------------- ----------------
* Using the number of Olivetti ordinary shares held by Olimpia on 9 May
2003, equal to 2,525,094,364, the percent held by Olimpia in the cases of
5% and 25% withdrawals remains unchanged at 13.35% and 13.60%,
respectively.
** Investment held via CDC Ixis Capital Market
44 | Information Document
In any event, it is foreseeable that no single shareholder will have control of
the Company Resulting from the Merger, which will be fully contestable.
2.1.4 Effects of the Merger on shareholders' agreements falling within the
scope of Article 122 of the Consolidated Law involving the shares of the
companies participating in the Merger
On 22 September 2002 notices were published in the Italian press with extracts
from the following share-holders' agreements:
- between Pirelli S.p.A. and Edizione Holding S.p.A.
- Edizione Finance International S.A., concluded on 7 August 2001 and
subsequently amended;
- among Pirelli S.p.A., Unicredito Italiano S.p.A. and IntesaBCI S.p.A.,
concluded on 14 September 2001 and subsequently amended.
On 1 March 2003 the content of the preliminary agreement concluded on 21
February 2003 among Pi-relli S.p.A., Edizione Finance International S.A. /
Edizione Holding S.p.A., Banca Intesa S.p.A., Unicredito Italiano S.p.A.,
Olimpia S.p.A. and Hopa S.p.A. was also published. One of the purposes of the
agreement was to allow Hopa S.p.A. to become a shareholder of Olimpia S.p.A.
Extracts of the above-mentioned shareholders' agreements are attached to this
Information Document (Annex XVII).
The parties to the shareholders' agreements falling within the scope of Article
122 of the Consolidated Law that concern the companies participating in the
Merger have not sent any notification concerning the possible effects of the
Merger on such agreements.
2.2 Aims of the Merger
The Merger is part of the reorganization aimed at creating value for Telecom
Italia shareholders, launched in July 2001 and carried out through an
industrial and financial restructuring with positive results despite the crisis
in the stock markets and the telecommunications sector.
The strategic objective of creating value for Telecom Italia shareholders
involved the identification of a series of actions and initiatives. In
particular, industrial restructuring and refocusing on the core business --
completed earlier than had been announced to the financial community, in
September 2001, and in line with Telecom Italia's Business Plan -- also
involved the disposal of a number of non-strategic assets (such as the equity
interests in Auna, Telemaco Immobiliare, Bouygues Decaux Telecom, Mobilkom
Aus-tria, Telekom Austria, Telespazio, Sogei and Lottomatica) and enabled the
Telecom Italia Group to:
o improve its operating result, which rose on a consolidated basis by 10.6%
to Euro 7.4 billion in 2002, and
o reduce total consolidated net debt from Euro 21.9 billion at 31 December
2001 to Euro 18.1 billion at 31 December 2002.
In addition, Olivetti refinanced some of its borrowings in order to improve the
maturity profile of its debt.
The completion of the above-mentioned restructuring of the activities of the
Telecom Italia Group, together with the improvement in Olivetti's financial
situation, now makes it possible to take the further
45 | Information Document
step of simplifying the Olivetti-Telecom Group's corporate structure, in
accordance with the market's expectations, by merging Telecom Italia into
Olivetti. As a consequence of the Merger, the shareholders of the companies
participating in the Merger will be able to benefit fully from the increase in
value deriving from the implementation of the Business Plan.
Currently, Telecom Italia is majority controlled by Olivetti and the latter has
a major shareholder - Olimpia S.p.A. - with a 28.55% interest in its share
capital. The Merger will lead to the Company Resulting from the Merger being
significantly more contestable since, upon completion of the Merger, the
holding of the present relative majority shareholder of Olivetti will be
reduced, with a consequent increase in the security's liquidity and in the
reasons for the market to view it favourably, to the benefit of all the
shareholders. Naturally, the size of Olimpia S.p.A.'s holding in the Company
Resulting from the Merger will depend on a series of factors such as the number
of Conversions (as defined in Section 2.1.2(c)), the number of Telecom Italia
stock options exercised, the number of withdrawals by Olivetti shareholders and
the number of acceptances of the Tender Offer (see Section 2.1.3).
The Merger will also bring a major simplification in the structure of the
Group. Among other things, the integration of corporate functions will ensure
faster decision-making in the context of an organizational structure comparable
to that of the leading international operators.
The Merger is also intended to optimize financial and income flows within the
Group through more efficient management of Group debt and more effective use of
financial leverage. In fact the Merger as a whole will also make it possible to
attain a more efficient financial structure, with an increase in debt capital,
which has a lower net cost than equity capital. It is also likely that these
effects will lead to an improvement in the creditworthiness of the Company
Resulting from the Merger, which, in turn, could lead to a more favourable
rating and a reduction in the cost of future debt.
It needs to be stressed that the increase in overall debt following the Merger
will result in the debt reaching a level (i) in line with or better than that
of other companies of comparable size operating in the sector in Europe, and
(ii) consistent and compatible with Telecom Italia's range of activities and
the prospective cash flows deriving from the implementation of the Business
Plan. Debt is projected to decline in the 18-24 months from the completion of
the Merger through the utilization of the proceeds of the sales of other
non-strategic assets. Furthermore, the Company Resulting from the Merger will
also benefit from the positive effects of unified debt management in terms of
the lengthening of maturities and optimal correlation with corporate
requirements.
At the same time, the Merger is intended to improve the tax efficiency of the
Company Resulting from the Merger under the current tax rules, through the
faster and more complete recovery of the potential tax benefits arising from
the value adjustments to equity interests decided at the time of the approval
of Olivetti's draft financial statements for 2002.
Moreover, despite the increase in debt, which will only be temporary as
explained above, the Company Resulting from the Merger is expected to continue
to generate profits and to adopt a dividend-distribution policy that will
ensure Telecom Italia's present shareholders receive a total amount of
dividends at least on a par with the current level.
46 | Information Document
2.2.1 Aims of the Merger with special reference to operating objectives
The companies participating in the Merger have agreed on the operating
objectives for the Company Resulting from the Merger. They are basically the
same as those of Telecom Italia, adopted by the Board of Directors on 13
February 2003, which in turn confirm the guidelines and objectives of the
Business Plan for 2002-04. With specific regard to Olivetti, it should be noted
that Olivetti Tecnost is basically neutral in terms of its impact on the
operating result.
However, the Merger will result in a merger deficit (deriving from the share
cancellations), any portion of which not assigned to Telecom Italia assets
(specifically equity interests) will be amortized over a period of 20 years.
The updated objectives take account of this additional portion of amortization.
The updated objectives also consider the financial charges associated with
Olivetti's present debt and the effect of the tax asset connected with the
value adjustments made in Olivetti's and Telecom Italia's draft financial
statements for 2002. In addition to the proceeds of the disposals already
envisaged by the Business Plan (Telekom Austria, Operazioni Real Estate), the
targets include those from the disposal of the company into which the Business
Directories, Directory Assistance and Business Information business segments of
Seat Pagine Gialle S.p.A. are to be spun off.
The following table summarizes the above considerations on a consolidated basis
and clearly shows the sustainability of the commitments entered into for the
future.
Objectives of the Company Resulting
Olivetti 2002 from the Merger on a consolidated
Billions of euros consolidated financial statements basis (*) CAGR (o) 2002-2005 (***)
------------------------------ --------------------------------- ----------------------------------
Sales and service revenues 31.4 4 - 4.5%
Gross operating profit 14.0 5 - 5.5%
% of sales 44.6%
Operating income 6.0 8 - 8.5%
% of sales 19.1%
Cumulative 2003-2005
Free cash flow 8.6 29
Net financial position(**) 33.4 34.3 (****)
------------------------------ --------------------------------- ----------------------------------
(*) Assuming zero withdrawals, fully diluted.
(**) The net financial position does not take account of the commitment to
purchase Seat shares (in December 2005) from Aldermanbury Investment
Limited (formerly Chase Equities Limited), equal to Euro 2,417 million.
(***) The scope of the consolidation is the same.
(****) At 31 December 2004.
(o) Compound average growth rate.
2.2.2 Plans drawn up by the companies participating in the Merger with special
reference to the outlook for operations and to restructurings and/or
reorganizations
Following the Merger the Company Resulting from the Merger will continue to
implement the strategies pursued to date by Olivetti and Telecom Italia in line
with the Business Plan, above all with the aim of creating value by putting to
good use the Group's assets and distinctive skills and by strengthening the
financial structure in order to sustain growth (for more details, see Section
2.1.1(b)).
47 | Information Document
2.3 Documents made available to the public and the places in which they can be
consulted
This Information Document and the documents referred to in Article 2501-sexies,
first paragraph, points 1) and 3), and Article 70(1) of the Consob Regulation
have been made available to the public. They can be consulted by anyone who
applies at the registered office of Olivetti (77 Via Jervis, Ivrea), at the
registered office of Telecom Italia (2 Piazza degli Affari, Milan) and its
headquarters (41 Corso d'Italia, Rome), and at the registered office of Borsa
Italiana S.p.A. (6 Piazza degli Affari, Milan). They have also been posted on
the Internet at www.olivetti.it and www.telecomitalia.it.
48 | Information Document
3. Significant effects of the Merger
3.1 Significant effects of the Merger on the key factors that influence and
characterize the activity of the companies participating in the Merger and the
type of business engaged in
At the end of the Merger the Company Resulting from the Merger will adopt
Telecom Italia's current corporate purpose. Among other things, this innovation
is necessary in order for it to take over the licences currently held by
Telecom Italia for the supply of public telecommunications services.
Upon completion of the Merger there will also have been a major change in the
business of the absorbing company, Olivetti, which will be transformed from a
holding company into an operating company with numerous licences and
administrative authorizations and operations in regulated markets, so that its
corporate purpose must include the supply of the services for which such
authorizations and franchises have been granted.
For the shareholders of Telecom Italia, the Merger will not bring any changes
in the sectors of activity in which they have invested since, as explained
earlier, the Company Resulting from the Merger will continue to perform the
activities currently performed by Telecom Italia without interruption.
3.2 Implications of the Merger for the strategies concerning business and
financial dealings between Group companies or the centralized supply of
services
The Merger will not lead to significant changes in the business and financial
dealings between companies belonging to the group headed by the Company
Resulting from the Merger or in the centralized supply of services.
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50 | Information Document
4. Economic and financial performance of the Telecom Italia Group
4.1 Comparison of the reclassified consolidated income statements and balance
sheets of the Telecom Italia Group for 2002 and 2001 and accompanying notes
Form and content
The layouts of the reclassified income statements and balance sheets shown
below are consistent with those used by Telecom Italia in the report on
operations submitted with the consolidated annual accounts to discuss the
Group's economic performance and financial position.
Scope of the consolidation
The consolidation includes the Italian and foreign companies in which the
Telecom Italia holds a majority of voting rights, and all other companies in
which it exercises a dominant influence. As permitted by law, subsidiaries that
are not material either individually or taken together are excluded from the
consolidation.
The companies in which Telecom Italia holds between 20% and 50% of the voting
capital (including jointly controlled companies) and companies in which it
exercises a significant influence have normally been accounted for using the
equity method.
The changes in the scope of the consolidation during 2002 did not materially
affect the economic and financial data with respect to 31 December 2001. Among
the most important changes it is worth noting the exit of the 9Telecom and
Telespazio groups, together with Sogei S.p.A. and Consiel S.p.A., and the entry
of the Webegg group and Blu S.p.A.
4.1.1 Reclassified Telecom Italia Group income statements for 2002 and 2001 and
accompanying notes
In 2002 the Telecom Italia Group recorded a consolidated net loss of Euro 322
million (net income of Euro 297 million before minority interest). In 2001 the
Group had recorded a consolidated net loss of Euro 2,068 million (a net loss of
Euro 1,658 million before minority interest).
The result before tax in 2002 was a loss of Euro 419 million, an improvement of
Euro 314 million compared with the previous year owing:
o to the significant improvement in operating income (+Euro 707
million);
o to the increase in net investment and financial income (expense)
(+Euro 1,792 million);
o to the deterioration in net extraordinary income (expense) (-Euro
2,185 million), which was primarily due to the increase in provisions
and writedowns in respect of equity investments and goodwill (Euro
6,237 million in 2002, as against Euro 2,984 million in 2001), which
was only partially offset by the larger capital gains on disposals of
equity investments, business segments, fixed assets and intangibles
(Euro 2,413 million in 2002, as against Euro 392 million in 2001).
51 | Information Document
Reclassified consolidated income statements of the Telecom Italia Group for
2002 and 2001
(in millions of euros) 2002 2001
------------------------------------------------------------ ------- -------
A. Sales and service revenues 30,400 30,818
Changes in inventories of work in progress, semi-finished
and finished goods 2 -
Changes in inventory of contract work in process (42) (115)
Increases in capitalized internal construction costs 675 581
Operating grants 19 24
------------------------------------------------------------ ------- -------
B. Standard production value 31,054 31,308
Raw materials and outside services (*) (12,558) (13,042)
------------------------------------------------------------ ------- -------
C. Value added 18,496 18,266
Labour costs (*) (4,532) (4,647)
------------------------------------------------------------ ------- -------
D. Gross operating profit 13,964 13,619)
Depreciation and amortization (5,877) (6,275)
Of which: goodwill (844) (1,022)
Other valuation adjustments (599) (455)
Provisions to reserves for risks and charges (153) (278)
Net other income (expense) 46 63
------------------------------------------------------------ ------- -------
E. Operating income 7,381 6,674
Net investment and financial income (2,163) (3,955)
Of which: value adjustments (682) (1,956)
------------------------------------------------------------ ------- -------
F. Income before extraordinary items and taxes 5,218 2,719
Net extraordinary income (expense) (5,637) (3,452)
------------------------------------------------------------ ------- -------
G. Income before taxes (419) (733)
Income taxes 716 (925)
------------------------------------------------------------ ------- -------
H. Net income (loss) before minority interest 297 (1,658)
Minority interest (619) (410)
------------------------------------------------------------ ------- -------
I. Net income (loss) (322) (2,068)
============================================================ ======= =======
(*) Reduced by related cost recoveries.
Notes to the reclassified consolidated income statements for 2002 and 2001
Sales and service revenues amounted to Euro 30,400 million, down by 1.4% on
2001. Excluding the effects of exchange rate movements (Euro 763 million) and
of changes in the scope of the consolidation (Euro 755 million), there was
growth of 3.8%. The most important changes in the scope of the consolidation
were the exit of the 9Telecom group and of Sogei S.p.A. (included for the first
six months of 2002) and that of the Telespazio group (from 1 October 2002).
Revenues benefited from the positive contribution of the Mobile business unit
and the increase in those generated by the Internet & Media business unit. On
the other hand there was a decline in the contribution of the Domestic Wireline
business unit, which saw traffic revenues decline by 6% (Euro 533 million),
despite a 2.4% rise in minutes, since this was accompanied by an 8.3% reduction
in the average return on retail and wholesale traffic. The downturn was offset
in part by the rise in basic charges and activation fees.
Gross operating profit amounted to Euro 13,964 million, up by 2.4% (Euro 345
million) on 2001. As a ratio to revenues, it rose from 44.2% to 45.9%.
Excluding the effects of exchange rate movements (Euro
52 | Information Document
186 million) and of changes in the scope of the consolidation (Euro 120
million), there was growth of 4.9% (Euro 651 million).
More specifically, the ratio to revenues for the Domestic Wireline business
unit rose from 45.1% to 46.8%, while that of the Mobile business unit remained
above 46%.
In more detail, the gross operating profit in 2002 was affected by:
o Raw materials and outside services, which decreased by 3.7% to Euro 12,558
million, primarily as a result of actions taken to raise efficiency. As a
ratio to revenues, this item declined from 42.3% to 41.3%.
o Labour costs, which decreased by 2.5% (Euro 115 million) to Euro 4.532
million; apart from the effect of change in the scope of the
consolidation, the decrease reflected the reduction in the staff of the
Parent Company, Telecom Italia, from 61,081 at 31 December 2001 to 54,705
at 31 December 2002. At 14.9% the ratio of this item to revenues was in
line with the result for the previous year.
At 31 December 2002 the staff of the Telecom Italia Group numbered 101,713,
compared with 109,956 at 31 December 2001. Of the total reduction turnover
accounted for 5,360 (the balance of 12,567 terminations and 7,207 hirings) and
the changes in the scope of the consolidation for 2,883.
The most important changes in staff numbers due to those in the scope of the
consolidation were the exit of the 9Telecom group (-1,003), the disposal of the
Telespazio group (-1,168) and the exit of Sogei and Consiel (-1,538 in total)
and the entry of Blu (+618) and the Webegg group (+719).
Operating income amounted to Euro 7.381 million, an increase of 10.6% (Euro 707
million). As a ratio to revenues, it improved from 21.7% to 24.3%. Excluding
the effects of exchange rate movements and of changes in the scope of the
consolidation, the increase was 9.9%.
The increase in absolute terms benefit both from the rise in gross operating
income and from the fall in depreciation and amortization.
In particular:
o Depreciation and amortization fell by Euro 398 million, from Euro 6.275
million to Euro 5.877 million, as detailed below:
2002 2001 Change
(in millions of euros) (a) (b) (a - b)
------------------------------------------- ----- ----- -------
Fixed assets 3,783 4,034 (251)
Intangibles 2,094 2,241 (147)
of which: goodwill 844 1,022 (178)
------------------------------------------- ----- ----- -------
Total depreciation and amortization 5,877 6,275 (398)
=========================================== ===== ===== =======
The reduction of Euro 178 million in the amortization of goodwill was mostly
due to the writedowns made in 2001.
The ratio of depreciation and amortization to revenues declined from 20.4% to
19.3%.
o Other valuation adjustments increased by Euro 144 million, from Euro 455
million to Euro 599 million. They were mainly in respect of receivables
from customers and served to bring these into line with their estimated
realizable value. The main contributions to this item came from Telecom
Italia (Euro 356 million), Gruppo Seat Pagine Gialle (Euro 57 million),
TIM (Euro 51 million) and Gruppo Entel Chile (Euro 40 million).
53 | Information Document
o Provisions to reserves for risks and charges decreased by Euro 125
million, from Euro 278 to Euro 153 million, partly owing to the Euro 54
million provision made in 2001 for the closure of the Astrolink supply
contract.
o Net other income declined from Euro 63 million to Euro 46 million and
comprised the amounts charged by TLC companies to customers in respect of
arrears (Euro 106 million, as against Euro 112 million), the portions of
capital grants that became available (Euro 65 million, as against Euro 73
million), indirect taxes and duties (Euro 115 million, as against Euro 120
million), costs in connection with the management of receivables (Euro 60
million, as against Euro 37 million) and the net capital losses on
disposals of fixed assets and intangibles (Euro 30 million, as against
Euro 17 million).
Net investment and financial income, comprising:
2002 2001 Change
(in millions of euros) (a) (b) (a - b)
------------------------------------------- ------- ------- --------
Net investment income 18 154 (136)
Net financial expense (1,499) (2,153) 654
Value adjustments to financial assets (682) (1,956) 1,274
------------------------------------------- ------- ------- --------
Total (2,163) (3,955) 1,792
=========================================== ======= ======= ========
In more detail:
o net investment income refers essentially to dividends received from
investee companies; the reduction was due to the lower net gains realized
on the listed stocks classified in current assets.
o of the total reduction in net financial expense, Euro 569 million can be
ascribed to the provision that was set aside in 2001 for the commitment to
purchase Seat Pagine Gialle shares; in 2002, instead, the allocation was
recorded in extraordinary expense. The remaining improvement in net
financial expense (Euro 85 million) benefited from the Group's lower
average debt during the period and lower interest rates and fees, the
effects of which were partly offset by adverse exchange rate movements for
some South American countries, particularly Venezuela and Brazil.
o value adjustments to financial assets amounted to Euro 682 million and
referred to:
- amortization of goodwill arising at the time of the purchase of the
investments in companies accounted for using the equity method
amounting to Euro 80 million (Euro 316 million in 2001). The
reduction was due to the writeoffs of goodwill taken in the 2001
financial statements;
- writedowns of securities and investments included in current assets
of Euro 176 million (Euro 291 million in 2001) and of long-term
securities of Euro 40 million (Euro 49 million in 2001), with a total
reduction of Euro 124 million compared with 2001;
- the Group's share of the equity in the earnings and losses of the
unconsolidated companies accounted for using the equity method, which
produced a loss of Euro 386 million (Euro 1,300 million in 2001).
This refers to the losses of Stream of Euro 246 million (Euro 241
million in 2001), Aria -IS Tim Turchia of Euro 171 million (Euro 334
million in 2001) and a positive balance for the other unconsolidated
companies of Euro 31 million.
Moreover, in 2001, this item had included the negative results of the
investments in the Nortel Inversora group (Euro 238 million) and the Auna group
(Euro 203 million) and Telespazio's writedown of Astrolink
54 | Information Document
(Euro 259 million) following the interruption of the project. The investment in
Nortel Inversora, the carrying value of which was prudently written off in the
consolidated financial statements for 2001, remained unchanged.
Net extraordinary income (expense), as detailed below:
2002 2001 Change
(in millions of euros) (a) (b) (a - b)
------------------------------------------- ------- ------- --------
Extraordinary income:
capital gains on disposals of equity
investments, business segments, fixed
assets and
intangibles 2,413 392 2,021
other extraordinary income 401 460 (59)
------------------------------------------- ------- ------- --------
2,814 852 1,962
------------------------------------------- ------- ------- --------
Extraordinary expense:
writedowns and provisions in respect
of equity investments and goodwill (6,237) (2,984) (3,253)
expenses and provisions for staff
cutbacks and layoffs (494) (380) (114)
expenses charges under Law 58/1992 and
related social security contribution (229) (232) 3
payable to INPS
other extraordinary expense (1,491) (708) (783)
------------------------------------------- ------- ------- --------
(8,451) (4,304) (4,147)
------------------------------------------- ------- ------- --------
Total (5,637) (3,452) (2,185)
=========================================== ======= ======= ========
Extraordinary income amounted to Euro 2,814 million and comprised:
o Euro 2,413 million of gains on disposals of equity investments, business
segments, fixed assets and intangibles, as detailed below:
- the sale of the entire 26.89% interest held by the Telecom Italia
Group in Auna, realizing a gross gain of Euro 1,245 million, which
contributed
- net of selling expenses
- Euro 1,033 million to the consolidated net result of the Telecom
Italia Group;
- the sale of the entire 19.61% interest held by the Mobile business
unit in Bouygues Decaux Telecom (BDT), realizing a gross gain of Euro
484 million, which contributed Euro 266 million to the consolidated
net result of the Telecom Italia Group;
- the acceptance of the tender offer for Lottomatica shares by the
Information Technology Market business unit (Finsiel group),
realizing a gross gain of Euro 133 million (Euro 93 million net of
income taxes), which contributed Euro 73 million to the consolidated
net result of the Telecom Italia Group;
- the sale to Telekom Austria (a company in which Telecom Italia
International had a 14.78% interest at 31 December 2002) of the
entire 25% interest held by the Mobile business unit in the Mobilkom
Austria group, realizing a gross gain of Euro 115 million, which
contributed 64 million to the consolidated net result of the Telecom
Italia Group;
- the sale of the entire 40% interest held in Telemaco Immobiliare,
realizing a gross gain of Euro 110 million, which contributed Euro 64
million to the consolidated net result of the Telecom Italia Group;
- the sale of the entire 100% interest held in Telespazio, realizing a
gross gain of Euro 70 million, which contributed Euro 36 million to
the consolidated net result of the Telecom Italia Group;
55 | Information Document
- the sale of the entire 100% interest held in Emsa and Telimm, and of
properties and business segments in connection with the Tiglio
project, realizing a total gross gain of Euro 234 million, which
contributed Euro 150 million to the consolidated net result of the
Telecom Italia Group;
- the disposal of other equity investments, fixed assets, intangibles
and business segments for a total of Euro 22 million.
o Euro 401 million of other extraordinary income, comprising:
- prior period income of Euro 131 million arising from the recovery of
accrued pre-amortization interest on costs for employee benefit
obligations under Law 58/1992 that were paid, with reserve, to INPS
up to 1999 - following the close of litigation with a ruling in
Telecom Italia's favor;
- the release of Euro 77 million, primarily to absorb a portion of the
reserve for risks and charges set up in 2001 by Telecom Italia to
cover the expenses connected with the agreement to sell Stream to
News Corporation and Vivendi Universal/Canal+, following the
termination of the agreement;
- other income of Euro 193 million.
Extraordinary expense amounted to Euro 8,451 million and comprised:
o writedowns for permanent impairments in value and other provisions
relating to investments totaling Euro 6,237 million (Euro 2,984 million in
2001), as detailed below:
- the writedown of goodwill in respect of Seat Pagine Gialle (Euro
1,544 million) and the provision to the reserve for charges to cover
the commitment to purchase Seat Pagine Gialle shares (Euro 1,942
million). The writedown and the provision were made on the basis of
market value (average market price of ordinary shares for the last
six months of 2002) within the framework of Telecom Italia Group's
decision to consider the "Directories" business of Seat Pagine Gialle
as no longer being of strategic interest. In 2001, with regard to the
purchase commitment only, a provision of Euro 569 million had been
set aside and included in net investment and financial income
(expense);
- the writeoff of the investment in Aria - IS Tim Turchia (Euro 1,491
million) and the provision to the reserves for risks and charges to
cover the Group's exposure with the same affiliated company (Euro 850
million). The provision is commensurate with the guarantees provided
by the Group to the international financial institutions that are
creditors of Aria - Is Tim and the loan granted directly by the
Group;
- the writedown of other equity investments (Euro 46 million) and
goodwill (Euro 321 million, of which Blu accounted for Euro 103
million, Netco Redes for Euro 96 million, Digitel Venezuela for Euro
75 million and other smaller subsidiaries for Euro 47 million);
- the provision relating to the purchase of an additional stake in
Consodata by Seat Pagine Gialle (Euro 43 million).
The writedowns in 2001 had referred to the goodwill relating to consolidated
companies (9 Telecom group, Entel Bolivia, Entel Chile group, Maxitel group,
Tele Celular Sul group, Tele Nordeste Celular group, Tim Brasil, Med-1 group
and some companies in the Seat Pagine Gialle group) and companies valued using
the equity method (Globo.com, Solpart Participacoes, Telekom Austria and Nortel
Inversora group), as well as other provisions related to investments.
o expenses and provisions totaling Euro 494 million for employee cutbacks
and layoffs (of which Euro 379 million borne by Telecom Italia S.p.A.);
o expenses amounting to Euro 155 million under Law 58/1992 to cover
employees under the former "Telephone Employees Pension Fund" (FPT) and
Euro 74 million for the extraordinary contribution to INPS
56 | Information Document
to meet the higher financial requirements deriving from the rules of that
fund after its incorporation in the general "Employee Pension Fund";
o other extraordinary expense amounting to Euro 1,491 million, as detailed
below:
- the expense incurred in connection with the disposal of the equity
investment in the 9Telecom group (Euro 316 million);
- the loss of deriving from the sale in November 2002 of 75 million
shares (15% of the capital) of Tele-kom Austria AG (Euro 135
million);
- expenses in connection with corporate events at investee companies
(Euro 235 million);
- provisions to reserves (Euro 194 million, of which Euro 135 million
in respect of guarantees provided on the occasion of disposals of
equity investments and business segments;
- writedowns of fixed assets and intangibles, mainly with reference to
the mobile phone companies in Brazil (Euro 190 million);
- losses on disposals of fixed assets, intangibles and long-term
investments (Euro 38 million);
- other prior-period expense of Euro 383 million.
Income taxes had a positive effect on the result of Euro 716 million, a
decrease of Euro 1,641 million compared with 2001. This was due to the loss for
the year that was principally caused by the above-mentioned investment
writedowns, which contributed to the increase in deferred tax assets, as well
as the utilization of tax loss carryforwards deriving from the merger of Blu
into TIM.
57 | Information Document
4.1.2 Reclassified consolidated balance sheets of the Telecom Italia Group at
31 December 2002 and 2001 and accompanying notes
Reclassified consolidated balance sheets of the Telecom Italia Group at 31
December 2002 and 2001
(in millions of euros) At 31.12.2002 At 31.12.2001
------------------------------------------------------------------------- ------------- -------------
A. INTANGIBLES, FIXED ASSETS AND LONG-TERM INVESTMENTS
Intangible assets 13,052 16,197
Fixed assets 19,291 21,757
Long-term investments:
equity investments and advances on future
capital contributions 2,286 6,586
other 957 478
------------------------------------------------------------------------- ------------- -------------
35,586 45,018
------------------------------------------------------------------------- ------------- -------------
B. WORKING CAPITAL
Inventories 411 636
Trade accounts receivable 8,201 8,346
Other assets 6,154 5,047
Trade accounts payable (5,966) (6,793)
Reserves for risks and charges (5,214) (3,053)
Other liabilities (6,926) (6,601)
------------------------------------------------------------------------- ------------- -------------
(3,340) (2,418)
------------------------------------------------------------------------- ------------- -------------
C. = A.+B. INVESTED CAPITAL, net of operating liabilities 32,246 42,600
------------------------------------------------------------------------- ------------- -------------
D. RESERVE FOR EMPLOYEE TERMINATION INDEMNITIES (1,305) (1,350)
------------------------------------------------------------------------- ------------- -------------
E. = C.+D. INVESTED CAPITAL, net of operating liabilities and the
reserve for employee termination indemnities 30,941 41,250
Financed by:
------------------------------------------------------------------------- ------------- -------------
F. SHAREHOLDERS' EQUITY (*)
Parent Company interest 9,049 13,522
Minority interest 3,774 5,786
------------------------------------------------------------------------- ------------- -------------
12,823 19,308
------------------------------------------------------------------------- ------------- -------------
G. MEDIUM/LONG-TERM DEBT 15,018 16,083
------------------------------------------------------------------------- ------------- -------------
H. NET SHORT-TERM BORROWINGS
Short-term borrowings 5,089 9,114
Liquid assets and short-term financial assets (2,271) (3,505)
Financial accrued expense (income) and deferred expense
(income), net 282 250
3,100 5,859
------------------------------------------------------------------------- ------------- -------------
G.+H. 18,118 21,942
------------------------------------------------------------------------- ------------- -------------
I. = F.+ G.+H. TOTAL 30,941 41,250
========================================================================= ============= =============
(*) Net of "Receivables from shareholders for capital contribution".
58 | Information Document
Notes to the reclassified balance sheets of the Telecom Italia Group at 31
December 2002 and 2001
Intangible assets, fixed assets and long-term investments amounted to Euro
35,586 million, a decrease of Euro 9,432 million compared with the end of 2001.
In more detail:
o fixed assets decreased from Euro 21,757 million to Euro 19,291 million
2002 and intangibles fell from Euro 16,197 million to Euro 13,052 million.
The reduction was due to the excess of the charge for depreciation and
amortization over investments, to the fall in exchange rates compared with
the end of 2001, to the contributions of business segments in connection
with the "Tiglio" project, and to the writedowns of goodwill in respect of
consolidated companies recorded in extraordinary expense;
o long-term investments decreased from Euro 7,064 million to Euro 3,243
million. The reduction was mainly due to disposals of investments and
writedowns for permanent impairments in value.
Investments totaled Euro 6,919 million (Euro 11,257 million in 2001) and were
divided as follows:
2002 2001 Change
(in millions of euros) (a) (b) (a-b)
-------------------------------- ------- ------- --------
Industrial investments 4,842 6,990 (2,148)
Goodwill 369 1,174 (805)
Financial investments 1,708 3,093 (1,385)
-------------------------------- ------- ------- --------
Total investments 6,919 11,257 (4,338)
-------------------------------- ------- ------- --------
The reduction of Euro 4,338 million in investments was mainly due to:
o industrial investments:
- the reduction of Euro 1,436 million in investment by the Mobile
business unit following the acquisition in 2001 of mobile phone
licenses in Brazil and Greece (about Euro 1,080 million);
- lower investments by the Domestic Wireline business unit (-Euro 339
million), by other companies in South America (-Euro 190 million) and
by the Seat group (-Euro 94 million), which reflected the policy of
carefully selecting investment projects to be implemented;
o goodwill: whereas in 2001 this had concerned the acquisition of Entel
Chile (Euro 731 million), Holding Media e Comunicazione (Euro 66 million),
NetCreations (Euro 93 million) and the increase in the investment in Stet
Hellas (Euro 31 million), in 2002 it referred mainly to the increases in
the investments in Stet Hellas (Euro 66 million) and Digitel Venezuela
(Euro 27 million), the acquisition of Epiclink (Euro 49 million), Netesi
(Euro 14 million) and Blu (Euro 103 million), and the increase in the
investment in the Webegg group (Euro 24 million);
o financial investments: the capital injections made in 2001 in Aria - IS
Tim Turchia (Euro 1,906 million) and Auna (Euro 276 million) were followed
in 2002 by transactions involving the share capital of Stream (Euro 234
million) and Auna (Euro 193 million, repaid on August 1, 2002), the
investment in the share capital of Tiglio I (Euro 197 million), the
purchase of LDCom within the framework of the 9Telecom deal (Euro 172
million), the disbursement of loans to subsidiaries and affiliated
companies (Euro 351 million),
59 | Information Document
the buy-back of treasury stock (Euro 287 million), and acquisitions of other
investments and share capital increases for a total of Euro 274 million.
Working capital showed a negative balance that increased by Euro 922 million,
from Euro 2,418 million to Euro 3,340 million.
Shareholders' equity amounted to Euro 12,823 million, compared with Euro 19,308
million at 31 December 2001. Telecom Italia's interest was Euro 9,049 million
(Euro 13,522 million at 31 December 2001) and the minority interest was Euro
3,774 million (Euro 5,786 million at 31 December 2001). The reduction of Euro
6,485 million can be detailed as follows:
(in millions of euros) 2002 2001
------------------------------------------------------------------ --------- ----------
At beginning of year 19,308 24,690
------------------------------------------------------------------ --------- ----------
Net income (loss) of the Parent company and minority interest 297 (1,658)
Dividends to minority interests paid by: (3,247) (3,097)
Telecom Italia S.p.A. (2,306) (2,309)
TIM S.p.A. (895) (743)
Other Group companies (46) (45)
Extraordinary distribution of reserves to minority interests: (1,698) -
Telecom Italia S.p.A. (987) -
TIM S.p.A. (711) -
Cancellation of Telecom Italia S.p.A. treasury stock - (711)
Change in scope of the consolidation (95) 358
Translation adjustments and other changes (1,742) (274)
------------------------------------------------------------------ --------- ----------
At end of year 12,823 19,308
================================================================== ========= ==========
Translation adjustments and other changes mainly reflected the deterioration in
the exchange rates of certain South American countries, including Brazil, Chile
and Bolivia.
Net financial debt amounted to Euro 18,118 million, a decrease of Euro 3,824
million compared with the end of 2001, after paying dividends and distributing
reserves for a total of Euro 4,945 million.
Indebtedness at 31 December 2002 benefited from the investment disposals made
during the year for a total of Euro 4,771 million, net of the related expenses,
mainly in connection with the sale of Auna (Euro 1,998 million), Bouygues
Decaux Telecom (Euro 750 million), Mobilkom Austria (Euro 756 million),
Lotto-matica (Euro 212 million), Sogei (Euro 176 million), Telemaco Immobiliare
(Euro 192 million), Immsi (Euro 69 million), Tiglio (euro 328 million), Telekom
Austria (Euro 559 million), Telespazio (Euro 239 million), 9Telecom (Euro 529
million) and other minor companies (Euro 21 million).
Transactions involving the securitization and factoring of trade accounts
receivable were also carried out and led to an improvement in net debt of Euro
1,038 million (Euro 848 million in 2001).
60 | Information Document
The following chart summarizes the major items which had an impact on the
change in net debt in 2002.
[Graphic omitted]
Net financial debt at
31.12.2001 from operations 21,942
Industrial Investments 4,842
Investments of goodwill 369
Financial investments 1,708
Payment of dividends and reserves 4,945
Payment present value reduction in
strike price of JPM put option on SEAT 500
Cash flow Disposals 10,390
Other 5,698
Net financial debt at 31.12.2002 18,118
61 | Information Document
4.1.3 Telecom Italia Group consolidated statements of cash flows in 2002 and
2001 and net financial position at 31 December 2002 and 2001
Consolidated statements of cash flows in 2002 and 2001
(in millions of euros) 2002 2001
------------------------------------------------------------------------------ -------------- ---------------
A. NET DEBT, AT BEGINNING OF YEAR (21,942) (17,233)
------------------------------------------------------------------------------ -------------- ---------------
B. CHANGE IN SCOPE OF THE CONSOLIDATION - (839)
------------------------------------------------------------------------------ -------------- ---------------
C. CASH FLOWS - OPERATING ACTIVITIES
Net income (loss) 297 (1,658)
Depreciation and amortization 5,877 6,275
(Gains) losses on sales of intangibles, fixed assets
and long-term investments (2,210) (330)
Writedowns of intangibles, fixed assets and
long-term investments 4,384 4,039
Change in working capital (*) 896 290
Net change in reserve for employee termination indemnities (45) 31
Foreign exchange gains (losses) and other changes 691 136
------------------------------------------------------------------------------ -------------- ---------------
9,890 8,783
------------------------------------------------------------------------------ -------------- ---------------
D. CASH FLOWS - INVESTING ACTIVITIES
Long-term investments: (6,919) (11,257)
intangible assets:
- goodwill (369) (1,174)
- other investments (1,584) (2,736)
fixed assets (3,258) (4,254)
long-term investments (1,708) (3,093)
Proceeds from the sale, or redemption value, of
intangibles, fixed assets and long-
term investments 5,698 1,439
------------------------------------------------------------------------------ -------------- ---------------
(1,221) (9,818)
------------------------------------------------------------------------------ -------------- ---------------
E. CASH FLOWS - FINANCING ACTIVITIES
Capital contributions 58 240
Capital grants 42 22
------------------------------------------------------------------------------ -------------- ---------------
100 262
------------------------------------------------------------------------------ -------------- ---------------
F. DIVIDENDS (4,945) (3,097)
------------------------------------------------------------------------------ -------------- ---------------
G.=B.+C.+D.+E.+F. CHANGE IN NET DEBT 3,824 (4,709)
------------------------------------------------------------------------------ -------------- ---------------
H.=A.+G. NET DEBT, AT END OF YEAR (18,118) (21,942)
============================================================================== ============== ===============
(*) The difference with respect to the reclassified balance sheets is due to
the movements in capital grants and the use of the reserves for risks and
charges.
The change in net debt was due to the following:
(in millions of euros) 2002 2001
------------------------------------------------------------------------------ -------------- ---------------
Increases (decreases) in medium/long-term debt (1,065) 9,350
Increases (decreases) in short-term borrowings (2,759) (4,641)
------------------------------------------------------------------------------ -------------- ---------------
Total (3,824) 4,709
============================================================================== ============== ===============
62 | Information Document
Cash flow (net income (loss), Parent Company and Minority interest + plus
depreciation and amortization) amounted to Euro 6,174 million (Euro 4,617
million in 2001).
Free cash flow from operations (operating income + depreciation and
amortization - industrial investments +/- change in operating working capital)
amounted to Euro 8,610 million (Euro 5,990 million in 2001).
Net debt, equal to Euro 18,118 million (Euro 21,942 million at 31 December
2001), comprised:
(in millions of euros) At 31.12.2002 At 31.12.2001
-------------------------------------- ---------------- ----------------
Medium/long-term debt 15,018 16,083
-------------------------------------- ---------------- ----------------
Net short-term borrowings:
Short-term borrowings 5,089 9,114
Bank and postal accounts (1,251) (757)
Cash and valuables on hand (4) (5)
Short-term financial assets (683) (805)
Other working capital securities (278) (1,935)
Receivables for sales of securities (55) (3)
Financial accrued expense/income and
deferred income/prepaid expense, net 282 250
3,100 5,859
-------------------------------------- ---------------- ----------------
Total net debt 18,118 21,942
====================================== ================ ================
The portion of debt due beyond one year rose from 64% at 31 December 2001 to
75% at 31 December 2002. If the current portion due next year (Euro 2,677
million) is also considered as medium/long-term, the percentage rises to 88%
(70% in 2001). The increase is the result of the issue of fixed-rate notes for
Euro 2,500 million by Telecom Italia S.p.A. on 1 February 2002, divided into
two tranches of Euro 1,250 million each, expiring, respectively on 1 February
2007 and 1 February 2012. This issue falls under the "Global Note Program".
The table below shows the composition of the gross financial debt.
At 31.12.2002 At 31.12.2001
---------------------------------------------------- ---------------
(in millions of euros) Euro % Non-euro % Total % Total %
---------------------- --------------- ---------------- ------------- ---------------
Medium/long-term debt 13,684 76 1,334 63 15,018 75 16,083 64
Short-term borrowings 4,320 24 769 37 5,089 25 9,114 36
---------------------- --------------- ---------------- ------------- ---------------
Total 18,004 100 2,103 100 20,107 100 25,197 100
====================== =============== ================ ============= ===============
4.2 The external auditor's report on the consolidated financial statements for
2001 and 2002
The comparative data shown in the tables of Section 4.1 have been taken from
the Telecom Italia Group's consolidated financial statements for the years
ended 31 December 2001 and 2002. These were audited by Reconta Ernst & Young
S.p.A., which issued an unqualified opinion for both years.
63 | Information Document
(THIS PAGE INTENTIONALLY LEFT BLANK)
64 | Information Document
5. Pro forma income statements and balance sheets of the absorbing company
Premise
This section contains the pro forma post-merger reclassified financial
statements of Olivetti S.p.A. ("Olivetti") on a consolidated and a stand alone
basis for the year ended 31 December 2002. The pro forma financial statements
give retroactive effect to the merger of Telecom Italia S.p.A. ("Telecom
Italia") into Olivetti, as described in the merger plan approved by the two
companies' Boards of Directors on 15 April 2003 (see Section 2).
It was considered desirable to show the pro forma company financial statements
as supplementary ino in addition to the pro forma consolidated financial
statements in view of the very substantial effects of the Merger on the assets
and liabilities and revenues and expenses of the Company Resulting from the
Merger. The pro forma post-Merger reclassified company and consolidated
financial statements were prepared by making appropriate pro forma adjustments
to the financial statements of the two companies participating in the Merger
for the year ended 31 December 2002. These financial statements were audited by
Reconta Ernst & Young S.p.A., which issued its audit reports on 18 April 2003.
They are included with the financial statements of Olivetti and Telecom Italia
attached to this Information Document.
The following tables show the pro forma reclassified balance sheets (which
among other things indicate the effects of the pro forma adjustments on the net
financial position) and income statements for the year ended 31 December 2002
are shown below.
The pro forma statements use the presentations adopted by Telecom Italia for
its reclassified historical balance sheets and income statements. Since
Olivetti used different presentations, its amounts were first reclassified in
accordance with the presentations used by Telecom Italia.
The pro forma figures have been obtained on the basis of:
i. the amounts in Olivetti's historical financial statements;
ii. the amounts in Telecom Italia's historical financial statements;
iii. pro forma adjustments reflecting the plan for the Merger of Telecom Italia
into Olivetti and the related transactions envisaged in carrying out the
Merger.
In accordance with Consob Communication No. DEM/1052803 of 5 July 2001, the
effects of the Merger have been shown retroactively in the pro forma balance
sheets as if the Merger had taken place on 31 December 2002 and in the pro
forma income statements as if it had taken place on 1 January 2002. The pro
forma adjustments made to Olivetti's reclassified historical financial
statements and the assumptions upon which they are based are described in
detail in Sections 5.1.1, 5.1.2 and 5.3.1.
Information on the accounting policies adopted by Olivetti and Telecom Italia
in preparing their historical financial statements can be found in the notes to
their financial statements for the year ended 31 December 2002 attached to this
Information Document.
In order to interpret the pro forma amounts correctly, it is necessary to bear
the following in mind:
i) since the figures are prepared based on assumptions, if the Merger had
taken place at the dates referred to for the purpose of preparing the pro
forma financial statements instead of the date at which it will actually
take place, the historical figures would not necessarily have coincided
with the pro forma figures;
ii) the pro forma figures do not reflect forecast data since they are drawn up
to represent only the effects of the merger that can be identified and
measured objectively, without considering the potential impact of changes
in management policies and operational decisions made as a consequence of
the Merger.
65 | Information Document
Moreover, in view of the difference between the aims of pro forma and
historical financial statements and the fact that the effects of the Merger are
calculated differently for the balance sheet and the income statement, the two
pro forma documents need to be examined separately, without attempting to
establish accounting relationships between them.
5.1 Pro forma consolidated balance sheet at 31 December 2002 and income
statement for the year ended 31.12.2002
Olivetti Group - pro-forma consolidated balance sheet at 31 December 2002
Olivetti Reclassifications/ Conversion
Group cancellation of of
(in millions of euros) before Merger equity investments Bond issues
----------------------------------------------------- ------------- ------------------ -----------
Assets
Intangible assets:
Goodwill Telecom 21,351 250
other intangible 13,210
Fixed assets 19,449
Long-term investments
Equity investments and advances on future
capital contributions 2,576 299 (299)
Others 1,424
----------------------------------------------------- ------------- ------------------ -----------
58,010 299 (49)
----------------------------------------------------- ------------- ------------------ -----------
Working capital
Inventories 584
Trade accounts receivable 8,418
Other assets 7,984
Trade accounts payable (6,168)
Reserves for risks & charges (5,826)
Other liabilities (7,616)
----------------------------------------------------- ------------- ------------------ -----------
(2,624)
----------------------------------------------------- ------------- ------------------ -----------
Invested Capital net of operating liabilities 55,386 299 (49)
----------------------------------------------------- ------------- ------------------ -----------
Reserve for employee termination indemnity (1,364)
----------------------------------------------------- ------------- ------------------ -----------
Invested capital, net of operating liabilities
& the reserve for empl. term. indemn. 54,022 299 (49)
----------------------------------------------------- ------------- ------------------ -----------
Financed by:
Shareholders' equity
Parent Company interest 11,639 6
Minority interest 8,984 (49)
----------------------------------------------------- ------------- ------------------ -----------
20,623 (49) 6
----------------------------------------------------- ------------- ------------------ -----------
Medium/long-term debt 33,804 (7)
----------------------------------------------------- ------------- ------------------ -----------
Net short-term borrowings
Short-term borrowings 6,827
Liquid assets & short-term financial assets (7,394) 299
Financial accrued expenses (income) & deferred
expenses (income), net 162 1
----------------------------------------------------- ------------- ------------------ -----------
(405) 299 1
----------------------------------------------------- ------------- ------------------ -----------
Total financial indebtedness 33,399 299 (6)
----------------------------------------------------- ------------- ------------------ -----------
Total 54,022 299 (49) (0)
===================================================== ============= ================== ===========
66 | Information Document
Withdrawals
Cancellation of Merger effects
treasury stock Reduction of Exchange of T.I.
Tender Offer & and distribution minority interest shares held by Cost Olivetti
cancellation of of reserves to on cancellation minority of Group
Withdrawals equity investments third parties of treasury stock shareholders financing after Merger
----------- ------------------ ------------- ----------------- ---------------- --------- ------------
7,518 29,119
13,210
19,449
8,695 (8,695) 2,576
(334) 1,090
----------- ------------------ ------------- ----------------- ---------------- --------- ------------
8,695 (1,177) (334) 65,444
----------- ------------------ ------------- ----------------- ---------------- --------- ------------
584
8,418
90 8,074
(6,168)
(5,826)
(7,616)
----------- ------------------ ------------- ----------------- ---------------- --------- ------------
90 (2,534)
----------- ------------------ ------------- ----------------- ---------------- --------- ------------
8,695 (1,177) (334) 90 62,910
----------- ------------------ ------------- ----------------- ---------------- --------- ------------
(1,364)
----------- ------------------ ------------- ----------------- ---------------- --------- ------------
8,695 (1,177) (334) 90 61,546
----------- ------------------ ------------- ----------------- ---------------- --------- ------------
(305) (133) 28 3,001 14,236
(1,177) (994) (28) (3,001) 3,734
----------- ------------------ ------------- ----------------- ---------------- --------- ------------
(305) (1,177) (1,128) 17,970
----------- ------------------ ------------- ----------------- ---------------- --------- ------------
305 8,695 42,797
----------- ------------------ ------------- ----------------- ---------------- --------- ------------
794 7,621
90 (7,005)
163
----------- ------------------ ------------- ----------------- ---------------- --------- ------------
794 90 778
----------- ------------------ ------------- ----------------- ---------------- --------- ------------
305 8,695 794 90 43,576
----------- ------------------ ------------- ----------------- ---------------- --------- ------------
8,695 (1,177) (334) 90 61,546
=========== ================== ============= ================= ================ ========= ============
67 | Information Document
Olivetti Group - pro-forma consolidated income statement for the year ended 31
December 2002
Cancellation of
Olivetti Telecom Italia
Group investment
(in millions of euros) before Merger write-down
---------------------------------------------------- ------------- ---------------
Sales and service revenues 31,408
---------------------------------------------------- ------------- ---------------
Changes in inventories of work in progress,
semi-finished and finished goods (8)
Changes in inventory of contract work in process (42)
Increases in capitalized internal construction costs 675
Operating grants 20
---------------------------------------------------- ------------- ---------------
Standard production value 32,053
---------------------------------------------------- ------------- ---------------
Raw materials and outside services (13,303)
---------------------------------------------------- ------------- ---------------
Value added 18,750
---------------------------------------------------- ------------- ---------------
Labor cost (4,727)
---------------------------------------------------- ------------- ---------------
Gross operating profit 14,023
---------------------------------------------------- ------------- ---------------
Depreciation & amortization (7,269)
of which goodwill (2,142)
Other valuation adjustments (605)
Provisions to reserves for risks & charges (171)
Net other income 38
---------------------------------------------------- ------------- ---------------
Operating income 6,016
---------------------------------------------------- ------------- ---------------
Net investments and financial income (expense) (3,036)
of which value adjustments (786)
---------------------------------------------------- ------------- ---------------
Income before extraordinary items and taxes 2,980
---------------------------------------------------- ------------- ---------------
Net extraordinary income (expenses) (5,496)
---------------------------------------------------- ------------- ---------------
Income before taxes (2,516)
---------------------------------------------------- ------------- ---------------
Income taxes 2,210 (1,078)
---------------------------------------------------- ------------- ---------------
Net income (loss) before minority interest (306) (1,078)
---------------------------------------------------- ------------- ---------------
Minority interest (467)
---------------------------------------------------- ------------- ---------------
Net income (loss) (773) (1,078)
==================================================== ============= ===============
68 | Information Document
Cost of financing Cancellation
------------------------ of tax credit Amortization Accrued Tax effect Olivetti
Tender on T.I. of consolidation cost of Minority on pro-forma Group
Withdrawals Offer dividends goodwill financing interests accounts after Merger
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
31,408
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
(8)
(42)
675
20
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
32,053
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
(13,303)
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
18,750
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
(4,727)
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
14,023)
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
(163) (7,432)
(163) (2,305)
(605)
(171)
38
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
(163) 5,853
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
(13) (356) (69) (3,474)
(786)
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
(13) (356) (163) (69) 2,379
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
(5,496)
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
(13) (356) (163) (69) (3,117)
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
(703) 796 1,225
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
(13) (356) (703) (163) (69) 796 (1,892)
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
(152) (619)
----------- ------------ ------------- ---------------- --------- --------- ------------ ------------
(13) (356) (703) (163) (69) (152) 796 (2,511)
=========== ============ ============= ================ ========= ========= ============ ============
69 | Information Document
5.1.1 Description of the pro forma adjustments to the historical consolidated
amounts at 31 December 2002 and for the year ended 31 December 2002
Pro forma adjustments to the historical consolidated balance sheet at 31
December 2002
1. The column "Reclassifications/cancellation of equity investments" refers to
the investment in Telecom Italia that was included under working capital and
not consolidated at 31 December 2002 but which, as explained in the reports of
the Boards of Directors of Olivetti and Telecom Italia is involved in the
Merger.
2. The column "Conversion of bond issues" refers to conversions carried out
between 31 December 2002 and 15 April 2003 of Olivetti 1.5% 2001-2004 and
Olivetti 1.5% 2001-2010 convertible bonds.
3. The column "Withdrawals" refers to the effect thereof on the assumption that
5% of Olivetti's shareholders, other than Olimpia and not considering treasury
stock, exercise their right of withdrawal at a price of Euro 0.9996 per share,
calculated as described below.
4. The column "Tender offer and cancellation of equity investments" refers to
the outlay, financed by the line of credit remaining after the payment of
withdrawals, for the purchase of Telecom Italia ordinary and savings shares at
a price of respectively Euro 7.958 and Euro 4.812 per share, calculated as
described below.
5. The column "Cancellation of treasury stock and distribution of reserves to
third parties" refers to the cancellation by Telecom Italia of its ordinary and
savings share treasury stock and the distribution of dividends to minority
interests drawing on prior-year profits and reserves.
6. "Merger effects" show the reduction of the minority interest in the
shareholders' equity following the cancellation of Telecom Italia's treasury
stock and the exchange of the Telecom Italia shares held by the remaining
minority shareholders.
7. The column "Cost of financing" shows the expense incurred in having the line
of credit available.
Pro forma adjustments to the historical income statement for 2002
1. The column "Cancellation of the Telecom Italia investment writedown" shows
the cancellation of the tax effect of the writedown of the investment in
Telecom Italia included in Olivetti's income statement, since it was made only
for tax purposes and in view of the fact that the writedown would not have been
made on the assumption that the Merger was effective from 1 January 2002.
2. The columns "Cost of financing" (withdrawals and tender offer) shows the
financial expense deriving from the use of the line of credit on the assumption
that it was drawn down at the beginning of the year.
3. The column "Cancellation of tax credit on Telecom Italia dividends" records
the elimination of the tax credit on the dividends received from Telecom Italia
and shown in the income statement for the year.
70 | Information Document
4. The column "Amortization of consolidation goodwill" shows the amortization
of the additional goodwill arising from the partial tender offer for Telecom
Italia shares (Euro 7,518 million) and that arising from the reclassification
of some Telecom Italia shares included in working capital as a long-term
investment (Euro 250 million), for a total of Euro 388 million. The
amortization charge was calculated with reference to a 20-year period. At the
same time the remaining useful life of the existing goodwill was revised, which
gave rise to a positive adjustment (lower amortization charge) of Euro 225
million.
5. The "Accrued cost of financing" is the part attributable to the year of the
total expense incurred in having the line of credit available.
6. The "Tax effects on the pro forma accounts" refer to the tax liability
incurred in 2002 by the Company Resulting from the Merger on the pro forma
adjustments.
5.1.2 Assumptions made for the preparation of the pro forma data
Consideration was given to the Olivetti 1.5% 2001-2004 and Olivetti 1.5%
2001-2010 convertible bonds that had been converted by 15 April 2003, the last
date for the conversion of Olivetti convertible bonds under the terms governing
the issues.
The recent performance of the Olivetti share price, which is now higher than
the value obtained from the calculation of the withdrawal price, means that the
exercise of the right is not profitable. It was therefore prudentially assumed
that withdrawals by Olivetti shareholders (other than Olimpia S.p.A. and not
considering treasury stock) would amount to 5% of the share capital following
the conversion of the Olivetti 1.5% 2001-2004 and Olivetti 1.5% 2001-2010
convertible bonds referred to above, at a price of Euro 0.9996 per share,
obtained on the basis of the average of the official prices of the Olivetti
share from 26 November 2002 to 9 May 2003, with the last official price kept
unchanged from 9 May 2003 to 23 May 2003.
As regards the financing of the withdrawals by Olivetti shareholders, account
was taken of the line of credit of Euro 9,000 million granted for that purpose
and the related cost included in the pro forma income statement at an interest
rate of 4.1% with consideration given to the three tranches in which it will be
disbursed.
The whole of the portion of the financing referred to in the previous paragraph
remaining after payment of the withdrawals, equal to Euro 8,695 million, was
allocated to the voluntary partial Tender Offer for Telecom Italia ordinary and
savings shares in equal percentages of the total ordinary and savings share
capital. The tender offer prices assumed were Euro 7.958 per ordinary share and
Euro 4.812 per savings share. These prices were obtained as the weighted
average, augmented by 20%, of the official stock exchange prices of the
Olivetti share from 12 March 2003 to 26 May 2003, the day of the third call of
Olivetti's extraordinary shareholders' meeting, with the last official price
available kept unchanged from 9 May 2003 to the day of the meeting, augmented
by 20%.
As a consequence of the Tender Offer, Olivetti's in the total share capital of
Telecom Italia after the Tender Offer and before the Merger rises from 39.53%
to 56.79%.
The Tender Offer for Telecom Italia shares results in consolidation goodwill of
Euro 7,518 million. The pro forma income statement contains an amortization
charge corresponding to one twentieth of that amount.
71 | Information Document
Account was taken of the Telecom Italia dividend drawing on prior-year profits
and reserves that will be submitted for approval to the shareholders' meeting
called to approve the merger plan.
Provision was made for the company to be absorbed to cancel its ordinary and
savings share treasury stock deriving from buybacks.
On the basis of an independent appraisal, Euro 22,950 million of the total
cancellation deficit of Euro 25,792 million that emerged in the post-Merger
balance sheet was allocated to the equity investment in TIM.
By means of the redistribution mechanism, used to account for the Merger in the
company financial statements, the pre-Merger value of Olivetti's share capital
was kept unchanged at Euro 8,845 million. To permit the total participation in
the Merger of the Telecom Italia shares held by Olivetti, those classified by
the latter as trading securities were reclassified as long-term investments.
The expense incurred in obtaining the line of credit to pay for withdrawals
and, for the portion remaining, for the purchase of shares in the Tender Offer
amounted to Euro 90 million and was included in full in the pro forma balance
sheet, while only the amount accruing in the first year was included in the pro
forma income statement.
The costs that will be incurred in 2003 in connection with the successful
outcome of the Merger for advisory services, legal opinions, valuations, etc.,
estimated to amount at most to Euro 110 million, were not considered among the
pro forma amounts since they are non-recurring items.
5.1.3 Main effects on the income statements and balance sheets of changing the
percentage of withdrawals assumed in preparing the pro forma data
The main effects on the income statements and balance sheets of changing the
figure of 5% assumed for withdrawals in preparing the pro forma data and
confirming acceptances of the Tender Offer utilizing all the portion of the
Euro 9 billion line of credit not required to pay for the withdrawals (Euro
8,695 million) are shown in the table below.
Absolute value Changes
----------------------------------- ---------------------------
Olivetti Group (in millions of euros) Pro-forma 0% 25% max % (1) 0% 25% max%
------------------------------------------------- --------- --------- -------- ----------- ------ ------ ------
Telecom Italia Goodwill 29,119 29,383 28,064 24,124 +264 -1,055 -4,995
Shareholders' equity after minority interest 14,236 14,500 13,181 9,241 +264 -1,055 -4,995
------------------------------------------------- --------- --------- -------- ----------- ------ ------ ------
Result for the year after minority interest (2) (2,511) (2,524) (2,458) (2,261) +(13) -(53) -(250)
------------------------------------------------- --------- --------- -------- ----------- ------ ------ ------
(1) On the assumption of complete withdrawal apart from the shares held by
Olimpia and treasury stock.
(2) The changes in the result are due to those in the amortization of the
consolidation goodwill with the size of the Tender Offer for Telecom
Italia shares.
72 | Information Document
5.2 Historical and pro forma amounts and per-share indicators
Olivetti Group
----------------------------------
2002 2002
(in millions of euros) (historical) (pro forma)
------------------------------------------------ ------------ ---------------
Income statement data
Sales and service revenues 31,408 31,408
Gross operating profit 14,023 14,023
Operating income 6,016 5,853
Net income (loss), before minority interest (306) (1,892)
Net income (loss), after minority interest (773) (2,511)
------------------------------------------------ ------------ ---------------
Balance sheet and financial data
Invested capital, net 54,022 61,546
Shareholders' equity (1): 20,623 17,970
of which:
Parent Company interest 11,639 14,236
Minority interest (1) 8,984 3,734
Net financial debt 33,399 43,576
Cash flow (2) 6,963 5,540
------------------------------------------------ ------------ ---------------
(in euros)
------------------------------------------------ ------------ ---------------
Per-share indicators (*)
Net income (loss) on ordinary operations,
after minority interest per share
(3):
Ordinary (0.1458) (4) (0.0653)
(0.0802) (5)
Savings (0.0543)
Net income (loss), after minority
interest per share:
Ordinary (0.0896) (4) (0.1614)
(0.0493) (5)
Savings (0.1504)
Cash flow per share 0.8068 (4) 0.3469
0.4437 (5)
Shareholders' equity, before minority
interest per share 1.3485 (4) 0.8914
0.7417 (5)
(*) Number of shares considered:
Ordinary 8,630,811,002 (4) 9,923,320,999
15,692,383,640 (5)
net of treasury stock (ordinary shares) 214,628,828 (4) 112,108,258
390,234,232 (5)
Savings 6,047,366,234
------------------------------------------------ ------------ ---------------
(1) Net of "Receivables from shareholders for capital contributions", equal to
Euro 4 million.
(2) Net income (loss) for the year, before minority interest plus depreciation
and amortization.
(3) Net income (Loss) for the year on ordinary operations after minority
interest, calculated on the basis of the result for operations net of the
related taxes with reference to the number of ordinary and savings shares
outstanding at the end of the year. In making the calculation, account was
taken of the bylaw requiring the dividend per share for savings shares to
be higher than that for ordinary shares by 2% of the share's par value
(Euro 0.0110).
(4) Historical number of shares.
(5) Pro forma number of shares taking account of the change in the par value
from Euro 1.00 to Euro 0.55.
73 | Information Document
5.3 Pro forma balance sheet at 31 December 2002 and income statement for the
year ended 31.12.2002 of the Company Resulting from the Merger
As mentioned in the premise, the pro forma company financial statements for
2002 are shown as supplementary information in view of the size of the effects
of the Merger on the balance sheet and income statement of the Company
Resulting from the Merger.
Olivetti S.p.A. - pro-forma balance sheet at 31 December 2002
Olivetti Conversion Tender Offer
spa of for
(in million of euros) before Merger Reclassification bond issues Withdrawals TI shares
---------------------------------------------------------- ------------- ---------------- ----------- ----------- ---------
Assets
Intangible assets:
Deficit from share cancellation
goodwill
other 179
Fixed assets 1
Long-term investments
Equity investments and advances on future
capital contributions:
Telecom Italia 22,090 299 8,695
other investments 798
Other 56
---------------------------------------------------------- ------------- ---------------- ----------- ----------- ---------
23,124 299 8,695
---------------------------------------------------------- ------------- ---------------- ----------- ----------- ---------
Working capital
Inventories
Trade accounts receivable 6
Other assets 1,756
Trade accounts payable (25)
Reserve for risks & charges (336)
Other liabilities (296)
---------------------------------------------------------- ------------- ---------------- ----------- ----------- ---------
1,105
---------------------------------------------------------- ------------- ---------------- ----------- ----------- ---------
Invested capital, net of operating liabilities 24,229 299 8,695
---------------------------------------------------------- ------------- ---------------- ----------- ----------- ---------
Reserve for employee termination indemnity (3)
---------------------------------------------------------- ------------- ---------------- ----------- ----------- ---------
Invested capital, net of operating liabilities
& res. for empl. term. indemn. 24,226 299 8,695
---------------------------------------------------------- ------------- ---------------- ----------- ----------- ---------
Financed by:
Shareholders' equity
Share capital paid-in 8,845 6 (305)
Reserves & retained earnings 6,426
Net income (loss) (6,240)
---------------------------------------------------------- ------------- ---------------- ----------- ----------- ---------
9,031 6 (305)
---------------------------------------------------------- ------------- ---------------- ----------- ----------- ---------
Medium/long-term debt 11,882 (7) 305 8,695
---------------------------------------------------------- ------------- ---------------- ----------- ----------- ---------
Net-short term borrowings
Short-term borrowings 3,298
Liquid assets & short-term financial assets (1,078) 299
Financial accrued expenses (income) and deferred
expenses (income), net 1,093 1
---------------------------------------------------------- ------------- ---------------- ----------- ----------- ---------
3,313 299 1
---------------------------------------------------------- ------------- ---------------- ----------- ----------- ---------
Total financial indebtedness 15,195 299 (6) 305 8,695
---------------------------------------------------------- ------------- ---------------- ----------- ----------- ---------
Total 24,226 299 8,695
========================================================== ============= ================ =========== =========== =========
74 | Information Document
Merger effects
------------------------------------------------------------------------------
Dividend Incorporation Treasury s. Cancellation Capital Cost Olivetti
payment Olivetti spa of & distr. of TI Allocation incr. and Sub of spa after
from TI s.p.a. before Merger TI s.p.a. reserves shares of deficit exchange total financing Merger
-------------- ------------- ------------- ----------- ------------ ---------- --------- --------- --------- ---------
25,792 (25,792)
2,842 2,842 2,842
179 1,287 1,287 1,466
1 12,678 12,678 12,679
31,084 (31,084) (31,084)
798 15,010 22,950 37,960 38,758
56 588 (334) 254 310
-------------- ------------- ------------- ----------- ------------ ---------- --------- --------- --------- ---------
32,118 29,563 (334) (5,292) 23,937 56,055
-------------- ------------- ------------- ----------- ------------ ---------- --------- --------- --------- ---------
70 70 70
6 4,292 4,292 4,298
1,756 3,468 3,468 90 5,314
(25) (2,958) (2,958) (2,983)
(336) (3,145) (3,145) (3,481)
(296) (4,238) (4,238) (4,534)
-------------- ------------- ------------- ----------- ------------ ---------- --------- --------- --------- ---------
1,105 (2,511) (2,511) 90 (1,316)
-------------- ------------- ------------- ----------- ------------ ---------- --------- --------- --------- ---------
33,223 27,052 (334) (5,292) 21,426 90 54,739
-------------- ------------- ------------- ----------- ------------ ---------- --------- --------- --------- ---------
(3) (968) (968) (971)
-------------- ------------- ------------- ----------- ------------ ---------- --------- --------- --------- ---------
33,220 26,084 (334) (5,292) 20,548 90 53,768
-------------- ------------- ------------- ----------- ------------ ---------- --------- --------- --------- ---------
8,545 300 300 8,845
511 6,937 3,726 3,726 10,663
(6,240) (6,240)
-------------- ------------- ------------- ----------- ------------ ---------- --------- --------- --------- ---------
511 9,243 4,025 4,025 13,268
-------------- ------------- ------------- ----------- ------------ ---------- --------- --------- --------- ---------
20,875 11,848 11,848 32,723
-------------- ------------- ------------- ----------- ------------ ---------- --------- --------- --------- ---------
3,298 5,451 1,305 6,756 90 10,144
(511) (1,290) (2,698) (2,698) (3,988)
1,094 527 527 1,621
-------------- ------------- ------------- ----------- ------------ ---------- --------- --------- --------- ---------
(511) 3,102 3,280 1,305 4,585 90 7,776
-------------- ------------- ------------- ----------- ------------ ---------- --------- --------- --------- ---------
(511) 23,977 15,128 1,305 16,433 90 40,500
-------------- ------------- ------------- ----------- ------------ ---------- --------- --------- --------- ---------
33,220 15,128 1,305 4,025 20,458 90 53,768
============== ============= ============= =========== ============ ========== ========= ========= ========= =========
75 | Information Document
Olivetti S.p.A. - pro-forma income statement for the year ended 31 December 2002
Cancellation of
Olivetti Telecom Italia
spa investment Telecom
(in millions of euros) before Merger write-down Italia spa
---------------------------------------------------- ------------- -------------- ----------
Sales and service revenues 17,055
---------------------------------------------------- ------------- -------------- ----------
Changes in inventory of contract work in process
Increases in capitalized internal construction costs 11
Operating grants
---------------------------------------------------- ------------- -------------- ----------
Standard production value 17,066
---------------------------------------------------- ------------- -------------- ----------
Raw materials and outside services (17) (6,966)
---------------------------------------------------- ------------- -------------- ----------
Value added (17) 10,100
---------------------------------------------------- ------------- -------------- ----------
Labor cost (14) (2,551)
---------------------------------------------------- ------------- -------------- ----------
Gross operating profit (31) 7,549
---------------------------------------------------- ------------- -------------- ----------
Depr. & amortiz. (72) (3,020)
Other valuation adjustments (357)
Prov. to reserves for risks & charges (44)
Net other income (83)
---------------------------------------------------- ------------- -------------- ----------
Operating income (103) 4,045
---------------------------------------------------- ------------- -------------- ----------
Net investment and financial income (expense) (7,193) 8,051 377
of which value adjustments (8,400) 8,051 (654)
---------------------------------------------------- ------------- -------------- ----------
Income before extraordinary items and taxes (7,296) 8,051 4,422
---------------------------------------------------- ------------- -------------- ----------
Net extraordinary income (expense) 164 (6,093)
---------------------------------------------------- ------------- -------------- ----------
Income before taxes (7,132) 8,051 (1,671)
---------------------------------------------------- ------------- -------------- ----------
Income taxes 892 (1,078) 26
---------------------------------------------------- ------------- -------------- ----------
Net income/Loss (6,240) 6,973 (1,645)
==================================================== ============= ============== ==========
76 | Information Document
Cost of financing
-------------------------- Amort. of
T/O Cancellation unallocated Accrued Tax effects Olivetti
Telecom of dividend ancellation cost of on pro-forma spa
Withdrawals shares from TI deficit financing accounts after Merger
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
17,055
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
11
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
17,066
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
(6,983)
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
10,083
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
(2,565)
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
7,518
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
(142) (3,234)
(357)
(44)
(83)
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
(142) 3,800
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
(13) (356) (1,952) (69) (1,155)
(1,003)
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
(13) (356) (1,952) (142) (69) 2,645
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
(5,929)
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
(13) (356) (1,952) (142) (69) (3,284)
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
796 636
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
(13) (356) (1,952) (142) (69) 796 (2,648)
----------- ---------- --------------- ------ ------- ------------ ------------- --------------
77 | Information Document
5.3.1 Description of the pro forma adjustments to the historical company
amounts at 31 December 2002 and for the year ended 31 December 2002
The pro forma company financial statements for 2002, which are shown in view of
the size of the effects of the Merger on the balance sheet and income statement
of the Company Resulting from the Merger, basically consider, in the columns
showing the adjustment to the historical amounts to produce the pro forma
amounts the adjustments described above for the pro forma consolidated amounts.
Apart from the above-mentioned adjustments, the balance sheet takes account of
the "merger transactions" regarding the elimination of the equity investment in
Telecom Italia as a consequence of the inclusion of its assets and liabilities,
with a specific item showing the cancellation deficit. This was subsequently
allocated almost entirely to the investment in TIM (Euro 22,950 million), with
the remainder of Euro 2,842 million allocated to goodwill.
In addition, the column "Reconstitution of capital and exchange difference"
shows the reconstitution of the share capital (Euro 300 million) in the context
of the redistribution aimed at keeping Olivetti's share capital unchanged
compared with the pre-merger value of Euro 8,845 million and an exchange
surplus of Euro 3.726 million.
The column "Receipt of dividends from Telecom Italia" shows the portion
accruing to Olivetti (Euro 511 million) of the total dividend of Euro 1,305
million to be approved by the shareholders' meeting called to approve the
merger plan.
The pro forma income statement also considers, in a separate column, the
succession to Telecom Italia's revenues and expenses.
In particular, the pro forma income statement of the Company Resulting from the
Merger shows net income for the year before extraordinary items and taxes of
Euro 2,645 million, after cancelling the writedown of the investment in Telecom
Italia of Euro 8,051 million included in Olivetti's financial statements for
2002, since it was made only for tax purposes and in view of the fact that the
writedown ceases to exist on the assumption that the Merger was effective from
1 January 2002.
5.3.2 Main effects on the income statements and balance sheets of changing the
percentage of withdrawals assumed in preparing the pro forma data
Absolute value Changes
Company Resulting from the Merger --------------------------------- -----------------------------
(in millions of euros) Pro-forma 0% 25% max % (1) 0% 25% max%
----------------------------------------------- --------- ------ ------ --------- ----- ------- ------
Goodwill (cancellation deficit) 2,842 3,091 1,842 - +249 -1,000 -2,842
Goodwill (exchange deficit) - - - 1,027 - - +1,027
Other equity investments (2) 38,758 38,758 38,758 36,871 - - -1,887
Shareholders' equity 13,268 13,517 12,268 9,566 +249 -1,000 -3,702
----------------------------------------------- --------- ------ ------ --------- ----- ------- ------
Result for the year (3) (2,648) (2,661) (2,598) (2,557) +(13) -(50) -(91)
----------------------------------------------- --------- ------ ------ --------- ----- ------- ------
(1) On the assumption of complete withdrawal apart from the shares held by
Olimpia and treasury stock.
(2) The change is due to the amount allocated to the investment in TIM being
smaller than the maximum possible of Euro 22,950 million. (3) The changes
in the result are due to those in the amortization of goodwill
(cancellation/exchange deficit) with the size of the Tender Offer for
Telecom Italia shares.
78 | Information Document
5.4 Report of the auditing firm on its examination of the pro forma figures
The report drawn up by the auditing firm Reconta Ernst & Young S.p.A. on its
examination of the post-merger reclassified pro forma figures on a consolidated
and a solo basis, carried out in accordance with the methods recommended by
Consob in Recommendation No. DEM/1061609 of 9 August 2001 on the verification
of pro forma data, is attached to this Information Document (Annex XVIII).
79 | Information Document
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80 | Information Document
6. Outlook for the absorbing company and for the group it heads
6.1 General indications regarding business since the close of the 2002 fiscal
year
On 5 May 2003, the Boards of Directors of Olivetti and Telecom Italia approved
their respective results for the first quarter of 2003. General indications
regarding the business of Olivetti and Telecom Italia since the close of the
2002 fiscal year can therefore be found in the two companies' respective
quarterly reports, which are attached to this Information Document (Annexes XIX
and XX).
6.2 Information permitting a reasonable forecast of the results for the current
year
In 2003 the operational profitability of the Telecom Italia Group is expected
to remain substantially stable and net financial debt is expected to be further
reduced.
Upon completion of the Merger to which this Information Document refers, to be
submitted to the shareholders' meetings of Olivetti and Telecom Italia for
their approval, Olivetti's results for 2003 will include the financial results
of Telecom Italia from 1 January 2003 onwards.
In contrast with the previous years, in which Olivetti's results depended on
the dividends for the year, which, together with the related tax credits, had
to offset the company's financial and operating expenses, the results for 2003
will include the entire net income that Telecom Italia succeeds in generating,
after meeting the financial expenses arising from the company's debt, which
will show a temporary increase as a consequence of the transactions related to
the Merger (withdrawals and the Tender Offer), the operating expenses for the
year and the costs incurred in carrying out the Merger. The temporary increase
in debt, covered by the financing put in place for the Merger, is expected to
be reduced, partly by using the proceeds of the sale of other non-strategic
assets for this purpose.
When consideration is also given to the additional tax benefits deriving from
the Merger, it is likely that the net result of the Company Resulting from the
Merger will be positive. This will permit a dividend policy whereby Telecom
Italia's present shareholders will receive a total dividend at least in line
with what they receive today.
The consolidated operating result of the Group headed by the Company Resulting
from the Merger in 2003, before amortization of the Merger goodwill, is also
expected to be positive in view of Telecom Italia's continued operational
profitability.
81 | Information Document
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82 | Information Document
Annexes
I. Report of the directors of Olivetti S.p.A. pursuant to Article
2501-quater of the Civil Code.
II. Report of the directors of Telecom Italia S.p.A. pursuant to Article
2501-quater of the Civil Code.
III. Merger plan referred to in Article 2501-bis of the Civil Code with
attached a copy of the bylaws of the Company Resulting from the Merger.
IV. Balance sheet of Olivetti S.p.A. at 31 December 2002 pursuant to Article
2501-ter of the Civil Code (2002 financial statements).
V. Balance sheet of Telecom Italia S.p.A. at 31 December 2002 pursuant to
Article 2501-ter of the Civil Code (2002 financial statements).
VI. Report of the auditing firm Deloitte & Touche Italia S.p.A. pursuant to
Article 2501-quinquies of the Civil Code.
VII. Report of the auditing firm Reconta Ernst & Young S.p.A. pursuant to
Article 2501-quinquies of the Civil Code.
VIII. JP Morgan Chase Bank Fairness Opinion, used by the directors of Olivetti
S.p.A. for the purpose of determining the exchange ratio.
IX. Summary description of the analyses carried out by JP Morgan Chase Bank,
as Olivetti's financial advisor, with reference to its Fairness Opinion.
X. JP Morgan Chase Bank Confirmation Letter.
XI. Lazard Fairness Opinion, used by the directors of Telecom Italia S.p.A.
for the purpose of determining the exchange ratio.
XII. Summary description of the analyses carried out by Lazard, as Telecom
Italia's financial advisor, with reference to its Fairness Opinion.
XIII. Lazard Confirmation Letter.
XIV. Goldman Sachs Fairness Opinion, used by the directors of Telecom Italia
S.p.A. for the purpose of establishing the exchange ratio.
XV. Summary description of the analyses carried out by Goldman Sachs, as
Telecom Italia's financial advisor, with reference to its Fairness
Opinion.
XVI. Conclusions reached by Professor Angelo Provasoli with regard to the
valuation methodologies applied by JP Morgan in connection with its
fairness opinion on the exchange ratio.
83 | Information Document
XVII. Extracts from the shareholders' agreements published pursuant to Article
122 of the Consolidated Law.
XVIII. Report of the auditing firm Reconta Ernst & Young S.p.A. on its
examination of the pro forma balance sheet and income statement amounts
for Olivetti S.p.A.
XIX. Quarterly report of the Olivetti Group for the three months ended 31
March 2003.
XX. Quarterly report of the Telecom Italia Group for the three months ended
31 March 2003.
84 | Information Document
ANNEXES
85 | Information Document
Annex I.
Report drawn up by the directors of Olivetti S.p.A.
pursuant to Article 2501-quater of the Civil Code
Report of the Board of Directors of Olivetti S.p.A.
on the plan for the merger of
Telecom Italia S.p.A.
into
Olivetti S.p.A.
Milan, April 15, 2003
The following is an English translation of the official version in Italian
language. In case of conflict, the Italian language version will prevail.
Except as provided below, any offer to purchase or sell securities
described herein is not being made, directly or indirectly, in or into, or by
the use of the mails o$ or by any means or instrumentality (including, without
limitation by mail, telephonically or electronically by way of internet or
otherwise) of interstate or foreign commerce, or any facility of any securities
exchange, of the United States of America and any such offer will not be
capable of acceptance by any such use, means, instrumentality or facility.
The information contained herein does not constitute an offer of
securities for sale in the United States or offer to acquire securities in the
United States.
The Olivetti securities referred to herein have not been, and are not
intended to be, registered under the US. Securities Act of 1933 (the
"Securities Act'y and may not be offered or sold, directly or indirectly, into
the United States except pursuant to an applicable exemption. The Olivetti
ordinary shares and Olivetti savings shares are intended to be made available
within the United States in connection with the merger pursuant to an exemption
from the registration requirements of the Securities Act.
The proposed cash tender offer for a portion of the Telecom Italia
ordinary shares described herein is intended to be made available in or into
the United States pursuant to an exemption from the tender offer rules
available pursuant to the Securities Exchange act of 1934.
The proposed cash tender offer for a portion of the Telecom Italia savings
shares described herein is not being made and will not be made, directly or
indirectly, in or into the United States.
***
The merger described herein relates to the securities of two foreign
companies. The merger in which Telecom Italia ordinary shares will be converted
into Olivetti ordinary shares is subject to disclosure and procedural
requirements of a foreign country that are different from those of the United
States.Financia1 statements included in the document, if any, will be prepared
in accordance with foreign accounting standards that may not be comparable to
the financial statements of United States companies.
It may be difficult for you to enforce your rights and any claim you may
have arising under the federal securities laws, since Olivetti and Telecom
Italia are located in Italy, and some or all of their officers and directors
may be residents of Italy or other foreign countries. You may not be able to
sue a foreign company or its officers or directors in a foreign court for
violations of the US. securities laws. It may be difficult to compel a foreign
company and its affiliates to subject themselves to a US. court's judgment.
You should be aware that Olivetti may purchase securities of Telecom
Italia otherwise than under the merger offer, such as in open market or
privately negotiated purchases.
2
Report of the Board of Directors of Olivetti S.p.A.
of 15 April 2003
on the plan for the merger of
Telecom Italia S.p.A.
into
Olivetti S.p.A.
pursuant to Article 2501-quater of the Civil Code
and Article 70(2) of Consob Regulation 11971/1999
3
CONTENTS
--------
1. DESCRIPTION OF AND REASONS FOR THE OPERATION
2. THE VALUES ATTRIBUTED TO OLIVETTI AND TELECOM ITALIA
FOR THE PURPOSE OF DETERMINING THE EXCHANGE RATIO
3. THE EXCHANGE RATIO ESTABLISHED AND THE METHODS
USED IN DETERMINING IT
4. PROCEDURE FOR ASSIGNING THE SHARES OF THE COMPANY
RESULTING FROM THE MERGER
5. DATE ON WHICH THE OPERATION BECOMES EFFECTIVE AND
DIVIDEND ENTITLEMENT DATE
6. TAX EFFECTS OF THE OPERATION ON OLIVETTI AND
TELECOM ITALIA
7. FORECASTS OF THE COMPOSITION OF MAJOR SHARE-
HOLDERS AND OF THE CONTROL STRUCTURE OF THE
COMPANY RESULTING FROM THE MERGER
8. EFFECTS OF THE OPERATION ON SHAREHOLDERS'
AGREEMENTS FALLING WITHIN THE SCOPE OF ARTICLE 122
OF LEGISLATIVE DECREE 58/1998
9. AMENDMENTS TO THE BYLAWS
10. CONSIDERATIONS OF THE BOARD OF DIRECTORS
CONCERNING THE POTENTIAL RECOURSE TO THE RIGHT OF
WITHDRAWAL
4
Dear shareholders,
We submit for your consideration this report, which describes, from the legal
and economic standpoints, the plan for the merger of Telecom Italia S.p.A.
("Telecom Italia" or the "Company to be Absorbed") into Olivetti S.p.A.
("Olivetti" or the "Absorbing Company"; once the merger becomes effective,
Olivetti is also referred to as the "Company Resulting from the Merger") and,
in particular, the methods used to determine the exchange ratio of the shares
of the companies concerned, pursuant to Article 2501-quater of the Civil Code
and Article 70(2) of Consob Regulation 11971/1999 (the "Regulation on
Issuers").
1. Description of and reasons for the operation
1.1 The operation
1.1.1 The operation submitted for your approval, of which the Boards of
Directors of Olivetti and Telecom Italia approved the broad outline
on 11 March 2003, will consist in the merger of Telecom Italia into
Olivetti pursuant to Article 2501 et seq. of the Civil Code (the
"Operation"). The Operation, since it involves companies with
financial instruments listed on an Italian regulated market, is also
subject to Legislative Decree 58/1998 and the Regulation on Issuers.
The proposed Operation will lead to the Company Resulting from the
Merger being the universal successor to Telecom Italia, so that, from
the date on which the merger becomes effective, it will assume all
the assets and liabilities, rights and obligations of Telecom Italia,
thus including, but not limited to, the title to all the related
tangible and intangible assets, receivables and payables accrued and
accruing, and, more generally, the entire patrimony of Telecom
Italia. Provision is also made for the Company Resulting from the
Merger to succeed to Telecom Italia in all the concessions, licences
and administrative authorizations granted thereto, in the ways
established by the law in force, including the amendment of its
corporate purpose.
The balance sheets used for the purposes of the merger are those of
the draft financial statements of Olivetti and Telecom Italia for the
year ended 31 December 2002, in accordance with Article of
the Civil Code.
The companies participating in the merger intend to complete the
Operation as soon as possible and, specifically, to work for the
merger to become effective in the first few days of August 2003.
1.1.2 Provision has been made for the Company Resulting from the Merger to
adopt new bylaws, corresponding almost entirely to Telecom Italia's
bylaws - with special reference to the governance rules, which will
provide minority shareholders with
5
analogous protection to that provided by Telecom Italia's bylaws -
and the latter's corporate purpose.
In particular, the change in Olivetti's corporate purpose, made
necessary by the need - derivable from the provisions of the licences
and related fee schedules issued by the competent authorities
pursuant to Presidential Decree 31 8/1997 - for the Company Resulting
from the Merger to have a purpose that expressly includes the
regulated activities subject to administrative authorization
currently performed by Telecom Italia will trigger the right of
withdrawal from the company, under Article 2437 of the Civil Code, in
favour of Olivetti shareholders contrary to the adoption of the
resolution providing for such change.
The change in the corporate purpose is also necessary in order to
eliminate the reference in Olivetti's present bylaws to the prevalent
nature of the activity of holding company, which is incompatible with
the activity performed by Telecom Italia, as expressly stated in its
present bylaws.
The relative majority shareholder of Olivetti, Olimpia S.p.A., has
announced that it will not exercise its right of withdrawal.
In order to meet the needs deriving from the settlement of
withdrawals, Olivetti will draw on lines of credit provided by a pool
of banks and amounting to Euro 9,000,000,000.
Provision has also been made for the Company Resulting from the
Merger to adopt the name Telecom Italia. This meets the need to make
the name of the Company Resulting from the Merger consistent with the
new organizational structure and the nature of the activities it will
acquire and perform at the end of the Operation, although the
intention is to continue to capitalize on the historic name of
"Olivetti" together with the other Group marks.
Lastly, it is proposed that the registered office of the Company
Resulting from the Merger be transferred to Milan, at the address of
Telecom Italia's present registered office. Ivrea will continue to be
the strategic headquarters for the manufacturing activity of the
Olivetti Group centered around Olivetti Tecnost and for the latter's
activity in connection with the Tiberius Project.
For a more detailed discussion of the changes to the bylaws and the
right of withdrawal made necessary by the Operation, see Sections 9
and 10.
1.1.3 Since the Operation will involve Olivetti's absorption of a
subsidiary, it will result in the cancellation of Olivetti's holding
in Telecom Italia at the time the merger becomes effective and the
assignment to the holders of Telecom Italia ordinary and savings
shares other than Olivetti of ordinary and savings shares issued by
the Company Resulting from the Merger and to the holders of Olivetti
shares of newly-
6
issued ordinary shares of the Company Resulting from the Merger on
the basis of assignment ratios corresponding to the exchange ratio.
This assignment will be made by redistributing Olivetti's capital at
the end of the Operation (see most notably Section 4).
In particular, in order to comply with the exchange ratio for the
Telecom Italia savings shares, provision has been made for the
Company Resulting from the Merger to issue savings shares to be
assigned to the holders of Telecom Italia savings shares. It is
proposed that application be made to Borsa Italiana S.p.A. for the
listing of these savings shares on the MTA electronic share market.
The effectiveness of the merger will be subject to such listing.
1.1.4 As mentioned earlier, as a consequence of the merger, Olivetti will
cancel all the Telecom Italia shares it holds at the time the merger
takes place. For the purposes of the financial statements for the
fiscal year, the difference between the carrying value of the
cancelled Telecom Italia shares and the corresponding share of the
shareholders' equity will be positive and will therefore give rise to
a cancellation deficit. This deficit, whose size will also depend on
the level of acceptances of the tender offer (discussed in Subsection
1.1.8), will be allocated to Telecom Italia's assets (in particular
its holding of TIM shares) and any remaining difference will be
entered under "goodwill". In view of the procedure for assigning the
shares of the Company Resulting from the Merger (see Section 4), it
is reasonable to expect that an exchange surplus will emerge.
In Olivetti's consolidated financial statements the consolidation
difference that arose with the acquisition of Telecom Italia in 1999
will be increased by the difference between the carrying value of any
Telecom Italia shares acquired in the tender offer and the
corresponding share of the shareholders' equity.
1.1.5 The savings shares issued by the Company Resulting from the
Merger for the holders of Telecom Italia savings shares will have
identical economic rights to those of the Telecom Italia savings
shares, including the possibility of satisfying the preferential
rights provided for in the bylaws by distributing reserves (the
addition of which to the Telecom Italia bylaws, with immediate
effect, will be proposed to the shareholders' meeting called to
approve the merger plan).
The maintenance of the preferential rights to which each Telecom
Italia savings share is entitled by law will be accompanied by an
improvement in the preferential position of each savings shareholder,
since he/she will be assigned, for each such share held, more than
one savings share of the Company Resulting from the Merger (on the
basis of the assignment ratio by means of which the exchange will be
implemented; on this point see Section 4).
Since each of the newly-issued savings shares of the Company
Resulting from the Merger will have a par value equal to the present
par value of the Telecom Italia
7
savings shares (Euro 0.55) and will give the same percentage
preferential right calculated with reference to its par value, at the
time of the exchange each holder of Telecom Italia savings shares
will receive, as a consequence of the assignment ratio, a larger
amount of the nominal capital of the Company Resulting from the
Merger than the amount previously held and will therefore be entitled
to a larger preferred dividend in absolute terms.
This advantage, together with the above-mentioned possibility of
satisfying the preferential rights by distributing reserves, improves
the position of the holders of savings shares compared with that
prevailing before the Operation.
1.1.6 On 13 March 2003 Olivetti published a notice in the Gazzetta
Ufficiale regarding the rights of holders of "Olivetti 1,5% 2001-2004
convertibile con premio a1 rimborso" and "Olivetti 13% 2001-2010
convertibile con premio al rimborso" convertible bonds to exercise
the right of conversion pursuant to Article 2503-bis, second
paragraph, of the Civil Code.
The time limit for the de jure exercise of the conversion right
expired on 13 April 2003. The holders of bonds convertible into
Olivetti shares can, however, exercise the conversion right in
accordance with the rules of the above-mentioned bond issues after
the expiration of the time limit established by Article 2503-bis,
second paragraph, of the Civil Code, without prejudice to the periods
of suspension provided for in such rules.
Lastly, it should be noted that as a consequence of the merger the
ratio for the bond conversion into Olivetti shares and that for the
exercise of the warrants will be adjusted to take account of the new
par value of the shares of the Company Resulting from the Merger and
in relation to the assignment ratio, as explained in more detail in
Section 4. In particular, the adjustment will be made to reflect the
new fractional number of shares of the Company Resulting from the
Merger into which each bond and each warrant can be converted at the
end of the merger in view of the assignment ratio on the basis of
which the shares of the Company Resulting from the Merger will be
assigned in exchange to the shareholders of Olivetti who have not
exercised their right of withdrawal.
1.7.7 The Olivetti shareholders' meeting called to adopt the merger
Resolution will therefore be required to update the resolutions
adopted to increase the capital for the exercise of the rights
attaching to the "Warrant azioni ordinarie Olivetti ex Tecnost
1999-2004" warrants and the "Olivetti 13% 2001-2004 convertibile con
premio al rimborso" and "Olivetti 1,5% 2001-2010 convertibile con
premio al rimborso" convertible bonds and for the exercise of stock
options, with the consequent revision of the related rules. The same
Olivetti shareholders' meeting will also be called upon to approve
increases in capital for the stock options issued by Telecom Italia
that have not yet been exercised.
8
Naturally, the exact quantification of the shares obtainable by
exercising the warrants and stock options and of those deriving from
conversions will be possible only when, at the time the deed of
merger is signed, the assignment ratio is established, as provided
for in Section 4.
1.1.8 As part of the Operation and before its completion, provision has
been made for a tender offer for some of Telecom Italia's ordinary
and savings shares. In addition to having an investment rationale,
this is also intended to provide a way for Telecom Italia
shareholders who do not wish to keep their entire holding in the
Company Resulting from the Merger to liquidate part of it, in a
similar way to the Olivetti shareholders who exercise their dejure
right of withdrawal. The tender offer will be made for an amount
equal to that remaining, if any, from the Euro 9,000,000,000 made
available by the pool of banks to finance the exercise of the right
of withdrawal.
Consequently, assuming the availability of financial resources, as
specified above, the tender offer will be made only at the end of the
period allowed for the exercise of the right of withdrawal following
the approval of the merger plan and the adoption of the new bylaws
with the amended corporate purpose and no minimum threshold will be
set for acceptances. The number of Telecom Italia shares tendered for
will be established - once the number of Olivetti shares for which
the right of withdrawal has been exercised is known - by dividing the
amount remaining of the finance provided for withdrawals, if any, by
the offer price per Telecom Italia ordinary and savings share
(established in the manner described below), so that the offer will
be for the same percentage of ordinary shares and savings shares
(calculated in relation to the total number of shares of each class).
The offer price will be equal to the weighted average of the official
prices recorded on the stock exchange between 12 March 2003 and the
date of the shareholders' meeting of the Absorbing Company that
approves the merger plan, plus a 20% premium. In addition, the offer
price will be between: (i) a maximum of Euro 8.40 and a minimum of
Euro 7 per share for Telecom Italia ordinary shares and (ii) a
maximum of Euro 5.65 and a minimum of Euro 4.70 per share for Telecom
Italia savings shares.
Depending on the offer price established in the manner described
above, and assuming that the full amount of Euro 9,000,000,000 is
available owing to the failure of Olivetti shareholders to exercise
their right of withdrawal, the tender offer will be for the minimum
and maximum quantities of Telecom Italia ordinary and savings shares
shown below:
9
(i) assuming that the offer price is equal to the maximum price
specified above, the offer will be for about 16.1% of the
ordinary shares and about 16.1% of the savings shares;
(ii) assuming that the offer price is equal to the minimum price
specified above, the offer will be for about 19.4% of the
ordinary shares and about 19.4% of the savings shares;
If, however, the acceptances of the tender offer fall short of the
maximum quantity for one class of shares but exceed it for the other
class, the amount not used to buy shares of the first class will be
used to buy shares of the second class, and the maximum quantity of
shares of the latter class will increase until all the funds
available have been used, so that the largest number of shareholders
wishing to accept the offer can be satisfied. In such case the
percentages indicated in the subparagraphs (i) and (ii) will change.
The tender offer will be made as soon as possible after the close of
the period for Olivetti shareholders to exercise their right of
withdrawal. Provision has also been made for the tender offer, if
made, to become ineffective if the merger does not become effective
by a given date, now tentatively envisaged to be 31 December 2003,
without prejudice to the intention of the companies participating in
the Operation to complete the merger as soon as possible and,
specifically, in the first few days of August 2003.
The foregoing condition for the ineffectiveness of the tender offer
is intended to ensure that it depend on substantially the same
circumstances as the right of withdrawal of the Olivetti
shareholders, which applies only if the merger is completed.
1.1.9 At the end of the Operation the ordinary shares of the Company
Resulting from the Merger will continue to be listed on Borsa
Italiana's MTA electronic share market. Nor will the Operation affect
the listing of the Olivetti ordinary shares on the Frankfurt Stock
Exchange. As mentioned earlier, the intention is for the savings
shares also to be listed on the MTA market before the merger becomes
effective and as a condition of its effectiveness. It is also
intended that the ordinary and savings shares be listed on the New
York Stock Exchange in the form of American Depositary Receipts
(ADRs), thus maintaining the present situation with regard to Telecom
Italia ordinary and savings shares.
1.2 The companies participating in the Operation
1.2.7 Olivetti is a holding company, of which the most important holding is
its 54.9% interest in the ordinary share capital of Telecom Italia
(about 39.5% of the total share capital). It also has holdings in
other industrial sectors such as office products and services and in
real estate, notably through its subsidiaries Olivetti Tecnost
10
S.p.A. (information technology and communications products and
services) and Olivetti Multiservice S.p.A. (services related to the
real-estate sector).
The following tables show selected income, balance sheet and
financial data for the Olivetti Group and for Olivetti, drawn from
the consolidated financial statements for the 2002 fiscal year,
Olivetti's draft financial statements for 2002 and its financial
statements for 2001 and 2000, appropriately reclassified to conform
with those of Telecom Italia.
Selected economic and financial data for the Olivetti Group and for
Olivetti
OLIVETTI GROUP
--------------
(in millions of euros) 2002 2001 2000(*) 2000
---------------------- ---- ---- ------- ----
Sales of goods and services 31,408 32,016 28,374 30,116
------ ------ ------ ------
Gross operating profit 14,033 13,707 12,272 13,173
------ ------ ------ ------
Operating income 6,016 5,338 5,112 5,477
------ ------ ------ ------
Consolidated net income (loss)
before minority interest (773) (3,090) (940) (940)
------ ------ ------ ------
Consolidated shareholders' 11,640 12,729 13,856 13,856
equity (parent company's
interest)
------ ------ ------ ------
Consolidated net financial debt: 33,399 38,362 35,728 37,524
- medium and long-term 33,309 37,042 25,622 27,157
- short-term 90 1,320 10,106 10,367
------ ------ ------ ------
(*) Reconstructed by consolidating the Nortel Inversora group (Telecom
Argentina) using the equity rather than the proportionate method.
OLIVETTI
--------
(in millions of euros) 2002 2001 2000
---------------------- ---- ---- ----
Net income (loss) (6,240) (871) 870
Shareholders' equity 9,031 15,235 13,937
Net financial debt 15,195 16,322 17,991
- medium and long-term 12,472 10,293 17,150
- short-term 2,723 6,029 841
1.2.2 Telecom Italia, together with the group of companies it heads, is one
of the largest international groups operating in the sector of
telecommunication services and,
11
more in general, information and communication technology. Its
companies, leaders in fixed and mobile communications, the Internet
and multimedia, information technology and research offer integrated
and innovative services in Italy and abroad. Its principal strength
lies in its leadership in the Italian markets for fixed and mobile
telecommunications and Internet services. The companies of the Group
have created broadband, fixed and mobile networks providing
innovative services, complex solutions for ICT, multimedia messaging,
solutions for mobile business, products for e-government and online
banking.
Following the changes in top management in 2001 and the significant
overhaul of corporate growth strategies with the formulation of the
Business Plan for 2002- 2004, in 2002 an overall restructuring was
launched. In particular, organizational restructuring led to the
formation of a completely renewed, compact and stable management
team. During 2002 the responsibilities of the Domestic Wireline and
Information Technology business units were revised in depth and a new
South American business unit was established.
At Group level the so-called "professional families" were upgraded
and strengthened with the establishment of a functional link between
distinctive competences in the individual Telecom Italia Group
companies and the analogous functions in the parent company so as (i)
to ensure greater organizational effectiveness and the verification
of resources, and (ii) to foster intra-Group mobility. In addition,
new procedures were introduced for the approval and monitoring of
investments and acquisitions, with the centralization of governance
responsibilities.
Important progress was made in financial strengthening and industrial
restructuring, in line with the Business Plan. The results obtained
with the gain in efficiency and the plan of disposals (which
generated a net cash flow of Euro4,771 million in 2002) were decisive
in reducing the Group's debt from Euro 21,942 million at the end of
2001 to Euro 18,118 million at 31 December 2002. The proportion of
debt with a maturity of more than one year rose from 64% at the end
of 2001 to 75% at the end of 2002. The Group's structure was
simplified, with the number of companies declining in 2002 from 714
to 416.
Turning to business developments, the focus in 2002 was placed on
innovation by strengthening the company's leadership in the Italian
market and its presence in international markets.
In the field of mobile telephony, TIM ranks first among European
operators in terms of the number of GSM lines on a single network and
is the leader in Italy. In October TIM launched Brazil's first GSM
service, which reached more than 80 cities throughout the country.
12
The following tables show selected income, balance sheet and
financial data for the Telecom Italia Group and for Telecom Italia,
drawn from the consolidated financial statements for the 2002 fiscal
year, the company's draft financial statements for 2002 and the
financial statements for 2001 and 2000.
Selected economic and financial data for the Telecom Italia Group and
for Telecom Italia
TELECOM ITALIA GROUP
(in millions of euros) 2002 2001 2000(*) 2000
---------------------- ---- ---- ------- ----
Sales of goods and services 30,400 30,818 27,169 28,911
------ ------ ------ ------
Gross operating profit 13,964 13,619 12,217 13,118
------ ------ ------ ------
Operating income 7,381 6,674 6,440 6,805
------ ------ ------ ------
Consolidated net income (loss) (322) (2,068) 2,028 2,028
before minority interest
------ ------ ------ ------
Consolidated shareholders' 9,049 13,522 18,821 18,821
equity (parent company's interest)
Consolidated net financial debt: 18,118 21,942 17,233 19,029
- medium/long-term 15,018 16,083 6,733 8,268
- short-term 3,100 5,859 10,500 10,761
------ ------ ------ ------
Consolidated free cash 8,610 5,990 4,453 4,763
------ ------ ------ ------
flow from operations1
(*) Reconstructed by consolidating the Nortel Inversora group (Telecom
Argentina) using the equity rather than the proportionate method.
1 Operating income + Depreciation and amortization - Industrial investments
- Change in working capital.
TELECOM ITALIA
(in millions of euros) 2002 2001 2000
---------------------- ---- ---- ----
Sales of goods and services 17,055 17,309 17,463
------ ------ ------
Gross operating profit 7,549 7,571 7,556
------ ------ ------
Operating income 4,045 3,983 3,595
------ ------ ------
Net income (loss) (1,645) 151 2,559
------ ------ ------
Shareholders' equity 10,956 15,871 18,714
Net financial debt: 15,128 16,913 16,839
- medium/long-term 11,848 10,371 3,188
- short-term 3,280 6,542 13,651
------ ------ ------
Free cash flow from operations 5,291 4,384 4,234
------ ------ ------
1 Operating income + Depreciation and amortization - Industrial investments -
Change in working capital.
13
1.3 The reasons for the Operation
One aspect of interest to shareholders is that the Operation will lead to
the Company Resulting from the Merger being more contestable since, upon
completion of the Operation, the holding of the present relative majority
shareholder of Olivetti will be reduced (see Section 7), with a consequent
increase in the security's liquidity and the reasons for the market to
view it favourably, to the benefit of all the shareholders.
The proposed Operation will also bring a major simplification in the
structure of the Group, in line with the expectations of the market and
the objective of an overall improvement in Olivetti's financial position.
Among other things, the integration of corporate functions will ensure
faster decision-making in the context of an organizational structure
comparable to that of the leading international operators.
The Operation is also intended to bring additional advantages by:
- optimizing financial and income flows within the Group through a more
efficient management of Group debt and more efficient use of
financial leverage. In fact the Operation will permit the whole
financial debt to be allocated directly to a level closer to the
operational activities that generate cash flow and eliminate the
dependence of Olivetti on the dividend policy of the Company to be
Absorbed. It is also likely that these effects will lead to an
improvement in the creditworthiness of the Company Resulting from the
Merger, which, in turn, could lead to a more favourable rating and a
reduction in the cost of future debt;
- allowing the Company Resulting from the Merger to optimize its
financial structure and reduce the average cost of capital employed
compared with that of Telecom Italia today. This effect should help
to sustain the price of the shares of the Company Resulting from the
Merger and therefore create value for the shareholders of Olivetti
and Telecom Italia;
- improving the tax efficiency of the Company Resulting from the Merger
under the current tax rules, through the complete and faster
recovery, including the part currently not stated, of the tax
benefits in connection with the value adjustments to equity interests
decided at the time of the approval of Olivetti's draft financial
statements for the 2002 fiscal year ("Tax Asset").
1.4 The objectives for operations and the plans for achieving them
The companies participating in the merger were in agreement on the
objectives for operations and the plans for their achievement by the
Company Resulting from the Merger. Substantially, they coincide with
those of Telecom Italia approved by its Board of Directors on 13
February 2003, which in turn confirm the guidelines and objectives of
the Business Plan 2002-2004. With specific regard to Olivetti, it
should
14
be noted that Olivetti Tecnost is substantially neutral in terms of
its impact on the operating income.
However, the Operation will result in a merger deficit (deriving from
share cancellation), any portion of which not classified as a Telecom
Italia asset (specifically among equity interests) will be amortized
over a period of 20 years. The updated financial projections take
account of this additional portion of amortization.
The same projections consider the financial charges associated with
Olivetti's present debt, as well as the effect of the tax asset
connected with the value adjustments made in Olivetti's and Telecom
Italia's draft financial statements for 2002.
In addition to the disposals already envisaged by the Business Plan
(Telekom Austria, Operazioni Real Estate), the projections also
include the receipts from the disposal of the company into which Seat
Pagine Gialle is to be spun off.
Lastly, it is estimated that the cash flows from operations and
disposals of the Company Resulting from the Merger will be able to
sustain not only a reduction in debt but also a dividend distribution
policy in line with that set out in Telecom Italia's Business Plan.
The following table summarizes the above considerations at
consolidated level, from which the sustainability of the commitments
entered into for the future appears evident.
Billions of euros Olivetti 2002 Consolidated objectives of
consolidated the Company Resulting
financial from the Merger (*)
statements CAGR 2002-2005 ***
----------------- ------------- --------------------------
Sales of products and services 31.4 4 - 4.5%
Gross operating profit 14.0 5 -5.5%
% of sales 44.6%
Operating income 6.0 8 -8.5%
% of sales 19.1%
Cumulative 2003-
2005
Free Cash Flow 8.6 29
Net financial position 33.4** 34.3****
(*) Assuming zero withdrawals, fully diluted.
(**) The net financial position does not take account of the forward purchase
commitments (December 2005) in respect of Aldermanbury Investment Limited
(formerly Chase Equities Limited), equal to Euro 2,417 million. (***) The scope
of the consolidation is the same.
(****) At 31 December 2004.
15
2. The values attributed to Olivetti and Telecom Italia for the purpose of
determining the exchange ratio
For the valuations needed to establish the exchange ratio, Olivetti's Board of
Directors had recourse to the advice and assistance of a leading financial
advisor, JPMorgan Chase Bank ("JPMorgan").
The valuation methods applied by JPMorgan to establish the exchange ratio have
been checked by Professor Angelo Provasoli, in his capacity as Olivetti's
consultant, with a view to verifying their mutual consistency and
appropriateness with respect to the purpose of the Operation.
Olivetti's Board of Directors - taking into account the draft financial
statements of the Absorbing Company and the Company to be Absorbed for the year
ended 31 December 2002, approved by the two companies' respective Boards of
Directors as the reference statements of assets and liabilities, and of the
proposed distribution of reserves by Telecom Italia up to a maximum of about
Euro 1,333 million, and after careful analyzing the valuations put forward by
the financial advisor and the conclusions reached by Professor Angelo Provasoli
and being in agreement with the valuation methods applied and described in
Section 3 - has identified the following ranges for the values of the shares of
the companies participating in the merger for the purpose of establishing the
exchange ratio:
Minimum Mean Maximum
------- ---- -------
Values per Telecom Italia 8.1 8.6 9.1
ordinary share (euros)
Minimum Mean Maximum
------- ---- -------
Values per Telecom Italia
savings share (euros) 5.4 5.8 6.1
Minimum Mean Maximum
------- ---- -------
Values per Olivetti ordinary 1.13 1.26 1.39
share (euros)
Minimum Mean Maximum
------- ---- -------
Values per Olivetti savings 0.76 0.84 0.93
share (euros)
It should be noted that the figures in the above tables, as in all the tables
in Section 3, have been rounded, albeit without this materially affecting the
results.
3. The exchange ratio established and the methods used in determining it
16
3.1 Valuation methods used
3.1.1 It needs to be premised that the ultimate aim of the valuation of the
companies participating in a merger is to obtain values of the
companies participating in the operation that can be meaningfully
compared.
Consistently with this objective, and in accordance with the regular
practice, a uniform yardstick must be adopted throughout the whole
valuation process in order to defend the interests of the
shareholders of the Absorbing Company and the Company to be Absorbed.
This does not necessarily mean that identical valuation methods must
be used for all the companies directly or indirectly involved in the
merger, especially if they operate in different sectors, but rather
that there must be the same approach to valuation.
Since, as mentioned earlier, the exclusive aim of the estimates is to
establish significantly comparable values, the methods adopted in the
context of valuations for merger purposes and the related results may
differ from those used for valuations having a different purpose.
On the basis of these assumptions and as a consequence of the
adoption of the redistribution method for the assignment of the
shares of the Company Resulting from the Merger (as discussed in more
detail in Section 4), it is first necessary to establish a "natural"
exchange ratio between the shares of the two companies, corresponding
to the exchange ratio that would have been applied if the merger had
involved the issue of new shares for the purpose of the exchange.
This "natural" exchange ratio will correspond to different assignment
ratios, which will depend, as shown in Section 4, on a number of
variables.
With this premise, the "natural" exchange ratio was established by
applying valuation methods that are commonly used in Italy and abroad
for operations of this kind and for businesses in this sector.
In particular, account was taken of the comparative valuation of the
companies involved and priority given to the homogeneousness and
comparability of the methods used with respect to the simple estimate
of the economic capital of each company considered on its own.
In this perspective, the valuations were carried out considering the
two companies as separate entities and therefore ignoring all the
strategic, operational and financial synergies expected from the
merger, as well as the question of control premiums/minority
discounts associated with the possession of equity interests.
3.1.2 For the valuation of Telecom Italia, the fundamental method it was
decided to apply was that known as the Sum-of-the-Parts method, which
it is standard market practice to use to estimate the value of a
group operating in several sectors.
17
Under the Sum-of-the-Parts method the value of a company's economic
capital is calculated as the sum of the values of its separate units,
in the sense of economic entities that can be valued independently
and suitably adjusted to take account of the company's financial
position and minority interests, where material, and of other factors
such as off-balance-sheet items and potential tax benefits.
As regards the single units, in view of the complexity and
extensiveness of the structure of the Telecom Italia Group and of the
many sectors in which it operates, it was decided advisable to value
each of them using the methods deemed most appropriate to each
situation. In particular, the valuation of the principal units was
based primarily on the Discounted Cash Flow method, while the
remaining assets, which are of limited importance in the overall
valuation, were valued using stock market prices, for companies
listed on a regulated market, and/or the method of market multiples,
with use also made for testing and control purposes of balance sheet
values and the values published in analysts' research reports on such
units, where available.
The Discounted Cash Flow method gives the value of a company as a
whole. It is based on the assumption that the value of a company or
an economic activity is equal to the present value of future cash
flows. These flows can be determined analytically as follows:
+ Earnings before interest and tax (EBIT)
- Imputed tax on EBIT Depreciation and other non-cash allowances -
Fixed investment +/- Change in net working capital
Under this method the value of the economic capital of a company or
an economic activity is equal to the sum of (i) the discounted value
of the expected cash flows and (ii) the terminal value of the
company, less (iii) the net financial debt and minority interests, as
given by the following formula:
n FC VT
t
W = SUM------------- + ------------- -DFt0
t=l (1 + WACC)t (1 + WACC)n
where:
W = Value of the economic capital W - FC t = Annual cash flow
expected in period t VT = Terminal value DF = Net financial debt and
minority interests at time t=O n = Number of projection periods WACC
= Weighted average cost of capital
18
The terminal value is the value of the company or economic activity
to be valued at the end of the period covered by the projections and
is determined assuming that the duration of the business is
unlimited. The terminal value is determined using the perpetual
growth method by applying the following formula:
VT = FC / (WACC - G)
where:
VT = Terminal value FC = Normalized cash flow g = Perpetual growth
rate
WACC = Weighted average cost of capital
The terminal value obtained in this way is treated as if it were an
additional cash flow and thus discounted using the weighted average
cost of capital, which is the average of the costs of the different
forms of financing used (equity capital and debt capital net of tax
effects) weighted according to the financial structure of the company
or economic activity.
D E
WACC=Kd (1-t) ------ + Ke -------
D+E D+E
where:
Kd = Cost of debt capital
Ke = Cost of equity capital
D = Debt capital
E = Equity capital
t = Tax rate
In particular, the cost of debt capital is the long-term interest
rate applicable to companies or economic activities of similar
riskiness net of the tax effect. The cost of equity capital, instead,
reflects the rate of return expected by the investor with account
taken of the relative risk, calculated using the Capital Asset
Pricing Model, as shown below:
Ke = Rf + B (Rm-Rf)
where:
Ke = Cost of equity capital
Rf = Rate of return on risk-free investments
19
B = Coefficient that measures the correlation between
the rate of return expected on an investment and the
rate of return expected on the reference equity market
R m = Expected equity market rate of return (Rm- Rf) = Risk premium
required by the equity market with
respect to the rate of return on risk-free investments
3.1.3 The valuation of Olivetti was based, instead, using as fundamental
method the Net Asset Value method (substantially equivalent in
methodological terms to the Sum-of-the-Parts method), since it is
standard market practice to use this method to value holding
companies without a significant operating activity.
According to the Net Asset Value method, the value of the economic
capital of a company is the sum of the values of its holdings, in the
sense of economic entities that can be valued independently, and
suitably adjusted to take account of the company's financial position
and minority interests, where material, and of other factors such as
the centralized costs of the holding company, other assets, off-
balance-sheet items and potential tax benefits.
3.1.4 The exchange ratio obtained by applying the above methods was tested
by using the stock-market prices method, which, in the case in
question, involves considering the ratio between the values of the
shares of the companies participating in the merger expressed by the
stock market.
This method is considered significant when making valuations for a
merger when both the companies involved are listed. Its significance
increases further when, as in the case in question, the average
volumes traded are large; in such circumstances the prices formed in
the market provide a baseline for the purposes of a comparison of the
profitability, soundness, growth prospects and riskiness of the
companies from the standpoint of investors and thus for the ratio
between the values of the companies involved in the merger.
In applying this method it is necessary to strike a balance between
the need to mitigate the volatility of daily share prices by
considering a sufficiently long period and the need to use recent
data that are indicative of the market values of the companies in
question. In identifying the time horizon to consider it also
necessary to take account of any major changes or significant events
that have affected the companies.
Since both Telecom Italia and Olivetti are listed on Borsa Italiana's
MTA electronic share market and are among the largest Italian
companies in terms of market value, it was considered that the stock
market prices of their securities constituted a reliable benchmark.
20
3.2 Application of the chosen valuation methods
This subsection contains a description of the manner in which the
valuation methods discussed in Subsection 3.1 were applied to the
companies participating in the merger in order to obtain the "natural"
exchange ratio.
3.2.1 Telecom Italia
Telecom Italia was valued using the Sum-of-the-Parts fundamental method.
In applying this method, the valuation of the principal activities (the
activities of Telecom Italia S.p.A., Telecom Italia Mobile and Seat Pagine
Gialle-directory) was based primarily on the Discounted Cash Flow method,
while the remaining units were valued using stock market prices, for
companies listed on a regulated market, and/or the method of market
multiples, with use also made for testing and control purposes of balance
sheet values and the values published in analysts' research reports on
such companies, where available.
In the case of the units for which the Discounted Cash Flow method was
used, the method was applied with a view to determining the fundamental
value of the companies for financial investors and on the basis of the
following assumptions and approaches:
- reference was made to the cash flows of the individual units as set
out in the economic and financial plans drawn up by Telecom Italia;
- the growth rates used for the financial projections beyond the time
horizon of Telecom Italia's business plan and for the calculation of
the terminal value reflect growth prospects consistent with the
relevant market benchmarks; the terminal value, determined on the
basis of the flows estimated in the manner indicated, is
substantially consistent with the multiples implicit in the current
prices of comparable companies;
- the weighted average cost of capital (WACC) was calculated on the
basis of a capital structure substantially in line with the present
one.
In applying the Discounted Cash Flow method, reference was made, as
mentioned earlier, to the cash flows from operations for the main
activities based on the economic and financial plans drawn up by Telecom
Italia's management. These are briefly described in what follows.
Fixed telephony
The economic and financial projections in this field were constructed
starting from the market and economic and financial results achieved in
2002. For the years 2003-2005 they
21
reflect the company's strategic operating and financial objectives within
a market scenario that refers substantially to the Italian fixed telephony
market.
The projections were developed assuming little change in the regulatory
framework, which is reflected in the movements expected in the prices for
access, interconnection and leased lines. In particular, consideration was
given to the introduction of the network cap for access and
interconnection, while for leased lines the financial projections reflect
a continuation of the present downward trend of prices in the period
2003-2005.
In a retail market characterized (i) by a decline in the value of voice
traffic at an annual rate of 2.3%, as a result of small increases in
volumes and falling prices, and (ii) by an in increase in sales in the
Internet, data transmission and high value-added services segments, the
"Domestic Wireline" business unit is expected to maintain the present
level of revenues, with an average compound annual growth rate estimated
at 0% - 0.5% in the period 2002-2005.
With revenues performing as described above, the Gross operating margin is
forecast to grow at an annual rate of 2% - 2.5% until 2005, with an
objective for the margin on sales of more than 49%. These results stem
from the strategy of focusing on the core business, product innovation and
a policy aimed at enhancing efficiency and lowering operating costs.
The high levels of profitability and of the generation of cash flow from
operations will benefit from capital spending on the order of Euro 6.2
billion in the period 2003-2005, of which about 80% will be on the
development of innovative products and services.
The following table summarizes the financial objectives of the "Domestic
Wireline" business unit, which consists principally of Telecom Italia's
activity in the field of fixed telephony.
2002 CAGR 2002 -2005
(billions of euros) (%)
------------------- --------------------
Revenues 17.0 0%- 0.5%
EBITDA 8.0 2% - 2.5%
EBIT 4.7 4.5% - 5%
Cumulative 2003 -2005
(billions of euros)
Capex 2.5 6.2
22
Mobile telephony (TIM)
In this field consideration was given to market data and the results for
the year 2002, together with economic and financial projections based on
the TIM group's strategic objectives, with a distinction made between
activities in Italy and abroad.
As regards the domestic market for mobile telephony, it is estimated that
its value will have risen to 1.5% of GDP in 2005 and that the level of
penetration will reach 100% in 2004. The level of profitability is
expected to remain high in the European context.
The main source of the creation of value will be Value Added Services
(VAS), which are expected to record a compound annual growth rate of
around 30% in the period 2002-2005, with an objective for their
contribution to Average Revenue Per User (ARPU) of 18%-22% in 2005,
compared with 9% in 2002. Capital spending to sustain the growth of VAS in
the domestic market is expected to increase from 28% of all capital
spending on mobile telephony in 2003 to 35% in 2005.
Business abroad is expected to account for a rising proportion of mobile
telephony revenues. In Brazil, which will be the main area of
international expansion, it is estimated that the penetration of mobile
telephony will rise from 19% in 2002 to 26% in 2005 and that over the same
period the Group's market share will grow from 16% to 26%, with the
objective of increasing users to 12.5 million, of which 9.9 million on the
GSM network; this growth will be sustained by capital spending on the
order of Euro 1.1 billion in the period 2003-2005.
The following table summarizes the results achieved in 2002 and the main
economic and financial objectives for the period 2003-2005.
2002 CAGR 2002 -2005
(billions of euros) (%)
------------------- --------------------
Revenues 10.9 7% - 8%
EBITDA 5.0 8% - 9%
Cumulative 2003 -2005
(billions of euros)
Capex 1.7 5.6
Seat Pagine Gialle
In this case consideration was again given to market data and the
results for the year 2002; reference was also made to a macroeconomic
scenario with moderate growth in GDP and advertising in the main
target markets (Italy and the United Kingdom).
23
In particular, Seat Pagine Gialle's strategy focuses on the search
for further efficiency gains and aggressive action to expand its
business, in order to generate continuous and growing cash flows.
This growth in business will come from a strengthening of the
Directories sector through the integration of the different platforms
(phone, paper and the Internet) and the application of this model in
foreign markets, starting with the United Kingdom.
As regards Internet business, a rapid growth in revenues is
envisaged, at an annual rate of between 17% and 21 % in the period
2002-2005.
The estimates underlying Seat Pagine Gialle's financial projections
are summarized in the following table.
2002 CAGR 2002 -2005
(billions of euros) (%)
------------------- --------------------
Revenues 2.0 6% - 8%
EBITDA 0.6 11% - 13%
EBIT 0.2 27% - 29%
Cumulative 2003 -2005
(billions of euros)
Capex 0.1 0.3
Sum of the Parts
In applying the Discounted Cash Flow method, in the context of the
calculation of the Sum of the Parts, for the rate of return expected
on risk-free investments, recourse was made to the "normal" rate of
return on risk-free investments in the Italian market, while the beta
coefficient was calculated on the basis of the most appropriate
market indicators in the light of the financial structure of the
activity to be valued. The risk premium required by the market was
deduced from the rate of return implicit in market prices.
To the sum of the values of the assets calculated in the manner
described above was added the net financial position at 31 December
2002 (adjusted to take account of the effects of the proportional net
debts and minority interests, where material) and the net value of
other adjustments, including some off-balance-sheet items and tax
benefits.
The table below shows the minimum, mean and maximum values of the
Telecom Italia ordinary share obtained using the Sum-of-the-Parts
method before the distribution of reserves planned for June 2003 and
thus before the completion of the merger.
24
Minimum Mean Maximum
------- ---- -------
Values per Telecom Italia 8.3 8.8 9.3
ordinary share (euros)
The results obtained using the Sum-of-the-Parts method were tested by
analyzing the target prices identified by financial analysts. The research
reports published by brokers and investment banks available at 7 March
2003, which gave a sample of 20 target prices for the Telecom Italia
ordinary share, showed a range of values from Euro 7.5 to Euro 12.0 per
Telecom Italia ordinary share. The mean value was Euro 9.2 per Telecom
Italia ordinary share and the mid point of the range was Euro 9.8 per
Telecom Italia ordinary share.
The table below shows the minimum, mean and maximum values of the Telecom
Italia ordinary share obtained using the Sum-of-the-Parts method adjusted
for the distribution of reserves planned for June 2003.
Minimum Mean Maximum
------- ---- -------
Values per Telecom Italia 8.1 8.6 9.1
ordinary share (euros)
The next table shows the minimum, mean and maximum values of the Telecom
Italia savings share calculated on the basis of the average market
discount of the last month before 7 March 2003, equal to about 33%, which
is in line with the discount on the last day of trading of the Olivetti
and Telecom Italia shares before the announcement of the merger (7 March
2003) and substantially in line with the average discount of the last 3, 6
and 12 months.
Minimum Mean Maximum
------- ---- -------
Values per Telecom Italia 5.4 5.8 6.1
savings share (euros)
3.2.2 Olivetti
As mentioned earlier, Olivetti was valued using the Net Asset Value
method, which it is standard market practice to use to value holding
companies without a significant operating activity.
The net asset value was calculated as the sum of the value of the
company's equity investments and of its other assets, less its net
financial liabilities and minority interests,
25
where material, and with consideration also given to the negative net
present value of the centralized costs of the holding company.
The company's principal equity investment is that in Telecom Italia, which
has been valued as discussed in Subsection 3.2.1 with reference to the
values obtained using the Sum-of-the-Parts method, adjusted for the effect
of the distribution of reserves planned for June 2003.
In this respect it needs to be stressed that it was not considered
appropriate to calculate the Net Asset Value on the basis of the current
stock market value of Olivetti's holding in Telecom Italia since, in the
context of a valuation for the purpose of establishing an exchange ratio,
having deemed it correct to value Telecom Italia on the basis of a
fundamental method (Sum of the Parts), the valuation of the holding
therein in the context of Olivetti's Net Asset Value had to be based on a
fundamental method, so as to ensure the homogeneousness of the methods
adopted and the overall reliability of the results. On the contrary, the
calculation of Olivetti's Net Asset Value on the basis of stock-market
prices of Telecom Italia would have been marked not only by the
non-homogeneousness of the methods adopted but also by high volatility
owing to Olivetti's financial leverage, which would cause the valuation to
be unreliable.
The other equity investments and assets were valued using the Discounted
Cash Flow method (Olivetti Tecnost), the stock market price method for
companies listed on regulated markets and/or the market multiples method,
with use also made for testing and control purposes of balance sheet
values and the values published in analysts' research reports on such
companies, where available.
The Olivetti treasury shares held both directly and indirectly through the
subsidiary Olivetti International S.A. were valued at the final implicit
value resulting from the calculation of Olivetti's Net Asset Value. This
valuation method gives a result that is substantially equivalent to that
obtained with the alternative method, which consists in determining the
value of the Olivetti share by dividing the value of the company's
economic capital (calculated without considering the holding of treasury
shares) by the number of shares, excluding the treasury shares.
The calculation of the Net Asset Value also included the Tax Asset in
connection with the adjustment of the value of Olivetti's equity
investment in Telecom Italia proposed in Olivetti's draft financial
statements for the 2002 fiscal year.
The value of the Tax Asset was calculated by discounting the amounts of
the lower tax liabilities resulting from application of the tax deductions
for which Olivetti would be eligible
26
on a stand-alone basis, taking into account to that end the taxable income
it is forecast to earn.
To the sum of the values of the assets and the Tax Asset, calculated as
described above, was added the value of the net financial position at 31
December 2002, adjusted for the effect of Telecom Italia's distribution of
reserves planned for June 2003 and to take account of the pro forma effect
of the conversion of the "Olivetti 1.5% 2001-2010 convertibile con premio
al rimborso" convertible bonds, consistently with the fully-diluted
method, which assumes the conversion into ordinary shares (the price of
such conversion, equal to Euro 1 per bond, is lower than the value of the
economic capital per Olivetti ordinary share obtained using the Net Asset
Value valuation method).
The table below shows the minimum, mean and maximum values of the Olivetti
ordinary share calculated using the fully-diluted method.
Minimum Mean Maximum
------- ---- -------
Values per Olivetti ordinary 1.13 1.26 1.39
share (euros)
The next table shows the minimum, mean and maximum values of the Olivetti
ordinary share calculated assuming the same 33% discount as was assumed
for the Telecom Italia savings share. The reference to the market discount
of Telecom Italia savings shares with respect to the ordinary shares is
the only objective and non-discretionary method which can be used in the
absence of Olivetti savings shares.
Minimum Mean Maximum
------- ---- -------
Values per Olivetti savings 0.76 0.84 0.93
share (euros)
The discount applied reflects the average market discount of the Telecom
Italia savings share with respect to the Telecom Italia ordinary share in
the last month before 7 March 2003, equal to about 33%, which is in line
with the discount on the last day of trading of the Olivetti and Telecom
Italia shares before the announcement of the merger (7 March 2003) and
substantially in line with the average discount of the last 3, 6 and 12
months.
Moreover, it appears unlikely that the discount of the savings shares of
the Company Resulting from the Merger with respect to the ordinary shares
will change significantly from that of the Telecom Italia savings shares
before the Operation. This view is based on consideration of effects of
opposite sign: on the one hand, the increase in the overall dividend
premium in absolute terms would suggest a reduction in the discount; on
the other
27
hand, the possibly greater rise in the price of the ordinary shares as a
result of the increased contestability of the Company Resulting from the
Merger would suggest an increase.
For the purposes of the valuation account was therefore taken both of the
fact that, as an effect of the redistribution mechanism (described in
Section 4), after the Operation the holders of Telecom Italia savings
shares will have received a larger total number of savings shares of the
Company Resulting from the Merger that, since they have the same par value
and preferential rights as the Telecom Italia savings shares, will entitle
them to a larger overall dividend premium in absolute terms, and of the
fact that the importance of the administrative rights might exceed that of
the economic rights in the Company Resulting from the Merger as a
consequence of its greater contestability.
Lastly, it needs to be stressed that in establishing the exchange ratio an
analysis was made of the reasonably foreseeable effects of the possible
exercise of the right of withdrawal by Olivetti shareholders. This led,
also on the basis of the stock market prices of the relevant period
already closed, to the belief that the number of withdrawals would not
make it necessary to change the exchange ratio, since it can reasonably be
expected that the withdrawal price will be lower than the value attributed
to the Olivetti shares for the purposes of the merger on the basis of the
valuation methods used.
Lastly, account was taken in determining the exchange ratio of the
eventuality of the exercise of financial instruments giving rise to the
subscription of Olivetti and Telecom Italia shares (stock options,
convertible bonds and warrants) exclusively to the extent that their
exercise was reasonably likely in the light of related economic and
financial convenience.
3.2.3 Difficulties encountered in making the valuations
In applying the valuation methods described above, consideration was given
to the characteristics and limitations of each one of them in the light of
the standard practice normally followed in Italy and abroad for the
valuation of companies comparable with Olivetti and Telecom Italia.
In making the valuations the following main critical areas were
encountered:
- the valuations were made assuming that the present tax system will
remain in force in the future. However, the tax reform under way in
Italy envisages a series of changes (including new rates,
consolidation for tax purposes and the abolition of Dual Income Tax,
etc.), whose effects are difficult to assess.
28
- the estimation of the value of the savings shares assigned by the
Company Resulting from the Merger for the purpose of the exchange was
based on the differential found between the stock-market prices of
Telecom Italia ordinary and savings shares. As explained in detail,
the decision to differentiate the estimated values of the shares of
different classes according to the differences between their market
prices is consistent with standard practice in this field. However,
even though in the case in question there were no objective elements
permitting any other solution, some empirical analyses have shown
that the differentials between the prices of ordinary and savings
shares tend to be larger for companies, such as the Company Resulting
from the Merger, where control is contestable. In such cases, in
fact, the importance of the administrative rights exceeds that of the
economic rights. This principle, however, is not applicable
objectively to the case in question in the absence of historical data
regarding Olivetti and it would only be possible to estimate its
effects generically on the basis of data regarding comparable
companies. Acting in the opposite direction to the foregoing, is the
increase discussed earlier in the economic rights attached to the
savings shares.
- the treasury shares held by Olivetti and the Olivetti shares held by
the subsidiary Olivetti International S.A., which can be likened to
treasury shares, were valued on the basis of the overall economic
value of Olivetti itself. This approach assumes that the economic
value is the same as the realizable value, i.e. the market value, of
the shares in question, an assumption that has not always been true
in practice. However, the valuation method adopted comes close to one
of the technical solutions suggested by the literature and practice,
which recommend treating treasury shares as early retirement of
capital and accordingly setting their value equal to zero and
calculating the value per share with reference to a smaller number of
shares than the total issued, equal to those actually in circulation.
- at the present time it is not possible to make an accurate forecast
of the outcome of the proposed disposal of the new company that will
be created as a result of the spin-off of Seat Pagine Gialle. It is
nonetheless considered, in view of the percentage of Telecom Italia's
overall value accounted for by its equity investment in Seat Pagine
Gialle, that the disposal cannot produce effects requiring the
exchange ratio to be changed.
- in view of the size of the holding in Telecom Italia, a careful
analysis was made, with the help of the Advisor, of the arguments put
forward by some institutional investors regarding the application of
the NAV method to Olivetti, as a holding company whose most important
asset is the holding in Telecom Italia, with special reference to the
appropriateness of valuing that holding on the basis of stock-market
prices. Although recognizing the complexity of the question, it has
been deemed appropriate, given the purpose of the valuation and the
need, discussed in Subsection 3.2.2, to adopt uniform criteria for
both the Companies, to value Olivetti using the same methods as those
adopted to determine the value of Telecom Italia (Sum of the Parts).
3.2.4 Determination of the exchange ratio
29
The next table summarizes the range of the estimates of the exchange ratio
calculated, with the methods and application criteria discussed in the
preceding subsections, as the ratio of the estimated value of the Telecom
Italia ordinary share to the estimated value of the Olivetti share using
the minimum and maximum values of the ranges reported earlier.
Minimum Mean Maximum
------- ---- -------
Olivetti ordinary shares per 6.6 6.9 7.2
Telecom Italia ordinary share
Olivetti savings shares per 6.6 6.9 7.2
Telecom Italia savings share
The Board of Directors, in the light of the indications provided by
JPMorgan and after considering the results of the application of the
above-mentioned valuation methods, reached a conclusion with regard to the
ratio between the economic values of the two companies participating in
the merger.
This conclusion was then compared with that reached by the Board of
Directors of Telecom Italia, in the light of the indications provided by
its own advisors, Lazard and Goldman Sachs.
At the end of the valuation process and the comparison between the results
obtained by the two companies participating in the merger, the Board of
Directors of Olivetti and the Board of Directors of Telecom Italia
established that the "natural" exchange ratio on the basis of which to
determine the assignment of the shares of the Company Resulting from the
Merger was:
7 Olivetti shares assuming the current par value of Euro 1.OO each for
every
1 Telecom Italia share assuming the current par value of Euro 0.55 each
The exchange ratio will be the same for both the Telecom Italia ordinary
shares and for the Telecom Italia savings shares. As will be shown in
Section 4, the "natural" exchange ratio will correspond to a different
assignment ratio, made necessary by the decision to carry out the exchange
through the redistribution of the capital of the Company Resulting from
the Merger, which means that it will also be necessary to establish an
assignment ratio for the Olivetti shares.
The above exchange ratio must be verified by the experts appointed under
Article 2501- quinquies of the Civil Code, namely by the auditing firm
Deloitte & Touche Italia S.p.A., appointed by the President of the Ivrea
Tribunal, for Olivetti, and by the auditing firm Reconta Ernst & Young,
the external auditors, for Telecom Italia, for the purpose of the issuance
of the fairness opinion required by law.
3.2.5 Control methodologies
30
In order to test the accuracy of the exchange ratio obtained in the manner
described above, a further test was made using the method based on stock
market prices.
Olivetti ordinary shares per Telecom Italia ordinary share The method was
applied considering the average exchange ratio (Olivetti ordinary shares
per Telecom Italia ordinary share) expressed by the market in different
periods prior to the day on which Borsa Italiana S.p.A. suspended trading
in the Olivetti and Telecom Italia securities in view of the forthcoming
announcement of the Operation (the ratios given by the official prices
recorded on 7 March 2003 and the weighted averages of the official prices
in the preceding 1, 3, 6 and 12 months), adjusted for the effect of the
distribution of reserves planned for June 2003, before the completion of
the merger.
Account was not taken, instead, of the stock market prices of the Telecom
Italia and Olivetti shares after the announcement of the Operation since
they were influenced by the announcement and were therefore not deemed to
be significant.
The following table shows the average exchange ratios obtained with
reference to the different periods specified above.
7 1 3 6 12
March month months months months
----- ----- ------ ------ ------
Olivetti ordinary shares 6.7 7.0 6.9 7.1 6.9
per Telecom Italia
ordinary share
The next table shows the minimum, mean and maximum values of the exchange
ratio (Olivetti ordinary shares per Telecom Italia ordinary share) given
by the stock market in the periods considered above.
Minimum Mean Maximum
------- ---- -------
Olivetti ordinary shares per 6.7 6.9 7.1
Telecom Italia ordinary share
The above figures are consistent with the exchange ratio established using
the main valuation method. It should be noted that the stock market price
method cannot be used to test the exchange ratio for the savings shares
owing to the non-existence of Olivetti savings shares. Nonetheless, in the
light of the arguments put forward above regarding the hypothesis of a
substantially unchanged discount for the savings shares of the Company
Resulting from the Merger with respect to its ordinary shares compared
with that recorded by Telecom Italia's savings shares, the consistency of
the exchange ratio established using the main valuation method can also be
confirmed for the savings share ratio.
4. Procedure for assigning the shares of the Company Resulting from the
Merger
31
In view of the interest in maintaining a flexible capital structure of a
size suitable for corporate activities and with a view to limiting the
effects of the Operation on the future remuneration of the shares, it was
considered advisable to leave the nominal capital of Olivetti
substantially unchanged at the conclusion of the Operation inasmuch as the
absolute increase in the nominal capital by means of the issue of as many
new shares as are necessary to satisfy the Exchange Ratio of all the
Telecom Italia shares to be exchanged would lead, under current accounting
rules, on the one hand, to an increase in the shareholders' equity
consisting of capital with a consequent significant (exchange) merger
deficit subject to amortization, obviously to the detriment of the
remuneration of shares in future years, and, on the other, to a capital
structure characterized by the nearly total prevalence of items not
available for distribution.
Considering the adequacy of Olivetti's share capital (in relation also to
the overall size of the debt when this is measured against the cash
generating capacity of the Company Resulting from the Merger, both in
absolute terms and relative to the main European competitors), it was
decided to carry out the share exchange primarily by redistributing
Olivetti's capital and have recourse to the issue of new shares only
insofar as this proved necessary to maintain the share capital at the
level currently subscribed.
The redistribution technique, which has also been used on previous
occasions in important mergers involving listed companies, consists in
dividing the share capital of the absorbing company and hence the shares
composing it (in an equal, larger or smaller number than that existing,
depending on whether the intention is to hold the par value of each share
unchanged, decrease it or increase it) among the shareholders of the
absorbing company and those of the absorbed company, according to what was
referred to above as the "natural" Exchange Ratio between the shares.
Obviously, the redistribution takes the share capital of the absorbing
company at the time the merger is implemented as the baseline. In the case
in question, the share capital of Olivetti at the time the merger is
implemented may vary from the current figure of Euro 8,845,537,520: (i)
increasinq as a consequence of the conversion of the "Olivetti 13%
2001-2004 convertibile con premio al rimborso" and "Olivetti 1,5%
2001-2010 convertibile con premio al rimborso" convertible bonds, the
exercise of the "Warrant azioni ordinarie Olivetti ex Tecnost 1999-2004"
Olivetti warrants and the exercise of all the Olivetti stock options
("Conversions") and (ii) decreasing as a consequence of withdrawals by
Olivetti shareholders absent or contrary to the merger. The Absorbing
Company's capital "to be "redistributed" will therefore be the algebraic
sum of the subscribed capital at the time the merger plan is approved and
the subsequent variations up to the implementation of the merger.
32
Assuming the extreme cases of (i) the total exercise of Conversions and no
withdrawals and (ii) no Conversions and the exercise of the right to
withdraw by all the Olivetti minority shareholders except the relative
majority shareholder Olimpia, Olivetti's share capital at the time the
merger is completed can vary between a maximum of Euro 11,926,697,278 and
a minimum of Euro 2,738,756,641.
Since it is assumed that the post-merger share capital must not be less
than the current figure of Euro 8,845,537,520, in the event that the
decreasing effect of withdrawals outweighs the increasing effect of
Conversions so that the share capital at the time the merger is
implemented is less than Euro 8,845,537,520, the redistribution of the
share capital will be accompanied by a simultaneous capital increase for
the purpose of the merger to bring the share capital up to the
above-mentioned minimum figure, apart from roundings serving to eliminate
any resulting fractions of shares. In this connection Olivetti
International has announced that it stands ready to renounce such number
of shares or fractions of shares as will be necessary to close out the
operation.
In the light of the method and principles described above, the share
capital will be established and the share exchange carried out according
to the following rules:
a) Olivetti will fix the nominal value of its shares - in the amount
resulting after Conversions on the one hand and withdrawals on the
other - at Euro 0.55 (equal to the par value of Telecom Italia
shares), in place of the current par value of Euro 1. Consequently,
Olivetti's share capital will be divided into a larger number of
shares. Such shares will be divided into ordinary shares and savings
shares.
35
b) The new ordinary and savings shares with a par value of Euro 0.55
each making up the share capital at the time of the merger of
Olivetti will be redistributed, respectively, to the holders of
Olivetti and Telecom Italia ordinary shares and the holders of
Telecom Italia savings shares according to assignment ratios
reflecting, with reference to the actual number of shares to be
redistributed, the "natural" exchange ratio specified above of 7
Olivetti ordinary or savings shares for every Telecom Italia ordinary
or savings share. In the redistribution only the Telecom Italia
shares held by persons other than Olivetti and Telecom Italia itself
will be exchanged with shares of the Company Resulting from the
Merger. The number of shares of the Company to be Absorbed held by
minority shareholders and actually to be exchanged will therefore
vary, depending on the outcome of the tender offer that Olivetti may
make after the shareholders' meeting called to approve the merger and
before the latter's completion.
33
More precisely, where:
- No. OLI Euro 1 shares denotes the number of Euro 1 Olivetti shares
resulting after Conversions and withdrawals;
- No. OLI Euro 0.55 shares denotes the number of shares of the Company
Resulting from the Merger with a par value of Euro 0.55 each actually
to be redistributed following the operation referred to at point a);
- No. T.I. shares denotes the number of Telecom Italia shares held by
minority shareholders that must be exchanged;
(1) the holders of Olivetti ordinary shares will be assigned, for every
share held, a number of ordinary shares of the Company Resulting from the
Merger equal to:
No. OLI Euro 0.55 shares
------------------------------------
No. OLI Euro 1 shares + (No. T.I. shares x 7)
(2) the holders of Telecom Italia ordinary and savings shares will be
assigned, for every ordinary or savings share held, a number of ordinary
or savings shares of the Company Resulting from the Merger equal to:
seven times the number of shares assigned
to Olivetti shareholders for every share
held by the latter
Assuming the extreme case in which all the Conversions were carried out,
all the shares reserved for the Telecom Italia stock-option plans were
issued, no withdrawals occurred and none of the holders of Telecom Italia
ordinary and savings shares accepted the tender offer, the redistribution
would involve 21,684,904,141 shares of the Company Resulting from the
Merger with a par value of Euro 0.55 each and the Telecom Italia shares to
be exchanged would total (taking account of Olivetti's holding in the
capital of Telecom Italia and of the latter's holding of treasury shares
at the date of this Report) 4,459,575,170. In such case, applying the
formula above would give the following assignment ratios:
(i) 0.502620 new ordinary shares of the Company Resulting from the Merger
with a par value of Euro 0.55 each for every Olivetti ordinary share
with a par value
34
of Euro 1 held at the date at which the merger becomes effective and
for which the right of withdrawal has not been exercised;
(ii) 3.518341 new ordinary or savings shares of the Company Resulting from
the Merger for every Telecom Italia ordinary or savings share,
respectively, held at the date at which the merger becomes effective
by minority shareholders other than Olivetti other than Olivetti and
Telecom Italia itself.
In the light of the above, since the variables represented by Conversions,
Telecom Italia stock options exercised, withdrawals and acceptances of the
tender offer can only be quantified exactly at the time the merger is
implemented, it is evident that the assignment ratio for the purposes of
redistribution can be established precisely only at the time the merger
becomes effective.
At all events, at the end of the Operation the ratio between the shares
assigned to Olivetti shareholders and those assigned to Telecom Italia
shareholders will accurately reflect the "natural" exchange ratio (1/7),
as calculated above.
c) As already indicated, if at the time the merger is implemented the
Absorbing Company's share capital is less than the current figure of Euro
8,845,537,520 because the decreasing effect of withdrawals outweighs the
increasing effect of Conversions, the redistribution of the share capital
just described will be accompanied by the simultaneous issue of up to a
maximum of 11,103,237,962 new ordinary and saving shares of the Company
Resulting from the Merger with a par value of Euro 0.55 each for the
purpose of the share exchange, against the transfer to capital of the
portion of Telecom Italia's shareholders' equity belonging to minority
interests, with the possibility of an exchange deficit. These additional
shares will be assigned to all the shareholders of both the Absorbing
Company and the Company to be Absorbed in proportion to their respective
shareholdings obtained by applying the assignment ratios indicated at
Point b).
Thus, even if such an event occurs, at the end of the Operation the ratio
between the shares assigned to Olivetti shareholders and those assigned to
Telecom Italia shareholders will accurately reflect the "natural" exchange
ratio (1 to 7), as calculated above.
d) As part of the procedure for assigning the shares of the Company Resulting
from the Merger, a service will be provided to the minority shareholders
of both Olivetti and Telecom Italia, through authorized intermediaries, to
permit the rounding of the
35
number of newly-issued shares owned down or up to nearest whole number, at
market prices and at no cost in terms of expenses, stamp duty or
commissions.
In the event that the Olivetti shares held do not entitle the holder to
receive, in accordance with the assignment mechanism, even one
newly-issued share of the Company Resulting from the Merger at the end of
the Operation, maintenance of the position of shareholder will be ensured
by Olivetti International S.A. making available to such persons, free of
charge, one share of the Company Resulting from the Merger.
e) The newly-issued shares to be utilized for the share exchange will be
assigned to those entitled by the respective authorized intermediaries
participating in Monte Titoli S.p.A. at the date the Operation becomes
effective. It will be possible to exchange Olivetti and Telecom shares
which have not been dematerialized only by delivering them to an
authorized intermediary for dematerialized book-entry in the central
securities system.
Olivetti will promptly publish notices in at least three newspapers with a
national circulation, of which one must be a financial newspaper,
announcing the amount of the capital of the Company Resulting from the
Merger at the time thereof as a result of the quantification of the
variables involved in the Operation (Conversions, the exercise of Telecom
Italia stock options, withdrawals from Olivetti, acceptances of the tender
offer), the exact assignment ratio in the overall and final measure
resulting from the outcome of the supplementary assignment described at
Point c), if any, and the detailed instructions on how to carry out the
share exchange and to trade or obtain fractional rights as provided for at
Point d).
5. Date on which the Operation becomes effective and dividend entitlement
date
In accordance with Article 2504-bis, second paragraph, of the Civil Code (and
with standard market practice for companies with listed shares), the Operation
will become effective starting on the date of the last filing of the deed of
merger provided for in Article 2504 of the Civil Code, or on such later date as
may be specified in that deed.
The newly-issued shares of the Company Resulting from the Merger will have
regular dividend rights.
In accordance with the combined effect of Articles 2504-bis, third paragraph,
and 2501-bis, first paragraph, point 6, of the Civil Code, the transactions of
Telecom Italia will be recorded
36
in the accounts of the Company Resulting from the Merger starting from 1
January of the year in which the Operation becomes effective and thus,
according to the planned timetable, from 1 January 2003, for tax purposes as
well, pursuant to Article 123(7) of Presidential Decree 917/1986.
Consequently, on the date the Operation becomes effective, the Company
Resulting from the Merger will assume all Telecom Italia's assets, rights and
obligations, including, but not limited to, all its fixed and movable, tangible
and intangible assets, licences, authorizations, franchises, securities,
current account assets and liabilities, loans, equity investments, insurance
policies, labour contracts and every other contractual instrument.
6. Tax effects of the Operation on Olivetti and Telecom Italia
This section, after first indicating the main provisions of tax law governing
mergers, considers the most important tax aspects of the Operation.
6.1 Tax neutrality
Pursuant to Article 123 of Presidential Decree 917/1986 (the "Income Tax Code")
and Article 27(1) of Law 724/1994, mergers are transactions that do not give
rise to the realization or distribution of capital gains or losses in respect
of the assets of the company being absorbed.
6.2 Merger differences
The Operation will make it necessary to include specific items in order to
achieve accounting balance between the assets and liabilities sides following
the unification of the patrimonies of the companies involved. As mentioned
earlier, in fact, the merger will give rise to a cancellation deficit and it is
reasonable to expect that an exchange surplus will emerge.
The cancellation deficit, as mentioned in Subsection 1.1.4, will be allocated
to Telecom Italia's assets (In particular to its holding of TIM shares) and any
difference will be included under "goodwill".
Under Article 6(1) of Legislative Decree 358/1997 such revaluations may also be
recognized for tax purposes if the 19% tax in lieu of income tax is paid.
Pursuant to paragraph 2 of the same article, revaluations in connection with
merger deficits may be recognized for tax purposes, even in the absence of
payment of the tax in lieu of income tax, if and to the extent that the equity
investments cancelled led to the previous owners being taxed on the resulting
capital gains, net of the related capital losses and writedowns.
6.3 Reserves with tax deferred
37
The reserves with tax deferred shown in the latest financial statements of the
company being absorbed will be included in the income of the absorbing company
if and to the extent that they are not reconstituted in its accounts.
This rule does not apply to reserves that are taxable only if they are
distributed (e.9. revaluation reserves), which have to be reconstituted in the
balance sheet of the absorbing company only if there is a merger surplus or an
increase in capital that exceeds the total capital of the companies
participating in the merger, net of the parts of the capital of each company
they already held. In this case the reserves will be included in the income of
the absorbing company in the event of a subsequent distribution of the surplus
or reduction in capital because it is excessive.
The reserves already allocated to capital by the company being absorbed are
considered to be transferred to the capital of the absorbing company and form
part of its income in the event of a reduction in capital because it is
excessive.
6.4 Registration tax
Applicable in the fixed amount of Euro 129.11.
6.5 Effects on the shareholders of the company being absorbed
The exchange of the shares held by the shareholders of the company being
absorbed is immaterial for tax purposes since it does not involve them in the
realization of their shares.
For tax purposes the cost of the cancelled shares is automatically transferred
to the new shares received in the exchange.
7. Forecasts of the composition of major shareholders and of the control
structure of the Company Resulting from the Merger
Since the Operation will
lead to the entry of Telecom Italia's shareholders into the capital of the
Company Resulting from the Merger and the extinction of Telecom Italia, the
forecasts of the composition of major shareholders at the end of the Operation
refer to the Company Resulting from the Merger.
On 15 April 2003 the shareholders of Olivetti listed in the table below were
found, on the basis of the shareholders' register and the notifications of
major shareholdings pursuant to Article 120 of Legislative Decree 58/1998, to
possess more than 2% of the company's capital:
Number of ordinary % of ordinary
Shareholders shares held share capital
------------ ------------------ --------------
Olimpia S.p.A. 2,524,127,813 28.54%
Caisse des Depots et Consignations* 389,200,000 4.40%
Assicurazioni Generali S.p.A.** 334,842,996 3.79%
Olivetti International S.A.*** 211,931,328 2.40%
Mediobanca S.p.A. 200,000,000 2.26%
* Investment held via CDC lxis Capital Market ** Investment held through
subsidiaries
*** Subsidiary of Olivetti S.p.A. Under Article 2359-bis of the Civil Code, the
voting rights of the shares held by Olivetti International S.A. may not be
exercised.
The following table shows the foreseeable composition of shareholders with
holdings of more than 2% in the Company Resulting from the Merger on the
assumption: (i) that there are no Conversions (apart from those deriving from
applications received by 31 March 2003, which are not yet reflected in
Olivetti's share capital filed with the Company Register but are considered in
this analysis) and that no Telecom Italia stock options have been exercised;
(ii) that 25% of the shareholders other than Olimpia S.p.A. withdraw at a price
taken to be equal to Euro 1 (which is in line with the average of the official
prices recorded from 26 November 2002 up to today), giving a total outlay of
about Euro 1,527 million; and (iii) that the tender offer is made at the
average price between the minimum and maximum prices for the Telecom Italia
ordinary and savings shares (i.e. Euro 7.7 per ordinary share and Euro 5.175
per savings share), giving a total outlay of about Euro 7,473 million, so that
the tender offer covers about 14.6% of the ordinary and savings shares in the
event of full acceptance.
Number of ordinary % of ordinary
Shareholders shares held share capital
------------ ------------------ --------------
Olimpia S.p.A. 1,336,092,044 13.65%
Caisse des DepBts et Consignations* 206,014,537 2.10%
* Investment held via CDC Ixis Capital Market
39
It is foreseeable that no single shareholder will have control of the Company
Resulting from the Merger, which, as mentioned earlier, will be fully
contestable.
8. Effects of the Operation on shareholders' aqreements falling within the
scope of Article 122 of Leqislative Decree 58/1998
The parties to the shareholders' agreements falling within the scope of Article
122 of Legislative Decree 58/1998 that concern the companies participating in
the merger have not sent any notification concerning the possible effects of
the merger on such agreements.
9. Amendments to the bylaws
As mentioned earlier, it is intended the Company Resulting from the Merger
adopt new bylaws, corresponding substantially to those of the current Telecom
Italia bylaws.
In particular, following the Operation the Company Resulting from the Merger
will change its name to "Telecom Italia S.p.A.", with the consequent amendment
of Article 1 of the bylaws and of the other articles in which the name of the
company appears. It has been clarified that the Company Resulting from the
Merger can continue to use its own corporate marks and those of Telecom Italia.
Article 2, regarding the registered office of the Company Resulting from the
Merger, will be amended to make the registered office that of Telecom Italia at
2 Piazza Affari, Milan.
As specified earlier, upon completion of the Operation the Company Resulting
from the Merger will adopt the corporate purpose of Telecom Italia, with the
integral substitution of Article 3 of Olivetti's current bylaws.
Article 5 of the bylaws of the Company Resulting from the Merger, concerning
the share capital, will undergo a series of amendments to take account, in
particular, of the redistribution and the assignment of the shares issued for
the purpose of the exchange, as set out in Section 4, and of the adjustments
necessary, in the light of the new amount of the share capital following the
merger, for the conversion of the convertible bonds and the exercise of the
warrants issued by the Absorbing Company and for the stock-option plans
approved by the Absorbing Company and the Company to be Absorbed. In more
detail, Article 5 of the bylaws will be amended as follows:
a) a new maximum amount of Euro492,726.30 will be established for the
variable capital increase for the exercise of the options already assigned
by the Absorbing Company under the "Piano triennale di Stock Option
2002-2004" stock-option plan, increase to be carried out by 15 December
2004, with an update of up to a maximum of 895,866 shares of the Company
Resulting from the Merger with a par value of Euro 0.55 each, which will
be offered to the holders of the above- mentioned options on the basis of
the exchange ratio for the shareholders of the
40
Absorbing Company in the context of the merger, at the price of Euro 3.308
per option held;
b) a new maximum amount of Euro 10,743,649.40 will be established for the
variable increase in capital for the exercise of the options already
assigned by the Absorbing Company under the "Piano triennale Stock Option
febbraio 2002-December 2004" stock-option plan, increase to be carried out
by 31 December 2004, with an update of up to a maximum of 19,533,908
shares of the Company Resulting from the Merger with a par value of Euro
0.55 to be offered to the holders of the above- mentioned options on the
basis of the exchange ratio for the shareholders of the Absorbing Company
in the context of the merger, at a price of Euro 2.515 per option held;
c) a new maximum amount of Euro 103,622,863.85 will be established for the
increase in capital for the exercise of the "Warrant azioni ordinarie
Olivetti ex Tecnost 1999-2004" warrants, increase to be carried out by 20
June 2004, with an update of up to a maximum of 188,405,207 shares of the
Company Resulting from the Merger with a par value of Euro 0.55 to be
offered to the holders of the above- mentioned warrants on the basis of
the exchange ratio for the shareholders of the Absorbing Company in the
context of the merger, at a price already fixed by the governing bodies of
the Absorbing Company and included in the warrant rules;
d) a new maximum amount of Euro 180,568,488.1 0 will be established for the
variable capital increase for the conversion of the "Olivetti 13% 2001
-2004 convertibile con premio al rimborso" convertible bonds already
issued by the Absorbing Company, increase to be carried out by 1 January
2004, with an update of up to a maximum of 328,306,342 shares of the
Company Resulting from the Merger with a par value of Euro 0.55 each,
reserved for the holders of the above-mentioned bonds at a conversion
ratio equal to the exchange ratio for the shareholders of the Absorbing
Company in the context of the merger.
e) a new maximum amount of Euro 892,681,820.80 will be established for the
variable capital increase for the conversion of the "Olivetti 13%
2001-2010 convertibile con premio al rimborso" convertible bonds already
issued by the Absorbing Company, increase to be carried out by 1 January
2010, with an update of up to a maximum of 1,623,057,856 shares of the
Company Resulting from the Merger with a par value of Euro0.55 each,
reserved for the holders of the above-mentioned bonds at a conversion
ratio equal to the exchange ratio for the shareholders of the Absorbing
Company in the context of the merger.
As mentioned earlier, the Company Resulting from the Merger will also have to
take over Telecom Italia's stock-option plans and will therefore have to honour
the stock options already assigned thereunder. To this end, Olivetti will
approve corresponding increases in capital permitting the issue in relation to
such stock options of a number of shares updated
41
in accordance with the exchange ratio and the assignment ratio provided for in
the merger plan, while the exercise price will remain unchanged.
In other words, the owner of Telecom Italia stock options will maintain the
right to subscribe, at the price already fixed, not for the original number of
Telecom Italia shares but the larger number of shares of the Company Resulting
from the Merger established on the basis of the "natural" exchange ratio of 1
to 7.
Naturally, the exact quantification of the new quantities that can be
subscribed will be possible only when, at the time the deed of merger is
signed, the assignment ratio is established, as provided for in Section 4. At
all events, the foregoing calculations will accurately reflect, with respect to
the number of shares currently obtainable, the "natural" exchange ratio of 1 to
7.
More precisely, Olivetti will approve an increase in capital for up to a total
maximum amount of Euro 261,956,575.10 by means of the issue of up to a maximum
of 476,284,682 shares with a par value of Euro 0.55 each, divided into the
following variable tranches:
a) a tranche of up to a maximum of Euro 21,969,104.30 for the exercise of the
options already assigned by Telecom Italia under the "Piano di Stock
Option 1999" stock-option plan, to be implemented by 31 January 2005 by
the issue of up to a maximum of 39,943,826 shares of the Company Resulting
from the Merger with a par value of Euro 0.55 each, which will be offered
to the holders of the above-mentioned options on the basis of the exchange
ratio for Telecom Italia shareholders in the context of the merger, at a
price of Euro 6.79 per option held;
b) a tranche of up to a maximum of Euro 53,421,890.50 for the exercise of the
options already assigned by Telecom Italia under the "Piano di Stock
Option 2000" stock-option plan, to be implemented by 30 July 2008 by the
issue of up to a maximum of 97,130,710 shares of the Company Resulting
from the Merger with a par value of Euro 0.55 each, which will be offered
to the holders of the above-mentioned options on the basis of the exchange
ratio for Telecom Italia shareholders in the context of the merger, at a
price of Euro 13.815 per option held;
c) a tranche of up to a maximum of Euro 84,158,927.60 for the exercise of the
options already assigned by Telecom Italia under the "Piano di Stock
Option 2001" stock-option plan, to be implemented by 30 April 2008 by the
issue of up to a maximum of 153,016,232 shares with a par value of Euro
0.55 each, which will be offered to the holders of the above-mentioned
options on the basis of the exchange ratio for Telecom Italia shareholders
in the context of the merger, at a price of Euro 10.488 per option held;
d) a tranche of up to a maximum of Euro 30,600,889.00 for the exercise of the
options already assigned by Telecom Italia under the "Piano di Stock
Option Top 2002" stock- option plan, to be implemented by 28 February 2010
by the issue of up to a maximum
42
of 55,637,980 shares of the Company Resulting from the Merger with a par
value of Euro 0.55 each, which will be offered to the holders of the
above-mentioned options on the basis of the exchange ratio for Telecom
Italia shareholders in the context of the merger, at a price of Euro 9.203
per option held;
e) a tranche of up to a maximum of Euro 71,805,763.70 for the exercise of the
options already assigned by Telecom Italia in three distinct lots under
the "Piano di Stock Option 2002" stock-option plan, to be implemented for
the three lots by 31 March 2008, 31 March 2009 and 31 March 2010
respectively by the issue of up to a maximum total of 130,555,934 shares
of the Company Resulting from the Merger with a par value of Euro 0.55
each, which will be offered to the holders of the above-mentioned options
on the basis of the exchange ratio for Telecom Italia shareholders in the
context of the merger, at a price for the three lots of Euro 9.665, Euro
7.952 and Euro 7.721 respectively per option held.
Article 6 will be reformulated and lay down the rules for the savings shares
that will be issued by the Company Resulting from the Merger. These shares will
entitle their holders to analogous preferential rights to those currently
enjoyed by the holders of Telecom Italia savings shares. Provision will also be
made, as announced, for the possibility for the preferred dividend established
in the bylaws to be paid by means of the distribution of reserves (in
accordance with the resolution that will be proposed to the Telecom Italia
shareholders' meeting called to approve the merger plan).
As regards corporate governance, the bylaws of the Company Resulting from the
Merger will provide for the appointment of a Board of Directors with not less
than 7 and not more than 23 members, appointed by means of a slate mechanism
taken over in large part from Telecom Italia's current bylaws.
Lastly, it needs to be underscored that Article of Telecom Italia's bylaws
contains clauses that give the Minister for the Economy and Finance some
special powers, to be exercised in agreement with the Minister for Productive
Activities, in application of Article 2 of Law 474/1994, it should be noted
that such powers include the right to veto the adoption of merger resolutions
and amendments to the bylaws that would suppress or alter such powers, which
were introduced into Telecom Italia's bylaws under a Prime Ministerial Decree
of 21 March 1997 in the light of the sector of the company's operations
(telecommunications) and with a view to its privatization.
At the end of the meeting of its Board of Directors on 11 March 2003, Telecom
Italia requested the Minister for the Economy and Finance to indicate whether
he intended to exercise the powers in question.
The Minister for the Economy and Finance subsequently informed Telecom Italia
that he did not consider the conditions existed for the exercise of the power
of veto with respect to the adoption by Telecom Italia's shareholders' meeting
of the merger resolution. By contrast, as regards the question of the presence
in the bylaws of the clauses giving the
43
special powers, the Minister for the Economy and Finance indicated that he
considered it necessary to maintain the power of expressing a favourable
opinion on the acquisition of major shareholdings in the company's capital and
the power of veto as set out in the current bylaws of Telecom Italia.
The Minister for the Economy and Finance also stated that he had reached
agreement with the Minister for Productive Activities on the indications
regarding these questions. With this premise, and pending the formalization of
the measure best suited to the foregoing indications and any opinion the
competent European Union authorities might express on the matter, the Minister
for the Economy and Finance requested that the bylaws to be submitted to the
shareholders' meetings of the companies participating in the merger conform
with the indications set out above.
The amendments to the bylaws described above will come into force on the date
that the Operation becomes effective, pursuant to Article 2504-bis of the Civil
Code and the merger plan.
The amended text of the bylaws of the Company Resulting from the Merger,
including the above-mentioned special powers, to be submitted to the
shareholders' meetings of Olivetti
48
and Telecom Italia for their approval is annexed to this Report.
10. Considerations of the Board of Directors concerning the potential recourse
to the right of withdrawal At the end of the Operation the Company Resulting
from the Merger will adopt the corporate purpose of Telecom Italia. This
innovation is necessary in order to reflect the major change in the business of
Olivetti, which will be transformed from a holding company into an operational
company with numerous administrative authorizations and franchises and
operations in regulated markets, so that its corporate purpose must include the
supply of the services for which such authorizations and franchises have been
granted.
In particular, the adoption of the new corporate purpose for the Company
Resulting from the Merger serves to permit it to maintain the licences
currently held by Telecom Italia for the supply of telecommunications services
to the public. In fact Telecom Italia's activity consists essentially in the
installation and operation of telecommunications equipment and in the supply of
telecommunications services on the basis of individual licences and general
authorizations issued under Presidential Decree 318/1997. Whereas the corporate
purpose of Telecom Italia laid down in its bylaws provides expressly for all
the activities referred to above, the corporate purpose of Olivetti only
mentions "production and marketing in the field . . . of telecommunications"
and "services" as a merely secondary activity (without further specification).
44
The change in the corporate purpose is also intended to allow the Company
Resulting from the Merger to engage in other activities covered by Telecom
Italia's bylaws, such as advertising and publishing, which are not envisaged in
Olivetti's current bylaws.
The adoption of Telecom Italia's corporate purpose means that the bylaws of the
Company Resulting from the Merger will contain the requirement that holding
equity investments should not be its principal activity, as it was for
Olivetti. This formal change entails a substantial change in the risk profile
associated with the investment since, as a consequence of the Operation, the
Company Resulting from the Merger will no longer have the characteristics
established by the Minister of the Treasury in implementing Article 113 of
Legislative Decree 38W 993 to define the concept of "engaging as the principal
activity, without dealings with the public, in the acquisition of equity
interests".
Under Article 2437 of the Civil Code, the Olivetti shareholders who are
contrary to the merger resolution and those who are absent may exercise the
right of withdrawal.
The right of withdrawal may be exercised by shareholders entitled to do so by
sending a registered letter that must reach Olivetti within 3 days of the date
of the shareholders' meeting that approved the merger if sent by shareholders
who were present at the meeting and contrary to the resolution or within 15
days of the filing of the resolution with the Company Register if sent by
shareholders who were not present at the meeting. The date on which letters are
received by Olivetti will count and not the date on which they were sent; it is
therefore up to the shareholders contrary to the resolution to ensure
compliance with the above-mentioned time limit since Olivetti takes no
responsibility for transmission or delivery delays due to causes beyond its
control.
For the purposes of legitimizing the exercise of the right of withdrawal,
shareholders must also send Olivetti an appropriate certification, issued by an
authorized intermediary pursuant to the provisions governing dematerialized
financial instruments deposited with a central securities depository, attesting
in particular the ownership of the company's shares from the date of the merger
resolution. As provided for by the regulations in force, when certifications
are issued the shares will be blocked by the intermediary in question until
they are redeemed.
Olivetti will inform shareholders in good time, as laid down by law, regarding
the procedure and time limits for exercising the right of withdrawal.
The amount due to Olivetti shareholders who exercise the right of withdrawal
will be based on the price per share calculated as the mean of the official
prices of the six months preceding the date of the merger resolution. For the
purposes of the redemption, consideration will be given to the daily quotations
of the Olivetti shares in the six calendar months preceding the date of the
adoption of the merger resolution.
45
The Olivetti shareholders who exercise their right of withdrawal will be
entitled to have their shares redeemed from the date on which the Operation
becomes effective, with the consequent right to be paid interest at the legal
rate from such date.
Accordingly, at the time the Operation becomes effective for civil law purposes
and simultaneously with the exchange of shares for the Olivetti shareholders
who did not exercise the right of withdrawal, Olivetti will redeem and cancel
the shares of the shareholders who exercised the right of withdrawal, with the
related payment expected to be made at the latest within 90 days of the date on
which the Operation becomes effective.
The sums due to the shareholders who exercise the right of withdrawal will be
taxable profit for any part exceeding the subscription or purchase price paid
for the shares Olivetti cancels (Article 44(3) of the "Income Tax Code").
In the event that shareholders who are natural persons but not entrepreneurs or
qualified shareholders are assigned reserves other than capital reserves, even
if they were previously classified as share capital, the intermediary
participating in the Monte Titoli S.p.A. central securities depository (or
foreign central securities depositories participating therein) is required to
apply the 12.50% tax in lieu of income tax pursuant to Article 27-ter,
paragraph 1, of Presidential Decree 600/1973.
If, instead, the above-mentioned reserves were used to redeem non-residents,
the tax in lieu of income would be 27%, without prejudice to the rate reduction
provided for in double taxation agreements.
In the event that shareholders who are natural persons are qualified
shareholders or, not being qualified shareholders, elect not to be subject to
the tax in lieu of income referred to above, the taxable profit must be
indicated in their tax returns for an amount equal to the difference between
that redeemed and the subscription or purchase price for the shares Olivetti
cancels and will be subject to personal income tax (Irpef) or separate
taxation. At all events, for the part of the taxable profit determined in this
way corresponding to the reserves, other than capital reserves, attributable to
shareholders in relation to the shares cancelled, a tax credit on the dividends
will be recognized up to the amount of the taxes referred to in Articles
105(l)(a) and 105(1)(6) of the "Income Tax Code".
Milan, 15 April 2003
On behalf of the Board of Directors of Olivetti S.p.A.
(in original signed by Olivetti's Legal Representative)
46
PROPOSED RESOLUTION TO THE SHAREHOLDERS' MEETING
The meeting of ordinary shareholders of Olivetti S.p.A. (the Absorbing
Company),
o having seen the plan for the merger of Telecom Italia S.p.A. into Olivetti
S.p.A., entered respectively in the Turin Company Register and the Milan
Company Register on April 22,2003 and on April 18, 2003 (the Merger Plan);
o having examined the Directors' report on the merger operation (the Merger);
o having taken note of the balance sheets of the companies participating in
the Merger, as shown in their draft financial statements for the year
ended 31 December 2002;
o having taken note of the reports on the congruousness of the merger
exchange ratio prepared by the auditing firms Deloitte & Touche Italia
S.p.A. for Olivetti and Reconta Ernst & Young S.p.A. for Telecom Italia;
o having taken note of the timely filing of the documentation required under
the applicable law;
o having taken note of the Board of Auditors' attestation that the present
share capital is fully paid up;
resolves
1. to approve the Merger Plan and consequently to proceed - with the
accounting and tax effects starting on 1 January of the year in which the
Merger becomes effective in respect of third parties, as provided for in
the Merger Plan - with the merger of Telecom Italia S.p.A. into Olivetti
S.p.A. on the basis of the following exchange ratio:
o 7 Olivetti ordinary shares with a par value of Euro 1 (one) for every
Telecom Italia ordinary share with a par value of Euro 0.55 each;
o 7 Olivetti savings shares with a par value of Euro 1 (one) for every
Telecom Italia savings share
with a par value of Euro 0.55 each; with the effectiveness of the whole
operation subject (i) to the adoption by the shareholders' meeting of
Telecom Italia of a like resolution and (ii) to the admission to listing
on the MTA electronic share market operated by Borsa Italiana S.p.A. of
the savings shares to be issued;
2. to withdraw and cancel the Olivetti shares with a par value of Euro 1 each
(net of those for which the right of withdrawal has been exercised) and
simultaneously to issue new ordinary and savings shares with a par value
of Euro 0.55 each and regular dividend entitlement, in the number
resulting from their assignment to Olivetti shareholders and Telecom
Italia shareholders other than Olivetti in accordance with the following
criteria:
A. satisfaction of the exchange ratio between the economic values
underlying the Olivetti and Telecom Italia shares by redistributing
Olivetti's capital at the time of the implementation of the Merger,
net of the Olivetti shares with a par value of Euro 1 (one) for which
the right of withdrawal has been exercised, subsequent to the change
in the par value of the shares of the Absorbing Company from Euro 1
to Euro 0.55, and thus by applying the following assignment ratios:
o for every Olivetti share (with a par value of Euro 1) withdrawn
and cancelled, assignment of "x" newly-issued ordinary shares of
the Absorbing Company (with a par value of Euro 0.55 each);
o for every Telecom Italia ordinary share (with a par value of
Euro 0.55) withdrawn and cancelled, assignment of "7x"
newly-issued ordinary shares of the Absorbing Company (with a
par value of Euro 0.55 each);
o for every Telecom Italia savings share (with a par value of Euro
0.55) withdrawn and cancelled, assignment of "7x" newly-issued
savings shares of the Absorbing Company (with a par value of
Euro 0.55 each);
where the number "x" is the ratio between
X the total number of shares of the Absorbing Company with a par
value of Euro 0.55 each to be redistributed and
X the sum of (i) the total number of Olivetti shares with a par
value of Euro 1 outstanding (for which the right of withdrawal
has not been exercised) at the time of the implementation of the
Merger and (ii) 7 times the total number of Telecom Italia
shares to be exchanged at the time of the implementation of the
Merger;
B. assignment, if necessary, to all the holders of the Absorbing
Company's ordinary and savings shares, in proportion to their
respective holdings following the redistribution and therefore on the
basis of the above-mentioned exchange ratio, of up to a maximum of
11,103,237,961 new shares, of the same class as the shares already
assigned under the redistribution, with a par value of Euro 0.55 each
(and thus up to a total maximum amount of Euro6,106,780,879.10) until
the share capital of the Absorbing Company reaches a total of Euro
8,845,537,520.05.
A service will be provided to shareholders to handle any fractions of
shares, without prejudice to any rounding deriving from the aforesaid
assignment operations;
3. to recalculate the remaining amount of the increase in capital already
approved by the Extraordinary Shareholder's Meeting of 4 October 2000, for
the part set aside for the exercise of the "Warrant Azioni Olivetti ex
Tecnost 1999-2004" warrants, up to a maximum amount of Euro 56,992,575.20,
by means of the issue of up to a maximum of 103,622,864 ordinary shares
with a par value of Euro 0.55 each.
A service will be provided to holders of the aforementioned warrants who
exercise their subscription rights to handle any fractions of shares,
without prejudice to any rounding deriving from the exercise of the
warrants;
4. to increase the share capital as of the date on which the Merger becomes
effective - by reiterating, updating and, where necessary, renewing
earlier resolutions to increase the share capital adopted by Olivetti's
Shareholders' Meeting and Board of Directors, insofar as they are still
effective - by the following divisible amounts to take account of the
assignment ratio for Olivetti shareholders in the context of the Merger:
(i) up to a maximum of Euro 492,726.30, by means of the issue of up to a
maximum of 895,866 ordinary shares with a par value of Euro 0.55 each
for the exercise of the "Piano triennale Stock Option 2002-2004"
stock options, increase to be implemented by 15 December 2004;
(ii) up to a maximum of Euro 10,743,649.40, by means of the issue of up to
a maximum of 19,533,908 ordinary shares with a par value of Euro 0.55
each for the exercise of the "Piano triennale Stock Option febbraio
2002-dicembre 2004" stock options, increase to be implemented by 31
December 2004;
(iii)up to a maximum of Euro 180,568,488.10, by means of the issue of up
to a maximum of 328,306,342 ordinary shares with a par value of Euro
0.55 each to be reserved irrevocably and exclusively for the
conversion of the "Olivetti 15% 2001- 2004 convertibile con premio al
rimborso" convertible bonds, on the basis of a conversion ratio equal
to the assignment ratio established for the shareholders of Olivetti
S.p.A. in the context of the merger of Telecom Italia S.p.A. into
Olivetti S.p.A.;
(iv) up to a maximum of Euro 892,681,820.80, by means of the issue of up
to a maximum of 1,623,057,856 ordinary shares with a par value of
Euro 0.55 each to be reserved irrevocably and exclusively for the
conversion of the "Olivetti 1,5% 2001-20010 convertibile con premio
al rimborso" convertible bonds, on the basis of a conversion ratio
equal to the assignment ratio established for the shareholders of
Olivetti S.p.A. in the context of the merger of Telecom Italia S.p.A.
into Olivetti S.p.A.
A service will be provided to holders of the aforementioned securities who
exercise their subscription/conversion rights to handle any fractions of
shares, without prejudice to any rounding deriving from the exercise of
the stock options and/or the conversion of the convertible bonds;
48
5. to increase the share capital as of the date on which the Merger becomes
effective - for the outstanding stock option plans of Telecom Italia
S.p.A., insofar as they are still effective, with account taken of the
assignment ratio for Telecom Italia ordinary shareholders in the context
of the Merger - by up to a maximum of Euro 261,956,575.1 0, by means of
the issue of up to a maximum of 476,284,682 ordinary shares with a par
value of Euro 0.55 each, divided into the following divisible tranches:
(i) a tranche of up to a maximum of Euro 21,969,104.30 for the exercise
of the "Piano di Stock Option 1999" stock options, increase to be
implemented by 31 January 2005 by means of the issue of up to a
maximum of 39,943,826 ordinary shares with a par value of Euro 0.55
each, to be subscribed for at a total price of Euro 6.79 per option
held;
(ii) a tranche of up to a maximum of Euro 53,421,890.50 for the exercise
of the "Piano di Stock Option 2000" stock options, increase to be
implemented by 30 July 2008 by means of the issue of up to a maximum
of 97,130,710 ordinary shares with a par value of Euro 0.55 each, to
be subscribed for at a total price of Euro 13.81 5 per option held;
(iii)a tranche of up to a maximum of Euro 84,158,927.60 for the exercise
of the "Piano di Stock Option 2001" stock options, increase to be
implemented by 30 April 2008 by means of the issue of up to a maximum
of 153,016,232 ordinary shares with a par value of Euro 0.55 each, to
be subscribed for at a total price of Euro 10.488 per option held;
(iv) a tranche of up to a maximum of Euro 30,600,889.00 for the exercise
of the "Piano di Stock Option Top 2002" stock options, increase to be
implemented by 28 February 2010 by means of the issue of up to a
maximum of 55,637,980 ordinary shares with a par value of Euro 0.55
each, to be subscribed for at a total price of Euro 9.203 per option
held;
(v) a tranche of up to a maximum of Euro 71,805,763.70 for the exercise
of the "Piano di Stock Option 2002" stock options, increase to be
implemented by 31 March 2008 for the first lot, by 31 March 2009 for
the second lot and by 31 March 2010 for the third lot by means of the
issue of up to a maximum of 130,555,934 ordinary shares with a par
value of Euro 0.55 each, to be subscribed for at a total price for
the different options of respectively Euro 9.665, Euro 7.952 and Euro
7.721 per option held.
A service will be provided to holders of the aforementioned options who
exercise their subscription rights to handle any fractions of shares, without
prejudice to any rounding deriving from the exercise of the stock options.
6. to adopt as of the date on which the Merger becomes effective the bylaws
annexed to the Merger Plan (the Bylaws of the Absorbing Company), to be
understood as referred to here in their entirety, in the version
consistent with the indications of the competent governmental authorities
regarding the special powers of the Minister for the Economy and Finance
under Article 2(1) of Decree Law 332/1994, ratified with amendments by Law
474/1994;
7. to grant severally to the Legal Representatives the powers needed:
(a) to complete all the formalities required for the resolutions adopted
to obtain all the necessary authorizations, with the right to approve
and introduce into such resolutions, the Merger Plan and the Bylaws
of the Absorbing Company annexed thereto any amendments, additions or
deletions that may be requested or suggested by administrative
authorities and/or following the exercise of the special powers
referred to in Article 5 of the bylaws of Telecom Italia S.p.A. or on
the occasion of filings with the Company Register;
(b) to draw up and sign, inter alia by having ad hoc recourse to
attorneys or agents, in conformity with the resolution of point 1,
the public merger instrument and every other assessment, supplement
and amendment that should prove necessary or desirable, defining
every agreement, condition, clause, time limit and procedure thereof
in conformity with and in implementation of the Merger Plan; 49
(c) to complete and amend at the signing of the merger instrument the
numbers contained in Article 5 of the Bylaws of the Absorbing Company
on the basis of the final assignment ratios obtained in accordance
with the criteria set out in point 2;
(d) to make, as and when necessary, the changes to Article 5 of the
Bylaws of the Absorbing Company consequent on the implementation of
the increases in capital referred to in points 2, 3 and 4, and to
that end to complete all the formalities and publish all the notices
required by law;
(e) to establish the timetable and procedures for carrying out the
redistribution and assignment operations referred to in point 2;
(f) to do - inter alia by having ad hoc recourse to attorneys or agents -
whatever else may be necessary for and conducive to the complete
implementation of the foregoing resolutions, authorizing entries,
transcriptions, annotations, amendments and corrections in public
registers and every other competent seat.
50
Annex II.
Report drawn up by the directors of Telecom Italia S.p.A.
pursuant to Article 2501--quater of the Civil Code
BOARD OF DIRECTORS OF TELECOM ITALIA S.p.A.
MEETING OF 15 APRIL 2003
REPORT ON THE PLAN FOR THE MERGER OF
TELECOM ITALIA S.p.A. INTO OLIVETTI S.p.A.
Milan, 15 April 2003
The following is an English translation of the official version in Italian
language. In case of conflict, the Italian language version will prevail.
Except as provided below, any offer to purchase or sell securities described
herein is not being made, directly or indirectly, in or into, or by the use of
the mails of, or by any means or instrumentality (including, without limitation
by mail, telephonically or electronically by way of internet or otherwise) of
interstate or foreign commerce, or any facility of any securities exchange, of
the United States of America and any such offer will not be capable of
acceptance by any such use, means, instrumentality or facility.
The information contained herein does not constitute an offer of
securities for sale in the United States or offer to acquire securities in the
United States.
The Olivetti securities referred to herein have not been, and are not
intended to be, registered under the U.S. Securities Act of 1933 (the
"Securities Act") and may not be offered or sold, directly or indirectly, into
the United States except pursuant to an applicable exemption. The Olivetti
ordinary shares and Olivetti savings shares are intended to be made available
within the United States in connection with the merger pursuant to an exemption
from the registration requirements of the Securities Act.
The proposed cash tender offer for a portion of the Telecom Italia
ordinary shares described herein is intended to be made available in or into
the United States pursuant to an exemption from the tender offer rules
available pursuant to the Securities Exchange act of 1934.
The proposed cash tender offer for a portion of the Telecom Italia savings
shares described herein is not being made and will not be made, directly or
indirectly, in or into the United States.
***
The merger described herein relates to the securities of two foreign
companies. The merger in which Telecom Italia ordinary shares will be converted
into Olivetti ordinary shares is subject to disclosure and procedural
requirements of a foreign country that are different from those of the United
States. Financial statements included in the document, if any, will be prepared
in accordance with foreign accounting standards that may not be comparable to
the financial statements of United States companies.
It may be difficult for you to enforce your rights and any claim you may
have arising under the federal securities laws, since Olivetti and Telecom
Italia are located in Italy, and some or all of their officers and directors
may be residents of Italy or other foreign countries. You may not be able to
sue a foreign company or its officers or directors in a foreign court for
violations of the U.S. securities laws. It may be difficult to compel a foreign
company and its affiliates to subject themselves to a U.S. court's judgment.
You should be aware that Olivetti may purchase securities of Telecom
Italia otherwise than under the merger offer, such as in open market or
privately negotiated purchases.
Contents
1. Description of the Operation and the reasons therefor, with particular
regard to the operating objectives of the companies participating in the
merger and the programmes formulated for achieving them................. 1
1.1 Description of the persons involved................................. 1
1.2 Description of the activities of Telecom Italia..................... 2
1.3 Description of Olivetti's activities................................ 4
1.4 Main legal aspects of the Operation................................. 5
1.5 Reasons for the Operation........................................... 9
1.6 Operating objectives and programmes to achieve them................. 11
2. The values attributed to the Companies Participating in the Merger for
the purpose of determining the Exchange Ratio........................... 12
2.1 Objective of the valuation.......................................... 12
2.2 Methods adopted and results obtained................................ 14
3. Conclusions............................................................. 28
3.1 Determination of the Exchange Ratio................................. 28
3.2 Exchange Ratio...................................................... 28
4. Procedure for assigning the shares of the Company Resulting from the
Merger and the entitlement date of the shares........................... 29
4.2 Date on which the Merger becomes effective.......................... 34
5. Date on which transactions are to be recorded in the Absorbing
Company's accounts...................................................... 34
6. Tax effects of the Operation on the Absorbing Company's accounts........ 35
6.1. Direct taxes: regime of the Companies Participating in the Merger... 35
6.2. Tax regime for the shareholders..................................... 36
6.3. Indirect tax regime................................................. 36
7. Forecasts of the composition of the shareholders of the Company
Resulting from the Merger............................................... 36
7.1 Telecom Italia shareholders......................................... 36
7.2 Olivetti shareholders............................................... 36
7.3 Effects of the Merger on the composition of shareholders............ 37
8. Effects of the merger on shareholders agreements (Article 122 of
Legislative Decree 58/1998) regarding the shares of the Companies
Participating in the Merger............................................. 38
9. Changes to bylaws....................................................... 38
9.1 Olivetti's bylaws and changes deriving from the Merger.............. 38
10. Evaluation of recourse to the right of withdrawal (Article 131 of
Consolidated Law and Article 2437 of the Civil Code) for Telecom
Italia shareholders..................................................... 42
10.1 Evaluation on the basis of Article 131 of the Consolidated Law...... 42
10.2 Evaluation on the basis of Article 2437 of the Civil Code........... 42
REPORT OF THE BOARD OF DIRECTORS OF TELECOM ITALIA S.p.A. ON THE PLAN FOR THE
MERGER OF TELECOM ITALIA S.p.A. INTO OLIVETTI S.p.A. PURSUANT TO ARTICLE
2501-QUATER OF THE CIVIL CODE AND ARTICLE 70(2) OF CONSOB REGULATION 11971/1999
ON ISSUERS, AS AMENDED, IMPLEMENTING LEGISLATIVE DECREE 58/1998 (THE
"CONSOLIDATED LAW").
Dear Shareholders,
In accordance with Article 2501 quater of the Civil Code and Article 70 of
Consob Regulation 11971/1999 (the "Regulation"), we submit for your
consideration and approval the plan (the "Merger Plan") for the merger (the
"Merger" or the "Operation") of Telecom Italia S.p.A. ("Telecom Italia" or the
"Company to be Absorbed") into Olivetti S.p.A. ("Olivetti" or the "Absorbing
Company", or -- once the Merger becomes effective -- the "Company Resulting
from the Merger"). The purpose of this report is to describe and justify the
Merger Plan from the legal and economic standpoints, with particular regard to
the exchange ratio.
1. Description of the Operation and the reasons therefor, with particular
regard to the operating objectives of the companies participating in the
merger and the programmes formulated for achieving them
------------------------------------------------------------------------
1.1 Description of the persons involved
-----------------------------------
1.1.1 Telecom Italia S.p.A.: Telecom Italia is a company limited by shares
with registered office at 2 Piazza Affari, Milan and headquarters at 4
Corso d'Italia, Rome, and a fully paid-up share capital of Euro
4,023,816,860.80 divided into 5,262,908,631 ordinary shares with a par
value of Euro 0.55 each and 2,053,122,025 savings shares with a par
value of Euro 0.55 each. The Company to be Absorbed is domiciled for
tax purposes at its registered office, and its Milan Company Register
Number and tax number is 00471850016.
1.1.2 Olivetti S.p.A.: Olivetti is a company limited by shares with
registered office at 77 Via Jervis, Ivrea, a fully paid-up share
capital of Euro 8,845,537,520 divided into 8,845,537,520 ordinary
shares with a par value of Euro 1 each. The Absorbing Company is
domiciled for tax purposes at its registered office, and its Ivrea
Company Register number and tax number is 00488410010.
1.2 Description of the activities of Telecom Italia
-----------------------------------------------
1.2.1 The Telecom Italia Group is one of the largest international groups
operating in the sector of telecommunications services and, more in
general, information and communication technology. Its companies,
leaders in fixed and mobile communications, the Internet and media,
information technology and research offer integrated and innovative
services in Italy and abroad. Its principal strength is its leadership
in the domestic market in fixed and mobile telecommunications and
Internet services. The companies of the Group have created broadband,
fixed and mobile networks providing innovative services, complex
solutions for ICT, multimedia messaging, solutions for mobile business,
products for e-government and online banking.
1.2.2 Following the changes in top management during 2001 and the significant
overhaul of corporate growth strategies with the formulation of the
Business Plan for 2002-2004 (the "Business Plan"), in 2002 an overall
restructuring was launched. In particular, organizational restructuring
led to the formation of a completely renewed, compact and stable
management team. During 2002 the responsibilities of the "Domestic
Wireline" and "Information Technology" business units were revised in
depth and a new "South America" business unit was established.
1.2.3 At Group level the so-called "professional families" were upgraded and
strengthened with the establishment of a functional link between
distinctive competences in the individual Telecom Italia Group
companies and the analogous functions in the parent company so as (i)
to ensure greater organizational effectiveness and the verification of
resources, and (ii) to foster intra-Group mobility. In addition, new
procedures were introduced for the approval and monitoring of
investments and acquisitions, with the centralization of governance
responsibilities.
1.2.4 The objectives of financial strengthening and industrial restructuring
were achieved in accordance with the Business Plan. The results
obtained with the gain in efficiency and the plan of disposals (which
generated a net cash flow of Euro 4,771 million in 2002) were decisive
in reducing the Group's debt from Euro 21,942 million at the end of
2001 to Euro 18,118 million at 31 December 2002. The proportion of debt
with a maturity of more than one year rose from 64% at the end of 2001
to 75% at the end of 2002. The Group's structure was simplified, with
the number of companies declining from 714 to 416.
2
1.2.5 Turning to business developments, 2002 brought a strengthening of
Telecom Italia's leadership in the Italian market, obtained thanks to
effective marketing and the focus on innovation.
1.2.6 In the field of mobile telephony, TIM S.p.A. ranks first among European
operators in terms of the number of GSM lines on a single network and
is the leader in Italy. In October TIM S.p.A. launched Brazil's first
GSM service, which reached more than 80 cities throughout the country.
1.2.7 The following tables show selected income, balance sheet and financial
data for the Telecom Italia Group and for Telecom Italia, drawn from
the consolidated financial accounts for the 2002 fiscal year, Telecom
Italia's draft financial statements for 2002 and its financial
statements for 2001 and 2000.
Selected economic and financial data for the Telecom Italia Group and
Telecom Italia
TELECOM ITALIA GROUP
(in millions of euros)
2002 2001 2000(*) 2000
------ ------ ------ ------
Sales of goods and services................................. 30,400 30,818 27,169 28,911
Gross operating margin...................................... 13,964 13,619 12,217 13,118
Operating result............................................ 7,381 6,674 6,440 6,805
Consolidated net income (loss) of the parent company........ (322) (2,068) 2,028 2,028
Consolidated shareholders equity of the parent company...... 9,049 13,522 18,821 18,821
Consolidated net financial debt:............................ 18,118 21,942 17,233 19,029
o medium/long-term....................................... 15,018 16,083 6,733 8,268
o short-term............................................. 3,100 5,859 10,500 10,761
Consolidated free cash flow from operations(1).............. 8,610 5,990 4,453 4,763
(*) Reconstructed by consolidating the Nortel Inversora group (Telecom Argentina) using the equity rather than
the proportionate method.
(1) Operating result + Depreciation and amortization - Industrial investments -- Change in working capital.
TELECOM ITALIA
(in millions of euros)
2002 2001 2000
------ ------ ------
Sales of goods and services................................. 17,055 17,309 17,463
Gross operating margin...................................... 7,549 7,571 7,556
Operating result............................................ 4,045 3,983 3,595
Net income (loss)........................................... (1,645) 151 2,559
Shareholders equity......................................... 10,956 15,871 18,714
Net financial debt:......................................... 15,128 16,913 16,839
o medium/long-term....................................... 11,848 10,371 3,188
o short-term............................................. 3,280 6,542 13,651
Free cash flow from operations(1)........................... 5,291 4,384 4,234
(1) Operating result + Depreciation and amortization -- Industrial investments -- Change in working capital.
3
1.3 Description of Olivetti's activities
------------------------------------
1.3.1 Olivetti, in conformity with its current corporate purpose, is a
company entered in the special section of the general register, kept by
the Italian Foreign Exchange Office, of persons engaging "principally"
in financial activities "without dealings with the public" pursuant to
and for the effects of Articles 106 and 113 of Legislative Decree
385/1993.
1.3.2 Olivetti's principal equity interest is that held in Telecom Italia
(54.9% of the ordinary capital) and, indirectly, in its subsidiaries.
Olivetti is also present in business sectors such as office products
and services and real estate, notably through its subsidiaries Olivetti
Tecnost S.p.A. (information technology and communications products and
services) and Olivetti Multiservice S.p.A. (services related to the
real-estate sector).
1.3.3 The following tables show selected income, balance sheet and financial
data for the Olivetti Group and for Olivetti, drawn from the
consolidated financial statements for the 2002 fiscal year, Olivetti's
draft financial statements for 2002 and its financial statements for
2001 and 2002, appropriately reclassified to make them consistent with
those of Telecom Italia.
Selected economic and financial data for the Olivetti Group and Olivetti
OLIVETTI GROUP
(in millions of euros)
2002 2001 2000(*) 2000
------ ------ ------ ------
Sales of goods and services................................. 31,408 32,016 28,374 30,116
Gross operating margin...................................... 14,033 13,707 12,272 13,173
Consolidated net income (loss) of the parent company........ (773) (3,090) (940) (940)
Consolidated shareholders' equity of the parent company..... 11,640 12,729 13,856 13,856
Consolidated net financial debt............................. 33,399 38,362 35,728 37,524
o medium and long-term................................... 33,309 37,042 25,622 27,157
o short-term............................................. 90 1,320 10,106 10,367
(*) Reconstructed by consolidating the Nortel Inversora group (Telecom
Argentina) using the equity rather than the 2002 2001 2000(*) 2000 Operating
result 6,016 5,338 5,112 5,477 proportionate method.
OLIVETTI
(in millions of euros)
2002 2001 2000
------ ------ ------
Net income (loss)........................................... (6,240) (871) 870
Shareholders' equity........................................ 9,031 15,235 13,937
Net financial debt.......................................... 15,195 16,322 17,991
o medium and long-term................................... 12,472 10,293 17,150
o short-term............................................. 2,723 6,029 841
4
1.4 Main legal aspects of the Operation
-----------------------------------
1.4.1 The proposed Operation envisages the merger of Telecom Italia into
Olivetti pursuant to and for the effects of Article 2501 et seq. of the
Civil Code. The Operation was approved, as regards its objectives and
principal characteristics, by the Boards of Directors of the interested
companies in their meetings on 11 March 2003.
On 13 March 2003 Olivetti published the notice provided for by Article
2503-bis, second paragraph, of the Civil Code. The time limit for
exercising of conversion rights de jure expired on 13 April 2003.
However, it is appropriate to point out that the holders of bonds
convertible into Olivetti shares will able to exercise conversion
rights in accordance with rules of these bond issues even after the
expiration of the time limit indicated in Article 2503-bis, second
paragraph, of the Civil Code, without prejudice to the periods of
suspension of such rights envisaged by the issue rules.
1.4.2 The Merger will take place on the basis of the draft financial
statements for the fiscal year ended 31 December 2002 of Olivetti and
Telecom Italia (jointly the "Companies Participating in the Merger"),
which were also adopted by the Boards of Directors of the Companies
Participating in the Merger as statements of assets and liabilities
under Article 2501-ter of the Civil Code (for each the "Merger
Statement of Assets and Liabilities").
1.4.3 The Absorbing Company, as a consequence and at the conclusion of the
Merger, will assume the name and corporate purpose of Telecom Italia.
More in general, Olivetti will adopt new bylaws based on the current
bylaws of Telecom Italia.
Concerning the amendment of the corporate purpose, premised that the
extension of the corporate purpose to the performance of services in
the telecommunications sector would by itself legitimate the right of
withdrawal, it was nonetheless considered appropriate to take over
Telecom Italia's corporate purpose in its entirety, in order to permit
the Absorbing Company to operate in all the sectors in which Telecom
Italia is currently present, with particular regard to the activities
that Telecom Italia is authorized to engage in pursuant to
administrative measures.
In this regard, the fee schedules of the individual licences issued to
Telecom Italia provide that "the corporate purpose of the company must
include activities in the telecommunications sector", which must refer
to the provision of telecommunications services, as defined in
Presidential Decree 318/1997, on the basis of which the licences were
issued.
5
The inclusion of such activities in the corporate purpose of the
licensee is among the elements evaluated for the grant of licences and,
inasmuch as it responds to a specific prescription of the schedules
accessory to such licences, must therefore be considered among the
conditions for the preservation thereof by the successor Olivetti,
whose corporate purpose does not currently provide for them.
As a consequence of the amendment of the corporate purpose within the
context of the Merger, Olivetti shareholders who are absent or contrary
to the resolutions approving the Operation will have the right to
withdraw pursuant to and for the purposes of Article 2437 of the Civil
Code (on the right to withdraw, see also Section 10 below).
The relative majority shareholder of Olivetti has already announced
that it will not exercise its right of withdrawal.
1.4.4 In order to give the shareholders of Telecom Italia a possibility to
disinvest within the context of the Operation, Olivetti has announced
its intention of making a partial tender offer for ordinary and savings
shares of Telecom Italia (the "Offer").
The consideration offered will be fixed on the basis of the weighted
average of the official stock-market prices of the ordinary and savings
shares of Telecom Italia in the period between 12 March 2003 and the
date of the shareholders' meeting of the Absorbing Company called to
approve the Merger Plan, plus a premium of 20%, but in no case will
such consideration be (i) greater than Euro 8.40 per ordinary share and
Euro 5.65 per savings share or (ii) lower than Euro 7 per ordinary
share and Euro 4.70 per savings share.
The market has been informed that the number of shares to be tendered
for will be decided after the time limit for exercising the right to
withdraw under Article 2437 of the Civil Code has expired and,
therefore, after the amount of the outlay to be incurred by Olivetti
for the withdrawal rights actually exercised ("Withdrawals") has been
ascertained. The maximum total amount to be allocated to the Offer will
be Euro 9 billion, less the repayment for Withdrawals.
The Offer will be for the same percentage of ordinary shares and
savings shares. If the resources allocated to the Offer for each of the
two classes of shares (ordinary and savings) are not completely used
for that class, they will be used for the other class. If the
acceptances of the Offer by the holders of ordinary shares and savings
shares were to exceed the quantity tendered for, they will be prorated
with respect to each class.
6
On the basis of what Olivetti has indicated, if there were no
Withdrawals and the Offer therefore had a maximum overall value of Euro
9,000,000,000:
(a) if made at the minimum price of Euro 7 per ordinary share and
Euro 4.70 per savings share, the Offer would be for about 19.4%
of the ordinary share capital and savings share capital
respectively;
(b) if made at the maximum price of Euro 8.40 per ordinary share and
Euro 5.65 per savings share, the Offer would be for about 16.1%
of the ordinary share capital and savings share capital
respectively.
The Offer will take place as soon as possible following the expiration
of the time limit for the exercise of Withdrawals and will close before
the merger instrument is signed. The Offer will cease to be effective
in the event of failure to complete the procedure for filing the merger
instrument with the Company Register within a given date, now
tentatively envisaged to be 31 December 2003, without prejudice to the
intention of the Companies Participating in the Merger to complete the
formalities for the Merger in the shortest time possible, and
specifically, as indicated in Subsection 1.4.8 below, by early August.
The Offer will be evaluated by the Board of Directors of Telecom Italia
pursuant to and for the purposes of Article 39 of the Regulation once
the offer document has been received.
Since the Operation will result in Olivetti's absorbing a subsidiary,
it will have as a consequence the cancellation of the equity interest
held by Olivetti in Telecom Italia at the time the Merger becomes
effective and the assignment to Telecom Italia ordinary or savings
shareholders other than Olivetti of ordinary or savings shares and to
Olivetti shareholders of ordinary shares issued by the Company
Resulting from the Merger on the basis of the assignment ratios
corresponding to the exchange ratio. This assignment will be made by
Olivetti's capital at the completion of the Operation (see Section 4).
Olivetti will cancel all the Telecom Italia shares held at the time of
the Merger. For the purposes of the annual financial statements, the
difference between the carrying value of the cancelled Telecom Italia
shares and the corresponding portion of shareholders' equity will be
positive and will thus give rise to a "cancellation deficit". This
deficit, whose size will also depend on the acceptances of the Offer,
will be allocated to Telecom Italia assets (in particular, to the Tim
shares held) and any difference recorded under the item "goodwill".
Considering the procedure for the assignment of the shares of the
Company Resulting from the Merger by means of the redistribution
technique, it is reasonable to expect that a share exchange surplus
will emerge.
7
1.4.5 For the share exchange, Olivetti will assign holders of Telecom Italia
savings shares new savings shares with features identical to those of
the shareholders currently issued by Telecom Italia. Among other
things, the bylaws of the Company Resulting from the Merger will
contain an article identical in content to that of the bylaws of
Telecom Italia, including the possibility of satisfying the
preferential rights of the holders of savings shares by distributing
reserves, whose introduction in the bylaws of the Company to be
Absorbed will be proposed at the shareholders' meeting called to
approve the Merger Plan.
In the context of the Operation, and as an essential aspect thereof,
the savings shares that will be issued by the Absorbing Company for the
share exchange in favour of holders of Telecom Italia savings shares
are to be listed on the stock exchange. The new Olivetti savings shares
will have a par value of Euro 0.55 each, thus corresponding fully to the
current savings shares of Telecom in this respect as well.
The Operation will therefore not give rise to any prejudice for the
holders of savings shares. Consequently, lacking the preconditions
referred to in Article 2376 of the Civil Code and Article 146 of the
Consolidated Law, it will not be necessary to call the special meeting
of such shareholders.
Considering that as a consequence of the share exchange and the
specific manner in which it is to be carried out each holder of savings
shares will be assigned a larger number of savings shares that that
currently held, and that each of the new shares assigned by the
Absorbing Company will have the same par value as a Telecom Italia
savings share, there will be an increase in the total amount of
dividends payable on a preferential basis to the holders of Telecom
Italia savings shares at the date the Merger becomes effective.
This advantage in absolute terms, together with the above-mentioned
possibility of satisfying the preferential right by distributing
reserves, undoubtedly improves the position of the holders of Telecom
Italia savings shares.
1.4.6 The Absorbing Company will succeed to all the legal relationships of
Telecom Italia, including the concessions, licences and administrative
authorizations granted thereto in accordance with the procedures
established by the legislation in force. The Absorbing Company will
also succeed to the relationships pertaining to Telecom Italia's bond
issues and stock-option plans; to this end, the Absorbing Company will
implement the capital increases for the purpose of such plans and will
update the capital increases for the convertible bonds, stock-option
plans and warrants issued by Olivetti with the necessary adjustments to
take
8
account of the new par value of the Olivetti shares and the assignment
procedure described in Section 4.
1.4.7 At the end of the Merger, the (ordinary and savings) shares of the
Company Resulting from the Merger will be listed on Borsa Italiana's
MTA electronic share market. Furthermore, it is expected that (1) the
Company Resulting from the Merger will also succeed to Telecom Italia
in being listed on the NYSE in the form of American Depositary Receipts
(ADRs), and (ii) the Merger will not have consequences for the listing
on the Frankfurt Stock Exchange of the ordinary shares of the Company
Resulting from the Merger.
1.4.8 It is the intention of the Companies Participating in the Merger to
complete the Operation in the shortest possible time. The Merger is
expected to become effective in early August 2003.
1.5 Reasons for the Operation
-------------------------
1.5.1 The Operation is framed in the reorganization drive aimed at creating
value for Telecom Italia shareholders, launched in July 2001 and
carried out through an industrial and financial restructuring with
positive results despite the crisis in the stock markets and the
telecommunications sector.
1.5.2 The strategic objective of creating value for Telecom Italia
shareholders involved the identification of a multiplicity of actions
and initiatives. In particular, industrial restructuring and refocusing
on the core business, completed earlier than had been announced to the
financial community from September 2001 onwards and in line with the
Business Plan, and carried out in part through the disposal of a number
of non-strategic assets (such as the equity interests in Auna, Telemaco
Immobiliare, Bouygues Decaux Telecom, Mobilkom Austria, Telekom
Austria, Telespazio, Sogei and Lottomatica) led to:
. an improvement in the operating result, with the consolidated
operating result rising by 10.6% to Euro 7.4 billion in the 2002
fiscal year, and
. a reduction in consolidated total net debt from Euro 21.9 billion
at 31 December 2001 to Euro 18.1 million at 31 December 2002.
Meanwhile, Olivetti carried out a series of transactions to refinance
its debt, with an improvement in the debt's conditions of maturity.
9
The completion of the above-mentioned industrial restructuring
activities of the Telecom Italia Group, together with the improvement
in Olivetti's financial situation, now makes it possible to take the
further step of simplifying the Olivetti-Telecom Group's corporate
structure, in accordance with the market's expectations, by merging
Telecom Italia into Olivetti.
1.5.3 As a consequence of the Operation, Telecom Italia shareholders will be
able to benefit fully from the enhancement in value deriving from the
execution of the Business Plan.
Currently, Telecom Italia is majority controlled by Olivetti and the
latter has a major shareholder- Olimpia S.p.A. - holding 28.54% of its
share capital.
As a result of the Merger, Olivetti's controlling interest in Telecom
Italia will be extinguished as a result of the cancellation of the
shares, while Olimpia's interest in Olivetti will be diluted
substantially.
Consequently, Telecom Italia shareholders, like Olivetti shareholders,
will hold shares of a fully contestable company in which there will be
no controlling shareholder. In this regard, it is to noted that the
final size of Olimpia S.p.A.'s holding in the Company Resulting from
the Merger will depend on a series of factors such as the number of
Conversions (as defined below), the number of Olivetti warrants and
Telecom Italia stock options exercised, the number of Withdrawals and
the number of acceptances of the Offer (see also what is indicated in
Subsection 7.3).
This will result in a more liquid security and, on the basis of
experience, an enhanced possibility of it being appreciated by the
market, to the benefit of all the shareholders.
1.5.4 At the same time, the Merger will create scope to improve tax
efficiency, in compliance with the legislation in force, inter alia
through the full and more rapid recovery within the Company Resulting
from the Merger of Olivetti's tax assets (see Subsection 2.2.3, Point
E).
1.5.5 The Operation as a whole will also make it possible to attain a more
efficient financial structure, involving an increase in debt capital,
whose net cost is lower than the cost of equity capital.
In connection with this aspect, it needs to be stressed that the
increase in overall debt following the Merger involves reaching a level
of debt (i) in line with or better than that of other companies of
comparable size
10
operating in the sector in Europe, and (ii) consistent and compatible
with Telecom Italia's set of activities and the prospective cash flows
deriving from the execution of the Business Plan. According to the
latter, debt is projected to decline with the utilization of the
proceeds of the sales of other non-strategic assets. Furthermore,
Telecom Italia will also benefit from the positive effects of unified
debt management in terms of the lengthening of maturities and optimal
correlation with corporate requirements.
1.5.6 Moreover, the Company Resulting from the Merger is expected to maintain
a capacity to produce profits and adopt a dividend-distribution policy
that will ensure Telecom Italia's current shareholders receive a total
amount of dividends at least on a par with that currently received.
1.5.7 In conclusion, the Board of Directors considers the Merger an essential
step so that the shareholders of Telecom Italia can reap, without
constraints arising from control by another listed company such as
Olivetti, all the benefits of a widely-held company operating in a
strategic sector and with significant potential for value growth. The
Business Plan and the clear direction adopted by the Board of Directors
in terms of focusing on core business and constantly improving
operational efficiency ensure a trajectory of value creation without
dispersion of economic resources, assuming the macroeconomic
environment remains unchanged.
1.6 Operating objectives and programmes to achieve them
---------------------------------------------------
1.6.1 The Companies Participating in the Merger have agreed on the operating
objectives and the programmes to achieve them on the part of the
Company Resulting from the Merger. These objectives are basically the
same as those of Telecom Italia, adopted by the Board of Directors on
13 February 2003, which in turn confirm the guidelines and objectives
of the Business Plan. With specific regard to Olivetti, it should be
noted that Olivetti Tecnost is basically neutral in terms of its impact
on the operating result.
However, the Operation will result in a Merger deficit (deriving from
share cancellation), any portion of which not classified as a Telecom
Italia asset (specifically among equity interests) will be amortized
over a period of 20 years. The updated financial projections take
account of this additional portion of amortization.
1.6.2 The same projections consider the financial charges associated with
Olivetti's present debt, as well as the effect of the tax asset
connected with the value adjustments made in Olivetti's and Telecom
Italia's draft
11
financial statements for 2002. In addition to the disposals already
envisaged by the Business Plan (Telekom Austria, Operazioni Real
Estate), the projections also include the receipts from the disposal of
the company into which Seat Pagine Gialle S.p.A. ("Seat Pagine Gialle")
is to be spun off.
1.6.3 Lastly, it is estimated that the cash flows from operations and
disposals of the Company Resulting from the Merger will be able to
sustain not only a reduction in debt but also a dividend distribution
policy such as to ensure Telecom Italia's current shareholders a total
dividend amount in line with that set out in the Business Plan, which
expressly envisaged dividend policy remaining constant.
1.6.4 The following table summarizes the above considerations at consolidated
level, from which the sustainability of the commitments entered into
for the future appears evident.
Billions of euros Olivetti 2002 Consolidated objectives of
consolidated financial the Company Resulting
statements from the Merger (*)
CAGR 2002-2005 ***
---------------------- --------------------------
Sales of products and services........ 31.4 4 - 4.5%
Gross operating margin................ 14.0 5 - 5.5%
% of sales............................ 44.6%
Operating result...................... 6.0 8 - 8.5%
% of sales............................ 19.1%
Cumulative 2003-2005
Free Cash Flow........................ 8.6 29
Net financial position................ 33.4** 34.3****
(*) Assuming zero Withdrawals, fully diluted.
(**) The net financial position does not take account of the forward purchase
commitments (December 2005) in respect of Aldermanbury Investment Limited
(formerly Chase Equities Limited), equal to Euro 2,417 million.
(***) The scope
of the consolidation is the same.
(****) At 31 December 2004.
2. The values attributed to the Companies Participating in the
Merger for the purpose of determining the Exchange Ratio
-----------------------------------------------------------
2.1 Objective of the valuation
--------------------------
2.1.1 The objective of the valuation in question is to establish the exchange
ratio ("Exchange Ratio") on the basis of which the participation in the
12
Company Resulting from the Merger of the shareholders of Olivetti and
Telecom Italia respectively will be determined.
The purpose of the valuation, therefore, is to value the two Companies
Participating in the Merger in order to obtain significantly comparable
values for the purpose of determining the Exchange Ratio with respect
to the specific Operation in question, considering all the shareholders
of the Companies Participating in the Merger as parties interested in
the valuation and the Exchange Ratio.
To achieve this objective, the valuations for the purpose of
determining the Exchange Ratio require the identification and
application of valuation methods based on uniform criteria for the
Companies Participating in the Merger.
Such valuations may therefore differ from other valuations made in
different contexts or for different purposes, notably as regards the
selection of the methods used.
2.1.2 The Board of Directors of Telecom Italia has reached its conclusions on
the Exchange Ratio following a well-considered evaluation of the
Companies Participating in the Merger, selecting from a multiplicity of
valuation methods those generally considered most appropriate in the
Merger in the light of the activities performed by the Absorbing
Company and the Company to be Absorbed.
Furthermore, as suggested by theory and standard professional practice,
the Board of Directors of Telecom Italia has compared the values
attributed to the Companies Participating in the Merger on a going-
concern basis.
The baseline accounting situation for the valuations performed is that
resulting from the Merger Statements of Assets and Liabilities.
2.1.3 For the purpose of determining the Exchange Ratio, the Board of
Directors of the Company to be Absorbed was assisted by Lazard and
Goldman Sachs as independent financial advisors (the "Advisors").
It is to be noted that the Board of Directors of Olivetti was assisted
by JPMorgan and by Professor Angel0 Provasoli (who ascertained the
consistency and appropriateness of the valuation methods adopted by JP
Morgan for the Operation) as independent advisors.
13
2.1.4 The methods followed and the results obtained by the Board of Directors
of Telecom Italia, with the support of the Advisors, are described in
the following subsection.
2.2 Methods adopted and results obtained
------------------------------------
2.2.1 Introduction
A. The Board of Directors of Telecom Italia, with the assistance of
the Advisors, selected the valuation methods to be applied in the
case in question taking into account:
a) the specific objectives of the valuations in connection with
the Operation;
b) the nature of the activities performed by each of the
Companies Participating in the Merger.
B. Concerning the first aspect, in selecting the valuation principles
and methods, reference was made, as is considered proper and
appropriate in every kind of valuation, to the purpose of the
exercise and to the significant factors allowing the value of the
object of valuation to be calculated. Given the objective of
obtaining comparable values for the determination of the Exchange
Ratio, valuation methods based on uniform criteria were adopted
for both the Companies Participating in the Merger.
In the case in question, the Exchange Ratio was established on the
basis of a comparison of the values of the Companies Participating
in the Merger.
As reported above, these values were determined on a going-
concern basis and can neither be considered to represent a
separate valuation of the two Companies Participating in the
Merger nor compared with any acquisition or disposal prices (which
normally take account of majority premiums and minority discounts,
if any). Nor do these values reflect strategic, operational and
financial synergies expected from the Merger.
As indicated below, the Board of Directors utilized both the
stock-market price method and the sum-of-parts method for the
valuation of both of the Companies Participating in the Merger. In
particular, for the purpose of establishing the Exchange Ratio,
values determined on the basis of uniform methods were compared:
the ratio between stock-market prices on the one hand and the
ratio between fundamental values (sum-of-parts) on the
14
other. Consequently, in the circumstances it was considered that
the Net Asset Value (NAV) method based on the current stock-
market value of the equity interest in Telecom Italia could not be
adopted. In a valuation to establish the Exchange Ratio carried
out on the basis of a fundamental method, the latter must also be
applied to Olivetti's equity interest in Telecom Italia. On the
contrary, the application to Olivetti of a NAV based on the
current stock-market value of the equity interest in Telecom
Italia would lead to highly volatile results, mainly owing to
Olivetti's financial leverage. Besides, the application of this
method would imply referring to market values for only one of the
Companies Participating in the Merger, which the Board of
Directors considered methodologically inadmissible.
C. With regard to the second aspect, account was taken on the one
hand of the various areas of the Telecom Italia Group's operations
and, on the other, of the fact that the controlling interest in
Telecom Italia held by Olivetti represents a significant component
of the latter's balance sheet assets.
D. In the light of the above, the following methods were used to
calculate the values of Olivetti and Telecom Italia, with equal
level of significance for the purpose of the valuation procedure:
(i) stock-market prices ("Stock-Market Prices") as the
principal method. In this regard, it is noted that where
companies interested in a merger have shares listed in
regulated securities markets, theory and professional
practice suggest that account should be taken of the
results derivable from the stock-market prices of the
respective shares, averaged over appropriate periods of
time. In the case in question, the stock-market prices are
considered to be particularly significant, taking account
of the high capitalization and liquidity of Telecom Italia
and Olivetti;
(ii) the sum-of-parts ("Sum-of-Parts") method as a control.
Under this method a company's value is calculated as the sum
of the values of its separate units (taken as economic
entities that can be valued independently) adjusted to take
account of the company's financial position, minority
interests and, where material, of other effects such as
those of off-balance-sheet items and potential tax
benefits.
In applying the valuation methods described, account was taken of
the planned distribution of reserves by Telecom Italia of up to a
maximum of Euro 1,333 million, whose proposal to the
15
shareholders' meeting called to consider the Merger Plan was
approved by the Board of Directors on 11 March 2003. Since under
the timetable of the Merger the share exchange is to take place
after the payment of the dividend, the impact of the distribution
of reserves on the values of the economic capital of the two
Companies Participating in the Merger was taken into account in
establishing the Exchange Ratio.
Finally, it should be stressed that in determining the Exchange
Ratio an analysis was made of the reasonably foreseeable effects
of the possible exercise of the right of withdrawal by Olivetti
shareholders and it was considered that on the basis, inter alia,
of the share prices in the significant period already elapsed the
outcome of such Withdrawals will not be such as to render a change
in the Exchange Ratio necessary; and this inasmuch as the
withdrawal price can be reasonably expected to be lower than the
value attributed to the shares of Olivetti for the purpose of the
Merger under the valuation methods used.
E. The subsections that follow describe the methods and principles
adopted in valuing the Companies Participating in the Merger both
from the theoretical point of view and in terms of the main
results.
2.2.2 Stock-market price method
A. The stock-market price method estimates the value of the capital
on the basis of the stock-market prices recorded in a significant
period concluding at a date close to that on which the estimation
is performed. After the announcement of the Operation, the stock-
market prices of Telecom Italia and Olivetti were influenced by
the announcement. Hence, the prices following such announcement
are not considered significant.
B. The stock-market price method is not applicable to Telecom Italia
savings shares inasmuch as Olivetti savings shares do not exist
today. For the savings shares, it was therefore assumed that the
prices of the Olivetti savings shares would reflect a discount
similar to that applied by the market to the Telecom Italia
savings shares, as detailed in Subsection 2.2.4.
C. On the basis of the market data at 7 March 2003 (the last day of
trading of the securities before the date of the board meetings
that announced the Operation), it is found that:
16
a) both of the Companies Participating in the Merger have a
large market capitalization and a significant and
widely-distributed float;
b) as can be seen from the following table: (i) the daily volume
of trading in Telecom Italia and Olivetti ordinary shares is
high (around 1% of the float on average); and (ii) during the
twelve months preceding the announcement of the Operation:
. trades of Olivetti shares amounted to around 240% of the
share capital (excluding the portion held by Olimpia
S.p.A.), for a value of Euro 16.9 billion;
. trades of Telecom Italia ordinary shares amounted to
around 289% of the share capital represented by that
class of shares (excluding the shares held by Olivetti),
for a value of around Euro 54 billion.
Telecom Italia Average volume Cumulated Average % of Cumulated $ of
(ordinary shares) ('000) volume capital traded (*) capital traded (*)
('000)
Prices
7 March 2003 42,131.3 42,131.3 1.8% 1.8%
Last week 38,225.3 191,126.4 1.6% 8.1%
Last month 28,994.8 579,895.0 1.2% 24.5%
Last 3 months 31,411.6 1,884,693.5 1.3% 79.5%
Last 6 months 30,126.5 3,765,810.3 1.3% 158.8%
Last year 27,073.7 6,849,656.0 1.1% 288.8%
Olivetti Average volume Cumulated Average % of Cumulated $ of
('000) volume capital traded (*) capital traded (*)
('000)
Prices
7 March 2003 90,695.9 90,695.9 1.0% 1.0%
Last week 86,240.0 431,200.0 1.4% 6.8%
Last month 59,319.6 1,186,392.2 0.9% 18.8%
Last 3 months 61,400.2 3,684,009.3 1.0% 58.3%
Last 6 months 61,220.3 7,652,538.4 1.0% 121.2%
Last year 59,851.9 15,142,528.8 1.0% 240.6%
(*) On the total number of shares held by the market.
Source: Datastream
c) both the Companies constitute a significant portion of the
total capitalization of the Mibtel and MIB3O stock indices.
At 24 March 2003 (for the MIB3O index) and 1 April 2003 (for
the Mibtel index), according to data provided by Borsa
Italiana:
17
. Olivetti made up 1.9% of the Mibtel index and 2.4% of the
MIB30 index; and
. Telecom Italia made up 8.4% of the Mibtel index and 9.5%
of the MIB30 index;
d) Telecom Italia's and Olivetti's floats are significantly
split up among Italian and foreign institutional investors
and Italian retail investors, none of whom is in a position
to influence the price of the securities.
D. In order to mitigate the short-term fluctuations typical of the
financial markets, in line with best valuation practice the
analysis of the share prices was extended to the average figures
recorded by the market in sufficiently large intervals of time.
Accordingly, the following were performed, among others:
a) analysis of the simple averages over a time span extending
up to the 12 preceding months;
b) analysis of the volume-weighted averages over a time span
extending up to the 12 preceding months;
c) analysis of 1,3,6 and 12 month moving averages;
d) adjustment of the value of Telecom Italia shares to take
account of the planned distribution of the dividend for 2002.
E. From the analysis of the historical price movements, the 1,3,6
and 12-month averages were identified as those falling within a
corridor of constant valuations, as can be seen from the following
table.
18
Value for the
Stock-market purpose of the Ratio*
Market prices value share exchange
------------- ----------------------- ------------------------ ------
TI post-
TI (euro) Oli (euro) div (euro) Oli (euro)
--------- ---------- ---------- ----------
Weighted averages
7 March 2003 5.9 0.86 5.7 0.86 6.7
1 month 6.5 0.91 6.3 0.91 7.0
3 months 7.0 0.99 6.8 0.99 6.9
6 months 7.4 1.02 7.2 1.02 7.1
12 months 7.8 1.11 7.6 1.11 6.9
Arithmetic averages
7 March 2003 5.9 0.86 5.7 0.86 6.7
1 month 6.6 0.91 6.4 0.91 7.0
3 months 7.0 0.99 6.9 0.99 7.0
6 months 7.4 1.01 7.2 1.01 7.1
12 months 7.9 1.11 7.7 1.11 6.9
Maximum and minimum prices
Maximum price in the last 12 months 9.7 1.47 9.5 1.47 6.5
Minimum prices in the last 12 months 5.9 0.84 5.7 0.84 6.8
Source: Datastream
* Differences are due to rounding.
F. The results shown above are also confirmed when the time horizon
of the analysis is extended to 18 months.
2.2.3 Sum-of-Parts method
A. Under the Sum-of-Parts method, the value of Telecom Italia and
Olivetti is calculated as the sum of the values of the individual
units of each company, taken as economic entities that can valued
independently. Such sum is suitably adjusted to take account of
the financial position and minority interests for each of the
Companies Participating in the Merger and, where material, of
other effects, including those of any off-balance-sheet items and
potential tax benefits.
B. Given the significant incidence on Olivetti's balance sheet
assets of its controlling interest in Telecom Italia, the
valuation procedure concentrated mainly on estimating Telecom
Italia's economic capital, which was also the key factor in
determining that of Olivetti.
19
In view of the complexity of the corporate structure of the Group
and the many areas in which it operates, the individual assets
were valued using the methods, among those commonly employed for
valuation purposes, deemed most appropriate to each specific
situation. In particular, the principal assets, such as fixed and
mobile telephony, were valued using the discounted cash flow
(IIDCFI) method.
The remaining assets and liabilities were valued on a case-by-case
basis mainly with reference to their book or market value, in view
of their limited importance in the overall valuation of Telecom
Italia.
The DCF method was applied by discounting operating cash flows
gross of any component of a financial nature (Free cash Flows or
("FCF"). Under this method the value of a company is equal to the
sum of the following components:
- operating cash flows that the company will be able to
generate in the future, discounted at a rate representing the
weighted average cost of capital;
- net financial position and minority interests, which in the
case in question were calculated with reference to 31
December 2002.
The DCF method was applied to determine the fundamental value for
financial investors and reflects the following assumptions and
approaches:
- the Weighted Average Cost of Capital ("WAAC") was calculated
on a capital structure in line with the current one;
- the growth rates used for the financial projections beyond
the horizon of Telecom Italia's Business Plan and for the
calculation of the terminal value reflect growth prospects
consistent with the relevant market benchmarks.
C. In applying the DCF method, reference was made to the cash
flows from operations for the main activities based on the
economic and financial plans drawn up by Telecom Italia's
management. These are briefly described in what follows.
20
Fixed telephony
The economic and financial projections in this field were
constructed starting from the market and economic and financial
results achieved in 2002. For the years 2003-2005 they reflect the
company's strategic operating and financial objectives within a
market scenario that refers basically to the Italian fixed
telephony market.
The projections were developed assuming little change in the
regulatory framework, which is reflected in the movements expected
in the prices for access, interconnection and rented lines. In
particular, consideration was given to the introduction of the
network cap for access and interconnection, while for rented lines
the financial projections reflect a continuation of the present
downward trend of prices in the period 2003-2005.
In a retail market characterized (i) by a decline in the value of
voice traffic at an annual rate of 2.3%, as a result of small
increases in volumes and falling prices, and (ii) in increase in
sales in the Internet, data transmission and high value-added
services segments, the "Domestic Wireline" business unit is
expected to maintain the present level of revenues, with an
average compound annual growth rate estimated at 0% - 0.5% in the
period 2002-2005.
With revenues performing as described above, the EBITDA is
forecast to grow at an annual rate of 2% - 2.5% until 2005, with
an objective for the margin on sales of more than 49%. These
results stem from the strategy of focusing on the core business,
product innovation and a policy aimed at enhancing efficiency and
lowering production costs.
The high levels of profitability and of the generation of cash
flow from operations will also benefit from capital spending on
the order of Euro 6.2 billion in the period 2003-2005, of which
about 80% will be on the development of innovative products and
services.
The following table summarizes the financial objectives of the
"Domestic Wireline" business unit, which consists principally of
Telecom Italia's activity in the field of fixed telephony.
21
2002 CAGR 2002 - 2005
(billions of euros) (%)
------------------- ----------------
Revenues 17.0 0% - 0.5%
EBITDA 8.0 2% - 2.5%
Operating result 4.7 4.5% - 5%
Cumulative 2003 - 2005
(billions of euros)
----------------------
Capital spending 2.5 6.2
Mobile telephony (TIM)
In this field consideration was given to market data and the
results for the year 2002, together with economic and financial
projections based on the TIM group's strategic objectives, with a
distinction made between activities in Italy and abroad.
As regards the domestic market for mobile telephony, it is
estimated that its value will have risen to 1.5% of GDP in 2005
and that the level of penetration will reach 100% in 2004. The
level of profitability is expected to remain high in the European
context.
The main source of the creation of value will be Value Added
Services (VAS), which are expected to record a compound annual
growth rate of around 30% in the period 2002-2005, with an
objective for their contribution to Average Revenue Per User
(ARPU) of 18%-22% in 2005, compared with 9% in 2002. Capital
spending to sustain the growth of VAS in the domestic market is
expected to increase from 28% of all capital spending on mobile
telephony in 2003 to 35% in 2005.
Business abroad is expected to account for a rising proportion of
mobile telephony revenues. In Brazil, which will be the main area
of international expansion, it is estimated that the penetration
of mobile telephony will rise from 19% in 2002 to 26% in 2005 and
that over the same period the Group's market share will grow from
16% to 26%, with the objective of increasing users to 12.5
million, of which 9.9 million on the GSM network; this growth will
be sustained by capital spending on the order of Euro 1.1 billion
in the period 2003-2005.
The following table summarizes the results achieved in 2002 and
the main economic and financial objectives for the period 2003-
2005.
22
2002 CAGR 2002 - 2005
(billions of euros) (%)
------------------- ----------------
Revenues 10.9 7% - 8%
EBITDA 5.0 8% - 9%
Cumulative 2003 - 2005
(billions of euros)
----------------------
Capital spending 1.7 5.6
Seat Pagine Gialle
In this case consideration was again given to market data and the
results for the year 2002; reference was also made to a macro-
economic scenario with moderate growth in GDP and advertising in
the main target markets (Italy and the United Kingdom).
In particular, Seat Pagine Gialle's strategy focuses on the search
for further efficiency gains and aggressive action to expand its
business, in order to generate continuous and growing cash flows.
This growth in business will come from a strengthening of the
Directories sector through the integration of the different
platforms (phone, paper and the Internet) and the application of
this model in foreign markets, starting with the United Kingdom.
As regards Internet business, a rapid growth in revenues is
envisaged, at an annual rate of between 17% and 21% in the period
2002-2005.
The estimates underlying Seat Pagine Gialle's financial
projections are summarized in the following table.
2002 CAGR 2002 - 2005
(billions of euros) (%)
------------------- ----------------
Revenues 2.0 6% - 8%
EBITDA 0.6 11% - 13%
Operating result 0.2 27% - 29%
Cumulative 2003 - 2005
(billions of euros)
----------------------
Capital spending 0.1 0.3
23
D. The financial projections for the activities analyzed above
provided the basis for the estimates of operating cash flows in
the forecasting period considered and of the residual value at the
end of that period ("Terminal Value").
For the estimation of the Terminal Value, theory and professional
practice proposes two alternatives:
- the value corresponding to the capitalization of the
normalized operating cash flow (or the present value of the
operating cash flows expected for the period subsequent to
the time horizon of the explicit projection), which can be
estimated as follows:
FCFn
VT = -------
(WACC-g)
where:
VT = Terminal Value;
FCFn = Normalized operating cash flow;
g = Assumed perpetual growth rate;
WACC = Weighted Average Cost of Capital;
or,
- the value calculated on the basis of a multiple of EBITDA
of the last year of the projection period considered.
Since the cash flows in question will be used to remunerate all
the persons contributing capital, in discounting it is necessary
to use a rate representing the cost of all the financial resources
utilized by the company. This rate is identified as the Weighted
Average Cost of Capital (WACC) and is calculated with reference to
a capital structure in line with that of the company to be valued,
as follows:
D E
WACC = Kd (1-t)--- + Ke ---
D+E D+E
where:
Kd = Cost of debt capital;
Ke = Cost of equity capital;
D = Debt capital;
24
E = Equity capital;
t = Tax rate.
In particular, the prevailing practice is to calculate the cost of
equity capital on the basis of the Capital Asset Pricing Model
(CAPM), defined by the following formula:
Ke = Rf+Beta x(Rm-Rf)
where:
Rf = rate of return on risk-free investments;
Beta = correlation coefficient between a share's effective
rate of return and the overall market rate of return;
Rm = overall market rate of return;
(Rm - Rf) = premium required by the market with respect to the
rate of return on risk-free investments.
The principle underlying this method rests on the hypothesis that
in a liquid and efficient market investors determine the required
rate of return only considering the degree of systematic (or
market) risk of the investment, expressed by the relation between
the variation in the price of the specific share and the variation
in the market (Beta). The specific risk of the investment (the
share) is not considered, since it can be eliminated by the
investor through appropriate diversification of investments.
E. In the light of the above, in the case in question reference was
made to the operating cash flows for the individual units as shown
by the economic and financial plans prepared by Telecom Italia.
The Terminal Value was calculated using both a perpetual growth
rate of the FCF and a multiple of EBITDA consistent with the
results produced by comparable listed companies for the different
sectors of reference.
The "normal" rate of return on riskless investments in the Italian
market was used for the risk-free rate. Beta was calculated on the
basis of the most appropriate market data, taking account of the
financial structure of the activities being valued. The most
recent valuation practice was followed for the risk premium
required by the market.
For Olivetti, which has the structure of a holding company whose
assets consist principally of the equity interest in Telecom
Italia, the Sum-of-Parts method was applied by valuing such equity
interest according to the procedures described earlier and valuing
25
the remaining assets and liabilities principally at book or market
value, in view of their limited importance in the overall
valuation.
In the valuation of Telecom Italia and Olivetti account was also
taken of the tax assets generated by value adjustments to the
controlling interests held respectively by Telecom Italia in Seat
Pagine Gialle and by Olivetti in Telecom Italia for the part that
the Companies Participating in the Merger will effectively be able
to use - independently of the completion of the Operation - on the
basis of the taxable income they are forecast to make on their
own.
From the sum of the values of the assets and the tax asset,
calculated as described above, was subtracted the value of the net
financial position at 31 December 2002, adjusted (i) for Telecom
Italia, for the effect of the dividend to be distributed from
reserves (June 2003) and (ii) for Olivetti, for the pro forma
effect of the conversion of the 1.5 % 2001-2010 convertible bonds,
consistently with the fully-diluted method, which assumes the
conversion into ordinary shares.
F. With reference to the Sum-of-Parts method, with the assistance
of the Advisors the Board of Directors of Telecom Italia has
identified the following values per ordinary share:
SUM-OF-PARTS METHOD
-------------------
Telecom
Italia Olivetti Ratio
------- -------- -----
Value per ordinary share (in 8.8 1.27 6.9
euros)
The results obtained applying the Sum-of-Parts method confirm the
relative values found with the stock-market price method.
2.2.4 Savings shares
For savings shares, inasmuch as shares of this class issued by Olivetti
do not exist today, it was assumed, inter alia considering the
preferential rights that Olivetti saving shares will have, that their
prices reflected a discount similar to that applied by the market to
Telecom Italia savings shares, and it was therefore considered
appropriate to adopt the same Exchange Ratio as for ordinary shares.
It is a generally accepted principle, in fact, that other procedures
for dividing the value of the capital between ordinary shares and
savings
26
shares would introduce discretionary elements into the valuation
unsupported by any objective evidence.
Moreover, it appears unlikely that the discount of the savings shares
of the Company Resulting from the Merger with respect to the ordinary
shares will be significantly different from that of the Telecom Italia
savings shares before the Operation. This view is based on
consideration of effects of opposite sign: on the one hand, the
increase in the overall dividend premium in absolute terms would
suggest a reduction in the discount; on the other hand, the possibly
greater rise in the price of the ordinary shares as a result of the
Company Resulting from the Merger not being controlled anymore by
another entity would suggest an increase.
2.2.5 Main problems
In performing the valuations to determine the Exchange Ratio, the Board
of Directors of Telecom Italia encountered the following main problems:
(i) Possible further asset sales during 2003: at present it is not
possible to foretell precisely the outcome of the planned
disposal of the new company that will be created as a result of
the spin-off of Seat Pagine Gialle. At all events, in view of
the limited importance of the equity interest in Seat Pagine
Gialle in the overall value of Telecom Italia, the disposal is
not expected to require changes in the Exchange Ratio;
(ii) taxation: the valuation was made on the basis of current tax
law and therefore did not take into account the tax reform now
being prepared, whose effects are difficult to quantify today;
(iii) valuation of savings shares: no Olivetti savings shares
exist today. To avoid introducing discretionary elements into
the analysis unsupported by objective evidence, in the absence
of historical data to which to refer for Olivetti, reference
consideration was given only to the price differential between
Telecom ordinary and savings shares.
The Board of Directors has also carefully considered, with the help of
the Advisors, the arguments put forward by some institutional investors
regarding the application of the NAV method to Olivetti, as a holding
company whose most important asset is the holding in Telecom Italia.
Although recognizing the complexity of the question, the Board of
Directors has come to the conclusion that, given the purpose of the
valuation and the need to adopt uniform criteria for both the Companies
Participating in the Merger, it is correct to value Olivetti using the
same
27
methods as those adopted to determine the value of Telecom Italia
(Stock-Market Prices and Sum of Parts).
3. Conclusions
-----------
3.1 Determination of the Exchange Ratio
-----------------------------------
3.1.1 In the light of the valuations made with the aid of their
respective Advisors, the Boards of Directors of Telecom Italia and
Olivetti have defined and agreed the relative values of the Companies
Participating in the Merger for the purpose of determining the Exchange
Ratio.
3.1.2 The exchange ratios derived by applying the methods used by the
Board of Directors of Telecom Italia are summarized below:
METHOD EXCHANGE RATIO
------ --------------
Stock-market price method
- 7 March 2003 6.7
Weighted averages:
- 1 Month 7.0
- 3 Months 6.9
- 6 Months 7.1
- 12 Months 6.9
Sum-of-Parts method 6.9
3.1.3 These conclusions were compared with those reached by the Board
of Directors of Olivetti with the assistance of its financial advisor,
JPMorgan. At the end of the comparison, the Exchange Ratio indicated
below was established.
3.2 Exchange Ratio
--------------
3.2.1 On the basis of the valuations of the Companies Participating in
the Merger described above, the following so-called "natural" Exchange
Ratio was established, corresponding to the exchange ratio that would
have been applied without redistribution but through the issue of new
shares for the purpose of the exchange:
- 7 Olivetti shares (ordinary and savings respectively) with a par
value of Euro 1 each for every Telecom Italia ordinary share or
savings share with a par value of Euro 0.55 each.
28
3.2.2 No cash consideration is envisaged.
4. Procedure for assigning the shares of the Company Resulting
from the Merger and the entitlement date of the shares
-----------------------------------------------------------
4.1 Procedure for carrying out the share exchange
---------------------------------------------
4.1.1 In view of the interest in maintaining a flexible capital
structure of a size suitable for corporate activities and with a view
to limiting the effects of the Operation on the future remuneration of
the shares, it was considered advisable to leave the nominal capital of
Olivetti basically unchanged at the conclusion of the Operation
inasmuch as the absolute increase in the nominal capital by means of
the issue of as many new shares as would be needed to satisfy the
Exchange Ratio of all the Telecom Italia shares to be exchanged would
have led, under the accounting rules in force, on the one hand, to an
increase in the shareholders' equity consisting of capital with a
consequent significant (exchange) merger deficit subject to
amortization, obviously to the detriment of the remuneration of shares
in future years, and, on the other, to a capital structure
characterized by the nearly total prevalance of items not available for
distribution.
4.1.2 Considering the adequacy of Olivetti's share capital (in relation
also to the overall size of the debt when this is measured against the
cash generating capacity of the Company Resulting from the Merger, both
in absolute terms and relative to the main European competitors), it is
proposed that the share exchange be carried out primarily by
redistributing Olivetti's capital, with recourse to the issue of new
shares only insofar as this proves necessary to maintain the share
capital at the level currently subscribed.
4.1.3 The redistribution technique, which has also been used on
previous occasions in important mergers involving listed companies,
consists in dividing the share capital of the absorbing company and
hence the shares composing it (in an equal, larger or smaller number
than that existing, depending on whether the intention is to hold the
par value of each share unchanged, decrease it or increase it) among
the shareholders of the absorbing company and those of the absorbed
company, according to what was referred to above as the "natural"
Exchange Ratio between the shares.
Obviously, the redistribution takes the share capital of the absorbing
company at the time the merger is implemented as the baseline. In the
case in question, the share capital of Olivetti at the time the Merger
is implemented may vary from the current figure of Euro 8,845,537,520:
(i) increasing as a consequence of the conversion of the "Olivetti 1,5%
29
2001-2004 convertibile con premio a1 rimborso" and "Olivetti 15% 2001-
2010 convertibile con premio a1 rimborso" convertible bonds, the
exercise of the "Warrant azioni ordinarie Olivetti ex Tecnost
1999-2004" Olivetti warrants and the exercise of all the Olivetti stock
options ("Conversions") and (ii) decreasing as a consequence of
Withdrawals. The Absorbing Company's capital "to be "redistributed"
will therefore be the algebraic sum of the subscribed capital at the
time the Merger Plan is approved and the subsequent variations up to
the implementation of the Merger.
4.1.4 Given the extreme cases of the total exercise of Conversions and
no Withdrawals on the one hand and no Conversions and the exercise of
the right to withdraw by all the Olivetti minority shareholders except
Olimpia on the other, at the time the Merger is implemented, Olivetti's
share capital can vary between a maximum of Euro 11,926,697,278 and a
minimum of Euro 2,738,756,641.
Since it is assumed that the post-Merger share capital must not be less
than the current figure of Euro 8,845,537,520, in the event that the
decreasing effect of Withdrawals outweighs the increasing effect of
Conversions so that the share capital at the time the Merger is
implemented is less than such amount, the redistribution of the share
capital will be accompanied by a simultaneous capital increase for the
purpose of the Merger to bring the share capital up to the above-
mentioned minimum figure, apart from roundings serving to eliminate any
resulting fractions of shares.
4.1.5 In the light of the method and principles described above, the
share capital will be fixed and the share exchange carried out
according to the following rules:
A) Olivetti will fix the nominal value of its shares - in the
amount resulting after Conversions on the one hand and Withdrawals
on the other - at Euro 0.55 (equal to the par value of Telecom
Italia shares), in place of the current par value of Euro 1.
Consequently, Olivetti's share capital will be divided into a
larger number of shares. Such shares will be divided into ordinary
shares and savings shares.
B) The new ordinary and savings shares with a par value of Euro
0.55 each making up the share capital at the time of the Merger of
Olivetti will be redistributed, respectively, to the holders of
Olivetti and Telecom Italia ordinary shares and the holders of
Telecom Italia savings shares according to assignment ratios
reflecting, with reference to the actual number of shares to be
redistributed, the "natural" Exchange Ratio specified above of 7
Olivetti ordinary or savings shares for every Telecom Italia
30
ordinary or savings share. It should be noted in this respect that
the Telecom Italia shares to be exchanged in the context of the
redistribution with shares of the Company Resulting from the
Merger with a new par value of Euro 0.55 each will naturally be
the Telecom Italian shares held by persons other than Olivetti and
Telecom Italia. The number of shares of the Company to be Absorbed
held by minority shareholders and actually to be exchanged will
therefore vary, depending on the outcome of the Offer that
Olivetti may make after the shareholders' meeting called to
approve the Merger and before the latter's completion.
More precisely, where:
No. OLI Euro 1 shares denotes the number of Euro 1 Olivetti
shares resulting after Conversions and Withdrawals;
No. OLI Euro 0.55 shares denotes the number of new shares of the
Company Resulting from the Merger with a par value of Euro 0.55
each actually to be redistributed following the operation
referred to at point A;
No. T.I. shares denotes the number of Telecom Italia shares held
by minority shareholders that must be exchanged;
(1) the holders of Olivetti ordinary shares will be assigned,
for every share held, a number of ordinary shares of the
Company Resulting from the Merger equal to:
No. OLI Euro 0.55 shares
---------------------------------------------
No. OLI Euro 1 shares + (No. T.I. shares X 7)
(2) the holders of Telecom Italia ordinary and savings shares
will be assigned, for every ordinary or savings share held,
a number of ordinary or savings shares of the Company
Resulting from the Merger equal to:
seven times the number of shares assigned to Olivetti shareholders for
every share held by the latter
31
C) Assuming the extreme case in which all the Conversions were
carried out, all the shares reserved for the Telecom Italia stock-
option plans were issued, no Withdrawals occurred and none of the
holders of Telecom Italia ordinary and savings shares accepted the
Offer, the redistribution would involve 21,684,904,142 shares of
the Company Resulting from the Merger with a par value of Euro 0.55
each and the Telecom Italia shares to be exchanged would total
4,459,575,170 (taking account of Olivetti's holding in the capital
of Telecom Italia and of the latter's holding of own shares at the
date of this Report). In such case, applying the formula above
would give the following assignment ratios:
(i) 0.502620 new ordinary shares of the Company Resulting from
the Merger with a par value of Euro 0.55 each for every
Olivetti ordinary share with a par value of Euro l held at
the date at which the Merger becomes effective and for
which the right of withdrawal has not been exercised;
(ii) 3.518341 new ordinary or savings shares of the Company
Resulting from the Merger for every Telecom Italia ordinary
or savings share, respectively, held at the date at which
the Merger becomes effective by minority shareholders other
than Olivetti and Telecom Italia itself.
D) In the light of the above, since the variables represented by
Conversions, the exercise of Telecom Italia stock options,
Withdrawals and acceptances of the Offer can only be quantified
exactly at the time the Merger is implemented, it is evident that
the assignment ratio for the purpose of redistribution can be
established precisely only at the time the Merger becomes
effective.
E) At all events, at the end of the Operation the ratio between the
shares assigned to Olivetti shareholders and those assigned
Telecom Italia shareholders will exactly reflect the "natural"
Exchange Ratio (1/7) determined above.
F) As already indicated, if at the time the Merger is implemented the
Absorbing Company's share capital is less than the current figure
of Euro 8,845,537,520 because the decreasing effect of Withdrawals
outweighs the increasing effect of Conversions, the redistribution
of the share capital just described will be accompanied by the
32
simultaneous issue of up to a maximum of 11,103,237,962 new
ordinary and saving shares of the Company Resulting from the
Merger with a par value of Euro 0.55 each for the purpose of the
share exchange, against the transfer to capital of the portion of
Telecom Italia's shareholders' equity belonging to minority
interests. These additional shares will be assigned to all the
shareholders of both the Absorbing Company and the Company to be
Absorbed in proportion to their respective shareholdings obtained
by applying the assignment ratios indicated at Point B).
G) Thus, even in the event of such an occurrence, at the end of
the Operation the ratio between the shares assigned to Olivetti
shareholders and those assigned to Telecom Italia shareholders
will exactly reflect the "natural" Exchange Ratio (1/7) determined
above.
The foregoing is without prejudice to roundings made necessary by
the exchange transactions. Olivetti International has announced
that it stands ready to renounce such number of shares or
fractions of shares as will be necessary to close out the
operation.
H) As part of the procedure for assigning the shares of the Company
Resulting from the Merger, a service will be provided to the
minority shareholders of both Olivetti and Telecom Italia, through
authorized intermediaries, to round the number of newly-issued
shares owned down or up to nearest whole number, at market prices
and at no cost in terms of expenses, stamp duty or commissions. In
the event that the Olivetti shares held do not entitle the holder
to receive, in accordance with the assignment mechanism, even one
newly-issued Olivetti share at the end of the Operation,
maintenance of the position of shareholder in the Absorbing
Company will be ensured by Olivetti International S.A. making
available to such persons, free of charge, one share of the
Company Resulting from the Merger.
I) The newly-issued shares to be utilized for the share exchange
will be assigned to those entitled by the respective authorized
intermediaries participating in Monte Titoli S.p.A. at the date
the Operation becomes effective. It will be possible to exchange
Olivetti and Telecom shares which have not been dematerialized
only by delivering them to an authorized intermediary for
dematerialized book-entry in the central securities system.
33
J) Special notices, published in at least three newspapers with a
national circulation (of which one must be a financial newspaper),
will promptly announce the amount of the capital of the Company
Resulting from the Merger at the time of the Merger as a result of
the quantification of the variables involved in the Operation
(Conversions, the exercise of Telecom Italia stock options,
Withdrawals, acceptances of the Offer), the exact assignment ratio
in the overall and final measure resulting from the outcome of the
supplementary assignment described at Point F, if any, and the
detailed instructions on how to carry out the share exchange and
to trade or obtain fractional rights as provided for at Point H).
4.2 Date on which the Merger becomes effective
------------------------------------------
4.2.1 Pursuant to Articles 2504-bis, last paragraph, and 2501-bis,
first paragraph, point 5, of the Civil Code, the newly-issued shares of
the Company Resulting from the Merger will have regular dividend
rights.
4.2.2 Pursuant to Article 2504-bis, second paragraph, of the Civil
Code, the effects of the Merger, except for those referred to in
Article 2501-bis, points 5 and 6, of the Civil Code, will become
effective starting on the date of the last filing of the merger
instrument, or from such later date as may be specified in that
instrument.
Consequently, on that date the Absorbing Company will assume all the
assets, rights and obligations of the Company to be Absorbed,
including, but not limited to, all the tangible and intangible assets,
expropriation procedures, licences, authorizations, concessions, public
service franchises, plant, machinery, equipment, motor vehicles and in
general movable goods entered in public registers, patents,
intellectual property, securities, current account assets and
liabilities, loans, bond issues, equity investments, insurance
policies, labour contracts and every other contractual instrument.
5. Date on which transactions are to be recorded in the Absorbing
Company's accounts
--------------------------------------------------------------
5.1.1 In accordance with the combined effects of Articles 2504-bis,
last paragraph, and 2501-bis, point 6, of the Civil Code and Article
123(7) of Presidential Decree 917/1986, and in conformity with Point 6
of the Merger Plan, the transactions of the Absorbed Company will be
recorded in the accounts of the Absorbing Company starting from 1
January of the year in which the Operation becomes effective and thus,
according to the planned timetable, from 1 January 2003, for income tax
purposes as well.
34
6. Tax effects of the Operation on the Absorbing Company's
accounts
-------------------------------------------------------
6.1 Direct taxes: regime of the Companies Participating in the Merger
-----------------------------------------------------------------
6.1.1 For income tax purposes, pursuant to Article 123 of the Income Tax Code
approved with Presidential Decree 917/1986 and to Article 27(1) of Law
724/1994, mergers are neutral and therefore do not constitute a
realization or distribution of capital gains or losses in respect of
the assets of the merged companies, including inventories and goodwill.
In particular, with regard to the position of the Absorbing Company, it
is to be noted that in principle merger differences are not included in
income and are totally immaterial for tax purposes.
However, pursuant to Article 6(1) of Legislative Decree 358/1997 it is
possible that the larger values stated in the accounts of the Absorbing
Company as a consequence of the recording of cancellation or share
exchange deficits may be recognized for tax purposes upon application
thereto of the tax in lieu of income tax at the rate of 19%.
Furthermore, pursuant to Article 6(2) of the same decree, such larger
values stated in the accounts as a consequence of the recording of the
cancellation deficit are considered to be recognized for tax purposes
without any tax liability (that is, without application of the
above-mentioned tax in lieu of income tax) if and to the extent that
the equity interests cancelled have resulted in the previous holders
paying tax on the capital gains, net of the related capital losses and
writedown.
6.1.2 Pursuant to Article 123(4) of Presidential Decree 917/1986,
Olivetti will reconstitute:
. the reserves with tax deferred in the latest financial statements of
Telecom Italia;
. the reserves subject to tax if they are distributed (Article 123(4),
second sentence) up to the amount of any share exchange surplus.
6.1.3 From the date on which the Merger becomes effective, Olivetti will
succeed to Telecom Italia's obligations and rights relating to income
tax. Since the Operation is to be retroactive to 1 January of the year
in which the Operation becomes effective for accounting and tax
purposes, there is no separate tax period between the closing date of
the last fiscal year of the Company to be Absorbed and the date on
which the Merger becomes effective.
35
6.2. Tax regime for the shareholders
-------------------------------
6.2.1 For the shareholders, the exchange of the shares held in the
Company to be Absorbed does not constitute a sale of such securities
since it simply involves replacing the securities of the Company to be
Absorbed (which will be cancelled as a result of the Merger) with
securities of the Absorbing Company. Consequently, the cost of the
equity investment in the Company to be Absorbed will be transferred to
the shares issued by the received Absorbing Company received in
exchange.
6.3. Indirect tax regime
-------------------
6.3.1 For the purposes of indirect taxes, the Merger is a transaction
excluded from the scope of V.A.T. pursuant to Article 2(3)(f) of
Presidential Decree 633/1972, whereby transfers of assets in connection
with corporate mergers are not considered sales material for V.A.T.
purposes. Consequently, the merger instrument is subject to a
registration fee of Euro 129.11 pursuant to Article 4(b) of the first
part of the fee schedule annexed to Presidential Decree 131/1986.
7. Forecasts of the composition of the shareholders of the Company
Resulting from the Merger
---------------------------------------------------------------
7.1 Telecom Italia shareholders
---------------------------
7.1.1 According to the company share register, supplemented by
communications received and available information, at the date of this
Report the following shareholders hold an interest of more than 2% in
the capital represented by ordinary shares of the Company to be
Absorbed:
NUMBER OF ORDINARY % OF ORDINARY
SHARES HELD SHARE CAPITAL
Olivetti S.p.A. 2,891,656,682 54.94%
7.2 Olivetti shareholders
---------------------
7.2.1 According to the company share register, supplemented by communications
received and available information, the following shareholders hold an
interest of than 2% of the capital represented by ordinary shares of
the Absorbing Company:
36
NUMBER OF ORDINARY % OF ORDINARY
SHARES HELD SHARE CAPITAL
------------------ -------------
Olimpia S.p.A. 2,524,127,813 28.54%
Caisse des Depots et 389,200,000 4.40%
Consimations
Assicurazioni Generali S.p.A. 334,842,996 3.79%
Olivetti International S.A. 211,931,328 2.40%
Mediobanca S.p.A. 210,723,954 2.38%
* Investment held via CDC Ixis Capital Market.
** Investment held through subsidiaries.
*** Subsidiary of Olivetti S.p.A. Under Article 23594-bi5 of the Civil Code, the
voting rights of the shares held by Olivetti International S.A. may not be
exercised.
7.3 Effects of the Merger on the composition of shareholders
--------------------------------------------------------
7.3.1 As already mentioned the shareholder structure of the Company
Resulting from the Merger depends on the number of Conversions and
Withdrawals and consequently on the sum devoted to the Offer and the
number of acceptances thereof. The following table shows the
foreseeable composition of shareholders with holdings of more than 2%
in the Company Resulting from the Merger on the assumption: (i) that
there are no Conversions (apart from those deriving from applications
received by 31 March 2003, which are not yet reflected in Olivetti's
share capital filed with the Company Register but are considered in
this analysis) and that no Telecom Italia stock options have been
exercised; (ii) that 25% of the shareholders other than Olimpia S.p.A.
withdraw at a price taken to be equal to Euro 1 (which is in line with
the average of the official prices recorded from 26 November 2002 up to
today), giving a total outlay of about Euro 1,527 million; and (iii)
that the Offer is made at prices between the minimum and maximum prices
for the Telecom Italia ordinary and savings shares (i.e. Euro 7.7 per
ordinary share and Euro 5.175 per savings share), giving a total outlay
of Euro 7,473 million, so that the Offer covers about 14.6% of the
ordinary and savings shares in the event of full acceptance.
NUMBER OF ORDINARY % OF ORDINARY
SHARES HELD SHARE CAPITAL
------------------ -------------
Olimpia S.p.A. 1,336,092,044 13.65%
Caisse des Depots et 296,014,537 2.10%
Consimations
* Investment held via CDC Ixis Capital Market.
37
It is foreseeable that no single shareholder will have control of the
Company Resulting from the Merger, which, as mentioned earlier, will be
fully contestable.
8. Effects of the merger on shareholders agreements (Article 122 of
Legislative Decree 58/1998) regarding the shares of the
Companies Participating in the Merger
----------------------------------------------------------------
The participants in the shareholders agreements falling within the
scope of Article 122 of Legislative Decree 58/1998 for the Companies
Participating in the Merger have not sent any notifications concerning
possible effects of the Merger on such agreements.
9. Changes to bylaws
-----------------
9.1 Olivetti's bylaws and changes deriving from the Merger
------------------------------------------------------
9.1.1 For the purpose of the Merger, Olivetti will amend its bylaws,
basically adopting the current bylaws of Telecom Italia. In particular:
(i) Olivetti will change its name to "Telecom Italia S.p.A." and
adopt Telecom Italia's current corporate purpose in its
entirety;
(ii) the article of the bylaws concerning the share capital will
incorporate the changes concerning the number, par value and
class of the shares into which the share capital of the Company
Resulting from the Merger will be divided as a result of the
Merger on the basis of the assignment procedure described in
Section 4. In particular, account is taken of the change in the
par value of the shares from Euro 1 to Euro 0.55 and the amount
of the capital increases already approved by Olivetti for the
purpose of the convertible bond issues, stock-option plans and
warrants consequently adjusted, with account also taken of the
Exchange Ratio and assignment procedure described in Section 4.
Lastly, the amendments are included that are necessary to ensure
the assumption by the Company Resulting from the Merger of the
commitments under the stock-option plans of the Company to be
Absorbed, for the part still applicable. Section 9.12
illustrates the provisions that will be included in the article
of the bylaws concerning the share capital with reference to the
capital increases for the stock-option plans of the Company to
be Absorbed;
(iii) a specific article will concern the savings shares that
will be assigned to the holders of Telecom Italia savings shares
on the basis of the exchange ratio and assignment procedure
described
38
earlier. In accordance with Article 145 of the Consolidated Law,
this article will specify the substance of the preferential
rights attaching to the savings shares issued for the purpose of
the exchange, the related conditions, limits and procedures for
the exercise thereof and describe the legal treatment of this
class of shares in the event of the delisting of the ordinary or
savings shares of the Company Resulting from the Merger. The
preferential rights of the savings shares to be issued in
exchange will be the same as those of the Telecom Italia savings
shares, including the possibility of satisfying the rights
attaching to them by distributing reserves, whose introduction
in the Telecom Italia bylaws will be proposed at the
shareholders' meeting called to consider the Merger Plan.
9.1.2 As regards the clauses of Telecom Italia's bylaws that give the
Minister for the Economy and Finance some special powers, to be
exercised in agreement with the Minister for Productive Activities, in
application of Article 2 of Law 474/1994, it should be noted that such
powers include the right to veto the adoption of merger resolutions and
amendments to the bylaws that would suppress or alter such powers,
which were introduced into Telecom Italia's bylaws under a Prime
Ministerial Decree of 21 March 1997 in the light of the sector of the
company's operations (telecommunications) and with a view to its
privatization.
At the end of the meeting of its Board of Directors on 11 March 2003,
Telecom Italia requested the Minister for the Economy and Finance to
indicate whether he intended to exercise the powers in question.
The Minister for the Economy and Finance subsequently informed Telecom
Italia that he did not consider the conditions existed for the exercise
of the power of veto with respect to the adoption by Telecom Italia's
shareholders' meeting of the merger resolution. By contrast, as regards
the question of the presence in the bylaws of the clauses giving the
special powers, the Minister for the Economy and Finance indicated that
he considered it necessary to maintain the power of expressing a
favourable opinion on the acquisition of major shareholdings in the
company's capital and the power of veto as set out in the current
bylaws of Telecom Italia.
The Minister for the Economy and Finance also stated that he had
reached agreement with the Minister for Productive Activities on the
indications regarding these questions.
With this premise, and pending the formalization of the measure best
suited to the foregoing indications and any opinion the competent
Community authorities might express on the matter, the Minister for the
39
Economy and Finance requested that the bylaws to be submitted to the
shareholders' meetings of the Companies Participating in the Merger
conform with the indications set out above.
9.1.3 The shareholders' meeting of the Absorbing Company called to
approve the Merger Plan will be required, in relation to what was just
said, not only to update the resolutions adopted to increase the
capital for the exercise of the rights attaching to the "Warrant azioni
ordinarie Olivetti ex Tecnost 1999-2004" warrants and the "Olivetti
1,5% 2001-2004 convertibile con premio a1 rimborso" and "Olivetti 1,5%
2001-2010 convertibile con premio a1 rimborso" convertible bonds and
for the exercise of the Olivetti stock options, but also to approve
increases in capital for the stock options issued by Telecom Italia
that have not yet been exercised.
To this end, the Company Resulting from the Merger will approve
corresponding increases in capital permitting the issue in relation to
such stock options of a number of shares updated in accordance with the
Exchange Ratio and the assignment ratio provided for in the Merger
Plan, while the exercise price of the option with respect to the total
number of shares updated as indicated above will remain unchanged. In
other words, the owner of Telecom Italia stock options will maintain
the right to subscribe, at the price already fixed, not for the
original number of Telecom Italia shares but the larger number
established on the basis of the assignment ratio as defined in Section
4.
In this case as well it will only be possible to calculate the exact
numbers of shares that can be subscribed when the final assignment
ratio is established at the time of the merger.
More precisely, with reference to Telecom Italia's stock options, the
Absorbing Company will approve an increase in capital divided into the
following tranches, all of which will be variable up to a maximum
amount:
1. a tranche for the exercise of the 8,471,500 options already
assigned by the Company to be Absorbed under the "Piano di Stock
Option 1999" stock-option plan, to be implemented not later than
31 January 2005 by the issue of ordinary shares with a par value
of Euro 0.55 each, which will be reserved for the holders of the
above-mentioned options on the basis of the assignment ratio
envisaged for the shareholders of the Company to be Absorbed in
the Merger, at a price of Euro 6.79 for each option held;
2. a tranche for the exercise of the 20,600,000 options already
assigned by the Company to be Absorbed under the "Piano di
40
Stock Option 2000" stock-option plan, to be implemented not later
than 30 July 2008 by the issue of ordinary shares with a par value
of Euro 0.55 each, which will be reserved for the holders of the
above-mentioned options on the basis of the assignment ratio
envisaged for the shareholders of the Company to be Absorbed in
the Merger, at a price of Euro 13.815 for each option held;
3. a tranche for the exercise of the 32,452,500 options already
assigned by the Company to be Absorbed under the "Piano di Stock
Option 2001" stock-option plan, to be implemented not later than
30 April 2008 by the issue of ordinary shares with a par value of
Euro 0.55 each, which will be reserved for the holders of the
above-mentioned options on the basis of the assignment ratio
envisaged for the shareholders of the Company to be Absorbed in
the Merger, at a price of Euro 10.488 for each option held;
4. a tranche for the exercise of the 11,800,000 options already
assigned by the Company to be Absorbed under the "Piano di Stock
Option Top 2002" stock-option plan, to be implemented not later
than 28 February 2010 by the issue of ordinary shares with a par
value of Euro 0.55 each, which will be reserved for the holders of
the above-mentioned options on the basis of the assignment ratio
envisaged for the shareholders of the Company to be Absorbed in
the Merger, at a price of Euro 9.203 for each option held;
5. a tranche for the exercise of the 27,689,000 options already
assigned by the Company to be Absorbed in three distinct lots
under the "Piano di Stock Option 2002" stock-option plan, to be
implemented not later for the three lots than 31 March 2008, 31
March 2009 and 31 March 2010 respectively by the issue of ordinary
shares with a par value of Euro 0.55 each, which will be reserved
for the holders of the above-mentioned options on the basis of the
assignment ratio envisaged for the shareholders of the Company to
be Absorbed in the Merger, at a price for the three lots of Euro
9.665, Euro 7.952 and Euro 7.721 respectively for each option
held.
9.1.4 As mentioned earlier, the amendment of the Absorbing Company's
corporate purpose is necessary in order to allow the Company Resulting
from the Merger to continue all the activities currently performed by
Telecom Italia, and particularly those performed on the basis of
specific administrative measures.
In another respect, it is necessary to clarify that at the completion
of the Merger the Company resulting from the Merger will be able to
engage in
41
other activities, such as "[. . .] publishing [and] advertising [. .
.]", which are not envisaged by Olivetti's current corporate purpose.
Again with a view to not prejudicing the succession by the Company
Resulting from the Merger to the activities of Telecom Italia, and
especially to those performed on the basis of specific administrative
measures, it was considered advisable to include in the corporate
purpose the provision that "the acquisition [. . .] of equity interests
in other companies or enterprises engaged in activities falling within
the scope of the corporate purpose or related, complementary or similar
thereto I...]" may be performed "provided it is not the Company's
principal activity". Consequently, Olivetti will cease to be a holding
company and will become a company operating principally in the sector
of telecommunications services.
10. Evaluation of recourse to the right of withdrawal (Article 131 of
Consolidated Law and Article 2437 of the Civil Code) for
Telecom Italia shareholders
-----------------------------------------------------------------
10.1 Evaluation on the basis of Article 131 of the Consolidated Law
--------------------------------------------------------------
10.1.1 The Absorbing Company is listed, inter alia, on Borsa Italiana's
MTA electronic share market and will remain so at the completion of the
Merger. Moreover, provision has been made for the Operation to be
subject to the listing of the savings shares to be offered in exchange
to holders of Telecom Italia savings shares at the date the Merger
becomes effective.
Thus, there are no legal grounds for the exercise of the right of
withdrawal provided for by Article 131 of the Consolidated Law.
10.2 Evaluation on the basis of Article 2437 of the Civil Code
---------------------------------------------------------
10.2.1 As explained earlier, as a result of the Merger Olivetti will
change its corporate purpose by adopting the current corporate purpose
of Telecom Italia.
10.2.2 Consequently, Telecom Italia shareholders will not be entitled
to exercise the right of withdrawal provided for by Article 2437 of the
Civil Code. By contrast, this right can be exercised by the Olivetti
shareholders who are absent or contrary to the approval of the Merger
Plan. More precisely, Olivetti shareholders who vote against the plan
in the shareholders' meeting will be able to exercise the right of
withdrawal within 3 days of the date of the meeting, while those absent
will be able
42
to exercise it within 15 days of the date the resolution is filed with
the Company Register. Withdrawal will be exercisable only by those who
are Olivetti shareholders at the date on which the Olivetti
shareholders' meeting approves the Merger Plan.
* * * * *
Milan, 15 April 2003
TELECOM ITALIA S.p.A.
For the Board of Directors
43
PROPOSAL TO THE SHAREHOLDERS' MEETING
The meeting of ordinary shareholders of Telecom Italia S.p.A.,
.. having seen the plan for the merger of Telecom Italia S.p.A. into
Olivetti S.p.A., entered respectively in the Turin Company Register and
the Milan Company Register on April 18 and 22,2003 (the Merger Plan);
.. having examined the Directors' report on the merger operation (the
Merger);
.. having taken note of the balance sheets of the companies participating in
the Merger, as shown in their draft financial statements for the year
ended 31 December 2002;
.. having taken note of the reports on the congruousness of the merger
exchange ratio prepared by the auditing firms Deloitte & Touche Italia
S.p.A. for Olivetti and Reconta Ernst & Young S.p.A. for Telecom Italia;
.. having taken note of the timely filing of the documentation required under
the applicable law;
resolves
1. to approve the Merger Plan and consequently to proceed - with the
accounting and tax effects starting on 1 January of the year in which the
Merger becomes effective in respect of third parties, as provided for in
the Merger Plan - with the merger of Telecom Italia S.p.A. into Olivetti
S.p.A. (the Absorbing Company) on the basis of the following exchange
ratio:
. Olivetti ordinary shares with a par value of Euro 1 (one) for every
Telecom Italia ordinary share with a par value of Euro 0.55 each;
. Olivetti savings shares with a par value of Euro 1 (one) for every
Telecom Italia savings share with a par value of Euro 0.55 each;
with the effectiveness of the whole operation subject (i) to the adoption
by the shareholders' meeting of Olivetti of a like resolution and (ii) to
the admission to listing on the MTA electronic share market operated by
Borsa Italiana S.p.A. of the savings shares to be issued by the Absorbing
Company, taking note that the Olivetti shares with a par value of Euro 1
each (net of those for which the right of withdrawal has been exercised)
will be withdrawn and that new ordinary and savings shares will be issued
with a par value of Euro 0.55 each and regular dividend entitlement, in
the number resulting from their assignment to Olivetti shareholders and
Telecom Italia shareholders other than Olivetti in accordance with the
following criteria:
A. satisfaction of the exchange ratio between the economic values
underlying the Olivetti and Telecom Italia shares by redistributing
Olivetti's capital at the time of the implementation of the Merger,
net of the Olivetti shares with a par value of Euro 1 (one) for which
the right of withdrawal has been exercised, subsequent to the change
in the par
value of the shares of the Absorbing Company from Euro 1 to Euro
0.55, and thus by applying the following assignment ratios:
. for every Olivetti share (with a par value of Euro 1) withdrawn
and cancelled, assignment of "x" newly-issued ordinary shares of
the Absorbing Company (with a par value of Euro 0.55 each);
. for every Telecom Italia ordinary share (with a par value of Euro
0.55) withdrawn and cancelled, assignment of "7x" newly-issued
ordinary shares of the Absorbing Company (with a par value of
Euro 0.55 each);
. for every Telecom Italia savings share (with a par value of Euro
0.55) withdrawn and cancelled, assignment of "7x" newly-issued
savings shares of the Absorbing Company (with a par value of Euro
0.55 each);
where the number "x" is the ratio between
o the total number of shares of the Absorbing Company with a par
value of Euro 0.55 each to be redistributed and
o the sum of (i) the total number of Olivetti shares with a par
value of Euro 1 outstanding (for which the right of withdrawal
has not been exercised) at the time of the implementation of the
Merger and (ii) 7 times the total number of Telecom Italia shares
to be exchanged at the time of the implementation of the Merger;
B. assignment, if necessary, to all the holders of the Absorbing
Company's ordinary and savings shares, in proportion to their
respective holdings following the redistribution and therefore on the
basis of the above-mentioned exchange ratio, of up to a maximum of
11,103,237,961 new shares, of the same class as the shares already
assigned under the redistribution, with a par value of Euro 0.55 each
(and thus up to a total maximum amount of Euro 6,106,780,879.10)
until the share capital of the Absorbing Company reaches a total of
Euro 8,845,537,520.05.
A service will be provided to shareholders to handle any fractions of
shares, without prejudice to any rounding deriving from the aforesaid
assignment operations;
2. to grant severally to the Chairman, the Deputy Chairman and each of the
Managing Directors the powers needed:
(a) to complete all the formalities required for the resolutions adopted
to obtain all the necessary authorizations, with the right to approve
and introduce into such resolutions, the Merger Plan and the Bylaws
of the Absorbing Company annexed thereto any amendments, additions or
deletions that may be requested or suggested by administrative
authorities and/ or following the exercise of the special powers
referred to in Article 5 of the bylaws of Telecom Italia S.p.A. or on
the occasion of filings with the Company Register;
(b) to draw up and sign, inter alia by having ad hoc recourse to
attorneys or agents, in conformity with the resolution of point 1,
the public merger instrument, defining every agreement, condition,
clause, time limit and procedure thereof in conformity with and in
implementation of the Merger Plan;
(c) to do - inter alia by having ad hoc recourse to attorneys or
agents - whatever else may be necessary for and conducive to the
complete implementation of the foregoing resolutions, authorizing
entries, transcriptions, annotations, amendments and corrections in
public registers and every other competent seat.
Annex III.
Merger plan referred to in Article 2501-bis of the Civil Code
with attached a copy of the bylaws of the
Company Resulting from the Merger
PLAN FOR THE MERGER
OF TELECOM ITALIA S.P.A.
INTO OLIVETTI S.P.A.
(under Article 2501-bis of the Civil Code)
Milan, April 15, 2003
The following is an English translation of the official version in Italian
language. In case of conflict, the Italian language version will prevail.
Except as provided below, any offer to purchase or sell securities
described herein is not being made, directly or indirectly, in or into, or by
the use of the mails of, or by any means or instrumentality (including, without
limitation by mail, telephonically or electronically by way of internet or
otherwise) of interstate or foreign commerce, or any facility of any securities
exchange, of the United States of America and any such offer will not be
capable of acceptance by any such use, means, instrumentality or facility.
The information contained herein does not constitute an offer of
securities for sale in the United States or offer to acquire securities in the
United States.
The Olivetti securities referred to herein have not been, and are not
intended to be, registered under the U.S. Securities Act of 1933 (the
"Securities Act") and may not be offered or sold, directly or indirectly, into
the United States except pursuant to an applicable exemption. The Olivetti
ordinary shares and Olivetti savings shares are intended to be made available
within the United States in connection with the merger pursuant to an exemption
from the registration requirements of the Securities Act.
The proposed cash tender offer for a portion of the Telecom Italia
ordinary shares described herein is intended to be made available in or into
the United States pursuant to an exemption from the tender offer rules
available pursuant to the Securities Exchange act of 1934.
The proposed cash tender offer for a portion of the Telecom Italia savings
shares described herein is not being made and will not be made, directly or
indirectly, in or into the United States
***
The merger described herein relates to the securities of two foreign
companies. The merger in which Telecom Italia ordinary shares will be converted
into Olivetti ordinary shares is subject to disclosure and procedural
requirements of a foreign country that are different from those of the United
States. Financial statements included in the document, if any, will be prepared
in accordance with foreign accounting standards that may not be comparable to
the financial statements of United States companies.
It may be difficult for you to enforce your rights and any claim you may
have arising under the federal securities laws, since Olivetti and Telecom
Italia are located in Italy, and some or all of their officers and directors
may be residents of Italy or other foreign countries.
You may not be able to sue a foreign company or its officers or directors
in a foreign court for violations of the U.S. securities laws. It may be
difficult to compel a foreign company and its affiliates to subject themselves
to a U.S. court's judgment. You should be aware that Olivetti may purchase
securities of Telecom Italia otherwise than under the merger offer, such as in
open market or privately negotiated purchases.
2
PLAN FOR THE MERGER
OF TELECOM ITALIA S.P.A.
INTO OLIVETTI S.P.A.
(under Article 2501-bis of the Civil Code)
1. Companies participating in the Merger
Absorbing Company
OLIVETTI S.P.A.
Olivetti S.p.A. ("Olivetti" or the "Absorbing Company"), with registered office
at 77 Via Jervis, Ivrea, fully paid-up share capital of Euro 8,845,537,520
divided into 8,845,537,520 ordinary shares with a par value of Euro 1 each, tax
code and registration number in the Turin Company Register: 00488410010.
Company to be Absorbed
TELECOM ITALIA S.P.A.
Telecom Italia S.p.A. ("Telecom Italia" or the "Company to be Absorbed"), with
registered office at 2 Piazza degli Affari, Milan, and headquarters and
secondary office at 41 Corso d'Italia, Rome, fully paid-up share capital of
Euro 4,023,816,860.80 divided into 5,262,908,631 ordinary shares with a par
value of Euro 0.55 each and 2,053,122,025 savings shares with a par value of
Euro 0.55 each, tax code and registration number in the Milan Company Register:
00471850016.
2. Bylaws of the Absorbing Company and amendments thereto deriving from the
Merger
As a consequence of the Merger, Olivetti will basically adopt the current
bylaws of Telecom Italia.
In particular:
(i) the Absorbing Company will change its name to "Telecom Italia S.p.A.";
(ii) the Absorbing Company will take over the corporate purpose of Telecom
Italia in its entirety, so as to be able to continue to perform the
activities that Telecom Italia is authorized to perform under
administrative measures. The amendment to the corporate purpose will give
the right of withdrawal to
3
Olivetti shareholders who are absent or contrary to the Merger, pursuant
to Article 2437 of the Civil Code;
(iii) the bylaws of the Absorbing Company will be amended to take account of
the changes that will be made to the number and par value (which will be
fixed at Euro 0.55) of the ordinary and savings shares at the end of the
Merger and hence following the application of the share exchange ratio
and assignment procedure described in Sections 3 and 4. As a further
consequence of the Merger the bylaws will also be amended to take account
of (a) the updating of the amount of the increases in capital already
approved by Olivetti for the purposes of the "Piano triennale di Stock
Option 2002-2004" stock-option plan, the "Piano triennale di Stock Option
febbraio 2002-dicembre 2004" stock-option plan, the "Warrant Azioni
Olivetti ex Tecnost 1999-2004" warrants, and the convertible bond issues
"Prestito Olivetti 1,5% 2001-2004 convertibile con premio al rimborso"
and "Prestito Olivetti 1,5% 2001-2010 convertibile con premio al
rimborso", and (b) the increases in capital that the Olivetti
shareholders' meeting will be called to approve for the purposes of the
stock-option plans of the Company to be Absorbed (Piano 1999, Piano 2000,
Piano 2001, Piano Top 2002 and Piano 2002), for the part still
applicable;
(iv) the bylaws of the Absorbing Company will contain an article concerning
the savings shares that will be assigned in exchange to the holders of
Telecom Italia savings shares on the basis of the exchange ratio and
assignment procedure described in Sections 3 and 4. In accordance with
Article 145 of Legislative Decree 58/1998, this article will specify the
substance of the preferential rights attaching to the savings shares
issued for the purpose of the exchange, the related conditions, limits
and procedures for the exercise thereof and describe the legal treatment
of this class of shares in the event of the delisting of the ordinary or
savings shares of the Absorbing Company. The preferential rights of the
savings shares to be issued in exchange will be the same as those of the
Telecom Italia savings shares, including the possibility of satisfying
the rights attaching to them by distributing reserves, whose introduction
in the Telecom Italia bylaws will be proposed at the shareholders'
meeting called to consider the Merger Plan;
(v) the Minister for the Economy and Finance has notified Telecom Italia that
he does not consider there are grounds for vetoing the adoption of the
merger resolution by the Telecom Italia shareholders. With regard to the
inclusion in the bylaws of the clauses providing for special powers, the
Minister for the Economy and Finance has communicated that he considers
it necessary to maintain the power of approval of the acquisition of
major equity interests in the company and the veto powers, in the text
currently contained in the Telecom Italia bylaws. The Minister for the
Economy and Finance has also communicated that he has reached the
agreement on these decisions with the Minister for Productive Activities.
This premised, pending the formalization of the measure most appropriate
to these decisions and the opinion, if any,
4
that the competent European Union authorities may see fit to express on
the matter, the Minister for the Economy and Finance has requested that
the bylaws to be submitted to the shareholders meetings of the Companies
Participating in the Merger contain the provisions specified above.
(vi) It is also pointed out the shareholders' meeting of the Absorbing Company
called to approve the Merger Plan will also be requested to grant a
delegation under Article 2443 of the Civil Code to increase the share
capital following the Merger by means of the issue of up to a maximum of
88,445,000 ordinary shares with a par value of Euro 0.55 each (and thus
for a maximum of Euro 48,644,750), to be offered for subscription to
employees of the Absorbing Company or its subsidiaries, with the
exclusion of the right of pre-emption under the combined effects of
Article 2441, last paragraph, of the Civil Code and Articles 134(2) and
134(3) of Legislative Decree 58/1998.
(vii) Lastly, it is pointed out that the shareholders' meeting of the Absorbing
Company called to approved the Merger Plan will first be requested to
approve the replacement of Article 20 (Board of Auditors) and the
amendment of Article 13 (Board of Directors) of Olivetti's bylaws.
The complete text of the Absorbing Company's bylaws incorporating all the
amendments deriving from the Merger, including what is provided for at points
(v) and (vi), is annexed to this Merger Plan. The numbers contained in such
bylaws will be specified in the merger instrument, on the basis of the
principles and methods described in Sections 3 and 4.
3. Exchange ratio
The draft financial statements for the year ended 31 December 2002 of Olivetti
and Telecom Italia were taken as showing their assets and liabilities in
accordance with and for the purposes of Article 2501-ter of the Civil Code.
The exchange ratio has been fixed as follows:
o 7 Olivetti ordinary shares with a par value of Euro 1 (one) each for
every Telecom Italia ordinary share with a par value of Euro 0.55;
o 7 Olivetti savings shares with a par value of Euro 1 (one) each for every
Telecom Italia savings share with a par value of Euro 0.55;
No cash consideration is envisaged.
5
4. Procedure for assigning the shares of the Absorbing Company
The exchange ratio between the economic values underlying the shares will be
satisfied principally by redistributing Olivetti's capital at the time of the
Merger's implementation, net of the Olivetti shares with a par value of Euro 1
(one) for which the right of withdrawal referred to in Section 2(ii) has been
exercised. This redistribution, subsequent to the change of the par value of
the shares of the Absorbing Company from Euro 1 to Euro 0.55, will be made to
the shareholders of Olivetti and the shareholders of Telecom Italia other than
Olivetti at the time of the implementation of the Merger on the basis of the
exchange ratio specified above and will thus give rise to the following
assignment ratios:
o for every Olivetti share (with a par value of Euro 1) withdrawn and
cancelled, "x" newly-issued ordinary shares of the Absorbing Company
(with a par value of Euro 0.55) will be assigned;
o for every Telecom Italia ordinary share (with a par value of Euro 0.55)
withdrawn and cancelled, "7x" newly-issued ordinary shares of the
Absorbing Company (with a par value of Euro 0.55) will be assigned;
o for every Telecom Italia savings share (with a par value of Euro 0.55)
withdrawn and cancelled, "7x" newly-issued savings shares of the
Absorbing Company (with a par value of Euro 0.55) will be assigned;
where "x" is the ratio between
/ the total number of shares of the Absorbing Company with a par
value of Euro 0.55 to be redistributed
/ the sum of (i) the total number of Olivetti shares with a par value
of Euro 1 outstanding (for which the right of withdrawal has not
been exercised) at the time of the Merger's implementation and (ii)
7 times the total number of Telecom Italia shares to be exchanged
at the time of the Merger's implementation.
Moreover, if the capital to be redistributed is less than Euro 8,845,537,520,
the redistribution will be accompanied by the assignment to all the holders of
the Absorbing Company's ordinary and savings shares, in proportion to their
respective holdings following the redistribution and therefore on the basis of
the above-mentioned exchange ratio, of up to a maximum of 11,103,237,961 new
ordinary or savings shares with a par value of Euro 0.55 each (and hence up to
a total maximum of Euro 6,106,780,879.1) until the share capital of the
Absorbing Company reaches a total of Euro 8,845,537,520 (more precisely: Euro
8,845,537,520.05, taking account of the change of the par value of the
Absorbing Company's shares to Euro 0.55), without prejudice to any rounding
deriving from the exchange operations.
A service will be provided to the shareholders of both Olivetti and Telecom
Italia through authorized intermediaries to handle any fractions of shares, at
market prices and at no cost in terms of expenses, stamp duty or commissions,
which will permit the number of newly-issued shares due to be rounded down or
up to the nearest whole number.
6
In the event that the Olivetti shares held do not entitle the holder to
receive, in accordance with the assignment mechanism, even one newly-issued
Olivetti share at the end of the Operation, maintenance of the position of
shareholder can be ensured by the assignment free of charge to such persons of
one share of the Absorbing Company made available by Olivetti International
S.A.
The ordinary and savings shares assigned in exchange as specified above will be
listed in the same way as the Olivetti ordinary shares currently outstanding.
Upon completion of the assignment procedure described above, the share capital
of the Absorbing Company will be fixed in an amount between a minimum of Euro
8,845,537,520 (more precisely: Euro 8,845,537,520.05, taking account of the
change of the par value of the Absorbing Company's shares to Euro 0.55)
corresponding to Olivetti's paid-up share capital and certified as per Article
2444 of the Civil Code at the date of this Merger Plan, and a maximum of Euro
11,926,697,278 (more precisely: Euro 11,926,697,277.55, taking account of the
change of the par value of the Absorbing Company's shares to Euro 0.55)
corresponding to the Absorbing Company's share capital assuming that the
conversion and subscription rights attaching respectively to the bonds and to
the warrants and stock options issued by Olivetti are exercised in full,
without prejudice to any rounding deriving from the exchange operations.
5. Date from which the ordinary and savings shares assigned in exchange will
be entitled to a share of profits
The ordinary and savings shares issued by the Absorbing Company in exchange for
the shares of the Company to be Absorbed that are cancelled as a result of the
Merger will have regular dividend rights.
6. Date of effectiveness of the Merger. Recording of Telecom Italia
transactions in the accounts of Olivetti. Start of the tax effects of the
Merger
In accordance with Article 2504-bis of the Civil Code, the effects of the
Merger shall start on the date of the last filing of the merger instrument, or
from such later date as may be specified in that instrument.
The effectiveness of the Merger is subject to the admission to listing on the
MTA electronic share market operated by Borsa Italiana S.p.A. of the savings
shares assigned by the Absorbing Company for the purpose of the exchange.
With reference to point 6 of Article 2501-bis of the Civil Code, the
transactions carried out by the Company to be Absorbed will be recorded in the
accounts of the Absorbing Company from 1 January of the year in which the
Merger will become effective in respect of third parties. The tax effects of
the Merger will also start on that date.
7
7. Treatment reserved to particular categories of shareholders or holders of
securities other than shares. Special advantages for directors
No special treatment is envisaged in connection with the Merger for any
categories of shareholders or for holders of financial instruments other than
the shares of the Absorbing Company or the shares of the Company to be
Absorbed, although:
a) the number of shares obtainable by exercising warrants (Olivetti) and
stock options (Olivetti and Telecom Italia) and the conversion ratios for
the convertible bonds issued by Olivetti will be adjusted to take account
of the exchange ratio and assignment procedure described in Sections 3
and 4, with ensuing amendment to all the respective rules;
b) the savings shares issued by the Absorbing Company in exchange for the
savings shares of the Company to be Absorbed will have the same rights
and features as the latter, as specified in Section 2(iv).
The Absorbing Company will assume the bonds already issued by Telecom Italia
and adopt the rules thereof.
No special advantages are envisaged in favour of the directors of the Companies
Participating in the Merger.
All numerical and other changes, additions and updates to this Merger Plan or
the bylaws of the Absorbing Company annexed hereto shall be made that may be
required by the administrative authorities, inter alia with reference to the
powers referred to in Section 2(v), or on the occasion of filing with the
Company Register or in connection with and/or attendant upon the operations
envisaged in this Plan.
Milan, 15 April 2003.
TELECOM ITALIA S.p.A. OLIVETTI S.p.A.
(in original signed by the respective Legal Representatives)
Annexes:
Bylaws of the Absorbing Company after the Merger
8
Annexed to the plan for the merger
of Telecom Italia S.p.A. into Olivetti S.p.A.
POST-MERGER BYLAWS OF THE ABSORBING COMPANY
NAME - REGISTERED OFFICE - PURPOSE AND DURATION OF THE COMPANY
Article 1
The name of the Company shall be "TELECOM ITALIA S.p.A."
Article 2
The registered office of the Company shall be at 2 Piazza degli Affari, Milan,
and the headquarters and secondary office at 41 Corso d'Italia, Rome.
Article 3
The Company's purpose shall be:
o the installation and operation, using any technique, method or system, of
fixed and mobile equipment and installations, including space systems
which use artificial satellites, radio stations, including shipboard
stations, links for maritime wireless communications, and dedicated
and/or integrated networks, for the purpose of providing and operating,
without territorial restrictions, licensed telecommunications services
for public use and telecommunications services in a freemarket
environment, including those resulting from technological progress, and
the performance of activities directly or indirectly related thereto,
including the design, construction, operation, maintenance and
distribution of telecommunications, remote-computing, online and
electronic products, services and systems;
o the performance of activities related to or otherwise serving the pursuit
of the corporate purpose, including publishing, advertising, information
technology, online and multimedia activities and, in general, all
commercial, financial, property, research, training and consulting
activities;
o the acquisition, provided it is not the Company's principal activity, of
equity interests in other companies and undertakings falling within the
scope of the corporate purpose or related, complementary or similar
thereto, including companies involved in manufacturing electronic
products and insurance;
o the control and the strategic, technical and administrative and financial
coordination of subsidiary companies and undertakings, and the financial
planning and management thereof, with the implementation of all related
transactions.
Activities reserved to persons entered in a professional register, activities
involving dealings with the public covered by Article 106 of Legislative Decree
385/1993, and those which are otherwise prohibited by applicable legislation
shall be expressly excluded.
Article 4
The duration of the Company shall be until 31 December 2100.
9
SHARE CAPITAL - SHARES - BONDS
Article 5
The share capital shall be Euro [-],divided into [-] ordinary shares with a par
value of Euro 0.55 each and [-] savings shares with a par value of Euro 0.55
each.
The Extraordinary Shareholders' Meeting of 4 October 2000 approved the
increase, in one or more steps, of the share capital by up to a maximum amount
now remaining, partly as a consequence of the resolution adopted by the
Extraordinary Shareholders' Meeting of [-], of Euro 56,992,575.20, which is
reserved exclusively for the exercise of the Warrant Tecnost 1999-2004 (now
Warrant Azioni Olivetti ex Tecnost 1999-2004) warrants, by means of the issue
of up to a maximum of 103,622,864 ordinary shares with a par value of Euro 0.55
each.
The Shareholders' Meeting of [-], reiterating, updating and, where necessary,
renewing earlier resolutions of the Shareholders' Meeting and the Board of
Directors resolved to increase the share capital by the following divisible
amounts:
1. up to a maximum of Euro 492,726.30, by means of the issue of up to a
maximum of 895,866 shares with a par value of Euro 0.55 each for the
exercise of the "Piano triennale Stock Option 2002-2004" stock options,
increase to be implemented by 15 December 2004;
2. up to a maximum of Euro 10,743,649.40, by means of the issue of up to a
maximum of 19,533,908 shares with a par value of Euro 0.55 each for the
exercise of the "Piano triennale Stock Option febbraio 2002-dicembre
2004" stock options, increase to be implemented by 31 December 2004;
3. up to a maximum of Euro 180,568,488.10, by means of the issue of up to a
maximum of 328,306,342 shares with a par value of Euro 0.55 each to be
reserved irrevocably and exclusively for the conversion of the "Olivetti
1,5% 2001-2004 convertibile con premio al rimborso" convertible bonds, on
the basis of a conversion ratio equal to the assignment ratio established
for the shareholders of Olivetti S.p.A. in the context of the merger of
Telecom Italia S.p.A. into Olivetti S.p.A.;
4. up to a maximum of Euro 892,681,820.80, by means of the issue of up to a
maximum of 1,623,057,856 shares with a par value of Euro 0.55 each to be
reserved irrevocably and exclusively for the conversion of the "Olivetti
1,5% 2001-2010 convertibile con premio al rimborso" convertible bonds, on
the basis of a conversion ratio equal to the assignment ratio established
for the shareholders of Olivetti S.p.A. in the context of the merger of
Telecom Italia S.p.A. into Olivetti S.p.A.
The Shareholders' Meeting of [-] also resolved to increase the share capital by
up to a maximum of Euro 261,956,575.10, by means of the issue of up to a
maximum of 476,284,682 shares with a par value of Euro 0.55 each, divided into
the following divisible tranches:
1. a tranche of up to a maximum of Euro 21,969,104.30 for the exercise of
the "Piano di Stock Option 1999" stock options, increase to be
implemented by 31 January 2005 by means of the issue of up to a maximum
of 39,943,826 shares with a par value of Euro 0.55 each, to be subscribed
for at a total price of Euro 6.79 per option held;
2. a tranche of up to a maximum of Euro 53,421,890.50 for the exercise of
the "Piano di Stock Option 2000" stock options, increase to be
implemented by 30 July 2008 by means of the issue of up to a maximum of
97,130,710 shares with a par value of Euro 0.55 each, to be subscribed
for at a total price of Euro 13.815 per option held;
3. a tranche of up to a maximum of Euro 84,158,927.60 for the exercise of
the "Piano di Stock Option 2001" stock options, increase to be
implemented by 30 April 2008 by means of the issue of up to a maximum of
153,016,232 shares with a par value of Euro 0.55 each, to be subscribed
for at a total price of Euro 10.488 per option held;
4. a tranche of up to a maximum of Euro 30,600,889.00 for the exercise of
the "Piano di Stock Option Top 2002" stock options, increase to be
implemented by 28 February 2010 by means of the
10
issue of up to a maximum of 55,637,980 shares with a par value of Euro
0.55 each, to be subscribed for at a total price of Euro 9.203 per option
held;
5. a tranche of up to a maximum of Euro 71,805,763.70 for the exercise of
the "Piano di Stock Option 2002" stock options, increase to be
implemented by 31 March 2008 for the first lot, by 31 March 2009 for the
second lot and by 31 March 2010 for the third lot by means of the issue
of up to a maximum of 130,555,934 ordinary shares with a par value of
Euro 0.55 each, to be subscribed for at a total price for the different
options of respectively Euro 9.665, Euro 7.952 and Euro 7.721 per option
held.
The Extraordinary Shareholders' Meeting of 8 May 2002 authorized the directors,
under Article 2420-ter of the Civil Code, to issue, in one or more steps, for
up to a maximum of five years from the date of the resolution referred to
above, bonds, in euros or other currencies, possibly convertible into the
shares of other companies, with or without warrants giving the right to acquire
shares of other companies, up to a maximum amount of Euro 9 billion, within the
limits permitted from time to time by law, and to establish the procedures,
time limits, conditions and related rules of such issues.
The Shareholders' Meeting of [-] authorized the Board of Directors, under
Article 2443 of the Civil Code and for a period of up to a maximum of five
years from [-], to increase the share capital in one or more steps by means of
the issue for cash of up to a maximum of 88,445,000 ordinary shares with a par
value of Euro 0.55 each (and thus for up to a maximum of Euro [-]), to be
offered for subscription to employees of Telecom Italia S.p.A. or its
subsidiaries, with the exclusion of the right of pre-emption pursuant to the
combined effects of Article 2441, last paragraph, of the Civil Code and
Articles 134(2) and 134(3) of Legislative Decree 58/1998. The Board of
Directors' resolutions shall establish a time limit for the subscription of the
shares and provide that, in the event of the increase approved not being
subscribed for within the time limit established from time to time for the
purpose, the share capital be increased by an amount equal to the subscriptions
collected by such time limit.
Article 6
The savings shares shall have the preferential rights set forth in this
Article.
The net profit shown in the duly approved annual accounts, less the amount
allocated to the legal reserve, must be distributed to the savings shares up to
five per cent of their par value.
The net profit that remains after the allocation to the savings shares of the
preferred dividend provided for in the second paragraph, payment of which must
be approved by the Shareholders' Meeting, shall be divided among all the shares
in such a way that the dividend per savings share is higher by two per cent of
its par value than the dividend per ordinary share.
When the dividend paid on savings share in a fiscal year is less than that
indicated in the second paragraph, the difference shall go to increase the
preferred dividend in the next two fiscal years.
In the event of a distribution of reserves, the savings shares have the same
rights as the other shares. If the net profit for the year is nil or
insufficient to satisfy the property rights referred to in the preceding
paragraphs, the Shareholders' Meeting called to approve the annual accounts may
resolve to satisfy the right referred to in the second paragraph and/or the
right to the premium referred to in the third paragraph by drawing on the
reserves. Payment made by drawing on the reserves shall exclude application of
the mechanism for carrying over, to the two following fiscal years, the right
to preferred dividends not received through the distribution of profits
referred to in the fourth paragraph.
A reduction of the share capital due to losses shall not entail a reduction of
the par value of the savings shares, except for the amount of the loss that
exceeds the total par value of the other shares.
Upon dissolution of the Company, the savings shares shall have priority in the
repayment of the capital up to their entire par value.
If the Company's ordinary or savings shares are delisted, holders of saving
shares may apply to the Company for their conversion into ordinary shares, in
the manner approved by an Extraordinary Shareholders' Meeting called ad hoc
within two months of the delisting.
11
Article 7
The shares shall be indivisible. In the event of joint ownership, the rights of
the joint owners shall be exercised by a common representative. Fully paid-up
shares may be bearer shares when the law permits. In such case, shareholders
may apply for their shares to be converted, at their own expense, into
registered shares or vice versa.
Vis-a-vis the Company, shareholders shall be deemed to elect domicile for all
legal purposes at the domicile indicated in the Shareholders' Register.
Article 8
The Company may issue bonds and shall establish the terms and conditions of
their placement.
BOARD OF DIRECTORS
Article 9
The Company shall be managed by a Board of Directors consisting of not less
than seven and not more than twenty-three members. The Shareholders' Meeting
shall establish the number of members of the Board, which shall remain
unchanged until the Meeting establishes a different number.
The Board of Directors shall be appointed on the basis of slates presented by
the shareholders pursuant to the following paragraphs or by the outgoing Board
of Directors, on which the candidates shall be listed by serial number.
When the Board of Directors presents its own slate, it shall be filed at the
registered office of the Company and published in at least one Italian daily
newspaper with national circulation, at least twenty days prior to the date set
for the Shareholders' Meeting on the first call.
The slates presented by the shareholders shall be filed at the registered
office of the Company and published at the expense of the shareholders in the
manner indicated in the preceding paragraph at least ten days prior to the date
set for the Shareholders' Meeting on the first call.
Each shareholder may present or participate in the presentation of only one
slate and each candidate may appear on only one slate on pain of ineligibility.
Only shareholders who alone or together with other shareholders hold a total
number of shares representing at least 1% of the share capital entitled to vote
at the Ordinary Shareholders' Meeting may submit slates. To evidence ownership
of the number of shares necessary to present slates, shareholders must present
and/or deliver to the registered office of the Company, at least five days
prior to the date set for the Shareholders' Meeting on the first call, a copy
of the documentation attesting their right to attend the meeting.
Together with each slate, and within the respective time limits specified
above, declarations must be filed in which the individual candidates agree to
their candidacy and attest, on their own responsibility, that there are no
grounds for ineligibility or incompatibility, and that they meet any
requirements prescribed for the positions in question. Together with the
declarations, a curriculum vitae shall be filed for each candidate setting out
their main personal and professional data with an indication, where
appropriate, of the grounds for their qualifying as independent.
Each person entitled to vote may vote for only one slate.
The Board of Directors shall be elected as specified below:
a) four fifths of the directors to be elected shall be chosen from the slate
that obtains the majority of the votes cast by the shareholders, in the
order in which they are listed on the slate; in the event of a fractional
number, it shall be rounded down to the nearest whole number;
b) the remaining directors shall be taken from the other slates; to that
end, the votes obtained by the various slates shall be divided first by
one, then by two, then by three and then by four, up to the
12
number of directors to be chosen. The quotients thus obtained shall be
assigned to the candidates on each slate in the order specified thereon.
On the basis of the quotients assigned, the candidates on the various
slates shall be arranged in a single decreasing ranking. Those who have
obtained the highest quotients shall be elected.
If more than one candidate obtains the same quotient, the candidate from
the slate that has not yet elected any director or that has elected the
smallest number of directors shall be elected.
If none of such slates has yet elected a director or all of them have
elected the same number of directors, the candidate from the slate that
obtained the largest number of votes shall be elected. If the different
slates have received the same number of votes and their candidates have
been assigned the same quotients, a new vote shall be held by the entire
Shareholders' Meeting and the candidate obtaining the simple majority of
the votes shall be elected.
In appointing directors who for any reason have not been appointed pursuant to
the procedure specified above, the Shareholders' Meeting shall vote on the
basis of the majorities required by law.
If in the course of the fiscal year one or more vacancies occur on the Board,
the procedure specified in Article 2386 of the Civil Code shall be followed.
Should a majority of the seats on the Board of Directors become vacant for any
cause or reason, the remaining directors shall be deemed to have resigned and
they shall cease to hold office from the time the Board has been reconstituted
by persons appointed by the Shareholders' Meeting.
Article 10
The Board of Directors shall elect a Chairman from among its member -- if the
Shareholders' Meeting has not already done so -- and may also appoint a Deputy
Chairman; both may be re-elected.
In the absence or disability to act of the Chairman, the Deputy Chairman, if
one has been appointed, shall take his/her place or, if the Deputy Chairman is
absent, the most senior director by age.
The Board of Directors may elect a Secretary who need not be a director.
Extracts from the register of the minutes of meetings of the Board of Directors
signed by the Chairman or by two directors and countersigned by the Secretary
shall be conclusive evidence.
Article 11
The Chairman or whoever takes his/her place shall call meetings of the Board of
Directors at the Company's registered office or elsewhere, indicating the time
and place, whenever he/she deems this appropriate in the interests of the
Company or receives a written request to do so from at least one third of the
directors holding office or from the members of the Board of Auditors.
In general, meetings shall be called at least five days prior to the date
thereof, except in urgent cases, when it may be given by telegram, fax or
e-mail with at least twenty-four hours' notice.
Notice shall be given to the Board of Auditors within the same time limits.
Meetings of the Board of Directors may be held -- if the Chairman or the person
acting in his/her place deems it necessary -- by video-conference or
audio-conference, provided that all those taking part can be identified by the
Chairman and all the other participants, that they are able to follow the
debate and intervene in real time in relation to the matters under discussion,
that they are able to exchange documents pertaining to such matters and that
all the above is fully recorded in the minutes. Once the above conditions have
been verified, the Board meeting shall be considered to have taken place where
the Chairman is located, where the Secretary to the meeting must also be.
Article 12
The Board of Directors shall have the broadest possible powers of ordinary and
extraordinary administration of the Company, since all matters not expressly
reserved to the General Shareholders' Meeting by law or these bylaws are within
its jurisdiction.
13
The Board of Directors, through the Chairman or other directors delegated for
the purpose, shall report to the Board of Auditors on the activities carried
out and the transactions of greatest economic, financial or asset-related
significance concluded by the Company or its subsidiaries; in particular,
transactions involving a potential conflict of interest must be reported on.
The report shall be made in good time, and at least once in each quarter, on
the occasion of the meetings of the Board of Directors and the Executive
Committee or in a written memorandum addressed to the Chairman of the Board of
Auditors.
In accordance with the times and procedures for disclosing information to the
market, the representative of the holders of savings shares must be informed by
the Board of Directors or the persons delegated for the purpose of any
corporate transactions that might affect the price of the shares of that class.
Article 13
To implement its own resolutions and manage the Company, the Board of
Directors, subject to the limits provided for by law, may:
o create an Executive Committee, establishing its powers and the number of
members;
o delegate suitable powers, establishing the limits thereof, to one or more
directors, possibly with the title of Chief Executive Officer;
o appoint one or more General Managers, establishing their powers and
duties;
o appoint attorneys, who may be members of the Board of Directors, for
specific transactions and for a limited period of time.
Article 14
The company signature and the legal representation of the Company vis-a-vis
third parties and in legal proceedings shall pertain to the Chairman and, in
his absence or disability to act, the Deputy Chairman, if one is appointed;
they shall also pertain to the directors with delegated powers.
Article 15
The directors shall be entitled to the reimbursement of expenses incurred in
the performance of their duties. The Ordinary Shareholders' Meeting shall also
decide the annual compensation payable to the Board. Once fixed, this
compensation shall remain unchanged until the Meeting establishes a different
amount.
BOARD OF AUDITORS
Article 16
The Board of Auditors shall consist of five or seven auditors. The
Shareholders' Meeting shall establish the exact number, which shall remain
unchanged until the Meeting establishes a different number. The Meeting shall
also appoint two alternates.
The Board of Auditors shall elect a Chairman from among its members by majority
vote. In the absence or disability to act of the Chairman, he/she shall be
replaced by the most senior auditor by age.
Without prejudice to the situations of incompatibility established by law,
persons who are members of the boards of auditors of more than five companies
listed on Italian regulated markets may not be appointed auditors and shall
forfeit the post if they are elected. TELECOM ITALIA S.p.A. and its
subsidiaries shall not be included when computing the above limit.
14
For the purposes of Articles 1(2)(b) and 1(2)(c) of the regulation referred to
in Justice Minister Decree 162/2000, the following sectors of activity and
matters shall be considered closely linked to those of the Company:
telecommunications, information technology, online systems, electronics and
multimedia technology, and matters related to private and administrative law,
economics and business administration.
The appointment of the Board of Auditors shall be based on the slates presented
by shareholders who individually or together with other shareholders hold a
total number of shares representing at least 1% of the share capital entitled
to vote at the Ordinary Shareholders' Meeting. To evidence ownership of the
number of shares necessary to present slates, shareholders must present and/or
deliver to the registered office of the Company, at least five days prior to
the date set for the Shareholders' Meeting on the first call, a copy of the
documentation attesting their right to attend the meeting.
Each shareholder may present or participate in the presentation of only one
slate and each candidate may appear on only one slate on pain of ineligibility.
The slates must be filed at the registered office of the Company and published
at the expense of the shareholders who present them in at least one Italian
daily newspaper with national circulation, at least ten days prior to the date
set for the Shareholders' Meeting on the first call.
Together with each slate, declarations must be filed in which the individual
candidates agree to their candidacy and attest, on their own responsibility,
that there are no grounds for ineligibility or incompatibility, and that they
meet the requirements prescribed by law and these bylaws. Together with the
declarations, a curriculum vitae for each candidate shall be filed setting out
their main personal and professional data.
The slates shall be divided into two sections: one for candidates to the
position of auditor and the other for candidates to the position of alternate.
The first candidate in each section must be selected from among persons entered
in the register of auditors who have worked on statutory audits for a period of
not less than three years.
Each person entitled to vote may vote for only one slate.
The Board of Auditors shall be elected as specified below:
a) from the slate that obtains the majority of the votes cast by the
shareholders (the Majority Slate) one alternate and all the auditors not
chosen from the other slates (the Minority Slates) shall be chosen in the
order in which they are listed on the slate;
b) from the Minority Slates two auditors shall be chosen. One alternate
shall be chosen from the Minority Slate that obtains the largest number
of votes.
For the appointment of the auditors from the Minority Lists, the votes
obtained by the various slates shall be divided first by one and then by
two. The quotients thus obtained shall be assigned to the candidate
auditors on each slate in the order specified thereon. On the basis of
the quotients assigned, the candidates on the various slates shall be
arranged in a single decreasing ranking and those who have obtained the
highest quotients shall be elected.
If more than one candidate obtains the same quotient, the candidate from
the slate that has not yet elected an auditor shall be elected or,
subordinately, there shall be a tiebreaker vote by the entire
Shareholders' Meeting and the slate that obtains the simple majority of
the votes shall prevail.
In appointing auditors who for any reason have not been appointed pursuant to
the procedure specified above, the Shareholders' Meeting shall vote on the
basis of the majorities required by law.
In the event of the substitution of an auditor chosen from the Majority Slate
or one of the Minority Slates, the alternate chosen respectively from the
Majority List or the Minority Lists shall take his/her place. Appointments to
fill vacancies on the Board of Auditors pursuant to Article 2401 of the Civil
Code shall be made by the Shareholders' Meeting on the basis of the majorities
required by law.
After notifying the Chairman of the Board of Directors, the Board of Auditors,
or at least two auditors, may call, as provided for by law, a meeting of the
shareholders, the Board of Directors or the Executive Committee.
15
Meetings of the Board of Auditors -- if the Chairman deems it necessary -- may
be validly held by video-conference or by audio-conference, provided all those
taking part can be identified by the Chairman and by all the other
participants, that they are able to follow the debate and intervene in real
time in dealing with the matters being discussed, that they are able to
exchange documents pertaining to such matters and that all the above is fully
recorded in the minutes. Once the above conditions have been verified, the
meeting of the Board of Auditors shall be considered to have taken place where
the Chairman is located.
SHAREHOLDERS' MEETING
Article 17
An Ordinary Shareholders' Meeting shall be called to approve the annual
accounts every year within six months of the end of the fiscal year. Ordinary
and Extraordinary Shareholders' Meetings may be held in a place other than the
Registered Office, provided it is in Italy.
An Extraordinary Shareholders' Meeting shall be called whenever it is deemed
advisable by the Board of Directors and when it is required by law.
Article 18
Every shareholder entitled to attend may be represented at the Shareholders'
Meeting by giving a proxy to an individual or legal entity, subject to the
restrictions established by law.
In order to facilitate the collection of proxies among employee shareholders of
the Company and its subsidiaries who belong to shareholder associations
satisfying the requirements established by law, special areas shall be made
available in accordance with the procedures and time limits established by the
Board of Directors either directly or through its agents where information can
be provided and proxy forms collected.
Article 19
The Chairman of the Board of Directors or whoever takes his/her place or, in
the absence thereof, the person appointed by those present, shall chair the
Shareholders' Meeting and set the rules for the proceedings.
The Secretary shall be appointed by the Meeting, which may select a person who
is not a shareholder.
The proceedings of shareholders' meetings shall be governed by law, these
bylaws and the Meeting Rules approved by the Ordinary Shareholders' Meeting.
Article 20
Resolutions may be adopted by a show of hands. The Chairman shall establish the
procedures for recording votes and may choose two or more tellers from among
the persons present.
Each shareholder may exercise his/her right to vote by mail, in accordance with
the applicable law.
FISCAL YEAR - DIVIDENDS
Article 21
The fiscal year shall end on 31 December of each year.
16
From the net profit reported in the annual accounts, 5% shall be allocated to
the legal reserve until this reaches an amount equal to one-fifth of the share
capital.
The remainder shall be used to pay the dividend determined by the Shareholders'
Meeting, and for such other purposes as the Meeting deems most appropriate or
necessary.
During the course of the fiscal year, the Board of Directors may distribute
interim dividends to the shareholders.
SPECIAL POWERS
Article 22
Pursuant to Article 2(1) of Decree Law 332/1994, ratified with amendments by
Law 474/1994, the Minister for the Economy and Finance, in agreement with the
Minister for Productive Activities, shall have the following special powers:
a) approval, to be granted expressly upon the acquisition by parties subject
to the limitations on share ownership referred to in Article 3 of Decree
Law 332/1994, ratified with amendments by Law 474/1994, of major
holdings, taken to mean holdings that, as specified by Treasury Minister
Decree of 24 March 1997, are equal to at least 3% of the share capital
represented by shares with a right to vote at the Ordinary Shareholders'
Meeting. Approval must be granted within sixty days of the date of the
communication that the Board of Directors must send at the time of the
application for entry in the Shareholders' Register. Until approval has
been granted and after expiration of the time limit without any action,
the transferee may not exercise the voting rights or any rights other
than the property rights attaching to the shares that represent the major
holding. If approval is refused or the time limit expires without action,
the transferee must sell the shares within one year. If this is not done,
the Court, at the request of the Minister for the Economy and Finance,
shall order the sale of the shares representing the major holding
pursuant to the procedures established in Article 2359-ter of the Civil
Code;
b) veto of any resolution to dissolve the Company, transfer the business,
merge or divide the Company, transfer the registered office outside
Italy, change the corporate object, or amend these bylaws with a view to
eliminating or modifying the powers specified in subparagraphs a) and b).
In accordance with the provisions of the Prime Ministerial Decree issued on 21
March 1997 pursuant to Law 474/1994 and the Treasury Minister Decree issued
pursuant to the same law on 21 March 1997, this article shall remain in the
bylaws for three years and in any case until the liberalization of the
telecommunications industry has reached a sufficiently advanced stage and the
industry regulatory authority has become firmly established; the decision that
these conditions have been met shall be adopted in an instrument issued in the
form indicated in the above-mentioned Prime Ministerial Decree.
17
Annex IV.
Balance sheet of Olivetti S.p.A. at 31 December 2002
pursuant to Article 2501-ter of the Civil Code
Olivetti S.p.A.
2002 Annual Report
Olivetti [logo]
Contents
Company Officers and Independent Auditors 5
Powers Delegated to the Company Officers 5
Directors' Report on Operations 7
Evolution of the Olivetti Group in 2002 9
Group Activities 12
The Telecom Italia Group 12
Other Sectors Directly Controlled by Olivetti S.p.A. 16
Human Resources 19
Financial Review 21
The Group 21
The Parent Company Olivetti S.p.A. 48
Annual Report on the Company's System of Corporate Governance 59
Legal Proceedings 69
Events Subsequent to the End of the Financial Year 76
Operating Outlook for 2003 81
Proposal for the Coverage of the Parent Company Loss for 2002 82
Statutory Financial Statements of Olivetti S.p.A. at 31 December 2002 83
Consolidated Financial Statements of the Olivetti Group at
31 December 2002 141
Independent Auditor's Reports and Board of Statutory Auditor's Report 227
3
olivetti [logo]
Olivetti S.p.A. - Registered Office: Via Jervis 77, Ivrea, Italy
Share Capital 8,845,522,868 Euros fully paid -
Registered on the Turin Companies Register no. 00488410010
Board of Directors
Chairman
ANTONIO TESONE
Deputy Chairman and Chief Executive Officer
MARCO TRONCHETTI PROVERA
Deputy Chairman
GILBERTO BENETTON
Chief Executive Officer
CARLO BUORA
Directors
LORENZO CAPRIO
GIORGIO CIRLA
PIER LUIGI FABRIZI
CESARE GERONZI
GIANNI MION
GIAMPIETRO NATTINO
PAOLA PIERRI (*)
ALBERTO PIRELLI
CARLO ALESSANDRO PURI NEGRI
GIAN CARLO ROCCO DI TORREPADULA (**)
DARIO TREVISAN
ALBERTO VARISCO
Secretary to the Board
PIERA ROSIELLO
Board of Statutory Auditors
Chairman
ANGELO FORNASARI
Standing Auditors
VITTORIO BENNANI
FRANCO CARAMANTI
Alternate Auditors
SERGIO LODI
MASSIMO NUTI
Chief Operating Officer
CORRADO ARIAUDO (***)
Independent Auditors
Reconta Ernst & Young S.p.A.
POWERS DELEGATED TO THE COMPANY OFFICERS
Powers delegated to the company officers
are illustrated in the section on
Corporate Governance in the Directors'
Report on Operations.
(*) co-opted by the Board of Directors on 7 November 2002
(**) co-opted by the Board of Directors on 5 September 2002
(***) resigned with effect from 31 December 2002
5
Directors' Report on Operations
Evolution of the Olivetti Group in 2002
2002 opened with the presentation by the Olivetti/Telecom Italia Group of the
2002-2004 Strategic Plan, which was approved by the Board of Directors on 13
February 2002.
The guidelines for the three-year period 2002-2004 are a stronger focus on core
businesses, development of market leadership positions through a
customer-oriented strategy, enhancement of the products and services portfolio
by leveraging Group assets and investing in technological innovation,
competencies and skills.
Financial strategy goals through 2004 are strong cash generation and a sharp
reduction in debt, while maintaining the Telecom Italia dividend policy and
without penalising investments. Investments for the three years will amount to
approximately 16 billion euros, and be divided between wireline and mobile
network services, with specific attention to innovation: X-DSL, data services,
fibre and, a top priority, development of broadband services for the wireline
network; GPRS, UMTS, VAS on the mobile network.
During 2002 the Group pursued the targets set in the 2002-2004 industrial plan,
in part by continuing the disposals programme introduced in the last quarter of
2001 to strengthen the focus on core businesses and improve the Group's
financial position. This programme, which also envisages a select number of
acquisitions, enabled the Group to reach the target set by the Plan of
disposals for 5 billion euros a year earlier than expected:
- in February Olivetti and Finsiel accepted the public tender offer on
Lottomatica launched by Tyche S.p.A. (De Agostini Group) on 23 November 2001
and tendered a combined stake of 34% of share capital to raise proceeds
totalling 391 million euros; Tim International sold its equity investment in
BDT (19.61%), the parent company of French operator Bouygues Telecom, raising
proceeds of 750 million euros;
- in July Finsiel closed the sale of Sogei to the Fiscal Policies Department of
the Ministry of the Economy and Finance, which had an impact of 176 million
euros on the Telecom Italia Group's net financial indebtedness;
- August saw the closing of the sale of the Telecom Italia Group's equity
investment in AUNA to Endesa, Union Fenosa and Banco Santander Central Hispano,
which had originally been scheduled for December. The transaction raised
proceeds of 1,998 million euros for the Telecom Italia Group and contributed
1,033 million euros to the Telecom Italia Group's consolidated net earnings.
Also in August, the Telecom Italia Group closed the sale of Telemaco
Immobiliare to Mirtus, a company indirectly held by the US property fund
Whitehall, promoted by the Goldman Sachs Group, generating proceeds of 192
million euros and a net capital gain of 64 million euros; additionally, Telecom
Italia signed an agreement with Finmeccanica for the sale of Telespazio (which
was subsequently executed in November), with a positive impact on Telecom
Italia Group debt of 239 million euros and a consolidated net capital gain of
36 million euros;
- in October, Telecom Italia reached an agreement with News Corporation to
create a single Italian pay-TV company (a single platform) through the merger
of Stream and Tele+; also in October TIM closed the preliminary contract signed
on 7 August with the shareholders of Blu S.p.A. for the purchase of 100% of
Blu, which was subsequently merged in TIM S.p.A. with effect from 23 December
2002. The final price was 83 million euros;
- in November Telecom Italia International N.V. organised a placement of 75
million shares of Telekom Austria AG stock (representing 15% of capital). As a
result of this operation, the Telecom Italia Group's
9 | Report on Operations
stake in Telekom Austria decreased from 29.78% to 14.78%. Also in November,
Telecom Italia sold its equity investment in IMMSI to the "Omniapartecipazioni"
company for 68 million euros;
- in December Telecom Italia signed an agreement with Accenture for the sale of
100% of TE.SS - Tele Pay Roll Services, which handles payroll operations for
the Telecom Italia Group. The selling price was approximately 10 million euros.
Also in December Telecom Italia accepted an offer from PTT Serbia for the
purchase of 29% of Telekom Srbija for 195 million euros, equivalent to the book
value in Telecom Italia International, and spun off the "International
Wholesale Services" business unit to the Telecom Italia Sparkle company (ex TMI
- Telemedia International Italia), to which it also transferred its equity
investments in PAN European Backbone and Telecom Italia of North America.
A key event in the disposals programme in 2002 was "Project Tiglio", a frame
agreement between the Pirelli and Olivetti-Telecom Italia Groups for the
integration and enhancement of the real-estate assets and property services
providers of the companies involved in the project. Under the agreement,
buildings, land and personnel involved in asset management were transferred by
Olivetti, Telecom Italia and Seat Pagine Gialle to two newly established
companies and subsequently to a closed-end real estate fund. As envisaged by
Project Tiglio, the Olivetti-Telecom Italia Group spun off real-estate
operations and assets for an overall value of 1,585 million euros to Tiglio I
and Tiglio II, two property companies controlled by The Morgan Stanley Real
Estate Funds. The Olivetti Group retains an overall minority share in the two
companies.
The operation brought Olivetti S.p.A. a gross capital gain of approximately 72
million euros and a net cash inflow of 165 million euros on an aggregate
transferred-asset value of 225 million euros. The positive financial impact for
the Telecom Italia Group was 328 million euros, against an aggregate
transferred- asset value of 1,360 million euros.
Additionally, the Olivetti Multiservices and Telecom Italia real-estate
business units were spun off to the Pirelli & C. Real Estate Group, an
operation involving the transfer of approximately 170 people to the Pirelli
Group. The overall price was 18 million euros: 15 million euros relating to
Telecom Italia and 3 million euros relating to Olivetti Multiservices.
2002 was also a year of intense financial activity, mainly for the purpose of
re-financing existing debt by extending overall maturity. A key event was the
issue by Telecom Italia in the first half of a 2.5 billion euro dual-tranche
fixed rate bond (maturing in five and ten years), as part of the Group's
"Global Note Programme".
An important operation at Olivetti was the placement of a 1.5 billion euro
multi-tranche benchmark bond, divided into a 5-year tranche for 1,000 million
euros and a 10-year tranche for 500 million euros by the subsidiary Olivetti
Finance. This company also decided to call in the "Olivetti Finance N.V. 1999-
2004" bond two years ahead of the original maturity date in 2004, for an amount
equivalent to the nominal amount plus accrued interest. Both operations are
part of the Olivetti Group's re-financing and debt-maturity extension plan.
Financial operations intensified in the second half of the year. In July and
August, Olivetti Finance N.V. launched and successfully placed a 385 million
euro bond exchangeable for Telecom Italia ordinary shares, maturing on 19 March
2004. The bonds have a per-share conversion price of 9.30 euros, and correspond
to 41,400,000 Telecom Italia ordinary shares (0.79% of capital).
10 | Report on Operations
In September Olivetti successfully re-opened three bonds, for an aggregate
amount of 1,550 million euros, subdivided into three tranches:
- 400 million euros, raising the "Olivetti Finance N.V. floating-rate
2002-2006" bond to 1,000 million euros;
- 650 million euros, raising the "Olivetti Finance N.V. 6.5% 2002-2007" bond to
1,650 million euros;
- 500 million euros, raising the "Olivetti Finance N.V. 7.25% 2002-2012" bond
to 1,000 million euros.
These operations raised the average life of Olivetti debt to 5.5 years (4.8
years in February 2002), with medium/long-term debt accounting for 93% of the
total amount.
As part of its re-financing plans, Olivetti also undertook extensive buy-backs
of its own securities on the market and consequently cancelled the following:
- "Olivetti S.p.A. Eonia linked notes 2001-2003" for 400 million euros; the
issue was extinguished as a result;
- "Olivetti Finance NV 1% 2000-2005" notes exchangeable for Telecom Italia
ordinary shares for 1,235 million euros, reducing the loan to 765 million
euros;
- "Olivetti Finance NV 5,375% 1999-2004" notes for 750 million euros, reducing
the loan to 4,200 million euros.
During 2002, as authorised by the Shareholders' Meeting of 7 November 2001,
Telecom Italia S.p.A. commenced a share buy-back on the market for a total
outlay of 287 million euros, of which 247 million euros for savings shares.
In December, the Telecom Italia and TIM Shareholders' Meetings approved early
pay-out of part of the 2002 dividend from reserves, for a maximum amount of 1
billion euros and 1.6 billion euros respectively, for a dividend to Telecom
Italia and TIM shareholders of 0.1357 euros and 0.1865 euros, respectively, per
each ordinary and savings share. Payment took place on 19 December.
In 2002 all the Olivetti/Telecom Italia Group companies extended their
Corporate Governance codes, well ahead of legal and regulatory requirements and
recommendations.
In July a series of principles governing dealings with related parties
(directors, statutory auditors, infragroup operations) was approved to
guarantee correct and transparent procedures and conduct and at the same time
ensure the full joint responsibility of all members of the Board of Directors
with regard to resolutions adopted by the Board. The companies also adopted a
Code of Conduct with regard to insider dealing drawn up in compliance with the
recent directives of Borsa Italiana (Italian Stock Exchange), which requires
regular disclosure of transactions on Olivetti and subsidiary securities by
parties with access to price-sensitive information. The new Code, which took
effect on 1 December 2002, is particularly flexible in identifying parties
subject to the disclosure requirement and extends this requirement to security
transactions by the controlling companies. It also brings down the quantitative
thresholds regulating quarterly disclosure of transactions. Furthermore, the
Code envisages a stringent system of penalties, which, in the most serious
cases, provides for termination for just cause of Directors and Statutory
Auditors.
11 | Report on Operations
Group activities
The Olivetti Group's main activities are in the telecommunications sector,
through Telecom Italia S.p.A. (owned 54.9% by Olivetti S.p.A.) and its
subsidiaries (Telecom Italia Group).
Olivetti is also active in other industrial sectors, such as office and
Internet products and services and facility management services.
Financial highlights by business sector for financial 2002 are set out below.
Telecom Olivetti Olivetti
Olivetti Finance Italia Tecnost Multi- Webegg Consolid. Total
(in millions of euros) S.p.A. companies Group Group services Group adjustm. Group
---------------------- ------ --------- ----- ----- -------- ----- -------- -----
Total net revenues 30,400 914 119 45 (70) 31,408
Result before interest and taxes
(EBIT) and non recurring income
and charges (1,419) (11) 7,415 14) 15 3 (1) 6,016
EBIT (1,323) (50) 1,850 (63) 20 3 83 520
Net result for the year for
consolidation purposes (548) (135) (97) (87) 11 83 (773)
Net result for consolidation purposes
before amortisation of goodwill on
Telecom Italia acquisitions 745 (135) (97) (87) 11 83 520
--------------------------- --- ----- ---- ---- -- -- ---
Shareholders' equity:
total 9,031 374 12,336 61 49 (1,227) 20,624
Group 9,031 374 3,345 63 49 (1,222) 11,640
Net financial indebtedness
(resources) 15,195 (27) 18,118 60 54 (1) 33,399
----------- ------ ---- ------- ----- -- ---- ------- -------
Employees (in units) 70 8 101,713 4,527 302 106,620
====================================== ====== ==== ======= ===== === ==== ======= =======
(*) consolidated in Telecom Italia from 30 June 2002
The Telecom Italia Group
In 2002 the Telecom Italia Group was principally active in the wireline
telephony and mobile telephony sectors through, respectively, the Domestic
Wireline Business Unit of Telecom Italia S.p.A. and the subsidiary TIM S.p.A.
The Telecom Italia Group was also active in the Internet and Media sector
through the Seat Pagine Gialle Group, in the information technology sector
through the Market IT and Group IT Business Units, and in Other Activities,
which mainly comprise the "Real Estate and General Services" Division, the
Central Overseas Companies Function and the Telespazio Group (sold in November
2002). The International Operations Division (IOP) was dismantled in May 2002
and the relevant companies and Telecom Italia business units were re-organised,
without changes to the corporate control structure, under the Domestic Wireline
Business Unit (Intelcom San Marino and Golden Lines) and the Central Overseas
Companies Function (9Telecom Group, BBNed Group, AUNA Group, Telekom Austria
Group, Telekom Srbija, Etec S.A., and the residual branch of the ex IOP unit);
all the companies in the Latin American area were re-organised under Latin
America Operations (LAO).
12 | Report on Operations
Telecom Italia Group financial highlights by business units
Other
Internet activities and
Domestic South and Market Group consolid.
(in millions of euros) Wireline Mobile America Media IT IT Sub-total adjustments Total
------------------------------ -------- ------ ------- ----- ------ ----- --------- ----------- -------
Revenues from sales
and services 2002 17,022 10,867 1,409 1,991 912 1,215 33,416 (3,016) 30,400
2001 17,168 10,250 1,534 1,957 1,198 1,198 33,305 (2,487) 30,818
------------------------------ -------- ------ ------- ----- ------ ----- --------- ---------- -------
Gross operating
margin 2002 7,965 5,039 450 593 104 140 14,291 (327) 13,964
2001 7,750 4,760 527 444 166 188 13,835 (216) 13,619
------------------------------ -------- ------ ------- ----- ------ ----- --------- ---------- -------
Operating result 2002 4,700 3,358 146 232 61 (21) 8,476 (1,095) 7,381
2001 4,361 3,136 187 31 123 22 7,860 (1,186) 6,674
------------------------------ -------- ------ ------- ----- ------ ----- --------- ---------- -------
Capital investments:
capital expenditure 2002 2,462 1,715 216 81 30 158 4,662 180 4,842
2001 2,801 3,151 406 175 30 162 6,725 265 6,990
goodwill 2002 - 196 - 40 - 28 264 105 369
2001 - 31 - 203 1 6 241 933 1,174
------------------------------ -------- ------ ------- ----- ------ ----- --------- ---------- -------
Personnel at year end 2002 53,682 18,702 5,461 7,715 4,493 7,327 97,380 4,333 101,713
(in units) 2001 57,895 16,721 5,746 9,264 6,441 6,844 102,911 7,045 109,956
============================== ======== ====== ======= ===== ====== ===== ========= ========== =======
Domestic Wireline
Revenues from sales and services decreased by 0.9% from the previous year (a
decrease of 146 million euros), which was significantly smaller than the
reduction reported in 2001 (-1.4% compared with 2000). The decrease in traffic
revenues (down 533 million euros) and slowdowns in other items (sales and other
revenues) were largely offset by the increase in standing charges and
contributions (up 539 million euros). Specifically, the reduction in the
average traffic yield (-8.3%) was offset in part by the rise in minutes (up
2.4%) as a result of the following:
o the success of commercial offers (mainly Teleconomy and Alice) offering
lower call rates to boost customer retention, against a standing charge;
o changes to rates on 1 July 2001 and 1 February 2002, which cut the prices
of domestic and international calls and increased standing charges;
o competitive conditions;
o the substantial increase in traffic carried on behalf of other operators.
The gross operating margin showed a significant increase from 2001 (up 2.8%),
which was amplified by the operating result (up 7.8%), thanks to the action
taken as from 2001 to contain costs and improve the efficiency of invested
capital.
Capital expenditure decreased by 12.1% from 2001 due to careful selection of
investments that ensure a combination of efficiency and technological growth.
13 | Report on Operations
Mobile
Revenues from sales and services in 2002 amounted to 10,867 million euros with
an increase of 617 million euros (up 6% from 2001), despite the impact of
currency devaluation in Brazil and Venezuela. Excluding the exchange rate
effect, the revenue increase compared with 2001 was 11.9%. Revenue growth arose
mainly in Italy (up 6.7%).
The Tim Brazil Group reported revenues of 39 million euros on the GSM service
introduced in the fourth quarter of 2002.
The gross operating margin for 2002 rose by 279 million euros to 5,039 million
euros (up 5.9% from 2001), giving a return on revenues of 46.4% (as in 2001).
Excluding the exchange rate effect, gross operating margin growth against the
previous year was 8.6%, due largely to positive performance at TIM S.p.A. (up
304 million euros) and Stet Hellas (up 67 million euros) and the improvement in
the albeit still negative margin at TIM Peru (up 26 million euros).
The operating result for 2002 was 3,358 million euros, an increase of 222
million euros (up 7.1% from 2001), giving a return on revenues of 30.9% (30.6%
in 2001). The operating result improvement was largely attributable to the
positive results posted by TIM S.p.A. (up 213 million euros) and Stet Hellas
(up 42 million euros), which offset the downturn in the operating result of the
TIM Brasil Group (45 million euros) after start-up charges.
Since the 2002 book values of TIM S.p.A. include the full-year financial and
business results of the former Blu S.p.A., the effects of transactions prior to
the acquisition date were eliminated from the TIM S.p.A. income statement
during consolidation. TIM S.p.A. financial statements were also re-stated to
exclude tax postings relating to amortisation of the UMTS licence.
Capital expenditure for 2002 amounted to 1,715 million euros, with a decrease
of 1,436 million euros compared with 2001, when the business unit invested
heavily in telecommunications licences and in the start-up and development of
international investee companies.
South America
Revenues from sales and services amounted to 1,409 million euros, a reduction
of 8.1% (down 125 million euros in absolute value) compared with 2001; the
decrease was largely due to the exchange rate effect, which had an overall
negative impact of 212 million euros (182 million euros for the Chilean Peso
and 29 million euros for the Boliviano). Excluding this effect, consolidated
revenues rose by 5.7%, reflecting growth at the Entel Chile Group (up 12.3% in
local currency) offset by the effects of market deregulation in Bolivia (the
Entel Bolivia Group reported a revenue reduction of approximately 4.5% stated
in local currency) and the suspension as from 1 April 2002 of the management
fee agreement with Telecom Argentina.
The above trends affected earnings performance. Specifically, the gross
operating margin decreased by 77 million euros (down 14.6%) from 2001, of which
approximately 65 million euros was due largely to the exchange rate effect.
Excluding this effect, the gross operating margin decreased by 2.3% against
14 | Report on Operations
2001, reflecting the suspension of the management fee from Telecom Argentina
and the loss of profitability in Bolivia, set against a recovery in Chile,
which increased profitability in the mobile business. The gross operating
margin ratio to revenues was 31.9% in 2002 (against 34.4% in 2001).
The operating result confirmed the trends reported for the gross operating
margin; the operating result ratio to revenues was 10.4% in 2002 (against 12.2%
in 2001).
Capital expenditure decreased by 46.8% compared with 2001.
Internet and Media
Consolidated revenues for 2002 totalled 1,991 million euros, rising by 1.7%
from 2001. The strongest contribution to growth came from telephone publishing,
where revenues rose by 3.4%.
Gross operating margin grew by 33.6% to 593 million euros (a return on revenues
of 29.8%), while the operating result rose from 31 million euros in 2001 to 232
million euros in 2002. These results - achieved despite the persisting crisis
on the advertising market - were achieved as a result of management action to
rationalise operations, contain costs and focus on selected initiatives.
Significant efficiency gains were achieved in 2002 in the Internet, Directories
and Directory Assistance areas (which together account for 73% of aggregate
revenues). For the first time, all activities reported a positive gross
operating margin (with the sole exception of Television, although the area
successfully reduced its losses from 2001).
The unit's more efficient capital allocation policy generated a 53.7% reduction
in capital expenditure (from 175 million euros in 2001 to 81 million euros in
2002).
Market IT
Revenues from sales and services decreased by 48 million euros from the
previous year on a consistent comparable basis, largely as a result of lower
revenues at Finsiel, Consiel and Banksiel due to lower sales volumes and the
general price reduction on sales to large accounts, offset by higher revenues
at Intersiel and Insiel due to increased activity with core clients and
acquisition of new clients on the Local Government market.
The gross operating margin and the operating result decreased due to the price
reductions on a number of contracts renewed during the year and to new
contracts with lower fees, which were only partly offset by cost reductions and
improved efficiency. The decrease was largely due to lower profit margins at
Finsiel, Consiel, and on outsourcing activities at Tele Sistemi Ferroviari for
the companies in the Italian State Railways Group.
Capital expenditure was substantially unchanged from the previous year.
15 | Report on Operations
Group IT
Consolidated revenues were largely stable, despite the effect of price
reductions.
The gross operating margin and the operating margin reflected these reductions
and decreased compared with 2001.
Capital expenditure was largely in line with 2001; 2002 investments in goodwill
refer to purchase of a controlling stake in Webegg.
Real Estate and General Services (Other Activities)
In 2002 revenues from sales and services totalled 846 million euros, a decrease
of 107 million euros from the previous year. This was largely due to the
reduction in revenues from the other Telecom Italia Business Units and
Functions as a result of space-re-organisation policies and the alignment of
prices with improved market conditions. Operating costs decreased by 51 million
euros from 2001, thanks to reduced spending on materials and external services
and a reduction in payroll costs following a significant reduction in the
headcount during the year; these effects offset in part the downturn in
revenues, thus mitigating the decrease in the gross operating margin compared
with the previous year.
The operating result, after depreciation and amortisation charges, provisions
to the reserve for risks and charges and sundry charges (mainly taxes on own
property), was negative, at 92 million euros (loss of 65 million euros in
2001).
Other sectors directly controlled by Olivetti S.p.A.
Products, IT services and specialised systems: Olivetti Tecnost
The Olivetti Tecnost Group is active in office products and solutions (Office
Products, Olivetti Advalia) and specialised applications for banking, retail
and gaming automation (Vertical Division).
The Group operates on the main international geographical markets (which
account for 68% of its aggregate revenues). While its primary focus is Europe
(29%), Asia (12%) and Latin America (15%), it is also active in the consumer
business in North America (11%) through the subsidiary Royal Consumer
Information Product Inc.
In June, Olivetti Tecnost presented an industrial plan to the Trade Unions
(fully illustrated in the 2002 Half-Year Report) which aims to return the Group
to profitability through a series of business-specific measures.
The uncertain business climate existing before the presentation of the
industrial plan had a negative impact on the year's results: revenues for the
Olivetti Tecnost Group for financial 2002 amounted to 914 million euros
(including 906 million euros from customers outside the Olivetti Group), a
decrease of 16.7% from 2001(down 12.7% net of the exchange rate effect).
Revenues comprised 588 million euros for hardware products, 154 million euros
for supplies, 73 million euros for services and 99 million euros of other
revenues.
16 | Report on Operations
In the Office sector covered by Olivetti Advalia, third-party revenues fell
sharply (down 19%) due to the decision to curtail operations on the PC market
and to the expected slowdown in fiscal cash register sales following the
changeover to the euro.
With regard to other products, the ink-jet fax and MFP businesses (products and
supplies) were stable and the copier business (products and supplies) expanded,
with a marked shift in the product mix towards digital copiers and
medium/high-end products.
In the first half of 2002 Olivetti Tecnost was awarded a contract by Consip, a
company owned by the Italian Ministry of the Economy which draws up conventions
with equipment and service suppliers for the public authorities, to supply 3000
digital photocopiers on a rental basis.
In the second half, Olivetti Tecnost introduced new laser printers and colour
copiers to complete its offer for the professional channel and business users,
renewed its laser and ink-jet fax range and expanded its digital copier offer.
2002 third-party revenues in the Vertical Division decreased from the previous
year (down 11.6%), largely as a result of the second-half slowdown in sales to
China at the Industrial Partnership division.
Gaming revenues, on a comparable basis, decreased compared with 2001 (down
5.7%) with a shift in the hardware/services mix towards hardware, reflecting
the impact of the new contract to supply Lottomatica with M370 terminals and
specialised printers.
As part of the diversification strategy, new initiatives were developed in the
gaming sector, especially overseas, which open up excellent prospects for 2003:
in Tunisia (contract with the Sport Commission to supply a turnkey solution for
automation of the local football pools system), Peru (football pools
automation, with supply of 1,500 terminals, of which 150 were delivered in
2002), India and China (with the launch of the new M380 family, which is
expected to bring good results).
Revenues in the banking and retail sector were stable, confirming the
importance of Tecnost Sistemi's products as the reference offer on the world
market (PR2, PR2 Enhanced, PR4 for retail); the increase in revenues in Europe
was offset by a decrease in China, where the PR2 E printer nevertheless
continues to maintain an 80% market share.
In the special products sector, revenues more than doubled in 2002, mainly as a
result of the supply of TP Label automatic weighing and franking machines to
the Italian Post Office.
In the shop automation sector, the new Net Shop initiative proceeded. Net Shop
offers services for SMBs in the retail business.
* * *
After taxes and minority interests, the Olivetti Tecnost Group posted a net
loss after adjustments for Olivetti consolidation purposes of 87.1 million
euros for financial 2002 (a loss of 54.7 million euros in 2001), after taking a
net non-recurring charge of 76.5 million euros relating to the corporate
restructuring, implementation of which is essential to ensure a return to
profitability in the future.
Net financial indebtedness at 31 December 2002 was 60.4 million euros compared
with 133.9 million euros at 31 December 2001, a decrease of 73.5 million euros
which was largely due to the decrease in working capital (mainly receivables
and inventories).
At 31 December 2002 the Olivetti Tecnost Group had 4,527 employees (4,896 at 31
December 2001), of whom 2,371 in Italy and 2,156 abroad.
17 | Report on Operations
On 7 January 2003 the Group closed the contract drawn up in the second half of
2002 with SMT Vertronic, a Mexican company in the SMT Group, for the sale of
industrial assets held by the subsidiary Olivetti Tecnost de Mexico, which is
active in office automation products.
The agreement provided for the sale of the Tlaxcala facility in Mexico and
recruitment by SMT Vertronic of the workers in the plant (1,266 at 31 December
2002). SMT will introduce new industrial operations into the Mexican plant in
addition to those currently performed, which Olivetti Tecnost will continue to
use.
Facility Management: Olivetti Multiservices
During 2002 Olivetti Multiservices made sweeping changes in its operations. As
part of Project Tiglio (approved by the Olivetti S.p.A. Board of Directors on
26 March 2002) for the enhancement of the real estate assets of the Pirelli,
Olivetti and Telecom Italia groups, on 1 September 2002 the partial split-up of
Olivetti Multiservices S.p.A. (as approved by the company Board of Directors on
21 June 2002) took effect, through the transfer at book value of the company's
real estate assets, specifically 23 buildings and 10 development areas, to OMS2
s.r.l. (a wholly owned subsidiary of Olivetti S.p.A. which was sold to Tiglio I
in October). The share capital of Olivetti Multiservices S.p.A. was reduced
accordingly.
Aggregate revenues for 2002 were 119.3 million euros, of which 75.8 million
euros from third parties and 43.5 million euros from the captive market.
Net income for Olivetti consolidation purposes totalled 10.8 million euros (1.7
million euros in 2001) arising in part from non-recurring income (5.8 million
euros) as a result of asset sales.
At 31 December 2002 the company had 302 employees, compared with 353 at the end
of 2001. The reduction of 51 heads was due to implementation of Project Tiglio.
18 | Report on Operations
Human resources
At 31 December 2002 the employees of the Olivetti Group companies included in
the consolidation numbered 106,620, a net decrease of 9,400 heads from 31
December 2001 (116,020 heads).
(employees) 31.12.2002 31.12.2001 Changes
------------------------------------ ---------- ---------- -------
Olivetti S.p.A 70 89 (19)
Finance companies 8 8 -
Telecom Italia Group 101,713 109,956 (8,243)
Olivetti Tecnost Group 4,527 (***) 4,896 (369)
Olivetti Multiservices (*) 302 353 (51)
Webegg Group (**) - 718 (718)
------------------------------------ ---------- ---------- -------
Total 106,620 116,020 (9,400)
==================================== ========== ========== =======
(*) property management and services
(**) the Webegg Group is consolidated in Telecom Italia Group from 30 June 2002
(***) including 1,266 units transferred on 7 January 2003 to SMT Vertronic
The headcount at the Telecom Italia Group at 31 December 2002 was 101,713, with
a decrease of 8,243 heads from 2001. This reflected the changes in the
consolidation area, which generated a net decrease of 2,883 heads, and the net
decrease arising from staff turnover (5,360 heads). Specifically, the main
changes in the consolidation area were: the exit of the 9Telecom Group (-1,003
heads), the sale of the Telespazio Group (-1,168 heads), the exit of Sogei and
Consiel (an overall reduction of 1,538 heads) and other minor companies (-711
heads), the entry of Blu (+ 618 heads), the Webegg Group (+ 719 heads), Netesi
and Epiclink (an overall increase of 168 heads) and other minor companies (+ 32
heads).
With regard to staff turnover, the year saw 12,567 full departures (including
5,413 at Telecom Italia S.p.A.) and 7,207 new hirings.
The headcount at the Olivetti Tecnost Group decreased by 369 heads, reflecting
a net decrease of 73 heads in Italy (136 departures and 64 new hirings) and a
net decrease of 296 heads abroad: 1,898 departures (including 1,752 in Mexico)
and 1,657 new hirings (1,542 in Mexico).
The headcount at Olivetti Multiservices decreased by 51 heads, mainly as a
result of the spin-off of the Property and Project units to Pirelli Real Estate
(47 heads) under Project Tiglio.
The average number of employees in the Olivetti Group in 2002 was 107,079, of
which 101,789 with the Telecom Italia Group.
* * *
On 27 May a frame agreement was signed with the Telecom Italia Trade Unions to
ensure the correct sizing of the workforce in relation to the 2002 - 2004
Industrial Plan. Accordingly, on 30 July a union agreement was signed to place
3,803 Telecom Italia S.p.A. employees on mobility schemes. Similar agreements
were reached during the rest of the year for other Group companies, affecting a
total of approximately 380 resources.
19 | Report on Operations
Also in connection with the frame agreement, accords were drawn up for the
recruitment of 350 young people in Telecontact Center and 110 young people in
the Telecom Italia Domestic Wireline Business Unit.
On 12 December procedures for the transfer of Blu S.p.A. staff to TIM were
completed.
On 25 June 2002, Olivetti Tecnost completed negotiations with the Trade Unions
with regard to the Group Industrial Recovery Plan. The Plan includes special
professional skills re-training programmes for approximately 300 employees
involved in the Group's industrial re-organisation.
20 | Report on Operations
Financial review
The Group
The Olivetti Group posted a net loss after taxes of 773 million euros for
financial 2002 (3,090 million euros in 2001); before amortisation of
consolidation goodwill relating to Telecom Italia, it had a positive net
result of 520 million euros (a loss of 1,791 million euros in 2001).
The 2,317 million euros improvement in the net result was largely due to lower
losses at Telecom Italia for 575 million euros and at the Parent Company
Olivetti S.p.A. for 1,681 million euros, the latter improvement arising chiefly
as the result of lower net financial charges for 158 million euros, net income
from non recurring items of 449 million euros and the writedown of the Telecom
Italia equity investment posted in the statutory accounts purely for tax
purposes; this writedown generated an overall benefit on consolidated income of
1,078 million euros, including deferred tax assets of 609 million euros whose
recovery is reasonably certain.
Group net financial indebtedness at 31 December 2002 totalled 33,399 million
euros (18,118 million euros for the Telecom Italia Group), a decrease of 4,963
million euros against 31 December 2001 (38,362 million euros).
Olivetti Group total shareholders' equity at 31 December 2002 was 20,624
million euros (26,353 million euros at 31 December 2001); excluding minority
interests, shareholders' equity attributable to the Parent Company was 11,640
million euros (12,729 million euros at 31 December 2001).
A significant factor in the decrease of 5,729 million euros in total
shareholders' equity was the Telecom Italia Group dividend payout of 3,649
million euros to minority shareholders.
Aggregate capital investments amounted to 7,024 million euros - relating in the
main to the Telecom Italia Group (6,921 million euros) - subdivided as follows:
3,291 million euros for tangible assets (3,258 million euros for the Telecom
Italia Group), 1,956 million euros for intangible assets (1,930 million euros
for the Telecom Italia Group) and 1,777 million euros for financial assets
(1,708 million euros for the Telecom Italia Group).
21 | Report on Operations
Group business performance
2002 business performance is reflected in the reclassified statement of income
set out below, which also includes data for 2001. The statement classifies
income components by nature, with separate disclosure of non-recurring income
and expense items.
Changes
(in millions of euros) Year 2002 % Year 2001 % absolute %
----------------------------------------------------------- --------- ----- --------------------- -------------------
Net revenues 31,408 100.0 32,016 100.0 (608) (1.9)
Operating costs:
Labour (4,727) (15.1) (4,877) (15.2) 150 3.1
Materials and services (12,668) (40.3) (13,458) (42.1) 790 5.9
Grants 20 0.1 26 0.1 (6) (23.1)
Depreciation of tangible assets (3,807) (12.1) (4,080) (12.7) 273 6.7
Amortisation of intangible assets:
Consolidation goodwill (2,142) (6.8) (2,278) (7.1) 136) 6.0
Other (1,320) (4.2) (1,283) (4.0) (37) (2.9)
Provisions for writedowns and risks (776) (2.5) (758) (2.4) (18) (2.4)
Other income (charges), net 28 0.1 30 0.1 (2) (6.7)
----------------------------------------------------------- --------- ----- --------------------- -------------------
Result before interest and taxes (EBIT) and non recurring
income and charges 6,016) 19.2 5,338 16.7 678 12.7
----------------------------------------------------------- --------- ----- --------------------- -------------------
Non recurring income:
Gains on disposals and other non-recurring income (*) 2,990 9.5 999 3.1 1,991 199.3
Non recurring charges:
Losses on disposals and other non-recurring charges (*) (8,486) (27.0) (4,354) (13.6) (4,132) (94.9)
----------------------------------------------------------- --------- ----- --------------------- -------------------
EBIT 520 1.7 1,983 6.2 (1,463) (73.8)
----------------------------------------------------------- --------- ----- --------------------- -------------------
Income from equity investments, net 57 0.1 221 0.7 (164) (74.2)
Financial charges, net (2,307) (7.3) (3,105) (9.7) 798 25.7
Value adjustments to financial assets (786) (2.5) (2,196) (6.9) 1,410 64.2
----------------------------------------------------------- --------- ----- --------------------- -------------------
Result before taxes (2,516) (8.0) (3,097) (9.7) 581 18.8
----------------------------------------------------------- --------- ----- --------------------- -------------------
Taxes 2,210) 7.0 (579) (1.8) 2,789 481.7
----------------------------------------------------------- --------- ----- --------------------- -------------------
Result after taxes before minority interest (306) (1.0) (3,676) (11.5) 3,370 91.7
----------------------------------------------------------- --------- ----- --------------------- -------------------
Minority interests (467) (1.5) 586 1.8 (1,053) (179.7)
----------------------------------------------------------- --------- ----- --------------------- -------------------
Net result for the year (773) (2.5) (3,090) (9.7) 2,317 75.0
=========================================================== ========= ===== ===================== ===================
(*) the amounts concerning the Telecom Italia Group have been classified as
extraordinary items in the consolidated accounts of this latter.
Group revenues amounted to 31,408 million euros, compared with 32,016 million
euros in 2001, a decrease of 1.9% (up 3.1% on a comparable basis and net of the
exchange-rate effect).
Revenues at the Telecom Italia Group, which accounted for 96.8% of the total,
increased by 3.8% excluding the exchange rate effect and the changes in the
consolidation area.
22 | Report on Operations
The revenue increase at the Telecom Italia Group reflected the positive
performance of the Mobile Business Unit and revenue growth at the Internet and
Media Business Unit, offset by a lower contribution from the Domestic Wireline
Business Unit, where, despite a 2.4% increase in minutes, traffic revenues fell
by 8.3% due to the lower average traffic yield.
Olivetti Group - Third party revenues
Changes
(in millions of euros) Year 2002 Year 2001 absolute %
--------------------------- --------- --------- -------- -------
TELECOM ITALIA GROUP 30,400.4 30,817.6 (417.2) (1.4)
OLIVETTI TECNOST GROUP 906.1 1,075.7 (169.6) (15.8)
OLIVETTI MULTISERVICES 75.8 68.2 7.6 11.1
WEBEGG GROUP (*) 25.6 54.2 (28.6) (52.8)
--------------------------- --------- --------- -------- -------
Total Group 31,407.9 32,015.7 (607.8) (1.9)
=========================== ========= ========= ======== =======
(*) Consolidated in Telecom Italia Group from 30 June 2002
Operating costs and other net charges amounted to 25,392 million euros (22,985
million euros for the Telecom Italia Group), a reduction of 1,286 million euros
on 2001 (26,678 million euros, of which 24,074 million euros for the Telecom
Italia Group). As a percentage of revenues, excluding amortisation of
consolidation goodwill, the heading decreased by 2.2 percentage points (74.0%
in 2002 compared with 76.2% in 2001).
Labour costs at 4,727 million euros decreased by 150 million euros from 2001
(down 3.1%) and the ratio to revenues, despite the reduction in revenues from
the previous year, also decreased slightly (from 15.2% in 2001 to 15.1% in
2002).
The decrease was due to the change in the consolidation area and also to the
reduction in labour costs at Telecom Italia S.p.A. following the introduction
of mobility schemes.
Costs of materials and services decreased by 790 million euros (down 5.9%),
largely due to continuing action to improve efficiency, the impact of which was
partly offset by higher costs, especially at the Brazilian companies being
started up by the Mobile Business Unit.
The ratio of material and service costs to revenues was 40.3%, compared with
42.1% in 2001.
Depreciation and amortisation charges amounted to 7,269 million euros (7,641
million euros in 2001), comprising 3,462 million euros for amortisation of
intangible assets (including 2,142 million euros relating to goodwill on the
acquisition of equity investments in subsidiary companies) and 3,807 million
euros for depreciation of tangible assets. The 136 million euros reduction in
goodwill amortisation charges was mainly due to the goodwill writedowns applied
in 2001. The ratio of this heading to revenues was 23.1%, down from 23.8% in
2001.
Provisions for writedowns and risks amounted overall to 776 million euros (758
million euros in 2001) as follows:
23 | Report on Operations
o 752 million euros for the Telecom Italia Group (733 million euros in 2001)
including:
- 599 million euros for writedowns on trade receivables (specifically,
339 million euros at Telecom Italia, 57 million euros at the Seat
Pagine Gialle Group, 40 million euros at the Entel Chile Group and 51
million euros at TIM);
- 153 million euros of provisions for risks and charges;
o 24 million euros for provisions and writedowns at other Olivetti Group
companies (25 million euros in 2001).
EBIT before non-recurring income and charges for 2002 was therefore positive,
at 6,016 million euros, with an improvement of 678 million euros (up 12.7%)
from the previous year (5,338 million euros).
Non-recurring income amounted to 2,990 million euros (999 million euros in
2001). It consisted of 2,553 million euros of capital gains from the year's
disposals (465 million euros in 2001) and 437 million euros of sundry income
(534 million euros in 2001).
Capital gains from disposals totalled 2,553 million euros, of which 2,413
million euros at the Telecom Italia Group, as follows:
o 1,245 million euros from the sale of the entire 26.89% shareholding in
AUNA;
o 484 million euros from the sale of the 19.61% shareholding in Bouygues
Decaux Telecom (BDT);
o 234 million euros from the sale of the entire 100% shareholding in EMSA
and Telimm as well as of real estate and activities as part of Project
Tiglio;
o 133 million euros from the acceptance by the Finsiel Group of the public
tender offer on Lottomatica;
o 115 million euros from the sale to Telekom Austria (in which Telecom
Italia indirectly holds 14.78%) of the entire 25% shareholding owned by
the Mobile Business Unit in Mobilkom Austria;
o 110 million euros from the sale of the entire 40% shareholding in Telemaco
Immobiliare;
o 70 million euros from the sale of 100% of Telespazio;
o 22 million euros from other minor sales.
The 140 million euros of capital gains posted by the other Group companies
included:
o 107 million euros from the acceptance by Olivetti S.p.A. and Olivetti
International S.A. of the public tender offer on Lottomatica;
o 26 million euros from the sale of the entire shareholding in OMS2, as part
of Project Tiglio;
o 7 million euros from other disposals.
Other non-recurring income totalling 437 million euros included 401
million euros at the Telecom Italia Group, as follows:
o 131 million euros from recovery of pre-amortisation interest in respect of
integration charges pursuant to Law no. 58/1992 paid on a conditional
basis to the Italian National Insurance Board (INPS) until 1999, after the
dispute was resolved in favour of Telecom Italia;
o 270 million euros of other income, including 77 million euros from use of
reserves (essentially use of part of the reserve for risks and charges
provided in 2001 by Telecom Italia S.p.A. to cover charges relating to the
agreement for the sale of Stream to News Corp. and Vivendi
Universal/Canal+, when the sale did not take place), 9 million euros of
contributions and 184 million euros of sundry income.
24 | Report on Operations
The 36 million euros of other non-recurring income posted by the other Group
companies included 21 million euros from the reversal of redundant reserves
provided in previous years.
Non-recurring charges amounted overall to 8,486 million euros (4,354 million
euros in 2001) and included 8,375 million euros for the Telecom Italia Group
(3,947 million euros in 2001), as follows:
o 6,237 million euros of equity investment writedowns to reflect enduring
impairments of value (2,984 million euros in 2001), as follows:
- writedown of goodwill and the call option on Seat Pagine Gialle
shares for a total of 3,486 million euros; such items were written
down to market value (based on the average ordinary share price for
the last six months of 2002), following the Telecom Italia Group's
decision to view the Seat Pagine Gialle Directories operation as a
non-core business. In 2001, with regard to the call option, a
provision of 569 million euros was posted under financial charges;
- writedown of goodwill relating to consolidated companies for a total
of 225 million euros, Blu (103 million euros), Digitel Venezuela (75
million euros), other subsidiaries (47 million euros);
- the equity investment in Aria - Is Tim Turchia (2,341 million euros):
the investment was written off in full (1,491 million euros) and a
provision was made to the reserve for risks and charges to cover
Group exposure to this associated company (850 million euros). The
provision was commensurate to the guarantees provided by the Group in
favour of international financial institutes that had granted loans
to Aria - Is Tim and to the loan granted directly by the Group;
- writedown of goodwill on Netco Redes (96 million euros) and other
companies (46 million euros) and a provision to align the purchase
price by Seat Pagine Gialle of an additional stake in Consodata to
the value of the company as determined by an appraisal (43 million
euros).
The 2,984 million euros writedown on equity investments applied in 2001
referred to goodwill writedowns on consolidated companies (9Telecom Group,
Entel Bolivia, Entel Chile Group, Maxitel Group, Tele Celular Sul Group, Tele
Nordeste Celular Group, Tim Brasil, Med1 Group and some companies in the Seat
Group) and on companies valued with the equity method (GLB Servicos
Interativos, Solpart Participacoes, Telekom Austria, Nortel Inversora Group)
and to other provisions relating to equity investments.
o 316 million euros of charges incurred following the sale of the equity
investment in the 9Telecom Group. Specifically, considering the loss
recorded prior to the sale, the French 9Telecom Group generated an overall
charge to Telecom Italia Group income for the first nine months of 2002 of
389 million euros (267 million euros after taxes);
o 135 million euros of capital losses on the sale of 75 million shares
(representing 15% of capital) of Telekom Austria A.G. in November 2002.
Following the sale, the Telecom Italia Group's stake in Telekom Austria
A.G. decreased to 14.78%;
o 494 million euros of charges and provisions relating to personnel
retirements and mobility schemes (including a 379 million euros charge at
Telecom Italia);
o 235 million euros of charges relating to non-recurring operations on
equity investments;
o 79 million euros of financial charges on the amount payable to the Italian
National Insurance Board (INPS) for re-absorption of the ex Telephone
Sector Employees Pension Fund (FPT) and 74 million euros for an
extraordinary contribution to INPS to cover increased financial
requirements following the integration of the FPT with the Employees
Pension Fund;
25 | Report on Operations
o 190 million euros of writedowns on fixed assets relating in the main to
mobile telephone companies in Brazil and 38 million euros for capital
losses on fixed-asset disposals;
o 194 million euros of provisions, including 135 million euros for
guarantees provided on the sale of equity investments and company
businesses and 59 million euros for other provisions;
o 383 million euros of other sundry charges.
Non-recurring charges for the other Group companies amounted to 111 million
euros (407 million euros in 2001) and included 62 million euros of capital
losses on the sale of the Seat Pagine Gialle equity investment, 32 million
euros of provisions relating to risks on equity investments, 4 million euros of
charges relating to the public tender offer on Lottomatica and 13 million euros
for miscellaneous charges.
The Group therefore posted positive consolidated EBIT of 520 million euros,
compared with 1,983 million euros in 2001.
Net income from equity investments amounted to 57 million euros (221 million
euros in 2001) and included 18 million euros for the Telecom Italia Group (154
million euros in 2001), 35 million euros for Olivetti S.p.A. from dividends on
non-consolidated equity investments and 4 million euros for other Olivetti
Group companies.
Interest expense and other financial charges, net, amounted to 2,307 million
euros (3,105 million euros in 2001), of which 1,499 million euros related to
the Telecom Italia Group (2,153 million euros in 2001) and 808 million euros to
the other Group companies (952 million euros in 2001).
Net financial charges at the Telecom Italia Group decreased by 654 million
euros (down 30.4%), for 85 million euros as a result of the decrease in net
financial indebtedness, offset in part by exchange rate trends, (which had a
negative impact on debt at a number of South American companies), and as a
result of the provision for the call option on Seat Pagine Gialle shares (569
million euros in 2001) which in 2002 was classified under non-recurring
charges.
Net financial charges for the other companies decreased by 144 million euros as
a result of lower financial exposure and debt re-financing at less costly
conditions.
Value adjustments to financial assets generated an overall charge of 786
million euros, including 682 million euros for the Telecom Italia Group as
follows:
o 80 million euros for amortisation of goodwill arising on the purchase of
equity investments in companies valued with the equity method, a reduction
of 236 million euros compared with 2001, due to goodwill writedowns posted
in 2001;
o the Group's share of income and losses of companies valued with the equity
method, with a negative balance of 386 million euros (-1,300 million euros
in 2001); this reflected losses at Stream for a total of 246 million euros
(241 million euros in 2001), at Aria Is Tim (Turkey) for 171 million euros
(334 million euros in 2001), and a positive balance of 31 million euros on
the results of the other investee companies;
o a writedown of 176 million euros on securities and equity investments held
as current assets (291 million euros in 2001) and of 40 million euros on
securities held as fixed assets (49 million euros in 2001).
26 | Report on Operations
In 2001, this heading also reflected the results of the equity investments in
the Nortel Inversora Group (238 million euros), the AUNA Group (203 million
euros) and the Astrolink writedown (259 million euros) taken by Telespazio upon
termination of the project. In 2002 the equity investment in Nortel Inversora
was unchanged from the consolidated book value at 31 December 2001, when it was
prudently written down to zero. The consolidated book value of the AUNA Group
and Astrolink at 31 December 2001 was maintained until the sale of these
investments, respectively, on 1 August 2002 and 30 November 2002. Value
adjustments at the other Group companies totalled 104 million euros, including
69 million euros relating to 41.4 million Telecom Italia shares held as current
assets and valued at market prices at 31 December 2002.
Under the heading income taxes the Group posted income of 2,210 million euros
for financial 2002 (a charge of 579 million euros in 2001). This referred to
the Parent Company Olivetti S.p.A. for 1,603 million euros (largely as a result
of the writedown of the Telecom Italia equity investment solely for tax
purposes; this produced a positive overall tax effect of 1,078 million euros,
including deferred tax assets of 609 million euros) and to the Telecom Italia
Group for 688 million euros (also largely as a result of deferred tax assets),
offset by tax charges posted by the other Group companies for an overall amount
of 81 million euros.
Income attributable to minority interests reflected a loss of 467 million euros
(income of 586 million euros in 2001) and included 472 million euros of income
attributable to Telecom Italia Group minority shareholders.
The Group net result for financial 2002 reflected a loss of 773 million euros
(a loss of 3,090 million euros in 2001); excluding amortisation of goodwill on
the acquisition of Telecom Italia, the Group had net income of 520 million
euros (a loss of 1,791 million euros in 2001).
27 | Report on Operations
Analysis of the Group balance sheet
The condensed reclassified balance sheet of the Group at 31 December 2002 is
set out below:
(in millions of euros) 31.12.2002 % 31.12.2001 % Changes
----------------------------------------- ---------------------- ------------------- -------
Short-term assets:
Financial resources 7,894 9.4 8,641 9.2 (747)
Operating assets 14,981 18.0 15,250 16.2 (269)
----------------------------------------- ---------------------- ------------------- -------
Total short-term assets 22,875 27.4 23,891 25.4 (1,016)
----------------------------------------- ---------------------- ------------------- -------
Medium/long-term assets:
Financial assets 495 0.6 705 0.7 (210)
Intangible fixed assets 34,561 41.4 39,220 41.6 (4,659)
Tangible fixed assets 19,449 23.3 22,097 23.5 (2,648)
Other assets 6,004 7.3 8,314 8.8 (2,310)
----------------------------------------- ---------------------- ------------------- -------
Total medium/long-term assets 60,509 72.6 70,336 74.6 (9,827)
----------------------------------------- ---------------------- ------------------- -------
Total assets 83,384 100.0 94,227 100.0 (10,843)
----------------------------------------- ---------------------- ------------------- -------
Short-term liabilities:
Short-term debt 7,984 9.6 9,961 10.6 (1,977)
Operating liabilities 18,396 22.1 17,010 18.0 1,386
----------------------------------------- ---------------------- ------------------- -------
Total short-term liabilities 26,380 31.7 26,971 28.6 (591)
----------------------------------------- ---------------------- ------------------- -------
Medium/long-term liabilities:
Medium/long-term debt 33,804 40.5 37,747 40.1 (3,943)
Other medium/long-term liabilities 2,576 3.1 3,156 3.3 (580)
----------------------------------------- ---------------------- ------------------- -------
Total medium/long-term liabilities 36,380 43.6 40,903 43.4 (4,523)
----------------------------------------- ---------------------- ------------------- -------
Total liabilities 62,760 75.3 67,874 72.0 (5,114)
----------------------------------------- ---------------------- ------------------- -------
Total shareholders' equity 20,624 24.7 26,353 28.0 (5,729)
----------------------------------------- ---------------------- ------------------- -------
Total liabilities and shareholders' equity 83,384 100.0 94,227 100.0 (10,843)
========================================= ====================== =================== =======
Short-term assets at 31 December 2002 totalled 22,875 million euros compared
with 23,891 million euros at 31 December 2001.
Specifically, the net decrease of 269 million euros in short-term operating
assets arose from a decrease of 107 million euros at the Telecom Italia Group
(largely due to the reduction in trade receivables) and from a decrease of 162
million euros at the other companies, mainly the Tecnost Group, also chiefly as
a result of a reduction in trade receivables.
Medium/long-term assets amounted to 60,509 million euros with a net decrease of
9,827 million euros from 70,336 million euros at 31 December 2001.
Specifically, medium/long-term financial assets at 31 December 2002 were 495
million euros and comprised 465 million euros for the prepayment of redemption
premiums on the Olivetti 1.5% 2001-2004 and Olivetti 1.5% 2001-2010 bonds
issued by the Parent Company in 2001 and on the Olivetti Finance
28 | Report on Operations
1% 2000-2005 bond exchangeable for Telecom Italia shares issued in 2000, for
residual amounts not accruing in 2002.
The decrease of 210 million euros arose mainly from the portion of the
prepayment on the above redemption premiums accrued in the year 2002 and from
write off of the prepayment on the redemption premium on Olivetti Finance N.V.
1% 2000-2005 notes, which were bought back and subsequently cancelled.
Intangible fixed assets amounted to 34,561 million euros compared with 39,220
million euros at the end of 2001, a decrease of 4,659 million euros, which
arose mainly from the amortisation charge of 3,462 million euros and goodwill
writedowns of 1,903 million euros (including 1,544 million euros for the Seat
equity investment), from other decreases of 1,250 million euros offset by
additions totalling 1,956 million euros.
Tangible fixed assets decreased by 2,648 million euros of which 2,466 million
euros for the Telecom Italia Group.
Other medium/long-term assets decreased by 2,310 million euros, reflecting a
decrease of 3,001 million euros for the Telecom Italia Group (mainly for equity
investment disposals and writedowns), offset in part by an addition of 691
million euros at the other Group companies, including 609 million euros of
deferred tax assets at Olivetti S.p.A. as a result of the writedown of the
Telecom Italia equity investment purely for tax purposes.
Short-term liabilities at 31 December 2002 amounted to 26,380 million euros,
down by 591 million euros from 26,971 million euros at 31 December 2001.
Specifically, short-term debt (7,984 million euros at 31 December 2002)
decreased by 1,977 million euros, reflecting a decrease for the Telecom Italia
Group of 3,338 million euros offset by an increase of 1,361 million euros for
the other Group companies.
Short-term operating liabilities increased by 1,386 million euros, reflecting a
rise of 1,782 million euros at the Telecom Italia Group offset by a decrease of
396 million euros for the other companies (the latter consisting mainly of
payment of previously provided charges of 125 million euros relating to
Olivetti Finance financing operations and use of the Olivetti S.p.A. reserve
for risks and charges for 167 million euros).
Medium/long-term liabilities amounted to 36,380 million euros with a decrease
of 4,523 million euros from 40,903 million euros at 31 December 2001.
Specifically, medium/long-term debt amounted to 33,804 million euros (including
15,018 million euros for the Telecom Italia Group) with a decrease of 3,943
million euros including 1,065 million euros for the Telecom Italia Group.
Debt for the other Group companies decreased by 2,878 million euros, mainly as
a result of operations to restructure debt and improve the maturity profile.
Medium/long-term non-financial liabilities decreased by 580 million euros, of
which 338 million euros for companies outside the Telecom Italia Group.
29 | Report on Operations
Capital invested at 31 December 2002 and related funding is illustrated in the
table below:
(in millions of euros) 31 12 2002 % 31 12 2001 % Changes
----------------------------------------- ----------------------- ----------------------- -------
Short-term operating assets 14,981 26.5 15,250 22.5 (269)
Short-term operating liabilities (18,396) (32 5) (17,010) (25.1) (1,386)
----------------------------------------- ----------------------- ----------------------- -------
Operating working capital (3,415) (6.0) (1,760) (2.6) (1,655)
Intangible fixed assets 34,561 61.0 39,220 57.8 (4,659)
Tangible fixed assets 19,449 34.4 22,097 32.6 (2,648)
Other assets 6,004 10.6 8,314 12.2 (2,310)
----------------------------------------- ----------------------- ----------------------- -------
Capital invested (A) 56,599 100.0 67,871 100.0 (11,272)
----------------------------------------- ----------------------- ----------------------- -------
Medium/long-term non financial liabilities 2,576 4.5 3,156 4.6 (580)
Minority interests 8,984 15.9 13,624 20.1 (4,640)
Group shareholders' equity 11,640 20.6 12,729 18.8 (1,089)
----------------------------------------- ----------------------- ----------------------- -------
Total non financial sources (B) 23,200 41.0 29,509 43.5 (6,309)
----------------------------------------- ----------------------- ----------------------- -------
Net financial indebtedness (A-B) 33,399 59.0 38,362 56.5 (4,963)
========================================= ======================= ======================= =======
Capital invested (56,599 million euros) decreased by 11,272 million euros from
the end of 2001. Of the total, 41% was funded by non-financial sources, mainly
total shareholders' equity (20,624 million euros, a decrease of 5,729 million
euros from 26,353 million euros at 31 December 2001 as analysed earlier in this
Report). Net financial indebtedness funded the remaining 59% (56.5% at 31
December 2001).
Olivetti Group net financial indebtedness at 31 December 2002 amounted to
33,399 million euros, a decrease of 4,963 million euros from 38,362 million
euros at 31 December 2001.
31.12.2002 31.12.2001
----------------------------- -----------------------------
Telecom Telecom
Italia Other Total Italia Other Total Changes
(in millions of euros) Group companies (a) Group companies (b) (a-b)
--------------------------------------------------- ------- --------- ------ ------- --------- ------ -------
Current portions of medium/long-term debt 2,677 773 3,450 1,669 270 1,939 1,511
Other payables to banks and other lenders 2,412 965 3,377 6,833 300 7,133 (3,756)
Financial payables to Olivetti Group companies - 612 -(*)
Interest accruals and deferrals 441 716 1,157 366 523 889 268
Liquid funds (1,588) (4,765) (6,353) (2,701) (4,621) (7,322) 969
Financial receivables (683) (328) (1,011) (804) (90) (894) (117)
Financial receivables from Olivetti Group - (612) -(*)
companies
Interest accruals and prepayments (159) (371) (530) (116) (309) (425) (105)
--------------------------------------------------- ------- --------- ------ ------- --------- ------ -------
Total short-term net financial indebtedness
(resources) (A) 3,100 (3,010) 90 5,859 (4,539) 1,320 (1,230)
--------------------------------------------------- ------- --------- ------ ------- --------- ------ -------
Bonds and other medium/long-term debt 15,018 18,786 33,804 16,083 21,664 37,747 (3,943)
Other medium/long-term financial assets (495) (495) (705) (705) 210
--------------------------------------------------- ------- --------- ------ ------- --------- ------ -------
Total medium/long-term net financial
indebtedness(B) 15,018 18,291 33,309 16,083 20,959 37,042 (3,733)
--------------------------------------------------- ------- --------- ------ ------- --------- ------ -------
Total net financial indebtedness (A+B) 18,118 15,281 33,399 21,942 16,420 38,362 (4,963)
=================================================== ======= ========= ====== ======= ========= ====== =======
(*) after intercompany balances elimination entries
30| Report on Operations
(in millions of euros) Year 2002
-------------------------------------------------------------- ---------
Telecom Italia Group
Capital expenditure 4,842
Goodwill 369
Financial investments 1,708
Payment of dividends:
to Olivetti S p A 1,296
to third parties 3,649
Payment to JP Morgan for strike price reduction 500
Operating cash flows (10,390)
Disposals (5,698)
Others (100)
-------------------------------------------------------------- ---------
Financial surplus of the Telecom Italia Group (3,824)
-------------------------------------------------------------- ---------
Other companies
Disposals (592)
Dividend proceeds from Telecom Italia S p A (1,296)
Financial charges and other disbursements, net 749
-------------------------------------------------------------- ---------
Financial surplus of other companies (1,139)
-------------------------------------------------------------- ---------
Total net financial surplus (4,963)
============================================================== =========
Disposals for the Telecom Italia Group (5,698 million euros) reflected 2002
disposals, net of related charges, for an overall 4,771 million euros. They
consisted mainly of the sale of AUNA (1,998 million euros), Bouygues Decaux
Telecom (750 million euros), Mobilkom Austria (756 million euros), Lottomatica
(212 million euros), Sogei (176 million euros), Telemaco Immobiliare (192
million euros), Immsi (69 million euros), Tiglio (328 million euros), Telekom
Austria (559 million euros), Telespazio (239 million euros), 9Telecom (529
million euros) and other minor sales (21 million euros).
Disposals for the other companies in the Olivetti Group reflected 2002 equity
investment sales, mainly the sale of Lottomatica (179 million euros), Seat (131
million euros), Tiglio (223 million euros) and Webegg (57 million euros).
* * *
The main financial operations transacted by the Olivetti Group in 2002 are
described below.
Telecom Italia Group
o Bond issue
In February, a 2.5 billion euro bond was issued, divided into two fixed-rate
tranches of 1.25 billion euros each, maturing on 1 February 2007 and 1 February
2012. The issue is part of the "Global Note Programme" for the restructuring of
Group debt; the overall amount of the programme was raised from 10 to 12
billion dollars following a resolution adopted by the Board of Directors on 18
December 2001.
31 | Report on Operations
o Closure of the revised agreements for put/call options on Seat Pagine
Gialle S.p.A. shares
On 25 February, Telecom Italia and the JPMorgan Chase Group signed the final
agreements relating to the re-negotiation of the put and call options on,
respectively, approximately 711 million and approximately 661 million Seat
Pagine Gialle shares. The preliminary agreements were originally stipulated on
4 December 2000.
Specifically, the option exercise price was reduced from 4.2 euros to 3.4 euros
per share; in return, Telecom Italia would pay JPMorgan Chase an amount of
approximately 569 million euros on the original expiry date in December 2005;
alternatively it may make early payment of this amount after discounting back.
The revised agreements also eliminate early exercise of the options for both
parties. The options therefore expire on 6 December 2005. Telecom Italia
retains early exercise rights on a portion of its call options - approximately
half of the overall amount - in blocks, as from December 2004.
The revised agreements achieve the aim of deferring exercise of the JPMorgan
Chase put until the final expiry in December 2005, thus allowing Telecom Italia
to avoid the possible impact of a single large outlay in 2003.
The economic effects of the reduction in the option exercise price were
reflected in the 2001 financial statements.
o Equity investment acquisitions and disposals
Sale of Lottomatica
In February 2002 the Market IT Business Unit (Finsiel group) accepted the
public tender offer on Lottomatica, raising proceeds of 212 million euros and a
capital gain of 73 million euros for the Telecom Italia Group consolidated net
result.
Sale of BDT - Bouygues Decaux Telecom
In March 2002 the Telecom Italia Group sold the TIM International equity
investment in BDT (19.61%), which controls the French operator Bouygues
Telecom, raising proceeds of 750 million euros and a capital gain of 266
million euros for the Telecom Italia Group consolidated net result.
Sale of Mobilkom Austria
On 28 June 2002, TIM International N.V. sold its entire stake (25%) in Mobilkom
Austria to Telekom Austria (in which Telecom Italia International held a 14.78%
stake at 31.12.2002), raising proceeds of 756 million euros and a capital gain
of 64 million euros for the Telecom Italia Group consolidated net result
Sale of Sogei
On 31 July 2002 Finsiel closed the sale of Sogei to the Fiscal Policies
Department of the Ministry of the Economy and Finance, with an impact of 176
million euros on Telecom Italia Group net financial indebtedness.
Sale of AUNA
On 1 August 2002 the Telecom Italia Group sold its equity investment in AUNA to
Endesa, Union Fenosa and Banco Santander Central Hispano. The sale was
originally planned for December. The transaction
32 | Report on Operations
raised proceeds of 1,998 million euros for the Telecom Italia Group and a
capital gain of 1,033 million euros for the Telecom Italia Group consolidated
net result.
Sale of Telemaco Immobiliare
On 1 August 2002 Telemaco Immobiliare was sold to Mirtus, a company indirectly
controlled by the US Whitehall real estate fund promoted by the Goldman Sachs
Group, raising proceeds of 192 million euros and a net capital gain of 64
million euros for the Telecom Italia Group.
Purchase of EPIClink
On 2 August 2002, having received approval from the Antitrust Authority,
Telecom Italia purchased 86% of EPIClink S.p.A. for a price of 60.2 million
euros. The equity was sold by Edisontel S.p.A.(30.3%), Pirelli S.p.A. (25.3%;
Pirelli is a Telecom Italia related party through the Chairman and Chief
Executive Officer Carlo Buora), IntesaBci S.p.A. (20%), E_voluzione (8%) and
Camozzi Holding (2.4%). As a result of this transaction, EPIClink ownership is
as follows: Telecom Italia 86%, Pirelli 5%, IntesaBci 5%, Camozzi 2%,
E_voluzione 2%. Telecom Italia also committed to acquire the residual stake
(14%) for an overall price of 10 million euros.
Sale of 9Telecom
On 26 August, the Telecom Italia Group closed the sale of the equity investment
in 9Telecom and the simultaneous purchase of 7% of LDCom. The transactions had
a net negative impact of 267 million euros on Telecom Italia Group income.
Sale of a portion of Solpart Participacoes
On 27 August the Telecom Italia Group reached an agreement with its partners in
Solpart (which indirectly controls Brasil Telecom) to reduce its ordinary
shareholding from 37.29% to 19% through the sale of 18.29% of ordinary share
capital to Timepart Participacoes and Techold Participacoes. The transaction
removed the regulatory obstacles blocking the start-up of a GSM 1800 commercial
offer by the local TIM subsidiaries. Options have been agreed by both parties,
to be exercised under certain conditions, that would restore the situation quo
ante.
Purchase of an additional stake in Stet Hellas
In August, TIM International NV, a TIM subsidiary, acquired from the Verizon
Europe Holding II group a 17.45% stake in Stet Hellas, in which it already held
63.95%, for a price of 108 million euros. The operation makes TIM International
NV the sole industrial shareholder and the reference shareholder of Stet
Hellas, and is part of the Group strategy to rationalise its international
portfolio by consolidating its position in the Mediterranean.
Purchase of an additional stake in Netesi
In August, after receiving approval from the Antitrust Authority, the Telecom
Italia Group purchased a 69.10% shareholding in Netesi, of which it already
held 17.98%, for a price of 11 million euros.
33 | Report on Operations
Purchase of Pagine Utili
On 11 September 2002 Telecom Italia reached an agreement with Pagine Italia
S.p.A. for the purchase of the Pagine Utili directories business, which has
approximately 60,000 subscribers.
Telecom Italia will pay Pagine Italia a consideration of 214 million Seat
ordinary shares held by the Telecom Italia Group, representing 1.9% of Seat
ordinary share capital.
Closing is subject to approval by the AGCM Authority (the Italian Antitrust
Authorities). Following the observations in the report of the AGCM, on 16
January 2003 Telecom Italia and Pagine Italia S.p.A. agreed to withdraw the
notice of acquisition of the Pagine Utili business unit.
They also agreed to extend the term of the contract in order to re-formulate
the purchase with a view to possible re-presentation to the Authority.
The contract provides in any case for an exclusive consideration to Pagine
Italia S.p.A., of 6.6% of the total number of Seat Pagine Gialle shares to be
paid in the event of closure.
Procedures for the merger of the Pagine Utili unit with Seat Pagine Gialle will
be drawn up once the transaction has closed.
Telecom Italia - News Corporation agreement
On 1 October, Telecom Italia signed contracts with the News Corporation Group
("News"), its partner in Stream, and with Vivendi Universal ("Vivendi"),
currently the controlling shareholder of Telepiu, for the acquisition of
Telepiu by Stream and the subsequent creation of a single pay TV platform in
Italy. Under the agreements, Telecom Italia will hold 19.9% of the single
platform and News Corporation will hold the remaining 80.1%.
At closing, Telecom Italia will pay 31.84 million euros for 19.9% of Telepiu
and will waive the receivables from Stream at the end of 2002 due to the Group
companies, for approximately 147 million euros (the full amount was provided in
2001). By the same token, News Corporation will waive receivables due to Stream
for a similar amount.
The contract is subject to approval by the European Antitrust Authority which
will issue a ruling by the end of April 2003.
Sale of the equity investment in Consiel
On 3 October 2002 the sale - between Finsiel and World Investment Partners S.A.
- of the shares representing the entire share capital of Consiel was completed
with the endorsement of the shares in favour of the purchaser.
The total amount paid by World Investment Partners S.A. was equal to 1 million
euros.
Purchase of 100% of Blu S.p.A.
On 7 October TIM closed the preliminary contract signed on 7 August for the
purchase of 100% of Blu S.p.A., which was subsequently merged with TIM S.p.A.
The operation had previously been approved by the Competition & Market
Authority, after the favourable ruling issued by the Communications Authority.
The merger deed was drawn up on 18 December 2002, when the final sale price of
83 million euros was set. The merger took effect on 23 December 2002.
34 | Report on Operations
Project Tiglio
On 29 October the frame agreement drawn up by the Pirelli, Olivetti-Telecom
Italia and The Morgan Stanley Real Estate Funds groups closed, with the merger
of the parties' respective real estate assets and property management services
providers.
Under the agreement, the assets of Tiglio I and Tiglio II will be enhanced in
2003 through a market operation implemented as part of a strategy for the
development of the real-estate market, opening up important opportunities for
the Telecom Italia Group to optimise the value of its current shareholdings in
the two vehicles.
Specifically, through a series of transactions, the Telecom Italia Group
transferred assets totalling 1,360 million euros to Tiglio I and Tiglio II. Of
these assets, 50 million euros related to Seat Pagine Gialle, approximately 840
million euros related to property spun off to Emsa Immobiliare as a result of
the nonproportional split-up of IM.SER, and 470 million euros related to other
assets. The operation generated gross income of 229 million euros for Telecom
Italia S.p.A. and 234 million euros for the Telecom Italia Group (with an
impact of 150 million euros on the Telecom Italia Group net result).
The Pirelli Group companies involved in the operation are Pirelli S.p.A. (a
related party of Telecom Italia through the Chairman and the Chief Executive
Officer Carlo Buora) and Pirelli & C. Real Estate S.p.A. (a related party of
Telecom Italia through the Chairman, the Chief Executive Officer Carlo Buora
and the Director Carlo Alessandro Puri Negri).
Sale of Telespazio
In November Telecom Italia and Finmeccanica closed the agreement of 2 August
2002 for the sale of Telespazio. The transaction generated a positive impact of
239 million euros on Telecom Italia Group financial indebtedness, and a net
capital gain of 36 million euros for Telecom Italia Group income.
Sale of the Viasat equity investment
On 18 November 2002, Seat Pagine Gialle S.p.A. and Finsatel sold their
respective shareholdings of 33.54% and 16.46% in Viasat S.p.A. to Exe Fin
S.p.A., for an aggregate amount of approximately 2.5 million euros; the
transaction also eliminated the equity investment indirectly held in Viasat
Assistance S.p.A.
Sale of Telekom Austria
In November Telecom Italia International N.V. organised placement of 75 million
Telekom Austria AG shares (representing 15% of capital). The placement price
was fixed at 7.45 per share. The operation raised gross proceeds of 559 million
euros, with a loss of 135 million euros on the Telecom Italia Group's
consolidated net result.
The operation reduced the Telecom Italia Group's equity investment in Telekom
Austria from 29.78% to 14.78%.
Sale of the equity investment in Informatica Trentina
On 21 November, Finsiel disposed of its equity investment (40.41%) in
Informatica Trentina in favour of DeDa Srl, a company controlled by Deltadator
S.p.A. (Sequenza Group) for an amount equal to approximately 8.7 million euros,
with a capital gain recorded in the Telecom Italia consolidated financial
statements of 4 million euros.
35 | Report on Operations
Sale of IMMSI
On 22 November Telecom Italia sold its equity investment in IMMSI to the
"Omniapartecipazioni" company. The selling price was 69 million euros, with a
positive impact of 41 million euros for Telecom Italia S.p.A..
Sale of Fintech
On 20 December 2002, Telecom Italia Lab sold its shareholding in Fintech S.p.A.
(50% of share capital) to the Belgian company Euroqube S.A., for an amount of
4.75 million euros, of which approximately half was settled at closing; the
outstanding consideration will be paid over the following 12 months.
Sale of Tele Pay Roll Services
On 20 December Telecom Italia signed an agreement with Accenture for the sale
of 100% of TE.SS - Tele Pay Roll Services, which handles payroll services for
the Telecom Italia Group. The selling price is approximately 10 million euros.
The transaction, part of the Telecom Italia Group plan to dispose of non-core
operations, closed on 28 February 2003, when title to the capital stock was
transferred.
Purchase of an equity investment in Mediocredito Centrale S.p.A.
On 27 December 2002 in execution of an agreement signed in July, the purchase
of a 3% stake in Mediocredito Centrale S.p.A. was finalised at a price of 36
million euros
Sale of Telekom Srbija
On 28 December 2002 the Telecom Italia Group announced an agreement for the
sale to PTT Serbia of its 29% shareholding in Telekom Srbija. On 20 February
2003 the contract was signed and closing is expected to take place by the end
of May.
PTT will pay a consideration of 195 million euros: 120 million euros are to be
paid in four monthly amounts as from February 2003 and the remaining sum in 6
six-monthly amounts as from January 2006. The shares involved in the
transaction will be deposited with an international bank until payment of the
consideration has been completed.
Project Ortensia
On 24 December 2002 Telecom Italia and the other shareholders of Tiglio I (MSMC
Italy Holding BV, Olivetti, Seat Pagine Gialle and Pirelli) and Tiglio II
(POPOY Holding B.V.) drew up a binding agreement with the Marzotto company -
which became effective on 4 March 2003 - for the formation of a jointly owned
vehicle to hold the land assets of Tiglio I e Tiglio II and the land assets
owned directly and indirectly by Marzotto. The agreement provides for the
transaction to be executed during 2003 through the spin-off from Tiglio I and
Tiglio II of land assets and other related assets and liabilities to a company
to which, under the agreement, Marzotto transferred its land assets at the end
of December 2002. Based on the asset valuations currently available, on
completion of the spin-offs, Telecom Italia will hold a share of approximately
28% of the company (at Group level, Seat Pagine Gialle will own a 1% share).
o Telecom Italia share buy-back
In connection with the share buy-back authorised by the Telecom Italia
Shareholders' Meeting of 7 November which began in March 2002, during the year
Telecom Italia purchased 45,647,000 savings shares and 5,280,500 ordinary
shares, for a total outlay of 287 million euros.
36 | Report on Operations
Other companies in the Olivetti Group
o In January 2002, Olivetti accepted the public tender offer for 100% of
Lottomatica shares made by the De Agostini Group on 23 November 2001, at a
price of 6.55 euros per share, after an improved bid. Olivetti tendered
its equity in Lottomatica, which amounted overall to 27,451,550 shares
representing 15.6% of the company's subscribed capital (of which 14.04%
directly owned by Olivetti S.p.A. and 1.56% owned by the subsidiary
Olivetti International S.A.).
Also considering Finsiel S.p.A.'s 18.3% equity investment in Lottomatica,
the overall cash inflow for the Olivetti-Telecom Italia Group was 391
million euros, with an aggregate capital gain of 367 million euros
recorded in the statutory accounts of the companies.
o On 27 June 2002 the Telecom Italia and Olivetti Boards of Directors
approved the acquisition by IT Telecom S.p.A. (100% Telecom Italia) of
Olivetti S.p.A.'s 50% equity investment in Webegg S.p.A. The transaction
price of 57.5 million euros was determined on the basis of assessments
performed by KPMG Corporate Finance for Telecom Italia and UBM for
Olivetti.
The operation will allow Webegg's specific knowhow to be integrated with
that of the Telecom Italia Group Information Technology division, with a
view to forming competence centres providing services for the Group itself
and on the open market.
* * *
o On 29 January 2002 (with settlement date 12 February 2002), through a
private placement with a select group of institutional investors, Olivetti
International Finance N.V. re-opened the bond maturing in July 2009 for an
additional amount of 250 million euros. As a result, total notes
outstanding amount to 2,350 million euros.
o On 14 March 2002, through a private placement, Olivetti Finance N.V.
issued a 500 million euro floating-rate bond, guaranteed by Olivetti
S.p.A. The bond pays a quarterly coupon linked to 3-month Euribor + 130
basis points. The term is 3 years, which may be extended at the
bondholders' option for subsequent 21-month periods up to a maximum
overall term of 10 years.
o In April, the subsidiary Olivetti Finance N.V. successfully issued a
multi-tranche bond. The operation raised proceeds totalling 1.5 billion
euros, subdivided into two tranches maturing in 5 and 10 years. The terms
of the issue are as follows:
first tranche
amount: 1,000 million euros
issue date: 24 April 2002
maturity: 24 April 2007
coupon: 6.50% per annum
37 | Report on Operations
second tranche
amount: 500 million euros
issue date: 24 April 2002
maturity: 24 April 2012
coupon: 7.25% per annum
o On 22 April 2002, through a private placement, Olivetti Finance N.V.
issued a 20 billion yen bond with a fixed 3.55% six-monthly coupon
maturing in May 2032 (callable annually by the issuer after the 10th
year).
o With a private placement, Olivetti Finance N.V. issued a bond for 300
million euros on 29 May and for an additional 300 million euros on 17
June. The bond bears a floating-rate quarterly coupon with a spread of
1.25%, and matures on 3 January 2006.
o On 24 June 2002, all outstanding notes of the "Olivetti Finance N.V.
floating-rate 1999-2004" bond were early redeemed (as allowed by the bond
regulation and in execution of the resolution adopted by the company's
Board of Directors), for an amount corresponding to the nominal value of
the notes (5,150 million euros), plus interest accrued to date.
o In the second half of 2002, Olivetti Finance N.V. launched additional euro
bonds:
1) a zero-coupon bond (with settlement date 20 September 2002)
exchangeable for Telecom Italia ordinary shares for approximately 385
million euros (350 million euros issued on 29 July, followed on 27
August by exercise of the greenshoe option for a further amount of
approximately 35 million euros by Lehman Brothers as global
co-ordinator), maturing in March 2004; the bond is exchangeable for
41,400,000 Telecom Italia ordinary shares (at a price of 9.30 euros
per share) representing approximately 0.79% of ordinary share
capital;
2) a bond placed privately on 7 August as part of the Euro Medium Term
Note (EMTN) Programme for 200 million euros and bearing a
floating-rate coupon of 1.45% over EONIA, maturing in February 2005;
3) a bond placed privately on 9 August as part of the EMTN Programme for
250 million euros, with an annual 7.77% coupon, maturing in August
2032.
4) the re-opening on 3 October of three bonds under the EMTN Programme,
to re-finance and extend the repayment profile of existing debt.
The overall gross proceeds of 1,550 million euros were as follows:
- 400 million euros on the "Olivetti Finance N.V. floating-rate
2002-2006" bond for an original amount of 600 million euros,
increased to 1,000 million euros;
- 650 million euros on the "Olivetti Finance N.V. 6.5% 2002-2007"
bond for an original amount of 1,000 million euros, increased to
1,650 million euros;
- 500 million euros on the "Olivetti Finance N.V. 7.25% 2002-2012"
bond for an original 500 million euros, increased to 1,000
million euros.
Additionally, the above issues maturing in 2006 and 2007 were increased through
private placements for 100 million euros each, thus raising the overall amounts
to 1,100 million euros and 1,750 million euros respectively.
38 | Report on Operations
o On 18 December 2002 a debt-transfer operation took place by which Olivetti
Finance N.V. (Netherlands) replaced Olivetti International Finance N.V.
(Dutch Antilles) as the issuer of all the bonds already issued by the
Antillean company under the EMTN Programme guaranteed by Olivetti S.p.A.,
as follows: the 4,950 million euro bond denominated "Euro Medium Term Note
Programme 5.375% due 2004" and the 2,350 million euros bond denominated
"Euro Medium Term Note Programme 6.125% due 2009".
o On 23 December 2002 the following bonds were extinguished:
- "Olivetti S.p.A. EONIA Linked notes 2001-2003" for a value of 400
million euros;
- "Olivetti Finance N.V. 1% 2000-2005", exchangeable for Telecom Italia
ordinary shares, for a nominal value of 1,235 million euros. As a
result, the residual nominal loan amount decreased to 765 million
euros;
- "Olivetti Finance N.V. 5.375% 1999-2004" (originally issued by
Olivetti International Finance N.V. for a nominal value of 750
million euros). As a result, the residual nominal loan amount
decreased to 4,200 million euros.
* * *
All bonds issued by Olivetti Finance N.V. and Olivetti International Finance
N.V. are guaranteed by the Parent Company Olivetti S.p.A..
Information by sector (CONSOB communication no. 98084143)
A) Information by business sector
The consolidated statement of income showing the results of the operating
companies adjusted for consolidation purposes and the consolidated reclassified
balance sheet showing the balances of these companies adjusted for
consolidation purposes are set out on the following pages. The results and
balances for consolidation purposes differ from those disclosed in the
companies' respective statutory financial statements at 31 December 2002. The
main consolidation adjustments are the elimination of intercompany gains and
depreciation charges on assets transferred within the Group, the reversal of
tax-related entries made largely in respect of depreciation, the valuation of
equity investments (equity investments in subsidiary companies, by definition,
appear in the consolidated accounts as the appropriate portion of the company's
net equity used for consolidation purposes) and other adjustments made to align
the results of the individual companies with the accounting policies adopted by
the Group.
39 | Report on Operations
Olivetti Group - Income Statement for the year 2002
Telecom
Olivetti Finance Italia
(in millions of euros) S.p.A. companies Group
----------------------------------------------------------------------------- ---------- --------- -------------------
Third party revenues 30,400.4
Revenues from Olivetti Group companies
----------------------------------------------------------------------------- ---------- --------- -------------------
TOTAL NET REVENUES 30,400.4 100.0
Operating costs:
Labour (13.8) (0.6) (4,532.0) (14.9)
Materials and services (18.0) (1.5) (11,923.4) (39.2)
Grants 19.0 -
Depreciation of tangible assets (0.9) (0.1) (3,783.3) (12.4)
Amortisation of intangible assets:
Consolidation goodwill (1,309.2) (1.3) (829.9) (2.7)
Others (76.8) (4.3) (1,226.3) (4.0)
Value adjustments and provision for risks and charges (3.4) (752.6) (2.5)
Other income (costs), net (0.1) 43.0 0.1
----------------------------------------------------------------------------- ---------- --------- -------------------
Result before interest and taxes (EBIT) and non recurring income and charges (1,418.7) (11.3) 7,414.9 24.4
----------------------------------------------------------------------------- ---------- --------- -------------------
Non recurring income 157.4 4.9 2,810.4 9.2
Non recurring charges (61.7) (43.5) (8,375.2) (27.5)
----------------------------------------------------------------------------- ---------- --------- -------------------
EBIT (1,323.0) (49.9) 1,850.1 6.1
----------------------------------------------------------------------------- ---------- --------- -------------------
Income from equity investments 34.8 3.3 18.4 -
Financial income and charges, net (771.7) (66.5) (1,499.4) (4.9)
Value adjustments to financial assets (90.5) (13.7) (682.0) (2.2)
----------------------------------------------------------------------------- ---------- --------- -------------------
Result before taxes (2,150.4) (126.8) (312.9) (1.0)
----------------------------------------------------------------------------- ---------- --------- -------------------
Taxes 1,602.6 (7.8) 687.9 2.3
----------------------------------------------------------------------------- ---------- --------- -------------------
Result after taxes before minority interests (547.8) (134.6) 375.0 1.2
----------------------------------------------------------------------------- ---------- --------- -------------------
Minority interests (472.2) (1.6)
----------------------------------------------------------------------------- ---------- --------- -------------------
Net result for the year for consolidation purposes (547.8) (134.6) (97.2) (0.3)
============================================================================= ========== ========= ===================
(*) consolidated in Telecom Italia Group from 30 June 2002
40 | Report on Operations
Olivetti
Tecnost Olivetti Webegg Consolidation Total
Group Multiservices Group adjustments Group
----------------------- ------------------------- ------------------ ----------- -----------------------
906.1 75.8 25.6 31,407.9
7.9 43.5 19.5 (70.9) -
----------------------- ------------------------- ------------------ ----------- -----------------------
914.0 100.0 119.3 100.0 45.1 100.0 (70.9) 31,407.9 100.0
(145.3) (15.9) (16.4) (13.7) (19.0) (42.1) (4,727.1) (15.1)
(704.9) (77.1) (70.6) (59.2) (20.6) (45.7) 70.9 (12,668.1) (40.3)
1.0 0.1 20.0 0.1
(13.4) (1.5) (8.7) (7.3) (0.6) (1.3) (3,807.0) (12.1)
(0.1) (0.0) (0.9) (2.0) (0.6) (2,142.0) (6.8)
(11.2) (1.2) (0.2) (0.2) (0.7) (1.6) (1,319.5) (4.2)
(15.5) (1.7) (3.9) (3.3) (0.2) (0.4) (775.6) (2.5)
(10.7) (1.2) (4.6) (3.9) 27.6 0.1
----------------------- ------------------------- ------------------ ----------- -----------------------
13.9 1.5 14.9 12.5 3.1 6.9 (0.6) 6,016.2 19.2
----------------------- ------------------------- ------------------ ----------- -----------------------
5.6 0.6 5.8 4.9 0.1 0.2 6.0 2,990.2 9.5
(82.1) (9.0) (0.7) (0.6) (0.4) (0.9) 77.6 (8,486.0) (27.0)
----------------------- ------------------------- ------------------ ----------- -----------------------
(62.6) (6.8) 20.0 16.8 2.8 6.2 83.0 520.4 1.7
----------------------- ------------------------- ------------------ ----------- -----------------------
56.5 0.1
(17.4) (1.9) (2.3) (1.9) 0.3 0.7 50.7 (2,306.3) (7.3)
(0.2) (0.0) (0.7) (1.6) 0.6 (786.5) (2.5)
----------------------- ------------------------- ------------------ ----------- -----------------------
(80.2) (8.8) 17.7 14.8 2.4 5.3 134.3 (2,515.9) (8.0)
----------------------- ------------------------- ------------------ ----------- -----------------------
(11.0) (1.2) (6.9) (5.8) (2.9) (6.4) (51.7) 2,210.2 7.0
----------------------- ------------------------- ------------------ ----------- -----------------------
(91.2) (10.0) 10.8 9.1 (0.5) (1.1) 82.6 (305.7) (1.0)
----------------------- ------------------------- ------------------ ----------- -----------------------
4.1 0.4 0.2 0.4 0.8 (467.1) (1.5)
----------------------- ------------------------- ------------------ ----------- -----------------------
(87.1) (9.5) 10.8 9.1 (0.3) (0.7) 83.4 (772.8) (2.5)
======================= ========================= ================== =========== =======================
41 | Report on Operations
Olivetti Group - Balance Sheet as of 31 december 2002 by company
Telecom
Olivetti Finance Italia
(in millions of euros) S.p.A. companies Group
-------------------------------------------------------------------------------
Assets
Short-term assets 2,221 7,498 16,033
Medium/long-term assets:
Intangible 179 22 12,918
Tangible 1 19,291
Other 23,975 9,200 4,620
-------------------------------------------------------------------------------
TOTAL ASSETS 26,376 16,720 52,862
-------------------------------------------------------------------------------
Liabilities
Short-term liabilities 4,449 1,853 23,021
Medium/long-term liabilities 12,896 14,493 17,505
-------------------------------------------------------------------------------
TOTAL LIABILITIES 17,345 16,346 40,526
-------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 9,031 374 12,336
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 26,376 16,720 52,862
===============================================================================
42 | Report on Operations
Olivetti
Tecnost Olivetti Consolidation Total
Group Multiservices adjustments Group
-------------------------------------------------------------------------------
646 106 (3,629) 22,875
31 1 21,410 34,561
66 89 2 19,449
18 8 (31,322) 6,499
-------------------------------------------------------------------------------
761 204 (13,539) 83,384
-------------------------------------------------------------------------------
587 127 (3,657) 26,380
113 28 (8,655) 36,380
-------------------------------------------------------------------------------
700 155 (12,312) 62,760
-------------------------------------------------------------------------------
61 49 (1,227) 20,624
-------------------------------------------------------------------------------
761 204 (13,539) 83,384
===============================================================================
43 | Report on Operations
Olivetti Group - Analysis of capital invested as of 31 december 2002 by company
Telecom
Olivetti Finance Italia
(in millions of euros) S.p.A. companies Group
----------------------------------------------- -------- --------- -------
Inventories 411
Third party trade receivables, net 1 8,084
Other assets 1,152 51 5,108
----------------------------------------------- -------- --------- -------
Short-term operating assets 1,153 51 13,603
----------------------------------------------- -------- --------- -------
Third party trade payables 9 5,687
Other liabilities 649 201 11,804
----------------------------------------------- -------- --------- -------
Short-term operating liabilities 658 201 17,491
----------------------------------------------- -------- --------- -------
Operating working capital 495 (150) (3,888)
----------------------------------------------- -------- --------- -------
Medium/long-term assets:
Intangible 179 22 12,918
Tangible 1 19,291
Other 23,554 475 4,620
----------------------------------------------- -------- --------- -------
A) CAPITAL INVESTED 24,229 347 32,941
----------------------------------------------- -------- --------- -------
Medium/long-term non-financial liabilities 3 2,487
Total shareholders' equity 9,031 374 12,336
=============================================== ======== ========= =======
B) TOTAL NON FINANCIAL SOURCES 9,034 374 14,823
=============================================== ======== ========= =======
C) NET FINANCIAL INDEBTEDNESS (RESOURCES) (A-B) 15,195 (27) 18,118
=============================================== ======== ========= =======
44 | Report on Operations
Olivetti
Tecnost Olivetti Consolidation Total
Group Multiservices adjustments Group
------------ ------------- ------------- -----------
150 23 584
192 27 8,304
98 35 (351) 6,093
------------ ------------- ------------- -----------
440 85 (351) 14,981
------------ ------------- ------------- -----------
168 41 (9) 5,896
186 29 (369) 12,500
------------ ------------- ------------- -----------
354 70 (378) 18,396
------------ ------------- ------------- -----------
86 15 27 (3,415)
------------ ------------- ------------- -----------
31 1 21,410 34,561
66 89 2 19,449
18 5 (22,668) 6,004
------------ ------------- ------------- -----------
201 110 (1,229) 56,599
------------ ------------- ------------- -----------
80 7 (1) 2,576
61 49 (1,227) 20,624
------------ ------------- ------------- -----------
141 56 (1,228) 23,200
------------ ------------- ------------- -----------
60 54 (1) 33,399
============ ============= ============= ===========
45| Report on Operations
B) Other information
A geographical breakdown of revenues from sales and services is set out below:
Changes
(in millions of euros) Year 2002 Year 2001 absolute %
------------------------------------ --------- --------- ----------------
Italy 25,029.5 24,895.3 134.2 0.5
Other European countries 2,454.6 2,494.8 (40.2) (1.6)
------------------------------------ --------- --------- ----------------
Total Europe 27,484.1 27,390.1 94.0 0.3
------------------------------------ --------- --------- ----------------
North America 452.1 1,088.0 (635.9) (58.4)
Central and South America 2,776.5 2,759.2 17.3 0.6
Australia, Africa and Asia 695.2 778.4 (83.2) (10.7)
------------------------------------ --------- --------- ----------------
Total Group 31,407.9 32,015.7 (607.8) (1.9)
==================================== ========= ========= ================
Intercompany transactions between different business sectors or geographical
areas are conducted at market prices and are eliminated during consolidation.
Quarterly results of the Olivetti Group
Year 2002 Year 2001
------------------------------------------ -----------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
(in millions of euros) quarter quarter quarter quarter Total quarter quarter quarter quarter Total
-------------------------------- ------- ------- ------- ------- ----- ------- ------- ------- ------- -------
Revenues from sales and services 7,533 8,010 7,660 8,205 31,408 7,409 7,925 7,802 8,880 32,016
Result before interest and taxes
(EBIT) and non recurring income
and charges 1,391 1,602 1,701 1,322 6,016 1,393 1,295 1,450 1,200 5,338
% EBIT before non recurring
items on Revenues 18.5% 20.0% 22.2% 16.1% 19.2% 18.8% 16.3% 18.6% 13.5% 16.7%
EBIT 2,041 1,161 941 (3,623) 520 1,482 1,372 (232) (639) 1,983
% EBIT on Revenues 27.1% 14.5% 12.3% -44.2% 1.7% 20.0% 17.3% -3.0% -7.2% 6.2%
Net result (187) (324) (349) 87 (773) (479) (608) (1,093) (910) (3,090)
Net result before amortisation
of goodwill on Telecom Italia
acquisitions 136 (1) (25) 410 520 (154) (284) (768) (585) (1,791)
-------------------------------- ------- ------- ------- ------- ----- ------- ------- ------- ------- -------
46 | Report on Operations
Research & Development
In 2002 most of the Telecom Italia Group's R&D operations were conducted by
TILAB, in some cases in co-operation with Pirelli Lab. R&D staff totalled 1,081
heads.
Activities consisted of study and testing in the wireline and mobile
telecommunications areas and in the Internet area.
Research on Internet and mobile applications focused on testing of integrated
technological and application solutions for the multimedia offer, development
of access solutions and solutions for management of broadband users,
development and assessment of advanced solutions for user environments
(terminals, domestic cabling, application platforms).
Switching and networking research focused on IP networks with the development
of Content Delivery Networks. Other special areas of interest were Wireless
LANs and innovative telephony solutions on packet-switching networks.
In the area of network infrastructures, work was concerned with the
metropolitan and transportation network, new automatic switching fibre
networks, and the access network, where innovative solutions based on copper
and fibre links are being developed.
During 2002, 45 patents were filed, an increase of 13% from 2001.
Total R&D expenditure for the year amounted to approximately 109 million euros.
Subsidies and low-interest loans for R&D expenses collected during the year or
due to be collected by TILAB amounted to approximately 12 million euros.
47 | Report on Operations
The Parent Company
In 2002, the Parent Company Olivetti S.p.A. operated purely as a holding,
mainly in the wireline and mobile telecommunications sector, through its equity
investment in the Telecom Italia Group, and, through controlling equity
investments, in other industries, including office and Internet products and
services (Olivetti Tecnost S.p.A.), and real-estate services (Olivetti
Multiservices S.p.A.).
The Company closed financial 2002 with a net loss of 6,240 million euros (a net
loss of 871 million euros in 2001) after equity investment writedowns of 8,400
million euros (175 million euros in 2001), including a writedown of 8,051
million euros on Telecom Italia S.p.A. shares made exclusively for tax
purposes.
Capital investments for 2002 totalled 225 million euros and referred to equity
investments. This compared with 584 million euros in 2001, of which 430 million
euros for equity investments and 153 million euros for intangible assets and 1
million for tangible assets.
At 31 December 2002 shareholders' equity totalled 9,031 million euros, a
decrease of 6,204 million euros against 15,235 million euros at 31 December
2001. The decrease arose as a result of the loss of 6,240 million euros posted
for 2002, offset by share capital increases for 36 million euros following the
conversion of bonds and exercise of warrants, net of use of restricted reserves
tied to bond conversion/warrant exercise.
Net financial indebtedness at the end of 2002 totalled 15,195 million euros, a
decrease of 1,127 million euros from the end of 2001 (16,322 million euros),
which arose largely as a result of collection of dividends and equity
investment disposals set against outlays mainly for financial charges.
48 | Report on Operations
Business performance for 2002 is reflected in the income statement set out
below, reclassified in compliance with the Consob model for industrial holding
companies pursuant to communication no. 94001437 of 23 February 1994:
(in millions of euros) Year 2002 Year 2001 Changes
------------------------------------------------- --------- --------- -------
Financial income and charges
1. Income from equity investments 1,979 85 1,894
2. Other financial income 41 37 4
3. Interest and other financial charges (813) (966) 153
------------------------------------------------- --------- --------- -------
Total financial income and charges 1,207) (844) 2,051
------------------------------------------------- --------- --------- -------
Value adjustments to financial assets
4. Revaluations on equity investments - - -
5. Write-downs on equity investments (8,400) (175) (8,225)
------------------------------------------------- --------- --------- -------
Total value adjustments to financial assets (8,400) (175) (8,225)
------------------------------------------------- --------- --------- -------
6. Other income from operations 14 15 (1)
------------------------------------------------- --------- --------- -------
Other costs from operations
7. Non-financial services received (26) (49) 23
8. Leases and rentals (2) (3) 1
9. Payroll (14) (13) (1)
10. Depreciation, amortisation and write-downs (72) (64) (8)
11. Provisions for risks - (192) 192
12. Other operational expenses (3) (3) -
------------------------------------------------- --------- --------- -------
Total other costs from operations (117) (324) 207
------------------------------------------------- --------- --------- -------
Result from ordinary operations (7,296) (1,328) (5,968)
------------------------------------------------- --------- --------- -------
Extraordinary income and charges
13. Income 240 23 217
14. Charges (76) (16) (60)
------------------------------------------------- --------- --------- -------
Extraordinary income 164 7 157
------------------------------------------------- --------- --------- -------
Result before taxation (7,132) (1,321) (5,811)
------------------------------------------------- --------- --------- -------
15. Taxation 892 450 442
------------------------------------------------- --------- --------- -------
Net income (loss) for the year (6,240) (871) (5,369)
================================================= ========= ========= =======
The year's ordinary operations closed with a loss of 7,296 million euros
compared with a loss of 1,328 million euros in 2001.
This result arose as follows:
o 2,020 million euros of financial income (122 million euros in 2001)
including:
- 1,979 million euros of dividends and related tax credits (85 million
euros in 2001), of which 1,952 million euros from Telecom Italia (73
million euros in 2001, recorded as accrued), 14 million euros from
Olivetti Multiservices, 7 million euros from Olivetti Finanziaria
Industriale S.p.A., 4 million euros from Mediobanca and 2 million
euros from other investee companies;
49 | Report on Operations
- 41 million euros of other financial income (37 million euros in 2001)
including:
* 3 million euros from securities and reverse repurchase
agreements classified under current assets (largely investments
in government securities);
* 7 million euros of interest income from subsidiary companies (on
borrowings and interest-bearing current accounts);
* 4 million euros of interest income on bank current accounts;
* 10 million euros of interest income on receivables from tax
authorities ceded without recourse in previous years;
* 11 million euros for exchange rate gains;
* 6 million euros of income on swaps;
o 813 million euros of interest expense and other financial charges (966
million euros in 2001), including:
- 607 million euros to subsidiaries (814 million euros in 2001) in
respect of borrowings and interest-bearing current accounts (of which
498 million euros to Olivetti Finance N.V. and 107 million euros to
Olivetti Holding B.V.), with a decrease of 207 million euros from
2001;
- 149 million euros on bond loans (62 million euros in 2001);
- 3 million euros on medium/long-term borrowings (28 million euros in
2001);
- 5 million euros for exchange rate losses (19 million euros in 2001);
- 24 million euros from use of bank credit lines (29 million euros in
2001);
- 14 million euros of swap charges;
- 11 million euros on other financial operations (14 million euros in
2001);
o 8,400 million euros for writedowns of equity investments in subsidiary
companies (175 million euros in 2001), including:
- 8,051 million euros relating to Telecom Italia S.p.A. shares held as
financial fixed assets, which were written down to the average market
share price for the last six months in order to be eligible for tax
benefits;
- 69 million euros relating to Telecom Italia S.p.A. shares held as
current assets, which were written down to market share prices at 30
December 2002;
- 182 million euros relating to the equity investment in Olivetti
Finance;
- 98 million euros for writedowns and provisions on other equity
investments.
o 14 million euros of other income from operations (15 million euros in
2001) consisting mainly of cost recoveries;
o 117 million euros in other costs of operations (324 million euros in
2001), including:
- 26 million euros for non-financial services (49 million euros in
2001);
- 72 million euros for depreciation and amortisation (63 million euros
in 2001); this included 71 million euros in respect of intangible
assets (62 million euros in 2001), of which 70 million euros for
charges relating to share-capital increases and bonds subscribed in
2001;
- 14 million euros for payroll costs (13 million euros in 2001);
- 5 million euros in other costs of operations (6 million euros in
2001).
Extraordinary operations generated net income of 164 million euros, compared
with net income of 7 million euros in 2001.
Extraordinary income amounted to 240 million euros, as follows:
- approximately 158 million euros from the sale of the Lottomatica equity
investment;
50 | Report on Operations
- 72 million euros from the sale of the OMS2 equity investment;
- 9 million euros from the sale of the Webegg equity investment to the
Telecom Italia Group;
- 1 million euros of other income.
Extraordinary charges amounted to 76 million euros (16 million euros in 2001),
as follows:
- 71 million euros on the sale of Seat Pagine Gialle shares;
- 4 million euros on the sale of the Lottomatica equity investment;
- 1 million euros of other costs.
The heading Taxation reflects income of 892 million euros arising mainly from
deferred tax assets (609 million euros) whose recovery is reasonably certain,
booked as a result of the writedown of the Telecom Italia equity investment,
and from the reversal of the reserve for deferred taxes provided in 2001, which
became redundant (283 million euros).
The balance sheet of Olivetti S.p.A. at 31 December 2002 is laid out below:
(in millions of euros) 31.12.2002 % 31.12.2001 % Changes
---------------------------- -------------------- -------------------- ----------
Short-term assets
Financial resources 1,068 4.0 314 0.9 754
Operating assets 1,153 4.4 761 2.3 392
---------------------------- -------------------- -------------------- ----------
Total short-term assets 2,221 8.4 1,075 3.2 1,146
---------------------------- -------------------- -------------------- ----------
Medium/long-term assets
Financial receivables and
marketable securities 16 0.1 - - 16
Medium/long-term interest
accruals and prepayments 405 1.5 495 1.5 (90)
Equity investments 22,888 86.8 31,409 94.3 (8,521)
Other assets 846 3.2 316 1.0 530
---------------------------- -------------------- -------------------- ----------
Total medium/long-term assets 24,155 91.6 32,220 96.8 (8,065)
---------------------------- -------------------- -------------------- ----------
TOTAL ASSETS 26,376 100.0 33,295 100.0 (6,919)
---------------------------- -------------------- -------------------- ----------
Short-term liabilities
Short-term debt 3,791 14.4 6,343 19.1 (2,552)
Operating liabilities 658 2.5 580 1.7 78
---------------------------- -------------------- -------------------- ----------
Total short-term liabilities 4,449 16.9 6,923 20.8 (2,474)
---------------------------- -------------------- -------------------- ----------
Medium/long-term liabilities
Medium/long-term debt 12,893 48.9 10,788 32.4 2,105
Other liabilities 3 - 349 1.0 (346)
---------------------------- -------------------- -------------------- ----------
Total medium/long-term
liabilities 12,896 48.9 11,137 33.4 1,759
---------------------------- -------------------- -------------------- ----------
TOTAL LIABILITIES 17,345 65.8 18,060 54.2 (715)
---------------------------- -------------------- -------------------- ----------
SHAREHOLDERS' EQUITY 9,031 34.2 15,235 45.8 (6,204)
---------------------------- -------------------- -------------------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 26,376 100.0 33,295 100.0 (6,919)
============================ ==================== ==================== ==========
Short-term assets at 31 December 2002 amounted to 2,221 million euros, an
increase of 1,146 million euros from 1,075 million euros at 31 December 2001;
this comprised an increase of 392 million euros in
51 | Report on Operations
operating assets and an increase of 754 million euros in financial resources
(mainly cash of 379 million euros, financial assets and financial receivables
due from third parties for 271 million euros and financial receivables due from
subsidiary companies for 104 million euros).
Medium/long-term assets at 31 December 2002 amounted to 24,155 million euros,
reflecting a net decrease of 8,065 million euros compared with 32,220 million
euros at 31 December 2001, of which 8,521 million euros referred to equity
investments; the decrease arose from the writedown of Telecom Italia shares to
average market value in the second half of 2002 in order to be eligible for tax
benefits (8,051 million euros) and from the sale of the Webegg, OMS2 and Seat
Pagine Gialle equity investments.
Medium/long-term interest accruals and prepayments decreased by 90 million
euros, mainly for the accrued portion of the redemption premium on the
"Olivetti 1.5% 2001-2004" and "Olivetti 1.5% 2001-2010" bonds.
Other medium/long-term non-financial assets increased by 530 million euros
(mainly reflecting deferred tax assets).
Short-term liabilities at 31 December 2002 amounted to 4,449 million euros,
with a decrease of 2,474 million euros compared with 6,923 million euros at 31
December 2001.
This reflected a decrease of 2,552 million euros in debt offset in part by an
increase of 78 million euros in operating liabilities. Specifically, the
decrease of 2,552 million euros in debt arose mainly from a reduction of 2,890
million euros in amounts due to subsidiaries (including 1,905 million euros on
interest-bearing current accounts) offset by an increase of 392 million euros
in amounts due to banks and other lenders.
Medium/long-term liabilities at 31 December 2002 amounted to 12,896 million
euros, an increase of 1,759 million euros from 11,137 million euros at 31
December 2001; this reflected an increase of 2,105 million euros in debt offset
by a decrease of 346 million euros in other liabilities.
Specifically, the 2,105 million euros increase in medium/long-term debt
consisted of an increase of 3,496 million euros in bonds, offset in part by a
decrease of 1,559 million euros in amounts due to subsidiaries and a decrease
of 52 million euros in amounts due to banks.
The table set out below analyses capital invested at 31 December 2002 and
relating funding:
(in millions of euros) 31.12.2002 % 31.12.2001 % Changes
----------------------------------------- ---------------------- ---------------------- -------
Short-term operating assets 1,153 4.7 761 2.4 392
Short-term operating liabilities (658) (2.7) (580) (1.8) (78)
----------------------------------------- ---------------------- ---------------------- -------
Operating working capital 495 2.0 181 0.6 314
Long-term assets 23,734 98.0 31,725 99.4 (7,991)
----------------------------------------- ---------------------- ---------------------- -------
Capital invested (A) 24,229 100.0 31,906 100.0 (7,677)
----------------------------------------- ---------------------- ---------------------- -------
Medium/long-term non financial liabilities 3 - 349 1.1 (346)
Shareholders' equity 9,031 37.3 15,235 47.7 (6,204)
----------------------------------------- ---------------------- ---------------------- -------
Total non financial sources (B) 9,034 37.3 15,584 48.8 (6,550)
----------------------------------------- ---------------------- ---------------------- -------
Net financial indebtedness (A-B) 15,195 62.7 16,322 51.2 (1,127)
========================================= ====================== ====================== =======
52 | Report on Operations
Capital invested was financed by debt for 62.7% (51.2% at the end of 2001) and
by shareholders' equity for 37.3% (47.7% at the end of 2001).
Specifically, shareholders' equity decreased by 6,204 million euros during 2002
as follows:
o a decrease of 6,240 million euros for the loss for 2002;
o share-capital increases of 36 million euros (net of 25 million euros
arising from free issues effected through use of reserves following the
re-denomination of share capital in euros) as a result of conversion of
bonds and exercise of warrants.
At 31 December 2002 the Company had net financial indebtedness of 15,195
million euros (16,322 million euros at 31 December 2001), as follows:
(in millions of euros) 31.12.2002 31.12.2001 Changes
----------------------------------------------------- ---------- ---------- ---------
Short-term financial resources
Liquid funds (519) (140) (379)
Financial assets and receivables from third parties (365) (94) (271)
Receivables from subsidiary companies (184) (80) (104)
----------------------------------------------------- ---------- ---------- ---------
Total short-term financial resources (1,068) (314) (754)
----------------------------------------------------- ---------- ---------- ---------
Short-term debt
Current portions of medium/long-term debt 54 90 (36)
Bonds - 16 (16)
Bank borrowings and amounts due to other lenders 697 307 390
Amounts due to subsidiary companies 3,040 5,930 (2,890)
----------------------------------------------------- ---------- ---------- ---------
Total short-term debt 3,791 6,343 (2,552)
----------------------------------------------------- ---------- ---------- ---------
Total short-term net financial indebtedness (A) 2,723 6,029 (3,306)
----------------------------------------------------- ---------- ---------- ---------
Medium/long-term financial assets:
Amounts due for medium/long-term borrowings (16) - (16)
Medium/long-term interest accruals and prepayments (405) (495) 90
----------------------------------------------------- ---------- ---------- ---------
Total medium/long-term financial assets (421) (495) 74
----------------------------------------------------- ---------- ---------- ---------
Medium/long-term debt
Bonds 8,084 (*) 4,588 3,496)
Amounts due to subsidiary companies 3,744 5,302 (1,558)
Amounts due to banks and other lenders 55 98 (43)
Medium/long-term accrued interest expenses 1,010 800 210
----------------------------------------------------- ---------- ---------- ---------
Total medium/long-term debt 12,893 10,788 2,105
----------------------------------------------------- ---------- ---------- ---------
Total medium/long-term net financial indebtedness (B) 12,472 10,293 2,179
----------------------------------------------------- ---------- ---------- ---------
Total net financial indebtedness (A+B) 15,195 16,322 (1,127)
===================================================== ========== ========== =========
(*) including 3,900 million euros subscribed by Olivetti Finance N.V.
53 | Report on Operations
The table set out below analyses the financial surplus generated in 2002:
(in millions of euros) Year 2002
----------------------------------------------- ---------
Dividends collection from Telecom Italia (1,296)
Disposals (577)
Tax credits assignments (405)
Share capital increases (36)
Costs for bond issues and borrowings 65
Settlement with Verizon (ex Bell Atlantic) 67
Cash disbursements for equity investments,
loss coverages, capital restorations and other 137
Financial charges and other net disbursements 918
---------------------------------------------- ----------
Total net financial surplus (1,127)
============================================== ==========
Dealings with related parties
Olivetti S.p.A.'s financial and commercial dealings with subsidiaries are
conducted at normal market conditions and consist mainly of the provision of
services, centralised treasury operations and, pursuant to its role as a
holding company, coordination of the activities of the subsidiaries.
Subsidiary Associated
(in millions of euros) companies companies
-------------------------------------- --------- ---------
Dividend income (excluding tax credit) 1,263 -
Other financial income 7 -
Financial charges 607 -
Other revenues 12 -
Purchase of goods and services 4 -
Trade and other receivables 305 -
Financial receivables 183 16
Trade and other payables 6 -
Financial payables 10,261 -
-------------------------------------- --------- ---------
Employee Stock Option Plans
1999-2001 Plan
During 1999, a "Three-Year 1999-2001" Stock Option Plan" for the benefit of
approximately one hundred managers of Olivetti S.p.A. and its subsidiaries was
approved as a tool to provide incentives and boost management loyalty.
Authorised by a Directors' resolution of 9 June 1999 and supplemented with a
subsequent resolution of 29 November 1999, the plan provided for a maximum of
48 million warrants, nontransferable inter vivos, to be assigned free of charge
to the beneficiaries. Each warrant gave an option on one Olivetti ordinary
share at an overall price (par value plus share premium) of 2,320 Italian lire
(equivalent to 1.198 euros), for a maximum nominal share-capital increase of 48
billion Italian lire (approximately 24.8 million euros). This increase,
resolved by the above-mentioned Board meetings in execution of the proxy
pursuant to art. 2443 of the Italian Civil Code (granted by the Extraordinary
Shareholders' Meeting of 7 April 1999) complied with the limits set by art.
134, par 2, of Legislative Decree 58/1998.
54 | Report on Operations
The warrants assigned could be exercised at pre-specified times during the
three-year period and could be accumulated until the end of the plan (January
2002). The first tranche was exercised in December 1999 and the second and
third tranches in 2001 and in January 2002 respectively. The evolution of the
plan in 2001 and 2002 is illustrated in the table set out below:
Year 2002 Year 2001
------------------------------------------------- ------------------------
Average
Number exercise Market Number Average Market
of price price of exercise price price
shares (euros) (euros) shares (euros) (euros) Notes
-------------------------------------- ------------ --------- --------- ------------ --------------- ------- ---------
Rights existing at 1st January 8,038,315 - 1.43 26,255,000 2.24
New rights assigned - - -
Rights exercised in the year (5,654,982) 1.000 1.38 (18,216,685) 1.198/1.040 2.31 (1)(2)(3)
Rights expired in 2002 (2,383,333) 2.36 -
Rights existing at 31 December - 8,038,315 - 1.44
====================================== ============ ========= ========= ============ =============== ======= =========
(1) Annual average share prices (Source: Bloomberg)
(2) Exercise price equivalent to 1 euro (as adjusted following the share
capital increase in November 2001) for no. 5,654,982 rights, relating to
year 2002
(3) Exercise price equivalent to 1.198 euro for 12,171,682 rights and 1,040
euros (as adjusted following the share capital increase in March 2001) for
6,045,003 rights, relating to year 2001
* * *
2002-2004 Plans
On 24 February 2000 the Board of Directors approved a three-year stock option
Plan from 1 January 2002 to 31 December 2004, assigning 29,500,000 warrants
free of charge to approximately one hundred managers of the Company and its
subsidiaries The warrants entitled the beneficiaries to subscribe to an equal
number of Olivetti ordinary shares at a price of 3.308 euros per share (after
adjustment for the share-capital increases of 2001), corresponding to the fair
value of Olivetti ordinary shares at the date of the Board meeting.
The warrants were to be exercised in three tranches between 1 November and 15
December of 2002, 2003 and 2004, and could be accumulated until the end of the
plan.
The relevant Directors' resolution, like that of the previous 1999-2001 plan,
executed the proxy pursuant to art. 2443 of the Italian Civil Code granted by
the Extraordinary Shareholders' Meeting of 7 April 1999. The Company did not
implement any operations that could encourage subscription of shares by its
employees, pursuant to art. 2358 of the Italian Civil Code.
Subsequently, on 9 February 2001, after reversing its previous resolution of 24
February 2000 as untimely and no longer appropriate for the purpose for which
it had been intended, the Board of Directors approved a share-capital increase
for a total of 29 million euros through the issue of 29 million shares at a
price of 2.515 euros per share (after adjustment for the share-capital
increases of 2001). The capital increase services a stock option plan for
managers of the Company and its subsidiaries for the three years 2002-2004;
with regard to stock options already assigned to managers on the payroll as of
24 February 2000 who have since left the Group (1,330,000 options), the
original terms and conditions apply.
55 | Report on Operations
The Company has not implemented any operations that could encourage
subscription of shares by its employees, pursuant to art. 2358 of the Italian
Civil Code.
At 31 December 2002, all the stock options assigned in connection with the two
Directors' resolutions illustrated above (30,330,000 rights, of which 1,330,000
to be exercised at a unit price of 3.308 euros and 29,000,000 to be exercised
at a unit price of 2.515 euros) were still unexercised. They entitled the
beneficiaries to subscribe 30,330,000 Olivetti shares (the share market price
at 31 December 2002 was 0.969 euros).
56 | Report on Operations
Shares in Olivetti S.p.A. and its subsidiaries held by Directors, Statutory
Auditors and Chief Operating Officer of Olivetti S.p.A. (CONSOB Regulation no.
11971/1999 and subsequent amendments)
In compliance with CONSOB Regulation no. 11971/1999 and subsequent amendments,
shares issued by Olivetti S.p.A. and its subsidiaries that are owned by Company
Directors, Statutory Auditors and Chief Operating Officer are detailed below.
(1) (2) (3) (4)
Shares held at
31.12.2001
(or at date of
appointment, if during Type of Type
Investee company the year 2002) shares of ownership Modalities
------------------------------------------- ---------------- ---------------------- ------ ------------ ----------
Board of Directors
Chairman
TESONE Antonio Olivetti S.p.A. 224 ordinary full ownership indirect
Telecom Italia Mobile S.p.A. 625 ordinary full ownership indirect
Deputy Chairman and Chief Executive Officer
TRONCHETTI PROVERA Marco - 0 - - -
Deputy Chairman
BENETTON Gilberto - 0 - - -
Chief Executive Officer
BUORA Carlo - 0 - - -
Directors
CAPRIO Lorenzo - 0 - - -
CIRLA Giorgio - 0 - - -
FABRIZI Pier Luigi - 0 - - -
GERONZI Cesare Olivetti S.p.A. 15,250 ordinary full ownership direct
Telecom Italia S.p.A. 0 ordinary full ownership direct
Telecom Italia S.p.A. 4,950 savings full ownership direct
Telecom Italia Mobile S.p.A. 5,000 ordinary full ownership direct
Seat Pagine Gialle 23,000 ordinary full ownership direct
S.p.A.
MION Gianni - 0 - - -
NATTINO Giampietro - 0 - - -
PIERRI Paola - 0 - - -
PIRELLI Alberto Telecom Italia S.p.A. 550 ordinary full ownership(**) direct
Telecom Italia Mobile S.p.A. 750 ordinary full ownership(**) direct
Seat Pagine Gialle 3,000 ordinary full ownership(**) direct
S.p.A.
PURI NEGRI Carlo Alessandro - 0 - - -
ROCCO di TORREPADULA Giancarlo - 0 - - -
TREVISAN Dario Olivetti S.p.A. (*) 6,961 ordinary full ownership direct
Seat Pagine Gialle 1,000 ordinary full ownership direct
S.p.A.
VARISCO Alberto Seat Pagine Gialle 5,000 ordinary full ownership direct
S.p.A.
Former Directors
BONDI Enrico - 0 - - -
MODIANO Pietro - 0 - - -
------------------------------------------- ---------------- ---------------------- ------ ------------ ----------
Board of Statutory Auditors
Chairman
FORNASARI Angelo - 0 - - -
Regular Auditors
BENNANI Vittorio - 0 - - -
CARAMANTI Franco Telecom Italia S.p.A. 20,000 savings full ownership(**) indirect
Chief Operating Officer
ARIAUDO Corrado Olivetti S.p.A. 0 ordinary full ownership direct
Telecom Italia S.p.A. 50,000 ordinary full ownership direct
Telecom Italia S.p.A. 200,000 savings full ownership direct
Telecom Italia Mobile S.p.A. 25,000 ordinary full ownership direct
====================================================================================================================================
(5) (6) (7)
Shares held
Number Number at 31.12.2002
of shares of shares (or at date of
purchased sold resignation)
-------------------------------------------- --------- --------- ------------
Board of Directors
Chairman 0 0 224
TESONE Antonio 0 0 625
Deputy Chairman and Chief Executive Officer 0 0 0
TRONCHETTI PROVERA Marco
Deputy Chairman 0 0 0
BENETTON Gilberto
Chief Executive Officer 0 0 0
BUORA Carlo
Directors 0 0 0
CAPRIO Lorenzo 0 0 0
CIRLA Giorgio 0 0 0
FABRIZI Pier Luigi 59,475 74,725 0
GERONZI Cesare 3,980 2,180 1,800
7,250 6,600 5,600
4,900 2,900 7,000
13,000 36,000 0
0 0 0
MION Gianni 0 0 0
NATTINO Giampietro 0 0 0
PIERRI Paola 0 0 550
PIRELLI Alberto
0 0 750
0 0 3,000
0 0 0
PURI NEGRI Carlo Alessandro 0 0 0
ROCCO di TORREPADULA Giancarlo 0 0 6,961
TREVISAN Dario 0 0 1,000
VARISCO Alberto 0 0 5,000
Former Directors
BONDI Enrico 0 0 0
MODIANO Pietro 0 0 0
-------------------------------------------- --------- --------- ------------
Board of Statutory Auditors
Chairman
FORNASARI Angelo 0 0 0
Regular Auditors
BENNANI Vittorio 0 0 0
CARAMANTI Franco 0 0 20,000
-------------------------------------------- --------- --------- ------------
Chief Operating Officer 533,332(***) 233,332 300,000
ARIAUDO Corrado 0 0 50,000
0 0 200,000
0 0 25,000
============================================ ========= ========= ============
(*) The number of shares owned at 31 December 2001 is adjusted with respect to
data contained in the Annual Report 2001
(**) Operations carried out by separate company-managed asset portfolio
(***) Through exercise of stock options
57 | Report on Operations
Other information
At 31 December 2002 Olivetti S.p.A. treasury stock comprised 2,697,500
ordinary shares with a par value of 1 euro per share, arising from the
conversion of an equal number of savings shares following approval by the
Extraordinary Shareholders' Meeting of 4 July 2000 of the compulsory conversion
of preferred and savings shares into ordinary shares. The shares, which are
stated in the accounts at a unit carrying value of 0.852 euros, also arise from
shareholder-approved purchases of stock from employees of the Company and its
subsidiaries as a result of fulfilment of the conditions of the relative share
offer regulations requiring that the shares be sold back to the Company.
The Shareholders' Meeting of 4 October 2000 authorised the Board of Directors,
pursuant to art. 2357 ter, par 1, to dispose of all the above-mentioned
treasury shares by 31 December 2002 through the distribution, in one or more
operations, of non-compulsory purchase options to former employees of the
Company and its subsidiaries who continue to provide services for the Group.
Equity investment writedowns pursuant to current tax laws
The Telecom Italia equity investment writedown (8,051.1 million euros),
pursuant to art. 2426 par 2 of the Italian Civil Code, was recorded in the
Company's Statutory Financial Statements in compliance with tax laws in order
to obtain tax benefits for which the Company would not otherwise be eligible;
the writedown reduced carrying value by an amount equivalent to the difference
between the book value and the arithmetic mean value of daily share prices in
the second half of the year, as envisaged under art. 66, par 1 bis of
Presidential Decree no. 917/1986.
Had this writedown not been applied, Olivetti S.p.A. would have posted positive
result before taxes for financial 2002 of 919 million euros, reflecting an
improvement equal to the writedown amount; its result, net of the taxation that
would otherwise have been applied, would have been positive (733.1 million
euros), reflecting an improvement of 6,973.1 million euros, which would also
have been reflected in shareholders' equity at 31 December 2002.
Following the above equity investment writedown, the consolidated result
reflected the combined benefit of the lower tax payable by Olivetti S.p.A. and
the deferred tax assets posted by Olivetti S.p.A., for a total of 1,078 million
euros; had the writedown not been applied, the Olivetti Group consolidated net
result and shareholders' equity would have been worse by a similar amount.
Since the above differences arose, as illustrated above, from the writedown of
equity investments applied pursuant to art. 2426 par 2 of the Italian Civil
Code, they will be retained unchanged in future financial statements, as will
the related tax benefits.
58 | Report on Operations
Annual report on the company's system of Corporate Governance
The Company's system of corporate governance has been gradually enhanced to
ensure maximum transparency and efficient management. It takes the Voluntary
Code of Conduct drawn up by Borsa Italiana as its frame of reference.
Composition and duties of the Board of Directors
The 16-member Board of Directors acting in 2002 was elected by the ordinary
Shareholders' Meeting of 13 October 2001; later, two Directors were co-opted to
replace outgoing Directors who resigned. The table below showing the
composition of the Board of Directors specifies for each Director the position
held, the expiry of his or her mandate and important positions held other than
in the Company.
Name Office Date of appointment Expiry date Other offices
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Antonio Tesone Chairman 13 October 2001 2003 Annual Report Chairman Olivetti International
approval S.A.; Director Sogefi S.p.A and
Sema S.p.A.
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Marco Tronchetti Provera Deputy Chairman and 13 October 2001 2003 Annual Report Chairman Telecom Italia S.p.A.,
Chief Executive Officer approval Olimpia S.p.A., Pirelli & C.
S.a.p.A., Pirelli & C. Real
Estate S.p.A., Camfin S.p.A.;
Chairman and Chief Executive
Officer Pirelli S.p.A.; Deputy
Chairman Confindustria; Director
Fondazione Teatro alla Scala and
Universita Commerciale Luigi
Bocconi; Chairman of the Council
for Italo-American Relations,
member of the Assonime Steering
Committee, of the European Round
Table of Industrialists, of the
Italian Group of the Trilateral
Commission, of the International
Advisory Board of Allianz, of
the International Council of
J.P. Morgan and of New York
Stock Exchange European Advisory
Committee.
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Gilberto Benetton Deputy Chairman 13 October 2001 2003 Annual Report Chairman Autogrill S.p.A.,
approval Benfin S.p.A., C.F.I. S.p.A.,
Edizione Holding S.p.A.,
Edizione Property S.p.A.,
Ragione S.a.p.a. di G. Benetton
& C., Verde Sport S.p.A.; Deputy
Chairman Fondazione Benetton,
Telecom Italia S.p.A., Olimpia
S.p.A.; Sole Director of Regia
S.r.l. and Immobiliare Marca
S.r.l.; Director of Benetton
Group S.p.A., Area Nord
Concessionaria di Pubblicita,
Banca Antoniana Popolare Veneta,
Impresa Tipografica Veneta,
Mediobanca S.p.A., Pirelli
S.p.A., Schemaventotto S.p.A.,
Sep S.p.A., Societa Finanziaria
Editrice San Marco, HMS Host
Corp., Autostrade S.p.A., Beni
Stabili S.p.A., Lloyd Adriatico
S.p.A., Autopistas C.E.S.A.
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
59 | Report on Operations
Name Office Date of appointment Expiry date Other offices
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Enrico Bondi Chief Executive Officer 13 October 2001 5 September 2002
(resignations)
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Carlo Buora Chief Executive Officer 13 October 2001 2003 Annual Report Chaiman of Telecom Italia Mobile
approval S.p.A.; Chief Executive Officer
of Telecom Italia S.p.A. and
Pirelli S.p.A.; Director of
Olimpia S.p.A., Pirelli & C.
S.a.p.A., Pirelli & C Real
Estate S.p.A., Pirelli Societe
Generale S.A., Pirelli & C.
Ambiente S.p.A., Pirelli
International Ltd., Pirelli & C.
Real Estate Ltd., Pirelli Labs
S.p.A., HDP Holding di
Partecipazioni S.p.A.,
Mediobanca S.p.A., RAS S.p.A.
and Tecnost S.p.A; Member of
Board of Management of Pirelli
Cable Holding N.V..
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Lorenzo Caprio Director 13 October 2001 2003 Annual Report Statutory Auditor of Commercial
approval Union Previdenza, Commercial
Union Assicurazioni, Commercial
Union Life and Commercial Union
Insurance; Professor of
Corporate Finance at Universita
Cattolica del Sacro Cuore in
Milan and Professor of Corporate
Finance and Corporate banking at
Italian Switzerland University
of Lugano.
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Giorgio Cirla Director 13 October 2001 2003 Annual Report Chief Executive Officer of
approval Interbanca S.p.A.; Chairman of
Interbanca International
Holding SA; Director of SNIA
S.p.A., Sirti S.p.A., Hopa
S.p.A., Interbanca Gestione
Investimenti SGR S.p.A., Anton-
veneta ABN Amro Bank S.p.A.,
Antonveneta ABN Amro SGR S.p.A.,
Imprenditori Associati S.p.A..
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Pier Luigi Fabrizi Director 13 October 2001 2003 Annual Report Chairman of Monte dei Paschi di
approval Siena S.p.A.; Deputy Chairman of
Banca Nazionale del Lavoro
S.p.A.; Director of Banca
Agricola Mantovana S.p.A.,
Banca Monte Parma S.p.A., Unipol
Assicurazioni S.p.A., Italian
Bankers Association; Professor
of Security Market Economics
at Universita L. Bocconi, Milan.
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Cesare Geronzi Director 13 October 2001 2003 Annual Report Chairman of Capitalia S.p.A.;
approval Deputy Chairman and Executive
Committee Member of Mediobanca
S.p.A.; Director of the Board of
Italian Bankers Association and
of CASPIE; Member of the
Steering Committee of Assonime;
Member of Executive Committee of
Associazione "Guido
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
60 | Report on Operations
Name Office Date of appointment Expiry date Other offices
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Carli"; Deputy Chairman Istituto
della Enciclopedia Italiana
founded by Giovanni Treccani
S.p.A..
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Gianni Mion Director 13 October 2001 2003 Annual Report Chief Executive Officer of
approval Edizione Holding S.p.A. and
Schemaventotto; Deputy Chairman
of Telecom Italia Mobile S.p.A.;
Director of Benetton Group
S.p.A., Autogrill S.p.A., 21
Investimenti S.p.A., Autostrade
S.p.A., Sagat S.p.A., Olimpia
S.p.A., Telecom Italia S.p.A.,
Seat PG S.p.A., Interbanca
S.p.A., Banca Antonveneta
S.p.A. and 21 Partners Societa di
Gestione del Risparmio S.p.
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Pietro Modiano Director 13 October 2001 7 November 2002
(resignations)
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Giampietro Nattino Director 13 October 2001 2003 Annual Chairman of Pirelli Cavi e
Report approval Sistemi telecom S.p.A., Pirelli
Cavi e Sistemi Energia S.p.A.
and GSC Proxitalia S.p.A.;
Deputy Chairman of Borsa
Italiana S.p.A., Fideuram Fondi
S.p.A., ASSOSIM, Fondo Nazionale
di Garanzia; Chief Executive
Officer of Banca Finnat
Euramerica S.p.A. Finnat AG
Zurigo; Director of Generali
SGR, Finnat Investments S.p.A.,
Banca Fideuram S.p.A.,
Caltagirone Editore S.p.A.,
Pirelli & C Real Estate S.p.A.,
Finnat Fiduciaria S.p.A., SCIA
S.p.A., Fedra S.r.l.
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Paola Pierri Director Coopted on 7 First Shareholders' Deputy General Manager of Uni-
November 2002 Meeting of the year credito Italiano
2003
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Alberto Pirelli Director 13 October 2001 2003 Annual Report Deputy Chairman Pirelli & C
approval S.a.p.A., Pirelli S.p.A. and
G.P.I. Gruppo Partecipazioni
Industriali S.p.A. Director of
Camfin S.p.A., SMI S.p.A.,
Olimpia S.p.A. and GIM S.p.A..
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Carlo Alessandro Puri Director 13 October 2001 2003 Annual Report Deputy Chairman and Chief Exe-
Negri approval cutive Officer of Pirelli & C.
Real Estate S.p.A.; Deputy
Chairman of Camfin S.p.A.;
General Partner and Chief
Operating Officer of Pirelli &
C. S.a.p.A.; Director of Olimpia
S.p.A., Pirelli S.p.A., Telecom
Italia S.p.A., Permasteelisa and
AON Italia S.p.A; Deputy
Chairman of Pirelli & C.
Ambiente S.p.A.; Member of the
Management Board of the Pirelli
& C. S.a.p.A. Voting Trust.
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Gian Carlo Rocco di Director Coopted on 5 First Shareholders' Member of Steering Committee of
Torrepadula September 2002 Meeting of the year Pirelli S.p.A.; Director of
2003 Pirelli
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
61 | Report on Operations
Name Office Date of appointment Expiry date Other offices
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Cultura S.p.A.; Member of
Steering Committee of UPA;
Manager of "Communication &
Image" of Telecom Italia Group;
Chairman of Communication
Committee of Telecom Italia
Group- TIM - Seat PG; Member of
Management Committee of Telecom
Italia S.p.A..
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Dario Trevisan Director 13 October 2001 2003 Annual Report Trevisan & Associati legal firm;
approval Common Representative of Savings
Non Convertible shareholders of
Marzotto & Figli S.p.A.;
International Member of
Council of Institutional
Investors, of Board of Go-
vernors of International
Corporate Governance Network, of
Eurolegal (European legal
association)
---------------------------- ------------------------ ------------------- ------------------ ---------------------------------
Alberto Varisco Director 13 October 2001 2003 Annual Report Director of Caboto IntesaBci SIM
approval S.p.A. and e-MID S.p.A.; Manager
of M&A and Equity Origination
(Corporate Division) of Banca
Intesa S.p.A.; Member of the
technical Commission for finance
of Italian Bankers Association.
The powers attributed to the Company officers by the Board of Directors are as
follows:
Chairman Antonio Tesone - legal representation and signature on the Company's
behalf. No management powers were attributed to the Chairman.
Deputy Chairmen - Deputy Chairman Marco Tronchetti Provera was granted the same
powers as the Chairman. Deputy Chairman Gilberto Benetton was granted the same
powers as the Chairman and the Deputy Chairman Tronchetti Provera, to be
exercised in the absence of the Chairman or of the other Deputy Chairman.
In his capacity as Chief Executive Officer, Marco Tronchetti Provera may carry
out all Company business with the following restrictions: power to issue, with
a single signature, personal guarantees up to 50 million euros for Group
companies and up to 20 million euros for third parties; power to invest,
dispose of and acquire controlling and associated interests and to dispose of
companies or businesses thereof in any manner, for amounts no greater than 250
million euros;
Chief Executive Officer Carlo Buora: management powers regarding ordinary
Company business.
The Board of Directors, in accordance with the bylaws, has the widest powers
for the ordinary and extraordinary administration of the Company, since it is
empowered to carry out any business which is not expressly the domain of the
shareholders, whether by law or under the bylaws.
62 | Report on Operations
Even in the absence of a specific bylaw, but as accepted practice, the
following are the exclusive domain of the Board :
o examination and approval of the industrial, financial and strategic
planning of the Company, as well as the corporate structure of its Group;
o granting and withdrawal of powers to the Chief Executive Officers and the
definition of any limits and operating procedures;
o determination, after examining the proposals of the specific Committee and
the opinion of the Board of Statutory Auditors, of the remuneration of the
Chief Executive Officers and those Directors with specific mandates;
o supervision of operations in general, with a particular focus on any
situations involving conflicts of interest, taking into account the
information received from the Chief Executive Officers and the Internal
Control Committee and regularly comparing results achieved with those
forecast;
o examination and approval of any transactions of financial significance,
particularly with related parties;
o verification of the suitability of the general administrative and
organisational structure of the Company and of the Group as set up by the
Chief Executive Officers;
o reporting to the Shareholders' Meetings.
In accordance with point 2.1 of the Voluntary Code of Conduct, the Deputy
Chairman and Chief Executive Officer Marco Tronchetti Provera and the Chief
Executive Officer Carlo Buora are deemed to be executive Directors, in that
they have operational/managerial powers further to the granting of the
above-mentioned powers.
Point 3.1 of the Voluntary Code of Conduct establishes that "independent
Directors" are those who: a) do not carry out business, directly, indirectly or
on behalf of third parties, nor have recently carried out such business with
the Company, its subsidiaries, its executive Directors, the shareholder or
group of shareholders who control the Company, such as would affect their
independence of judgement; b) do not own, directly or indirectly or on behalf
of third parties, equity interests of a size to enable them to exercise control
or significant influence over the Company, nor are party to private shareholder
agreements regarding the control of the Company; c) are not closely related to
the Company executive Directors or to parties as in points a) and b) above.
In light of the above definition, 6 of the remaining 14 Directors (the Chairman
Antonio Tesone and the Directors Lorenzo Caprio, Giorgio Cirla, PierLuigi
Fabrizi, Cesare Geronzi and Dario Trevisan) qualify as "independent".
The Chairman, as part of the functions attributed to him by the bylaws,
supervises the activities of the Board, ensuring that the statutory and legal
regulations in force are properly applied, using the powers granted to him by
law and the Articles of Association, chairs and supervises the Company's
Shareholders' Meetings.
The Board of Directors held nine meetings in 2002; the overall attendance was
more than 76% (76.39). The Board has also already met twice in 2003. The
Company has approved the calendar of corporate events for 2003, which has been
announced to the market, on the basis of which at least six Board meetings are
envisaged.
63 | Report on Operations
In applying article 19 of the Bylaws, those Directors with powers granted
pursuant to article 2381 of the Italian Civil Code report at least quarterly to
the Board of Directors and the Board of Statutory Auditors (also pursuant to
article 150 of Legislative Decree 58/1998) on their activities, on
extraordinary transactions as well as on those where there could be a potential
conflict of interest, following a specific Procedure illustrated later in this
report.
Appointment and remuneration of the Directors
The list vote mechanism is not envisaged when electing Directors.
The Board of Directors did not deem it necessary to establish an internal
committee to propose Directors for election.
At the aforementioned Shareholders' Meeting held on 13 October 2001, all
shareholders, upon entering the hall, were provided with a printed document
containing the names of the proposed candidates and a detailed curriculum vitae
for each one.
The same meeting, pursuant to article 2389, par 1, of the Italian Civil Code,
voted to grant the Board of Directors overall annual emoluments of 826,331.04
euros, to be divided equally among the Directors, which will be computed before
the net profit in the financial statements.
On 13 October 2001, the Board of Directors formed a Remuneration Committee
(expanding the duties of the already existing Emoluments Committee) and
provided that part of its duties is to formulate proposals to the Board for the
remuneration of the Chief Executive Officers and those Directors with specific
mandates, to formulate proposals, at the request of the Chief Executive
Officers, for determining the criteria used for the remuneration of the top
management of the Company, and to conduct preliminary examinations of stock
option proposals. As regards composition, the Board voted that the Committee
comprise at least three Directors, who elect the Chairman and, even if not one
of them, a Secretary, with the members of the Board of Statutory Auditors as
well as the Chief Executive Officers being entitled to attend the meetings.
The Committee meets whenever the Chairman deems it appropriate or upon the
request of another member or Chief Executive Officer.
The Board also voted that notice of the meetings of the Committee as well as
the validity of the meetings and the decisions thereof shall be governed by the
same regulations stated in the Bylaws regarding Board meetings of the Company.
The Board elected to the Committee Lorenzo Caprio, Pietro Modiano and Antonio
Tesone, all non-executive and independent Directors.
64 | Report on Operations
At the meeting held on 13 November 2001, the Committee elected the Chairman
(Antonio Tesone) and the Secretary (Piera Rosiello). It also formulated
proposals regarding the emoluments for those Directors with specific mandates,
as per article 2839, par 2, of the Italian Civil Code, expressing the opinion
that, since the Company is a pure holding company (which therefore reflects the
results of the operating subsidiaries), it was not appropriate to envisage a
variable element in the emoluments, only a fixed one. The Committee's proposals
were approved by the Board of Directors (in the meeting held on 13 November),
which therefore voted to grant those Directors with specific mandates the
emoluments which are stated next to each name in the Report on Operations.
On 7 November 2002, the Director Paola Pierri was elected to the Committee to
replace Pietro Modiano who resigned.
No stock options are envisaged for Directors in service.
Internal control system
1) For a number of years, the Company has had an internal control function, one
of whose duties is to ensure, with regard to Olivetti itself and also to its
unlisted subsidiaries, the adequacy of the corporate regulations regarding
processes as well as the reliability and correctness of the accounts and
compliance with relevant laws and regulations.
In 2002, the Board of Directors adopted a proposal by the Internal Control
Committee to designate the consortium In.Tel.Audit, originally formed by the
subsidiaries Telecom Italia, TIM and Seat Pagine Gialle, and in which Olivetti
had in the meantime become a member, as the Head of Internal Control (pursuant
to article 9.4 of the Voluntary Code of Conduct) for the purpose of verifying
the adequacy and efficiency of the current internal control system.
With reference to Legislative Decree 231/2001 (Administrative liability of
bodies for offences committed by its collaborators), the consortium will also,
on behalf of all its member companies, identify and assess areas of operation
that are at risk and draw up an appropriate "dispensing organisational model"
that takes account of the particular characteristics of each member company.
The Board deems the Company's internal control system as a whole to be adequate.
2) The Board of Directors has set up, within its ambit, an "Internal Control
Committee", establishing that:
a) as regards consultative and proposing duties vis-a-vis the Board of
Directors, the Committee should in particular:
- evaluate the adequacy of the internal control system;
- evaluate the work schedule prepared by the internal control officers and
receive regular reports from them;
- evaluate the proposals of the external auditors for their audit services
as well as the work schedule for the audit and the results stated in the
Audit Report and in the Suggestions Report;
- report to the Board at least once every six months, when the annual
accounts and the half-year report are approved, regarding the activities
carried out and the adequacy of the internal control system;
- carry out any further duties which it may be assigned by the Board of
Directors, particularly regarding relations with the external auditors;
65 | Report on Operations
b) as regards composition, that:
- the Committee comprise non-executive directors, who shall elect a Chairman
and, even if not one of them, a Secretary;
- the Board of Statutory Auditors, the Chief Executive Officers as well as,
if invited, the head of the Internal Auditing Department and one or more
Chief Operating Officers may attend the meetings;
c) as regards activities, that:
- the Committee meet at least twice a year, before the Board meetings for
the approval of the Annual Report and the Half-Year Report, or whenever
the Chairman deems it appropriate or upon the request of another member or
Chief Executive Officer;
- notice of the meetings as well as the validity of the meetings and the
decisions thereof shall be governed by the same regulations stated in the
Bylaws regarding meetings of the Company Board of Directors.
The Company is updating the duties attributed to the Internal Control Committee
and its composition in line with the new provisions of the revised July 2002
edition of the Code of Voluntary Conduct.
In 2002 the Internal Control Committee met six times; as of the date of
approval of this Report, it has already held two meetings in 2003.
The members of the Internal Control Committee are: Antonio Tesone (Chairman),
Lorenzo Caprio and Alberto Varisco.
The Committee evaluated the suitability of Olivetti's membership of the
consortium In.Tel.Audit Scrl; during the year. It also conducted a detailed
examination of the specific characteristics of the "Head of Internal Control",
as a result of which, as already mentioned in heading 1) above, it drew up a
proposal for the consortium to be designated to this duty; it established a
continuous flow of information with the Independent Auditors, also with regard
to the audit plan drawn up by them; it examined the half-year report and the
quarterly reports for financial 2002.
With regard to corporate governance, the Committee analysed the Code and the
Procedures that the Company intended to adopt (see the specific sections in
this Report) and expressed a positive opinion thereof.
Dealings with related parties
In order to ensure proper conduct and management transparency, at its meeting
of 25 July 2002, the Board of Directors approved a set of "Principles of
Conduct" to be observed in the execution of operations, including infragroup
operations, with "related parties" (as defined by International Accounting
Standard - IAS - 24).
At the same meeting, the Board also adopted a special Procedure ("Procedure for
compliance with the requirements of article 150, par 1. of Legislative Decree
no. 58 of 1998"), to be observed by all Directors and Statutory Auditors, in
order to guarantee complete and effective information flows pursuant to the
66 | Report on Operations
above-mentioned article 150, to article 19 of the Bylaws and to CONSOB
recommendations concerning corporate governance. The Procedure is designed to
ensure that activities performed, operations of particular importance,
non-typical or unusual operations and operations transacted with related
parties are fully transparent in substance and at procedural level, and makes
the entire Board responsible for the resolutions adopted in connection with
such operations.
The Procedure was amended at the Board meeting of 13 February 2003 to take
account of the notion of "related parties" adopted by CONSOB with effect from 1
January 2003 and is now consistent with the pronouncements of CONSOB where
CONSOB adopts definitions of a more stringent nature; it remains unchanged
where the original text drawn up by the Company is more stringent.
The Principles and the Procedure may be consulted on the Company web site,
www.olivetti.it, under the heading "Investor Relations", sub-heading "Corporate
Governance", and will be sent in hard copy to any person who may request a
copy.
Code of Conduct with regard to Insider Dealing
On 7 November 2002, the Company implemented the relevant regulations issued by
Borsa Italiana and adopted a "Code of Conduct with regard to Insider Dealing",
which governs disclosure to the Company and to the market of transactions on
Group listed securities executed by so-called "relevant persons".
The Code adopts a more rigorous approach than the regulations drawn up by the
Market Authority with regard to insider dealing, compared with which it
presents a number of significant differences (including: reduction of the
quantitative thresholds for market disclosure of transactions on a quarterly
basis or at the time of the transaction; indication of periods during which
Relevant Persons may not transact operations on Group securities; extension of
disclosure requirements to cover financial instruments issued by controlling
companies as well as by subsidiary companies; considerable flexibility in the
identification of Relevant Persons in order to take account of contingencies in
which additional parties may have access to company strategy).
The Code took effect earlier than the term established by Borsa Italiana (1
December 2002 instead of 1 January 2003) and also comprises a particularly
severe system of penalties. The document may be consulted on the Company web
site, www.olivetti.it, under the heading "Investor Relations", sub-heading
"Corporate Governance", and will be sent in hard copy to any person who may
request a copy.
Treatment of confidential information
Management of confidential information is supervised directly by the Chairman
or by the Deputy Chairman and Chief Executive Officer.
With regard to communication of price-sensitive information to the public, the
Company recently approved a special Procedure, which specifies, among other
things, the measures to be taken in the event of rumours or requests for
information from the market control and supervisory bodies and the conduct to
be observed to ensure non-selective use of company information during meetings
with the shareholders, with the financial community and with the Press.
67 | Report on Operations
Investor relations (in particular relations with institutional investors)
The company has a special unit (investor.relations@olivetti.com) which is
responsible for relations with shareholders and institutional investors.
The Board of Directors has not deemed - and in the present circumstances does
not deem - it necessary to adopt rules for Shareholders' Meetings since it
believes that the powers assigned to the Chairman of the Board of Directors in
this respect are amply sufficient for the normal business of Shareholders'
Meetings.
Statutory Auditors
In accordance with article 20 of the Company Bylaws, the election (or
integration following substitution or forfeiture) of the Board of Statutory
Auditors occurs by means of a list vote. Those shareholders who alone or
together own voting shares equivalent to at least 5% of the corresponding share
capital may present one (and only one) list.
Each candidate may be presented in one list only, pain of ineligibility;
candidates who are Statutory Auditors in another five listed companies
(excluding Olivetti S.p.A.'s controlling or subsidiary companies) or who do not
possess the necessary requirements of character and professional background may
not be listed.
The lists (together with, pain of inadmissibility, the acceptances of the
individual candidates, the statements declaring absence of reasons of
ineligibility and incompatibility and the statements declaring existence of the
conditions required by law and the bylaws) must be presented at the Company's
registered offices at least five days prior to the date of the first calling of
the Shareholders' Meeting.
68 | Report on Operations
Legal proceedings
Olivetti S.p.A.
---------------
The legal proceedings involving the Parent Company are described below:
1. Currently under preliminary examination by magistrates in Rome are the
criminal charges of corruption and peculation brought by the Rome State
Prosecutor against former representatives and former employees of Olivetti (and
of the Italian Post Office) regarding products and services provided by
Olivetti to the Post Office in the early 1990s; the Rome magistrates acquitted
all the Olivetti people involved in the investigation of the charge of
peculation, since the fact did not amount to a crime. The State Prosecutor
lodged an appeal against the sentence. Recently the Rome magistrates fully
acquitted all the former Olivetti managers involved in the investigation of
charges of corruption
2. With regard to the dispute in the Rome courts between Olivetti and Poste
Italiane S.p.A. for non-payment by Poste Italiane S.p.A. of products and/or
technical assistance, sentences passed to date are in favour of Olivetti and
have been appealed by Poste Italiane S.p.A..
3. In relation to the disposal of the personal computers business in April
1997, lawsuits have been brought before the Ivrea courts against Olivetti and
its subsidiary Olivetti Finanziaria Industriale S.p.A. (which had merged
Sy.F.A. S.p.A., which had in turn merged Olivetti Personal Computers S.p.A) by:
a) Centenary Corporation and Centenary International, for damages (250 billion
Italian lire equivalent to 129.1 million euros claimed but lacking evidence)
which the plaintiffs allege they suffered as a consequence of the acquisition
of the Olivetti Group's personal computers business (through acquisition of the
specific business unit, which was spun off to OP Computers S.p.A., established
for that purpose);
b) ex-employees of OP Computers S.p.A., to ascertain that the contracts
relating to the aforementioned disposal of the personal computers business are
null and void, to obtain reinstatement as employees of Olivetti, with payment
of salary differences and damages (calculated at 310 billion Italian lire,
160.1 million euros, and lacking evidence);
c) the receiver of OP Computers S.p.A. (which is in bankruptcy proceedings), to
ascertain that the contract of sale of the personal computers business by
Olivetti Personal Computers to OP Computers is either null and void, or to be
annulled or revoked, claiming damages (again, lacking evidence and calculated
at 158 billion Italian lire, 81.6 million euros).
d) a group of ex-employees of OP Computers S.p.A., who have filed a complaint
against former legal representatives of the company; the Ivrea State Prosecutor
has opened an investigation into the former legal representatives.
Olivetti and its external advisors believe that the transactions carried out
regarding the disposal of the personal computers business were legal and
proper, and therefore consider the above legal actions to be essentially
groundless in fact and in law.
4. Olivetti and its subsidiary Olivetti Finanziaria Industriale S.p.A., on
their part, have taken legal action in the Milan courts against Piedmont
International S.A. (a Centenary Group company) for the recovery of 100 billion
Italian lire (51.6 million euros) due by the latter or for a greater amount to
be proven in court.
69 | Report on Operations
Telecom Italia Group
Disputes regarding Telecom Italia shareholder resolutions
Still pending is the claim for damages of 18.9 million euros brought against
Olivetti, Telecom Italia and the Chairman and Deputy Chairman pro-tempore,
alleging non-fulfilment of the undertakings in the "Offer document" concerning
the public tender and exchange offer made by Olivetti and Tecnost on Telecom
Italia in 1999, and of the resolutions carried by the Shareholders' Meeting of
14 January 2000 regarding purchases of own savings shares.
Universal service
In January 2002 the Regional Administrative Court of Lazio accepted Omnitel's
appeal for the annulment of the Telecommunications Authority' decision
regarding the "applicability of the mechanism for the division of the net costs
of the universal service for 1999", which had also been contested by
Infostrada. Specifically, the court upheld the complaint alleging defects in
the administrative procedure, but did not accept the appeal against the merits
of the decision, which will in any case have to be renewed.
In the meantime, Infostrada and Omnitel have not paid their respective portions
(set at 9 million euros overall), thereby preventing the Ministry of
Communications from transferring the amount globally assessed in favour of
Telecom Italia for costs sustained in 1999 for the universal service (27
million euros).
* * *
In early 2002 Telecom Italia was served with notice of Omnitel's appeal to the
Regional Administrative Court of Lazio and Wind's extraordinary appeal to the
Head of State for the annulment of the resolution setting out regulations for
the "Universal Service: applicability of the mechanism for the division and
assessment of the net costs for 2000". In addition to suspension of the
resolution, Omnitel also requested prior referral to the European Court of
Justice to ascertain whether community directives have been correctly
interpreted.
Data transmission and Internet access services using X-DSL technology
Following the opening of an investigation into the supply by Telecom Italia of
direct baseband circuits and the offer to its business customers of broadband
Internet access and data transmission services based on X-DSL technology
without a corresponding wholesale offer to competitors, in April 2001 the
Competition and Market Authority imposed a fine of 59 million euros on Telecom
Italia. In November 2001, the Regional Administrative Court of Lazio reduced
the fine to 29 million euros, which was paid in January on a conditional basis,
given Telecom Italia's intention of lodging an appeal with the Administrative
Supreme Court. This appeal, for the annulment of the entire fine, on the
grounds of a general lack of logic and defects in motivation and investigation,
was subsequently filed.
Meanwhile, Albacom, Infostrada, AIIP, Unidata, Data Service and other operators
filed claims for damages before the civil courts, alleging abuse of a dominant
position by Telecom Italia in connection with the practices challenged by the
Competition and Market Authority.
70 | Report on Operations
In January 2003, the Rome Court of Appeal sentenced Telecom Italia to pay
damages totalling approximately 2 million euros to Albacom, Wind (formerly
Infostrada), Cable & Wireless (formerly Unidata) and Data Service. Similar
claims for damages presented by other operators are still pending.
Galactica dispute
In May 2001, a dispute arose between Telecom Italia and the Internet Service
Provider Galactica S.p.A. (currently being wound up) for the non-renewal of an
agreement regarding an experimental Internet access service at a flat rate.
Claiming that failure to renew was unlawful, Galactica sued Telecom Italia for
damages and filed an injunction against Telecom Italia interrupting the
service.
In February 2002, Galactica filed another writ of summons for damages relating
to alleged anti-competitive practices of Telecom Italia.
In May 2002 the investigating magistrate unified the two lawsuits.
On 16 October 2002, the Servinternet S.p.A. company (formerly Galactica
S.p.A.), which is being wound up, filed a third writ of summons on Telecom
Italia in the Milan courts. This third suit has been unified with the other two
being investigated by the same judge.
Alleged anti-competitive strategies of Telecom Italia
Following the complaint filed by 27 competing operators alleging
anti-competitive market strategies by Telecom Italia, the Telecommunications
Authority issued decision no. 179/01/CONS charging the Company with a series of
breaches and commenced sanction proceedings with specific resolutions.
A counter-action against the decision and the subsequent resolutions has been
filed with the Regional Administrative Court of Lazio.
In the meantime the Authority ordered Telecom Italia to pay two administrative
fines for a total of approximately 150,000 euros; the Company has filed an
appeal against the orders with the Regional Administrative Court of Lazio.
Seat Pagine Gialle/De Agostini
Arbitration is underway on the dispute referred by De Agostini against Seat
Pagine Gialle, Finanziaria Web, Matrix and the Buffetti Group for alleged
breaches of the agreement signed in 2000, which among other things regulates
the acquisition of shareholdings in Finanziaria Web (which controls Matrix) by
Seat and De Agostini. Claiming that the conditions required under the agreement
had occurred, De Agostini is requesting the transfer to Seat of its Finanziaria
Web shares for a price of 700 million euros, with payment beginning as from 30
June 2003.
Seat Pagine Gialle/Cecchi Gori
On 13 June 2002 the Rome courts dismissed the applications filed by Cecchi Gori
Group Media Holding and Fin.Ma.Vi. to ascertain the nullity of the financial
statements and related balance sheet as at 31 December 2000 of Cecchi Gori
Communications - CGC (now Holding Media Communications) and to declare null the
resolutions carried by the company's Shareholders' Meeting on 27 April 2001.
Cecchi
71 | Report on Operations
Gori Group Media Holding and Fin.Ma.Vi have appealed the dismissal and
re-presented the applications filed in the first instance.
Still pending are: i) a ruling on the annulment of the contract pledging CGC
shares to guarantee fulfil-ment of the undertakings set out in the contract
under which Seat Pagine Gialle acquired control of CGC on 7 August 2000; ii) a
ruling on the annulment of the resolution adopted by the extraordinary
Shareholders' Meeting of CGC, to modify the quorums for resolutions adopted by
the Board of Directors and the Shareholders' Meeting. Cecchi Gori Group Media
Holding and Fin.Ma.Vi. have also begun arbitration proceedings on both matters.
FastWeb
On 11 July 2001, Telecom Italia and FastWeb drew up a "Contract for access to
and use of civil infrastructures" in compliance with the Competition & Market
Authority ruling requiring Telecom Italia to make its civil infrastructures
available to competitors for the supply of interactive and multimedia services,
on non-discriminatory conditions and at cost-oriented prices.
On 29 August 2002, Fastweb filed a writ of summons against Telecom Italia
requesting the determination and declaration of the exact consideration due for
access to and use of such infrastructures in order to clarify interpretation of
the clause regulating the price determination procedures.
With a counter-summons, Telecom Italia has requested payment of a consideration
of approximately 46 million euros for the services pursuant to the contract.
Contribution as per art. 20, par 2 of Law no. 448 of 23.12.1998
Before the Regional Administrative Court of Lazio, Telecom Italia, TIM, Wind
and Omnitel challenged the Ministerial Decree of 21 March 2000, implementing
Law no. 448 of 23 December 1998, which, from 1 January 1999, introduced a new
contribution to replace the concession fee. Infostrada and Albacom have
presented extraordinary appeals to the Head of State against the same Decree.
With regard to the extraordinary appeals to the Head of State, the
Administrative Supreme Court has raised the preliminary issue before the
European Court of Justice of whether the contribution was compatible with EU
directives concerning telecommunications.
Stet Hellas
In 1996 Mobitel, a company in the Greek Interamerican Group (now Demco
Reinsurance) and at that time the sole agent of Stet Hellas, initiated
arbitration proceeding to ascertain its right to receive fees not only on
outgoing traffic generated by the subscribers it introduced, but also on
incoming traffic and on traffic generated by late-paying customers. It also
claimed payment of relevant damages and of damages relating to resolution of
the sole agency by Stet Hellas.
Stet Hellas and Telecom Italia (which replaced Stet International, the former
guarantor of Stet Hellas and as such party to the agreements signed at the
time) filed a counter-claim for damages suffered as the result of
non-acquisition of market share due to breach of contract by Mobitel.
An initial partial award (October 2000) was made in favour of Mobitel's claim
for recognition of fees on incoming traffic; in November 2001 the arbitration
panel asserted its competence regarding quantification of damages as well as
the existence of a due amount. The parties notified their final compensation
72 | Report on Operations
claims, which are approximately 140 million euros by Mobitel and approximately
890 million euros by Stet Hellas and Telecom Italia.
Nortel Inversora
In August 2001, a minority shareholder applied for a writ of summons for Nortel
to appear before the Buenos Aires courts for a conciliation attempt (which
proved unsuccessful), alleging irregularities in the shareholders' resolution
approving the financial statements for the year closed on 31 December 2000.
The same shareholder had previously contested the shareholders' resolution
approving the financial statements for the year closed on 30 September 2000. In
September 2001 the Buenos Aires courts therefore issued a precautionary ruling
suspending the effectiveness of the above-mentioned shareholders' resolutions.
In August 2002, at the request of the same shareholder, two additional but
unsuccessful conciliation hearings were held with regard to alleged
irregularities in the resolutions carried by the Nortel ordinary and special
Shareholders' Meetings of 25 April 2002, which, among other things, approved
the Nortel financial statements for financial 2001.
On 3 March 2003 a settlement was reached under which the minority shareholder
has undertaken to desist from continuation of the suits filed against Nortel
and its representatives and to not file other similar suits against Nortel
and/or its representatives. The agreement is due to be submitted to the Buenos
Aires courts for approval.
Brasil Telecom
Still pending are two lawsuits filed by Brasil Telecom in 2001 before the Rio
de Janeiro civil courts (Brazil), respectively against Telecom Italia and
Telecom Italia International and against two directors of Brasil Telecom
appointed by Telecom Italia International. The plaintiff claims compensation
for damages suffered as a result of the acquisition of CRT and
non-participation in the SMP tender.
Chase Manhattan Bank dispute
On 5 April 2002, the US District Court judge for the District of Delaware
dismissed Telecom Italia (on the grounds that it was no longer a direct
shareholder of Iridium LLC) from the action initiated in June 2000 by Chase
Manhattan Bank (now JP Morgan Chase Bank) with regard to the 800 million US
dollar loan granted in 1998 to Iridium Operating LLC (a subsidiary of Iridium
LLC).
Chase has appealed against the judge's ruling and has also summoned Iridium
Italia S.p.A, in which Telecom Italia has a 30% shareholding (the remaining
equity is equally owned by TIM and Telespazio) and which is a direct
shareholder of Iridium LLC.
TIM PCS companies in Brazil
Following the dismissal of applications filed by local operators Telesp Celular
and BCP for the precautionary suspension of the transfer of approximately 18.3%
of the equity of Solpart from Telecom Italia International to Techold and
Timepart, and of related administrative measures, BCP took out a suit against
Anatel in the Brazilian Federal Court requesting that the assignment of PCS
frequencies to TIM's Brazilian subsidiaries be annulled.
73 | Report on Operations
Bancomext/Etec S.A. dispute
On 12 August the Turin civil court issued a cautionary attachment on all the
assets of Etec S.A. (a Cuban investee company of Telecom Italia) and Telan (the
majority shareholder of Etec S.A., which is controlled by the Cuban
government), including receivables due from third parties, up to an amount of
33 million euros.
This followed a complaint filed by Banco Nacional de Comercio Exterior
("Bancomext") that Etec S.A. and Telan had failed to comply with repayment and
guarantee obligations - for a value to date of approximately 300 million US
dollars - stipulated in a financing contract drawn up by Etec S.A., Telan,
Bancuba (Cuba's central bank) and Bancomext. The attachment was subsequently
notified to Telecom Italia, TIM, Intesa BCI and Deutsche Telekom, who have
received a garnishment in respect of all payments to Etec S.A., up to an amount
of 33 million euros.
TIM has already presented a negative third-party debtor declaration, pursuant
to article 547 of the Italian code of civil procedure.
On 6 February 2002 Telecom Italia presented its positive third-party debtor
declaration, pursuant to article 547 of the Italian code of civil procedure.
Teleque Communications S.p.A.
On 6 November 2002, Teleque Communications S.p.A., which offers prepaid
solutions for international telephone services, served a summons on Telecom
Italia before the Rome Court of Appeal alleging anticompetitive practices and
claiming damages of 65 million euros. Teleque Communications alleges that
Telecom Italia obtained a competitive advantage by imposing additional costs on
supply of its interconnection services, whereas Telecom Italia did not charge
such costs to its end clients for prepaid international services.
Request of refund for Ministry of Defence charges for 900 band frequency
release
With formal decrees issued in 2001, the Italian Ministries of Defence and of
Communications quantified charges for the release of the band frequencies in
question and debited such charges largely to TIM as the licensee of the TACS
service. The band frequency release, however, was intended to broaden GSM
frequencies, which were to be shared out among all operators.
The ministerial quantifications are deemed illegitimate since they are based on
an incorrect interpretation of Ministerial Decree 113/98 governing these
matters. An application for their annulment has therefore been filed with the
Regional Administrative Court of Lazio.
Dispute with INPS
In compliance with Law no. 58/1992, Telecom Italia is required to provide full
national insurance coverage for all persons employed as at 20 February 1992 by
STET S.p.A., SIP S.p.A., Italcable S.p.A. and Telespazio S.p.A., as well as
persons transferred from the Public Administration to IRITEL, including periods
previously worked in other companies, through the "Fondo Previdenza Telefonici"
(Telephone Sector Employees Pension Fund), which merged into the "Assicurazione
generale obbligatoria" (compulsory general insurance scheme) on 1 January 2000.
The contributions due are calculated by INPS (Italian National Insurance Board)
and must be paid in 15 annual instalments.
74 | Report on Operations
The amount of the liability regarding the payments due is uncertain, in that
Telecom Italia and INPS disagree on the method of calculating such amounts.
However, 595 million euros of outstanding amounts due to INPS relating to
ex-IRITEL employees are included in the Telecom Italia Group financial
statements at 31 December 2002.
Concerning the application and interpretation of the regulation, there is an
ongoing dispute with INPS regarding both the starting date for the calculation
of interest due, as per the aforementioned Law no. 58/1992, for the deferred
payment of the amount, as well as the exclusion from the provisions of Law
58/1992 of all those employees (except for ex-IRITEL personnel) who had already
requested full insurance coverage prior to 20 February 1992.
Telecom Italia has undertaken to pay on a conditional basis the amounts claimed
by INPS according to its calculations, subject to adjustment in the event that
the courts' final ruling should uphold the company's position.
According to Telecom Italia's estimates, the principal amount payable
(excluding, as stated above, the portion relating to ex-employees of IRITEL)
could vary, depending on the opposing interpretations and on evaluations which
take account of all the employees involved, between 964 million euros and 1,289
billion euros approximately, of which an amount of 409 million euros has
already been paid.
In compliance with accepted accounting principles, a provision for an amount in
line with the minimum estimated liability has been stated in the consolidated
financial statements of the Olivetti Group at 31 December 2002, as a component
of the goodwill arising on the acquisition of Telecom Italia.
Following an agreement between INPS and Telecom Italia, pre-amortisation
interest (including interest relating to ex-IRITEL employees) was paid by
Telecom Italia - on a conditional basis - in fifteen equal annual deferred
instalments, inclusive of interest at 5% per annum, up to the end of 1999, for
a total amount of 110 million euros, net of adjustment interest and some
refunds paid by INPS.
The dispute was settled in the first half of 2002 with Supreme Court sentence
no. 3398/2002 which found in favour of Telecom Italia, in conformity with the
previous sentence no. 4242/2000 (following which payment of the above interest
and the deferred interest relating thereto was suspended as from June 2000). A
receivable of 131 million euros (including interest calculated at the
conventional annual rate of 5%) therefore arose for the Telecom Italia Group,
which has been fully offset on payment of the usual instalments.
75 | Report on Operations
Events subsequent to the end of the financial year
Telecom Italia Group
Sale of Globo.com
On 15 January Telecom Italia Finance sold its 28.57% shareholding in Brazilian
company GLB Servicos Interativos ("Globo.com") to TIM Brasil, for 15 million
dollars. At the end of January, TIM Brasil in turn sold the shareholding to the
Globo television group. The sale generated a net capital gain of 4 million
euros for the Telecom Italia Group.
Renewal of first tranche of 2001 securitisation programme
On 22 January, the TI Securitisation Vehicle company renewed the first 100
million euro tranche of the asset-backed securities issued on 29 January 2001.
The operation, which is part of the Telecom Italia telephone bill
securitisation programme, is described in full in the Telecom Italia S.p.A.
Explanatory Notes.
Early purchase of leased buildings
On 27 January procedures were completed for the early purchase from Teleleasing
S.p.A. of 12 buildings (for approximately 300,000 m2) used by Telecom Italia
S.p.A. and other Group companies on a financial leasing basis. The operation
generated a total financial outlay for the Telecom Italia Group of
approximately 369 million euros.
Sale of Telecom Italia logistics business
On 27 January, Telecom Italia announced an agreement for the sale to TNT
Logistics Italia of Telecom Italia customer wireline telephony product
warehousing and distribution operations and network assistance and installation
operations. The Telecom Italia business being sold to TNT Logistics includes 6
central warehouses and 100 advanced warehouses, which handle more than 4.5
million items annually (handsets and telephone parts). The agreement, designed
to strengthen Telecom Italia's focus on its core business, became operational
on 5 March 2003 following approval by the Antitrust Authority and completion of
consultations with the trade unions.
LISIT Informatica
On 4 February 2003, as part of a temporary grouping of companies with Finsiel
and Lutech (Lucchini Group), Telecom Italia was awarded a tender organised by
the Regional Authority of Lombardy (through its subsidiary Lombardia
Informatica S.p.A.) to supply goods and services for region-wide introduction
and management of the "Regional Services Card".
The aggregate value of the contract awarded to the grouping led by Telecom
Italia, over the term of the agreement, which expires in 2009, is approximately
350 million euros.
As required under the terms of the contract, Telecom Italia and Finsiel have
purchased 35.2% of the share capital of LISIT, for a total outlay of 54 million
euros.
76 | Report on Operations
Consodata stock purchase
On 12 February, Seat Pagine Gialle purchased 1,108,695 shares of ordinary stock
of the French subsidiary Consodata S.A. - which is listed on the Nouveau Marche
of the Paris Stock Exchange - after the founding partners exercised their put
option as envisaged by the agreement signed by the previous management of Seat
PG on 31 July 2000. As a result of the purchase, for an agreed price of 44
euros per share and a total value of approximately 48.8 million euros, Seat PG
acquired a further 8.17% of the capital and voting rights in Consodata S.A.,
thereby increasing its stake to 98.60%.
Bond reserved for employees
On 13 February 2003, the Telecom Italia Board of Directors adopted a resolution
to reduce the bond reserved for employees from 1 billion euros to 400 million
euros, by revoking the issue resolution for the part that had not yet been
implemented.
Sale of Telekom Srbija
On 28 December 2002, the Telecom Italia Group announced an agreement for the
sale of its 29% shareholding in Telekom Srbija to PTT Srbija. The agreement was
finalised on 20 February 2003 and closing is expected to take place in June.
PTT Srbija will pay Telecom Italia 195 million euros, of which 120 million
euros in four monthly instalments starting from February 2003, and the
remaining amount in six half-yearly instalments beginning in January 2006. The
stock involved in the transaction will be deposited with an international bank
until payment is complete.
Telecom Italia - Hewlett-Packard agreement
On 21 February, Telecom Italia and Hewlett-Packard signed a five-year
management services and out-sourcing agreement worth 225 million euros. Under
the agreement, HP is to provide asset management, help desk, maintenance and
management services for 90,000 Telecom Italia workstations, leveraging the
skills of approximately 600 specialists from IT Telecom, who will join a new HP
unit specialised in the delivery of these services. IT Telecom will host the
systems and manage HP operations for SAP environments.
The agreement is designed to help Telecom Italia strengthen its focus on its
core business and achieve cost savings in distributed environment management.
It will become operational once consultations with the unions have been
completed and approval has been received from the Italian Antitrust
authorities.
Approval of the 2002 interconnection price list by the Communication Authority
On 27 February 2003 the Infrastructures & Networks Commission of the
Communication Authority approved the 2002 Reference Offer, now being notified,
which Telecom Italia is to apply to competitors for use of its network as
regards traffic interconnection services, the "billing and insolvency risk for
Telecom Italia subscriber access to non-geographical numbers of other
operators" service, unbundled access services. 2002 income takes account of the
impact of this price list.
77 | Report on Operations
Megabeam acquisition agreement
In March 2003 Telecom Italia signed an agreement to purchase 100% of the share
capital of Megabeam Italia S.p.A., Italy's first wireless Internet service
provider, for an outlay of 11.5 million euros.
The acquisition is part of Telecom Italia's broadband strategy, where Wi-Fi
wireless technology plays a key role in both residential and business
solutions, since it enhances the functionality and flexibility of the company's
innovative wireline access offer.
Megabeam provides Wi-Fi networking services to private locations and is
currently running Wi-Fi service trials in public locations - major Italian
airports and a leading hotel chain - through Wireless-LANs on the 2,400-2,483.5
bandwidth.
The execution of the agreement is subject to the approval of the Antitrust
Authority.
Telecom Italia share buy-back
In connection with the share buy-back authorised by the Telecom Italia
Shareholders' Meeting of 7 November 2001, from 1 January through 11 March 2003
Telecom Italia purchased 8,662,500 own savings shares for an average per-share
price of 4.73 euros and a total outlay of 41 million euros, and 915,000
ordinary shares for an average per-share price of 6.83 euros and a total outlay
of 6 million euros.
Therefore, until 11 March 2003 Telecom Italia purchased overall 54,309,500 own
savings share for an average per-share price of 5.24 euros and a total outlay
of 285 million euros, and 6,195,500 own ordinary shares for an average
per-share price of 8 euros and a total outlay of 50 million euros.
Bond buy-back and subsequent cancellation
On 11 March 2003, the Telecom Italia Board of Directors carried a resolution
for the buy-back, at the market price, and subsequent cancellation of a portion
of the bonds subscribed by the subsidiary Telecom Italia Finance, up to a
maximum amount of 2 billion euros. The purpose of the operation is to restore
the balance between shareholders' equity and bond loans and finance bills, in
connection with the proposal to distribute reserves up to a maximum of 1,333
million euros.
Other companies in the Olivetti Group
o On 10 January 2003, the multi-tranche benchmark bond issued by Olivetti
Finance N.V. and guaranteed by Olivetti S.p.A. was successfully placed. The
bond is part of the operations to re-finance debt and extend average maturity
and does not imply any change in net financial indebtedness.
As a result of solid investor demand, for approximately 4 billion euros, which
reflected strong market interest, the bond amount was set at 3 billion euros to
be divided into three tranches, for five, ten and thirty years. The 30-year
eurobond, a novelty in the corporate sector, is the first public
euro-denominated bond with such long maturity.
The terms of the bond are as follows:
78 | Report on Operations
first tranche
-------------
amount: 1,750 million euros
issue date: 24 January 2003
maturity: 24 January 2008
term: 5 years
coupon: 5.875% per annum
issue price: 98.937%
effective yield on maturity: 5.89% per annum,
corresponding to a yield
of + 225 basis points
over the mid-swap rate
second tranche
--------------
amount: 850 million euros
issue date: 24 January 2003
maturity: 24 January 2013
term: 10 years
coupon: 6.875% per annum
issue price: 99.332%
effective yield on maturity: 6.97% per annum,
corresponding to a yield
of + 255 basis points
over the mid-swap rate
third tranche
-------------
amount: 400 million euros
issue date: 24 January 2003
maturity: 24 January 2033
term: 30 years
coupon: 7.75% per annum
issue price: 98.239%
effective yield on maturity: 7.905% per annum,
corresponding to a yield
of + 300 basis points over
mid-swap rate
The issue is part of Olivetti's Euro Medium Term Note (EMTN) programme.
o On 28 January 2003, in response to the large number of applications and
strong market interest, the thirty-year "Olivetti Finance N.V. 7.75%
2003-2033" bond issued on 24 January and guaranteed by Olivetti S.p.A. was
re-opened. The bond is part of the operations to re-finance debt and
extend average maturity and does not imply any change in net financial
indebtedness.
The size of the operation was set at 400 million euros, bringing the total
issue amount to 800 million euros; this made the bond eligible for inclusion in
the top market indices and significantly improved liquidity to the benefit of
investors.
The coupon and term are the same as the original loan and the issue price was
set at 102.142% corresponding to an effective yield at maturity of + 287 basis
points over the mid-swap rate.
The issue is part of Olivetti's Euro Medium Term Note (EMTN) programme.
79 | Report on Operations
* * *
Telecom Italia / Olivetti merger project
On 11 March 2003, the Boards of Directors of Olivetti and Telecom Italia
adopted a project to simplify the Group's corporate structure by merging the
two companies. Specifically, the project envisages the merger of Telecom Italia
into Olivetti and is a key step in the industrial and financial restructuring
process launched in July 2001 to create shareholder value.
80 | Report on Operations
Operating outlook for 2003
Assuming that the dividend payout policy of the subsidiary Telecom Italia
continues, Olivetti S.p.A. expects to post a positive full-year net result for
financial 2003, before accounting for the impact of any extraordinary
operations.
Group earnings, before amortisation of goodwill on the acquisition of Telecom
Italia, will depend on the results reported by the Telecom Italia Group, which
expects profitability to be substantially unchanged from financial 2002.
81 | Report on Operations
Proposal for the coverage of the parent company loss for 2002
The 2002 financial statements of the Parent Company Olivetti S.p.A. show a net
loss of 6,239,962,549 euros and shareholders' equity at 31 December 2002 of
9,031,365,025 euros, as follows:
(in euros) 31.12.2002
-----------------------------------------------------------------------
I. Share capital 8,845,239,632
I bis. Share capital increase to be filed
with the Companies Register 200,198
II. Additional paid-in capital 3,765,365,301
II bis. Additional paid-in capital in respect
of capital increases to
be filed with the Companies Register 126,941
III. Revaluation reserves 1,128,827
IV. Legal reserve 920,809,760
V. Reserve for treasury stock 2,298,156
VII. Other reserves 2,036,088,939
VIII. Retained earnings and accumulated losses (299,930,180)
-----------------------------------------------------------------------
Total Share Capital and Reserves 15,271,327,574
IX. Net loss for the year (6,239,962,549)
-----------------------------------------------------------------------
Total 9,031,365,025
=======================================================================
The Board of Directors proposes that the 2002 net loss of 6,239,962,549 euros
be covered as follows:
o 1,888,261,068 euros through use of the Extraordinary Reserve (included
under the heading Other reserves);
o 10,217,010 euros through use of Non-taxable reserves (including under the
heading Other reserves), specifically:
- 8,741,403 euros from the Reserve for research grants (law no.
346/1988)
- 685,713 euros from the Reserve for technological innovation grants
(law no. 46/1982)
- 695,110 euros from the Reserve for capital investment grants (law no.
64/1986)
- 94,784 euros from the Reserve for VAT deductions on capital
investments;
o 18,598,579 euros through use of reserves previously tied to conversion of
bonds and exercise of warrants, which have become available upon expiry of
the relevant rights (included under the heading Other reserves),
specifically:
- 927,188 euros from the Reserve tied to conversion of Olivetti
floating-rate 1998-2002 bonds
- 163,110 euros from the Reserve tied to exercise of Olivetti 1998-2002
ordinary share warrants
- 3,886,872 euros from the Reserve tied to exercise of Olivetti
1999-2001 subscription rights (warrants or options) reserved for
managers of the Parent Company and its subsidiaries;
- 13,621,409 euros from the Reserve tied to exercise of Olivetti
2002-2004 subscription rights (warrants or options) reserved for
managers of the Parent Company and its subsidiaries.
o 1,128,827 euros through use of the Revaluation reserves;
o 920,809,760 euros through use of the Legal reserve;
o 126,941 euros through use of the Additional paid-in capital reserve in
respect of share capital increases to be filed with the Companies
Register;
o 3,400,820,364 euros through partial use of the Additional paid-in capital
reserve, which will therefore reflect a residual balance of 364,544,937
euros.
Additionally, the Board of Directors proposes that the Accumulated losses of
299,930,180 euros be covered through partial use of the Additional paid-in
capital reserve, which will therefore reflect a residual balance of 64,614,757
euros.
The Board of Directors
82 | Report on Operations
Statutory Financial Statements of Olivetti S.p.A.
at 31 December 2002
Balance Sheet
Income Statement
Explanatory Notes
Olivetti S.p.A.
Balance Sheet (in euros)
ASSETS 31.12.2002 31.12.2001 Changes
--------------------------------------------------- ---------- ------------ --------------
A) AMOUNTS DUE FROM SHAREHOLDERS - - -
--------------------------------------------------- ---------- ------------ --------------
B) FIXED ASSETS
I. Intangible fixed assets
1) Start-up and expansion costs 50,496,231 81,096,623 (30,600,392)
3) Industrial patents and
intellectual property rights - 1,033 (1,033)
7) Other assets 128,872,804 168,624,950 (39,752,146)
-------------- -------------- --------------
Total intangible fixed assets 179,369,035 249,722,606 (70,353,571)
II. Tangible fixed assets
2) Plant and machinery 277,269 1,104,221 (826,952)
3) Industrial and commercial equipment - 4,648 (4,648)
4) Other assets 767,173 1,065,708 (298,535)
5) Assets under construction
and advance payments 33,343 33,343 -
-------------- -------------- --------------
Total tangible assets 1,077,785 2,207,920 (1,130,135)
III. Financial fixed assets
1) Equity investments in:
subsidiary companies 22,693,511,448 31,261,276,711 (8,567,765,263)
associated companies 44,935,728 295,528 44,640,200
other 149,090,191 147,732,059 1,358,132
-------------- -------------- --------------
22,887,537,367 31,409,304,298 (8,521,766,931)
2) Receivables
Due within 12 months from
subsidiary companies - 18,201 (18,201)
associated companies - 61,397 (61,397)
others 9,024,236 13,510,565 (4,486,329)
-------------- -------------- --------------
9,024,236 13,590,163 (4,565,927)
Due after 12 months from
subsidiary companies - - -
associated companies 15,879,855 95,535 15,784,320
others 54,181,142 61,328,465 (7,147,323)
-------------- -------------- --------------
70,060,997 61,424,000 8,636,997
3) Other securities - - -
4) Treasury stock 2,298,155 2,298,156 (1)
-------------- -------------- --------------
Total financial fixed assets 22,968,920,755 31,486,616,617 (8,517,695,862)
Total fixed assets (B) 23,149,367,575 31,738,547,143 (8,589,179,568)
------------------------------------------------- -------------- -------------- --------------
84 | Olivetti S.p.A. Financial Statements
31.12.2002 31.12.2001 Changes
------------------------------------------------ -------------- -------------- -------------
C) CURRENT ASSETS
I. Inventories - - -
II. Receivables
Due within 12 months from
1) Customers 997,697 1,222,062 (224,365)
2) Subsidiary companies
- trade and other receivables 313,397,251 55,936,486 257,460,765
- interest bearing current
accounts 183,724,426 79,528,229 104,196,197
3) Associated companies
- trade and other receivables 53,456 45,627 7,829
- interest bearing current
accounts 89,429 85,576 3,853
4) Others
- miscellaneous 832,835,762 693,755,383 139,080,379
- interest bearing current
accounts 2,789,317 6,882,372 (4,093,055)
-------------- -------------- -------------
1,333,887,338 837,455,735 496,431,603
Due after 12 months from
1) Others 609,000,000 - 609,000,000
-------------- -------------- -------------
Total receivables 1,942,887,338 837,455,735 1,105,431,603
III. Financial assets not held as fixed
assets
4) Other equity investments 2,755,510 7,236,210 (4,480,700)
6) Other securities
- miscellaneous 346,871,904 67,361,517 279,510,387
- receivables for securities
held under reverse repurchase
agreements 961,066 911,312 49,754
-------------- -------------- -------------
Total financial assets not held as
fixed assets 350,588,480 75,509,039 275,079,441
IV. Liquid funds
1) Bank and post office deposits 518,639,674 140,359,133 378,280,541
3) Cash 3,431 6,391 (2,960)
-------------- -------------- -------------
Total liquid funds 518,643,105 140,365,524 378,277,581
Total current assets (C) 2,812,118,923 1,053,330,298 1,758,788,625
------------------------------------------------ -------------- -------------- -------------
D) ACCRUED INCOME AND PREPAID EXPENSES
2) Other accrued income and prepaid
expenses subsidiary and associated - 1,515 (1,515)
companies third parties 414,077,727 502,988,663 (88,910,936)
Total accrued income and prepaid expenses (D) 414,077,727 502,990,178 (88,912,451)
------------------------------------------------ -------------- -------------- -------------
TOTAL ASSETS 26,375,564,225 33,294,867,619 (6,919,303,394)
================================================ ============== ============== =============
85 | Olivetti S.p.A. Financial Statements
LIABILITIES AND SHAREHOLDERS' EQUITY 31.12.2002 31.12.2001 Changes
------------------------------------------------ --------------- -------------- --------------
A) SHAREHOLDERS' EQUITY
I. Share capital 8,845,239,632 8,783,701,564 61,538,068
I bis. Share capital increases to
be filed with the Companies
Register (article 2444 of
the Civil Code) 200,198 839,593 (639,395)
I ter. Share capital increase pay-
ments relating to shares to
be issued - 26,954 (26,954)
II. Additional paid-in capital 3,765,365,301 3,765,113,918 251,383
II bis. Additional paid-in capital
in respect of share capital
increases to be filed with
the Companies Register and
of shares to be issued 126,941 10,442 116,499
III. Revaluation reserves 1,128,827 1,128,827 -
IV. Legal reserve 920,809,760 920,809,760 -
V. Reserve for treasury stock 2,298,156 2,298,156 -
VII. Other reserves 2,036,088,939 2,061,056,125 (24,967,186)
VIII. Retained earnings and
accumulated losses (299,930,180) 571,549,306 (871,479,486)
IX. Net income (loss) for the
year (6,239,962,549) (871,479,486) (5,368,483,063)
Total shareholders' equity (A) 9,031,365,025 15,235,055,159 (6,203,690,134)
------------------------------------------------ -------------- -------------- --------------
B) RESERVES FOR RISKS AND CHARGES
2) a) Reserves for taxation - - -
b) Reserves for deferred
taxation - 344,437,178 (344,437,178)
3) Other provisions 336,309,681 429,507,304 (93,197,623)
Total reserves for risks and charges (B) 336,309,681 773,944,482 (437,634,801)
------------------------------------------------ -------------- -------------- --------------
C) RESERVE FOR EMPLOYEE SEVERANCE INDEMNITIES 2,587,158 3,857,916 (1,270,758)
================================================ ============== ============== ==============
86 | Olivetti S.p.A. Financial Statements
31.12.2002 31.12.2001 Changes
------------------------------------------------- --------------- -------------- ---------------
D) PAYABLES
Due within 12 months
1) Bonds - - -
2) Convertible bonds - 15,675,896 (15,675,896)
3) Due to banks 670,458,552 357,134,963 313,323,589
4) Due to other lenders 2,842,623 6,375,644 (3,533,021)
5) Advances 3,772,422 3,772,422 -
6) Due to suppliers 8,989,315 24,717,419 (15,728,104)
8) Due to subsidiary companies
- trade and other payables 13,143,430 22,312,200 (9,168,770)
- interest bearing current accounts 2,617,061,850 4,522,110,267 (1,905,048,417)
9) Due to associated companies
- trade and other payables 586,256 1,107 585,149
11) Due to tax authorities 282,587,074 31,172,199 251,414,875
12) Due to social security authorities 373,603 699,126 (325,523)
13) Other payables
- miscellaneous 17,685,785 66,957,695 (49,271,910)
--------------- -------------- ---------------
3,617,500,910 5,050,928,938 (1,433,428,028)
Due after 12 months
1) Bonds
subscribed by third parties - 400,000,000 (400,000,000)
subscribed by subsidiary companies 3,900,000,000 - 3,900,000,000
2) Convertible bonds 4,184,127,509 4,188,416,003 (4,288,494)
3) Due to banks 20,270,104 71,798,098 (51,527,994)
4) Due to other lenders 34,489,703 25,372,174 9,117,529
5) Due to subsidiary companies 3,743,567,709 5,302,415,417 (1,558,847,708)
--------------- -------------- ---------------
11,882,455,025 9,988,001,692 1,894,453,333)
Total payables (D) 15,499,955,935 15,038,930,630 461,025,305
------------------------------------------------- --------------- -------------- ---------------
E) ACCRUED EXPENSES AND DEFERRED INCOME
2) Other accrued expenses and deferred
income
Group companies 1,434,016,225 2,208,669,229 (774,653,004)
third parties 71,330,201 34,410,203 36,919,998
Total accrued expenses and deferred income (E) 1,505,346,426 2,243,079,432 (737,733,006)
------------------------------------------------- --------------- -------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 26,375,564,225 33,294,867,619 (6,919,303,394)
================================================= =============== ============== ===============
MEMORANDUM ACCOUNTS 31.12.2002 31.12.2001 Changes
------------------------------------------------- --------------- -------------- ---------------
Personal guarantees, net of counter-securities
received 15,097,017,500 17,319,460,000 (2,222,442,500)
Commitments 7,960,000 10,990,000 (3,030,000)
Other accounts 3,810,000 3,810,000 -
------------------------------------------------- --------------- -------------- ---------------
TOTAL MEMORANDUM ACCOUNTS 15,108,787,500 17,334,260,000 (2,225,472,500)
================================================= =============== ============== ===============
87 | Olivetti S.p.A. Financial Statements
Olivetti S.p.A.
Income Statement (in euros)
Year 2002 Year 2001 Changes
------------------------------------------------- --------------- -------------- -------------
A) VALUE OF PRODUCTION
1) Revenues from sales and services - -
2) Changes in inventories of work in
progress, semifinished and finished
products - -
3) Changes in contract work in progress - -
4) Capitalized production - -
5) Other revenues and income:
- other 13,598,043 15,209,057 (1,611,014)
Total value of production (A) 13,598,043 15,209,057 (1,611,014)
------------------------------------------------- --------------- -------------- -------------
B) COSTS OF PRODUCTION
6) Raw, ancillary and consumable mater-
ials and goods for resale 232,022 179,687 52,335
7) Services received 26,361,228 49,093,106 (22,731,878)
8) Leases and rentals 2,383,471 2,532,780 (149,309)
9) Personnel
a) Wages and salaries 4,898,745 8,040,416 (3,141,671)
b) Social security charges 1,409,992 2,108,684 (698,692)
c) Termination indemnities 24,045 1,050,599 (1,026,554)
d) Employee pension and similar
obligation charges - - -
e) Other costs 7,424,646 1,900,561 5,524,085
--------------- -------------- -------------
13,757,428 13,100,260 657,168
10) Amortisation, depreciation and write-
downs
a) Amortisation of intangible fixed
assets 70,525,404 61,688,982 8,836,422
b) Depreciation of tangible fixed
assets 1,194,871 1,262,719 (67,848)
c) Other amounts written down on
fixed assets - - -
d) Write-down of receivables classi-
fied as current assets and of
liquid funds - 1,523,624 (1,523,624)
--------------- -------------- -------------
71,720,275 64,475,325 7,244,950
11) Changes in inventories of raw, ancil-
lary and consumable materials
and goods for resale - - -
12) Provisions for risks - 191,808,785 (191,808,785)
13) Other provisions - - -)
14) Other operational expenses 2,730,313 3,045,755 (315,442)
Total costs of production (B) 117,184,737 324,235,698 (207,050,961)
------------------------------------------------- --------------- -------------- -------------
DIFFERENCE BETWEEN VALUE AND COSTS OF PRODUCTION
(A-B) (103,586,694) (309,026,641) 205,439,947
================================================= =============== ============== =============
88 | Olivetti S.p.A. Financial Statements
Year 2002 Year 2001 Changes
------------------------------------------------- ------------- ----------- -------------
C) FINANCIAL INCOME AND EXPENSES
15) Income from equity investments
- subsidiary companies 1,973,535,014 73,555,112 1,899,979,902
- associated companies - 8,261,552 (8,261,552)
- other companies 5,818,495 3,591,809 2,226,686
------------- ----------- -------------
1,979,353,509 85,408,473 1,893,945,036
16) Other financial income
a) income from receivables
classified as fixed assets from
- subsidiary companies 402 1,134 (732)
- associated companies 1,355 9,683 (8,328)
- others 1,418 4,002 (2,584)
------------- ----------- -------------
3,175 14,819 (11,644)
b) income from securities held as
fixed assets - - -
c) income from securities held as
current assets 3,063,050 4,202,788 (1,139,738)
d) other income from
- subsidiary companies 7,468,984 3,991,770 3,477,214
- associated companies 151,716 4,516 147,200
- others 30,709,474 29,120,917 1,588,557
------------- ----------- -------------
38,330,174 33,117,203 5,212,971
------------- ----------- -------------
41,396,399 37,334,810 4,061,589
17) Interest and other financial charges
a) subsidiary companies (607,163,943) (814,204,575) 207,040,632
b) associated companies - - -
c) others (205,925,868) (152,423,847) (53,502,021)
------------- ----------- -------------
(813,089,811) (966,628,422) 153,538,611
Total financial income and expenses (C) 1,207,660,097 (843,885,139) 2,051,545,236
------------------------------------------------- ------------- ----------- -------------
D) VALUE ADJUSTMENTS TO FINANCIAL ASSETS
18) Revaluations - - -
19) Writedowns
a) on equity investments (8,400,396,263) (175,226,612) (8,225,169,651)
Total value adjustments to financial assets (D) (8,400,396,263) (175,226,612) (8,225,169,651)
------------------------------------------------- ------------- ----------- -------------
E) EXTRAORDINARY INCOME AND CHARGES
20) Income
- Gains from disposals 238,849,887 1,045,574 237,804,313
- Other income 1,447,518 22,622,268 (21,174,750)
------------- ----------- -------------
240,297,405 23,667,842 216,629,563
21) Charges
- Losses from disposals (70,547,485) (512) (70,546,973)
- Taxes for previous years (1,213,055) - (1,213,055)
- Other charges (4,274,051) (16,459,071) 12,185,020
------------- ----------- -------------
(76,034,591) (16,459,583) (59,575,008)
Total extraordinary income and charges (E) 164,262,814 7,208,259 157,054,555
------------------------------------------------- ------------- ----------- -------------
RESULT BEFORE TAXATION (A-B+C+D+E) (7,132,060,046) (1,320,930,133) (5,811,129,913)
------------------------------------------------- ------------- ----------- -------------
22) Income taxes for the year 892,097,497 449,450,647 442,646,850
------------------------------------------------- ------------- ----------- -------------
23) NET RESULT FOR THE YEAR (6,239,962,549) (871,479,486) (5,368,483,063)
================================================= ============= =========== =============
89 | Olivetti S.p.A. Financial Statements
Explanatory Notes
Form and content of the financial statements
The financial statements for the year closed at 31 December 2002 have been
prepared and presented in accordance with the Italian Civil Code interpreted by
the accounting principles established by the Italian Accounting Profession
("Consigli Nazionali dei Dottori Commercialisti e dei Ragionieri"). They
comprise the Balance Sheet (prepared in accordance with the formats specified
in articles 2424 and 2424 bis of the Italian Civil Code), the Income Statement
(prepared in accordance with the formats specified in articles 2425 and 2425
bis of the Italian Civil Code) and these Explanatory Notes.
The Explanatory Notes are provided to illustrate, analyse and supplement the
data reported in the financial statements with the information required by
article 2427 of the Italian Civil Code, by other provisions of Legislative
Decree no. 127/1991, or by other laws; they also provide additional
information, even where not required by specific legislation, if deemed
necessary to present a true and fair view.
The Explanatory Notes also include information relating to holding companies
requested by the Italian Securities and Investment Board (CONSOB) in
communication no. 94001437 of 23 February 1994.
Accounting policies in the valuation of financial statement items, in value
adjustments and in translation of values not originally denominated in euros
The most significant accounting policies adopted for the financial statements
for the year to 31 December 2002, in compliance with article 2426 of the
Italian Civil Code, are as follows:
1) Intangible fixed assets
Intangible fixed assets are stated at purchase or production cost including
related accessory charges, and are amortised over their residual useful life.
Start-up and expansion costs and purchased goodwill are amortised over five and
ten years respectively. Intangible fixed assets are written down to reflect any
other than temporary impairment in value; their book value is reinstated in
subsequent years if the reasons for such writedowns no longer apply.
2) Tangible fixed assets and depreciation
Tangible fixed assets are stated at purchase or construction cost, which
includes financial charges incurred over the period of construction of the
asset, if this period is of significant duration, up to the time the asset
enters service. Assets are written down to reflect any other than temporary
impairment in value; the original value is reinstated in subsequent periods if
the reasons for such writedowns no longer exist. Ordinary depreciation is
provided on a straight-line basis using rates that reflect the residual useful
life of the assets concerned.
90 | Olivetti S.p.A. Financial Statements
The Company also provides accelerated depreciation for some categories of
assets in order to obtain the benefits deriving from deferred taxation, as
allowed by current tax legislation.
Ordinary maintenance costs are charged in full to income; costs incurred that
extend the useful life of assets are capitalised as part of the said assets and
depreciated over the remaining useful life thereof.
3) Equity investments and securities held as financial fixed assets
Equity investments held as fixed assets are stated at purchase cost (LIFO
method with annual layers), written down to reflect any other than temporary
impairment in value; their original value is reinstated in subsequent years if
the reasons for such writedowns no longer apply.
Securities held as fixed assets are valued at purchase cost (LIFO method with
annual layers), adjusted on an accrual basis for the difference between such
cost and the redemption value, written down to reflect any other than temporary
impairment in value; their original value is reinstated in subsequent years if
the reasons for such writedowns no longer apply.
4) Accounts receivable and payable
Accounts receivable are stated at estimated realisable value and classified
under financial fixed assets or current assets. Accounts payable are stated at
face value.
5) Equity investments and securities not held as financial fixed assets
Securities and equity investments in listed companies held as current assets
are valued at the lower of cost and market value, the latter being determined
on the basis of the stock market prices at the end of December; if the reasons
for writedowns no longer apply, the original value is reinstated in subsequent
years to the extent that it does not exceed the original cost.
Securities purchased through reverse repurchase agreements with an obligation
of resale on maturity are classified as financial assets not held as fixed
assets and stated at purchase cost.
Income and charges relating to such transactions are calculated taking into
account both the difference between the spot and forward prices and the income
generated by such assets over the duration of the operation and are recorded on
an accrual basis.
6) Accruals, prepayments and deferrals
Costs and income common to two or more financial years are recorded under this
heading to reflect the accrual accounting principle.
7) Reserves for risks and charges
Specific reserves are provided to cover known or likely losses or liabilities
of a given nature, the extent or timing of which are uncertain at the end of
the year; the provisions reflect, therefore, the best estimate based on the
information available.
8) Employee severance indemnities
This provision is formed in accordance with current legislation and labour
contracts and reflects the liability accrued to all employees at the
balance-sheet date.
91 | Olivetti S.p.A. Financial Statements
9) Revenues
Revenues from services are credited to income at the time the services are
provided.
10) Research and development
Interest-relief grants on financial charges accruing on research loans are
accounted on an accrual basis and credited directly to income for the year
against financial charges.
11) Exchange rate differences arising on transactions in foreign currency and
translation criteria for foreign currency items
Receivables and payables denominated in non-EMU currencies are originally
translated into euros by adopting the accounting rates at the date of the
respective transactions. Exchange rate differences arising at the time of
collection of receivables or settlement of payables in non-EMU currencies are
credited or charged to income.
Gains or losses on payables and receivables arising from application of the
exchange rates in force in December are credited or charged to income for the
year.
Total exchange rate differences are illustrated in the specific comment on
financial income and charges.
12) Forward currency transactions
As regards forward purchase or sale transactions of foreign currency at
pre-arranged exchange rates in respect of specific receivables and payables
expressed in foreign currency, i.e., in respect of a net exposure in foreign
currency, the difference between the exchange rate at the transaction date and
the prearranged forward exchange rate is charged to income for the duration of
the said transaction; furthermore, gains or losses arising from differences
between the spot exchange rate at the transaction date and the spot exchange
rate at the balance-sheet date are credited or charged to income, if gains or
losses in respect of the foreign-currency assets and liabilities to which the
transactions refer are also credited or charged to income.
Gains or losses arising from other forward purchases or sales of foreign
currency at pre-arranged exchange rates, determined by reference to the
comparable forward rates at the balance-sheet date, are credited or charged to
income.
13) Forward interest rate transactions
Interest rate differentials to be paid or received on interest rate swaps and
similar transactions accruing at the balance-sheet date are posted to income on
an accrual basis under financial income and charges. Considerations for options
acquired or sold in connection with forward interest rate transactions are
posted to income over the duration of the options.
14) Dividends
Dividend income and the relative tax credit from subsidiary companies are
entered on accrual, that is, in the year such income is formed; dividends from
other equity investments are recorded on collection.
92 | Olivetti S.p.A. Financial Statements
15) Capital gains from contributions in kind
Capital gains from corporate demergers and subsequent contributions are
classified as extraordinary income.
16) Value adjustments and provisions charged exclusively for tax purposes
Value adjustments and provisions charged exclusively for tax purposes,
comprising accelerated depreciation as allowed under specific tax laws and
writedowns on equity investments, are
carried in the respective income headings.
17) Income taxes
Current tax liabilities are provided, where applicable, as amounts due to tax
authorities, based on a reasonable estimate of taxation for the year. In
addition, in accordance with the tax liability method, deferred taxes or
prepaid taxes are recognised on all temporary differences between the book
values of assets and liabilities and their corresponding tax values, applying
tax rates expected in the periods in which the temporary differences will be
reversed.
The benefit of tax-loss carryforwards is recognised when a reasonable certainty
exists that future taxable income will be available against which such
carryforwards can be utilised, in accordance with current legislation.
18) Grouping of financial statement headings
The financial statements at 31 December 2002 do not include any groupings of
headings.
20) Exceptions allowed under paragraph 4, article 2423 of the Italian Civil
Code.
No exceptions were applied in the attached financial statements pursuant to
paragraph 4, art. 2423 of the Italian Civil Code.
93 | Olivetti S.p.A. Financial Statements
Comments on assets
B) Fixed assets
I. Intangible fixed assets
Net intangible fixed assets at 31 December 2002 amounted to 179.4 million euros
(249.7 million euros at 31 December 2001).
Net value at Amortisation Net value at
31.12.2001 New costs charges 31.12.2002
------------------------------------------------- ----------- ------- ----------- -----------
1) Start-up and expansion costs 81,096,623 - (30,600,392) 50,496,231
3) Industrial patents and intellectual property
rights 1,033 - (1,033) -
7) Other
Extraordinary maintenance and leasehold
improvements 3,197,051 171,833 (1,006,708) 2,362,176
Costs relating to the issue of bonds 85,100,888 - (17,385,222) 67,715,666
Costs relating to borrowings, sustained by
Tecnost S.p.A. (merged into
Olivetti in 2000) 80,327,011 - (21,532,049) 58,794,962
----------- ------- ----------- -----------
168,624,950 171,833 (39,923,979) 128,872,804
----------- ------- ----------- -----------
Total 249,722,606 171,833 (70,525,404) 179,369,035
================================================= =========== ======= =========== ===========
Start-up and expansion costs at 31 December 2002 amounted to 50.5 million euros
and included guarantee commissions connected with share capital increases.
These costs are amortised over five years.
Extraordinary maintenance and leasehold improvements included expenses incurred
for the renovation of the building provided on a free loan basis, as a
contribution in kind, to the "Associazione Interaction Design Institute" of
Ivrea; these costs are amortised over the term of contracts. Net value at 31
December 2002 was 2.4 million euros.
Costs relating to the issue of bonds and to borrowings amounted to 126.5
million euros at 31 December 2002 and referred to bonds issued in previous
years including bonds issued by Tecnost S.p.A. (merged with Olivetti in 2000).
94 | Olivetti S.p.A. Financial Statements
II. Tangible fixed assets
Breakdown of tangible fixed assets:
Net book % accum.
Accumulated value at depreciation Net book value
Cost depreciation 31.12.2002 at 31.12.2001 at 31.12.2001
--------------------------------------------------- ------------ ------------ ---------- ------------- --------------
1) Land and buildings - - - -
--------------------------------------------------- ------------ ------------ ---------- ------------- --------------
2) Plant and machinery
General plant 27,889 (13,943) 13,946 49.99 19,522
Electronic plant 5,328,678 (5,093,525) 235,153 95.59 1,045,180
Machinery and specific plant 6,196,874 (6,168,704) 28,170 99.55 39,519
--------------------------------------------------- ------------ ------------ ---------- ------------- --------------
11,553,441 (11,276,172) 277,269 97.60 1,104,221
--------------------------------------------------- ------------ ------------ ---------- ------------- --------------
3) Industrial and commercial equipment 10,267,336 (10,267,336) - 100.00 4,648
--------------------------------------------------- ------------ ------------ ---------- ------------- --------------
4) Other asset
Vehicles 214,498 (214,498) - 100.00 -
Furniture and fittings 3,059,026 (2,291,853) 767,173 74.92 1,065,708
--------------------------------------------------- ------------ ------------ ---------- ------------- --------------
3,273,524 (2,506,351) 767,173 76.56 1,065,708
--------------------------------------------------- ------------ ------------ ---------- ------------- --------------
5) Assets under construction and advance payments
Assets under construction 33,343 - 33,343 - 33,343
--------------------------------------------------- ------------ ------------ ---------- ------------- --------------
Total 25,127,644 (24,049,859) 1,077,785 95.71 2,207,920
=================================================== ============ ============ ========== ============= ==============
The gross value of tangible fixed assets changed as follows during 2002:
Disposals and
Cost at reclassifi- Cost at
31.12.2001 Additions cations 31.12.2002
------------------------------------------------------------------- ------------ ---------- ------------- --------------
1) Land and buildings - - - -
------------------------------------------------------------------- ------------ ---------- ------------- --------------
2) Plant and machinery
General plant 27,889 - - 27,889
Electronic plant 5,318,056 79,188 (68,566) 5,328,678
Machinery and specific plant 6,191,818 5,319 (263) 6,196,874
------------------------------------------------------------------- ------------ ---------- ------------- --------------
11,537,763 84,507 (68,829) 11,553,441
------------------------------------------------------------------- ------------ ---------- ------------- --------------
3) Industrial and commercial equipment 10,267,336 - - 10,267,336
------------------------------------------------------------------- ------------ ---------- ------------- --------------
4) Other assets
Vehicles 340,349 - (125,851) 214,498
Furniture and fittings 3,178,555 73,551 (193,080) 3,059,026
------------------------------------------------------------------- ------------ ---------- ------------- --------------
3,518,904 73,551 (318,931) 3,273,524
------------------------------------------------------------------- ------------ ---------- ------------- --------------
5) Assets under construction and advance payments
Assets under construction 33,343 - - 33,343
------------------------------------------------------------------- ------------ ---------- ------------- --------------
Total 25,357,346 158,058 (387,760) 25,127,644
=================================================================== ============ ========== ============= ==============
95 | Olivetti S.p.A. Financial Statements
Changes in accumulated depreciation for 2002 were as follows:
Accumulated Disposals and Accumulated
depreciatio Provision reclassifi- depreciation
Accumulated ordinary depreciation at 31.12.2001 for the year cations at 31.12.2002
------------------------------------------------------------------- ------------- ------------ ------------- -------------
1) Land and buildings - - - -
------------------------------------------------------------------- ------------- ------------ ------------- -------------
2) Plant and machinery
General plant 4,182 2,789 - 6,971
Electronic plant 2,590,665 453,087 (27,784) 3,015,968
Machinery and specific plant 5,559,316 9,043 (263) 5,568,096
------------------------------------------------------------------- ------------- ------------ ------------- -------------
8,154,163 464,919 (28,047) 8,591,035
------------------------------------------------------------------- ------------- ------------ ------------- -------------
3) Industrial and commercial equipment 6,913,294 3,099 - 6,916,393
------------------------------------------------------------------- ------------- ------------ ------------- -------------
4) Other assets
Vehicles 228,491 - (83,913) 144,578
Furniture and fittings 1,700,092 147,375 (102,153) 1,745,314
------------------------------------------------------------------- ------------- ------------ ------------- -------------
1,928,583 147,375 (186,066) 1,889,892
------------------------------------------------------------------- ------------- ------------ ------------- -------------
Total accumulated ordinary depreciation 16,996,040 615,393 (214,113) 17,397,320
------------------------------------------------------------------- ------------- ------------ ------------- -------------
Accumulated accelerated depreciation
------------------------------------------------------------------- ------------- ------------ ------------- -------------
1) Land and buildings - - - -
------------------------------------------------------------------- ------------- ------------ ------------- -------------
2) Plant and machinery
General plant 4,183 2,789 - 6,972
Electronic plant 1,682,153 420,209 (24,805) 2,077,557
Machinery and specific plant 593,043 7,565 - 600,608
------------------------------------------------------------------- ------------- ------------ ------------- -------------
2,279,379 430,563 (24,805) 2,685,137
------------------------------------------------------------------- ------------- ------------ ------------- -------------
3) Industrial and commercial equipment 3,349,394 1,549 - 3,350,943
------------------------------------------------------------------- ------------- ------------ ------------- -------------
4) Other assets
Vehicles 111,858 - (41,938) 69,920
Furniture and fittings 412,755 147,366 (13,582) 546,539
------------------------------------------------------------------- ------------- ------------ ------------- -------------
524,613 147,366 (55,520) 616,459
------------------------------------------------------------------- ------------- ------------ ------------- -------------
Total accumulated accelerated depreciation 6,153,386 579,478 (80,325) 6,652,539
------------------------------------------------------------------- ------------- ------------ ------------- -------------
Total accumulated depreciation 23,149,426 1,194,871 (294,438) 24,049,859
=================================================================== ============= ============ ============= =============
Ordinary depreciation was provided at rates deemed to reflect the residual
useful life of the tangible fixed assets in question.
96 | Olivetti S.p.A. Financial Statements
The rates applied, reduced by 50% for assets acquired during the year, were as
follows:
---------------------------------------- ------------
Plant and machinery 10% - 20%
Industrial and commercial equipment 20% - 40%
Other assets:
Electronic office machines 20%
Office furniture and fittings 12%
Motor vehicles 25%
---------------------------------------- ------------
At 31 December 2002 fixed assets were depreciated by 95.71%, compared with
91.29% at the end of 2001.
Accelerated depreciation for the year and previous years, charged in accordance
with current tax laws, was classified as a deduction of the relevant asset
items.
III. Financial fixed assets
Equity investments
Equity investments at 31 December 2002 totalled 22,887.5 million euros, a
decrease of 8,521.8 million euros from 31 December 2001, as analysed below:
Net book value
-------------------------------------------- ---------------
As of 31 December 2001 31,409,304,298
-------------------------------------------- ---------------
Acquisitions, capital subscriptions,
replenishment of losses and other
disbursements 224,595,924
Disposals (405,281,584)
Write-downs (8,341,081,271)
-------------------------------------------- ---------------
(8,521,766,931)
-------------------------------------------- ---------------
As of 31 December 2002 22,887,537,367
============================================ ===============
Changes were as follows:
o acquisitions of shares or quotas in the following companies for 67.3
million euros:
- 7.5 million euros Thema S.p.A.
- 14.9 million euros Mediobanca S.p.A.
- 44.6 million euros Tiglio I S.r.l.
- 0.3 million euros In.Tel. Audit S.c.r.l.
o share capital increases and other disbursements for 20.6 million euros
relating to:
- 20.0 million euros Olivetti Multiservices S.p.A.
- 0.5 million euros Eurofly Services S.p.A.
- 0.1 million euros OMS 2 S.r.l.
o replenishment of losses and capital increase for 136.7 million euros
relating to Olivetti Finance N.V.;
97 | Olivetti S.p.A. Financial Statements
o disposals of equity investments in the following companies for 405.3
million euros:
- 150.2 million euros OMS 2 S.r.l.
- 192.0 million euros SEAT Pagine Gialle S.p.A.
- 49.1 million euros Webegg S.p.A.
- 14.0 million euros Tredicimarzo S.r.l.
o writedowns totalling 8,341.1 million euros on the following equity
investments:
- 106.4 million euros Olivetti Tecnost S.p.A.
- 183.6 million euros Olivetti Finance N.V.
- 8,051.1 million euros Telecom Italia S.p.A.
During the year the OMS 2 s.r.l. company was formed and the real-estate assets
of Multiservices S.p.A. were transferred to the new company under Project
Tiglio. OMS 2 s.r.l. was subsequently sold to Tiglio I generating a capital
gain of 71.9 million euros.
The equity investment in Telecom Italia S.p.A. during the year 2002 was written
down by approximately 8,051 million euros, in compliance with current tax
regulations, for tax benefit purposes only.
Likewise, during 1999 the same investment in Telecom Italia and that in
Olivetti International were written down by 2,166 million euros. The Company
collected, during 2002, from Telecom Italia S.p.A. dividends amounting to
approximately 832 million euros (392 million of which in December) deriving
from the distribution of income reserves formed prior to the acquisition of
Telecom Italia. Such dividends were credited to income and not considered as a
reduction of the equity investment.
Subsequently, as a result of the afore-mentioned writedowns, the higher equity
investment would be considered reduced from 10,217 million euros to 9,385
million euros as the writedown applied in 1999, in compliance with tax
regulations, can be considered partially reduced by the amount of the dividends
themselves.
If all the above-mentioned operations would have not been effected, the net
shareholders' equity at 31 December 2002 would have shown an increase of
approximately 8,217 million euros (net of the relevant tax effect equal to
about 1,168 million euros) and the financial years' net result would have shown
an improvement of approximately 6,300 million euros (net of the relevant tax
effect equal to about 919 million euros).
98 | Olivetti S.p.A. Financial Statements
The breakdown of the opening balances for equity investments classified as
financial fixed assets was as follows:
Replenishments
Shares/quotas Losses and and value Book value at
at 31.12.2001 Original cost write-downs restorations 31.12.2001
------------------------------------------ -------------- -------------- -------------- ------------ -------------
Subsidiary companies
Finsiel S.p.A 18,320 429,486 429,486
Global Gaming Investments S.p.A
in winding-up 1,300,000 1,396,896 (96,896) 1,300,000
Olivetti International S.A 3,999,998 442,739,664 (778,241,328) 756,428,121 420,926,457
Olivetti Multiservices S.p.A 33,131,900 176,156,192 (9,174,314) - 166,981,878
Olivetti Finance N.V 46,905,660 46,905,655 - - 46,905,655
Olivetti Finanziaria Industriale S.p.A 35,000,000 78,939,697 (27,556,568) (16,274,462) 35,108,667
Olivetti Tecnost S.p.A 273,000,000 538,912,186 (266,801,172) (64,100,000) 208,011,014
Seat P.G. S.p.A 159,614,304 192,016,008 192,016,008
Telecom Italia S.p.A 2,850,255,432 32,206,376,093 (2,065,827,596) - 30,140,548,497
Webegg S.p.A 6,621,432 49,049,050 - - 49,049,050
========================================== ============== ============== ============== =========== ==============
Total subsidiary companies 33,732,920,927 (3,147,697,874) 676,053,659) 31,261,276,712
------------------------------------------ -------------- -------------- -------------- ----------- --------------
Associated companies
IN.VA. S.p.A 400,000 206,583 (44,817) - 161,766
Consorzio per il Distretto
Tecnologico del Canavese 225 117,752 - - 117,752
-------------- -------------- -------------- ----------- --------------
324,335 (44,817) 279,518
Other 16,009
========================================== ============== ============== ============== =========== ==============
Total associated companies 295,527
------------------------------------------ -------------- -------------- -------------- ----------- --------------
Other investments
Consortium S.r.l 12,768,512 19,527,217 19,527,217
Eurofly Service S.p.A 387,915 482,006 (1,064,845) 787,700 204,861
Fin - Priv. S.r.l 22,877 15,375,273 - - 15,375,273
Mediobanca S.p.A 12,837,000 98,255,610 98,255,610
Tredicimarzo 1 14,001,000 14,001,000
-------------- -------------- -------------- ----------- --------------
147,641,106 (1,064,845) 787,700) 147,363,961
Other 368,098
------------------------------------------ -------------- -------------- -------------- ----------- --------------
Total other 147,732,059
------------------------------------------ -------------- -------------- -------------- ----------- --------------
Total 31,409,304,298
========================================== ============== ============== ============== =========== ==============
99 | Olivetti S.p.A. Financial Statements
The changes in equity investments during 2002 are analysed below:
Book value
at 31.12.2001 Acquisitions, subscriptions and replenishments
Equity investments Shares/quotas Amounts Shares/quotas Amounts
--------------------------------------------------- ------------------------------- ---------------------------------------
Subsidiary companies
Italian listed companies
------------------------
Telecom Italia S.p.A 2,850,255,432 30,140,548,497
Seat P.G. S.p.A 159,614,304 192,016,008
Foreign unlisted companies
--------------------------
Olivetti International, S.A 3,999,998 420,926,457
Olivetti Finance N.V 46,905,660 46,905,655 136,714,803
Italian unlisted companies
--------------------------
Olivetti Multiservices S.p.A 33,131,900 166,981,878 20,000,000
OMS2 S.r.l 115,000
Finsiel S.p.A 18,320 429,486
Olivetti Tecnost S.p.A 273,000,000 208,011,014
Webegg S.p.A 6,621,432 49,049,050
Olivetti Finanziaria Industriale S.p.A 35,000,000 35,108,667
Global Gaming Investments S.p.A. in winding-up 1,300,000 1,300,000
Thema S.p.A 1,300,000 7,516,272
In.Tel.Audit.Scrl 250,000 250,000
Total subsidiary companies 31,261,276,712 164,596,075
--------------------------------------------------- -------------- -------------- ------------- -------------
Associated companies
Italian unlisted companies
--------------------------
IN.VA., S.p.A 400,000 161,766
OCN Trading S.r.l. (in winding-up) 32,000 516
Consorzio per il Distretto Tecnologico del Canavese 225 117,752
EO consorzio (in winding-up) 6 15,493
Tiglio I S.r.l 456,964 44,640,200
Total associated companies 295,527 44,640,200
--------------------------------------------------- -------------- -------------- -------------- --------------
Other investments
Consortium S.r.l 12,768,912 19,527,217
Eurofly Service, S.p.A 387,915 204,861 954,868 496,531
Fin - Priv. S.r.l 2,857 15,375,273
Mediobanca S.p.A 12,837,000 98,255,610 1,281,350 14,863,118
Tredicimarzo S.r.l 1 14,001,000
Societa diverse 368,098
Total other investments 147,732,059 15,359,649
--------------------------------------------------- -------------- -------------- -------------- --------------
Total 31,409,304,298 224,595,924
=================================================== ============== ============== ============== ==============
100 | Olivetti S.p.A. Financial Statements
Book value
Disposals, demergers and reclassifications Writedowns and at 31.12.2002
Shares/quotas Amounts value restorations Shares/quotas Amounts
------------------------------------------ ------------------ -----------------------------------------
(8,051,068,899) 2,850,255,432 22,089,479,598
159,614,304 (192,016,008)
3,999,998 420,926,457
(183,620,458) 46,905,660
2,131,900 (150,100,010) 31,000,000 36,881,868
(115,000)
18,320 429,486
(106,391,914) 273,000,000 101,619,100
6,621,432 (49,049,050)
35,000,000 35,108,667
1,300,000 1,300,000
1,300,000 7,516,272
250,000 250,000
(391,280,068) (8,341,081,271) 22,693,511,448
======================================= ================== =========================================
400,000 161,766
32,000 516
225 117,752
6 15,493
456,964 44,640,200
44,935,727
------------------------------------------ ------------------ -----------------------------------------
12,768,912 19,527,217
1,342,783 701,392
2,857 15,375,273
14,118,350 113,118,728
1 (14,001,000)
(516) 367,582
(14,001,516) 149,090,192
--------------------------------------- ------------------ -----------------------------------------
(405,281,584) (8,341,081,271) 22,887,537,367
======================================= ================== =========================================
101 | Olivetti S.p.A. Financial Statements
Pro-quota (*)
Share capital Shareholders' Net income Shares/quotas % shareholders'
(amounts in euros) par value equity (loss) owned owned equity Book value
---------------------------- ------------ ------------ --------------- --------------- ------- -------------- --------------
Subsidiary companies
Italian listed companies
Telecom Italia S.p.A. 4,023,816,861 10,955,270,523 (1,645,375,512) 2,850,255,432 38.96(**) 4,268,173,396 22,089,479,598
Foreign unlisted companies
Olivetti International S.A 500,000,000 373,933,790 (64,510,649) 3,999,998 100.00 373,933,603 420,926,457
Olivetti Finance N.V 46,905,660 (24,542,346) (71,448,006) 46,905,660 100.00 (24,542,346) -
Italian unlisted companies
Finsiel S.p.A. 59,982,385 206,170,000 37,110,000 18,320 1.58 (o) 3,252,352 429,486
In.Tel.Audit Scrl 2,750,000 2,750,000 - 250,000 9.09 (o) 250,000 250,000
Global Gaming Investments
S.p.A. in winding-up 1,300,000 977,833 (41,661) 1,300,000 100.00 977,833 1,300,000
Olivetti Multiservices S.p.A. 31,000,000 42,024,680 9,202,848 31,000,000 100.00 42,024,680 36,881,868
Olivetti Finanziaria
Industriale S.p.A. 35,000,000 1,662,422 36,992,084 35,000,000 100.00 1,662,422 35,108,667
Olivetti Tecnost S.p.A. 273,000,000 160,654,511 (132,708,904) 273,000,000 100.00 160,654,512 101,619,100
Thema S.p.A. 1,300,000 7,673,513 671,029 1,300,000 100.00 7,673,513 7,516,272
Total subsidiary companies 4,834,059,965 22,693,511,448
---------------------------- ------------ ------------ --------------- --------------- ------- -------------- --------------
Associated companies
Italian unlisted companies
IN:VA S.p.A. 520,000 935,773 238,401 400,000 40.00 374,309 161,766
OCN Trading S.r.l..
(in winding-up) (***) 80,000,000 30,948 (650) 32,000 40.00 12,379 516
Tiglio I S.r.l. 5,255,704 497,444,772 (7,288,762) 456,964 8.85 465,130 44,640,200
Cons. Distret. Tecn. Canavese 472,558 368,673 (452,846) 225 24.59 90,657 117,752
Other companies 15,494 15,494
Total associated companies 957,969 44,935,728
---------------------------- ------------ ------------ --------------- --------------- ------- -------------- --------------
Other investments
Consortium S.r.l. 561,600,000 664,414,186 37,193,625 12,768,912 2.27 15,106,564 19,527,217
Fin - Priv. S.r.l. 20,000 98,155,330 2,778,391 2,857 14.28 14,011,673 15,375,273
Mediobanca S.p.A. 389,262,457 3,695,702,984 117,646,087 14,118,350 1.81 64,902,808 113,118,728
Other investments 49,859,779 1,068,973
Total other investments 143,880,824 149,090,191
---------------------------- ------------ ------------ --------------- --------------- ------- -------------- --------------
TOTAL EQUITY INVESTMENTS 4,978,898,758 22,887,537,367
============================ ============ ============ =============== =============== ======= ============== ==============
(*) Pro-quota net equity, after distribution of dividends
(**) 39.52% (54.94% of the voting rights) taking account of the shares
classified as current assets.
(o) Controlled indirectly through Telecom Italia S.p.A.
(***) The share capital is denominated in Italian Lira
102 | Olivetti S.p.A. Financial Statements
A comparison of the book values of equity investments in subsidiary companies
and the corresponding portions of shareholders' equity adjusted for
consolidation purposes shows aggregate equity investment book value to be
18,845.3 million euros higher than aggregate shareholders' equity portions:
Portion of net equity
as adjusted for con-
Book value solidation purposes
of equity attributable to the
investments Parent Company Differences
(in millions of euros) (a) (b) (a-b)
---------------------------------------------------------------------------- ----------- --------------------- -----------
Equity investments the book values of which are lower than the pro-quota net
equity of the relevant subsidiaries, as adjusted for consolidation purposes:
Olivetti Multiservices S.p.A. 36.9 44.3 (7.4)
Olivetti Finanziaria Industriale S.p.A. 35.1 37.0 (1.9)
Thema S.p.A. 7.5 7.7 (0.2)
----------- --------------------- -----------
79.5 89.0 (9.5)
Equity investments the book values of which are higher than the pro-quota net
equity of the relevant subsidiaries, as adjusted for consolidation purposes:
Telecom Italia S.p.A. 22,089.5 3,345.4 18,744.1
Olivetti International S.A. 420.9 373.9 47.0
Olivetti Finance N.V. - (24.3) 24.3
Olivetti Tecnost S.p.A. 101.6 62.5 39.1
Global Gaming Investments S.p.A. (in winding-up) 1.3 1.0 0.3
----------- --------------------- -----------
22,613.3 3,758.5 18,854.8
---------------------------------------------------------------------------- ----------- --------------------- -----------
22,692.8 3,847.5 18,845.3
============================================================================ =========== ===================== ===========
The difference between the book value of the Telecom Italia S.p.A. equity
investment and the corresponding portion of shareholders' equity adjusted for
consolidation purposes (18,744.1 million euros) is 6,363.7 million euros lower
than the difference in 2001. This is due to the writedown of 8,051.1 million
euros applied purely for fiscal purposes pursuant to article 2426 par 2 of the
Italian Civil Code, offset by the effect of the dividends distributed during
the year.
The liabilities arising from the risk of uncollectibility of the higher amount
of the other investments (110.7 million euros) are included in the reserve for
risks and charges.
103 | Olivetti S.p.A. Financial Statements
Receivables
This heading includes both short-term and medium/long-term financial
receivables:
31.12.2002 31.12.2001 Changes
------------------------------------------------------------------ ---------- ---------- ---------
Amounts due within 12 months
Current portions of subsidized loans relating to:
Subsidiary companies - 18,201 (18,201)
Associated companies - 61,397 (61,397)
Other companies - 64,242 (64,242)
Getronics Solutions Italia S.p.A. 974,880 3,620,238 (2,645,358)
Interest relief grants Law 346/1988 8,049,356 9,826,085 (1,776,729)
------------------------------------------------------------------ ---------- ---------- ---------
Total amounts due within 12 months 9,024,236 13,590,163 (4,565,927)
------------------------------------------------------------------ ---------- ---------- ---------
Amounts due after 12 months
Portions of subsidized loans relating to subsidiary companies
Olivetti I-Jet S.p.A. - 18,201 (18,201)
less: current portions - (18,201) 18,201
------------------------------------------------------------------ ---------- ---------- ---------
Total amounts due from subsidiary companies after 12 months - - -
------------------------------------------------------------------ ---------- ---------- ---------
Associated companies
Tiglio I S.r.l. 15,784,320 - 15,784,320
Istituto RTM S.p.A. 95,535 95,535 -
Baltea S.r.l. - 61,396 (61,396)
less: current portions - (61,396) 61,396
------------------------------------------------------------------ ---------- ---------- ---------
Total amounts due from associated companies after 12 months 15,879,855 95,535 15,784,320
------------------------------------------------------------------ ---------- ---------- ---------
Portions of subsidized loans relating to other parties
o Nortel Italia S.p.A. - 64,242 (64,242)
o Consorzio per il Distretto Tecnologico del Canavese 226,760 358,811 (132,051)
less: current portions - (64,242) 64,242
Due from tax authorities for advancess on severance indemnities 877,182 989,117 (111,935)
Due from Allen Bradley 56,294 56,294 -
Restricted deposit in favour of Getronics (ex Wang Lab.) 40,544,599 46,487,558 (5,942,959)
Cash guarantee deposits 12,476,307 13,436,685 (960,378)
------------------------------------------------------------------ ---------- ---------- ---------
Total amounts due from others after 12 months 54,181,142 61,328,465 (7,147,323)
------------------------------------------------------------------ ---------- ---------- ---------
Total amounts due after 12 months 70,060,997 61,424,000 8,636,997
================================================================== ========== ========== =========
The 4.6 million euros decrease in receivables due within 12 months from third
parties compared with 31 December 2001 (13.6 million euros) was largely due to
collection of receivables from Getronics Solutions Italia S.p.A. (2.6 million
euros) and receivables for grants pursuant to Law 346/1998 (1.8 million euros).
Amounts due after 12 months totalled 70.1 million euros (61.4 million euros at
31 December 2001) and related in the main to a long-term loan granted to Tiglio
I S.r.l. (15.8 million euros) due in December 2009 and an interest-bearing
restricted deposit (40.5 million dollars at 31 December 2002), established with
a leading bank to guarantee cover for any residual liabilities, in favour of
Getronics (formerly Wang Laboratories).
104 | Olivetti S.p.A. Financial Statements
A currency hedging contract was arranged on the deposit through a forward sale
of dollars against euros. It totalled 40.5 million euros at 31 December 2002.
Treasury stock
At 31 December 2002 the Parent Company held 2,697,500 own ordinary shares
(formerly savings shares converted into ordinary shares in 2000), including
shares acquired from employees, for a par value, following the re-denomination
of share capital in euros, of 2.7 million euros, and recorded at cost at 2.3
million euros; a special restricted reserve is carried under shareholders'
equity for the same amount.
105 | Olivetti S.p.A. Financial Statements
C) Current assets
II. Receivables
Receivables due within 12 months
31.12.2002 31.12.2001 Changes
----------------------------------------------------------------------------- ------------- ----------- ------------
Due from third parties
Customers 2,351,995 2,724,938 (372,943)
Trade notes receivables 58,876 98,127 (39,251)
------------- ----------- ------------
2,410,871 2,823,065 (412,194)
less: allowance for doubtful accounts (1,413,174) (1,601,003) 187,829
------------- ----------- ------------
997,697 1,222,062 (224,365)
----------------------------------------------------------------------------- ------------- ----------- ------------
Due from subsidiary companies
For supplies and other 5,711,280 2,533,042 3,178,238
Due from Telecom Italia S.p.A.. for VAT 213,916,627 - 213,916,627
Due from Olivetti Group for VAT 3,663,006 - 3,663,006
Due from Tim and Seat PG for assignments of
receivables due from tax authorities 81,364,338 - 81,364,338
Due from Olivetti Finance N.V. - 6,944,280 (6,944,280)
Telecom Italia dividends as accrued - 46,459,164 (46,459,164)
Multiservices dividends as accrued 8,742,000 - 8,742,000
------------- ----------- ------------
313,397,251 55,936,486 257,460,765
Interest bearing current accounts:
- Financing to Olivetti Tecnost S.p.A. 150,000,000 - 150,000,000
- Financing to Olivetti Multiservices S.p.A. - 20,000,000 (20,000,000)
- Alladium S.p.A. 192,521 - 192,521
- Olivetti Multiservices S.p.A. 10,216,089 - 10,216,089
- Est S.p.A. 867,841 319,268 548,573
- Olivetti Finance N.V. - 400,946 (400,946)
- Domustech S.p.A. 1,105,029 667,312 437,717
- GotoWeb S.p.A. 1,071,966 1,669,194 (597,228)
- Olivetti Tecnost S.p.A. 10,653,136 50,761,332 (40,108,196)
- Tecnost Sistemi S.p.A. 4,900,492 - (4,900,492)
- OliWeb S.p.A. - 872,369 (872,369)
- Tiemme Sistemi S.p.A. 4,717,352 4,823,367 (106,015)
- Other subsidiary companies - 14,441 (14,441)
------------- ----------- ------------
183,724,426 79,528,229 104,196,197
----------------------------------------------------------------------------- ------------- ----------- ------------
497,121,677 135,464,715 361,656,962
----------------------------------------------------------------------------- ------------- ----------- ------------
Due from associated companies
for supplies and other 53,456 45,627 7,829
interest bearing current accounts 89,429 85,576 3,853
----------------------------------------------------------------------------- ------------- ----------- ------------
142,885 131,203 11,682
----------------------------------------------------------------------------- ------------- ----------- ------------
Due from others
Withholdings and amounts due from tax authorities 753,276,839 548,030,314 205,246,525
VAT and other amounts due from public authorities 11,114,579 47,027,839 (35,913,260)
Due from employees 176,517 139,486 37,031
Prepaid taxes 4,917,465 26,133,279 (21,215,814)
Due from Getronics 1,606,157 1,606,157 -
Amounts due from insurance companies 119,854 18,281,065 (18,161,211)
Receivables acquired from TechnoProduzioni S.p.A. 1,262,471 1,262,471 -
Due from Ixtant (settlement of grants accrued by Modinform) - 37,222 (37,222)
Receivables acquired from Getronics S.p.A.. and O.i.S Group 60,979,538 67,003,111 (6,023,573)
Other 29,466,411 19,407,365 10,059,046
less: allowance for doubtful accounts (30,084,069) (35,172,926) 5,088,857
832,835,762 693,755,383 139,080,379
Loans and interest bearing current accounts 2,789,317 6,882,372 (4,093,055)
----------------------------------------------------------------------------- ------------- ----------- ------------
835,625,079 700,637,755 134,987,324
----------------------------------------------------------------------------- ------------- ----------- ------------
Total receivables due within 12 months 1,333,887,338 837,455,735 496,431,603
----------------------------------------------------------------------------- ------------- ----------- ------------
Summary of receivables due within 12 months
Total receivables for suppliers and others
Third parties 833,833,459 694,977,445 138,856,014
Group 313,450,707 55,982,113 257,468,594
----------------------------------------------------------------------------- ------------- ----------- ------------
1,147,284,166 750,959,558 396,324,608
----------------------------------------------------------------------------- ------------- ----------- ------------
Total financial receivables
Third parties 2,789,317 6,882,372 (4,093,055)
Group 183,813,855 79,613,805 104,200,050
----------------------------------------------------------------------------- ------------- ----------- ------------
186,603,172 86,496,177 100,106,995
----------------------------------------------------------------------------- ------------- ----------- ------------
Total 1,333,887,338 837,455,735 496,431,603
============================================================================= ============= =========== ============
106 | Olivetti S.p.A. Financial Statements
Receivables due within 12 months amounted to 1,333.9 million euros, a net
increase of 496.4 million euros compared with 31 December 2001.
The change arose largely as a result of an increase in receivables due from
subsidiaries (81.4 million euros) in respect of ceded tax credits, an increase
in financial receivables due from subsidiaries (104.2 million euros) and an
increase in amounts due from tax authorities (205.2 million euros) mainly in
connection with tax credits on dividends.
With the participation of Telecom Italia S.p.A. to the Group VAT system in
2002, Olivetti S.p.A. also had a receivable of 213.9 million euros due from
Telecom Italia S.p.A. for VAT payables.
These higher receivables were offset by decreases in amounts due from accrued
dividends (37.7 million euros), related tax credits (21.2 million euros) and
amounts due from insurance companies (18.2 million euros).
Receivables due after 12 months
The balance on this heading at 31 December 2002 was 609 million euros and
referred entirely to prepaid taxes arising largely from the allocation on five
years of the tax benefit on the Telecom Italia S.p.A. investment writedown
(8,051.1 million euros).
III. Financial assets not held as fixed assets
Other equity investments
These assets amounted to 2.7 million euros at 31 December 2002, and referred to
equity investments acquiring for trading purposes in:
o Biesse S.p.A. 0.6 million euros;
o Datalogic S.p.A. 2.1 million euros;
The decrease of 4.5 million euros compared with 31 December 2001 was largely
due to the sale of the equity investment in Lottomatica S.p.A. (3.3 million
euros).
Miscellaneous securities
31.12.2002 31.12.2001 Changes Market value
--------------------------------- ----------- ---------- ----------- ------------
Treasury Certificates (C.C.T.) 31,559,665 46,716,156 (15,156,491) 31,488,810
Long Term Treasury Bonds (B.T.P.) 15,981,202 19,612,447 (3,631,245) 16,779,455
Corporate Bonds -- 1,032,914 (1,032,914) --
Shares 299,331,037 -- 299,331,037 299,331,037
--------------------------------- ----------- ---------- ----------- -----------
Total 346,871,904 67,361,517 279,510,387 347,599,302
================================= =========== ========== =========== ===========
The amount of 299.3 million euros of shares refers to no. 41,401,250 Telecom
Italia ordinary shares purchased during the year 2002 from Olivetti Finance
N.V. and valued at euro 7,23 per share, corresponding to the stock price on the
last day of trading in December.
107 | Olivetti S.p.A. Financial Statements
Receivables for securities held under reverse repurchase agreements
This heading reflects the purchase cost of securities acquired under agreements
to resell the securities at a pre-arranged date and price.
Income and charges relating to these transactions are computed in respect of
the difference between the agreed spot and forward prices and recognised on an
accrual basis, under other financial income or charges.
31.12.2002 31.12.2001 Changes
--------------------------------------- ---------- ---------- -------
Treasury Certificates (C.C.T.) 961,066 -- 961,066
Long Term Treasury Bonds (B.T.P.) -- 911,312 (911,312)
--------------------------------------- ---------- ---------- -------
Total 961,066 911,312 49,754
======================================= ========== ========== =======
D) Accrued income and prepaid expenses
31.12.2002 31.12.2001 Changes
----------------------------------------------- ----------- ----------- ----------
Accrued income
Due within 12 months
Interest income
from third parties 3,019,953 1,898,916 1,121,037
from associated companies -- 1,169 (1,169)
from subsidiary companies -- 346 (346)
Interest relief grants 2,491,939 3,807,848 (1,315,909)
----------- ----------- ----------
Total accrued income within 12 months 5,511,892 5,708,279 (196,387)
Due after 12 months
from third parties -- 11,449,758 (11,449,758)
----------------------------------------------- ----------- ----------- ----------
Total accrued income 5,511,892 17,158,037 (11,646,145)
----------------------------------------------- ----------- ----------- ----------
Prepaid expenses
Due within 12 months
Financial charges to third parties - - -
Insurance premiums and other costs to:
third parties 3,329,179 2,259,725 1,069,454
subsidiary companies - - -
----------- ----------- ----------
Total prepaid expenses due within 12 months 3,329,179 2,259,725 1,069,454
Due after 12 months
Financial charges from third parties 405,236,656 483,572,416 (78,335,760)
----------------------------------------------- ----------- ----------- ----------
Total prepaid expenses 408,565,835 485,832,141 (77,266,306)
----------------------------------------------- ----------- ----------- ----------
Total 414,077,727 502,990,178 (88,912,451)
=============================================== =========== =========== ==========
Prepaid expenses in respect of financial charges (405.2 million euros) consist
mainly of future-year portions of the redemption premium on the convertible
bonds issued in 2001.
108 | Olivetti S.p.A. Financial Statements
Comments on liabilities and shareholders' equity
A) Shareholders' equity
I. Share capital
The share capital of Olivetti S.p.A. at 31 December 2002, fully subscribed,
paid-up and filed with the Companies Register, was represented by 8,845,239,632
ordinary shares with a par value of 1 euro each (8,783,701,564 ordinary shares
at 31 December 2001) for an aggregate value of 8,845,239,632 euros
(8,783,701,564 euros at 31 December 2001).
The following operations determined the net increase of 61,538,068 euros during
2002:
o share capital increases subscribed by 31 December 2001 for an aggregate
amount of 839,593 euros through the issuance of 839,593 ordinary shares
filed with the Companies Register in 2002, in accordance with article 2444
of the Italian Civil Code, as follows:
- share capital increase of 780,895 euros par value through the
issuance of 780,895 ordinary shares, following conversion of a
similar number of "Olivetti floating rate 1998-2002" bonds;
- share capital increase of 52,575 euros par value through the issuance
of 52,575 ordinary shares following exercise of a similar number of
"Olivetti 1998-2002 ordinary share warrants";
- share capital increase of 6,123 euros par value through the issuance
of 6,123 ordinary shares, following exercise of 12,246 "Olivetti
2001-2002 share warrants";
o share capital increases for 26,954 euros par value through the issuance of
26,954 ordinary shares following exercise in December 2001 of 21,033
"Olivetti 1998-2002 ordinary share warrants" and 11,842 "Olivetti
2001-2002 share warrants" in respect of which the corresponding shares had
not yet been issued at 31 December 2001;
o share capital increases for 28,797,733 euros par value through the
issuance of 28,797,733 ordinary shares following conversion of a similar
number of "Olivetti floating-rate 1998-2002" bonds with a par value of
1,000 Italian each (equivalent to 0.5165 euro), after utilisation of
13,924,945 euros from the "Reserve tied to conversion of Olivetti floating
rate 1998-2002 bonds" formed following re-denomination of share capital in
euros;
o share capital increases for 22,831,828 euros par value through the
issuance of 22,831,828 ordinary shares following exercise of a similar
number of "Olivetti 1998-2002 ordinary share warrants"; the shares were
issued:
- for 11,791,655 euros against payment of 0.5165 euros (equivalent to
1,000 Italian lire) per share;
- for 11,040,173 euros on a free basis through use of the "Reserve tied
to exercise of Olivetti 1998-2002 ordinary share warrants" formed
following re-denomination of share capital in euros;
o share capital increases for 134,430 euros par value (in addition to a
share premium of 215,088 euros) through the issuance of 134,430 ordinary
shares following conversion of a similar number of "Olivetti 1.5%
2001-2004 convertible bonds with redemption premium";
o share capital increases for an aggregate amount of 5,654,982 euros par
value through the issuance at par of 5,654,982 ordinary shares reserved
for managers of the Parent Company and its subsidiaries following exercise
of a similar number of "Olivetti 1999-2001 share warrants";
109 | Olivetti S.p.A. Financial Statements
o share capital increases for 2,688 euros par value (in addition to a share
premium of 8,114 euros) through the issuance of 2,688 ordinary shares
following exercise of 2,400 "Olivetti ex Tecnost 1999-2004 warrants" on an
exchange basis of 1.12 Olivetti shares per warrant; the issuance was
effected:
- for 620 euros against payment;
- for 2,068 euros on a free basis through use of the "Reserve tied to
exercise of ex Tecnost 1999-2004 warrants" formed following
re-denomination of Tecnost S.p.A. share capital in euros;
o share capital increases for 20,460 euros par value (in addition to a share
premium of 17,739 euros) through the issuance of 20,460 ordinary shares
following exercise of 40,920 "Olivetti 2001-2002 ordinary share warrants";
o share capital increases for 3,229,400 euros par value through the issuance
at par of 3,229,400 ordinary shares following conversion of a similar
number of "Olivetti 1.5% 2001-2010 convertible bonds with redemption
premium".
Future potential changes in share capital
The following were still outstanding at 31 December 2002:
- 137,355,625 "Olivetti ex Tecnost 1999-2004 warrants" for subscription of
153,838,300 Olivetti ordinary shares (at a rate of 1.12 Olivetti shares
for each warrant exercised) at the originally planned price per share of
2.80 euros with a 15% annual increment, for the period between 20 August
1999 and the execution date of the respective applications; the price
therefore ranges (following adjustment in respect of the share capital
increases executed in 2001) from 3.780 euros in the case of warrants
exercised in January 2003 to 4.626 euros in relation to warrants that will
be exercised in June 2004.
Consequently, should all warrants outstanding at 31 December 2002 be exercised,
the aggregate value of the share capital increase, including the share premium,
would vary from a minimum of 581,508,774 euros (January 2003) to a maximum of
711,655,976 euros (June 2004), with an additional amount of 118,369,170 euros
from utilisation of pre-established free share capital increase reserves;
- 487,409,258 "Olivetti 1.5% 2001-2004 convertible bonds with redemption
premium" net of 2,618 bonds for which applications for conversion into
shares had been received at 31 December 2002, thus reducing the value of
outstanding bonds with counter-item represented by a payable due to future
shareholders (the corresponding shares were issued on 15 January 2003). A
total of 487,409,258 Olivetti ordinary shares could still be issued in
respect of the outstanding bonds, for an aggregate par value of
487,409,258 euros (plus a share premium of 779,854,813 euros);
- 2,409,663,062 "Olivetti 1.5% 2001-2010 convertible bonds with redemption
premium" net of 14,210 bonds for which applications for conversion into
shares had been received at 31 December 2002, thus reducing the value of
outstanding bonds with counter-item represented by a payable due to future
shareholders (the corresponding shares were issued on 15 January 2003). A
total of 2,409,663,062 Olivetti shares could still be issued at par in
respect of the outstanding bonds for an aggregate par value of
2,409,663,062 euros.
The Board of Directors' meeting of 24 February 2000 implemented the proxy
granted pursuant to art. 2443 of the Italian Civil Code by the Extraordinary
Shareholders' Meeting of 7 April 1999 to carry a resolution for a Three-Year
Stock Option Plan from 1 January 2002 to 31 December 2004, assigning to
approximately one hundred managers of the Parent Company and its subsidiaries
29,500,000 free war-
110 | Olivetti S.p.A. Financial Statements
rants for subscription of an equal number of Olivetti ordinary shares at a
price of 3.308 euros per share (after adjustment for the share capital
increases of 2001) corresponding to the fair value of Olivetti ordinary shares
at the date of the Board of Directors' meeting.
The stock options were to have been exercised in three groups in the period
between 2 November and 15 December of 2002, 2003 and 2004 and could be
accumulated until the end of the Plan. Subsequently, the Board of Directors'
meeting of 9 February 2001 passed a resolution to reverse the previous
resolution of 24 February 2000 and to raise share capital by an aggregate
amount of 29 million euros through issue of 29 million shares at a subscription
price of 2.515 euros per share (after adjustment for the share capital
increases of 2001). The shares are reserved for managers of the Parent Company
and its subsidiaries and service the warrants to be assigned to such managers
under the "February 2002 - December 2004 Three-Year Stock Option Plan", with no
changes to terms and conditions applying to stock options already assigned to
managers on the payroll as of 24 February 2000 who had since left the Group's
employ (a total of 1,330,000 rights).
Proxies assigned to Directors
The Extraordinary Shareholders' Meeting held on 7 April 1999 granted the
following powers to the Directors, pursuant to arts. 2443 and 2420 ter of the
Italian Civil Code, for a period of five years as from the date of the
resolution:
a) to increase share capital in one or more tranches, for a maximum par value
of 5 thousand billion Italian lire (2,582.3 million euros), on a free
and/or payment basis, with or without share premium, through the issuance
of ordinary shares and/or shares serviced with various rights, with the
same characteristics as the outstanding shares, to be assigned or offered
to parties with entitlement thereto, giving the Directors the right to
establish, case by case, the categories of the shares, the issue price
thereof, the dividend due date, the appropriation of share capital
increase to service the conversion of bonds including bonds issued by
third parties, both in Italy and abroad, and/or warrants, as well as the
right to appropriate the increase or the increases (within the time limits
set forth in art. 134 of Legislative Decree no. 58/1998), also via
options, warrants, or similar rights, to employees of the Company, its
controlling company and its subsidiary companies;
b) to issue bonds, in one or more tranches, and/or bonds convertible into
ordinary shares and/or serviced with various rights, with the same
characteristics as the outstanding bonds, with or without warrants, also
issued in foreign currency, to be offered with pre-emptive rights to
parties with entitlement thereto, for a maximum amount of 8 thousand
billion Italian lire (4,131.7 million euros), within the limits permitted
under law, on a case-by-case basis, with the consequent share capital
increase to service the conversion of bonds and/or exercise of warrants,
establishing the procedures, terms, conditions and regulations thereof.
On 13 October 2001, the Extraordinary Shareholders' Meeting resolved to grant
proxies authorising the Directors, in accordance with article 2443 of the
Italian Civil Code, to raise share capital on one or more occasions over a
five-year period from the date of the resolution, by a maximum of 7 billion
euros (par value) through the issuance of shares to be assigned or offered with
pre-emptive rights to entitled parties and to issue bonds and/or convertible
bonds - in accordance with article 2420 ter of the Italian Civil Code - up to a
maximum of 10 billion euros (par value), on one or more occasions over a
five-year period from the date of the resolution. These proxies are additional
to existing proxies for remaining sums.
111 | Olivetti S.p.A. Financial Statements
The Shareholders' Meeting of 8 May 2002 upheld the Board of Directors' proposal
of 13 October 2001 and passed a resolution to revoke the non-utilised portions
of the proxies pursuant to articles 2443 and 2420 ter granted with the
resolutions carried by the Shareholders' Meetings of 7 April 1999 and 13
October 2001 (amounting respectively to a maximum of 6,740 million euros and
10,051 million euros). Therefore any future operation on capital or any
operation that may have an effect on capital (to be executed directly or
through a request for new proxies, by means of issuance of shares, convertible
bonds or bonds with warrants, warrants, options or other similar rights to the
Company shares) will be submitted for Shareholder approval on a case-by-case
basis.
The Shareholders' Meeting of 8 May 2002 also passed a resolution empowering the
Directors, pursuant to article 2420 ter of the Italian Civil Code, to issue
bonds in euros or foreign currency, in one or more instances, over a maximum
period of five years as from the date of the resolution, for a maximum
aggregate amount of 9 billion euros, within the limits permitted under law on a
case-by-case basis, and to establish the procedures, terms, conditions and
regulations thereof. These bonds might be convertible into the shares of other
companies, and might or might not bear warrants for the purchase of shares of
other companies.
I bis. Share capital increases to be filed with the Companies Register pursuant
to art. 2444 of the Italian Civil Code
The balance on this heading amounted to 200,198 euros at 31 December 2002
(839,593 euros at 31 December 2001). It reflects the par value of the shares
issued by the Company in respect of share capital increases effected in 2002,
which had not been filed with the Companies Register by the end of the year
(141,134 shares from the exercise of 282,268 "Olivetti 2001-2002 ordinary share
warrants", 2,861 shares from the conversion of a similar number of "Olivetti
1.5% 2001-2004 convertible bonds with redemption premium" and 56,203 shares
from the conversion of a similar number of "Olivetti 1.5% 2001-2010 convertible
bonds with redemption premium").
I ter. Share capital increase payments relating to shares to be issued
At 31 December 2002 the balance on this heading was zero, compared with 26,954
euros at 31 December 2001.
II. Additional paid-in capital
This reserve amounted to 3,765,365,301 euros at 31 December 2002 compared with
3,765,113,918 euros at 31 December 2001, a net increase of 251,383 euros which
reflected the following movements:
- 10,442 euros relating to 12,044 shares (issued at 1.867 euros per share)
arising from the exercise in December 2001 of a similar number of
"Olivetti 2001-2002 share warrants", for which the relevant shares were
issued in 2001 and registered in 2002 (6,123 shares) or issued and
registered in January 2002 (5,921 shares);
- 215,088 euros relating to 134,430 shares issued following conversion of a
similar number of bonds (with a par value of 2.60 euros per bond) of the
series "Olivetti 1.5% 2001-2004 convertible with redemption premium";
112 | Olivetti S.p.A. Financial Statements
- 17,739 euros relating to 20,460 shares issued (at a price of 1.867 euros
per share) following exercise of 40,920 "Olivetti 2001-2002 share
warrants";
- 8,114 euros relating to 2,688 shares issued following exercise of 2,400
"Olivetti ex Tecnost 1999-2004 warrants" at a price of 3.249 euros per
share.
II bis. Additional paid-in capital in respect of share capital increases to be
filed with the Companies Register and of shares to be issued
This reserve amounted to 126,941 euros at 31 December 2002 (10,442 euros at 31
December 2001) and comprised 122,363 euros for 141,134 shares arising from the
exercise (at a price of 1.867 euros per share) of 282,268 "Olivetti 2001-2002
share warrants" and 4,578 euros for 2,861 shares arising from the conversion of
a similar number of bonds with a par value of 2.60 euros per bond from the
series "Olivetti 1.5% 2001-2004 with redemption premium".
III. Revaluation reserves
This heading refers to the Revaluation reserve previously stated in the books
of the merged company Tecnost S.p.A. and re-formed in the books of Olivetti
S.p.A. following the merger with effect from 31 December 2000; at 31 December
2002 it amounted to 1,128,827 euros, unchanged from 31 December 2001.
IV. Legal reserve
This reserve amounted to 920,809,760 euros at 31 December 2002 (unchanged from
31 December 2001).
V. Reserve for treasury stock
This reserve of 2,298,156 euros reflects the value of 2,697,500 shares issued
and held by the Company and carried in the balance sheet under the appropriate
financial fixed assets heading, in accordance with art. 2357 ter of the Italian
Civil Code: it cannot be distributed while own shares continue to be held.
VII. Other reserves
At 31 December 2002 these reserves reflected an aggregate amount of
2,036,088,939 euros compared with 2,061,056,125 euros at 31 December 2001, a
total net decrease of 24,967,186 euros.
a) Extraordinary reserve
At 31 December 2002 this reserve amounted to 1,888,261,068 euros (unchanged
from 31 December 2001).
b) Restricted reserve tied to exercise of Olivetti ex Tecnost 1999-2004 warrants
This reserve is irrevocably tied to exercise of "Olivetti ex Tecnost 1999-2004
warrants". At 31 December 2001 it amounted to 118,369,170 euros compared with
118,371,238 euros at 31 December 2001; the decrease of 2,068 euros was due to
the exercise of 2,400 warrants during the year. The reserve was
113 | Olivetti S.p.A. Financial Statements
formed following the free share capital increase at Tecnost S.p.A. and the
simultaneous re-denomination of share capital in euros; at the moment of
exercise of the warrants, the unit amount of 1,436.27 Italian lire (equal to
the difference between the unit counter-value of 1 euro, namely 1,936.27
Italian lire, and the pre-existing par value of 500 Italian lire per share)
will be transferred to share capital in the form of a free share capital
increase, as well as to take account of the joint exchange ratio of 1.12
Olivetti shares for each ex-Tecnost warrant following the merger of Tecnost
S.p.A. into and with Olivetti S.p.A..
c) Restricted reserves tied to conversion of Olivetti bonds and exercise of
Olivetti warrants
These reserves (formed following the re-denomination of Olivetti share capital
in euros) amounted to an aggregate 19,241,691 euros at 31 December 2002
compared with 44,206,809 euros at 31 December 2001. The decrease of 24,965,118
euros reflects:
- for 13,924,945 euros, use of the "Reserve for conversion of Olivetti
floating rate 1998-2002 bonds" (which decreased from 14,852,133 euros to
927,188 euros) following conversion of 28,797,733 bonds;
- for 11,040,173 euros, use of the "Reserve for exercise of Olivetti
1998-2002 ordinary share warrants" (which decreased from 11,203,283 euros
to 163,110 euros) following exercise of 22,831,828 warrants. At 31
December 2002 the heading also included the "Reserve for exercise of
Olivetti 2002-2004 subscription rights (warrants or options) reserved for
managers of the Parent Company and its subsidiaries" for 14,264,521 euros,
unchanged from 31 December 2001, (and for 643,112 euros still restricted
as tied to the exercise of no. 1,330,000 warrants still outstanding) and
the "Reserve for exercise of Olivetti 1999-2001 subscription rights
(warrants or options) reserved for managers of Parent Company and its
subsidiaries" for 3,886,872 euros, also unchanged from 31 December 2001.
After closure of the conversion period for Olivetti 1998-2002 floating rate
bonds and the exercise periods for Olivetti 1998-2002 share warrants, Olivetti
1999-2001 subscription rights, and no. 28,170,000 Olivetti 2002-2004
subscription rights (stock options) at 31 December 2002 the corresponding
reserves reflected an aggregate balance of 18,598,579 euros and were no longer
restricted.
d) Non-taxable reserves
These reserves, amounting overall to 10,217,010 euros (unchanged from 31
December 2002), were originally carried by Tecnost S.p.A. They were re-formed
in the Olivetti balance sheet following the merger of Tecnost into and with
Olivetti; the breakdown of these reserves is as follows:
- Reserve pertaining to research grants (Law no. 346/1988) for 8,741,403
euros
- Reserve pertaining to Technological Innovation grants (Law no. 46/1982)
for 685,713 euros
- Reserve pertaining to capital investment grants (Law no. 64/1986) for
695,110 euros
- Reserve pertaining to VAT deductions on capital investments for 94,784
euros.
Taxes are not provided for these reserves since operations that would make them
liable for taxation are not planned at the present time.
VIII. Retained earnings (accumulated losses)
At 31 December 2002 this heading reflected accumulated losses totalling
299,930,180 euros (retained earnings of 571,549,306 euros at 31 December 2001).
The difference arose after the loss of 871,479,486 euros posted in 2001 was
carried forward with the approval of the Shareholders' Meeting of 8 May 2002.
114 | Olivetti S.p.A. Financial Statements
B) Reserves for risks and charges
2.a) Reserves for taxation
The following years are still subject to adjustment or to assessment by the tax
authorities: the financial years from 1997 onwards as regards income taxes; the
financial years from 1998 onwards as regards value added tax.
In 1999 the Parent Company underwent a general tax inspection conducted by the
Regional Corps of the Turin Tax Police, with specific reference to the years
1994, 1995 and 1996. At the end of the inspection, the tax authorities were
notified of hypothetical administrative anomalies regarding both value added
tax and (predominantly) income tax. The objections regarding income tax were
resolved as a result of the tax settlement agreed on 23 July 2001.
On 15 December 2000 adjustment notices were received regarding value added tax
for 1994 and 1995 as a consequence of the findings of the Tax Police's report.
The Company promptly presented a well-argued appeal, which was substantially
accepted by the Provincial Tax Commission.
In 1994, 1995 and 1996 the Company received assessment notices relating to the
income tax returns from 1988 to 1992.
With regard to the assessment relating to 1988, the authorities objected, in
view of the consequent tax regime, to the treatment of lease-back contracts as
financial leasing contracts. The assessments relating to 1991 and 1992 stemmed
from the findings of the Regional Corps of the Trieste Tax Police with regard
to usufruct on share contracts entered into by the Company in previous years,
while the assessments for 1989 and 1990 concerned both matters.
With regard to usufruct on share contracts, the authorities, in separate
assessments, questioned the legitimacy of the deduction of tax credits and
withholdings relating to dividends collected from resident companies by the
Company as usufructuary. It also alleged the joint responsibility of the
Company for the failure to apply to such dividends the higher withholdings tax
due on payment of share income to non-residents.
Well-argued appeals have been made against all these assessments.
The objections raised with regard to lease-back contracts have been resolved in
favour of the Company and the tax authorities have not proceeded with the
matter.
All the objections raised by the authorities regarding usufruct on shares for
1989, 1991 and 1992, as well as that relating to the alleged non-deductibility
of tax credits and withholdings on dividends for 1990, have been rejected by
the first and second degree tax commissions. Only the appeal lodged by the
Company against the 1990 assessment alleging joint responsibility for lower tax
withholdings has been rejected by both the provincial and regional tax
commissions.
The tax authorities have submitted appeals to the Supreme Court as regards all
the decisions in favour of the Company concerning the objections to usufruct on
shares and the Company has lodged counter-appeals. With regard to the adverse
ruling of the regional tax commission regarding the assessment of tax
withholdings for 1990, the Company has lodged an appeal to the Supreme Court
and the tax authorities have submitted a counter-appeal.
The Company's tax advisors believe that the dispute regarding usufruct on
shares will be settled in favour of the Company since the objections raised on
both matters lack any juridical basis, and the Supreme Court has already issued
favourable jurisprudence in this area.
115 | Olivetti S.p.A. Financial Statements
2.b) Reserve for deferred taxation
The entire reserve for deferred taxation (344.4 million euros at 31 December
2001) was reversed to income in relation to taxable result for the year and the
reduction in the taxable temporary differences for which the reserve was formed
in 2000; these differences were more than offset by the deductible temporary
differences that arose in the year, as described in the note on prepaid tax
receivables.
3) Other provisions
Other provisions at 31 December 2002 amounted to 336.3 million euros (429.5
million euros at 31 December 2001), following increases of 121.8 million euros
and uses totalling 215.0 million euros.
The heading includes 23.4 million euros for deferred social security charges
arising as a result of reductions in the workforce pursuant to Law 223/1991,
71.5 million euros for charges relating to commitments and possible future
risks associated with the sale of OliMan Holding B.V., 222.1 million euros for
risks and charges relating to investee companies and 19.3 million euros for
charges relating to guarantees given in connection with the sale of subsidiary
companies.
C) Reserve for employee severance indemnities
31.12.2002 31.12.2001 Changes
-------------------------------------------------------------- ----------- ----------- ----------
Beginning balance 3,857,916 4,126,520 (268,604)
-------------------------------------------------------------- ----------- ----------- ----------
Provision for the year 24,045 1,050,599 (1,026,554)
Additional indemnities 7,424,646 1,900,561 5,524,085
-------------------------------------------------------------- ----------- ----------- ----------
7,448,691 2,951,160 4,497,531
-------------------------------------------------------------- ----------- ----------- ----------
Indemnities paid (8,191,475) (2,832,851) (5,358,624)
Advances to employees (17,815) (47,529) 29,714
Contributions paid to the National Insurance Board (INPS) (8,700) (11,544) 2,844
Net transfers between Olivetti S.p.A. and Italian subsidiaries (413,707) (185,006) (228,701)
Other uses (87,752) (142,834) 55,082
-------------------------------------------------------------- ----------- ----------- ----------
(8,719,449) (3,219,764) (5,499,685)
-------------------------------------------------------------- ----------- ----------- ----------
Ending balance 2,587,158 3,857,916 (1,270,758)
============================================================== =========== =========== ==========
116 | Olivetti S.p.A. Financial Statements
D) Payables
Payables due within 12 months
31.12.2002 31.12.2001 Changes
---------------------------------------------------------------------------- ------------- ------------- -------------
Financial payables
2) Olivetti 1998-2002 floating rate convertible bond - 15,675,896 (15,675,896)
3) Due to banks
Bank overdrafts 618,930,558 266,785,214 352,145,344
Ordinary loans - - -
Current portion of loans for research activities 26,527,994 25,159,770 1,368,224
Current portion of ordinary loans 25,000,000 65,189,979 (40,189,979)
------------- ------------- -------------
670,458,552 357,134,963 313,323,589
4) Due to other lenders
Savings deposits of employees 63,752 63,752 -
Other debt - 549,716 (549,716)
Current portion of loans from the Tecnological Innov. Fund (FIT) 2,778,871 5,762,176 (2,983,305)
------------- ------------- -------------
2,842,623 6,375,644 (3,533,021)
8) Due to subsidiary companies
Borrowings
Olivetti Finance N.V. 368,636,730 407,718,697 (39,081,967)
Current portion of medium/long term loans:
o Olivetti Finance N.V. - 1,908,200,000 (1,908,200,000)
o Olivetti Holding B.V. 2,147,000,000 2,147,000,000 -
------------- ------------- -------------
2,515,636,730 4,462,918,697 (1,947,281,967)
Interest bearing current accounts
Olivetti Multiservices S.p.A. - 9,450,460 (9,450,460)
Jetech S.p.A. 76,804 - 76,804
Alladium S.p.A. - 7,256,030 (7,256,030)
Olivetti Finanziaria Industriale S.p.A. 3,641,942 14,531,595 (10,889,653)
Antex F&A S.p.A.. (ex Olivetti Servizi Amministrativi) - 2,129,793 (2,129,793)
TechnoProduzioni S.p.A. 34,254,683 17,665,270 16,589,413
Olivetti I-Jet S.p.A. 18,904,896 2,674,634 16,230,262
Tecnost Sistemi S.p.A. 42,404,916 1,569,954 40,834,962
TeleAp S.p.A. 147,719 - 147,719
OliWeb S.p.A. 882,843 1,969,084 (1,086,241)
Global Gaming Investments S.p.A. 965,013 1,066,486 (101,473)
Other subsidiary companies 146,304 878,264 (731,960)
------------- ------------- -------------
101,425,120 59,191,570 42,233,550
------------- ------------- -------------
2,617,061,850 4,522,110,267 (1,905,048,417)
---------------------------------------------------------------------------- ------------- ------------- -------------
Total financial payables 3,290,363,025 4,901,296,770 (1,610,933,745)
---------------------------------------------------------------------------- ------------- ------------- -------------
Non financial payables
5) Advances 3,772,422 3,772,422 -
6) Suppliers 8,989,315 24,717,419 (15,728,104)
8) Subsidiary companies
for supplies 8,980,575 3,265,895 5,714,680
other 4,162,855 19,046,305 (14,883,450)
------------- ------------- -------------
13,143,430 22,312,200 (9,168,770)
9) Due to associated companies
for supplies - 1,107 (1,107)
other 586,256 - 586,256
------------- ------------- -------------
586,256 1,107 585,149
11) Due to tax authorities 282,587,074 31,172,199 251,414,875
12) Due to soocial security authorities 373,603 699,126 (325,523)
13) Other payables
Invoices to be received for costs on 2001 capital increases 5,955,602 55,815,417 (49,859,815)
Wages, salaries and social contributions 5,659,003 3,032,833 2,626,170
Other 6,071,180 8,109,445 (2,038,265)
------------- ------------- -------------
17,685,785 66,957,695 (49,271,910)
---------------------------------------------------------------------------- ------------- ------------- -------------
Total non financial payables 327,137,885 149,632,168 177,505,717
---------------------------------------------------------------------------- ------------- ------------- -------------
Total payables due within 12 months 3,617,500,910 5,050,928,938 (1,433,428,028)
============================================================================ ============= ============= =============
117 | Olivetti S.p.A. Financial Statements
Payables due within 12 months amounted to 3,617.5 million euros at 31 December
2002 (5,050.9 million euros at 31 December 2001).
The change of 1,433.4 million euros arose largely from the decrease in the
current portion due on borrowings from foreign subsidiary companies (1,908.2
million euros) set against the increase in amounts due to banks (352.1 million
euros) and in non-financial payables (177.6 million euros). Payment of the
current portion of the borrowing from Olivetti Holding B.V. amounting to 2,147
million euros was extended to 30 June 2003.
Payables due after 12 months
1) Bonds
Amounts due to third parties:
31.12.2002 31.12.2001 Changes
------------------------------------------------------- ---------- ----------- -----------
Olivetti S.p.A. EONIA linked notes 2001-2003 bond - 400,000,000 (400,000,000)
======================================================= ========== =========== ===========
The "Olivetti S.p.A. EONIA linked notes 2001-2003" bond for a par value of 400
million euros was cancelled in full as part of the debt re-financing and
maturity profile improvement plan.
Amounts due to subsidiary companies:
31.12.2002 31.12.2001 Changes
---------------------------------------------------------------- ------------- ---------- -------------
Olivetti 2002-2012 fixed rate bond issued on 26 June 2002 2,500,000,000 - 2,500,000,000
Olivetti 2002-2012 fixed rate bond issued on 23 December 2002 1,400,000,000 - 1,400,000,000
---------------------------------------------------------------- ------------- ---------- -------------
Total 3,900,000,000 - 3,900,000,000
================================================================ ============= ========== =============
2) Convertible bonds
31.12.2002 31.12.2001 Changes
---------------------------------------------------------------------- ------------- ------------- ---------
Olivetti 1,5% 2001-2004 convertible bond with premium upon redemption
par value 1,267,627,834 1,267,627,834 -
less: conversions into ordinary shares (363,763) - (363,763)
premium upon redemption 64,346,474 64,364,944 (18,470)
------------- ------------- ---------
1,331,610,545 1,331,992,778 (382,233)
Olivetti 1,5% 2001-2010 convertible bond with premium upon redemption
par value 2,412,962,875 2,412,962,875 -
less: conversions into ordinary shares (3,299,813) - (3,299,813)
premium upon redemption 442,853,902 443,460,350 (606,448)
------------- ------------- ---------
2,852,516,964 2,856,423,225 (3,906,261)
---------------------------------------------------------------------- ------------- ------------- ---------
Total 4,184,127,509 4,188,416,003 (4,288,494)
====================================================================== ============= ============= =========
118 | Olivetti S.p.A. Financial Statements
The premiums on the 2001-2004 and 2001-2010 bonds, determined on the basis of
5.07759% and 18.37825% redemption increments respectively, were recorded under
financial charges and deferred for amounts accruing to future years.
3) Amounts due to banks
31.12.2002 31.12.2001 Changes
--------------------------------------------------- -------------- ------------- -------------
Ordinary loans 25,000,000 90,189,979 (65,189,979)
Loans for research 46,798,098 71,957,868 (25,159,770)
less: current portion (51,527,994) (90,349,749) 38,821,755
--------------------------------------------------- -------------- ------------- -------------
Total 20,270,104 71,798,098 (51,527,994)
=================================================== ============== ============= =============
4) Amounts due to other lenders
31.12.2002 31.12.2001 Changes
--------------------------------------------------- -------------- ------------- -------------
Loans from the Tecnological Innovation Fund (FIT) 13,137,832 18,900,009 (5,762,177)
Other lenders 24,130,742 12,234,341 11,896,401)
less: current portions (2,778,871) (5,762,176) 2,983,305
--------------------------------------------------- -------------- ------------- -------------
Total 34,489,703 25,372,174 9,117,529
=================================================== ============== ============= =============
5) Amounts due to subsidiary companies
31.12.2002 31.12.2001 Changes
--------------------------------------------------- -------------- ------------- -------------
Amounts due to subsidiary companies
Olivetti Finance N.V. 3,743,567,709 5,302,415,417 (1,558,847,708)
--------------------------------------------------- -------------- ------------- -------------
3,743,567,709 5,302,415,417 (1,558,847,708)
--------------------------------------------------- -------------- ------------- -------------
Total amounts due after 12 months 11,882,455,025 9,988,001,692 1,894,453,333
=================================================== ============== ============= =============
With regard to amounts due to Olivetti Finance N.V., two 20 billion yen loans
have been arranged at a six-monthly floating rate, expiring respectively in
2029 (referring to a capital of 174.2 million euros) and 2032 (referring to a
capital of 171.5 million euros).
On both loans, cross currency and interest rate swaps have been arranged to
nullify yen/euro exchange and interest risks. The hedging structure is
applicable as long as Olivetti S.p.A. is in bonis.
* * *
At 31 December 2002 financial payables secured by guarantees on assets owned by
the Company amounted to 20.9 million euros; these guarantees, for 22.7 million
euros (34.5 million euros at 31 December 2001), consisted of pledges on
securities and were provided in connection with research loans granted by San
Paolo IMI.
119 | Olivetti S.p.A. Financial Statements
The breakdown of medium/long-term debt, including portions due within 12
months, was as follows:
(in millions of euros) 31.12.2002 31.12.2001
---------------------------------------------------------------------------------------------------- ---------- ----------
Amounts due to subsidiary companies:
Loan from Olivetti Holding B.V., floating rate 4.74361% at 31.12.2002, extended to 30 June 2003 2,147.0 2,147.0
Loan from Olivetti Finance N.V., repaid on 26 June 2002 - 1,908.2
Loan from Olivetti Finance N.V., floating rate 8.03475% at 31.12.2002, repayable on 30 June 2004 2,434.0 3,129.0
Loan from Olivetti Finance N.V., floating rate 5.86237% al 31.12.2002, repayable on 30 June 2007 223.0 -
Loan from Olivetti Finance N.V., floating rate 4.131178% at 31.12.2002, repayable on 3 November
2005 765.0 2,000.0
Loan from Olivetti Finance N.V. - yen 20 billion - floating rate 1.140978% at 31.12.2002, repayable
on 29 October 2029 160.8 173.4
Loan from Olivetti Finance N.V. - yen 20 billion - floating rate 0.07813% at 31.12.2002, repayable
on 14 May 2032 160.8 -
Bond issued on 26/6/2002, repayable on 26/6/2012, fixed rate 7.375%, subscribed by Olivetti
Finance N.V. 2,500.0 -
Bond issued on 23/12/2002 repayable on 23/12/2012, fixed rate 6.625%, subscribed by Olivetti
Finance N.V. 1,400.0 -
Amounts due to third parties:
"Olivetti 1998-2002" floating rate bond, convertible into ordinary shares, repaid in full on 30
September 2002. - 15.7
"EONIA Linked Notes due 2003", EONIA rate plus 0.92%, cancelled on 23/12 2002 - 400.0
"Olivetti 1,5% 2001-2004 convertible bond with premium upon redemption", repayable in full on
1st January 2004 1,267.3 1,267.6
Premium upon redemption "Olivetti 1,5% 2001-2004": 5.07759% of bond par value, payable upon
redemption on 1st January 2004 64.3 64.4
"Olivetti 1,5% 2001-2010 convertible bond with premium upon redemption", repayable in full on
1st January 2010 2,409.7 2,413.0
Premium upon redemption "Olivetti 1.5% 2001-2010": 18.37825% of bond par value, payable upon
bond redemption on 1st January 2010 442.9 443.5
IMI loans for research pursuant Law 346/1988, average interest rate 12.4742% (gross of interest
relief grants) at 31 December 2002, repayable by 2004 46.8 71.9
Subsidized loans for technological innovation, average interst rate 4.0994% at 31 December 2002,
repayable by 2012 13.1 18.9
Other loans, average interest 3.638% at 31 December 2002, repayable by 2003 25.0 90.2
Other lenders 24.1 12.2
==================================================================================================== ========== ==========
Total 14,083.8 14,155.0
---------------------------------------------------------------------------------------------------- ---------- ----------
of which:
Portions expiring within 12 months 2,201.3 4,167.0
Portions expiring after 12 months 11,882.5 9,988.0
==================================================================================================== ========== ==========
120 | Olivetti S.p.A. Financial Statements
Payables due after 12 months were as follows:
(in millions of euros) al 31.12.2002 al 31.12.2001
---------------------- ------------- -------------
within 2 years 4,556.2 465.7
within 5 years 3,080.5 6,487.7
after 5 years 4,245.8 3,034.6
---------------------- ---------- ----------
Total 11,882.5 9,988.0
====================== ========== ==========
At 31 December 2002 the Company had unused overdraft facilities on current
accounts of 129.5 million euros (315.4 million euros at 31 December 2001) and
other unused standby lines of credit for 61 million euros (46.7 million euros
at 31 December 2001).
Analysis of the financial position
31.12.2002 31.12.2001 Changes
------------------------------------ -------------- -------------- -------------
Financial liabilities:
Due within 12 months 3,791,075,585 6,343,665,953 (2,552,590,368)
Due after 12 months 12,892,671,729 10,788,241,009 2,104,430,720
------------------------------------ -------------- -------------- -------------
Total financial liabilities (A) 16,683,747,314 17,131,906,962 (448,159,648)
------------------------------------ -------------- -------------- -------------
Medium/long-term financial assets 421,020,975 495,022,174 (74,001,199)
Financial current assets 1,062,103,484 308,724,693 753,378,791
Accrued interest income 5,511,892 5,708,279 (196,387)
------------------------------------ -------------- -------------- -------------
Total financial resources (B) 1,488,636,351 809,455,146 679,181,205
------------------------------------ -------------- -------------- -------------
Net financial indebtedness (A-B) 15,195,110,963 16,322,451,816 (1,127,340,853)
==================================== ============== ============== =============
Net financial indebtedness at 31 December 2002 amounted to 15,195.1 million
euros, a decrease of 1,127.3 million euros compared with 31 December 2001.
The change (reflecting an increase in medium/long-term debt of 2,178.4 million
euros and a decrease in short-term debt of 3,305.8 million euros) was largely
due to collection of dividends, disposal of equity investments, assignment of
receivables due from tax authorities to Group companies, net of costs incurred
mainly for financial charges.
121 | Olivetti S.p.A. Financial Statements
E) Accrued expenses and deferred income
31.12.2002 31.12.2001 Changes
-------------------------------------------------- ------------- ------------- ------------
Accrued expenses
Due within 12 months
Interest expenses and charges on loans payable to:
Subsidiary companies
Olivetti Holding B.V. 305,673,260 201,394,399 104,278,861
Olivetti Finance N.V. 117,020,093 1,206,694,659 (1,089,674,566)
Third parties 70,339,122 34,280,125 36,058,997
Insurance premiums and other
Third parties 216,731 98,517 118,214
------------- ------------- ------------
Total accrued expenses within 12 months 493,249,206 1,442,467,700 (949,218,494)
Due after 12 months
Interest expenses on loans payable to:
Subsidiary companies
Olivetti Finance N.V. 1,010,216,704 800,239,317 209,977,387
------------- ------------- ------------
Total accrued expenses after 12 months 1,010,216,704 800,239,317 209,977,387
-------------------------------------------------- ------------- ------------- ------------
Total accrued expenses 1,503,465,910 2,242,707,017 (739,241,107)
-------------------------------------------------- ------------- ------------- ------------
Deferred income
Due within 12 months
Third parties 774,348 31,561 742,787
Subsidiary companies 1,106,168 340,854 765,314
-------------------------------------------------- ------------- ------------- ------------
Total deferred income within 12 months 1,880,516 372,415 1,508,101
-------------------------------------------------- ------------- ------------- ------------
Total accrued expenses and deferred income 1,505,346,426 2,243,079,432 (737,733,006)
================================================== ============= ============= ============
122 | Olivetti S.p.A. Financial Statements
Memorandum accounts
A) Personal guarantees given and counter-securities received
At 31 December 2002 suretyships and other personal securities given directly or
indirectly through banks and insurance companies totalled 15,387 million euros
(17,634.5 million euros at 31 December 2001), as follows:
(in millions of euros) al 31.12.2002 al 31.12.2001 Changes
--------------------------------------------------------------------------- ------------- ------------- -------
To third party holders of securities issued by subsidiary companies 15,032 17,136 (2,104)
To banks and finance companies for credit lines and financings given to
subsidiary and associated companies 14 137 (123)
Counter-securities given to third parties for guarantees given on behalf of:
subsidiary companies 72 72 -
associated and unconsolidated subsidiary companies 3 3 -
third parties 32 34 (2)
--------------------------------------------------------------------------- ------------- ------------- -------
15,153 17,382 (2,229)
Other personal guarantees given 234 253 (19)
--------------------------------------------------------------------------- ------------- ------------- -------
Total personal guarantees given 15,387 17,635 (2,248)
=========================================================================== ============= ============= =======
The decrease of 2,104 in guarantees to third-party holders of securities issued
by subsidiary companies refers in particular to guarantees given in respect of
bond loans issued by Olivetti International Finance N.V. and Olivetti Finance
N.V.
Counter-securities given to third parties for guarantees given on behalf of
subsidiary companies included 52.8 million euros in favour of Telecom Italia.
Other personal guarantees, amounting to 234 million euros at 31 December 2002,
referred to:
o suretyships for 3.6 million euros to guarantee fulfilment of trade
supplies by Getronics S.p.A.;
o guarantees of 228.1 million euros given to the Italian State Railways in
the interest of Wind S.p.A. (ex Infostrada S.p.A.);
o other guarantees for 2.3 million euros.
In respect of the above guarantees, at 31 December 2002 the Company had
counter-securities totalling 290 million euros (315 million euros at 31
December 2001), including 213 million euros from Mannesmann A.G., in respect of
guarantees given to the Italian State Railways, and 52.8 million euros from
Telecom Italia.
B) Guarantees on company assets
Guarantees on Company assets relating to financial operations are analysed
under financial payables.
123 | Olivetti S.p.A. Financial Statements
C) Commitments
At 31 December 2002 contractual commitments totalled 8 million euros overall
(11 million euros at 31 December 2001), down by 3 million euros.
On the same date, the heading also included a letter of indemnity in favour of
Olivetti Finanziaria Industriale S.p.A. in respect of potential risks from
on-going disputes.
D) Other memorandum accounts
Other memorandum accounts at 31 December 2002 amounted to 3.8 million euros
relating to third-party assets held as guarantee deposits (unchanged from 31
December 2001).
124 | Olivetti S.p.A. Financial Statements
Comments on the income statement
A) Value of production
5) Other revenues and income
Other revenues amounted to 13.6 million euros (15.2 million euros in 2001).
They referred to services supplied and to the recovery of costs in relation to
subsidiary companies.
B) Costs of production
7) Services
The amount of 26.4 million euros (49.1 million euros in 2001) consisted largely
of costs incurred for services and consultancy.
9) Personnel
Payroll costs in 2002 were 13.8 million euros (13.1 million euros in 2001). The
increase of 0.7 million euros arose from higher costs for retirement incentives
(7.4 million euros) offset in part by the decrease in costs as a result of the
reduction in the average number of employees, from 107 heads in 2001 to 78
heads in 2002 (22 managers, 12 supervisors, 44 office staff).
At 31 December 2002 there were 70 employees (89 at 31 December 2001).
10) Amortisation, depreciation and writedowns
Amortisation of intangible fixed assets - The charge for the year amounted to
70.5 million euros, of which 30.6 million euros for amortisation of costs
incurred for share capital increases and 38.9 million euros for amortisation of
costs relating to issuance of bond loans.
Depreciation of tangible fixed assets - Depreciation for the year (1.2 million
euros) was determined on a straight-line basis by adopting rates that reflect
the residual useful life of the assets.
As illustrated in the note on tangible fixed assets, accelerated depreciation
was also provided, as allowed under tax laws:
(in millions of euros) Year 2002 Year 2001 Changes
---------------------- --------- --------- -------
Ordinary depreciation 0.6 0.7 (0.1)
Accelerated depreciation 0.6 0.6 -
---------------------- --------- --------- -------
Total depreciation 1.2 1.3 (0.1)
====================== ========= ========= =======
Writedowns of receivables classified as current assets - No provision for
doubtful accounts was deemed necessary in 2002; the 2001 provision was 1.5
million euros.
125 | Olivetti S.p.A. Financial Statements
14) Other operational expenses
Other operational expenses amounted to 2.7 million euros in 2002 (3 million
euros in 2001) and largely comprised duties and taxes other than income taxes
of 0.7 million euros and contributions to public and private institutions of
0.8 million euros.
C) Financial income and charges
15) Income from equity investments
Year 2002 Year 2001 Changes
--------------------------------------------------- ------------- ------------- -------------
Dividends from subsidiary companies
Telecom Italia S.p.A.:
accrued in the year - 46,459,164 (46,459,164)
collected in the year 1,249,581,359 - 1,249,581,359
Finsiel S.p.A. 540,171 606,482 (66,311)
Olivetti Finanziaria Industriale S.p.A. 4,198,879 - 4,198,879
Olivetti Multiservices S.p.A., accrued in the year 8,742,000 - 8,742,000
------------- ------------- -------------
1,263,062,409 47,065,646 1,215,996,763
Tax credit
on accrued dividends 705,555,230 356,187 679,421,951
on dividends collected 4,917,375 26,133,279 4,561,188
--------------------------------------------------- ------------- ------------- -------------
1,973,535,014 73,555,112 1,899,979,902
--------------------------------------------------- ------------- ------------- -------------
Dividends from associated companies
Lottomatica S.p.A. - 5,204,783 (5,204,783)
------------- ------------- -------------
- 5,204,783 (5,204,783)
Tax credit - 3,056,769 (3,056,769)
--------------------------------------------------- ------------- ------------- -------------
- 8,261,552 (8,261,552)
--------------------------------------------------- ------------- ------------- -------------
Other dividends
Fin - Priv. S.r.l. - 273,915 (273,915)
Mediobanca S.p.A. 2,432,896 1,988,927 443,969
Tredicimarzo S.r.l. 782,910 - 782,910
Eurofly Service 496,531 - 496,531
Datalogic 11,500 - 11,500
------------- ------------- -------------
3,723,837 2,262,842 1,460,995
Tax credits 2,094,658 1,328,967 765,691
--------------------------------------------------- ------------- ------------- -------------
5,818,495 3,591,809 2,226,686
--------------------------------------------------- ------------- ------------- -------------
Total 1,979,353,509 85,408,473 1,893,945,036
=================================================== ============= ============= =============
126 | Olivetti S.p.A. Financial Statements
16) Other financial income
Year 2002 Year 2001 Changes
----------------------------------------------------------------------- ----------- ----------- ---------
Income from
Receivables classified as financial fixed assets for subsidized loans
pertaining to
subsidiary companies 402 1,134 (732)
associated companies 1,355 4,142 (2,787)
third parties 1,418 4,002 (2,584)
Other from associated companies - 5,541 (5,541)
Securities held as current assets
fixed income 1,636,953 1,802,576 (165,623)
floating income 1,385,779 2,310,411 (924,632)
Receivables for securities held under reverse repurchase agreements 40,318 89,801 (49,483)
Other receivables from:
subsidiary companies
Olivetti Tecnost S.p.A. 5,933,457 10,571 5,922,886
Olivetti I-Jet S.p.A. 158,127 2,152,328 (1,994,201)
Olivetti Multiservices S.p.A. 540,861 781,976 (241,115)
other subsidiary companies 836,539 1,046,895 (210,356)
associated companies 151,716 4,516 147,200
others 154,354 763,114 (608,760)
Bank current accounts 3,590,102 8,857,886 (5,267,784)
Gains from exchange rate fluctuations 11,325,899 9,796,816 1,529,083
Gains from swaps 6,142,461 - 6,142,461
Other 9,496,658 9,703,101 (206,443)
----------------------------------------------------------------------- ----------- ----------- ---------
Total 41,396,399 37,334,810 4,061,589
======================================================================= =========== =========== =========
17) Interest expense and other financial charges
Year 2002 Year 2001 Changes
----------------------------------------------------------------------- ----------- ----------- -----------
Interest payable to subsidiary companies
Olivetti Tecnost S.p.A. 311,248 7,920,376 (7,609,128)
Olivetti Finanziaria Industriale S.p.A. 481,740 789,342 (307,602)
TechnoProduzioni S.p.A. - 527,357 (527,357)
Olivetti Holding B.V. 107,315,195 81,641,655 25,673,540
Tecnost Sistemi S.p.A. - 301,323 (301,323)
Olivetti Finance N.V. 497,774,288 722,416,961 (224,642,673)
other subsidiary companies 1,281,472 607,561 673,911
Interest payable to third parties
Bonds 148,952,776 62,139,142 86,813,634
Medium/long-term loans 3,468,402 28,089,997 (24,621,595)
Bank current accounts 23,834,480 29,281,339 (5,446,859)
Interest rate swaps 14,206,634 2,116,366 12,090,268
Losses on exchange rate fluctuations 5,400,706 18,800,340 (13,399,634)
Interest, commissions and charges on other finance operations 10,062,870 11,996,663 (1,933,793)
----------------------------------------------------------------------- ----------- ----------- -----------
Total 813,089,811 966,628,422 (153,538,611)
======================================================================= =========== =========== ===========
Financial charges totalled 813.1 million euros, a decrease of 153.5 million
euros compared with 2001. The reduction reflected lower charges on borrowings
from Olivetti Finance N.V. (224.6 million euros), due to
127 | Olivetti S.p.A. Financial Statements
the fact that interest rates on new borrowings were lower than those on loans
discharged during the year, set against higher charges for bonds issued in 2001
which had only a partial impact on 2001 income.
D) Value adjustments to financial assets
19) Writedowns
The writedown of 8,400.4 million euros (175.2 million euros in 2001) referred
mainly to the fixed-asset equity investment in Telecom Italia S.p.A., which was
written down by 8,051.1 million euros, and to Olivetti Finance N.V., which was
written down by 182.5 million euros.
The heading also includes a writedown of 69.3 million euros on Telecom Italia
S.p.A. shares acquired by Olivetti Finance N.V. during the year and classified
as current assets, to reflect the difference between the purchase price and
stock market value at 31 December 2002.
E) Extraordinary income and charges
20) Extraordinary income
Year 2002 Year 2001 Changes
------------------------- ----------- ----------- ----------
Gains on disposals
Equity investments
subsidiary companies 80,328,447 1,032,155 79,296,292
associated companies - 10,106 (10,106)
other companies 158,468,340 - 158,468,340
Tangible fixed assets 53,100 3,313 49,787
------------------------- ----------- ---------- -----------
238,849,887 1,045,574 237,804,313
------------------------- ----------- ---------- -----------
Other income 1,447,518 22,622,268 (21,174,750)
------------------------- ----------- ---------- -----------
Total 240,297,405 23,667,842 216,629,563
========================= =========== ========== ===========
Gains on disposals of equity investments in subsidiaries (80.3 million euros)
include 71.8 million euros arising from the sale of OMS2 and 8.5 million euros
arising from the sale of Webegg to Telecom Italia S.p.A. Other income (1.4
million euros) included collection of amounts in excess of the price paid for
the repurchase of receivables by Wang Global S.p.A., now Getronics S.p.A. (0.5
million euros), the portion of the sale price of equity investments disposed of
in previous years that related to the collection of research grants (0.5
million euros) and other items (0.4 million euros).
21) Extraordinary charges
Extraordinary charges amounted to 76.0 million euros (16.5 million euros in
2001) and referred to a capital loss of 70.5 million euros on the sale of Seat
Pagine Gialle shares, and a charge of 3.6 million euros for costs incurred on
the sale of the equity investment in Lottomatica.
128 | Olivetti S.p.A. Financial Statements
22) Income taxes for the year
The overall tax benefit of 892.1 million euros arose from deferred tax assets
of 609 million euros and reversal of the previously provided reserve for
deferred taxes of 344.4 million euros, set against current income tax for 2002
of 61.3 million euros.
The table below illustrates the difference between effective corporate income
tax (IRPEG) for the year and the theoretical tax computed with the tax rates
applicable for 2002; no provisions were made with regard to the local tax on
production activities (IRAP), since both the theoretical and the effective
taxable amounts were negative.
Reconciliation between theoretical taxes and effective taxes reported in the
income statement
IRPEG
Result Temporary Tax charge (benefit)
(in millions of euros) for the year differences Current Deferred
--------------------------------------------------------- ------------ ----------- ------- --------
Result before taxes (7,132.0)
--------------------------------------------------------- ------------ ----------- ------- --------
Theoretical income tax charge (benefit) (1,355.0)
--------------------------------------------------------- ------------ ----------- ------- --------
Temporary differences taxable in the following years (19.3) 19.3 (3.7) 3.7
Temporary differences deductible in the following years 6,574.2 (6,574.2) 1,249.1 (770.9)
Reversal of temporary differences arisen in prior years 715.6 834.9 135.9 158.2
Permanent differences 184.3 - 35.0 -
--------------------------------------------------------- ------------ ----------- ------- --------
Increase (decrease) of taxable income 7,454.8 (5,720.0) 1,416.3 (609.0)
--------------------------------------------------------- ------------ ----------- ------- --------
Taxable income (tax loss) 322.8 (5,720.0)
--------------------------------------------------------- ------------ -----------
less: Reserve for deferred taxation as of 31 December 2001 344.4
--------------------------------------------------------- ------------ ----------- ------- --------
Total income tax charge (benefit) for the year 2002 61.3 (953.4)
========================================================= ============ =========== ======= ========
The temporary differences deductible in subsequent years arose largely from the
equity investment writedowns applied during the year as a result of compulsory
allocation of the allowance over five years pursuant to Legislative Decree
209/2002.
The temporary differences from previous years related mainly to the capital
gains recorded in 1999 (4,155.8 million euros, of which 2,493.5 million euros
already taxed in previous years) on the sale of 31.5% of the equity investment
in OliMan Holding B.V., taxation of which was allocated over five annual
instalments.
The year's taxable income of 322.8 million euros generated a current tax charge
of 61.3 million euros (19% tax rate).
The deferred tax credit of 609 million euros was determined by calculating
taxes on temporary differences that will be reversed in respect of future
expected taxable income (2,880 million euros) and taking account of DIT
benefits.
129 | Olivetti S.p.A. Financial Statements
Other information
Remunerations to Parent Company Directors, Statutory Auditors and Chief
Operating Officer
In compliance with CONSOB resolution no. 11971/1999, details are provided below
of the remunerations payable in 2002 by the Parent Company and also by
subsidiary companies, on whatever basis and in whatever form, to Directors,
Statutory Auditors and the Chief Operating Officer.
Office Office
Name Office period expiry
( A ) ( B ) ( C ) ( D )
------------------------- -------------------------- -------------- --------------------------------
TESONE Antonio Chairman 1/1-31/12/2002 2003 Annual Report approval
Director 1/1-31/12/2002 2003 Annual Report approval
Chairman of Internal
Control and
Remuneration Committees 1/1-31/12/2002 2003 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
TRONCHETTI PROVERA
Marco Deputy Chairman and Chief 1/1-31/12/2002 2003 Annual Report approval
Executive Officer
Director 1/1-31/12/2002 2003 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
BENETTON Gilberto Deputy Chairman and Director 1/1-31/12/2002 2003 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
BONDI Enrico Chief Executive Officer 1/1-5/9/2002 5 September 2002
Director 1/1-5/9/2002 5 September 2002
------------------------- -------------------------- -------------- --------------------------------
BUORA Carlo Chief Executive Officer 1/1-31/12/2002 2003 Annual Report approval
Director 1/1-31/12/2002 2003 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
CAPRIO Lorenzo Director 1/1-31/12/2002 2003 Annual Report approval
Member of Internal Control
and
Remuneration Committees 1/1-31/12/2002 2003 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
CIRLA Giorgio Director 1/1-31/12/2002 2003 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
FABRIZI Pier Luigi Director 1/1-31/12/2002 2003 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
GERONZI Cesare Director 1/1-31/12/2002 2003 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
MION Gianni Director 1/1-31/12/2002 2003 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
MODIANO Pietro Director 1/1-7/11/2002 7 November 2002
Member of 1/1-7/11/2002 7 November 2002
Remuneration Committee
------------------------- -------------------------- -------------- --------------------------------
NATTINO Giampietro Director 1/1-31/12/2002 2003 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
PIERRI Paola Director 7/11-31/12/2002 1st 2003 Shareholders' meeting
Member of 7/11-31/12/2002 1st 2003 Shareholders' meeting
Remuneration Committee
------------------------- -------------------------- -------------- --------------------------------
PIRELLI Alberto Director 1/1-31/12/2002 2003 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
PURI NEGRI Carlo
Alessandro Director 1/1-31/12/2002 2003 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
ROCCO di TORREPADULA
Giancarlo Director 5/9-31/12/2002 1st 2003 Shareholders' meeting
------------------------- -------------------------- -------------- --------------------------------
TREVISAN Dario Director 1/1-31/12/2002 2003 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
VARISCO Alberto Director 1/1-31/12/2002 2003 Annual Report approval
Member of Internal 1/1-31/12/2002 2003 Annual Report approval
Control Committee
------------------------- -------------------------- -------------- --------------------------------
Total Directors
========================= ========================== ============== ================================
FORNASARI Angelo Chairman of Board of 1/1-31/12/2002 2002 Annual Report approval
Statutory Auditors
------------------------- -------------------------- -------------- --------------------------------
BENNANI Vittorio Statutory Auditor 1/1-31/12/2002 2002 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
CARAMANTI Franco Statutory Auditor 1/1-31/12/2002 2002 Annual Report approval
------------------------- -------------------------- -------------- --------------------------------
Total Statutory Auditors
========================= ========================== ============== ================================
ARIAUDO Corrado Chief Operating Officer 1/1-31/12/2002
------------------------- -------------------------- -------------- --------------------------------
TOTAL EMOLUMENTS
========================= ========================== ============== ================================
Gross remunerations for the year 2002 (in euros)
---------------------------------------------------------------------------------------------
( E ) ( F ) ( G ) ( H )
Emoluments for the
office in the
company Bonuses Other emoluments
Name drawing up the F/S Non-cash and other ------------------------------------------
( A ) (i.e. Olivetti S.p.A.) benefits incentives Amount Company
----------------------- ---------------------- -------- ---------- -------------- --------------------------
TESONE Antonio 774,685
51,646
51,646
------------------------- --------- ------- ---------- ---------- ---------------------------
TRONCHETTI PROVERA
Marco 516,457 1,755,953(1) Telecom Italia S.p.A.
51,646
------------------------- --------- ------- ---------- ---------- ---------------------------
BENETTON Gilberto 51,646 103,291 Telecom Italia S.p.A.
12,911 Seat Pagine Gialle S.p.A.
------------------------- --------- ------- ---------- ---------- ---------------------------
BONDI Enrico 350,908 4,711 2,055,910(2) Telecom Italia S.p.A.
35,091 117,689(3)
------------------------- --------- ------- ---------- ---------- ---------------------------
BUORA Carlo 516,457 2,065,828(1) Telecom Italia S.p.A.
51,646 80,000 Telecom Italia Mobile S.p.A.
------------------------- --------- ------- ---------- ---------- ---------------------------
CAPRIO Lorenzo 51,646
51,646
------------------------- --------- ------- ---------- ---------- ---------------------------
CIRLA Giorgio 51,646
------------------------- --------- ------- ---------- ---------- ---------------------------
FABRIZI Pier Luigi 51,646
------------------------- --------- ------- ---------- ---------- ---------------------------
GERONZI Cesare 51,646
------------------------- --------- ------- ---------- ---------- ---------------------------
MION Gianni 51,646(*) 103,291 Telecom Italia S.p.A.
80,000 Telecom Italia Mobile S.p.A.
103,292 Seat Pagine Gialle S.p.A.
------------------------- --------- ------- ---------- ---------- ---------------------------
MODIANO Pietro 44,005(*)
22,002(*)
------------------------- --------- ------- ---------- ---------- ---------------------------
NATTINO Giampietro 51,646
------------------------- --------- ------- ---------- ---------- ---------------------------
PIERRI Paola 7,641(*)
3,820(*)
------------------------- --------- ------- ---------- ---------- ---------------------------
PIRELLI Alberto 51,646
------------------------- --------- ------- ---------- ---------- ---------------------------
PURI NEGRI Carlo
Alessandro 51,646
------------------------- --------- ------- ---------- ---------- ---------------------------
ROCCO di TORREPADULA
Giancarlo 16,555 271,443 Telecom Italia S.p.A.
------------------------- --------- ------- ---------- ---------- ---------------------------
TREVISAN Dario 51,646
------------------------- --------- ------- ---------- ---------- ---------------------------
VARISCO Alberto 51,646(*)
25,823(*)
------------------------- --------- ------- ---------- ---------- ---------------------------
Total Directors 3,139,775 4,711 0 6,749,609
========================= ========= ======= ========== ========== ===========================
FORNASARI Angelo 124,000 32,260 Tecnost Sistemi S.p.A.
4,388 Alladium S.p.A.
------------------------- --------- ------- ---------- ---------- ---------------------------
BENNANI Vittorio 82,633 6,869 Alladium S.p.A.
11,931 Technoproduzioni S.p.A.
11,950 Olivetti Fin. Ind.le S.p.A.
------------------------- --------- ------- ---------- ---------- ---------------------------
CARAMANTI Franco 83,833 43,571 Seat Pagine Gialle S.p.A.
------------------------- --------- ------- ---------- ---------- ---------------------------
Total Statutory Auditors 290,466 0 0 110,969
========================= ========= ======= ========== ========== ===========================
ARIAUDO Corrado 10,000 154,937 4,161,350(4)
------------------------- --------- ------- ---------- ---------- ---------------------------
TOTAL EMOLUMENTS 3,430,241 14,711 154,937,00 11,021,928
========================= ========= ======= ========== ========== ===========================
(1) Amount including the gross remuneration ex art. 2389 para 1 and 2 of the
Italian Civil Code
(2) Amount including the gross remuneration ex art. 2389 para 1 and 2 of the
Italian Civil Code, as well as bonuses and other incentives (for an amount
equal to euros 650,000)
(3) Emoluments for the office of Chairman in companies controlled by Telecom
Italia S.p.A. not collected but transferred to Telecom Italia.
(4) Remuneration as employee, accrued compensations and severance indemnity,
as well as indemnity for the early waiver to corporate offices and stock
options.
(*) Olivetti emoluments are transferred to the employing company
130 | Olivetti S.p.A. Financial Statements
As requested by the Consob resolution no. 11971/1999 and subsequent amendments
details are provided below of stock options assigned to the Chief Operating
Officer
Options owned at the beginning Options assigned Options exercised
of the year during the year during the year
------------------------------- -------------------------------- --------------------------- ------------------------------------
(A) (B) (1) (2) (3) (4) (5) (6) (7) (8) (9)
Average
Average Average Average market
First Name Number of exercise Average Number of exercise Average Number of exercise value upon
and Surname Office options price expiry options price expiry options price exercise
--------------- ------------- ---------- -------- ------- --------- -------- ------- --------- -------- -----------
Corrado ARIAUDO Chief Operat-
ing Officer 533,332 1.00 - - - - 533,332 1.00 -
Corrado ARIAUDO Chief Operat-
ing Officer 2,500,000 2.515 - - - - - - -
=============== ============= ========== ======== ======= ========= ======== ======= ========= ======== ===========
Options
expired during Options owned at the end
the year of the year
------------------------------- -------- -------------------------------------
(A) (B) (10) (11)=1+4-7-10 (12) (13)
Average
First Name Number of Number of exercise Average
and Surname Office options options price expiry
--------------- ------------- ------- --------- -------- ------
Corrado ARIAUDO Chief O
ing Officer - - - -
Corrado ARIAUDO Chief O
ing Officer - 2,500,000 2.515 -
=============== ============= ======= ========= ======= ======
Tax regime in the event of distribution of reserves
o Additional paid-in capital reserve (3,765,365,301 euros). This is a
capital reserve and therefore, in the event of distribution, does not
contribute to the formation of shareholders' taxable income.
o Revaluation reserve (1,128,827 euros).
In the event of distribution, this reserve contributes to the formation of
Company and shareholders' taxable income.
o Reserve for treasury stock (2,298,156 euros).
Should this reserve be made available and distributed, it would contribute
to the formation of shareholders' taxable income. The shareholders would
attract tax credits within the limits of the taxes paid by the Company
pursuant to article 105, par 1, subheads a and b of the Income Tax
Consolidated Text.
o Extraordinary reserve (1,888,261,068 euros).
In the event of distribution, this reserve contributes to the formation of
shareholders' taxable income. The shareholders would attract tax credits
within the limits of the taxes paid by the Company pursuant to article
105, par 1, subheads a and b of the Income Tax Consolidated Text.
o Non-taxable reserves.
These comprise:
- a reserve for research grants (Law 346/1988) for 8,741,403 euros;
- a reserve for Technology Innovation grants (Law 46/1982) for 685,713
euros;
- a reserve for capital investment grants (Law 64/1986) for 695,110
euros;
- a reserve for VAT deductions on capital investments for 94,784 euros.
In the event of distribution, these reserves would contribute to the formation
of Company and shareholders' taxable income; should they be used for purposes
other than replenishment of losses for the year, they would be treated as
contributing to the formation of the Company's taxable income.
131 | Olivetti S.p.A. Financial Statements
[Page intentionally left blank]
Exhibits
Statement of Changes in Shareholders' Equity
Reclassified Income Statement
Statement of Changes in Financial Position
133 | Olivetti S.p.A. Financial Statements
Olivetti S.p.A.
Statement of Changes in Shareholders' Equity
Additional
paid-in capital
in respect of
share capital
Share capital increases to be
increases filed with the
(I bis through I quater Companies Register
of Shareholders' Additional or shares Revaluation
(in euros) Share capital Equity) paid-in capital to be issued reserves
-------------------------------------------------- ------------- ---------------- --------------- ----------------- -----------
Balance as of 31 December 2000 4,914,694,381 1,999,862,926 3,196,212,781 - 1,128,827
-------------------------------------------------- ------------- ---------------- --------------- ----------------- -----------
Appropriation of net income 2000
as resolved by the Shareholders'
Meeting held on 14 June 2001
Payment of dividends
Conversion of no. 360,695 Olivetti f.r.
1998-2002 convertible bonds 360,695 (360,695)
Exercise of "Olivetti common shares
1998-2002 warrants" 37,012 (37,012)
Exercise of "Olivetti common shares
1998-2002 warrants" 26,127 (26,127)
Merger of Tecnost S.p.A:
Share capital increase through the issue
of no. 1,999,439,092 shares
in exchange for no.1,785,213,475 shares
owned by third parties 1,999,439,092 (1,999,439,092)
Conversion of no. 7,213,223 Olivetti f.r.
1998-2002 convertible bonds 3,725,319
Use of reserve for free capital increase
following the conversion of no. 7,213,223
Olivetti f.r. 1998-2002 convertible bonds 3,487,904
Exercise of "Olivetti common shares 1998-2002
warrants" 2,009,582
Use of the reserve for free share
capital increase following the exercise
of "Olivetti common shares 1998-2002 warrants" 1,881,511
Exercise of "Olivetti ex Tecnost common shares
1999-2004 warrants" 1,685 20,709
Usse of the reserve for free share capital
increase following the exercise of "Olivetti
ex Tecnost common shares 1999-2004 warrants" 5,623
Share capital increase resolved by the Board of
Directors' Meeting held on 9 June 1999
(stock-options) in execution of the powers
conferred by the Extraordinary Shareholders'
Meeting held on 7 April 1999 9,408,133 11,488,562
Use of the reserve for free share capital increase
following the exercise of Stock Options 8,808,552
Share capital increase in March 2001
(no. 348,249,405 shares) 348,249,405 557,199,048
Share capital increase in November 2001
(no.1,491,373,698 shares) 1,491,373,698
Exercise of "Olivetti common shares 2001-2002
warrants" 192,845 192,818
Conversion of no. 780,895 Olivetti 1998-2002 f.r.
convertible bonds 403,299
Use of the reserve for free share capital increase
following the conversion of no.780,895 Olivetti
1998-2002 f. r. convertible bonds (I bis) 377,596
Exercise of "Olivetti common shares 1998-2002
warrants" (I bis) 27,153
Use of the reserve for free share capital
increase following the exercise of "Olivetti
common shares 1998-2002 warrants" 25,422
Exercise of "Olivetti common shares 2001-2002
warrants" (I bis) 6,123 5,309
Exercise of "Olivetti common shares 1998-2002
warrants" (I ter) 10,863
Use of the reserve for free share capital
increase following the exercise of "Olivetti
common shares 1998 -2002 warrants" 10,170
Exercise of "Olivetti common shares 2001-2002
warrants" (I ter) 5,921 5,133
Net result of the year
-------------------------------------------------- ------------- ---------------- --------------- ----------------- -----------
Balance as of 31 December 2001 8,783,701,564 866,547 3,765,113,918 10,442 1,128,827
================================================== ============= ================ =============== ================= ===========
134 | Olivetti S.p.A. Financial Statements
Other reserves
-----------------------------
Retained
earnings
Legal Reserve for Extraordinary (accumulated Net result
reserve treasury stock reserve Other losses) for the year Total
----------- -------------- ------------- ----------- ----------- ------------ --------------
877,318,758 2,298,156 1,888,261,068 187,391,835 - 869,820,034 13,936,988,766
----------- -------------- ------------- ----------- ----------- ------------ --------------
43,491,002 571,549,306 (615,040,308)
(254,779,726) (254,779,726)
3,725,319
(3,487,904)
2,009,582
(1,881,511)
22,394
(5,623)
20,896,695
(8,808,552)
905,448,453
1,491,373,698
385,663
403,299
(377,596)
27,153
(25,422)
11,432
10,863
(10,170)
11,054
(871,479,486) (871,479,486)
----------- -------------- ------------- ----------- ----------- ------------ --------------
920,809,760 2,298,156 1,888,261,068 172,795,057 571,549,306 (871,479,486) 15,235,055,159
=========== =====.======== ============= =========== =========== ============ ==============
135 | Olivetti S.p.A. Financial Statements
Share capital Additional paid-in
increases capital in respect of
(I bis and I share capital increases
ter of Share- to be filed with the
holders' Additional Companies Register or Revaluation
(in euros) Share capital Equity) paid-in capital shares to be issued reserves
------------------------------------------- ------------- ----------- --------------- ------------------- -----------
Balance as of 31 December 2001 8,783,701,564 866,547 3,765,113,918 10,442 1,128,827
------------------------------------------- ------------- ----------- --------------- ------------------- -----------
Year 2001 loss coverage
Conversion of no. 780,895 Olivetti
1998-2002 f.r. convertible bonds 780,895 (780,895)
Exercise of "Olivetti common shares
1998-2002 warrants" 52,575 (52,575)
Exercise of "Olivetti common shares
2001-2002 warrants" 6,123 (6,123) 5,309 (5,309)
Exercise of "Olivetti common shares
1998-2002 warrants" 21,033 (21,033)
Exercise of "Olivetti common shares
2001-2002 warrants" 5,921 (5,921) 5,133 (5,133)
Conversion of no. 28,797,733 Olivetti
1998-2002 f.r. convertible bonds 14,872,788
Use of the reserve for free share capital
increase following the conversion of
no. 28,797,733 Olivetti 1998-2002
f.r. convertible bonds 13,924,945
Conversion of no. 134,430 Olivetti 1,5%
2001-2004 convertible bonds 134,430 215,088
Exercice of no. 40,920 "Olivetti common
shares 2001-2002 warrants" 20,460 17,739
Share capital increase resolved by the
Board of Directors' Meeting held
on 9 June 1999 (Stock Options) in
execution of the powers conferred
by the Extraordinary Shareholders'
Meeting held on 7 April 1999 5,654,982
Exercise of no. 22,831,828 "Olivetti
common shares 1998-2002 warrants" 11,791,655
Use of the reserve for free share capital
increase following the exercise of
"Olivetti common shares 1998 -2002 warrants" 11,040,173
Exercise of no. 2,400 "Olivetti ex Tecnost
common shares 1999 -2004 warrants" 620 8,114
Use of the reserve for share capital
increase following the exercise
of "Olivetti ex Tecnost common shares
1999 -2004 warrants" 2,068
Conversion of no. 3,229,400 Olivetti
1,5% 2001-2010 convertible bonds 3,229,400
Conversion of no. 2,861 Olivetti 1,5%
2001-2004 convertible bonds 2,861 4,578
Exercise of no. 282,268 "Olivetti
common shares 2001-2002 warrants" 141,134 122,363
Conversion of no. 56,203 Olivetti
1,5% 2001-2010 convertible bonds 56,203
Net result of the year
------------------------------------------- ------------- ----------- --------------- ------------------- -----------
Balance as of 31 December 2002 8,845,239,632 200,198 3,765,365,301 126,941 1,128,827
=========================================== ============= =========== =============== =================== ===========
136 | Olivetti S.p.A. Financial Statements
Other reserves Retained
earnings
Legal Reserve for Extraordinary (accumulated Net result
reserve treasury stock reserve Other losses) for the year Total
----------- -------------- ------------- ----------- ----------- ------------- --------------
920,809,760 2,298,156 1,888,261,068 172,795,057 571,549,306 (871,479,486) 15,235,055,159
----------- -------------- ------------- ----------- ----------- ------------- --------------
(871,479,486) 871,479,486
14,872,788
(13,924,945)
349,518
38,199
5,654,982
11,791,655
(11,040,173) -
8,734
(2,068) -
3,229,400
7,439
263,497
56,203
(6,239,962,549) (6,239,962,549)
----------- -------------- ------------- ----------- ----------- --------------- --------------
920,809,760 2,298,156 1,888,261,068 147,827,871 (299,930,180) (6,239,962,549) 9,031,365,025
=========== ============== ============= =========== =========== =============== ==============
137 | Olivetti S.p.A. Financial Statements
Olivetti S.p.A.
Reclassified Income Statement
(in euros) Year 2002 Year 2001 Changes
-------------------------------------------------------- ------------- ------------ -------------
Financial income and charges
1. Income from equity investments in
Subsidiary companies 1,973,535,014 73,555,112 1,899,979,902
Other companies 5,818,495 11,853,361 (6,034,866)
-------------------------------------------------------- ------------- ------------ -------------
Total income from equity investments 1,979,353,509 85,408,473 1,893,945,036
-------------------------------------------------------- ------------- ------------ -------------
2. Other financial income from
Receivables classified as fixed assets 3,175 14,819 (11,644)
Securities classified as current assets 3,063,050 4,202,788 (1,139,738)
Other income:
Interest income from subsidiary companies 7,468,984 3,991,770 3,477,214
Interest income from associated companies 151,716 4,516 147,200
Interest and other financial income 30,709,474 29,120,917 1,588,557
-------------------------------------------------------- ------------- ------------ -------------
Total other financial income 41,396,399 37,334,810 4,061,589
-------------------------------------------------------- ------------- ------------ -------------
3. Interest and other financial charges payable to:
Subsidiary companies (607,163,943) (814,204,575) 207,040,632
Others (205,925,868) (152,423,847) (53,502,021)
-------------------------------------------------------- ------------- ------------ -------------
Total interest and other financial charges (813,089,811) (966,628,422) 153,538,611)
-------------------------------------------------------- ------------- ------------ -------------
Total financial income and charges (1+2+3) 1,207,660,097 (843,885,139) 2,051,545,236
-------------------------------------------------------- ------------- ------------ -------------
Value adjustments to financial assets
4. Revaluation of equity investments -- -- --
5. Write-down of equity investments (8,400,396,263) (175,226,612) (8,225,169,651)
-------------------------------------------------------- ------------- ------------ -------------
Total value adjustments to financial assets (4+5) (8,400,396,263) (175,226,612) (8,225,169,651)
-------------------------------------------------------- ------------- ------------ -------------
6. Other income from operations 13,598,043 15,209,057 (1,611,014)
Other costs from operations
7. Non-financial services (26,361,228) (49,093,106) 22,731,878)
8. Leases and rentals (2,383,471) (2,532,780) 149,309
9. Personnel (13,757,428) (13,100,260) (657,168)
10. Amortisation, depreciation and write-downs (71,720,275) (64,475,325) (7,244,950)
11. Provision for risk and charges -- (191,808,785) 191,808,785
12. Miscellaneous operational expenses (2,962,335) (3,225,442) 263,107
-------------------------------------------------------- ------------- ------------ -------------
Total other costs from operations (117,184,737) (324,235,698) 207,050,961
-------------------------------------------------------- ------------- ------------ -------------
Result from ordinary operations (7,296,322,860) (1,328,138,392) (5,968,184,468)
-------------------------------------------------------- ------------- ------------ -------------
Extraordinary income and charges
13. Income 240,297,405 23,667,842 216,629,563
14. Charges (76,034,591) (16,459,583) (59,575,008)
-------------------------------------------------------- ------------- ------------ -------------
Extraordinary income 164,262,814 7,208,259 157,054,555
-------------------------------------------------------- ------------- ------------ -------------
Result before taxation (7,132,060,046) (1,320,930,133) (5,811,129,913)
-------------------------------------------------------- ------------- ------------ -------------
15. Income taxes for the year 892,097,497 449,450,647 442,646,850
-------------------------------------------------------- ------------- ------------ -------------
NET INCOME (LOSS) FOR THE YEAR (6,239,962,549) (871,479,486) (5,368,483,063)
======================================================== ============= ============ =============
138 | Olivetti S.p.A. Financial Statements
Olivetti S.p.A.
Statement of Changes in Financial Position
(in millions of euros) Year 2002 Year 2001
---------------------------------------------------------------------- --------- ---------
A. Net financial resources (indebtedness) at the beginning of the year (16,322.5) (17,990.9)
---------------------------------------------------------------------- --------- ---------
B. Cash-flow provided (used) by operating activities
Net income (loss) for the year (6,240.0) (871.5)
Amortization and depreciation 71.7 63.0
Net gains from disposal of fixed assets (9.7) (1.0)
Writedown of fixed assets 8,341.1 64.2
Change in operating working capital (1,268.1) 810.3
Net change in reserve for severance indemnities (1.3) (0.3)
---------------------------------------------------------------------- --------- ---------
893.7 64.7
---------------------------------------------------------------------- --------- ---------
C. Cash-flow provided (used) by investing activities
Capital investments:
Intangible assets (0.2) (153.1)
Tangible assets (0.1) (1.4)
Financial assets (224.6) (438.7)
Other 7.1 -
Proceeds from the disposal of fixed assets 415.2 27.4
---------------------------------------------------------------------- --------- ---------
197.4 (565.8)
---------------------------------------------------------------------- --------- ---------
D. Cash-flow provided (used) by financing activities
Capital increases 36.3 2,424.3
Distribution of dividends - (254.8)
---------------------------------------------------------------------- --------- ---------
36.3 2,169.5
---------------------------------------------------------------------- --------- ---------
E. Net cash-flow provided (used) in the year (B+C+D) 1,127.4 1,668.4
---------------------------------------------------------------------- --------- ---------
F. Net financial resources (indebtedness) at the end of the year (A+E) (15,195.1) (16,322.5)
====================================================================== ========= =========
The Board of Directors
139 | Olivetti S.p.A. Financial Statements
[Page intentionally left blank]
Consolidated Financial Statements of the Olivetti Group
at 31 December 2002
Balance Sheet
Income Statement
Explanatory Notes
Olivetti Group
Consolidated Balance Sheet (in millions of euros)
ASSETS 31.12.2002 31.12.2001
----------------------------------------------------------- ---------- ----------
A) AMOUNTS DUE FROM SHAREHOLDERS 3 1
----------------------------------------------------------- ---------- ----------
B) FIXED ASSETS
I. Intangible fixed assets
1) Start-up and expansion costs 83 126
2) Industrial patents and intellectual property rights 1,269 1,291
3) Concessions, licenses, trademarks and similar rights 3,995 4,452
4) Goodwill 17 50
5) Assets in process of formation and advance payments 832 874
6) Other assets 488 590
7) Consolidation differences 27,877 31,837
---------- ----------
Total intangible fixed assets 34,561 39,220
II. Tangible fixed assets
1) Land and buildings 2,245 3,137
2) Plant and machinery 14,958 16,695
3) Industrial and commercial equipment 60 83
4) Other assets 691 746
5) Assets under construction and advance payments 1,495 1,436
---------- ----------
Total tangible assets 19,449 22,097
III. Financial fixed assets
1) Equity investments in
subsidiary companies 19 19
associated companies 2,101 4,651
other companies 456 387
advances on future capital contributions 1,659
2) Financial receivables
Due within 12 months from
others 16 82
Due after 12 months from
subsidiary company 16
others 14
3) Other receivables
Due within 12 months from
subsidiary companies 5 2
associated companies 2
verso altri 55 80
Due after 12 months from
associated companies 433 117
others 232 273
4) Other securities
Guarantee deposits 1 1
Other 303 86
5) Treasury stock 393 393
---------- ----------
Total financial fixed assets 4,046 7,750
Total financial fixed assets (B) 58,056 69,067
=========================================================== ========== ==========
142 | Consolidated Financial Statements
ASSETS 31.12.2002 31.12.2001
--------------------------------------------------------------------- ---------- ----------
C) CURRENT ASSETS
I. Inventories
1) Raw, ancillary and consumable materials 30 42
2) Work-in progress and semi-finished products 27 29
3) Contract work-in progress 179 352
4) Finished products and goods for resale 346 436
5) Advances to suppliers 2 2
---------- ----------
Total inventories 584 861
II. Receivables
Due within 12 months from
customers 8,119 8,251
subsidiary companies 41 32
associated companies 214 569
others 6,295 4,908
Due after 12 months from
customers 1 3
others 2,065 725
---------- ----------
Total receivables 16,735 14,488
III.Financial assets not held as fixed assets
Equity investments 173 393
Securities 1,927 3,616
Receivables for securities held under reverse repurchase 56 4
agreements
Total financial assets not held as fixed assets 2,156 4,013
IV. Liquid funds
Bank and post office deposits 4,363 3,626
Cash 7 76
---------- ----------
Total liquid funds 4,370 3,702
Total current assets (C) 23,845 23,064
--------------------------------------------------------------------- ---------- ----------
D) ACCRUED INCOME AND PREPAID EXPENSES
1) Discounts on bond issues and deferred charges on loans 150 131
2) Other accrued income and prepaid expenses 1,330 1,964
---------- ----------
Total accrued income and prepaid expenses (D) 1,480 2,095
--------------------------------------------------------------------- ---------- ----------
TOTAL ASSETS 83,384 94,227
===================================================================== ========== ==========
143 | Consolidated Financial Statements
LIABILITIES AND SHAREHOLDERS' EQUITY 31.12.2002 31.12.2001
------------------------------------------------------------------------------------- ---------- ----------
A) SHAREHOLDERS' EQUITY
I. Share capital 8,845 8,784
I bis. Share capital increases to be filed with the Companies Register,
pursuant article 2444 of the Italian Civil Code 1
I ter. Share capital increase payments relating to shares to be issued
II. Additional paid-in capital 3,765 3,765
II bis.Additional paid-in capital in respect of share capital increases to
be filed with the Companies Register and of shares to be issued -
III. Revaluation reserves 1 1
IV. Legal reserve 921 921
V. Reserve for treasury stock 2 2
VI. Other Parent Company reserves 2,036 2,061
VII. Reserve for Parent Company shares held by subsidiary companies 391 391
VIII. Sundry reserves, retained earnings and accumulated losses (3,548) (107)
IX. Group income (loss) for the year (773) (3,090)
Group shareholders' equity 11,640 12,729
------------------------------------------------------------------------------------- ---------- ----------
X. Minority interests 8,984 13,624
Total shareholders' equity (A) 20,624 26,353
------------------------------------------------------------------------------------- ---------- ----------
B) RESERVES FOR RISKS AND CHARGES
1) Employee pensions and similar obligations 47 66
2) Taxation 384 759
3) Other provisions 5,395 3,333
Total reserves for risks and charges (B) 5,826 4,158
------------------------------------------------------------------------------------- ---------- ----------
C) RESERVE FOR EMPLOYEE SEVERANCE INDEMNITIES 1,364 1,414
===================================================================================== ========== ==========
144 | Consolidated Financial Statements
LIABILITIES AND SHAREHOLDERS' EQUITY 31.12.2002 31.12.2001
-------------------------------------------- ---------- ----------
D) PAYABLES
Due within 12 months
1) Bonds 813 180
2) Convertible bonds 16
3) Due to banks 3,926 7,412
4) Due to other lenders 1,104 412
5) Advances 270 399
6) Due to suppliers 5,657 6,351
7) Notes payable 241
8) Due to subsidiary companies 16 27
9) Due to associated companies 625 421
10) Due to tax authorities 898 937
11) Due to social security authorities 257 284
12) Other payables 4,511 4,770
Due after 12 months
1) Bonds 23,591 22,871
2) Convertible bonds 7,401 8,956
3) Due to banks 1,850 3,453
4) Due to other lenders 866 1,413
5) Due to suppliers 13 156
6) Notes payable 220
7) Due to associated companies 24 474
8) Due to tax authorities 29 82
9) Due to social security authorities 1,102 1,236
10) Other payables 49 181
Total payables (D) 53,243 60,251
-------------------------------------------- ---------- ----------
E) ACCRUED EXPENSES AND DEFERRED INCOME
Premiums on loan issues 37
Other accrued expenses and deferred income 2,290 2,051
Total accrued expenses and deferred income (E) 2,327 2,051
-------------------------------------------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 83,384 94,227
============================================ ========== ==========
MEMORANDUM ACCOUNTS 31.12.2002 31.12.2001
-------------------------------------------- --------- ----------
Personal guarantees given, net of counter-
securities received 1,227 1,538
Guarantees on Group companies assets 111 163
Commitments 3,124 5,431
Other accounts 93 295
-------------------------------------------- --------- ----------
TOTAL MEMORANDUM ACCOUNTS 4,555 7,427
============================================ ========= ==========
145 | Consolidated Financial Statements
Olivetti Group
Consolidated Income Statement (in millions of euros)
Year 2002 Year 2001
-------------------------------------------------------------------------------- --------- ---------
A) VALUE OF PRODUCTION
1) Revenues from sales and services 31,408 32,016
2) Changes in inventories of work-in progress, semi-finished and finished (8) (15)
products
3) Changes in contract work-in progress (42) (119)
4) Capitalised production 675 583
5) Other revenues and income
grants 20 26
other 484 450
Total value of production (A) 32,537 32,941
-------------------------------------------------------------------------------- --------- ---------
B) COSTS OF PRODUCTION
6) Raw, ancillary and consumable materials and goods for resale 2,315 2,640
7) Services received 9,407 9,782
8) Leases and rentals 1,166 1,096
9) Personnel
a) Wages and salaries 3,410 3,522
b) Social security charges 1,008 1,042
c) Employee severance indemnities 218 222
d) Other 101 133
--------- ---------
4,737 4,919
10) Amortisation, depreciation and writedowns
a) Amortisation of intangible fixed assets 3,462 3,565
b) Depreciation of tangible fixed assets 3,807 4,080
c) Other writedowns of fixed assets 58 17
d) Writedowns of receivables classified as current assets
and of liquid funds 546 448
--------- ---------
7,873 8,110
11) Changes in inventories of raw, ancillary and consumable materials and 12 (42)
goods for resale
12) Provisions for risks 114 389
13) Other provisions 58 97
14) Other operational expenses 839 858
Total costs of production (B) 26,521 27,849
-------------------------------------------------------------------------------- --------- ---------
DIFFERENCE BETWEEN VALUE AND COSTS OF PRODUCTION (A-B) 6,016 5,092
================================================================================ ========= =========
146 | Consolidated Financial Statements
Year 2002 Year 2001
------------------------------------------------------ --------- ---------
C) FINANCIAL INCOME AND CHARGES
15) Income from equity investments in
Subsidiary companies 46 9
Associated companies 8
Others 11 204
--------- ---------
57 221
16) Other financial income
a) From receivables classified as fixed
assets due from
subsidiary companies
associated companies 1 6
others 16 16
b) From securities held as fixed assets 4 3
c) From securities held as current assets 234 295
d) Other interest and financial income from
subsidiary companies 1 1
associated companies 12 17
others 1,244 887
--------- ---------
1,512 1,225
17) Interest and other financial charges (3,819) (4,330)
Total financial income and charges (C) (2,250) (2,884)
------------------------------------------------------ --------- ---------
D) VALUE ADJUSTMENTS TO FINANCIAL ASSETS
18) Revaluations of
equity investments 121 168
securities held as current assets 30
--------- ---------
121 198
19) Writedowns of
equity investments (759) (2,157)
financial fixed assets (40) (49)
securities held as current assets (108) (188)
--------- ---------
(907) (2,394)
Total value adjustments to financial assets (D) (786) (2,196)
------------------------------------------------------ --------- ---------
E) EXTRAORDINARY INCOME AND CHARGES
20) Income
gains on disposals 2,553 465
other income 437 531
--------- ---------
2,990 996
21) Charges
losses on disposals (236) (48)
prior years taxation (8) (5)
other charges (8,242) (4,052)
--------- ---------
(8,486) (4,105)
Total extraordinary income and charges (E) (5,496) (3,109)
------------------------------------------------------ --------- ---------
RESULT BEFORE TAXATION AND MINORITY INTERESTS (A-B+C+D+E) (2,516) (3,097)
------------------------------------------------------ --------- ---------
22) Income taxes for the year 2,210 (579)
------------------------------------------------------ --------- ---------
RESULT AFTER TAXATION BEFORE MINORITY INTERESTS (306) (3,676)
------------------------------------------------------ --------- ---------
23) Result after taxation attributable to minority
shareholders (467) 586
------------------------------------------------------ --------- ---------
24) GROUP NET RESULT FOR THE YEAR (773) (3,090)
====================================================== ========= =========
147 | Consolidated Financial Statements
Explanatory Notes
Basis of presentation
The consolidated financial statements for the year ended 31 December 2002 have
been prepared in accordance with Legislative Decree no. 127 of 9 April 1991.
They comprise the Consolidated Balance Sheet (prepared in accordance with the
formats specified in articles 2424 and 2424 bis of the Italian Civil Code with
suitable adaptations), the Consolidated Income Statement (prepared in
accordance with the formats specified in articles 2425 and 2425 bis of the
Italian Civil Code with suitable adaptations) and these Explanatory Notes.
The Explanatory Notes are provided to illustrate, analyse and, in some cases,
supplement the data reported in the financial statements. They include the
information required by article 38 of Legislative Decree no. 127/1991 and by
other provisions contained therein, as well as by provisions issued by the
Italian Securities and Investments Board (CONSOB); they also provide additional
information, even where not required by specific legislation, if deemed
necessary to present a true and fair view.
The financial statements used for consolidation purposes are those at 31
December 2002 approved by the Shareholders' Meetings of the individual
companies or prepared by the respective Boards of Directors for such approval,
adjusted, where necessary, to eliminate entries recorded solely for fiscal
purposes and to align the statements with the accounting policies adopted by
the Group. Such accounting policies are consistent with legislation governing
consolidated financial statements, interpreted by the accounting principles
established by the Italian Accounting Profession.
Consolidation area
The consolidated financial statements at 31 December 2002 were prepared using
the financial statements of the Parent Company Olivetti S.p.A. and those of the
Groups and companies it controls directly and indirectly (that is to say, in
which, at 31 December 2002, the Parent Company directly or indirectly held the
majority of voting rights at ordinary Shareholders' Meetings, or sufficient
votes to exercise a dominant influence), with the exception of a number of
minor subsidiary companies and of companies sold since 31 December 2002.
Specifically, Telecom Italia S.p.A. and its subsidiary companies (hereinafter
referred to as the Telecom Italia Group), which contributed approximately 97%
of consolidated revenues, were included through line-by-line consolidation of
the consolidated financial statements of the Telecom Italia Group (approved by
the Board of Directors and audited by Reconta Ernst & Young S.p.A.), after the
necessary consolidation adjustments.
The complete list of investee companies is contained in the Exhibit to these
Explanatory Notes ("List of companies included in the consolidated financial
statements at 31 December 2002 and of equity investments, pursuant to articles
38 and 39 of Legislative Decree no. 127/1991").
The main changes in the Telecom Italia Group consolidation area compared with
31 December 2001 are as follows:
a) inclusion in the consolidation area:
- for Domestic Wireline: Mediterranean Nautilus Telekomunikasyon
Hizmetleri Ticaret Anonim Sirketi, Latin American Nautilus Saint
Croix, Latin American Nautilus Colombia Limitada and Latin American
Nautilus Bolivia;
148 | Consolidated Financial Statements
- for Mobile: Timnet Usa, Starcel, Blu;
- for Market IT: Agrisian;
- for Group IT: Teco Soft Argentina;
- for "Others": EMSA Servizi Immobiliari, IN.TEL.AUDIT; Epiclink,
Netesi.
b) exclusion from the consolidation area:
- for Domestic Wireline: Euro Datacom, TMI Italy-Canada and TMI do
Brasil;
- for Mobile: Autel;
- for Internet and Media: Data House Group and some companies in the
Internet Business Area;
- for Market IT: Consiel, Sogei;
- for Group IT: Teco Soft Espana;
- for "Others": the Telespazio Group, Emsa, Immsi, Telimm, Trainet, the
9Telecom Group, Indian Telecommunication Holding, Telecom Italia de
Espana and Telecom Italia GmbH.
Telecom Italia S.p.A. spun off the International Wholesale Services business to
Telecom Italia Sparkle S.p.A. (ex TMI Telemedia International Italia S.p.A. )
and the Training business to Telecom Italia Learning Services S.p.A.
Consolidation principles
The most significant consolidation principles adopted for the consolidated
financial statements at 31 December 2002 are as follows:
a) the assets and liabilities of the companies consolidated on a line-by-line
basis are stated by eliminating the book value of each consolidated equity
investment against the related portion of shareholders' equity.
b) unrealised gains and losses deriving from operations between Group
companies are eliminated, as are all receivables, payables, dividends and
transactions between companies in the consolidation area.
c) goodwill (or consolidation difference), defined as the difference between
the purchase price of subsidiary companies and their current value at the
time of acquisition, if positive, is classified under the asset heading
"Consolidation differences", which represents the future earnings capacity
of the company, and amortised over the period in which such goodwill is
expected to provide benefit; if negative, it is classified under the
equity reserve "Consolidation reserve". The income statements of
subsidiaries acquired during the year are consolidated for the full year;
pre-acquisition results not accruing to the Group are reversed under a
specific income statement heading.
Consolidation differences relating to equity investments in associated
companies, if positive, are included in the investment cost and amortised
over the period in which they are expected to provide benefit.
d) minority shareholders' interests in the equity and net result for the year
of the consolidated subsidiaries are disclosed separately under specific
headings of consolidated shareholders' equity and consolidated income
respectively.
e) capital gains and losses arising from the sale of shares in Group
companies to third parties are recorded under income. In the event of a
share capital increase at a Group company subscribed by a minority
149 | Consolidated Financial Statements
shareholder only, any capital gains or losses arising as the difference
between the value of the Group's share of equity before and after the
various operations are recorded under income.
f) provisions and value adjustments recorded by consolidated companies to
obtain tax benefits allowed under current legislation are eliminated from
the consolidated financial statements, taking due account of any related
tax effects.
Translation into euro of financial statements denominated in foreign currency
The financial statements of foreign subsidiary companies resident in
non-European Monetary Union (EMU) countries are translated into euro by
applying the year-end exchange rates to balance sheet headings and the average
exchange rates for the year to income statement headings. Any differences
arising in respect of the rates at the end of the previous financial year are
reported separately under a specific consolidated shareholders' equity heading
"Sundry reserves, retained earnings and accumulated losses".
150 | Consolidated Financial Statements
The exchange rates used for currencies of non-EMU countries are set out below:
Exchanges rates Euro/Local Currency
--------------------------------------------------------------------------------------
average for
the year 2001
---------------------------------
average for Telecom Italia
31.12.2002 31.12.2001 the year 2002 Group Others
------------------------ ---------- ---------- ------------- -------------- -----------
European currencies
Danish krone 7.42880 7.43650 7.43053 - -
Norwegian krone 7.27560 7.95150 7.50888 - -
Swedish krone 9.15280 9.30120 9.16143 - 9.14077
Hungarian forint 236.290 245.180 242.959 256.624 -
Swiss franc 1.45240 1.48290 1.46701 - -
British pound 0.65050 0.60850 0.62879 0.62187 0.61757
Roumanian leu 35,134.6 27,817.2 35,134.6 27,817.2 -
Russian rublo 33.4790 26.8524 29.6715 26.1487 -
Polish zloty 4.02099 3.49530 3.85693 3.67004 -
Non-European currencies
Venezuelan bolivar 1,471.33 672.432 1,471.33 679.55 640.539
Bolivian 7.85843 6.00473 6.77947 5.89386 -
Australian dollar 1.8556 1.72800 1.74053 - -
Canadian dollar 1.65500 1.40770 1.48607 - -
Hong Kong dollar 8.17810 6.87230 7.37650 6.98554 6.8730
Singapore dollar 1.81990 1.63060 1.69391 - -
US dollar 1.04870 0.88130 0.94540 0.89564 0.89006
Japanese yen 124.3900 115.330 118.03372 - 108.721
Argentine peso 3.53412 1.49821 3.01204 0.89564 0.91112
Chilean peso 755.064 577.066 651.816 567.384 564.356
Colombian peso 2,993.51 2,019.22 2,369.77248 - 2,047.85
Mexican peso 10.85405 8.05711 9.13752 - 8.29024
South African rand 9.00940 10.43020 9.90602 - 7.62055
Brazilian real 3.70537 2.08224 2.77091 2.10294 2.09923
Peruvian sol 3.67150 3.03343 3.32488 - 3.13306
------------------------ ---------- ---------- ------------- -------------- -----------
The financial statements of companies operating in highly inflationary
economies have been adjusted in accordance with inflation accounting procedures
by restating historical book values on the basis of indices that reflect the
real change in the purchasing power of local currencies. In order to avoid
distortions to results, the year-end exchange rates have been used to translate
the income statements of these companies, rather than the average rates for the
year. The following companies adopt inflation accounting procedures:
Corporacion Digitel C.A. (Venezuela), Finsiel Romania S.r.l. (Romania), IS Tim
Telekomunikasyon Hitzmetleri A.S. (Turkey), TECO Soft Argentina and Olivetti
Argentina S.A.C.e.l..
151 | Consolidated Financial Statements
Accounting policies
The accounting policies adopted for the preparation of the consolidated
financial statements comply with those established by law and are consistent
with those adopted in the previous financial year. The accounting policies
adopted for the various headings are illustrated below.
Intangible fixed assets
Intangible fixed assets are stated at purchase or production cost including
related accessory charges, and are amortised over their residual useful life;
intangible fixed assets are written down to reflect any other than temporary
impairment in value; their book value is reinstated in subsequent years if the
reasons for such writedowns no longer apply.
Start-up and expansion costs are amortised over five years.
Industrial patents and intellectual property rights are amortised in respect of
their expected useful life, over five years (for industrial patents) or
predominantly over three years (software), as from the year in which they enter
service.
Concessions, licences, trademarks and similar rights are amortised in respect
of their expected useful life (licences are amortised over the term of the
relevant contracts).
Purchased goodwill relating to the acquisition of businesses or business units
is capitalised and generally amortised over five years.
Assets in process of formation and advance payments refer to costs sustained
for current software development projects. Due to their nature and value, these
projects are of high economic and management importance and offer significant
prospects of future revenues or containment of costs.
The heading Other includes leasehold improvements (generally amortised over the
term of the relevant leases), rights of way acquired by Telecom Italia to
ensure extension of its transmission capacity over non-Italian territory
(amortised over the residual life of the contracts with the foreign operators
who own the facilities to which the rights refer).
Tangible fixed assets
Tangible fixed assets are recorded at purchase or construction cost restated in
accordance with specific monetary revaluation laws and amortised over their
residual useful lives.
Assets are written down to reflect any other than temporary impairment in
value; the original value is reinstated in subsequent periods if the reasons
for such writedowns no longer exist.
Depreciation rates applied are as follows:
------------------------------------------------------------- --------
Buildings 3 - 7%
Telecommunication plant and systems 3 - 33%
Plant and machinery 20 - 33%
Industrial and commercial plant 15 - 25%
Other assets 6 - 33%
------------------------------------------------------------- --------
Tangible fixed assets under construction are stated at the direct costs
incurred.
Ordinary maintenance costs are charged in full to income.
152 | Consolidated Financial Statements
Equity investments
Long-standing equity investments are classified as financial fixed assets;
equity investments acquired for subsequent sale are classified as financial
assets not held as fixed assets.
Equity investments classified as financial fixed assets in unconsolidated
companies in which at least 20% of voting rights are held are valued with the
equity method. Other equity investments classified as financial fixed assets in
unconsolidated companies are recorded at cost written down to the corresponding
portion of shareholders' equity resulting from the latest financial statements
of the investee company in order to reflect other than temporary impairments in
value. Losses in value in excess of the corresponding book values are recorded
under reserves for risks and charges. In any case the book value of such equity
investments is determined on the basis of reasonable expectations of utility
and recovery in future financial periods, if lower.
Equity investments purchased for trading purposes and consequently classified
under current assets, in consolidated or unconsolidated listed companies, are
stated at the lower of purchase cost and realisable value based on year-end
stock market prices.
Writedowns of equity investments (both those held as financial fixed assets and
those held as current assets) are eliminated in subsequent years if the reasons
for such writedowns no longer exist.
Other securities (other than equity investments)
Securities to be held until maturity are classified as financial fixed assets;
marketable securities are classified as financial assets not held as fixed
assets.
Securities held as fixed assets are stated at purchase cost adjusted on an
accrual basis to reflect the difference between purchase cost and redemption
value, and written down to reflect any other than temporary impairment in
value.
Securities held as current assets are recorded at the lower of purchase cost,
adjusted on an accrual basis to reflect the issue spread, and presumed
realisable value based on market trends.
Writedowns of securities are eliminated in subsequent years if the reasons for
such writedowns no longer exist.
Securities purchased through reverse repurchase agreements with an obligation
of re-sale on maturity are classified as financial assets not held as fixed
assets and stated at purchase cost. The differences between the spot and
forward prices are charged or credited to income on an accrual basis, with a
counter-item under accrued income/expenses.
Inventories
Inventories are valued at the lower of purchase or production cost and market
value.
The chief methods used to determine cost are as follows:
- raw materials and finished products: LIFO based on annual layers for the
Telecom Italia Group and weighted average for the Olivetti Tecnost Group;
- goods: weighted average;
- work-in-progress and semi-finished products: production cost;
- short-term contract work-in-progress: industrial cost;
153 | Consolidated Financial Statements
- long-term contract work-in-progress: percentage of completion method,
based on the agreed considerations, also taking account of presumed losses
until completion and other possible related risks.
Raw materials, finished products and goods in excess of foreseeable
production requirements, slow-moving items or items subject to
obsolescence are written down to presumed realisable value.
Accounts receivable and payable
Accounts receivable are stated at estimated realisable value and classified
under financial fixed assets or current assets.
Accounts payable are stated at face value.
Foreign currency receivables and payables are stated on the basis of year-end
exchange rates; any translation gains or losses arising in respect of the
original exchange rates are recorded under "financial income" and "financial
charges" respectively.
Receivables due to the consolidated subsidiary TIM from almost all its dealers
are transferred to a factoring company (without recourse, within the agreed
limits). As each receivable falls due, the factoring company pays TIM the
relative face value, minus amounts due to dealers for services rendered. TIM
has not provided guarantees in respect of this operation.
Telephone Companies Employees Social Security Fund
Pursuant to law no. 58/1992, Telecom Italia is required to provide full
national insurance coverage for all employees on the payrolls of STET, SIP,
Italcable and Telespazio as at 20 February 1992, as well as for all employees
transferred from the Public Administration to IRITEL, through the Telephone
Companies Employees Social Security Fund (Fondo Previdenza Telefonici, FPT).
This coverage also extends to previous periods of employment in other
companies. The amounts due were calculated by the Italian National Social
Security Board (INPS) and are to be paid in 15 annual instalments.
Subsequently, article 66 of Law no. 427/1993 ruled that these costs be recorded
in the financial statements and deducted against taxes for the years in which
the payments are made.
The amount of the liability is uncertain, since Telecom Italia and the INPS do
not agree on the calculation methods to be used.
The matter is being examined in the Courts. Telecom Italia believes that the
total liability at 31 December 2002 in respect of the above payments is between
964 million euros and 1,289 million euros (of which 409 million have already
been paid), net of the residual amount already recorded by IRITEL and currently
carried in the financial statements of Telecom Italia and TIM following the
merger of IRITEL.
In accordance with accepted accounting principles, a payable for an amount
equivalent to the minimum estimated liability has been recorded in the Olivetti
Group's consolidated financial statements for the purposes of determining
consolidation goodwill.
Accruals, prepayments and deferrals
Accruals, prepayments and deferrals are determined to reflect the correct
apportionment of costs and revenues applicable to two or more financial
periods.
154 | Consolidated Financial Statements
Reserves for risks and charges
Taxation: reserves are provided to cover presumed tax liabilities (including
any surcharges and arrears interest) in respect of open or disputed positions,
and also to cover deferred taxes.
In addition, deferred and prepaid taxes are recognised for temporary
differences between the book value and the tax value of the assets and
liabilities of the individual consolidated companies, and also for
consolidation adjustments.
In accordance with prudent accounting principles, prepaid tax assets are not
recognised unless there is a reasonable certainty that future taxable income
will be available in the years in which the temporary differences will be
reversed.
Prepaid and deferred taxes are recorded in the consolidated financial balance
sheet under, respectively, the current assets heading "receivables due from
others" and the "reserve for taxation" as a counter-item to "income taxes for
the year".
The tax benefit of tax loss carry-forwards is recognised to the extent that
there is a reasonable expectation of realising the said benefit.
Deferred taxes on equity reserves not subject to taxation of consolidated
companies or companies valued with the equity method are recognised when such
reserves are distributed or utilised and are thus liable for taxation.
Other provisions: these amounts are provided largely to cover likely known
charges whose timing and extent are however uncertain at year-end. The
provisions reflect best estimates based on the commitments undertaken and the
information available.
Employee severance indemnities
This provision is formed in accordance with current legislation and labour
contracts and reflects the liability accrued to all employees of the
consolidated companies at the balance-sheet date. Receivables arising as a
result of advance tax payments on employee severance indemnities pursuant to
Law no. 662 of 23 December 1996 and subsequent amendments are shown under the
financial fixed assets heading "other receivables". These receivables are
re-valued in compliance with the provisions of the said law.
Grants
Grants related to income (directly credited to the income statement) and grants
related to assets are recognised in the period in which the documents
confirming payment are filed, or in the period in which the related costs are
sustained in cases when payment is based on established procedures.
Specifically, grants related to assets are recognised on an accrual basis: they
are classified as deferred income and subsequently credited to income as the
assets to which they refer are amortised.
Revenues
Revenues are recognised as they arise, as follows:
a) telecommunications services: in the year the services are provided; since
1999, traffic revenues have been stated gross of amounts due to
third-party operators;
155 | Consolidated Financial Statements
b) IT operations, innovative network services and other operations: to the
extent that the relevant services are provided during the year;
c) manufacturing and installation operations: on delivery of goods in the
case of supplies or on completion of work in the case of services,
consistently with contractual commitments;
d) office products: on delivery.
Leased assets
Assets held under finance lease contracts are classified under fixed assets and
depreciated beginning from the contract date at the rates applied to
proprietary assets of a similar nature. A financial payable is recorded for an
equivalent amount and gradually written down as payment is made. Financial
charges and amortisation charges provided in respect of leased asset values are
charged to income on an accrual basis. Capital gains realised on the sale of
assets to leasing companies that are immediately leased back through finance
lease contracts are deferred in financial statements and credited to
consolidated income over the lease term.
Dividends
Dividend income from subsidiaries is recorded on accrual (i.e., in the year in
which the corresponding income is earned) and eliminated during consolidation.
Deferred taxes are provided in respect of such income.
In line with accrual accounting procedures, tax credits arising on collection
of dividends are also classified as deferred tax assets in the year the
dividends accrue, with a balance-sheet counter-item under the heading "Prepaid
taxes" in other receivables.
Dividends from non-subsidiary companies and related tax credits are recorded in
the year in which such dividends are declared, which generally coincides with
the year of collection.
Memorandum accounts
Guarantees given - referring in the main to suretyships - are stated for an
amount reflecting the value of securities, net of counter-securities received.
Purchase and sale commitments reflect year-end contractual amounts which have
not been included in the normal "operating cycle" and portions not yet
executed.
Derivative instruments
Financial derivative contracts are used by the Group to hedge exposure to
interest rate and exchange rate risks. They are valued consistently with the
underlying asset and liability positions and any net expenses connected with
each single transaction are recognized in the statement of income.
For financial instruments used to hedge interest rate risks, the interest
differentials are recorded in the statement of income in "financial income and
expense" based on the accrual principle.
For financial instruments used to hedge exchange rate risks, the cost (or
"financial component" calculated as the difference between the rate at the date
of stipulating the contract and the forward rate) is recorded in the statement
of income in "financial income and expense" based on the accrual principle.
156 | Consolidated Financial Statements
Non-hedging derivatives are assessed by comparing the instrument value at the
contract date and its year-end value. Any losses are charged to income, while
gains are not recorded since they are not realised.
Premiums collected (paid) on the sale or purchase of put and call options on
listed portfolio shares are classified under "other payables" or "receivables
due from others". If the option is exercised, the premium collected (paid) is
treated as an accessory component of the strike price of the underlying
instruments; if the option is not exercised, the premium collected (paid) is
recorded under financial income (financial charges). Purchase or sale
commitments in respect of the sale of put and call options are illustrated in
these notes, in the section "Hedging instruments and other derivatives".
Exceptions allowed under article 2423, paragraph 4, of the Italian Civil Code
No exceptions pursuant to article 2423, par 4, of the Italian Civil Code have
been made in the financial statements as at 31 December 2002.
Changes in the application of accounting policies
No changes have been adopted in accounting or evaluation policies for financial
statement items in 2002.
157 | Consolidated Financial Statements
Comments on consolidated assets
B) Fixed assets
I. Intangible fixed assets
Net intangible fixed assets at 31 December 2002 amounted to 34,561 million
euros (39,220 million euros at 31 December 2001).
Net book Net book
value Other value
(in millions of euros) at 31.12.2001 Increases Amortisations changes at 31.12.2002
----------------------------------------------------- ------------- --------- ------------- ------- -------------
Start-up and expansion costs 126 14 (46) (11) 83
Industrial patents and intellectual property rights 1,291 581 (1,013) 410 1,269
Concessions, licenses, trademarks and similar rights 4,452 117 (107) (467) 3,995
Goodwill 50 3 (9) (27) 17
Assets in process of formation and advance payments 874 817 (859) 832
Other 590 78 (145) (35) 488
Consolidation differences 31,837 346 (2,142) (2,164) 27,877
----------------------------------------------------- ------------- --------- ------------- ------- -------------
Total 39,220 1,956 (3,462) (3,153) 34,561
===================================================== ============= ========= ============= ======= =============
Start-up and expansion costs comprised costs relating to share capital
increases.
Industrial patents and intellectual property rights essentially related to
application software owned or licensed indefinitely, largely attributable to
the Telecom Italia Group.
Concessions, licences, trademarks and similar rights amounted to 3,995 million
euros, a decrease of 457 million euros caused mainly by exchange rate changes
in South American countries (-650 million euros). They referred chiefly to the
residual cost of UMTS and PCS licences.
Assets in process of formation and advance payments amounted to 832 million
euros and reflected costs sustained by Telecom Italia for current software
development projects.
The heading Other reflected a balance of 488 million euros, including:
a) 222 million euros for leasehold improvements;
b) 42 million euros for bank fees and commissions in respect of the public
tender offer on Telecom Italia;
c) 148 million euros for bond issuance expenses.
Consolidation differences (or consolidation goodwill) at 31 December 2002
amounted to 27,877 million euros (31,837 million euros at 31 December 2001) and
included:
158 | Consolidated Financial Statements
o 20,692 million euros for the acquisition of 52.12% of the ordinary share
capital of Telecom Italia, net of amortisation totalling 4,446 million
euros.
Aggregate consolidation goodwill was originally stated at 25,534 million euros
(justified by stock market prices, availability of the majority of voting
rights and earnings expectations as a result of implementation of the
Industrial Business Plan drawn up at the time of the public tender offer), to
be amortised over 20 years beginning from the second half of 1999;
o 659 million euros for Telecom Italia shares purchased since the public
tender offer, net of amortisation of 102 million euros;
o 6,509 million euros for the acquisition by the Telecom Italia Group of the
equity investment in Seat Pagine Gialle and other companies.
The balance on the heading decreased by 3,960 million euros from 2001 as a
result of writedowns of 1,903 million euros generated by the Telecom
Italia Group, current amortisation charges totalling 2,142 million euros
and the impact of Latin American currency devaluation on goodwill
denominated in such currencies.
II. Tangible fixed assets
At 31 December 2002 net tangible fixed assets amounted to 19,449 million euros
(22,097 million euros at 31 December 2001) and comprised:
Accumulated Net book value Net book value
Gross value depreciation at 31.12.2002 at 31.12.2001 Changes
(in millions of euros) at 31.12.2002 at 31.12.2002 (a) (b) (a-b)
---------------------- ------------- ------------- -------------- -------------- -------
Land and buildings 3,712 1,467 2,245 3,137 (892)
Plant and machinery 56,801 41,843 14,958 16,695 (1,737)
Equipment 1,043 983 60 83 (23)
Other assets 2,101 1,410 691 746 (55)
Assets under construction 1,495 0 1,495 1,436 59
---------------------- ------------- ------------- -------------- -------------- -------
Total 65,152 45,703 19,449 22,097 (2,648)
====================== ============= ============= ============== ============== =======
Changes in tangible fixed assets during 2002 were as follows:
(in millions of euros)
------------------------------------- -------
Net book value as of 31 December 2001 22,097
------------------------------------- -------
Additions 3,291
Depreciation charges (3,807)
Changes in the consolidation area (313)
Disposals (541)
Translation differences and other changes (1,278)
------------------------------------- -------
Net book value as of 31 December 2002 19,449
===================================== =======
159 | Consolidated Financial Statements
Additions totalled 3,291 million euros, of which 3,258 million euros for the
Telecom Italia Group and 33 million euros for the other Group companies.
Additions at the Telecom Italia Group were as follows:
(in millions of euros) Year 2002
--------------------------------------------------------- ---------
Domestic Wireline 1,828
Mobile 1,075
South America 201
Internet and Media 28
Market IT 12
Group IT 85
Sundry operations and consolidation adjustments 29
--------------------------------------------------------- ---------
Total 3,258
========================================================= =========
Additions for the other Group companies totalled 33 million euros and related
to the Olivetti Tecnost Group for 26 million euros and the Olivetti
Multiservices Group for 7 million euros.
Depreciation was provided at rates deemed to reflect the residual useful life
of the assets concerned and related to the period of utilisation as regards
additions for the period.
III. Financial fixed assets
Financial fixed assets at 31 December 2002 amounted overall to 4,046 million
euros compared with 7,750 million euros at 31 December 2001, as follows:
31.12.2002 31.12.2001 Changes
(in millions of euros) (a) (b) (a-b)
---------------------------------------- ---------- ---------- -------
Equity investments 2,576 5,057 (2,481)
Advances on future capital contributions - 1,659 (1,659)
Financial receivables 46 82 (36)
Other receivables due from:
subsidiary companies 5 2 3
associated companies 435 117 318
other companies 287 353 (66)
Other securities 304 87 217
Treasury stock 393 393 -
---------------------------------------- ---------- ---------- -------
Total 4,046 7,750 (3,704)
======================================== ========== ========== =======
160 | Consolidated Financial Statements
Equity investments
31.12.2002 31.12.2001 Changes
(in millions of euros) (a) (b) (a-b)
--------------------------------------------------------- ---------- ---------- -------
Equity investments in unconsolidated subsidiary companies 19 19 -
Equity investments in associated companies 2,101 4,651 (2,550)
Equity investments in other companies 456 387 69
--------------------------------------------------------- ---------- ---------- -------
Total 2,576 5,057 (2,481)
========================================================= ========== ========== =======
Equity investments in associated companies (2,101 million euros as of 31
December 2002) comprised:
Net book value Net book value
(in millions of euros) as of 31.12.2002 as of 31.12.2001 Changes
---------------------- ---------------- ---------------- -------
Telekom Austria 708 1,460 (752)
GLB Servicos Interativos 13 24 (11)
Solpart Participacoes 142 238 (96)
Mobilkom Austria - 544 (544)
AUNA - 690 (690)
Etec S.A. 467 551 (84)
Telekom Srbija 187 195 (8)
IS TIM - 81 (81)
B.D.T. - 158 (158)
IM.SER 12 141 (129)
Netco Redes 22 125 (103)
Telemaco immobiliare - 91 (91)
Tiglio I 242 - 242
Tiglio II 74 - 74
Mirror International Holding 94 94 -
Italtel Holding 43 65 (22)
Stream 19 32 (13)
Other 78 162 (84)
---------------------- ---------------- ---------------- -------
Total 2,101 4,651 (2,550)
====================== ================ ================ =======
The aggregate value of these equity investments includes the residual amount to
be amortised (504 million euros at 31 December 2002 and 1,688 million euros at
31 December 2001) of the positive consolidation difference arising at the time
of acquisition between the purchase cost and the value of the corresponding net
equity portion of the investee companies. The consolidation difference mainly
referred to Telekom Austria (315 million euros) and Etec S.A. (100 million
euros).
161 | Consolidated Financial Statements
Other receivables
Other receivables classified as financial fixed assets (but not included in the
net financial position) amounted to 727 million euros at 31 December 2002 (of
which 62 million euros short-term and 665 million euros medium/long-term). They
included 94 million euros for receivables, including revaluations, arising from
advance tax payments on employee severance indemnities, 435 million euros due
from associated companies, mainly for borrowings granted by the Telecom Italia
Group to its foreign investee companies, and 85 million euros for loans to
personnel.
At 31 December 2001 other receivables amounted to 472 million euros, of which
82 million euros short-term and 390 million euros medium/long-term.
Other securities
The balance on this heading at 31 December 2002 totalled 304 million euros (87
million euros at 31 December 2001).
Treasury shares held by the Parent Company and by its subsidiary Olivetti
International S.A.
At 31 December 2002 Olivetti S.p.A. and Olivetti International S.A. held a
total of 214,628,828 Parent Company ordinary shares, carried at a book value of
393 million euros. Treasury shares held by the Parent Company Olivetti S.p.A.
(2,697,500) are carried at 2 million euros and arose partly from purchases
authorised by the Shareholders' Meeting of stock held by employees of the
Parent Company and its subsidiaries. The shares held by Olivetti International
S.A. (211,931,328) were obtained in joint exchange for Tecnost S.p.A. shares
following the upstream merger of Tecnost into Olivetti and are carried at an
aggregate value of 391 million euros, the original book value of the Tecnost
shares.
162 | Consolidated Financial Statements
C) Current assets
I. Inventories
Net inventories at 31 December 2002 amounted to 584 million euros (861million
euros at 31 December 2001):
31.12.2002 31.12.2001 Changes
(in millions of euros) (a) (b) (a-b)
-------------------------------------------- ---------- ---------- -------
Raw, ancillary and consumable materials 30 42 (12)
Work-in progress and semifinished products 27 29 (2)
-------------------------------------------- ---------- ---------- -------
Total manufacturing inventories 57 71 (14)
Finished products and goods for resale:
in respect of group core business 323 409 (86)
property for sale 23 27 (4)
---------- ---------- -------
346 436 (90)
Contract work-in progress 179 352 (173)
Advance payments 2 2 -
-------------------------------------------- ---------- ---------- -------
Total 584 861 (277)
============================================ ========== ========== =======
Long-term contract work-in-progress reflected considerations due under
contractual terms, according to the percentage of completion method.
Property for sale comprised land and buildings already owned by the Olivetti
Group, as well as residential real estate whose construction or restructuring
had not been completed by the contractors at 31 December 2002.
II. Receivables
Accounts receivable not held as fixed assets amounted to 16,735 million euros
at 31 December 2002 (14,488 million euros at 31 December 2001).
31.12.2002 31.12.2001 Changes
(in millions of euros) (a) (b) (a-b)
-------------------------------- ---------- ---------- -------
Receivables due within 12 months 14,669 13,760 909
Receivables due after 12 months 2,066 728 1,338
-------------------------------- ---------- ---------- -------
Total 16,735 14,488 2,247
================================ ========== ========== =======
163 | Consolidated Financial Statements
Receivables due within 12 months
31.12.2002 31.12.2001 Changes
(in millions of euros) (a) (b) (a-b)
------------------------------------------------- ---------- ---------- ----------
Financial receivables:
Interest-bearing current accounts and loans
subsidiary companies 23 7 16
associated companies 12 206 (194)
third parties 960 599 361
------------------------------------------------- ---------- ---------- ----------
995 812 183
------------------------------------------------- ---------- ---------- ----------
Non financial receivables due from:
subsidiary companies 18 25 (7)
associated companies 202 363 (161)
trade customers 8,967 9,081 (114)
others 5,374 4,354 1,020
------------------------------------------------- ---------- ---------- ----------
14,561 13,823 738
less: allowance for doubtful accounts (887) (875) (12)
------------------------------------------------- ---------- ---------- ----------
Totale 14,669 13,760 909
------------------------------------------------- ---------- ---------- ----------
Trade receivables before allowances for bad debts amounted to 8,967 million
euros and referred in the main to amounts due for telecommunications services
and supplies of office products. They related to Telecom Italia (3,753 million
euros), TIM (1,404 million euros) and the Seat Pagine Gialle Group (894 million
euros). They also included 1,107 million euros for amounts due from other
telecommunications services providers.
Receivables were written down to estimated realisable value. Such writedowns
mainly concerned amounts due to the Group's telecommunications companies.
During 2002, Telecom Italia S.p.A. transacted securitisation operations which
generated a decrease of 849 million euros in trade receivables at 31 December
2002, of which 757 million euros were not yet due, and a decrease of 826
million euros in net financial indebtedness.
Factoring operations totalling 3,969 million euros were also arranged, of which
3,843 million euros relating to the Telecom Italia Group and 126 million euros
to other Group companies; ceded receivables not yet due at 31 December 2002
amounted to 585 million euros.
164 | Consolidated Financial Statements
Other short-term non-financial receivables amounted to 5,374 million euros
(4,354 million euros at 31 December 2001), as follows:
(in millions of euros) 31.12.2002 31.12.2001 Changes
------------------------------------------------------------------------ ---------- ---------- ----------
Subsidies and grants due from the State and other public bodies 59 43 16
Amounts collected from customers, currently being credited 98 210 (112)
Amounts due from tax authorities 2,092 2,215 (123)
Prepaid taxes 2,151 991 1,160
Amounts due from employees 95 94 1
Sundry amounts due (from the State and other public bodies) 879 801 78
------------------------------------------------------------------------ ---------- ---------- ----------
Total 5,374 4,354 1,020
======================================================================== ========== ========== ==========
Receivables due after 12 months
Receivables due after 12 months amounted to 2,066 million euros at 31 December
2002 (728 million euros at 31 December 2001), as follows:
o 2,039 million euros for prepaid taxes (704 million euros at 31 December 2001),
of which 210 million euros for the entry in the Olivetti consolidated financial
statements only of the Telephone Companies Employee Social Security Fund
payable (which the Telecom Italia Group accounts for on a cash basis);
o 27 million euros for other receivables (24 million euros in 2001).
III. Financial assets not held as fixed assets
These assets totalled 2,156 million euros at 31 December 2002 (4,013 million
euros at 31 December 2001).
31.12.2002 31.12.2001 Changes
(in millions of euros) (a) (b) (a-b)
------------------------------------------------------------------------ ---------- ---------- ----------
Equity investments in subsidiary companies 169 247 (78)
Equity investments in associated companies - 134 (134)
Other equity investments 4 12 (8)
Securities 1,927 3,616 (1,689)
Receivables for securities held under reverse repurchase agreements 56 4 52)
------------------------------------------------------------------------ ---------- ---------- ----------
Total 2,156 4,013 (1,857)
======================================================================== ========== ========== ==========
Equity investments available for future divestments are classified under
current assets and carried at the lower of purchase cost and estimated
realisable value based on December stock market prices.
At 31 December 2002, equity investments in subsidiary companies amounted to 169
million euros and related primarily to shares held by companies in the Telecom
Italia Group. The reduction was largely due to the Telecom Italia writedown on
TIM shares.
Equity investments acquired for trading purposes relating to listed companies,
including companies consolidated on a line-by-line basis, are classified as
Securities and carried at the lower of purchase cost and estimated realisable
value based on year-end stock market prices.
165 | Consolidated Financial Statements
Securities amounted overall to 1,927 million euros at 31 December 2002 and were
held in the main by Group finance companies in connection with trading
activities; they included 278 million euros for securities held by the Telecom
Italia Group and 1,649 million euros for securities held by other Olivetti
Group companies, in particular bonds (517 million euros), own bonds (649
million euros) and other securities (483 million euros).
IV. Liquid funds
At 31 December 2002 liquid funds amounted to 4,370 million euros (3,702 million
euros at 31 December 2001), including 1,255 million euros for the Telecom
Italia Group. They consisted mainly of cash held in bank current accounts.
D) Accrued income and prepaid expenses
Accrued income and prepaid expenses amounted to 1,480 million euros at 31
December 2002 (2,095 million euros at 31 December 2001).
31.12.2002 31.12.2001 Changes
(in milions of euros) (a) (b) (a-b)
---------------------------------------------------------- ---------- ---------- ----------
Accrued income:
interest income
within 12 months 358 366 (8)
after 12 months 12 (12)
other 9 100 (91)
---------------------------------------------------------- ---------- ---------- ----------
Total accrued income 367 478 (111)
---------------------------------------------------------- ---------- ---------- ----------
Prepaid expenses:
interest charges
within 12 months 22 59 (37)
after 12 months 465 693 (228)
other 476 734 (258)
Discounts on bond issues and other similar charges on loans 150 131 19
---------------------------------------------------------- ---------- ---------- ----------
Total prepaid expenses and discounts 1,113 1,617 (504)
========================================================== ========== ========== ==========
Total 1,480 2,095 (615)
========================================================== ========== ========== ==========
Prepaid expenses in respect of financial charges due after 12 months amounted
to 465 million euros at 31 December 2002 and consisted of the redemption
premium on the Olivetti 1.5% 2001-2004 and Olivetti 1.5% 2001-2010 bonds issued
by the Parent Company in 2001 and on the 2000-2005 1% Bond exchangeable for
Telecom Italia shares issued by Olivetti Finance N.V., for the portions not
accruing in 2002.
166 | Consolidated Financial Statements
Comments on liabilities and shareholders' equity
A) Shareholders' equity
I. Share capital
The share capital of Olivetti S.p.A. at 31 December 2002, fully subscribed,
paid-up and filed with the Companies Register, was represented by 8,845,239,632
ordinary shares with a par value of 1 euro each (8,783,701,564 ordinary shares
at 31 December 2001) for an aggregate value of 8,845,239,632 euros
(8,783,701,564 euros at 31 December 2001).
The following operations determined the net increase of 61,538,068 euros during
2002:
o share capital increases subscribed by 31 December 2001 for an aggregate
amount of 839,593 euros, filed with the Companies Register in January 2002, as
follows:
- 780,895 euros following conversion of 780,895 "Olivetti floating rate
1998-2002" bonds;
- 52,575 euros following exercise of 52,575 "Olivetti 1998-2002 ordinary share
warrants";
- 6,123 euros following exercise of 12,246 "Olivetti 2001-2002 share warrants";
o share capital increases for an aggregate 26,954 euros following exercise in
December 2001 of 21,033 "Olivetti 1998-2002 ordinary share warrants" and 11,842
"Olivetti 2001-2002 share warrants" in respect of which the corresponding
shares were issued and filed with the Companies Register in 2002;
o share capital increases for an aggregate 32,161,563 euros following the
conversion of bonds, comprising:
- 28,797,733 euros following conversion of 28,797,733 "Olivetti floating rate
1998-2002" bonds with a par value of 1,000 Italian lire each (equivalent to
0.5165 euro), after utilisation of 13,924,945 euros from the "Reserve tied to
conversion of Olivetti floating rate 1998-2002 bonds" formed following
re-denomination of share capital in euros;
- 134,430 euros following conversion of 134,430 "Olivetti 1.5% 2001-2004
convertible bonds with redemption premium" (in addition to a share premium of
215,088 euros);
- 3,229,400 euros following conversion of 3,229,400 "Olivetti 1.5% 2001-2010
convertible bonds with redemption premium";
o share capital increases for an aggregate 28,509,958 euros following exercise
of warrants, comprising:
- 22,831,828 euros par value following exercise of "Olivetti 1998-2002 ordinary
share warrants"; this increase consisted of 11,791,655 euros against payment of
0.5165 euros (equivalent to 1,000 Italian lire) per share and 11,040,173 euros
on a free basis (through use of the "Reserve tied to exercise of Olivetti
1998-2002 ordinary share warrants" formed following the re-denomination of
share capital in euros);
- 5,654,982 euros par value following exercise of a similar number of "Olivetti
1999-2001 share warrants" assigned to Parent Company and subsidiary managers;
- 2,688 euros par value (in addition to a share premium of 8,114 euros)
following exercise of 2,400 "Olivetti ex Tecnost 1999-2004 warrants" on an
exchange basis of 1.12 Olivetti shares per warrant; the issue was effected for
620 euros against payment and for 2,068 euros on a free basis through use of
the "Reserve tied to exercise of ex Tecnost 1999-2004 warrants" formed
following the re-denomination of Tecnost S.p.A. share capital in euros;
167 | Consolidated Financial Statements
- share capital increase for 20,460 euros par value (in addition to a share
premium of 17,739 euros) following exercise of 40,920 "Olivetti 2001-2002
ordinary share warrants".
Future potential changes in share capital and proxies assigned to Directors
The following were still outstanding at 31 December 2002:
- 137,355,625 "Olivetti ex Tecnost 1999-2004 warrants" with a floating exercise
price. Exercise of these warrants would determine an aggregate share capital
increase including the share premium varying from a minimum of 581.5 million
euros (January 2003) to a maximum of 711.7 million euros (June 2004), as well
as 118.4 euros from utilisation of pre-established free share capital increase
reserves;
- 487,409,258 "Olivetti 1.5% 2001-2004 convertible bonds with redemption
premium" which would generate a share capital increase for an aggregate par
value of 487.4 million euros (in addition to a share premium of 779.9 million
euros);
- 2,409,663,062 "Olivetti 1.5% 2001-2010 convertible bonds with redemption
premium" in respect of which a similar number of Olivetti ordinary shares could
still be issued at 31 December 2002 for an aggregate par value of 2,409.7
million euros.
The Board of Directors' meeting of 24 February 2000 implemented the proxy
granted pursuant to art. 2443 of the Italian Civil Code by the Extraordinary
Shareholders' Meeting of 7 April 1999 to carry a resolution for a Three-Year
Stock Option Plan from 1 January 2002 to 31 December 2004, assigning to
approximately one hundred managers of the Parent Company and its subsidiaries
29,500,000 free warrants for subscription of an equal number of Olivetti
ordinary shares at a price of 3.308 euros per share (after adjustment for the
share capital increases of 2001) corresponding to the normal value of Olivetti
ordinary shares at the date of the Board of Directors' meeting.
The warrants were to have been exercised in three groups in the period between
1 November and 15 December of 2002, 2003 and 2004 and could be accumulated
until the end of the Plan.
Subsequently, the Board of Directors' meeting of 9 February 2001 passed a
resolution to revoke the previous resolution of 24 February 2000 and to raise
share capital by an aggregate amount of 29 million euros through issue of 29
million shares at a subscription price of 2.515 euros per share (after
adjustment for the share capital increases of 2001). The shares are reserved
for managers of the Parent Company and its subsidiaries and service the
warrants to be assigned to such managers under the "February 2002 - December
2004 Three-Year Stock Option Plan", with no changes to terms and conditions
applying to stock options (a total of 1,330,000) already assigned to managers
on the payroll as of 24 February 2000 who had since left the Group's employ.
The Shareholders' Meeting of 8 May 2002 upheld the Board of Directors' proposal
of 13 October 2001 and passed a resolution to revoke the non-utilised portions
of the proxies pursuant to articles 2443 and 2420 ter granted with the
resolutions carried by the Shareholders' Meetings of 7 April 1999 and 13
October 2001 (amounting respectively to a maximum of 6,740 million euros and
10,051 million euros). Therefore any future operation on capital or any
operation that may have an effect on capital (to be executed directly or
through a request for new proxies, by means of issuance of shares, convertible
bonds or bonds with warrants, warrants, options or other similar rights to the
Company shares) will be submitted for Shareholder approval on a case-by-case
basis.
The Shareholders' Meeting of 8 May 2002 also passed a resolution empowering the
Directors, pursuant to article 2420 ter of the Italian Civil Code, to issue
bonds in euros or foreign currency, in one or more
168 | Consolidated Financial Statements
instances, over a maximum period of five years as from the date of the
resolution, for a maximum aggregate amount of 9 billion euros, within the
limits permitted under law on a case-by-case basis, and to establish the
procedures, terms, conditions and regulations thereof.
I bis. Share capital increases to be filed with the Companies Register pursuant
to art. 2444 of the Italian Civil Code
The balance on this heading amounted to 200,198 euros at 31 December 2002
(839,593 euros at 31 December 2001). It reflects the par value of the shares
issued by Olivetti S.p.A. in respect of share capital increases effected in
2002, which had not been filed with the Companies Register by the end of the
year.
I ter. Share capital increase payments relating to shares to be issued
At 31 December 2002 the balance on this Parent Company heading was zero (26,954
euros at 31 December 2001).
II. Additional paid-in capital
This Parent Company reserve amounted to 3,765,365,301 euros at 31 December 2002
compared with 3,765,113,918 euros at 31 December 2001, a net increase of
251,383 euros which reflected the following movements:
- 10,442 euros relating to 12,044 shares (issued at 1.867 euros per share)
arising from the exercise in December 2001 of a similar number of "Olivetti
2001-2002 share warrants" for which the relevant shares were issued in 2001 and
registered in 2002 (6,123 shares) or issued and registered in January 2002
(5,921 shares);
- 215,088 euros relating to 134,430 shares issued following conversion of a
similar number of bonds (with a par value of 2.60 euros per bond) of the series
"Olivetti 1.5% 2001-2004 convertible with redemption premium";
- 17,739 euros relating to 20,460 shares issued (at a price of 1.867 euros per
share) following exercise of 40,920 "Olivetti 2001-2002 share warrants";
o 8,114 euros relating to 2,688 shares issued following exercise of 2,400
"Olivetti ex Tecnost 1999-2004 warrants" at a price of 3.249 euros per share.
II bis. Additional paid-in capital in respect of share increases to be filed
with the Companies Register and of shares to be issued
This Parent Company reserve (which is not shown in the Consolidated Balance
Sheet given the immaterial amount involved) amounted to 126,941 euros at 31
December 2002 (10,442 euros at 31 December 2001).
169 | Consolidated Financial Statements
III. Revaluation reserves
This Parent Company reserve of 1,128,827 euros (unchanged from 31 December
2001) consists of the revaluation reserve originally stated in the books of the
merged company Tecnost S.p.A. and re-formed in the books of Olivetti S.p.A..
IV. Legal reserve
This Parent Company reserve amounted to 920,809,760 euros at 31 December 2002
(unchanged from 31 December 2001).
V. Reserve for treasury stock
This Parent Company reserve of 2,298,156 euros reflects the value of 2,697,500
shares issued and held by Olivetti S.p.A. and carried in the balance sheet
under the appropriate financial fixed assets heading.
VII. Other reserves
a) Other Parent Company reserves
At 31 December 2002 these reserves reflected an aggregate amount of
2,036,088,939 euros compared with 2,061,056,125 euros at 31 December 2001, a
total net decrease of 24,967,186 euros.
1) Extraordinary reserve
At 31 December 2002 this reserve amounted to 1,888,261,068 euros (unchanged
from 31 December 2001).
2) Restricted reserve tied to exercise of Olivetti ex Tecnost 1999-2004 warrants
This reserve was formed following the free share capital increase at Tecnost
S.p.A. and the simultaneous re-denomination of share capital in euros. It is
irrevocably tied to exercise of "Olivetti ex Tecnost 1999-2004 warrants". At 31
December 2002 it amounted to 118,369,170 euros, down by 2,068 euros from 31
December 2001 due to exercise of 2,400 warrants during the year.
3) Restricted reserves tied to conversion of Olivetti bonds and exercise of
Olivetti warrants
These reserves (formed following the re-denomination of Olivetti share capital
in euros) amounted to an aggregate 19,241,691 euros at 31 December 2002
compared with 44,206,809 euros at 31 December 2001. The decrease of 24,965,118
euros reflects:
- for 13,924,945 euros, use of the "Reserve for conversion of Olivetti
floating rate 1998-2002 bonds" (which decreased from 14,852,133 euros to
927,188 euros) following conversion of 28,797,733 bonds;
- for 11,040,173 euros, use of the "Reserve for exercise of Olivetti 1998-2002
ordinary share warrants" (which decreased from 11,203,283 euros to 163,110
euros) following exercise of 22,831,828 warrants.
170 | Consolidated Financial Statements
At 31 December 2002 the heading also included the "Reserve for exercise of
Olivetti 2002-2004 subscription rights (warrants or options) reserved for
managers of the Parent Company and its subsidiaries" for 14,264,521 euros,
unchanged from 31 December 2001, (and for 643,112 euros still restricted as
tied to the exercise of no.1,330,000 warrants still outstanding), and the
"Reserve for exercise of Olivetti 1999-2001 subscription rights (warrants or
options) reserved for managers of Parent Company and its subsidiaries" for
3,886,872 euros, also unchanged from 31 December 2001.
After closure of the conversion period for Olivetti 1998-2002 floating rate
bonds and the exercise period for Olivetti 1998-2002 share warrants, Olivetti
1999-2001 subscription rights and no. 28,170,000 Olivetti 2002-2004
subscription rights (stock options), at 31 December 2002 the corresponding
reserves, which reflected an aggregate balance of 18,598,579 euros, were no
longer restricted.
4) Non-taxable reserves
These reserves, amounting overall to 10,217,010 euros (unchanged from 31
December 2002), were originally carried by Tecnost S.p.A. They were re-formed
in the Olivetti balance sheet following the merger of Tecnost into and with
Olivetti. Taxes are not provided for these reserves since operations that would
make them liable for taxation are not planned at the present time.
b) Reserve for Parent Company shares held by subsidiary companies
This reserve amounted to 391 million euros at 31 December 2002 (unchanged from
31 December 2001) in respect of 211,931,328 Olivetti shares held by the
subsidiary Olivetti International S.A., and received in exchange for Tecnost
S.p.A. shares following the merger of Tecnost into and with Olivetti.
VIII. Sundry reserves, retained earnings and accumulated losses
At 31 December 2002 this heading reflected a negative balance of 3,548 euros (a
negative balance of 107 million euros at 31 December 2001). It included sundry
reserves, retained earnings/accumulated losses, exchange rate differences from
the translation of financial statements denominated in foreign currency and
other net equity headings relating to subsidiaries that were not eliminated
during consolidation.
171 | Consolidated Financial Statements
Total Group shareholders' equity
At 31 December 2002 consolidated shareholders' equity pertaining to the Group
amounted to 11,640 million euros (12,729 million euros at 31 December 2001).
The reconciliation of the consolidated net result pertaining to the Group and
the Parent Company net result for 2002 is set out below:
Net result
(in millions of euros) for the year
--------------------------------------------------------------------------------------------------- -------------
Net result shown in the Olivetti S.p.A. statutory financial statements as of 31 December 2002 (6,240)
--------------------------------------------------------------------------------------------------- -------------
Elimination of dividend income from subsidiary companies (1,245)
Elimination of the writedown of Telecom Italia equity investment recorded by the Parent Company for
tax purposes only 8,051
Amortization of consolidation goodwill on the acquisition of Telecom Italia shares (1,293)
Results of subsidiary companies as adjusted for consolidation purposes and other changes (46)
--------------------------------------------------------------------------------------------------- -------------
Net result shown in the consolidated financial statements of the Olivetti Group as of
31 December 2002 (773)
=================================================================================================== =============
The reconciliation of consolidated shareholders' equity pertaining to the Group
and Parent Company shareholders' equity at 31 December 2002 is set out below:
Shareholders'
(in millions of euros) equity
--------------------------------------------------------------------------------------------------- -------------
Amount shown in the Olivetti S.p.A. statutory financial statements as of 31 December 2002 9,031
--------------------------------------------------------------------------------------------------- -------------
Lower carrying value in Olivetti S.p.A. statutory accounts of Telecom Italia equity investment 2,607
Higher carrying value in Olivetti S.p.A. statutory accounts of other equity investments with
respect to the relevant shareholders' equity portions (as adjusted for consolidation purposes) (101)
Other differences 103
--------------------------------------------------------------------------------------------------- -------------
Amount shown in the consolidated financial statements of the Olivetti Group as of 31 December 2002 11,640
=================================================================================================== =============
X. Minority interests
Minority interests at 31 December 2002 and 2001 were as follows:
31.12.2002 31.12.2001 Changes
(in millions of euros) (a) (b) (a-b)
---------------------------------------------------------- ---------- ---------- ----------
Reserves 8,517 14,210 (5,693)
Result of the year 467 (586) 1,053
---------------------------------------------------------- ---------- ---------- ----------
Total 8,984 13,624 (4,640)
========================================================== ========== ========== ==========
172 | Consolidated Financial Statements
Total shareholders' equity
Total shareholders' equity at 31 December 2002 and 2001 (Group shareholders'
equity and minority interests) amounted to 20,624 million euros and 26,353
million euros respectively, and comprised:
31.12.2002 31.12.2001 Changes
(in millions of euros) (a) (b) (a-b)
---------------------------------------------------------- ---------- ---------- ----------
Capital and reserves
Group 12,413 15,819 (3,406)
minority interests 8,517 14,210 (5,693)
---------------------------------------------------------- ---------- ---------- ----------
20,930 30,029 (9,099)
---------------------------------------------------------- ---------- ---------- ----------
Net result of the year
Group (773) (3,090) 2,317
minority interests 467 (586) 1,053
---------------------------------------------------------- ---------- ---------- ----------
(306) (3,676) 3,370
---------------------------------------------------------- ---------- ---------- ----------
Total 20,624 26,353 (5,729)
========================================================== ========== ========== ==========
B) Reserves for risks and charges
Reserves for risks and charges at 31 December 2002 and 2001 amounted to 5,826
million euros and 4,158 million euros respectively and comprised:
1) Employee pensions and similar obligations
This reserve includes liabilities accruing to the employees of a number of
Group companies operating abroad. At 31 December 2002 it amounted to 47 million
euros, compared to 66 million euros at 31 December 2001.
2) Taxation
This reserve includes the provision for tax risks and the provision for
deferred taxes.
The reserve for tax risks is provided in relation to potential charges on open
or disputed tax positions. At 31 December 2002 it amounted to 344 million euros
(378 million euros at 31 December 2001), of which 198 million euros relating to
the Telecom Italia Group (154 million euros at 31 December 2001), 103 million
euros to Olivetti Finance N.V. (202 million euros at 31 December 2001) and 43
million euros to other Olivetti Group companies.
The tax position of the Parent Company Olivetti S.p.A. is illustrated in the
Explanatory Notes to the Olivetti S.p.A. Financial Statements.
Deferred taxes and prepaid taxes are calculated on temporary differences
between the tax values of assets and liabilities and the corresponding book
values carried in the Group companies' balance sheets used for consolidation
purposes, as well as on consolidation adjustments, based on local tax rates in
each country.
173 | Consolidated Financial Statements
Deferred taxes and prepaid taxes are set off only when permitted under tax laws
and for each financial year in which temporary differences are expected to be
reversed.
Deferred tax liabilities which are not set off against prepaid taxes are
included in the Reserve for deferred taxes, while prepaid taxes which are not
set off against deferred taxes are classified under the current assets heading
Other receivables.
The balance on deferred and/or prepaid taxes at 31 December 2002 reflected a
net tax asset of 4,150 million euros, compared with a net tax asset of 1,314
million euros at 31 December 2001, and comprised:
(in millions of euros) 31.12.2002 31.12.2001 Changes
---------------------------------------------------------- ---------- ---------- ----------
Reserves for deferred taxes 40 381 (341)
Prepaid tax assets (4,190) (1,695) (2,495)
---------------------------------------------------------- ---------- ---------- ----------
Net tax liability (asset) (4,150) (1,314) (2,836)
========================================================== ========== ========== ==========
Prepaid tax assets referred to the Telecom Italia Group for 3,546 million euros
and to Olivetti S.p.A. for 624 million euros.
As of 31 December 2002 Olivetti Group companies had tax losses brought forward,
not utilised to post deferred tax assets, representing an aggregate amount of
approximately 3,200 million euros.
3) Other provisions
At 31 December 2002 these reserves amounted to an overall total of 5,395
million euros (3,333 million euros at 31 December 2001). They included reserves
provided by Telecom Italia Group companies for 4,950 million euros, as follows:
o provisions of 293 million euros for risks relating to investee companies,
consisting largely of extraordinary charges relating to the new strategic
guidelines;
o a provision of 1,942 million euros relating to forward purchase commitments
on Seat Pagine Gialle shares, for the estimated unrecoverable amount of the
original strike price: following re-negotiation of the strike price on 25
February 2002, the entire 2001 provision of 569 million euros was re-classified
under payables due to other lenders; in November the payable was early repaid
to JP Morgan Chase with a consideration of 500 million euros, equivalent to the
present value of the payable;
o a provision of 43 million euros at Seat Pagine Gialle, for charges relating
to the exercise of put options by the founder shareholders of Consodata S.A.;
o provisions of 850 million euros at TIM, to cover guarantees given by the
Group in favour of Is Tim bank creditors and the loan granted directly by the
Group;
o provisions for contractual and sundry risks totalling 946 million euros,
mainly at Telecom Italia; these included current and prior-year provisions
relating to the spin-off of the "Grandi Immobili" business and the disposals of
Italtel, Telespazio and the satellite consortia; the amounts reversed to income
related almost entirely to the termination of the agreement for the sale of
Stream to News Corporation and Vivendi Universal/Canal+ (59 million euros);
o provisions of 299 million euros for restructuring charges, including
194 million euros at Telecom Italia;
174 | Consolidated Financial Statements
o provisions of 453 million euros for technological upgrades and charges
relating to Tim's regulatory position;
o provisions of 124 million euros at Telecom Italia Finance (ex Sogerim) for
financial charges on the bond loan.
The other reserves of 445 million euros for the other Olivetti Group companies
included provisions of 201 million euros for contractual risks arising from the
disposal of equity investments.
C) Reserve for employee severance indemnities
This heading reflects accrued severance liabilities pursuant to current
legislation and employment contracts in the countries in which the consolidated
companies operate.
The movements on the reserve during 2002 were as follows:
(in millions of euros)
---------------------------------------------------------------- ------------
Balance as of 31 December 2001 1,414
---------------------------------------------------------------- ------------
Indemnity accrued 216
Indemnities paid in the year (168)
Other changes, net (98)
---------------------------------------------------------------- ------------
Balance as of 31 December 2002 1,364
================================================================ ============
D) Payables
Payables at 31 December 2002 totalled 53,243 million euros (60,251 million
euros at 31 December 2001), of which 40,631 million euros were financial
payables (46,819 million euros at 31 December 2001) and 12,612 million euros
were trade and other payables (13,432 million euros at 31 December 2001).
175 | Consolidated Financial Statements
Financial payables
31.12.2002 31.12.2001
---------------------------------------- --------------------------------------
(in millions of euros) short-term long-term total short-term long-term total
------------------------------------------ ---------- ---------- ---------- ---------- ---------- ----------
Bonds
Telecom Italia Group 113 10,511 10,624 180 8,003 8,183
Olivetti S.p.A 400 400
Finance companies controlled by Olivetti 700 13,080 13,780 14,468 14,468
---------- ---------- ---------- ---------- ---------- ----------
Total 813 23,591 24,404 180 22,871 23,051
Convertible bonds
Telecom Italia Group 1,964 1,964 2,500 2,500
Olivetti S.p.A 4,184 4,184 16 4,188 4,204
Finance companies controlled by Olivetti 1,253 1,253 2,268 2,268
---------- ---------- ---------- ---------- ---------- ----------
Total 7,401 7,401 16 8,956 8,972
Due to banks
Telecom Italia Group 3,225 1,803 5,028 6,895 3,340 10,235
Other companies 701 47 748 517 113 630
---------- ---------- ---------- ---------- ---------- ----------
Total 3,926 1,850 5,776 7,412 3,453 10,865
Due to other lenders
Telecom Italia Group 775 644 1,419 977 1,186 2,163
Other companies 329 222 551 35 227 262
---------- ---------- ---------- ---------- ---------- ----------
Total 1,104 866 1,970 1,012 1,413 2,425
Due to suppliers
Telecom Italia Group 8 13 21 13 155 168
Other companies
---------- ---------- ---------- ---------- ---------- ----------
Total 8 13 21 13 155 168
Notes payable
Telecom Italia Group 241 241 220 220
Other companies
---------- ---------- ---------- ---------- ---------- ----------
Total 241 241 220 220
Due to subsidiary companies
Telecom Italia Group 8 8 29 29
Other companies 2 2
---------- ---------- ---------- ---------- ---------- ----------
Total 8 8 31 31
Due to associated companies
Telecom Italia Group 374 24 398 67 474 541
Other companies
---------- ---------- ---------- ---------- ---------- ----------
Total 374 24 398 67 474 541
Due to tax authorities
Telecom Italia Group 18 14 32 18 32 50
Other companies 8 8
---------- ---------- ---------- ---------- ---------- ----------
Total 26 14 40 18 32 50
Other payables
Telecom Italia Group 327 45 372 935 173 1,108
Other companies
---------- ---------- ---------- ---------- ---------- ----------
Total 327 45 372 935 173 1,108
========================================== ========== ========== ========== ========== ========== ==========
Total
Telecom Italia Group 5,089 15,018 20,107 9,114 16,083 25,197
Other companies 1,738 18,786 20,524 570 21,664 22,234
Consolidation adjustments (612) (612)
------------------------------------------ ---------- ---------- ---------- ---------- ---------- ----------
Total 6,827 33,804 40,631 9,072 37,747 46,819
========================================== ========== ========== ========== ========== ========== ==========
176 | Consolidated Financial Statements
The Olivetti Group's main debt components are illustrated below:
Telecom Italia Group
Bonds amounted to 10,624 million euros, an increase of 2,441 million euros
compared with 31 December 2001. They were as follows:
o an international bond issued by the subsidiary company Sogerim (merged with
Telecom Italia Finance) for a total of 6,000 million euros. The issue was
subdivided into three tranches: one, floating rate notes for 1,000 million
euros maturing 20 April 2004; two, fixed rate bonds for 3,000 million euros
maturing 20 April 2006; three, fixed rate bonds for 2,000 million euros
maturing 20 April 2011;
o floating rate notes for a total of 1,500 million euros issued by Telecom
Italia (the first issue in the Global Medium Term Note Programme with Telecom
Italia as issuer). The bond matures on 21 June 2005, and is callable at par by
the issuer as from the end of second year and with each subsequent coupon;
o bonds maturing in 2003 issued by Brazil's Tele Nordeste Celular and Tele
Celular Sul for an aggregate amount of 108 million euros;
o bonds maturing between 2007 and 2023 issued by Entel Chile for an aggregate
amount of 208 million euros;
o bonds issued by the TDL Infomedia Ltd. Group, maturing between 2009 and 2010,
for an aggregate amount of 116 million euros.
o a 2,500 million euro fixed rate bond issued by Telecom Italia on 1 February
2002 and subdivided into two 1,250 million euro tranches maturing on 1 February
2007 and 1 February 2012 respectively. The issue is part of the "Global Note
Programme";
o a 2002 - 2022 bond reserved for current and retired employees of Italian
companies controlled directly and indirectly by Telecom Italia, for 192 million
euros.
Convertible bonds refer to a bond issued in March 2001 by Sogerim (merged with
Telecom Italia Finance) for 2,500 million euros, exchangeable into TIM or Seat
Pagine Gialle shares, with the issuer having the right to make a cash
settlement. The bond matures after five years, with early redemption rights for
investors as from the end of the third year. The bond was reduced by 536
million euros due to the bond buy-back by Telecom Italia Finance, which
subsequently cancelled the notes.
Amounts due to banks amounted to 5,028 million euros and were collateralised by
mortgages for 25 million euros and pledges for 229 million euros; the decrease
in respect of 31 December 2001 was 5,207 million euros.
Amounts due to other lenders totalled 1,419 million euros, a decrease of 744
million euros from 31 December 2001. They include amounts due at Seat Pagine
Gialle for a loan granted by Seat Pagine Gialle Finance s.r.l., a corporate
securitisation vehicle wholly owned by third parties, which operates pursuant
to law no. 130/99 (780 million euros), amounts due at Telecom Italia for
short-term loans granted by T.I. Securitisation Vehicle s.r.l. for surplus
liquidity generated in connection with the securitisation operation (165
million euros), and loans granted to Telecom Italia by the Cassa Depositi e
Prestiti (284 million euros).
177 | Consolidated Financial Statements
Amounts due to associated companies amounted to 398 million euros, and included
393 million euros for amounts due to Teleleasing in respect of finance lease
contracts.
Amounts due to tax authorities totalled 32 million euros and referred to the
agreements with the tax authorities regarding the notices of assessment served
on Telecom Italia in 2001.
Amounts due in respect of notes payable totalled 241 million euros. They
comprised investment certificates of 221 million euros maturing in June 2003
issued by Seat Pagine Gialle as part of the securitisation operation with Seat
Pagine Gialle Finance s.r.l. and short-term finance bills for 20 million euros
issued by Telecom Italia.
Other payables amounted to 372 million euros. They included 181 million euros
at Telecom Italia (including 176 million euros for security lending operations)
and 161 million euros at the TIM Group for residual amounts due to the Ministry
of Communications for acquisition of the UMTS licence in Italy and Greece.
Other companies
Bonds amounted overall to 13,780 million euros. For each one, the original rate
and any credit protection step-ups are disclosed separately below. All hedging
operations are analysed in the section "Hedging instruments and other
derivatives".
o Olivetti International N.V. - 700 million euros
- bond (1998-2003) with a fixed annual 5.875% coupon + 0.15% step-up
maturing in May 2003;
o Olivetti International N.V. - 1,500 million euros
- bond (1999-2009) with a fixed annual 5% coupon + 0.15% step-up
maturing in February 2009;
o Olivetti International N.V. - 100 million Swiss francs equivalent to 69
million euros
- Swiss franc bond (1986-2046) with a fixed annual 5.625% coupon
maturing in June 2046;
o Olivetti Finance N.V. (originally Olivetti International Finance N.V.) -
4,200 million euros
- bond (1999-2004) with a fixed annual 5 3/8% coupon + 0.45% step-up
maturing in July 2004;
o Olivetti Finance N.V. - 200 million euros
- bond (2002-2005) with a floating rate coupon of 1.45% over the EONIA
maturing in February 2005;
o Olivetti Finance N.V. - 500 million euros
- bond (2002-2005) with a floating rate coupon linked to quarterly
EURIBOR + 130 basis points. Bondholders may extend maturity for
subsequent periods of 21 months up to an overall maximum term of 10
years;
o Olivetti Finance N.V. - 1,100 million euros
- bond (2002-2006) with a floating rate quarterly coupon + 1.25% spread
maturing in January 2006;
o Olivetti Finance N.V. - 1,750 million euros
- bond (2002-2007) with a fixed annual 6.5% coupon maturing in April
2007;
o Olivetti Finance N.V. (originally Olivetti International Finance N.V.) -
2,350 million euros
- bond (1999-2009) with a fixed annual 6 1/8% coupon + 0.45% step-up
maturing in July 2009;
o Olivetti Finance N.V. - 1,000 million euros
- bond (2002-2012) with a fixed annual 7.25% coupon maturing in April
2012;
178 | Consolidated Financial Statements
o Olivetti Finance N.V. - 20 billion yen equivalent to 161 million euros
- bond (2002-2032) with a fixed six-monthly 3.55% coupon maturing in May 2032
(callable by the issuer annually as from the tenth year);
o Olivetti Finance N.V. - 250 million euros
- bond (2002-2032) with a fixed annual 7.77% coupon maturing in August 2032.
All the above Olivetti Finance N.V. bonds were issued under the Euro Medium
Term Note programme (EMTN).
Convertible bonds amounted overall to 5,437 million euros, as follows:
o Olivetti Finance N.V.: 2000-2005 bond for 765 million euros exchangeable for
Telecom Italia ordinary shares, with a fixed annual 1% coupon and redemption
premium of 113.41% of the issue price (approximately 15.22 euros per bond)
maturing in November 2005. The loan determined an aggregate payable of 868
million euros. The yield on maturity is 3.5% per annum and the exchange will be
one Telecom Italia share for each bond;
o Olivetti S.p.A.: 2001-2004 bond for 1,267 million euros convertible into
Olivetti S.p.A. shares, with a fixed annual 1.5% coupon and redemption premium
of 105.07759% of the issue price (2.6 euros per bond) maturing in January 2004.
The loan determined an aggregate payable of 1,331 million euros. The yield on
maturity is 3.25% per annum and the conversion rate is one Olivetti share for
each bond.
o Olivetti Finance N.V.: 2002-2004 zero-coupon bond for 385 million euros
maturing in March 2004. The loan is convertible into 41,400,000 Telecom Italia
ordinary shares (at an exercise price of 9.30 euros per share);
o Olivetti S.p.A.: 2001-2010 bond for 2,410 million euros convertible into
Olivetti S.p.A. shares, with a fixed annual 1.5% coupon and redemption premium
of 118.37825% of the issue price (1.0 euros per bond) maturing in January 2010.
The loan determined an aggregate payable of 2,853 million euros. The yield on
maturity is 3.5% per annum and the conversion rate is one Olivetti share for
each bond.
Amounts due to banks amounted to an aggregate 748 million euros (630 million
euros at 31 December 2001). The main items were as follows:
o Olivetti S.p.A.:
- IMI research loans pursuant to law no. 346/1988, for 47 million euros,
average rate of 12.4742% at 31 December 2002 before interest-relief grants, to
be repaid by the end of 2004 (27 million euros falling due by 31.12.2003);
- other loans totalling 644 million euros, average rate of 3.886% at
31.12.2002, to be repaid by the end of 2003.
o Olivetti Tecnost Group:
- loans totalling 40 million euros (13 million euros falling due by
31.12.2003); - other short-term payables for 17 million euros.
Amounts due to other lenders amounted to an aggregate 551 million euros, as
follows:
o Olivetti S.p.A.: subsidised loans for technological innovation (FIT)
totalling 13 million euros (3 million euros falling due by 31.12.2003), average
rate of 4.0994% at 31.12.2002, to be repaid by 2012;
o other loans for 32 million euros;
179 | Consolidated Financial Statements
o other companies:
- a financing contract for 174 million euros due 29.10.2029 granted to Olivetti
International Finance N.V. by a Japanese investor; the borrowing previously
took the form of a bond loan; this 20 billion yen loan bears a fixed 5% coupon
+ 0.45% step-up in relation to a notional capital of 185.6 million US dollars;
- other loans totalling 31 million euros (5 million euros falling due by
31.12.2003);
- short-term payables due to other lenders for 301 million euros.
* * *
Financial payables totalling 40,631 million euros may be analysed by currency
as follows:
(in millions of euros) 31.12.2002 31.12.2001
-------------------------------------- ---------- ----------
EMU currencies 35,465 42,502
Other currencies 5,166 4,317
-------------------------------------- ---------- ----------
Total 40,631 46,819
====================================== ========== ==========
At 31 December 2002 financial payables due after five years amounted to 12,703
million euros, as follows:
(in millions of euros) 31.12.2002 31.12.2001
-------------------------------------- ---------- ----------
Bonds 12,408 8,804
Amounts due to banks 4 350
Amounts due to other lenders 291 597
-------------------------------------- ---------- ----------
Total 12,703 9,751
====================================== ========== ==========
180 | Consolidated Financial Statements
Overall net financial indebtedness at 31 December 2002 amounted to 33,399
million euros (38,362 million euros at 31 December 2001) as shown in the table
below:
31.12.2002 31.12.2001 Changes
(in millions of euros) (a) (b) (a-b)
---------------------------------------------------- ---------- ---------- ----------
Debt
short-term 6,827 9,072 (2,245)
medium/long-term 33,804 37,747 (3,943)
Interest accruals and deferrals 1,157 889 268
---------------------------------------------------- ---------- ---------- ----------
Total gross financial indebtedness (A) 41,788 47,708 (5,920)
---------------------------------------------------- ---------- ---------- ----------
Financial fixed assets:
financial receivables due within 12 months 16 82 (66)
financial receivables due after 12 months 30 30
Current assets:
financing and interest bearing current accounts 995 812 183
financial assets not held as fixed assets 1,983 3,620 (1,637)
liquid funds 4,370 3,702 668
Interest accruals and prepayments
due within 12 months 530 425 105
due after 12 months 465 705 (240)
---------------------------------------------------- ---------- ---------- ----------
Total financial resources (B) 8,389 9,346 (957)
---------------------------------------------------- ---------- ---------- ----------
Net financial indebtedness (A-B) 33,399 38,362 (4,963)
==================================================== ========== ========== ==========
At 31 December 2002 financial payables were secured by guarantees on Group
assets for a total of 283 million euros.
180 | Consolidated Financial Statements
Trade and other payables
31.12.2002 31.12.2001
(in millions of euros) short-term long-term total short-term long-term total
----------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Advances
Telecom Italia Group 263 263 388 388
Other companies 7 7 11 11
---------- ---------- ---------- ---------- ---------- ----------
Total 270 270 399 399
Due to suppliers
Telecom Italia Group 5,442 5,442 6,058 1 6,059
Other companies 207 207 280 280
---------- ---------- ---------- ---------- ---------- ----------
Total 5,649 5,649 6,338 1 6,339
Due to subsidiary companies
Telecom Italia Group 8 8 8 8
Other companies
---------- ---------- ---------- ---------- ---------- ----------
Total 8 8 8 8
Due to associated companies
Telecom Italia Group 247 247 349 349
Other companies 4 4 5 5
---------- ---------- ---------- ---------- ---------- ----------
Total 251 251 354 354
Due to tax authorities
Telecom Italia Group 558 7 565 822 50 872
Other companies 314 8 322 97 97
---------- ---------- ---------- ---------- ---------- ----------
Total 872 15 887 919 50 969
Due to social security authorities
Telecom Italia Group 248 1,102 1,350 271 1,236 1,507
Other companies 9 9 13 13
---------- ---------- ---------- ---------- ---------- ----------
Total 257 1,102 1,359 284 1,236 1,520
Other payables
Telecom Italia Group 4,140 4 4,144 3,727 8 3,735
Other companies 44 44 108 108
---------- ---------- ---------- ---------- ---------- ----------
Total 4,184 4 4,188 3,835 8 3,843
=================================== ========== ========== ========== ========== ========== ==========
Total
Telecom Italia Group 10,906 1,113 12,019 11,623 1,295 12,918
Other companies 585 8 593 514 514
=================================== ========== ========== ========== ========== ========== ==========
Total 11,491 1,121 12,612 12,137 1,295 13,432
=================================== ========== ========== ========== ========== ========== ==========
Amounts due to suppliers totalled 5,649 million euros and included 513 million
euros due to other telecommunications services providers.
Amounts due to tax authorities totalled 887 million euros (969 million euros at
31 December 2001) and included current income taxes, indirect duties and taxes
and withholdings to be paid.
The current tax payable of 244 million euros reflects a reasonable estimate of
the current income tax liabilities of Group companies computed with reference
to local tax regulations; the payable for other
182 | Consolidated Financial Statements
taxes at 31 December 2002 refers in the main to tax withholdings applied by
Group companies in their capacity as withholding agents.
The tax position of Olivetti S.p.A. is illustrated in the Explanatory Notes to
the Parent Company financial statements.
Amounts due to social security authorities totalled 1,359 million euros and
referred to contributions accrued and due to social security authorities; the
heading includes 595 million euros in respect of the residual Telecom Italia
payable due to the INPS in connection with the estimated re-absorption charge
for former ASST personnel, pursuant to law no. 58/1992.
The heading also includes the payable of 568 million euros to the former
Telephone Companies Employee Social Security Fund (FPT) for Telecom Italia
Group employees, which was incorporated under compulsory national insurance on
1 January 2001. The amount was recorded in the Olivetti Group consolidated
financial statements at the time of determination of consolidation goodwill on
the acquisition of the Telecom Italia Group.
Other payables amounted to 4,188 million euros and included:
o 1,604 million euros for customer-related items: subscriber payments for
conversations, prepaid rentals and prepaid traffic charges;
o 1,394 million euros for contributions regarding operation of
telecommunications services;
o 720 million euros for payables relating to staff management;
o 470 million euros for other items of a miscellaneous and recurring nature.
***
Payables due after 12 months, excluding the Telephone Companies Employee Social
Security Fund payable of 568 million euros, totalled 34,357 million euros,
falling due as follows:
(in millions of euros) from 2 to 5 years after 5 years Total
---------------------------- ----------------- ----------------- --------------
Debt
Telecom Italia Group 10,693 4,325 15,018
Other companies 10,408 8,378 18,786
Trade and other payables
Telecom Italia Group 296 249 545
Other companies 8 8
---------------------------- ----------------- ----------------- --------------
Total 21,405 12,952 34,357
============================ ================= ================= ==============
183 | Consolidated Financial Statements
E) Accrued expenses and deferred income
Accrued expenses and deferred income at 31 December 2002 totalled 2,327 million
euros (2,051 million euros at 31 December 2001):
31.12.2002 31.12.2001 Changes
(in millions of euros) (a) (b) (a-b)
---------------------------------- ---------- ---------- -----------
Accrued expenses:
interest charges 1,110 875 235
other 58 92 (34)
---------------------------------- ---------- ---------- -----------
Total accrued expenses 1,168 967 201
---------------------------------- ---------- ---------- -----------
Deferred income:
grants related to assets 325 349 (24)
other 787 721 66
premiums on loans 37 37
interest income 10 14 (4)
---------------------------------- ---------- ---------- -----------
Total deferred income 1,159 1,084 75
---------------------------------- ---------- ---------- -----------
Total 2,327 2,051 276
================================== ========== ========== ===========
184 | Consolidated Financial Statements
Hedging instruments and other derivatives
The Olivetti Group enters into forward contracts to hedge risks associated with
exchange rate fluctuations among the currencies of denomination of commercial
and financial transactions undertaken by Group companies.
At 31 December 2002, the Olivetti Group companies had forward contracts and
options for the purchase or sale of foreign currency at pre-arranged rates of
exchange for the equivalent of 702 million euros, comprising hedging contracts
for 537 million euros on financial operations transacted by Olivetti
International S.A. and exchange-risk hedges for 165 million euros arranged by
Olivetti Finance N.V. (on the 20 billion yen 2002/2032 bond issued by Olivetti
Finance N.V.).
The Olivetti Group enters into Interest Rate Swaps (IRS), Currency and Interest
Rate Swaps (CIRS) and other hedging agreements to mitigate the possible effects
of interest rate fluctuations. At 31 December 2002, the Group companies had
short- and long-term forward contracts covering financial liabilities based on
a total notional capital amount for the equivalent of 16,735 million euros
(5,881 million euros relating to Telecom Italia Group companies and 10,854
million euros relating to other Olivetti Group companies), as illustrated
below:
(in millions of euros) 31.12.2002
------------------------------------------------------------------------------------------------------- ----------
Telecom Italia Group
Interest Rate Swaps (IRS) and Interest Rate Options (IRO) 5,054
Cross Currency and Interest Rate Swaps 827
------------------------------------------------------------------------------------------------------- ----------
Total 5,881
------------------------------------------------------------------------------------------------------- ----------
Other companies
IRS contracts expiring June 2046, carried out by Olivetti International S.A.
on the bonds of 100 million Swiss francs (1986-2046) issued by Olivetti International N.V. 69
IRS contracts with cap structures, expiring February 2009, carried out by Olivetti
International S.A. and Olivetti Finance N.V. on the bonds of euro 1,500 million (1999-2009)
issued by Olivetti International N.V. 1,500
IRS contracts, expiring May 2003 carried out by Olivetti International S.A. on the bonds of
euro 700 million (1998-2003) issued by Olivetti International N.V. 700
CIRS contracts expiring October 2029 carried out by Olivetti S.p.A., on the loan of Yen 20
billion received by Olivetti International Finance N.V. 174
IRS contracts, expiring May 2032 carried out by Olivetti Finance N.V. on bonds of Yen 20
billion issued by Olivetti Finance N.V. 161
IRS contracts (with cap and floor structures) carried out by Olivetti Finance N.V.:
expiring July 2009 on the bonds of euro 2,350 million issued by Olivetti Finance N.V. , originally
issued by Olivetti International Finance N.V. (1999-2009) 2,350
expiring July 2004 on the bonds of euro 4,200 million issued by Olivetti Finance N.V., originally
issued by Olivetti International Finance N.V. (1999-2004) 4,000
expiring March 2005 on the bonds of euro 500 million issued by Olivetti International Finance N.V.
(2002-2005) 500
expiring January 2006 on the bonds of euro 1,100 million issued by Olivetti Finance N.V. (2002-2006) 800
expiring April 2007 on the bonds of euro 1,750 million issued by Olivetti Finance N.V. (2002-2007) 250
expiring April 2012 on the bonds of euro 1.000 million issued by Olivetti Finance N.V. (2002-2012) 350
------------------------------------------------------------------------------------------------------- ----------
Total 10,854
======================================================================================================= ==========
Total hedging contracts 16,735
======================================================================================================= ==========
185 | Consolidated Financial Statements
Telecom Italia Group
The Telecom Italia Group used derivatives mainly for the management of its debt
positions, primarily interest rate swaps (IRS) and interest rate options (IRO)
to reduce interest rate exposure on fixed rate and floating rate bank loans and
bonds, and cross currency and interest rate swaps (CIRS) and currency forwards
to convert currency loans - mainly in dollars and euros - into the accounting
currencies of the various Group companies.
IRSs and IROs respectively involve or may involve the exchange, with the
counterparts, of interest flows calculated on the reference notional value at
the agreed fixed or floating rates, at the specified maturity dates. The
notional value does not represent the amount exchanged and therefore does not
constitute a measure of exposure to credit risk, such exposure being limited
instead to the amount of interest or interest differentials to be received at
the interest date.
The same also applies to CIRSs, which involve the exchange of the principal, in
the respective currencies of denomination, at maturity and eventually for cash,
in addition to the settlement of periodic interest flows. Counterparts to
derivative contracts are selected from among the top rated banks and financial
institutions and are continually monitored in order to minimise the risk of
default.
Other companies
The main hedging agreements with regard to the medium/long-term debt positions
of the other companies in the Olivetti group are analysed below.
With regard to the 1986/2046 100 million Swiss franc 5.625% fixed rate bond (69
million euros) expiring in June 2046 issued by Olivetti International N.V.,
Olivetti International S.A. has arranged an IRS for the full amount and
maturity, to convert the annual fixed rate into a six-monthly floating rate in
Swiss francs.
With regard to the 1999/2009 1,500 million euro 5%+0.15% step-up fixed rate
bond maturing in February 2009 issued by Olivetti International N.V., Olivetti
International S.A. and Olivetti Finance N.V. have arranged the following
hedging contracts for the full amount and maturity:
o IRS for 500 million euros to convert the annual fixed rate into a quarterly
floating rate with a protection structure applicable until the 1-year swap
rates exceed the 5-year swap rates and simultaneous floor sale at 2.50%;
o IRS for 500 million euros to convert the annual fixed rate into a quarterly
4.30% fixed rate (if 3-month Euribor remains under 5.80%), or into a quarterly
floating rate less 0.50% (if 3-month Euribor exceeds 5.80%), and simultaneous
cap sale for 500 million euros at the USD six-monthly rate of 7.10%;
o IRS for 250 million euros to convert the annual fixed rate into a fixed 4.15%
rate (if 6-month Euribor fixed in arrears remains under 6.65%) or into a
six-monthly floating rate fixed in arrears (if 6-month Euribor exceeds 6.65%),
with a protection structure applicable until the USD 5-year swap rates exceed
the GBP 5-year swap rates with a 1% increment;
o IRS for 250 million euros to convert the annual fixed rate into a six-monthly
floating rate fixed in arrears, with a protection structure applicable until
the USD 5-year swap rates exceed the GBP 5-year swap rates with a 1% increment.
186 | Consolidated Financial Statements
With regard to the 1998/2003 700 million euros annual 5.875%+0.15% step-up
fixed-rate bond maturing in May 2003 issued by Olivetti International N.V.,
Olivetti International S.A. has arranged IRS for a similar amount and maturity
to convert the annual fixed rate into a rate linked to the six-monthly and
two-year rates in Swiss francs, fixed in arrears.
With regard to the fixed-rate 20 billion yen borrowing expiring in October 2029
received by Olivetti International Finance N.V., Olivetti S.p.A. has arranged a
CIRS for the full amount and similar expiration, to convert the rate into an
annual 5.525% fixed rate until 2004 and subsequently into an annual 6.08% fixed
rate (or into a floating rate, as the counterpart prefers) until maturity (on a
principal of 174.2 million euros). The interest rate and currency risk hedging
structure is applicable as long as Olivetti S.p.A. is in bonis.
With regard to the 2002/2032 bond for 20 billion yen (equivalent to 161 million
euros) with a 3.55% fixed-rate coupon maturing in May 2032 issued by Olivetti
Finance N.V., Olivetti Finance N.V. has arranged an IRS with similar maturity
to convert the annual fixed rate into a 1.68% fixed rate until 2012 and
subsequently into a six-monthly floating rate until maturity. The interest-rate
and currency risk hedging structure is applicable as long as Olivetti S.p.A. is
in bonis.
With regard to the Olivetti Finance N.V. 1999/2009 bond for 2,350 million euros
with an annual 6.125%+0.45% step-up fixed rate (originally issued by Olivetti
International Finance N.V.), Olivetti Finance N.V. has arranged IRS for the
full amount and similar maturity to convert the annual fixed rate as follows:
a) into a 3.55% fixed rate until January 2003 and subsequently into a floating
rate linked to the US six-monthly rates fixed in arrears for 1,000 million
euros with the following additional hedges:
o cap purchase at 5.17%
o cap sale at 6.44%
o floor sale at 1.50% until July 2003 and subsequently at 3.25% until maturity;
b) into a 4.1475% fixed rate until January 2003 and subsequently into a
floating rate linked to six-monthly Euribor fixed in arrears for 750 million
euros with the following additional hedges:
o cap purchase at 5.50%
o cap sale at 7.125% on the USD 6-month rate fixed in arrears as from July 2005
o floor sale at 2.375% as from July 2003;
c) into a six-monthly 5.55% fixed rate for 250 million euros until 30 January
2003, subsequently into a 5.5745% fixed rate if 6-month Euribor remains below
7%, or into a six-monthly floating rate if 6-month Euribor exceeds 7%, with a
protection structure application until the 1-year swap rates exceed the 5-year
swap rates;
d) into a six-monthly 5.0025% fixed rate for 350 million euros until 30 January
2003 and subsequently into a 5.12% fixed rate until July 2003, into a floating
rate linked to quarterly Euribor fixed in arrears until July 2004 and
subsequently until maturity into a floating rate linked to quarterly USD Libor
and Euribor, whichever is the higher.
With regard to the Olivetti Finance N.V. 1999/2004 bond for 4,200 million euros
with an annual 5.375%+0.45% step-up fixed rate (originally issued by Olivetti
International Finance N.V.) maturing in
187 | Consolidated Financial Statements
July 2004, Olivetti Finance N.V. has arranged the following hedges with similar
maturity for a total of 4,000 million euros:
a) for 500 million euros, conversion of the annual fixed rate into a
six-monthly fixed rate of 4.1829% until January 2003 and subsequently of 4.63%
until maturity;
b) for 1,000 million euros, conversion of the annual fixed rate into 12-month
Euribor fixed in arrears (of which 500 million euros already fixed at 5.375%
until July 2003) with a floor sale for a similar amount at 3.15% fixed in
arrears (to be applied if at fixing 12-month Euribor is below 2.65%);
c) conversion of the annual fixed rate until January 2003 into a six-monthly
fixed rate of 4.83% for 500 million euros and of 4.4675% for a further 1000
million euros, with conversion of the annual fixed rate into a six-monthly
floating rate fixed in arrears;
d) for 500 million euros, conversion of the annual fixed rate (4.8 % until
January 2003) into quarterly Euribor fixed in arrears with floor sale at 3.25%
for 450 million euros (applicable if at fixing 3-month Euribor is below 2.75%);
e) for 500 million euros, conversion of the annual fixed rate into a
six-monthly floating rate linked to the CHF 2-year swap rate with six-monthly
fixing in arrears.
With regard to the 2002/2005 bond for 500 million euros with a quarterly
floating rate maturing in March 2005 issued by Olivetti Finance N.V., Olivetti
Finance N.V. has arranged IRS with similar maturity to convert the floating
rate into an average quarterly fixed rate of 4.0865%.
With regard to the 2002/2006 bond for 1,100 million euros with a quarterly
floating rate maturing in January 2006 issued by Olivetti Finance N.V.,
Olivetti Finance N.V. has arranged IRS for 800 million euros with similar
maturity to convert the floating rate as follows:
a) into a quarterly floating rate for 200 million euros linked to the quarterly
USD or euro rate, whichever is the higher, with a protection structure
applicable until the CHF quarterly rates are below the USD rates;
b) into a six-monthly floating rate fixed in arrears for 600 million euros with
the following additional hedges:
o floor sale at 3% (to be activated if at fixing six-monthly Euribor is below
2.50%)
o cap sale at 5%
o digital cap purchase to be activated if the six-monthly rate fixed in arrears
exceeds 4%.
With regard to the 2002/2007 bond for 1,750 million euros with a 6.50% fixed
rate maturing in April 2007 issued by Olivetti Finance N.V., Olivetti Finance
N.V. has arranged IRS for 250 million euros with similar maturity to convert
the annual fixed rate as follows: for 250 million euros into a six-monthly
fixed rate of 5.75% until April 2003, 5.774% until April 2005, with a
protection structure applicable as long as the 30-year euro swap rate exceeds
the 5-year swap rate.
With regard to the 2002/2012 bond for 1,000 million euros with a 7.25% fixed
rate maturing in April 2012 issued by Olivetti Finance N.V., Olivetti Finance
N.V. has arranged IRS contracts with similar maturity and with the following
protection structure applicable as long as the 10-year euro swap rate exceeds
the two-year swap rate, to convert the annual fixed rate as follows:
188 | Consolidated Financial Statements
- for 250 million euros, into a quarterly 5.85% fixed rate unless Euribor fixed
in advance exceeds 6% or into a quarterly floating rate;
- for 100 million euros, into a quarterly 5.61% fixed rate unless the USD Libor
rate exceeds 7% or into a quarterly floating rate tied to USD Libor.
* * *
The following operations have also been arranged to hedge securities or other
portfolio assets:
o IRS and CIRS arranged by Telecom Italia Finance and TIM Celular on financial
assets for 150 million euros;
o treasury hedging contracts for a notional capital of 1,433 million euros;
o IRS arranged by Olivetti International S.A. and Olivetti Finance N.V. on
securities for a nominal value of, respectively, 50 million euros and 300
million euros;
o contracts arranged by Olivetti S.p.A. to hedge the currency risk on the
restricted deposit denominated in USD, for 41 million euros.
189 | Consolidated Financial Statements
Memorandum accounts
A. Personal guarantees given and counter-securities received
At 31 December 2002 personal guarantees given directly or indirectly through
banks and insurance companies amounted to 1,823 million euros (2,344 million
euros at 31 December 2001), of which 965 million euros in respect of
unconsolidated subsidiaries and associated companies (1,656 million euros at 31
December 2001).
Personal guarantees given at 31 December 2002 were as follows:
o guarantees given by the Telecom Italia Group in the interest of
unconsolidated subsidiaries and associated companies (957 million euros),
consolidated subsidiaries (5 million euros), and third parties (529 million
euros) in respect of medium/long-term financial operations, supply contracts
and telephony licences abroad, for a total of 1,491 million euros;
o suretyships and counter-securities given by other companies in the Olivetti
Group in the interest of unconsolidated subsidiaries and associated companies
(8 million euros), consolidated subsidiaries (69 million euros) and third
parties (32 million euros), for a total of 109 million euros;
o 213 million euros for guarantees given by Olivetti S.p.A. to the Italian
State Railways in the interest of Wind S.p.A. (formerly Infostrada S.p.A.);
o 1 million euros for guarantees given by Olivetti S.p.A. with regard to
fulfilment of trade supplies by Getronics S.p.A. (formerly Wang Global S.p.A.);
o 9 million euros for other guarantees.
At 31 December 2002, the Olivetti Group had counter-securities in respect of
the above guarantees for an amount totalling 596 million euros (806 million
euros at 31 December 2001), as follows:
o counter-securities from third parties for 378 million euros relating to
guarantees given by Telecom Italia S.p.A.;
o counter-securities from Mannesmann AG for 213 million euros relating to the
guarantees given by Olivetti S.p.A. to the Italian State Railways;
o counter-securities from Getronics for 1 million euros.
B. Guarantees on Group assets
These guarantees related to pledges and mortgages set up on Telecom Italia
Group assets in respect of non-financial operations for an amount totalling 111
million euros at 31 December 2002 (163 million euros at 31 December 2001). They
included pledges on IS Tim shares given by TIM International to guarantee
fulfilment of obligations stipulated in IS Tim's supply contracts with Ericsson
and Siemens. Guarantees on Group assets securing financial operations are
analysed in the section on financial payables.
190 | Consolidated Financial Statements
C. Commitments
At 31 December 2002 the Olivetti Group had contractual commitments for an
aggregate amount of 3,124 million euros (5,431 million euros at 31 December
2001), of which 3,077 million euros for the Telecom Italia Group and 47 million
euros for the other companies.
Telecom Italia Group commitments amounted to 3,077 million euros (5,369 million
euros at 31 December 2001) as follows:
o a commitment of 2,417 million euros for the Telecom Italia put option on Seat
Pagine Gialle shares, which was updated following the re-negotiation on 25
February 2002 of the put and call options agreed with JP Morgan Chase on Seat
Pagine Gialle shares; the revised agreement reduced the original strike price
(from 4.2 euros to 3.4 euros per share). To guarantee fulfilment of the put on
Seat Pagine Gialle shares, Telecom Italia Finance provided a Direct
Participation Letter of Credit, in favour of JP Morgan Chase Equity Limited,
for 1,940 million euros.
Additionally, the 2002 year-end valuation of the call option on Seat Pagine
Gialle shares generated a provision of 1,942 million euros to the reserve for
risks and charges, for the estimated non-recoverable strike price following the
decision to view the Seat P.G. Directories operations as a non-core business;
o 195 million euros for the Group commitment on the sale of the equity
investment in Telekom Srbija to PTT Serbia;
o 55 million euros for the Seat Pagine Gialle commitment to purchase 9,122,733
Seat Pagine Gialle shares from shareholder-managers of TDL Infomedia Ltd. and
the residual 0.27% of TDL Infomedia Ltd.;
o 34 million euros for leases of which 17 million towards Teleleasing;
o 20 million euros for the TIM commitment to purchase Blu core network assets
from Wind;
o 10 million euros for the Telecom Italia S.p.A. commitment to purchase the
residual 14% shareholding in Epiclink from Pirelli and the other shareholders;
o 10 million euros for the commitment to sell Tess to Accenture;
o 7 million euros for the commitment on the sale of Siteba to the other
shareholders;
o 329 million euros for other commitments.
The commitments of the other Olivetti Group companies amounted to an aggregate
47 million euros (62 million euros at 31 December 2001), as follows:
o 35 million euros for leases;
o 6 million euros for trade receivables guaranteed by Olivetti S.p.A. in
respect of the sale of the O.i.S. group to GFI Informatique S.A.;
o 6 million euros for other commitments.
191 | Consolidated Financial Statements
D. Other memorandum accounts
At 31 December 2002, other memorandum accounts totalled 93 million euros (295
million euros at 31 December 2001), of which 88 million euros for the Telecom
Italia Group (287 million euros at 31 December 2001). They related to
third-party assets deposited with consolidated companies, mainly in the IT
sector.
The reduction of 199 million euros at the Telecom Italia Group arose as a
result of the deconsolidation of Sogei and the Telespazio group.
E. Other information
At 31 December 2002 the aggregate value of Telecom Italia commitments for
rentals on buildings payable to IMSER 60, Tiglio I and Tiglio II under the
terms of 21-year contracts was 3,818 million euros. The amount accruing to each
year is 209 million euros.
TIM is drawing up a purchase and sale commitment with H3G, regarding the
transfer of certain equipment and property lease contracts as a result of the
new valuation of the Blu business sold to H3G.
192 | Consolidated Financial Statements
Comments on the consolidated income statement
A) Value of production
1) Net revenues from sales and services
Net revenues from the sale of products and supply of services in 2002 amounted
to 31.408 million euros compared with 32,016 million euros in 2001, a decrease
of 608 million euros, or -1.9%. The revenue breakdown by business sector is set
out in the table below:
Year 2002 Year 2001 Changes
-------------- -------------- --------------
(in millions of euros) (a) % (b) % (a-b) %
---------------------------------------------- ------ ---- ------ ----- ----- ------
Telecom Italia Group Business Units
Domestic Wireline 17,022 54,2 17,168 53,6 (146) (0,9)
Mobile 10,867 34,6 10,250 32,0 617 6,0
South America 1,409 4,5 1,534 4,8 (125) (8,1)
Internet and Media 1,991 6,3 1,957 6,1 34 1,7
Market IT 912 2,9 1,198 3,8 (286) (23,9)
Group IT 1,215 3,9 1,198 3,7 17 1,4
Other operations and consolidation adjustments (3,016) (9,6) (2,487) (7,8) (529) 21,3
---------------------------------------------- ------ ---- ------ ----- ----- ------
Total Telecom Italia Group 30,400 96,8 30,818 96,3 (418) (1,4)
---------------------------------------------- ------ ---- ------ ----- ----- ------
Other Olivetti Group activities
Information Technology 932 3,0 1,130 3,5 (198) (17,5)
Property management and services 76 0,2 68 0,2 8 11,8
---------------------------------------------- ------ ---- ------ ----- ----- ------
Total Olivetti Group 31,408 100,0 32,016 100,0 (608) (1,9)
============================================== ====== ==== ====== ===== ===== ======
4) Capitalised production
Capitalised production amounted to 675 million euros, and related entirely to
the Telecom Italia Group.
5) Other revenues and income
Other revenues and income for 2002 amounted to 504 million euros (476 million
euros in 2001) and included:
- 20 million euros in grants relating to costs for research, development and
technological innovation;
- 65 million euros for the portion of capitalised grants credited to income
as accrued, relating entirely to the Telecom Italia Group;
- 106 million euros for charges to customers for late bill payments;
- 313 million euros of other income from ordinary operations, arising mainly
from indemnities and refunds, recovery of expenses and sundry income.
193 | Consolidated Financial Statements
B) Costs of production
6) Purchases of raw, ancillary and consumable materials and goods for resale
In 2002 this heading totalled 2,315 million euros (1,779 million euros for the
Telecom Italia Group) compared with 2,640 million euros in 2001 (1,972 million
euros for the Telecom Italia Group) and included costs for the supply of
materials relating to the Group's core businesses.
7) Costs of services
These costs amounted to 9,407 million euros in 2002 compared to 9,782 million
euros in 2001. The decrease of 375 million euros related to the Telecom Italia
Group for 323 million euros and to the other Group companies for 52 million
euros.
8) Leases and rentals
This heading included rentals for buildings and other asset lease and hire
charges. In 2002 it amounted to 1,166 million euros, compared to 1,096 million
euros in 2001. The increase of 70 million euros reflected higher costs of 76
million euros at the Telecom Italia Group.
9) Personnel
Payroll costs in 2002 amounted to 4,737 million euros (4,919 million euros in
2001) and included 4,540 million euros for the Telecom Italia Group, of which
3,373 million euros relating to the companies that provide telecommunications
services.
In 2002 the aggregate average number of staff employed by the Olivetti Group
was 107,079 equivalent units, compared with 113,974 equivalent units in 2001.
In terms of geographical distribution, in 2002 the average number of employees
was 87,737 heads in Italy (93,610 in 2001) and 19,342 heads abroad (20,364 in
2001).
The staff breakdown by category in Italy (different categories apply in other
countries) was as follows:
(employees) Year 2002 Year 2001
-------------------------------------------------- --------- ---------
ITALY
Managers 2,058 2,214
Supervisors 5,271 5,031
White collars 71,608 76,092
Blue collars 8,800 10,273
-------------------------------------------------- --------- ---------
Total average in Italy 87,737 93,610
-------------------------------------------------- --------- ---------
Average abroad 19,342 20,364
-------------------------------------------------- --------- ---------
TOTAL AVERAGE 107,079 113,974
================================================== ========= =========
194 | Consolidated Financial Statements
10) Amortisation, depreciation and writedowns
Depreciation and amortisation charges in 2002 totalled 7,269 million euros and
included 3,462 million euros relating to intangible fixed assets and 3,807
million euros relating to tangible fixed assets.
Charges in 2001 amounted to 7,645 million euros and included 3,565 million
euros relating to intangible fixed assets and 4,080 million euros relating to
tangible fixed assets.
Amortisation of intangible fixed assets (3,462 million euros) included 1,293
million euros in respect of consolidation goodwill on the acquisition of
Telecom Italia (1,299 million euros in 2001) and 2,056 million euros for
amortisation charges at the Telecom Italia Group.
Writedowns in 2002 amounted to 604 million euros and included 58 million euros
relating to fixed assets and 546 million euros relating to receivables
classified under current assets. Writedowns in 2001 totalled 465 million euros.
12-13) Provisions for risks and Other provisions
Provisions for risks and Other provisions amounted overall to 172 million euros
in 2002 (486 million euros in 2001). They included 153 million euros of
provisions for Telecom Italia Group contractual risks and risks relating to
legal disputes and 19 million euros of provisions at other Olivetti Group
companies, mainly in respect of risks on equity investments.
14) Other operational expenses
Other operational expenses amounted to 839 million euros (858 million euros in
2001) and included:
Year 2002 Year 2001 Changes
(in millions of euros) (a) (b) (a-b)
----------------------------------------------- --------- --------- --------
Duties for communications activities 431 524 (93)
Losses on disposal of intangible and
tangible fixed assets 36 29 7
Taxes (other than on income) and
duties accrued in the year, including ICI
(local tax on real estate) 123 125 (2)
Other charges 249 180 69
----------------------------------------------- --------- --------- --------
Total 839 858 (19)
=============================================== ========= ========= ========
C) Financial income and charges
15) Income from equity investments
Income from equity investments amounted to 57 million euros (221 million euros
in 2001) and included:
Year 2002 Year 2001 Changes
(in millions of euros) (a) (b) (a-b)
--------------------------------------------- --------- --------- -------
Dividends and tax credits 51 30 21
Other income from equity investments 6 191 (185)
--------------------------------------------- --------- --------- -------
Total 57 221 (164)
============================================= ========= ========= =======
195 | Consolidated Financial Statements
16) Other financial income
Other financial income amounted to 1,512 million euros in 2002 (1,225 million
euros in 2001) and included:
Year 2002 Year 2001 Changes
(in millions of euros) (a) (b) (a-b)
---------------------- --------- --------- -------
Interest income and gains on fixed income
securities 125 295 (170)
Interest income and commissions from:
unconsolidated subsidiary companies 1 1 -
associated companies 13 23 (10)
banks 185 197 (12)
customers 2 2 -
Exchange rate gains 508 257 251
Other 678 450 228
----------------------------------------- --------- --------- -------
Total 1,512 1,225 287
========================================= ========= ========= =======
17) Interest expense and other financial charges
Interest expense and other financial charges amounted to 3,819 million euros
(4,330 million euros in 2001), of which 2,717 million euros for the Telecom
Italia Group (3,075 million euros in 2001). The heading comprised:
Year 2002 Year 2001 Changes
(in millions of euros) (a) (b) (a-b)
------------------------------------------- --------- --------- -------
Interest and other charges on bonds 1,751 1,501 250
Exchange rate losses 905 392 513
Banks and other 1,163 2,437 (1,274)
------------------------------------------- --------- --------- -------
Total 3,819 4,330 (511)
=========================================== ========= ========= =======
D) Value adjustments to financial assets
18) Revaluations
Revaluations amounted to 121 million euros, reflecting upward adjustments on
unconsolidated equity investments valued with the equity method.
The heading amounted to 198 million euros in 2001
19) Writedowns
This heading totalled 907 million euros (2,394 million euros in 2001),
reflecting writedowns for other than temporary impairments of value on equity
investments valued at cost, downward adjustments of equity investments valued
with the equity method and writedowns of securities to reflect other than
temporary impairments of value (on securities classified under fixed assets)
and to reflect market value
196 | Consolidated Financial Statements
(on securities held as current assets). It also included amortisation of
goodwill arising on the acquisition of equity investments valued with the
equity method.
Writedowns arose as follows:
- amortisation of goodwill arising on the acquisition of equity investments
valued with the equity method for 80 million euros (316 million euros in
2001), a reduction of 236 million euros compared with 2001, as a result of
the goodwill writedowns applied in 2001;
- writedowns for 259 million euros on securities and equity investments held
as current assets (509 million euros in 2001) and for 40 million euros on
securities held as fixed assets (49 million euros in 2001), with an
overall reduction of 123 million euros compared with 2001;
- the Group's share of losses at investee companies valued with the equity
method, for 528 million euros (1,569 million euros in 2001); specifically,
Stream for 246 million euros (241 million euros in 2001), Is Tim (Turkey)
for 171 million euros (334 million euros in 2001).
The heading was not affected by the results of the equity investments in
Astrolink, Nortel Inversora (Telecom Argentina) and the AUNA Group, which had a
negative impact of 700 million euros in 2001. No change was made in the Nortel
Inversora equity investment which, in accordance with prudent accounting
policies, was written off in the consolidated balance sheet at 31 December
2001. The consolidated book values of the AUNA Group and the Astrolink company
at 31 December 2001 were retained until the equity investments were sold, on 1
August 2002 and 30 November 2002 respectively, as a result of the sale of the
Telespazio Group.
Year 2002 Year 2001 Changes
(in millions of euros) (a) (b) (a-b)
--------------------------------------------------------------------- --------- --------- -------
Equity investments 759 2,157 (1,398)
Financial fixed assets other than equity investments 40 49 (9)
Securities classified as current assets other than equity investments 108 188 (80)
--------------------------------------------------------------------- --------- --------- -------
Total 907 2,394 (1,487)
===================================================================== ========= ========= =======
E) Extraordinary income and charges
20) Extraordinary income
Extraordinary income, at 2,990 million euros (996 million euros in 2001),
included 2,553 million euros of capital gains from disposals during the year
(465 million euros in 2001) and 437 million euros from sundry and other income
(531 million euros in 2001).
Capital gains from disposals amounted to 2,553 million euros, of which 2,413
million euros at the Telecom Italia Group, including:
o 1,245 million euros from the sale of the full 26.89% shareholding in AUNA;
o 484 million euros from the sale of the 19.61% shareholding in Bouygues
Decaux Telecom (BDT);
o 234 million euros from the sale of the full 100% shareholding in EMSA,
Telimm as well as of real estate and activities as part of Project Tiglio;
o 133 million euros from the acceptance by the Finsiel Group of the public
tender offer on Lottomatica;
197 | Consolidated Financial Statements
o 115 million euros from the sale to Telekom Austria (in which Telecom
Italia indirectly holds 14.78%) of the entire 25% shareholding in Mobilkom
Austria;
o 110 million euros from the sale of the entire 40% shareholding in Telemaco
Immobiliare;
o 70 million euros from the sale of 100% of Telespazio;
o 22 million euros from other minor sales.
The capital gains totalling 140 million euros posted by the other Group
companies included:
o 107 million euros from the acceptance by Olivetti S.p.A. and Olivetti
International S.A. of the public tender offer on Lottomatica;
o 26 million euros from the sale of the entire shareholding in OMS2, as part
of Project Tiglio;
o 7 million euros from other disposals.
Other extraordinary income totalling 437 million euros included 401 million
euros at the Telecom Italia Group, as follows:
o 131 million euros from recovery of pre-amortisation interest in respect of
integration charges pursuant to Law no. 58/1992 paid on a conditional
basis to the Italian National Insurance Board (INPS) until 1999, after the
dispute was resolved in favour of Telecom Italia;
o 270 million euros of other income, including 77 million euros from use of
reserves (essentially use of part of the reserve for risks and charges
provided in 2001 by Telecom Italia S.p.A. to cover charges relating to the
agreement for the sale of Stream to News Corp. and Vivendi
Universal/Canal+, when the sale did not take place), 9 million euros of
contributions and 184 million euros of sundry income.
The 36 million euros of other extraordinary income posted by the other Group
companies included 21 million euros from use of surplus reserves provided in
previous years.
21) Extraordinary charges
Extraordinary charges amounted overall to 8,486 million euros (4,105 million
euros in 2001) and included 8,375 million euros for the Telecom Italia Group
(3,947 million euros in 2001), as follows:
o 6,237 million euros of equity investment writedowns to reflect other than
temporary impairments of value (2,984 million euros in 2001), as follows:
- writedown of goodwill and the call option on Seat Pagine Gialle
shares for a total of 3,486 million euros; goodwill was written down
to market value (based on the average ordinary share price for the
last six months of 2002), following the Telecom Italia Group's
decision to view the Seat Pagine Gialle Directories operation as a
non-core business. In 2001, with regard to the call option, a
provision of 569 million euros was posted under financial charges;
- writedown of goodwill relating to consolidated companies for a total
of 225 million euros, Blu (103 million euros), Digitel Venezuela (75
million euros), other subsidiaries (47 million euros);
- the equity investment in Aria
- Is Tim (2,341 million euros): the investment was written off in full
(1,491 million euros) and a provision was made to the reserve for
risks and charges to cover Group exposure to this associated company
(850 million euros). The provision was commensurate to the guarantees
provided by the Group in favour of international financial institutes
that had granted loans to Aria
- Is Tim and to the loan granted directly by the Group;
- writedown of goodwill on Netco Redes (96 million euros) and other
companies (46 million euros) and a provision to align the purchase by
Seat Pagine Gialle of an additional stake in Consodata with the value
of the company as determined by an appraisal (43 million euros).
198 | Consolidated Financial Statements
The 2,984 million euros equity investment writedown applied in 2001 referred to
goodwill writedowns on consolidated companies (9Telecom Group, Entel Bolivia,
Entel Chile Group, Maxitel, Tele Celular Sul Group, Tele Nordeste Celular
Group, Tim Brasil, Med1 Group and other companies in the Seat Group) and on
companies valued with the equity method (GLB Servicos Interativos, Solpart
Participacoes, Telekom Austria, Nortel Inversora Group) and to other provisions
relating to equity investments.
o 316 million euros of provisions relating to the sale of the equity
investment in the 9Telecom Group. Specifically, considering the loss
recorded prior to the sale, the French 9Telecom Group generated an overall
charge to Telecom Italia Group income for the first nine months of 2002 of
389 million euros (267 million euros after taxes);
o 135 million euros of capital losses on the sale of 75 million shares
(representing 15% of capital) of Telekom Austria A.G. in November 2002.
Following the sale, the Telecom Italia Group's stake in Telekom Austria
A.G. decreased to 14.78%;
o 494 million euros of charges and provisions relating to personnel
retirements and mobility schemes (including a 379 million euros charge at
Telecom Italia);
o 235 million euros of charges relating to extraordinary operations on
equity investments;
o 79 million euros of financial charges on the amount payable to the Italian
National Insurance Board (INPS) for re-absorption of the ex Telephone
Companies Employees Pension Fund (FPT) and 74 million euros for an
extraordinary contribution to INPS to cover increased financial
requirements following the integration of the FPT with the Employees
Pension Fund;
o 190 million euros of writedowns on fixed assets relating in the main to
mobile telephone companies in Brazil (142 million euros) and 38 million
euros for capital losses on fixed-asset disposals;
o 194 million euros of provisions to reserves, including 135 million euros
for guarantees provided on the sale of equity investments and company
units and 59 million euros for other provisions;
o 383 million euros of other sundry charges.
Extraordinary charges for the other Group companies amounted to 111 million
euros (158 million euros in 2001) and included 62 million euros of capital
losses on the sale of the Seat Pagine Gialle equity investment, 32 million
euros of provisions relating to risks on equity investments, 4 million euros of
charges relating to the public tender offer on Lottomatica and 13 million euros
for miscellaneous charges.
22) Income taxes for the year
Income taxes for financial 2002 reflected a benefit of 2,210 million euros
compared with a tax charge of 579 million euros in 2001.
(in millions of euros) Year 2002 Year 2001
-------------------------------------------- --------- ---------
Current taxes 1,585 1,291
Deferred (prepaid) taxes, net (3,795) (712)
-------------------------------------------- --------- ---------
Total (2,210) 579)
============================================ ========= =========
Net prepaid taxes arose mainly from deferred tax assets and use of deferred tax
reserves (provided in previous years) as a result of the writedown of Olivetti
and Telecom Italia Group equity investments for 964 million euros and 2,167
million euros, respectively, as well as from the Olivetti tax credit on
dividends collected from Telecom Italia for 700 million euros.
199 | Consolidated Financial Statements
Loss per share
The primary loss per share for fiscal 2002 determined in compliance with
International Financial Reporting Standard (IFRS) no. 33, is set below:
Net loss Number of Loss per share
Year 2002 (in millions of euros) shares (in euros)
------------------------------------------------------------- ---------------------- ------------- --------------
Loss for the year, wholly attributable to outstanding shares (773)
Average number of outstanding ordinary shares 8,600,047,643
------------------------------------------------------------- ---------------------- ------------- --------------
Primary loss per share (0.090)
============================================================= ====================== ============= ==============
Other information
1) Transactions with related parties
The operations transacted by consolidated companies of the Olivetti Group with
related companies and entities are all normal operations and are conducted
according to market conditions or in compliance with specific laws; no
non-typical or unusual operation has been effected.
The main operations with unconsolidated subsidiaries and with associated
companies are detailed below:
200 | Consolidated Financial Statements
Telecom Italia Group
---------------------------------
subsidiary and
unconsolidated associated
subsidiary companies Other
Main income and financial items and of the Olivetti
for the year 2002 associated controlling Group
(in millions of euros) companies company companies Description
------------------------------------------ -------------- -------------- --------- ---------------------------------------
Revenues from sales 299 3 4 They include revenues from Teleleasing
(euro 105 million), Revenues from sales
Brasil Telecom (euro 48 million), Stream
(euro 42 million), AUNA Group (euro 18
million), Telecom Argentina (euro 18
million), Telecom Srbija (euro 17
million)
Consumption of materials and services 445 24 6 They include principally costs for
rentals paid to IM.SER (euro 153
million), Telemaco Immobiliare (euro 37
million) and costs for Tlc services to
Etecsa Cuba (euro 77 million) and for
maintenance and technical asistance to
Italtel (euro 40 million) and Siemens
Informatica (euro 24 million)
Other income, net 9 - They refer principally to recoveries of
payroll costs for personnel moved
temporarily to some foreign subsidiaries
Financial charges, net 9 - They include interest income accrued on
loans granted to some group companies
(euro 14 million) and interest payable
to Teleleasing accrued on financial
lease contracts (euro 23 million)
Receivables under financial fixed assets 440 - 16 They include medium/long-term loans to
Is Tim (euro 313 million), Tiglio I
(euro 70 million), Telegono (euro 34
millioni) and Tiglio II (euro 30
million)
Financial receivables 35 - They include short-term loans to TMI
Group companies (euro 14 million) and to
Golden Lines (euro 10 million net of
allowances)
Financial payables 406 - They refer principally to amounts due to
Teleleasing for financial lease
contracts (euro 393 million)
Trade receivables and other 219 2 1 They refer principally to receivables
from Stream (euro 71 million), Telekom
Srbija (euro 21 million net of
allowances), Teleleasing (euro 38
million) and Consorzio Telcal (euro 14
million)
Trade payables and other 386 15 4 They refer to supply contracts for
investing and operating activities:
Italtel Group (euro 150 million),
Siemens Informatica (euro 40 million),
Teleleasing (euro 17 million) as well as
advances from Consorzio Telcal (euro 103
million)
Contract work-in progress 110 - They refer principally to work-in
progress on jobs ordered by Consorzio
Telcal for Piano Telematico Calabria
Guarantees given 930 - 5 They include suretyships given in favor
of Is Tim (euro 537 million), Consorzio
Csia (euro 85 million), Stream (euro 72
million) as well as guarantees on assets
given in favor of Is Tim (euro 110
million)
Purchase and sale commitments 17 - They refer to commitments to Teleleasing
relating to operating lease contracts
Capital investments 441 - They refer principally to purchase of
telephone exchanges from Italtel Group
(euro 406 million) and Siemens
Informatica (euro 19 million)
Disposal of equity investments 690 - 25% of Mobilkom Austria, trough transfer
of Autel holding to Telekom Austria
Transfers of businesses 219 - 26 They refer to gains from transfers of
real estate assets to Tiglio I (euro 185
million) and the contribution of the
"asset management" business to Tiglio II
(euro 60 million)
------------------------------------------ -------------- -------------- --------- ----------------------------------------
201 | Consolidated Financial Statements
Operations with related parties other than Group companies include those
transacted in 2002 by the Telecom Italia Group with the Pirelli Group and
Edizione Holding Group.
(in millions of euros) Year 2002
-------------------------------------------- --------- ------------------------------------------------------------------------
Revenues from sales 26 They refer principally to phone services supplied to the Pirelli Group
(euro 8 million) and to the Edizione Holding Group (euro 16 million) as
well as to IT services rendered to the Pirelli Group (euro 2 million)
Consumption of materials and external 23 They refer principally to capital expenditure for R&D and supplies in IPR
services sector
Trade receivables and other 3 They refer principally to phone services above mentioned
Trade payables and other 9 They refer principally to supplies linked to investment activities
Capital investments 32 They refer principally to purchases of telecommunication cables
Equity investments acquisition and purchase 21 Acquisition by Telecom Italia S.p.A. of 25.3% of Epiclink S.p.A. from
commitments Pirelli S.p.A. (euro 18 million) and commitment to purchase the
remaining 5% (euro 3 million)
Business acquisitions 3 Acquisition by Epiclink S.p.A. of a business from Pirelli Informatica
Business disposals 19 Gain from transfer of non facility businesses to Pirelli Real Estate from
Telecom Italia Group and of Property and Project business from Olivetti
Multiservices
-------------------------------------------- --------- ------------------------------------------------------------------------
We also point out that in the year 2002 TIM sold telephone cards to Autogrill
S.p.A. (Edizioni Holding Group) for the subsequent sale to the public for a
total amount of euro 20 million.
2) Remunerations to Parent Company Directors and Statutory Auditors
Remunerations for 2002 due to Parent Company Directors and Statutory Auditors
in respect of services provided to companies included in the consolidation area
totalled 5,877,304 euros and 375,268 euros respectively.
3) Exhibits
The following exhibits are attached to provide the fullest and clearest
description of the consolidated financial position at 31 December 2002 and of
the consolidated result for financial 2002:
a) statement of changes in consolidated financial position;
b) statement of changes in Group consolidated shareholders' equity;
c) reclassified consolidated statement of income;
d) list of companies included in the consolidated financial statements at 31
December 2002 and of equity investments, pursuant to articles 38 and 39 of
Legislative Decree no. 127/1991.
202 | Consolidated Financial Statements
Olivetti Group
Statement of Changes in Consolidated Financial Position
(in millions of euros) Year 2002 Year 2001
-------------------------------------------------------------------------------- --------- ---------
A. Net financial resources (indebtedness) at the beginning of the year (38,362) (35,728)
-------------------------------------------------------------------------------- --------- ---------
B. Cash flow provided (used) by operating activities
Net result for the year (including minority interests) (306) (3,676)
Amortization and depreciation 7,269 7,645
(Gains) or losses from disposal of fixed assets (2,243) (373)
Writedowns of fixed assets, net 4,387 3,753
Net change in operating working capital (382) 620
Net change in reserve for severance indemnities (50) 26
Changes in the consolidation area, exchange differences and other changes (2,734) (2,735)
-------------------------------------------------------------------------------- --------- ---------
5,941 5,260
-------------------------------------------------------------------------------- --------- ---------
C. Cash flow provided (used) by investing activities
Fixed assets:
intangible (1,956) (4,107)
tangible (3,291) (4,317)
financial (1,777) (3,141)
Proceeds from disposal, or reimbursement value, of fixed assets 5,968 1,484
-------------------------------------------------------------------------------- --------- ---------
(1,056) (10,081)
-------------------------------------------------------------------------------- --------- ---------
D. Cash flow provided (used) by financing activities
Capital increases 36 2,420
Grants related to assets 42 22
-------------------------------------------------------------------------------- --------- ---------
78 2,442
-------------------------------------------------------------------------------- --------- ---------
E. Distribution of dividends - (255)
-------------------------------------------------------------------------------- --------- ---------
F. Net cash flow provided (used) in the year (B+C+D+E) 4,963 (2,634)
-------------------------------------------------------------------------------- --------- ---------
G. Net financial resources (indebtedness) at the end of the year (A+F) (33,399) (38,362)
================================================================================ ========= =========
203 | Consolidated Financial Statements
Olivetti Group
Statement of Changes in the Group Consolidated Shareholders' Equity
Share capital
increases to be
filed with the Additional
(in millions of euros) Share capital Companies Register paid-in capital
------------------------------------------------------------------- ------------- ------------------ ---------------
Balance as of 31 December 2000 4,915 1,999 3,196
------------------------------------------------------------------- ------------- ------------------ ---------------
Appropriation of 2000 net result
Dividend distribution
------------------------------------------------------------------- ------------- ------------------ ---------------
Share capital increases:
In exchange for Tecnost shares owned by third parties 1,999 (1,999)
Conversion of "Olivetti 1998-2002 bonds" 8 1
Exercise of "Olivetti common shares 1998-2002 warrants" 4
Resolution of the Board of Directors on 9 June 1999 in
execution of the powers granted by Extraordinary
Shareholders' Meeting on 7 April 1999 17 12
Rights issue in March 2001 (no. 348,249,405 shares subscribed) 349 557
Rights issue in November 2001 (no.1,491,698 shares subscribed) 1,492
Cancellation of Telecom Italia savings shares
Other changes
------------------------------------------------------------------- ------------- ------------------ ---------------
Net result of the year 2001
------------------------------------------------------------------- ------------- ------------------ ---------------
Balance as of 31 December 2001 8,784 1 3,765
------------------------------------------------------------------- ------------- ------------------ ---------------
Appropriation of 2001 net result
------------------------------------------------------------------- ------------- ------------------ ---------------
Share capital increases:
Conversion of "Olivetti 1998-2002 bonds" 30 (1)
Exercise of "Olivetti common shares 1998-2002 warrant" 23
Resolution of the Board of Directors on 9 June 1999 in
execution of the powers granted by Extraordinary
Shareholders' Meeting on 7 April 1999 5
Conversion of Olivetti 2001-2010 bonds 3
Other changes
------------------------------------------------------------------- ------------- ------------------ ---------------
Net result of the year 2002
------------------------------------------------------------------- ------------- ------------------ ---------------
Balance as of 31 December 2002 8,845 3,765
=================================================================== ============= ================== ===============
204 | Consolidated Financial Statements
Reserve for Sundry reserves,
Parent Company retained
shares held earnings and Group Group
Revaluation Legal Reserve for Other Parent by subsidiary accumulated net result shareholders'
reserves reserve treasury stock Company reserves companies loss of the year equity
----------- ------- -------------- ---------------- -------------- ---------------- ----------- -------------
1 877 2 2,075 391 1,340 (940) 13,856
----------- ------- -------------- ---------------- -------------- ---------------- ----------- -------------
44 (984) 940
(255) (255)
----------- ------- -------------- ---------------- -------------- ---------------- ----------- -------------
(4) 5
(2) 2
(8) 21
906
1,492
(277) (277)
69 69
----------- ------- -------------- ---------------- -------------- ---------------- ----------- -------------
(3,090) (3,090)
----------- ------- -------------- ---------------- -------------- ---------------- ----------- -------------
1 921 2 2,061 391 (107) (3,090) 12,729
----------- ------- -------------- ---------------- -------------- ---------------- ----------- -------------
(3,090) 3,090
----------- ------- -------------- ---------------- -------------- ---------------- ----------- -------------
(14) 15
(11) 12
5
3
(351) (351)
----------- ------- -------------- ---------------- -------------- ---------------- ----------- -------------
(773) (773)
----------- ------- -------------- ---------------- -------------- ---------------- ----------- -------------
1 921 2 2,036 391 (3,548) (773) 11,640
=========== ======= ============== ================ ============== ================ =========== =============
205 | Consolidated Financial Statements
Olivetti Group
Reclassified Consolidated Income Statement
(in millions of euros) Year 2002 % Year 2001 %
--------------------------------------------------------------------------------- ---------------------- ----------------------
Net revenues 31,408 100.0 32,016 100.0
Operating costs:
Labour (4,727) (15.1) (4,877) (15.2)
Materials and services (12,668) (40.3) (13,458) (42.1)
Grants 20 0.1 26 0.1
Depreciation of tangible assets (3,807) (12.1) (4,080) (12.7)
Amortisation of intangible assets:
Consolidation goodwill (2,142) (6.8) (2,278) (7.1)
Other (1,320) (4.2) (1,283) (4.0)
Provisions for writedowns and risks (776) (2.5) (758) (2.4)
Other income (costs) net 28 0.1 30 0.1
--------------------------------------------------------------------------------- ---------------------- ----------------------
Result before interest and taxes (EBIT) and non recurring income and charges 6,016 19.2 5,338 16.7
--------------------------------------------------------------------------------- ---------------------- ----------------------
Non recurring income:
Gains on disposals and other non-recurring income (*) 2,990 9.5 999 3.1
Non recurring costs:
Losses on disposals and other non-recurring charges (*) (8,486) (27.0) (4,354) (13.6)
--------------------------------------------------------------------------------- ---------------------- ----------------------
EBIT 520 1.7 1,983 6.2
--------------------------------------------------------------------------------- ---------------------- ----------------------
Income from equity investments, net 57 0.1 221 0.7
Financial charges, net (2,307) (7.3) (3,105) (9.7)
Value adjustments to financial assets (786) (2.5) (2,196) (6.9)
--------------------------------------------------------------------------------- ---------------------- ----------------------
Result before taxes and minority interests (2,516) (8.0) (3,097) (9.7)
--------------------------------------------------------------------------------- ---------------------- ----------------------
Taxes 2,210 7.0 (579) (1.8)
--------------------------------------------------------------------------------- ---------------------- ----------------------
Result after taxes before minority interests (306) (1.0) (3,676) (11.5)
--------------------------------------------------------------------------------- ---------------------- ----------------------
Minority interests (467) (1.5) 586 1.8
--------------------------------------------------------------------------------- ---------------------- ----------------------
Net result for the year (773) (2.5) (3,090) (9.7)
================================================================================= ====================== ======================
(*) The amounts concerning the Telecom Italia Group have been classified as
extraordinary items in the consolidated accounts of this latter.
206 | Consolidated Financial Statements
List of Companies included in the consolidated financial statements at 31
December 2002 and of equity investments, pursuant to articles 38 and 39 of
Italian Legislative Decree no. 127/1991
--------------------------------------------------------------------------- -------------------------------------------------
Investees as of 31 December, 2002 Direct investors as of 31 December, 2002
--------------------------------------------------------------------------- -------------------------------------------------
Company name Registered office Currency Share % of Company name
capital ownership
--------------------------------------------------------------------------- -------------------------------------------------
COMPANIES CONSOLIDATED ON A
LINE-BY-LINE BASIS
--------------------------------------------------------------------------- -------------------------------------------------
Parent company
------------------------------------------------------------------------- -------------------------------------------------
Olivetti S.p.A. Italy Eur 8,845,239,632
Finance companies
------------------------------------------------------------------------- -------------------------------------------------
Global Gaming Investments S.p.A. Italy Eur 1,300,000 100.00 Olivetti S.p.A.
Olivetti Finance N.V. Netherlands Eur 46,905,660 100.00 Olivetti S.p.A.
Olivetti Finanziaria Industriale S.p.A. Italy Eur 35,000,000 100.00 Olivetti S.p.A.
Olivetti Holding B.V. Netherlands Eur 15,882,770 100.00 Olivetti International S.A.
Olivetti International S.A. Luxembourg Eur 500,000,000 100.00 Olivetti S.p.A.
Olivetti International (Service) S.A. Switzerland Fsv 50,000 100.00 Olivetti International S.A.
Olivetti International Finance N.V. Neth. Antilles Eur 3,000,000 100.00 Olivetti Finance N.V.
Olivetti International N.V. Neth. Antilles Eur 3,000,000 100.00 Olivetti International S.A.
Olivetti Rap S.A. Spain Eur 63,613,800 90.00 Olivetti Holding B.V.
10.00 Olivetti International S.A.
Olivetti Systems & Services UK Ltd. Great Britain Lgs 47,180,759 100.00 Olivetti Holding B.V.
Olivetti Telemedia Investments B.V. Netherlands Eur 24,957,920 100.00 Olivetti Holding B.V.
Telecom Italia Group
--------------------------------------------------------------------------- -------------------------------------------------
(*) Telecom Italia S.p.A. Italy Eur 4,023,816,861 38.96 (o)Olivetti S.p.A.
(**) Finsiel S.p.A. - Consulenza e
Applicazioni Informatiche Italy Eur 59,982,385 1.58 Olivetti S.p.A.
(**) In.Tel.Audit - Societa
Consort. di Rev. Interna
Gruppo Telecom A R.L. Italy Eur 2,750,000 9.09 Olivetti S.p.A.
Olivetti Tecnost Group
--------------------------------------------------------------------------- -------------------------------------------------
Alladium S.p.A. Italy Eur 1,500,000 100.00 Olivetti Tecnost S.p.A.
Aprimatic Doors S.L. Spain Eur 50,000 0.02 Aprimatic France S.A.S.
99.98 Aprimatic S.p.A.
Aprimatic France S.A.S. France Eur 38,200 100.00 Aprimatic S.p.A.
Aprimatic S.p.A. Italy Eur 6,240,000 100.00 Domustech S.p.A.
Consorzio Mael Italy Eur 52,000 60.00 Tecnost Sistemi S.p.A.
40.00 Tiemme Sistemi S.R.L.
Diaspron do Brasil S.A. Brazil Real 5,135,417 100.00 Olivetti do Brasil S.A.
Domustech S.p.A. Italy Eur 8,333,333 93.87 Olivetti Tecnost S.p.A.
Gotoweb S.p.A. Italy Eur 3,719,764 80.00 Olivetti Tecnost S.p.A.
Innovis S.p.A. Italy Eur 1,000,000 80.00 Olivetti Tecnost S.p.A.
Jetech S.p.A. Italy Eur 100,000 100.00 Olivetti Tecnost S.p.A.
Multidata S/A Eletronica
Industria e Comercio Brazil Real 5,583,350 100.00 Olivetti do Brasil S.A.
Olivetti Argentina S.A.C.e.I. Argentina Psa 7,590,000 100.00 Olivetti Tecnost International B.V.
Olivetti Chile S.A. Chile Pcl 2,341,370,200 100.00 Olivetti Tecnost International B.V.
Olivetti Colombiana S.A. Columbia Pcs 6,245,014,700 0.11 Olivetti Colombiana S.A.
9.46 Olivetti Tecnost S.p.A.
90.43 Olivetti Tecnost International B.V.
Olivetti da Amazonia Ind. e Com. Brazil Real 361,000 99.72 Olivetti do Brasil S.A.
0.28 Olivetti Sistema e Servicos Limitadas
Olivetti de Puerto Rico, Inc. Puerto rico USA $ 1,000 100.00 Olivetti Tecnost International B.V.
Olivetti de Venezuela C.A. Venezuela Bol 150,000,000 100.00 Olivetti Tecnost International B.V.
Olivetti do Brasil S.A. Brazil Real 111,660,625 3.36 Olivetti Mexicana S.A.
96.65 Olivetti Tecnost International B.V.
Olivetti I-Jet S.p.A. Italy Eur 25,000,000 100.00 Olivetti Tecnost S.p.A.
207 | Consolidated Financial Statements
--------------------------------------------------------------------------- -------------------------------------------------
Investees as of 31 December, 2002 Direct investors as of 31 December, 2002
--------------------------------------------------------------------------- -------------------------------------------------
Company name Registered office Currency Share % of Company name
capital ownership
--------------------------------------------------------------------------- -------------------------------------------------
Olivetti Lexikon Benelux S.A. Belgium Eur 1,932,592 100.00 Olivetti Tecnost International B.V.
Olivetti Lexikon Nordic Ab Sweden Ks 10,100,000 100.00 Olivetti Tecnost International B.V.
Olivetti Mexicana S.A. Mexico Psm 153,538,636 100.00 Olivetti Tecnost International B.V.
Olivetti Peruana S.A. Peru Sol 4,654,920 100.00 Olivetti Tecnost International B.V.
Olivetti Servicios y Soluciones
Integrales S.A. de C.V. Mexico Psm 7,025,226 100.00 Olivetti Tecnost International B.V.
Olivetti Sistema e Servicos Limitadas Brazil Real 410,000 0.02 Olivetti da Amazonia Ind. e Com.
99.98 Olivetti do Brasil S.A.
Olivetti Tecnost (H.K.) Ltd. China Pop. Rep. HK $ 100,000 99.00 Olivetti Tecnost International B.V.
1.00 Olivetti Tecnost S.p.A.
Olivetti Tecnost Africa (Pty) Ltd. South Africa Rand 601 100.00 Olivetti Tecnost International B.V.
Olivetti Tecnost Austria Ges.M.B.H Austria Eur 36,336 100.00 Olivetti Tecnost International B.V.
Olivetti Tecnost de Mexico S.A. De C.V. Mexico Psm 193,243,310 100.00 Olivetti Mexicana S.A.
Olivetti Tecnost Deutschland Gmbh Germany Eur 25,600,000 100.00 Olivetti Tecnost International B.V.
Olivetti Tecnost Espana S.A. Spain Eur 1,229,309 99.99 Olivetti Tecnost International B.V.
Olivetti Tecnost France S.A.S. France Eur 2,200,000 100.00 Olivetti Tecnost International B.V.
Olivetti Tecnost International B.V. Netherlands Eur 5,027,142 100.00 Olivetti Tecnost S.p.A.
Olivetti Tecnost Nederland B.V. Netherlands Eur 18,151 100.00 Olivetti Lexikon Benelux S.A.
Olivetti Tecnost Portugal, S.A. Portugal Eur 275,000 99.99 Olivetti Tecnost International B.V.
Olivetti Tecnost S.p.A. Italy Eur 273,000,000 100.00 Olivetti S.p.A.
Olivetti Tecnost Uk Ltd. Great Britain Lgs 6,295,712 100.00 Olivetti Tecnost International B.V.
Oliweb S.P.A Italy Eur 1,000,000 100.00 Olivetti Tecnost S.p.A.
Royal Consumer Information
Products, Inc. USA USA $ 1,176 100.00 Olivetti Tecnost International B.V.
Technoproduzioni S.p.A. Italy Eur 25,000,000 100.00 Tecnost Sistemi S.p.A.
Tecnost Sistemi S.p.A. Italy Eur 145,000,000 100.00 Olivetti Tecnost S.p.A.
Tiemme Sistemi S.R.L. Italy Eur 1,040,000 100.00 Technoproduzioni S.p.A.
Tiesse S.C.P.A. Italy Eur 103,292 42.00 Tecnost Sistemi S.p.A.
19.00 Tiemme Sistemi S.R.L.
Property management and services companies
--------------------------------------------------------------------------- -------------------------------------------------
E.S.T. - Erogazione Servizi e
Tecnologie - S.p.A. Italy Eur 1,600,995 100.00 Olivetti Multiservices S.p.A.
Emmegiesse S.p.A. Italy Eur 250,000 51.00 E.S.T. - Erogazione Servizi e
Tecnologie - S.p.A.
O&B Costruzioni Generali S.R.L. Italy Eur 100,000 50.10 Olivetti Multiservices S.p.A.
Olivetti Multiservices S.p.A. Italy Eur 31,000,000 100.00 Olivetti S.p.A.
Olivetti Systems Technology Corporation Japan Yen 100,000,000 100.00 Olivetti International S.A.
Oms Holding B.V. Netherlands Eur 20,000 100.00 Olivetti Multiservices S.p.A.
Ruf Gestion S.A.S. France Eur 266,300 100.00 Oms Holding B.V.
Other companies
--------------------------------------------------------------------------- -------------------------------------------------
Thema S.p.A. Italy Eur 1,300,000 100.00 Olivetti S.p.A.
EQUITY INVESTMENTS IN SUBSIDIARY AND ASSOCIATED COMPANIES ACCOUNTED FOR USING THE EQUITY METHOD
Subsidiary Companies
--------------------------------------------------------------------------- -------------------------------------------------
P.I.T. S.C.R.L. Italy Eur 25,823 100.00 E.S.T. - Erogazione Servizi e
Tecnologie - S.p.A.
Associated Companies
--------------------------------------------------------------------------- -------------------------------------------------
(**) Localport S.p.A. Italy Eur 922,365 37.67 Olivetti Tecnost S.p.A.
208 | Consolidated Financial Statements
--------------------------------------------------------------------------- -------------------------------------------------
Investees as of 31 December, 2002 Direct investors as of 31 December, 2002
--------------------------------------------------------------------------- -------------------------------------------------
Company name Registered office Currency Share % of Company name
capital ownership
--------------------------------------------------------------------------- -------------------------------------------------
OTHER EQUITY INVESTMENTS IN SUBSIDIARY AND ASSOCIATED COMPANIES
Subsidiary Companies
--------------------------------------------------------------------------- -------------------------------------------------
Ensambladora Tlaxcalteca S.A. Mexico Psm 2,000 0.02 Olivetti Mexicana S.A.
99.98 Olivetti Tecnost de Mexico S.A. de C.V.
Top Service S.p.A. Italy Eur 1,051,350 50.55 Olivetti Tecnost S.p.A.
Associated Companies
--------------------------------------------------------------------------- -------------------------------------------------
Baltea S.r.l. Italy Eur 2,220,000 49.00 Olivetti Tecnost S.p.A.
In.Va. S.p.A. Italy Eur 520,000 40.00 Olivetti S.p.A.
International Information Services Russia Rub 1,000,000 50.00 Olivetti Holding B.V.
Istituto R.T.M. S.p.A. Italy Eur 2,107,320 31.46 Olivetti Tecnost S.p.A.
Oli Gulf Fzco Dubai Dir 500,000 40.00 Olivetti Tecnost International B.V.
Olitecno S.A. de C.V. Mexico Psm 1,000,000 50.00 Olivetti Mexicana S.A.
Parco Dora Baltea S.p.A. Italy Eur 300,000 33.33 Olivetti Multiservices S.p.A.
(**) Tiglio I S.r.l. Italy Eur 5,255,704 8.85 Olivetti S.p.A.
Yminds S.A. Switzerland Fsv 100,000 27.20 Olivetti I-Jet S.p.A.
11.40 Olivetti Tecnost International B.V.
Associated Consortia
--------------------------------------------------------------------------- -------------------------------------------------
Consorzio per il Distretto Tecnologico
del Canavese Italy Eur 472,558 24.59 Olivetti S.p.A.
EQUITY INVESTMENTS IN OTHER COMPANIES
Azienda Esercizio Gas S.C.R.L. Italy Eur 901,558 0.24 Olivetti S.p.A.
Bemar Serveis Ofimatics S.L. Spain Eur 12,000 15.00 Olivetti Tecnost Espana S.A.
Bioindustry Park del Canavese S.p.A. Italy Eur 5,651,891 0.90 Olivetti S.p.A.
Cirsa Business Corporation S.A. Spain Eur 24,077,424 4.98 Olivetti Rap S.A.
Cisi Campania S.p.A. Italy Eur 2,580,000 8.00 E.S.T. - Erogazione Servizi e Tecnologie
- S.p.A
Consortium S.R.L. Italy Eur 561,600,000 2.27 Olivetti S.p.A.
Docunet Inc. USA USA $ 15,851,731 0.60 Olivetti International S.A.
Eurofly Service S.p.A. Italy Eur 4,275,000 16.33 Olivetti S.p.A.
Fin.Priv., S.R.L. Italy Eur 20,000 14.29 Olivetti S.p.A.
Flextel S.p.A. Italy Eur 2,150,829 13.42 Olivetti Tecnost S.p.A.
Funivie del Piccolo S. Bernardo S.p.A. Italy Eur 7,789,469 N.S. Olivetti S.p.A.
IPV Ltd Great Britain Lgs 265,837 12.54 Olivetti Telemedia Investments B.V.
Istud Istituto Studi Direzionali S.p.A. Italy Eur 1,136,212 0.68 Olivetti S.p.A.
Leisure Link Holdings Ltd Great Britain Lgs 7,809,618 1.20 Olivetti International S.A.
Mediapolis S.p.A. Italy Eur 3,517,615 10.00 Olivetti Multiservices S.p.A.
Mediobanca S.p.A. Italy Eur 389,262,458 1.81 Olivetti S.p.A.
Monterosa S.P.A Italy Eur 19,156,858 0.11 Olivetti S.p.A.
Nomisma S.p.A. Italy Eur 5,345,328 0.07 Olivetti Finanziaria Industriale S.p.A.
Penta Service S.p.A. Italy Eur 516,000 5.00 Olivetti Tecnost S.p.A.
Piedmont International S.A. Luxembourg USA $ 9,192,500 11.92 Olivetti International S.A.
Pila S.p.A. Italy Eur 7,060,000 0.10 Olivetti S.p.A.
Retail Network Services B.V. Netherlands Eur 15,129,484 13.65 Tecnost Sistemi S.p.A.
Revisione S.R.L. Italy Eur 31,200 5.00 Olivetti Finanziaria Industriale S.p.A.
S.A.G.I.T., S.p.A. Italy Eur 1,150,930 0.14 Olivetti S.p.A.
S.F.C. - Sistemi Formativi
Confindustria - S.C.P.A. Italy Eur 236,022 0.22 E.S.T. - Erogazione Servizi e
Tecnologie - S.p.A.
209 | Consolidated Financial Statements
--------------------------------------------------------------------------- -------------------------------------------------
Investees as of 31 December, 2002 Direct investors as of 31 December, 2002
--------------------------------------------------------------------------- -------------------------------------------------
Company name Registered office Currency Share % of Company name
capital ownership
--------------------------------------------------------------------------- -------------------------------------------------
System Union Group Plc. Great Britain Lgs 4,880,000 0.09 Olivetti Holding B.V.
X/Open Inc. Great Britain Lgs 11 9.09 Olivetti S.p.A.
Consortia
--------------------------------------------------------------------------- -------------------------------------------------
Consorzio Ingegneria
Partenopea S.C.R.L. Italy Eur 67,145 7.69 E.S.T. - Erogazione Servizi e Tecnologie
- S.p.A.
Corep - Consorzio per la Ricerca e
l'Educazione Permanente Italy Eur 707,763 7.69 Olivetti S.p.A.
=========================================================================== =================================================
Notes:- This statement does not include companies in winding-up, dormant
companies and those companies intended to be disposed of to third parties.
- Percentages of ownership do not consider securities classified as
current assets (in particular the share of 0.57% of Telecom Italia
S.p.A. owned by Olivetti S.p.A.).
(*) Equity investments held by Telecom Italia S.p.A. are listed in the
following pages, as shown in the Exhibits of Telecom Italia itself's
Annual Report.
(**) Equity investments held also by Telecom Italia Group companies.
(o) Companies whose share percentage computed on voting rights is
different from that computed on ownership.
In the following pages subsidiary and associated companies of the Telecom
Italia Group are listed with format of the Exhibit to the "2002 Annual Report"
of the Telecom Italia Group itself.
210 | Consolidated Financial Statements
Telecom Italia Group
List of subsidiary and associated companies
(Exhibit to the Telecom Italia Group Consolidated Financial Statements
as of 31 December 2002)
211 | Consolidated Financial Statements
[Page intentionally left blank.]
212 | Consolidated Financial Statements
LIST OF COMPANIES CONSOLIDATED ON A LINE-BY-LINE BASIS
Name
(type of business) Head office
------------------------------------------------------------------------------------------------------------------------------------
Domestic Wireline
ATESIA - Telemarketing Comunicazione Telefonica e Ricerche di
Mercato S.p.A. Rome EUR
(Telemarketing) (Italy)
--------------------------------------
INTELCOM SAN MARINo S.p.A Republic of San Marino EUR
(TELECOMMUNICATIONS SERVICES IN San Marino)
--------------------------------------
LATIN AMERICAN NAUTILUS S.A. Luxembourg USD
(holding company)
--------------------------------------
- LATIN AMERICAN NAUTILUS ARGENTINA S.A. Buenos Aires ARS
(installation and maintenance of submarine cable systems) (Argentina)
--------------------------------------
- LATIN AMERICAN NAUTILUS BOLIVIA SrL La Paz BOB
(installation and maintenance of submarine cable systems) (Bolivia)
--------------------------------------
- LATIN AMERICAN NAUTILUS BRASIL Ltda Rio de Janeiro BRL
(installation and maintenance of submarine cable systems) (Brazil)
--------------------------------------
- LATIN AMERICAN NAUTILUS CHILE S.A. Santiago CLP
(installation and maintenance of submarine cable systems) (Chile)
--------------------------------------
- LATIN AMERICAN NAUTILUS COLOMBIA S.A. Bogota COP
(installation and maintenance of submarine cable systems) (Colombia)
--------------------------------------
- LATIN AMERICAN NAUTILUS Ltd Dublin USD
(installation and maintenance of submarine cable systems) (Ireland)
--------------------------------------
- LATIN AMERICAN NAUTILUS PANAMA S.A. Panama USD
(installation and maintenance of submarine cable systems)
--------------------------------------
- LATIN AMERICAN NAUTILUS PERU' S.A. Lima PEN
(installation and maintenance of submarine cable systems) (Peru)
--------------------------------------
- LATIN AMERICAN NAUTILUS ST. CROIX LLC St. Croix USD
(installation and maintenance of submarine cable systems) (USA Virgin Islands)
--------------------------------------
- LATIN AMERICAN NAUTILUS USA Inc. Florida USD
(installation and maintenance of submarine cable systems) (USA)
--------------------------------------
- LATIN AMERICAN NAUTILUS SERVICE Inc. Florida USD
(installation and maintenance of submarine cable systems) (USA)
--------------------------------------
- LATIN AMERICAN NAUTILUS VENEZUELA C.A. Caracas VEB
(installation and maintenance of submarine cable systems) (Venezuela)
--------------------------------------
MED-1 SUBMARINE CABLES Ltd Tel Aviv ILS
(construction and maintenance of submarine cable Lev) (Israel)
--------------------------------------
- MED 1 IC-1 (1999) Ltd Tel Aviv ILS
(installation and maintenance of submarine cable IC1) (Israel)
--------------------------------------
- MED-1 (NETHERLANDS) B.V. Amsterdam EUR
(holding company) (Holland)
--------------------------------------
- MED-1 ITALY S.r.l. Rome EUR
(installation and maintenance submarine cable systems in
Italian seas) (Italy)
--------------------------------------
MEDITERRANEAN NAUTILUS S.A. Luxembourg USD
(holding company)
--------------------------------------
- ELETTRA TLC S.p.A. Rome EUR
(installation and maintenance of submarine cable systems) (Italy)
--------------------------------------
- MEDITERRANEAN NAUTILUS Ltd. Dublin USD
(installation and maintenance of submarine cable systems) (Ireland)
--------------------------------------
- MEDITERRANEAN NAUTILUS B.V. Amsterdam EUR
(holding company) (Holland)
--------------------------------------
- MEDITERRANEAN NAUTILUS GREECE S.A. Athens EUR
(installation and maintenance of submarine cable systems) (Greece)
--------------------------------------
- MEDITERRANEAN NAUTILUS ISRAEL Ltd Tel Aviv ILS
(installation and maintenance of submarine cable systems) (Israel)
--------------------------------------
- MEDITERRANEAN NAUTILUS ITALY S.p.A. Rome EUR
(installation and maintenance of submarine cable systems) (Italy)
--------------------------------------
- MEDITERRANEAN NAUTILUS Inc. Delaware USD
(telecommunications activities) (USA)
--------------------------------------
- MEDITERRANEAN NAUTILUS TELEKOMUNIKASYON HIZMETLERI TICARET
ANONIM SIRKETI Istanbul TRL
(telecommunications activities)) (Turkey)
Name %
(type of business) Share capital ownership
------------------------------------------------------------------------------------------------------------------------------------
Domestic Wireline
ATESIA - Telemarketing Comunicazione Telefonica e Ricerche di
Mercato S.p.A. 3,150,406 100.00
(Telemarketing)
----------------------------------------------
INTELCOM SAN MARINo S.p.A 1,550,000 70.00
(TELECOMMUNICATIONS SERVICES IN San Marino)
----------------------------------------------
LATIN AMERICAN NAUTILUS S.A. 60,000,000 70.00
(holding company) 10.00
10.00
10.00
----------------------------------------------
- LATIN AMERICAN NAUTILUS ARGENTINA S.A. 12,000 100.00 (*)
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS BOLIVIA SrL 1,000 100.00
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS BRASIL Ltda 20,000 99.99
(installation and maintenance of submarine cable systems) 0.01
----------------------------------------------
- LATIN AMERICAN NAUTILUS CHILE S.A. 6,200,000 100.00 (*)
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS COLOMBIA S.A. 28,430,000 100.00 (*)
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS Ltd 1,000,000 100.00
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS PANAMA S.A. 10,000 100.00
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS PERU' S.A. 3,500 100.00 (*)
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS ST. CROIX LLC 1,000 100.00
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS USA Inc. 10,000 100.00
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS SERVICE Inc. 10,000 100.00
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS VENEZUELA C.A. 7,000,000 100.00 (*)
(installation and maintenance of submarine cable systems)
----------------------------------------------
MED-1 SUBMARINE CABLES Ltd 100,000 23.17
(construction and maintenance of submarine cable Lev) 27.83
----------------------------------------------
- MED 1 IC-1 (1999) Ltd 1,000 99.99
(installation and maintenance of submarine cable IC1) 0.01
----------------------------------------------
- MED-1 (NETHERLANDS) B.V. 18,151 100.00
(holding company)
----------------------------------------------
- MED-1 ITALY S.r.l. 548,477 100.00
(installation and maintenance submarine cable systems in
Italian seas)
----------------------------------------------
MEDITERRANEAN NAUTILUS S.A. 326,480,000 62.51
(holding company) 7.49
----------------------------------------------
- ELETTRA TLC S.p.A. 10,329,200 100.00
(installation and maintenance of submarine cable systems)
----------------------------------------------
- MEDITERRANEAN NAUTILUS Ltd. 100,000 51.00
(installation and maintenance of submarine cable systems)
----------------------------------------------
- MEDITERRANEAN NAUTILUS B.V. 18,003 100.00
(holding company)
----------------------------------------------
- MEDITERRANEAN NAUTILUS GREECE S.A. 11,600 100.00
(installation and maintenance of submarine cable systems)
----------------------------------------------
- MEDITERRANEAN NAUTILUS ISRAEL Ltd 1,000 100.00
(installation and maintenance of submarine cable systems)
----------------------------------------------
- MEDITERRANEAN NAUTILUS ITALY S.p.A. 3,100,000 100.00
(installation and maintenance of submarine cable systems)
----------------------------------------------
- MEDITERRANEAN NAUTILUS Inc. 3,000 100.00
(telecommunications activities)
----------------------------------------------
- MEDITERRANEAN NAUTILUS TELEKOMUNIKASYON HIZMETLERI TICARET
ANONIM SIRKETI 350,000,000,000 99.9988
(telecommunications activities)) 0.0003
0.0003
0.0003
0.0003
%
Name of voting
(type of business) rights Held by
------------------------------------------------------------------------------------------------------------------------------------
Domestic Wireline
ATESIA - Telemarketing Comunicazione Telefonica e Ricerche di
Mercato S.p.A. TELECOM ITALIA
(Telemarketing)
----------------------------------------------
INTELCOM SAN MARINo S.p.A TELECOM ITALIA INTERNATIONAL
(TELECOMMUNICATIONS SERVICES IN San Marino)
----------------------------------------------
LATIN AMERICAN NAUTILUS S.A. TELECOM ITALIA
(holding company) ENTEL BOLIVIA
ENTEL CHILE
TELECOM ARGENTINA
STET-FRANCE TELECOM
----------------------------------------------
- LATIN AMERICAN NAUTILUS ARGENTINA S.A. LATIN AMERICAN NAUTILUS S.A.
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS BOLIVIA SrL LATIN AMERICAN NAUTILUS S.A.
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS BRASIL Ltda LATIN AMERICAN NAUTILUS S.A.
(installation and maintenance of submarine cable systems) LATIN AMERICAN NAUTILUS USA
----------------------------------------------
- LATIN AMERICAN NAUTILUS CHILE S.A. LATIN AMERICAN NAUTILUS S.A.
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS COLOMBIA S.A. LATIN AMERICAN NAUTILUS S.A.
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS Ltd LATIN AMERICAN NAUTILUS S.A.
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS PANAMA S.A. LATIN AMERICAN NAUTILUS S.A.
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS PERU' S.A. LATIN AMERICAN NAUTILUS S.A.
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS ST. CROIX LLC LATIN AMERICAN NAUTILUS S.A.
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS USA Inc. LATIN AMERICAN NAUTILUS S.A.
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS SERVICE Inc. LATIN AMERICAN NAUTILUS USA
(installation and maintenance of submarine cable systems)
----------------------------------------------
- LATIN AMERICAN NAUTILUS VENEZUELA C.A. LATIN AMERICAN NAUTILUS S.A.
(installation and maintenance of submarine cable systems)
----------------------------------------------
MED-1 SUBMARINE CABLES Ltd TELECOM ITALIA
(construction and maintenance of submarine cable Lev) TELECOM ITALIA INTERNATIONAL
----------------------------------------------
- MED 1 IC-1 (1999) Ltd MED-1 SUBMARINE CABLES
(installation and maintenance of submarine cable IC1) MED-1 ITALY
----------------------------------------------
- MED-1 (NETHERLANDS) B.V. MED-1 SUBMARINE CABLES
(holding company)
----------------------------------------------
- MED-1 ITALY S.r.l. MED-1 NETHERLANDS
(installation and maintenance submarine cable systems in
Italian seas)
----------------------------------------------
MEDITERRANEAN NAUTILUS S.A. TELECOM ITALIA
(holding company) TELECOM ITALIA INTERNATIONAL
----------------------------------------------
- ELETTRA TLC S.p.A. MEDITERRANEAN NAUTILUS S.A.
(installation and maintenance of submarine cable systems)
----------------------------------------------
- MEDITERRANEAN NAUTILUS Ltd. MEDITERRANEAN NAUTILUS S.A.
(installation and maintenance of submarine cable systems)
----------------------------------------------
- MEDITERRANEAN NAUTILUS B.V. MEDITERRANEAN NAUTILUS S.A.
(holding company)
----------------------------------------------
- MEDITERRANEAN NAUTILUS GREECE S.A. MEDITERRANEAN NAUTILUS B.V.
(installation and maintenance of submarine cable systems)
----------------------------------------------
- MEDITERRANEAN NAUTILUS ISRAEL Ltd MEDITERRANEAN NAUTILUS B.V.
(installation and maintenance of submarine cable systems)
----------------------------------------------
- MEDITERRANEAN NAUTILUS ITALY S.p.A. MEDITERRANEAN NAUTILUS B.V.
(installation and maintenance of submarine cable systems)
----------------------------------------------
- MEDITERRANEAN NAUTILUS Inc. MEDITERRANEAN NAUTILUS B.V.
(telecommunications activities)
----------------------------------------------
- MEDITERRANEAN NAUTILUS TELEKOMUNIKASYON HIZMETLERI TICARET
ANONIM SIRKETI MEDITERRANEAN NAUTILUS B.V.
(telecommunications activities)) MEDITERRANEAN NAUTILUS Ltd
MEDITERRANEAN NAUTILUS ISRAEL
MEDITERRANEAN NAUTILUS ITALY
MEDITERRANEAN NAUTILUS GREECE
213 | Consolidated Financial Statements
Name
(type of business) Head office
------------------------------------------------------------------------------------------------------------------------------------
PATH.NET S.p.A. Rome EUR
(networking systems and telecommunications) (Italy)
--------------------------------------
TELECONTACT CENTER S.p.A. Naples EUR
(telemarketing) (Italy)
--------------------------------------
TELECOM ITALIA SPARKLE S.p.A. (former TMI) Rome EUR
(public and private telecommunication services) (Italy)
--------------------------------------
- TELECOM ITALIA NETHERLANDS B.V. Amsterdam EUR
(telecommunications services) (Holland)
--------------------------------------
- TELECOM ITALIA OF NORTH AMERICA Inc. New York USD
(telecommunications promotional services) (USA)
--------------------------------------
- TELECOM ITALIA SPAIN S.L. UNIPERSONAL Madrid EUR
(telecommunications services) (Spain)
--------------------------------------
- TI BELGIUM S.P.R.L. - B.V.B.A Brussels EUR
(telecommunications services) (Belgium)
--------------------------------------
- TI FRANCE S.A.R.L. Paris EUR
(telecommunications services) (France)
--------------------------------------
- TI GERMANY GmbH Frankfurt EUR
(telecommunications services) (Germany)
--------------------------------------
- TI SWITZERLAND GmbH Zurich CHF
(telecommunications services) (Switzerland)
--------------------------------------
- TI Telecom Italia (Austria) Telekommunikationsdienste GmbH Vienna EUR
(telecommunications services) (Austria)
--------------------------------------
- TI UNITED KINGDOM Ltd London GBP
(telecommunications services) (UK)
--------------------------------------
- TMI TELEMEDIA INTERNATIONAL LUXEMBOURG S.A. Luxembourg EUR
(holding company)
--------------------------------------
- TMI TELEMEDIA INTERNATIONAL Ltd London USD
(telecommunications services) (UK)
--------------------------------------
- TELEMEDIA INTERNATIONAL USA Inc. New Jersey USD
(telecommunications services) (USA)
--------------------------------------
Mobile
TELECOM ITALIA MOBILE S.p.A. Turin EUR
(mobile telecommunications) (Italy)
--------------------------------------
- TIM INTERNATIONAL N.V. Amsterdam EUR
(holding company) (Holland)
--------------------------------------
- STET HELLAS TELECOMMUNICATIONS S.A. Athens EUR
(mobile telephony services) (Greece)
--------------------------------------
- TIM BRASIL S.A. Sao Paulo BRL
(holding company) (Brazil)
--------------------------------------
- BITEL PARTICIPACOES S.A. Rio de Janeiro BRL
(holding company) (Brazil)
--------------------------------------
- TELE CELULAR SUL PARTICIPACOES S.A. Curitiba BRL
(holding company for operating companies providing
mobile network services) (Brazil)
--------------------------------------
- TELEPAR CELULAR S.A. Curitiba BRL
(mobile telephony operator) (Brazil)
--------------------------------------
- CTMR CELULAR S.A. Pelotas BRL
(mobile telephony operator) (Brazil)
--------------------------------------
- TELESC CELULAR S.A. Florianopolis BRL
(mobile telephony operator) (Brazil)
--------------------------------------
- TELE NORDESTE CELULAR PARTICIPACOES S.A. Recife BRL
(holding company for operating companies
providing mobile network services) (Brazil)
--------------------------------------
- TELASA CELULAR S.A. Recife BRL
(mobile telephony operator) (Brazil)
--------------------------------------
- TELECEARA' CELULAR S.A. Fortaleza BRL
(mobile telephony operator) (Brazil)
--------------------------------------
- TELEPISA CELULAR S.A. Teresina BRL
(mobile telephony operator) (Brazil)
--------------------------------------
- TELERN CELULAR S.A. Natal BRL
(mobile telephony operator) (Brazil)
--------------------------------------
- TELPA CELULAR S.A. Joao Pessoa BRL
(mobile telephony operator) (Brazil)
--------------------------------------
- TELPE CELULAR S.A. Recife BRL
(mobile telephony operator) (Brazil)
--------------------------------------
- STARCEL Ltda Sao Paulo BRL
(call center services) (Brazil)
--------------------------------------
- TIM CELULAR S.A. (former PORTALE SAO PAULO S.A.) Sao Paulo BRL
(mobile telephony operator) (Brazil)
--------------------------------------
Name %
(type of business) Share capital ownership
------------------------------------------------------------------------------------------------------------------------------------
PATH.NET S.p.A. 25,800,000 99.99
(networking systems and telecommunications) 0.01
----------------------------------------------
TELECONTACT CENTER S.p.A. 110,000 100.00
(telemarketing)
----------------------------------------------
TELECOM ITALIA SPARKLE S.p.A. (former TMI) 200,000,000 100.00
(public and private telecommunication services)
----------------------------------------------
- TELECOM ITALIA NETHERLANDS B.V. 18,200 100.00
(telecommunications services)
----------------------------------------------
- TELECOM ITALIA OF NORTH AMERICA Inc. 15,550,000 100.00
(telecommunications promotional services)
----------------------------------------------
- TELECOM ITALIA SPAIN S.L. UNIPERSONAL 703,111 100.00
(telecommunications services)
----------------------------------------------
- TI BELGIUM S.P.R.L. - B.V.B.A 3,000,000 100.00
(telecommunications services)
----------------------------------------------
- TI FRANCE S.A.R.L. 10,307,800 100.00
(telecommunications services)
----------------------------------------------
- TI GERMANY GmbH 25,000 100.00
(telecommunications services)
----------------------------------------------
- TI SWITZERLAND GmbH 2,000,000 100.00
(telecommunications services)
----------------------------------------------
- TI Telecom Italia (Austria) Telekommunikationsdienste GmbH 1,835,000 100.00
(telecommunications services)
----------------------------------------------
- TI UNITED KINGDOM Ltd 2,680,000 100.00
(telecommunications services)
----------------------------------------------
- TMI TELEMEDIA INTERNATIONAL LUXEMBOURG S.A. 82,150,674.64 100.00 (*)
(holding company)
----------------------------------------------
- TMI TELEMEDIA INTERNATIONAL Ltd 558,472,454 67.88
(telecommunications services) 32.12
----------------------------------------------
- TELEMEDIA INTERNATIONAL USA Inc. 119,022,889.68 100.00
(telecommunications services)
----------------------------------------------
Mobile
TELECOM ITALIA MOBILE S.p.A. 513,964,432.74 54.82
(mobile telecommunications) 0.17
----------------------------------------------
- TIM INTERNATIONAL N.V. 555,427,000 100.00
(holding company)
----------------------------------------------
- STET HELLAS TELECOMMUNICATIONS S.A. 126,453,694.4 81.40
(mobile telephony services) 0.13
----------------------------------------------
- TIM BRASIL S.A. 4,760,522,987.04 100.00 (*)
(holding company)
----------------------------------------------
- BITEL PARTICIPACOES S.A. 2,290,264,028 100.00 (*)
(holding company)
----------------------------------------------
- TELE CELULAR SUL PARTICIPACOES S.A. 324,666,393.24 20.68 (*)
(holding company for operating companies providing
mobile network services)
----------------------------------------------
- TELEPAR CELULAR S.A. 912,839,704.66 80.79 (*)
(mobile telephony operator)
----------------------------------------------
- CTMR CELULAR S.A. 21,251,917.26 100.00 (*)
(mobile telephony operator)
----------------------------------------------
- TELESC CELULAR S.A. 266,803,506.58 100.00 (*)
(mobile telephony operator)
----------------------------------------------
- TELE NORDESTE CELULAR PARTICIPACOES S.A. 288,442,548.62 21.18 (*)
(holding company for operating companies
providing mobile network services)
----------------------------------------------
- TELASA CELULAR S.A. 33,970,730.02 78.78 (*)
(mobile telephony operator)
----------------------------------------------
- TELECEARA' CELULAR S.A. 148,484,134.39 79.99 (*)
(mobile telephony operator)
----------------------------------------------
- TELEPISA CELULAR S.A. 24,762,149.14 79.46 (*)
(mobile telephony operator)
----------------------------------------------
- TELERN CELULAR S.A. 45,011,693.89 76.19 (*)
(mobile telephony operator)
----------------------------------------------
- TELPA CELULAR S.A. 43,164,229.17 71.85 (*)
(mobile telephony operator)
----------------------------------------------
- TELPE CELULAR S.A. 125,620,727.74 78.68 (*)
(mobile telephony operator)
----------------------------------------------
- STARCEL Ltda 30,000 100.00 (*)
(call center services)
----------------------------------------------
- TIM CELULAR S.A. (former PORTALE SAO PAULO S.A.) 1,251,790,742 100.00 (*)
(mobile telephony operator)
----------------------------------------------
%
Name of voting
(type of business) rights Held by
------------------------------------------------------------------------------------------------------------------------------------
PATH.NET S.p.A. TELECOM ITALIA
(networking systems and telecommunications) IT TELECOM
----------------------------------------------
TELECONTACT CENTER S.p.A. TELECOM ITALIA
(telemarketing)
----------------------------------------------
TELECOM ITALIA SPARKLE S.p.A. (former TMI) TELECOM ITALIA
(public and private telecommunication services)
----------------------------------------------
- TELECOM ITALIA NETHERLANDS B.V. TELECOM ITALIA SPARKLE
(telecommunications services)
----------------------------------------------
- TELECOM ITALIA OF NORTH AMERICA Inc. TELECOM ITALIA SPARKLE
(telecommunications promotional services)
----------------------------------------------
- TELECOM ITALIA SPAIN S.L. UNIPERSONAL TELECOM ITALIA SPARKLE
(telecommunications services)
----------------------------------------------
- TI BELGIUM S.P.R.L. - B.V.B.A TELECOM ITALIA SPARKLE
(telecommunications services)
----------------------------------------------
- TI FRANCE S.A.R.L. TELECOM ITALIA SPARKLE
(telecommunications services)
----------------------------------------------
- TI GERMANY GmbH TELECOM ITALIA SPARKLE
(telecommunications services)
----------------------------------------------
- TI SWITZERLAND GmbH TELECOM ITALIA SPARKLE
(telecommunications services)
----------------------------------------------
- TI Telecom Italia (Austria) Telekommunikationsdienste GmbH TELECOM ITALIA SPARKLE
(telecommunications services)
----------------------------------------------
- TI UNITED KINGDOM Ltd TELECOM ITALIA SPARKLE
(telecommunications services)
----------------------------------------------
- TMI TELEMEDIA INTERNATIONAL LUXEMBOURG S.A. TELECOM ITALIA SPARKLE
(holding company)
----------------------------------------------
- TMI TELEMEDIA INTERNATIONAL Ltd TMI TELEMEDIA INTERN. LUX.
(telecommunications services) TELECOM ITALIA SPARKLE
----------------------------------------------
- TELEMEDIA INTERNATIONAL USA Inc. TMI TELEMEDIA INTERN. Ltd
(telecommunications services)
----------------------------------------------
Mobile
TELECOM ITALIA MOBILE S.p.A. 55.68 TELECOM ITALIA
(mobile telecommunications) 0.17 TELECOM ITALIA FINANCE
----------------------------------------------
- TIM INTERNATIONAL N.V. TELECOM ITALIA MOBILE
(holding company)
----------------------------------------------
- STET HELLAS TELECOMMUNICATIONS S.A. TIM INTERNATIONAL
(mobile telephony services) TELECOM ITALIA FINANCE
----------------------------------------------
- TIM BRASIL S.A. TIM INTERNATIONAL
(holding company)
----------------------------------------------
- BITEL PARTICIPACOES S.A. TIM BRASIL
(holding company)
----------------------------------------------
- TELE CELULAR SUL PARTICIPACOES S.A. 52.06 BITEL PARTICIPACOES
(holding company for operating companies providing
mobile network services)
----------------------------------------------
- TELEPAR CELULAR S.A. 90.19 TELE CELULAR SUL
(mobile telephony operator)
----------------------------------------------
- CTMR CELULAR S.A. TELEPAR CELULAR
(mobile telephony operator)
----------------------------------------------
- TELESC CELULAR S.A. TELEPAR CELULAR
(mobile telephony operator)
----------------------------------------------
- TELE NORDESTE CELULAR PARTICIPACOES S.A. 52.32 BITEL PARTICIPACOES
(holding company for operating companies
providing mobile network services)
----------------------------------------------
- TELASA CELULAR S.A. 97.31 TELE NORDESTE CELULAR
(mobile telephony operator)
----------------------------------------------
- TELECEARA' CELULAR S.A. 86.00 TELE NORDESTE CELULAR
(mobile telephony operator)
----------------------------------------------
- TELEPISA CELULAR S.A. 97.59 TELE NORDESTE CELULAR
(mobile telephony operator)
----------------------------------------------
- TELERN CELULAR S.A. 92.87 TELE NORDESTE CELULAR
(mobile telephony operator)
----------------------------------------------
- TELPA CELULAR S.A. 94.87 TELE NORDESTE CELULAR
(mobile telephony operator)
----------------------------------------------
- TELPE CELULAR S.A. 95.16 TELE NORDESTE CELULAR
(mobile telephony operator)
----------------------------------------------
- STARCEL Ltda TIM BRASIL
(call center services)
----------------------------------------------
- TIM CELULAR S.A. (former PORTALE SAO PAULO S.A.) TIM BRASIL
(mobile telephony operator)
----------------------------------------------
214 | Consolidated Financial Statements
Name
(type of business) Head office
------------------------------------------------------------------------------------------------------------------------------------
- MAXITEL S.A. Belo Horizonte BRL
(mobile telephony operator) (Brazil)
--------------------------------------
- TIMNET.COM S.A. Rio de Janeiro BRL
(Internet services) (Brazil)
--------------------------------------
- TIMNET USA Inc. New Jersey USD
(mobile services) (USA)
--------------------------------------
- TIM PERU' S.A.C. Lima PEN
(mobile telephony operator) (Peru)
--------------------------------------
- CORPORACION DIGITEL C.A. Caracas VEB
(telecommunications services) (Venezuela)
--------------------------------------
South America
ENTEL CHILE S.A. Santiago CLP
(telecommunications services) (Chile)
--------------------------------------
- AMERICATEL CENTROAMERICA S.A. Guatemala City USD
(holding company) (Guatemala)
--------------------------------------
- AMERICATEL EL SALVADOR S.A. DE C.V. San Salvador USD
(telecommunications services) (El Salvador)
--------------------------------------
- AMERICATEL GUATEMALA S.A. Guatemala City GTQ
(telecommunications services) (Guatemala)
--------------------------------------
- AMERICATEL HONDURAS S.A. Tegucigalpa HNL
(telecommunications services) (Honduras)
--------------------------------------
- ENTEL CALL CENTER S.A. Santiago CLP
(telecommunications services) (Chile)
--------------------------------------
- ENTEL INTERNATIONAL B.V.I. Corp. Tortola CLP
(holding company) (British Virgin Islands)
--------------------------------------
- AMERICATEL CORP. USA Florida USD
(telecommunications services) (USA)
--------------------------------------
- ENTEL USA HOLDING Inc. Florida USD
(holding company) (USA)
--------------------------------------
- AMERICASKY Corporation Florida USD
(telecommunications services) (USA)
--------------------------------------
- ENTEL INVERSIONES S.A. Santiago CLP
(holding company) (Chile)
--------------------------------------
- AMERICATEL PERU' S.A. Lima PEN
(telecommunications services) (Peru
--------------------------------------
- ENTEL INVESTMENTS Inc. Tortola USD
(holding company) (British Virgin Islands)
--------------------------------------
- ENTEL SERVICIOS TELEFONICOS S.A. Santiago CLP
(telecommunications services) (Chile)
--------------------------------------
- ENTEL TELEFONIA LOCAL S.A. Santiago CLP
(local telecommunications services) (Chile)
--------------------------------------
- CHILE WIRELESS S.A. Santiago CLP
(holding company) (Chile)
--------------------------------------
- ENTEL TELEFONIA PERSONAL S.A. Santiago CLP
(holding company) (Chile)
--------------------------------------
- EMPRESA DE RADIOCOMUNICACIONES INSTA BEEP Ltda Santiago CLP
(telecommunications services) (Chile)
--------------------------------------
- ENTEL PCS TELECOMUNICACIONES S.A. Santiago CLP
(mobile telecommunications services) (Chile)
--------------------------------------
- ENTEL TELEFONIA MOVIL S.A. Santiago CLP
(mobile telecommunications services) (Chile)
--------------------------------------
- MICARRIER TELECOMUNICACIONES S.A. Santiago CLP
(telecommunications services) (Chile)
--------------------------------------
- ENTEL VENEZUELA C.A. Caracas VEB
(former ORBITEL VENEZUELA C.A.) (Venezuela)
(telecommunications services)
--------------------------------------
- RED DE TRANSACCIONES ELECTRONICAS S.A. Santiago CLP
(telecommunications services) (Chile)
--------------------------------------
- SATEL TELECOMUNICACIONES S.A. Santiago CLP
(telecommunications services) (Chile)
--------------------------------------
ENTEL Empresa Nacional de Telecomunicaciones S.A. La Paz BOB
(telecommunications services) (Bolivia)
--------------------------------------
- DATACOM S.A. La Paz BOB
(data transmission services) (Bolivia)
--------------------------------------
TELECOM ITALIA AMERICA LATINA S.A. Sao Paulo BRL
(telecommunications promotional services) (Brazil)
Name %
(type of business) Share capital ownership
------------------------------------------------------------------------------------------------------------------------------------
- MAXITEL S.A. 677,679,703 58.70 (*)
(mobile telephony operator) 37.97
3.33
----------------------------------------------
- TIMNET.COM S.A. 78,000,000 20.00 (*)
(Internet services) 20.00
20.00
20.00
20.00
----------------------------------------------
- TIMNET USA Inc. 11,000,000 100.00
(mobile services)
----------------------------------------------
- TIM PERU' S.A.C. 1,337,542,452 100.00 (*)
(mobile telephony operator)
----------------------------------------------
- CORPORACION DIGITEL C.A. 42,823,450,241 66.56
(telecommunications services)
----------------------------------------------
South America
ENTEL CHILE S.A. 408,096,296,423 54.76
(telecommunications services)
----------------------------------------------
- AMERICATEL CENTROAMERICA S.A. 2,649,608 78.65
(holding company)
----------------------------------------------
- AMERICATEL EL SALVADOR S.A. DE C.V. 1,143,572.24 15.00
(telecommunications services) 85.00
----------------------------------------------
- AMERICATEL GUATEMALA S.A. 450,000 100.00
(telecommunications services)
----------------------------------------------
- AMERICATEL HONDURAS S.A. 500,000 100.00 (*)
(telecommunications services)
----------------------------------------------
- ENTEL CALL CENTER S.A. 10,827,422,540 90.00
(telecommunications services) 10.00
----------------------------------------------
- ENTEL INTERNATIONAL B.V.I. Corp. 32,424,451,213 100.00
(holding company)
----------------------------------------------
- AMERICATEL CORP. USA 62,372,552.74 80.00
(telecommunications services)
----------------------------------------------
- ENTEL USA HOLDING Inc. 1,000 100.00
(holding company)
----------------------------------------------
- AMERICASKY Corporation 1,000 80.00
(telecommunications services) 20.00
----------------------------------------------
- ENTEL INVERSIONES S.A. 3,223,396,817 100.00
(holding company)
----------------------------------------------
- AMERICATEL PERU' S.A. 39,288,339.60 45.69
(telecommunications services) 54.31
----------------------------------------------
- ENTEL INVESTMENTS Inc. 1,630 100.00
(holding company)
----------------------------------------------
- ENTEL SERVICIOS TELEFONICOS S.A. 1,103,479,919 91.42
(telecommunications services) 8.58
----------------------------------------------
- ENTEL TELEFONIA LOCAL S.A. 23,113,989,207 99.00
(local telecommunications services) 1.00
----------------------------------------------
- CHILE WIRELESS S.A. 116,128,205 99.00
(holding company) 1.00
----------------------------------------------
- ENTEL TELEFONIA PERSONAL S.A. 127,256,898,429 94.64
(holding company) 5.36
----------------------------------------------
- EMPRESA DE RADIOCOMUNICACIONES INSTA BEEP Ltda 1,757,062,939 99.90
(telecommunications services)
----------------------------------------------
- ENTEL PCS TELECOMUNICACIONES S.A. 98,369,022,334 0.10
(mobile telecommunications services) 99.90
----------------------------------------------
- ENTEL TELEFONIA MOVIL S.A. 1,883,969,582 0.08
(mobile telecommunications services) 99.92
----------------------------------------------
- MICARRIER TELECOMUNICACIONES S.A. 3,233,725,941 99.99
(telecommunications services) 0.01
----------------------------------------------
- ENTEL VENEZUELA C.A. 709,500,000 100.00
(former ORBITEL VENEZUELA C.A.)
(telecommunications services)
----------------------------------------------
- RED DE TRANSACCIONES ELECTRONICAS S.A. 1,629,756,041 93.76
(telecommunications services)
----------------------------------------------
- SATEL TELECOMUNICACIONES S.A. 2,779,689,356 99.90
(telecommunications services) 0.10
----------------------------------------------
ENTEL Empresa Nacional de Telecomunicaciones S.A. 1,280,898,800 50.00
(telecommunications services)
----------------------------------------------
- DATACOM S.A. 66,938,200 99.99
(data transmission services)
----------------------------------------------
TELECOM ITALIA AMERICA LATINA S.A. 43,614,072 100.00
(telecommunications promotional services)
%
Name of voting
(type of business) rights Held by
------------------------------------------------------------------------------------------------------------------------------------
- MAXITEL S.A. 43.15 TIM INTERNATIONAL
(mobile telephony operator) 46.85 BITEL PARTICIPACOES
10.00 TIM BRASIL
----------------------------------------------
- TIMNET.COM S.A. TIM INTERNATIONAL
(Internet services) MAXITEL
TELE NORDESTE CELULAR
TELE CELULAR SUL
TIM CELULAR
----------------------------------------------
- TIMNET USA Inc. TIM INTERNATIONAL
(mobile services)
----------------------------------------------
- TIM PERU' S.A.C. TIM INTERNATIONAL
(mobile telephony operator)
----------------------------------------------
- CORPORACION DIGITEL C.A. TIM INTERNATIONAL
(telecommunications services)
----------------------------------------------
South America
ENTEL CHILE S.A. TELECOM ITALIA INTERNATIONAL
(telecommunications services)
----------------------------------------------
- AMERICATEL CENTROAMERICA S.A. ENTEL CHILE
(holding company)
----------------------------------------------
- AMERICATEL EL SALVADOR S.A. DE C.V. ENTEL CHILE
(telecommunications services) AMERICATEL CENTROAMERICA
----------------------------------------------
- AMERICATEL GUATEMALA S.A. AMERICATEL CENTROAMERICA
(telecommunications services)
----------------------------------------------
- AMERICATEL HONDURAS S.A. AMERICATEL CENTROAMERICA
(telecommunications services)
----------------------------------------------
- ENTEL CALL CENTER S.A. ENTEL CHILE
(telecommunications services) ENTEL INVERSIONES
----------------------------------------------
- ENTEL INTERNATIONAL B.V.I. Corp. ENTEL CHILE
(holding company)
----------------------------------------------
- AMERICATEL CORP. USA ENTEL INTERNATIONAL B.V.I.
(telecommunications services)
----------------------------------------------
- ENTEL USA HOLDING Inc. ENTEL INTERNATIONAL B.V.I.
(holding company)
----------------------------------------------
- AMERICASKY Corporation ENTEL USA HOLDING
(telecommunications services) ENTEL INTERNATIONAL B.V.I.
----------------------------------------------
- ENTEL INVERSIONES S.A. ENTEL CHILE
(holding company)
----------------------------------------------
- AMERICATEL PERU' S.A. ENTEL CHILE
(telecommunications services) ENTEL INVERSIONES
----------------------------------------------
- ENTEL INVESTMENTS Inc. ENTEL CHILE
(holding company)
----------------------------------------------
- ENTEL SERVICIOS TELEFONICOS S.A. ENTEL CHILE
(telecommunications services) ENTEL INVERSIONES
----------------------------------------------
- ENTEL TELEFONIA LOCAL S.A. ENTEL CHILE
(local telecommunications services) ENTEL INVERSIONES
----------------------------------------------
- CHILE WIRELESS S.A. ENTEL TELEFONIA LOCAL
(holding company) ENTEL INVERSIONES
----------------------------------------------
- ENTEL TELEFONIA PERSONAL S.A. ENTEL CHILE
(holding company) ENTEL INVERSIONES
----------------------------------------------
- EMPRESA DE RADIOCOMUNICACIONES INSTA BEEP Ltda ENTEL TELEFONIA PERSONAL
(telecommunications services)
----------------------------------------------
- ENTEL PCS TELECOMUNICACIONES S.A. ENTEL CHILE
(mobile telecommunications services) ENTEL TELEFONIA PERSONAL
----------------------------------------------
- ENTEL TELEFONIA MOVIL S.A. ENTEL CHILE
(mobile telecommunications services) ENTEL TELEFONIA PERSONAL
----------------------------------------------
- MICARRIER TELECOMUNICACIONES S.A. ENTEL CHILE
(telecommunications services) ENTEL INVERSIONES
----------------------------------------------
- ENTEL VENEZUELA C.A. ENTEL CHILE
(former ORBITEL VENEZUELA C.A.)
(telecommunications services)
----------------------------------------------
- RED DE TRANSACCIONES ELECTRONICAS S.A. ENTEL CHILE
(telecommunications services)
----------------------------------------------
- SATEL TELECOMUNICACIONES S.A. ENTEL CHILE
(telecommunications services) ENTEL INVERSIONES
----------------------------------------------
ENTEL Empresa Nacional de Telecomunicaciones S.A. ETI
(telecommunications services)
----------------------------------------------
- DATACOM S.A. ENTEL S.A.
(data transmission services)
----------------------------------------------
TELECOM ITALIA AMERICA LATINA S.A. TELECOM ITALIA
(telecommunications promotional services)
215 | Consolidated Financial Statements
Name
(type of business) Head office
------------------------------------------------------------------------------------------------------------------------------------
Internet and Media
SEAT PAGINE GIALLE S.p.A. Milan EUR
(publishing and Internet services) (Italy)
--------------------------------------
- ANNUARI ITALIANI S.p.A. (former KOMPASS ITALIA) Turin EUR
(publishing of annuals and sale of telematic products) (Italy)
--------------------------------------
- CIPI S.p.A. Milan EUR
(personalized products for companies) (Italy)
--------------------------------------
- CONSODATA S.A. Levallois Perret EUR
(management and supply of data banks and market researches) (France)
--------------------------------------
- BCA FINANCES S.A. Lille EUR
(analysis, management and trading of data banks) (France)
--------------------------------------
- BCA S.A. Lille EUR
(analysis, management and trading of data banks) (France)
--------------------------------------
- CAL - CONSUMER ACCES Ltd Kingston GBP
(management and supply of data banks) (UK)
--------------------------------------
- CONSODATA UK Ltd Kingston GBP
(business information) (UK)
--------------------------------------
- CHINALOOP HOLDINGS Cayman Islands USD
(direct marketing)
--------------------------------------
- CHINALOOP (MAURITIUS) Co Port Louis USD
(direct marketing) (Mauritius)
--------------------------------------
- SHANGHAI CHINALOOP INFORMATION SERVICES Shanghai USD
(direct marketing) (China)
--------------------------------------
- CONSOBELGIUM S.A. Brussels EUR
(business information) (Belgium)
--------------------------------------
- CONSODATA ESPANA S.A. Barcelona ESP
(business information) (Spain)
--------------------------------------
- QUANTITATIVE MARKETING TECHNOLOGIES S.L. Barcelona EUR
(direct marketing) (Spain)
--------------------------------------
- CONSODATA SOLUTIONS S.A. Levallois Perret EUR
(data management) (France)
--------------------------------------
- CONSODATA S.p.A. Rome EUR
(services of direct marketing; creation, management and
marketing of data bank) (Italy)
--------------------------------------
- CONSODATA MARKETING INTELLIGENCE S.r.l. Milan EUR
(former DOMINO RESEARCH S.r.l.) (Italy)
(data processing geomarketing sector)
--------------------------------------
- DWI S.p.A. Verona EUR
(design, software realization) (Italy)
--------------------------------------
- FINANZA E GESTIONE S.r.l. Milan EUR
(creation, management and trading of data banks for
the banking sector) (Italy)
--------------------------------------
- PUBBLIBABY S.p.A. Cusago EUR
(design, management and marketing of native sector
data bank) (Milan, Italy)
--------------------------------------
- MEDIA PRISME S.A. Levallois Perret EUR
(analysis, management and trading of data banks) (France)
--------------------------------------
- MEDIA PRISME ESPAGNE S.A. Madrid EUR
(direct marketing) (Spain)
--------------------------------------
- MP LIST S.A. Brussels FB
(analysis, management and trading of data banks) (Belgium)
--------------------------------------
- CONSODATA GROUP Ltd London GBP
(management and supply of data banks) (UK)
--------------------------------------
- NETCREATIONS Inc. New York USD
(management of the license regarding the software
products of Netex Ltd) (USA)
--------------------------------------
- PAN-ADRESS DIREKTMARKETING VERWALTUNG GmbH Munich EUR
(direct marketing) (Germany)
--------------------------------------
- PAN-ADRESS DIREKTMARKETING & Co. KG Munich DEM
(direct marketing) (Germany)
--------------------------------------
- CONSODATA DEUTSCHLAND GmbH (in liquidation) Munich DEM
(direct marketing) (Germany)
--------------------------------------
- CONSODATA MARKETING INTELLIGENCE GmbH Munich EUR
(direct marketing) (Germany)
--------------------------------------
- MEDIAPLAN GmbH (in liquidation) Munich EUR
(direct marketing) (Germany)
--------------------------------------
- DATABANK S.p.A. Milan EUR
(marketing) (Italy)
--------------------------------------
- DBK S.A. Madrid EUR
(marketing) (Spain)
Name %
(type of business) Share capital ownership
------------------------------------------------------------------------------------------------------------------------------------
Internet and Media
SEAT PAGINE GIALLE S.p.A. 341,183,511.30 53.21
(publishing and Internet services) 2.03
0.02
----------------------------------------------
- ANNUARI ITALIANI S.p.A. (former KOMPASS ITALIA) 1,610,904.88 100.00
(publishing of annuals and sale of telematic products)
----------------------------------------------
- CIPI S.p.A. 1,200000 60.00
(personalized products for companies)
----------------------------------------------
- CONSODATA S.A. 4,748,159.50 90.42
(management and supply of data banks and market researches)
----------------------------------------------
- BCA FINANCES S.A. 107,100 100.00
(analysis, management and trading of data banks)
----------------------------------------------
- BCA S.A. 80,000 17.00
(analysis, management and trading of data banks) 83.00
----------------------------------------------
- CAL - CONSUMER ACCES Ltd 200,000 100.00
(management and supply of data banks)
----------------------------------------------
- CONSODATA UK Ltd 2 100.00
(business information)
----------------------------------------------
- CHINALOOP HOLDINGS 29,961.3 50.06
(direct marketing)
----------------------------------------------
- CHINALOOP (MAURITIUS) Co 200 100.00
(direct marketing)
----------------------------------------------
- SHANGHAI CHINALOOP INFORMATION SERVICES 1,730,000 100.00
(direct marketing)
----------------------------------------------
- CONSOBELGIUM S.A. 62,500 100.00
(business information)
----------------------------------------------
- CONSODATA ESPANA S.A. 310,000,000 100.00
(business information)
----------------------------------------------
- QUANTITATIVE MARKETING TECHNOLOGIES S.L. 13,113 70.00
(direct marketing)
----------------------------------------------
- CONSODATA SOLUTIONS S.A. 270,000 100.00
(data management)
----------------------------------------------
- CONSODATA S.p.A. 13,200,000 100.00
(services of direct marketing; creation, management and
marketing of data bank)
----------------------------------------------
- CONSODATA MARKETING INTELLIGENCE S.r.l. 46,400 96.00
(former DOMINO RESEARCH S.r.l.)
(data processing geomarketing sector)
----------------------------------------------
- DWI S.p.A. 500,000 51.00
(design, software realization)
----------------------------------------------
- FINANZA E GESTIONE S.r.l. 77,450 100.00
(creation, management and trading of data banks for
the banking sector)
----------------------------------------------
- PUBBLIBABY S.p.A. 100,000 100.00
(design, management and marketing of native sector
data bank)
----------------------------------------------
- MEDIA PRISME S.A. 40,000 50.00
(analysis, management and trading of data banks) 50.00
----------------------------------------------
- MEDIA PRISME ESPAGNE S.A. 30,490 100.00
(direct marketing)
----------------------------------------------
- MP LIST S.A. 750,000 100.00
(analysis, management and trading of data banks)
----------------------------------------------
- CONSODATA GROUP Ltd 25,146,140 99.996
(management and supply of data banks) 0.004
----------------------------------------------
- NETCREATIONS Inc. 1 100.00
(management of the license regarding the software
products of Netex Ltd)
----------------------------------------------
- PAN-ADRESS DIREKTMARKETING VERWALTUNG GmbH 25,000 100.00
(direct marketing)
----------------------------------------------
- PAN-ADRESS DIREKTMARKETING & Co. KG 2,040,000 100.00
(direct marketing)
----------------------------------------------
- CONSODATA DEUTSCHLAND GmbH (in liquidation) 50,000 100.00
(direct marketing)
----------------------------------------------
- CONSODATA MARKETING INTELLIGENCE GmbH 25,000 100.00
(direct marketing)
----------------------------------------------
- MEDIAPLAN GmbH (in liquidation) 26,000 93.465
(direct marketing)
----------------------------------------------
- DATABANK S.p.A. 937,300 93.465
(marketing)
----------------------------------------------
- DBK S.A. 99,000 99.99
(marketing)
%
Name of voting
(type of business) rights Held by
------------------------------------------------------------------------------------------------------------------------------------
Internet and Media
SEAT PAGINE GIALLE S.p.A. 53.5850 TELECOM ITALIA
(publishing and Internet services) 2.068 TELECOM ITALIA FINANCE
0.0171 IT TELECOM
----------------------------------------------
- ANNUARI ITALIANI S.p.A. (former KOMPASS ITALIA) SEAT PAGINE GIALLE
(publishing of annuals and sale of telematic products)
----------------------------------------------
- CIPI S.p.A. SEAT PAGINE GIALLE
(personalized products for companies)
----------------------------------------------
- CONSODATA S.A. SEAT PAGINE GIALLE
(management and supply of data banks and market researches)
----------------------------------------------
- BCA FINANCES S.A. CONSODATA S.A.
(analysis, management and trading of data banks)
----------------------------------------------
- BCA S.A. CONSODATA S.A.
(analysis, management and trading of data banks) BCA FINANCES
----------------------------------------------
- CAL - CONSUMER ACCES Ltd CONSODATA S.A.
(management and supply of data banks)
----------------------------------------------
- CONSODATA UK Ltd CAL - CONSUMER ACCES
(business information)
----------------------------------------------
- CHINALOOP HOLDINGS CONSODATA S.A.
(direct marketing)
----------------------------------------------
- CHINALOOP (MAURITIUS) Co CHINALOOP HOLDINGS
(direct marketing)
----------------------------------------------
- SHANGHAI CHINALOOP INFORMATION SERVICES CHINALOOP (MAURITIUS)
(direct marketing)
----------------------------------------------
- CONSOBELGIUM S.A. CONSODATA S.A.
(business information)
----------------------------------------------
- CONSODATA ESPANA S.A. CONSODATA S.A.
(business information)
----------------------------------------------
- QUANTITATIVE MARKETING TECHNOLOGIES S.L. CONSODATA ESPANA
(direct marketing)
----------------------------------------------
- CONSODATA SOLUTIONS S.A. CONSODATA S.A.
(data management)
----------------------------------------------
- CONSODATA S.p.A. CONSODATA S.A.
(services of direct marketing; creation, management and
marketing of data bank)
----------------------------------------------
- CONSODATA MARKETING INTELLIGENCE S.r.l. CONSODATA S.p.A.
(former DOMINO RESEARCH S.r.l.)
(data processing geomarketing sector)
----------------------------------------------
- DWI S.p.A. CONSODATA S.p.A.
(design, software realization)
----------------------------------------------
- FINANZA E GESTIONE S.r.l. CONSODATA S.p.A.
(creation, management and trading of data banks for
the banking sector)
----------------------------------------------
- PUBBLIBABY S.p.A. CONSODATA S.p.A.
(design, management and marketing of native sector
data bank)
----------------------------------------------
- MEDIA PRISME S.A. CONSODATA S.A.
(analysis, management and trading of data banks) BCA FINANCES
----------------------------------------------
- MEDIA PRISME ESPAGNE S.A. MEDIA PRISME
(direct marketing)
----------------------------------------------
- MP LIST S.A. MEDIA PRISME
(analysis, management and trading of data banks)
----------------------------------------------
- CONSODATA GROUP Ltd SEAT PAGINE GIALLE
(management and supply of data banks) CAL - CONSUMER ACCES
----------------------------------------------
- NETCREATIONS Inc. CONSODATA GROUP
(management of the license regarding the software
products of Netex Ltd)
----------------------------------------------
- PAN-ADRESS DIREKTMARKETING VERWALTUNG GmbH CONSODATA GROUP
(direct marketing)
----------------------------------------------
- PAN-ADRESS DIREKTMARKETING & Co. KG CONSODATA GROUP
(direct marketing)
----------------------------------------------
- CONSODATA DEUTSCHLAND GmbH (in liquidation) PAN-ADRESS DIRECTMARK. & Co. KG
(direct marketing)
----------------------------------------------
- CONSODATA MARKETING INTELLIGENCE GmbH PAN-ADRESS DIRECTMARK. & Co. KG
(direct marketing)
----------------------------------------------
- MEDIAPLAN GmbH (in liquidation) PAN-ADRESS DIRECTMARK. & Co. KG
(direct marketing)
----------------------------------------------
- DATABANK S.p.A. SEAT PAGINE GIALLE
(marketing)
----------------------------------------------
- DBK S.A. DATABANK S.p.A.
(marketing)
216 | Consolidated Financial Statements
Name
(type of business) Head office
------------------------------------------------------------------------------------------------------------------------------------
- EUREDIT S.A. Paris EUR
(realization, promotion and marketing European
technology of commerce annual (France)
"Europages")
--------------------------------------
- FINANZIARIA WEB S.p.A. Turin EUR
(financing) (Italy)
--------------------------------------
- MATRIX S.p.A. Milan EUR
(Internet services) (Italy)
--------------------------------------
- FREE FINANCE S.p.A. Milan EUR
(Internet loans for the real estate market) (Italy)
--------------------------------------
- WEBNEXT S.r.l. (former XOOM.It S.p.A.) (in
liquidation) Milan EUR
(development and management of virtual
communities) (Italy)
--------------------------------------
- FINSATEL S.r.l. (in liquidation) Turin EUR
(holding company) (Italy)
--------------------------------------
- GIALLO PROFESSIONAL PUBLISHING S.p.A. Turin EUR
(publishing, typographic and graphic marketing,
advertising) (Italy)
--------------------------------------
- GRUPPO EDITORIALE FAENZA EDITRICE S.p.A. Faenza EUR
(publishing house) (Ravenna, Italy)
--------------------------------------
- FAENZA EDITRICE IBERICA S.L. Castellon de La Plana EUR
(publishing house also on behalf of third
parties) (Spain)
--------------------------------------
- FAENZA EDITRICE DO BRASIL Ltda Sao Paulo BRL
(publishing house also on behalf of third
parties) (Brazil)
--------------------------------------
- PROMO ADVERTISING S.r.l. Faenza EUR
(acquisition of advertising on behalf of
magazines, tv and multimedia broadcasting) (Ravenna, Italy)
--------------------------------------
- GRUPPO EDITORIALE JCE S.p.A. Cinisello Balsamo EUR
(publishing house) (Milan, Italy)
--------------------------------------
- QUASAR E ASSOCIATI S.r.l. Milan EUR
(multimedia publishers) (Italy)
--------------------------------------
- EDITORIALE QUASAR S.r.l. Milan EUR
(publishing house and advertising agency) (Italy)
--------------------------------------
- TTG ITALIA S.p.A. Turin EUR
(publishing house and advertising agency) (Italy)
--------------------------------------
- GIALLO VOICE S.p.A. Turin EUR
(teleselling, telemarketing, call centers and marketing) (Italy)
--------------------------------------
- IMR S.r.l. Turin EUR
(call center services) (Italy)
--------------------------------------
- OPS S.r.l. Milan EUR
(call center services) (Italy)
--------------------------------------
- TELEPROFESSIONAL S.r.l. Monza EUR
(call center services) (Milan, Italy)
--------------------------------------
- GRUPPO BUFFETTI S.p.A. Rome EUR
(supply of products regarding the paper industry, printing and
publishing) (Italy)
--------------------------------------
- OFFICE AUTOMATION PRODUCTS S.p.A. Lecco EUR
(wholesale magnetic stand) (Italy)
--------------------------------------
- IS PRODUCTS S.p.A. Lecco EUR
(marketing of office automation) (Italy)
--------------------------------------
- INCAS PRODUCTIONS S.r.l. Venaria Reale EUR
(wholesale production and marketing of office consumable
products) (Turin, Italy)
--------------------------------------
- PBS PROFESSIONAL BUSINESS SOFTWARE S.p.A. Rome EUR
(production and trading of business software) (Italy)
--------------------------------------
- SK DIRECT S.r.l. Rome EUR
(graphic arts) (Italy)
--------------------------------------
- HOLDING MEDIA E COMUNICAZIONE H.M.C. S.p.A. Rome EUR
(production, marketing on TV and press) (Italy)
--------------------------------------
- GLOBO EUROPA B.V. (in liquidation) Amsterdam EUR
(services and operations in the field of radio and tv
broadcasting) (Holland)
--------------------------------------
- HOLDING MEDIA E COMUNICAZIONE PUBBLICITA S.r.l. (in liquidation) Rome EUR
(purchase and sale of advertising spaces and management of
advertising in the field of radio and tv broadcasting) (Italy)
--------------------------------------
- TV INTERNAZIONALE S.p.A. Rome EUR
(purchase, management and maintenance of technical transmission
systems for audio and video broadcasting) (Italy)
--------------------------------------
- BEIGUA S.r.l. Rome EUR
(purchase, management and maintenance of installation for
the repair and distribution of radio and tv broadcasting) (Italy)
--------------------------------------
Name %
(type of business) Share capital ownership
----------------------------------------------------------------------------------------------------------------------------------
- EUREDIT S.A. 2,800,000 93.562
(realization, promotion and marketing European
technology of commerce annual
"Europages")
---------------------------------------------
- FINANZIARIA WEB S.p.A. 9,606,073.50 60.00
(financing)
---------------------------------------------
- MATRIX S.p.A. 1,100,000 0.70
(Internet services) 66.00
33.00
---------------------------------------------
- FREE FINANCE S.p.A. 148,102 100.00
(Internet loans for the real estate market)
---------------------------------------------
- WEBNEXT S.r.l. (former XOOM.It S.p.A.) (in
liquidation) 100,000 100.00
(development and management of virtual
communities)
---------------------------------------------
- FINSATEL S.r.l. (in liquidation) 10,000 100.00
(holding company)
---------------------------------------------
- GIALLO PROFESSIONAL PUBLISHING S.p.A. 1,000,000 100.00
(publishing, typographic and graphic marketing,
advertising)
---------------------------------------------
- GRUPPO EDITORIALE FAENZA EDITRICE S.p.A. 260,000 60.00
(publishing house)
---------------------------------------------
- FAENZA EDITRICE IBERICA S.L. 3,005.50 100.00
(publishing house also on behalf of third
parties)
---------------------------------------------
- FAENZA EDITRICE DO BRASIL Ltda 133,169 91.00
(publishing house also on behalf of third
parties) 9.00
---------------------------------------------
- PROMO ADVERTISING S.r.l. 10,320 100.00
(acquisition of advertising on behalf of
magazines, tv and multimedia broadcasting)
---------------------------------------------
- GRUPPO EDITORIALE JCE S.p.A. 1,032,800 65.00
(publishing house)
---------------------------------------------
- QUASAR E ASSOCIATI S.r.l. 20,408 51.00
(multimedia publishers)
---------------------------------------------
- EDITORIALE QUASAR S.r.l. 10,000 100.00
(publishing house and advertising agency)
---------------------------------------------
- TTG ITALIA S.p.A. 100,000 98.00
(publishing house and advertising agency)
---------------------------------------------
- GIALLO VOICE S.p.A. 1,000,000 100.00
(teleselling, telemarketing, call centers and marketing)
---------------------------------------------
- IMR S.r.l. 10,500 100.00
(call center services)
---------------------------------------------
- OPS S.r.l. 10,200 66.00
(call center services)
---------------------------------------------
- TELEPROFESSIONAL S.r.l. 52,000 66.00
(call center services)
---------------------------------------------
- GRUPPO BUFFETTI S.p.A. 11,817,000 100.00
(supply of products regarding the paper industry, printing and
publishing)
---------------------------------------------
- OFFICE AUTOMATION PRODUCTS S.p.A. 774,000 84.00
(wholesale magnetic stand)
---------------------------------------------
- IS PRODUCTS S.p.A. 9,360,000 27.78
(marketing of office automation) 72.22
---------------------------------------------
- INCAS PRODUCTIONS S.r.l. 510,000 100.00
(wholesale production and marketing of office consumable
products)
---------------------------------------------
- PBS PROFESSIONAL BUSINESS SOFTWARE S.p.A. 127,500 100.00
(production and trading of business software)
---------------------------------------------
- SK DIRECT S.r.l. 5,522,920 58.37
(graphic arts) 41.63
---------------------------------------------
- HOLDING MEDIA E COMUNICAZIONE H.M.C. S.p.A. 5,064,000 100.00
(production, marketing on TV and press)
---------------------------------------------
- GLOBO EUROPA B.V. (in liquidation) 181,512.09 100.00
(services and operations in the field of radio and tv
broadcasting)
---------------------------------------------
- HOLDING MEDIA E COMUNICAZIONE PUBBLICITA S.r.l. (in liquidation) 516,500 100.00
(purchase and sale of advertising spaces and management of
advertising in the field of radio and tv broadcasting)
---------------------------------------------
- TV INTERNAZIONALE S.p.A. 6,200,000 100.00
(purchase, management and maintenance of technical transmission
systems for audio and video broadcasting)
---------------------------------------------
- BEIGUA S.r.l. 51,480 51.00
(purchase, management and maintenance of installation for
the repair and distribution of radio and tv broadcasting)
---------------------------------------------
%
Name of voting
(type of business) rights Held by
------------------------------------------------------------------------------------------------------------------------------------
- EUREDIT S.A. SEAT PAGINE GIALLE
(realization, promotion and marketing European
technology of commerce annual
"Europages")
-----------------------------------------------
- FINANZIARIA WEB S.p.A. SEAT PAGINE GIALLE
(financing)
-----------------------------------------------
- MATRIX S.p.A. SEAT PAGINE GIALLE
(Internet services) FINANZIARIA WEB
N.V. VERTICO
-----------------------------------------------
- FREE FINANCE S.p.A. MATRIX
(Internet loans for the real estate market)
-----------------------------------------------
- WEBNEXT S.r.l. (former XOOM.It S.p.A.) (in
liquidation) MATRIX
(development and management of virtual
communities)
-----------------------------------------------
- FINSATEL S.r.l. (in liquidation) SEAT PAGINE GIALLE
(holding company)
-----------------------------------------------
- GIALLO PROFESSIONAL PUBLISHING S.p.A. SEAT PAGINE GIALLE
(publishing, typographic and graphic marketing,
advertising)
-----------------------------------------------
- GRUPPO EDITORIALE FAENZA EDITRICE S.p.A. GIALLO PROFESSIONAL PUBLISHING
(publishing house)
-----------------------------------------------
- FAENZA EDITRICE IBERICA S.L. GRUPPO EDITORIALE FAENZA EDITRICE
(publishing house also on behalf of third
parties)
-----------------------------------------------
- FAENZA EDITRICE DO BRASIL Ltda GRUPPO EDITORIALE FAENZA EDITRICE
(publishing house also on behalf of third
parties) FAENZA EDITRICE IBERICA
-----------------------------------------------
- PROMO ADVERTISING S.r.l. GRUPPO EDITORIALE FAENZA EDITRICE
(acquisition of advertising on behalf of
magazines, tv and multimedia broadcasting)
-----------------------------------------------
- GRUPPO EDITORIALE JCE S.p.A. GIALLO PROFESSIONAL PUBLISHING
(publishing house)
-----------------------------------------------
- QUASAR E ASSOCIATI S.r.l. GIALLO PROFESSIONAL PUBLISHING
(multimedia publishers)
-----------------------------------------------
- EDITORIALE QUASAR S.r.l. QUASAR E ASSOCIATI
(publishing house and advertising agency)
-----------------------------------------------
- TTG ITALIA S.p.A. GIALLO PROFESSIONAL PUBLISHING
(publishing house and advertising agency)
-----------------------------------------------
- GIALLO VOICE S.p.A. SEAT PAGINE GIALLE
(teleselling, telemarketing, call centers and marketing)
-----------------------------------------------
- IMR S.r.l. GIALLO VOICE
(call center services)
-----------------------------------------------
- OPS S.r.l. GIALLO VOICE
(call center services)
-----------------------------------------------
- TELEPROFESSIONAL S.r.l. GIALLO VOICE
(call center services)
-----------------------------------------------
- GRUPPO BUFFETTI S.p.A. SEAT PAGINE GIALLE
(supply of products regarding the paper industry, printing and
publishing)
-----------------------------------------------
- OFFICE AUTOMATION PRODUCTS S.p.A. GRUPPO BUFFETTI
(wholesale magnetic stand)
-----------------------------------------------
- IS PRODUCTS S.p.A. GRUPPO BUFFETTI
(marketing of office automation) OFFICE AUTOMATION PRODUCTS
-----------------------------------------------
- INCAS PRODUCTIONS S.r.l. OFFICE AUTOMATION PRODUCTS
(wholesale production and marketing of office consumable
products)
-----------------------------------------------
- PBS PROFESSIONAL BUSINESS SOFTWARE S.p.A. GRUPPO BUFFETTI
(production and trading of business software)
-----------------------------------------------
- SK DIRECT S.r.l. GRUPPO BUFFETTI
(graphic arts) OFFICE AUTOMATION PRODUCTS
-----------------------------------------------
- HOLDING MEDIA E COMUNICAZIONE H.M.C. S.p.A. SEAT PAGINE GIALLE
(production, marketing on TV and press)
-----------------------------------------------
- GLOBO EUROPA B.V. (in liquidation) HOLDING MEDIA E COMUNICAZIONE H.M.C.
(services and operations in the field of radio and tv
broadcasting)
-----------------------------------------------
- HOLDING MEDIA E COMUNICAZIONE PUBBLICITA S.r.l. (in liquidation) HOLDING MEDIA E COMUNICAZIONE H.M.C.
(purchase and sale of advertising spaces and management of
advertising in the field of radio and tv broadcasting)
-----------------------------------------------
- TV INTERNAZIONALE S.p.A. HOLDING MEDIA E COMUNICAZIONE H.M.C.
(purchase, management and maintenance of technical transmission
systems for audio and video broadcasting)
-----------------------------------------------
- BEIGUA S.r.l. TV INTERNAZIONALE
(purchase, management and maintenance of installation for
the repair and distribution of radio and tv broadcasting)
-----------------------------------------------
217 | Consolidated Financial Statements
Name
(type of business) Head office
------------------------------------------------------------------------------------------------------------------------------------
- GIAROLO S.r.l. Rome EUR
(purchase, management and maintenance of installation for the
repair and distribution of radio and tv broadcasting) (Italy)
--------------------------------------
- MTV ITALIA S.r.l. Rome EUR
(services in the field of radio and tv broadcasting, production
and sale of radio, tv and cinema programs) (Italy)
--------------------------------------
- MTV PUBBLICITA S.r.l. Milan EUR
(advertising agency) (Italy)
--------------------------------------
- TDL INFOMEDIA Ltd Hampshire GBP
(holding company) (UK)
--------------------------------------
- MYBLUECAT.COM (in liquidation) Hampshire GBP
(supply of services) (UK)
--------------------------------------
- TDL INFOMEDIA FINANCE Ltd Hampshire GBP
(holding company) (UK)
--------------------------------------
- TDL INFOMEDIA HOLDINGS Plc Hampshire GBP
(holding company) (UK)
--------------------------------------
- TDL INFOMEDIA GROUP Plc Hampshire GBP
(holding company) (UK)
--------------------------------------
- TDL GROUP Ltd Hampshire GBP
(holding company) (UK)
--------------------------------------
- THOMSON DIRECTORIES Ltd Hampshire GBP
(publishing and marketing directories) (UK)
--------------------------------------
- THOMSON DIRECTORIES PENSION COMPANY Ltd Hampshire GBP
(management of Thomson Directories Pension fund) (UK)
--------------------------------------
- TDL INVESTMENTS B.V. (in liquidation) Rotterdam EUR
(supply of services) (Holland)
--------------------------------------
- TELEGATE HOLDING GmbH Martinsried EUR
(holding company) (Germany)
--------------------------------------
- TELEGATE A.G. Martinsried EUR
(call center services) (Germany)
--------------------------------------
- 118866 Ltd (former TELEGATE Ltd) London GBP
(call center services) (UK)
--------------------------------------
- ARSMOVENDI.COM A.G. (in liquidation) Munich EUR
(Internet services) (Germany)
--------------------------------------
- TRAVELGATE BUSINESS GmbH (in liquidation) Munich EUR
(business tour operator) (Germany)
--------------------------------------
- DATAGATE GmbH Martinsried EUR
(call center) (Germany)
--------------------------------------
- KIMTRAVEL CONSULTING A.G. (in liquidation) Munich EUR
(Internet services) (Germany)
--------------------------------------
- TELEGATE AKADEMIE GmbH Rostock EUR
(training center for employees of call centers) (Germany)
--------------------------------------
- TELEGATE ANKLAM GmbH Anklam EUR
(Internet services) (Germany)
--------------------------------------
- 11880.com GmbH Martinsried EUR
(call center services) (Germany)
--------------------------------------
- MOBILSAFE A.G. (in liquidation) Meerbusch EUR
(Internet services) (Germany)
--------------------------------------
- TELEGATE ESPANA S.A. Madrid EUR
(call center services) (Spain)
--------------------------------------
- TELEGATE GmbH Vienna EUR
(call center services) (Austria)
--------------------------------------
- TELEGATE Inc. Texas USD
(call center services) (USA)
--------------------------------------
- TELEGATE ITALIA S.r.l. Milan EUR
(call center services) (Italy)
--------------------------------------
- TGT HOLDING B.V. (in liquidation) Schiphol EUR
(holding company) (Holland)
--------------------------------------
Information Technology - Market
FINSIEL - Consulenza e Applicazioni Informatiche S.p.A. Rome EUR
(conception and implementation of projects in information technology
applications) (Italy)
--------------------------------------
- AGRISIAN - Consulenza e Servizi per l'Agricoltura S.C.p.A. Rome EUR
(consulting and services in favour of agriculture) (Italy)
--------------------------------------
- ASPASIEL S.r.l. Rome EUR
(information systems) (Italy)
--------------------------------------
- BANKSIEL - Societa di informatica e Organizzazione p.A. Milan EUR
(design, installation, operation and maintenance of information systems for
bank and insurance companies) (Italy)
--------------------------------------
Name %
(type of business) Share capital ownership
------------------------------------------------------------------------------------------------------------------------------------
- GIAROLO S.r.l. 50,490 75.50
(purchase, management and maintenance of installation for the
repair and distribution of radio and tv broadcasting)
----------------------------------------------
- MTV ITALIA S.r.l. 12,151,928 51.00
(services in the field of radio and tv broadcasting, production
and sale of radio, tv and cinema programs)
----------------------------------------------
- MTV PUBBLICITA S.r.l. 10,400 100.00
(advertising agency)
----------------------------------------------
- TDL INFOMEDIA Ltd 139,524.78 99.73
(holding company)
----------------------------------------------
- MYBLUECAT.COM (in liquidation) 2 100.00
(supply of services)
----------------------------------------------
- TDL INFOMEDIA FINANCE Ltd 9,734.09 100.00
(holding company)
----------------------------------------------
- TDL INFOMEDIA HOLDINGS Plc 397,126.43 100.00
(holding company)
----------------------------------------------
- TDL INFOMEDIA GROUP Plc 624,576.64 100.00
(holding company)
----------------------------------------------
- TDL GROUP Ltd 89,864.25 100.00
(holding company)
----------------------------------------------
- THOMSON DIRECTORIES Ltd 1,340,000 100.00
(publishing and marketing directories)
----------------------------------------------
- THOMSON DIRECTORIES PENSION COMPANY Ltd 2 100.00
(management of Thomson Directories Pension fund)
----------------------------------------------
- TDL INVESTMENTS B.V. (in liquidation) 20,000 100.00
(supply of services)
----------------------------------------------
- TELEGATE HOLDING GmbH 26,076 100.00
(holding company)
----------------------------------------------
- TELEGATE A.G. 20,944,355 16.46
(call center services) 61.98
----------------------------------------------
- 118866 Ltd (former TELEGATE Ltd) 1 100.00
(call center services)
----------------------------------------------
- ARSMOVENDI.COM A.G. (in liquidation) 150,000 100.00
(Internet services)
----------------------------------------------
- TRAVELGATE BUSINESS GmbH (in liquidation) 25,000 100.00
(business tour operator)
----------------------------------------------
- DATAGATE GmbH 25,000 100.00
(call center)
----------------------------------------------
- KIMTRAVEL CONSULTING A.G. (in liquidation) 69,493 100.00
(Internet services)
----------------------------------------------
- TELEGATE AKADEMIE GmbH 25,000 100.00
(training center for employees of call centers)
----------------------------------------------
- TELEGATE ANKLAM GmbH 51,129 100.00
(Internet services)
----------------------------------------------
- 11880.com GmbH 25,000 100.00
(call center services)
----------------------------------------------
- MOBILSAFE A.G. (in liquidation) 150,000 100.00
(Internet services)
----------------------------------------------
- TELEGATE ESPANA S.A. 3,061,000 100.00
(call center services)
----------------------------------------------
- TELEGATE GmbH 35,000 100.00
(call center services)
----------------------------------------------
- TELEGATE Inc. 10,000,010 100.00
(call center services)
----------------------------------------------
- TELEGATE ITALIA S.r.l. 129,000 100.00
(call center services)
----------------------------------------------
- TGT HOLDING B.V. (in liquidation) 18,200 100.00
(holding company)
----------------------------------------------
Information Technology - Market
FINSIEL - Consulenza e Applicazioni Informatiche S.p.A. 59,982,384.60 77.92
(conception and implementation of projects in information technology
applications) 0.63
----------------------------------------------
- AGRISIAN - Consulenza e Servizi per l'Agricoltura S.C.p.A. 10,330,000 50.86
(consulting and services in favour of agriculture)
----------------------------------------------
- ASPASIEL S.r.l. 260,000 50.00
(information systems)
----------------------------------------------
- BANKSIEL - Societa di informatica e Organizzazione p.A. 10,400,000 55.50
(design, installation, operation and maintenance of information systems for
bank and insurance companies)
----------------------------------------------
%
Name of voting
(type of business) rights Held by
------------------------------------------------------------------------------------------------------------------------------------
- GIAROLO S.r.l. TV INTERNAZIONALE
(purchase, management and maintenance of installation for the
repair and distribution of radio and tv broadcasting)
----------------------------------------------
- MTV ITALIA S.r.l. TV INTERNAZIONALE
(services in the field of radio and tv broadcasting, production
and sale of radio, tv and cinema programs)
----------------------------------------------
- MTV PUBBLICITA S.r.l. MTV ITALIA
(advertising agency)
----------------------------------------------
- TDL INFOMEDIA Ltd SEAT PAGINE GIALLE
(holding company)
----------------------------------------------
- MYBLUECAT.COM (in liquidation) TDL INFOMEDIA
(supply of services)
----------------------------------------------
- TDL INFOMEDIA FINANCE Ltd TDL INFOMEDIA
(holding company)
----------------------------------------------
- TDL INFOMEDIA HOLDINGS Plc TDL INFOMEDIA FINANCE
(holding company)
----------------------------------------------
- TDL INFOMEDIA GROUP Plc TDL INFOMEDIA HOLDINGS
(holding company)
----------------------------------------------
- TDL GROUP Ltd TDL INFOMEDIA GROUP
(holding company)
----------------------------------------------
- THOMSON DIRECTORIES Ltd TDL GROUP
(publishing and marketing directories)
----------------------------------------------
- THOMSON DIRECTORIES PENSION COMPANY Ltd THOMSON DIRECTORIES
(management of Thomson Directories Pension fund)
----------------------------------------------
- TDL INVESTMENTS B.V. (in liquidation) TDL INFOMEDIA
(supply of services)
----------------------------------------------
- TELEGATE HOLDING GmbH SEAT PAGINE GIALLE
(holding company)
----------------------------------------------
- TELEGATE A.G. SEAT PAGINE GAILLE
(call center services) TELEGATE HOLDING
----------------------------------------------
- 118866 Ltd (former TELEGATE Ltd) TELEGATE A.G.
(call center services)
----------------------------------------------
- ARSMOVENDI.COM A.G. (in liquidation) TELEGATE A.G.
(Internet services)
----------------------------------------------
- TRAVELGATE BUSINESS GmbH (in liquidation) ARSMOVENDI.COM
(business tour operator)
----------------------------------------------
- DATAGATE GmbH TELEGATE A.G.
(call center)
----------------------------------------------
- KIMTRAVEL CONSULTING A.G. (in liquidation) TELEGATE A.G.
(Internet services)
----------------------------------------------
- TELEGATE AKADEMIE GmbH TELEGATE A.G.
(training center for employees of call centers)
----------------------------------------------
- TELEGATE ANKLAM GmbH TELEGATE A.G.
(Internet services)
----------------------------------------------
- 11880.com GmbH TELEGATE ANKLAM
(call center services)
----------------------------------------------
- MOBILSAFE A.G. (in liquidation) TELEGATE ANKLAM
(Internet services)
----------------------------------------------
- TELEGATE ESPANA S.A. TELEGATE A.G.
(call center services)
----------------------------------------------
- TELEGATE GmbH TELEGATE A.G.
(call center services)
----------------------------------------------
- TELEGATE Inc. TELEGATE A.G.
(call center services)
----------------------------------------------
- TELEGATE ITALIA S.r.l. TELEGATE A.G.
(call center services)
----------------------------------------------
- TGT HOLDING B.V. (in liquidation) TELEGATE A.G.
(holding company)
----------------------------------------------
Information Technology - Market
FINSIEL - Consulenza e Applicazioni Informatiche S.p.A. TELECOM ITALIA
(conception and implementation of projects in information technology
applications) FINSIEL
----------------------------------------------
- AGRISIAN - Consulenza e Servizi per l'Agricoltura S.C.p.A. FINSIEL
(consulting and services in favour of agriculture)
----------------------------------------------
- ASPASIEL S.r.l. 51.00 FINSIEL
(information systems)
----------------------------------------------
- BANKSIEL - Societa di informatica e Organizzazione p.A. FINSIEL
(design, installation, operation and maintenance of information systems for
bank and insurance companies)
----------------------------------------------
218 | Consolidated Financial Statements
Name
(type of business) Head office
------------------------------------------------------------------------------------------------------------------------------------
- CARISIEL Sistemi Informativi Elettronici per il Settore Creditizio e
Finanziario S.p.A. electronic information systems for banking and financial Rende EUR
industry) (Cosenza, Italy)
--------------------------------------
- CENTROSIEL S.p.A. Milan EUR
(information systems) (Italy)
--------------------------------------
- EIS - Elettronica Ingegneria Sistemi S.p.A. Rome EUR
(design, installation, operation and maintenance of sophisticated
electronic systems) (Italy)
--------------------------------------
- FINSIEL ROMANIA S.r.l. Bucharest ROL
(information systems) (Rumania)
--------------------------------------
- INSIEL - Informatica per il Sistema degli Enti Locall S.p.A. Trieste EUR
(information systems) (Italy)
--------------------------------------
- VENIS - VENEZIA INFORMATICA E SISTEMI S.p.A. Venice EUR
(information systems for the municipality of Venice and other public
entities) (Italy)
--------------------------------------
- INTERSIEL - Societa Interregionale Sistemi Informativi Elettronici S.p.A. Rende EUR
(design, installation, operation and maintenance of information systems) (Cosenza, Italy)
--------------------------------------
- KRENESIEL - Societa Sarda di Informatica S.p.A. Sassari EUR
(information systems) (Italy)
--------------------------------------
- TELE SISTEMI FERROVIARI S.p.A. Rome EUR
(information systems) (Italy)
--------------------------------------
- WEBRED S.p.A. Perugia EUR
(information systems) (Italy)
--------------------------------------
Information Technology - Group
IT TELECOM S.p.A. Rome EUR
(information and communication technology) (Italy)
--------------------------------------
- NETIKOS S.p.A. Rome EUR
(information systems) (Italy)
--------------------------------------
- NETIKOS FINLAND OY Helsinki EUR
(development of wireless solutions) (Finland)
--------------------------------------
- SODALIA NORTH AMERICA Inc. Virginia USD
(telecommunications software) (USA)
--------------------------------------
- EUSTEMA S.p.A. Rome EUR
(design, research, development and marketing of software, information and
online systems) (Italy)
--------------------------------------
- TECO SOFT ARGENTINA S.A. Buenos Aires ARS
(design, realization and sale of software) (Argentina)
--------------------------------------
- TELESOFT HELLAS S.A. Athens EUR
(telecommunications software) (Greece)
--------------------------------------
- TELESOFT RUSSIA ZAO Moscow RUB
(telecommunications software) (Russia)
--------------------------------------
- WEBEGG S.p.A. Milan EUR
(e-business solution) (Italy)
--------------------------------------
- TELEAP S.p.A. Ivrea EUR
(software applications, architecture) (Turin, Italy)
--------------------------------------
- @LIVE S.p.A. Turin EUR
(international training) (Italy)
--------------------------------------
- DOMUS ACCADEMY S.p.A. Milan EUR
(design research) (Italy)
--------------------------------------
- W.P. WINNER PROJECT B.V. Rotterdam EUR
(software applications) (Holland)
--------------------------------------
- SOFTWARE FACTORY S.p.A. Milan EUR
(software applications) (Italy)
--------------------------------------
TELECOM ITALIA LAB S.p.A. Turin EUR
(studies, research and venture capital in telecommunications and electronics) (Italy)
--------------------------------------
- LOQUENDO - SOCIETA PER AZIONI Turin EUR
(research, development and trading of technologies and equipments regarding (Italy)
vocal recognition and interaction)
--------------------------------------
- TELECOM ITALIA LAB GENERAL PARTNER S.A. Luxembourg USD
(holding company)
--------------------------------------
- TELECOM ITALIA LAB S.A. Luxembourg USD
(holding company)
--------------------------------------
- TELECOM ITALIA LAB B.V. Amsterdam EUR
(holding company) (Holland)
--------------------------------------
- TELSY Elettronica e Telecomunicazioni S.p.A. Turin EUR
(manufacturing and sale of systems for encrypted telecommunications) (Italy)
Name %
(type of business) Share capital ownership
------------------------------------------------------------------------------------------------------------------------------------
- CARISIEL Sistemi Informativi Elettronici per il Settore Creditizio e
Finanziario S.p.A. electronic information systems for banking and financial 769,585 2.00
industry) 98.00
----------------------------------------------
- CENTROSIEL S.p.A. 516,600 47.00
(information systems)
----------------------------------------------
- EIS - Elettronica Ingegneria Sistemi S.p.A. 5,165,000 100.00
(design, installation, operation and maintenance of sophisticated
electronic systems)
----------------------------------------------
- FINSIEL ROMANIA S.r.l. 11,841,500,000 90.53
(information systems)
----------------------------------------------
- INSIEL - Informatica per il Sistema degli Enti Locall S.p.A. 7,755,000 52.00
(information systems)
----------------------------------------------
- VENIS - VENEZIA INFORMATICA E SISTEMI S.p.A. 1,549,500 20.40
(information systems for the municipality of Venice and other public
entities) 30.60
----------------------------------------------
- INTERSIEL - Societa Interregionale Sistemi Informativi Elettronici S.p.A. 1,033,000 100.00
(design, installation, operation and maintenance of information systems)
----------------------------------------------
- KRENESIEL - Societa Sarda di Informatica S.p.A. 2,582,300 41.00
(information systems) 10.00
----------------------------------------------
- TELE SISTEMI FERROVIARI S.p.A. 77,003,669.54 61.00
(information systems)
----------------------------------------------
- WEBRED S.p.A. 1,560,000 51.00
(information systems)
----------------------------------------------
Information Technology - Group
IT TELECOM S.p.A. 96,853,000 100.00
(information and communication technology)
----------------------------------------------
- NETIKOS S.p.A. 13,416,000 100.00
(information systems)
----------------------------------------------
- NETIKOS FINLAND OY 10,700 100.00
(development of wireless solutions)
----------------------------------------------
- SODALIA NORTH AMERICA Inc. 700,000 100.00
(telecommunications software)
----------------------------------------------
- EUSTEMA S.p.A. 312,000 67.33
(design, research, development and marketing of software, information and
online systems)
----------------------------------------------
- TECO SOFT ARGENTINA S.A. 12,000 100.00 (*)
(design, realization and sale of software)
----------------------------------------------
- TELESOFT HELLAS S.A. 489,000` 100.00
(telecommunications software)
----------------------------------------------
- TELESOFT RUSSIA ZAO 1,592,000 75.00
(telecommunications software)
----------------------------------------------
- WEBEGG S.p.A. 33,107,160 69.80
(e-business solution) 30.20
----------------------------------------------
- TELEAP S.p.A. 1,560,000 100.00
(software applications, architecture)
----------------------------------------------
- @LIVE S.p.A. 10,000 100.00
(international training)
----------------------------------------------
- DOMUS ACCADEMY S.p.A. 140,000 67.33
(design research)
----------------------------------------------
- W.P. WINNER PROJECT B.V. 18,152 100.00
(software applications)
----------------------------------------------
- SOFTWARE FACTORY S.p.A. 1,500,000 100.00
(software applications)
----------------------------------------------
TELECOM ITALIA LAB S.p.A. 27,455,000 100.00
(studies, research and venture capital in telecommunications and electronics)
----------------------------------------------
- LOQUENDO - SOCIETA PER AZIONI 3,573,741 99.99
(research, development and trading of technologies and equipments regarding
vocal recognition and interaction)
----------------------------------------------
- TELECOM ITALIA LAB GENERAL PARTNER S.A. 30,000 99.97
(holding company) 0.03
----------------------------------------------
- TELECOM ITALIA LAB S.A. 25,894,360 99.99
(holding company) 0.01
----------------------------------------------
- TELECOM ITALIA LAB B.V. 18,655 100.00
(holding company)
----------------------------------------------
- TELSY Elettronica e Telecomunicazioni S.p.A. 390,000 100.00
(manufacturing and sale of systems for encrypted telecommunications)
%
Name of voting
(type of business) rights Held by
------------------------------------------------------------------------------------------------------------------------------------
- CARISIEL Sistemi Informativi Elettronici per il Settore Creditizio e
Finanziario S.p.A. electronic information systems for banking and financial FINSIEL
industry) BANKSIEL
----------------------------------------------
- CENTROSIEL S.p.A. 51.00 BANKSIEL
(information systems)
----------------------------------------------
- EIS - Elettronica Ingegneria Sistemi S.p.A. FINSIEL
(design, installation, operation and maintenance of sophisticated
electronic systems)
----------------------------------------------
- FINSIEL ROMANIA S.r.l. FINSIEL
(information systems)
----------------------------------------------
- INSIEL - Informatica per il Sistema degli Enti Locall S.p.A. FINSIEL
(information systems)
----------------------------------------------
- VENIS - VENEZIA INFORMATICA E SISTEMI S.p.A. FINSIEL
(information systems for the municipality of Venice and other public
entities) INSIEL
----------------------------------------------
- INTERSIEL - Societa Interregionale Sistemi Informativi Elettronici S.p.A. FINSIEL
(design, installation, operation and maintenance of information systems)
----------------------------------------------
- KRENESIEL - Societa Sarda di Informatica S.p.A. FINSIEL
(information systems) INSIEL
----------------------------------------------
- TELE SISTEMI FERROVIARI S.p.A. FINSIEL
(information systems)
----------------------------------------------
- WEBRED S.p.A. FINSIEL
(information systems)
----------------------------------------------
Information Technology - Group
IT TELECOM S.p.A. TELECOM ITALIA
(information and communication technology)
----------------------------------------------
- NETIKOS S.p.A. IT TELECOM
(information systems)
----------------------------------------------
- NETIKOS FINLAND OY NETIKOS
(development of wireless solutions)
----------------------------------------------
- SODALIA NORTH AMERICA Inc. IT TELECOM
(telecommunications software)
----------------------------------------------
- EUSTEMA S.p.A. IT TELECOM
(design, research, development and marketing of software, information and
online systems)
----------------------------------------------
- TECO SOFT ARGENTINA S.A. IT TELECOM
(design, realization and sale of software)
----------------------------------------------
- TELESOFT HELLAS S.A. IT TELECOM
(telecommunications software)
----------------------------------------------
- TELESOFT RUSSIA ZAO IT TELECOM
(telecommunications software)
----------------------------------------------
- WEBEGG S.p.A. IT TELECOM
(e-business solution) FINSIEL
----------------------------------------------
- TELEAP S.p.A. WEBEGG
(software applications, architecture)
----------------------------------------------
- @LIVE S.p.A. WEBEGG
(international training)
----------------------------------------------
- DOMUS ACCADEMY S.p.A. WEBEGG
(design research)
----------------------------------------------
- W.P. WINNER PROJECT B.V. WEBEGG
(software applications)
----------------------------------------------
- SOFTWARE FACTORY S.p.A. W.P. WINNER PROJECT
(software applications)
----------------------------------------------
TELECOM ITALIA LAB S.p.A. TELECOM ITALIA
(studies, research and venture capital in telecommunications and electronics)
----------------------------------------------
- LOQUENDO - SOCIETA PER AZIONI TELECOM ITALIA LAB S.p.A.
(research, development and trading of technologies and equipments regarding
vocal recognition and interaction)
----------------------------------------------
- TELECOM ITALIA LAB GENERAL PARTNER S.A. TELECOM ITALIA LAB S.p.A.
(holding company) TELECOM ITALIA FINANCE
----------------------------------------------
- TELECOM ITALIA LAB S.A. TELECOM ITALIA LAB S.p.A.
(holding company) TELECOM ITALIA FINANCE
----------------------------------------------
- TELECOM ITALIA LAB B.V. TELECOM ITALIA LAB S.A.
(holding company)
----------------------------------------------
- TELSY Elettronica e Telecomunicazioni S.p.A. TELECOM ITALIA LAB S.p.A.
(manufacturing and sale of systems for encrypted telecommunications)
TELECOM ITALIA LAB S.p.A.
219 | Consolidated Financial Statements
Name
(type of business) Head office
------------------------------------------------------------------------------------------------------------------------------------
Other operations
EMSA Servizi S.p.A. (former CONSULTEL S.p.A.) Rome EUR
(real estate management) (Italy)
--------------------------------------
EPICLINK S.p.A. Segrate EUR
(telecommunications services) (Milan, Italy)
--------------------------------------
IN.TELAUDIT S.c.a r.l. Milan EUR
(internal auditing for the Telecom Italia Group) (Italy)
--------------------------------------
NETESI S.p.a. Milan EUR
(telecommunication and multimedia services) (Italy)
--------------------------------------
SAIAT - Societa Attivita Intermedie Ausillarie Telecomunicazioni p.A. Turin EUR
(financing) (Italy)
--------------------------------------
TELECOM ITALIA LEARNING SERVICES S.p.A. (former SSGRR) L'Aquila EUR
(professional training) (Italy)
--------------------------------------
- TELECOM ITALIA LEARNING SERVICES DO BRASIL Ltda (former CONSIEL DO BRASIL) Sao Paulo BRL
(consulting and information systems) (Brazil)
--------------------------------------
TECNO SERVIZI MOBILI S.r.l. Rome EUR
(real estate management) (Italy)
--------------------------------------
TELECOM ITALIA INTERNATIONAL N.V. (former STET INTERNATIONAL NETHERLANDS N.V.) Amsterdam EUR
(holding company) (Holland)
--------------------------------------
- BBNED N.V. Amsterdam EUR
(telecommunications services) (Holland)
--------------------------------------
- BBEYOND B.V. Amsterdam EUR
(telecommunications services) (Holland)
--------------------------------------
- ICH - International Communication Holding N.V. Amsterdam EUR
(holding company) (Holland)
--------------------------------------
- ETI - Euro Telecom International N.V. Amsterdam EUR
(holding company) (Holland)
--------------------------------------
TELECOM ITALIA FINANCE S.A. (former TI WEB) Luxembourg EUR
(holding company)
--------------------------------------
- ISM S.r.l. Turin EUR
(holding company) (Italy)
--------------------------------------
- N.V. VERTICO Brussels EUR
(holding company) (Belgium)
--------------------------------------
- TELSI Ltd London EUR
(holding company) (UK)
--------------------------------------
TELE PAY ROLL SERVICES S.p.A. Rome EUR
(information systems for payroll services) (Italy)
--------------------------------------
Name %
(type of business) Share capital ownership
------------------------------------------------------------------------------------------------------------------------------------
Other operations
EMSA Servizi S.p.A. (former CONSULTEL S.p.A.) 5,000,000 100.00
(real estate management)
----------------------------------------------
EPICLINK S.p.A. 12,500,000 86.00
(telecommunications services)
----------------------------------------------
IN.TELAUDIT S.c.a r.l. 2,750,000 54.55
(internal auditing for the Telecom Italia Group) 18.18
18.18
----------------------------------------------
NETESI S.p.a. 14,744,573 100.00
(telecommunication and multimedia services)
----------------------------------------------
SAIAT - Societa Attivita Intermedie Ausillarie Telecomunicazioni p.A. 35,745,120 100.00
(financing)
----------------------------------------------
TELECOM ITALIA LEARNING SERVICES S.p.A. (former SSGRR) 1,560,000 100.00
(professional training)
----------------------------------------------
- TELECOM ITALIA LEARNING SERVICES DO BRASIL Ltda (former CONSIEL DO BRASIL) 174,040 100.00 (*)
(consulting and information systems)
----------------------------------------------
TECNO SERVIZI MOBILI S.r.l. 26,000 51.00
(real estate management)
----------------------------------------------
TELECOM ITALIA INTERNATIONAL N.V. (former STET INTERNATIONAL NETHERLANDS N.V.) 2,399,483,300 100.00
(holding company)
----------------------------------------------
- BBNED N.V. 82,425,000 97.56
(telecommunications services)
----------------------------------------------
- BBEYOND B.V. 18,000 100.00
(telecommunications services)
----------------------------------------------
- ICH - International Communication Holding N.V. 50,000 100.00
(holding company)
----------------------------------------------
- ETI - Euro Telecom International N.V. 50,050 100.00
(holding company)
----------------------------------------------
TELECOM ITALIA FINANCE S.A. (former TI WEB) 869,162,615 100.00 (*)
(holding company)
----------------------------------------------
- ISM S.r.l. 10,000 100.00
(holding company)
----------------------------------------------
- N.V. VERTICO 3,533,781 99.99
(holding company) 0.01
----------------------------------------------
- TELSI Ltd 603,565,000 100.00 (*)
(holding company)
----------------------------------------------
TELE PAY ROLL SERVICES S.p.A. 2,840,000 100.00
(information systems for payroll services)
----------------------------------------------
%
Name of voting
(type of business) rights Held by
------------------------------------------------------------------------------------------------------------------------------------
Other operations
EMSA Servizi S.p.A. (former CONSULTEL S.p.A.) TELECOM ITALIA
(real estate management)
----------------------------------------------
EPICLINK S.p.A. TELECOM ITALIA
(telecommunications services)
----------------------------------------------
IN.TELAUDIT S.c.a r.l. TELECOM ITALIA
(internal auditing for the Telecom Italia Group) SEAT PAGINE GIALLE
TELECOM ITALIA MOBILE
----------------------------------------------
NETESI S.p.a. TELECOM ITALIA
(telecommunication and multimedia services)
----------------------------------------------
SAIAT - Societa Attivita Intermedie Ausillarie Telecomunicazioni p.A. TELECOM ITALIA
(financing)
----------------------------------------------
TELECOM ITALIA LEARNING SERVICES S.p.A. (former SSGRR) TELECOM ITALIA
(professional training)
----------------------------------------------
- TELECOM ITALIA LEARNING SERVICES DO BRASIL Ltda (former CONSIEL DO BRASIL) TELECOM ITALIA LEARNING SERVICES
(consulting and information systems)
----------------------------------------------
TECNO SERVIZI MOBILI S.r.l. TELECOM ITALIA
(real estate management)
----------------------------------------------
TELECOM ITALIA INTERNATIONAL N.V. (former STET INTERNATIONAL NETHERLANDS N.V.) TELECOM ITALIA
(holding company)
----------------------------------------------
- BBNED N.V. TELECOM ITALIA INTERNATIONAL
(telecommunications services)
----------------------------------------------
- BBEYOND B.V. BBNED
(telecommunications services)
----------------------------------------------
- ICH - International Communication Holding N.V. TELECOM ITALIA INTERNATIONAL
(holding company)
----------------------------------------------
- ETI - Euro Telecom International N.V. ICH
(holding company)
----------------------------------------------
TELECOM ITALIA FINANCE S.A. (former TI WEB) TELECOM ITALIA
(holding company)
----------------------------------------------
- ISM S.r.l. TELECOM ITALIA FINANCE
(holding company)
----------------------------------------------
- N.V. VERTICO ISM
(holding company) TELECOM ITALIA FINANCE
----------------------------------------------
- TELSI Ltd TELECOM ITALIA FINANCE
(holding company)
----------------------------------------------
TELE PAY ROLL SERVICES S.p.A. TELECOM ITALIA
(information systems for payroll services)
----------------------------------------------
---------
* The percentage of ownership includes Ordinary Shares/Quotas held by members
of the Board of Directors/Managers, as requested by local laws in order to
undertake the charge of Director/Manager, or held by Fiduciaries.
220 | Consolidated Financial Statements
LIST OF COMPANIES CONSOLIDATED BY THE EQUITY METHOD
Name
(type of business) Head office
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES
--------------------------------------
EDOTEL S.p.A. Turin EUR
(holding company) (Italy)
--------------------------------------
EURO DATACOM Ltd Huddersfield GBP
(telecommunications services) (UK)
--------------------------------------
GOALLARS B.V. Amsterdam EUR
(management of an Internet site) (Holland)
--------------------------------------
TELECOM ITALIA CAPITAL S.A. Luxembourg EUR
(financing)
--------------------------------------
TELECOM MEDIA INTERNATIONAL ITALY-CANADA Inc. Montreal CAD
(telecommunications services) (Canada)
--------------------------------------
TELEFONIA MOBILE SAMMARINESE S.p.A. Republic of San Marino EUR
(mobile telecommunications)
--------------------------------------
THINX-SM TELEHOUSE INTERNET EXCHANGE S.A. Republic of San Marino EUR
(housing and hosting)
--------------------------------------
TMI TELEMEDIA INTERNATIONAL DO BRASIL Ltda Sao Paulo BRL
(telecommunications services) (Brazil)
--------------------------------------
ZDNET ITALIA S.p.A. Milan EUR
(creation and management of Internet sites) (Italy)
--------------------------------------
AFFILIATED COMPANIES
--------------------------------------
ASCAI SERVIZI S.r.l. Rome EUR
(promotion of communications strategies and process) (Italy)
--------------------------------------
BROAD BAND SERVICE S.A. Republic of San Marino EUR
(production and sales of multimedia services)
--------------------------------------
BUENAVENTURA S.A. Santiago CLP
(telecommunications services) (Chile)
--------------------------------------
CABLE INSIGNIA S.A. Asuncion PYG
(telecommunications services) (Paraguay)
--------------------------------------
CARTESIA-CARTOGRAFIA DIGITALE S.p.A. Rome EUR
(design, realization, marketing of numeric cartography) (Italy)
--------------------------------------
CYGENT Inc. California USD
(development and sale of software) (USA)
--------------------------------------
DATASIEL - Sistemi e Tecnologie di Informatica S.p.A. Genoa EUR
(data processing products and services for public administration agencies,
institutions and enterprises under Ligurian Regional Law n. 17/85) (Italy)
--------------------------------------
DISCOVERITALIA S.p.A. Novara EUR
(communication services) (Italy)
--------------------------------------
EISYS S.p.A. Rome EUR
(information systems) (Italy)
--------------------------------------
ESRI ITALIA S.p.A. Rome EUR
(development and distribution of services based on the GIS - "Geographical
Information Systems" technology) (Italy)
--------------------------------------
ETEC S.A. - Empresa de Telecomunicaciones de Cuba S.A. La Habana USD
(telecommunications services) (Cuba)
--------------------------------------
EURODIRECTORY S.A. Luxembourg EUR
(holding company of the publishers of the Kompass directories)
--------------------------------------
GARAGE S.r.l. Milan EUR
(multimedia and cinema broadcasting) (Italy)
--------------------------------------
GLB SERVICOS INTERATIVOS S.A. Rio de Janeiro BRL
(Internet services) (Brazil)
--------------------------------------
GO TO WEB S.p.A. Ivrea EUR
(web-based software solutions) (Torino, Italy)
--------------------------------------
GOLDEN LINES INTERNATIONAL COMMUNICATIONS SERVICES Ltd Ramat Gan ILS
(long distance telephony services) (Israel)
--------------------------------------
ICOM Inc. Toronto CAD
(development of data bank and Internet market place) (Canada)
--------------------------------------
IM.SER S.p.A. Rome EUR
(real estate management) (Italy)
--------------------------------------
IS TIM TELEKOMUNIKASYON HIZMETLERI A.S. Istanbul TRL
(mobile telephony operator) (Turkey)
--------------------------------------
Name %
(type of business) Share capital ownership
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES
-----------------------------------------------
EDOTEL S.p.A. 15,080,541.90 60.00
(holding company) 40.00
-----------------------------------------------
EURO DATACOM Ltd 306,666 100.00
(telecommunications services)
-----------------------------------------------
GOALLARS B.V. 100,000 55.00
(management of an Internet site)
-----------------------------------------------
TELECOM ITALIA CAPITAL S.A. 2,336,000 99.999
(financing) 0.001
-----------------------------------------------
TELECOM MEDIA INTERNATIONAL ITALY-CANADA Inc. 952,100 100.00
(telecommunications services)
-----------------------------------------------
TELEFONIA MOBILE SAMMARINESE S.p.A. 78,000 51.00
(mobile telecommunications)
-----------------------------------------------
THINX-SM TELEHOUSE INTERNET EXCHANGE S.A. 870,000 100.00
(housing and hosting)
-----------------------------------------------
TMI TELEMEDIA INTERNATIONAL DO BRASIL Ltda 2,443,217 100.00 (*)
(telecommunications services)
-----------------------------------------------
ZDNET ITALIA S.p.A. 400,000 51.00
(creation and management of Internet sites)
-----------------------------------------------
AFFILIATED COMPANIES
-----------------------------------------------
ASCAI SERVIZI S.r.l. 73,336.84 35.21
(promotion of communications strategies and process)
-----------------------------------------------
BROAD BAND SERVICE S.A. 258,000 20.00
(production and sales of multimedia services) 20.00
-----------------------------------------------
BUENAVENTURA S.A. 1,841,258,210 50.00
(telecommunications services)
-----------------------------------------------
CABLE INSIGNIA S.A. 1,000,000,000 75.00
(telecommunications services)
-----------------------------------------------
CARTESIA-CARTOGRAFIA DIGITALE S.p.A. 1,032,800 50.00
(design, realization, marketing of numeric cartography)
-----------------------------------------------
CYGENT Inc. 52,273,000 25.21
(development and sale of software)
-----------------------------------------------
DATASIEL - Sistemi e Tecnologie di Informatica S.p.A. 2,582,500 49.00
(data processing products and services for public administration agencies,
institutions and enterprises under Ligurian Regional Law n. 17/85)
-----------------------------------------------
DISCOVERITALIA S.p.A. 5,160,000 25.00
(communication services)
-----------------------------------------------
EISYS S.p.A. 619,200 25.00
(information systems)
-----------------------------------------------
ESRI ITALIA S.p.A. 500,000 49.00
(development and distribution of services based on the GIS - "Geographical
Information Systems" technology)
-----------------------------------------------
ETEC S.A. - Empresa de Telecomunicaciones de Cuba S.A. 1,441,900,000 29.29
(telecommunications services)
-----------------------------------------------
EURODIRECTORY S.A. 1,625,320 50.00
(holding company of the publishers of the Kompass directories)
-----------------------------------------------
GARAGE S.r.l. 49,400 35.00
(multimedia and cinema broadcasting)
-----------------------------------------------
GLB SERVICOS INTERATIVOS S.A. 182,732,615 28.57
(Internet services)
-----------------------------------------------
GO TO WEB S.p.A. 3,719,764 20.00
(web-based software solutions)
-----------------------------------------------
GOLDEN LINES INTERNATIONAL COMMUNICATIONS SERVICES Ltd 3,000,000 26.40
(long distance telephony services)
-----------------------------------------------
ICOM Inc. 203.09 40.00
(development of data bank and Internet market place)
-----------------------------------------------
IM.SER S.p.A. 1,315,800 40.00
(real estate management)
-----------------------------------------------
IS TIM TELEKOMUNIKASYON HIZMETLERI A.S. 545,000,000,000,000 49.00
(mobile telephony operator)
-----------------------------------------------
%
Name of voting
(type of business) rights Held by
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES
-----------------------------------------------
EDOTEL S.p.A. TELECOM ITALIA
(holding company) TELECOM ITALIA MOBILE
-----------------------------------------------
EURO DATACOM Ltd TMI TELEMEDIA INTERN. Ltd
(telecommunications services)
-----------------------------------------------
GOALLARS B.V. MATRIX
(management of an Internet site)
-----------------------------------------------
TELECOM ITALIA CAPITAL S.A. TELECOM ITALIA
(financing) TELECOM ITALIA FINANCE
-----------------------------------------------
TELECOM MEDIA INTERNATIONAL ITALY-CANADA Inc. TMI TELEMEDIA INTERN. Ltd
(telecommunications services)
-----------------------------------------------
TELEFONIA MOBILE SAMMARINESE S.p.A. INTELCOM S.MARINO
(mobile telecommunications)
-----------------------------------------------
THINX-SM TELEHOUSE INTERNET EXCHANGE S.A. INTELCOM S.MARINO
(housing and hosting)
-----------------------------------------------
TMI TELEMEDIA INTERNATIONAL DO BRASIL Ltda TMI TELEMEDIA INTERN. Ltd
(telecommunications services)
-----------------------------------------------
ZDNET ITALIA S.p.A. MATRIX
(creation and management of Internet sites)
-----------------------------------------------
AFFILIATED COMPANIES
-----------------------------------------------
ASCAI SERVIZI S.r.l. SAIAT
(promotion of communications strategies and process)
-----------------------------------------------
BROAD BAND SERVICE S.A. INTELCOM S.MARINO STREAM
(production and sales of multimedia services)
-----------------------------------------------
BUENAVENTURA S.A. ENTEL TELEFONIA PERSONAL
(telecommunications services)
-----------------------------------------------
CABLE INSIGNIA S.A. TELECOM PERSONAL
(telecommunications services)
-----------------------------------------------
CARTESIA-CARTOGRAFIA DIGITALE S.p.A. TELECOM ITALIA
(design, realization, marketing of numeric cartography)
-----------------------------------------------
CYGENT Inc. TELECOM ITALIA LAB B.V.
(development and sale of software)
-----------------------------------------------
DATASIEL - Sistemi e Tecnologie di Informatica S.p.A. FINSIEL
(data processing products and services for public administration agencies,
institutions and enterprises under Ligurian Regional Law n. 17/85)
-----------------------------------------------
DISCOVERITALIA S.p.A. SEAT PAGINE GIALLE
(communication services)
-----------------------------------------------
EISYS S.p.A. EIS
(information systems)
-----------------------------------------------
ESRI ITALIA S.p.A. SEAT PAGINE GIALLE
(development and distribution of services based on the GIS - "Geographical
Information Systems" technology)
-----------------------------------------------
ETEC S.A. - Empresa de Telecomunicaciones de Cuba S.A. TELECOM ITALIA INTERNATIONAL
(telecommunications services)
-----------------------------------------------
EURODIRECTORY S.A. SEAT PAGINE GIALLE
(holding company of the publishers of the Kompass directories)
-----------------------------------------------
GARAGE S.r.l. WEBEGG
(multimedia and cinema broadcasting)
-----------------------------------------------
GLB SERVICOS INTERATIVOS S.A. TELECOM ITALIA FINANCE
(Internet services)
-----------------------------------------------
GO TO WEB S.p.A. WEBEGG
(web-based software solutions)
-----------------------------------------------
GOLDEN LINES INTERNATIONAL COMMUNICATIONS SERVICES Ltd TELECOM ITALIA INTERNATIONAL
(long distance telephony services)
-----------------------------------------------
ICOM Inc. NETCREATIONS
(development of data bank and Internet market place)
-----------------------------------------------
IM.SER S.p.A. TELECOM ITALIA
(real estate management)
-----------------------------------------------
IS TIM TELEKOMUNIKASYON HIZMETLERI A.S. TIM INTERNATIONAL
(mobile telephony operator)
-----------------------------------------------
221 | Consolidated Financial Statements
Name
(type of business) Head office
------------------------------------------------------------------------------------------------------------------------------------
ISCE Investor In Sapient & Cuneo Europe SA. Luxembourg EUR
(consulting)
--------------------------------------
ITALCOM S.p.A. Milan EUR
(multimedia systems and devices) (Italy)
--------------------------------------
ITALDATA S.p.A. Avellino EUR
(solutions and services for the web economy) (Italy)
--------------------------------------
ITALTEL A.O. Saint Petersburg RUB
(telecommunications system) (Russia)
--------------------------------------
ITALTEL ARGENTINA SA Buenos Aires ARS
(telecommunications systems) (Argentina)
--------------------------------------
ITALTEL B.V. Amsterdam EUR
(trade and financial company) (Holland)
--------------------------------------
ITALTEL BRASIL Ltda. Sao Paulo BRL
(trade company) (Brazil)
--------------------------------------
ITALTEL CERM PALERMO S.c.p.a. Palermo EUR
(research) (Italy)
--------------------------------------
ITALTEL DE CHILE S.A. Santiago CLP
(telecommunications system) (Chile)
--------------------------------------
ITALTEL DEUTSCHLAND GmbH Dusseldorf EUR
(trade company) (Germany)
--------------------------------------
ITALTEL FRANCE S.a.s. Issy EUR
(trade company) (France)
--------------------------------------
ITALTEL HOLDING S.p.A. Milan EUR
(holding company) (Italy)
--------------------------------------
ITALTEL Inc. Delaware USD
(trade company) (USA)
--------------------------------------
ITALTEL KENYA Ltd Nairobi KES
(telecommunications systems) (Kenya)
--------------------------------------
ITALTEL NIGERIA Ltd Lagos NGN
(telecommunications systems) (Nigeria)
--------------------------------------
ITALTEL S.A. Madrid EUR
(telecommunications systems) (Spain
--------------------------------------
ITALTEL S.p.A. Milan EUR
(telecommunications system) (Italy)
--------------------------------------
ITALTEL UK Ltd Staines GBP
(trade company) (UK)
--------------------------------------
L'UFFICIO MODERNO S.r.l. Florence EUR
(sale of books and office supplies) (Italy)
--------------------------------------
MARCAM ITALY S.r.l Milan EUR
(services for automatical data management) (Italy)
--------------------------------------
MESNIL HOLDING S.A. Luxembourg EUR
(trading company)
--------------------------------------
MIA ECONOMIA.com S.r.l. Milan EUR
(publishing in the field of personal finance) (Italy)
--------------------------------------
MICRO SISTEMAS S.A. Buenos Aires ARS
(telecommunications services) (Argentina)
--------------------------------------
MIRROR INTERNATIONAL HOLDING S.a.r.l Luxembourg EUR
(holding company)
--------------------------------------
MIRROR INTERNATIONAL GmbH Frankfurt EUR
(holding company) (Germany)
--------------------------------------
MOVENDA S.p.A Rome EUR
(technological platforms for the development of mobile Internet services) (Italy)
--------------------------------------
NETCO REDES S.A. Madrid EUR
(provider of telecommunications infrastructures) (Spain)
--------------------------------------
NORDCOM S.p.A. Milan CUR
(application service provider) (Italy)
--------------------------------------
NORTEL INVERSORA S.A. Buenos Aires ARS
(holding company) (Argentina)
--------------------------------------
NUCLEO S.A. Asuncion PYG
(telecommunications services) (Paraguay)
--------------------------------------
PRAXIS CALCOLO S.p.A. Milan EUR
(technical and organizational services for automatic data processing) (Italy)
--------------------------------------
PUBLICOM S.A. Buenos Aires ARS
(telecommunications services) (Argentina)
--------------------------------------
SIEMENS INFORMAT1CA S.p.A. Milan EUR
(sale of innovating solutions in the field of electronic and mobile business) (Italy)
--------------------------------------
SIOSISTEMI S.p.A. Brescia EUR
(systems networking with special emphasis on the design of LAN and WAN systems
and related hardware support system) (Italy)
--------------------------------------
Name %
(type of business) Share capital ownership
-----------------------------------------------------------------------------------------------------------------------------------
ISCE Investor In Sapient & Cuneo Europe SA. 4,334,400 25.00
(consulting)
-----------------------------------------------
ITALCOM S.p.A. 103,200 100.00
(multimedia systems and devices)
-----------------------------------------------
ITALDATA S.p.A. 3,096,000 100.00
(solutions and services for the web economy)
-----------------------------------------------
ITALTEL A.O. 20,000 100.00
(telecommunications system)
-----------------------------------------------
ITALTEL ARGENTINA SA 600,000 96.00
(telecommunications systems) 4.00
-----------------------------------------------
ITALTEL B.V. 6,000,000 100.00
(trade and financial company)
-----------------------------------------------
ITALTEL BRASIL Ltda. 2,018,302 51.44
(trade company) 48.56
-----------------------------------------------
ITALTEL CERM PALERMO S.c.p.a. 2,125,000 90.00
(research) 10.00
-----------------------------------------------
ITALTEL DE CHILE S.A. 50,119,607 90.00
(telecommunications system) 10,00
-----------------------------------------------
ITALTEL DEUTSCHLAND GmbH 40,000 60.00
(trade company) 40.00
-----------------------------------------------
ITALTEL FRANCE S.a.s. 40,000 100.00
(trade company)
-----------------------------------------------
ITALTEL HOLDING S.p.A. 115,459,344 19.37
(holding company)
-----------------------------------------------
ITALTEL Inc. 100 60.00
(trade company) 40.00
-----------------------------------------------
ITALTEL KENYA Ltd 500,000 99.98
(telecommunications systems) 0.02
-----------------------------------------------
ITALTEL NIGERIA Ltd 2,000,000 99.99
(telecommunications systems) 0.01
-----------------------------------------------
ITALTEL S.A. 6,460,750 100.00
(telecommunications systems)
-----------------------------------------------
ITALTEL S.p.A. 196,830,400 100.00
(telecommunications system)
-----------------------------------------------
ITALTEL UK Ltd 26,000 60.00
(trade company) 40.00
-----------------------------------------------
L'UFFICIO MODERNO S.r.l. 10,400 15.00
(sale of books and office supplies) 15.00
-----------------------------------------------
MARCAM ITALY S.r.l 92,962 99.00
(services for automatical data management)
-----------------------------------------------
MESNIL HOLDING S.A. 78,000 99,99
(trading company)
-----------------------------------------------
MIA ECONOMIA.com S.r.l. 1,500,000 30.00
(publishing in the field of personal finance)
-----------------------------------------------
MICRO SISTEMAS S.A. 210,000 99.99
(telecommunications services) 0.01
-----------------------------------------------
MIRROR INTERNATIONAL HOLDING S.a.r.l 250,000 30.00
(holding company)
-----------------------------------------------
MIRROR INTERNATIONAL GmbH 25,000 100.00
(holding company)
-----------------------------------------------
MOVENDA S.p.A 133,333 25.00
(technological platforms for the development of mobile Internet services)
-----------------------------------------------
NETCO REDES S.A. 6,038,248 30.00
(provider of telecommunications infrastructures)
-----------------------------------------------
NORDCOM S.p.A. 5,000,000 42.00
(application service provider)
-----------------------------------------------
NORTEL INVERSORA S.A. 78,633,050 22.03 32.5
(holding company) 11.86 17.5
-----------------------------------------------
NUCLEO S.A. 175,200,000,000 67.50
(telecommunications services)
-----------------------------------------------
PRAXIS CALCOLO S.p.A. 1,056,000 22.50
(technical and organizational services for automatic data processing)
-----------------------------------------------
PUBLICOM S.A. 16,000,000 99.99
(telecommunications services) 0.01
-----------------------------------------------
SIEMENS INFORMAT1CA S.p.A. 6,192,000 49.00
(sale of innovating solutions in the field of electronic and mobile business)
-----------------------------------------------
SIOSISTEMI S.p.A. 260,000 40.00
(systems networking with special emphasis on the design of LAN and WAN systems
and related hardware support system)
-----------------------------------------------
%
Name of voting
(type of business) rights Held by
------------------------------------------------------------------------------------------------------------------------------------
ISCE Investor In Sapient & Cuneo Europe SA. SEAT PAGINE GIALLE
(consulting)
------------------------------------------------
ITALCOM S.p.A. ITALTEL S.p.A.
(multimedia systems and devices)
------------------------------------------------
ITALDATA S.p.A. SIEMENS INFORMATICA
(solutions and services for the web economy)
------------------------------------------------
ITALTEL A.O. ITALTEL B.V.
(telecommunications system)
------------------------------------------------
ITALTEL ARGENTINA SA ITALTEL B.V.
(telecommunications systems) ITALTEL S.p.A.
------------------------------------------------
ITALTEL B.V. ITALTEL S.p.A.
(trade and financial company)
------------------------------------------------
ITALTEL BRASIL Ltda. ITALTEL S.p.A.
(trade company) ITALTEL B.V.
------------------------------------------------
ITALTEL CERM PALERMO S.c.p.a. ITALTEL S.p.A.
(research) TELECOM ITALIA LAB S.p.A.
------------------------------------------------
ITALTEL DE CHILE S.A. ITALTEL B.V.
(telecommunications system) ITALTEL S.p.A.
------------------------------------------------
ITALTEL DEUTSCHLAND GmbH ITALTEL HOLDING
(trade company) ITALTEL B.V.
------------------------------------------------
ITALTEL FRANCE S.a.s. ITALTEL HOLDING
(trade company)
------------------------------------------------
ITALTEL HOLDING S.p.A. TELECOM ITALIA FINANCE
(holding company)
------------------------------------------------
ITALTEL Inc. ITALTEL HOLDING
(trade company) ITALTEL B.V.
------------------------------------------------
ITALTEL KENYA Ltd ITALTEL B.V.
(telecommunications systems) ITALTEL S.p.A.
------------------------------------------------
ITALTEL NIGERIA Ltd ITALTEL B.V.
(telecommunications systems) ITALTEL S.p.A.
------------------------------------------------
ITALTEL S.A. ITALTEL B.V.
(telecommunications systems)
------------------------------------------------
ITALTEL S.p.A. ITALTEL HOLDING
(telecommunications system)
------------------------------------------------
ITALTEL UK Ltd ITALTEL HOLDING
(trade company) ITALTEL B.V.
------------------------------------------------
L'UFFICIO MODERNO S.r.l. GRUPPO BUFFETTI
(sale of books and office supplies) IL CENTRO CONTABILE
------------------------------------------------
MARCAM ITALY S.r.l PRAXIS CALCOLO
(services for automatical data management)
------------------------------------------------
MESNIL HOLDING S.A. ISCE
(trading company)
------------------------------------------------
MIA ECONOMIA.com S.r.l. MATRIX
(publishing in the field of personal finance)
------------------------------------------------
MICRO SISTEMAS S.A. TELECOM ARGENTINA STET-FRANCE TELECOM
(telecommunications services) PUBLICOM
------------------------------------------------
MIRROR INTERNATIONAL HOLDING S.a.r.l TELECOM ITALIA
(holding company)
------------------------------------------------
MIRROR INTERNATIONAL GmbH MIRROR INTERN. HOLDING
(holding company)
------------------------------------------------
MOVENDA S.p.A TELECOM ITALIA LAB B.V.
(technological platforms for the development of mobile Internet services)
------------------------------------------------
NETCO REDES S.A. TELECOM ITALIA INTERNATIONAL
(provider of telecommunications infrastructures)
------------------------------------------------
NORDCOM S.p.A. TELECOM ITALIA
(application service provider)
------------------------------------------------
NORTEL INVERSORA S.A. TELECOM ITALIA
(holding company) TELECOM ITALIA INTERNATIONAL
------------------------------------------------
NUCLEO S.A. TELECOM PERSONAL
(telecommunications services)
------------------------------------------------
PRAXIS CALCOLO S.p.A. FINSIEL
(technical and organizational services for automatic data processing)
------------------------------------------------
PUBLICOM S.A. TELECOM ARGENTINA STET-FRANCE TELECOM
(telecommunications services) NORTEL INVERSORA
------------------------------------------------
SIEMENS INFORMAT1CA S.p.A. TELECOM ITALIA
(sale of innovating solutions in the field of electronic and mobile business)
------------------------------------------------
SIOSISTEMI S.p.A. TELECOM ITALIA LAB S.p.A.
(systems networking with special emphasis on the design of LAN and WAN systems
and related hardware support system)
------------------------------------------------
222 | Consolidated Financial Statements
Name
(type of business) Head office
------------------------------------------------------------------------------------------------------------------------------------
SISPI S.p.A. Palermo EUR
(information systems for the municipality of Palermo and other private and
public entities) (Italy)
--------------------------------------
SITEBA SISTEMI TELEMATICI BANCARI S.p.A Milan EUR
(support services for payments systems) (Italy)
--------------------------------------
SITECNIKA S.p.A. Milan EUR
(IT multivendor services) (Italy)
--------------------------------------
SITEKNE S.p.A Rome EUR
(furnishing of resources in the field of ITC-Information Technology
Communication solutions) (Italy)
--------------------------------------
SOGEI SERVIZI INNOVATIVI E TECNOLOGICI S.p.A. Rome EUR
(development of business enterprises in the field of ITC and technological
information) (Italy)
--------------------------------------
STREAM S.p.A. Rome EUR
(multimedia services) (Italy)
--------------------------------------
TELECOM ARGENTINA STET-FRANCE TELECOM S.A. Buenos Aires ARS
(telecommunications services) (Argentina)
--------------------------------------
TELECOM ARGENTINA USA Inc. Delaware USD
(telecommunications services) (USA)
--------------------------------------
TELECOM PERSONAL SA Buenos Aires ARS
(telecommunications services)) (Argentina)
--------------------------------------
TELEGONO S.r.l. Rome EUR
(real estate management) (Italy)
--------------------------------------
TELEKOM AUSTRIA A.G. Vienna EUR
(wireline telephony) (Austria)
--------------------------------------
TELEKOM SRBIJA a.d. Belgrade YUM
(telecommunications services) (Serbia)
--------------------------------------
TELELEASING - Leasing di Telecomunicazioni e Generale S.p.A. Milan EUR
(financial leasing of real estate and other assets) (Italy)
--------------------------------------
TIGLIO I S.r.l. Milan EUR
(real estate management) (Italy)
--------------------------------------
TIGLIO II S.r.l. Milan EUR
(real estate management) (Italy)
--------------------------------------
USABLENET Inc. Delaware USD
(development of a software for the analysis of web sites) (USA)
--------------------------------------
VIRTUALSELF Ltd. Ramat Gan ILS
(development and sale of internet services based on a technology for the
linguistic analysis for the research of contents). (Israel)
Name %
(type of business) Share capital ownership
------------------------------------------------------------------------------------------------------------------------------------
SISPI S.p.A. 2,066,000 49.00
(information systems for the municipality of Palermo and other private and
public entities)
------------------------------------------------
SITEBA SISTEMI TELEMATICI BANCARI S.p.A 2,600,000 30.00
(support services for payments systems)
------------------------------------------------
SITECNIKA S.p.A. 143,000 100.00
(IT multivendor services)
------------------------------------------------
SITEKNE S.p.A 103,200 100.00
(furnishing of resources in the field of ITC-Information Technology
Communication solutions)
------------------------------------------------
SOGEI SERVIZI INNOVATIVI E TECNOLOGICI S.p.A. 100,000 49.00
(development of business enterprises in the field of ITC and technological
information)
------------------------------------------------
STREAM S.p.A. 302,399,080 50.00
(multimedia services)
------------------------------------------------
TELECOM ARGENTINA STET-FRANCE TELECOM S.A. 984,380,978 54.74
(telecommunications services)
------------------------------------------------
TELECOM ARGENTINA USA Inc. 249,873 100.00
(telecommunications services)
------------------------------------------------
TELECOM PERSONAL SA 310,514,481 99.99
(telecommunications services)) 0.01
------------------------------------------------
TELEGONO S.r.l. 1,000,000 40.00
(real estate management)
------------------------------------------------
TELEKOM AUSTRIA A.G. 1,090,500,000 14.78
(wireline telephony)
------------------------------------------------
TELEKOM SRBIJA a.d. 10,800,000,080 29.00
(telecommunications services)
------------------------------------------------
TELELEASING - Leasing di Telecomunicazioni e Generale S.p.A. 9,500,000 20.00
(financial leasing of real estate and other assets)
------------------------------------------------
TIGLIO I S.r.l. 5,255,704 36.85
(real estate management) 2.10
------------------------------------------------
TIGLIO II S.r.l. 14,185,288 49.47
(real estate management)
------------------------------------------------
USABLENET Inc. 1 20.00
(development of a software for the analysis of web sites)
------------------------------------------------
VIRTUALSELF Ltd. 4,749 38.70
(development and sale of internet services based on a technology for the
linguistic analysis for the research of contents).
%
Name of voting
(type of business) rights Held by
------------------------------------------------------------------------------------------------------------------------------------
SISPI S.p.A. FINSIEL
(information systems for the municipality of Palermo and other private and
public entities)
------------------------------------------------
SITEBA SISTEMI TELEMATICI BANCARI S.p.A TELECOM ITALIA
(support services for payments systems)
------------------------------------------------
SITECNIKA S.p.A. SIEMENS INFORMATICA
(IT multivendor services)
------------------------------------------------
SITEKNE S.p.A SIEMENS INFORMATICA
(furnishing of resources in the field of ITC-Information Technology
Communication solutions)
------------------------------------------------
SOGEI SERVIZI INNOVATIVI E TECNOLOGICI S.p.A. FINSIEL
(development of business enterprises in the field of ITC and technological
information)
------------------------------------------------
STREAM S.p.A. TELECOM ITALIA
(multimedia services)
------------------------------------------------
TELECOM ARGENTINA STET-FRANCE TELECOM S.A. NORTEL INVERSORA
(telecommunications services)
------------------------------------------------
TELECOM ARGENTINA USA Inc. TELECOM ARGENTINA STET-FRANCE TELECOM
(telecommunications services)
------------------------------------------------
TELECOM PERSONAL SA TELECOM ARGENTINA STET-FRANCE TELECOM
(telecommunications services)) PUBLICOM
------------------------------------------------
TELEGONO S.r.l. TELECOM ITALIA
(real estate management)
------------------------------------------------
TELEKOM AUSTRIA A.G. TELECOM ITALIA INTERNATIONAL
(wireline telephony)
------------------------------------------------
TELEKOM SRBIJA a.d. TELECOM ITALIA INTERNATIONAL
(telecommunications services)
------------------------------------------------
TELELEASING - Leasing di Telecomunicazioni e Generale S.p.A. SAIAT
(financial leasing of real estate and other assets)
------------------------------------------------
TIGLIO I S.r.l. TELECOM ITALIA
(real estate management) SEAT PAGINE GIALLE
------------------------------------------------
TIGLIO II S.r.l. TELECOM ITALIA
(real estate management)
------------------------------------------------
USABLENET Inc. TELECOM ITALIA LAB B.V.
(development of a software for the analysis of web sites)
------------------------------------------------
VIRTUALSELF Ltd. TELECOM ITALIA LAB B.V.
(development and sale of internet services based on a technology for the
linguistic analysis for the research of contents).
---------
* The percentage of ownership includes Ordinary Shares/Quotas held by members
of the Board of Directors/Managers, as requested by local laws in order to
undertake the charge of Director/Manager, or held by Fiduciaries.
223 | Consolidated Financial Statements
LIST OF OTHER SUBSIDIARIES AND AFFILIATED COMPANIES
Name
(type of business) Head office
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES
ARTES S.r.l. (in liquidation) Rome EUR
(telecommunications services) (Italy)
--------------------------------------
BUFFETTI S.r.l (in liquidation) Rome EUR
(sale of books and office supplies) (Italy)
--------------------------------------
CABESTAN S.A. (in liquidation) Suresnes FRF
(software design) (France)
--------------------------------------
CONSODATA INTERACTIVE S.A. (in liquidation) Levallois Perret EUR
(business information services) (France)
--------------------------------------
CONSODATA ITALIA S.r.l. (in liquidation) Milan EUR
(business information) (Italy)
--------------------------------------
CONSODATA SYSTEME S.A. (in liquidation) Levallois Perret EUR
(business information services) (France)
--------------------------------------
DATABANK WETTBEWERBS - MARKT - UND Darmstadt EUR
FINANZANALYSE GmbH (in liquidation) (Germany)
(marketing)
--------------------------------------
EMAX-TRADE S.r.l. (in liquidation) Milan EUR
(management of Internet sites) (Italy)
--------------------------------------
GIALLO MARKET S.r.l. (in liquidation) Milan EUR
(owner of Virgillo.it) (Italy)
--------------------------------------
GIALLO VIAGGI.It S.p.A. (in liquidation) Milan EUR
(research, development, production of information and telematic products
for tourism) (Italy)
--------------------------------------
EVEREST S.r.l. Trieste EUR
(telematic services) (Italy)
--------------------------------------
FINSIEL HELLAS S.A. (in liquidation) Koropi GRD
(computer products for public and private customers) (Greece)
--------------------------------------
IL CENTRO CONTABILE S.p.A. (in liquidation) Rome EUR
(sale of books and office ware) (Italy)
--------------------------------------
INCAS FRANCE S.A. (in liquidation) Asnieres FRF
(sale of products for office automation) (France)
--------------------------------------
IREOS S.p.A. (in liquidation) Rome EUR
(promotion and management of remote domiciliary assistance) (Italy)
--------------------------------------
IRIDIUM ITALIA S.p.A. (in liquidation) Rome EUR
(satellite telecommunications services) (Italy)
--------------------------------------
KMATRIX S.r.l Milan EUR
(creation and management of an Internet site) (Italy)
--------------------------------------
LINK S.r.l. (in liquidation) Milan EUR
(supply of computer services) (Italy)
--------------------------------------
LOQUENO Inc. (in liquidation) California USD
(development of software for web vocal interaction) (USA)
--------------------------------------
NETESI S.A.S. (in liquidation) Paris EUR
(telecommunication services) (France)
--------------------------------------
NEW WORLD TELECOM S.A. Santiago CLP
(telecommunication services) (Chile)
--------------------------------------
OR.MA INFORMATICA S.r.l. Rome EUR
(wholesale of computer products) (Italy)
--------------------------------------
RFM DATA Ltd (in liquidation) Kingston GBP
(list broking) (UK)
--------------------------------------
SCS COMUNICAZIONE INTEGRATA S.p.A. (in liquidation) Rome EUR
(marketing and communication consulting) (Italy)
--------------------------------------
SERVICE IN S.r.l. (in liquidation) Milan EUR
(furnishing of services) (Italy)
--------------------------------------
TELECOM ITALIA GmbH (in liquidation) Vienna EUR
(holding company) (Austria)
--------------------------------------
TELECOM ITALIA IRELAND Ltd Dublin EUR
(telecommunications services) (Ireland)
--------------------------------------
TELECOMMUNICATIONS ADVISER LLC Delaware USD
(management of Saturn Venture Partners fund) (USA)
--------------------------------------
TELENERGIA S.r.l. Rome EUR
(import, export, purchase, sale and exchange of electrical energy) (Italy)
--------------------------------------
TIM.COM Holding B.V. Amsterdam EUR
(holding company) (Holland)
--------------------------------------
TIMNET.COM PERU' S.A.C. Lima PEN
(services for mobile networks) (Peru)
--------------------------------------
Name %
(type of business) Share capital ownership
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES
ARTES S.r.l. (in liquidation) 10,000 100.00
(telecommunications services)
-------------------------------------------------
BUFFETTI S.r.l (in liquidation) 10,000 100.00
(sale of books and office supplies)
-------------------------------------------------
CABESTAN S.A. (in liquidation) 250,000 100.00
(software design)
-------------------------------------------------
CONSODATA INTERACTIVE S.A. (in liquidation) 40,000 100.00
(business information services)
-------------------------------------------------
CONSODATA ITALIA S.r.l. (in liquidation) 10,200 100.00
(business information)
-------------------------------------------------
CONSODATA SYSTEME S.A. (in liquidation) 40,000 100.00
(business information services)
-------------------------------------------------
DATABANK WETTBEWERBS - MARKT - UND 153,387.56 60.00
FINANZANALYSE GmbH (in liquidation)
(marketing)
-------------------------------------------------
EMAX-TRADE S.r.l. (in liquidation) 100,000 100.00
(management of Internet sites)
-------------------------------------------------
GIALLO MARKET S.r.l. (in liquidation) 10,000 90.00
(owner of Virgillo.it) 10.00
-------------------------------------------------
GIALLO VIAGGI.It S.p.A. (in liquidation) 10,000 100.00
(research, development, production of information and telematic products
for tourism)
-------------------------------------------------
EVEREST S.r.l. 10,400 100.00
(telematic services)
-------------------------------------------------
FINSIEL HELLAS S.A. (in liquidation) 230,000,000 91.00
(computer products for public and private customers)
-------------------------------------------------
IL CENTRO CONTABILE S.p.A. (in liquidation) 2,233,507.26 89.70
(sale of books and office ware)
-------------------------------------------------
INCAS FRANCE S.A. (in liquidation) 19,168,900 100.00
(sale of products for office automation)
-------------------------------------------------
IREOS S.p.A. (in liquidation) 100,000 100.00
(promotion and management of remote domiciliary assistance)
-------------------------------------------------
IRIDIUM ITALIA S.p.A. (in liquidation) 2,575,000 30.00
(satellite telecommunications services) 35.00
-------------------------------------------------
KMATRIX S.r.l 100,000 100.00
(creation and management of an Internet site)
-------------------------------------------------
LINK S.r.l. (in liquidation) 10,400 100.00
(supply of computer services)
-------------------------------------------------
LOQUENO Inc. (in liquidation) 14,021,000 100.00
(development of software for web vocal interaction)
-------------------------------------------------
NETESI S.A.S. (in liquidation) 40,000 100.00 (*)
(telecommunication services)
-------------------------------------------------
NEW WORLD TELECOM S.A. 14,000,000 100.00 (*)
(telecommunication services)
-------------------------------------------------
OR.MA INFORMATICA S.r.l. 10,200 100.00
(wholesale of computer products)
-------------------------------------------------
RFM DATA Ltd (in liquidation) 2 100.00
(list broking)
-------------------------------------------------
SCS COMUNICAZIONE INTEGRATA S.p.A. (in liquidation) 600,000 100.00
(marketing and communication consulting)
-------------------------------------------------
SERVICE IN S.r.l. (in liquidation) 10,691 95.00
(furnishing of services)
-------------------------------------------------
TELECOM ITALIA GmbH (in liquidation) 36,336.42 100.00
(holding company)
-------------------------------------------------
TELECOM ITALIA IRELAND Ltd 2 100.00
(telecommunications services)
-------------------------------------------------
TELECOMMUNICATIONS ADVISER LLC 560,280 100.00
(management of Saturn Venture Partners fund)
-------------------------------------------------
TELENERGIA S.r.l. 50,000 80.00
(import, export, purchase, sale and exchange of electrical energy) 20.00
-------------------------------------------------
TIM.COM Holding B.V. 18,000 100.00
(holding company)
-------------------------------------------------
TIMNET.COM PERU' S.A.C. 1,000 100.00
(services for mobile networks)
-------------------------------------------------
%
Name of voting
(type of business) rights Held by
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES
ARTES S.r.l. (in liquidation) HOLDING MEDIA E COMUNICAZIONE HMC
(telecommunications services)
-------------------------------------------------
BUFFETTI S.r.l (in liquidation) GRUPPO BUFFETTI
(sale of books and office supplies)
-------------------------------------------------
CABESTAN S.A. (in liquidation) CONSODATA S.A.
(software design)
-------------------------------------------------
CONSODATA INTERACTIVE S.A. (in liquidation) CONSODATA S.A.
(business information services)
-------------------------------------------------
CONSODATA ITALIA S.r.l. (in liquidation) CONSODATA S.A.
(business information)
-------------------------------------------------
CONSODATA SYSTEME S.A. (in liquidation) CONSODATA S.A.
(business information services)
-------------------------------------------------
DATABANK WETTBEWERBS - MARKT - UND DATABANK S.p.A.
FINANZANALYSE GmbH (in liquidation)
(marketing)
-------------------------------------------------
EMAX-TRADE S.r.l. (in liquidation) MATRIX
(management of Internet sites)
-------------------------------------------------
GIALLO MARKET S.r.l. (in liquidation) MATRIX
(owner of Virgillo.it) SEAT PAGINE GIALLE
-------------------------------------------------
GIALLO VIAGGI.It S.p.A. (in liquidation) SEAT PAGINE GIALLE
(research, development, production of information and telematic products
for tourism)
-------------------------------------------------
EVEREST S.r.l. WAVENET
(telematic services)
-------------------------------------------------
FINSIEL HELLAS S.A. (in liquidation) FINSIEL
(computer products for public and private customers)
-------------------------------------------------
IL CENTRO CONTABILE S.p.A. (in liquidation) GRUPPO BUFFETTI
(sale of books and office ware)
-------------------------------------------------
INCAS FRANCE S.A. (in liquidation) IS PRODUCTS
(sale of products for office automation)
-------------------------------------------------
IREOS S.p.A. (in liquidation) TELECOM ITALIA
(promotion and management of remote domiciliary assistance)
-------------------------------------------------
IRIDIUM ITALIA S.p.A. (in liquidation) TELECOM ITALIA
(satellite telecommunications services) TELECOM ITALIA MOBILE
-------------------------------------------------
KMATRIX S.r.l MATRIX
(creation and management of an Internet site)
-------------------------------------------------
LINK S.r.l. (in liquidation) MATRIX
(supply of computer services)
-------------------------------------------------
LOQUENO Inc. (in liquidation) LOQUENDO S.p.A.
(development of software for web vocal interaction)
-------------------------------------------------
NETESI S.A.S. (in liquidation) NETESI
(telecommunication services)
-------------------------------------------------
NEW WORLD TELECOM S.A. LATIN AMERICA NAUTILUS CHILE
(telecommunication services)
-------------------------------------------------
OR.MA INFORMATICA S.r.l. GRUPPO BUFFETTI
(wholesale of computer products)
-------------------------------------------------
RFM DATA Ltd (in liquidation) CAL - CONSUMER ACCESS
(list broking)
-------------------------------------------------
SCS COMUNICAZIONE INTEGRATA S.p.A. (in liquidation) SEAT PAGINE GIALLE
(marketing and communication consulting)
-------------------------------------------------
SERVICE IN S.r.l. (in liquidation) CIPI
(furnishing of services)
-------------------------------------------------
TELECOM ITALIA GmbH (in liquidation) TELECOM ITALIA
(holding company)
-------------------------------------------------
TELECOM ITALIA IRELAND Ltd TELECOM ITALIA
(telecommunications services)
-------------------------------------------------
TELECOMMUNICATIONS ADVISER LLC TELECOM ITALIA LAB G.P.
(management of Saturn Venture Partners fund)
-------------------------------------------------
TELENERGIA S.r.l. TELECOM ITALIA
(import, export, purchase, sale and exchange of electrical energy) TELCOM ITALIA MOBILE
-------------------------------------------------
TIM.COM Holding B.V. TIM INTERNATIONAL
(holding company)
-------------------------------------------------
TIMNET.COM PERU' S.A.C. TIM PERU'
(services for mobile networks)
-------------------------------------------------
224 | Consolidated Financial Statements
Name
(type of business) Head office
------------------------------------------------------------------------------------------------------------------------------------
TIN WEB S.p.A. (in liquidation) Milan EUR
(consulting for the creation of Internet sites) (Italy)
--------------------------------------
TMI HUNGARY TRADING AND SERVICES Ltd (in liquidation) Budapest HUF
(telecommunications services) (Hungary)
--------------------------------------
TRAINET S.p.A. (in liquidation) Rome EUR
(development, operation and sales of lines teaching systems) (Italy)
--------------------------------------
WAVENET S.r.l. Monfalcone EUR
(thematic services) (Gorizia, Italy)
--------------------------------------
AFFILIATED COMPANIES
CITEL - Corporacion Interamericana de Telecomunicaciones S.A. Monterrey MXN
(holding company) (Mexico)
--------------------------------------
CLIPPER S.p.A. (in liquidation) Rome EUR
(marketing and communication consulting) (Italy)
--------------------------------------
CROMA S.r.l. (in liquidation) P. San Giovanni EUR
(hardware maintenance) (Perugia, Italy)
--------------------------------------
DATATRADER S.A. (in liquidation) Ruell Mallmaison EUR
(creation and sale of data base) (France)
--------------------------------------
E-UTILE S.p.A. Milan EUR
(ICT Solutions and services for companies in the field of public utilities) (Italy)
--------------------------------------
INDIRECT S.P.R.L. (in liquidation) Brussels BEF
(sale of services) (Belgium)
--------------------------------------
MEDITERRANEAN BROAD BAND ACCESS S.A. Heraklion Crete EUR
(telecommunications services) (Greece)
--------------------------------------
NETEX S.r.l. (in liquidation) Milan EUR
(activities relating to the contract regarding the licence of the software of
Netex Ltd.) (Italy)
--------------------------------------
TDL BELGIUM S.A. Bruxelles FB
(publishing and sale of directories) (Belgium)
--------------------------------------
UBA - NET S.A. Buenos Aires ARS
(teledidactic services) (Argentina)
--------------------------------------
VOICEMAIL INTERNATIONAL INC. (in liquidation) California USD
(vocal message services) (USA)
--------------------------------------
CONSORTIUM SUBSIDIARIES
CONSORZIO ABECA (in liquidation) Rome EUR
(information systems for the Ministry of cultural properties and environment) (Italy)
--------------------------------------
CONSORZIO CONNET FORMAZIONE Bari EUR
(Professional training for the Ministry of work and social security) (Italy)
--------------------------------------
CONSORZIO ENERGIA GRUPPO TELECOM ITALIA Rome EUR
(electrical feeding of the fixed and mobile lines of the associated companies) (Italy)
--------------------------------------
CONSORZIO GEODOC (in liquidation) Rome EUR
(realization of an information system for the geological documentation of the nation) (Italy)
--------------------------------------
CONSORZIO IRIS BENI CULTURALI Rome EUR
(filing and recovery of documents and system assistance for the Ministry of cultural (Italy)
properties and environment)
--------------------------------------
CONSORZIO ISIB (in liquidation) Rome EUR
(harmonization of the infrastructural system of the Central Institute which manages the (Italy)
unique catalogue of the Italian libraries)
--------------------------------------
CONSORZIO NAUTILUS Rome EUR
(professional training) (Italy)
--------------------------------------
CONSORZIO SEGISIEL (in liquidation) Rende EUR
(realization of operating systems in the field of justice for the Telcal consortium) (Cosenza, Italy)
--------------------------------------
CONSORZIO SER (in liquidation) Catanzaro EUR
(realization of the information plan Calabria for the Telcal consortium) (Italy)
--------------------------------------
CONSORZIO SESIT Rome EUR
(realization of the integrated information system for the Ministry of transport and (Italy)
navigation)
--------------------------------------
CONSORZIO SOFTIN (in liquidation) Naples EUR
(research and development in the field of industrial software and consulting) (Italy)
--------------------------------------
CONSORZIO TURISTEL Rome EUR
(information systems for tourism) (Italy)
--------------------------------------
Name %
(type of business) Share capital ownership
------------------------------------------------------------------------------------------------------------------------------------
TIN WEB S.p.A. (in liquidation) 10,000 100.00
(consulting for the creation of Internet sites)
------------------------------------------------
TMI HUNGARY TRADING AND SERVICES Ltd (in liquidation) 3,000,000 100.00
(telecommunications services)
------------------------------------------------
TRAINET S.p.A. (in liquidation) 674,445.70 100.00
(development, operation and sales of lines teaching systems)
------------------------------------------------
WAVENET S.r.l. 51,600 84.37
(thematic services)
------------------------------------------------
AFFILIATED COMPANIES
CITEL - Corporacion Interamericana de Telecomunicaciones S.A. 2,073,729,933 25.00
(holding company)
------------------------------------------------
CLIPPER S.p.A. (in liquidation) 100,000 50.00
(marketing and communication consulting)
------------------------------------------------
CROMA S.r.l. (in liquidation) 41,317 50.00
(hardware maintenance)
------------------------------------------------
DATATRADER S.A. (in liquidation) 266,980 50.00
(creation and sale of data base)
------------------------------------------------
E-UTILE S.p.A. 482,000 51.00
(ICT Solutions and services for companies in the field of public utilities)
------------------------------------------------
INDIRECT S.P.R.L. (in liquidation) 6,000,000 19.17
(sale of services) 7.83
------------------------------------------------
MEDITERRANEAN BROAD BAND ACCESS S.A. 17,580,000 40.00
(telecommunications services)
------------------------------------------------
NETEX S.r.l. (in liquidation) 10,000 50.00
(activities relating to the contract regarding the licence of the software of
Netex Ltd.)
------------------------------------------------
TDL BELGIUM S.A. 750,087,200 49.60
(publishing and sale of directories)
------------------------------------------------
UBA - NET S.A. 12,000 50.00
(teledidactic services)
------------------------------------------------
VOICEMAIL INTERNATIONAL INC. (in liquidation) 48,580 37.07
(vocal message services)
------------------------------------------------
CONSORTIUM SUBSIDIARIES
CONSORZIO ABECA (in liquidation) 103,291.38 33.33
(information systems for the Ministry of cultural properties and environment) 33.33
------------------------------------------------
CONSORZIO CONNET FORMAZIONE 51,645.69 60.00
(Professional training for the Ministry of work and social security)
------------------------------------------------
CONSORZIO ENERGIA GRUPPO TELECOM ITALIA 10,000 50.00
(electrical feeding of the fixed and mobile lines of the associated companies) 50.00
------------------------------------------------
CONSORZIO GEODOC (in liquidation) 103,291.38 90.00
(realization of an information system for the geological documentation of the nation)
------------------------------------------------
CONSORZIO IRIS BENI CULTURALI 171,600 90.91
(filing and recovery of documents and system assistance for the Ministry of cultural 9.09
properties and environment)
------------------------------------------------
CONSORZIO ISIB (in liquidation) 51,645.69 70.00
(harmonization of the infrastructural system of the Central Institute which manages 30.00
the unique catalogue of the Italian libraries)
------------------------------------------------
CONSORZIO NAUTILUS 30,000 31.00
(professional training) 20.00
------------------------------------------------
CONSORZIO SEGISIEL (in liquidation) 103,291.38 85.00
(realization of operating systems in the field of justice for the Telcal consortium) 15.00
------------------------------------------------
CONSORZIO SER (in liquidation) 103,291.38 46.00
(realization of the information plan Calabria for the Telcal consortium) 5.00
------------------------------------------------
CONSORZIO SESIT 51,645.69 70.00
(realization of the integrated information system for the Ministry of transport and
navigation)
------------------------------------------------
CONSORZIO SOFTIN (in liquidation) 877,976.73 100.00
(research and development in the field of industrial software and consulting)
------------------------------------------------
CONSORZIO TURISTEL 77,460 33.33
(information systems for tourism) 33.33
------------------------------------------------
%
Name of voting
(type of business) rights Held by
------------------------------------------------------------------------------------------------------------------------------------
TIN WEB S.p.A. (in liquidation) SEAT PAGINE GIALLE, Ltd
(consulting for the creation of Internet sites)
------------------------------------------------
TMI HUNGARY TRADING AND SERVICES Ltd (in liquidation) TMI TELEMEDIA INTERN, Ltd
(telecommunications services)
------------------------------------------------
TRAINET S.p.A. (in liquidation) TELECOM ITALIA
(development, operation and sales of lines teaching systems)
------------------------------------------------
WAVENET S.r.l. NESTESI
(thematic services)
------------------------------------------------
AFFILIATED COMPANIES
CITEL - Corporacion Interamericana de Telecomunicaciones S.A. TELECOM ITALIA INTERNATIONAL
(holding company)
------------------------------------------------
CLIPPER S.p.A. (in liquidation) SCS COMUNICAZIONE INTEGR. (in liq.)
(marketing and communication consulting)
------------------------------------------------
CROMA S.r.l. (in liquidation) WEBRED
(hardware maintenance)
------------------------------------------------
DATATRADER S.A. (in liquidation) CONSODATA S.A.
(creation and sale of data base)
------------------------------------------------
E-UTILE S.p.A. SIEMENS INFORMATICA
(ICT Solutions and services for companies in the field of public utilities)
------------------------------------------------
INDIRECT S.P.R.L. (in liquidation) TDL INVESTMENTS
(sale of services) TDL INFORMEDIA Ltd
------------------------------------------------
MEDITERRANEAN BROAD BAND ACCESS S.A. TELECOM ITALIA INTERNATIONAL
(telecommunications services)
------------------------------------------------
NETEX S.r.l. (in liquidation) MATRIX
(activities relating to the contract regarding the licence of the software of
Netex Ltd.)
------------------------------------------------
TDL BELGIUM S.A. TDL INVESTMENTS
(publishing and sale of directories)
------------------------------------------------
UBA - NET S.A. TRAINET (in liquidation)
(teledidactic services)
------------------------------------------------
VOICEMAIL INTERNATIONAL INC. (in liquidation) TELECOM ITALIA
(vocal message services)
------------------------------------------------
CONSORTIUM SUBSIDIARIES
CONSORZIO ABECA (in liquidation) FINSIEL
(information systems for the Ministry of cultural properties and environment) INTERSIEL
------------------------------------------------
CONSORZIO CONNET FORMAZIONE TELECOM ITALIA LEARNING SERVICES
(Professional training for the Ministry of work and social security)
------------------------------------------------
CONSORZIO ENERGIA GRUPPO TELECOM ITALIA TELECOM ITALIA
(electrical feeding of the fixed and mobile lines of the associated companies) TELECOM ITALIA MOBILE
------------------------------------------------
CONSORZIO GEODOC (in liquidation) FINSIEL
(realization of an information system for the geological documentation of the nation)
------------------------------------------------
CONSORZIO IRIS BENI CULTURALI FINSIEL
(filing and recovery of documents and system assistance for the Ministry of cultural IT TELECOM
properties and environment)
------------------------------------------------
CONSORZIO ISIB (in liquidation) FINSIEL
(harmonization of the infrastructural system of the Central Institute which manages INTERSIEL
the unique catalogue of the Italian libraries)
------------------------------------------------
CONSORZIO NAUTILUS TELECOM ITALIA LEARNING SERVICES
(professional training) MEDITERRANEAN NAUTILIS Ltd
------------------------------------------------
CONSORZIO SEGISIEL (in liquidation) FINSIEL
(realization of operating systems in the field of justice for the Telcal consortium) INTERSIEL
------------------------------------------------
CONSORZIO SER (in liquidation) FINSIEL
(realization of the information plan Calabria for the Telcal consortium) INTERSIEL
------------------------------------------------
CONSORZIO SESIT FINSIEL
(realization of the integrated information system for the Ministry of transport and
navigation)
------------------------------------------------
CONSORZIO SOFTIN (in liquidation) FINSIEL
(research and development in the field of industrial software and consulting)
------------------------------------------------
CONSORZIO TURISTEL IT TELECOM
(information systems for tourism) FINSIEL
------------------------------------------------
225 | Consolidated Financial Statements
Name
(type of business) Head office
------------------------------------------------------------------------------------------------------------------------------------
CONSORTIUM AFFILIATES
CONSORZIO ACCAM Rome EUR
(automation of the communication centers of the agencies and operating units of the (Italy)
military air force)
--------------------------------------
CONSORZIO C.O.M.P.A. (in liquidation) Bologna EUR
(study and monitoring of the problems of the Padano-Adriatico basin and professional (Italy)
training)
--------------------------------------
CONSORZIO CEW Perugia EUR
(electronic publishing) (Italy)
--------------------------------------
CONSORZIO CSIA Rome EUR
(information systems for the State agency for the agricultural market) (Italy)
--------------------------------------
CONSORZIO DREAM FACTORY Rome EUR
(promotion and development of new economy in the weak areas of the Nation) (Italy)
--------------------------------------
CONSORZIO ITALTEL TELESIS (in liquidation) Milan EUR
(integrated telematic systems) (Italy)
--------------------------------------
CONSORZIO LABORATORIO DELLA CONOSCENZA Naples EUR
(realization of a research project for innovative remote professional training and (Italy)
platforms in Naples)
--------------------------------------
CONSORZIO LA CARTA DI VENEZIA (in liquidation) Venice EUR
(Integrated services for the metropolitan area of Venice) (Italy)
--------------------------------------
CONSORZIO OMNIA (in liquidation) Perugia EUR
(hardware maintenance) (Italy)
--------------------------------------
CONSORZIO PAOLA (in liquidation) Udine EUR
(applicated research for the development of information systems for clinics and
medical structures) (Italy)
--------------------------------------
CONSORZIO REISSFORM Rome EUR
(services and consulting regarding professional training and management) (Italy)
--------------------------------------
CONSORZIO SCUOLA SUPERIORE ALTA FORMAZIONE UNIVERSITA FEDERICO II Naples EUR
(professional training) (Italy)
--------------------------------------
CONSORZIO SIMT Rome EUR
(information systems for the General Management of the civil traffic and transport
control authority) (Italy)
--------------------------------------
CONSORZIO STOAMED Ercolano EUR
(projects and management of technologically advanced services regarding professional (Naples, Italy)
training)
--------------------------------------
CONSORZIO TELCAL Catanzaro EUR
(planning and development of the organic project "Plano Telematico Calabria") (Italy)
--------------------------------------
CONSORZIO TELEMED (in liquidation) Rome EUR
(telematic activities for social and sanitary assistance) (Italy)
Name %
(type of business) Share capital ownership
------------------------------------------------------------------------------------------------------------------------------------
CONSORTIUM AFFILIATES
CONSORZIO ACCAM 6,120 33.33
(automation of the communication centers of the agencies and operating units of the
military air force)
--------------------------------------------
CONSORZIO C.O.M.P.A. (in liquidation) 180,759.91 20.00
(study and monitoring of the problems of the Padano-Adriatico basin and professional
training)
--------------------------------------------
CONSORZIO CEW 15,400 40.00
(electronic publishing)
--------------------------------------------
CONSORZIO CSIA 206,582.76 44.00
(information systems for the State agency for the agricultural market)
--------------------------------------------
CONSORZIO DREAM FACTORY 20,000 20.00
(promotion and development of new economy in the weak areas of the Nation)
--------------------------------------------
CONSORZIO ITALTEL TELESIS (in liquidation) 516,456 100.00
(integrated telematic systems)
--------------------------------------------
CONSORZIO LABORATORIO DELLA CONOSCENZA 51,646 25.00
(realization of a research project for innovative remote professional training and 25.00
platforms in Naples)
--------------------------------------------
CONSORZIO LA CARTA DI VENEZIA (in liquidation) 10,500 50.00
(Integrated services for the metropolitan area of Venice)
--------------------------------------------
CONSORZIO OMNIA (in liquidation) 2,582.28 50.00
(hardware maintenance)
--------------------------------------------
CONSORZIO PAOLA (in liquidation) 8,143.88 50.00
(applicated research for the development of information systems for clinics and
medical structures)
--------------------------------------------
CONSORZIO REISSFORM 51,000 50.00
(services and consulting regarding professional training and management)
--------------------------------------------
CONSORZIO SCUOLA SUPERIORE ALTA FORMAZIONE UNIVERSITA FEDERICO II 127,500 20.00
(professional training)
--------------------------------------------
CONSORZIO SIMT 51,645.69 45.00
(information systems for the General Management of the civil traffic and transport
control authority)
--------------------------------------------
CONSORZIO STOAMED 10,000 30.00
(projects and management of technologically advanced services regarding professional
training)
--------------------------------------------
CONSORZIO TELCAL 877,975 24.00
(planning and development of the organic project "Plano Telematico Calabria") 24.00
--------------------------------------------
CONSORZIO TELEMED (in liquidation) 103,291 33.33
(telematic activities for social and sanitary assistance)
%
Name of voting
(type of business) rights Held by
------------------------------------------------------------------------------------------------------------------------------------
CONSORTIUM AFFILIATES
CONSORZIO ACCAM EIS
(automation of the communication centers of the agencies and operating units of the
military air force)
--------------------------------------------
CONSORZIO C.O.M.P.A. (in liquidation) FINSIEL
(study and monitoring of the problems of the Padano-Adriatico basin and professional
training)
--------------------------------------------
CONSORZIO CEW WEBRED
(electronic publishing)
--------------------------------------------
CONSORZIO CSIA FINSIEL
(information systems for the State agency for the agricultural market)
--------------------------------------------
CONSORZIO DREAM FACTORY TELECOM ITALIA LAB S.p.A.
(promotion and development of new economy in the weak areas of the Nation)
--------------------------------------------
CONSORZIO ITALTEL TELESIS (in liquidation) ITALTEL S.p.A.
(integrated telematic systems)
--------------------------------------------
CONSORZIO LABORATORIO DELLA CONOSCENZA TELECOM ITALIA LAB S.p.A.
(realization of a research project for innovative remote professional training and TELECOM ITALIA LEARNING SERVICES
platforms in Naples)
--------------------------------------------
CONSORZIO LA CARTA DI VENEZIA (in liquidation) VENIS
(Integrated services for the metropolitan area of Venice)
--------------------------------------------
CONSORZIO OMNIA (in liquidation) WEBRED
(hardware maintenance)
--------------------------------------------
CONSORZIO PAOLA (in liquidation) INSIEL
(applicated research for the development of information systems for clinics and
medical structures)
--------------------------------------------
CONSORZIO REISSFORM TELECOM ITALIA LEARNING SERVICES
(services and consulting regarding professional training and management)
--------------------------------------------
CONSORZIO SCUOLA SUPERIORE ALTA FORMAZIONE UNIVERSITA FEDERICO II TELECOM ITALIA MOBILE
(professional training)
--------------------------------------------
CONSORZIO SIMT FINSIEL
(information systems for the General Management of the civil traffic and transport
control authority)
--------------------------------------------
CONSORZIO STOAMED TELECOM ITALIA LEARNING SERVICES
(projects and management of technologically advanced services regarding professional
training)
--------------------------------------------
CONSORZIO TELCAL TELECOM ITALIA
(planning and development of the organic project "Plano Telematico Calabria") INTERSIEL
--------------------------------------------
CONSORZIO TELEMED (in liquidation) TELECOM ITALIA
(telematic activities for social and sanitary assistance)
---------
* The percentage of ownership includes Ordinary Shares/Quotas held by members
of the Board of Directors/Managers, as requested by local laws in order to
undertake the charge of Director/Manager, or held by Fiduciaries.
226 | Consolidated Financial Statements
Independent Auditors' Report and
Board of Statutory Auditors' Report
227 | Report of the Independent Auditors (Olivetti S.p.A.)
[THIS PAGE INTENTIONALLY LEFT BLANK]
228 | Report of the Independent Auditors (Olivetti S.p.A.)
[LOGO] ERNST & YOUNG | Reconta Ernst & Young S.p.A. | Tel. (+39) 011 5161611
Corso Vittorio Emanuele II, 83 Fax (+39) 011 5612554
10128 Torino www.ey.com
AUDITORS' REPORT
pursuant to article 156 of Legislative Decree of February 24, 1998, n. 58
(Translation from the original Italian text)
To the Shareholders
of Olivetti S.p.A.
1. We have audited the financial statements of Olivetti S.p.A. as of and for
the year ended December 31, 2002. These financial statements are the
responsibility of the Olivetti S.p.A.'s management. Our responsibility is
to express an opinion on these financial statements based on our audit.
2. Our audit was made in accordance with auditing standards and procedures
recommended by CONSOB. In accordance with such standards and procedures we
planned and performed our audit to obtain the information necessary in
order to determine whether the financial statements are materially
misstated and if such financial statements, taken as a whole, may be
relied upon. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, as
well as assessing the appropriateness of the accounting principles applied
and the reasonableness of the estimates made by management. We believe
that our audit provides a reasonable basis for our opinion.
For the opinion on the financial statements of the prior year, which are
presented for comparative purposes as required by the law, reference
should be made to our report dated April 16, 2002.
3. In our opinion, the financial statements of Olivetti S.p.A. comply with
the Italian regulations governing financial statements; accordingly, they
clearly present and give a true and fair view of the financial position of
Olivetti S.p.A. as of December 31, 2002, and the results of its operations
for the year then ended.
4. We draw your attention to the following:
a) The company holds investments in subsidiary companies and has
therefore prepared (as required by law) consolidated financial
statements. These consolidated financial statements form an integral
part of the annual financial statements for the purpose of providing
adequate information on the financial position and the results of
operation of the company and the Group. We have audited the
consolidated financial statements which, together with our audit
report thereon, are presented together with these financial
statements.
Reconta Ernst & Young S.p.A.
Sede Legale: 00196 Roma -Via G.D. Romagnosi, 18/A
Capitale Sociale(euro)1.111.000,00 iv.
Iscritta alla S.O. del Registro delle Imprese presso a
C.C.I.A.A. di Roma
Codice fiscale e numero di iscrizione 00434000584
P.I. 00891231003
(vecchio numero R.I. 6697/89 - numero R.E.A. 2509041)
229 | Report of the Independent Auditors (Olivetti S.p.A.)
[logo] ERNST & YOUNG | Reconta Ernst & Young S.p.A.
b) In 2002, the company wrote-down its investment in Telecom Italia
S.p.A., in order to obtain tax benefits provided by the tax
legislation. The purpose and the effects of such accounting
treatment, allowed by the Italian regulations governing financial
statements, are illustrated in the explanatory notes.
c) On April 15, 2003 the board of directors of the company adopted the
plan for the merger of the subsidiary Telecom Italia S.p.A. into
Olivetti S.p.A., which will be submitted for approval to the
extraordinary shareholders' meetings of the respective companies
called for this purpose.
Turin, April 18, 2003
Reconta Ernst & Young S.p.A.
Signed by: Mario Lamprati, Partner
230 | Report of the Independent Auditors (Olivetti S.p.A.)
[LOGO] ERNST & YOUNG | Reconta Ernst & Young S.p.A. | Tel. (+39) 011 5161611
Corso Vittorio Emanuele II, 83 Fax (+39) 011 5612554
10128 Torino www.ey.com
AUDITORS' REPORT
pursuant to article 156 of Legislative Decree of February 24, 1998, n. 58
(Translation from the original Italian text)
To the Shareholders
of Olivetti S.p.A.
1. We have audited the consolidated financial statements of Olivetti S.p.A.
as of and for the year ended December 31, 2002. These financial statements
are the responsibility of the Olivetti S.p.A.'s management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
2. Our audit was made in accordance with auditing standards and procedures
recommended by CONSOB. In accordance with such standards and procedures we
planned and performed our audit to obtain the information necessary in
order to determine whether the consolidated financial statements are
materially misstated and if such financial statements, taken as a whole,
may be relied upon. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, as
well as assessing the appropriateness of the accounting principles applied
and the reasonableness of the estimates made by management. We believe
that our audit provides a reasonable basis for our opinion.
The financial statements of certain subsidiaries and associated companies,
which represent respectively 4% and 7% of consolidated total assets and
consolidated total revenues, have been examined by other auditors, whose
reports have been furnished to us. Our opinion, expressed herein, insofar
as it relates to the data relating to these subsidiaries and associated
companies included in the consolidated financial statements, is based also
on the reports of the other auditors.
For the opinion on the consolidated financial statements of the prior
year, which are presented for comparative purposes as required by the law,
reference should be made to our report dated April 16, 2002.
3. In our opinion, the consolidated financial statements of Olivetti S.p.A.
comply with the Italian regulations governing consolidated financial
statements; accordingly, they clearly present and give a true and fair
view of the consolidated financial position of Olivetti S.p.A. as of
December 31, 2002, and the consolidated results of its operations for the
year then ended.
Reconta Ernst & Young S.p.A.
Sede Legale: 00196 Roma -Via G.D. Romagnosi, 18/A
Capitale Sociale(euro)1.111.000,00 iv.
Iscritta alla S.O. del Registro delle Imprese presso a
C.C.I.A.A. di Roma
Codice fiscale e numero di iscrizione 00434000584
P.I. 00891231003
(vecchio numero R.I. 6697/89 - numero R.E.A. 2509041)
231 | Report of the Independent Auditors (Olivetti S.p.A.)
[logo] ERNST & YOUNG | Reconta Ernst & Young S.p.A.
4. We draw your attention to the following:
a) The explanatory notes describe, in relation to the dispute with INPS
(the "Italian National Insurance Board"), the uncertainty of the
liability for the payments due by the subsidiary Telecom Italia
S.p.A. for the social security contributions (the previous Telecom
Workers Fund) of the personnel of its telephone division.
b) On April 15, 2003 the board of directors of the company adopted the
plan for the merger of the subsidiary Telecom Italia S.p.A. into
Olivetti S.p.A., which will be submitted for approval to the
extraordinary shareholders' meetings of the respective companies
called for this purpose.
Turin, April 18, 2003
Reconta Ernst & Young S.p.A.
Signed by: Mario Lamprati, Partner
232 | Report of the Independent Auditors (Olivetti S.p.A.)
Report of the Board of Statutory Auditors to the Olivetti S.p.A. Shareholders'
Meeting pursuant to art. 153 Legislative Decree 58/98 and art. 2429 of the
Italian Civil Code.
(Translation from the original version in Italian)
To the Shareholders,
The Board of Statutory Auditors reports on the controls it performs and on the
other duties it is required to perform pursuant to Legislative Decree 58/98 and
art. 2429 of the Italian Civil Code, and also with reference to the relevant
Consob communications.
The Board has controlled compliance with the provisions of law and with the
articles of association.
The Company's statutory financial statements at 31 December 2002 show net
losses of 6,239,962,549 euros (of which 8,051 million euros from the writedown
of Telecom Italia shares purely for tax reasons) and shareholders' equity of
9,031,365,025 euros; the financial statements were consigned together with the
Directors' Report on Operations as prescribed by law.
The Board of Statutory Auditors has verified that the financial statements were
drawn up in compliance with legal requirements through its own auditing work
and through the information provided by the Independent Auditors.
The Olivetti Group consolidated financial statements were also consigned to the
Board of Statutory Auditors as prescribed by law and show a loss for the
portion attributable to the Group of 773 million euros and Group shareholders'
equity of 11,640 million euros (20,624 million euros including minority
interests).
1. The Directors provided us with quarterly reports on activities and on the
main business, financial and equity operations, as well as on transactions
executed by the Company with related parties, other Group entities and/or
transactions that could represent a potential conflict of interest; these are
described briefly below and - for the most part - are illustrated in greater
detail in the Directors' Report on Operations:
o together with Finsiel, in February 2002 the Company accepted the public
tender offer launched on Lottomatica by Tyche S.p.A. of the De Agostini
Group, for an overall total of 34% of the company's capital, raising
proceeds of 391 million euros;
o with regard to financial operations, Olivetti executed the following main
transactions:
- placement of a multi-tranche bond for 1.5 billion euros;
- redemption two years early of the "Olivetti Finance N.V. 1999-2004"
bond for the outstanding amount of 5.15 billion euros;
- re-opening of three bond loans for an aggregate amount of 1,550
million euros on existing "Olivetti Finance N.V." bonds;
o in 2002, the Pirelli and Olivetti-Telecom Italia groups drew up a frame
agreement, named Project Tiglio, for the integration and enhancement of
their respective real-estate assets and property services provider
entities.
Under this operation, Olivetti sold a real-estate equity investment for
approximately 225 million euros, realising a gain of approximately 72 million
euros. Approximately 45 million euros of the proceeds from the sale were
re-invested to purchase an equity investment in Tiglio 1;
o in the period 1 July - 30 September the Olivetti Finance N.V. company (a
wholly owned subsidiary of Olivetti S.p.A.) granted the following loans to
the Softe S.p.A. company (a wholly owned subsidiary of the Telecom Italia
Group):
o 161,566,794.04 euros from 18 July 2002 to 26 July 2002 at a rate of
3.68371%.
233 | Report of the Board of Statutory Auditors
o 150,996,577.41 euros from 26 July 2002 to 30 July 2002 at a rate of
3.5285%.
In the same period, Olivetti International S.A. (a wholly owned subsidiary of
Olivetti S.p.A.) granted the following loan to Softe S.p.A.:
o 151,214,100 euros from 30 July to 1 August at a rate of 3.5285%;
o in the period 1 October - 31 December, in order to optimise synergies
among their professional resources working in the Latin American area,
Olivetti do Brasil S.A. (a Tecnost Group company wholly owned by Olivetti
Tecnost S.p.A.), Telecom Italia America Latina S.A., Tim Brasil S.A. and
Pirelli S.A. (all subject to Brazilian law and active in Brazil) drew up a
Reciprocal Services Provision agreement (Contrato de Prestacao de Servicio
Reciproco) dated 30 October 2002, which provides for any service relating
to administrative activities of any kind, including assistance on fiscal
matters, to be shared, depending on the availability and needs of each
company.
Deloitte Touche Tohmatsu of Sao Paulo, Brazil attested the congruity of the
remuneration determined for such services.
In the opinion of the Board of Statutory Auditors, the operations performed
comply with the law and with the articles of association, are in the interests
of the Company, are not manifestly imprudent or speculative, do not conflict
with resolutions adopted by the Shareholders and do not compromise the
integrity of the Company's net assets.
2. The Board of Statutory Auditors has not encountered any atypical and/or
unusual operations by Olivetti S.p.A. with third parties.
The ordinary operations between Olivetti S.p.A. and related parties and Group
entities are conducted at normal market conditions, are in the interests of the
Company and consist mainly of the provision of services, centralised Treasury
management and coordination of the operations of the subsidiaries, in line with
the Company's role as a holding.
Specifically:
o financial charges of 607 million euros posted to income refer to financial
payables due to Group financial companies;
o income from equity investments for dividends from subsidiary and
associated companies totalling 1,263 million euros (of which 1,250 million
euros from Telecom Italia) plus 710 million euros for tax credits;
o other operations for smaller amounts as described in the Directors' Report
on Operations.
3. The Board of Statutory Auditors believes that the information provided in
the Directors' Report on Operations with regard to operations with Group
entities and with related parties is adequate, and presented in sufficient
detail to illustrate the interest of the Company in such operations, in
consideration of the nature and complexity of the Group.
4. The reports issued on 18 April 2003 by the Independent Auditors Reconta
Ernst & Young S.p.A. pursuant to art. 156 of Legislative Decree 58/98 certify
that the statutory financial statements and the consolidated financial
statements give a true and fair view of the operations and financial and equity
situation of the Parent Company and of the Group.
The report of the Independent Auditors on the statutory financial statements
draws your attention to three points:
234 | Report of the Board of Statutory Auditors
- first, that the Company draws up consolidated financial statements to
supplement the statutory financial statements in order to provide adequate
information on the financial and equity position and operations of the
Parent Company and the Group;
- second, that in financial year 2002 the Parent Company adjusted the book
value of the equity investment in Telecom Italia S.p.A. in order to obtain
the fiscal benefits allowed under tax laws. The nature and the effects on
the financial statements of this adjustment, which is allowed under
regulations governing financial reporting, are illustrated in the
explanatory notes;
- third, that on 15 April 2003 the Company Board of Directors adopted a plan
for the merger of the subsidiary Telecom Italia S.p.A. into the
controlling company Olivetti S.p.A., which will be presented for the
approval of the respective Extraordinary Shareholders' Meetings convened
specifically for this purpose.
The report of the Independent Auditors on the consolidated financial statements
draws your attention to two points:
- first, to the uncertainty over the liability for the payments due by the
subsidiary Telecom Italia S.p.A. - in connection with the dispute with the
INPS (the Italian National Insurance Board) - for the social security
contributions of the personnel of its telephone division, as illustrated
in the explanatory note;
- second, a repetition of the information provided in the Report to the
statutory financial statements concerning the plans for Telecom Italia
S.p.A. to be merged with Olivetti S.p.A.
5. No charges were presented to the Board of Statutory Auditors pursuant to
art. 2408 of the Italian Civil Code.
6. No petitions, objections or complaints were presented to the Board of
Statutory Auditors.
7. During the year, in addition to the audit of the financial statements
Olivetti S.p.A. commissioned the following services from the Independent
Auditors Reconta Ernst & Young S.p.A.:
- Issue of the "Pricing Supplements" of 24 April 2002 Euro 85,000
- Issue of the Offering Circular on the Euro Medium
Term Note ("EMTN") Programme of 14 May 2002 Euro 75,000
- Issue of the "Pricing Supplement" on the EMTN of 7 August 2002 Euro 52,000
- Issue of the Offering Circular on the "Zero Coupon Guaranteed
Exchangeable Bond" of 20 September 2002 Euro 145,000
- Issue of the "Pricing Supplements" on the EMTNs of 3 October 2002 Euro 53,000
- Issue of the "Pricing Supplement" on the EMTNs of 11 November 2002 Euro 54,000
The Company was also billed for out-of-pocket expenses totalling Euro 27,700.
The fees and out-of-pocket expenses were checked by the Board of Statutory
Auditors, and are considered fair.
8. During the year Olivetti S.p.A. did not commission services from entities
with which the Independent Auditors Reconta Ernst & Young S.p.A. have relations
on a continuous basis.
235 | Report of the Board of Statutory Auditors
9. During the year the Board of Statutory Auditors approved the resolutions
adopted by the Board of Directors to co-opt two Directors in the place of
outgoing Directors on 5 September and 7 November respectively (par 1, art. 2386
of the Italian Civil Code).
10. During the period between the Report of the Board of Statutory Auditors
to the 2001 financial statements and this Report, the Board of Statutory
Auditors held 14 meetings.
The Statutory Auditors also attended all of the 9 meetings held by the Board of
Directors during 2002, obtaining information from the directors on activities
and on the main business, financial and equity operations performed by the
Company and its subsidiaries, also in compliance with art. 150 of Legislative
Decree 58/98.
The Statutory Auditors also attended all of the 6 meetings held by the Internal
Control Committee.
11. Within the limits of its competence, the Board of Statutory Auditors
ascertained and controlled compliance with the principles of correct
administration, through direct observation, collection of information from the
heads of function and meetings with the managers of the Independent Auditors
for the purpose of exchanging significant data and information.
It has nothing of note to report in this connection.
12. Within the limits of its competence, the Board of Statutory Auditors also
ascertained and controlled the adequacy of the Company's organisational
structure, and found nothing of note to report.
13. The Board of Statutory Auditors controlled the adequacy of the internal
control system of the Company, whose structure is that of a holding company,
verifying the activities and control procedures thereof, confirming their
adequacy and obtaining specific documentation at regular intervals.
During the year, the Internal Control Committee took steps to improve the
structure and functionality of the Company's Internal Control system. In 2002
the Company joined a consortium with the Telecom Italia Group (In.Tel.Audit)
and designated the consortium as the Head of Internal Control in the person of
a Director.
14. The administrative and accounting system is adequate and reliable for the
purposes of correct disclosure of operations.
15. Olivetti S.p.A. provided the subsidiaries with the instructions necessary
to ensure fulfilment of disclosure requirements pursuant to par 2, art. 114,
Legislative Decree 58/98. These instructions are adequate to ensure compliance
with legal requirements.
16. During the meetings held with the Independent Auditors, pursuant to par 2,
art. 150, Legislative Decree 58/98, no comments or observations were made to
the Board of Statutory Auditors as regards matters for which the Independent
Auditors are responsible. The Board of Statutory Auditors therefore has nothing
of note to report.
17. The Company strongly supports the letter and spirit of the recommendations
of the Voluntary Code of Conduct for listed companies, on which increasingly it
bases its own corporate governance model. In particular:
236 | Report of the Board of Statutory Auditors
o the Company By-Laws comply with Legislative Decree 58/98;
o under the By-Laws, the Board of Directors, which consists of 16 members,
is invested with full ordinary and extraordinary administrative powers,
since all matters that are not by law or under the By-Laws expressly
reserved for the Shareholders' Meeting fall within its competence;
o the Company declares that the Deputy Chairman and Chief Executive Officer
and the Chief Executive Officer are considered executives since they have
been given management/operational powers; six Directors may be qualified
as independent;
o in the previous year, the Board of Directors formed an Internal Control
Committee and a Remuneration Committee with the characteristics specified
by the Code of Conduct, whose members are all independent Directors;
o the Board of Directors approved the "Principles of conduct" to be observed
in the execution of transactions with related parties (according to the
definition provided by the International Financial Reporting Standard -
IFRS 24) including operations among Group entities;
It also adopted a specific procedure for compliance with the requirements of
par 1, art. 150, Legislative Decree 58/98 in order - as declared by the Company
- to ensure full procedural and substantial transparency with regard to
activities, principal operations, atypical or unusual operations as well as
operations with related parties, and to make the entire Board responsible for
the resolutions it adopts.
The procedure has been amended this year to introduce subsequent CONSOB updates
in this area;
o the Board of Directors adopted a "Code of Conduct on insider dealing",
which regulates disclosure to the Company and to the market of
transactions executed on Group listed securities by so-called "relevant
persons"; the code took effect on 1 December 2002;
o in performing the duties envisaged by the By-Laws, the Chairman of the
Board of Directors moderates the meetings of the Board of Directors and
chairs and moderates the Shareholders' Meetings, ensuring correct
application of the provisions of law and the By-Laws;
o a specific function guarantees relations with the Shareholders and with
institutional investors.
18. The controls performed by the Board of Statutory Auditors have not found
any omissions, censurable facts or irregularities to be reported to the
Shareholders and other Controlling Bodies.
Your attention is drawn to the fact that the book value of the Telecom Italia
S.p.A. shares in the statutory accounts was written down exclusively for tax
purposes.
On 15 April 2003 the Olivetti S.p.A. and Telecom Italia S.p.A. Boards of
Directors approved plans for the merger of Telecom Italia into Olivetti, which
will be submitted to the respective Extraordinary Shareholders' Meetings.
The Board of Statutory Auditors requested and obtained the Reports of the
Boards of Statutory Auditors on the 2002 Annual Reports of the companies
controlled directly by Olivetti S.p.A. No critical matters have been found in
these reports.
19. The Olivetti S.p.A. Board of Statutory Auditors invites you to approve the
Company statutory financial statements at 31 December 2002 as drawn up by the
Board of Directors and, with reference to par 2, art. 153, Legislative Decree
58/98, has no objections to the proposal for the coverage of the loss.
237 | Report of the Board of Statutory Auditors
Shareholders,
our mandate expires at the Meeting to which you have been convened and we
therefore invite you to renew the Board of Statutory Auditors.
Ivrea, 7 May 2003
The Board of Statutory Auditors
The Chairman
Angelo Fornasari
(signed in the original version)
238 | Report of the Board of Statutory Auditors
ANNEX V
Balance Sheet of Telecom Italia S.p.A at 31 December,
2002 pursuant to Article 2051-ter of the Civil Code
[TELECOM ITALIA LOGO]
---------
ANNUAL REPORT 2002
[] CONTENTS
-----------------------------------------------------------------------------------------------------------------------------------
Summary data Corporate boards 2
and general Selected economic and financial data - Telecom Italia Group 3
information Key data - Telecom Italia Business Units/Operating Activities 4
Operating highlights - Telecom Italia Group 6
Shareholder information 7
Macro-organization chart of Telecom Italia Group at December 31, 2002 10
International presence 11
-----------------------------------------------------------------------------------------------------------------------------------
Report on Economic and financial performance - Telecom Italia Group 12
operations Economic and financial performance - Telecom Italia S.p.A. 28
Subsequent events 35
Business outlook 37
Related party transactions 37
Economic and financial performance - Telecom Italia Business Units/Operating Activities
Domestic Wireline 39
Mobile 47
South America 55
Internet and Media 60
Information Technology Market 65
Information Technology Group 70
Other activities 75
Sustainability section
Introduction 81
Charters and Codes 82
Human resources 83
Shareholders: Corporate Governance 87
Customers 97
Suppliers 98
Competitors and regulatory framework 99
The State and other institutions 102
Future generations 102
The Community 105
Research & Development 108
Other information
Equity investments held by Directors, Statutory Auditors and General Manager 109
Litigation 110
Interbusiness services 114
-----------------------------------------------------------------------------------------------------------------------------------
Telecom Italia Consolidated balance sheets 116
Group - Consolidated statements of income 119
Consolidated Notes to consolidated financial statements 121
financial Independent Auditors' report
statements
-----------------------------------------------------------------------------------------------------------------------------------
Telecom Italia Balance sheets 171
S.p.A. - Statements of income 174
Financial Notes to financial statements 175
statements Independent Auditors' report
1
[] CORPORATE BOARDS
Board of Directors1 Chairman Marco Tronchetti Provera (E)
Deputy Chairman Gilberto Benetton
Managing Directors Carlo Orazio Buora (E)
Riccardo Ruggiero (E) *
Directors Umberto Colombo (I)
Francesco Denozza (I)
Luigi Fausti (I)
Guido Ferrarini (I)
Natalino Irti (I)
Gianni Mion
Pietro Modiano o
Massimo Moratti
Carlo Alessandro Puri Negri
Pier Francesco Saviotti
Roberto Ulissi (I)
Secretary to the Board Francesco Chiappetta
Directors' Compensation Chairman Luigi Fausti
Committee
Members Umberto Colombo
Pier Francesco Saviotti
Audit and Corporate Chairman Roberto Ulissi
Governance Committee
Members Guido Ferrarini
Natalino Irti
Board of Statutory Chairman Paolo Germani
Auditors2 Acting auditors Mario Boidi
Paolo Golia
Fabrizio Quarta
Gianfranco Zanda
Alternate auditors Enrico Bignami
Leonida Liuni
Common representative of
savings shareholders 3 Carlo Pasteris
Independent auditors 4 Reconta Ernst & Young S.p.A.
-----------------------------------------------------------------------------------------------------------------------------------
4 Appointed by the Shareholders' Meeting on June 12, 2001.
(E) Executive director.
* Appointed by the Shareholders' Meeting on December 12, 2002;
(I) Independent director. he holds the position of general manager since May 5, 2002.
1 Appointed by the Shareholders' Meeting on November 7, 2001.
o Appointed by the Shareholders' Meeting on December 12, 2002.
2 Appointed by the Shareholders' Meeting on July 3, 2000.
3 Appointed by the special Savings Shareholders' Meeting on October 31, 2001.
2
[] SELECTED ECONOMIC AND FINANCIAL DATA - TELECOM ITALIA GROUP
Changes in the scope of consolidation in 2002 refer to the exclusion of the 9
Telecom group, the Telespazio group and the companies Sogei S.p.A., Consiel
S.p.A., DataHouse S.p.A., Emsa S.p.A., Immsi S.p.A., and Telimm S.p.A.;
additions include the Webegg group, Blu S.p.A. and other minor companies. These
changes, moreover, did not have a significant impact on the economic results or
the financial conditions for the year ended December 31, 2002.
Revenues 2002 2001 2000 (*)
(euro/millions) ---- ---- ----
[GRAPHIC OMITTED] Results of operations (in millions of euro)
[2000 - 27,169 Sales and services revenues 30,400 30,818 27,169
2001 - 30,818 Gross operating profit 13,964 13,619 12,217
+13.4% Operating income 7,381 6,674 6,440
2002 - 30,400 Income (loss) before income taxes (419) (733) 4,802
-1.4%] Income (loss) before minority interest 297 (1,658) 2,892
Net income (loss) (322) (2,068) 2,028
Free cash flow (1) 8,610 5,990 4,453
Investments: 6,919 11,257 19,484
- Industrial 4,842 6,990 7,375
- Goodwill 369 1,174 9,109
- Financial 1,708 3,093 3,000
Operating income
(euro/millions)
Financial condition (in millions of euro)
[GRAPHIC OMITTED]
Total assets 52,786 62,670 61,985
[2000 - 6,440 Net invested capital 30,941 41,250 41,923
2001 - 6,674 Shareholders' equity 12,823 19,308 24,690
+3.6% - Parent company's interest 9,049 13,522 18,821
2002 - 7,381 - Minority interest 3,774 5,786 5,869
+10.6%] Net debt 18,118 21,942 17,233
Profit and financial indexes
Gross operating profit/Revenues 45.9% 44.2% 45.0%
Operating income/Revenues (ROS) 24.3% 21.7% 23.7%
Return on investments (ROI) 20.4% 16,0% 18.4%
Free cash flow/Revenues 28.3% 19.4% 16.4%
Revenues/Employees (Debt ratio) Net debt/ Net invested capital 58.6% 53.2% 41.1%
(euro/thousands)
Employees
[GRAPHIC OMITTED]
Employees (number in Group at year-end) 101,713 109,956 107,171
[2000 - 231.4 Employees (average number in Group) 101,789 107,491 117,424
2001 - 286.7 Revenues/Employees (Group average), euro/thousands 298.7 286.7 231.4
+23.9%
2002 - 298.7]
(*) Restated to give effect to the consolidation of the Nortel Inversora group
(Telecom Argentina) using the equity method instead of the proportional
method.
(1) Calculated as follows: Operating income + Depreciation and amortization -
Industrial investments - Change in operating working capital.
3
[] KEY DATA - TELECOM ITALIA BUSINESS UNITS /OPERATING ACTIVITIES
In May 2002, the International Operations (IOP) "Operating Activity" was
disbanded. Although maintaining the same corporate control structure, the
relative companies and business segments of Telecom Italia organizationally
became part of the following: the Domestic Wireline BU (Intelcom San Marino and
Golden Lines), the Foreign Holdings Central Function (9 Telecom group, BB Ned
group, Auna group, Telekom Austria group, Telekom Srbija, Etec S.A. and what
remains of the ex IOP) and the companies in the South American area report to
Latin America Operations (LAO).
Telecom Italia Group thus operated with the following Business Unit/Operating
Activities structure:
---------------------------------------------------------------------------------------------------
Domestic Mobile South Internet IT Market IT Group Sub-total Other Consolidated
Wireline America and Media activities total
and
(in millions of euro) eliminations
(1) (1) (2) (3) (3) (4)
------------------------------------------------------------------------------------------------------------------------------------
Sales and services 2002 17,022 10,867 1,409 1,991 912 1,215 33,416 (3,016) 30,400
revenues 2001 17,168 10,250 1,534 1,957 1,198 1,198 33,305 (2,487) 30,818
Gross operating profit 2002 7,965 5,039 450 593 104 140 14,291 (327) 13,964
2001 7,750 4,760 527 444 166 188 13,835 (216) 13,619
Operating income 2002 4,700 3,358 146 232 61 (21) 8,476 (1,095) 7,381
2001 4,361 3,136 187 31 123 22 7,860 (1,186) 6,674
Investments:
- Industrial 2002 2,462 1,715 216 81 30 158 4,662 180 4,842
2001 2,801 3,151 406 175 30 162 6,725 265 6,990
- Goodwill 2002 196 40 28 264 105 369
2001 31 203 1 6 241 933 1,174
Number of employees at 2002 53,682 18,702 5,461 7,715 4,493 7,327 97,380 4,333 101,713
December 31 2001 57,895 16,721 5,746 9,264 6,441 6,844 102,911 7,045 109,956
------------------------------------------------------------------------------------------------------------------------------------
(1) For purposes of a more meaningful comparison, the data relating to 2001
has been restated.
(2) The data relates to the Entel Chile group, the Entel Bolivia group, the
companies Telecom Italia America Latina and the South American business
segment of Telecom Italia.
(3) In the early months of 2002, the IT Services Business Unit was split into
two distinct units: Information Technology Market and Information
Technology Group; beginning January 1, 2002, Saritel S.p.A. has been
consolidated in the Information Technology Group BU instead of the
Domestic Wireline BU.
(4) The data presented above includes the Foreign Holdings Central Function
and the Telespazio business unit, sold in the last quarter of 2002 and
consolidated only with respect to the statement of income for the first
nine months of 2002.
4
Major economic and operating indicators in 2002 by Business Unit / Operating
Activity
Sales and
services Gross operating Operating Industrial
revenue margin income investments Employees(*)
--------- --------------- --------- ----------- ------------
Domestic 51.0% 55.8% 55.5% 52.9% 52.8%
Wireline
Mobile 32.5% 35.3% 39.6% 36.8% 18.4%
South America (1) 4.2% 3.1% 1.7% 4.6% 5.4%
Internet and 6.0% 4.1% 2.7% 1.7% 7.6%
Media
IT Market 2.7% 0.7% 0.7% 0.6% 4.4%
IT Group 3.6% 1.0% (0.2)% 3.4% 7.2%
(*) 4.2% of employees work in Other Activities of the Telecom Italia Group.
(1) The data relates to the Entel Chile group, the Entel Bolivia group, the
companies Telecom Italia America Latina and the South American business
segment of Telecom Italia.
5
[] OPERATING HIGHLIGHTS - TELECOM ITALIA GROUP
2002 2001 2000
---- ---- ----
Voice flat rate plans
(thousands) DOMESTIC WIRELINE
Fixed network connections in Italy (thousands) 27,142 27,353 27,153
[GRPAHIC OMITTED] - of which digital (equivalent ISDN channels) 5,756 5,403 4,584
Voice flat rate plans (thousands) 5,224 4,094 2,200
[12/31/2000 - 2,200 Network infrastructure in Italy
- access network in copper (millions of km - pair) 104.3 104.3 104.0
12/31/2001 - 4,094 - access network and transport in fiber optics
+86.1% (millions of km of fiber optics) 3.6 3.2 3.1
Network infrastructure abroad
12/31/2002 - 5,224 - European backbone (km of fiber optics) 36,600 36,600 36,600
+27.6%]
MOBILE
TIM lines in Italy (at year-end, thousands) 25,302 23,946 21,601
TIM lines in Italy TIM group foreign lines (at year-end, thousands)(1) 13,809 10,923 7,637
(thousands) TIM group lines total (Italy + foreign in thousands)(1) 39,111 34,869 29,238
GSM penetration in Italy (% of population) 99.8 99.7 99.6
[GRAPHIC OMITTED] E-TACS penetration in Italy (% of population) 98.0 98.0 98.0
[12/31/2000 - 21,601 INTERNET AND MEDIA
Directories:
12/31/2001 - 23,946 - published by Seat Pagine Gialle (units) 304 304 304
+10.6% - published by Thomson (TDL Infomedia Ltd.) (units) 173 173 170
Internet:
12/31/2002 - 25,302 Page views Virgilio (millions) 5,267 3,945 2,218
+5.7%] Active users ISP (at year-end, thousands) 2,226 1,804 1,656
(1) The foreign lines at December 31, 2001 and December 31, 2000 have been
rendered comparable to those at December 31, 2002, excluding the lines of
Bouygues Decaux Telecom, Amena (mobile operator controlled by Auna) and the
Mobilkom Austria group. The foreign lines include those of the affiliate Aria -
IS TIM Turchia and the subsidiary Radiomobil.
6
[] SHAREHOLDER INFORMATION
o TELECOM ITALIA S.p.A. SHARES
Share capital euro 4,023,816,860.80
Ordinary shares (par value euro 0.55 each) No. 5,262,908,631
Savings shares (par value euro 0.55 each) No. 2,053,122,025
Market capitalization (based on average December 2002 prices) euro 50,362 million
Percentage of Telecom Italia stock
.. on Mibtel Index (Telecom Italia - ordinary and savings) 10.1% (at 12/31/2002)
.. on DJ eurostoxx TLC Index 1 (Telecom Italia - ordinary) 5.1% (at 12/31/2002)
Percentage of the stocks of companies in the Telecom Italia Group
.. on Mibtel Index (Telecom Italia, TIM, Seat Pagine Gialle - ordinary and savings) 19.9% (at 12/31/2002)
.. on DJ eurostoxx TLC Index (Telecom Italia, TIM - ordinary) 10.0% (at 12/31/2002)
o SHAREHOLDERS
Shareholders of Telecom Italia S.p.A. as of stock
ledger at December 31, 2002
(Ordinary shares)
[GRAPHIC OMITTED]
[Olivetti 54.94%
Italian institutional investors 10.55%
Foreign institutional investors 22.42%
Italian companies 0.65%
Foreign companies 2.81%
Others 8.63%]
---------
1The Index is calculated on a geographical basis that includes all European
countries.
7
[] DISTRIBUTION OF INCOME RESERVES
Mention should made of the fact that:
[X] the TIM Shareholders' Meeting on December 11, 2002 voted to
distribute reserves to the shareholders up to a maximum of euro 1,600
million, equal to euro 0.1865 per each ordinary and savings share.
Payment was made from these reserves starting from December 19, 2002;
the amount paid out amounted to euro 1,597 million, of which euro 711
million was to minority shareholders.
[X] the Telecom Italia Shareholders' Meeting on December 12, 2002 voted
to reclassify reserves by the transfer of euro 2,160 million from
"miscellaneous reserves" to "additional paid-in-capital ", the
transfer of euro 820 million from "additional paid-in-capital" to the
"legal reserve", the transfer of euro 660 million from the "legal
reserve" to "miscellaneous reserves" with the contextual change in
the name to "miscellaneous income reserves".
This reclassification immediately identifies the nature of the
reserves in the financial statements, namely whether they are profit
or capital reserves. The same Shareholders' Meeting resolved to
distribute reserves for a maximum amount of euro 1,000 million,
paying euro 0.1357 to the shareholders per each ordinary and savings
share. On December 19, 2002, a payment of euro 987 million was made.
[] PERFORMANCE OF THE MAIN STOCKS OF THE TELECOM ITALIA GROUP
Relative performance Telecom Italia [GRAPHIC OMITTED]
S.p.A., 2002 vs. MIBTEL Index and DJ
eurostoxx TLC Index (ordinary shares) [Performance of stocks for
(Source: Reuters) Telecom Italia Ord., Telecom
Italia Sav., MIBTEL Index and
Dow Jones EUROSTOXX TLC Index
from Jan-02 through Dec-2]
Relative performance TIM S.p.A. [GRAPHIC OMITTED]
2002, vs. MIBTEL Index and DJ
eurostoxx TLC Index (ordinary shares) [Performance of stocks for
(Source: Reuters) TIM Ord., MIBTEL Index, and
Dow Jones EUROSTOXX TLC Index
from Jan-02 through Dec-02]
8
Relative performance Seat Pagine Gialle [GRAPHIC OMITTED]
S.p.A., 2002 vs. MIBTEL Index and DJ
eurostoxx TLC Index (ordinary shares) [Performance of stocks for
(Source: Reuters) SEAT PG Ord., MIBTEL Index,
and Dow Jones EUROSTOXX MEDIA
Index from Jan-02 through
Dec-2]
[] FINANCIAL INDICATORS
(in euro) 2002 2001 2000
---- ---- ----
Telecom Italia S.p.A.
Market price (December average ) (*)
- Ordinary share 7.61 9.56 12,75
- Savings share 5.03 5.80 6,33
Dividends 0.3125 (o)
- Ordinary share 0.3235 (o) 0.3125 0,3125
- Savings share - 0.3237 0,3238
Pay-out Ratio 4.6 95% 90%
Market to Book Value 4.11% 3.9 4,3
Dividend Yield (on December average market prices) 6.43%
- Ordinary share (0.0443) 3.27% 2,45%
- Savings share 1.1851 5.58% 5,11%
1.2455
Telecom Italia Group
Earnings/(loss) per share (0.2827) 0.2770
Operating free cash flow per share 0.8189 0.6082
Consolidated equity per share 1.8486 2,5708
Ratings at 12/31/2002 Outlook
STANDARD&POOR'S BBB+ Positive
MOODY'S Baa1 Positive
FITCH IBCA A- Stable
The positive outlook expressed by both Moody's and Standard & Poor's is
confirmation of the Company's credibility to reduce its debt and sell its
non-core businesses, as established by the Industrial Plan. The opinion
expressed by the rating agencies also reflects expectations that the Company
will remain the leading operator in Italy in both wireline and mobile telephone
services with the ability to continue to generate cash flows.
(o) In line with the objective of ensuring shareholders dividends commensurate
with those paid out for 2001, in December 2002, reserves were distributed
corresponding to a per share dividend of euro 0.1357. A motion will be put
before the Shareholders' Meeting for the approval of the financial statements
for the year ended December 2002 to pay out the residual dividends of euro
0.1768 euro per ordinary share and euro 0.1878 per savings share, by drawing
from the income and capital reserves.
9
[] MACRO-ORGANIZATION CHART OF TELECOM ITALIA
GROUP AT DECEMBER 31, 2002
------------------------ -----------------
Chairman Deputy Chairman
Marco Tronchetti Provera --------- Gilberto Benetton
------------------------ -----------------
|
--------------- |
C.E.O. |
---| Assistant to the Chairman
Carlo Buora |---- Giuseppe Sala
--------------- |
Assistant to C.E.O. | |
Fausto Federici --------| |
| |-----------------------------------------------------------------------------
| | | | | | | |
| | -------------- ---------- --------- ------------- ---------- -------------
| | Communication Brand Human Public and General IN.TEL. AUDIT
| | and Image Enrichment Resources Economic Counsel (1)
| | Affairs
| | R. Perissich
| | G. Carlo Rocco Andrea Gustavo A. Camanzi Francesco Armando
| | di Torrepadula Kerbaker Bracco (Co-director) Chiappetta Focaroli
| | -------------- ---------- --------- ------------- ---------- -------------
| ------|
----------------------------------------|--------------------------------------------------------------------------------
| | | | | | | | | | | | |
-------------- ---------- --------- --------- | ------------ ----------- --------- -------- -------- ----------- ----------- |
Finance Purchasing Corporate Security | Mergers and Research Investor Venture Foreign Real Estate Information |
Administration and Legal (2) | Acquisitions and Relations Capital Holdings and General Technology |
and Control Affairs | Development (3) (4) Services(5) Group |
| |
Enrico Germanio Aldo Luciano | Francesca Andrea Alberto Andrea Francesco Salvatore Arrigo |
Parazzini Spreafico Cappuccio Gallo M. | Di Carlo Granelli Borgia Granelli S. Bruno Sardo Andreoni |
-------------- ---------- --------- --------- | ------------ ----------- --------- -------- --------- ----------- ----------- |
| |
| |
------------------------------------------------ - - - - - - - - - - - - - |
| | | | |
----------------- ------------------ -------------- ---------------- -----------------------|
Domestic Wireline Mobile Internet and Media Latin America Information Technology
Operations Market
(6)
Riccardo Ruggiero Marco De Benedetti Paolo Dal Pino Oscar Cristianci Nino Tronchetti Provera
----------------- ------------------ -------------- ---------------- -----------------------
(1) Consortium company which carries out Internal Auditing activities in the
Telecom Italia Group and Olivetti.
(2) Starting March 1, 2003, Giuliano Tavaroli took over responsibility for the
Security function. (3) Starting February 1, 2003, Olimpia Cuomo took over
responsibility for the Investor Relations function.
(4) In January 2003, the Venture Capital function was disbanded.
(5) In February 2003 the Real Estate and General Services Operating Activity
was disbanded; its activities and resources were reassigned to other
corporate functions of the Group.
(6) The function coordinates the activities of the Telecom Italia Group in
Latin America, to be developed in accordance with the strategic plan. It
reports to the International Steering Committee, composed of the Chairman
and CEO. Permanent invitations to the Steering Committee meetings are
extended to those in charge of the Domestic Wireline and Mobile Business
Units; the assistant to the Chairman is the Secretary. Beginning February
2003, Latin America Operations reports directly to the CEO Carlo Buora for
wireline TLC and to the manager of the Mobile Business Unit Mobile for
Mobile TLC.
10
[] INTERNATIONAL PRESENCE OF TELECOM ITALIA GROUP AT DECEMBER 31, 2002 -
MAJOR SUBSIDIARIES
====== Presence through subsidiaries
------ Presence through affiliates or other companies
ITALY
DOMESTIC WIRELINE
- Atesia S.p.A. *
- Path.net S.p.A. *
[MAP OMITTED] - Telecom Italia Sparkle S.p.A. *
- Telecontact Center S.p.A.
MOBILE
- TIM S.p.A. *
INTERNET AND MEDIA
- Buffetti Group *
- Holding Media e Comunicazione Group *
- Matrix S.p.A. *
- Seat Pagine Gialle S.p.A. *
IT MARKET
- Agrisian S.C.p.A.
- Aspasiel S.p.A.
- Banksiel S.p.A. *
- EIS S.p.A.
EUROPE - Finsiel S.p.A. *
- Insiel S.p.A. *
DOMESTIC WIRELINE - Tele Sistemi Ferroviari S.p.A. *
- Intelcom S.Marino (S.Marino) * IT GROUP
- Pan European Backbone (Europe) * - Netikos Group *
- TMI - Telemedia International Luxemburg - TILAB Group *
S.A. - Webegg Group *
INTERNET AND MEDIA - I.T. Telecom S.p.A. *
- Consodata Group (France) * OTHER ACTIVITIES
- Telegate Group (Germany) * - Saiat S.p.A. *
- TDL Infomedia Group (Great Britain) * - TI Learning Services S.p.A. *
FOREIGN HOLDINGS
- BBNed (Holland)
- Telecom Italia International (Holland) MEDITERRANEAN BASIN
OTHER ACTIVITIES
- T.I.Finance (Luxembourg) * DOMESTIC WIRELINE
- Mediterranean Nautilus Group (Mediterranean Basin) *
- Med-1 Group (Mediterranean Basin) *
MOBILE
- Stet Hellas S.A. (Greece) *
SOUTH AMERICA
DOMESTIC WIRELINE
- Latin American Nautilus Group (Latin America) *
MOBILE
[MAP OMITTED] - Bitel Participacoes S.A. (Brazil)
- Corporacion Digitel C.A. (Venezuela) *
- Tele Celular Sul Participacoes Group (Brazil) *
- Tele Nordeste Celular Participacoes Group (Brazil) *
- Maxitel S.A. (Brazil) *
- TIM Celular S.A. * (Brazil)
- TimNet Com S.A. (Brazil)
- TIM Peru S.A.C. (Peru) *
LATIN AMERICA OPERATIONS
- Entel Bolivia Group (Bolivia) *
- Entel Chile Group (Chile) *
- Telecom Italia America Latina
(1) In May 2002, the International Operations (IOP) "Operating Activity" was
disbanded. Although maintaining the same corporate control structure, the
relative companies became part of the following: the Domestic Wireline BU
(Intelcom San Marino and Golden Lines), the Foreign Holdings Central Function
(9Telecom Reseau group, BB Ned group, Auna group, Telekom Austria group,
Telekom Srbija, Etec S.A. and what remains of the ex IOP) and the companies in
the South American area report to Latin America Operation (LAO).
* Comments on the main economic and financial performance of these companies
are provided in the report.
11
[] ECONOMIC AND FINANCIAL PERFORMANCE - TELECOM ITALIA GROUP
RESULTS OF OPERATIONS
The consolidated net result of the Group for 2002 is a loss of euro 322 million
(net income of euro 297 million before minority interest). In 2001, the
consolidated net result of the Group was a loss of euro 2,068 million (loss of
euro 1,658 million before minority interest).
The pretax result was a loss of euro 419 million. The improvement of euro 314
million compared to the prior year was due to:
o a notable increase in the operating income (+euro 707 million);
o an improvement in net investment and financial income (expense)
(+euro 1,792 million)
o a deterioration in net extraordinary income (expense) (-euro 2,185
million).
The latter, as detailed later in the report, includes:
. gains from the disposal of investments for euro 2,413 million
(euro 264 million in 2001) following the sales of Auna, Bouygues
Decaux Telecom (BDT), Mobilkom Austria, Lottomatica, Telemaco
Immobiliare, Telespazio and the Tiglio transaction;
. writedown of Seat Pagine Gialle goodwill and provision to the
reserve for charges in respect of the forward commitment to
purchase Seat Pagine Gialle shares for a total of euro 3,486
million, following the decision - taken within the framework of
the redefinition of Telecom Italia Group's strategies - of no
longer considering the "Directories" business of Seat Pagine
Gialle to be of strategic interest. In 2001, with regard to the
purchase commitment, a provision of euro 569 million had been
aside and was included in net investment and financial income
and expense;
. writedowns of investments and goodwill on investments for euro
2,751 million (euro 2,984 million in 2001) mainly with regard to
Aria - Is Tim Turchia, Netco Redes, Corporacion Digitel and Blu;
. other extraordinary expense for euro 1,813 million (euro 732
million in 2001) relating in 2002, among other things, to the
expenses incurred on the sale of the investment in the 9Telecom
group, the loss on the sale of Telekom Austria AG shares, the
expenses connected with extraordinary investment transactions,
the expenses and provisions for employee cutbacks and layoffs
and provisions to reserves.
Sales and service revenues in 2002 amounted to euro 30,400 million, with a
reduction of 1.4% compared to 2001. Excluding the effect of the changes in the
exchange rates (euro 763 million), the increase was 1.1%, while the effect of
the change in the scope of consolidation was euro 755 million. Excluding such
effects, the organic growth was +3.8%. Particularly affecting the change in the
scope of consolidation are the exclusion of the 9Telecom group and Sogei (both
consolidated for the first six months of 2002) and the exit of the Telespazio
group from October 1, 2002.
The increase in revenues reflected the positive contribution made by the Mobile
BU and higher revenues from the Internet and Media BU, contrasting a reduction
in the revenues contributed by the Domestic Wireline BU where traffic revenues,
despite a 2.4% increase in terms of minutes, fell by euro 533 million (- 6.0%).
In spite of an increase in minutes, the average return of retail and wholesale
traffic fell by 8.3%. Such phenomena were partly compensated by higher basic
charges and activation fees.
The breakdown of sales and service revenues is as follows:
-------------------------------------------------------------------------------
Geographical area 2002 2001
(millions of euro)
-------------------------------------------------------------------------------
Italy 24,652 81.1% 24,456 79.4%
Rest of Europe 2,182 7.2% 2,169 7.0%
North America 354 1.2% 968 3.1%
Central and South America 2,638 8.7% 2,592 8.4%
Australia, Africa and Asia 574 1.9% 633 2.1%
-------------------------------------------------------------------------------
Gross operating profit, equal to euro 13,964 million, rose in comparison to
2001 by euro 345 million (+ 2.5%). As a percentage of revenues, the gross
operating profit was 45.9% (44.2% in 2001). Excluding the effect of exchange
rates (euro 186 million) and the effect caused by the change in the scope of
consolidation (euro 120 million), the increase was 4.9% (euro 651 million).
12
In particular, the percentage of the Domestic Wireline BU's gross operating
profit to revenues rose from 45.1% in 2001 to 46.8% in 2002, while the Mobile
BU confirms its position at over 46%.
In greater detail, gross operating profit was impacted in 2002 by the
following:
. raw materials and outside services, equal to euro 12,558 million,
were down by 3.7% compared to 2001. The reduction was principally due
to action taken to improve the level of efficiency. The percentage of
raw materials and outside services to revenues was 41.3%, a decrease
from 2001 (42.3%).
. Labor costs, equal to euro 4,532 million, were lower by euro 115
million compared to 2001 (2.5%). The decrease was connected to the
change in the scope of consolidation as well as the headcount
reduction in Telecom Italia. As a percentage of revenues, labor costs
were 14.9%, in line with 2001. Employees at December 31, 2002
numbered 101,713 (109,956 at December 31, 2001). A breakdown is
presented below:
----------------------------------------------------------
12/31/2002 12/31/2001 Change
(a) (b) (a - b)
----------------------------------------------------------
Italy 83,541 90,628 (7,087)
Outside Italy 18,172 19,328 (1,156)
Total employees 101,713 109,956 (8,243)
----------------------------------------------------------
Contributing to this decrease were the changes in the scope of
consolidation, with a net headcount reduction of -2,883, and the drop
in the number of employees due to turnover (-5,360). The headcount
variation caused by changes in the scope of consolidation
specifically refer to the exclusion of the 9Telecom group (-1,003),
the sale of the Telespazio group (-1,168), the exit of Sogei and
Consiel (a total of -1,538) and other minor companies (-711), as well
as the inclusion of Blu (+618), the Webegg group (+719), Netesi and
Epiclink (a total of +168) and other minor companies (+32).
As regards turnover, during the year 12,567 employees left and 7,207
were hired.
Operating income, equal to euro 7,381 million, increased by euro 707 million
(+10.6%) compared to 2001, and as a percentage of revenues rose from 21.7% in
2001 to 24.3% in 2002. Excluding the effect of exchange rates and the
consequence of the change in the scope of consolidation, the gain was 9.9%. The
increase in the absolute amount reflects higher gross operating profit, in
addition to the decrease in amortization and depreciation charges.
In particular:
. Depreciation and amortization, equal to euro 5,877 million (euro
6,275 million in 2001), recorded a reduction of euro 398 million.
Details are as follows:
-------------------------------------------------
2002 2001 Change
(millions of euro) (a) (b) (a - b)
-------------------------------------------------
Fixed assets 3,783 4,034 (251)
Intangibles 2,094 2,241 (147)
of which goodwill 844 1,022 (178)
Total depreciation and
amortization 5,877 6,275 (398)
-------------------------------------------------
The reduction in the amortization of goodwill (-euro 178 million) was
primarily due to the goodwill writeoffs taken in 2001. As a
percentage of revenues, depreciation and amortization charges were
19.3%, down from 20.4% in 2001.
. Other valuation adjustments, equal to euro 599 million (euro 455
million in 2001), increased by euro 144 million compared to 2001.
Such adjustments were principally for writedowns to reduce
receivables from customers to their estimated realizable value. They
referred, in particular, to:
- Telecom Italia: euro 356 million
- Seat Pagine Gialle group: euro 57 million
- Tim: euro 51 million
- Entel Chile group: euro 40 million
13
. Provisions to reserves for risks and charges, amounting to euro 153
million (euro 278 million in 2001), presented a reduction of euro 125
million, which was partly due to the amount provided in 2001 for the
closing of the Astrolink contract (euro 54 million).
. Net other income (expense) showed an income balance of euro 46
million (an income balance of euro 63 million in 2001). Details are
as follows:
--------------------------------------------------------------------------------------
2002 2001 Change
(millions of euro) (a) (b) (a - b)
--------------------------------------------------------------------------------------
Indirect duties and taxes (115) (120) 5
Net loss on sale of fixed assets and intangibles (30) (17) (13)
Expenses connected with credit management (60) (37) (23)
Late payment fees charged by TLC companies to customers 106 112 (6)
Portion of capital grants credited to income during the year 65 73 (8)
Sundry other income and expense 80 52 28
--------------------------------------------------------------------------------------
Total 46 63 (17)
--------------------------------------------------------------------------------------
Net investment and financial income (expense) is composed of the following:
-------------------------------------------------------------------
2002 2001 Change
(millions of euro) (a) (b) (a - b)
-------------------------------------------------------------------
Net investment income 18 154 (136)
Net financial expense (1,449) (2,153) 654
Value adjustments to financial assets (682) (1,956) 1,274
-------------------------------------------------------------------
Total (2,163) (3,955) 1,792
-------------------------------------------------------------------
Details are as follows:
o The reduction in net investment income was due to lower net gains realized
on the listed stocks classified in current assets.
o The reduction in net financial expenses, for euro 569 million, can be
ascribed to the provision that was set aside in 2001 for the forward
commitment to purchase Seat Pagine Gialle shares that, in 2002, instead,
was recorded in extraordinary expense. Excluding such effect, the
improvement in net financial expenses (+euro 85 million) came from a lower
average debt exposure of the Group during the period and lower interest
rates and fees that was mainly countered by a worsening of the exchange
rates which negatively affected certain South American economies,
particularly Venezuela and Brazil.
o Value adjustments to financial assets, equal to euro 682 million, refer
to:
- amortization of goodwill arising at the time of the purchase of the
investments in companies accounted for using the equity method, equal
to euro 80 million (euro 316 million in 2001). The reduction is due
to the writeoffs of goodwill taken in the 2001 financial statements;
- writedowns of securities and investments included in current assets
of euro 176 million (euro 291 million in 2001) and long-term
securities of euro 40 million (euro 49 million in 2001), with a total
reduction of euro 124 million compared to 2001;
- the Group's share of the equity in the earnings and losses of the
unconsolidated companies accounted for using the equity method which
produced a loss of euro 386 million (-euro 1,300 million in 2001).
This refers to the losses of Stream of euro 246 million (euro 241
million in 2001), Aria -Is Tim Turchia of euro 171 million (euro 334
million in 2001) and the earnings balance relating to the earnings
and losses of the other unconsolidated companies of euro 31 million.
Moreover, in 2001, this caption had included the results of the
investments in the Nortel Inversora group (euro 238 million) and the Auna
group (euro 203 million) and the writedown of Astrolink (euro 259 million)
effected by Telespazio as a consequence of the interruption of the
relative contract. The investment in Nortel Inversora, the carrying value
of which had been prudently written off in the consolidated financial
statements at December 31, 2001, has remained unchanged.
Net extraordinary income (expense) showed an expense balance of euro 5,637
million (-euro 3,452 million in 2001), with a deterioration of euro 2,185
million compared to 2001. In particular:
Extraordinary income of euro 2,814 million comprised:
o euro 2,413 million of gains from disposals relating to:
14
. the sale of the entire 26.89% interest held by the Telecom Italia
Group in Auna, realizing a gross gain of euro 1,245 million, which
contributed - net of selling expenses - euro 1,033 million to the
consolidated net result of the Telecom Italia Group;
. sale of the entire 19.61% interest held by the Mobile BU in Bouygues
Decaux Telecom (BDT), realizing a gross gain of euro 484 million,
which contributed euro 266 million to the consolidated net result of
the Telecom Italia Group;
. the acceptance of the tender offer for Lottomatica shares by the
Information Technology Market BU (Finsiel group), realizing a gross
gain of euro 133 million (euro 93 million net of income taxes), which
contributed euro 73 million to the consolidated net result of the
Telecom Italia Group;
. the sale to Telekom Austria (a company in which Telecom Italia
International has a 14.78% interest at December 31, 2002) of the
entire 25% interest held by the Mobile BU in the Mobilkom Austria
group, realizing a gross gain of euro 115 million, which contributed
64 million to the consolidated net result of the Telecom Italia
Group;
. the sale of the entire 40% interest held in Telemaco Immobiliare,
realizing a gross gain of euro 110 million, which contributed euro 64
million to the consolidated net result of the Telecom Italia Group;
. the sale of the entire 100% interest held in Telespazio, realizing a
gross gain of euro 70 million, which contributed euro 36 million to
the consolidated net result of the Telecom Italia Group;
. the sale of the entire 100% interest held in Emsa and Telimm, in
addition to the properties and business segment in the Tiglio
transaction, realizing a total gross gain of euro 234 million, which
contributed euro 150 million to the consolidated net result of the
Telecom Italia Group;
. the disposal of other investments, fixed assets, intangibles and
business segments for a total of euro 22 million.
o prior period income of euro 131 million arising from the recovery of
accrued pre-amortization interest - on the expenses for employee benefit
obligations under Law 58/1992 that were paid, with reserve, to INPS up to
1999 - following the termination of litigation after the courts ruled in
Telecom Italia's favor;
o the release of euro 77 million, primarily to absorb a portion of the
reserve for risks and charges set up in 2001 by Telecom Italia to cover
the expenses connected with the agreement to sell Stream to News
Corporation and Vivendi Universal/Canal+ after the parties did not go
through with the agreement
o grants of euro 9 million and other income of euro 184 million.
Extraordinary expenses of euro 8,451 million comprised:
o writedowns, for permanent impairments in value, and other provisions
relating to investments for a total of euro 6,237 million (euro 2,984
million in 2001), referring to:
. the writedown of goodwill and the provision to the reserve for
charges in respect of the forward commitment to purchase Seat Pagine
Gialle shares for a total of euro 3,486 million. The writedown and
the provision were effected on the basis of market value (average
market price of ordinary shares for the last six months of 2002)
within the framework of Telecom Italia Group's decision of no longer
considering the "Directories" business of Seat Pagine Gialle to be of
strategic interest. In 2001, with regard to the purchase commitment
only, a provision of euro 569 million had been set aside and was
included in net investment and financial income (expense);
. the writedown of goodwill on the subsidiaries and affiliated
companies for a total of euro 225 million in respect of Blu (euro 103
million), Digitel Venezuela (euro 75 million) and other subsidiaries
(euro 47 million);
. the writeoff of the investment in Aria - Is Tim Turchia (euro 2,341
million), arising from the writeoff of the carrying value (euro 1,491
million) and the provision to the reserves for risks and charges to
cover the Group's exposure with the same affiliated company (euro 850
million). The provision is commensurate with the guarantees provided
by the Group to the international financial institutions that are
creditors of Aria - Is Tim and the loan in financial receivable
granted directly by the Group.
. the writedown of goodwill on Netco Redes (euro 96 million),
writedowns of other companies (euro 46 million) and the provision
relating to the purchase of an additional stake in Consodata by Seat
Pagine Gialle in order to adjust the value of the company to that
determined on the basis of an appraisal (euro 43 million).
The writedowns in 2001 had referred to the goodwill relating to both the
consolidated companies (9 Telecom group, Entel Bolivia, Entel Chile group,
Maxitel group, Tele Celular Sul group, Tele Nordeste Celular group, Tim
Brasil, Med-1 group and certain companies in the Seat Pagine Gialle group)
and companies valued using the equity method (Globo.com, Solpart
Participacoes, Telekom Austria and Nortel Inversora group), as well as
other provisions related to investments.
15
o the expenses of euro 316 million incurred in conjunction with the disposal
of the investment in the 9Telecom group. In particular, in view of the
loss reported prior to the sale, the French group 9Telecom produced a
negative effect on the nine-months 2002 statement of income of the Telecom
Italia Group for a total of euro 389 million (euro 267 million net of
income taxes);
o the loss of euro 135 million on the sale of 75 million (equal to 15% of
share capital) Telekom Austria AG shares during the month of November
2002. As a result of this sale, Telecom Italia Group's holding in Telekom
Austria AG has been reduced to 14.78% and the investment value is aligned
with the market value;
o the expenses of euro 235 million connected with extraordinary investment
transactions;
o the provisions to reserves for euro 194 million, of which euro 135 million
refer to guarantees provided for the disposal of investments and business
segments and euro 59 million for other provisions to reserves;
o the expenses and provisions of euro 494 million for employee cutbacks and
layoffs (of which euro 379 million is borne by Telecom Italia S.p.A.);
o the expenses of euro 155 million under Law 58/1992 to cover employees
under the former fund "Telephone Employees Pension Fund" (FPT) and euro 74
million for the extraordinary contribution to INPS to meet the higher
financial requirements covered by the rules of the former fund "Telephone
Employees Pension Fund" (FPT) which became part of the general "Employees
Pension Fund";
o the writedowns of euro 190 million to fixed assets, intangibles and
long-term investments, mainly in reference to the mobile telephone
companies in Brazil, and euro 38 million for losses on the sale of fixed
assets, intangibles and long-term investments;
o other prior period expenses of euro 383 million.
Income taxes had a positive effect on the result of euro 716 million and
decreased by euro 1,641 million compared to 2001. This was due to the loss for
the year that was principally caused by the aforementioned investment
writedowns, which contributed to the increase in deferred tax assets, as well
as the utilization of tax loss carryforwards deriving from the merger of TIM
and Blu.
FINANCIAL CONDITION
Intangibles, fixed assets and long-term investments, amounting to euro 35,586
million, decreased by euro 9,432 million from the end of 2001.
Details are as follows:
o fixed assets decreased from euro 21,757 million at the end of 2001 to euro
19,291 million at the end of 2002 and intangibles fell from euro 16,197
million at the end of 2001 to euro 13,052 million at December 31, 2002.
The reduction is due overall to the depreciation and amortization charge
for the year that was only partly compensated by the investments made
during the same period, the fall in exchange rates compared to the end of
2001, as well as the contributions of business segments under the "Tiglio"
transaction and the writedowns of the goodwill on consolidated companies
effected in 2002 and recorded in extraordinary expense.
o long-term investments decreased from euro 7,064 million at the end of 2001
to euro 3,243 million al December 31, 2002. The reduction is principally
due to the disposal of investments and writedowns for permanent
impairments in value carried out during the year.
Investments made during the year amounted to euro 6,919 million (compared to
euro 11,257 million in 2001). The breakdown is as follows:
--------------------------------------------------
2002 2001 Change
------
(millions of euro) (a) (b) (a-b)
--------------------------------------------------
Industrial investments 4,842 6,990 (2,148)
Goodwill 369 1,174 (805)
Financial investments 1,708 3,093 (1,385)
--------------------------------------------------
Total investments 6,919 11,257 (4,338)
--------------------------------------------------
The reduction of investments by euro 4,338 million was mainly due to:
o industrial investments:
- to lower investment made by the Mobile BU for euro 1,436 million,
chiefly relating to mobile phone licenses acquired in 2001 in Brazil
and Greece (about euro 1,080 million);
16
- to lower investments made by the Domestic Wireline BU (-euro 339
million), by other companies in South America (-euro 190 million) and
by the Seat group (-euro 94 million) partly as a result of the
implementation of the selective investment program;
o for goodwill: to the acquisitions which occurred in 2001 in respect of
Entel Chile (euro 731 million), Holding Media e Comunicazione (euro 66
million), NetCreations (euro 93 million) and the increase in the
investment in Stet Hellas (euro 31 million), compared to those in 2002
which referred mainly to the increase in the investment in Stet Hellas
(euro 66 million) and in Digitel Venezuela (euro 27 million), to the
acquisition of Epiclink (euro 49 million) and Netesi (euro 14 million),
the acquisition of Blu (euro 103 million) and the increase in the
investment holding in the Webegg group (euro 24 million);
o for financial investments: to capital injections made in 2001 in the
company Aria - Is Tim Turchia (euro 1,906 million) and in Auna (euro 276
million).
Financial investments made in 2002 mainly regarded transactions involving the
share capital of Stream (euro 234 million) and Auna (euro 193 million, repaid
on August 1, 2002), the investment in the share capital of Tiglio I (euro 197
million), the purchase of LDCom within the framework of the 9Telecom deal (euro
172 million), the disbursement of loans to subsidiaries and affiliated
companies (euro 351 million), as well as the buy-back of treasury stock (euro
287 million), acquisitions of other investments and share capital increases for
a total of euro 274 million.
Working capital showed a negative balance of euro 3,340 million (a negative
balance of euro 2,418 million at December 31, 2001), with a change of euro 922
million.
Shareholders' equity amounted to euro 12,823 million (euro 19,308 million at
the end of 2001), of which euro 9,049 million was Telecom Italia, the Parent
Company's interest (euro 13,522 million al December 31, 2001), and euro 3,774
million was the minority interest (euro 5,786 million at December 31, 2001).
The reduction of euro 6,485 million can be analyzed as follows:
-------------------------------------------------------------------------------
(millions of euro) 2002 2001
-------------------------------------------------------------------------------
At beginning of year 19,308 24,690
Net income (loss) of the Parent Company and
minority interest 297 (1,658)
Dividends to third parties paid by: (3,247) (3,097)
- Telecom Italia S.p.A (2,306) (2,309)
- TIM S.p.A (895) (743)
- Other Group companies (46) (45)
Extraordinary distribution of reserves to third parties: (1,698) --
- Telecom Italia S.p.A (987)
- TIM S.p.A (711)
Cancellation of Telecom Italia S.p.A. treasury stock -- (711)
Change in scope of consolidation (95) 358
Translation adjustments and other changes (1,742) (274)
At end of year 12,823 19,308
-------------------------------------------------------------------------------
Translation adjustments and other changes, in particular, are primarily the
result of the deterioration in exchange rates of certain South American
countries such as Brazil, Chile and Bolivia.
Net debt of euro 18,118 million decreased from euro 21,942 million at the end
of 2001 by euro 3,824 million subsequent to the payment of dividends and the
distribution of reserves for a total of euro 4,945 million. Indebtedness at
December 31, 2002 particularly benefited from the investment disposals made in
2002, net of the related expenses, for a total of euro 4,771 million mainly in
connection with the sale of Auna (euro 1,998 million), Bouygues Decaux Telecom
(euro 750 million), Mobilkom Austria (euro 756 million), Lottomatica (euro 212
million), Sogei (euro 176 million), Telemaco Immobiliare (euro 192 million),
Immsi (euro 69 million) Tiglio (euro 328 million), Telekom Austria (euro 559
million), Telespazio (euro 239 million), 9Telecom (-euro 529 million) and other
minor companies (euro 21 million). Transactions for the securitization and
factoring of trade accounts receivable were also carried out which led to an
improvement in net debt at December 31, 2002 of euro 1,038 million (euro 848
million at the end of 2001).
17
The following chart summarizes the major items which had an impact on the
change in net debt during the course of 2002.
[GRAPHIC OMITTED]
[Net financial debt 12/31/2001 21,942
Industrial investments 4,842
Goodwill investments 369
Financial investments 1,708
Dividend and reserve payments 4,945
Payment at present value JPM strike price reduction 500
Flows from operating activities 10,390
Disposals 5,698
Other 100
Net financial debt 12/31/2002 18,118]
The portion of debt due beyond one year rose from 64% at December 31, 2001 to
75% at December 31, 2002. When also considering the current portion due next
year (euro 2,677 million) as medium/long-term, the percentage rises to 88% (70%
in 2001). The increase is the result of the issue of fixed-rate notes for euro
2,500 million by Telecom Italia S.p.A. on February 1, 2002, divided into two
tranches of euro 1,250 million each, expiring, respectively on February 1, 2007
and February 1, 2012. This issue falls under the "Global Note Program".
Gross debt is detailed in the following table:
--------------------------------------------------------------------------------------
At 12/31/2002 At 12/31/2001
--------------------------------------------------------------
euro % Foreign % Total % Total %
(millions of euro) currency
--------------------------------------------------------------------------------------
Medium/long-term debt 13,684 76 1,334 63 15,018 75 16,083 64
Short-term borrowings 4,320 24 769 37 5,089 25 9,114 36
Total 18,004 100 2,103 100 20,107 100 25,197 100
--------------------------------------------------------------------------------------
18
[] ACQUISITIONS AND SALES OF EQUITY INVESTMENTS
Sale of Lottomatica
In February 2002, the Information Technology Market BU (Finsiel group) tendered
its Lottomatica shares to the tender offer for Lottomatica for proceeds of euro
212 million, realizing a gain that contributed euro 73 million to the
consolidated net result of the Telecom Italia Group.
Sale of BDT - Bouygues Decaux Telecom
In March 2002, the Telecom Italia Group sold the investment (19.61%) held by
TIM International in BDT, the holding company of the French operator Bouygues
Telecom for proceeds of euro 750 million, realizing a gain that contributed
euro 266 million to the consolidated net result of the Telecom Italia Group.
Sale of Mobilkom Austria
On June 28, 2002, TIM International N.V. sold the entire investment (25%) held
in Mobilkom Austria to Telekom Austria (a 14.78%-owned affiliate of Telecom
Italia International at December 31, 2002) for proceeds of euro 756 million,
realizing a gain that contributed euro 64 million to the consolidated net
result of the Telecom Italia Group.
Sale of Sogei
On July 31, 2002, Finsiel concluded the sale of Sogei to the Ministry of
Economy and Finance - Department of Fiscal Policy. This had a positive impact
of euro 176 million on the net debt of the Telecom Italia Group.
Sale of Auna
On August 1, 2002, the transaction was finalized for sale of the investment in
Auna by the Telecom Italia Group to Endesa, Union Fenosa and Banco Santander
Central Hispano, that had initially been planned for December. The transaction
gave rise to proceeds of euro 1,998 million for Telecom Italia Group that
contributed 1,033 million to the consolidated net result.
Sale of Telemaco Immobiliare
On August 1, 2002, Telemaco Immobiliare was sold to Mirtus, a company
indirectly controlled by the American real estate fund Whitehall, promoted by
the Goldman Sachs group, for net proceeds of euro 192 million, realizing a net
gain of 64 million for the Telecom Italia Group.
Acquisition of EPIClink
On August 2, 2002, after having received approval from the Antitrust Authority,
Telecom Italia purchased 86% of EPIClink S.p.A. for a price of euro 60.2
million. The shares were sold by Edisontel S.p.A. (30.3%), Pirelli S.p.A.
(25.3%; Pirelli is considered a related party of Telecom Italia through the
persons of the Chairman and the CEO Carlo Buora), IntesaBci S.p.A. (20%),
E_voluzione (8%) and Camozzi Holding (2.4%). After this transaction, EPIClink's
shareholder base was as follows: Telecom Italia 86%, Pirelli 5%, IntesaBci 5%,
Camozzi 2% and E_voluzione 2%. Furthermore, Telecom Italia is committed to the
purchase of the remaining stake (14%) at a total price of euro 10 million.
Sale of 9Telecom
On August 26, 2002, the transaction was concluded for sale of the investment in
9Telecom and the simultaneous purchase of a 7% stake in LDCom. The net impact
on the net result of the Telecom Italia Group was a loss of euro 267 million.
Sale of a stake in Solpart Participacoes
On August 27, 2002, the Telecom Italia Group reached an agreement with the
other shareholders of Solpart (indirect parent company of Brasil Telecom) to
reduce its stake in ordinary share capital from 37.29% to 19% by the sale of
18.29% of ordinary share capital to Timepart Participacoes and to Techold
Participacoes. This reduction, among other things, removed the regulatory
obstacles that prevented TIM's local subsidiaries from offering GSM 1800
commercial service. Within the framework of this transaction, both parties have
an option which can be exercised in the event certain conditions are met that
will restore the shareholder position quo ante.
19
Acquisition of another stake in Stet Hellas
In August, TIM International N.V., a subsidiary of TIM, purchased, from the
Verizon Europe Holding II group, a 17.45% stake in the share capital of Stet
Hellas, in which it already had a 63.95% interest, at a price of euro 108
million. The deal, which in effect makes TIM International N.V. the only
industrial partner and strategic shareholder in the company, falls within the
framework of the Group's strategy to rationalize its international portfolio
and consolidate its position in the Mediterranean Basin.
Acquisition of another stake in Netesi
In August, following the authorization received from the Antitrust Authority,
the Telecom Italia Group purchased a 69.10% stake in the share capital of
Netesi, in which it already held a 17.98% interest, at a price of euro 11
million.
Acquisition of Pagine Utili
On September 11, 2002, Telecom Italia reached an agreement with Pagine Italia
S.p.A. for the acquisition of the assets of the Pagine Utili directories, the
business segment represented principally by the so-called pocket pages with
about 60,000 advertisers.
The transaction involves the payment of consideration to Pagine Italia equal to
214 million Seat Pagine Gialle ordinary shares held by the Telecom Italia
Group, corresponding to 1.9% of the Seat Pagine Gialle ordinary share capital.
The execution of this transaction is subject to the approval of the Italian
Antitrust Authority. After the observations formulated by the Antitrust
Authority during the preliminary investigation, on January 16, 2003, Telecom
Italia and Pagine Italia S.p.A. agreed to formally withdraw the announcement
about the acquisition of the Pagine Utili business segment.
The parties further agreed to extend the contract period in order to be able to
re-design the transaction so that it can eventually be re-submitted to the
Antitrust Authority.
Moreover, the agreement between the parties provides for exclusive
consideration which would, in any case, involve the payment to Pagine Italia
S.p.A. of a percentage equal to 6.6% of the 214 million of Seat Pagine Gialle
shares already said.
After execution of the transaction, a decision will be made as to how the
purchased business segment will be integrated in Seat Pagine Gialle.
Telecom Italia - News Corporation agreement
On October 1, 2002, Telecom Italia signed agreements with the News Corporation
group ("News"), partner of Telecom Italia in Stream, and Vivendi Universal
("Vivendi"), current shareholder of Tele+, in order to allow Stream to purchase
Tele+ and to subsequently create a single platform for pay-TV in Italy. On the
basis of this agreement Telecom Italia will hold a 19.9% stake in the single
platform and News Corporation will own the remaining 80.1%.
Telecom Italia will pay euro 31.84 million at the closing for a 19.9% stake in
Tele+ and will waive receivables owed by Stream to the Telecom Italia Group
companies due at the end of 2002 for euro 147 million (a figure entirely
provided for in the 2001 financial statements). At the same time, News
Corporation will waive receivables from Stream for the same amount.
The execution of the contract is subject to the approval by the European
Antitrust Authority which should announce a decision by the end of April 2003.
Sale of Consiel investment
On October 3, 2002, the agreement was concluded for the sale of the shares
representing the entire share capital of Consiel by Finsiel to World Investment
Partners S.A.. The total amount paid by World Investment Partners S.A. amounted
to euro 1 million.
Acquisition of 100% of Blu S.p.A. shares
On October 7, 2002, TIM finalized the preliminary contract signed on August 7,
2002 with Blu S.p.A. shareholders for the purchase of 100% of the company,
later merged with TIM S.p.A.. The authorizations for this transaction had been
previously granted by the Antitrust Authority in view of the approval by the
Telecommunications Regulatory Agency. The merger plan was signed on December
18, 2002. On that date the final price of the sale was set at euro 83 million.
The merger became effective on December 23, 2002. Other sellers of Blu S.p.A.
include Edizione Holding S.p.A. (the Chairman and Deputy Chairman of which are,
respectively, the Deputy Chairman of Telecom Italia Gilberto Benetton and the
Director Gianni Mion) and Autostrade S.p.A. (where the same Gilberto Benetton
and Gianni Mion are members of the Executive Committee)
20
Progetto Tiglio
On October 29, 2002, the transaction envisaged by the framework agreement
between the Pirelli, Olivetti- Telecom Italia Groups and The Morgan Stanley
Real Estate Funds was finalized and integration was thus achieved for the real
estate properties of the companies involved as well as the entities that
provide real estate services to the same companies or to their subsidiaries.
The agreement also calls for leveraging, during 2003, the assets of Tiglio I
and Tiglio II through a market transaction within the framework of a strategy
that could contribute to the development of the real estate financial market,
with consequent significant opportunities for the Telecom Italia Group to
leverage the investments currently held in the two companies.
In particular, Telecom Italia Group transferred assets worth euro 1,360 million
to Tiglio I and Tiglio II , in various corporate forms. Euro 50 million of the
total relates to Seat Pagine Gialle, about euro 840 million to real estate that
was contributed to Emsa Immobiliare after the non-proportional spin-off of
IM.SER and euro 470 million to other assets. The transaction had a gross
economic impact of about euro 229 million on Telecom Italia S.p.A. and euro 234
million on the Telecom Italia Group (a net impact of euro 150 on the net result
of the Telecom Italia Group).
The companies in the Pirelli Group involved in the transaction were Pirelli
S.p.A. (a related party of Telecom Italia through the Chairman and the Managing
Director Carlo Buora) and Pirelli & C. Real Estate S.p.A. (a related party of
Telecom Italia through the Chairman, the Managing Director Carlo Buora and the
Director Carlo Alessandro Puri Negri).
Sale of Telespazio
In November, Telecom Italia executed the sale of Telespazio to Finmeccanica on
the basis of the agreement signed on August 2, 2002. The positive impact on the
financial indebtedness of the Telecom Italia Group was euro 239 million and the
net gain was euro 36 million for the Telecom Italia Group.
Sale of Viasat
On November 18, 2002, Seat Pagine Gialle S.p.A. and Finsatel sold their
respective 33.54% and 16.46% investments in Viasat S.p.A. to Exe Fin S.p.A. for
a total of some euro 2.5 million. As a result of this sale, the company no
longer holds an indirect interest in the company Viasat Assistance S.p.A.
Sale of Telekom Austria
In November 2002, Telecom Italia International N.V. placed 75 million Telekom
Austria AG shares on the market (equal to 15% of share capital). The price of
the placement was set at euro 7.45 per share. Gross proceeds from the sale were
euro 559 million. The impact on the consolidated net result of the Telecom
Italia Group was a loss of -euro 101 million. After this transaction, Telecom
Italia Group's stake in Telekom Austria decreased from 29.78% to 14.78%.
Sale of Informatica Trentina
On November 21, 2002, Finsiel sold the 40.41% stake held in Informatica
Trentina to DeDa S.r.l., a company controlled by Deltadator S.p.A. (Sequenza
Group), for some euro 8.7 million, realizing a gain of euro 4 million in the
consolidated financial statements of Telecom Italia.
Sale of IMMSI
On November 22, 2002, Telecom Italia sold its stake in IMMSI to the company
Omniapartecipazioni. The sales price was euro 69 million, with a positive
impact of euro 41 million for the Parent Company, Telecom Italia.
Sale of Fintech
On December 20, 2002, Telecom Italia Lab sold its investment in Fintech S.p.A.
(equal to 50% of share capital) to the Belgium-registered company Euroqube
S.A., for consideration of euro 4.75 million, of which about half will be paid
at the closing and the remainder within 12 months thereafter.
Acquisition of a stake in Mediocredito Centrale S.p.A.
On December 27, 2002, in execution of the contract signed in July, a 3% stake
was purchased in the share capital of Mediocredito Centrale S.p.A. for a price
of euro 36 million.
In conclusion, the following chart depicts the impact that the sales had on the
net debt of the Telecom Italia Group in the two-year period 2001-2002, reaching
the objective of the divestiture program earlier than anticipated.
21
[GRAPHIC OMITTED]
[Satellite Consortia 2001 450
Lottomatica 212
Bouygues 750
Mobilkom Austria 756
Real Estate 610
o Tiglio 1 and 2 +328
o Telemaco +192
o IMSI +69
o Other Assets +21
9Telecom -529
Auna 1,998
Sogei 176
Telespazio 239
TeleKom Austria 559
Total 5,221
o 2002 - 4,771
o 2001 - 450]
22
[] MARKET SCENARIO
The projections for the world market of telecommunications services for the
next few years suggest average annual growth of approximately 5.7%, lower than
the growth of 7.7% reported in 2002.
In Europe, in 2002, the market grew by 5.4% and, over the next few years,
annual average growth is expected to be in the order of 4.1%, and impacted by a
slowdown in the growth of revenues from mobile services.
Performance of the
European TLC services [GRAPHIC OMITTED]
market
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
[TD eleased lines 9 12 14 17 21
Internet access (NB + BB) 14 15 16 17 17
Wireline (voice and VAS) 109 106 102 101 100
Mobile (voice and VAS) 93 104 115 123 130
Total 225 237 247 258 268]
In Italy, growth over the next few years is expected to be higher than in the
European market as a whole, with annual average growth of 5%. In particular,
revenues from mobile services will increase at an annual average of 9%,
particularly as a result of the development of innovative services, broadband
and VAS on wireline networks, especially thanks to the spread of ADSL, at an
annual average of approximately 18%.
In South America, annual average growth over the next few years is expected to
be 11.6%. In particular, the mobile telephone services market in Brazil is
expected to grow at an annual average of approximately 12%, and will be marked
by a growing consolidation and by a regulatory framework that will favor the
evolution of the SMC model over the SMP model, with higher standards of quality
and fiercer competition.
From the point of view of the range of services available, it is probable that,
over the next few years, the trend towards the consolidation of operators will
continue, especially on a national level. This may prove to be to the advantage
of large operators which will be able to exploit a broad customer base and
control over the infrastructures.
From the point of view of technological development, there is likely to be
innovation geared to expanding the bandwidth for wireline services and the
development of "seamless" solutions for mobile services.
The development strategies of the larger operators are mainly focused on
defending the domestic core business, launching broadband and value-added
services and on reducing the level of indebtedness.
23
[] STRATEGIC GUIDELINES
The fundamental objective declared by management for the next few years (as it
was last year) will continue to be the creation of value. This must be ensured
by capitalizing on the assets and on the distinctive competences and by further
strengthening the financial structure to sustain development.
The priorities of industrial operations as described by the management are as
follows:
- to consolidate its leadership of the domestic market: in wireline
services, by encouraging customer loyalty with innovative products
and stimulating the market of VAS and broadband, particularly through
ASL access technology; in mobile services, by augmenting traffic
volumes and developing a range of value-added services consistent
with market expectations (MMS, community, videotelephone services),
and by effectively introducing UMTS technology; in Internet and
Media, by developing broadband and portals, directories and office
products.
- to develop corporate presence abroad in markets where the Group can
enhance its commercial and technological expertise: in the mobile
sector, in South American countries, and particularly in Brazil; in
the wireline sector, through the development of the pan-European
broadband network.
- to continue to manage the Group according to strict criteria of
efficiency thanks to the synergies activated by the organizational
model based on professional categories and service centers, systems
that control expenditure and results, and a careful selection of
investments targeting innovation and development.
Over the next few years, the exacting dynamics in the economic and financial
field will generate cash flows that will lead to a reduction in consolidated
indebtedness that is expected to fall by more than euro 5 billion by the end of
2005, compared to the end of 2002.
The Group will also further develop initiatives associated with sustainability,
which for the first time constitutes an integral part of corporate planning.
24
Telecom Italia Group
Consolidated Statements of Income
----------------------------------------------------------------------------------------------------------
Change
2002 2001 (a-b)
----------------
(millions of euro) (a) (b) amount %
C---------------------------------------------------------------------------------------------------------
A. SALES AND SERVICE REVENUES 30,400 30,818 (418) (1.4)
Changes in inventories of work in progress, semifinished
and finished goods 2 2 n.s.
Changes in inventory of contract work in process (42) (115) 73 (63.5)
Increases in capitalized internal construction costs 675 581 94 16.2
Operating grants 19 24 (5) (20.8)
----------------------------------------------------------------------------------------------------------
B. STANDARD PRODUCTION VALUE 31,054 31,308 (254) (0.8)
Raw materials and outside services (1) (12,558) (13,042) 484 (3.7)
----------------------------------------------------------------------------------------------------------
C. VALUE ADDED 18,496 18,266 230 1.3
Labor costs (1) (4,532) (4,647) 115 (2.5)
----------------------------------------------------------------------------------------------------------
D. GROSS OPERATING PROFIT 13,964 13,619 345 2.5
Depreciation and amortization (5,877) (6,275) 398 (6.3)
of which goodwill (844) (1,022) 178 (17.4)
Other valuation adjustments (599) (455) (144) 31.6
Provisions to reserves for risks and charges (153) (278) 125 (45.0)
Net other income (expense) 46 63 (17) (27.0)
----------------------------------------------------------------------------------------------------------
E. OPERATING INCOME 7,381 6,674 707 10.6
Net investment and financial income (expense) (2,163) (3,955) 1,792 (45.3)
of which value adjustments (682) (1,956) 1,274 (65.1)
INCOME BEFORE EXTRAORDINARY ITEMS AND
----------------------------------------------------------------------------------------------------------
F. TAXES 5,218 2,719 2,499 91.9
Net extraordinary income (expense) (5,637) (3,452) (2,185) 63.3
----------------------------------------------------------------------------------------------------------
G. INCOME BEFORE TAXES (419) (733) 314 (42.8)
Income taxes 716 (925) 1,641 o
----------------------------------------------------------------------------------------------------------
H. NET INCOME (LOSS) BEFORE MINORITY INTEREST 297 (1,658) 1,955 o
(619) (410) (209) 51.0
----------------------------------------------------------------------------------------------------------
I. NET INCOME (LOSS) (322) (2,068) 1,746 (84.4)
----------------------------------------------------------------------------------------------------------
(1) Reduced by related cost recoveries
25
Telecom Italia Group
Consolidated Balance Sheets
----------------------------------------------------------------------------------------------
12/31/2002 12/31/2001 Change
(millions of euro) (a) (b) (a-b)
----------------------------------------------------------------------------------------------
A. INTANGIBLES, FIXED ASSETS AND
LONG-TERM INVESTMENTS
Intangible assets 13,052 16,197 (3,145)
Fixed assets 19,291 21,757 (2,466)
Long-term investments
. equity investments and advances on 2,286 6,586 (4,300)
future capital contributions
. other 957 478 479
----------------------------------------------------------------------------------------------
35,586 45,018 (9,432)
----------------------------------------------------------------------------------------------
B. WORKING CAPITAL
Inventories 411 636 (225)
Trade accounts receivable 8,201 8,346 (145)
Other assets 6,154 5,047 1,107
Trade accounts payable (5,966) (6,793) 827
Reserves for risks and charges (5,214) (3,053) (2,161)
Other liabilities (6,926) (6,601) (325)
----------------------------------------------------------------------------------------------
(3,340) (2,418) (922)
----------------------------------------------------------------------------------------------
C. INVESTED CAPITAL, net of operating
liabilities (A+B) 32,246 42,600 (10,354)
----------------------------------------------------------------------------------------------
D. RESERVE FOR EMPLOYEE
TERMINATION INDEMNITIES (1,305) (1,350) 45
----------------------------------------------------------------------------------------------
E. INVESTED CAPITAL, net of operating
liabilities and the reserve for employee
termination indemnities (C+D) 30,941 41,250 (10,309)
Financed by:
----------------------------------------------------------------------------------------------
F. SHAREHOLDERS' EQUITY (1)
Parent Company interest 9,049 13,522 (4,473)
Minority interest 3,774 5,786 (2,012)
----------------------------------------------------------------------------------------------
12,823 19,308 (6,485)
----------------------------------------------------------------------------------------------
G. MEDIUM/LONG-TERM DEBT 15,018 16,083 (1,065)
----------------------------------------------------------------------------------------------
H. NET SHORT-TERM BORROWINGS
Short-term borrowings 5,089 9,114 (4,025)
Liquid assets and short-term financial assets (2,271) (3,505) 1,234
Financial accrued expense (income) and
deferred expense (income), net 282 250 32
----------------------------------------------------------------------------------------------
(G+H) 3,100 5,859 (2,759)
----------------------------------------------------------------------------------------------
I. TOTAL (F+G+H) 18,118 21,942 (3,824)
----------------------------------------------------------------------------------------------
30,941 41,250 (10,309)
----------------------------------------------------------------------------------------------
(*) Net of "Receivables from shareholders for capital contribution"
26
Telecom Italia Group
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------------------------------------------------------
(millions of euro) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
A. NET DEBT, AT BEGINNING OF YEAR (21,942) (17,233)
B. CHANGE IN SCOPE OF CONSOLIDATION (839)
C. CASH FLOWS - OPERATING ACTIVITIES
Net income (loss) 297 (1,658)
Depreciation and amortization 5,877 6,275
(Gains) losses on sales of intangibles, fixed assets and
long-term investments (2,210) (330)
Writedowns of intangibles, fixed assets and long-term
investments 4,384 4,039
Change in working capital (*) 896 290
Net change in reserve for employee termination
indemnities (45) 31
Foreign exchange gains (losses) and other changes 691 136
--------------------------------------------------------------------------------------------------------------------------------
9,890 8,783
--------------------------------------------------------------------------------------------------------------------------------
D. CASH FLOWS - INVESTING ACTIVITIES
Long-term investments: (6,919) (11,257)
. intangible assets:
- goodwill (369) (1,174)
- other investments (1,584) (2,736)
. fixed assets (3,258) (4,254)
. long-term investments (1,708) (3,093)
Proceeds from sale, or redemption value, of intangible
assets, fixed assets and long-term investments 5,698 1,439
--------------------------------------------------------------------------------------------------------------------------------
(1,221) (9,818)
--------------------------------------------------------------------------------------------------------------------------------
E. CASH FLOWS - FINANCING ACTIVITIES
Capital contributions 58 240
Capital grants 42 22
--------------------------------------------------------------------------------------------------------------------------------
100 262
--------------------------------------------------------------------------------------------------------------------------------
F. DIVIDENDS (4,945) (3,097)
--------------------------------------------------------------------------------------------------------------------------------
G. CHANGE IN NET DEBT (B+C+D+E+F) 3,824 (4,709)
--------------------------------------------------------------------------------------------------------------------------------
H. NET DEBT, AT END OF YEAR (A+G) (18,118) (21,942)
--------------------------------------------------------------------------------------------------------------------------------
(*) The difference with respect to the reclassified consolidated balance
sheets is due to the movements in capital grants and the use of the
reserves for risks and charges.
The change in net debt was due to the following:
--------------------------------------------------------------------------------------------------------------------------------
(millions of euro) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Increases (decreases) in medium/long-term debt (1,065) 9,350
Increases (decreases) in short-term borrowings (2,759) (4,641)
Total (3,824) 4,709
27
[] ECONOMIC AND FINANCIAL PERFORMANCE - TELECOM ITALIA S.p.A.
RESULTS OF OPERATIONS
The Parent Company, Telecom Italia S.p.A., closed the year 2002 with a net loss
of euro 1,645 million (a net income of euro 151 million in 2001).
The result was mainly caused by a higher expense balance of net extraordinary
income (expense) (-euro 3,200 million) that was partly offset by an improvement
in the operating income (+euro 62 million) and the income balance of net
investment and financial income (expense) (+euro 754 million), and lower income
taxes (-euro 588 million).
The increase in the net expense balance of extraordinary income (expense), in
particular, was caused, on one hand, by the provisions made with respect to the
value of the Seat Pagine Gialle investment (euro 2,691 million) and to the
forward commitment for the purchase of Seat Pagine Gialle shares (euro 1,942
million), to adjust them to the market value of the shares (based on the
average of the last six months of 2002), as a result of the decision of no
longer considering the "Directories" business of Seat Pagine Gialle to be of
strategic interest, and, on the other hand, to the lower writedown, compared to
the prior year, made in respect of Telecom Italia International (-euro 882
million) and the writedown of TI WEB (euro 542 million) effected in 2001.
As far as dividends are concerned, with a view towards meeting the objective of
paying dividends to the shareholders that are substantially in line with 2001,
in December 2002, reserves were distributed for euro 987 million. A motion for
the residual amount of dividends will be submitted to the Shareholders' Meeting
convened to approve the 2002 financial statements.
Sales and service revenues of euro 17,055 million decreased by euro 254
million, -1.5%, compared to 2001.
The reduction can principally be attributed to traffic, the equivalent amount
of which, despite an increase of 2.4% in term of minutes, declined by euro 533
million (-6.0%) as a result of a reduction in the average retail and wholesale
return of 8.3%.
Such phenomena were partly compensated by the increase in basic charges and
activation fees.
Sales and service revenues, net of the amounts due to other telecommunications
operators, totaled euro 13,409 million and decreased by euro 485 million
(-3.5%) compared to the prior year.
Gross operating profit of euro 7,549 million decreased by euro 22 million
compared to 2001 (euro 7,571 million). The percentage of gross operating profit
to sales and service revenues was 44.3% (43.7% in the previous year).
The change is due to the reduction in the costs of raw materials and outside
services (-euro 143 million) and the reduction in labor costs, which fell by
euro 65 million compared to 2001, thus compensating the aforementioned decrease
in revenues.
Total raw materials and outside services, net of the amount due to other
operators, amounted to euro 3,320 million, and decreased by euro 374 million
compared to the prior year.
Operating income, amounting to euro 4,045 million, increased by euro 62 million
compared to 2001 (+1.6%), and represents 23.7% of revenues, compared to 23.0%
in 2001. The increase was essentially attributable to lower depreciation and
amortization charges (-euro 301 million) that were partly compensated by
expenses connected with credit management (+euro 255 million).
Net investment and financial income (expense) is composed as follows:
-------------------------------------------------------------------------------
2002 2001 Change
(millions of euro) (a) (b) (a-b)
-------------------------------------------------------------------------------
Net investment income 2,118 2,022 96
Net financial expense (1,087) (1,624) 537
Value adjustments to financial assets (654) (775) 121
-------------------------------------------------------------------------------
Total 377 (377) 754
-------------------------------------------------------------------------------
28
In particular:
o the increase in net investment income (+euro 96 million) is primarily
due to higher dividends from the subsidiaries TIM (+euro 247 million)
- following the distribution of reserves in December 2002 - and
Finsiel (+euro 126 million), partly offset by the fact that in 2001
Telecom Italia had benefited from a distribution of reserves by Saiat
(euro 249 million);
o the reduction in net financial expenses (-euro 537 million) was
almost entirely due to the fact that a provision was set aside in
2001 (euro 569 million) for the forward commitment to purchase Seat
Pagine Gialle shares; the provision in 2002, as previously described,
was recorded in extraordinary expense;
o the reduction in value adjustments to financial assets (-euro 121
million) was due to the increase in the writedowns of other
investments for a total of euro 131 million and to the fact that in
2001 writedowns were made to the investments in Telespazio (euro 91
million) and in TMI - Telemedia International Italia (euro 161
million).
Net extraordinary income (expense) showed an expense balance of euro 6,093
million (-euro 2,893 million in 2001), with an decrease of euro 3,200 million.
Specifically:
Extraordinary income of euro 884 million comprised:
o the gains realized on the sales of investments in Telemaco
Immobiliare (euro 134 million), Telespazio (euro 47 million), IMMSI
(euro 51 million), EMSA (euro 70 million), the contribution of the
"Asset Management" business segment to Tiglio II (euro 126 million),
the sale of the non-facility business segments (property, project and
agency) to the Pirelli & C. Real Estate group (euro 15 million), the
sale of the "Training" segment to Telecom Italia Learning Services
(euro 2 million) and the disposal of buildings (euro 7 million);
o the prior period income arising from the recovery of accrued
pre-amortization interest (euro 131 million) on the expenses for
employee benefit obligations under Law 58/1992 that were paid, with
reserve, to INPS up to 1999 following the termination of litigation
after the courts ruled in Telecom Italia's favor;
o the recovery of expenses connected with extraordinary transactions
(euro 192 million) incurred by Telecom Italia on behalf of
subsidiaries (principally Telecom Italia International and TIM
International);
o the release to income (euro 59 million) of a part of the reserve for
risks and charges, set up in 2001 to cover the expenses connected
with the agreement for the sale of Stream to News Corporation and
Vivendi Universal/Canal+, after the parties did not go through with
the agreement;
o other prior period income of euro 50 million.
Extraordinary expenses of euro 6,977 million comprised:
o the writedown of the investment in Seat Pagine Gialle (euro 2,691
million) and the provision for the forward commitment to purchase
Seat Pagine Gialle shares (euro 1,942 million);
o the extraordinary provisions regarding the investments in Netesi
(euro 31 million) and Telecom Italia International (euro 1,102
million) mainly in conjunction with the expenses on the sale of the
investment in 9Telecom to LDCom (euro 389 million), the loss on the
sale of Telekom Austria (euro 189 million), the writedown of Netco
Redes (euro 103 million) and the writeoff of the carrying value of
the investment in Nortel Inversora (euro 37 million);
o the expenses and provisions (euro 379 million) for corporate
restructuring relating to employees cutbacks and layoffs;
o expenses under Law 58/1992 (euro 154 million) to cover employees
under the former fund "Telephone Employees Pension Fund" (FPT), which
became part of the general "Employees Pension Fund", in accordance
with the 2000 Finance Bill;
o the aforementioned expenses incurred on behalf of Group companies and
recovered from the same companies (euro 192 million);
o the extraordinary contribution to INPS, euro 71 million (established
by the 2000 Finance Bill for the three years 2000 - 2002);
o the provisions of euro 111 million following the guarantees provided
upon the disposals of Italtel (euro 15 million) and Telespazio (euro
38 million) and at the time of the reorganization of real estate
assets (Progetto Tiglio, euro 30 million), as well as for other
matters totaling euro 28 million, of which euro 22 million refers to
relations with Stream;
o the prior period expense (euro 158 million) relating to the
adjustment of the estimated value of unused prepaid telephone cards
following the introduction of technical data collection procedures;
29
o other prior period expenses of euro 146 million relating mainly to
expenses connected with extraordinary transactions, damage
compensation to third parties and sundry charges.
Income taxes had a positive effect on the result for the year of euro 26
million and decreased by euro 588 million compared to 2001. This was due to the
loss for the year that was principally caused by the aforementioned investment
writedowns, which contributed to the increase in deferred tax assets.
FINANCIAL CONDITION
As far as intangibles, fixed assets and long-term investments are concerned,
the reduction in industrial assets compared to December 31, 2001 (-euro 1,462
million) can be ascribed to the balance between investments (euro 2,322
million), depreciation and amortization (euro 3,020 million), disposals (euro
84 million), writedowns (euro 39 million) and the contributions of Telecom
Italia's "Asset Management" business to Tiglio II (euro 245 million) and the
"International Wholesale Services" business segment to TI Sparkle (euro 396
million). Long-term investments totaled euro 15,598 million and decreased by
euro 2,772 million from December 31, 2001. The reduction is principally due to:
o new investments and recapitalizations of euro 860 million of which:
[X] euro 186 million for the purchase of a 36.85% interest in the share
capital of Tiglio I;
[X] euro 60 million for the purchase of an 86% interest in EPIClink;
[X] euro 29 million for the purchase of a 69.10% interest in the share
capital of Netesi and for its successive recapitalization;
[X] euro 234 million for the recapitalization and replenishment of the
share capital of Stream;
[X] euro 87 million for the recapitalization of Telecom Italia Sparkle;
[X] euro 166 million for payments against future capital increases in
investments made principally to IT Telecom;
[X] euro 98 million for the purchase/recapitalization of other holdings;
o acquisition of investments, as a result of the aforementioned
contributions of business segments, in Telecom Italia Sparkle (euro 698
million) and Tiglio II (euro 74 million);
o writedowns for euro 4,396 million, including extraordinary writedowns
(euro 3,939 million) made to the value of investments in Seat Pagine
Gialle, Telecom Italia International and Netesi;
o disposals of investments for euro 376 million, of which euro 330 million
principally relates to the sale of EMSA (euro 155 million), Telespazio
(euro 80 million) and Telemaco Immobiliare (euro 76 million) and euro 46
million for the disposal of investments within the framework of the
contribution of the "International Wholesale Services" business segment to
Telecom Italia Sparkle;
o loans made primarily to Tiglio I, Tiglio II and Telegono for a total of
euro 117 million;
o euro 287 million for the purchase of 5,280,500 ordinary shares of treasury
stock and 45,647,000 savings shares of treasury stock.
Working capital was a negative balance of euro 2,511 million (a positive
balance of euro 12 million at December 31, 2001) and decreased by euro 2,523
million. The reduction is due to lower "trade accounts receivable" (-euro 812
million) and "other assets" (-euro 400 million) and higher "reserves for risks
and charges" (+euro 1,532 million) - especially with regard to the provision
for the forward commitment to purchase Seat Pagine Gialle shares of euro 1,942
million and the provisions to the reserve for corporate restructuring - and
higher other liabilities (+euro 363 million). Such effects were partly
compensated by the reduction in trade accounts payable (-euro 591 million). In
2002, transactions for the securitization of trade accounts receivable from
residential customers and the sale of receivables to factoring companies led to
a reduction in trade accounts receivable from customers at December 31, 2002 of
euro 1,031 million.
Net invested capital of euro 26,084 million (euro 32,784 million at December
31, 2001) was financed by shareholders' equity for 42% and net debt for 58%.
Shareholders' equity went from euro 15,871 million at December 31, 2001 to euro
10,956 million at the end of 2002. The reduction, equal to euro 4,915 million,
was due to:
30
-------------------------------------------------------------------------------
(millions of euro) 2002 2001
-------------------------------------------------------------------------------
At January 1 15,871 18,714
Net income (loss) for the year (1,645) 151
Retained earnings 1 -
Portion of capital grants available 13 15
Distribution of profits (142) (2,309)
Distribution of income reserves (3,151) -
Cancellation of the reserve for treasury stock in portfolio - (711)
Increase in additional paid-in-capital 8 10
Increase in share capital 1 188
Reduction in revaluation reserve Law 72, 3/19/83 - (187)
-------------------------------------------------------------------------------
At December 31 10,956 15,871
-------------------------------------------------------------------------------
The Telecom Italia Shareholders' Meeting on December 12, 2002 passed a
resolution to reclassify reserves by the transfer of euro 2,160 million from
"miscellaneous reserves" to "additional paid-in-capital ", the transfer of euro
820 million from "additional paid-in-capital" to the "legal reserve", the
transfer of euro 660 million from the "legal reserve" to "miscellaneous
reserves" with the contextual change in the name to "miscellaneous income
reserves". This reclassification immediately identifies, in the financial
statements, the nature of the reserves, namely whether they are profit or
capital reserves. The same Shareholders' Meeting resolved to distribute
reserves for an amount of euro 987 million, paying euro 0.1357 to the
shareholders for each ordinary and savings share, which is in line with the
objective of ensuring the shareholders an amount corresponding to the dividends
paid out for 2001.
Net debt of euro 15,128 million (euro 16,913 million at December 31, 2001)
decreased by euro 1,785 million from December 31, 2001. The improvement from
the end of 2001 was due to the monetary flows provided by operating activities
(euro 7,845 million) which more than compensated the flows used for investing
activities (euro 2,799 million), for the payment of 2001 dividends and for the
distribution of income reserves totaling euro 3,293 million. Net financial debt
benefited from the effects of the securitization and factoring transactions for
a total amount, at December 31, 2002, of euro 1,008 million, of which euro 826
million refers to securitization (euro 848 million at December 31, 2001).
Gross debt at December 31, 2002 totals euro 17,299 million (euro 17,909 million
at December 31, 2001). Details are provided in the following table:
-------------------------------------------------------
(millions of euro) At 12/31/2002 At 12/31/2001
-------------------------------------------------------------------------------
euro % Foreign % Total % Total %
currency
-------------------------------------------------------------------------------
Medium/long-term debt 11,767 69 81 26 11,848 68 10,371 58
Short-term borrowings 5,216 31 235 74 5,451 32 7,538 42
-------------------------------------------------------------------------------
Total 16,983 100 316 100 17,299 100 17,909 100
-------------------------------------------------------------------------------
The portion of medium/long-term debt rose from 58% at December 31, 2001 to 68%
at December 31, 2002 following the issue of Telecom Italia fixed-rate notes
under the "Global Note Program" for a total of euro 2,500 million.
31
Telecom Italia S.p.A.
Statements of income
-------------------------------------------------------------------------------------------
Change
2002 2001 -------------
(millions of euro) amount %
-------------------------------------------------------------------------------------------
A. SALES AND SERVICE REVENUES 17,005 17,309 (254) (1.5)
Changes in inventory of contract work in
process - (19) 19
Increases in capitalized internal
construction costs 11 6 5 83.3
Operating grants - -
-------------------------------------------------------------------------------------------
B. STANDARD PRODUCTION VALUE 17,066 17,296 (230) (1.3)
Raw materials and outside services (1) (6,966) (7,109) 143 (2.0)
-------------------------------------------------------------------------------------------
C. VALUE ADDED 10,100 10,187 (87) (0.9)
Labor costs (1) (2,551) (2,616) 65 (2.5)
-------------------------------------------------------------------------------------------
D. GROSS OPERATING PROFIT 7,549 7,571 (22) (0.3)
Depreciation and amortization (3,020) (3,321) 301 (9.1)
Other valuation adjustments (357) (159) (198) o
Provisions to reserves for risks and charges (44) (100) 56 (56.0)
Net other income (expense) (83) (8) (75) o
-------------------------------------------------------------------------------------------
E. OPERATING INCOME 4,045 3,983 62 1.6
Net investment and financial income (expense) 377 (377) 754 o
Of which value adjustments (654) (775) 121 (15.6)
-------------------------------------------------------------------------------------------
F. INCOME BEFORE EXTRAORDINARY 4,422 3,606 816 22.6
ITEMS AND TAXES
Net extraordinary income (expense) (6,093) (2,893) (3,200) o
-------------------------------------------------------------------------------------------
G. INCOME BEFORE TAXES (1,671) 713 (2,384) o
Income taxes 26 (562) 588 o
-------------------------------------------------------------------------------------------
H. NET INCOME (LOSS) (1,645) 151 (1,796) o
-------------------------------------------------------------------------------------------
(1) Reduced by related cost recoveries
32
Balance Sheets
--------------------------------------------------------------------------------------------------------------
12/31/2002 12/31/2001 Change
(millions of euro) (a) (b) (a-b)
--------------------------------------------------------------------------------------------------------------
A. INTANGIBLES, FIXED ASSETS AND LONGTERM
INVESTMENTS
Intangible assets 1,287 1,336 (49)
Fixed assets 12,678 14,091 (1,413)
Long-term investments
o Equity investments and advances
on future capital contributions 15,010 18,149 (3,139)
o Other 588 221 367
--------------------------------------------------------------------------------------------------------------
29,563 33,797 (4,234)
--------------------------------------------------------------------------------------------------------------
B. WORKING CAPITAL
Inventories 70 77 (7)
Trade accounts receivable 4,292 5,104 (812)
Other assets 3,468 3,868 (400)
Trade accounts payable (2,958) (3,549) 591
Reserves for risks and charges (3,145) (1,613) (1,532)
Other liabilities (4,238) (3,875) (363)
--------------------------------------------------------------------------------------------------------------
(2,511) 12 (2,523)
--------------------------------------------------------------------------------------------------------------
C. INVESTED CAPITAL, net of
operating liabilities (A+B) 27,052 33,809 (6,757)
--------------------------------------------------------------------------------------------------------------
D. RESERVE FOR EMPLOYEE
TERMINATION INDEMNITY (968) (1,025) 57
--------------------------------------------------------------------------------------------------------------
E. INVESTED CAPITAL, net of operating liabilities
and reserve for employee termination
indemnities (C+D) 26,084 32,784 (6,700)
--------------------------------------------------------------------------------------------------------------
Financed by:
F. SHAREHOLDERS' EQUITY
Share capital paid-in 4,024 4,023 1
Reserves and retained earnings 8,577 11,697 (3,120)
Net income (loss) (1,645) 151 (1,796)
--------------------------------------------------------------------------------------------------------------
10,956 15,871 (4,915)
--------------------------------------------------------------------------------------------------------------
G. MEDIUM/LONG-TERM DEBT 11,848 10,371 1,477
--------------------------------------------------------------------------------------------------------------
H. NET SHORT-TERM BORROWINGS
Short-term borrowings 5,451 7,538 (2,087)
Liquid assets and short-term financial assets (2,698) (1,248) (1,450)
Financial accrued expense (income) and deferred
expense (income), net 527 252 275
--------------------------------------------------------------------------------------------------------------
3,280 6,542 (3,262)
--------------------------------------------------------------------------------------------------------------
(G+H) 15,128 16,913 (1,785)
--------------------------------------------------------------------------------------------------------------
I. TOTAL (F+G+H) 26,084 32,784 (6,700)
--------------------------------------------------------------------------------------------------------------
33
Statements of Cash Flows
----------------------------------------------------------------------------------------------------------------------------------
(millions of euro) 2002 2001
----------------------------------------------------------------------------------------------------------------------------------
A. NET DEBT, AT BEGINNING OF YEAR (16,913) (16,839)
----------------------------------------------------------------------------------------------------------------------------------
B. CASH FLOWS - OPERATING ACTIVITIES
Net income (loss) (1,645) 151
Depreciation and amortization 3,020 3,321
(Gains) losses on sales of intangibles, fixed assets and long-
term investments (423) (241)
Writedowns of intangibles and fixed assets and long-term
investments 4,371 3,148
Change in working capital (*) 2,579 (514)
Net change in reserve for employee termination indemnities (57) (6)
----------------------------------------------------------------------------------------------------------------------------------
7,845 5,859
----------------------------------------------------------------------------------------------------------------------------------
C. CASH FLOWS - INVESTING ACTIVITIES
Intangibles, fixed assets and long-term
investments: (3,608) (4,495)
. intangible assets (648) (727)
. fixed assets (1,674) (1,739)
. long-term investments (1,286) (2,029)
Intangibles, fixed assets and long-term investments purchased
as a result of corporate transactions (772) (413)
Proceeds from sale, or redemption value, of intangibles, fixed
assets and long-term investments 891 975
Intangibles, fixed assets and long-term investments sold as a
result of corporate transactions 690 280
----------------------------------------------------------------------------------------------------------------------------------
(2,799) (3,653)
----------------------------------------------------------------------------------------------------------------------------------
D. CASH FLOWS - FINANCING ACTIVITIES
Capital contributions 9 10
Capital grants 23 19
----------------------------------------------------------------------------------------------------------------------------------
32 29
----------------------------------------------------------------------------------------------------------------------------------
E. DIVIDENDS (3,293) (2,309)
----------------------------------------------------------------------------------------------------------------------------------
F. CHANGE IN NET DEBT (B+C+D+E) 1,785 (74)
----------------------------------------------------------------------------------------------------------------------------------
G. NET DEBT, AT END OF YEAR (A+F) (15,128) (16,913)
----------------------------------------------------------------------------------------------------------------------------------
(*) The difference with respect to the reclassified "balance sheet" is due to
entries affecting working capital. They refer to changes in capital
grants, the use of the reserve for losses of subsidiaries and affiliates,
the adjustment of medium/long-term loans receivable to year-end exchange
rates.
The change in net debt is due to the following:
-------------------------------------------------------------------------------
(millions of euro) 2002 2001
-------------------------------------------------------------------------------
Increase (decrease) in medium/long-term debt 1,477 7,183
Increase (decrease) in short-term borrowings (3,262) (7,109)
-------------------------------------------------------------------------------
Total (1,785) 74
-------------------------------------------------------------------------------
34
[] SUBSEQUENT EVENTS
There follows a description of the significant events subsequent to December
31, 2002.
Sale of Globo.com
On January 15, 2003, Telecom Italia Finance sold its 28.57% investment in the
Brazilian company Glb Servicos Interativos ("Globo.com") to TIM Brasil for US
$15 million. At the end of January, TIM Brasil then sold that investment to the
Globo television group. The net gain for the Telecom Italia Group was about
euro 4 million.
Renewal of the first securitization tranche 2001
On January 22, the company TI Securitisation Vehicle renewed the first tranche
of euro 100 million of asset backed securities issued on January 29, 2001. The
transaction falls under the securitization program of Telecom Italia telephone
bills and is described in greater detail in the notes to the financial
statements of Telecom Italia S.p.A.
Early purchase of leased assets
On January 27, 2003, the procedures were completed for the early purchase of 12
property units (for about 300,000 square meters) from Teleleasing S.p.A. that
are used by Telecom Italia S.p.A. and other Group companies under financial
leasing contracts. The deal involved a total financial payment of some euro 369
million for the entire Group.
Sale of the TI Logistic business segment
On January 27, 2003, Telecom Italia announced an agreement with TNT Logistics
Italia whereby this company would take over the warehouse and distribution
operations of wireline telephone products for customers and for assistance and
installation for the Telecom Italia network. The agreement also provides for
the sale to TNT Logistics of the relative business segment of Telecom Italia,
including six central warehouses, 100 advance warehouses and over 4.5 million
pieces of telephone equipment and parts a year. The understanding, finalized
with the aim of concentrating on the core business, became operative on March
5, 2003 following the authorization of the Antitrust Authority and the
experiment with the labor consultation procedure.
Acquisition of Consodata shares
On February 12, 2003, Seat Pagine Gialle purchased 1,108,695 ordinary shares of
the French subsidiary Consodata S.A. - listed on the Nouveau Marche of the
Paris Stock Exchange - following the sale option exercised by the founding
shareholders to which they were entitled on the basis of the agreement signed
originally with the previous management of Seat Pagine Gialle on July 31, 2000.
As a result of this transaction, after payment of the agreed consideration of
euro 44 per share - for a total amount some euro 48.8 million - Seat Pagine
Gialle acquired a further 8.17% stake and voting rights in the company, thus
increasing its holding in Consodata S.A. to 98.60%.
Sale of Telekom Srbija
On December 28, 2002, the Telecom Italia Group announced that it had reached an
agreement for the sale of its 29% stake in Telekom Srbija to PTT Srbija. The
agreement for the sale was finalized on February 20, 2003 and the closing is
scheduled to take place by the end of June.
PTT will pay euro 195 million, 120 million of which will be paid in four
installments beginning February 2003. The remaining amount will be paid in six
semi-annual installments beginning January 2006. The shares sold will be
deposited with an international bank until full payment of the price.
Sale of Tele Pay Roll Services
On February 28, 2003, Telecom Italia sold to Accenture group the 100% interest
in TE.SS - Tele Pay Roll Services, a company responsible for the administration
activities connected with human resources management of the Telecom Italia
Group. The sales price was euro 10 million. The transaction falls under the
program for the divestiture of non-core businesses by the Telecom Italia Group.
Telecom Italia - Hewlett Packard agreement
On February 21, 2003, Telecom Italia and Hewlett-Packard signed a five-year
agreement for management services and outsourcing worth a total of euro 225
million. Under the agreement, HP will supply asset management, help desk,
maintenance and administration services for 90,000 Telecom Italia workstations,
35
drawing upon the skills of around 600 IT Telecom specialists, who will be
absorbed by a new HP company specialized in these services. For its part, IT
Telecom is to house the systems and manage HP Italia's operating activities in
the SAP environment. The agreement will lead to a closer focus on the core
business and efficiency needs in terms of savings in the operation of the
distributed environment. The deal becomes binding and operational once the
consultations with the labor unions have been concluded and authorization has
been received from the Italian Antitrust Authority.
Bonds reserved for employees
On February 13, 2003, the Board of Directors of Telecom Italia resolved, by
partially revoking the resolution for the issue of bonds for the part not yet
executed, to reduce the bond issue reserved for employees from euro 1 billion
to euro 400 million.
Repurchase and subsequent cancellation of notes
On March 11, 2003, the Board of Directors of Telecom Italia voted to
repurchase, at market price, and subsequently cancel, a part of the notes
subscribed by the subsidiary Telecom Italia Finance up to a maximum amount of
euro 2 billion. This decision was taken in order to regulate the ratio of net
equity to notes and bonds, in view of the motion for the distribution of
reserves up to a maximum amount of euro 1,333 million.
Approval of the 2002 interconnection price list by the National Regulatory
Agency
On February 27, 2003, the Infrastructures and Networks Commission of the
National Regulatory Agency approved the interconnection price list for 2002,
currently being announced, which Telecom Italia must apply to competing
operators for the use of its network with regard to Interconnection Services
for traffic, Billing Services with the risk of non-payment by Telecom Italia
subscribers for access to non-geographical numbers and Unbundling Local Loop
Access Services. The economic effects are included in the 2002 financial
statements.
LISIT Informatica
On February 4, 2003, Telecom Italia, in a temporary association of companies
with Finsiel and Lutech (Lucchini group), won the bid held by the Lombardy
Region (through the subsidiary Lombardia Informatica S.p.A.) for the supply of
the goods and services needed to disseminate and manage the "Regional Services
Card" throughout the Lombardy Region.
The total value of the bid won by the association led by Telecom Italia,
scheduled to last until 2009, is approximately euro 350 million.
Within the framework of the obligations undertaken, Telecom Italia and Finsiel
acquired 35.2% of the share capital of LISIT, for a total of euro 54 million.
Agreement for the acquisition of Megabeam
In March 2003, Telecom Italia signed the agreement for the acquisition of 100%
of the share capital of Megabeam Italia S.p.A., the first Italian wireless
internet service provider, for consideration of euro 11.5 million.
Megabeam's acquisition falls under Telecom Italia's broadband strategy, in
which wireless technology, such as Wi-Fi, occupies a fundamental role in
solutions both for the family and for business, since it enhances the
innovative connectivity services on fixed networks with functions and
flexibility. Megabeam offers Wi-Fi networking services in private sites and is
experimenting the same Wi-Fi service in public places - in the main Italian
airports and in an important hotel chain - using Wireless-Lan which operates on
the 2400-2483.5 frequency.
The execution of the agreement is subject to the approval of the Antitrust
Authority.
Buy-back of treasury stock by Telecom Italia
Under the transaction for the buy-back of treasury stock authorized by the
Ordinary Shareholders' Meeting of Telecom Italia shareholders on November 7,
2001, during the period January 1, 2003 to March 11, 2003, 8,662,500 savings
shares were purchased at an average price of euro 4.73 per share, for an
investment of euro 41 million, and 915,000 ordinary shares at an average price
of euro 6.83 per share, for an investment of euro 6 million. The total treasury
stock purchased up to March 11, 2003 amounted to 54,309,500 savings shares at
an average price of euro 5.24 for an investment of euro 285 million and
6,195,500 ordinary shares at an average price of euro 8.00 for an investment of
euro 50 million.
36
Sale of SITEBA
On March 12, 2003, Telecom Italia sold, to the other shareholders which
exercised their pre-emptive right, the 30% investment held in the share capital
of the company SITEBA Sistemi Telematici Bancari S.p.A., for a total amount of
some euro 7.2 million.
Merger by incorporation of Telecom Italia Lab in Telecom Italia
As voted by the Extraordinary Shareholders' Meetings of Telecom Italia and
Telecom Italia Lab on December 12, 2002, the 100%-controlled company Telecom
Italia Lab was merged by incorporation in Telecom Italia. The deed of merger
was signed on March 18, 2003, effective for accounting and fiscal purposes on
January 1, 2003.
Project to merge Telecom Italia and Olivetti
On March 11, 2003, the Boards of Directors of Olivetti and Telecom Italia
passed resolutions on the project directed to the simplification of the
corporate structure of the Group via the merger of the two companies. The
project specifically calls for the merger by incorporation of Telecom Italia in
Olivetti and constitutes a fundamental step in the industrial and financial
reorganization process begun in July 2001 and aimed at the creation of value
for the shareholders.
[] BUSINESS OUTLOOK
In 2003, the Telecom Italia Group expects to substantially maintain operating
income at this year's level and further reduce net debt.
[] RELATED PARTY TRANSACTIONS
With reference to related party transactions, the effects of such transactions
on the balance sheet and statement of income in the consolidated financial
statements of the Telecom Italia Group at December 31, 2002 are reported in the
following table.
The effects of transactions between Telecom Italia S.p.A. and the relative
parent companies, subsidiaries and affiliated companies are reported, as a
supplement to this disclosure, in the individual notes to the statutory
financial statements of Telecom Italia S.p.A.
In the consolidated financial statements, the effects of intercompany
transactions on the balance sheet and statement of income, that is, all
transactions among consolidated companies, have been eliminated. All related
party transactions, including intercompany transactions, fall within the normal
business operations of the group, are governed by market terms or on the basis
of specific laws; there aren't atipic or unusual transactions.
37
-----------------------------------------------------------------------------------------------------------------------------------
Major statement of income and
balance sheet components Transactions with: Nature of transaction
-----------------------------------------------------------------------------------------------------------------------------------
unconsolidated parent companies,
subsidiaries subsidiaries and
and affiliates affiliates of
(millions of euro) parent companies
-----------------------------------------------------------------------------------------------------------------------------------
Sales and service revenues 299 3 These comprise revenues from Teleleasing (euro 105
million), Brasil Telecom (euro 48 million), Stream
(euro 42 million), Auna group (euro 18 million),
Telecom Argentina (euro 18 million), Telekom Srbija
(euro 17 million)
-----------------------------------------------------------------------------------------------------------------------------------
Raw materials and outside services 445 24 These mainly comprise rent payable to IMSER (euro
153 million) and Telemaco Immobiliare (euro 37
million) as well as TLC service costs from Etecsa
Cuba (euro 77 million) and maintenance and
assistance contracts from Italtel (euro 40 million)
and Siemens Informatica (euro 24 million)
-----------------------------------------------------------------------------------------------------------------------------------
Net other (income) expense 9 - These mainly relate to cost recoveries for personnel
on loan to certain foreign subsidiaries and
affiliates
-----------------------------------------------------------------------------------------------------------------------------------
Net financial (income) expense (9) (11) These include accrued interest income on loans made
to certain subsidiaries and affiliates (euro 14
million), interest expense payable to Teleleasing
for financial leasing transactions (euro 23 million)
and interest on the payable by Softe to Olivetti
Finance NV (euro 11 million)
-----------------------------------------------------------------------------------------------------------------------------------
Loans in long-term investments 440 - These comprise medium/long-term loans made to IS TIM
(euro 313 million) , Tiglio I (euro 54 million),
Telegono (euro 34 million) and Tiglio II (euro 30
million)
-----------------------------------------------------------------------------------------------------------------------------------
Financial receivables 35 - These comprise short-term loans made to TMI group
companies (euro 14 million) and Golden Lines (euro
10 million net of provisions)
-----------------------------------------------------------------------------------------------------------------------------------
Financial payables 406 - These refer mainly to payables for finance leases to
Teleleasing (euro 393 million)
-----------------------------------------------------------------------------------------------------------------------------------
Trade and other accounts receivable 219 2 They mainly regard receivables from Stream (euro 71
million), Telekom Srbija (euro 21 million net of
provisions), Teleleasing (euro 38 million) and
Consorzio Telcal (euro 14 million)
-----------------------------------------------------------------------------------------------------------------------------------
Trade and other accounts payable 386 311 These refer to payables to Olivetti for the
settlement of Group VAT and receivables from the tax
authorities transferred (euro 296 million) and
supply contracts connected with operating and
investment activities: they include payables to the
Italtel group (euro 150 million), Siemens
Informatica (euro 40 million), Teleleasing (euro 17
million) and advances from Consorzio Telcal (euro
103 million)
-----------------------------------------------------------------------------------------------------------------------------------
Contract work in process 110 - These refer mainly to activities on behalf of
Consorzio Telcal for the Telematico Calabria Plan
-----------------------------------------------------------------------------------------------------------------------------------
Guarantees and collateral provided 908 - These comprise sureties provided on behalf of Is Tim
(euro 537 million), Consorzio Csia (euro 85 million)
and Stream (euro 72 million) as well as collateral
on behalf of Is Tim (euro 110 million)
-----------------------------------------------------------------------------------------------------------------------------------
Purchases and sales commitments 17 - They refer to commitments with Teleleasing under
operating leases.
-----------------------------------------------------------------------------------------------------------------------------------
Investments in fixed assets and 455 - These mainly consist of acquisitions of telephone
intangibles million) and Siemens Informatica (euro
19 million) exchanges from the Italtel group (euro
406 million) and computer projects from Webegg (euro
14 million) and Siemens Informatica (euro 19
million)
-----------------------------------------------------------------------------------------------------------------------------------
Acquisition of investments - 58 50% of Webegg from Olivetti
-----------------------------------------------------------------------------------------------------------------------------------
Disposal of investments 690 - 25% of Mobilkom Austria, through the disposal of the
Autel holding to Telekom Austria
-----------------------------------------------------------------------------------------------------------------------------------
Contribution and sale of business 219 - They refer to gains realized on the concentration of
segments real estate assets in Tiglio I (euro 159
million) and the contribution of the "asset
management" business segment to Tiglio II (euro 60
million) (1).
-----------------------------------------------------------------------------------------------------------------------------------
Related party transactions, excluding transactions among Group companies, also
comprise those by the Telecom Italia Group with the Pirelli group and the
Edizione Holding group in 2002 as follows:
--------------------------------------------------------------------
(millions of euro) 2002
-----------------------------------------------------------------------------------------------------------------------------------
Sales and service revenues 26 These mainly refer to telephone services to Pirelli
group (euro 8 million) and to Edizione Holding (euro
16 million) and to information services to Pirelli
group (euro 2 million).
-----------------------------------------------------------------------------------------------------------------------------------
Raw materials and outside services 23 These essentially refer to R & D expenditures and
the supply of services in the IPR field to Pirelli
group (euro 21 million) and to Edizione Holding
group (euro 2 million).
-----------------------------------------------------------------------------------------------------------------------------------
Trade and other accounts receivable 3 These mainly refer to the above-mentioned telephone
services to Pirelli group (euro 1.6 million) and to
Edizione Holding group (euro 1.5 million).
-----------------------------------------------------------------------------------------------------------------------------------
Trade and other accounts payable 9 These mainly refer to the supply contracts connected
with investment activities to Pirelli group (euro 8
million) and to Edizione Holding group (euro 1
million).
-----------------------------------------------------------------------------------------------------------------------------------
Investments in fixed assets and intangibles 32 These mainly refer to purchases of
telecommunications cables from Pirelli group.
-----------------------------------------------------------------------------------------------------------------------------------
Acquisition of investments and purchases commitments 21 Purchase of 25.3% stake in EPIClink by Telecom
Italia S.p.A. from Pirelli S.p.A. (euro 18 million)
purchase commitment for remaining 5% (euro 3
million) (2)
-----------------------------------------------------------------------------------------------------------------------------------
35 Purchase by TIM of Blu S.p.A. shares, stake from
Edizione Holding S.p.A. e Autostrade S.p.A.. (2)
-----------------------------------------------------------------------------------------------------------------------------------
Acquisition of business segments 3 Purchase of a business segment by EPIClink S.p.A.
from Pirelli Informatica
-----------------------------------------------------------------------------------------------------------------------------------
Disposal of business segments 15 Gain on the sale of non-facility business segments
to Pirelli Real Estate (1)
-----------------------------------------------------------------------------------------------------------------------------------
Moreover, during the year 2002, TIM sold telephone cards for an equivalent
amount of some euro 20 million to Autogrill (Edizione Holding Group) for
subsequent resale to the public.
(1) The acquisition and sale transactions of equity investments is fully
described in the section "Acquisitions and sales of equity investments" and in
the section "Economic and financial performance - Telecom Italia Business
Units/Operating Activities - Other activities".
(2) The transaction is extensively described in the section "Acquisitions and
sales of equity investments".
38
ECONOMIC AND FINANCIAL PERFORMANCE - TELECOM ITALIA
BUSINESS UNITS/OPERATING ACTIVITIES
DOMESTIC WIRELINE
o Growth of profit margins
o Innovation of products and service and in the field of Customer Care
o Efficiency in costs and investments
o Development of fiber optic networks for operators
o Corporate reorganization for international services management
[] THE BUSINESS UNIT
The Domestic Wireline Business Unit operates on a national level as the
consolidated market leader in wireline telephone and data services and
call centers, for final (retail) customers and other (wholesale)
operators. On an international level, Domestic Wireline develops fiber
optic networks for wholesale customers, mainly in Europe and Latin
America. During the year, strong competition in the market continued. It
was more accentuated in the case of national traffic and was countered
with new rate plans offered as part of the action to win back and retain
customers.
[] THE STRUCTURE BUSINESS UNIT
The Business Unit is organized as follows:
-------------------------------- -------------------------------- -------------------------------
Telecom Italia DW National Subsidiaries International Subsidiaries
-------------------------------- -------------------------------- -------------------------------
Wireline TLC services: Atesia S.p.A. Latin American Nautilus Group
Path.Net S.p.A. Mediterranean Nautilus Group
.. Traffic and Access Telecom Italia Sparkle Group (1) Med-1 Group
.. Data Business - Telecom Italia Sparkle S.p.A. Intelcom San Marino S.p.A.
.. National Wholesale - Pan European Backbone
.. International Wholesale (1) - Telecom Italia of N.A.Inc.
.. Public Telephone Services - Telemedia Int.Lux. Group
-------------------------------- -------------------------------- -------------------------------
(1) "International Wholesale Services" became part ot Telecom Italia
Sparkle on December 31, 2002
[] MAJOR CORPORATE EVENTS/SCOPE OF CONSOLIDATION
In 2002, changes in the scope of consolidation were due to the transfer of
Saritel S.p.A. to the Information Technology Group Operating Activity and
the addition of the company Intelcom San Marino S.p.A. (previously part of
the International Operations Operating Activity) following the
reorganization of the international operations of the Telecom Italia
Group. 2001 figures have been restated accordingly.
On December 31, 2002, Telecom Italia's "International Wholesale Services"
business was contributed to Telecom Italia Sparkle (ex TMI - Telemedia
International Italia), to which the investments in the companies headed by
Pan European Backbone and Telecom Italia of North America were also
conferred at the same time. Telecom Italia Sparkle will have the task of
developing the international services market aimed at "heavy users", these
being wireline and mobile operators, ISPs (Internet Service Providers) and
multinational companies. This initiative will enable Telecom Italia to
step up its competitive position on the international market by focusing
on high-value Data and Internet services with a high growth potential,
operated on infrastructures owned by the Group in Italy and abroad.
39
[] ECONOMIC AND FINANCIAL DATA
The following table shows the key results in 2002 compared to those in
2001, restated for purposes of comparison.
-------------------------------------------------------------------------------
2002 2001 Change
(a) (b) (a - b)
-------------------------------------------------------------------------------
(millions of euro) amount %
-------------------------------------------------------------------------------
Sales and service revenues 17,022 17,168 (146) (0.9)
Gross operating profit 7,965 7,750 215 2.8
% of revenues 46.8% 45.1%
Operating income 4,700 4,361 339 7.8
% of revenues 26.6% 25.4%
Investments:
.. industrial 2,462 2,801 (339) (12.1)
.. goodwill - - - -
Employees at year-end (number) 53,682 57,895 (4,213) (7.3)
-------------------------------------------------------------------------------
Gross operating profit For comments on the performance of operations
please refer to the section "Economic and
[GRAPHIC OMITTED] financial review of Telecom Italia S.p.A.".
[2001 - 7,750
2002 - 7,965]
Compared to the prior year, Sales and service revenues reported a reduction of
0.9% (-euro 146 million). This slight fall, which was considerably lower than
that reported in 2001 (-1.4% compared to 2000), constitutes a very important
result that was achieved thanks to an effective focus on the telephony market,
the core market of the Business Unit, and to the notable growth of the
broadband markets. Growth in the segment of innovative Data services and Web
services was particularly significant. This compensated the decline recorded in
traditional data and leased line services, which were affected by a regimented
price regime, and the effect of migration towards innovative solutions.
In particular, the reduction in revenues can be mainly attributed to traffic
(-euro 533 million) and other components reporting a decline (sales and other
revenues), and was offset to a large extent by the increase in charges and fees
(+euro 539 million).
In greater detail, the reduction in the average yield of traffic (-8.3%) was
partially compensated by an increase in minutes (+2.4%), with greater stability
of the market share and growth of 0.1% compared to 2001. The main phenomena
which influenced these figures were as follows:
o the spread of commercial rate plans (mainly Teleconomy and Alice) offering
rate discounts on traffic in order to build customer loyalty, with payment
of subscription charges;
o the rate adjustments of July 1, 2001 and February 1, 2002 which reduced
the prices of national and international communications and, at the same
time, led to an increase in subscriber line charges for the network;
o the competitive context;
o the sharp growth of "carried" traffic on behalf of other operators.
There was a considerable increase in the gross operating profit compared to the
prior year (+2.8%), which was amply confirmed by the operating income (+7.8%),
as a result of steps taken to curb costs and improve the level of the
efficiency of invested capital begun in 2001.
Investments fell by 12.1% compared to the prior year, as a result of a
selective policy of investments designed to combine efficiency with
technological development.
The number of employees fell by 4,213 due to cutbacks under Law 223/1991
(3,298), other resignations (2,040), new recruits (1,104) and an increase as a
result of transfers of employees from other companies in the Group (21).
[] INFORMATION ON OPERATIONS
The following table shows the operating highlights in 2002, compared to
those in 2001:
40
-------------------------------------------------------------------------------
Operating data 12.31.2002 12.31.2001
-------------------------------------------------------------------------------
Fixed network connections (in thousands) 27,142 27,353
- of which ISDN 5,756 5,403
Annual increase in minutes of traffic on
the fixed network (%) 2.4 22.5
o national traffic 1.8 22.8
o international traffic 17.9 16.9
- outgoing 13.0 11.4
- incoming (0.1) 12.6
- in transit 64.1 39.3
-------------------------------------------------------------------------------
[] Traffic and access
During 2002, new commercial rate plans were launched for Residential and
Business Phone services, including:
---------------------------------------------------------------------------------------------------------------------------
Residential telephone Ricomincio da Te Generalized plan combining minutes of free calls (local and long-
services distance) included in the monthly basic telephone subscription charge
----------------------------------------------------------------------------------------------
Teleconomy Forfait Customized package offering free national calls (local and long-
distance calls) of unlimited duration for a fixed monthly cost
----------------------------------------------------------------------------------------------
Teleconomy Zero Customized package offering calls to anywhere in Italy (local and long-
distance calls) at a fixed cost per call (regardless of the duration
of the call) with a monthly subscription charge
---------------------------------------------------------------------------------------------------------------------------
Business telephone Ricomincio da Te In the second half, the plan combining minutes of free calls with a
services simultaneous adjustment of the monthly basic subscription charge was
also introduced to the Business segment
----------------------------------------------------------------------------------------------
Business and Plan directed at companies with a high volume of traffic detailed into
Corporate Rate Plans 9 variable rate plans according to the customer's commitment for
expenditure, with the expense subdivided into six installments
----------------------------------------------------------------------------------------------
Teleconomy Plan enabling customers to acquire a maximum number of minutes of
Professional Plan national traffic included in the monthly subscription charge
----------------------------------------------------------------------------------------------
Teleconomy Zero Package offering calls to anywhere in Italy (local and long-distance
Business calls) at a fixed cost per call (regardless of the duration of the
call) with a monthly subscription charge
---------------------------------------------------------------------------------------------------------------------------
With reference to Public Telephone Service installations, terminals using
ISDN technology numbered 104,635 at year-end (+50% compared to year-end
2001).
[] Data business
During 2002, the commercial range of data packages was expanded by the
introduction of new plans in both the data transmission segment of
corporate networks and Internet access, offered to Companies and Private
Customers alike. These included:
-------------------------------------------------------------------------------
Data transmission o Development of new fiber optic solutions for both
point-to-point connections and IP services
services, with new rate plan profiles especially
for the small/medium size business segment
o Extension of geographical coverage in broadband
with 600 new ADSL exchanges, and extension of the
ATM service to 80 POP with consequent repricing
o Consolidation of the range of value-added
services offered through the launch of security
solutions for the small/medium-size business
segment and enhancement of the range of
outsourcing services
-------------------------------------------------------------------------------
Web services o Launch of the web-wizard rate plan for helping
users create websites on the Broadway platform
o Launch of storage services which make a secure,
confidential space available to companies for
keeping and conserving sensitive documents in
Internet Data Centers
o Enhancement of messaging services through
integration with SMS and Fax services and of
streaming services on Internet WebStudios with
the introduction of hi-tech production and
operation tools
o Expansion of the IES rate plan with customized
e-learning environments for companies New
services for the Full Business Management plan
(Housing, Hosting and Colocation)
-------------------------------------------------------------------------------
41
[] National wholesale
In 2002, Telecom Italia expanded its activities in the national wholesale
area as follows:
- at year-end approximately 131,000 phone lines had been connected
directly to the networks of other operators, through Local Loop
Unbundling.
- approximately 220,000 ADSL Wholesale lines were acquired by other
operators and ISPs.
- an increase of approximately 20% of traffic from traditional
interconnection services compared to the prior year.
- an increase of approximately 8% of access lines compared to 2001.
- construction of long-distance fiber optic networks for some leading
mobile and wireline operators in 2002.
From the commercial point of view, in 2002 the activities of the Wholesale
market were expanded through the following products:
-------------------------------------------------------------------------------
Access to broadband Wholesale ADSL: The plan, which was already
available the prior year, was enhanced through the
addition of new features in terms of services and
economic incentives. A new plan was introduced
whereby the ADSL connection is invoiced based on
consumption, according to the traffic involved.
Finally, promotional offers were introduced for
activation fees and discounts on monthly
subscription rates
Permanent Virtual Channel: new technological (SHDSL
technology) and commercial (flat-rate charges
applied to symmetrical connections) features have
also been introduced for this type of connection
-------------------------------------------------------------------------------
Dedicated carrier Giganet: the service for carrying data on optic
services connections, already available at the speed of 2.5
Gbit/s, has been expanded with the introduction of
the speed of 10 Gbit/s
-------------------------------------------------------------------------------
Unbundling Local Loop ULL Provisioning: A new plan has been created to
Services enable operators to obtain additional processing
capacity of ULL orders from Telecom Italia compared
to the standard capacity. In addition, significant
economic incentives were introduced on ULL and
Shared Access services
-------------------------------------------------------------------------------
Housing and hosting There have been significant developments in the
offering to accommodate apparatus on Telecom Italia
premises. It has been extended to various types of
systems and includes the option of maintenance of
the apparatus concerned
-------------------------------------------------------------------------------
Internet interconnection Decade 7: OLOs (Other Licensed Operator) and ISPs
traffic have initiated the large-scale introduction of the
new numbering system for access to Internet through
the telephone network. This interconnection service
makes it possible to use single numbers on a
national scale to dial the access supplier, and also
makes it possible to charge the final customer for
the traffic in various ways
"Flat collection": This new offer has been
introduced whereby, in addition to the minute
collection system already available, operators can
acquire a certain "capacity" of traffic collection
at various levels of the network, in blocks of 30
lines
-------------------------------------------------------------------------------
[] International wholesale
With regard to international wholesale services (which, as described
above, were contributed to Telecom Italia Sparkle at the end of 2002 by
Telecom Italia - Domestic Wireline), growth was steady both in Telephony
services and in IP and Data transmission services:
- With regard to wholesale volumes there was growth (+26.2% compared to
the prior year) thanks to interconnection with new international
carriers, to greater collection by Italian OLOs on the domestic
market and the competitiveness of the Telecom Italia offering in the
transit segment.
- In the area of IP and data transmission, there was an increase in the
sales of innovative international connectivity services, (+6.7%
compared to 2001), in line with the growth trend of the market.
[] National network
The national network in statistics at December 31, 2002 is as follows.
----------------------------------------------------------------------------------------
Exchange areas about 10,400
Switching areas 615, served by 628 Line Stages (LS)
Gateway areas 33, served by 66 Transit Group Stages (TGS)
Copper access network 104.3 millions of kilometers-pair
Fiber optic access network 417,000 kilometers-line
Fiber optic carrier network 3.18 million of kilometers-line
Direct dialing circuits 3.6 million
Network for direct digital circuits 511,600 access points with speed up to 2 Mbit/s
Frame Relay accesses about 71,500 gates at 2 Mbit/s
PoP main data networks 32
----------------------------------------------------------------------------------------
42
As far as the national network is concerned, during 2002, infrastructures and
operation systems were improved, in particular, by the development of the
infrastructure supporting broadband services. The following activities are
worthy of note:
-------------------------------------------------------------------------------
National Backbone The migration of long-distance phone traffic from a
backbone based on circuit technologies to the
innovative one based on IP technologies began. In
2002, work began to integrate the voice and data
network platforms with the migration of voice
traffic to the Rome-Milan route on the innovative IP
network; the project is scheduled for completion in
2004
-------------------------------------------------------------------------------
ADSL In 2002, the ADSL network was extended to increase
the coverage of the ADSL service to more than 74% of
Internet users in 1,300 towns with 2,120 exchanges
-------------------------------------------------------------------------------
SHDSL New technology is making it possible to supply
services at up to 2 Mbit/s by using a single
two-pair copper cable
-------------------------------------------------------------------------------
Gigabit Ethernet Work continued to create a network to support the
marketing of services based on Gigabit Ethernet
technology (Ethernity and Hyperway MPLS services)
-------------------------------------------------------------------------------
W-LAN The broadband wireless LAN service for private users
was introduced
-------------------------------------------------------------------------------
Open Multimedia The Open Multimedia Platform (Content Delivery
Platform Network) was introduced, making it possible to
accelerate the distribution time of Web content by
repetition on the network server
-------------------------------------------------------------------------------
Carrier network 17 more SDH rings were realized for the network
infrastructure called Arianna involving links
between the regional networks and the national
transmission backbone. The national 96-fiber T- bone
fiber optic cable infrastructure using new
technology linking the largest Italian cities has
been completed along the main line of Turin-Venice
and Milan-Palermo via Genoa-Florence-Rome- Naples,
and via Bologna-Ancona-Bari. 32-fiber optic
wavelength division multiplexer systems (DWDM) have
been introduced at the speed of 40 times 10 Gbit/s
-------------------------------------------------------------------------------
Organization of Within the framework of striving to improve the
operating activities efficiency and quality of service, the Single Work
Center (CLU) project has been completed for the
integration of work centers (which are no longer
specialized according to the type of activity) and
the reduction of the number of centers from 331 to
148. The Work Force Management (WFM) and Trouble
Ticket Management (TTM) platform has now been spread
to all the work centers. The organization of network
platform supervision and control has been
centralized and the number of national centers has
been reduced from 11 to 5. The delivery and
assurance processes were re-engineered and optimized
-------------------------------------------------------------------------------
Value-added voice With regard to VAS voice services, implemented
services through the Intelligent Network, numerous new
services were created, particularly in the field of
Public Telephone Services, games and Customer
Operation
-------------------------------------------------------------------------------
[] International network
The international network in statistics at December 31, 2002 is as
follows.
------------------------------------------------------------------------------------------
Network operator directly connected 237
- Countries connected by direct dialing 220 (more than 9 satellite destinations)
- Countries connected by ISDN 53
Switching exchanges 9 (5 in Milan, 3 in Rome and 1 in Palermo)
Extent of European backbone 36,600 kilometers-line
Bands 2 rings of 60,000 Mbit/s
------------------------------------------------------------------------------------------
As far as the international network is concerned, services continued to be
activated on the new infrastructures and operating systems developed in 2001.
These were carried out in geographical areas with a strong growth in demand for
capacity and of strategic importance, thanks partly to interconnection with MED
and LAN networks.
At the end of 2002, integrated voice/data POPs in Europe and the U.S.A. were
nine, in Amsterdam, Brussels, Frankfurt, London, Milan, Paris, Vienna, Zurich
and Newark. The submarine cable network is now approximately 360,000 km long.
Highlights during the year include:
-------------------------------------------------------------------------------
Pan-European Activation of the pan-European regional network,
Backbone which connects nine countries (Austria, Belgium,
France, Germany, Italy, Holland, Spain, Switzerland
and Great Britain) with high-speed optical fibers
and a ring structure which will guarantee the
self-protection of traffic should a fault occur on
any given section. Activation of cross-border
services for wholesale customers such as Managed
Bandwidth (transmission capacity services), IP
connectivity (international IP connectivity
services), international phone services (transport
and delivery of international phone traffic, also
using ATM technology) and GRX (GPRS Roaming eXchange
for IP interconnection between GPRS mobile
operators) which are now fully operational.
-------------------------------------------------------------------------------
LAN (Latin American Activation of the final configuration of the LAN
Nautilus) ring network, which connects eight junctions in
Latin America, including Rio de Janeiro, Sao Paulo,
Buenos Aires and Santiago, to the American junctions
in Miami and New York.
-------------------------------------------------------------------------------
43
-------------------------------------------------------------------------------
MED (Mediterranean Work continued on the "Mediterranean Nautilus"
Nautilus) project, the submarine optical fiber ring network
which will connect Italy, Greece, Turkey and Israel,
with the completion (in the configuration which
ensures self-protection of the traffic) of the ring
which connects the points of Catania (Sicily),
Chania (Crete), Haifa (Israel) and Tel Aviv
(Israel).
-------------------------------------------------------------------------------
TINA (Telecom Italia Within the framework of the international development
of North America) of the Telecom Italia network, POPs were installed
in Newark (NJ) and Miami, making it possible to
expand and extend the commercial range of services
currently active on the Pan-European PEB network (IP
connectivity, wholesale phone services and Managed
bandwidth) to North America and, through Miami, also
to those of South America (LAN). Furthermore, work
began to augment capacity on the trans-Atlantic
route (EU- USA).
-------------------------------------------------------------------------------
[] Events subsequent to December 31, 2002
Events already described in the section "Subsequent events" are listed
below:
o New broadband network infrastructure: in February 2003, Telecom
Italia announced the start of an important project to create a new
broadband network infrastructure able to distribute hi-tech
multimedia services. This initiative will make it possible to adapt
telephone exchanges to new technologies through the gradual
replacement of current connection systems with apparatus of the new
generation.
The construction of this project was awarded by Telecom Italia to
Marconi which won the bid worth more than euro 80 million under a
two-year agreement, in keeping with the wide- ranging investment plan
that Telecom Italia has set up for developing broadband technologies.
Marconi will build the new network infrastructure together with
Italtel which will supply its switching technologies and professional
services. Thanks in particular to its Access Hub technology, Marconi
will make it possible to distribute many services to the clientele,
including xDSL, conventional and ISDN telephone services that are
able to interact both with conventional exchanges and with
new-generation systems based on IP protocols.
o Approval of the 2002 interconnection price list by the National
Regulatory Agency
On February 27, 2003, the Infrastructures and Networks Commission of
the National Regulatory Agency approved the interconnection price
list for 2002, currently being announced, which Telecom Italia must
apply to competing operators for the use of its network with regard
to Interconnection Services for traffic, Billing Services with the
risk of non-payment by Telecom Italia subscribers for access to
non-geographical numbers and Unbundling Local Loop Access Services.
The economic effects are included in the 2002 financial statements.
[] MAJOR SUBSIDIARIES
Atesia S.p.A.
Held by: Telecom Italia 100.0%
The company operates in the sector of telemarketing and market research.
The table shows the key economic highlights:
-------------------------------------------------------------------------------
(millions of euro) 2002 2001 Change (%)
-------------------------------------------------------------------------------
Sales and service revenues 98 83 18.1
Gross operating profit 38 40 (5.0)
Operating income 32 36 (11.1)
-------------------------------------------------------------------------------
Activities during 2002:
- creation and operation of the first CRM platform and opening of two
new Call Centers (about 700 operating stations) to manage the growth
of Telecom Italia's business
Path.Net S.p.A.
Held by: Telecom Italia 99.99%, IT Telecom 0.01%
The company is responsible for the development and management of the single
Public Administration (R.U.P.A.) network.
The table shows the key economic highlights:
-------------------------------------------------------------------------------
(millions of euro) 2002 2001 Change (%)
-------------------------------------------------------------------------------
Sales and service revenues 93 79 17.7
Gross operating profit 5 3 66.7
Operating income 4 1 o
-------------------------------------------------------------------------------
44
Activities during 2002:
- growth of access and transmission band services compared to 2001
- stipulation of eight important new contracts with the Public
Administration (at year-end there were 64 active contracts)
TMI group - Telemedia International Italia (Telecom Italia Sparkle as from
December 31, 2002)
Held by: Telecom Italia 100.0%
During 2002, the group was reorganized as a result of the contribution of the
"International Wholesale Services" business segment of Telecom Italia -
Domestic Wireline. It also changed its name to Telecom Italia Sparkle.
The table shows the key economic highlights, which refer exclusively to the
former TMI - Telemedia International Italia group, since the contribution of
the business segment took place on December 31, 2002:
-------------------------------------------------------------------------------
(millions of euro) 2002 2001 Change (%)
-------------------------------------------------------------------------------
Sales and service revenues 19 91 (79.1)
Gross operating loss (30) (53) 43.4
Operating loss (43) (126) 65.9
-------------------------------------------------------------------------------
Activities during 2002:
- With reference to the reorganization described above, the economic
and financial data for 2002 are not significant
Latin American Nautilus Group
Held by: Telecom Italia 70.0%, Entel Bolivia 10.0%, Entel Chile 10.0%. Tel.
Arg. 10.0%
The group ensures the transport of traffic and the supply of transmission
capacity for wholesale customers in Latin America.
The table shows the key economic highlights:
-------------------------------------------------------------------------------------------------
2002 2001 2002 2001
millions of (millions of (millions (millions Change in
euro) euro) of US$) of US$) US$ (%)
-------------------------------------------------------------------------------------------------
Sales and service revenues 29 3 28 3 o
Gross operating profit (loss) 11 (26) 11 (24) o
Operating loss (6) (27) (6) (24) 75.0
-------------------------------------------------------------------------------------------------
Activities during 2002:
- The group network has been fully operational since the first quarter
of 2002. Activities during the year focused on extending the customer
base and developing new products and services
Mediterranean Nautilus Group
Held by: Telecom Italia 62.51%, Telecom Italia International 7.49%
The group ensures the transport of traffic and the supply of transmission
capacity for wholesale customers in the Eastern Mediterranean.
The table shows the key economic highlights:
-------------------------------------------------------------------------------------------------
2002 2001 2002 2001
millions of (millions of (millions (millions Change in
euro) euro) of US$) of US$) US$ (%)
-------------------------------------------------------------------------------------------------
Sales and service revenues 64 54 61 48 27.1
Gross operating profit 26 20 24 18 33.3
Operating income (loss) 56 (20) 53 (17) o
-------------------------------------------------------------------------------------------------
45
Med-1 Group
Held by: Telecom Italia 23.17%, Telecom Italia International 27.83%
The group is responsible for installing land-based and submarine networks in
the area of the Middle East.
The table shows the key economic highlights:
-----------------------------------------------------------------------------------------------------
2002 2001 2002 2001
millions of (millions of (millions (millions Change in
euro) euro) of US$) of US$) US$ (%)
-----------------------------------------------------------------------------------------------------
Sales and service revenues 20 13 19 12 58.3
Gross operating profit 12 2 12 1 o
Operating income (loss) 4 (5) 4 (5) o
-----------------------------------------------------------------------------------------------------
Activities during 2002:
- management of the laying of the Lev-1 (Israel-Cyprus-Italy) fiber
optic submarine network and integration of the land network
Pan European Backbone
Held by: Telecom Italia Sparkle 100.00%
This is a group of companies responsible for the transport of traffic and the
supply of transmission capacity for wholesale customers in Europe.
The table shows the key economic highlights:
-------------------------------------------------------------------------------
(millions of euro) 2002 2001 Change (%)
-------------------------------------------------------------------------------
Sales and service revenues 27 19 42.1
Gross operating profit 18 13 38.5
Operating income 6 7 (14.3)
-------------------------------------------------------------------------------
Activities during 2002:
- completion of the Vienna junction and consolidation of commercial
activities with the aim of supplying wholesale customers with Managed
Bandwidth services (transmission capacity services), IP Connectivity,
international phone services and GRX (GPRS Roaming eXchange)
Intelcom San Marino S.p.A.
Held by: Telecom Italia International 70.00%
The company operates under a concession for international telephone services in
the Republic of San Marino. In addition, it offers value-added services
connected with the sale of international connections, as well as
data-transmission, hosting and housing and Internet-access services.
The table shows the key economic highlights:
-------------------------------------------------------------------------------
(millions of euro) 2002 2001 Change (%)
-------------------------------------------------------------------------------
Sales and service revenues 25 41 (39.0)
Gross operating profit (loss) (1) 2 o
Operating income (loss) (11) 1 o
Volume of traffic handled (millions of minutes) 166 304 (45.4)
Internet customers at year-end (thousands) 5.3 4.6 15.2
-------------------------------------------------------------------------------
Activities during the 2002:
- The company is currently working out an organizational restructuring
plan and a commercial repositioning plan
46
MOBILE
o Growth of revenues and improvement in profitability margins
o Confirmation of leadership on the domestic market
o Launch of GSM service in Brazil
o Completion of non-core asset divestiture program
o Completion of integration of the former company Blu S.p.A.
[] THE BUSINESS UNIT
The Mobile Services Business Unit (TIM group) operates in the sector of
national and international mobile telecommunications. Its international
presence is concentrated in Latin America and in the Mediterranean Basin.
During 2002, the spread of wireless telephone services throughout the
world continued at a steady pace. The number of customers exceeded the
billion mark, with penetration of the population at close to 20%. In this
scenario, Italy is a market that can now be considered saturated (with a
penetration rate of more than 90%) whereas Latin America, with
approximately 100 million customers and a level of penetration of
approximately 20%, is a market with enormous potential (growth in 2002 was
higher than 20%).
[] THE STRUCTURE OF THE BUSINESS UNIT
The Business Unit is organized as follows:
----------------------------------------------------------------------------------------------------------------------------------
Mobile
==================================================================================================================================
National Subsidiaries International Subsidiaries Affiliated companies
--------------------------- ----------------------------------------------------------------------- ----------------------------
TIM - Telecom Italia Mobile Mobile South America Other Subsidiaries IS TIM T.H.A.S.
S.p.A ----------------------------------------------------------------------- (Turkey)
TIM International N.V.
-----------------------------------------------------------------------
. TIM Brasil Group Stet Hellas Telecommunications
. Bitel Participacoes S.A. (Brazil) S.A. (Greece)
. Tele Nordeste Celular Group
Participacoes (Brazil)
. Tele Celular Sul Group
Participacoes (Brazil)
. Maxitel S.A. (Brazil)
. TIM Celular S.A .Brazil)
. TIMNet.com S.A. (Brazil)
. TIM Peru S.A.C.
. Corporacion Digitel C.A.
(Venezuela)
----------------------------------------------------------------------------------------------------------------------------------
[] MAJOR CORPORATE EVENTS/SCOPE OF CONSOLIDATION
The year 2002 was marked by:
o the sale of BDT (Bouygues Decaux Telecom, a 19.61%-owned
affiliate, the group holding company of the French operator
Bouygues Telecom), for proceeds of euro 750 million and a gain
of euro 484 million;
o the sale of Autel (a 100%-owned subsidiary which holds a 25%
stake in the Mobilkom Austria group) to Telekom Austria, for
proceeds of euro 756 million and a gain of euro 163 million;
o the sale of Auna, for proceeds of euro 240 million and a gain of
euro 198 million;
o the purchase of 17.45% of the ordinary share capital of Stet
Hellas for euro 108 million, bringing the stake held by TIM
International to 81.40%;
o the purchase of 10% of the ordinary share capital of Digitel for
euro 32 million, bringing the stake held by TIM International to
66.56%;
o the purchase of 100% of the share capital of Blu, later absorbed
by TIM S.p.A.
These transactions had no significant effect on the scope of consolidation
in that the companies sold had been valued using the equity method,
whereas the acquisition of Blu, consolidated in the Mobile Business Unit
for the fourth quarter of 2002 only, had no meaningful impact on the
results of operations or on the financial condition.
47
[] ECONOMIC AND FINANCIAL DATA
The following table shows the key results in the 2002, compared to those
in 2001.
-------------------------------------------------------------------------------
2002 2001 Change
(a) (b) (a - b)
----------------
(millions of euro) amount %
-------------------------------------------------------------------------------
Sales and service revenues 10,867 10,250 617 6.0
Gross operating profit 5,039 4,760 279 5.9
% on Revenues 46.4% 46.4%
Operating income 3,358 3,136 222 7.1
% on Revenues 30.9% 30.6%
Investments:
.. industrial 1,715 3,151 (1,436) (45.6)
.. goodwill 196 31 165 o
Employees at year-end (number) 18,702 16,721 1,981 11.8
-------------------------------------------------------------------------------
Gross operating profit In 2002, sales and service revenues amounted to
euro 10,867 million, an increase of euro 617
[GRAPHIC OMITTED] million (+6% compared to 2001) despite the effects
deriving from the weakness of the Brazilian and
[2001 - 4,760 Venezuelan currencies. Excluding the effect of the
2002 - 5,039] changes in the exchange rates, the increase in
revenues would be +11.9% compared to the prior
year.
The growth in revenues can mainly be attributed to Italy (+6.7%).
In addition, the TIM Brasil group reported revenues of euro 39 million
generated by the GSM service launched in the fourth quarter of 2002.
In 2002, the gross operating profit was euro 5,039 million, with an increase of
euro 279 million (+5.9% compared to 2001). As a percentage of revenues, the
gross operating profit was 46.4% (46.4% in 2001). Excluding the effect of the
changes in the exchange rates, the growth of the gross operating profit would
be +8.6% compared to the prior year, and can mainly be attributed to the
positive performance reported by TIM S.p.A. (+euro 304 million), Stet Hellas
(+euro 67 million) and to the improvement in the results, albeit still
negative, of TIM Peru (+euro 26 million).
Operating income in 2002 was euro 3,358 million, an increase of euro 222
million (+7.1% compared to 2001) and, as a percentage of revenues was 30.9%
(30.6% in 2001). The increase in the operating income can mainly be attributed
to the positive results of TIM S.p.A. (+euro 213 million) and Stet Hellas
(+euro 42 million) which compensates for the deterioration in the operating
income of the TIM Brasil group (euro 45 million) due to expenses incurred for
start-up operations. Since the financial statements of TIM S.p.A. include the
economic and financial results for the whole of 2002 of the former company Blu
S.p.A., for the purposes of consolidation the economic and equity situation of
TIM S.p.A. has been adjusted to eliminate the effects of the merger with Blu as
regards pre-acquisition transactions. Furthermore, the economic and equity
situation of TIM S.p.A. has been adjusted to account for tax interference
mainly for the amortization taken on the UMTS licenses.
Industrial investments in 2002 amounted to a total of euro 1,715 million, with
a decrease compared to 2001 of euro 1,436 million, relating to the considerable
investments made in 2001 for the acquisition of telecommunications licenses and
for the start-up and development of foreign subsidiaries and affiliates.
At December 31, 2002, employees numbered 18,702 with an increase of 1,981
compared to December 31, 2001 due both to the acquisition of Blu S.p.A. and the
increase in the number of employees of the South American companies connected,
amongst other things, with the launch of the GSM service in Brazil.
For a description of operations, please refer to the comment on the parent
company TIM and the individual consolidated companies.
48
[] ECONOMIC AND FINANCIAL DATA FOR MOBILE OPERATIONS IN SOUTH AMERICA
The following table shows the key economic and financial highlights of the
Mobile BU operations in Latin America, coordinated by Latin America
Operations (LAO).
-------------------------------------------------------------------------------
2002 2001 Change
(a) (b) (a - b)
---------------------
(millions of euro) amount %
-------------------------------------------------------------------------------
Sales and service revenues 1,298 1,403 (105) (7.5)
Gross operating profit 274 355 (81) (22.8)
% on Revenues 21.1 25.3
Operating loss (98) (72) (26) (36.1)
% on Revenues o o
Investment:
.. industrial 541 1,662 (1,121) (67.4)
.. goodwill
Employees at year-end (number) 7,050 5,678 1,372 24.2
-------------------------------------------------------------------------------
Gross operating profit In 2002, the operations of the Mobile Business Unit in
Latin America generated revenues of euro 1,298
[GRAPHIC OMITTED] million, with a decrease of 7.5% compared to 2001, and
can mainly be attributed to the effect of changes in
[2001 - 355 the exchange rates resulting from the weakening of the
2002 - 274] Brazilian and Venezuelan currencies.
Gross operating profit for 2002 amounted to euro 274 million, with a decrease
of 22.8% compared to 2001. This was due mainly to expenses incurred for
start-up activities.
Operating income for 2002 was a loss of euro 98 million.
In 2002, industrial investments amounted to euro 541 million, with a decrease
compared to 2001 of euro 1,121 million. The decrease can be correlated to the
aforementioned investments made in 2001 to acquire PCS telecommunications
licenses in Brazil and the start-up and development of foreign subsidiaries. In
particular, on October 18, following the concession of authorization from
Anatel, the Brazilian Regulatory body for telecommunications, the TIM group
launched a commercial plan for the GSM mobile telephone service throughout the
Brazilian territory.
At December 31, 2002, employees numbered 7,050, an increase of 1,372 compared
to December 31, 2001 which can mainly be attributed to the increase of
employees associated with the above-mentioned launch of the GSM service in
Brazil.
[] TELECOM ITALIA MOBILE S.p.A. (PARENT COMPANY)
Held by: Telecom Italia 54.82%, TI Finance 0.17%
The following table shows the key economic highlights. Since the 2002 economic
results of TIM S.p.A. also include those of the merged company Blu, for
purposes of comparison with the figures of the prior year, the results are also
shown net of Blu.
--------------------------------------------------------------------------------------------------------------
2002 2002 2002 2001 Change (%)
TIM BLU TIM POST- TIM
EXCLUDING MERGER (*)
BLU (b) (a+b) (c) (a-c)
(millions of euro) (a)
--------------------------------------------------------------------------------------------------------------
Sales and service revenues 8,915 213 9,022 8,357 6.7
--------------------------------------------------------------------------------------------------------------
Gross operating profit (loss) 4,529 (125) 4,404 4,225 7.2
--------------------------------------------------------------------------------------------------------------
Operating income (loss) 3,323 (170) 3,153 3,231 2.8
--------------------------------------------------------------------------------------------------------------
(*) The figures are net of any intercompany eliminations.
49
The comments on the key economic and financial results refer to data excluding
the effects of Blu's operations.
The increase in sales and service revenues stems from higher service revenues,
the VAS component of which increased by more than 41% to euro 752 million,
thanks to the growth of SMS (+32.6%) and the increase in traffic to euro 6,845
million (+3.5%) especially as a result of the growth of Internet traffic.
Revenues from prepaid cards showed an increase of 19.3%.
Revenues from sales of phones, spurred on by the launch of MMS services, led to
overall growth of approximately 9%.
Gross operating profit increased more than revenues, as a result of efforts to
curb expenses, achieved also thanks to the considerable efforts made to improve
efficiency in operating and administrative expenses.
Operating income rose by 2.8% and was affected by higher amortization and
depreciation charges for the year which included:
o the amortization of the UMTS license, recorded beginning from the
month of January for purposes of tax deductibility. The charge was
some euro 121 million, gross of the tax effect of some euro 49
million;
o higher depreciation of fixed assets following the review of the
estimates for the useful lives of the assets. Such higher
depreciation, compared to the depreciation charge that would have
been recorded if the previous estimated useful lives had been used,
amounted to about euro 53 million.
Activities during 2002:
The following table shows the key operating highlights for 2002, compared to
2001, and the main activities carried out by each sector:
-------------------------------------------------------------------------------
TIM - operating highlights 12.31.2002 12.31.2001
(excluding BLU)
-------------------------------------------------------------------------------
TIM lines in Italy (thousands) 25,302 23,946
-------------------------------------------------------------------------------
Mobile traffic (millions of minutes) 36,432 33,784
-------------------------------------------------------------------------------
GSM penetration in Italy (% of population) 99.8 99.7
-------------------------------------------------------------------------------
E-TACS penetration in Italy (% of population) 98.0 98.0
-------------------------------------------------------------------------------
In 2002, TIM continued to develop innovative services with the aim of building
customer loyalty and giving users greater incentives for using mobile phones.
The most important initiatives are discussed below:
- TIM was the first mobile operator in Europe to launch the new MMS
(Multimedia Messaging Service), the multimedia evolution of SMS, making it
possible to send and receive, directly from and on cell phones or on PCs,
messages composed by photos, images, sound and texts.
- Presentation of the Extended memory SIM Card (64K/byte).
- Launch of the exclusive "4888 Pay For Me" service, which enables customers
to charge the cost of a call to the receiver of the call (TIM cell phones
and all Telecom Italia fixed phones).
50
[] MAJOR SUBSIDIARIES
[] EUROPE
Stet Hellas Telecommunications S.A.
Held by: TIM International N.V. 81.40%, TI Finance 0.13%
The company operates the GSM service in Greece.
The table shows the main economic and operating data:
-------------------------------------------------------------------------------
2002 2001 Change (%)
(millions of euro)
-------------------------------------------------------------------------------
Sales and service revenues 689 523 31.7
-------------------------------------------------------------------------------
Gross operating profit 255 188 35.6
-------------------------------------------------------------------------------
Operating income 131 89 47.2
-------------------------------------------------------------------------------
Number of lines at year-end (thousands) 2,514 2,135 17.8
-------------------------------------------------------------------------------
Market share 27% 27%
-------------------------------------------------------------------------------
The results achieved in 2002 confirm the positive market performance of Stet
Hellas. Revenues increased by 31.7% compared to the prior year, mainly as a
result of the increase in outgoing traffic and VAS services. The gross
operating margin rose by 35.6% as a result of market growth, with an increase
in industrial costs that was lower than the increase in revenues. The operating
income was euro 131 million, an increase of 47.2%.
Activities during 2002:
- Launch of the TELEST E-bill, a service offered to subscribers through
Internet
- Development of TELESTET Centers, which helped to encourage the growth
of the distribution network
- Launch of the new "B Best Web SMS" service for business clientele
- Experiments with the UMTS infrastructure, currently at the testing
stage
[] LATIN AMERICA
As previously pointed out, the activities of the Mobile BU in Latin
America are coordinated by Latin America Operations.
Tele Nordeste Celular Participacoes Group
Held by: Bitel Participacoes S.A. 21.18%
The group operates mobile network services in the northeast of Brazil
using TDMA technology.
The table shows the main economic and operating data:
-------------------------------------------------------------------------------------------
2002 2001 2002 2001 Change in
(millions of (millions of (millions (millions of reais
euro) euro) of reais) reais) (%)
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Sales and service revenues 355 416 984 876 12.3
----------------------------------------------------------------------------------------------------------------------------
Gross operating profit 189 198 523 416 25.7
----------------------------------------------------------------------------------------------------------------------------
Operating income 98 102 271 215 26.0
----------------------------------------------------------------------------------------------------------------------------
Number of lines at year-end 1,926 1,758 9.6
(thousands)
----------------------------------------------------------------------------------------------------------------------------
Market share 59% 65%
----------------------------------------------------------------------------------------------------------------------------
The economic results achieved in 2002 reflect a general increase compared to
2001. Revenues increased by 12.3% thanks to the expansion of telephone traffic
and growth in interconnection rates which were updated by Anatel in February.
The gross operating profit increased by 25.7% compared to the prior year as a
result of an improvement in cost control policies. The operating income rose by
26% compared to 2001.
Activities during 2002:
- Strategy aimed at pursuing profitability and focused on the corporate
segment
- Launch of programs to encourage customer loyalty and retention
- Rationalization in the operation of points of sale and with the aim
of pursuing a continuous reduction of costs
- Control of investments, while pursuing the objective of maintaining
an optimum level of efficiency of service
51
Tele Celular Sul Participacoes Group
Held by: Bitel Participacoes S.A. 20.68%
The group operates mobile network services in the south of Brazil using TDMA
technology.
The table shows the main economic and operating data:
------------------------------------------------------------------------------------
2002 2001 2002 2001 Change in
(millions (millions (millions (millions reais
of euro) of euro) of reais) of reais) (%)
------------------------------------------------------------------------------------------------------------------------------
Sales and service revenues 364 423 1,010 889 13.6
------------------------------------------------------------------------------------------------------------------------------
Gross operating profit 152 179 422 376 12.2
------------------------------------------------------------------------------------------------------------------------------
Operating income 69 88 192 185 3.8
------------------------------------------------------------------------------------------------------------------------------
Number of lines at year-end (thousands) 1,724 1,604 7.5
------------------------------------------------------------------------------------------------------------------------------
Market share 61% 65%
------------------------------------------------------------------------------------------------------------------------------
Positive results were reported in 2002. As in the case of Tele Nordeste
Celular, revenues increased compared to 2001 (+13.6%) thanks to higher
interconnection rates and greater telephone traffic. Cost control policies led
to an increase in the gross operating profit of 12.2% and an improvement in the
operating income of 3.8%.
Activities during 2002:
- Implementation of strategies focused on the clientele
- Repositioning of the commercial product range for the business
segment
- Growth of revenues from SMS and from value-added services
- Development of diversified sales channels
Maxitel S.A.
Held by: TIM International N.V. 58.70%, Bitel Participacoes S.A. 37.97%, TIM
Brasil S.A. 3.33%
The group handles mobile telephone services in Brazil in the areas of Bahia
Sergipe and Minas Gerais using TDMA technology.
The table shows the main economic and operating data:
-----------------------------------------------------------------------------------------
2002 2001 2002 2001 Change in
(millions of (millions of (millions (millions reais
euro) euro) of reais) of reais) (%)
---------------------------------------------------------------------------------------------------------------------------------
Sales and service revenues 273 277 755 582 29.7
---------------------------------------------------------------------------------------------------------------------------------
Gross operating profit 106 86 293 181 61.9
---------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 27 (21) 74 (44) o
---------------------------------------------------------------------------------------------------------------------------------
Number of lines at year-end (thousands) 1,392 1,196 16.4
---------------------------------------------------------------------------------------------------------------------------------
Market share 30% 33%
---------------------------------------------------------------------------------------------------------------------------------
During 2002, Maxitel reported an increase in revenues of 29.7% compared to
2001, attributed to a significant increase in telephone traffic and to the
review of interconnection rates. The increase in revenues, together with a more
careful control of costs, led to growth in the gross operating profit of 61.9%
and to a positive operating income.
Activities during the year:
- Special offers for subscriber customers to encourage migration to new
rate plans
- Commercial strategies focused on customer acquisition and retention
of high-profile customers
- Expansion of the range of value-added services
Tim Celular S.A.
Held by: TIM Brasil S.A. 100.00%
The company operates mobile network services using GSM technology in the north
of Brazil and in the states of Sao Paulo, Rio de Janeiro and Espirito Santo.
Within the framework of the corporate reorganization process, Portale Rio Norte
and TIM Celular Centro Sul were merged by absorption in Portale Sao Paulo,
which subsequently changed its name to Tim Celular.
The table shows the main economic and operating data:
52
-----------------------------------------------------------------------
2002 2001 2002 2001 Change
(millions (millions (millions (millions in reais
of euro) of euro) of reais) of reais) (%)
--------------------------------------------------------------------------------------------------------
Sales and service revenues 39 0 108 0 -
--------------------------------------------------------------------------------------------------------
Gross operating loss (170) (16) (472) (33) o
--------------------------------------------------------------------------------------------------------
Operating loss (188) (16) (521) (34) o
--------------------------------------------------------------------------------------------------------
Number of lines at year-end
(thousands) 293 0 -
--------------------------------------------------------------------------------------------------------
Revenues in 2002 were generated by the launch of the GSM service in the fourth
quarter of 2002. The company reported a gross operating loss and an operating
loss because of start-up expenses.
Activities in 2002:
- Implementation of the roll-out of the network and IT systems
- Organization of the sales force and the distribution channel
- Strategy focused on innovative features of the GSM service and the
SIM card
- Activation of call center services
TIM Peru S.A.C.
Held by: TIM International N.V. 100.00%
The company operates mobile telephone services in Peru.
The table shows the main economic and operating data:
-----------------------------------------------------------------------------------
2002 2001
2002 2001 (millions of (millions of Change in
(millions (millions nuevo nuevo nuevo soles
of euro) of euro) soles) soles) (%)
-------------------------------------------------------------------------------------------------------------------------
Sales and service revenues 93 34 308 105 193.3
-------------------------------------------------------------------------------------------------------------------------
Gross operating loss (29) (55) (95) (173) 45.1
-------------------------------------------------------------------------------------------------------------------------
Operating loss (61) (76) (201) (238) 15.5
-------------------------------------------------------------------------------------------------------------------------
Number of lines at year-end
(thousands) 395 173 128.3
-------------------------------------------------------------------------------------------------------------------------
Market share 17% 10%
-------------------------------------------------------------------------------------------------------------------------
In 2002, revenues increased by approximately 193% compared to the prior year,
particularly as a result of the intensification of telephone traffic generated
by the increase in the customer base. The gross operating result improved by
45.1% compared to 2001 thanks to higher revenues and more careful cost control.
Despite the fact that the company again reported an operating loss, it improved
considerably compared to the prior year.
Activities during 2002:
- Launch of new products and services, with the aim of developing voice
and data traffic
- Expansion of the distribution chain and phone recharging points
Corporacion Digitel C.A.
Held by: TIM International N.V. 66.56%
The company operates mobile telephone services in Venezuela.
The table shows the main economic and operating data:
------------------------------------------------------------------------------------
2002 2001 2002 2001 Change in
(millions (millions (millions of (millions of bolivares
of euro) of euro) bolivares) bolivares) (%)
--------------------------------------------------------------------------------------------------------------------------------
Sales and service revenues 177 255 260,378 173,328 50.2
--------------------------------------------------------------------------------------------------------------------------------
Gross operating profit 35 15 51,355 10,139 o
--------------------------------------------------------------------------------------------------------------------------------
Operating loss (20) (32) (30,070) (21,466) 40.1
--------------------------------------------------------------------------------------------------------------------------------
Number of lines at year-end (thousands) 894 667 34.0
--------------------------------------------------------------------------------------------------------------------------------
Market share (*) 15% 18%
--------------------------------------------------------------------------------------------------------------------------------
(*)The market share in 2001 cannot be compared to that in 2002 because the
latter refers to the whole of Venezuela whereas the 2001 figure refers only to
the central region.
53
In 2002, revenues increased by 50.2% compared to 2001, thanks to an increase in
the number of lines. The gross operating profit improved compared to the prior
year as a combined result of a decrease in the costs of services and an
increase in revenues. The operating loss shows a deterioration of 40.1% which
can mainly be attributed to the impact of the writedown of assets with
out-of-date technology.
Activities during 2002:
- Significant changes in the architecture of the network with the
choice of Nokia as the main infrastructure supplier
- Updates of prepaid services technology
- Launch of the GPRS and MMS services
[] AFFILIATED COMPANIES
[] MEDITERRANEAN BASIN
IS TIM T.H.A.S.
Held by: TIM International N.V. 49.00%
The company operates mobile telephone services in Turkey, under the Aria
trademark.
The table shows the main economic and operating data:
----------------------------------------------------------------------------------------
2002 2001 2002 2001 Change in
(millions (millions (billions of (billions of Turkish lire
of euro) of euro) Turkish Turkish (%)
lire) lire)
---------------------------------------------------------------------------------------------------------------------------------
Sales and service revenues 83 46 141,276 58,753 140.5
---------------------------------------------------------------------------------------------------------------------------------
Gross operating loss (122) (181) 207,609) (229,154) 9.4
---------------------------------------------------------------------------------------------------------------------------------
Operating loss (420) (382) 715,735) (484,897) (47.6)
---------------------------------------------------------------------------------------------------------------------------------
Number of lines at year-end (thousands) 1,161 540 115.0
---------------------------------------------------------------------------------------------------------------------------------
Market share 5% 3%
---------------------------------------------------------------------------------------------------------------------------------
The results for 2002 cannot be compared with those of 2001 because some of the
revenues and costs date from the start of the operations, that is, from March
21, 2001, and thus refer to a shorter period than the twelve months of 2002.
The growth of revenues was negatively influenced by the deterioration of the
macroeconomic scenario which was already in place in 2001 and by a regulatory
framework which made it impossible to conclude national roaming agreements with
other operators. The company succeeded in limiting the growth of consumption
costs. As a percentage of revenues, the company reported a gross operating
loss, but with a considerable improvement over that of the prior year. The
operating loss deteriorated primarily as a result of the higher amortization
and depreciation charges. Activities during 2002:
- New rate plans aimed at corporate clientele and the introduction of
rates based on time frames
- Launch of new services including "pay for me"
- Continuation of the network roll-out with a significant increase in
radio base stations
54
SOUTH AMERICA
In May 2002, the International Operations (IOP) "Operating Activity" was
disbanded. While the companies involved maintained the same corporate control
structure, the companies and business segments of Telecom Italia which formerly
reported to the IOP have been transferred to Domestic Wireline (Intelcom San
Marino and Golden Lines), the Foreign Holdings Corporate Function (9Telecom
Reseau group, BBNed group, Auna group, Telekom Austria group, Telekom Srbija,
Etec S.A. and what remains of the ex IOP), while all the companies situated in
Latin America are now coordinated by Latin America Operations (LAO).
LAO's structure is organized as follows:
Latin America Operations
-----------------------------------------------------------------------------------------------
Subsidiaries Affiliates
--------------------------------------------------------------- ------------------------------
.. TIM Brasil Group . Entel Chile Group . Telecom Argentina Group
.. TIM Peru S.A.C. . Entel Bolivia Group . GLB Servicos Interativos
.. Corporacion Digitel C.A. . Telecom Italia America Latina (Globo.com) - Brazil
(Venezuela)
The following comments present the key consolidated economic and financial
highlights of the Entel Chile group, the Entel Bolivia group, the company
Telecom Italia America Latina and the South America business segment of Telecom
Italia.
The economic and financial highlights of the companies in the Tim Brasil group,
Tim Peru and Corporacion Digitel are described in the section pertaining to the
Mobile BU.
[] MAJOR CORPORATE EVENTS/SCOPE OF CONSOLIDATION
2002 was marked by the following transactions:
o Sale, by Telecom Italia Group of a stake in Solpart
Participacoes S.A. (indirect parent company of Brasil Telecom)
to other shareholders for a price of US $47,000, which takes
into account the value of the ordinary shares compared to the
preferred shares based on the economic value of Solpart.
Following this transaction, the Group's stake in ordinary share
capital fell from 37.29% to 19.0%. As a result, the regulatory
obstacle preventing the TIM group from launching a mobile
telephone service based on GSM technology throughout Brazil was
removed. Within the framework of this transaction, both parties
have an option which can be exercised in the event certain
conditions are met that will restore the shareholder position
quo ante.
o on August 19, as a result of the transformation of the
subsidiary Telecom Italia do Brasil Ltda, the company Telecom
Italia America Latina S.A. came into being. Subsequently, on
September 26, Telecom Italia S.p.A. subscribed to the share
capital increase of euro 11 million voted by the subsidiary.
[] ECONOMIC AND FINANCIAL DATA
The following table shows the key highlights, restated for the
purposes of comparison, of the Entel Chile group, the Entel Bolivia
group, the company Telecom Italia America Latina and the South
America business segment of Telecom Italia in 2002, compared to those
of 2001.
-------------------------------------------------------------------------------
2002 2001 Change
(a) (b) (1) (a - b)
-----------------
(millions of euro) amount %
-------------------------------------------------------------------------------
Sales and service revenues 1,409 1,534 (125) (8.1)
Gross operating profit 450 527 (77) (14.6)
% on Revenues 31.9% 34.4%
Operating income 146 187 (41) (21.9)
% on Revenues 10.4% 12.2%
Investments:
.. industrial 216 406 (190) (46.8)
.. goodwill 5,461 -
Employees at year-end (number)(1) 5,746 (285) (5.0)
-------------------------------------------------------------------------------
(1) Figures restated for the purposes of comparison.
55
Gross operating profit Sales and service revenues amounted to euro 1,409
million, with a decrease of 8.1% (-euro 125
[GRAPHIC OMITTED] million in absolute terms) compared to 2001. The
decrease can be attributed mainly to exchange
[2001 - 527 rate fluctuations (which generated a total impact
2002 - 450] of -euro 212 million, of which euro 182 million
refer to the Chilean peso and euro 29 million to
the Bolivian boliviano). Had this effect not been
considered, consolidated revenues would have
increased by 5.7%, as a result of the increase in
revenues of the Entel Chile group (+12.3% in
local currency). This was offset by the effects
of the deregulation of the Bolivian market (Entel
Bolivia reported a reduction of approximately
4.5% in local currency), and the suspension with
effect from April 1, 2002 of the contribution of
the management fee under the terms of the
contract with Telecom Argentina.
The fluctuations described affected profitability performance. In particular,
the gross operating profit decreased by euro 77 million (-14.6%) compared to
2001, of which approximately euro 65 million can be attributed to the exchange
effect. Excluding the exchange effect, the reduction in the gross operating
profit compared to 2001 would have been 2.3% and can be ascribed to the
suspension of the payment of the management fee by Telecom Argentina and lower
profit margins in Bolivia that were offset by a recovery in Chile that can be
attributed to improved profit margins in the mobile sector. As a percentage of
revenues, the gross operating profit was 31.9% in 2002 (34.4% in the prior
year).
Operating income confirms the trends already described with regard to the gross
operating profit. As a percentage of revenues, the operating income was 10.4%
in 2002 (compared to 12.2% in 2001).
Industrial investments show a declining trend compared to December 31 2001,
with a reduction of 46.8%.
Employees numbered 5,461, with a decrease of 285 (-5.0%) compared to December
31, 2001. This can mainly be attributed to rationalization measures adopted by
the Entel Chile group and the Entel Bolivia group (reductions of -180 and -122
respectively compared to December 31, 2001).
Entel Chile Group
Held by: Telecom Italia International 54.76%
The group operates in the sectors of fixed and mobile telephone services, data
transmission and Internet access services in Chile.
The table shows the key economic and operating highlights 2002, compared to
those of 2001:
-------------------------------------------------------------------------------
2002 2001 2002 2001 Change in
(millions (billions of (billions of (billions of pesos
of euro) pesos) pesos) pesos) (%)
---------------------------------------------------------------------------------------------------------------------------------
Sales and service revenues 1,223 1,251 797 710 12.3
---------------------------------------------------------------------------------------------------------------------------------
Gross operating profit 381 374 248 212 17.0
---------------------------------------------------------------------------------------------------------------------------------
Operating income 151 128 99 72 37.5
---------------------------------------------------------------------------------------------------------------------------------
No. of fixed lines at year-end (thousands) 98 95
---------------------------------------------------------------------------------------------------------------------------------
No. of mobile customers at year-end (thousands) 2,293 1,936
---------------------------------------------------------------------------------------------------------------------------------
Internet customers at year-end (thousands) 513 326
---------------------------------------------------------------------------------------------------------------------------------
56
Activities during 2002:
- Despite the persisting recessive macroeconomic context in South
America, in 2002, the Entel Chile group considerably improved all the
economic indicators of operational profitability, consolidating its
leadership position as a mobile telephone services operator and
successfully implementing a fast Internet-access service using WLL
technology in Chile and long distance services in Peru and Venezuela
- In August 2002, the Entel Chile group reduced the number of its
employees (468 between staff and outsourcing) incurring extraordinary
expenses of approximately euro 10 million
Entel Bolivia Group
Held by: Telecom Italia International through ICH/ETI 50.00%
The group operates in the sectors of wireline and mobile telephone services,
Internet, data transmission, telex and telegraphy services in Bolivia.
The table shows the economic and operating highlights for 2002, compared to
those of 2001:
-----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001 Change in
(millions of (millions (millions of (millions of bolivianos
euro) of euro) bolivianos) bolivianos) (%)
-----------------------------------------------------------------------------------------------------------------------------------
Sales and service revenues 186 224 1,260 1,320 (4.5)
-----------------------------------------------------------------------------------------------------------------------------------
Gross operating profit 72 92 489 545 (10.3)
-----------------------------------------------------------------------------------------------------------------------------------
Operating income 2 15 15 91 (83.5)
-----------------------------------------------------------------------------------------------------------------------------------
Number of fixed lines at year-end (thousands) 50 53
-----------------------------------------------------------------------------------------------------------------------------------
Number of mobile customers at year-end (thousands) 462 368
-----------------------------------------------------------------------------------------------------------------------------------
Internet customers at year-end (thousands) 15 12
-----------------------------------------------------------------------------------------------------------------------------------
Activities during 2002:
- Following the deregulation of the market in November 2001, there are
now 7 Long Distance and 4 mobile competitors operating in Bolivia,
whereas local traffic continues to be operated mainly by pre-existing
operators ("cooperativas") In this scenario, the operating
performance of the group (which formerly held the monopoly for long
distance service) shows a significant reduction in revenues from
wireline services (- 23% in local currency, as a result of lower
volumes and price fluctuations) and a decline in profitability (the
gross operating profit in local currency was -10% compared to 2001).
There was also a reduction in the market share which fell to 87% on
long distance service and 71% on international long distance service.
Conversely, the mobile sector showed marked growth. Revenues
increased by 50% thanks to the dynamics of customers. The company now
leads the field with 52% of the market
- During 2002, the group implemented a radical rationalization plan to
reduce labor costs (-7%) and investments (-61% compared to 2001),
giving priority to the development of GSM technology in keeping with
the strategies decided for South America. 2002 also saw the start-up
of the xDSL service
Affiliated companies
Telecom Argentina Group
Held by: Telecom Italia and Telecom Italia International through Nortel
Inversora 13.97%
The group operates in the sector of fixed and mobile telephone services,
data-transmission and Internet-access services in Argentina.
The table shows the key economic and operating highlights:
------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001 Change in
(millions (millions (millions of (millions pesos
of euro) of euro) pesos) of pesos) (%)
------------------------------------------------------------------------------------------------------------------
Sales and service revenues 1,115 3,588 3,940 3,188 23.6
------------------------------------------------------------------------------------------------------------------
Gross operating profit 672 1,904 2.374 1,705 39.2
------------------------------------------------------------------------------------------------------------------
Operating income 6 636 21 570 (96.3)
------------------------------------------------------------------------------------------------------------------
Number of fixed lines at year-end (thousands) 3,295 3,584
------------------------------------------------------------------------------------------------------------------
Number of mobile lines at year-end (thousands) 2,725 2,636
------------------------------------------------------------------------------------------------------------------
Internet customers at year-end (thousands) 181 247
------------------------------------------------------------------------------------------------------------------
The figure for mobile lines at December 31, 2001 includes Nucleo customers.
57
Activities during 2002:
- The group is implementing a plan to optimize costs and investments
and is making efforts to restructure the debt resulting from the
serious crisis prevailing in the country
- The group maintained its leadership in the mobile sector, whereas the
development of ADSL services has been slowed down by the weakness in
the demand for domestic consumption
In the 2002 financial statements, the value of the investment held by Telecom
Italia Group in Nortel Inversora, written off in the consolidated financial
statements at December 31, 2001, has remained unchanged.
Furthermore, the Telecom Italia Group, as a result of the Nortel Inversora
Shareholders' Meeting on April 25 and September 13, 2002 which gave voting
rights in the shareholders' meeting to the savings shareholders and the right
to appoint their own representative on the Board of Directors, has reduced its
percentage of vote in the shareholders' meeting to 33.89%. The percentage
holding of ordinary share capital has remained unchanged at 50%, as well as the
economic rights thereto.
Finally, as part of the plan to restructure debt, on February 12, 2003, Telecom
Argentina and its subsidiary Telecom Personal announced the intention to launch
an offer for a portion of its financial debt for cash and to effect a partial
payment of the interest due. The offer will be launched after the necessary
approvals are received from the competent regulatory authorities.
58
****
In order to present an overall view of Latin America Operations (LAO), the
following table shows the key economic and financial highlights of all the
companies operating in wireline and mobile telephone services in South America
in 2002, compared to those in 2001, restated for the purposes of comparison.
-------------------------------------------------------------------------------
2002 2001 Change
(a) (b)(1) (a - b)
----------------
(millions of euro) amount %
-------------------------------------------------------------------------------
Sales and service revenues 2,706 2,937 (231) (7.9)
Gross operating profit 724 882 (158) (17.9)
% on Revenues 26.8 30
Operating income 48 115 (67) (58.3)
% on Revenues 1.8 3.9
Investments:
.. industrial 757 2,068 (1,311) (63.4)
.. goodwill 0 0 - -
Employees at year-end (number) 12,511 11,424 1,087 9.5
-------------------------------------------------------------------------------
(1) Figures restated for the purposes of comparison.
59
INTERNET AND MEDIA
o Sharp increase in profitability, gross operating profit reaches
29.8% of revenues
o Revenues gain 1.7% thanks to the positive trend of telephone
publishing
o Rationalization of activities and focus on core business areas
[] THE BUSINESS UNIT
The Internet and Media Business Unit is responsible for the whole
chain of value in the media sector, satisfying the public's need for
information and entertainment, and the communication requirements of
the business sector, through the production of traditional products
on paper, and innovative products through the media of Internet, the
telephone and television.
In the field of telephone publishing, the group leads the field in
Italy and is the second largest telephone publishing group in the
United Kingdom with a market share of 14%. In the Internet sector,
Seat Pagine Gialle promotes the development of all Internet services
for residential customers and for small and medium-size companies:
access, portals and web services. In Directory Assistance, the group
handles the 89.24.24 Pronto Pagine Gialle 24-hour service in Italy
and has a market share of more than 30% in Germany. Furthermore, in
Italy, Seat Pagine Gialle is the top company in the marketing of
services and products for the office and is present in the television
sector with La7 and MTV Italia.
[] THE STRUCTURE OF THE BUSINESS UNIT
The Business Unit consists of the Seat Pagine Gialle group, which is
organized as follows (the table shows the main consolidated
companies/areas of consolidated operations):
---------------------------------------------------------------------------------------------------------------------
Seat Pagine Gialle Group
---------------------------------------------------------------------------------------------------------------------
Directory Office Products & Business
Directories Assistance Internet Services Information TV and Other TV
---------------------------------------------------------------------------------------------------------------------
o Seat Pagine Gialle o Telegate Group o Seat Pagine o Buffetti Group o Consodata Group o Holding Media e
- Directories Division o Seat Pagine Gialle - Tin.it o CIPI o Pan-Adress Comunicazione
Italia Gialle - o Matrix o NetCreations Group
o TDL Infomedia Directory
Group Assistance
Division
---------------------------------------------------------------------------------------------------------------------
[] MAJOR CORPORATE EVENTS/SCOPE OF CONSOLIDATION
There were no significant changes in the scope of consolidation
compared to 2001. Major corporate transactions during the year
comprised the sale of Datahouse (Business Information) and Neoexpo
(Directories) and the investments in the affiliated companies Mondus,
Viasat and Roncadin. Transactions were also concluded for the
rationalization and simplification of the corporate structure,
particularly in the TV sector.
[] ECONOMIC AND FINANCIAL DATA
The table shows the key highlights for 2002, compared to those for
2001.
60
Gross operating profit -------------------------------------------------------------------------------
2002 2001 Change
[GRAPHIC OMITTED] (a) (b) (a - b)
-------------------
[2001 - 444 (millions of euro) amount %
2002 - 593] -------------------------------------------------------------------------------
Sales and service revenues 1,991 1,957 34 1.7
Gross operating profit 593 444 149 33.6
% on Revenues 29.8% 22.7%
Operating income 232 31 201 o
% on Revenues 11.7% 1.6%
Investments:
. industrial 81 175 (94) (53.7)
. goodwill 40 203 (163) (80.3)
Employees at year-end (number) 7,715 9,264 (1,549) (16.7)
-------------------------------------------------------------------------------
Consolidated revenues of the Seat Pagine Gialle group for 2002 showed an
increase of 1.7% to euro 1,991 million compared to 2001. The largest
contributor to the increase was telephone publishing activities, which
rose by 3.4%.
Gross operating profit reported an increase of 33.6% to euro 593 million
(equal to 29.8% of revenues), while operating income rose from euro 31
million in 2001 to euro 232 million in 2002. These figures - despite the
persisting crisis in the advertising market - are the result of the
initiatives launched by management which, in a particularly difficult
economic context, concentrated on rationalizing activities, curbing costs
and applying selectivity in its initiatives. In particular, during 2002,
important improvements in efficiency were achieved in the areas of
Internet, Directories and Directory Assistance (which, together,
constitute 73% of aggregate revenues). For the first time, all the areas
of operations generated a gross operating profit (with the sole exception
of Television, where, however, there were lower losses than in 2001).
A more effective capital allocation policy made it possible to reduce
industrial investments by 53.7% (from euro 175 million in 2001 to euro 81
million in 2002). The reduction of 80.3% in investments in goodwill (from
euro 203 million in 2001 to euro 40 million in 2002) reflects fewer
purchases of consolidated investments effected in 2002.
Rationalization measures led to a reduction in the number of employees of
1,549 compared to December 31, 2001, from 9,264 to 7,715.
[] INFORMATION ON OPERATIONS
During 2002, in addition to achieving significant improvements in
efficiency, Seat Pagine Gialle strengthened its position on the markets in
which it operates thanks to a dynamic sales strategy and to its portfolio
of highly acclaimed trademarks. The business of the group was
characterized by:
- New definition of internal activities and processes and the
introduction of a new commercial group structure;
- Launch of new telephone publishing products on paper and the constant
development of on-line products (telephone and Internet) as part of
the process of integrating the various media;
- Revision of the range of text products proposed by the Virgilio
portal and a more effective use of its search tool by offering
outgoing priority and listing on the results of searches (PG Net
product);
- Entry of Telegate on the British Directory Assistance market, in
collaboration with Thomson;
- Collaboration with Telecom Italia Domestic Wireline for the range of
integrated content and services in the Alice ADSL subscription
package;
- Collaboration on content between the areas of Internet and
Television.
For a description of operations during 2002, please refer to the comments
on the parent company Seat Pagine Gialle and its main consolidated
companies, presented below.
[] EVENTS SUBSEQUENT TO DECEMBER 31, 2002
o In January 2003, the remaining 34% stake was acquired in
Teleprofessional. As a result of this transaction, the company is now
100%-owned by Seat Pagine Gialle.
o On February 12, 2003, Seat Pagine Gialle purchased 1,108,695 ordinary
shares of the French subsidiary Consodata S.A. - listed on the
Nouveau Marche of the Paris Stock
61
Exchange - following the sale option exercised by the founding
shareholders to which they were entitled on the basis of the
agreement signed originally with the previous management of Seat
Pagine Gialle on July 31, 2000. As a result of this transaction,
after payment of the agreed consideration of euro 44 per share - for
a total amount of some euro 48.8 million - Seat Pagine Gialle
acquired a further 8.17% stake and voting rights in the company, thus
increasing its stake in Consodata S.A. to 98.60%.
[] SEAT PAGINE GIALLE (PARENT COMPANY)
Held by: Telecom Italia 53.21%, TI Finance 2.03%, IT Telecom 0.02%
The company operates in the sectors of telephone publishing and the
Internet.
The table shows the economic highlights for 2002, compared to those for
2001.
-----------------------------
(millions of euro) 2002 2001 Change (%)
----------------------------------------------------------
Sales and service revenues 1,152 1,090 5.7
----------------------------------------------------------
Gross operating profit 545 505 8.0
----------------------------------------------------------
Operating income 348 285 22.2
----------------------------------------------------------
Activities during 2002:
---------------------------------------------------------------------------------------------------------------------------
Telephone publishing Pagine Bianche Introduction of the Pagine Bianche name to replace the old directories
---------------------------------------------------------------------------------------------
Pagine Gialle Launch of graphics restyling and innovations in content
---------------------------------------------------------------------------------------------
PG on line Sharp increase in the customer base (+18%), integration with PG Net,
a new product offering listing on the Virgilio search engine
---------------------------------------------------------------------------------------------
Tuttocitta Service supplying maps of Italian cities on-line
---------------------------------------------------------------------------------------------------------------------------
Internet Dial up Growth of 6.3% in the number of users to 1.8 million despite migration
towards ADSL
---------------------------------------------------------------------------------------------
ADSL Extension of the product range, introduction of ADSL based on
consumption and marked increase in the customer base (Alice+Tin.it),
more than tripled compared to 450,000
---------------------------------------------------------------------------------------------------------------------------
[] MAJOR SUBSIDIARIES
TDL Infomedia Group
Held by: Seat Pagine Gialle 99.73%
The group operates in the telephone publishing sector and is the
second-largest publisher of directories in the United Kingdom.
The table shows the economic highlights for 2002, compared to those for
2001.
------------------------------
(millions of euro) 2002 2001 Change (%)
-----------------------------------------------------------
Sales and service revenues 154 151.2 1.8
-----------------------------------------------------------
Gross operating profit 52 48.4 8.1
-----------------------------------------------------------
Operating income 20 19 2.1
-----------------------------------------------------------
Activities during 2002:
- 173 Thomson Local editions were published and distributed, the
same number as in 2001
- Growth in the customer base of paper editions by 4% to 92,791
- Development of the plan to relaunch the yellow pages activities
on line (Thomweb)
- Growth of business information services
Telegate Group
Held by: Seat Pagine Gialle 78.44%
The group operates in the sector of Directory Assistance, mainly in
Germany and Italy.
The table shows the key economic highlights for 2002, compared to those
for 2001.
------------------------------
(millions of euro) 2002 2001 Change (%)
-----------------------------------------------------------
Sales and service revenues 116 135 (14.4)
-----------------------------------------------------------
Gross operating profit 14 (12) 214.3
-----------------------------------------------------------
Operating loss (3) (32) 90.4
-----------------------------------------------------------
Activities during 2002:
- Rationalization of Telegate activities in Germany, given the
very difficult market situation
- Start-up of operations in the United Kingdom following
deregulation and in collaboration with Thomson
62
Matrix S.p.A.
Held by: Finanziaria WEB 66.0%, Seat Pagine Gialle 0.7%, NV Vertico 33.3%
The company operates in the Internet sector.
The table shows the key economic highlights for 2002, compared to those
for 2001.
------------------------------
(millions of euro) 2002 2001 Change (%)
-----------------------------------------------------------
Sales and service revenues 28 26 7.7
-----------------------------------------------------------
Gross operating loss (7) (39) 82.1
-----------------------------------------------------------
Operating loss (15) (46) 67.4
-----------------------------------------------------------
Activities during 2002:
- New definition of range of activities and strengthening of the
company's competitive position (reach of 63% compared to
approximately 61% the prior year)
- Complete review of the text and graphics of the Virgilio portal
and the launch of the pay-service Virgilio Piu
- Introduction of PG Net (a new service offering outgoing
priorities and listing on the Virgilio search tool for a fee)
with almost 33 thousand on-line customers after 6 months of
activity
Buffetti Group
Held by: Seat Pagine Gialle 100.0%
The group operates in the sector of products and services for the office.
The table shows the key economic highlights for 2002, compared to those
for 2001.
---------------------------
(millions of euro) 2002 2001 Change (%)
-----------------------------------------------------------
Sales and service revenues 253 239 5.9
-----------------------------------------------------------
Gross operating profit 11 11 -
-----------------------------------------------------------
Operating income 5 4 25.0
-----------------------------------------------------------
Activities during 2002:
- Repositioning towards products with greater added value, with the
introduction of print on demand and the digital signature,
development of software and the ADSL subscription plan
- Strengthening of the market position of Cipi (promotional gifts),
generating revenues of euro 27 million
Consodata Group
Held by: Seat Pagine Gialle 90.42%
The group operates in the sector of business information in the French
market.
The table shows the economic highlights for 2002, compared to those for
2001. (Figures restated for the purposes of comparison):
--------------------------
(millions of euro) 2002 2001 Change (%)
-----------------------------------------------------------
Sales and service revenues 83 82 1.2
-----------------------------------------------------------
Gross operating profit 7 4 75.0
-----------------------------------------------------------
Operating loss (5) (13) 61.5
-----------------------------------------------------------
Activities during 2002:
- During the first half of the year a plan was started to rationalize
operations and relaunch commercial activities
Holding Media e Comunicazione Group
Held by: Seat Pagine Gialle 100.0%
The group operates in the sector of radio and television broadcasting.
The table shows the key economic highlights for 2002, compared to those
for 2001.
--------------------------
(millions of euro) 2002 2001 Change (%)
-----------------------------------------------------------
Sales and service revenues 88 85 3.5
-----------------------------------------------------------
Gross operating loss (45) (75) 40.0
-----------------------------------------------------------
Operating loss (64) (99) 35.4
-----------------------------------------------------------
Activities during 2002:
63
- Repositioning of the television broadcasting channel La7 with new
programming and programs starting March 2002, and significant
development of MTV Italia
- Consolidation of geographical coverage and the percentage of the
population served by the signal distribution network
- Agreement with Cairo Communication to collect advertising business
with a guaranteed minimum on channel La7 with effect from 2003
- Collaboration with the Virgilio portal for news
64
INFORMATION TECHNOLOGY MARKET
o Action to improve efficiency and reduce the cost of orders in a
shrinkage market with falling prices
o Relaunching of commercial dealings with all high-profile
customers and acquisition of strategic new customers in the
sphere of the Public Administration, banks, insurance companies
and transport
[] INTRODUCTION
The Information Technology Market Business Unit was created in the
early months of 2002 with the aim of focusing the activities
previously concentrated in the Information Technology Services BU
according to the type of customer.
The BU is responsible for organizing the information technology
activities of the Group towards the external market, in particular,
Central and Local Public Administrations moving towards
decentralization and e-government, as well as banks, insurance
companies and industry. Its product range covers the whole chain of
value of information services. The IT Market BU creates solutions and
services around platforms and products of the main market vendors.
Customers' problems are solved in one of three possible ways: by
acquiring existing solutions on the market, developing special
solutions, or by integrating components offered by Finsiel with
typical market platforms (including Microsoft, SAP and Oracle).
The year 2002 was marked by growth in the IT services market on a
global scale, although growth was more restrained and tended to
contract more compared to the prior year. The negative economic
situation and the stagnation of the IT market, which affected all
operators, and the acquisition of new orders and new customers at
lower prices than in the past, obliged companies in the Finsiel group
to adopt far-reaching measures to reduce costs and improve
efficiency.
[] THE STRUCTURE OF THE BUSINESS UNIT
The Business Unit, which is represented by the Finsiel group, is organized
as follows:
Information Technology Market
Major subsidiaries
Finsiel S.p.A.
Agrisian S.C.p.A.
Aspasiel S.p.A.
Banksiel S.p.A.
EIS S.p.A.
Insiel S.p.A.
Tele Sistemi Ferroviari S.p.A.
On October 22, 2002 a new organizational structure became operational
in the IT Market BU, organized according to the following functions
which have the task of guaranteeing activities relating to the
design, development, operation and marketing of IT products/solutions
for each respective reference market:
-------------------------------------------------------------------------------
| | |
Government Finance Innovation, New markets and
Central and Local Public Administrations Bank and insurance market Coordination
market
[] MAJOR CORPORATE EVENTS/SCOPE OF CONSOLIDATION
The following major corporate events and changes in the scope of
consolidation took place during the year:
- Sale, in February 2002, of the investment in Lottomatica
(18.33%) by Finsiel to Tyche S.p.A., through the tender of its
shares in the tender offer.
- Creation, in May 2002, of Sogei Servizi Innovativi and
Tecnologici S.p.A. (Sogei 51% and Finsiel 49%). The business
purposes of these companies is to obtain and realize initiatives
geared to the operation and development of businesses connected
with Information Communication Technology (ICT) in the fiscal
sector. Furthermore, on July 25, 2002, the company voted a
capital increase to be paid partly in cash and partly in kind.
The cash
65
increase was subscribed to by Finsiel while the increase in kind
was carried out by Sogei by contribution of its "ETI" business
segment. Sogei IT, as a result of the sale of Sogei S.p.A.,
became an affiliated company and is valued using the equity
method.
- Sale, in June 2002, of the investments held by Finsiel in
Netikos (75%), Netsiel (31.35% and Telesoft (40%) to IT Telecom.
- On July 10, 2002, Finsiel sold the investment (40.41%) in the
affiliated company Informatica Trentina to Deda S.r.l.. The
transfer of the shares took place on November 21, 2002.
- On July 31, 2002, Finsiel sold 100% of the share capital of
Sogei to the Ministry of Economy and Finance - Department of
Fiscal Policy, with the relative transfer of the shares. For
purposes of the consolidation of the ITM Business Unit, Sogei's
statement of income was consolidated up to June 30, 2002.
- On August 2, 2002, the company AGRISIAN - Consulenza e Servizi
per l'Agricoltura S.C.p.A., was set up; Finsiel has a 50.86%
stake. The company administers a five-year contract with the
Ministry for Agriculture and Forestry Policy also on behalf of
AGEA (Agency for Agriculture Disbursements). The company was
consolidated from the month of August.
- On August 2, 2002, Finsiel signed a contract for the sale of
100% of the capital of Consiel to World Investment Partners S.A.
The company was deconsolidated beginning September 1, 2002,
while the transfer of shares took place on October 3, 2002.
[] ECONOMIC AND FINANCIAL DATA
The table shows the key highlights for 2002, compared to those for
2001, restated for the purposes of comparison.
---------------------------------------------------------------------------------------------------------------------
2002 2001 2001 Change
(a) (b)(1) (a - b)
--------------------
(millions of euro) amount %
---------------------------------------------------------------------------------------------------------------------
Sales and service revenues 912 960 1,198 (48) (5.0)
Gross operating profit 104 137 166 (33) (24.1)
% on Revenues 11.4% 14.3% 13.9%
Operating income 61 100 123 (39) (39.0)
% on Revenues 6.7% 10.4% 10.3%
Investments:
.. industrial 30 28 30 2 7.1
.. goodwill 1 1 (1) (100.0)
Employees at year-end (number) 4,493 4,810 6,441 (317) (6.6)
---------------------------------------------------------------------------------------------------------------------
(1) Restated for the purposes of comparison. Note that Sogei is included in the scope of consolidation for only the
first six months of 2001 and Consiel for only the first eight months of 2001.
[GRAPHIC OMITTED] Sales and service revenues, in 2002, decreased by euro 48
million compared to the prior year which was restated for
Gross purposes of comparison. A contributory factor to the
operating profit decrease was a contraction in the revenues of Finsiel,
[2001 - 137 Consiel and Banksiel, resulting from both lower volumes and
2002 - 104] a reduction in prices with the most important customers.
This was offset by an increase in the operations of
Intersiel and Insiel both for core customers and as a result
of the acquisition of new customers in the Local Public
Administration market.
The profitability of the IT Market BU, both in terms of the gross
operating profit and the operating income, decreased as a result of
the already-mentioned reduction of prices on some contracts which
were renewed during the year, and the new bids won with lower
contract prices, that were only partly offset by cost cuts and
improved levels of efficiency. The reduction can mainly be attributed
to the lower profit margins of Finsiel, Consiel and Tele Sistemi
Ferroviari on outsourcing activities for companies in the Ferrovie
group.
Industrial investments were much in line with those in the prior
year.
The number of employees of the IT Market BU fell by 317 compared to
the figure at December 31, 2001, adjusted for the purposes of
comparison, and can mainly be attributed to Finsiel. The reduction
was the result, on the one hand, of the sale by Finsiel of the
"Personnel Administration" business segment to Tess S.p.A., and, on
the other, to rationalization activities and measures aimed to
improve efficiency.
66
[] INFORMATION ON OPERATIONS
During 2002, the range of services was rationalized through an
organization focusing on the vertical markets (government, finance
and enterprises).
Numerous contracts were acquired, including the following:
- Finsiel stepped up its collaboration with Inps by winning the
bid for new e-service services, with Consip for the document
system of the Ministry of Economy and Finance and for the public
employment information system. Collaboration continued with
MIFAP to create the new National Agricultural Information System
and with the Ministry of the Interior on the electronic identity
card; at the end of 2002 Emilia Romagna and the Veneto were
added to the list of customers in the field of local health
services.
- Insiel devoted itself to new e-government initiatives:
electronic personal Health Records, which can also be consulted
via Internet; a system of health-care administration, based on
an epidemiological and economic datawarehouse; regional CUP; a
regional Coordination and Compensation Center for the Blood
Plan; completion of the Territorial and Hospital Information
System.
- Banksiel, the leading Italian company specializing in IT
solutions and services for finance, has supervised the migration
of information systems of banks involved in processes of
combining or merging with other banks, such as Sanpaolo IMI,
Banca Antoniana Popolare Veneta and Banca Popolare di Milano; it
has acquired the first important customer in the sphere of
insurance (Cattolica group); it has created innovative projects
in the area of derivatives (Cassa Risparmio di Firenze) and
Wealth Management for Monte dei Paschi di Siena.
- Tele Sistemi Ferroviari, the technological partner of the
companies of the Ferrovie dello Stato group, has stepped up its
presence in local public transport with projects that are highly
innovative from a technological point of view; in 2002 the
company won three bids for electronic ticketing systems for CIVA
(the consortium of companies providing transport in the Province
of Varese), ASM of Pavia and the Autonomous Province of Trento.
It was also involved in numerous activities for the Italian
national rail network, including the electronic system for
managing investment projects on the SAP platform, the start of
the Traffic Information Platform for planning and operating the
rail network; the extension and integration of traffic control
and public information systems and development over new
companies in the FS group (Centostazioni).
[] EVENTS SUBSEQUENT TO DECEMBER 31, 2002
o Finsiel with RTI was awarded the bid to develop and operate the
new Ministry of Education Information System in full outsourcing
for five years. The group will create an information system
which will be disseminated to teachers, families and students
who will be able to interact with the system wherever they are,
at school or at home.
o The bid was won for the creation of an Information System for
Social Services and Health Care and a Regional Services Card for
the Lombardy Region, under a seven-year contract, which involves
the design of a network incorporating all the facilities and
operators of health care and social services, as well as new
services which the public can access through a Regional Health
Care Card;
o Still in the field of health care, the Ministry of Health has
entrusted Finsiel with the operation of the information system
of the National Transplant Center, which Finsiel has been
involved in developing over the last three years;
o The bid was awarded for the whole project to create the portal
for Italy's six-month Presidency of the European Union.
o In mid-January, Finsiel and Oracle Italia (a subsidiary of
Oracle Corporation, a world leader in creating software for
businesses) signed an agreement to use and develop vertical
applications on the innovative Oracle HTB (Healthcare
Transaction Based) platform. Finsiel aims to use the HTB
platform for designing new solutions for information systems of
clinics and hospitals, and intends to develop approximately 60
specialized resources using Oracle technologies.
67
[] MAJOR SUBSIDIARIES
Finsiel S.p.A.
Held by: Telecom Italia 77.92%
The company supplies systems integration and Internet services for the
Public Administration and large businesses.
The table shows the key economic highlights for 2002, compared to those
for 2001:
---------------------------
(millions of euro) 2002 2001 Change (%)
-----------------------------------------------------------
Sales and service revenues 244 296 (17.6)
-----------------------------------------------------------
Gross operating profit 3 24 (87.5)
-----------------------------------------------------------
Operating income (loss) (14) 16 o
-----------------------------------------------------------
Activities during 2002:
- There was a reduction in sales and service revenues in 2002, leading
to a contraction of profitability indicators. This can almost
exclusively be attributed to a revision of the prices applied to
important customers and to the acquisition of new orders at lower
prices
- The award of numerous bids and the renewal of some important
contracts
- The start of initiatives geared to considerably improving the level
of efficiency, by taking measures to reduce purchase costs and
improve performance through a review of the organizational structure
Banksiel S.p.A.
Held by: Finsiel 55.5%
The company is the leading Italian company in information technology for
banking and finance.
The table shows the key economic highlights for 2002, compared to those
for 2001:
---------------------------
(millions of euro) 2002 2001 Change (%)
-----------------------------------------------------------
Sales and service revenues 114 118 (3.4)
-----------------------------------------------------------
Gross operating profit 17 16 6.3
-----------------------------------------------------------
Operating income 15 11 36.4
-----------------------------------------------------------
Activities during 2002:
- Consolidation of its market share in the sphere of banking and
finance through the rationalization of its range of services
- Start of a service directed at insurance companies, and acquisition
of the first important customer in this new market (Cattolica
Assicurazioni group)
- New organization with the aim of improving the level of efficiency
and capacity to follow its clientele effectively
Insiel S.p.A.
Held by: Finsiel 52.0%
Insiel is the leading company in Italy for solutions and information
services for local Public Administrations.
The table shows the key economic highlights for 2002, compared to those
for 2001:
---------------------------
(millions of euro) 2002 2001 Change (%)
-----------------------------------------------------------
Sales and service revenues 84 81 3.7
-----------------------------------------------------------
Gross operating profit 18 17 5.9
-----------------------------------------------------------
Operating income 12 11 9.1
-----------------------------------------------------------
Activities during 2002:
- Acquisition of new contracts in the sphere of the Public
Administration and Health Care Services, including the electronic
identity card project for the Bolzano City Council, the Territorial
Information System for Friuli-Venezia Giulia, virtual Records and, in
the field of health care, the development of an information system
for the administration and operation of health-care services in
Friuli-Venezia Giulia, Health Care Records and the citizens Card
68
Tele Sistemi Ferroviari S.p.A.
Held by: Finsiel 61.0%
The company specializes in the sector of transport and logistics and is a
partner of the Italian national railways, the Ferrovie dello Stato group.
The table shows the key economic highlights for 2002, compared to those
for 2001:
---------------------------
(millions of euro) 2002 2001 Change (%)
-----------------------------------------------------------
Sales and service revenues 155 157 (1.3)
-----------------------------------------------------------
Gross operating profit 30 35 (14.3)
-----------------------------------------------------------
Operating income 20 28 (28.6)
-----------------------------------------------------------
Activities during 2002:
- Renewal of the ten-year outsourcing contract for the period 2002-2006
for ICT services for the companies of the Ferrovie dello Stato group,
with lower contract payments, obliging the company to achieve higher
levels of efficiency in order to maintain its levels of
profitability;
- Development and innovation of its range of products with the
acquisition of important customers in the local public transport
sector and new companies in the Ferrovie dello Stato group
(Centostazioni)
69
INFORMATION TECHNOLOGY GROUP
o Creation of a new Operating Activity directed towards Group
services
[] THE OPERATING ACTIVITY
The Information Technology Group Operating Activity was created in
the early months of 2002 as a result of rationalizing the activities
previously included in the Information Technology Services BU. It
also incorporates operations of the TILAB group(1).
The unit is responsible for organizing technological innovation and
service information technology activities within the Telecom Italia
Group, pursuing objectives that will augment efficiency, improve
quality and stimulate innovation.
[] THE STRUCTURE OF THE OPERATING ACTIVITY
The Operating Activity is responsible for the companies dedicated to the
Group's information systems within the framework of the plan to integrate
the various companies involved.
Information Technology
Group
IT Telecom S.p.A.
Eustema S.p.A.
Sodalia North America
Teco Soft Argentina
Telesoft Hellas
Telesoft Russia
NETikos Group
Webegg Group
TILAB Group
The Operating Activity is organized as follows:
-----------------------------------------------------------------------------------
| | | | |
Domestic Wireline VAS-Solutions Group Solutions IT Operations and IT Architectures
Solutions Infrastructures
The new operating activity is organized into five production divisions:
Domestic Wireline Solutions - design and development of systems, solutions
and IT applications required to oversee the Domestic Wireline business of
Telecom Italia;
VAS Solutions - basic systems integrator and technological support in the
evolution of innovative services for the Telecom Italia Group;
Group Solutions - design and development of systems, solutions, and IT
applications required to monitor the transversal processes of the Business
Units and support activities for the information systems of the Mobile
Business Unit;
IT Operations and Infrastructures - creation of the IT infrastructures
required for running systems, Group applications and the delivery of
investment-based services for the market;
IT Architectures - design and creation of applications and infrastructure
architectures, ensuring their creation and standardization.
[] MAJOR CORPORATE EVENTS/SCOPE OF CONSOLIDATION
The following major corporate events and changes in the scope of
consolidation took place during the year:
- On December 2, 2002, the following companies were merged by
absorption in IT Telecom S.p.A. effective January 1, 2002 for
accounting and tax purposes: Netsiel S.p.A., Saritel S.p.A., Sodalia
S.p.A. and Telesoft S.p.A.. The transactions previously entered into
in order to the execute the mergers were the following:
o contribution by Telecom Italia S.p.A. to IT Telecom S.p.A. of
the holdings in Netsiel S.p.A.
---------
(1) With effect from October 2002, the TILab Group came under the direct
control of the Managing Director of Telecom Italia, Carlo Buora.
70
(68.65%), in Saritel S.p.A. (100%), in Sodalia S.p.A. (100%) and
in Telesoft S.p.A. (60%);
o purchase by IT Telecom S.p.A. of the holdings held by Finsiel
S.p.A. in Netikos S.p.A. (75%), in Netsiel S.p.A. (31.35%) and
in Telesoft S.p.A. (40%).
- purchase by IT Telecom S.p.A., at the end of June, of the 50% stake
in Webegg S.p.A. held by Olivetti S.p.A.; Webegg S.p.A. is now 69.8%
controlled. The Webegg group was consolidated beginning July 1, 2002.
- Teco Soft Espana (100%-controlled by Telesoft S.p.A.) was sold on
July 31, 2002 after the Telecom Italia group disbanded operations in
Spain following the sale of Auna.
[] ECONOMIC AND FINANCIAL DATA
The table shows the key highlights for 2002, compared to those for 2001,
restated for the purposes of comparison.
--------------------------------------------------------------------
2002 2001 Change
(a) (b) (a - b)
--------------------------------------------------------------------
(millions of euro) amount %
--------------------------------------------------------------------
Gross operating profit Sales and service revenues 1,215 1,198 17 1.4
[GRAPHIC OMITTED] Gross operating profit 140 188 (48) (25.5)
% on Revenues 11.5% 15.7%
[2001 - 188 Operating income (21) 22 (43) o
2002 - 140] % on Revenues (1.7%) 1.8%
Investments:
. industrial 158 162 (4) (2.5)
. goodwill 28 6 22 o
Employees at year-end (number) 7,327 6,844 483 7.1
Consolidated revenues remained fairly stable and were affected by the fall
in prices.
Gross operating profit and operating income were also affected by the fall
in prices and showed a reduction compared to 2001.
Industrial investments are much in line with those of 2001. Investments in
goodwill in 2002 refers to the acquisition of the majority stake in
Webegg.
The number of employees increased as a result of the change in the scope
of consolidation, and was particularly affected by the acquisition of the
Webegg group (+701 at December 31, 2002, and +719 at June 30,2002).
[] INFORMATION ON OPERATIONS
2002 was marked by the completion of the merger plan for absorption of
Netsiel, Saritel, Sodalia and Telesoft by IT Telecom S.p.A., within the
framework of a broader reorganization of the investments of the Telecom
Italia Group, with the aim of significantly streamlining the decision-
making and control chain of the Information Technology segment, in order
to achieve single operations, business and organization in a unitary stand
for captive TLC supplying and group factories.
In 2002 it proved possible to focus the Business Unit on its core
business, TLC, ensuring the development and application of the solutions
needed for the functioning of the business and the monitoring of the
technological innovation of the information systems as drivers for the
development of Telecom Italia.
During the year, operations were marked by a series of initiatives geared
to the following objectives:
- increasing efficiency and improving performance;
- reducing the disparate architecture and infrastructure solutions,
with obvious economies of scale, strengthening the operational tool
and making the best possible use of existing specific professional
skills.
71
[] EVENTS SUBSEQUENT TO DECEMBER 31, 2002
These transactions are described in the section "Significant events":
- following the Extraordinary Shareholders' Meetings of TILAB S.p.A.
and Telecom Italia, held on December 12, 2002 and December 13, 2002
respectively, TILAB S.p.A. will be merged by absorption in Telecom
Italia S.p.A. The merger of Tilab and Telecom Italia is scheduled for
March 2003, with effect from January 1, 2003;
- On January 27, 2003, as decided by the Board of Directors on December
19, 2002, IT Telecom acquired the real estate complex in Pomezia
(Rome) S.S. 148 Pontina Km. 29,100, by paying off the lease contract
with Teleleasing S.p.A. before the expiration date. The purchase
price was euro 32.6 million.
- On February 21, 2003, Telecom Italia signed an outsourcing agreement
with Hewlett Packard to supply asset management, help desk and
maintenance and administration operations regarding 90,000
workstations. The contract, which will last for five years, will draw
upon the skills of about 600 IT Telecom specialists who will be
transferred to a new HP entity specialized in these services. The
strategic importance of this agreement, which is worth euro 255
million and will become binding and operational once consultations
have been completed with the unions and a go-ahead has been received
from the Italian Antitrust Authority, will generate significant
savings in the management of the distributed environment and will
lead to a greater focus of the resources on Telecom Italia's core
business.
[] MAJOR SUBSIDIARIES
IT Telecom S.p.A.
Held by: Telecom Italia 100.0%
The table shows the key economic highlights for 2002, compared to those
for 2001:
--------------------------
(millions of euro) 2002 2001(1) Change (%)
-----------------------------------------------------------
Sales and service revenues 974 967 0.7
-----------------------------------------------------------
Gross operating profit 114 198 (42.4)
-----------------------------------------------------------
Operating income (loss) (13) 56 o
-----------------------------------------------------------
(1) Proforma figures
Activities during 2002:
Revenues remained virtually unchanged despite being negatively influenced
by the redefinition of commercial dealings with the Domestic Wireline BU,
which led to a significant reduction in prices both for IT Operations and
Infrastructures, and for Domestic Wireline Solutions. This phenomenon,
associated with an increase in labor costs and an increase in the
consumption of raw materials and external services, led to a reduction in
the gross operating profit and an operating loss.
Webegg Group
Held by: IT Telecom 69.8%, Finsiel 30.2%
The Webegg group operates in many different spheres with a network of
international partners that aims its business at positioning companies on
the Internet.
The group operates mainly as a supplier of CRM systems, particularly for
Telecom Italia Mobile and for third-party customers, especially Software
Factory, exclusively in the banking and insurance sector.
The table shows the key economic highlights for 2002, compared to those
for 2001:
----------------------------
(millions of euro) 2002(*) 2001(*) Change (%)
-----------------------------------------------------------
Sales and service revenues 80 92 (13,0)
-----------------------------------------------------------
Gross operating profit 8 13 (38,5)
-----------------------------------------------------------
Operating income 2 7 (71,4)
-----------------------------------------------------------
(*) In 2001, the Webegg group was not consolidated in the Telecom Italia
Group, whereas, in 2002, the Webegg group was included in the scope of
consolidation with effect from July 1, 2002
72
Activities during 2002:
Revenues showed a marked reduction, particularly in the area of Web and
Internet applications owing to the performance of the reference market.
Despite this, thanks to constant efforts to improve corporate efficiency,
it proved possible to maintain positive profit margins. Personnel costs
were the target of a far-reaching and incisive cost-saving policy, through
outplacements in the areas of business which had reported the highest
decline in operations.
NETikos Group
Held by: IT Telecom 100.0%
The NETikos group was founded by Telecom Italia to respond to the growing
need for Internet and wireless solutions, with the aim of being a
"one-stop-shop partner" that would satisfy every need with regard to
Mobile Internet in such a way that would enable companies, institutions
and final users to be permanently on-line and to obtain better results by
using wireless applications.
--------------------------
(millions of euro) 2002 2001 Change (%)
-----------------------------------------------------------
Sales and service revenues 21 17 23.5
-----------------------------------------------------------
Gross operating profit 2 2 -
-----------------------------------------------------------
Operating profit 0 1 o
-----------------------------------------------------------
Activities during 2002:
The NETikos group suffered from the uncertainty prevailing on the market
and from the postponement of important projects by its main customers,
although, during the second half of the year there was a considerable
improvement in revenues and a substantial growth of international
activities through the affiliated company NETikos Finland, especially in
the area of Wireless Lab.
TILAB Group
Held by: Telecom Italia 100.0%
The TILAB group identifies and manages innovative initiatives, creating
new business opportunities both for companies within the Group and for the
external market. The table shows the key economic highlights for 2002,
compared to those for 2001:
--------------------------
(millions of euro) 2002 2001 Change (%)
-----------------------------------------------------------
Sales and service revenues 166 134 23.9
-----------------------------------------------------------
Gross operating profit (loss) 31 (14) o
-----------------------------------------------------------
Operating income (loss) 7 (34) o
-----------------------------------------------------------
Activities during 2002:
Operations which focused on R&D, and which also involved collaboration
with Pirelli Lab concerned the following projects:
- study of enabling techniques in mobile and wireless sectors
- definition of network design, planning and management tools
- definition and testing of local access techniques
- development of solutions, architectures and products integrated in
silicon
- development of modular products, created in software and able to be
transformed into firmware for specific solutions or hardware
components
- implementation of interactive TV services
73
There follows a description of the most significant activities of TILAB in
2002:
- completion of the first phase of the "Network Development" project to
support the Group in making strategic decisions about the evolution
of the network;
- testing in the field of the localization platform, in collaboration
with TIM;
- completion of the economic evaluation of a business disaster recovery
service with a "storage" services center operated through fiber-optic
connections;
- definition of a new release of equipment for interconnecting GSM and
the Internet operating with the UCP (Universal Communication
Protocol) Gateway protocol, so that SMS text messages on mobile
networks can be interchanged in a Web environment;
- creation of content protection functions within the framework of the
Easy Video streaming platform, based on multimedia techniques
developed by TILAB for the mobile network;
- creation of the "Video Intervention" service based on video
communication technologies on the Internet used for TV programming
(for example, the program "Processo del lunedi");
- definition of new cost models for the broadband access network;
- definition of the functional specifications of the virtual ADSL
platform to design Systems Intellectual Properties on Chips;
- testing of a prototype of a cryogenic filter to increase the
efficiency of the base stations of the mobile network, in
collaboration with Pirelli Labs;
- creation of an updated version of the prototype of an emulator of the
UMTS network in order to assess the impact of the quality of service
on Internet multimedia applications;
- creation of the specification and prototype of some OSA-Parlay
components for a network intelligence architecture with standard open
interfaces for the introduction of new services;
- testing on the DW and TIM networks of the StarSip platform for the
delivery of integrated voice
- data services on the network;
- integration of data network backbone functions on the OPB
infrastructure and OPB-BBN (national backbone) cross-work;
- definition and creation of wholesale services directed at OLO and ISP
customers;
- testing of the interactive TV service within TV broadcasts (LA7);
- evolution of the Mobile Amico instant messaging system used in
TIM@Cafe;
- download&play and videostreaming services on a mobile terminal;
- preparation and inauguration of the "Exhibition on the Future of
Telecommunications" at the Future Centre in Venice.
74
OTHER ACTIVITIES
The "Other Activities" of the Telecom Italia Group are principally
constituted by the "Real Estate and General Services" Operating Activity,
by the companies formerly in ex-International Operations which, following
the reorganization of international activities, were transferred to the
Foreign Holdings Function, by the Telespazio BU, by subsidiaries which
supply support activities to the Group and by the affiliated company
Stream.
[] REAL ESTATE AND GENERAL SERVICES
In addition to leveraging the net asset value of the Group, up to December
31, 2002, the "Real Estate and General Services" Function constituted an
interface for the various corporate Functions/Business Units in order to
satisfy the needs of the real estate and general services area. In
particular, the activity operated by the Real Estate and General Services
Function concerns the planning of the sites and locations of the Group,
the design and construction of civil works, the maintenance of the
properties and technological plant, in addition to providing real estate
and general services.
The Function operates through the internal structures of Telecom Italia
S.p.A. - mainly for the activities conducted on behalf of the Telecom
Italia BU/Functions - and through the subsidiary Emsa Servizi S.p.A.,
which, for the most part, gears its activities towards the other companies
in the Group.
In February 2003 the Real Estate and General Services Operating Activity
was disbanded; its activities and resources were reassigned to other
corporate functions of the Group.
The following table shows the key highlights for 2002, compared to those
for 2001, restated for purposes of comparison. The figures take into
account the exchanges between the Real Estate and General Services
operating activity and the other functions of Telecom Italia S.p.A.
--------------------------------------------------------------------
2002 2001 Change
(a) (b) (a - b)
----------------------
(millions of euro) amount %
--------------------------------------------------------------------
Sales and service revenues 846 953 (107) (11.2)
Operating costs (758) (809) 51 6.3
Gross operating profit 88 145 (57) (39.3)
% on Revenues 10.4% 15.2%
Operating loss (92) (65) (27) (41.5)
--------------------------------------------------------------------
In 2002, sales and service revenues decreased by euro 107 million to euro
846 million compared to the prior year. The reduction can be attributed
mainly to a reduction of revenues from other corporate BU/Functions
resulting both from the continuation of the policy of rationalizing the
space occupied, and to the process of bringing prices into line with the
best market terms. Operating costs benefited from a reduction of euro 51
million compared to 2001, following efforts to curb expenditures for
materials and external services and from the reduction in labor costs
following a marked cutback in the workforce during the year; these effects
partially compensated the above- mentioned reduction in revenues, thus
attenuating the decline in the gross operating profit compared to the
prior year.
The operating loss, which includes amortization and depreciation,
provisions to the reserves for risks and charges and various expenses that
are mainly in reference to property taxes, amounted to euro 92 million
(-euro 65 million in 2001).
With reference to the core activities of the Function aimed at leveraging
the value of the Group's real estate assets, during 2002 some important
new extraordinary transactions were completed, and are described below.
Tiglio project
Following the framework agreement signed May 2002 between the Pirelli,
Olivetti-Telecom Italia Groups and The Morgan Stanley Real Estate Funds
for the integration of the relative real estate properties as well as the
entities that provide real estate services to the same companies or to
their subsidiaries, in the second half of 2002, the transactions were
finalized for the concentration of the assets in the two new vehicles
companies set up for this purpose (Tiglio I and Tiglio II). Such
75
concentration is functional to specific development actions to be started
in the real estate market in 2003, including the possibility of a
contribution of the properties to real estate investment funds. Among the
preliminary transactions for the concentration of the real estate assets
in Tiglio I and Tiglio II, on October 24, 2002, the non-proportional
partial spin-off IM.SER (60% Beni Stabili and 40% Telecom Italia) was
effected by which the relative real estate assets were contributed to the
company IMSER 60 (98% Beni Stabili group and 2% Telecom Italia) and to the
company EMSA Immobiliare (100% controlled by Telecom Italia) in proportion
to the stakes held in IM.SER, respectively, by Beni Stabili and Telecom
Italia. Following this transaction, which came after the positive
conclusion of the securitization of IMSER 60's debt, and also to the
effect of certain fixed asset acquisitions by companies in the Seat Pagine
Gialle group, EMSA Immobiliare had a conspicuous portfolio constituted by
a total 169 real estate properties.
On October 29, 2002, having met all the preliminary conditions for the
deal, a series of acts were therefore finalized whereby the first stage of
the Progetto Tiglio was concluded which, for Telecom Italia regarded:
o the subscription, simultaneously with all the other participants in
the initiative, to a capital increase by Tiglio I for cash, with the
consequent stake in the company equaling 36.85% (in addition, at
Telecom Italia Group level, to the 2.1% subscribed to by Seat Pagine
Gialle), in proportion to the value of the assets transferred by
Telecom Italia (and by Seat Pagine Gialle) to Tiglio I to the total
assets that were taken over by the latter company;
o the subscription to a capital increase by Tiglio II paid for in kind
by the contribution of its "Asset Management" business segment with
the consequent stake in the company equaling 49.47%;
o the sale of the investment in EMSA Immobiliare to OMS2 (100%
controlled by Tiglio I);
o the sale - directly and through the subsidiary Saiat - of the
investment in Telimm S.r.l. to the company MSMC Immobiliare Holding
(entirely controlled by Tiglio I).
With reference to the part of the Progetto Tiglio regarding the
optimization of the service activities, in November, Telecom Italia sold
the "Property Management", "Project Management" and "Agency" business
segments to the Pirelli & C. Real Estate group.
These transactions gave rise to a total gross economic impact (gross gain
and extraordinary dividend) for the Parent Company, Telecom Italia of euro
229 million. The impact for the Telecom Italia Group was euro 234 million.
Finally, as agreed between the parties, December 24, 2002 marked the
completion of the merger by absorption, in Tiglio I and Tiglio II, of the
real estate investment holdings owned by them - falling under Progetto
Tiglio and already 100% controlled, directly or indirectly - so that the
corporate structure of the two subjects could be optimized, in view of the
successive actions to leverage the assets on the market.
Sale of IMMSI
On November 22, 2002, Telecom Italia sold its stake in IMMSI to the
company Omniapartecipazioni. The sales price was euro 68 million, with a
gross gain of 51 million for the Parent Company and euro 1 million for the
Group.
Sale of Telemaco Immobiliare
On December 20, 2002, the final price was fixed for the sale, which took
place in July, of Telecom Italia's investment in Telemaco Immobiliare to
the company Mirtus.
The net proceeds were euro 192 million for the Telecom Italia Group with a
gross gain of euro 134 million for the Parent Company, Telecom Italia, and
euro 110 million for the Group.
On October 31, 2002, Telemaco Immobiliare exercised a put option on 28
real estate properties owned by Telegono (a company which is held 40% by
Telecom Italia, 45% by the Beni Stabili group and 15% by Lehman Brothers,
analogously to the original shareholder base of Telemaco Immobiliare)
based on agreements formalized in July 2002 between Mirtus and the three
sellers of the company. For purposes of the acquisition of such assets,
Telegono signed a loan agreement that will be extinguished partly by the
consideration from the sale in progress of such properties.
Ortensia project
On December 24, 2002, Telecom Italia and the other shareholders of Tiglio
I (MSMC Italy Holding BV, Olivetti, Seat Pagine Gialle and Pirelli) and
Tiglio II (POPOY Holding B.V.) formalized a binding agreement with the
company Marzotto - which became executive on March 4, 2003 - to set up a
common vehicle company for the land owned by Tiglio I and Tiglio II
together with the portfolio of areas owned, directly and indirectly, by
Marzotto. The agreement calls for the deal to be finalized in 2003 through
the spin-off of the land owned by Tiglio I and Tiglio II and other assets
and liabilities related thereto to a company in which Marzotto, at the end
of December 2002, on the
76
basis of formalized agreements, had contributed a business segment
inclusive of the land earmarked for the initiative. Given the valuation of
the assets available at this time, it is expected that, when the spin-offs
are completed, Telecom Italia will hold about a 28% stake in the company
(in addition, at Group level, of the 1% stake that will be held by Seat
Pagine Gialle).
Events subsequent to December 31, 2002
On January 27, 2003, the procedures were completed for the early purchase
of 12 property units (for about 300,000 square meters) from Teleleasing
S.p.A. that are used by Telecom Italia S.p.A. and other Group companies
under financial leasing contracts. The deal involved a total financial
payment of some euro 369 million for the entire Group.
77
[] FOREIGN HOLDINGS
The corporate function Foreign Holdings, operating under the corporate
control structure, heads up the companies Telecom Italia International,
9Telecom group (consolidated up to June 30, 2002), the BBNed group, the
Telekom Austria group, Telekom Srbija, Etec S.A. and Netco Redes. The
function ensures the coordination, leveraging and rationalization of the
foreign holdings held by Telecom Italia operating in the fixed and
integrated fixed-mobile TLC business.
The table shows the key highlights for 2002, compared to those for 2001,
restated for the purposes of comparison.
----------------------------------------------------------
(millions of euro) 2002 2001
----------------------------------------------------------
Sales and service revenues 214 292
Gross operating loss (49) (149)
----------------------------------------------------------
The above data refers to the BBNed group and Telecom Italia International
and the 9 Telecom group, consolidated line-by-line for the first six
months of 2002 only since they were sold in August 2002, as described
below. The two years are therefore not comparable.
As far as the principal corporate transactions are concerned, the
following can be said:
- on August 1, 2002, the Telecom Italia group finalized the sale of the
investment in Auna and Multimedia Cable to Endesa, Union Fenosa and
Banco Santander Central Hispano, realizing a total consolidated gross
gain of euro 1,245 million, including the stake sold through TIM
International.
- On August 26, 2002, the French group 9Telecom was sold to LDCom with
the simultaneous purchase on the part of Telecom Italia International
of a 7.22% stake in LDCom (euro 172 million). At December 31, 2002,
the stake was reduced to 6.99% after the company effected a reserved
capital increase in November. In the 2002 financial statements, the
Telecom Italia Group adjusted the carrying value to euro 51 million.
- Telecom Italia International, following the agreement reached in June
with OIAG, in the month of November, sold 75,000,000 Telekom Austria
shares at a price of euro 7.45 per share, reducing its investment
from 29.78% to 14.78%. The transaction resulted in gross proceeds of
euro 559 million with a loss of euro 135 million. The carrying value
of the investment in the 2002 financial statements is in line with
market value; the residual holding is gradually being sold.
- On December 28, 2002, the Telecom Italia Group announced that it had
reached an agreement for the sale of its 29% stake in Telekom Srbija
to PTT Srbija. The agreement for the sale was finalized on February
20, 2003 and the closing is scheduled to take place by the end of
June.
PTT will pay euro 195 million, 120 million of which will be paid in
four installments beginning February 2003. The remaining amount will
be paid in six semi-annual installments beginning January 2006. The
shares sold will be deposited with an international bank until full
payment of the price.
Finally, as regards the investment in Netco Redes (Spain), the carrying
value of the investment was adjusted to market value as at December 31,
2002, with an impact on the consolidated financial statements of the
Telecom Italia Group of euro 96 million.
78
[] TELESPAZIO
In 2002, the Telespazio Business Unit included the Telespazio group, sold
in November 2002 and with only the statement of income consolidated up to
September 30, 2002, and the "Satellite Telecommunications" business
segment of Telecom Italia.
The following table shows the key highlights of the Telespazio Group
(included in the scope of consolidation until September 30, 2002) and the
Satellite Telecommunications business segment of Telecom Italia, compared
to the whole of 2001, which included the effects of the interruption of
the Astrolink initiative.
--------------------------------------------------------------
(millions of euro) 2002 2001
--------------------------------------------------------------
Sales and service revenues 237 648
Gross operating profit 12 159
Operating income (loss) (6) 60
--------------------------------------------------------------
[] OTHER SUBSIDIARIES
Telecom Italia Finance S.A.
Held by: Telecom Italia 100.00%
Under the reorganization of the Telecom Italia Group companies in
Luxembourg, in October 2002, Sogerim S.A. was absorbed by its sole
shareholder Softe S.A., and Huit II was absorbed by its sole shareholder
TI Media S.A..
On December 16, 2002, Softe S.A. incorporated TI Media S.A. and the new
company was merged with TI WEB S.A., which, on the same date, changed its
name to Telecom Italia Finance. The financial statements used in the
merger were those as at October 31, 2002.
Following the merger, beginning November 1, 2002, TI Finance took over
responsibility of the international treasury function operating in support
of the financial needs of the foreign companies of the Telecom Italia
Group, a task previously carried out by Softe.
From an economic standpoint, TI Finance's financial statements for the
year ended December 31, 2002 include the former TI WEB, and beginning
November 1, 2002, Softe and TI Media. Therefore, a comparison with the
corresponding prior year's figures would not be meaningful.
The company ended the year 2002 with a loss of euro 85 million, due
principally to writedowns for euro 80 million. The writedowns specifically
refer to euro 24 million for the adjustment of third-party bonds in
portfolio to market price, euro 56 million for the adjustment of
investments to market value and the adjustment of the investment in GLB
Servicoes Interativos S.A. (Globo.com). to the sales price.
Saiat S.p.A.
Held by: Telecom Italia 100.00%
The company carries out support services for the Parent Company, Telecom
Italia, in the financial area and in investment management.
In 2002, in particular, the company continued to provide services under
the program for the securitization of Telecom Italia trade accounts
receivable. Under the "Progetto Tiglio", the company sold its interest
(99.42%) in TELIMM to MSMC Immobiliare and, as part of the reorganization
of the Luxembourg companies of the Group, sold its stakes in Softe (0.01%)
and Sogerim (0.05%).
79
TI Learning Services S.p.A.
Held by: Telecom Italia 100.00%
The company operates in the sector of training with the aim of achieving a
leadership position in the market of Learning & Knowledge Management.
Thanks to the technologies at its disposal and the experience gained in
this field, the company is able to design complex and customized training
systems that can be used by large numbers of people. Its product range
includes more than 1,000 courses for continuous training, particularly on
topics associated with ICT and Business Management. At December 31, 2002
the conferral of the "Training" business segment of Telecom Italia was
completed, concluding the project to rationalize the companies of Telecom
Italia operating in the field of traditional and web-based training
approved by the Board of Directors of Telecom Italia on December 18, 2001.
Activities during 2002:
- Strengthening of commercial action, on internal and external markets,
regarding the services industry and the Public Administration, as
well as participation in bids for training with financial backing
- Harmonization of production, rationalization and cost-cutting
processes
[] OTHER AFFILIATED COMPANIES
STREAM S.p.A.
Held by: Telecom Italia 50.00%
On October 1, 2002, Telecom Italia reached an agreement with News
Corporation over the creation of a single Italian pay-TV company (single
platform) born of the integration Stream and Tele+. Under this agreement,
Telecom Italia will hold a 19.9% stake in the single platform and News
Corporation the remaining 80.1% stake. Telecom Italia, at the closing,
will pay a price of euro 31.84 million for the 19.9% interest in Tele+ and
will waive the receivables due to the Group companies from Stream accrued
up to the end of 2002 for some euro 147 million (a figure entirely set
aside in the 2001 financial statements). In the meantime, News Corporation
will waive the receivables due from Stream for the same amount. Execution
of the contract is subject to the approval of the European Antitrust
Authority which will announce its decision by the end of April 2003.
***
Furthermore, in 2002, the following transactions were carried out:
o under the project to create the Administrative Services Center (ASC)
of the Telecom Italia Group, in December, the ASC business segment of
Telecom Italia absorbed the business segments performing
administrative and accounting activities of the companies Holding
Media e Comunicazione (effective December 31, 2002) and TIM
(effective January 1, 2003). The TIM business segment comprises 96
human resources and the Holding Media e Comunicazione business
segment has 13 resources;
o on December 20, 2002, Telecom Italia reached an agreement for the
sale to the Accenture group of 100% of TE.SS - Tele Pay Roll
Services, a company responsible for the administration activities
connected with human resources management of the Telecom Italia
Group. The sales price was set at euro 10 million. The transaction,
which is part of the divestiture program for the non-core businesses
of the Telecom Italia Group, was executed on February 28, 2003, with
delivery of the shares.
80
[] SUSTAINABILITY SECTION
INTRODUCTION
As from this year the Annual Report will include a Sustainability Section,
which shows the Group's attention to its stakeholders, stakeholder satisfaction
being fundamental to its reputation and ability to compete in the market in the
medium-to-long term. The section covers the same information reported last year
under Other Relevant Information about Telecom Italia Group but is organized by
pertinent shareholder.
Accordingly, the Corporate Governance report is included in the section on
shareholders and new information is provided specifically regarding customers,
suppliers, competitors, future generations, the Community, and the State, and
in greater depth in the attached Sustainability Report.
[] SUSTAINABILITY PROGRESS IN 2002
The Sustainability Report was already updated in 2001 when it was produced
as a joint publication with the Annual Report.
In March 2002, the Telecom Italia Group signed up to the Global Compact's
nine principles set by the UN Secretary General, Kofi Annan, concerning
human rights, labor and the environment.
During 2002, a new Sustainability reporting system was developed allowing
around 380 Key Performance Indicators, both quantity and quality related,
to be monitored at Group level. This set of information will make it
possible to measure the impact of Sustainability in relation to all
stakeholders inside and outside the Group.
Telecom Italia and TIM were admitted to the FTSE4Good Global 100
Sustainability Index and Seat Pagine Gialle to the Dow Jones
Sustainability Group Index, for which Telecom Italia and TIM have gained
qualification.
The Code of Ethics and Code of Conduct for Insider Dealing were introduced
across the Group, joining the Charter of Values, the Environmental Charter
and Charter of Services already in place [the texts can be viewed on
www.telecomitalia.it]
The first version of the Strategic Sustainability Plan was also prepared,
forming an integral part of the 2003-2005 Industrial Plan presented to the
Financial Community on February 14, 2003.
The office of Sustainability Manager was established and organizational
mechanisms were introduced for management of Sustainability at Group
level.
Sustainability governance actions in 2002 were therefore:
[GRAPHIC OMITTED]
Chart reading:
[Principles: UN Global Impact (1st and 2nd quarters)
Sustainability Report: Now joint publication with the Annual Report
(Triple Bottom Line) (1st, 2nd, and 3rd quarters)
Verification: New Sustainability KPIs for the Group (2nd, 3rd
and 4th quarters)
Entry in indexes: FTSE4Good for Telecom Italia and Tim. DJSI for
Seat and qualification for Telecom and Tim
(2nd, 3rd and 4th quarters)
Standards: Code of Ethics across the Group and Code of
Conduct within Telecom Italia (2nd, 3rd and 4th
quarters)
Planning: 2003-2005 Strategic Sustainability Plan (3rd and
4th quarters)
Organization: Group Sustainability Function Leaders (3rd and 4th
quarters)]
81
CHARTERS AND CODES
[] CODE OF ETHICS
The Group Code of Ethics, adopted on November 7, 2002, is the charter of
fundamental values with which the Group identifies and which forms the
framework for the whole corporate governance system. The Code is of basic
importance in programmatic terms as the corpus of principles necessary for
the ethically- oriented conduct of affairs and states the information
objectives and values of business activities, with reference to the
principal stakeholders with which the Group companies interact on a daily
basis: shareholders, the financial market, customers, the community and
employees.
Under the Code, Group companies are committed to:
- observing, and ensuring compliance within their organizations with,
the laws in force in the countries in which they operate and the
ethical principles commonly accepted in the conduct of business:
transparency, correctness and fairness;
- ensuring equal treatment for all classes of shareholders and avoiding
biased behavior;
- pursuing their business objectives exclusively through the excellence
of their products and services rejecting recourse to illegal and
improper conduct;
- conducting their activities in accordance with the principles of
transparency and fair competition, being aware of the importance to
the market, investors and the community in general, of correct
information on their operations;
- contributing to the economic well-being and growth of the communities
in which they operate by providing efficient and technologically
advanced services; the Group companies also support social, cultural
and educational initiatives aimed at personal development and
improving standards of living;
- employing resources responsibly, recognizing the central role of
human resources, in the belief that the principal factor in the
success of every business is the professional contribution of its
employees, in a context of fairness and mutual trust;
- forming investment and business decisions with respect for the
environment and public health, considering environmental issues.
Telecom Italia promoted adoption of the Code of Ethics in all companies
belonging to the group.
The governing bodies of all Group companies, their management and all
those who work for them are required to observe the code in order to
enforce the principles and commitments set by the Code and each company
has the duty to make provision for appropriate procedures and, where
necessary, sanction systems for violations.
[] CODE OF CONDUCT
The Code of Conduct for insider dealing, adopted on November 7, 2002, was
drawn up in compliance with the regulation recently introduced by the
Italian Stock Exchange, which requires listed companies to regularly
disclose transactions in the listed stocks of the Company and its
subsidiaries entered into by persons who may have access to
price-sensitive information.
The criteria assumed in drawing up the Code of Conduct are consistent with
the fundamental choices of Telecom Italia's corporate governance:
stringency, transparency and alignment with the best international
practices. Additional information on the Code of Conduct regarding insider
dealing is contained in the section on corporate governance.
82
HUMAN RESOURCES
[] TELECOM ITALIA GROUP
---------------------------------------------------------------------------------------
Change in
Employees at Employees at scope of
Dec. 31, 2001 Dec. 31, 2002 Change Hired Left consolidation
---------------------------------------------------------------------------------------
109,956 101,713 (8,243) 7,207 (12,567) (2,883)
---------------------------------------------------------------------------------------
On December 31, 2002, Telecom Italia Group employed 101,713 people, 8,243
less than at year-end 2001. This reduction was the result of the change in
the scope of consolidation (-2,883 people) and employee turnover (-5,360
people). The more significant movements in the Group from the change in
the scope of consolidation were: exclusion of the 9Telecom group (-1,003
people), sale of Telespazio (-1,168 people), exclusion of Sogei and
Consiel (in total - 1,538 people) and other minor movements (-711), as
well as the addition of BLU (+618 people), the Webegg group (+719 people),
Netesi and Epiclink (in total +168 people) and other minor companies (+ 32
people).
With regard to employee turnover, during the year a total of 12,567 people
left the Group and 7,207 people joined the workforce.
The number of people employed in Italy is 82% of the overall workforce.
[GRAPHIC OMITTED]
Pie chart reading:
[TELECOM ITALIA GROUP: breakdown by age
under 32 - 17%
33 to 45 - 50%
over 45 - 33%]
[GRAPHIC OMITTED]
Pie chart reading:
[TELECOM ITALIA GROUP
breakdown by professional category
Workers - 7.2%
Senior Management - 2.2%
Middle Management - 5.8%
Clerical Staff - 84.8%]
[] TELECOM ITALIA S.p.A.
-----------------------------------------------------------------------------------------------------------------
Transfers from/to
Employees at Employees at other Group
Dec. 31, 2001 Dec. 31, 2002 Change Hired Left companies Services
-----------------------------------------------------------------------------------------------------------------
61,081 54,705 (6,376) 398 (5,413) (1,086) (275)
-----------------------------------------------------------------------------------------------------------------
83
[] DEVELOPMENT AND TRAINING
Around 2 million hours were spent in training activities in 2002
(classroom and on-line learning and on-the-job training for employees in
Italy) and around euro 35 million in actual costs. These activities were
largely delivered by Telecom Italia Learning Services, the Group company
appointed with development and marketing of learning packages, and
primarily addressed:
o specialist issues to meet the needs of specific businesses, with
particular attention to development of customer focus and to training
for front-end personnel (e.g., Info 12, Customer Relationship
Management, Progetto Coaching, Progetto Concorde, Progetto CuORE,
Progetto Fish);
o management development initiatives for the Group's management,
targeted both for change management according to the managerial model
defined for the Group and for enhancement of skills and behaviors
essential to creating value (e.g., Progetto Economics aimed at rapidly
spreading knowledge about the economic value of an enterprise);
o learning packages for professional groups, to integrate and develop
activity-specific knowledge and skills (e.g., Human Resources,
Investor Relations);
o institutional training for new employees in management roles.
[] EMPLOYEE SATISFACTION
In the first six months of the year 2002, the quantitative phase of the
survey on employee attitudes across the group, known as the "Group Photo",
was carried out via Intranet. A total of 33,919 questionnaires were
completed.
The results were communicated through the Group Intranet portal and focus
group meetings. In October 2002, the qualitative phase of the survey was
run with 19 focus groups, counting around one hundred participants selected
from senior and middle managers, workers and clerical staff. Based on this
feedback, the general picture of employee satisfaction and motivation shows
steady improvement.
[] INTERNAL COMMUNICATION
In 2002, Internal Communication implemented a number of initiatives for
Telecom Italia Group employees, including:
- continuing the process of implementing the Group Intranet, which
connected 75% of the Group companies at year-end 2002;
- organizing a convention transmitted by satellite business TV to the
35 offices in Italy and worldwide, during which the Chairman, Marco
Tronchetti Provera, illustrated the Industrial Plan to the Group's
management;
- making a calendar entitled "noi" (us), featuring 12 employees from
different companies belonging to the Group, with the objective of
developing a sense of belonging and integration between different
cultures and businesses;
- producing a newsletter e-mailed to all Group employees on the
occasion of Telethon, the fundraising marathon broadcast by the RAI
networks.
[] INDUSTRIAL RELATIONS
During the year, negotiations in the Group mainly covered the following
areas:
[] Employment
On May 27, the Group framework agreement was signed with the labor unions
to guarantee the correct number of the workforce in relation to the
2002-2004 Industrial Plan. In implementation of the understanding, a union
agreement was signed on July 30, downsizing the Telecom Italia workforce
by 3,803. Similar agreements were signed in the following months for other
Group companies for a further reduction in force of 380.
Under the same framework agreement, on October 8, Telecontact Center
signed a union agreement for 350 new entrants and on November 13, an
understanding was signed between Telecom Italia and the labor unions to
recruit 110 young people in Domestic Wireline.
Lastly, on December 12, the procedure transferring Blu employees to TIM
was completed.
[] Performance bonus
On June 3, Telecom Italia and the labor unions reached agreement over the
Performance Bonus for 2002, paid in relation to the Gross Operating Profit
for financial year 2001. For the years 2003-2005 the bonus will be
determined also considering a Customer Loyalty rating.
84
[] Corporate reorganization
Procedures were carried out for the sale of the business segments of
Telecom Italia responsible for management and development of corporate
real estate to the companies Pirelli & C. Commercial Agency, Pirelli & C.
Project Management, Pirelli & C. Property Management and Tiglio II.
Procedures were also completed for assigning organization units within the
Group according to the missions of the various companies.
[] TRANSFERS WITHIN THE GROUP
Transfers of resources between the Business Units was particularly
intensified during the year with a view to developing loyalty to the
Group, creating new opportunities for professional development and
balancing recourse to external recruitment. Around 1,300 resources were
transferred at Group level.
[] STOCK OPTION PLANS
In 2002, two stock option plans were introduced, one for top management
and one for middle management.
The 2002 TOP plan, voted by the Board of the Directors of the Company by
the power vested in it by the Extraordinary Shareholders' Meeting of June
12, 2001, was introduced in February 2002 and 11,800,000 options were
granted to sixteen top managers. The strike price, defined as the normal
value of the share at the time of the grant, in agreement with existing
fiscal legislation, was (euro) 9.203. The plan covers a period of three
years.
The 2002 plan, instead, was reserved for Group management who already held
options from the 2000 stock option plan and other executives hired after
July 27, 2001 (the date of the start of the 2001 stock option plan). This
plan was deemed necessary since, as a result of the general performance of
the stock market during recent years, the 2000 plan had lost its
effectiveness as a tool through which to encourage and retain management
staff. The new plan was financed through the voluntary relinquishment of
the 2000 plan by executives still working for the Group.
The 2002 plan, at December 31, 2002, covered 440 managers of the Group,
398 of whom were already covered by the 2000 plan which, as stated, they
voluntarily renounced.
The options were granted in March, August and October. The strike price
was defined as the normal value of the share in the month prior to the
grant, in agreement with existing fiscal legislation. The weighted average
price was (euro) 9.606. The plan covers a period of three years.
85
In compliance with the recommendation contained in Consob Communication
No. 11508 dated February 15, 2000, the following table summarizes the key
features of the stock option plans in force in 2002:
-----------------------------------------------------------------------------------------------------------------------------------
Options
expired
Options Options during the
New options Options expired and extinguished year due to
Options granted exercised not exercised during the termination Options of which
Amount existing at during the during the during the year due to of service/ existing at exercisable at
(in euro) 1/1/2002 year year year renouncement other reason 12/31/2002 12/31/2002
===================================================================================================================================
No.options 9,846,650 - 1,375,150 - - - 8,471,500 8,471,500
---------------------------------------------------------------------------------------------------------------------------
1999 Exercise
Plan price 6.79 - 6.79 - - - 6.79 6.79
---------------------------------------------------------------------------------------------------------------------------
Market
price 9.713 - 9.325 - - - 7.202 -
===================================================================================================================================
No.options 50,570,000 - - - 29,820,000 150,000 20,600,000 10,699,996
------------------------------------------------------------------------------- ------------------------------------------
Exercise
2000 price 13.815 - - - 13.815 13.815 13.815 13.815
Plan ---------------------------------------------------------------------------------------------------------------------------
Market
price 9.713 - - - 9.837 8.062 7.202 -
===================================================================================================================================
No.options 66,320,000 - - - - 2,032,500 64,287,500 32,560,000
------------------------------------------------------------------------------- ------------------------------------------
Exercise
2001 price 10.488 - - - - 10.488 10.488 10.488
Plan ---------------------------------------------------------------------------------------------------------------------------
Market
price 9.713 - - - - 8.163 7.202 -
===================================================================================================================================
No.options - 30,998,000 - - - 1,974,000 29,024,000 -
---------------------------------------------------------------------------------------------------------------------------
Exercise
2002 price - 9.606 - - - 9.665 9.602 -
Plan ---------------------------------------------------------------------------------------------------------------------------
Market
price - 9.771 - - - 7.735 7.202 -
===================================================================================================================================
No.options - 11,800,000 - - - - 11,800,000 -
---------------------------------------------------------------------------------------------------------------------------
2002 Exercise
TOP price - 9.203 - - - - 9.203 -
Plan ---------------------------------------------------------------------------------------------------------------------------
Market
price - 8.694 - - - - 7.202 -
===================================================================================================================================
-------------------------------------------------------------------------------------------------------------------------
Number of options granted at
12/31/2002
and exercisable from
Exercise
price ---------------------------------------------------- Maximum period of
Plan (in euro) 2001 2002 2003 2004 2005 Total options
-------------------------------------------------------------------------------------------------------------------------
3 years beginning
1999 6.79 3,755,750 4,715,750 - - - 8,471,500 from each year
-------------------------------------------------------------------------------------------------------------------------
5 years beginning
2000 13.815 5,349,998 5,349,998 9,900,004 - - 20,600,000 from each year
-------------------------------------------------------------------------------------------------------------------------
5 years beginning
2001 10.488 - 32,560,000 31,727,500 - - 64,287,500 from each year
-------------------------------------------------------------------------------------------------------------------------
9.665 - - 8,395,200 8,395,200 11,193,600 27,984,000 5 years beginning
2002 7.952 - - 252,000 252,000 336,000 840,000 from each year
7.721 - - 60,000 60,000 80,000 200,000
-------------------------------------------------------------------------------------------------------------------------
2002 TOP 9.203 - - 3,540,000 3,540,000 4,720,000 11,800,000 5 years beginning
from each year
-------------------------------------------------------------------------------------------------------------------------
86
SHAREHOLDERS: CORPORATE GOVERNANCE
CODES, PRINCIPLES AND PROCEDURES
During 2002, the Company and the Group continued to improve the instruments
used for corporate governance. In this context, the Group's fundamental
decision to comply with the principles formulated by the Corporate Governance
Committee (encompassed in the "Preda Code") was accomplished through the
adoption of practices and principles of conduct, formalized in specific codes
and procedures aimed at realistically putting into practice the principles of
the Preda Code and adapting the system of corporate governance to the specific
realities of the Company and Group. Contemporaneously, the review of certain
previously adopted instruments was, for the most part, completed in accordance
with the principle that governance practices should be constantly subject to
verification and updating, in order to respond in a timely and effective manner
to the demands arising from changes in operating practices and the evolution of
the overall internal and external regulatory context. Within that framework, an
overall review of the Company's Code of Self-discipline is being planned and a
Group project is being developed that is aimed at verifying the suitability of
the organizational models already in place in respect of the regulations set
forth by Legislative Decree No. 231 of 2001, regarding the administrative
responsibility of entities for violations committed by their associates, with
consequent adjustment, where necessary, to the internal control system. The
documents related to the corporate governance instruments adopted by Telecom
Italia during 2002 and summarized below, are, for the most part, available for
consultation on the Company's website: www.telecomitalia.it.
Code of Ethics
The system of corporate governance of the Telecom Italia Group was implemented
during 2002 with the adoption of the Code of Ethics that ideally is the
foundation of the entire system and represents the "charter of values" of the
Group, establishing, in programmatic terms, the corpus of principles for the
ethically- oriented conduct of affairs to which the Group aspires. The Code of
Ethics, adopted by Telecom Italia and to be gradually adopted by all Group
entities, sets out the objectives and guiding values of the business
activities, with reference to the principal stakeholders with which Group
companies find themselves interacting on a daily basis: shareholders, the
financial market, customers, the community and employees.
Transactions with related parties and information flows
During 2002, the Company adopted a series of principles of conduct concerning
the manner in which transactions with related parties, including intra-group
transactions, are carried out. The principles of conduct are directed towards
guaranteeing true accuracy and transparency in these transactions, both in
substance and in form, with full joint responsibility being assumed the entire
Board of Directors in the related decisions. At the same time, internal rules
were formalized, through a specific procedure, for the collection and
communication to the Board of Statutory Auditors - in accordance with Article
150, paragraph 1, of Legislative Decree No. 58 of 1998 ("Testo Unico of
Finance") - of the most exhaustive information inherent to the activities being
carried out, to the most significant economic, financial and equity
transactions, to transactions with related parties (including intra-group
transactions) and to atypical or unusual transactions. Contemporaneously, that
procedure ensures the completeness of information flows - also recommended by
the Preda Code - from the Directors responsible for those activities to all
members of the Board of Directors.
Code of Conduct on insider dealing
In accordance with the regulations recently introduced in the Regulation of
Markets Organized and Managed by Borsa Italiana, Telecom Italia has adopted a
Code of Conduct on insider dealing aimed at disciplining the obligatory
regulations concerning disclosure requirements and conduct inherent to
transactions on the Group's listed securities carried out by persons who, by
virtue of their positions held in the Group, have access to confidential "price
sensitive" information. The criteria adopted in the drafting of the Code are
consistent with Telecom Italia's fundamental decisions regarding governance:
stringency, transparency and alignment with the best international practices.
Procedure for the communication of price sensitive information to the market
At the beginning of the current year, the Company formalized a specific
Procedure containing the practices to be followed in the communication of price
sensitive information to the market. The Procedure establishes the operating
procedures for the circulation of that type of information to the market,
identifies the Company Functions and Structures involved in the process, and
also regulates the procedures to be followed in the event of rumors or requests
for information by those responsible for the surveillance and management of the
87
market. Furthermore, the Procedure regulates the activities to be carried out
for meetings with the financial community and the Press, so as to guarantee a
non-selective use of Company information.
With regard to the internal management of information relating to Telecom
Italia, specific guidelines have been adopted for some time regarding the
classification and management of information from the viewpoint of Company
confidentiality and privacy.
BOARD OF DIRECTORS
Composition
The number of members of the Board of Directors has not changed during 2002
compared to that fixed during the Shareholders' Meeting of November 7, 2001.
The Board of Directors is thus comprised of fifteen members.
During the year, following the resignations of the Directors Paolo Maria Grandi
and Enrico Bondi (in July and September 2002, respectively), Pietro Modiano and
Riccardo Ruggiero (already General Manager of the Company) were nominated as
Directors of Telecom Italia. Consequently, the present members are: Gilberto
Benetton (Deputy Chairman), Carlo Orazio Buora (Managing Director), Umberto
Colombo, Francesco Denozza, Luigi Fausti, Guido Ferrarini, Natalino Irti,
Gianni Mion, Pietro Modiano, Massimo Moratti, Carlo Alessandro Puri Negri,
Riccardo Ruggiero (Managing Director and General Manager), Pier Francesco
Saviotti, Marco Tronchetti Provera (Chairman) and Roberto Ulissi. The Board's
term of office was set for three years, expiring at the time of approval of the
2003 financial statements.
As recommended by the Preda Code, the offices held by the Directors in other
listed companies, in financial, banking or insurance companies or in companies
that are significant in size are set out below:
Chairman Marco Tronchetti Provera Chairman of CAMFIN S.p.A., Chairman and CEO of Pirelli
S.p.A., Chairman of Pirelli & C. S.a.p.A., Olimpia S.p.A. and
Pirelli & C. Real Estate S.p.A., and Deputy Chairman and
Managing Director of Olivetti S.p.A..
Deputy Chairman Gilberto Benetton Chairman of Edizione Holding S.p.A., Autogrill S.p.A.,
Ragione S.a.p.A. and Verde Sport S.p.A., Deputy Chairman
of the Benetton Foundation, Olimpia S.p.A. and Olivetti
S.p.A., Director of Area Nord Concessionaria di Pubblicita,
Autopistas C.E.S.A., Autostrade S.p.A., Banca Antoniana
Popolare Veneta, Benetton Group S.p.A., Beni Stabili
S.p.A., HMS Host Corp., Lloyd Adriatico S.p.A., Pirelli
S.p.A., Mediobanca S.p.A., Schemaventotto S.p.A. and Sep
S.p.A..
Managing Carlo Buora Director of Pirelli & C., Managing Director and General
Director Manager of Pirelli S.p.A., Director of Pirelli & C. Real Estate
S.p.A. and Olimpia S.p.A., Managing Director of Olivetti
S.p.A., Chairman of Tim S.p.A., Director of HDP Holding di
Partecipazioni S.p.A., Ras S.p.A., Mediobanca S.p.A.,
Olivetti Tecnost and F.C. Internazionale.
Managing Riccardo Ruggiero Deputy Chairman of Banca della Rete, Director of Telecom
Director - Italia America Latina and Sia S.p.A..
General Manager
88
Director Umberto Colombo Chairman of Novamont S.p.A., Alcantara S.p.A. and Kemyx
S.p.A., and Director of ACEA S.p.A., Impregilo S.p.A., Snia
S.p.A. and Energy Conversion Devices.
Director Francesco Denozza
Director Luigi Fausti Chairman of Patrimonio Immobiliare dello Stato S.p.A., and
Director of MONRIF S.p.A..
Director Guido Ferrarini Independent Director of Erg S.p.A. and Grandi Navi Veloci
S.p.A..
Director Natalino Irti
Director Pietro Modiano Director of Borsa Italiana S.p.A., E-Mid S.p.A., Euro Capital
Structures Ltd, Equinox Inv. Comp. S.c.p.a., TLX S.p.A., Mts
S.p.A. and Locat S.p.A., Deputy General Manager of
Unicredito Italiano S.p.A., Chairman of Pioneer Global Asset
Management S.p.A. and TradingLab Banca S.p.A., and
Deputy Chairman of Unicredit Fondi SGR p.A., Pioneer Inv.
Management USA Inc. and MonteTitoli S.p.A..
Director Gianni Mion Managing Director of Edizione Holding S.p.A. and
Schemaventotto S.p.A., Deputy Chairman of Telecom Italia
Mobile S.p.A., Director of Benetton Group S.p.A., Autogrill
S.p.A., 21 Investimenti S.p.A., Autostrade S.p.A., Sagat
S.p.A., Olimpia S.p.A., Olivetti S.p.A., Seat PG S.p.A.,
Interbanca S.p.A., Banca Antonveneta S.p.A. and 21
Partners Societa di Gestione del Risparmio S.p.A..
Director Massimo Moratti Managing Partner of Angelo Moratti di Gian Marco e
Massimo Moratti & C. S.a.p.a., Managing Director and
Deputy Chairman of Saras S.p.A. Raffinerie Sarde,
Chairman of F.C. Internazionale Milano S.p.A. and Sarint
S.A., and Director of Interbanca.
Director Carlo Alessandro Puri Director of Aon Italia S.p.A., Deputy Chairman and
Negri Managing Director of Pirelli & C. Real Estate S.p.A., Deputy
Chairman of CAMFIN S.p.A. and Pirelli & C. Ambiente
S.p.A., Director of Pirelli S.p.A., Olimpia S.p.A., Olivetti
S.p.A., Pirelli & C. S.a.p.A. and Parmasteelisa S.p.A.,
General Manager of Pirelli & C. S.a.p.A., and Management
Representative of Voting Trust of Pirelli & C. S.a.p.A..
Director Pier Francesco Saviotti Director of Stefanel S.p.A., TOD'S S.p.A., Danieli S.p.A. and
Linificio e Canapificio Nazionale S.p.A., and General
Manager of Intesa BCI S.p.A., with responsibility for the
credit area.
Director Roberto Ulissi General Manager Responsible for the 4th Directorate of the
Department of Treasury of the Ministry of Economy and
Finance (Banking and Financial Sector and Legal Affairs).
Independent Directors
Members of the Board of Directors that are considered independent, in
accordance with the guidelines set down by the Preda Code, are those that (i)
do not have, nor have they recently had, either directly, indirectly or on
behalf of third parties, economic relationships of such significance as to
influence the independence of their judgment with regard to the Company, its
subsidiaries, its Executive Directors, or its controlling shareholder or group
of shareholders; (ii) do not hold directly, indirectly or on behalf of third
parties equity investments of such magnitude as to allow them to exercise
control or significant influence over the Company, nor do they participate in
shareholder agreements for control over the Company and (iii) are not close
family members of Executive Directors of the Company or of persons that find
themselves in the above situations.
Furthermore, Telecom Italia has adopted as a further condition of independence
the requirement that Directors not participate in shareholder agreements
containing clauses concerning the composition and the resolutions of the Board
of Directors.
In light of the declarations given by the members of the Board of Directors,
the Directors Umberto Colombo, Francesco Denozza, Luigi Fausti, Guido
Ferrarini, Natalino Irti and Roberto Ulissi are considered independent.
89
Executive Directors
In September 2002, the Board of Directors reviewed the overall system of
mandates of the Company's Executive Directors' (Chairman and Managing
Directors), which are as follows:
- the Chairman Marco Tronchetti Provera is granted the powers necessary to
execute all acts pertaining to the corporate activity in its various forms,
with the exception of investments and acts to dispose of investments in
subsidiaries and associated companies, and companies or businesses thereof, of
amounts in excess of euro 250 million per transaction. Furthermore, the
signature of the Chairman must be joined by that of a Managing Director for the
issue of guarantees against obligations of Telecom Italia or its subsidiaries
in excess of euro 250 million or against the obligations of third parties in
excess of euro 100 million. The Chairman is further granted emergency powers
regarding matters under the Board of Directors' responsibility, the duty of
reporting to the Board of Statutory Auditors in the manner and under the terms
required by Article 13 of the by-laws, the mandate to provide for the
management of confidential information and ensure the functioning and adequacy
of the internal control system, and the power to appoint one or more persons in
charge;
- the Managing Director Carlo Orazio Buora is granted the powers necessary to
execute all acts pertaining to the corporate activity in its various forms,
with the exception of investments and acts to purchase, sell and dispose of
investments in subsidiaries and associated companies, and companies or
businesses thereof, and of goods and services in general of amounts in excess
of euro 150 million per transaction. The Managing Director Carlo Orazio Buora
may issue guarantees against the obligations of Telecom Italia or its
subsidiaries not in excess of euro 150 million, or against the obligations of
third parties not in excess of euro 50 million;
- the Managing Director Riccardo Ruggiero is granted the powers necessary to
execute all acts pertaining to the corporate activity in its various forms,
with the exception of investments and acts to purchase, sell and dispose of
investments in subsidiaries and associated companies, and companies or
businesses thereof, and of goods and services in general of amounts in excess
of euro 75 million per transaction, and with the exception of the issue of
guarantees. The powers of the Managing Director Riccardo Ruggiero exclusively
relate to the activities of the Domestic Wireline Business Unit.
In respect of the limits of value described above, an individual transaction is
intended to mean the aggregate of transactions that, while individually may be
below the thresholds indicated, prove to be linked together within the same
strategic or executive structure and therefore, when considered together,
exceed the materiality threshold.
During 2002 the Company, as mentioned previously, adopted a procedure to
formalize the rules for the collection and communication to the Board of
Statutory Auditors and Board of Directors of the most exhaustive information
inherent to the activities carried out, to the most significant economic,
financial and equity transactions, to transactions with related parties
(including intra-group transactions) and to atypical or unusual transactions.
This procedure sets in motion the information flows recommended by the Preda
Code through which the appointed Directors periodically report to the Board of
Directors and the Board of Statutory Auditors on the activities they have
carried out in exercising the mandates conferred upon them. That information
includes executive activities and the status of transactions already approved
by the Board of Directors; in particular, Executive Directors report on the
activities carried out by them - also through the Company's and its
subsidiaries' structures - in exercising the mandates conferred upon them,
including the initiatives adopted and projects launched.
Roles and Activities of the Board of Directors
In accordance with Telecom Italia's by-laws, the Board of Directors has full and
ample powers for the ordinary and extraordinary administration of the Company,
including all responsibilities that are not, under the law and the by-laws,
expressly reserved for the general Shareholders' Meeting. Furthermore, the Board
- in accordance with paragraph 1.3 of Telecom Italia's Code of Self-discipline -
is exclusively responsible for (i) the examination and approval of the Company's
and Group's strategic, industrial and financial plans; (ii) the examination and
approval of transactions (including, for example, the acquisition and
divestiture of direct or indirect controlling interests) of particular economic
or strategic significance, with particular reference to transactions with
related parties; (iii) the granting and revoking of the mandates of the Managing
Director and the Executive Committee, if established, defining the limits,
operating procedures and frequency, normally not less than every three months,
with which they should report to the Board on the activities they have carried
out in exercising their mandates; (iv) the determination, after having examined
the proposals of the specific committee and consulted the Board of Statutory
Auditors, of the compensation of the Managing Directors and those who hold
particular offices, and, providing that the Shareholders' Meeting has not
already taken steps to do so, the breakdown of the overall compensation due to
individual members of the Board and committees; (v) the supervision of the
general management performance, with particular attention to situations of
conflict of interest, taking into consideration information received from the
Managing Director and the Audit and Corporate Governance Committee, and
periodically comparing the results achieved with those planned; (vi) the
verification of the adequacy of the Company's and Group's general organizational
and administrative structure drawn up by the Managing Director.
90
In addition to the above matters, that are also recommended by the Preda Code,
the Board - based on the provisions of paragraph 1.3 of the Code of
Self-discipline - is responsible for (vii) the preparation and adoption of the
Company's rules of corporate governance and the definition of the Group's
corporate governance guidelines; (viii) the evaluation and approval of the
Company's and Group's annual budgets; (ix) the evaluation and approval of the
periodic accounting documentation as provided by the existing regulations; (x)
the examination and approval of investments and divestitures (also in real
estate) of amounts exceeding Lire 500 billion (approximately euro 258.2
million); (xi) the nominating, revoking and conferring of powers of the General
Managers of the Company, by proposal of the Managing Director; (xii) the
appointments for the offices of Managing Director and Chairman in subsidiaries
with sales equal to or higher than Lire 2,000 billion (approximately euro 1,033
million) - as per the latest available financial statements - and (xiii)
reporting to the Shareholders during Shareholders' Meetings.
The criteria adopted by Telecom Italia to identify transactions that should be
examined, in advance, by the Board of Directors are both quantitative and
qualitative, in that - in addition to an assessment of relevance based on the
value of the transaction - an evaluation is carried out of the actual impact of
the transaction on the performance of the Company. This may result in the
requirement for advance Board approval of transactions that, while being lower
than the defined materiality thresholds, exhibit particular critical elements,
such as the nature of the counterparty, the time-frame of execution or the
potential risks deriving from the transaction. In this regard, during 2002 the
Company adopted - as previously highlighted - a series of principles on the
execution of transactions with related parties, by virtue of which the Board of
Directors approves, in advance, transactions with related parties, including
intra-group transactions, with the exception of typical or usual transactions
or those to be concluded under standard conditions.
During 2002, the Board met nine times, more than double that required by the
Company's Code of Self- discipline (paragraph 3.3 indicates a frequency of at
least four meetings per year) and a greater number than communicated beforehand
in disclosure to the market (eight meetings).
Attendance at the meetings by Directors was always very high, with a percentage
attendance that was never below 73% of Directors; statistically, even the
independent Directors participated in the Board's activities with notable
regularity, always ensuring an overall minimum presence of above 66% of
independent Directors.
As provided by the Company's Code of Self-discipline, it is normal practice for
the Directors to be provided, sufficiently in advance of the Board meetings,
with the documentation and information necessary to allow them to effectively
participate in the Board's business.
In December 2002, the Company distributed a calendar of Company events for
2003, which included the planned Board meetings. In particular, Telecom Italia
will, again in 2003, anticipate the publication of the annual and semiannual
financial statements, in order to take advantage of the possibility, provided
by Consob Regulation 11971 of 1999, to be exempted from the preparation of the
second and fourth quarter accounts.
DIRECTORS' NOMINATION AND COMPENSATION
Nomination of Directors
Telecom Italia S.p.A.'s by-laws provide that the nomination of members of the
Board of Directors occur through a ballot based on lists of candidates. That
system, in place since 1997, is intended to ensure adequate representation of
minority shareholders on the Board and has rendered the establishment of a
nominating committee unnecessary. For the nomination of the Directors, it is
now common practice in Telecom Italia to make the profiles of each candidate
available to the shareholders, at the registered office, the secondary office
and the premises where Shareholders' Meetings are held, so as to enable
shareholders to become acquainted with their personal and professional
characteristics and exercise their voting rights more knowledgeably.
Directors' Compensation Committee
As already highlighted in the annual report on Corporate Governance in the 2001
financial statements, the Board of Directors has a Directors' Compensation
Committee with investigative and advisory functions. No changes were made
during 2002 to the composition or responsibilities of the Directors'
Compensation Committee, which has particular responsibility for formulating
proposals to the Board in respect of the compensation of the Managing Directors
and of those Directors who hold specific offices, and, at the Managing
Directors' indication, in respect of the determination of criteria for the
compensation of top management of the Company. The Committee is composed of the
independent Directors Luigi Fausti (Chairman) and Umberto Colombo, and of Pier
Francesco Saviotti.
During 2002, the Committee held six meetings, during which it examined subjects
related to the start-up of new stock option plans, the criteria to be utilized
for the compensation of management and the incentive
91
formulas. Furthermore, the Committee identified the reference parameters for
the variable component of Executive Directors' compensation, in accordance with
Article 2389, paragraph 2, of the Italian Civil Code.
With reference to the choices made by the Company regarding the compensation of
top management of the Company, the current system provides for the allocation
of compensation broken down into a fixed component and a variable component,
contingent upon the achievement of predetermined budget objectives. The system
is similar to that used for the rest of management which - in addition to the
base salary - provides for the presence of incentive and loyalty systems by
means of stock options. More detailed information on the stock option plans are
contained in the "Human Resources" paragraph, above.
During its meetings the Committee has availed itself of the assistance of
external consultants, in addition to Company personnel.
INTERNAL CONTROL SYSTEM
The system of internal controls - briefly outlined in the Company's Code of
Self-discipline - is a process aimed towards guaranteeing the efficiency of
administrative and operational management, its understanding and verification,
the reliability of the accounting and management data, the observance of the
laws and regulations from every source and the safeguarding of the Company's
integrity, also to prevent fraud that may damage the Company and the financial
markets.
As disclosed in the previous year's report on Corporate Governance, the Telecom
Italia Group has approved the organizational decision to concentrate the
so-called internal audit activities in a specific consortium company, with the
formation of In.Tel.Audit - S.c.a r.l..
That solution, which was born out of the need to take into consideration the
objective complexity of the Group (while at the same time evaluating the
professional resources within), as well as the new requirements set forth by
Legislative Decree No. 231/2001, was further implemented during 2002. Having
taken into consideration the approach, now common in international doctrine and
practice, by which the functions of those in charge of internal control should
be the verification of the adequacy and efficiency (i.e. proper functioning) of
the internal control system and - where anomalies are discovered - the proposal
of necessary corrective solutions, In.Tel.Audit - S.c.a.r.l. was identified as
being in charge of internal control, responsibility for internal auditing.
This organizational solution permits the maximization of independence of the
those in charge of internal control from the Company's organizational
structure, from which they work in complete autonomy, reporting their findings
to the Chairman, the Audit and Corporate Governance Committee and the Board of
Statutory Auditors. The execution of any "maintenance" interventions on the
internal control system recommended by those in charge of internal control is
then, depending on the occasion, the responsibility of the various sectors of
the Company or Group companies, based on the recommendations drawn up by the
Board of Directors. Furthermore, the Company, in order to facilitate the
overall operation of the system, will identify an "individual in charge of
execution" of the above-mentioned interventions.
The Board of Directors - based on the checks carried out and having taken
account of the improvement initiatives undertaken - considers the system of
internal control to be adequate for the needs of the Company and in respect of
the regulations in force.
Audit and Corporate Governance Committee
Telecom Italia's Audit and Corporate Governance Committee, in its composition
and in the activities carried out by it, has already adapted to the regulations
of the Code of Self-discipline adopted by Borsa Italiana in July 2002.
The Committee is, in fact, composed exclusively of independent non-executive
Directors, including the Directors Roberto Ulissi (Chairman), Guido Ferrarini
and Natalino Irti. The Chairman of the Board of Statutory Auditors or, when it
was considered appropriate to hold a joint meeting, all members of the Board
participated in the meetings of the Committee, of which in 2002 there were
eight.
The Audit and Corporate Governance Committee, based on the provisions of
Telecom Italia's Code of Self- discipline, carries out the following
activities: (i) evaluates the adequacy of the internal control system; (ii)
evaluates the work plan prepared by those in charge of internal control and
receives periodic reports from the same; (iii) evaluates proposals formulated
by independent audit firms wishing to be appointed as auditors, and the audit
plan and results expressed in the letter of recommendations; (iv) discloses to
the Board, at least every six months, at the time of the approval of the annual
and semiannual financial statements, the work carried out by it and the
adequacy of the system of internal control; and (v) monitors compliance with
and periodic updating of the corporate governance regulations.
During 2002, the Committee contributed to the process of implementation of the
corporate governance instruments, participating in the analysis and the
definition of the documents that were subsequently adopted by the Company in
the above-mentioned period. Furthermore, in adopting the new recommendations of
the Preda Code, the Committee examined, with the aid of the Company's Offices
and the independent auditors
92
Reconta Ernst & Young, the appropriateness of the accounting principles used
and their uniformity in the preparation of the consolidated financial
statements, following the evaluation and verification activities undertaken by
management on the reasonableness of the carrying values of the Group's
investment portfolio.
The Committee placed particular attention on the evolution of the American
corporate regulations (i.e. Sarbanes Oxley Act 2002).
TRANSACTIONS WITH RELATED PARTIES
As previously indicated, during 2002 the Company adopted a series of principles
for the execution of transactions with related parties. On the basis of those
principles the Board of Directors approves in advance transactions with related
parties, including intra-group transactions, with the exception of transactions
that are typical or usual or to be finalized at standard conditions. To this
end, the Board of Directors receives adequate information on the nature of the
relationship, the manner in which the transaction is to be executed, the
conditions, even economic, for its realization, the valuation technique
followed, the interests and underlying motivations and any risks to the
Company. Furthermore, in the event that the relationship is with a Director or
with a party related through a Director, the interested Director will be
limited to providing clarification and will leave the Directors' meeting at the
time of the deliberations.
In relation to the nature, value or other characteristics of the transaction,
the Board of Directors, in order to avoid that the transaction is realized at
unreasonable conditions, is assisted by one or more experts who, depending on
the circumstances, expresses an opinion on the economic conditions, and/or the
objectivity, and/or the technical aspects of the transaction.
HANDLING OF CONFIDENTIAL INFORMATION
With regard to the internal management of information relating to Telecom
Italia, some time ago the Company adopted specific guidelines regarding the
classification and management of information from the viewpoint of Company
confidentiality and privacy, in the knowledge that information represents a
strategic component of corporate wealth and a fundamental asset for the success
of all organizations that operate in the Telecom Italia Group. However, the
protection of information is not only an instrument to support the business, it
is also a legal obligation in the event that it deals with personal data
related to customers, employees, suppliers or other persons (either physical or
juridical) external to or within the Company's organization.
At the end of 2002, in compliance with the regulations of Borsa Italiana, a
Code of Conduct was adopted relating to insider dealing, that regulates the
requirements for information and conduct in relation to transactions regarding
the listed stocks of the Group carried out by "relevant persons" who operate
within the Company. The criteria assumed in the drafting of the Code are
consistent with the Telecom Italia's fundamental decisions regarding
governance: stringency, transparency and alignment with the best international
practices.
The Code goes beyond the regulations prescribed by Borsa Italiana, providing
flexibility in the identification of persons subject to the disclosure
obligation and extending the communication requirement to transactions executed
on listed financial instruments issued by the Parent Company (in addition to
the subsidiaries), even if carried out within an individual investment
portfolio relationship, in which the client foregoes the right to give
instructions.
Furthermore, Telecom Italia has significantly reduced the materiality
thresholds, compared to those indicated by Borsa Italiana, on the transactions
to be periodically communicated to the market (from euro 50,000 to euro 35,000)
or to be immediately communicated at the time the transaction is carried out
(from euro 250,000 to euro 80,000), assuming a flexible period of time for the
verification of whether the materiality threshold for communication without
delay has been attained. Finally, Telecom Italia's Code of Conduct - which came
into force (on December 1, 2002) in advance of the obligatory deadline set by
the Regulation of Borsa Italiana (of January 1, 2003) - limits the period of
free trading of Group stocks by "relevant persons" and provides for a
particularly stringent system of sanctions.
At the beginning of 2003, the Company formalized a specific Procedure
containing the operating procedures for communication of price sensitive
information to the market, identifying the Functions and Structures involved in
the process and also regulating the procedures to be followed in the event of
rumors or requests for information by those responsible for the surveillance
and management of the market. Furthermore, the Procedure regulates the
activities to be carried out for meetings with the financial community and the
media, so as to guarantee a non-selective use of Company information.
93
BOARD OF STATUTORY AUDITORS
The Board of Statutory Auditors of Telecom Italia, appointed by the
Shareholders' Meeting of July 2000, is composed of five Acting Auditors (Paolo
Germani - Chairman, Mario Boidi, Paolo Golia, Fabrizio Quarta and Gianfranco
Zanda), of which two (Paolo Germani - Chairman and Fabrizio Quarta) are
appointed by the government and one (Paolo Golia) was elected from the list
presented by the minority shareholders.
In accordance with paragraph 13.1 of the Code of Self-discipline, proposals put
to the Shareholders' meeting for the appointment of Statutory Auditors,
accompanied by comprehensive information concerning the personal and
professional characteristics of the candidates, are normally deposited at the
Company's registered office at least ten days prior to the date set for the
meeting, or at the time the lists are deposited. The Board of Statutory Auditors
conducted 24 meetings during 2002, in addition to meetings with the Audit
Committee, the internal auditors, and the external auditors and Company
management.
As previously highlighted, during 2002 the Company formalized, through a
specific procedure, internal rules for the collection and communication to the
Board of Statutory Auditors - in accordance with Article 150, paragraph 1, of
the Testo Unico of Finance - of information on the activities and significant
transactions carried out by the Company and its subsidiaries, as well as on
transactions that are potentially in conflict of interest. Through that
procedure - which also ensures, as already noted, the completeness of
information flows recommended by the Preda Code from the Directors responsible
for those activities to all members of the Board of Directors - the Chairman,
by the mandate delegated to him for this purpose, reports, in writing, to the
Board of Statutory Auditors:
a) on the activities carried out by the Company, with particular
reference to executive activities and the status of transactions
already approved by the Board of Directors, as well as to activities
carried out by Executive Directors, also through the Company's and
its subsidiaries' structures, in exercising their mandates, including
the initiatives adopted and the projects begun;
b) on the most significant economic, financial and equity transactions,
highlighting, in particular, the strategic aims, the consistency with
the budget and industrial plan, the terms of execution (including the
terms and conditions, also economic, of their realization) and the
developments, and any conditions and implications that they carry on
the Group's activities;
c) on transactions that are potentially in conflict of interest, that is
to say on intra-group transactions and on transactions with related
parties that are not intra-group transactions. The information
concerning those types of transactions illustrates the underlying
interests (and, for intra-group transactions, their rationale in the
Group context) as well as the terms of execution of the transaction
(including the terms and conditions, also economic, of their
realization) with particular regard to the valuation methods
followed. The concept of related parties utilized in this procedure
was adapted during 2002 to that prescribed by Consob in its
Communication No. 2064231 dated September 30, 2002, whilst
maintaining the remaining parts of the definition utilized in the
Telecom Italia procedure, where they conform to more stringent
criteria than prescribed by Consob;
d) on the atypical or unusual transactions, by which it is intended
those transactions whose subject or nature are outside the normal
course of the Company's business or that present particular critical
elements due to their characteristics and to the risks inherent to
the nature of the counterparty or to the time of their completion.
Also in this case, the information provided about those transactions
highlights the underlying interests and illustrates the terms of
execution of the transactions (including the terms and conditions of
their realization) with particular regard to the valuation methods
followed.
Set out below are the offices held by the statutory auditors in other listed
companies, in financial, banking or insurance companies or in companies that
are significant in size:
94
Chairman Paolo Germani General Manager, General Inspectorate of Finance of the
National Department of General Accounting - Ministry of
Economy and Finance, and Chairman of the Supervisory
Committee of EFIM - in forced administrative liquidation.
Acting Auditor Mario Boidi
Acting Auditor Paolo Golia Chairman of the Board of Statutory Auditors of Banco di
Brescia S. Paolo S.p.A., Acting Statutory Auditor of C.B.A.
Vita and C.B.I. Factor, Chairman of the Board of Statutory
Auditors of Cosidis S.p.A., Acting Statutory Auditor of
Criterium S.p.A., Chairman of the Board of Statutory
Auditors of Ergon Finanziaria S.p.A., General Partner of
Gami S.a.s., Chairman of the Board of Statutory Auditors of
Interdis S.p.A. and Mercati Finanziari SIM S.p.A., Acting
Statutory Auditor of Multiutility S.p.A., Chairman of the
Board of Statutory Auditors of Riva Acciaio S.p.A., Acting
Statutory Auditor of Sara Ass.ni S.p.A., Sara Vita S.p.A.,
Schemaventotto S.p.A. and TSP S.p.A., and Chairman of
the Board of Statutory Auditors of Vege Italia S.c.a.r.l. and
Vege Leasing S.p.A., in liquidation.
Acting Auditor Fabrizio Quarta
Acting Auditor Gianfranco Zanda Member of the Board of Statutory Auditors of AGIP Petroli
S.p.A., AGIP S.p.A., Banca d'Italia, Ufficio Internazionale
Cambi, Finsiel S.p.A., Telespazio S.p.A., Tim S.p.A.,
Sangemi S.p.A., and Immsi S.p.A..
SHAREHOLDERS
Shareholders' Meetings
During 2002, two Shareholders' Meetings took place. During the first, on May 7,
the 2001 financial statements were examined, whereas on December 12, during the
ordinary session of the Shareholders' Meeting the nomination of two Directors
(Modiano and Ruggiero) and the reclassification and distribution of certain
reserves were approved, and during the extraordinary session the merger through
incorporation of TILab into Telecom Italia was approved. Again during the
Shareholders' Meetings in 2002, which the Company views as a constant
commitment on its part, shareholders were encouraged and supported to
participate in direct discussions with management and shareholders, with a view
towards a productive exchange of opinions.
Furthermore, with a view to carrying out its responsibilities in a more orderly
and productive manner, the Company, in 2001, adopted regulations for
Shareholders' Meetings that are applicable to ordinary and extraordinary
meetings of the Shareholders.
Finally, a specific function within Telecom Italia's organizational structure
(Investor Relations) is dedicated to relations with the national and
international financial communities. More detailed information is contained in
the paragraph relating to "Financial Communications".
Shareholders' agreements
During 2001, shareholders' agreements were signed among the shareholders of
Olimpia S.p.A. (Pirelli S.p.A., Edizione Holding S.p.A., Unicredito Italiano
S.p.A. and Intesa BCI S.p.A.) that contain certain clauses concerning, amongst
other things, the composition and resolutions of Telecom Italia's Board of
Directors. The cited agreements and any variations thereto were communicated to
the market in accordance with the regulations in force.
In December 2002, a new shareholders' agreement was signed among Pirelli,
Edizione Holding, Unicredito Italiano, IntesaBCI, Olimpia and Hopa S.p.A., that
provides for a change in the shareholder base of Olimpia upon the conclusion of
certain transactions (amongst which the merger of Holy S.p.A., 100%-controlled
by Hopa, into Olimpia). The shareholder base of Olimpia will then comprise
Pirelli, 50.40%, Edizione Finance International 16.80%, UniCredito 8.40%,
IntesaBCI 8.40% and Hopa 16.00%.
After the aforementioned merger, Olimpia S.p.A. will hold 28.5% of the share
capital of Olivetti, the parent company of Telecom Italia.
95
[] FINANCIAL COMMUNICATIONS
Since the end of 2001 and throughout 2002, the Telecom Italia Group has
wanted to provide information about financial matters that is ever-more
accurate, continuous and timely, with the aim of achieving greater
transparency and reliability both in terms of the business results and
corporate governance of Telecom Italia S.p.A. and its subsidiaries, in
order to meet in full the requirements of investors and the regulations
established by the official bodies involved.
Moreover, this high level of commitment is recognized by the financial
market which, through a study conducted by Deutsche Bank in collaboration
with DWS Investment, ranked Telecom Italia in first place among European
telecommunications companies in terms of respecting corporate governance
regulations. It should be pointed out that the operations of Investor
Relations have been entrusted to an independent Corporate Function which
reports directly to the Managing Director, with key accounts devoted to
the various categories of internal and external interlocutors, with the
aim of ensuring that communication will be more timely, complete and
effective.
With this in mind, it has been decided to disseminate precise, exhaustive
information through the delivery of communiques and the publication of
institutional bulletins (compulsory and optional periodical reports, such
as the Sustainability Report, and disclosure giving details of
shareholders' meetings and individual transactions on the market) and by
taking advantage of both traditional paper and innovative on-line tools.
In fact, the Telecom Italia website www.telecomitalia.it has been
renovated with a special area devoted to institutional investors and the
retail sector. In addition to the continuous enhancing and updating of the
content of the website, special care has been taken to provide information
on the performance of shares and corporate events.
In 2002, the company organized more than 25 formal encounters with the
market (with analysts, institutional investors and members of the national
and international specialized Press). They took the form of quarterly
conference calls, road shows, participation in conventions, Press
conferences, to which must be added daily dealings with all the financial
analysts and investors both through direct meetings or by phone, to supply
them with the information they need for their activities.
In addition, the annual meeting was held in Milan on February 14 and 15,
to present the guidelines of the Group's industrial and financial plan for
2002-2004 and, for the first time, a special event was organized in Rome
on July 18 and 19 called "Technology Day", to illustrate the development
of innovative technologies and services of the Telecom Italia Group to the
financial community.
Finally, on February 13, 2003, within the framework of the activities
undertaken to implement the rules of Corporate Governance, the Board of
Directors of Telecom Italia also approved the "Procedure for the
communication of price-sensitive information to the market". The document
establishes ways of operating with the aim of disseminating this kind of
information to the market, identifies the Functions and Structures
involved in the process, and also lays down the procedure that must be
observed in the presence of rumors or requests for information from people
involved in the supervision or management of the market. Furthermore, the
procedure lays down rules about activities to be conducted whenever there
are encounters between the Company and the financial community or the
Press, so as to ensure a non-selective use of corporate information.
96
CUSTOMERS
[] CUSTOMER SATISFACTION
Customer satisfaction and direct, ongoing business with customers were the
cornerstone of Telecom Italia Group's loyalty policy also in 2002. Despite
the diversity of operations of the various businesses, the customer
relationship management tools are quite similar (call centers, toll-free
numbers, service centers, websites, regular customer satisfaction surveys
- the latter often in collaboration with independent agencies), although
tailored to the type of customer and service delivered.
In 2002, customer care at Telecom Italia S.p.A. - Domestic Wireline was
based on 169 toll-free numbers, 100 service centers and the company
website. The helpdesks answered nearly 64 million calls, while the website
was visited around 4 million times. Monthly surveys on customer
satisfaction produced the following feedback:
o customers satisfied with line operations were on average over 90%
(90.9% residential customers and 89.2% business customers);
o 64% of residential customers and 50% of business customers receive a
solution to their problems in a single telephone call, a one-call
solution;
o 77% of residential customers' repairs and 74.6% of business
customers' are carried out within the 2nd day after being reported;
o Residential customer satisfaction with fault repairs measures 92.7%
and business customer satisfaction 83%;
o Executive customer satisfaction levels are high and, on average, over
80%.
The other companies belonging to the Domestic Wireline Business Unit,
operating in various markets, use similar tools, adapting them according
to their specific customers.
The organizational model of the TIM group (Mobile Business Unit) consists
in extending the controlling company's model to all affiliates. Its
customer care policies are underpinned by nationwide sales and service
networks and services (toll-free numbers, call centers, websites) that are
easily and regularly used by customers, who particularly appreciated the
effectiveness of these services in 2002. Customer satisfaction was 83.9%
for the TIM call center, 90.3% for the Stet Hellas call center and, on
average, around 70% for the call centers run by the companies operating in
South America.
To improve customer satisfaction, both Entel Chile and Entel Bolivia
(Latin America Operations) set up call centers, toll-free numbers
dedicated to segments of its customer base, sales points, service centers
and websites; the call centers were the most successful service with as
many as 3.2 million calls in Bolivia.
All companies in the Seat group (Internet & Media Business Unit) employ
dedicated toll-free numbers and call centers, greatly used by customers,
and corporate websites for customer relationship management. Seat Tin.it
also uses innovative web-based forms of contact with customers. The La7
call center and MTV toll-free number are dedicated to customers who have
signal reception problems.
As regards the Information Technology Market Business Unit, the group
leader, Finsiel, manages customer relations through dedicated toll-free
numbers, websites/e-mail (with more than 70,000 hits in 2002) and
automatic call centers. The help desk - the main service for customer
satisfaction - was used to interview customers by telephone in order to
monitor customer satisfaction.
In the companies forming the Information Technology Group Business Unit,
customer service was guaranteed by toll-free numbers, service centers and
websites/e-mail; in 2002, Sodalia and Webegg's sites had a very high
viewing rate. Saritel's service procedures are diversified according to
the services delivered. Customer satisfaction with Sodalia's communication
and supply of service was around 70%. ISO 9000 certifications were
obtained by companies belonging to all Business Units and operating
activities in the Group, including Telecom Italia S.p.A. - Domestic
Wireline, TIM, Stet Hellas, Maxitel, Entel Bolivia, Banksiel, Saritel and
TILab. Digitel Venezuela and Entel Chile expect to obtain them in 2004.
Part of TIM's network operations are certified according to the ISO 14001
standard concerning the environmental management system. The same
certification is pending for Telecom Italia's network; TILab has already
obtained it for its Environment, Health & Safety system. A number of
companies obtained special certifications for specific activities.
97
SUPPLIERS
[] CONTRIBUTION TO SUPPLIERS OF THE TELECOM ITALIA GROUP
To quantify Telecom Italia Group's business with suppliers, consumption of
outside supplies and services and industrial investments are shown below:
---------------------------------------------------------------------------------------------------------------
(millions of euro) 2002 2001
---------------------------------------------------------------------------------------------------------------
TELECOM ITALIA GROUP
* Consumption of raw materials and outside services (net of the
telecommunications license fee or charge) (A) 12,127 12,518
- of which related parties (a) 469 586
* Industrial investments (B) 4,842 8,164
- of which related parties and capitalized internal construction costs (b) 1,130 665
---------------------------------------------------------------------------------------------------------------
* Total contribution (C=A+B) 16,969 20,682
---------------------------------------------------------------------------------------------------------------
- of which related parties and capitalized internal construction costs
(c=a+b) 1,599 1,251
---------------------------------------------------------------------------------------------------------------
* Net total contribution (C-c) 15,370 19,431
---------------------------------------------------------------------------------------------------------------
[] QUALIFICATION
The supplier qualification process is centralized for all Telecom Italia
Group companies through application of common general criteria, but taking
into account product/service-specific parameters or checklists.
Qualification can be of three typologies, each preliminary to the
subsequent assessment:
- Basic (sales, safety, social responsibility, compliance with
environmental policies, etc.);
- Economic-Financial (examination of financial statements and evaluation
of specific indicators);
- Technical-Organizational (actual capability to produce or supply
products and services).
Qualified suppliers are listed in the Telecom Italia Group Register of
Vendors by product category.
The Group's procurement policy is based on competition between qualified
Vendors in terms of purchase cost, procurement time, and quality of
supplies.
A similar, but more simplified, selection process is applied to
subcontractors, the results of which determine authorization to
subcontract.
[] VERIFICATION
The quality of supplies/services is monitored by means of the
product/service-specific Vendor Rating based on technical, commercial and
administrative evaluations.
Assessments are made both at centralized level during supplier
qualification and by the individual companies in the Telecom Italia Group
during the term of contract.
The latter assessments may be annual or six-monthly and the number of
assessments can vary according to performance resulting from the Vendor
Rating.
[] TRANSPARENCY
Transparency is assured in relationships with suppliers by:
- informing suppliers of the results of the Vendor Rating in order to
agree on improvements;
- informing suppliers of the verification system, illustrating all aspects
related to the specific monitoring procedure in documents enclosed with
contracts;
- on-line bids via the Corporate Internet site, allowing suppliers to know
developments and the final results in real time;
- including health & safety and environmental standards in bidding
documents and related specifications.
98
COMPETITORS AND REGULATORY FRAMEWORK
[] APPROACH
OLO (Other Licensed Operators), ISP (Internet Service Providers) and other
television licensees can - at one and the same time - be for Telecom
Italia:
- Competitors and participate in defining rules for fair competition and
for achieving convergence in communications. Creation of balanced,
stable, predictable rules is a target shared by all businesses in the
sector.
- Partners in development of new services and new business models. In
the recent past, development first in mobile telephony followed by
Internet was also the result of innovations proposed by various
businesses.
- Customers. Telecom Italia's organization comprises a Wholesale
Division, which sells a wide range of services. Telecom is one of the
first operators in Europe to have offered services such as the
permanent virtual channel, partial lines, wholesale direct lines, and
shared access.
[] PARTNERSHIPS
The Telecom Italia Group joined the digital TV sector with La7 and MTV,
actively participating in television associationism and starting
experimentation on its own sites.
At European level, relations with institutions in the industry increased.
Telecom Italia supports various initiatives, including a market and
investments strategy for e-Europe.
Group companies operating in South America, such as TIM Peru and Wireline
Bolivia, collaborated with competitors in numerous projects.
The principal associations in which the Group actively participates are:
- ETNO (European Telecommunications Network Operators' Association)
founded to promote development of a competitive and efficient European
market for telecommunications. Telecom Italia is a member of the
Executive Board of the Association and chairs the Sustainability Task
Force;
- ITU (International Telecommunications Union) which aims to support
development of the industry internationally through cooperation
between the public and private sectors. Telecom Italia, TIM and TILab
participate in, and often lead or coordinate, many study groups.
- GSM Association which promotes global development of wireless
communications guaranteeing interoperability between operators,
equipment, services and roaming, in which TIM was recognized
technological leadership in addressing and defining strategies for
development of global radiomobile services worldwide.
Participation in the Task Forces EIRUS (European Ipqm and Rqms UserS) in
Europe and QuEST (Quality Excellence for Suppliers of Telecommunications)
in North America allows the Telecom Italia Group to be informed of
developments in technical quality monitoring processes applied by the
leading operators and manufacturers of telecommunications products and
systems.
99
[] REGULATORY FRAMEWORK
The new regulatory framework will be governed by new standards which will
be introduced in national regulations by incorporating the EC Directives
in the "'99 Review" relating to electronic communication networks and
services (directives concerning "Access", "Authorization", "Framework",
"Universal Service" and "Data Protection"). The new standards will be
included in the national regulatory framework by July 24, 2003. In this
connection, Law No. 166 of August 1, 2002 gave the Government a mandate to
implement the new directives, and to adopt a code of legal and regulatory
measures in the field of TLC. Furthermore, the European Commission
published Recommendations on important product and services markets in
electronic communications, as well as Guidelines for market analysis and
the evaluation of significant market power.
There follows a brief description of the standards adopted during 2002.
[] RATE REBALANCING
Within the framework of the price cap formulas and in observance of
Resolution No. 847/00/CONS of December 11, 2000, the price adjustments of
February 1, July 1, and December 30, 2002 became effective and further
reduced telephone expenses for residential and business customers. The
adjustment of basic subscription charges was accompanied by further price
reductions for local, inter-district and international calls.
On August 5, 2002, the National Regulatory Agency began a public
consultation with Resolution No. 183/02/CONS on the review of the
price-cap formulas with effect from 2003.
[] INTERCONNECTION AND LOCAL LOOP UNBUNDLING
In compliance with the rules laid down in Resolution No. 4/02/CIR, on
April 18, 2002 Telecom Italia published the Interconnection Reference Plan
(OIR) which contains technical and economic conditions for using the
network, both in terms of switched transport and local loop unbundling to
the last mile. The new plan offers generalized reductions on the services
distributed to interconnected operators. On February 27, 2003, the
National Regulatory Agency approved the OIR together with the criteria for
changing the charges of the OIR for the next 4 years (the so-called
network cap). In compliance with Resolution No. 5/02/CIR, on April 30,
2002 Telecom Italia published the new flat-rate interconnection rate for
Internet access known as FRIACO. The terms of supplying Partial lines
according to the 2002 price list were published on the same date.
[] ADSL BROADBAND ACCESS SERVICES
On September 30, 2002, Telecom Italia presented a new ADSL wholesale rate
plan, based on a flat rate, which enables an operator to separately
acquire access and "carry" data traffic to its point of presence. These
changes, together with simultaneous price reductions for unbundling and
shared access services led the National Regulatory Agency to grant
approval of Telecom Italia's new "Alice time" rate plan, on September 25,
2002.
[] EQUALITY IN INTERNAL/EXTERNAL TREATMENT
In Resolution No. 152/02/CONS, the National Regulatory Agency approved
measures that are intended to ensure the full application of the principle
of equality in internal and external treatment on the part of fixed
telephone operators with significant market power. These measures concern
accounting reports, the ways in which services are offered to other
operators, the application of the Network Cap model to the interconnection
price list and unbundling, and ways of verifying the terms of the plans
offered to the public.
[] GENERAL TELEPHONE DIRECTORY
In Resolutions No. 36/02/CONS and 180/02/CONS, the National Regulatory
Agency established the rules and organizational methods for the creation
and supply of a general telephone directory containing the numbers of
subscribers to the services of all fixed and mobile telephone operators.
The creation of the single database will be organized within the
regulatory framework agreements stipulated among the various operators.
[] MOBILE NUMBER PORTABILITY
In Resolution No. 7/02/CIR, the National Regulatory Agency issued the
regulations for the pricing of Mobile Number Portability. The prices which
the Recipient (the operator who acquires the customer with the same
number) must pay to the Donor (the operator who gives up the customer)
will be established by the National Regulatory Agency and must not, in any
case, be higher than the prices for Number
100
Portability on fixed networks. In addition, the customer migrating to
another operator has the right to use up any credit remaining on prepaid
cards.
[] UNIVERSAL SERVICE
Telecom Italia continues to maintain its obligation to provide certain
services - including phone services - at "accessible" prices. Such
services, which are guaranteed in unprofitable geographical areas to low-
profile customers, constitute the so-called "Universal Service", for the
supply of which Telecom Italia sustains a "net cost". On December 23,
2002, the Infrastructures and Networks Commission of the National
Regulatory Agency approved the measure in which the net cost sustained by
Telecom Italia to provide the Universal Service in 2001 was estimated at
euro 40.28 million, to which Telecom Italia itself contributes 42.68%
(euro 17.19 million).
[] EQUALITY FOR ISP/OLO
In its implementation of Law No. 59/02, the National Regulatory Agency
declared that Internet Service Providers (ISP) are to be considered on an
equal basis with other licensed operators, granting ISPs the right of
access to the prices on the Interconnection Reference Plan (OIR), and to
ask the Ministry of Communications to grant them the right to use
numbering resources for Internet services and for the routing of the
traffic involved. In implementation of the above-mentioned law, the
National Regulatory Agency made known that Telecom Italia and Wind were
"Significant Market Power" (SMP) operators in the intermediate market for
the termination of calls destined for Internet, and Telecom Italia was an
SMP in the market of final Internet access services from the wireline
network using dial-up technology.
[] LEASED LINES
In Resolution No. 59/02/CONS, the National Regulatory Agency approved the
wholesale plan of charges for leased lines for OLO and ISP in compliance
with the obligation to levy charges based on the "retail- minus" principle
established in Resolution No. 393/01/CONS.
[] LICENSES
DPR No. 211 of August 1, 2002 changed the period of individual licenses in
the TLC sector from 15 to 20 years (with an extension for those already
issued).
[] TLC INFRASTRUCTURES
Legislative Decree No. 198 of September 4, 2002 establishes the
fundamental principles with regard to the installation and alteration of
TLC infrastructures that are regarded as being strategic, and fixing
precise terms for the issue of authorizations, abrogating the procedure of
environmental impact assessment (VIA) and limiting the financial
responsibility of companies to expenses associated with installation
operations, digging and occupation of public property. Law No. 166 of
August 1, 2002, also defined the new standards relating to the
installation, access and sharing of multi-service cables and cable ducts
that need to be built following construction and maintenance work on civil
works.
[] EVOLUTION OF THE EC REGULATORY FRAMEWORK
New directives have been published and are in the "99 Review":
o Directive 2002/19/CE concerning access to electronic communications
networks and related resources, and interconnection of the said
networks (known as the "Access" directive );
o Directive 2002/20/CE concerning authorizations for electronic
communications networks and services (known as the "Authorizations"
directive);
o Directive 2002/21/CE which establishes a common regulatory framework
for electronic communications networks and services (known as the
"Framework" directive);
o Directive 2002/22/CE concerning the universal service and the rights
of users with regard to electronic communications networks and
services (known as the "Universal Service" directive).
o Directive 2002/58/CE on the treatment of personal information and on
the safeguarding of privacy (known as the "Data Protection"
directive)
The new standard must be incorporated in national regulations by July 24,
2003 and, in this context, Law No. 166 of August 1, 2002 gave the
Government a mandate to introduce the new directives and to adopt a code
of legal and regulatory measures for TLC. In addition, the European
Commission is in the process of defining a recommendation concerning
important markets for services and products with the aim of imposing,
changing or revoking the observance of regulations.
101
THE STATE AND OTHER INSTITUTIONS
In 2002 the contribution of Telecom Italia Group to Public Administrations, in
Italy and internationally, was euro 1,090 million.
-------------------------------------------------------------------------------
Telecom Italia Group
(millions of euro)
-------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------------
Social security and national health insurance contributions 1,199 1,225
-------------------------------------------------------------------------------
Direct taxes (716) 925
-------------------------------------------------------------------------------
Indirect taxes 115 120
-------------------------------------------------------------------------------
TLC license fees 431 524
-------------------------------------------------------------------------------
Ministry of Economy and Finance (dividends) 61 61
-------------------------------------------------------------------------------
1,090 2,855
-------------------------------------------------------------------------------
In 2002, the Group received capital grants from Italian Public Administrations
only amounting to euro 42 million (euro 22 million in 2001), including euro 23
million pertaining to Telecom Italia S.p.A. .
FUTURE GENERATIONS
Respect for the environment, which is an integral part of Telecom Italia
Group's commitment in adopting Sustainability as one of its principal values of
reference, ranks among the Group's strategic objectives and is the subject of
continuous verification.
[] ENVIRONMENTAL PERFORMANCE INDICATORS
The Group identified four major elements by which it measures the effectiveness
of its environmental management system and establishes programs to improve
performance:
o waste management;
o consumption of natural resources and energy;
o air quality and climate changes;
o electromagnetic emissions.
All information reported herebelow has been obtained by processing
appropriately reclassified management accounting data.
[] Waste management
The waste generated by Telecom Italia derives from constant innovation and
development of its infrastructures and from day-to-day business
operations.
Waste, primarily consisting of telecommunications materials and products,
has been managed by a single company at national level since 1999.
Disposal processes favor reuse and recycling options, whenever possible.
The data reported herebelow refer to the financial year 2001 and Telecom
Italia S.p.A.. In 2001, generated waste totaled 27,915 tons, a decrease of
nearly 34% over the previous year. Compared with the year 2000, there was
a significant reduction in disposal of equipment and batteries, which were
related to decommissioning of analog telephone exchanges, poles and
cables.
Hazardous waste accounted for 29.7% of the total amount of waste (against
36.9% in 2000) while the percentage of waste destined for recovery was 83%
(89% in 2000).
102
[GRAPHIC OMITTED]
[Pie Chart Reading:
Types of waste produced by Telecom Italia S.p.A. in 2001
Telegraph poles - 19.18%
Equipment - 34.19%
Other - 0.27%
Electrolytes - 0.02%
Adhesives and sealants - 0.04%
Ink and toner cartridges - 0.05%
Tank sediment and purification plant sludge - 0.06%
Waste containing PCBs and PCTs - 0.27%
CFCs - 0.52%
Demolition and decommissioning waste - 0.57%
Plastic reinforced by fiber glass, plastic and rubber - 1.17%
Paper and cardboard - 1.81%
Waste containing asbestos - 5.00%
Packaging - 5.17%
Metal - 9.78%
Batteries - 10.22%
Ccables - 11.68%]
[] Consumption of natural resources and energy
The natural resources used directly by the company include materials
employed in material manufacturing processes and products acquired and
operated directly or made available to the public:
o water, for civil use. In 2002, consumption rose 19%.
o diesel oil and natural gas used in heating systems. In 2002, diesel
oil consumption decreased by more than 14%, whereas natural gas
consumption increased by just over 4.3%; from an energy standpoint,
this means a global reduction of 0.68% (from consumption of 825,151
GJ in 2001 to 819,540 GJ in 2002). Thanks to an optimization plan
currently underway diesel oil consumption for heating purposes is
expected to be reduced by 3% in 2003.
o fuel for corporate fleet vehicles. Consumption was reduced by around
11.5% compared with 2001, as a result of a reduction in vehicle
numbers and distances covered. A project is in place that should lead
to the reduction of the corporate fleet by approx. 4,000 vehicles in
2003 and the introduction of a certain number of vehicles using a
gasoline and methane fuel mixture aimed at reducing polluting
atmospheric emissions.
Electricity for power for corporate infrastructures and buildings is
classed as indirect consumption of natural resources as the majority of
electric power generation in Italy utilizes fossil fuels (approx. 76%). As
a result of action to improve the energetic efficiency of infrastructures
over the last three years, the Group succeeded in achieving an annual
reduction in the consumption of electricity used to power the
telecommunications network exceeding 3%. The action plans should also make
it possible to continue the declining trend in 2003.
The Group is experimenting alternative sources of electric power
generation to power the Base Radio Stations (SRB) including photovoltaic
and wind power production. In 2002, a program was launched to produce four
SRBs in Calabria able to produce a total of 80KW. It is estimated that for
every SRB with a power of 18KW there will be a daily saving of 110 liters
of diesel oil; this significantly reduces pollutant emissions to air
(particulate, carbon monoxide, nitric oxide).
2003 Targets for Telecom Italia S.p.A.:
a) to reduce consumption by 3% (diesel oil and natural gas);
b) to reduce the corporate fleet by approx. 4,000 vehicles;
c) to reduce wireline network electric power consumption by 3%.
[] Air quality and climate change
The Group's contribution to greenhouse emissions, primarily carbon dioxide
(CO2), is basically due to use of fuels for heating and transport and,
indirectly, to consumption of electricity.
In 2002, Telecom Italia S.p.A.'s emissions amounted to 950,304 tonnes of
CO2; the estimated net reduction compared with the previous year was above
13.0%.
103
-------------------------------------------------------------------------------
Electricity consumption [GWh] 2002 2001
-------------------------------------------------------------------------------
Telecom Italia S.p.A. 1,706 1,835
-------------------------------------------------------------------------------
TIM S.p.A. 431 410
-------------------------------------------------------------------------------
Seat S.p.A.1 6 5.4
-------------------------------------------------------------------------------
Total 2,143 2,250.4
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Water consumption [m3] 2002 2001
-------------------------------------------------------------------------------
Telecom Italia S.p.A. 4,967,312 4,220,253
-------------------------------------------------------------------------------
TIM S.p.A. 310,000 432,000
-------------------------------------------------------------------------------
Seat S.p.A. 55,000 54,122
-------------------------------------------------------------------------------
Total 5,332,312 4,706,375
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Diesel oil consumption for heating [liters] 2002 2001
-------------------------------------------------------------------------------
Telecom Italia S.p.A. 5,393,518 6,280,431
-------------------------------------------------------------------------------
TIM S.p.A. 140,000 147,000
-------------------------------------------------------------------------------
Seat S.p.A. 0 0
-------------------------------------------------------------------------------
Total 5,533,518 6,427,431
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Natural gas consumption for heating [m3] 2002 2001
-------------------------------------------------------------------------------
Telecom Italia S.p.A. 17,990,314 17,241,706
-------------------------------------------------------------------------------
TIM S.p.A. 2,950,000 2,275,000
-------------------------------------------------------------------------------
Seat S.p.A. 500,000 411,650
-------------------------------------------------------------------------------
Total 21,440,314 19,928,356
-------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
CO2 emissions [t] 2002 2001
------------------------------------------- -----------------------------------------
Electricity Heating fuel Transport fuel Electricity Heating fuel Transport fuel
---------------------------------------------------------------------------------------
Telecom Italia S.p.A. 843,186 54,887 52,231 979,890 55,581 58,410
TIM S.p.A. 217,338 7,005 6,949 218,940 5,507 6,332
Seat S.p.A. 3,204 1,124 1,424 2,873 925 Not reported
Total 1,063,728 63,016 60,604 1,201,703 62,013 64,742
[] Electromagnetic emissions
The Telecom Italia Group's attention to the issue of electromagnetic
emissions can be summed up in the following commitments and actions:
- absolute compliance with the legislation in force in the countries in
which it operates. The corporate process is structured on rigorous
management of project engineering, of the selection of sites, and of
installation of systems;
- careful and scrupulous management of company installations throughout
the whole life cycle, in compliance with additional internal
efficiency and safety standards;
- use of, and constant research for, leading-edge technology tools for
control and investigation activities. Specifically, as far as regards
GSM, a procedure for monitoring the fraction of power emitted with
respect to the maximum rated power is currently in an advanced stage
of development.
Regarding UMTS, definition of methodologies of analysis and
simulation for estimation of radioelectric power in various
propagating environments and multimedia traffic contexts is in the
process of refinement. The first results have already been presented
at a number of international conferences The technology developed by
TILab for measurement of radiofrequency power generated by a base
radio station will shortly be integrated by a sensor that will allow
direct measurement of electromagnetic pollution.
In 2002, TIM monitored 2,896 transmission installations out of 4,059,
spending euro 3,936,064. As far as regards cell phones marketed
through its sales network, TIM makes a selection based on level of
technological innovation and Standard Absorption Rate (SAR)
measurements, to guarantee reduced electromagnetic emissions levels.
- cooperation and support in medical-scientific studies. Specifically,
Telecom Italia S.p.A., in cooperation with a number of Italian
universities and national and international organizations, promoted
investigations to check the emission values of electromagnetic
radiations and possible impacts.
[] ENVIRONMENTAL MANAGEMENT
An Environmental Management System (EMS) is under development;
implementation of the system is a target to be progressively extended
across the Group.
------------
1 The consumption figures for Seat S.p.A. refer to the 7 company offices where
electricity supplies are registered in the name of the company.
104
Telecom Italia Lab developed an integrated system for environmental
management in accordance with the standard UNI EN ISO 14001 and for Health
& Safety management in accordance with standard OHSAS 18001. The
Environmental Management System obtained certification by DNV (Det Norske
Veritas, an internationally accredited certification agency) in 2001.
Additionally, Telecom Italia Lab conducted research on behalf of Telecom
S.p.A. and TIM, to promote the improvement process in terms of sustainable
development.
The project for UNI EN ISO 4001 certification of the Environmental
Management System of the Network Function of the Domestic Wireline (DW)
Business Unit is in the stage of completion. In 2002, audits were carried
out by the certification agency IMQ-CSQ, all with positive results, in the
Network's territorial structures "Centro 2" (which covers Lazio, Abruzzo,
Molise and Sardinia), Milan, "Centro-Nord" (which covers Emilia Romagna,
the Marches and Umbria), "Sud 2" (which covers Calabria and Sicily),
Piemonte-Valle d'Aosta, plus Network's central Function SQ, which
coordinates the project.
Audits at the remaining structures will be finished by July 2003. On
completion of the project, all certificates issued for the individually
certified structures will go to form a single ISO 14001 certificate
applying to the whole Network Function.
TIM is carrying on the project, begun in 2001, for implementation and
certification of the integrated system for Quality Management and
Environmental Management, respectively developed to standard UNI EN ISO
9001 and UNI EN ISO14001, in its territorial organizations of the Network
Function. To date, IMQ-CSQ awarded certification to the Network
organizations in Piedmont, Liguria, Valle d'Aosta, Calabria and Sicily;
certification is expected to be extended to Campania, Basilicata and
Apulia by April 2003. The project will be completed in 2004.
THE COMMUNITY
In 2002, the Telecom Italia Group companies' commitment to the community was
estimated at euro 120,885 million, equal to 1.6% of the Group's operating
income.
This was calculated using appropriately reclassified management accounting data
and is a partial quantitative estimate of the cost of community projects and
initiatives recorded in the accounts according to several criteria.
[] CONTRIBUTION CLASSIFICATION (LONDON BENCHMARKING GROUP MODEL)
The London Benchmarking Group (LBG), established in 1994, comprises 60
leading international companies and is currently the European benchmark in
evolution of social-environmental reporting.
[GRAPHIC OMITTED]
[Pie Chart Reading:
Distribution of the social and enviromental contribution of the Telecom Italia
Group euro 120,885 milion
Charity - 3,9%
Initiatives for social improvements - 10,3%
Investments in the community - 19,4%
Innovatives services for social growth - 66,4%]
[GRAPHIC OMITTED]
[Pyramid Chart Reading:
SCHEMA LBG
Charity - 4,735 (euro milioni)
Investments in the community - 23,504 (euro milioni)
Initiatives for social improvement - 12,438 (euro milioni)
Innovative services for social growth - 80,208]
This model reclassifies contributions into four different categories. The
pyramid diagram reflects the possibility of measuring the benefits and
business returns arising from the various activities:
- at the base of the pyramid, the return can easily be measured since
it is connected to the core business;
- at the apex, donations are strictly linked to the Group's sense of
social and moral responsibility.
105
The four category classification proposed by the LBG model is not
straightforward as a single initiative may have effects in more than one
different category. As a general rule, preference has been given to
comparability with previous years.
Classification according to this model, compared with 2001, shows a
general increase in the contribution also as a result of introducing a
more analytical data entry system. Nevertheless, the share of investment
in each category is basically the same as in 2001.
COMMUNITY ACTIVITIES SELECTED TO FORM THE CATEGORIES ACCORDING TO THE LBG MODEL
-------------------------------------------------------------------------------
CHARITY Funding to Associations and liberal grants
Humanitarian projects [CRALT]
Donations
-------------------------------------------------------------------------------
COMMUNITY Scholarships, internships
INVESTMENTS Education and employment projects
Environmental Management Development
Electromagnetic emissions - monitoring and measurement
Health & Safety Management System - improvement
Environment, Health & Safety research
Energy saving schemes
Territorial safety plans
Civil Protection
-------------------------------------------------------------------------------
SOCIAL INITIATIVES Projects in the social field
Health and social solidarity related events
Culture, arts and sports events
-------------------------------------------------------------------------------
INNOVATIVE Research and development for innovative services
SERVICES FOR Support for university research
SOCIAL GROWTH Technological innovation projects
Initiatives and projects promoting social growth
E-learning platform project
-------------------------------------------------------------------------------
[] Charity
Group companies in Italy and other countries supported various initiatives
including "Telefono Azzurro" (helpline for children), AIRC (cancer
research), Telethon, San Patrignano (community for recovery of drug
addicts), donation of medicines to the needy and surgical equipment to
public hospitals in Bolivia, support for the populations hit by the
earthquake in Molise and by flooding in Brazil and for the victims of
domestic violence in South America.
[] Community investments
Group activities to improve infrastructures (building and technological
infrastructures) from a safety and environmental viewpoint continued in
2002.
Numerous scholarships were offered by the Group ("Master Bocconi MEGeS",
"Borsa Scuola Superiore di Specializzazione in TLC", "Borsa di studio
Master LUISS"; "Consorzio ELIS" (CONSEL); "Federazione Nazionale Cavalieri
del Lavoro"). Additionally, the "TIM Fellowship Programme", conceived with
the aim of creating a preferential channel for identifying the best
candidates, through promoting lifelong learning and professional
development of university students in the new economy, mobile business and
ICT, was started up.
The Project "Telecom alleniamoci alla Vita" (Telecom let's train for life)
is conceived with the aim of promoting social and individual growth of the
young through the values of sport. It is a three-year, nation-wide
project for schools of all types and levels, targeted and diversified for
students, teachers and families by an integrated package of educational
materials and aids: teaching cards, posters, films, CD-Roms, guides and
booklets.
Support for the Children's Hospital "Ospedale Pediatrico Bambino Gesu" in
Rome for a research project to set up human endothelial cell banks to
treat diseases and pathological injuries resistant to pharmacological
therapy.
106
[] Social initiatives
Participation of the Telecom Italia Group in the 13th edition of the
television marathon Telethon, providing Group facilities and technology to
raise awareness for and most successfully support fundraising for muscular
dystrophy and other genetic diseases. The Group also provided support in
the form of an important press campaign in the leading national and
regional newspapers to maximize circulation of the message of the appeal.
Support for the 19th edition of "ViviCitta", recognized as a major social
and sports event, with stops in 60 cities in Italy (and 30 prisons and
juvenile detention centers) and 50 cities worldwide, covering a total
distance of 14,535 km and involving one million participants. Africa was
chosen as the testimonial for the 2002 edition, named "Run for rights".
Support for the "Bread project", an educational program for alternative
nutrition in the poor regions in Brazil aimed at eliminating infantile
malnutrition through education for 10,000 people.
[] Innovative services for social growth
These basically refer to research and development activities by TILab for
the Group companies in ICT, which have reverberations of great social
importance.
The E-Learning platform, begun in 2001, was completed. This service has
made it possible to deliver "distance" learning and mixed learning
(traditional classroom teaching supported by and/or replaced by on-line
learning). In the distance learning field, the "Application Service
Provider" facility (interactivity with the customer's IT structure or
setting up the learning package on the customer's premises) proved the key
solution for the future of training. Teaching packages were designed and
produced and put into operation, as well as the E-Educational branch for
formative services for Schools and Universities.
-------------------------------------------------------------------------------
In 2003, "PROGETTO ITALIA" was launched programming community investment
initiatives.
Progetto Italia, publicly presented on January 21, 2003, is a further sign
of the will to give a unitary and strategic sense to all the resources and
energies spent by the Group on various fronts of activities in the
cultural, social and sports field.
Specifically, the aim of the program is to promote growth of the country
through improving diffusion of culture and cultural values.
With a budget of euro 30 million, Progetto Italia comprises more than 30
initiatives. Each of them is conceived and realized directly by Telecom
Italia, either independently or in partnership allowing the Group to
actively participate with a contribution of ideas and technologies.
-------------------------------------------------------------------------------
107
RESEARCH & DEVELOPMENT
During 2002, the R&D activities of the Telecom Italia Group were largely
conducted by TILAB, also in collaboration with Pirelli Lab, dedicating 1,081
employees
The activities involved research and testing in the field of fixed, mobile and
Internet telecommunications. As far as Internet and mobile applications are
concerned, research activities were focused on testing integrated applications
and technological solutions for multimedia, the definition of the manner and
methods of accessing contents and managing broadband users, creating and
evaluating hi-tech solutions for user environments (terminals, domestic cabling
and applications platforms).
Activities in the sphere of switching and networking were geared to the
evolution of IP networks, developing Content Delivery Network architectures for
an efficient distribution of multimedia content. Particular attention was also
focused on Wireless LAN and on innovative solutions for telephone services on
package networks.
Research into network infrastructures involved both the metropolitan and
transport network, with the testing of new automatic fiber optic switching
architectures, and the access network, with the proposal of innovative
solutions based on copper wire and fiber optic connections.
In 2002, these research activities led to the registration of 45 patents, an
increase of 13% compared to the prior year.
Overall R&D expenditures incurred during the year amounted to approximately
euro 121 million. The total of grants and low-interest loans to support R&D
costs, already received or awaiting receipt by TILAB, amounted to approximately
euro 12 million.
108
OTHER INFORMATION
EQUITY INVESTMENTS HELD BY DIRECTORS, STATUTORY AUDITORS AND GENERAL MANAGER
Pursuant to art. 79 which introduced Legislative Decree No. 58 of February 24,
1998, adopted by Consob under Resolution No. 11971 of May 14, 1999 and later
amendments and supplements, the following table presents the equity interests
held by the Directors, Statutory Auditors and General Manager of Telecom Italia
S.p.A. and its subsidiaries.
------------------------------------------------------------------------------------------------------------------------------------
Name Company Class of Number of Number of Number of Number of
shares shares held at shares shares sold shares held at
the end of 2001 purchased the end of 2002
------------------------------------------------------------------------------------------------------------------------------------
BOARD OF DIRECTORS
------------------------------------------------------------------------------------------------------------------------------------
Marco TRONCHETTI PROVERA = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Gilberto BENETTON = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Carlo Orazio BUORA = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Riccardo RUGGIERO = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Enrico BONDI = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Umberto COLOMBO
------------------------------------------------------------------------------------------------------------------------------------
Francesco DENOZZA = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Luigi FAUSTI Telecom Italia Mobile ordinary 50,000 = = 50,000
------------------------------------------------------------------------------------------------------------------------------------
Guido FERRARINI = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Paolo GRANDI = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Natalino IRTI Telecom Italia Mobile ordinary 11,000 = 11,000 =
------------------------------------------------------------------------------------------------------------------------------------
Gianni MION = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Pietro MODIANO = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Massimo MORATTI = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Carlo Alessandro PURI NEGRI = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Pier Francesco SAVIOTTI Telecom Italia Mobile ordinary 10,000 = = 10,000
------------------------------------------------------------------------------------------------------------------------------------
Roberto ULISSI = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
BOARD OF STATUTORY AUDITORS
------------------------------------------------------------------------------------------------------------------------------------
Paolo GERMANI = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Mario BOIDI = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Paolo GOLIA Telecom Italia savings = 4,309 4,309 =
------------------------------------------------------------------------------------------------------------------------------------
Fabrizio QUARTA = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
Gianfranco ZANDA = = = = = =
------------------------------------------------------------------------------------------------------------------------------------
109
LITIGATION
There follows a description of the main disputes and litigation in which the
Telecom Italia Group is involved at December 31, 2002. Except where
specifically mentioned, the Telecom Italia Group did not make any provision to
the risk reserves because of the absence of definite and certain elements
and/or because a negative outcome to the litigation is not considered probable.
[] DISPUTE CONCERNING RESOLUTIONS PASSED AT TELECOM ITALIA SHAREHOLDERS'
MEETINGS
Personal action is pending for damages claimed for a total of euro 18.9
million brought against Olivetti, Telecom Italia and the Chairman and
Deputy Chairman pro tempore. The claim is based upon the alleged
non-fulfillment of the commitments contained in the "Offer Document"
relating to the takeover and exchange bid by Olivetti and Tecnost for
Telecom Italia in 1999, and also for the resolution passed by the
Shareholders' Meeting of January 14, 2000 for the buy-back of savings
treasury stock.
[] UNIVERSAL SERVICE
In January 2002, the Regional Administrative Court (TAR) of Lazio ruled in
favor of the appeal presented by Omnitel to obtain the annulment of the
resolution passed by the National Regulatory Agency on the subject of the
"Applicability of the formula for sharing the net cost of the universal
service for the year 1999", that was also contested by Infostrada. In
particular, the TAR ruled that the dispute concerning the errors in the
administrative proceedings was valid whereas it turned down the plea over
the merits of the regulation, which in any case will be updated.
Meanwhile, Omnitel did not pay its share of the universal service (some
euro 9 million) and the Ministry of Communication was thus unable to pay
the amount due to Telecom Italia for the costs it incurred in 1999 to
supply the universal service.
***
In the early months of 2002, Telecom Italia was notified of the appeal
presented by Omnitel to the TAR of Lazio and the extraordinary appeal
filed by Wind to the Head of State to annul the resolution containing the
regulations on the "Universal Service: Applicability of the formula for
sharing the net cost of the universal service for the year 2000".
In addition to the suspension of the efficacy of the law, Omnitel also
requested that the case be referred to the Court of Justice of the
European Community for a preliminary opinion on the correct interpretation
of the EC directives. This being the case, Omnitel and Wind did not pay
their share of the contribution for supplying the universal service for
the year 2000 which amounted to euro 12 million.
[] DATA TRANSMISSION SERVICES AND INTERNET ACCESS BASED ON X-DSL TECHNOLOGY
Following a preliminary investigation into Telecom Italia's conduct with
regard to the supply of basic band direct lines and the offer to its
business users of broadband data-transmission and Internet access services
based on x-DSL technology, without any corresponding wholesale rate plan
for its competitors, in April 2001 the Antitrust Authorities imposed a
fine of euro 59 million on Telecom Italia. In November, the TAR of Lazio
reduced the fine to euro 29 million which was paid, with reserve, in
January, in relation to a proposed appeal to the Council of State. The
appeal was then filed to obtain the integral annulment of the contested
proceedings, which was disputed on the basis of general unreasonableness
and lack of motivation and preliminary investigation.
In the meantime, claims for the payment of damages have been brought
before the competent civil courts by Albacom, Infostrada, AIIP, Unidata,
Data Service and other operators, for the alleged abuse of a dominant
position on the part of Telecom Italia for the same conduct contested by
the Antitrust Authorities. In January 2003, the Court of Appeals of Rome
sentenced Telecom Italia to pay a total of about euro 2 million as
compensatory damages to Albacom, Wind (formerly Infostrada), Cable &
Wireless (formerly Unidata) and Data Service.
Similar actions are pending for claims brought by other operators.
[] GALACTICA DISPUTE
At the end of May 2001 a dispute arose between Telecom Italia and the
Internet Service Provider Galactica S.p.A. (currently in liquidation) for
failure to renew the agreement concerning the testing of an Internet
access service, at a flat rate. Assuming the alleged illegality of not
renewing the agreement, Galactica claimed damages, challenging Telecom
Italia not to interrupt the distribution of the service.
In February 2002, Galactica therefore presented a new summons in action
for damages suffered as a result of the alleged unfair trade practices of
Telecom Italia.
In May 2002, the magistrate judge combined the two cases.
110
On October 16, 2002, the company Servinternet S.p.A. (formerly Galactica)
in liquidation, presented a third summons in action against Telecom Italia
to appear before the Milan Courts. This case has also been combined with
the other two cases pending before the same magistrate judge.
[] ALLEGED UNFAIR TRADE PRACTICES BY TELECOM ITALIA
Following a petition by 27 operators of the competition in which Telecom
Italia was denounced for alleged market strategies hurting market
development, in regulation No. 179/01/CONS, the National Regulatory Agency
objected to violations committed by the Company, and proceeded to commence
the relative procedures for sanctions with independent and specific
resolutions.
A counter-action is pending before the TAR of Lazio for both the presumed
procedure and the successive resolutions.
In the meantime, the National Regulatory Agency notified Telecom Italia of
certain proceedings relating to administrative sanctions which were
contested by the Company before the TAR of Lazio.
[] SEAT PAGINE GIALLE/DE AGOSTINI
Arbitration proceedings initiated by De Agostini are pending against Seat
Pagine Gialle, Finanziaria Web, Matrix and Buffetti group for the alleged
non-fulfillment of the agreement signed in 2000 governing - among other
things, the sale of the 40% stake in Finanziaria Web (which, in turn,
controls Matrix) by De Agostini to Seat. Maintaining that all the
conditions stipulated in the contract were met, De Agostini is asking for
the specific execution of the agreement and, therefore, the transfer of
its Finanziaria Web shares to Seat at the price of euro 700 million, with
payment beginning on June 30, 2003.
[] SEAT PAGINE GIALLE/CECCHI GORI
On June 13, 2002, the Rome Court rejected the complaint filed by Cecchi
Gori Group Media Holding and Fin.Ma.Vi. to find the financial statements
and related balance sheet at December 31, 2000 of Cecchi Gori
Communications - CGC (now Holding Media Communications) null and void and
to find the resolutions passed by the Shareholders' Meeting of April 27,
2001 invalid. Cecchi Gori Group Media Holding and Fin.Ma.Vi appealed the
decision, re-proposing the complaint in the first degree court.
Pending at this date is i) the case for the annulment of the pledge of the
CGC shares to guarantee the proper fulfillment of all the obligations
covered by the contract under which, on August 7, 2000, Seat Pagine Gialle
acquired control of CGC ii) the case for a declaratory judgement finding
the resolution passed by the CGC Extraordinary Shareholders' Meeting
invalid and to change the quorum for voting in the Board of Directors'
Meeting and the Shareholders' Meeting. In August 2001, Cecchi Gori Group
Media Holding and Fin.Ma.Vi. also initiated arbitration proceedings to
find for the rescission or the invalidity of the contract for the
acquisition of Cecchi Gori Communications dated August 7, 2000, signed
between Seat Pagine Gialle and the Cecchi Gori Group, and to sentence Seat
Pagine Gialle to return 75% of the share capital of Cecchi Gori
Communication or to pay damages for breach of contract.
[] FASTWEB
On July 11, 2001, Telecom Italia and Fastweb signed the "Contract for
access and utilization of civil infrastructures" in compliance with the
ruling handed down by the Antitrust Authority, which obliged Telecom
Italia to make its civil infrastructures available to competing operators
for the supply of interactive and multimedia services, at
non-discriminatory terms and prices aligned to costs.
Telecom Italia was subpoenaed on August 29, 2002 to appear before courts
in action brought by Fastweb so that the judge could ascertain and state
the precise amount of consideration due for the access and the utilization
of said infrastructures, eliminating any doubts arising from the
interpretation of the clause governing the determination of price.
Telecom Italia asked, by way of a counterclaim, the payment of some euro
46 million as consideration for the services contained in above said
contract.
[] FEE CONCERNING ARTICLE 20, PARAGRAPH 2 OF LAW NO. 448 OF DECEMBER 23 1998
The Ministerial Decree of March 21, 2000 introducing Italian Law No. 448
of December 23, 1998, which, on January 1, 1999, established a new license
fee in place of the concession fee was contested by Telecom Italia, Tim,
Wind and Omnitel, before the TAR of Lazio and extraordinary appeals were
presented by Infostrada and Albacom to the Head of State. Furthermore,
with regard to extraordinary appeals presented to the Head of State,
asking for the annulment of the above-mentioned decree, the Council of
State brought the case before the European Court of Justice, raising the
preliminary question of the non-compatibility of the fee with Community
regulations relating to telecommunications.
Following the dispute, Telecom Italia and Tim did not proceed to pay the
fee for 2000, 2001 and 2002, although the corresponding costs, including
interest, were recorded in the financial statements in the pertinent
years.
111
[] STET HELLAS
In 1996, Mobitel - a company in the Greek Interamerican group (now Demco
Reinsurance), and, at that time, the exclusive representative of Stet
Hellas - initiated arbitration proceedings to ascertain its right to
receive commissions not only on outgoing traffic generated by the
subscribers it had signed up, but also on incoming traffic and on that
generated by customers in default of payment. It also requested the
payment of the corresponding damages in addition to damages generated by
the cancellation of the exclusive agency agreement with Stet Hellas.
The latter and Telecom Italia (which took over from Stet International
which was already the guarantor of Stet Hellas and, as such, a party to
the contracts at one time signed) presented a counterclaim seeking damages
suffered as a result of the loss of the acquisition of market share caused
by non-fulfillment on the part of Mobitel.
In October 2000, a partial award was ruled which, in principle, agreed
with Mobitel's request for recognition of a commission also on Stet
Hellas's revenues from incoming traffic; in November 2001, the Board of
Arbitration affirmed its jurisdiction over the quantification of the
amount of damages, besides its payment. The parties therefore indicated
their final claims which can be summarized in damages for some euro 140
million on the part of Mobitel and some euro 890 million on the part of
Stet Hellas and Telecom Italia.
[] NORTEL INVERSORA
In August 2001, a minority shareholder of Nortel filed a complaint
summoning the company's appearance before the Civil Court of Buenos Aires
to try and reach an agreement (which did not have a positive outcome) over
the alleged irregularities in the resolution passed by the Nortel
Shareholders' Meeting approving the financial statements for the year
ended December 31, 2000. The same shareholder had previously contested the
resolution passed by the Nortel Shareholders' Meeting approving the
financial statements at September 30, 2000. In September 2001, the
effectiveness of both the aforementioned shareholders' resolutions was
suspended by the Buenos Aires Court with a precautionary relief order.
In August 2002, based on complaints filed by the same shareholder, two
further hearings were held to attempt reconciliation (which proved
inconclusive) regarding the alleged irregularities in the resolution
passed by the Nortel Ordinary and Extraordinary Shareholders' Meeting on
April 25, 2002, concerning, among other things, the approval of the
financial statements at December 31, 2001.
On March 3, 2003, a settlement agreement was reached with the aforesaid
minority shareholder in which the same shareholder has agreed to desist
from continuing with the pending legal cases against Nortel and its
representatives and not to bring other similar actions against Nortel
and/or its representatives. The agreement was validated by the Buenos
Aires Court on March 5, 2003.
[] BRASIL TELECOM
There are two cases pending from 2001 brought by Brasil Telecom before the
Civil Court of Rio de Janeiro (Brazil), against, respectively, Telecom
Italia and Telecom Italia International and against two directors of
Brasil Telecom nominated by Telecom Italia International. The suits
request compensation for the damages suffered by Brasil Telecom as a
result of the acquisition of CRT and the failure to participate in the
auction of the SMP licenses.
[] CHASE MANHATTAN BANK DISPUTE
On April 5, 2002, the magistrate judge of the U.S. District Court for the
District of Delaware dismissed the case against Telecom Italia (since it
is no longer a direct shareholder of Iridium LLC) begun in June 2000 by
Chase Manhattan Bank (now JP Morgan Chase Bank) over the U.S. $800 million
loan given to Iridium Operating LLC (a subsidiary of Iridium LLC) in 1998.
The above decision was appealed by Chase, which also decided to sue
Iridium Italia S.p.A., a 30%-owned affiliate of Telecom Italia (with the
remaining stake divided equally between TIM and Telespazio), and the
direct shareholder of Iridium LLC.
[] TIM PCS IN BRASILE
Following the denial of the request for precautionary measures presented
by the local operators, Telesp Celular and BCP, to obtain suspension of
the effect of the share transfer of about 18.3% of the capital of Solpart
by Telecom Italia International to Techold and to Timepart, as well as the
administrative regulations related thereto, BCP brought ordinary action
against Anatel, before the Brazilian Federal Court, to obtain the
nullification of the assignment of PCS frequencies to the Brazilian
subsidiaries of TIM.
[] BANCOMEXT/ETEC S.A. DISPUTE
By order of August 12, 2002, the Civil Court of Turin issued a cautionary
attachment order for all the assets of Etec S.A. (a Cuban affiliated
company of Telecom Italia) and Telan (a majority shareholder of Etec S.A.,
a subsidiary of the Cuban government), also including the receivables from
third parties up to the amount of
112
euro 33 million.
This ruling follows an appeal presented by Banco Nacional de Comercio
Exterior ("Bancomext") which claims breach of contract, on the part of
Etec S.A. and Telan, concerning alleged obligations for the restitution
and guarantee - to date, of an amount of about U.S. $300 million -
established in a loan contract stipulated between Etac S.A., Telan,
Bancuba (Central Bank of Cuba) and Bancomext. Notice of the attachment was
successively served to Telecom Italia, TIM, Intesa BCI and Deutsche
Telecom, which were ordered to suspend any payment to Etec S.A., up to
euro 33 million.
TIM has already made a negative statement as third party pursuant to art.
547 of the Italian Civil Code. Telecom Italia, on February 6, 2003, again
pursuant to art. 547 of the Italian Civil Code, made a positive statement
as third party.
[] TELEQUE COMMUNICATIONS S.P.A.
Under the summons of November 6, 2002, Teleque Communications S.p.A., a
company operating in the sector of prepaid telephone cards for
international telephone services, has brought suit to summon Telecom
Italia before the Rome Court of Appeals to find for alleged unfair trade
practices and to obtain damages quantifiable in euro 65 million. Teleque
Communications claims that Telecom Italia acquired a competitive advantage
by adding, for the supply of its interconnecting services, additional
costs which, vice-versa, would not have been charged to Telecom Italia's
final customers of prepaid international services.
[] EXPENSE COMPENSATION TO THE MINISTRY OF DEFENSE FOR THE LIBERATION OF THE
900 BAND FREQUENCY
The Ministry of Defense and the Ministry of Communications, with the
regulations formalized in 2001, have quantified the expenses to liberate
the frequency band in question, charging such expenses mainly to TIM as
the licenseholder of the TAC mobile service. The liberation of the band in
question, instead, was aimed at amplifying the frequency resources to be
destined to GSM and, as such, to be allocated among all the beneficiary
operators.
Maintaining that such judgements are not legal, since they are based upon
an incorrect interpretation of Ministerial Decree 113/98 which governs the
matter, said judgements have been contested before the TAR of Lazio,
asking for their annulment.
[] DISPUTE CONCERNING RESOLUTION 399/02
On March 3, 2003, the National Regulatory Agency and Wind were notified of
the appeal presented to the TAR against Resolution 399/02/CONS regarding
the "Current cost accounting guidelines for notified operations of
wireline and wireless networks" which constitutes the presupposition for
establishing the prices to be applied to operators which ask to use of the
network.
Telecom Italia has contested the part of the resolution in which the
National Regulatory Agency establishes that the current cost method,
adopted to replace the historical cost method, should not be applied
equally to the copper network, that is, the so-called "access network",
for which the National Regulatory Agency has reserved the right to make
future judgement and with reference to which it should continue,
therefore, to apply the historical cost method.
113
[] INTERBUSINESS SERVICES
As required by the Antitrust Authority, the accounting principles used to
determine the economic values for Interbusiness services are described below.
These accounting principles have been audited starting from the year 1996.
In 2002, this examination was performed by the firm of Reconta Ernst & Young
S.p.A..
o Revenues are stated at market prices for competitive services and at
rates established by law for services granted by license and are recorded
on the accrual basis. In the case of services provided that imply the use
of dedicated access lines by the final customer, the revenues also include
the income from leasing such lines (valued on the basis of the rates
defined in the ministerial decrees), with the consequent recognition of
the same amount in costs.
o Direct costs
- labor costs represent the cost of personnel who worked to provide
such services; the cost includes salary and wages, social security
costs, provisions for employee termination indemnities and other
sundry costs recorded on the basis of the number of persons in the
dedicated operating structures and using cost accounting standards;
- network utilization costs include the cost to use the regulated
carrier services (usually direct connections) and the cost to use the
carrier products/services offered in a competitive environment; they
are therefore valued, respectively, using the rates established by
law and the rates applied to all third-party customers, the same as
that which occurs in the cost structure of other carriers in the
sector;
- other direct costs refer to direct costs (advertising, marketing,
service connection, operating and maintenance, etc.) and indirect
costs (corporate structure costs supporting the operating lines)
valued using cost accounting standards and applying specific
allocation methods.
o Depreciation: of fixed assets directly employed in providing the
services in question are determined on the basis of the estimated useful
lives of the assets of Telecom Italia.
The economic results of the interbusiness services are reported as follows:
===============================================================================
2002 2001 Change
(a) (b) (a-b)
-------------------------
(thousands of euro) amount %
------------------------------=================================================
Revenues 70,157 88,913 (18,756) (21.1)
Costs (56,286) (80,810) 24,524 (30.3)
Of which:
Labor cost (2,871) (5,920) 3,049 (51.5)
Network utilization costs (36,023) (44,878) 8,855 (19.7)
Other costs (17,392) (30,012) 12,620 (42.0)
-------------------------------------------------------------------------------
Gross operating profit 13,871 8,103 5,768 71.2
-------------------------------------------------------------------------------
Depreciation and amortization (17,696) (18,439) 743 (4.0)
-------------------------------------------------------------------------------
Operating loss (3,825) (10,336) 6,511 n.s.
-------------------------------------------------------------------------------
The results for 2002 show an operating loss of euro 3.8 million compared
to a loss of euro 10.3 million in 2001. Such result is due to the combined
effect of the reduction in revenues that was more than offset by the
reduction in costs. The impact on revenues (-21.1%) is mainly on account
of a decline in customers who switched to other alternative plans. The
reduction of resources absorbed by the service is due to a decline in the
clientele and, in some cases, a reduction in the unit cost; in total,
therefore, costs decreased by 30.3%. Depreciation and amortization show a
reduction of 4.0%.
114
CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 2002
OF TELECOM ITALIA GROUP
115
--------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS 12/31/2002 12/31/2001
--------------------------------------------------------------------------------------------------
ASSETS
(in millions of euro)
RECEIVABLES FROM SHAREHOLDERS FOR CAPITAL CONTRIBUTIONS
o PORTION CALLED IN = =
o PORTION NOT CALLED IN 4 1
------ ------
TOTAL RECEIVABLES FROM SHAREHOLDERS FOR CAPITAL CONTRIBUTIONS 4 1
------ ------
INTANGIBLES, FIXED ASSETS AND LONG-TERM INVESTMENTS
o INTANGIBLE ASSETS
Start-up and expansion costs 73 104
Industrial patents and intellectual property rights 1,256 1,274
Concession, licenses, trademarks and similar rights 3,995 4,452
Goodwill 15 47
Consolidation difference 6,597 9,094
Work in progress and advances to suppliers 831 874
Other intangibles 285 352
------ ------
TOTAL INTANGIBLE ASSETS 13,052 16,197
------ ------
o FIXED ASSETS
Land and buildings 2,145 2,877
Plant and machinery 14,933 16,649
Manufacturing and distribution equipment 49 73
Other fixed assets 677 731
Construction in progress and advances to suppliers 1,487 1,427
------ ------
TOTAL FIXED ASSETS 19,291 21,757
------ ------
o LONG-TERM INVESTMENTS
Equity investments in:
unconsolidated subsidiaries 18 18
affiliated companies 2,051 4,764
other companies 217 145
------ ------
Total equity investments 2,286 4,927
Advances on future capital contributions = 1,659
Accounts receivable: (*) (*)
unconsolidated subsidiaries 5 5 2 2
affiliated companies 2 435 = 117
other receivables 55 215 80 273
------ ------ ------ ------
Total accounts receivable 62 655 82 392
------ ------
Other securities 15 86
------ ------
Treasury stock (total par value of euro 28 million at
12/31/2002) 287 =
------ ------
TOTAL LONG-TERM INVESTMENTS 3,243 7,064
------ ------
TOTAL INTANGIBLES, FIXED ASSETS AND LONG-TERM INVESTMENTS 35,586 45,018
------ ------
CURRENT ASSETS
o INVENTORIES
Raw materials and supplies 19 22
Work in progress and semifinished goods 8 6
Contract work in process 179 352
Finished goods and merchandise:
finished goods 2 2
merchandise 202 204 253 255
------ ------
Advances to suppliers 1 1
------ ------
TOTAL INVENTORIES 411 636
------ ------
o ACCOUNTS RECEIVABLE (* *) (* *)
Trade accounts receivable 1 7,901 3 7,904
Accounts receivable from unconsolidated subsidiaries = 41 = 31
Accounts receivable from affiliated companies = 213 = 567
Accounts receivable from parent companies = 2 = 1
Other receivables 1,221 6,236 478 4,524
------ ------ ------ ------
TOTAL ACCOUNTS RECEIVABLE 1,222 14,393 481 13,027
------ ------
o SHORT-TERM FINANCIAL ASSETS
Equity investments in unconsolidated subsidiaries 170 247
Other equity investments 1 9
Other securities 278 1,935
Receivables for sales of securities 55 3
------ ------
TOTAL SHORT-TERM FINANCIAL ASSETS 504 2,194
------ ------
o LIQUID ASSETS
Bank and postal accounts 1,251 757
Cash and valuables on hand 4 5
------ ------
TOTAL LIQUID ASSETS 1,255 762
------ ------
TOTAL CURRENT ASSETS 16,563 16,619
------ ------
ACCRUED INCOME AND PREPAID EXPENSES
Issue discounts and similar charges 108 94
Accrued income and other prepaid expenses 525 938
------ ------
TOTAL ACCRUED INCOME AND PREPAID EXPENSES 633 1,032
------ ------
TOTAL ASSETS 52,786 62,670
==================================================================================================
(*) Amounts due within one year.
(**) Amounts due beyond one year.
116
----------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS 12/31/2002 12/31/2001
----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
(in millions of euro)
SHAREHOLDERS' EQUITY
PARENT COMPANY INTEREST IN:
.. SHARE CAPITAL 4,024 4,023
.. RESERVE FOR TREASURY STOCK 287 =
.. RESERVES AND RETAINED EARNINGS 5,060 11,567
.. NET LOSS (322) (2,068)
------ ------
TOTAL PARENT COMPANY INTEREST 9,049 13,522
------ ------
MINORITY INTEREST IN:
.. SHARE CAPITAL, RESERVES AND RETAINED EARNING 3,159 5,377
.. NET INCOME 619 410
------ ------
TOTAL MINORITY INTEREST 3,778 5,787
------ ------
TOTAL SHAREHOLDERS' EQUITY 12,827 19,309
------ ------
RESERVES FOR RISKS AND CHARGES
Reserve for pension and similar obligation 32 49
Reserve for taxes
for taxes 198 154
for deferred taxes 34 35
------ ------
Total reserve for taxes 232 189
Other reserves 4,950 2,815
------ ------
TOTAL RESERVES FOR RISKS AND CHARGES 5,214 3,053
------ ------
RESERVE FOR EMPLOYEE TERMINATION INDEMNITIES 1,305 1,350
------ ------
(* *) (* *)
LIABILITIES
Debentures 10,511 10,624 8,003 8,183
Convertible debentures 1,964 1,964 2,500 2,500
Due to banks 1,803 5,028 3,340 10,235
Due to other lenders 644 1,419 1,186 2,163
Advances = 263 = 388
Trade accounts payable 13 5,477 155 6,226
Notes payable = 241 221 221
Accounts payable to unconsolidated subsidiaries = 16 = 25
Accounts payable to affiliated companies 24 645 474 902
Accounts payable to parent companies = 296 = 1
Taxes payable 20 597 82 922
Contributions to pension and social security institutions 535 784 598 865
Other liabilities 50 4,516 178 4,851
------ ------ ------ ------
TOTAL LIABILITIES 15,564 31,870 16,737 37,482
------ ------ ------
ACCRUED EXPENSES AND DEFERRED INCOME 1,570 1,476
------ ------
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 52,786 62,670
===================================================================================================
(* *) Amounts due beyond one year.
117
-------------------------------------------------------------------------------
MEMORANDUM ACCOUNTS 12/31/2002 12/31/2001
-------------------------------------------------------------------------------
(in millions of euro)
GUARANTEES PROVIDED
Sureties:
on behalf of unconsolidated subsidiaries 5 20
on behalf of affiliated companies 783 1,041
on behalf of others 231 213
------ ------
Total sureties 1,019 1,274
------ ------
Endorsements:
------ ------
on behalf of others = =
------ ------
Other guarantees:
on behalf of unconsolidated subsidiaries = 3
on behalf of affiliated companies 10 50
on behalf of others 84 95
------ ------
Total other guarantees 94 148
------ ------
TOTAL GUARANTEES PROVIDED 1,113 1,422
------ ------
COLLATERAL PROVIDED
For obligations of others, of affiliated 110 147
companies
For own obligations, not including liabilities 1 16
------ ------
TOTAL COLLATERAL PROVIDED 111 163
------ ------
------ ------
PURCHASES AND SALES COMMITMENTS 3,077 5,369
------ ------
------ ------
OTHER MEMORANDUM ACCOUNTS 88 287
------ ------
------ ------
TOTAL MEMORANDUM ACCOUNTS 4,389 7,241
------ ------
===============================================================================
118
---------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME 2002 2001
---------------------------------------------------------------------------------------------------------------
(in millions of euro)
PRODUCTION VALUE
Sales and service revenues 30,400 30,818
Changes in inventories of work in progress,
semifinished and finished goods 2 =
Changes in inventory of contract work in process (42) (115)
Increases in capitalized internal construction costs 675 581
Other revenue and income:
operating grants 19 24
other 460 393
------ ------
Total other revenue and income 479 417
------ ------
TOTAL PRODUCTION VALUE 31,514 31,701
------ ------
PRODUCTION COST
Raw materials, supplies and merchandise (1,579) (1,767)
Semifinished and finished goods (200) (205)
Services (9,229) (9,552)
Use of property not owned (1,145) (1,069)
Personnel:
wages and salaries (3,272) (3,355)
social security contributions (970) (993)
termination indemnities (208) (211)
other costs (90) (107)
------ ------
Total personnel cost (4,540) (4,666)
Amortization, depreciation and writedowns
amortization of intangible assets (2,094) (2,241)
depreciation of fixed assets (3,783) (4,034)
other writedowns of intangibles and fixed assets (57) (16)
writedowns of receivables included in current assets and liquid assets (542) (439)
------ ------
Total amortization, depreciation and writedowns (6,476) (6,730)
Changes in inventory of raw materials, supplies and merchandise 12 57
Provisions for risks (109) (189)
Other provisions (44) (89)
Miscellaneous operating costs (823) (817)
------ ------
TOTAL PRODUCTION COST (24,133) (25,027)
------ ------
OPERATING INCOME 7,381 6,674
------ ------
FINANCIAL INCOME AND EXPENSE
Income from equity investments:
dividends from unconsolidated subsidiaries 16 9
dividends from other companies = 8
other income from equity investments 2 137
------ ------
Total income from equity investments 18 154
------ ------
Other financial income from:
accounts receivable included in long-term investments
affiliated companies 1 7
other 16 16
------ ------
Total accounts receivable included in long-term investments 17 23
------ ------
securities, other than equity investments, included in long-term
investments 4 3
securities, other than equity investments, included in current assets 90 135
other income
interest and fees from unconsolidated subsidiaries 1 1
interest and fees from affiliated companies 12 16
interest and fees from others and miscellaneous income 1,094 744
------ ------
Total other income 1,107 761
------ ------
Total other financial income 1,214 919
------ ------
Interest and other financial expense:
interest and fees paid to affiliated companies (23) (31)
interest and fees paid to others and miscellaneous expense (2,694) (3,044)
------ ------
Total interest and other financial expense (2,717) (3,075)
------ ------
TOTAL FINANCIAL INCOME AND EXPENSE (1,485) (2,002)
------ ------
===============================================================================================================
119
---------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (continued) YEAR 2002 YEAR 2001
---------------------------------------------------------------------------------------------------------------
(in millions of euro)
VALUE ADJUSTMENTS TO FINANCIAL ASSETS
Upward adjustments of
equity investments 121 167
------ ------
Total upward adjustments 121 167
------ ------
Writedowns of
equity investments (668) (1,933)
long-term investments, other than equity investments (40) (49)
securities, other than equity investments, included in current assets (95) (141)
------ ------
Total writedowns (803) (2,123)
------ ------
TOTAL VALUE ADJUSTMENTS (682) (1,956)
------ ------
EXTRAORDINARY INCOME AND EXPENSE
Income
gains on disposals 2,413 392
miscellaneous 401 460
------ ------
Total income 2,814 852
------ ------
Expense
losses on disposals (173) (46)
prior years' taxes (6) (5)
provisions and writedowns of equity investments (6,552) (2,984)
miscellaneous (1,720) (1,269)
------ ------
Total expense (8,451) (4,304)
------ ------
TOTAL EXTRAORDINARY ITEMS (5,637) (3,452)
------ ------
LOSS BEFORE TAXES (423) (736)
------ ------
Income taxes
current taxes (1,451) (1,186)
deferred taxes 2,167 261
------ ------
Total income taxes 716 (925)
------ ------
NET INCOME (LOSS) BEFORE MINORITY INTEREST 293 (1,661)
------ ------
Minority interest (619) (410)
------ ------
NET LOSS (326) (2,071)
------ ------
===============================================================================================================
120
Notes to consolidated financial statements
The consolidated financial statements have been prepared in accordance with the
provisions of the Italian Civil Code and are also accompanied by the Report on
the Group's operations together with the Report on Telecom Italia. At December
31, 2002, a 54.94% stake is held in Telecom Italia by Olivetti S.p.A.
Reclassifications made to certain captions of the consolidated financial
statements have also been made to the consolidated financial statements at
December 31, 2001 for purposes of comparison.
The consolidated statement of cash flows, although presented in the Report on
Operations, constitutes an integral part of these Notes to consolidated
financial statements pursuant to Article 29, paragraph 3 of Legislative Decree
No. 127/1991.
The scope and principles of consolidation, the summary of significant
accounting policies, along with the composition and changes in the individual
components of the consolidated financial statements are set out below.
SCOPE OF CONSOLIDATION
The scope of the consolidation at December 31, 2002, which was affected by the
far-reaching reorganization of the Business Units compared to December 31, 2001,
includes the Italian and foreign companies listed in Annex 5, in which Telecom
Italia holds a majority of voting rights, and all other companies in which it
exercises a dominant influence.
The companies in which Telecom Italia holds between a 20% and 50% investment in
share capital, with voting rights, including jointly controlled companies and
companies in which a significant influence is exercised, have been accounted
for using the equity method.
The following changes have taken place in the scope of consolidation since
December 31, 2001:
a) added to the scope of consolidation:
- for Domestic Wireline: Mediterranean Nautilus Telekomunikasyon
Hizmetleri Ticaret Anonim Sirketi, Latin American Nautilus Saint
Croix, Latin American Nautilus Colombia Limitada and Latin
American Nautilus Bolivia;
- for Mobile: Timnet Usa, Starcel and Blu;
- for IT Market: Agrisian;
- for IT Group: Webegg group and Teco Soft Argentina;
- for Other Activities: EMSA Servizi Immobiliari, IN.TEL.AUDIT,
Epiclink and Netesi.
b) eliminated from the scope of consolidation:
- for Domestic Wireline: Euro Datacom, TMI Italy-Canada and TMI do
Brasil;
- for Mobile: Autel;
- for Internet and Media: Data House Group and certain minor
companies in the Internet Business Area;
- for IT Market: Consiel, Sogei;
- for IT Group: Teco Soft Espana;
- for Other Activities: Telespazio group, Emsa, Immsi, Telimm,
Trainet, 9Telecom group, Indian Telecommunication Holding,
Telecom Italia de Espana and Telecom Italia GmbH.
c) merged:
- for Mobile: Blu in TIM, Telepolis in Stet Hellas, and Tim
Celular Centro Sul and Portale Rio Norte in Tim Celular (ex
Portale Sao Paulo);
- for Internet and Media: H.M.C. Broadcasting and H.M.C.
Produzioni in TV Internazionale;
- for IT Group: Sibisiel in Netsiel; Sodalia, Telesoft, Saritel
and Netsiel in IT Telecom;
- for Other Activities: Softe, Sogerim, Huit II and TI Media in
Telecom Italia Finance (ex TI Web).
Telecom Italia S.p.A. also conferred the "International Wholesale Services"
business segment to Telecom Italia Sparkle S.p.A. (ex TMI Telemedia
International Italia S.p.A.) and the "Training" business to Telecom Italia
Learning Services S.p.A.
At December 31, 2002, Telecom Italia's subsidiaries and affiliates listed in
Annexes 5 to 7, were categorized as follows:
121
Subsidiaries Affiliates Total
==========================================================================================================================
Italy Abroad Total Italy Abroad Total
-------------------------------------------------------------------------
Companies:
o consolidated line-by-line 80 155 235 235
o valued by the equity method 2 7 9 32 38 70 79
o valued at cost 31 16 47 20 7 27 74
--------------------------------------------------------------------------------------------------------------------------
Total companies 113 178 291 52 45 97 388
==========================================================================================================================
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements used in consolidation are those of each consolidated
company at December 31, 2002, approved by the respective boards, and adjusted
where necessary to conform to the accounting policies adopted by the Parent
Company, Telecom Italia.
The financial statements expressed in foreign currency have been translated
into euro by applying the average annual exchange rate to the individual items
of the statement of income and the year-end exchange rate to the items of the
balance sheet.
The difference arising from the translation of beginning shareholders' equity
and the net result for the year at the year-end exchange rate is recorded in
the reserves under consolidated shareholders' equity.
For the consolidated subsidiaries and affiliates which use inflation accounting
to eliminate distorting effects on the results for the year, the statements of
income have been translated at the year-end exchange rates instead of at the
average rates. The companies in the Group which apply inflation accounting
principles are Corporacion Digitel C.A. (Venezuela), Finsiel Romania S.r.l.
(Romania), IS Tim Telekomunikasyon Hizmetleri A.S. (Turkey) and Teco Soft
Argentina (Argentina).
The exchange rates used are those presented in "Other information".
All subsidiaries included in the scope of consolidation have been consolidated
using the line-by-line method, which can be summarized as follows:
a) assumption of the total amount of assets, liabilities, revenues and
expenses, regardless of the interest held, separately showing the minority
interest in shareholders' equity and net income;
b) the difference arising from the elimination of the carrying value of an
investment in a company included in the scope of consolidation against the
underlying share of the shareholders' equity at the date of acquisition is
allocated, where possible, to the assets and liabilities of the company.
Any residual amount is treated as follows:
o if positive, it is recorded in "consolidation difference" under
"intangible assets" and is amortized on the straight-line method over
the estimated time required to recover the amount and, in any case,
not more than a period of 15 years;
o if negative, it is recorded in shareholders' equity as "consolidation
reserve", or, when the amount is due to expectations of unfavorable
financial results, to "consolidation reserve for future risks and
charges";
c) elimination of receivables and payables, as well as expenses and revenues
among consolidated companies;
d) elimination of profit included in fixed assets and intangible assets which
stem from intra-Group purchases of goods and services at market prices.
The portion of intra-Group revenues referring to the above goods and
services has been reclassified, net of intra-Group profit, to the item
"increase in capitalized internal construction costs".
Provisions and value adjustments made by individual consolidated companies
exclusively for the purpose of securing tax benefits allowed by law have also
been eliminated from the consolidated financial statements.
ACCOUNTING POLICIES
The accounting policies adopted in preparing the consolidated financial
statements conform to the law and have been applied on a basis consistent with
the prior year. The accounting policies are set out below:
122
Intangible assets
Intangible assets are recorded at acquisition or production cost and are
amortized systematically over their estimated period of benefit, as follows:
Licenses, trademarks and similar rights Contract term
Goodwill Years expected to be benefited
Software Generally 3 years
Leasehold improvements Lease period
Capitalized software costs only represent costs for the development of new
software or improvements to software for the introduction of new features. The
Group applies the same principle to website development costs and software
development costs for internal use. All costs for software maintenance, for
software development of new features that are not introduced and for the
preliminary stages of software development are expensed in the statement of
income in the year incurred.
Fixed assets
Fixed assets are recorded at acquisition or production cost, including
incidental purchase costs and expenses directly attributable to construction.
They are depreciated on the straight-line method over their estimated useful
lives or possibility of utilization. They include inflation adjustments
required or allowed by specific laws in the countries in which the fixed assets
are located.
Construction in progress is stated at the amount of direct costs incurred.
Ordinary maintenance is expensed in the statement of income in the year
incurred. The elimination, disposal or sale of fixed assets is recorded in the
financial statements by eliminating the cost and accumulated depreciation from
the balance sheet and booking the related gain or loss in the statement of
income.
Equity investments
Equity investments considered long-term in nature are recorded in long-term
investments or, if acquired for subsequent sale, recorded in short-term
financial assets.
Long-term equity investments in unconsolidated subsidiaries and affiliates are
generally valued by the equity method; positive differences arising upon
acquisition, between the carrying value of the investments in said companies
and the underlying share of net equity at current values, are included in the
value of the investments and amortized on the straight-line method over their
expected period of recoverability and, in any case, for a period not exceeding
15 years. Such amortization is charged to the statement of income in "value
adjustments to financial assets" under writedowns of equity investments.
Other long-term investments in unconsolidated companies are recorded at
acquisition or subscription cost, including incidental costs, adjusted for any
reasonable expectations of a decline in profitability or recoverability in
future years.
In the case of a permanent impairment, the value of such investments is written
down and the impairment in value in excess of the corresponding carrying value
is recorded in "reserves for risks and charges".
Contracts for the loan of securities are represented in the financial
statements as two functionally related transactions: a loan and a "repurchase
transaction" on the securities with the obligation of the borrower to resell
them at maturity. Accordingly, "Other receivables" and "Other liabilities"
include, respectively, a receivable and a payable of the same amount at the
fixed amount of the contract (market price of stock at the date of delivery of
the securities).
Equity investments included under current assets, consisting mainly of shares
of consolidated listed companies purchased for trading purposes, are stated at
the lower of cost and realizable value, based on the year-end stock market
prices.
Writedown of long-term assets
Long-term assets (intangibles, including goodwill, fixed assets and equity
investments) are written down when there is a permanent impairment to below
their net book value. The lower value is not maintained in subsequent financial
statements whenever the reasons for the adjustment no longer apply. The Group
periodically evaluates its long-term assets for any permanent impairments in
value. The writedown is recorded when the recoverable value of the asset is
below the net book value and, in this case, the amount
123
of the writedown is given by the difference between the two amounts, as stated
in Article 2426, paragraph 1, paragraph 3 of the Italian Civil Code.
Other securities (other than equity investments)
Securities that the company intends to hold to maturity are included among
long-term investments; those bought for trading purposes are listed under
short-term financial assets.
Securities held as long-term investments are valued at cost, adjusted by any
permanent impairment in value. Securities included in current assets are valued
at the lower of cost of acquisition and realizable value based on market
prices.
Writedowns of securities will be reversed in subsequent years, if the
underlying assumptions are no longer correct.
Securities acquired under "repurchase agreements", for which the obligation
exists to resell them at maturity, are included at purchase cost in receivables
under short-term financial assets. The difference between the sales price and
the purchase price is allocated to income as it accrues with a contra-entry to
accrued income/expense in the balance sheet.
Inventories
Inventories are valued at the lower of purchase or production cost and market.
The methods mainly used in computing cost are the following:
- raw materials and finished goods: LIFO with annual adjustments;
- merchandise: weighted average;
- work in progress and semifinished goods: production cost;
- contract work in process:
o contracts covering less than 12 months: industrial cost;
o contracts covering more than one year: at estimated revenues using
the percentage of completion method.
In determining the value of contract work in process, anticipated losses upon
completion and any other risks are also taken into account. Inventories of raw
materials, finished goods and merchandise which exceed foreseeable
manufacturing requirements or have become obsolete are written down to their
estimated realizable value.
Accounts receivable and liabilities
Receivables are stated at estimated realizable value and classified under
long-term investments or current assets. Estimated realizable value is based
upon an analysis of receivables at year-end. Uncollectible receivables are
accounted for in the year they are identified. Liabilities are shown at their
nominal value.
Transactions in foreign currency
Monetary assets and liabilities are accounted for at the exchange rate as of
the transaction date and updated to the exchange rates prevailing at year-end,
taking into account hedging contracts. Unrealized positive and negative
differences arising from recording foreign currency assets and liabilities at
the exchange rates at the transaction date and at year-end date are recorded in
the statement of income, respectively, in "financial income" and "financial
expense".
Accruals and deferrals
These items are recorded on the accrual basis.
Reserves for risks and charges
"For taxes": this reserve includes prudent provisions for estimated tax
charges, including any surtaxes and late payment interest, on positions not yet
agreed or in dispute.
124
"For deferred taxes": this reserve includes deferred taxes calculated as
described in the note on income taxes.
"Other reserves" relate primarily to provisions to cover risks and charges for
losses or liabilities of certain or likely existence whose amount or date of
occurrence could, however, not be determined at the end of the year. The
provisions reflect the best possible estimate, based on the commitments made
and on the available data.
Reserve for employee termination indemnities
The amount of this reserve is determined in accordance with current laws and
collective bargaining agreements and includes the liability matured at the end
of the year in favor of all personnel employed by the Italian consolidated
companies, net of advances paid.
Employee benefit obligations under Law No. 58/1992
Employee benefit obligations, as required by Law No. 58/1992, are accounted for
on a cash basis, as described in the notes to financial statements of Telecom
Italia. The remaining liability for such obligations, payable in fifteen
deferred annual installments on the basis of the statement updated to December
31, 2002 by the National Social Security Institute (INPS) and according to its
interpretation, amounts to euro 1,227 million, divided as follows:
a) euro 859 million for the principal amount (except for the portion
attributable to former Iritel employees);
b) euro 368 million for accrued interest.
As regards pre-amortization interest and the related accrued interest, as
described in the notes of Telecom Italia, the dispute with INPS was won by
Telecom Italia and the ensuing credit of euro 131 million has been completely
offset against the payment of the regular expense installments.
The consolidated balance sheet also includes euro 595 million due to INPS for
the residual liability relating to the estimate for the employees of the former
State Company for Telephone Services (ASST) made by the special Ministerial
Commission established under Law No. 58/1992, upon the contribution of the
assets of the Post and Telecommunications Administration to Iritel.
The employee benefit obligations to guarantee uniform insurance status recorded
in the consolidated statement of income for the year 2002 (under "extraordinary
expense") amount to euro 155 million inclusive of accrued and pre-amortization
interest.
Grants
Both operating grants (directly credited to the statement of income) and
capital grants or grants for installations are recorded in the accounting
period in which the paperwork documenting the grants is received, or in the
period in which the respective costs are incurred, provided that the certainty
of payment is confirmed by established procedures. Such grants are not subject
to restrictions regarding their use and are not subject to reimbursement.
Specifically, capital grants are recorded in deferred income and recognized in
future years in the statement of income in relation to the amount of
depreciation taken on the underlying assets to which the grants refer.
Revenues and expenses
Revenues and expenses are recorded on an accrual basis.
In particular, revenue are recognized in the consolidated statement of income
as follows:
a) telecommunications services (wireline and mobile): in the year in which
the services are rendered; in particular, traffic revenues are shown gross
of the amounts due to other carriers which are recorded, for the same
amount, in production costs. Certain services deriving from wireline and
mobile telephony are invoiced in advance and recognized as revenues when
they are used. The revenues deriving from other telecommunications
services, principally those related to network access, long-distance calls
and the
125
use of local and wireless networks, are recognized in the statement of
income on the basis of the minutes of traffic used or on the basis of
fixed rates by contract. The revenues deriving from installations or
activations are recognized in the statement of income at the date of
installation or activation. The revenues and costs relating to sales of
wireless equipment and related accessories are recognized in the statement
of income at the time of delivery and acceptance on the part of the
customers in that these revenues are considered separate from the revenues
deriving from the use of wireless services;
b) information technology and innovative network services, other activities:
to the extent to which the related services were carried out during the
fiscal year.
c) revenues from the segments Internet and Media, which principally derive
from advertising and publishing, the sale of office and similar products
and internet access (including related services) are recognized in the
statement of income as follows: i) the revenues from advertising and
publishing sales are recognized in the income statement on the basis of
the date of publication which corresponds to the date the telephone
directories are printed and distributed ii) revenues from advertising
sales from on-line services are recognized in revenues when the
advertising appears on the website iii) revenues from TV advertising are
recognized when the advertising is broadcast and iv) the sales of office
and similar products are recognized in revenues when passage of title
takes place, usually upon delivery of the products.
Provisions for returns and other sales-related provisions are recorded in the
year of the relative sales. Revenues for internet access and related services,
mainly subscriber revenues, are recognized in the period in which the
subscription is in effect, using the straight-line method.
Leased assets
Assets covered by finance lease contracts with a purchase option are recorded
in fixed assets and depreciated from the date of the lease contract using rates
consistent with those used for similarly owned assets. At the same time, a
liability is recorded for the same amount, adjusted by the principal lease
payments. The statement of income is charged for the financial expenses for the
period and the depreciation charge on the assets acquired in leasing.
Income taxes
Current income taxes are computed on the basis of a realistic estimate of the
income tax charge according to the tax laws of the country; the related income
tax payable is shown net of payments on account, withholding taxes and tax
credits in "income taxes payable". Any net receivable position is shown in
"other receivables". Deferred income taxes are calculated in the financial
statements of the individual consolidated companies on the basis of the
temporary differences between the value attributed to the assets and
liabilities for statutory purposes and the value attributed to the same assets
and liabilities for tax purposes, as well as on the consolidation adjustments
in the consolidated financial statements. Deferred tax assets, including
benefits from tax loss carryforwards, are booked in "other receivables" in
current assets. The tax benefit relating to tax loss carryforwards is recorded
only when there is reasonable certainty of recovery.
Deferred tax assets and liabilities are offset, whenever the assumptions for
doing so exist. Deferred taxes on the reserves and funds in abeyance of
taxation carried by the consolidated companies or the companies accounted for
using the equity method are book if such reserves will be distributed or, in
any case, utilized and their distribution or utilization gives rise to a tax
charge.
Capitalization of interest
Interest on construction projects is capitalized only when loans have been
taken out that can be specifically attributed to the project.
125
Memorandum accounts
"Collateral and guarantees provided" are recorded for an amount equal to the
guarantee provided; those in foreign currencies are translated at year-end
exchange rates.
"Purchases and sales commitments" are determined on the basis of the
unperformed portion of contracts outstanding at the end of the fiscal year
which do not fall under the normal "operating cycle".
Derivative financial instruments
Derivative financial instruments are used by the Group to hedge exposure on
interest rate and exchange rate risks. They are valued consistently with the
underlying asset and liability positions and any net expenses connected with
each single transaction are recognized in the statement of income.
For financial instruments used to hedge interest rate risks, the interest
differentials are recorded in the statement of income in "financial income and
expense" based on the accrual principle.
For financial instruments used to hedge exchange rate risks, the cost (or
"financial component" calculated as the difference between the rate at the date
of stipulating the contract and the forward rate) is recorded in the statement
of income in "financial income and expense" based on the accrual principle.
Receivables transactions
o Securitization
As a result of the sale of receivables (securitization) to TI Securitization
Vehicle S.r.l., such receivables are reversed from the balance sheet and the
difference between the carrying value of the receivables sold and consideration
received on the sale (including the deferred consideration provided on the
deferred purchase price) is charged on the accrual basis to the statement of
income in "miscellaneous operating costs". All expenses incurred for the
securitization program are recorded in "costs for services".
The securities issued under the securitization program are not recorded in the
balance sheet of the Group since these represent legal obligations of TI
Securitization Vehicle S.r.l.
The program for the securitization of trade accounts receivable generated by
the services rendered to the clientele of Telecom Italia Domestic Wireline
(TIDW) begun during 2001 has continued into 2002. Reference should be made to
the 2001 annual report for a description of the program.
In 2002, the total amount of trade accounts receivable sold under the
securitization program was equal to euro 9 billion and referred to Telecom
Italia's receivables from residential customers. At December 31, 2002,
receivables sold amounted to euro 849 million (of which euro 757 was not yet
due).
The securitization transaction led to an improvement in net financial debt of
euro 826 million at December 31, 2002.
At December 31, 2002, Telecom Italia showed financial payables of euro 165
million due to TI Securitisation Vehicle for the investment of excess temporary
liquid resources by the latter in Telecom Italia.
o Factoring
In 2002, Telecom Italia, Seat Pagine Gialle and TIM sold trade accounts
receivables without recourse for a total of euro 3,843 million.
These factoring transactions led to a reduction in net financial debt at
December 31, 2002 of euro 212 million.
127
CONSOLIDATED BALANCE SHEETS
ASSETS
INTANGIBLES, FIXED ASSETS AND LONG-TERM INVESTMENTS
INTANGIBLE ASSETS euro 13,052 million
(euro 16,197 million at December 31, 2001)
Intangible assets decreased by euro 3,145 million compared to December 31,
2001. A breakdown of the composition and the changes in this account are
provided below:
======================================================================================================================
(in millions of euro) 12/31/2001 Additions Amortization Other changes 12/31/2002
---------------------------------------------------------------------------------------------------------------------
Start-up and expansion costs 104 14 (37) (8) 73
Industrial patents and intellectual property
rights 1,274 578 (1,007) 411 1,256
Concessions, licenses, trademarks and
similar rights 4,452 117 (107) (467) 3,995
Goodwill 47 3 (8) (27) 15
Consolidation difference 9,094 369 (844) (2,022) 6,597
Work in progress and advances to
suppliers 874 816 (859) 831
Other intangibles 352 56 (91) (32) 285
---------------------------------------------------------------------------------------------------------------------
Total 16,197 1,953 (2,094) (3,004) 13,052
======================================================================================================================
The other changes include writedowns for euro 2,004 million and translation
adjustments, for euro 933 million, referred to foreign companies, in particular
South American.
Start-up and expansion costs
Start-up and expansion costs referred primarily to registration fees paid when
consolidated companies were established or when their capital was increased.
Industrial patents and intellectual property rights
Industrial patents and intellectual property rights consisted mainly of
applications software either owned outright or acquired under a license for an
unspecified period of time.
Concessions, licenses, trademarks and similar rights
Concessions, licenses, trademarks and similar rights decreased by euro 457
million mainly as a result of the variation in the exchange rates of South
American countries (-euro 650 million). They refer to the Mobile BU for euro
3,446 million, principally for the residual cost on UMTS and PCS licenses (of
which euro 2,417 million relates to TIM), and to other Telecom Italia Group
companies for euro 549 million, mainly Indefeasible Rights Of Use - IRU.
Consolidation difference
The consolidation difference decreased by euro 2,497 million from the end of
2001 mainly due to the amortization taken during the year (euro 844 million),
the writedown of residual goodwill of 9Telecom relating to the subsidiary
JetMultimedia (euro 134 million), the goodwill relating to the companies Seat
Pagine Gialle (euro 1,544 million), Blu (euro 103 million), Corporacion Digitel
(euro 75 million) and other minor companies (euro 47 million) and the negative
performance of the Brazilian real and the Chilean peso (euro 84 million) in
respect of the goodwill in those currencies.
Additions during the year mainly referred to the purchase of Blu by Tim (euro
103 million) and Netesi and Epiclink by Telecom Italia (euro 67 million), the
increase in the stake in Webegg (euro 24 million) by ITTEL and in Stet Hellas
(euro 66 million) and in Digitel (euro 27 million) by Tim International.
The remaining amount of euro 6,597 million mainly referred to:
==========================================================
(in millions of euro) 12/31/2002
----------------------------------------------------------
Seat Pagine Gialle 3,780
TIM 748
Entel Chile 739
Corporacion Digitel 266
TDL Infomedia 252
Holding Media e Comunicazione 163
Other companies 649
----------------------------------------------------------
Total 6,597
==========================================================
128
Work in progress and advances to suppliers
Work in progress and advances to suppliers decreased by euro 43 million,
compared to December 31, 2001, and represented the difference between the
capitalization of costs incurred mainly by Telecom Italia for software
development projects in progress and the projects which came into use during
the year.
Other intangibles
Other intangibles, totaling euro 285 million (euro 352 million at December 31,
2001) mainly referred to leasehold improvements.
FIXED ASSETS euro 19,291 million
(euro 21,757 million at December 31, 2001)
Fixed assets decreased by euro 2,466 million compared to the end of 2001. They
are shown net of accumulated depreciation and writedowns and have been adjusted
to eliminate intra-Group profits generated by purchases of internally produced
goods and services by the Group. An analysis of fixed assets is provided in the
following table:
(in millions of euro) 12/31/2002 12/31/2001
-----------------------------------------------------------------------------------------------------------------------------------
Owned assets Leased assets Total Net book
value
Gross Accumulated Total Gross Accumulated Total
value depreciation value depreciation
===================================================================================================================================
Land and buildings 2,998 (1,305) 1,693 565 (113) 452 2,145 2,877
Plant and machinery 56,644 (41,716) 14,928 22 (17) 5 14,933 16,649
Manufacturing and
distribution equipment 955 (906) 49 2 (2) 49 73
Other fixed assets 1,987 (1,365) 622 82 (27) 55 677 731
Construction in
progress and advances
to suppliers 1,462 1,462 25 25 1,487 1,427
-----------------------------------------------------------------------------------------------------------------------------------
Total 64,046 (45,292) 18,754 696 (159) 537 19,291 21,757
===================================================================================================================================
The gross value of fixed assets included euro 1,167 million of monetary
revaluations made by the Italian companies. Accumulated depreciation covered
71.9% of gross fixed assets, compared to 70.4% at the end of last year.
Certain fixed assets leased by Telecom Italia and other Group companies were
purchased in January 2003, before the expiration date.
A summary of the changes in fixed assets during the year is shown in the
following table:
(in millions of euro) 2002 2001
===============================================================================
At January 1 21,757 20,721
- Additions 3,258 4,254
- Disposals and contributions (533) (172)
- Depreciation for the year (3,783) (4,034)
- Writedowns (88) (11)
- Change in the scope of consolidation (313) 1,345
- Translation adjustment and other (1,007) (346)
-------------------------------------------------------------------------------
At December 31 19,291 21,757
===============================================================================
Translation adjustments equal to euro 1,154 million referred to the Mobile BU
for euro 674 million, the Entel Chile group for euro 305 million, the Entel
Bolivia group for euro 111 million and other minor companies (euro 64 million).
Additions for the year amounted to euro 3,258 million (euro 4,254 million in
2001), with a decrease of euro 996 million compared to 2001. Details by
Business Unit are as follows:
(in millions of euro) 2002 2001
===============================================================================
Domestic Wireline 1,828 1,949
Mobile 1,075 1,547
South America 201 351
Internet and Media 28 82
IT Market 12 19
IT Group 85 111
3,229 4,059
-------------------------------------------------------------------------------
Other operations and intra-Group eliminations 29 195
-------------------------------------------------------------------------------
Total 3,258 4,254
===============================================================================
129
LONG-TERM INVESTMENTS euro 3,243 million
(euro 7,064 million at December 31, 2001)
Long-term investments, which decreased by euro 3,821 million from December 31,
2001, comprised the following:
===============================================================================
(in millions of euro) 12/31/2002 12/31/2001
Equity investments in:
o unconsolidated subsidiaries 18 18
o affiliated companies 2,051 4,764
o other companies 217 145
-------------------------------------------------------------------------------
2,286 4,927
-------------------------------------------------------------------------------
Advances on future capital contributions 1,659
-------------------------------------------------------------------------------
2,286 6,586
Accounts receivable:
o unconsolidated subsidiaries 5 2
o affiliated companies 435 117
o other receivables 215 273
-------------------------------------------------------------------------------
655 392
-------------------------------------------------------------------------------
Other securities 15 86
-------------------------------------------------------------------------------
Treasury stock 287 -
-------------------------------------------------------------------------------
Total 3,243 7,064
===============================================================================
Equity investments in affiliated companies
Equity investments in affiliated companies, amounting to euro 2,051 million,
decreased by euro 2,713 million from December 31, 2001 chiefly due to the sale
of equity investments made during the year. Equity investments in affiliated
companies refer to the following:
(in millions of euro) 12/31/2001 Additions Disposals Valuation using 12/31/2002
equity method (*)
Auna 690 193 (883) -
BDT 158 (158) -
Etec S.A. 551 (84) 467
GLB Servicos Interativos 24 (11) 13
IM.SER 141 (126) (3) 12
IS Tim 81 (81) -
Italtel Holding 65 (22) 43
Lottomatica 78 (78) -
Mirror International Holding 94 94
Mobilkom Austria 544 (553) 9 -
Mondus 18 (18) -
Netco Redes 125 (103) 22
Solpart Participacoes 238 (7) (89) 142
Stream 32 234 (247) 19
Telemaco Immobiliare 91 (109) 18 -
Telekom Austria 1,460 (718) (34) 708
Telekom Srbija 195 (8) 187
Tiglio I 197 197
Tiglio II 74 74
Other 179 6 (85) (27) 73
------------------------------------------------------------------------------------------------------------
Total 4,764 704 (2,735) (682) 2,051
============================================================================================================
(*) Includes the share of earnings or losses for the period, amortization of
goodwill and adjustments on the translation of foreign currency financial
statements.
The investments valued using the equity method include the unamortized portion
of the excess, euro 504 million (euro 1,688 million at December 31, 2001), of
book values over the corresponding share of the underlying net equity at the
time of purchase. The excess mainly referred to Telekom Austria, euro 315
million, and Etec S.A., euro 100 million.
A list of the companies valued using the equity method is provided in Annex 6;
equity investments in unconsolidated subsidiaries and affiliates are listed in
Annex 7.
130
Advances on future capital contributions
Advances on future capital contributions at December 31, 2001 mainly referred
to advances made by Tim International to IS TIM. The advances have been
completely written off due to the worsening of the prospects for the
recoverability of the investment.
Accounts receivable from affiliated companies
Accounts receivable from affiliated companies mainly referred to loans made to
IS Tim (euro 313 million), Tiglio I (euro 54 million), Telegono (euro 34
million), Tiglio II (euro 30 million) and other minor companies (euro 4
million). Relating to the loan made to IS Tim, the relative allowance for
doubtful accounts has been set aside for uncollectible receivables.
Other receivables
Other receivables included the revalued amount of the tax receivable from the
prepayment of the taxes on the reserve for employee severance indemnities (euro
89 million), loans to employees (euro 85 million), loans to other companies and
security deposits (euro 41 million).
Other securities
Other securities decreased by euro 71 million from December 31, 2001, and
mainly referred to the closed investment fund Saturn Venture Partners LLC held
by TIM and TILAB (euro 9 million) and other investments in securities (euro 6
million).
Treasury stock
Treasury stock referred to 45,647,000 Telecom Italia ordinary shares and
5,280,500 Telecom Italia savings shares purchased by authorization of the
Ordinary Shareholders' Meeting held on November 7, 2001.
CURRENT ASSETS
INVENTORIES euro 411 million
(euro 636 million at December 31, 2001)
Inventories include the following:
(in millions of euro) 12/31/2002 12/31/2001
===============================================================================
Raw materials and supplies 19 22
Merchandise 202 253
-------------------------------------------------------------------------------
221 275
-------------------------------------------------------------------------------
Work in progress and semifinished goods 8 6
Finished goods 2 2
-------------------------------------------------------------------------------
10 8
-------------------------------------------------------------------------------
Contract work in process 179 352
Advances to suppliers 1 1
-------------------------------------------------------------------------------
180 353
-------------------------------------------------------------------------------
Total 411 636
===============================================================================
Inventories were held by companies providing telecommunications services for
euro 193 million (euro 245 million at December 31, 2001), the companies in the
information technology BU for euro 170 million (euro 234 million at December
31, 2001) and the Seat Pagine Gialle group and other minor companies for euro
48 million. The reduction from December 31, 2001 is substantially due to the
sale of Sogei and the Telepspazio group (- euro 133 million). Contract work in
process included work on behalf of Consorzio Telcal for the Piano Telematico
Calabria (euro 110 million).
Raw materials and supplies and work in progress and semifinished goods are in
line with current costs.
ACCOUNTS RECEIVABLE euro 14,393 million
(euro 13,027 million at December 31, 2001)
A breakdown of accounts receivable, which increased by euro 1,366 million, is
provided below:
131
(in millions of euro) 12/31/2002 12/31/2001
===============================================================================
Trade accounts receivable 8,731 8,712
o allowance for doubtful accounts (830) (808)
-------------------------------------------------------------------------------
Total trade accounts receivable 7,901 7,904
-------------------------------------------------------------------------------
Accounts receivable from unconsolidated subsidiaries 41 31
Accounts receivable from affiliated companies 213 567
Accounts receivable from parent companies 2 1
Other receivables 6,236 4,524
-------------------------------------------------------------------------------
Total 14,393 13,027
===============================================================================
Trade accounts receivable
Gross trade accounts receivable totaled euro 8,731 million and consisted, for
the most part, of receivables for telecommunications services. Receivables have
been adjusted to estimated realizable value by writedowns and they, too, refer
mostly to telecommunications companies. Trade accounts receivable referred, in
particular, to Telecom Italia (euro 3,753 million), TIM (euro 1,404 million)
and the Seat Pagine Gialle group (euro 894 million).
The balance is in line with that at December 31, 2001 owing to the fact that
the increase in Tim (euro 487 million) and Telecom Italia (euro 91 million net
of the contribution to Telecom Italia Sparkle) is compensated by the exit from
the scope of consolidation of the 9 Telecom group, Sogei and the Telespazio
group (euro 487 million) and by the negative performance of the currencies of
the South American countries (euro 208 million).
This caption also includes euro 1,107 million of receivables from other
telecommunications carriers and euro 113 million of services to be performed by
Seat Pagine Gialle, with a contra-entry to other liabilities for the same
amount, representing advertising commitments undertaken and invoiced by the
company for directories that will be published in 2003.
Furthermore, the securitization of receivables by Telecom Italia led to a
reduction in trade accounts receivable at December 31, 2002 of euro 849
million, of which euro 757 million refer to receivables not yet due.
During 2002, the Group sold trade accounts receivable without recourse under
factoring arrangements for euro 3,843 million. At December 31, 2002, such
receivables sold and not yet due totaled euro 573 million.
Accounts receivable from unconsolidated subsidiaries
Accounts receivable from unconsolidated subsidiaries included loans of euro 23
million and trade accounts receivables and other receivables from subsidiaries
of euro 18 million.
Accounts receivable from affiliated companies
Accounts receivable from affiliated companies of euro 213 million decreased by
euro 354 million and referred to financial receivables of euro 12 million and
trade and other receivables of euro 201 million. Trade and other receivables
chiefly referred to Stream (euro 106 million, of which euro 35 million was
completely written off following the enforcement of the guarantees provided by
Telecom Italia to Italtel) and Teleleasing (euro 38 million).
Other receivables
Other receivables of euro 6,236 million (euro 4,524 million at December 31,
2001) included the following:
o financial receivables of euro 648 million (euro 591 million at December
31, 2001), almost entirely in reference to Telecom Italia for the loan of
securities transactions on Seat Pagine Gialle shares (euro 176 million)
that was concluded in February and March 2003, and receivables for the
"deferred purchasing price" connected with the securitization transaction
(euro 370 million);
o other receivables totaling euro 5,588 million (euro 3,933 million at
December 31, 2001), which referred to the following:
(in millions of euro) 12/31/2002 12/31/2001
================================================================================
Government and other public entities
for subsidies and grants 68 45
Customer payments in transit 98 95
Due from the Tax Administration 1,262 1,544
Deferred tax assets 3,336 1,410
Employees 94 93
Other receivables (from the Government,
other public entities and items) 730 746
--------------------------------------------------------------------------------
Total 5,588 3,933
================================================================================
132
The increase in deferred tax assets of TIM (euro 928 million) and Telecom
Italia (euro 1,080 million) was due to the writedowns of investments recorded
in long-term investments and provisions made to the reserves for risks and
charges whereas the decrease in receivables from the Tax Administration was
caused by lower VAT receivables and direct income taxes of Telecom Italia (euro
596 million) that were partly offset by the increase in TIM receivables ( euro
376 million) due primarily to the utilization of Blu's tax loss carryforwards.
Net deferred tax assets were composed as follows:
(in millions of euro) 12/31/2002 12/31/2001
===============================================================================
Deferred tax assets 3,336 1,410
Reserve for deferred taxes (34) (35)
-------------------------------------------------------------------------------
Total 3,302 1,375
===============================================================================
Deferred tax assets mainly referred to the writedown of investments, reserves
for risks and the writedown of receivables; deferred tax liabilities mainly
originated from gains.
No deferred tax assets have been set aside because of uncertainty over their
recoverability against future taxable profits. In particular, tax losses
carryforwards, which have not been considered in the determination of deferred
tax assets, amount to some euro 2,830 million.
SHORT-TERM FINANCIAL ASSETS euro 504 million
(euro 2,194 million at December 31, 2001)
This item, which decreased by euro 1,690 million compared to December 31, 2001,
included the following:
(in millions of euro) 12/31/2002 12/31/2001
===============================================================================
Equity investments in unconsolidated subsidiaries 170 247
Other equity investments 1 9
Other securities 278 1,935
Receivables for sales of securities 55 3
-------------------------------------------------------------------------------
Total 504 2,194
===============================================================================
Equity investments in unconsolidated subsidiaries mainly referred to listed
shares purchased for trading; the reduction from December 31, 2001 is chiefly
attributable to the writedown of TIM shares by Telecom Italia (euro 75
million).
Other securities consist of bank certificates of deposit held by the Tele
Nordeste Celular group and bonds held by Telecom Italia Finance. Other
securities decreased by euro 1,657 million compared to December 31, 2001 mainly
with regard to those held by Softe and Sogerim which, before their merger with
Telecom Italia Finance, had reduced their bond portfolios.
The carrying values of both equity investments and other securities have been
adjusted by euro 177 million to approximate market values at year end.
LIQUID ASSETS euro 1,255 million
(euro 762 million at December 31, 2001)
Liquid assets increased by euro 493 million. They consist mainly of funds on
deposit in Italian and foreign banks in current accounts. Euro 300 million, due
in the first months of 2003, are lodged for the creditors of the companies
Netsiel, Saritel, Sodalia and Telesoft due to their mergers and absorption in
IT Telecom, for the creditors of Blu due to its merger and absorption by TIM
and for the creditors of the companies H.M.C. Broadcasting and H.M.C.Produzioni
for their mergers and absorption in TV Internazionale. Euro 198 million are
lodged for a guarantee provided by Royal Bank of Scotland on behalf of
Mediobanca in the interest of IS Tim.
133
ACCRUED INCOME AND PREPAID EXPENSES euro 633 million
(euro 1,032 million at December 31, 2001)
This item, which decreased by euro 399 million, can be analyzed as follows:
(in millions of euro) 12/31/2002 12/31/2001
===============================================================================
Issue discounts and similar charges 108 94
-------------------------------------------------------------------------------
Accrued income:
o production value 8 95
o financial income 31 57
o other - -
-------------------------------------------------------------------------------
39 152
-------------------------------------------------------------------------------
Other prepaid expenses:
o production costs 85 127
o financial expense 20 60
o other 381 599
-------------------------------------------------------------------------------
486 786
-------------------------------------------------------------------------------
Accrued income and other prepaid expenses 525 938
-------------------------------------------------------------------------------
Total 633 1,032
===============================================================================
Other prepaid expenses referred to the deferral of the put option on Seat
Pagine Gialle shares.
An analysis of accounts receivable and accrued income by maturity and type is
provided in Annex 1.
134
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
SHAREHOLDERS' EQUITY euro 12,827 million
(euro 19,309 million at December 31, 2001)
A breakdown of shareholders' equity is presented below:
(in millions of euro) 12/31/2002 12/31/2001
===============================================================================
Parent company interest 9,049 13,522
Minority interest 3,778 5,787
-------------------------------------------------------------------------------
Total 12,827 19,309
===============================================================================
Telecom Italia's interest in shareholders' equity decreased by euro 4,473
million compared to December 31, 2001. The reduction was due mainly to the
payment of 2001 dividends (euro 2,306 million), the distribution of reserves
(euro 987 million), the loss for the year (euro 322 million), as well as the
decrease in the net equities of some foreign companies as a result of the
unfavorable performance of the local currency against the euro.
Share capital
The share capital of Telecom Italia consists of 5,262,908,631 ordinary shares
and 2,053,122,025 savings shares, both with a par value of euro 0.55 each.
Parent Company interest in reserves and retained earnings
The Parent company interest in reserves and retained earnings includes Telecom
Italia's own retained earnings and reserves, as well as the consolidated
companies' retained earnings and inflation adjustment reserves and tax-deferred
reserves. No deferred taxes have been provided on the latter reserves since,
based on current plans, no transactions are expected to be entered into that
would warrant their taxation.
The reconciliation of Telecom Italia's financial statements with the
consolidated financial statements as regards shareholders' equity and net
result for the year, and the changes in the components of consolidated
shareholders' equity, are provided in Annexes 3 and 4.
RESERVES FOR RISKS AND CHARGES euro 5,214 million
(euro 3,053 million at December 31, 2001)
These reserves increased by euro 2,161 million from December 31, 2001 and
referred to the following:
Reserve for taxes
The reserve for taxes, amounting to euro 198 million (euro 154 million at
December 31, 2001), consisted of estimated tax liabilities on positions still
to be agreed or in dispute.
Reserve for deferred taxes
The reserve for deferred taxes, amounting to euro 34 million (euro 35 million
compared to December 31, 2001), included deferred taxes provided by the
individual consolidated companies on the income components subject to deferred
taxation and on consolidation adjustments.
Other reserves
Other reserves, amounting to euro 4,982 million, increased by euro 2,118
million compared to December 31, 2001.
They comprised:
- the reserve for the forward commitment to purchase Seat Pagine Gialle
shares of euro 1,942 million provided to cover the estimate of the
non-recoverability of the original price to exercise the option. The
amount set aside in 2001 of euro 569 million was completely utilized
following the renegotiation of the put and call option exercise price
on February 25, 2002, reclassifying the amount to "due to other
lenders" under liabilities. In November, this liability was
extinguished before the expiration
135
date by paying JP Morgan Chase consideration equal to euro 500
million, corresponding to the present value of the liability;
- Seat Pagine Gialle's reserve totaling euro 43 million, for expenses
connected with the exercise of the put option by the founding
shareholders of Consodata S.A.;
- TIM's reserves totaling euro 850 million, set aside to cover the
guarantees provided by the group to the creditor financial
institutions of IS TIM and the loan made directly by the group;
- the reserves for contractual risks and other risks, mainly in respect
of Telecom Italia, for a total of euro 978 million provided in
previous years and in the current year, relating to the contribution
of the business segment "Large Buildings", the sales of Italtel,
Telespazio and the satellite consortia. The release to income is
mainly connected to the agreement for the sale of Stream to News
Corporation and Vivendi Universal/Canal+ (euro 59 million) which did
not go through;
- the reserves for corporate restructuring of euro 299 million, of
which euro 194 million, related to Telecom Italia, for the framework
agreement with the labor unions concerning the layoffs for the month
of May 2002;
- the reserves for the risks of technological revisions and future
risks inherent to the regulatory framework of TIM for euro 453
million;
- Telecom Italia Finance's (ex Sogerim) reserve totaling euro 124
million, relating to the financial expenses connected with the notes;
- reserve for losses of subsidiaries and affiliates of euro 293
million.
RESERVE FOR EMPLOYEE TERMINATION INDEMNITIES euro 1,305 million
(euro 1,350 million at December 31, 2001)
A breakdown of the changes which occurred during the year are provided below:
(in millions of euro)
====================================================================
January 1 1,350
Change during the period:
o provisions charged to income 208
o utilizations for:
.. indemnities paid to employees (159)
.. advances (19)
.. pension funds (30)
other changes (45)
--------------------------------------------------------------------
December 31 1,305
====================================================================
"Other changes" mainly refer to the change in the scope of consolidation.
LIABILITIES euro 31,870 million
(euro 37,482 million at December 31, 2001)
A breakdown of liabilities, which increased by euro 5,612 million from December
31, 2001, is as follows:
12/31/2002 12/31/2001
========================================================================================================================
Financial Trade Financial Trade accounts
(in millions of euro) payables accounts payables payable and
payable and other payables
other payables
Debentures 10,624 - 8,183 -
Convertible debentures 1,964 - 2,500 -
Due to banks 5,028 - 10,235 -
Due to other lenders 1,419 - 2,163 -
Advances - 263 - 388
Trade accounts payable 21 5,456 168 6,058
Notes payable 241 - 221 -
Accounts payable to unconsolidated
subsidiaries 8 8 17 8
Accounts payable to affiliated companies 398 247 553 349
Accounts payable to parent companies - 296 - 1
Taxes payable 32 565 50 872
Contributions to pensions and social security
institutions - 784 - 865
Other liabilities 372 4,144 1,107 3,744
------------------------------------------------------------------------------------------------------------------------
Total 20,107 11,763 25,197 12,285
========================================================================================================================
136
Debentures
Debentures totaled euro 10,624 million and increased by euro 2,441 million
compared to December 31, 2001; details are as follows:
o notes issued by the subsidiary Sogerim (merged in Telecom Italia Finance)
on international markets for euro 6,000 million. The issue was divided in
three tranches: the first, for euro 1,000 million of floating rate notes,
maturing on April 20, 2004; the second, for euro 3,000 million of
fixed-rate notes, maturing on April 20, 2006; the third, for euro 2,000
million of fixed-rate notes, maturing on April 20, 2011;
o floating rate notes of euro 1,500 million issued by Telecom Italia (this
is the first issue under the Global Medium-Term Note Program with Telecom
Italia as the issuer). The maturity date is June 21, 2005 and the issuer
can call in the notes at an earlier date at face value beginning from the
second year and at every coupon date for interest thereafter;
o notes maturing in 2003 issued by the Brazilian companies Tele Nordeste
Celular and Tele Celular Sul for a total of euro 108 million;
o notes maturing between 2007 and 2023 issued by Entel Chile for a total of
euro 208 million;
o notes maturing between 2009 and 2010 issued by the TDL Infomedia Ltd group
for a total of euro 116 million;
o notes issued by Telecom Italia on February 1, 2002 for euro 2,500 million,
divided into two tranches of euro 1,250 million each, at fixed interest
rates, maturing, respectively on February 1, 2007 and February 1, 2012.
The issue is part of the "Global Note Program";
o notes 2002 - 2022 reserved for subscription by employees, in service and
retired, of companies, directly and indirectly, controlled by Telecom
Italia with headquarters in Italy, for euro 192 million.
Convertible debentures
Convertible debentures included notes issued by Sogerim (merged with Telecom
Italia Finance) in March 2001, for euro 2,500 million convertible into TIM or
Seat Pagine Gialle shares, with the right of the issuer to pay off the amount
due in cash.
These are five-year notes and can be redeemed by the noteholders before
maturity at the end of the third year after issue. Debentures decreased by euro
536 million due to the purchase of own notes by Telecom Italia Finance,
subsequently cancelled.
Due to banks
Due to banks, totaling euro 5,028 million, were secured by euro 254 million
including mortgages of euro 25 million and liens and pledges of euro 229
million mainly referring to Maxitel. The balance decreased by euro 5,207
million compared to December 31, 2001. It should be pointed out that TIM
pledged Digitel shares to guarantee the credit facility granted to Digitel.
Due to other lenders
Due to other lenders, totaling euro 1,419 million, decreased by euro 744
million compared to December 31, 2001. This caption refers to payables for a
loan received by Seat Pagine Gialle (euro 780 million) from Seat Pagine Gialle
Finance S.r.l., a corporate vehicle entirely owned by third parties, operating
under Law No. 130/99 on securitization, short-term loans received by Telecom
Italia from TI Securitisation Vehicle S.r.l., from the excess liquidity
generated by the securitization of receivables (euro 165 million), and loans
received by Telecom Italia from the Cassa Depositi e Prestiti (euro 284
million) .
Advances
Advances, which totaled euro 263 million, decreased by euro 125 million
compared to December 31, 2001 and included advances received from customers, of
which euro 103 million referred to Consorzio Telcal.
Trade accounts payable
Trade accounts payable amounted to euro 5,477 million and decreased by euro 749
million from December 31, 2001, mainly as a result of the reduction in payables
by Telecom Italia (-euro 146 million net of payables transferred to Telecom
Italia Sparkle), the change in the scope of consolidation (-euro 368 million)
and the negative performance of the currencies of the South American companies
(euro 282 million). This item also included euro 513 million of amounts due to
other telecommunications operators. It should be pointed out that Tim Group
pledged its Maxitel shares to guarantee the supply contract between Maxitel and
Ericsson.
137
Notes payable
Notes payable, totaling euro 241 million, increased by euro 20 million compared
at December 31, 2001. They refer to investment certificates, maturing in June
30, 2003, issued by Seat Pagine Gialle as part of the securitization
transaction with Seat Pagine Gialle Finance S.r.l. for euro 221 million and
short-term financial notes issued by Telecom Italia for euro 20 million.
Accounts payable to unconsolidated subsidiaries
Accounts payable to unconsolidated subsidiaries amounted to euro 16 million and
decreased by euro 9 million from December 31, 2001. The balance included
financial payables of euro 8 million and trade accounts payable and other
payables of euro 8 million.
Accounts payable to affiliated companies
Accounts payable to affiliated companies, totaling euro 645 million, decreased
by euro 257 million compared to December 31, 2001. They included financial
payables of euro 398 million, mainly to Teleleasing (euro 393 million) for
financial lease contracts, some of which were paid off before the expiration
date in January 2003 (euro 369 million) and trade accounts payable and other
payables for euro 247 million due to the Italtel group (euro 150 million),
Siemens Informatica (euro 40 million), Teleleasing (euro 17 million) and Etec
S.A. (euro 12 million).
Accounts payable to parent companies
Accounts payable to parent companies of euro 296 million referred to the
payable to Olivetti for Group VAT (euro 214 million) and the sale of Irpeg
receivables (euro 82 million).
Taxes payable
Taxes payable amounted to euro 597 million and decreased by euro 325 million
compared to December 31, 2001. Taxes payable included euro 162 million for
income taxes and euro 403 million for indirect taxes and withholdings made by
the companies as substitute taxpayers, as well as euro 32 million for
medium/long-term financial debt relating to the agreement reached with the Tax
Administration over the assessments received in 2001 by Telecom Italia.
Contributions to pensions and social security institutions
Contributions to pensions and social security institutions totaled euro 784
million and decreased by euro 81 million compared to December 31, 2001; they
included amounts owed to social security and health institutions. This item
includes euro 595 million payable to INPS for the remaining balance of the
estimated charges assessed for employees of the former ASST pursuant to Law No.
58/1992.
Other liabilities
Other liabilities, of euro 4,516 million, decreased by euro 335 million
compared to December 31, 2001. A breakdown is provided below:
(in millions of euro) 12/31/2002 12/31/2001
=================================================================================================================
Customer-related items 1,604 1,650
Employee-related items 707 631
Telecommunications license fee 1,394 1,034
Other financial items 372 1,108
Other recurring and miscellaneous items (contra-entries for accrued costs, accrued
interest expense at December 31 and payable the following year, sundry payables, etc.) 439 428
-----------------------------------------------------------------------------------------------------------------
Total 4,516 4,851
=================================================================================================================
In particular, customer-related items consisted of deposits paid by customers
and basic subscriber charges (mainly for January and February), as well as
prepaid traffic. The item also included other liabilities for services to be
performed by Seat Pagine Gialle (euro 113 million). The financial items payable
principally comprised euro 181 million payable by Telecom Italia and include
the transaction for the loan on securities to Morgan Stanley (euro 176
million), and euro 161 million by the Mobile BU, for the remaining amount due
on the UMTS licenses acquired in Italy and Greece. Such liabilities are
considerably lower as a result of the payment of the residual liability for the
purchase of the PCS licenses by Tim Celular.
138
ACCRUED EXPENSES AND DEFERRED INCOME euro 1,570 million
(euro 1,476 million at December 31, 2001)
A breakdown of accrued expenses and deferred income, which increased by euro 94
million, is provided below:
(in millions of euro) 12/31/2002 12/31/2001
===============================================================================
Accrued expenses:
.. production costs 24 51
.. financial expense 431 352
.. other charges - -
-------------------------------------------------------------------------------
455 403
-------------------------------------------------------------------------------
Deferred income:
.. capital grants (unavailable amount) 325 349
.. production value 526 452
.. financial income 10 14
.. other income 254 258
-------------------------------------------------------------------------------
1,115 1,073
-------------------------------------------------------------------------------
Total 1,570 1,476
===============================================================================
An analysis of liabilities and accrued expenses by maturity and type is
provided in Annex 2.
139
MEMORANDUM ACCOUNTS
Memorandum accounts at December 31, 2002 totaled euro 4,389 million and
decreased, compared to December 31, 2001, by euro 2,852 million.
Memorandum accounts are detailed as follows:
(in millions of euro) 12/31/2002 12/31/2001
===============================================================================
Guarantees provided 1,113 1,422
Collateral provided 111 163
Purchases and sales commitments 3,077 5,369
Other 88 287
-------------------------------------------------------------------------------
Total 4,389 7,241
===============================================================================
GUARANTEES PROVIDED
Guarantees provided, net of counter-guarantees received of euro 378 million,
totaled euro 1,113 million and mainly consisted of sureties provided by Telecom
Italia and TIM on behalf of affiliated companies (of which euro 537 million was
in the interests of IS Tim, set aside in the reserves for risks and charges)
and others for medium/long-term loan transactions and guarantees on bids to
acquire fixed line and mobile licenses abroad.
COLLATERAL PROVIDED
Collateral provided of euro 111 million referred mainly to the Is Tim shares
pledged as guarantees by TIM International for the performance of the
obligations covered by the supply contracts signed by IS TIM with Ericsson and
Siemens.
PURCHASES AND SALES COMMITMENTS
Purchases and sales commitments at the end of the year, respectively, of euro
2,858 million (euro 3,305 million at December 31, 2001) and euro 219 million
(euro 2,064 million at December 31, 2001), referred to commitments, for the
portion still to be executed, which do not fall within the normal "operating
cycle" of the individual consolidated companies.
In particular, the purchases commitments refer to:
- Telecom Italia's commitment for the put option on Seat Pagine Gialle
shares (euro 2,417 million), revised in relation to the renegotiation
with JP Morgan Chase of the put and call options on Seat Pagine
Gialle shares on February 25, 2002. This renegotiation is fully
described in the notes to the financial statements of Telecom Italia
S.p.A. and led to the reduction of the original option exercise price
(from euro 4.2 to euro 3.4 per share). To guarantee the performance
of the obligations relating to the put option on Seat Pagine Gialle
shares, Telecom Italia Finance provided a guarantee (euro 1,940
million) in the form of a Direct Participation Letter of Credit to
JPMorgan Chase Equity Limited.
Furthermore, the valuation of the forward commitment to purchase Seat
Pagine Gialle shares at year-end 2002 led to a provision set aside in
the reserve for risks and charges of euro 1,942 million to account
for the estimated non-recoverability of the exercise option price as
a result of the decision, taken within the framework of the
redefinition of Telecom Italia Group's strategies, of no longer
considering the "Directories" business of Seat Pagine Gialle to be of
strategic interest;
- commitment by Seat Pagine Gialle (euro 55 million) to purchase
9,122,733 Seat Pagine Gialle shares and the remaining 0.27% stake in
TDL Infomedia Ltd from the manager shareholders of TDL Infomedia Ltd;
- commitment by Telecom Italia (euro 10 million) to purchase the
remaining 14% stake in Epiclink from Pirelli and other shareholders;
- commitment by Tim (euro 20 million) to purchase the assets of the ex
Blu core network from Wind;
- future operating lease obligations including the purchase option
price (euro 34 million, of which euro 17 million refers to
Teleleasing).
140
Sales commitments mainly included the Group's commitment for the sale of the
investment in Telekom Srbija to PTT Srbija (euro 195 million), the sale of TESS
to Accenture (euro 10 million) and the sale of Siteba to other shareholders
(euro 7 million).
Purchases and sales commitments include commitments by Telecom Italia
International, for the same amount (euro 7 million), by which, if the transfer
of the investment in Mediterranean Broadband Access by Forthnet has not
occurred by the date of June 30, 2003 in exchange for the capital increase by
Forthnet reserved for Telecom Italia International, beginning July 1, 2003, the
transfer of said investment will be effected for the same amount in cash.
Furthermore, there are purchase commitments for the stakes held by the minority
shareholders (equal to 49% of the companies) of Mediterranean Nautilus Ltd and
Med-1 Submarine Cables Ltd based on the market value of the companies at the
option expiration date.
OTHER MEMORANDUM ACCOUNTS
Other memorandum accounts of euro 88 million referred mainly to third-party
assets held by the individual consolidated companies, principally those in the
information technology sector. They decreased by euro 199 million as a result
of the deconsolidation of Sogei and Telespazio Group.
Furthermore:
- the consolidated companies of the Group issued weak letters of patronage
totaling euro 241 million chiefly on behalf of unconsolidated subsidiaries
and affiliated companies to guarantee insurance polices, lines of credit
and overdraft arrangements;
- assets held by third parties on loan, on deposit for safekeeping or for
similar purposes amounted to euro 261 million and consisted mainly of
equipment leased to customers;
- collateral received amounted to euro 2 million;
- guarantees received amounted to euro 18 million;
- guarantees provided by others for obligations of the Group companies,
which consisted primarily of sureties to guarantee the proper performance
of non-financial contractual obligations, totaled euro 1,752 million. They
comprised euro 1,110 million of bank guarantees provided for the merger by
absorption of Blu in TIM, euro 123 million of bank guarantees for the
merger of Netsiel, Saritel, Sodalia Telesoft in ITTEL. They also comprised
euro 207 million for the surety policy replacing the security deposit for
contracts with public agencies, issued by Fondiaria Assicurazioni S.p.A.
on behalf of the temporary association of companies, of which Finsiel is
the principal on behalf of the guaranteed agency (MIPAF - Ministry of
Agriculture and Forest Policies) after having won the bid for the
contract, euro 208 million for sureties provided by insurance companies to
guarantee Agrisian's contractual commitments with MIPAF and AGEA and euro
7 million for the bank surety provided in order to take part in a bid set
up by the Lombardy Region for the Regional Service Card-Health Care
Information System;
- the value of the shares of employees and private shareholders deposited on
December 31, 2002 at the companies of the Group amounted to about euro 99
million;
- the total amount of Telecom Italia commitments at December 31, 2002 for
building lease obligations to be paid to IMSER 60, Tiglio I and Tiglio II,
under 21-year contracts was euro 3,818 million. The amount for each single
year is euro 209 million. Furthermore, Telecom Italia provided guarantees
to IMSER 60 for contractual risks on previously sold buildings for a
maximum amount of euro 450 million.
- a purchase and sale commitment is currently being set up by TIM with H3G
for the transfer of certain equipment and property lease contracts arising
from the revision of the value of the Blu business segment sold to H3G.
141
DERIVATIVE FINANCIAL INSTRUMENTS
The Group uses derivative financial instruments mainly for the management of
its debt positions, primarily interest rate swaps (IRS) and interest rate
options (IRO) to reduce the interest rate exposure on fixed-rate and
floating-rate bank loans and bonds, and the use of cross currency and interest
rate swaps (CIRS) and currency forwards to convert various currency loans -
mainly in US dollar and euro - into the functional currencies of the various
subsidiaries of the Group.
The following table gives a description of the derivative financial instruments
used to hedge medium/long- term debt positions of the Group at December 31,
2002.
===============================================================================
Notional amount/
Capital exchanged
(in millions of euro) at 12/31/2002
-------------------------------------------------------------------------------
Interest rate swaps and interest rate options 5,054
Cross currency and interest rate swaps 827
===============================================================================
IRSs and IROs involve or can involve the exchange of flows of interest
calculated on the notional amount of reference at the agreed fixed or variable
rates at the specified maturity date with the counterparts. This amount does
not represent the amount exchanged between the parties and therefore does not
constitute a measure of exposure to credit risk, which is instead limited to
the amount of interest or interest differentials to be received at the interest
date.
The same also applies to CIRSs which involve the exchange of capital, in the
respective currencies of denomination, in addition to the settlement of
periodic interest flows, at maturity and at another date. The counterparts to
derivative contracts are only the best rated banks and financial institutions
and continually monitored in order to minimize the risk of non-performance.
Besides the derivative contracts for the management of debt exposure, at
December 31, 2002, IRSs and CIRSs were in place at the subsidiaries Telecom
Italia Finance and Tim Celular to hedge financial assets of euro 150 million.
There are also currency forwards to hedge exchange rate risks on short-term
cash management transactions for a total of euro 1,433 million.
142
CONSOLIDATED STATEMENTS OF INCOME
PRODUCTION VALUE euro 31,514 million
(euro 31,701 million in 2001)
Production value decreased by euro 187 million (-0.6% compared to 2001) and
included the captions below.
Sales and service revenues
Sales and service revenues amounted to euro 30,400 million and decreased by
euro 418 million compared to 2001 (-1.4% compared to 2001). This growth is due
to the positive performance of mobile telephone services and the increase in
revenues from the Internet area countered by a reduction in wireline telephone
services and exclusion from the scope of consolidation of the 9 Telecom group
and Sogei, beginning from July 1, 2002, and the Telespazio group, beginning
from October 1, 2002. A breakdown by Business Unit is presented below:
Change
2002 2001 Amount %
(in millions of euro)
Domestic Wireline 17,022 17,168 (146) (0,9)
Mobile 10,867 10,250 617 6,0
South America 1,409 1,534 (125) (8,1)
Internet and Media 1,991 1,957 34 1,7
IT Market 912 1,198 (286) (23,9)
IT Group 1,215 1,198 17 1,4
33,416 33,305 111 0,3
Other activities and Intra-Group eliminations (3,016) (2,487) (529) (21,3)
Consolidated Group revenues 30,400 30,818 (418) (1,4)
Revenues from telecommunications services are shown gross of the amount due to
other carriers of euro 4,159 million (euro 3,714 million in 2001).
Revenues from foreign operations totaled euro 5,748 million (euro 6,362 million
in 2001) and decreased mainly as a result of the weakness of the currencies of
the South American countries against the euro and the end of the Astrolink
contract in 2001.
Increases in capitalized internal construction costs
Increases in capitalized internal construction costs totaled euro 675 million,
with an increase of euro 94 million compared to 2001; they may be analyzed as
follows:
(in millions of euro) 2002 2001 Change
===================================================================================================
o intra-Group revenues from sales of
systems 643 549 94
- personnel 19 14
- financial expenses 1 3
- materials and other costs 12 32 15 32 -
---------------------------------------------------------------------------------------------------
Total 675 581 94
===================================================================================================
The financial expenses were charged to "construction in progress and advances
to suppliers" in fixed assets.
Other revenues and income
Other revenues and income of euro 479 million (euro 417 million in 2001)
included the following:
(in millions of euro) 2002 2001 Change
===============================================================================
o operating grants 19 24 (5)
o gains on disposal of intangibles and fixed assets 6 12 (6)
o portion of capital grants recorded in income 65 73 (8)
o other income 389 308 81
-------------------------------------------------------------------------------
Total 479 417 62
===============================================================================
143
In particular:
o operating grants, for the most part, referred to the amounts bestowed by
public institutions to defray the costs incurred for research, development
and technological innovation;
o the portion of capital grants recorded in income represents the portion
that became available during the year;
o other income from operations mainly included charges to customers by the
telecommunications services companies for the late payment of telephone
bills (euro 106 million compared to euro 112 million in 2001).
PRODUCTION COST euro 24,133 million
(euro 25,027 million in 2001)
Production cost increased by euro 894 million compared to 2001 (-3.6.% compared
to 2001) and included the following captions.
Raw materials, supplies and merchandise
Raw materials, supplies and merchandise amounted to euro 1,579 million (euro
1,767 million in 2001) and semifinished and finished goods amounted to euro 200
million (euro 205 million in 2001). These costs, which principally represented
purchases of raw materials and other goods to be used in operations, decreased
by a total of euro 193 million.
Services
Service costs totaled euro 9,229 million (euro 9,552 million in 2001) and the
cost for the use of property not owned amounted to euro 1,145 million (euro
1,069 million in 2001). Overall, these two items increased by euro 247 million,
mainly due to higher costs for the operation and development of mobile
telecommunications (euro 187 million) and the exclusion from the scope of
consolidation of the Telespazio group, the 9 Telecom group and Sogei (-euro 252
million).
Personnel costs
Personnel costs amounted to euro 4,540 million (euro 4,666 million in 2001),
including euro 3,373 million relating to companies which provide
telecommunications services. The decrease from 2001 is due to the reduction in
Telecom Italia's personnel costs following layoffs and the change in the scope
of consolidation due to the exclusion from the scope of consolidation of the
Telespazio group, the 9 Telecom group and Sogei and the addition of the Webegg
group, of Blu, Epiclink and Netesi.
The average cost per capita for the Group was euro 45 thousand (euro 43
thousand in 2001).
At December 31, 2002, employees of the Group numbered 101,713 (109,956 at
December 31, 2001), a decrease of 8,243, owing to personnel turnover (-5,360)
and the effect of the change in the scope of consolidation (-2,883). A
breakdown of personnel by Business Unit is presented as follows:
12/31/2002 12/31/2001 Change
===============================================================================
Domestic Wireline 53,682 57,895 (4,213)
Mobile Services 18,702 16,721 1,981
South America 5,461 5,746 (285)
Internet and Media 7,715 9,264 (1,549)
IT Market 4,493 6,441 (1,948)
IT Group 7,327 6,844 483
Other activities 4,333 7,045 (2,712)
-------------------------------------------------------------------------------
Total 101,713 109,956 (8,243)
===============================================================================
The equivalent average number of salaried employees was 101,789 in 2002
(107,491 in 2001). A breakdown by category follows:
2002 2001
-------------------------------------------------------------------------------
Executives 2,317 2,454
Middle management 6,648 6,379
Clerical staff 84,841 89,066
Technicians 7,983 9,592
-------------------------------------------------------------------------------
Total 101,789 107,491
===============================================================================
144
Amortization, depreciation and writedowns
Amortization, depreciation and writedowns amounted to euro 6,476 million (euro
6,730 million in 2001), with a decrease of euro 254 million. Details are as
follows:
o amortization of intangible assets totaled euro 2,094 million, compared to
euro 2,241 million in 2001, with a decrease of euro 147 million. The
change is due to the writeoff of goodwill in 2001 of euro 1,303 million;
o depreciation of fixed assets totaled euro 3,783 million, compared to euro
4,034 million in 2001, with a decrease of euro 251 million. A breakdown of
depreciation expense by asset category is provided below:
(in millions of euro) 2002 2001 Change
===============================================================================
Non-industrial and industrial buildings 147 152 (5)
Plant and machinery 3,331 3,542 (211)
Manufacturing and distribution equipment 32 34 (2)
Other fixed assets 273 306 (33)
-------------------------------------------------------------------------------
Total 3,783 4,034 (251)
===============================================================================
Depreciation decreased as a result of the change in the scope of
consolidation, a reduction in the depreciation expense of Telecom Italia
(euro 250 million) owing to a lower amount of depreciable assets and a
change in the mix of depreciable assets.
o other writedowns of intangibles and fixed assets totaled euro 57 million
(euro 16 million in 2001), of which euro 18 million refer to the writedoff
of IRU.
o writedowns of receivables included in current assets and liquid assets
amounted to euro 542 million (euro 439 million in 2001) and represent the
provisions made during the year to adjust receivables to their estimated
realizable value.
Provisions for risks and other provisions
Provisions for risks and other provisions totaled euro 153 million (euro 278
million in 2001) and consisted of provisions made during the year to the
various reserves for contractual risks and pending disputes.
Miscellaneous operating costs
Miscellaneous operating costs amounted to euro 823 million compared to euro 817
million in 2001. They referred to the following:
(in millions of euro) 2002 2001
=============================================================================================================
o TLC license fee 431 524
o losses on disposal of intangibles and fixed assets 36 29
o expenses connected with receivables management 60 37
o indirect duties and annual taxes, including the local property tax (I.C.I.) 115 120
o membership dues and other costs 181 107
-------------------------------------------------------------------------------------------------------------
Total 823 817
=============================================================================================================
FINANCIAL INCOME AND EXPENSE -euro 1,481 million
(-euro 1,999 million in 2001)
Financial income and expense refers to the following items:
(in millions of euro) 2002 2001 Change
===============================================================================
Income from equity investments, net 18 154 (136)
Other financial income 1,218 922 296
Interest and other financial expense (2,717) (3,075) 358
-------------------------------------------------------------------------------
Total (1,481) (1,999) 518
===============================================================================
Income from equity investments
Income from equity investments, net, totaled euro 18 million (euro 154 million
in 2001) and mainly included dividends from unconsolidated companies.
145
Other financial income
Other financial income of euro 1,218 million (euro 922 million in 2001),
included the following:
(in millions of euro) 2002 2001 Change
==========================================================================================
Interest and capital gains on fixed-income
securities 93 138 (45)
Interest and fees from:
- unconsolidated subsidiaries 1 1
- affiliated companies 13 23
- banks 84 110
- customers 2 100 2 136 (36)
------- -------
Foreign exchange gains 478 217 261
Other 547 431 116
------------------------------------------------------------------------------------------
Total 1,218 922 296
==========================================================================================
Interest and capital gains on fixed-income securities referred to interest on
long-term investment securities for euro 4 million (euro 3 million in 2001) and
interest and capital gains on marketable securities for euro 89 million (euro
135 million in 2001).
Foreign exchange gains referred essentially to the TIM group. "Other" included
euro 392 million of income on hedging contracts and income from the application
of inflation accounting principles.
Interest and other financial expense
Interest and other financial expense of euro 2,717 million (euro 3,075 million
in 2001), included the following:
(in millions of euro) 2002 2001 Change
=============================================================================================================
o Interest and fees paid to:
- affiliated companies 23 31
- banks 257 815
- suppliers and other lenders 181 461 165 1,011 (550)
------- -------
o Interest and other charges on note issues 765 449 316
o Foreign exchange losses 874 348 526
o Other financial expense 617 1,267 (650)
-------------------------------------------------------------------------------------------------------------
Total 2,717 3,075 (358)
=============================================================================================================
The reduction in financial expense can mainly be ascribed to the provision of
euro 569 million set aside, in 2001, for the forward commitment to purchase
Seat Pagine Gialle shares in connection with the estimated nonrecoverability of
the original option exercise price whereas the improvement in net financial
expense came from a lower average debt exposure of the Group that was partly
neutralized by a worsening of the exchange rates of the South American
countries.
Foreign exchange losses referred mainly to the TIM group. "Other" included euro
153 million of expenses on hedging contracts and expenses from the application
of inflation accounting principles.
146
VALUE ADJUSTMENTS TO FINANCIAL ASSETS -euro 682 million
(-euro 1,956 million in 2001)
These include:
(in millions of euro) 2002 2001 Change
===============================================================================
o Upward adjustments of:
- equity investments 121 167 (46)
-------------------------------------------------------------------------------
121 167 (46)
-------------------------------------------------------------------------------
o Writedowns of:
- equity investments (668) (1,933) 1,265
- long-term investments other than equity
investments included in current assets (40) (49) 9
- securities included in current assets other than
equity investments (95) (141) 46
-------------------------------------------------------------------------------
(803) (2,123) 1,320
-------------------------------------------------------------------------------
Total (682) (1,956) 1,274
===============================================================================
Value adjustments to financial assets amounted to a net expense balance of euro
682 million. They refer to:
- amortization of goodwill arising at the time of the purchase of the
investments in companies accounted for using the equity method, equal
to euro 80 million (euro 316 million in 2001), with a reduction of
euro 236 million from the writeoffs of goodwill taken in the 2001
financial statements;
- writedowns of securities and investments included in current assets
of euro 176 million (euro 291 million in 2001) and long-term
securities of euro 40 million (euro 49 million in 2001), with a total
reduction of euro 123 million compared to 2001;
- the Group's share of the equity in the earnings and losses of the
unconsolidated companies accounted for using the equity method which
produced a loss of euro 386 million (-euro 1,300 million in 2001).
This refers to the losses of Stream of euro 246 million (euro 241
million in 2001), Aria -Is Tim Turchia of euro 171 million (euro 334
million in 2001) and the earnings balance relating to the earnings
and losses of the other unconsolidated companies of euro 32 million
(a loss balance of 725 million in 2001).
Moreover, this caption was not affected by the results of the investments in
Astrolink, Nortel Inversora (Telecom Argentina) and the Auna Group which, in
2001, reported losses of euro 700 million. The investment in Nortel Inversora,
the carrying value of which had been prudently written off in the consolidated
financial statements at December 31, 2001, has remained unchanged. As for the
Auna Group and the company Astrolink, the carry values recorded in the 2001
consolidated financial statements were maintained until their sale on,
respectively, August 1, 2002 and November 30, 2002, with the divestiture of the
Telespazio group.
EXTRAORDINARY INCOME AND EXPENSE -euro 5,637 million
(-euro 3,452 million in 2001)
Extraordinary income and expense showed a net expense balance of euro 5,637
million (-euro 3,452 million in 2001) which included euro 2,814 million of
income and euro 8,451 million of expense.
Extraordinary income of euro 2,814 million comprised:
o euro 2,391 million for gains on the disposals of the investments and
business segments, detailed as follows:
- euro 1,245 million for the sale of the 26.89% stake in Auna;
- euro 484 million for the sale of the 19.61% stake in Bouygues
Decaux Telecom (BDT);
- euro 133 million for the shares tendered in the tender offer for
Lottomatica;
- euro 115 million for the sale of the 25% stake in the Mobilkom
Austria group to Telekom Austria;
- euro 110 million for the sale of the 40% stake in Telemaco
Immobiliare;
- euro 70 million for the sale of the 100% stake in Telespazio;
- euro 159 million for the concentration of the real estate assets
in Tiglio I through the companies Imser, Emsa and Telimm;
147
- euro 60 million for the contribution of the "Asset Management"
business segment to Tiglio II;
- euro 15 million for the sale of the non-facility business to
Pirelli Real Estate;
o euro 22 million for the disposal of other investments, fixed assets
and business segments;
o euro 131 million for prior period income arising from the recovery of
accrued pre-amortization interest - on the expenses for employee
benefit obligations under Law 58/1992 that were paid, with reserve,
to INPS up to 1999 - following the termination of litigation after
the courts ruled in Telecom Italia's favor;
o euro 270 million, of which euro 77 million was for the release of
reserves primarily to absorb a portion of the reserve for risks and
charges set up in 2001 by Telecom Italia to cover the expenses
connected with the agreement to sell Stream to News Corporation and
Vivendi Universal/Canal+ after the parties did not go through with
the agreement, grants of euro 9 million and other income of euro 184
million.
Extraordinary expense of euro 8,451 million comprised:
o writedowns for impairment losses of investments for a total of euro
6,237 million (euro 2,984 million in 2001), for:
- the investment held in IS Tim (euro 1,491 million), owing to the
changed conditions of the macroeconomic scenario and the
difficulties in supplying services independent of the company
and the provisions (euro 850 million) connected with the loans
made and the guarantees provided on behalf of the company;
- the goodwill relating to the consolidated companies Seat (euro
1,544 million), Blu (euro 103 million), Corporacion Digitel
(euro 75 million) and other minor companies (euro 47 million);
- the goodwill relating to Netco Redes (euro 96 million) and
writedowns of other investments (euro 46 million);
- the provision for the forward commitment to purchase Seat Pagine
Gialle shares (euro 1,942 million) that had already been partly
written down in 2001 by a charge to "financial expense" of euro
569 million and the provision for the purchase of an additional
8.17% holding in Consodata (euro 43 million) to adjust it to the
current value of the company as determined on the basis of an
appraisal.
The writedowns of euro 2,984 million in 2001 had referred to the
writedowns of goodwill relating to both the consolidated companies (9
Telecom group, Entel Bolivia, Entel Chile group, Maxitel, Tele Celular Sul
group, Tele Nordeste Celular group, Tim Brasil, Med-1 group and certain
companies in the Seat Pagine Gialle group) and companies valued using the
equity method (GLB Servicos Interativos, Solpart Participacoes, Telekom
Austria and Nortel Inversora group), as well as other provisions related
to investments.
o euro 316 million relating to the provisions effected in conjunction
with the disposal of the investment in the 9Telecom group. In
particular, in view of the loss reported prior to sale, the French
group 9Telecom produced a negative effect on the nine-months 2002
statement of income of the Telecom Italia Group for a total of euro
389 million;
o euro 135 million of losses for the sale of the 15% stake in Telekom
Austria;
o euro 494 million of expenses and provisions for employee cutbacks and
layoffs (of which euro 379 million was borne by Telecom Italia);
o euro 235 million of expenses in connection with extraordinary
investment transactions;
o euro 155 million of expenses under Law 58/1992 to cover employees
under the former fund "Telephone Employees Pension Fund" (FPT) and
euro 74 million for the extraordinary contribution to INPS to meet
the higher financial requirements covered by the rules of the former
fund "Telephone Employees Pension Fund" (FPT) which became part of
the general "Employees Pension Fund";
o euro 190 million of writedowns of intangibles and fixed assets, of
which euro 142 million related to the Brazilian companies;
o euro 194 million of provisions to reserves, of which 135 million
referred to guarantees provided upon the sale of investments and
business segments;
o euro 158 million for the adjustment of Telecom Italia's liability to
customers for prepaid telephone cards;
148
o euro 38 million of losses relating to intangibles, fixed assets and
long-term investments and euro 225 million of other expenses.
INCOME TAXES -euro 716 million
(euro 925 million in 2001)
Income taxes decreased by euro 1,641 million due to the investment writedowns
which contributed to the increase in deferred tax assets, as well as the
benefit from the utilization of tax loss carryforwards deriving from the merger
of TIM and Blu.
Income taxes included current taxes for euro 1,451 million and deferred tax
assets for euro 2,167 million, of which euro 1,900 million deriving from the
application of D.L. 209/02 (turned ex L. n. 265/02) to writedowns of equity
investments.
OTHER INFORMATION
Compensation to directors and statutory auditors
The compensation to which the directors and statutory auditors of Telecom
Italia are entitled for fiscal 2002 for carrying out their responsibilities and
functions in Telecom Italia and also in other consolidated companies, totaled
euro 7,887 thousand for directors and euro 748 thousand for statutory auditors.
EXCHANGE RATES USED TO TRANSLATE FOREIGN CURRENCY FINANCIAL STATEMENTS
Year-end exchange rates Average exchange rate for the year
(balance sheet items) (statement of income items)
------------------------------------------------------------------------------------------
(currency/euro) 31/12/2002 31/12/2001 % Change 2002 2001 % Change
========================================================================================================================
Europe
Romanian leu 0.000028462 0.000035949 (20.8) 0.000028462 0.000035949 (20.8)
Pound sterling 1.537279016 1.643385374 (6.5) 1.590356081 1.608054208 (1.10)
Turkish lira 0.000000587 0.000000788 (25.5) 0.000000587 0.000000788 (25.5)
Hungarian forint 0.004232088 0.004078636 3.8 0.004115926 0.003896759 5.6
Russian rouble 0.029864127 0.037240619 (19.8) 0.033702329 0.038242782 (11.9)
Polish zloty 0.248694355 0.286098475 (13.1) 0.259273567 0.272476471 (4.8)
North America
USA dollar 0.953561552 1.134687394 (16.0) 1.057753332 1.116525329 (5.3)
South America
Venezuelan bolivar 0.000679659 0.001471562 (53.8) 0.000679659 0.001471562 (53.8)
Bolivian boliviano 0.127251881 0.166535381 (23.6) 0.147504156 0.169668023 (13.1)
Costarican colon 0.002520449 0.003302924 (23.7) 0.002942266 0.003362076 (12.5)
Peruvian nuevo sol 0.272368242 0.329612014 (17.4) 0.300762734 0.318505825 (5.6)
Argentinean peso 0.282955870 0.667463173 (57.6) 0.282955870 1.116525329 (74.7)
Chilean peso 0.001324391 0.001740402 (23.9) 0.001534176 0.001762476 (13.0)
Colombian peso 0.000334056 0.000483854 (31.0) 0.000334055 0.000498525 (33.0)
Brazilian real 0.269878582 0.488901926 (44.8) 0.360892270 0.475524176 (24.1)
Asia
Hong Kong dollar 0.122277791 0.145511692 (16.0) 0.135565648 0.143152839 (5.3)
Israeli shekel 0.199782237 0.258742254 (22.8) 0.223439720 0.265806340 (15.9)
========================================================================================================================
The following Annexes numbered 1 to 7 are an integral part of these notes.
149
ANNEX 1
ACCOUNTS RECEIVABLE AND ACCRUED INCOME BY MATURITY AND TYPE
(in millions of euro)
12/31/2002 12/31/2001
-------------------------------------------- --------------------------------------------
Amount due Amount due
-------------------------------------------- --------------------------------------------
Within From Beyond Total Within From Beyond Total
one two to five five one two to five five
year years years year years years
-------------------------------------------- --------------------------------------------
Accounts receivable in long-term
investments
Unconsolidated subsidiaries 5 5 2 2
Affiliated companies 2 433 435 3 114 117
Other:
Customers 2 13 1 16 2 3 1 6
Others 53 115 31 199 78 155 34 267
-------------------------------------------- --------------------------------------------
62 561 32 655 82 161 149 392
-------------------------------------------- --------------------------------------------
Accounts receivable in current assets
Other loans to:
Unconsolidated subsidiaries 23 23 7 7
Affiliated companies 12 12 206 206
Others 646 2 648 591 591
-------------------------------------------- --------------------------------------------
681 2 683 804 804
-------------------------------------------- --------------------------------------------
Trade accounts receivables:
Customers 7,900 1 7,901 7,901 3 7,904
Unconsolidated subsidiaries 16 16 10 10
Affiliated companies 184 184 360 360
Parent companies 2 2 1 1
Others 88 2 8 98 70 1 71
-------------------------------------------- --------------------------------------------
8,190 3 8 8,201 8,342 4 8,346
-------------------------------------------- --------------------------------------------
Other receivables:
Unconsolidated subsidiaries 2 2 14 14
Affiliated companies 17 17 1 1
Others 4,281 1,059 150 5,490 3,385 223 254 3,862
-------------------------------------------- --------------------------------------------
4,300 1,059 150 5,509 3,400 223 254 3,877
-------------------------------------------- --------------------------------------------
Total accounts receivables 13,171 1,064 158 14,393 12,546 227 254 13,027
-------------------------------------------- --------------------------------------------
Accrued income 39 39 152 152
-------------------------------------------- --------------------------------------------
150
ANNEX 2
LIABILITIES AND ACCRUED EXPENSES BY MATURITY AND TYPE
(in millions of euro)
12/31/2002 12/31/2001
-------------------------------------------- --------------------------------------------
Amount due Amount due
-------------------------------------------- --------------------------------------------
Within From Beyond Total Within From Beyond Total
one two to five five one two to five five
year years years year years years
-------------------------------------------- --------------------------------------------
Medium and long-term debt
Debentures 113 6,285 4,226 10,624 180 5,722 2,281 8,183
Convertible debentures - 1,964 - 1,964 - 2,500 - 2,500
Due to banks 1,225 1,801 2 3,028 1,105 2,995 345 4,445
Due to other lenders 609 567 77 1,253 186 1,090 96 1,372
Suppliers 3 13 - 16 12 155 - 167
Notes 221 - - 221 - 221 - 221
Affiliated companies 369 18 6 393 48 176 298 522
Taxes payables 18 14 - 32 18 32 - 50
Other liabilities 119 30 15 164 120 157 15 292
-------------------------------------------- --------------------------------------------
2,677 10,692 4,326 17,695 1,669 13,048 3,035 17,752
-------------------------------------------- --------------------------------------------
Short-term debt
Due to banks 2,000 - - 2,000 5,790 - - 5,790
Due to other lenders 166 - - 166 791 - - 791
Trade accounts payable 5 - - 5 1 - - 1
Notes payable 20 - - 20 - - - -
Unconsolidated subsidiaries 8 - - 8 17 - - 17
Affiliated companies 5 - - 5 31 - - 31
Other liabilities 208 - - 208 815 - - 815
-------------------------------------------- --------------------------------------------
2,412 - - 2,412 7,445 - - 7,445
-------------------------------------------- --------------------------------------------
Trade accounts payable (1)
Suppliers 5,456 - - 5,456 6,058 - - 6,058
Unconsolidated subsidiaries 2 - - 2 3 - - 3
Affiliated companies 245 - - 245 343 - - 343
Parent companies - - - - 1 - - 1
-------------------------------------------- --------------------------------------------
5,703 - - 5,703 6,405 - - 6,405
-------------------------------------------- --------------------------------------------
Other payables
Unconsolidated subsidiaries 6 - - 6 5 - - 5
Affiliated companies 2 - - 2 6 - - 6
Parent companies 296 - - 296 - - - -
Taxes payable 559 6 - 565 822 50 - 872
Contributions to pension and social
security institutions 249 286 249 784 267 272 326 865
Other liabilities 4,139 5 - 4,144 3,738 6 - 3,744
-------------------------------------------- --------------------------------------------
5,251 297 249 5,797 4,838 328 326 5,492
-------------------------------------------- --------------------------------------------
Total liabilities (1) 16,043 10,989 4,575 31,607 20,357 13,376 3,361 37,094
-------------------------------------------- --------------------------------------------
Accrued expenses 455 455 403 - - 403
-------------------------------------------- --------------------------------------------
(1) not including advances
151
ANNEX 3
RECONCILIATION OF THE SHAREHOLDERS' EQUITY AND NET INCOME OF TELECOM ITALIA AND
THE CONSOLIDATED FIGURES IN THE FINANCIAL STATEMENTS AT DECEMBER 31, 2001
TELECOM ITALIA'S INTEREST MINORITY INTEREST TOTAL
------------------------------------------ --------------------------
Reserves Share
(in millions of euro) and Net capital Net
Share retained income and income
capital earnings (loss) Total reserves (loss) Total
---------------------------------------------------------------------------------------------------------------------------------
Financial statements of Telecom Italia
at December 31, 2001 4,023 11,697 151 15,871 15,871
Results of consolidated companies (7,020) (7,020) (1,048) (1,048) (8,068)
Share capital and reserves of consolidated
companies 32,301 32,301 5,914 5,914 38,215
o carrying value of investments in
consolidated companies (39,539) (39,539) (39,539)
Consolidation adjustments:
o elimination of tax-related entries (137) 70 (67) 4 1 5 (62)
o valuation of investments using the
equity method (1,526) (888) (2,414) (636) (136) (772) (3,186)
o positive differences on purchase of
investments 9,788 (860) 8,928 464 (43) 421 9,349
o elimination of intra-Group dividends 263 (1,334) (1,071) (27) (27) (1,098)
o losses of subsidiaries included in the
results of parent companies and
extraordinary writedowns of investments (612) 7,826 7,214 7 1,609 1,616 8,830
o gains on sales of investments (149) (35) (184) (4) 4 (184)
o elimination of intra-Group profits
included in fixed assets and intangibles (283) 57 (226) (21) 4 (17) (243)
o elimination of intra-Group profits
on investments (469) (469) (283) (283) (752)
o other 233 (35) 198 (68) 46 (22) 176
-------------------------------------------------------------------------------
Consolidated financial statements
at December 31, 2001 4,023 11,567 (2,068) 13,522 5,377 410 5,787 19,309
=================================================================================================================================
152
ANNEX 3
RECONCILIATION OF THE SHAREHOLDERS' EQUITY AND NET INCOME OF TELECOM ITALIA AND THE
CONSOLIDATED FIGURES IN THE FINANCIAL STATEMENTS AT DECEMBER 31, 2002
(in millions of euro)
TELECOM ITALIA'S INTEREST MINORITY INTEREST TOTAL
------------------------------------------ --------------------------
Reserves Share
(in millions of euro) and Net capital Net
Share retained income and income
capital earnings (loss) Total reserves (loss) Total
---------------------------------------------------------------------------------------------------------------------------------
Financial statements of Telecom Italia
at December 31, 2002 4,024 8,577 (1,645) 10,956 10,956
Results of consolidated companies (2,428) (2,428) (1,002) (1,002) (3,430)
Share capital and reserves of consolidated
companies 24,728 3,388 3,388 28,116
24,728
o carrying value of investments in
consolidated companies (32,773) (32,773) (32,773)
Consolidation adjustments:
o elimination of tax-related entries (86) 36 (50) 2 2 (48)
o valuation of investments using the
equity method (720) 222 (498) (417) (743) (1,160) (1,658)
o positive differences on purchase of
investments 6,844 (784) 6,060 598 (61) 537 6,597
o elimination of intra-Group dividends 1,119 (1,478) (359) 10 (16) (6) (365)
o losses of subsidiaries included in the
results of parent companies and
extraordinary writedowns of investments (1,081) 5,223 4,142 (26) 2,284 2,258 6,400
o gains on sales of investments (690) 493 (197) (158) 129 (29) (226)
o elimination of intra-Group profits
included in fixed assets and intangibles (224) 66 (158) (14) 4 (10) (168)
o elimination of intra-Group profits
on investments (418) (418) (261) (261) (679)
o other 71 (27) 44 37 24 61 105
-------------------------------------------------------------------------------
Consolidated financial statements
at December 31, 2002 4,024 5,347 (322) 9,049 3,159 619 3,778 12,827
=================================================================================================================================
153
ANNEX 4
STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2001
(in millions of euro)
TELECOM ITALIA'S INTEREST MINORITY INTEREST TOTAL
------------------------------------------ --------------------------
Reserves Share
(in millions of euro) and Net capital Net
Share retained income and income
capital earnings (loss) Total reserves (loss) Total
---------------------------------------------------------------------------------------------------------------------------------
Consolidated financial statements
at December 31, 2000 3,835 12,958 2,028 18,821 5,788 920 6,708 25,529
Deconsolidation of Nortel Inversora group - - - - (781) (56) (837) (837)
Consolidated financial statements
at December 31, 2000 3,835 12,958 2,028 18,821 5,007 864 5,871 24,692
Contribution by shareholders 1 137 138 102 102 240
Cancellation of treasury stock
and euro conversion 187 (898) (711) (711)
Appropriation of 2000 net income:
Dividends distributed (281) (2,028) (2,309) (788) (788) (3,097)
Transfer to reserves 76 (76)
Consolidation of Entel Chile group 358 358 358
Translation adjustments on the conversion
of financial statements in foreign
currencies and other (349) (349) (166) (166) (515)
Net income (loss) for the year 2001 (2,068) (2,068) 410 410 (1,658)
-------------------------------------------------------------------------------
Consolidated financial statements
at December 31, 2001 4,023 11,567 (2,068) 13,522 5,377 410 5,787 19,309
=================================================================================================================================
STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2002
(in millions of euro)
TELECOM ITALIA'S INTEREST MINORITY INTEREST TOTAL
------------------------------------------ --------------------------
Reserves share
(in millions of euro) and Net capital Net
Share retained income and income
capital earnings (loss) Total reserves (loss) Total
---------------------------------------------------------------------------------------------------------------------------------
Consolidated financial statements
at December 31, 2001 4,023 11,567 (2,068) 13,522 5,377 410 5,787 19,309
Contribution by shareholders 1 8 9 49 49 58
Appropriation of 2001 net income:
Dividends distributed (2,306) (2,306) (531) (410) (941) (3,247)
Transfer to reserves (2,068) 2,068
Distribution of extraordinary reserves (987) (987) (711) (711) (1,698)
Translation adjustments on the conversion
of financial statements in foreign currencies
and other (867) (867) (1,025) (1,025) (1,892)
Net income (loss) for the year 2002 (322) (322) 619 619 297
-------------------------------------------------------------------------------
Consolidated financial statements
at December 31, 2002 4,024 5,347 (322) 9,049 3,159 619 3,778 12,827
=================================================================================================================================
154
TELECOM ITALIA GROUP - ANNEX 5
LIST OF COMPANIES CONSOLIDATED ON A LINE-BY-LINE BASIS
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
Domestic Wireline
ATESIA -Telemarketing Comunicazione
Telefonica e Ricerche di Mercato S.p.A. Rome EUR 3,150,406 100.00 TELECOM ITALIA
(telemarketing) (Italy)
--------------------------------------------------------------------------------------
INTELCOM SAN MARINO S.p.A Republic of EUR 1,550,000 70.00 TELECOM ITALIA
(telecommunications services in San Marino INTERNATIONAL
San Marino)
--------------------------------------------------------------------------------------
LATIN AMERICAN NAUTILUS S.A. Luxembourg USD 60,000,000 70.00 TELECOM ITALIA
(holding company) 10.00 ENTEL BOLIVIA
10.00 ENTEL CHILE
10.00 TELECOM ARGENTINA
STET-FRANCE
TELECOM
--------------------------------------------------------------------------------------
- LATIN AMERICAN NAUTILUS ARGENTINA S.A. Buenos Aires ARS 12,000 100.00 (*) LATIN AMERICAN
(installation and maintenance of (Argentina) NAUTILUS S.A.
submarine cable systems)
--------------------------------------------------------------------------------------
- LATIN AMERICAN NAUTILUS BOLIVIA S.r.l. La Paz BOB 1,000 100.00 LATIN AMERICAN
(installation and maintenance of (Bolivia) NAUTILUS S.A.
submarine cable systems)
--------------------------------------------------------------------------------------
- LATIN AMERICAN NAUTILUS BRASIL Ltda Rio de Janeiro BRL 20,000 99.99 LATIN AMERICAN
(installation and maintenance of (Brazil) NAUTILUS S.A.
submarine cable systems) 0.01 LATIN AMERICAN
NAUTILUS USA
--------------------------------------------------------------------------------------
- LATIN AMERICAN NAUTILUS CHILE S.A. Santiago CLP 6,200,000 100.00 (*) LATIN AMERICAN
(installation and maintenance of (Chile) NAUTILUS S.A.
submarine cable systems)
--------------------------------------------------------------------------------------
- LATIN AMERICAN NAUTILUS COLOMBIA S.A. Bogota COP 28,430,000 100.00 (*) LATIN AMERICAN
(installation and maintenance of (Colombia) NAUTILUS S.A.
submarine cable systems)
--------------------------------------------------------------------------------------
- LATIN AMERICAN NAUTILUS Ltd Dublin USD 1,000,000 100.00 LATIN AMERICAN
(installation and maintenance of (Ireland) NAUTILUS S.A.
submarine cable systems)
--------------------------------------------------------------------------------------
- LATIN AMERICAN NAUTILUS PANAMA S.A. Panama USD 10,000 100.00 LATIN AMERICAN
(installation and maintenance of NAUTILUS S.A.
submarine cable systems)
--------------------------------------------------------------------------------------
- LATIN AMERICAN NAUTILUS PERU' S.A. Lima PEN 3,500 100.00 (*) LATIN AMERICAN
(installation and maintenance of (Peru) NAUTILUS S.A.
submarine cable systems)
--------------------------------------------------------------------------------------
- LATIN AMERICAN NAUTILUS ST. CROIX LLC St. Croix USD 1,000 100.00 LATIN AMERICAN
(installation and maintenance of (USA Virgin Islands) NAUTILUS S.A
submarine cable systems)
--------------------------------------------------------------------------------------
- LATIN AMERICAN NAUTILUS USA Inc. Florida USD 10,000 100.00 LATIN AMERICAN
(installation and maintenance of (USA) NAUTILUS S.A
submarine cable systems)
--------------------------------------------------------------------------------------
- LATIN AMERICAN NAUTILUS SERVICE Inc. Florida USD 10,000 100.00 LATIN AMERICAN
(installation and maintenance of (USA) NAUTILUS USA
submarine cable systems)
--------------------------------------------------------------------------------------
- LATIN AMERICAN NAUTILUS VENEZUELA C.A. Caracas VEB 7,000,000 100.00 (*) LATIN AMERICAN
(installation and maintenance of (Venezuela) NAUTILUS S.A
submarine cable systems)
--------------------------------------------------------------------------------------
MED-1 SUBMARINE CABLES Ltd Tel Aviv ILS 100,000 23.17 TELECOM ITALIA
(construction and maintenance of (Israel) 27.83 TELECOM ITALIA
submarine cable Lev) INTERNATIONAL
--------------------------------------------------------------------------------------
- MED 1 IC-1 (1999) Ltd Tel Aviv ILS 1,000 99.99 MED-1 SUBMARINE
(installation and maintenance of (Israel) CABLES
submarine cable IC1) 0.01 MED-1 ITALY
--------------------------------------------------------------------------------------
- MED-1 (NETHERLANDS) B.V. Amsterdam EUR 18,151 100.00 MED-1 SUBMARINE
(holding company) (Holland) CABLES
--------------------------------------------------------------------------------------
- MED-1 ITALY S.r.l. Rome EUR 548,477 100.00 MED-1 NETHERLANDS
(installation and maintenance (Italy)
submarine cable systems in Italian seas)
--------------------------------------------------------------------------------------
MEDITERRANEAN NAUTILUS S.A. Luxembourg USD 326,480,000 62.51 TELECOM ITALIA
(holding company) 7.49 TELECOM ITALIA
INTERNATIONAL
--------------------------------------------------------------------------------------
- ELETTRA TLC S.p.A. Rome EUR 10,329,200 100.00 MEDITERRANEAN
(installation and maintenance of (Italy) NAUTILUS S.A.
submarine cable systems)
--------------------------------------------------------------------------------------
- MEDITERRANEAN NAUTILUS Ltd Dublin USD 100,000 51.00 MEDITERRANEAN
(installation and maintenance of (Ireland) NAUTILUS S.A.
submarine cable systems)
--------------------------------------------------------------------------------------
- MEDITERRANEAN NAUTILUS B.V. Amsterdam EUR 18,003 100.00 MEDITERRANEAN
(holding company) (Holland) NAUTILUS Ltd
--------------------------------------------------------------------------------------
- MEDITERRANEAN NAUTILUS GREECE S.A. Athens EUR 111,600 100.00 MEDITERRANEAN
(installation and maintenance of (Greece) NAUTILUS B.V.
submarine cable systems)
--------------------------------------------------------------------------------------
- MEDITERRANEAN NAUTILUS ISRAEL Ltd Tel Aviv ILS 1,000 100.00 MEDITERRANEAN
(installation and maintenance of (Israel) NAUTILUS B.V.
submarine cable systems)
--------------------------------------------------------------------------------------
- MEDITERRANEAN NAUTILUS ITALY S.p.A. Rome EUR 3,100,000 100.00 MEDITERRANEAN
(installation and maintenance of (Italy) NAUTILUS B.V.
submarine cable systems)
--------------------------------------------------------------------------------------
- MEDITERRANEAN NAUTILUS Inc. Delaware USD 3,000 100.00 MEDITERRANEAN
(telecommunications activities) (USA) NAUTILUS B.V.
--------------------------------------------------------------------------------------
155
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
- MEDITERRANEAN NAUTILUS TELEKOMUNIKASYON Istanbul TRL 350,000,000,000 99.9988 MEDITERRANEAN
HIZMETLERI TICARET ANONIM SIRKETI (Turkey) NAUTILUS B.V.
(telecommunications activities) 0.0003 MEDITERRANEAN
NAUTILUS Ltd
0.0003 MEDITERRANEAN
NAUTILUS ISRAEL
0.0003 MEDITERRANEAN
NAUTILUS ITALY
0.0003 MEDITERRANEAN
NAUTILUS GREECE
--------------------------------------------------------------------------------------
PATH.NET S.p.A. Rome EUR 25,800,000 99.99 TELECOM ITALIA
(networking systems and (Italy) 0.01 IT TELECOM
telecommunications)
--------------------------------------------------------------------------------------
TELECONTACT CENTER S.p.A. Naples EUR 110,000 100.00 TELECOM ITALIA
(telemarketing) (Italy)
--------------------------------------------------------------------------------------
TELECOM ITALIA SPARKLE S.p.A. (ex-TMI) Rome EUR 200,000,000 100.00 TELECOM ITALIA
(public and private telecommunication (Italy)
services)
--------------------------------------------------------------------------------------
- TELECOM ITALIA NETHERLANDS B.V. Amsterdam EUR 18,200 100.00 TELECOM ITALIA
(telecommunications services) (Holland) SPARKLE
--------------------------------------------------------------------------------------
- TELECOM ITALIA OF NORTH AMERICA Inc. New York USD 15,550,000 100.00 TELECOM ITALIA
(telecommunications promotional (USA) SPARKLE
services)
--------------------------------------------------------------------------------------
- TELECOM ITALIA SPAIN S.L. UNIPERSONAL Madrid EUR 703,111 100.00 TELECOM ITALIA
(telecommunications services) (Spain) SPARKLE
--------------------------------------------------------------------------------------
- TI BELGIUM S.P.R.L. - B.V.B.A Brussels EUR 3,000,000 100.00 TELECOM ITALIA
(telecommunications services) (Belgium) SPARKLE
--------------------------------------------------------------------------------------
- TI FRANCE S.A.R.L. Paris EUR 10,307,800 100.00 TELECOM ITALIA
(telecommunications services) (France) SPARKLE
--------------------------------------------------------------------------------------
- TI GERMANY GmbH Frankfurt EUR 25,000 100.00 TELECOM ITALIA
(telecommunications services) (Germany) SPARKLE
--------------------------------------------------------------------------------------
- TI SWITZERLAND GmbH Zurich CHF 2,000,000 100.00 TELECOM ITALIA
(telecommunications services) (Switzerland) SPARKLE
--------------------------------------------------------------------------------------
- TI Telecom Italia (Austria)
Telekommunikationsdienste GmbH Vienna EUR 1,835,000 100.00 TELECOM ITALIA
(telecommunications services) (Austria) SPARKLE
--------------------------------------------------------------------------------------
- TI UNITED KINGDOM Ltd London GBP 2,680,000 100.00 TELECOM ITALIA
(telecommunications services) (UK) SPARKLE
--------------------------------------------------------------------------------------
- TMI TELEMEDIA INTERNATIONAL Luxembourg EUR 82,150,674.64 100.00 (*) TELECOM ITALIA
LUXEMBOURG S.A. (holding company) SPARKLE
--------------------------------------------------------------------------------------
- TMI TELEMEDIA INTERNATIONAL Ltd London USD 558,472,454 67.88 TMI TELEMEDIA
(telecommunications services) (UK) INTERN. LUX.
32.12 TELECOM ITALIA
SPARKLE
--------------------------------------------------------------------------------------
- TELEMEDIA INTERNATIONAL USA Inc. New Jersey USD 119,022,889.68 100.00 TMI TELEMEDIA
(telecommunications services) (USA) INTERN. Ltd
--------------------------------------------------------------------------------------
Mobile
TELECOM ITALIA MOBILE S.p.A. Turin EUR 513,964,432.74 54.82 55.68 TELECOM ITALIA
(mobile telecommunications) (Italy) 0.17 0.17 TELECOM ITALIA
FINANCE
--------------------------------------------------------------------------------------
- TIM INTERNATIONAL N.V. Amsterdam EUR 555,427,000 100.00 TELECOM ITALIA
(holding company) (Holland) MOBILE
--------------------------------------------------------------------------------------
- STET HELLAS TELECOMMUNICATIONS S.A. Athens EUR 126,453,694.4 81.40 TIM INTERNATIONAL
( mobile telephony services) (Greece) 0.13 TELECOM ITALIA
FINANCE
--------------------------------------------------------------------------------------
- TIM BRASIL S.A. Sao Paulo BRL 4,760,522,987.04 100.00 (*) TIM INTERNATIONAL
(holding company) (Brazil)
--------------------------------------------------------------------------------------
- BITEL PARTICIPACOES S.A. Rio de Janeiro BRL 2,290,264,028 100.00 (*) TIM BRASIL
(holding company) (Brazil)
--------------------------------------------------------------------------------------
- TELE CELULAR SUL PARTICIPACOES S.A. Curitiba BRL 324,666,393.24 20.68 (*) 52.06 BITEL
(holding company for operating companies (Brazil) PARTICIPACOES
providing mobile network services)
--------------------------------------------------------------------------------------
- TELEPAR CELULAR S.A. Curitiba BRL 912,839,704.66 80.79 (*) 90.19 TELE CELULAR SUL
(mobile telephony operator) (Brazil)
--------------------------------------------------------------------------------------
- CTMR CELULAR S.A. Pelotas BRL 21,251,917.26 100.00 (*) TELEPAR CELULAR
(mobile telephony operator) (Brazil)
--------------------------------------------------------------------------------------
- TELESC CELULAR S.A. Florianopolis BRL 266,803,506.58 100.00 (*) TELEPAR CELULAR
(mobile telephony operator) (Brazil)
--------------------------------------------------------------------------------------
- TELE NORDESTE CELULAR PARTICIPACOES S.A. Recife BRL 288,442,548.62 21.18 (*) 52.32 BITEL
(holding company for operating companies (Brazil) PARTICIPACOES
providing mobile network services)
--------------------------------------------------------------------------------------
- TELASA CELULAR S.A. Recife BRL 33,970,730.02 78.78 (*) 97.31 TELE NORDESTE
(mobile telephony operator) (Brazil) CELULAR
--------------------------------------------------------------------------------------
- TELECEARA' CELULAR S.A. Fortaleza BRL 148,484,134.39 79.99 (*) 86.00 TELE NORDESTE
(mobile telephony operator) (Brazil) CELULAR
--------------------------------------------------------------------------------------
- TELEPISA CELULAR S.A. Teresina BRL 24,762,149.14 79.46 (*) 97.59 TELE NORDESTE
(mobile telephony operator) (Brazil) CELULAR
--------------------------------------------------------------------------------------
- TELERN CELULAR S.A. Natal BRL 45,011,693.89 76.19 (*) 92.87 TELE NORDESTE
(mobile telephony operator) (Brazil) CELULAR
--------------------------------------------------------------------------------------
- TELPA CELULAR S.A. Joao Pessoa BRL 43,164,229.17 71.85 (*) 94.87 TELE NORDESTE
(mobile telephony operator) (Brazil) CELULAR
--------------------------------------------------------------------------------------
156
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
- TELPE CELULAR S.A. Recife BRL 125,620,727.74 78.68 (*) 95.16 TELE NORDESTE
(mobile telephony operator) (Brazil) CELULAR
--------------------------------------------------------------------------------------
- STARCEL Ltda Sao Paulo BRL 30,000 100.00 (*) TIM BRASIL
(call center services) (Brazil)
--------------------------------------------------------------------------------------
- TIM CELULAR S.A. (ex-PORTALE SAO Sao Paulo BRL 1,251,790,742 100.00 (*) TIM BRASIL
PAULO S.A.) (mobile telephony operator) (Brazil)
--------------------------------------------------------------------------------------
- MAXITEL S.A. Belo Horizonte BRL 677,679,703 58.70 (*) 43.15 TIM INTERNATIONAL
(mobile telephony operator) (Brazil) 37.97 46.85 BITEL
PARTICIPACOES
3.33 10.00 TIM BRASIL
--------------------------------------------------------------------------------------
- TIMNET.COM S.A. Rio de Janeiro BRL 78,000,000 20.00 (*) TIM INTERNATIONAL
(Internet services) (Brazil) 20.00 MAXITEL
20.00 TELE NORDESTE
CELULAR
20.00 TELE CELULAR SUL
20.00 TIM CELULAR
--------------------------------------------------------------------------------------
- TIMNET USA Inc. New Jersey USD 11,000,000 100.00 TIM INTERNATIONAL
(mobile services) (USA)
--------------------------------------------------------------------------------------
- TIM PERU' S.A.C. Lima PEN 1,337,542,452 100.00 (*) TIM INTERNATIONAL
(mobile telephony operator) (Peru)
--------------------------------------------------------------------------------------
- CORPORACION DIGITEL C.A. Caracas VEB 42,823,450,241 66.56 TIM INTERNATIONAL
(telecommunications services) (Venezuela)
--------------------------------------------------------------------------------------
South America
ENTEL CHILE S.A. Santiago CLP 408,096,296,423 54.76 TELECOM ITALIA
(telecommunications services) (Chile) INTERNATIONAL
--------------------------------------------------------------------------------------
- AMERICATEL CENTROAMERICA S.A. Guatemala City USD 2,649,608 78.65 ENTEL CHILE
(holding company) (Guatemala)
--------------------------------------------------------------------------------------
- AMERICATEL EL SALVADOR S.A. DE C.V. San Salvador USD 1,143,572.24 15.00 ENTEL CHILE
(telecommunications services) (El Salvador) 85.00 AMERICATEL
CENTROAMERICA
--------------------------------------------------------------------------------------
- AMERICATEL GUATEMALA S.A. Guatemala City GTQ 450,000 100.00 AMERICATEL
(telecommunications services) (Guatemala) CENTROAMERICA
--------------------------------------------------------------------------------------
- AMERICATEL HONDURAS S.A. Tegucigalpa HNL 500,000 100.00 (*) AMERICATEL
(telecommunications services) (Honduras) CENTROAMERICA
--------------------------------------------------------------------------------------
- ENTEL CALL CENTER S.A. Santiago CLP 10,827,422,540 90.00 ENTEL CHILE
(telecommunications services) (Chile) 10.00 ENTEL INVERSIONES
--------------------------------------------------------------------------------------
- ENTEL INTERNATIONAL B.V.I. Corp. Tortola CLP 32,424,451,213 100.00 ENTEL CHILE
(holding company) (British Virgin
Islands)
--------------------------------------------------------------------------------------
- AMERICATEL CORP. USA Florida USD 62,372,552.74 80.00 ENTEL
(telecommunications services) (USA) INTERNATIONAL
B.V.I.
--------------------------------------------------------------------------------------
- ENTEL USA HOLDING Inc. Florida USD 1,000 100.00 ENTEL
(holding company) (USA) INTERNATIONAL
B.V.I.
--------------------------------------------------------------------------------------
- AMERICASKY Corporation Florida USD 1,000 80.00 ENTEL USA HOLDING
(telecommunications services) (USA) 20.00 ENTEL
INTERNATIONAL
B.V.I.
--------------------------------------------------------------------------------------
- ENTEL INVERSIONES S.A. Santiago CLP 3,223,396,817 100.00 (*) ENTEL CHILE
(holding company) (Chile)
--------------------------------------------------------------------------------------
- AMERICATEL PERU' S.A. Lima PEN 39,288,339.60 45.69 ENTEL CHILE
(telecommunications services) (Peru) 54.31 ENTEL INVERSIONES
--------------------------------------------------------------------------------------
- ENTEL INVESTMENTS Inc. Tortola USD 1,630 100.00 ENTEL CHILE
(holding company) (British Virgin
Islands)
--------------------------------------------------------------------------------------
- ENTEL SERVICIOS TELEFONICOS S.A. Santiago CLP 1,103,479,919 91.42 ENTEL CHILE
(telecommunications services) (Chile) 8.58 ENTEL INVERSIONES
--------------------------------------------------------------------------------------
- ENTEL TELEFONIA LOCAL S.A. Santiago CLP 23,113,989,207 99.00 ENTEL CHILE
(local telecommunications services) (Chile) 1.00 ENTEL INVERSIONES
--------------------------------------------------------------------------------------
- CHILE WIRELESS S.A. Santiago CLP 116,128,205 99.00 ENTEL TELEFONIA
(holding company) (Chile) LOCAL
1.00 ENTEL INVERSIONES
--------------------------------------------------------------------------------------
- ENTEL TELEFONIA PERSONAL S.A. Santiago CLP 127,256,898,429 94.64 ENTEL CHILE
(holding company) (Chile) 5.36 ENTEL INVERSIONES
--------------------------------------------------------------------------------------
- EMPRESA DE RADIOCOMUNICACIONES INSTA Santiago CLP 1,757,062,939 99.90 ENTEL TELEFONIA
BEEP Ltda (telecommunications services) (Chile) PERSONAL
--------------------------------------------------------------------------------------
- ENTEL PCS TELECOMUNICACIONES S.A. Santiago CLP 98,369,022,334 0.10 ENTEL CHILE
(mobile telecommunications services) (Chile) 99.90 ENTEL TELEFONIA
PERSONAL
--------------------------------------------------------------------------------------
- ENTEL TELEFONIA MOVIL S.A. Santiago CLP 1,883,969,582 0.08 ENTEL CHILE
(mobile telecommunications services) (Chile) 99.92 ENTEL TELEFONIA
PERSONAL
--------------------------------------------------------------------------------------
- MICARRIER TELECOMUNICACIONES S.A. Santiago CLP 3,233,725,941 99.99 ENTEL CHILE
(telecommunications services) (Chile) 0.01 ENTEL INVERSIONES
--------------------------------------------------------------------------------------
157
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
- ENTEL VENEZUELA C.A. Caracas VEB 709,500,000 100.00 ENTEL CHILE
(ex-ORBITEL VENEZUELA C.A.) (Venezuela)
(telecommunications services)
--------------------------------------------------------------------------------------
- RED DE TRANSACCIONES ELECTRONICAS S.A Santiago CLP 1,629,756,041 93.76 ENTEL CHILE
(telecommunications services) (Chile)
--------------------------------------------------------------------------------------
- SATEL TELECOMUNICACIONES S.A. Santiago CLP 2,779,689,356 99.90 ENTEL CHILE
(telecommunications services) (Chile) 0.10 ENTEL INVERSIONES
--------------------------------------------------------------------------------------
ENTEL Empresa Nacional de Telecomunicaciones La Paz BOB 1,280,898,800 50.00 ETI
S.A. (telecommunications services) (Bolivia)
--------------------------------------------------------------------------------------
- DATACOM S.A. La Paz BOB 66,938,200 99.99 ENTEL S.A.
(data transmission services) (Bolivia)
--------------------------------------------------------------------------------------
TELECOM ITALIA AMERICA LATINA S.A. Sao Paulo BRL 43,614,072 100.00 TELECOM ITALIA
(telecommunications promotional services) (Brazil)
--------------------------------------------------------------------------------------
Internet and Media
SEAT PAGINE GIALLE S.p.A. Milan EUR 341,183,511.30 53.21 53.5850 TELECOM ITALIA
(publishing and Internet services) (Italy) 2.03 2.068 TELECOM ITALIA
FINANCE
0.02 0.0171 IT TELECOM
--------------------------------------------------------------------------------------
- ANNUARI ITALIANI S.p.A. (ex-KOMPASS ITALIA) Turin EUR 1,610,904.88 100.00 SEAT PAGINE
(publishing of annuals and sale of telematic (Italy) GIALLE
products)
--------------------------------------------------------------------------------------
- CIPI S.p.A. Milan EUR 1,200,000 60.00 SEAT PAGINE
(personalized products for companies) (Italy) GIALLE
--------------------------------------------------------------------------------------
- CONSODATA S.A. Levallois Perret EUR 4,748,159.50 90.42 SEAT PAGINE
(management and supply of data banks and (France) GIALLE
market research)
--------------------------------------------------------------------------------------
- BCA FINANCES S.A. Lille EUR 107,100 100.00 CONSODATA S.A.
(analysis, management and marketing of data (France)
banks)
--------------------------------------------------------------------------------------
- BCA S.A. Lille EUR 80,000 17.00 CONSODATA S.A.
(analysis, management and marketing of data (France) 83.00 BCA FINANCES
banks)
--------------------------------------------------------------------------------------
- CAL - CONSUMER ACCES Ltd Kingston GBP 200,000 100.00 CONSODATA S.A.
(management and supply of data banks) (UK)
--------------------------------------------------------------------------------------
- CONSODATA UK Ltd Kingston GBP 2 100.00 CAL - CONSUMER
(business information) (UK) ACCES
--------------------------------------------------------------------------------------
- CHINALOOP HOLDINGS Cayman Islands USD 29,961.3 50.06 CONSODATA S.A.
(direct marketing)
--------------------------------------------------------------------------------------
- CHINALOOP (MAURITIUS) Co Port Louis USD 200 100.00 CHINALOOP
(direct marketing) (Mauritius) HOLDINGS
--------------------------------------------------------------------------------------
- SHANGHAI CHINALOOP INFORMATION SERVICES Shanghai USD 1,730,000 100.00 CHINALOOP
(direct marketing) (China) (MAURITIUS)
--------------------------------------------------------------------------------------
- CONSOBELGIUM S.A. Brussels EUR 62,500 100.00 CONSODATA S.A.
(business information) (Belgium)
--------------------------------------------------------------------------------------
- CONSODATA ESPANA S.A. Barcelona ESP 310,000,000 100.00 CONSODATA S.A.
(business information) (Spain)
--------------------------------------------------------------------------------------
- QUANTITATIVE MARKETING TECHNOLOGIES S.L. Barcelona EUR 13,113 70.00 CONSODATA ESPANA
(direct marketing) (Spain)
--------------------------------------------------------------------------------------
- CONSODATA SOLUTIONS S.A. Levallois Perret EUR 270,000 100.00 CONSODATA S.A.
(data management) (France)
--------------------------------------------------------------------------------------
- CONSODATA S.p.A. Rome EUR 13,200,000 100.00 CONSODATA S.A.
(services of direct marketing; creation, (Italy)
management and marketing of data bank)
--------------------------------------------------------------------------------------
- CONSODATA MARKETING INTELLIGENCE S.r.l. Milan EUR 46,400 96.00 CONSODATA S.p.A.
(ex-DOMINO RESEARCH S.r.l.) (Italy)
(data processing geomarketing sector)
--------------------------------------------------------------------------------------
- DWI S.p.A. Verona EUR 500,000 51.00 CONSODATA S.p.A.
(design, software realization) (Italy)
--------------------------------------------------------------------------------------
- FINANZA E GESTIONE S.r.l. Milan EUR 77,450 100.00 CONSODATA S.p.A.
(creation, management and trading of data (Italy)
banks for the banking sector)
--------------------------------------------------------------------------------------
- PUBBLIBABY S.p.A. Cusago EUR 100,000 100.00 CONSODATA S.p.A.
(design, management and marketing of native (Milan, Italy)
sector data bank)
--------------------------------------------------------------------------------------
- MEDIA PRISME S.A. Levallois Perret EUR 40,000 50.00 CONSODATA S.A.
(analysis, management and marketing of data (France) 50.00 BCA FINANCES
banks)
--------------------------------------------------------------------------------------
- MEDIA PRISME ESPAGNE S.A. Madrid EUR 30,490 100.00 MEDIA PRISME
(direct marketing) (Spain)
--------------------------------------------------------------------------------------
- MP LIST S.A. Brussels FB 750,000 100.00 MEDIA PRISME
(analysis, management and marketing of data (Belgium)
banks)
--------------------------------------------------------------------------------------
- CONSODATA GROUP Ltd London GBP 25,146,140 99.996 SEAT PAGINE
(management and supply of data banks) (UK) GIALLE
0.004 CAL - CONSUMER
ACCES
--------------------------------------------------------------------------------------
- NETCREATIONS Inc. New York USD 1 100.00 CONSODATA GROUP
(management of the license regarding the (USA)
software products of Netex Ltd)
--------------------------------------------------------------------------------------
158
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
- PAN-ADRESS DIREKTMARKETING VERWALTUNG GmbH Munich EUR 25,000 100.00 CONSODATA GROUP
(direct marketing) (Germany)
--------------------------------------------------------------------------------------
- PAN-ADRESS DIREKTMARKETING & Co. KG Munich DEM 2,040,000 100.00 CONSODATA GROUP
(direct marketing) (Germany)
--------------------------------------------------------------------------------------
- CONSODATA DEUTSCHLAND GmbH (in liquidation) Munich DEM 50,000 100.00 PAN-ADRESS
(direct marketing) (Germany) DIREKTMARK. &
Co. KG
--------------------------------------------------------------------------------------
- CONSODATA MARKETING INTELLIGENCE GmbH Munich EUR 25,000 100.00 PAN-ADRESS
(direct marketing) (Germany) DIREKTMARK. &
Co. KG
--------------------------------------------------------------------------------------
- MEDIPLAN GmbH (in liquidation) Munich EUR 26,000 100.00 PAN-ADRESS
(direct marketing) (Germany) DIREKTMARK. &
Co. KG
--------------------------------------------------------------------------------------
- DATABANK S.p.A. Milan EUR 937,300 93.465 SEAT PAGINE
(marketing) (Italy) GIALLE
--------------------------------------------------------------------------------------
- DBK S.A. Madrid EUR 99,000 99.99 DATABANK S.p.A.
(marketing) (Spain)
--------------------------------------------------------------------------------------
- EUREDIT S.A. Paris EUR 2,800,000 93.562 SEAT PAGINE
(realization, promotion and marketing of (France) GIALLE
European "Europages" product annual)
--------------------------------------------------------------------------------------
- FINANZIARIA WEB S.p.A. Turin EUR 9,606,073.50 60.00 SEAT PAGINE
(financing) (Italy) GIALLE
--------------------------------------------------------------------------------------
- MATRIX S.p.A Milan EUR 1,100,000 0.70 SEAT PAGINE
(Internet services) (Italy) GIALLE
66.00 FINANZIARIA WEB
33.30 N.V. VERTICO
--------------------------------------------------------------------------------------
- FREE FINANCE S.p.A Milan EUR 148,102 100.00 MATRIX
(Internet loans for the real estate market) (Italy)
--------------------------------------------------------------------------------------
- WEBNEXT S.r.l. (ex-XOOM.it S.p.A.) (in Milan EUR 100,000 100.00 MATRIX
liquidation) (development and management of (Italy)
virtual communities)
--------------------------------------------------------------------------------------
- FINSATEL S.r.l. (in liquidation) Turin EUR 10,000 100.00 SEAT PAGINE
(holding company) (Italy) GIALLE
--------------------------------------------------------------------------------------
- GIALLO PROFESSIONAL PUBLISHING S.p.A. Turin EUR 1,000,000 100.00 SEAT PAGINE
(publishing, typographic and graphic (Italy) GIALLE
marketing, advertising)
--------------------------------------------------------------------------------------
- GRUPPO EDITORIALE FAENZA EDITRICE S.p.A. Faenza EUR 260,000 60.00 GIALLO
(publishing house) (Ravenna, Italy) PROFESSIONAL
PUBLISHING
--------------------------------------------------------------------------------------
- FAENZA EDITRICE IBERICA S.L. Castellon de La EUR 3,005.50 100.00 GRUPPO EDITORIALE
(publishing house also on behalf of third Plana FAENZA EDITRICE
parties) (Spain)
--------------------------------------------------------------------------------------
- FAENZA EDITRICE DO BRASIL Ltda Sao Paulo BRL 133,169 91.00 GRUPPO EDITORIALE
(publishing house also on behalf of third (Brazil) FAENZA EDITRICE
parties) 9.00 FAENZA EDITRICE
IBERICA
--------------------------------------------------------------------------------------
- PROMO ADVERTISING S.r.l. Faenza EUR 10,320 100.00 GRUPPO EDITORIALE
(acquisition of advertising on behalf of (Ravenna, Italy) FAENZA EDITRICE
magazines, TV and multimedia broadcasting)
--------------------------------------------------------------------------------------
- GRUPPO EDITORIALE JCE S.p.A. Cinisello Balsamo EUR 1,032,800 65.00 GIALLO
(publishing house) (Milan, Italy) PROFESSIONAL
PUBLISHING
--------------------------------------------------------------------------------------
- QUASAR E ASSOCIATI S.r.l. Milan EUR 20,408 51.00 GIALLO
(multimedia publishers) (Italy) PROFESSIONAL
PUBLISHING
--------------------------------------------------------------------------------------
- EDITORIALE QUASAR S.r.l. Milan EUR 10,000 100.00 QUASAR E
(publishing house and advertising agency) (Italy) ASSOCIATI
--------------------------------------------------------------------------------------
- TTG ITALIA S.p.A. Turin EUR 100,000 98.00 GIALLO
(publishing house for the tourist market) (Italy) PROFESSIONAL
PUBLISHING
--------------------------------------------------------------------------------------
- GIALLO VOICE S.p.A. Turin EUR 1,000,000 100.00 SEAT PAGINE
(teleselling, telemarketing, call centers (Italy) GIALLE
and marketing)
--------------------------------------------------------------------------------------
- IMR S.r.l. Turin EUR 10,500 100.00 GIALLO VOICE
(call center services) (Italy)
--------------------------------------------------------------------------------------
- OPS S.r.l. Milan EUR 10,200 66.00 GIALLO VOICE
(call center services) (Italy)
--------------------------------------------------------------------------------------
- TELEPROFESSIONAL S.r.l. Monza EUR 52,000 66.00 GIALLO VOICE
(call center services) (Milan, Italy)
--------------------------------------------------------------------------------------
- GRUPPO BUFFETTI S.p.A. Rome EUR 11,817,000 100.00 SEAT PAGINE
(supply of products regarding the paper (Italy) GIALLE
industry, printing and publishing)
--------------------------------------------------------------------------------------
- OFFICE AUTOMATION PRODUCTS S.p.A. Lecco EUR 774,000 84.00 GRUPPO BUFFETTI
(wholesale magnetic support sales) (Italy)
--------------------------------------------------------------------------------------
- IS PRODUCTS S.p.A. Lecco EUR 9,360,000 27.78 GRUPPO BUFFETTI
(marketing of office automation) (Italy) 72.22 OFFICE AUTOMATION
PRODUCTS
--------------------------------------------------------------------------------------
- INCAS PRODUCTIONS S.r.l. Venaria Reale EUR 510,000 100.00 OFFICE AUTOMATION
(wholesale production and marketing (Turin, Italy) PRODUCTS
of office consumable products)
--------------------------------------------------------------------------------------
- PBS PROFESSIONAL BUSINESS SOFTWARE S.p.A. Rome EUR 127,500 100.00 GRUPPO BUFFETTI
(production and marketing of business (Italy)
software)
--------------------------------------------------------------------------------------
- SK DIRECT S.r.l. Rome EUR 5,522,920 58.37 GRUPPO BUFFETTI
(graphic arts) (Italy) 41.63 OFFICE AUTOMATION
PRODUCTS
--------------------------------------------------------------------------------------
159
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
- HOLDING MEDIA E COMUNICAZIONE H.M.C. S.p.A. Rome EUR 5,064,000 100.00 SEAT PAGINE
(production, marketing on TV and press) (Italy) GIALLE
--------------------------------------------------------------------------------------
- GLOBO EUROPA B.V. (in liquidation) Amsterdam EUR 181,512.09 100.00 HOLDING MEDIA E
(services and operations in the field of (Holland) COMUNICAZIONE
radio and TV broadcasting) H.M.C.
--------------------------------------------------------------------------------------
- HOLDING MEDIA E COMUNICAZIONE PUBBLICITA' Rome EUR 516,500 100.00 HOLDING MEDIA E
S.r.l. (in liquidation) (purchase and sale (Italy) COMUNICAZIONE
of advertising spaces and management of H.M.C.
advertising in the field of radio and TV
broadcasting)
--------------------------------------------------------------------------------------
- TV INTERNAZIONALE S.p.A. Rome EUR 6,200,000 100.00 HOLDING MEDIA E
(purchase, management and maintenance of (Italy) COMUNICAZIONE
technical transmission systems for audio H.M.C.
and video broadcasting)
--------------------------------------------------------------------------------------
- BEIGUA S.r.l. Rome EUR 51,480 51.00 TV INTERNAZIONALE
(purchase, management and maintenance of (Italy)
installation for the repair and
distribution of radio and TV broadcasting)
--------------------------------------------------------------------------------------
- GIAROLO S.r.l. Rome EUR 50,490 75.50 TV INTERNAZIONALE
(purchase, management and maintenance of (Italy)
installation for the repair and
distribution of radio and TV broadcasting)
--------------------------------------------------------------------------------------
- MTV ITALIA S.r.l. Rome EUR 12,151,928 51.00 TV INTERNAZIONALE
(services in the field of radio and TV (Italy)
broadcasting, production and sale of radio,
TV and cinema programs)
--------------------------------------------------------------------------------------
- MTV PUBBLICITA' S.r.l. Milan EUR 10,400 100.00 MTV ITALIA
(advertising agency) (Italy)
--------------------------------------------------------------------------------------
- TDL INFOMEDIA Ltd Hampshire GBP 139,524.78 99.73 SEAT PAGINE
(holding company) (UK) GIALLE
--------------------------------------------------------------------------------------
- MYBLUECAT.COM Ltd (in liquidation) Hampshire GBP 2 100.00 TDL INFOMEDIA
(supply of services) (UK)
--------------------------------------------------------------------------------------
- TDL INFOMEDIA FINANCE Ltd Hampshire GBP 9,734.09 100.00 TDL INFOMEDIA
(holding company) (UK)
--------------------------------------------------------------------------------------
- TDL INFOMEDIA HOLDINGS Plc Hampshire GBP 397,126.43 100.00 TDL INFOMEDIA
(holding company) (UK) FINANCE
--------------------------------------------------------------------------------------
- TDL INFOMEDIA GROUP Plc Hampshire GBP 624,576.64 100.00 TDL INFOMEDIA
(holding company) (UK) HOLDINGS
--------------------------------------------------------------------------------------
- TDL GROUP Ltd Hampshire GBP 89,864.25 100.00 TDL INFOMEDIA
(holding company) (UK) GROUP
--------------------------------------------------------------------------------------
- THOMSON DIRECTORIES Ltd Hampshire GBP 1,340,000 100.00 TDL GROUP
(publishing and marketing directories) (UK)
--------------------------------------------------------------------------------------
- THOMSON DIRECTORIES PENSION Hampshire GBP 2 100.00 THOMSON
COMPANY Ltd (UK) DIRECTORIES
(management of Thomson Directories Pension
fund)
--------------------------------------------------------------------------------------
- TDL INVESTMENTS B.V. (in liquidation) Rotterdam EUR 20,000 100.00 TDL INFOMEDIA
(supply of services) (Holland)
--------------------------------------------------------------------------------------
- TELEGATE HOLDING GmbH Martinsried EUR 26,076 100.00 SEAT PAGINE
(holding company) (Germany) GIALLE
--------------------------------------------------------------------------------------
- TELEGATE A.G. Martinsried EUR 20,944,355 16.46 SEAT PAGINE
(call center services) (Germany) GIALLE
61.98 TELEGATE HOLDING
--------------------------------------------------------------------------------------
- 118866 Ltd (ex-TELEGATE Ltd) London GBP 1 100.00 TELEGATE A.G.
(call center services) (UK)
--------------------------------------------------------------------------------------
- ARSMOVENDI.COM A.G. (in liquidation) Munich EUR 150,000 100.00 TELEGATE A.G.
(Internet services) (Germany)
--------------------------------------------------------------------------------------
- TRAVELGATE BUSINESS GmbH (in liquidation) Munich EUR 25,000 100.00 ARSMOVENDI.COM
(business tour operator) (Germany)
--------------------------------------------------------------------------------------
- DATAGATE GmbH Martinsried EUR 25,000 100.00 TELEGATE A.G.
(call center) (Germany)
--------------------------------------------------------------------------------------
- KIMTRAVEL CONSULTING A.G. (in liquidation) Munich EUR 69,493 100.00 TELEGATE A.G.
(Internet services) (Germany)
--------------------------------------------------------------------------------------
- TELEGATE AKADEMIE GmbH Rostock EUR 25,000 100.00 TELEGATE A.G.
(training center for employees of call (Germany)
centers)
--------------------------------------------------------------------------------------
- TELEGATE ANKLAM GmbH Anklam EUR 51,129 100.00 TELEGATE A.G.
(Internet services) (Germany)
--------------------------------------------------------------------------------------
- 11880.com GmbH Martinsried EUR 25,000 100.00 TELEGATE ANKLAM
(call center services) (Germany)
--------------------------------------------------------------------------------------
- MOBILSAFE A.G. (in liquidation) Meerbusch EUR 150,000 100.00 TELEGATE ANKLAM
(Internet services) (Germany)
--------------------------------------------------------------------------------------
- TELEGATE ESPANA S.A. Madrid EUR 3,061,000 100.00 TELEGATE A.G.
(call center services) (Spain)
--------------------------------------------------------------------------------------
- TELEGATE GmbH Vienna EUR 35,000 100.00 TELEGATE A.G.
(call center services) (Austria)
--------------------------------------------------------------------------------------
- TELEGATE Inc. Texas USD 10,000,010 100.00 TELEGATE A.G.
(call center services) (USA)
--------------------------------------------------------------------------------------
160
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
- TELEGATE ITALIA S.r.l. Milan EUR 129,000 100.00 TELEGATE A.G.
(call center services) (Italy)
--------------------------------------------------------------------------------------
- TGT HOLDING B.V. (in liquidation) Schiphol EUR 18,200 100.00 TELEGATE A.G.
(holding company) (Holland)
--------------------------------------------------------------------------------------
Information Technology Market
--------------------------------------------------------------------------------------
FINSIEL - Consulenza e Applicazioni Rome EUR 59,982,384.60 77.92 TELECOM ITALIA
Informatiche S.p.A. (conception and (Italy) 0.63 FINSIEL
implementation of projects in information
technology applications)
--------------------------------------------------------------------------------------
- AGRISIAN - Consulenza e Servizi per Rome EUR 10,330,000 50.86 FINSIEL
l'Agricoltura S.C.p.A. (consulting and (Italy)
services in favor of agriculture)
--------------------------------------------------------------------------------------
- ASPASIEL S.r.l. Rome EUR 260,000 50.00 51.00 FINSIEL
(information systems) (Italy)
--------------------------------------------------------------------------------------
- BANKSIEL - Societa di informatica e Milan EUR 10,400,000 55.50 FINSIEL
Organizzazione p.A. (design, installation, (Italy)
operation and maintenance of information
systems for bank and insurance companies)
--------------------------------------------------------------------------------------
- CARISIEL Sistemi Informativi Elettronici Rende EUR 769,585 2.00 FINSIEL
per il Settore Creditizio e Finanziario (Cosenza, Italy) 98.00 BANKSIEL
S.p.A. (electronic information systems for
banking and financial industry)
--------------------------------------------------------------------------------------
- CENTROSIEL S.p.A. Milan EUR 516,600 47.00 51.00 BANKSIEL
(information systems) (Italy)
--------------------------------------------------------------------------------------
- EIS - Elettronica Ingegneria Sistemi Rome EUR 5,165,000 100.00 FINSIEL
S.p.A. (design, installation, operation (Italy)
and maintenance of sophisticated
electronic systems)
--------------------------------------------------------------------------------------
- FINSIEL ROMANIA S.r.l. Bucharest ROL 11,841,500,000 90.53 FINSIEL
(information systems) (Rumania)
--------------------------------------------------------------------------------------
- INSIEL - Informatica per il Sistema Trieste EUR 7,755,000 52.00 FINSIEL
degli Enti Locali S.p.A. (information (Italy)
systems)
--------------------------------------------------------------------------------------
- VENIS - VENEZIA INFORMATICA E SISTEMI Venice EUR 1,549,500 20.40 FINSIEL
S.p.A.(information systems for the (Italy) 30.60 INSIEL
municipality of Venice and other
public entities)
--------------------------------------------------------------------------------------
- INTERSIEL - Societa Interregionale Rende EUR 1,033,000 100.00 FINSIEL
Sistemi Informativi Elettronici S.p.A. (Cosenza, Italy)
(design, installation, operation and
maintenance of information systems)
--------------------------------------------------------------------------------------
- KRENESIEL - Societa Sarda di Sassari EUR 2,582,300 41.00 FINSIEL
Informatica S.p.A. (information systems) (Italy) 10.00 INSIEL
--------------------------------------------------------------------------------------
- TELE SISTEMI FERROVIARI S.p.A. Rome EUR 77,003,669.54 61.00 FINSIEL
(information systems) (Italy)
--------------------------------------------------------------------------------------
- WEBRED S.p.A. Perugia EUR 1,560,000 51.00 FINSIEL
(information systems) (Italy)
--------------------------------------------------------------------------------------
Information Technology Group
IT TELECOM S.p.A. Rome EUR 96,853,000 100.00 TELECOM ITALIA
(information and communication technology) (Italy)
--------------------------------------------------------------------------------------
- NETIKOS S.p.A. Rome EUR 13,416,000 100.00 IT TELECOM
(information systems) (Italy)
--------------------------------------------------------------------------------------
- NETIKOS FINLAND OY Helsinki EUR 10,700 100.00 NETIKOS
(development of wireless solutions) (Finland)
--------------------------------------------------------------------------------------
- SODALIA NORTH AMERICA Inc. Virginia USD 700,000 100.00 IT TELECOM
(telecommunications software) (USA)
--------------------------------------------------------------------------------------
- EUSTEMA S.p.A. Rome EUR 312,000 67.33 IT TELECOM
(design, research, development and Italy)
marketing of software, information and
online systems)
--------------------------------------------------------------------------------------
- TECO SOFT ARGENTINA S.A. Buenos Aires ARS 12,000 100.00 (*) IT TELECOM
(design, realization and sale of software) (Argentina)
--------------------------------------------------------------------------------------
- TELESOFT HELLAS S.A. Athens EUR 489,000 100.00 IT TELECOM
(telecommunications software) (Greece)
--------------------------------------------------------------------------------------
- TELESOFT RUSSIA ZAO Moscow RUB 1,592,000 75.00 IT TELECOM
(telecommunications software) (Russia)
--------------------------------------------------------------------------------------
- WEBEGG S.p.A. Milan EUR 33,107,160 69.80 IT TELECOM
(e-business solutions) (Italy) 30.20 FINSIEL
--------------------------------------------------------------------------------------
- TELEAP S.p.A. Ivrea EUR 1,560,000 100.00 WEBEGG
(software applications, architecture) (Turin, Italy)
--------------------------------------------------------------------------------------
- @LIVE S.p.A. Turin EUR 10,000 100.00 WEBEGG
(international training) (Italy)
--------------------------------------------------------------------------------------
- DOMUS ACCADEMY S.p.A. Milan EUR 140,000 67.33 WEBEGG
(design research) (Italy)
--------------------------------------------------------------------------------------
161
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
- W.P. WINNER PROJECT B.V. Rotterdam EUR 18,152 100.00 WEBEGG
(software applications) (Holland)
--------------------------------------------------------------------------------------
- SOFTWARE FACTORY S.p.A. Milan EUR 1,500,000 100.00 W.P. WINNER
(software applications) (Italy) PROJECT
--------------------------------------------------------------------------------------
TELECOM ITALIA LAB S.p.A. Turin EUR 27,455,000 100.00 TELECOM ITALIA
(studies, research and venture capital (Italy)
in telecommunications and electronics)
--------------------------------------------------------------------------------------
- LOQUENDO - SOCIETA' PER AZIONI Turin EUR 3,573,741 99.99 TELECOM ITALIA
(research, development and marketing of (Italy) LAB S.p.A.
technologies and equipment regarding voice
recognition and interaction)
--------------------------------------------------------------------------------------
- TELECOM ITALIA LAB GENERAL PARTNER S.A. Luxembourg USD 30,000 99.97 TELECOM ITALIA
(holding company) LAB S.p.A.
0.03 TELECOM ITALIA
FINANCE
--------------------------------------------------------------------------------------
- TELECOM ITALIA LAB S.A. Luxembourg USD 25,894,360 99.99 TELECOM ITALIA
(holding company) LAB S.p.A.
0.01 TELECOM ITALIA
FINANCE
--------------------------------------------------------------------------------------
- TELECOM ITALIA LAB B.V. Amsterdam EUR 18,655 100.00 TELECOM ITALIA
(holding company) (Holland) LAB S.A.
--------------------------------------------------------------------------------------
- TELSY Elettronica e Telecomunicazioni Turin EUR 390,000 100.00 TELECOM ITALIA
S.p.A. (manufacturing and sale of systems (Italy) LAB S.p.A.
for encrypted telecommunications)
--------------------------------------------------------------------------------------
Other operations
--------------------------------------------------------------------------------------
EMSA Servizi S.p.A. (ex-CONSULTEL S.p.A.) Rome EUR 5,000,000 100.00 TELECOM ITALIA
(real estate management) (Italy)
--------------------------------------------------------------------------------------
EPICLINK S.p.A. Segrate EUR 12,500,000 86.00 TELECOM ITALIA
(telecommunication services) (Milan, Italy)
--------------------------------------------------------------------------------------
IN.TEL.AUDIT S.c.a r.l. Milan EUR 2,750,000 54.55 TELECOM ITALIA
(internal auditing for the Telecom (Italy) 18.18 SEAT PAGINE
Italia Group) GIALLE
18.18 TELECOM ITALIA
MOBILE
--------------------------------------------------------------------------------------
NETESI S.p.A. Milan EUR 14,744,573 100.00 TELECOM ITALIA
(telecommunication and multimedia services) (Italy)
--------------------------------------------------------------------------------------
SAIAT- Societa Attivita Intermedie Turin EUR 35,745,120 100.00 TELECOM ITALIA
Ausiliarie Telecomunicazioni p.A. (Italy)
(financing)
--------------------------------------------------------------------------------------
TELECOM ITALIA LEARNING SERVICES S.p.A. L'Aquila EUR 1,560,000 100.00 TELECOM ITALIA
(ex-SSGRR) (professional training) (Italy)
--------------------------------------------------------------------------------------
- TELECOM ITALIA LEARNING SERVICES DO Sao Paulo BRL 174,040 100.00 (*) TELECOM ITALIA
BRASIL Ltda (ex-CONSIEL DO BRASIL) (Brazil) LEARNING
(consulting and information systems) SERVICES
--------------------------------------------------------------------------------------
TECNO SERVIZI MOBILI S.r.l. Rome EUR 26,000 51.00 TELECOM ITALIA
(real estate management) (Italy)
--------------------------------------------------------------------------------------
TELECOM ITALIA INTERNATIONAL N.V. Amsterdam EUR 2,399,483,300 100.00 TELECOM ITALIA
(ex-STET INTERNATIONAL NETHERLANDS N.V.) (Holland)
(holding company)
--------------------------------------------------------------------------------------
- BBNED N.V. Amsterdam EUR 82,425,000 97.56 TELECOM ITALIA
(telecommunications services) (Holland) INTERNATIONAL
--------------------------------------------------------------------------------------
- BBEYOND B.V. Amsterdam EUR 18,000 100.00 BBNED
(telecommunications services) (Holland)
--------------------------------------------------------------------------------------
- ICH - International Communication Amsterdam EUR 50,000 100.00 TELECOM ITALIA
Holding N.V. (holding company) (Holland) INTERNATIONAL
--------------------------------------------------------------------------------------
- ETI - Euro Telecom International N.V. Amsterdam EUR 50,050 100.00 ICH
(holding company) (Holland)
--------------------------------------------------------------------------------------
TELECOM ITALIA FINANCE S.A. (ex-TI WEB) Luxembourg EUR 869,162,615 100.00 (*) TELECOM ITALIA
(holding company)
--------------------------------------------------------------------------------------
- ISM S.r.l. Turin EUR 10,000 100.00 TELECOM ITALIA
(holding company) (Italy) FINANCE
--------------------------------------------------------------------------------------
- N.V. VERTICO Brussels EUR 3,533,781 99.99 ISM
(holding company) (Belgium) 0.01 TELECOM ITALIA
FINANCE
--------------------------------------------------------------------------------------
- TELSI Ltd London EUR 603,565,000 100.00 (*) TELECOM ITALIA
(holding company) (UK) FINANCE
--------------------------------------------------------------------------------------
TELE PAY ROLL SERVICES S.p.A. Rome EUR 2,840,000 100.00 TELECOM ITALIA
(information systems for payroll services) (Italy)
--------------------------------------------------------------------------------------
(*) The percentage of ownership includes Ordinary Shares/Quotas held by members
of the Board of Directors/Managers, as requested by local laws in order to take
the post of Director /Manager, or held by Fiduciaries.
162
TELECOM ITALIA GROUP - ANNEX 6
LIST OF COMPANIES CONSOLIDATED BY THE EQUITY METHOD
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES
EDOTEL S.p.A. Turin EUR 15,080,541.90 60.00 TELECOM ITALIA
(holding company) (Italy) 40.00 TELECOM ITALIA
MOBILE
--------------------------------------------------------------------------------------
EURO DATACOM Ltd Huddersfield GBP 306,666 100.00 TMI TELEMEDIA
(telecommunications services) (UK) INTERN. Ltd
--------------------------------------------------------------------------------------
GOALLARS B.V. Amsterdam EUR 100,000 55.00 MATRIX
(management of an Internet site) (Holland)
--------------------------------------------------------------------------------------
TELECOM ITALIA CAPITAL S.A. Luxembourg EUR 2,336,000 99.999 ELECOM ITALIA
(financing) 0.001 TELECOM ITALIA
FINANCE
--------------------------------------------------------------------------------------
TELECOM MEDIA INTERNATIONAL ITALY-CANADA Montreal CAD 952,100 100.00 TMI TELEMEDIA
Inc. (telecommunications services) (Canada) INTERN. Ltd
--------------------------------------------------------------------------------------
TELEFONIA MOBILE SAMMARINESE S.p.A. Republic of EUR 78,000 51.00 INTELCOM S.MARINO
(mobile telecommunications) San Marino
--------------------------------------------------------------------------------------
THINX-SM TELEHOUSE INTERNET EXCHANGE S.A. Republic of EUR 870,000 100.00 INTELCOM S.MARINO
(housing and hosting) San Marino
--------------------------------------------------------------------------------------
TMI TELEMEDIA INTERNATIONAL DO BRASIL Ltda Sao Paulo BRL 2,443,217 100.00 (*) TMI TELEMEDIA
(telecommunications services) (Brazil) INTERN. Ltd
--------------------------------------------------------------------------------------
ZDNET ITALIA S.p.A. Milan EUR 400,000 51.00 MATRIX
(creation and management of Internet sites) (Italy)
--------------------------------------------------------------------------------------
AFFILIATED COMPANIES
--------------------------------------------------------------------------------------
ASCAI SERVIZI S.r.l. Rome EUR 73,336.84 35.21 SAIAT
(promotion of communications strategies (Italy)
and process)
--------------------------------------------------------------------------------------
BROAD BAND SERVICE S.A. Republic of EUR 258,000 20.00 INTELCOM S.MARINO
(production and sales of multimedia services) San Marino 20.00 STREAM
--------------------------------------------------------------------------------------
BUENAVENTURA S.A. Santiago CLP 1,841,258,210 50.00 ENTEL TELEFONIA
(telecommunications services) (Chile) PERSONAL
--------------------------------------------------------------------------------------
CABLE INSIGNIA S.A. Asuncion PYG 1,000,000,000 75.00 TELECOM PERSONAL
(telecommunications services) (Paraguay)
--------------------------------------------------------------------------------------
CARTESIA-CARTOGRAFIA DIGITALE S.p.A. Rome EUR 1,032,800 50.00 TELECOM ITALIA
(design, realization, marketing of numeric (Italy)
cartography)
--------------------------------------------------------------------------------------
CYGENT Inc. California USD 52,273,000 25.21 TELECOM ITALIA
(development and sale of software) (USA) LAB B.V.
--------------------------------------------------------------------------------------
DATASIEL - Sistemi e Tecnologie di Genoa EUR 2,582,500 49.00 FINSIEL
Informatica S.p.A. (data processing (Italy)
products and services for public
administration agencies, institutions and
enterprises under Ligurian Regional
Law n. 17/85)
--------------------------------------------------------------------------------------
DISCOVERITALIA S.p.A. Novara EUR 5,160,000 25.00 SEAT PAGINE
(communication services) (Italy) GIALLE
--------------------------------------------------------------------------------------
EISYS S.p.A. Rome EUR 619,200 25.00 EIS
(information systems) (Italy)
--------------------------------------------------------------------------------------
ESRI ITALIA S.p.A. Rome EUR 500,000 49.00 SEAT PAGINE
(development and distribution of services (Italy) GIALLE
based on the GIS - "Geographical
Information Systems" technology)
--------------------------------------------------------------------------------------
ETEC S.A. - Empresa de Telecomunicaciones La Habana USD 1,441,900,000 29.29 TELECOM ITALIA
de Cuba S.A. (telecommunications services) (Cuba) INTERNATIONAL
--------------------------------------------------------------------------------------
EURODIRECTORY S.A. Luxembourg EUR 1,625,320 50.00 SEAT PAGINE
(holding company of the publishers of the GIALLE
Kompass directories)
--------------------------------------------------------------------------------------
GARAGE S.r.l. Milan EUR 49,400 35.00 WEBEGG
(multimedia and cinema broadcasting) (Italy)
--------------------------------------------------------------------------------------
GLB SERVICOS INTERATIVOS S.A. Rio de Janeiro BRL 182,732,615 28.57 TELECOM ITALIA
(Internet services) (Brazil) FINANCE
--------------------------------------------------------------------------------------
GO TO WEB S.p.A. Ivrea EUR 3,719,764 20.00 WEBEGG
(web-based software solutions) (Turin, Italy)
--------------------------------------------------------------------------------------
GOLDEN LINES INTERNATIONAL COMMUNICATIONS Ramat Gan ILS 3,000,000 26.40 TELECOM ITALIA
SERVICES Ltd (Israel) INTERNATIONAL
(long distance telephony services)
--------------------------------------------------------------------------------------
ICOM Inc. Toronto CAD 203.09 40.00 NETCREATIONS
(development of data bank and Internet (Canada)
market place)
--------------------------------------------------------------------------------------
163
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
IM.SER S.p.A. Rome EUR 1,315,800 40.00 TELECOM ITALIA
(real estate management) (Italy)
--------------------------------------------------------------------------------------
IS TIM TELEKOMUNIKASYON HIZMETLERI A.S. Istanbul TRL 545,000,000,000,000 49.00 TIM INTERNATIONAL
(mobile telephony operator) (Turkey)
--------------------------------------------------------------------------------------
ISCE Investor in Sapient & Cuneo Europe S.A. Luxembourg EUR 4,334,400 25.00 SEAT PAGINE
(consulting) GIALLE
--------------------------------------------------------------------------------------
ITALCOM S.p.A. Milan EUR 103,200 100.00 ITALTEL S.p.A.
(multimedia systems and devices) (Italy)
--------------------------------------------------------------------------------------
ITALDATA S.p.A. Avellino EUR 3,096,000 100.00 SIEMENS
(solutions and services for the web economy) (Italy) INFORMATICA
--------------------------------------------------------------------------------------
ITALTEL A.O. Saint Petersburg RUB 20,000 100.00 ITALTEL B.V.
(telecommunications systems) (Russia)
--------------------------------------------------------------------------------------
ITALTEL ARGENTINA S.A. Buenos Aires ARS 600,000 96.00 ITALTEL B.V.
(telecommunications systems) (Argentina) 4.00 ITALTEL S.p.A.
--------------------------------------------------------------------------------------
ITALTEL B.V. Amsterdam EUR 6,000,000 100.00 TALTEL S.p.A.
(trading and financial company) (Holland)
--------------------------------------------------------------------------------------
ITALTEL BRASIL Ltda Sao Paulo BRL 2,018,302 51.44 ITALTEL S.p.A.
(trading company) (Brazil) 48.56 ITALTEL B.V.
--------------------------------------------------------------------------------------
ITALTEL CERM PALERMO S.c.p.a. Palermo EUR 2,125,000 90.00 ITALTEL S.p.A.
(research) (Italy) 10.00 TELECOM ITALIA
LAB S.p.A.
--------------------------------------------------------------------------------------
ITALTEL DE CHILE S.A. Santiago CLP 50,119,607 90.00 ITALTEL B.V.
(telecommunications systems) (Chile) 10.00 ITALTEL S.p.A.
--------------------------------------------------------------------------------------
ITALTEL DEUTSCHLAND GmbH Dusseldorf EUR 40,000 60.00 ITALTEL HOLDING
(trading company) (Germany) 40.00 ITALTEL B.V.
--------------------------------------------------------------------------------------
ITALTEL FRANCE S.a.s. Issy EUR 40,000 100.00 ITALTEL HOLDING
(trading company) (France)
--------------------------------------------------------------------------------------
ITALTEL HOLDING S.p.A. Milan EUR 115,459,344 19.37 TELECOM ITALIA
(holding company) (Italy) FINANCE
--------------------------------------------------------------------------------------
ITALTEL Inc. Delaware USD 100 60.00 ITALTEL HOLDING
(trading company) (USA) 40.00 ITALTEL B.V.
--------------------------------------------------------------------------------------
ITALTEL KENYA Ltd Nairobi KES 500,000 99.98 ITALTEL B.V.
(telecommunications systems) (Kenya) 0.02 ITALTEL S.p.A.
--------------------------------------------------------------------------------------
ITALTEL NIGERIA Ltd Lagos NGN 2,000,000 99.99 ITALTEL B.V.
(telecommunications systems) (Nigeria) 0.01 ITALTEL S.p.A.
--------------------------------------------------------------------------------------
ITALTEL S.A. Madrid EUR 6,460,750 100.00 TALTEL B.V.
(telecommunications systems) (Spain)
--------------------------------------------------------------------------------------
ITALTEL S.p.A. Milan EUR 196,830,400 100.00 TALTEL HOLDING
(telecommunications systems) (Italy)
--------------------------------------------------------------------------------------
ITALTEL UK Ltd Staines GBP 26,000 60.00 ITALTEL HOLDING
(trading company) (UK) 40.00 ITALTEL B.V.
--------------------------------------------------------------------------------------
L'UFFICIO MODERNO S.r.l. Florence EUR 10,400 15.00 GRUPPO BUFFETTI
(sale of books and office supplies) (Italy) 15.00 IL CENTRO
CONTABILE
--------------------------------------------------------------------------------------
MARCAM ITALY S.r.l. Milan EUR 92,962 99.00 PRAXIS CALCOLO
(services for automatic data management) (Italy)
--------------------------------------------------------------------------------------
MESNIL HOLDING S.A. Luxembourg EUR 78,000 99.99 ISCE
(holding company)
--------------------------------------------------------------------------------------
MIA ECONOMIA.com S.r.l. Milan EUR 1,500,000 30.00 MATRIX
(publishing in the field of personal finance) (Italy)
--------------------------------------------------------------------------------------
MICRO SISTEMAS S.A. Buenos Aires ARS 210,000 99.99 TELECOM ARGENTINA
(telecommunications services) (Argentina) STET-FRANCE
TELECOM
0.01 PUBLICOM
--------------------------------------------------------------------------------------
MIRROR INTERNATIONAL HOLDING S.a.r.l. Luxembourg EUR 250,000 30.00 TELECOM ITALIA
(holding company)
--------------------------------------------------------------------------------------
MIRROR INTERNATIONAL GmbH Frankfurt EUR 25,000 100.00 MIRROR INTERN.
(holding company) (Germany) HOLDING
--------------------------------------------------------------------------------------
MOVENDA S.p.A. Rome EUR 133,333 25.00 TELECOM ITALIA
(technological platforms for the (Italy) LAB B.V.
development of mobile Internet services)
--------------------------------------------------------------------------------------
NETCO REDES S.A. Madrid EUR 6,038,248 30.00 TELECOM ITALIA
(provider of telecommunications (Spain) INTERNATIONAL
infrastructures)
--------------------------------------------------------------------------------------
NORDCOM S.p.A. Milan EUR 5,000,000 42.00 TELECOM ITALIA
(application service provider) (Italy)
--------------------------------------------------------------------------------------
NORTEL INVERSORA S.A. Buenos Aires ARS 78,633,050 22.03 32.50 TELECOM ITALIA
(holding company) (Argentina) 11.86 17.50 TELECOM ITALIA
INTERNATIONAL
--------------------------------------------------------------------------------------
NUCLEO S.A. Asuncion PYG 175,200,000,000 67.50 TELECOM PERSONAL
(telecommunications services) (Paraguay)
--------------------------------------------------------------------------------------
PRAXIS CALCOLO S.p.A. Milan EUR 1,056,000 22.50 FINSIEL
(technical and organizational services for (Italy)
automatic data management)
--------------------------------------------------------------------------------------
PUBLICOM S.A. Buenos Aires ARS 16,000,000 99.99 TELECOM ARGENTINA
(telecommunications services) (Argentina) STET-FRANCE
TELECOM
0.01 NORTEL INVERSORA
--------------------------------------------------------------------------------------
SIEMENS INFORMATICA S.p.A. Milan EUR 6,192,000 49.00 TELECOM ITALIA
164
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
(sale of innovating solutions in the (Italy)
field of electronic and mobile business)
--------------------------------------------------------------------------------------
SIOSISTEMI S.p.A. Brescia EUR 260,000 40.00 TELECOM ITALIA
(systems networking with special emphasis (Italy) LAB S.p.A.
on the design of LAN and WAN systems and
related hardware support systems)
--------------------------------------------------------------------------------------
SISPI S.p.A. Palermo EUR 2,066,000 49.00 FINSIEL
(information systems for the municipality (Italy)
of Palermo and other private and public
entities)
--------------------------------------------------------------------------------------
SITEBA SISTEMI TELEMATICI BANCARI S.p.A. Milan EUR 2,600,000 30.00 TELECOM ITALIA
(support services for payments systems) (Italy)
--------------------------------------------------------------------------------------
SITECNIKA S.p.A. Milan EUR 143,000 100.00 SIEMENS
(IT multivendor services) (Italy) INFORMATICA
--------------------------------------------------------------------------------------
SITEKNE S.p.A. Rome EUR 103,200 100.00 SIEMENS
(furnishing of resources in the field of (Italy) INFORMATICA
ITC-Information Technology Communication
solutions)
--------------------------------------------------------------------------------------
SOGEI SERVIZI INNOVATIVI E TECNOLOGICI Rome EUR 5,200,000 49.00 FINSIEL
S.p.A. (development of business enterprises (Italy)
in the field of ITC and technological
information)
--------------------------------------------------------------------------------------
STREAM S.p.A. Rome EUR 302,399,080 50.00 TELECOM ITALIA
(multimedia services) (Italy)
--------------------------------------------------------------------------------------
TELECOM ARGENTINA STET-FRANCE TELECOM S.A. Buenos Aires ARS 984,380,978 54.74 NORTEL INVERSORA
(telecommunications services) (Argentina)
--------------------------------------------------------------------------------------
TELECOM ARGENTINA USA Inc. Delaware USD 249,873 100.00 TELECOM ARGENTINA
(telecommunications services) (USA) STET-FRANCE
TELECOM
--------------------------------------------------------------------------------------
TELECOM PERSONAL S.A. Buenos Aires ARS 310,514,481 99.99 TELECOM ARGENTINA
(telecommunications services) (Argentina) STET-FRANCE
TELECOM
0.01 PUBLICOM
--------------------------------------------------------------------------------------
TELEGONO S.r.l. Rome EUR 1,000,000 40.00 TELECOM ITALIA
(real estate management) (Italy)
--------------------------------------------------------------------------------------
TELEKOM AUSTRIA A.G. Vienna EUR 1,090,500,000 14.78 TELECOM ITALIA
(wireline telephony) (Austria) INTERNATIONAL
--------------------------------------------------------------------------------------
TELEKOM SRBIJA a.d. Belgrade YUM 10,800,000,000 29.00 TELECOM ITALIA
(telecommunications services) (Serbia) INTERNATIONAL
--------------------------------------------------------------------------------------
TELELEASING - Leasing di Telecomunicazioni Milan EUR 9,500,000 20.00 SAIAT
e Generale S.p.A. (financial leasing of (Italy)
real estate and other assets)
--------------------------------------------------------------------------------------
TIGLIO I S.r.l. Milan EUR 5,255,704 36.85 TELECOM ITALIA
(real estate management) (Italy) 2.10 SEAT PAGINE
GIALLE
--------------------------------------------------------------------------------------
TIGLIO II S.r.l. Milan EUR 14,185,288 49.47 TELECOM ITALIA
(real estate management) (Italy)
--------------------------------------------------------------------------------------
USABLENET Inc. Delaware USD 1 20.00 TELECOM ITALIA
(development of software for the analysis (USA) LAB B.V.
of web site usability)
--------------------------------------------------------------------------------------
VIRTUALSELF Ltd. Ramat Gan ILS 4,749 38.70 TELECOM ITALIA
(development and sale of internet services (Israel) LAB B.V.
based on a technology for the linguistic
analysis for the research of contents)
(*) The percentage of ownership includes Ordinary Shares/Quotas held by members
of the Board of Directors/Managers, as requested by local laws in order to take
the post of Director /Manager, or held by Fiduciaries.
165
TELECOM ITALIA GROUP - ANNEX 7
LIST OF OTHER SUBSIDIARIES AND AFFILIATED COMPANIES
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES
ARTES S.r.l. (in liquidation) Rome EUR 10,000 100.00 HOLDING MEDIA E
(telecommunications services) (Italy) COMUNICAZIONE
HMC
--------------------------------------------------------------------------------------
BUFFETTI S.r.l. (in liquidation) Rome EUR 10,000 100.00 GRUPPO BUFFETTI
(sale of books and office supplies) (Italy)
--------------------------------------------------------------------------------------
CABESTAN S.A. (in liquidation) Suresnes FRF 250,000 100.00 CONSODATA S.A.
(software design) (France)
--------------------------------------------------------------------------------------
CONSODATA INTERACTIVE S.A. (in liquidation) Levallois Perret EUR 40,000 100.00 CONSODATA S.A.
(business information services) (France)
--------------------------------------------------------------------------------------
CONSODATA ITALIA S.r.l. (in liquidation) Milan EUR 10,200 100.00 CONSODATA S.A.
(business information) (Italy)
--------------------------------------------------------------------------------------
CONSODATA SYSTEME S.A. (in liquidation) Levallois Perret EUR 40,000 100.00 CONSODATA S.A.
(business information services) (France)
--------------------------------------------------------------------------------------
DATABANK WETTBEWERBS - MARKT- UND Darmstadt EUR 153,387.56 60.00 DATABANK S.p.A.
FINANZANALYSE GmbH (in liquidation) (Germany)
(marketing)
--------------------------------------------------------------------------------------
EMAX-TRADE S.r.l. (in liquidation) Milan EUR 100,000 100.00 MATRIX
(management of Internet sites) (Italy)
--------------------------------------------------------------------------------------
GIALLO MARKET S.r.l. (in liquidation) Milan EUR 10,000 90.00 MATRIX
(owner of Virgilio.it) (Italy) 10.00 SEAT PAGINE
GIALLE
--------------------------------------------------------------------------------------
GIALLO VIAGGI.it S.p.A. (in liquidation) Milan EUR 10,000 100.00 SEAT PAGINE
(research, development, production of (Italy) GIALLE
information and telematic products for
tourism)
--------------------------------------------------------------------------------------
EVEREST S.r.l. Trieste EUR 10,400 100.00 WAVENET
(telematic services) (Italy)
--------------------------------------------------------------------------------------
FINSIEL HELLAS S.A. (in liquidation) Koropi GRD 230,000,000 91.00 FINSIEL
(computer products for public and private (Greece)
customers)
--------------------------------------------------------------------------------------
IL CENTRO CONTABILE S.p.A. (in liquidation) Rome EUR 2,233,507.26 89.70 GRUPPO BUFFETTI
(sale of books and office ware) (Italy)
--------------------------------------------------------------------------------------
INCAS FRANCE S.A. (in liquidation) Asnieres FRF 19,168,900 100.00 IS PRODUCTS
(sale of products for office automation) (France)
--------------------------------------------------------------------------------------
IREOS S.p.A. (in liquidation) Rome EUR 100,000 100.00 TELECOM ITALIA
(promotion and management of remote (Italy)
at-home assistance)
--------------------------------------------------------------------------------------
IRIDIUM ITALIA S.p.A. (in liquidation) Rome EUR 2,575,000 30.00 TELECOM ITALIA
(satellite telecommunications services) (Italy) 35.00 TELECOM ITALIA
MOBILE
--------------------------------------------------------------------------------------
KMATRIX S.r.l. Milan EUR 100,000 100.00 MATRIX
(creation and management of an Internet (Italy)
site)
--------------------------------------------------------------------------------------
LINK S.r.l. (in liquidation) Milan EUR 10,400 100.00 MATRIX
(supply of computer services) (Italy)
--------------------------------------------------------------------------------------
LOQUENDO Inc. (in liquidation) California USD 14,021,000 100.00 LOQUENDO S.p.A.
(development of software for web voice (USA)
interaction)
--------------------------------------------------------------------------------------
NETESI S.A.S. (in liquidation) Paris EUR 40,000 100.00 (*) NETESI
(telecommunication services) (France)
--------------------------------------------------------------------------------------
NEW WORLD TELECOM S.A. Santiago CLP 14,000,000 100.00 (*) LATIN AMERICAN
(telecommunication services) (Chile) NAUTILUS CHILE
--------------------------------------------------------------------------------------
OR.MA INFORMATICA S.r. Rome EUR 10,200 100.00 GRUPPO BUFFETTI
(wholesale of computer products) (Italy)
--------------------------------------------------------------------------------------
RFM DATA Ltd (in liquidation) Kingston GBP 2 100.00 CAL - CONSUMER
(list brokering) (UK) ACCESS
--------------------------------------------------------------------------------------
SCS COMUNICAZIONE INTEGRATA S.p.A. Rome EUR 600,000 100.00 SEAT PAGINE
(in liquidation) (marketing and (Italy) GIALLE
communication consulting)
--------------------------------------------------------------------------------------
SERVICE IN S.r.l. (in liquidation) Milan EUR 10,691 95.00 CIPI
(furnishing of services) (Italy)
--------------------------------------------------------------------------------------
TELECOM ITALIA GmbH (in liquidation) Vienna EUR 36,336.42 100.00 TELECOM ITALIA
(holding company) (Austria)
--------------------------------------------------------------------------------------
TELECOM ITALIA IRELAND Ltd Dublin EUR 2 100.00 TELECOM ITALIA
(telecommunications services) (Ireland)
--------------------------------------------------------------------------------------
TELECOMMUNICATIONS ADVISER LLC Delaware USD 560,280 100.00 TELECOM ITALIA
(management of Saturn Venture Partners (USA) LAB G.P.
fund)
--------------------------------------------------------------------------------------
TELENERGIA S.r.l. Rome EUR 50,000 80.00 TELECOM ITALIA
(import, export, purchase, sale and (Italy) 20.00 TELECOM ITALIA
exchange of electrical energy) MOBILE
166
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
TIM.COM Holding B.V. Amsterdam EUR 18,000 100.00 TIM INTERNATIONAL
(holding company) (Holland)
--------------------------------------------------------------------------------------
TIMNET.COM PERU' S.A.C. Lima PEN 1,000 100.00 TIM PERU'
(services for mobile networks) (Peru)
--------------------------------------------------------------------------------------
TIN WEB S.p.A. (in liquidation) Milan EUR 10,000 100.00 SEAT PAGINE
(consulting for the creation of Internet (Italy) GIALLE
sites)
--------------------------------------------------------------------------------------
TMI HUNGARY TRADING AND SERVICES Ltd Budapest HUF 3,000,000 100.00 TMI TELEMEDIA
(in liquidation) (telecommunications (Hungary) INTERN. Ltd
services)
--------------------------------------------------------------------------------------
TRAINET S.p.A. (in liquidation) Rome EUR 674,445.70 100.00 TELECOM ITALIA
(development, operation and sales of (Italy)
lines teaching systems)
--------------------------------------------------------------------------------------
WAVENET S.r.l. Monfalcone EUR 51,600 84.37 NETESI
(telematic services) (Gorizia, Italy)
--------------------------------------------------------------------------------------
AFFILIATED COMPANIES
CITEL - Corporacion Interamericana de Monterrey MXN 2,073,729,933 25.00 TELECOM ITALIA
Telecomunicaciones S.A. (holding company) (Mexico) INTERNATIONAL
--------------------------------------------------------------------------------------
CLIPPER S.p.A. (in liquidation) Rome EUR 100,000 50.00 SCS COMUNICAZIONE
(marketing and communication consulting) (Italy) INTEGR.
(in liq.)
--------------------------------------------------------------------------------------
CROMA S.r.l. (in liquidation) P. San Giovanni EUR 41,317 50.00 WEBRED
(hardware maintenance) (Perugia, Italy)
--------------------------------------------------------------------------------------
DATATRADER S.A. (in liquidation) Rueil Mailmaison EUR 266,980 50.00 CONSODATA S.A.
(creation and sale of data base) (France)
--------------------------------------------------------------------------------------
E-UTILE S.p.A. Milan EUR 482,000 51.00 SIEMENS
(ICT solutions and services for companies (Italy) INFORMATICA
in the field of public utilities)
--------------------------------------------------------------------------------------
INDIRECT S.P.R.L. (in liquidation) Brussels BEF 6,000,000 19.17 TDL INVESTMENTS
(sale of services) (Belgium) 7.83 TDL INFOMEDIA Ltd
--------------------------------------------------------------------------------------
MEDITERRANEAN BROAD BAND ACCESS S.A. Heraklion Crete EUR 17,580,000 40.00 TELECOM ITALIA
(telecommunications services) (Greece) INTERNATIONAL
--------------------------------------------------------------------------------------
NETEX S.r.l. (in liquidation) Milan EUR 10,000 50.00 MATRIX
(activities relating to the contract (Italy)
regarding the license of the software of
Netex Ltd )
--------------------------------------------------------------------------------------
TDL BELGIUM S.A. Brussels FB 750,087,200 49.60 TDL INVESTMENTS
(publishing and sale of directories) (Belgium)
--------------------------------------------------------------------------------------
UBA - NET S.A. Buenos Aires ARS 12,000 50.00 TRAINET
(teledidactic services) (Argentina) (in liquidation)
--------------------------------------------------------------------------------------
VOICEMAIL INTERNATIONAL Inc. California USD 48,580 37.07 TELECOM ITALIA
(in liquidation) (voice message services) (USA)
--------------------------------------------------------------------------------------
CONSORTIUM SUBSIDIARIES
CONSORZIO ABECA (in liquidation) Rome EUR 103,291.38 33.33 FINSIEL
(information systems for the Ministry of (Italy) 33.33 INTERSIEL
Cultural Works and the Environment)
--------------------------------------------------------------------------------------
CONSORZIO CONNET FORMAZIONE Bari EUR 51,645.69 60.00 TELECOM ITALIA
(professional training for the Ministry (Italy) LEARNING
of Labor and Social Security) SERVICES
--------------------------------------------------------------------------------------
CONSORZIO ENERGIA GRUPPO TELECOM ITALIA Rome EUR 10,000 50.00 TELECOM ITALIA
(cooordination of power for fixed and (Italy) 50.00 TELECOM ITALIA
mobile network of the associated companies) MOBILE
--------------------------------------------------------------------------------------
CONSORZIO GEODOC (in liquidation) Rome EUR 103,291.38 90.00 FINSIEL
(realization of an information system for (Italy)
the geological documentation of the
national territory)
--------------------------------------------------------------------------------------
CONSORZIO IRIS BENI CULTURALI Rome EUR 171,600 90.91 FINSIEL
(filing and recovery of documents and (Italy) 9.09 IT TELECOM
system assistance for the Ministry of
Cultural Works and the Environment)
--------------------------------------------------------------------------------------
CONSORZIO ISIB (in liquidation) Rome EUR 51,645.69 70.00 FINSIEL
(harmonization of the infrastructure system (Italy) 30.00 INTERSIEL
of the Central Institute which manages the
unique catalogue of the Italian libraries)
--------------------------------------------------------------------------------------
CONSORZIO NAUTILUS Rome EUR 30,000 31.00 TELECOM ITALIA
(professional training) (Italy) LEARNING
SERVICES
20.00 MEDITERRANEAN
NAUTILUS Ltd
--------------------------------------------------------------------------------------
CONSORZIO SEGISIEL in liquidation) Rende EUR 103,291.38 85.00 INTERSIEL
(realization of operating systems in the (Cosenza, Italy) 15.00 FINSIEL
field of justice for the Telcal consortium)
--------------------------------------------------------------------------------------
CONSORZIO SER (in liquidation) Catanzaro EUR 103,291.38 46.00 INTERSIEL
(realization of the information plan (Italy) 5.00 INSIEL
Calabria for the Telcal consortium)
--------------------------------------------------------------------------------------
CONSORZIO SESIT Rome EUR 51,645.69 70.00 FINSIEL
(realization of the integrated information (Italy)
system for the Ministry of Transport
and Navigation)
--------------------------------------------------------------------------------------
CONSORZIO SOFTIN (in liquidation) Naples EUR 877,976.73 100.00 FINSIEL
167
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
(research and development in the field of (Italy)
industrial software and consulting)
--------------------------------------------------------------------------------------
CONSORZIO TURISTEL Rome EUR 77,460 33.33 IT TELECOM
(information systems for tourism) (Italy) 33.33 FINSIEL
--------------------------------------------------------------------------------------
CONSORTIUM AFFILIATES
CONSORZIO ACCAM Rome EUR 6,120 33.33 EIS
(automation of the communication centers (Italy)
of the agencies and operating units of
the Air Force)
--------------------------------------------------------------------------------------
CONSORZIO C.O.M.P.A. (in liquidation) Bologna EUR 180,759.91 20.00 FINSIEL
(study and monitoring of the problems of (Italy)
the Padano-Adriatico basin and
professional training)
--------------------------------------------------------------------------------------
CONSORZIO CEW Perugia EUR 15,400 40.00 WEBRED
(electronic publishing) (Italy)
--------------------------------------------------------------------------------------
CONSORZIO CSIA Rome EUR 206,582.76 44.00 FINSIEL
(information systems for the State agency (Italy)
for the agricultural market)
--------------------------------------------------------------------------------------
CONSORZIO DREAM FACTORY Rome EUR 20,000 20.00 TELECOM ITALIA
(promotion and development of new economy (Italy) LAB S.p.A.
in the weak areas of the Nation)
--------------------------------------------------------------------------------------
CONSORZIO ITALTEL TELESIS (in liquidation) Milan EUR 516,456 100.00 ITALTEL S.p.A.
(integrated telematic systems) (Italy)
--------------------------------------------------------------------------------------
CONSORZIO LABORATORIO DELLA CONOSCENZA Naples EUR 51,646 25.00 TELECOM ITALIA
(realization of a research project for Italy) LAB S.p.A.
innovative remote professional training 25.00 TELECOM ITALIA
and platforms in Naples) LEARNING
SERVICES
--------------------------------------------------------------------------------------
CONSORZIO LA CARTA DI VENEZIA Venice EUR 10,500 50.00 VENIS
(in liquidation) (integrated services for (Italy)
the metropolitan area of Venice)
--------------------------------------------------------------------------------------
CONSORZIO OMNIA (in liquidation) Perugia EUR 2,582.28 50.00 WEBRED
(hardware maintenance) (Italy)
--------------------------------------------------------------------------------------
CONSORZIO PAOLA (in liquidation) Udine EUR 8,143.88 50.00 INSIEL
(applied research for the development of (Italy)
information systems for clinics and
medical structures)
--------------------------------------------------------------------------------------
CONSORZIO REISSFORM Rome EUR 51,000 50.00 TELECOM ITALIA
(services and consulting regarding (Italy) LEARNING
professional training and management) SERVICES
--------------------------------------------------------------------------------------
CONSORZIO SCUOLA SUPERIORE ALTA Naples EUR 127,500 20.00 TELECOM ITALIA
FORMAZIONE UNIVERSITA' FEDERICO II (Italy) MOBILE
(professional training)
--------------------------------------------------------------------------------------
CONSORZIO SIMT Rome EUR 51,645.69 45.00 FINSIEL
(information systems for the General (Italy)
Management of the civil traffic and
transport control authority)
--------------------------------------------------------------------------------------
CONSORZIO STOAMED Ercolano EUR 10,000 30.00 TELECOM ITALIA
(projects and management of technologically (Naples, Italy) LEARNING
advanced services regarding professional SERVICES
training)
--------------------------------------------------------------------------------------
CONSORZIO TELCAL Catanzaro EUR 877,975 24.00 TELECOM ITALIA
(planning and development of the organic (Italy) 24.00 INTERSIEL
project "Piano Telematico Calabria")
--------------------------------------------------------------------------------------
CONSORZIO TELEMED (in liquidation) Rome EUR 103,291 33.33 TELECOM ITALIA
(telematic activities for social and (Italy)
sanitary assistance)
(*) The percentage of ownership includes Ordinary Shares/Quotas held by members
of the Board of Directors/Managers, as requested by local laws in order to take
the post of Director/Manager, or held by Fiduciaries.
168
TELECOM ITALIA GROUP - ANNEX 8
OTHER MAJOR EQUITY HOLDINGS AS PER CONSOB RESOLUTION N. 11971 OF MAY 14, 1999
Name Head office Share capital % % Held by
(type of business) ownership of voting
rights
------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
ANCITEL S.p.A. Rome EUR 1,087,232 8.55 TELECOM ITALIA
(telecommunications services) (Italy) 7.13 INSIEL
--------------------------------------------------------------------------------------
CIFRA S.c.a.r.l. Cagliari EUR 61,976 16.67 KRENESIEL
(information technology activities) (Italy)
--------------------------------------------------------------------------------------
COMUNICARE VIA SATELLITE S.r.l. Republic of EUR 72,000 15.00 INTELCOM S.MARINO
(in liquidation) (sale of services San Marino
relating to TV business)
--------------------------------------------------------------------------------------
ELETTROCLICK S.p.A. (in liquidation) Milan EUR 127,420 14.70 SEAT PAGINE
(software production) (Italy) GIALLE
--------------------------------------------------------------------------------------
EUSKALTEL S.A. Zamudio Bizkaia EUR 295,000,000 15.26 TELECOM ITALIA
(telecommunications services) (Spain) INTERNATIONAL
--------------------------------------------------------------------------------------
HOLDING BANCA DELLA RETE S.p.A. Milan EUR 25,040,000 15.00 EDOTEL
(financing) (Italy)
--------------------------------------------------------------------------------------
IFM INFOMASTER S.p.A. Genoa EUR 161,765 12.00 TELECOM ITALIA
(planning and realization of call (Italy) LAB B.V.
center solutions)
--------------------------------------------------------------------------------------
INSULA S.p.A. Mestre EUR 2,064,000 12.00 TELECOM ITALIA
(telecommunications services) (Venice, Italy)
--------------------------------------------------------------------------------------
ITALBIZ.COM Inc. California USD 4,720 19.50 SEAT PAGINE
(management of an Internet site) (USA) GIALLE
--------------------------------------------------------------------------------------
LOCALPORT S.p.A. Ivrea EUR 922,365 12.14 TELECOM ITALIA
(study, research, development and sale (Turin, Italy) LAB S.p.A.
of information systems)
--------------------------------------------------------------------------------------
PAS GROUP - Professional Application Milan EUR 91,800 16.67 EUSTEMA
Software S.r.l. (software production) (Italy)
--------------------------------------------------------------------------------------
POLCESCA S.r.l. (in liquidation) Bologna EUR 89,000 16.67 EIS
(managenent of information services) (Italy)
--------------------------------------------------------------------------------------
SOLPART PARTICIPACOES S.A. Rio de Janeiro BRL 2,023,103,679 19.00 TELECOM ITALIA
(holding company for investment in Brasil (Brazil) INTERNATIONAL
Telecom Participacoes S.A.)
--------------------------------------------------------------------------------------
TELEPORTO ADRIATICO S.r.l. Venice EUR 1,650,000 7.50 TELECOM ITALIA
(telecommunications services) (Italy) 4.69 INSIEL
--------------------------------------------------------------------------------------
TRADIZIONI ITALIANE S.p.A. Ciro EUR 8,263,111 11.38 INTERSIEL
(agro-food company) (Crotone, Italy)
--------------------------------------------------------------------------------------
TWICE SIM S.p.A. Milan EUR 12,925,000 18.64 SEAT PAGINE
(investment services) (Italy) GIALLE
--------------------------------------------------------------------------------------
VIRTUALAND PARK S.p.A. (in liquidation) Castiglione del Lago EUR 103,280 12.50 WEBRED
(information services) (Perugia, Italy)
--------------------------------------------------------------------------------------
169
ERNST & YOUNG [] Reconta Ernst & Young S.p.A. [] Tel.(+39)011 5161611
Corso Vittorio Emanuele II, 83 Fax (+39)011 5612554
10128 Torino www.ey.com
AUDITORS' REPORT
pursuant to article 156 of Legislative Decree of February 24, 1998, n. 58
(Translation from the original Italian text)
To the Shareholders
of Telecom Italia S.p.A.
1. We have audited the consolidated financial statements of Telecom Italia
S.p.A. as of and for the year ended December 31, 2002. These financial
statements are the responsibility of the Telecom Italia S.p.A.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
2. Our audit was made in accordance with auditing standards and procedures
recommended by CONSOB. In accordance with such standards and procedures we
planned and performed our audit to obtain the information necessary in
order to determine whether the consolidated financial statements are
materially misstated and if such financial statements, taken as a whole,
may be relied upon. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, as
well as assessing the appropriateness of the accounting principles applied
and the reasonableness of the estimates made by management. We believe
that our audit provides a reasonable basis for our opinion.
The financial statements of certain subsidiaries and associated companies,
which represent respectively 6% and 8% of consolidated total assets and
consolidated total revenues, have been examined by other auditors, whose
reports have been furnished to us. Our opinion, expressed herein, insorar
as it relates to the data relating to those subsidiaries and associated
companies included in the consolidated financial statements, is based on
the reports of the other auditors.
For the opinion on the consoldiated financial statements of the prior year,
which are presented for comparative purposes as required by the law,
reference should be made to our auditors' report dated April 15, 2002.
3. In our opinion, the consolidated financial statements of Telecom Italia
S.p.A. comply with the Italian regulations governing consolidated
financial statements; accordingly, they clearly present and give a true
and fair view of the consolidated financial position of Telecom Italia
S.p.A. as of December 31, 2002, and the consolidated results of its
operations for the year then ended.
[] Reconta Ernst and Young, S.p.A.
Sede Legale: 00196 Roma - Via G.D. Romagnosi, 187A
Capitale Sociale Euro 1,111,000,00 i.v.
Iscritta alla S.O. del Registro delle Imprese presso la C.C.I.A.A. di Roma
Codice fiscale e numero di Iscrizione 00434000584
P.I. 00891231003
(vecchio numero R.I. 6697/89 - numero R.E.A. 250904)
ERNST & YOUNG [] Reconta Ernst & Young S.p.A.
4. We draw your attention to the information presented in the explanatory
notes, "Summary of significant accounting policies", regarding the
accounting criteria utilized for the employee benefit obligations as
required by Law no. 58/1992.
5. On March 11, 2003, the Board of Directors of Telecom Italia S.p.A.,
approved the proposal for a project aimed to shorten the corporate
structure through the merger of Telecom Italia S.p.A. into Olivetti S.p.A.
and subsequently, on April 15, 2003 it approved the related plan for the
merger, prepared in accordance with art. 2501 - bis of the Italian Civil
Code.
Turin, April 18, 2003
Reconta Ernst & Young S.p.A.
signed by: Felice Persico (Partner)
FINANCIAL STATEMENTS AT DECEMBER 31, 2002 OF
TELECOM ITALIA S.p.A.
170
BALANCE SHEETS
=============================================================================================================
ASSETS 12/31/2002
-------------------------------------------------------------------------------------------------------------
(in euros)
RECEIVABLES FROM SHAREHOLDERS FOR CAPITAL CONTRIBUTIONS
INTANGIBLES, FIXED ASSETS AND LONG-TERM INVESTMENTS
INTANGIBLE ASSETS
Start-up and expansion costs -
Industrial patents and intellectual property rights 525,523,663
Concessions, licenses, trademarks and similar rights 10,791,308
Goodwill 16,000
Work in progress and advances to suppliers 637,069,639
Other intangibles 114,048,229
----------------------------------------------------
TOTAL INTANGIBLE ASSETS 1,287,448,839
----------------------------------------------------
FIXED ASSETS
Land and buildings 1,178,606,207
Plant and machinery 10,692,289,963
Manufacturing and distribution equipment 11,937,567
Other fixed assets 63,711,467
Construction in progress and advances to suppliers 731,490,279
----------------------------------------------------
TOTAL FIXED ASSETS 12,678,035,483
----------------------------------------------------
LONG-TERM INVESTMENTS
Equity investments in
subsidiaries 14,399,645,612
affiliated companies 388,273,288
other companies 55,233,459
----------------------------------------------------
Total equity investments 14,843,152,359
----------------------------------------------------
Advances on future capital contributions 166,183,295
Accounts receivable (*)
subsidiaries 60,000,000
affiliated 117,406,373
other receivables 34,795,153 123,533,159
----------------------------------------------------
Total accounts receivable 34,795,153 300,939,532
----------------------------------------------------
Treasury stocks (par value euro 28,010 thousand
at 12/31/2002 287,212,760
----------------------------------------------------
TOTAL LONG-TERM INVESTMENTS 15,597,487,946
----------------------------------------------------
TOTAL INTANGIBLES, FIXED ASSETS AND LONG-TERM INVESTMENTS 29,562,972,268
----------------------------------------------------
CURRENT ASSETS
INVENTORIES
Contract work in process 16,868,691
Finished goods and merchandise
merchandise 52,703,650
----------------------------------------------------
TOTAL INVENTORIES 69,572,341
----------------------------------------------------
(* *)
ACCOUNTS RECEIVABLE
Trade accounts receivable 3,753,467,984
Accounts receivable from subsidiaries 2,796,623,107
Accounts receivable from affiliated companies 91,519,524
Accounts receivable from parent companies 1,243,144
Other receivables due from
Government and other public entities for grants
and subsidies 1,265,371
deferred tax assets 850,727,767 1,589,039,225
other receivables 1,399,099,236
----------------------------------------------------
Total other receivables 850,727,767 2,989,403,832
----------------------------------------------------
TOTAL ACCOUNTS RECEIVABLE 9,632,257,591
----------------------------------------------------
SHORT-TERM FINANCIAL ASSETS
Equity investments in subsidiaries 165,282,784
Other equity investments -
Other securities -
----------------------------------------------------
TOTAL SHORT-TERM FINANCIAL ASSETS 165,282,784
----------------------------------------------------
LIQUID ASSETS
Bank and postal accounts 235,044,882
Checks 15,028
Cash and valuables on hand 478,432
----------------------------------------------------
TOTAL LIQUID ASSETS 235,538,342
----------------------------------------------------
TOTAL CURRENT ASSETS 10,102,651,058
----------------------------------------------------
ACCRUED INCOME AND PREPARED EXPENSES
Issue discounts and similar charges 40,952,035
Accrued income and other prepaid expenses 438,973,972
----------------------------------------------------
TOTAL ACCRUED INCOME AND PREPARED EXPENSES 479,926,007
----------------------------------------------------
TOTAL ASSETS 40,145,549,333
=============================================================================================================
(*) Amounts due within one year
(**) Amounts due beyond one year
171
=============================================================================================================
ASSETS 12/31/2001
-------------------------------------------------------------------------------------------------------------
(in euros)
RECEIVABLES FROM SHAREHOLDERS FOR CAPITAL CONTRIBUTIONS
INTANGIBLES, FIXED ASSETS AND LONG-TERM INVESTMENTS
INTANGIBLE ASSETS
Start-up and expansion costs -
Industrial patents and intellectual property rights 665,720,762
Concessions, licenses, trademarks and similar rights 85,560
Goodwill -
Work in progress and advances to suppliers 479,961,536
Other intangibles 172,154,470
----------------------------------------------------
TOTAL INTANGIBLE ASSETS 1,317,922,328
----------------------------------------------------
FIXED ASSETS
Land and buildings 1,497,470,780
Plant and machinery 11,800,587,380
Manufacturing and distribution equipment 27,952,989
Other fixed assets 102,835,291
Construction in progress and advances to suppliers 680,743,184
----------------------------------------------------
TOTAL FIXED ASSETS 14,109,589,624
----------------------------------------------------
LONG-TERM INVESTMENTS
Equity investments in
subsidiaries 17,659,160,313
affiliated companies 386,923,301
other companies 24,326,711
----------------------------------------------------
Total equity investments 18,070,410,325
----------------------------------------------------
Advances on future capital contributions 78,895,821
Accounts receivable (*)
subsidiaries 60,000,000
affiliated -
other receivables 60,523,522 160,738,026
----------------------------------------------------
Total accounts receivable 60,523,522 220,738,026
----------------------------------------------------
Treasury stocks (par value euro 28,010 thousand
at 12/31/200 -
----------------------------------------------------
TOTAL LONG-TERM INVESTMENTS 18,370,044,172
----------------------------------------------------
TOTAL INTANGIBLES, FIXED ASSETS AND LONG-TERM INVESTMENTS 33,797,556,124
----------------------------------------------------
CURRENT ASSETS
INVENTORIES
Contract work in process 16,593,288
Finished goods and merchandise
merchandise 60,300,588
----------------------------------------------------
TOTAL INVENTORIES 76,893,876
----------------------------------------------------
(* *)
ACCOUNTS RECEIVABLE
Trade accounts receivable 4,241,654,077
Accounts receivable from subsidiaries 2,196,920,276
Accounts receivable from affiliated companies 311,569,853
Accounts receivable from parent companies 1,090,158
Other receivables due from
Government and other public entities for grants
and subsidies 1,265,371
deferred tax assets 94,489,404 509,093,704
other receivables 1,958,800,056
----------------------------------------------------
Total other receivables 94,489,404 2,469,159,131
----------------------------------------------------
TOTAL ACCOUNTS RECEIVABLE 9,220,393,495
----------------------------------------------------
SHORT-TERM FINANCIAL ASSETS
Equity investments in subsidiaries 240,456,832
Other equity investments -
Other securities -
----------------------------------------------------
TOTAL SHORT-TERM FINANCIAL ASSETS 240,456,832
----------------------------------------------------
LIQUID ASSETS
Bank and postal accounts 80,219,566
Checks 9,021
Cash and valuables on hand 384,569
----------------------------------------------------
TOTAL LIQUID ASSETS 80,613,156
----------------------------------------------------
TOTAL CURRENT ASSETS 9,618,357,359
----------------------------------------------------
ACCRUED INCOME AND PREPARED EXPENSES
Issue discounts and similar charges 25,097,171
Accrued income and other prepaid expenses 669,942,075
----------------------------------------------------
TOTAL ACCRUED INCOME AND PREPARED EXPENSES 695,039,246
----------------------------------------------------
TOTAL ASSETS 44,110,952,729
=============================================================================================================
(*) Amounts due within one year
(* *) Amounts due beyond one year
171
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY 12/31/2002
-----------------------------------------------------------------------------------------------------------
(in euros)
SHAREHOLDERS' EQUITY
SHARE CAPITAL 4,023,816,861
ADDITIONAL PAID-IN-CAPITAL 3,038,373,925
RESERVES FOR INFLATION ADJUSTMENTS UNDER
Law No. 72 of 3.19.1983 2,294,719,878
Law No. 413 of 12.30.1991 468,944,257
----------------------------------------------------
TOTAL RESERVES FOR INFLATION ADJUSTMENTS UNDER 2,763,664,135
LEGAL RESERVE 820,000,000
RESERVE FOR TREASURY STOCK 287,212,760
OTHER RESERVES
Reserve for accelerated depreciation -
Reserve under Law No. 342 of 11.21.2000 - art.14 716,378,105
Reserve under Legislative Decree No. 124/93 - art. 13 169,300
Reserve under Law No. 488/1992 118,677,664
Special reserve -
Reserve for capital grants 485,702,698
Miscellaneous reserves -
Miscellaneous income reserves 345,503,775
----------------------------------------------------
TOTAL OTHER RESERVES 1,666,431,542
----------------------------------------------------
RETAINED EARNINGS 1,146,812
----------------------------------------------------
NET INCOME (LOSS) (1,645,375,512)
----------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 10,955,270,523
----------------------------------------------------
RESERVES FOR RISK AND CHARGES
Reserves for taxes 134,682,384
Other reserves 3,010,304,006
----------------------------------------------------
TOTAL RESERVES FOR RISK AND CHARGES 3,144,986,390
----------------------------------------------------
RESERVE FOR EMPLOYEE TERMINATION INDEMNITIES 968,553,216
----------------------------------------------------
LIABILITIES (* *)
Debentures 10,941,662,050 10,941,662,050
Due to banks 657,448,391 3,447,500,472
Due to other lenders 235,273,938 502,544,735
Advances 9,967,386
Trade accounts payable 1,855,721,117
Notes payable 20,000,000
Accounts payable to subsidiaries 3,181,937,098
Accounts payable to affiliated companies 156,023,258
Accounts payable to parent companies 213,968,607
Taxes payables 18,063,563 221,260,462
Contributions to pension and social
security institutions 529,899,160 691,021,070
Other liabilities 1,019,681 2,731,143,190
----------------------------------------------------
TOTAL LIABILITIES 12,383,366,783 23,972,749,445
-----------------------------------------------------------------------------------------------------------
ACCRUED INCOME AND DEFERRED EXPENSES 1,103,989,759
----------------------------------------------------
===========================================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 40,145,549,333
-------------------------------------------------------------
(* *) Amounts due beyond one year
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY 12/31/2001
-----------------------------------------------------------------------------------------------------------
(in euros)
SHAREHOLDERS' EQUITY
SHARE CAPITAL 4,023,060,528
ADDITIONAL PAID-IN-CAPITAL 1,812,283,565
RESERVES FOR INFLATION ADJUSTMENTS UNDER
Law No. 72 of 3.19.1983 2,294,719,878
Law No. 413 of 12.30.1991 468,944,257
----------------------------------------------------
TOTAL RESERVES FOR INFLATION ADJUSTMENTS UNDER 2,763,664,135
LEGAL RESERVE 652,025,781
RESERVE FOR TREASURY STOCK -
OTHER RESERVES
Reserve for accelerated depreciation -
Reserve under Law No. 342 of 11.21.2000 - art.14 716,378,105
Reserve under Legislative Decree No. 124/93 - art. 13 169,300
Reserve under Law No. 488/1992 118,677,664
Special reserve 1,369,062,099
Reserve for capital grants 471,946,843
Miscellaneous reserves 2,324,722,183
Miscellaneous income reserves 1,467,854,031
----------------------------------------------------
TOTAL OTHER RESERVES 6,468,810,225
----------------------------------------------------
RETAINED EARNINGS -
----------------------------------------------------
NET INCOME (LOSS) 150,809,707
----------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 15,870,653,941
----------------------------------------------------
RESERVES FOR RISK AND CHARGES
Reserves for taxes 116,647,942
Other reserves 1,496,089,636
----------------------------------------------------
TOTAL RESERVES FOR RISK AND CHARGES 1,612,737,578
----------------------------------------------------
RESERVE FOR EMPLOYEE TERMINATION INDEMNITIES 1,025,348,862
----------------------------------------------------
LIABILITIES (* *)
Debentures 8,250,000,000 8,250,000,000
Due to banks 1,771,000,440 7,308,419,764
Due to other lenders 317,658,225 657,777,214
Advances 2,447,145
Trade accounts payable 2,240,654,716
Notes payable -
Accounts payable to subsidiaries 2,350,729,615
Accounts payable to affiliated companies 244,744,430
Accounts payable to parent companies 11,000
Taxes payables 43,974,617 460,551,409
Contributions to pension and social
security institutions 593,360,920 767,411,695
Other liabilities 1,960,192 2,615,256,311
----------------------------------------------------
TOTAL LIABILITIES 10,977,954,394 24,898,003,299
-----------------------------------------------------------------------------------------------------------
ACCRUED INCOME AND DEFERRED EXPENSES 704,209,049
----------------------------------------------------
===========================================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 44,110,952,729
----------------------------------------------------
(* *) Amounts due beyond one year
172
======================================================================================================================
MEMORANDUM ACCOUNTS 12/31/2002 12/31/2001
----------------------------------------------------------------------------------------------------------------------
(in euros)
GUARANTEES PROVIDED
Sureties
on behalf of subsidiaries 10,504,477,542 11,191,302,621
on behalf of affiliated companies 157,028,262 185,450,107
on behalf others 143,255,055 164,576,258
----------------------------------------------------------------------------------
TOTAL GUARANTEES PROVIDED 10,804,760,859 11,541,328,986
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
COLLATERAL PROVIDED - -
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
PURCHASES AND SALES COMMITMENTS 2,802,362,068 3,388,579,706
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
OTHER MEMORANDUM ACCOUNTS 6,253,354 7,060,549
----------------------------------------------------------------------------------
======================================================================================================================
TOTAL MEMORANDUM ACCOUNTS 13,613,376,281 14,936,969,241
----------------------------------------------------------------------------------
173
=======================================================================================================
STATEMENTS OF INCOME 2002 2001
-------------------------------------------------------------------------------------------------------
(in euros)
PRODUCTION VALUE
Sales and service revenues 17,055,185,163 17,309,065,135
Changes in inventory of contract work in process 275,402 (19,317,463)
Increases in capitalized internal construction costs 10,582,584 5,615,206
Other revenue and income
operating grants - 278,080
other 226,669,754 241,624,830
-----------------------------------------------
Total other revenue and income 226,669,754 241,902,910
-----------------------------------------------
TOTAL PRODUCTION VALUE 17,292,712,903 17,537,265,788
-----------------------------------------------
PRODUCTION COSTS
Raw materials, supplies and merchandise 244,546,331 301,446,894
Services 5,906,771,486 5,945,961,040
Use of property not owned 599,807,343 619,499,094
Personnel
wages and salaries 1,823,410,523 1,858,020,773
social security contributions 577,147,337 590,283,266
termination indemnities 138,990,806 142,974,705
other costs 43,407,726 52,961,421
-----------------------------------------------
Total personnel cost 2,582,956,392 2,644,240,165
-----------------------------------------------
Amortization, depreciation and writedowns
amortization of intangible assets 566,495,015 617,565,388
amortization of fixed assets 2,453,875,371 2,703,674,290
other writedowns of intangibles and fixed assets 39,306,896 -
writedowns of receivables included in current assets and
liquid assets 317,041,940 158,542,120
-----------------------------------------------
Total Amortization, depreciation and writedowns 3,376,719,222 3,479,781,798
-----------------------------------------------
Changes in inventory of raw materials, supplies and
merchandise 7,596,937 (19,058,872)
Provisions for risks 44,118,787 76,784,534
Other provisions - 23,429,622
Miscellaneous operating costs
losses on disposals of assets 31,386,328 24,747,506
license fee 224,769,247 289,581,611
other miscellaneous costs 228,750,172 167,567,664
-----------------------------------------------
Total miscellaneous operating costs 484,905,747 481,896,781
-----------------------------------------------
TOTAL PRODUCTION COSTS (13,247,422,245) (13,553,981,056)
-----------------------------------------------
OPERATING INCOME 4,045,290,658 3,983,284,732
-----------------------------------------------
FINANCIAL INCOME AND EXPENSE
Income from equity investments
dividends from subsidiaries 1,396,474,300 1,259,193,465
dividends from affiliated companies 16,771,548 41,055,604
dividends from other companies 462,993 4,384,727
other income from equity investments 704,048,145 717,456,025
-----------------------------------------------
Total income from equity investments 2,117,756,986 2,022,089,821
-----------------------------------------------
Other financial income from
accounts receivable included in long-term investments
subsidiaries 3,420,000 2,466,241
affiliated companies 1,265,043 -
other 12,458,360 11,917,535
-----------------------------------------------
Total accounts receivable included in long-term
investments 17,143,403 14,383,776
-----------------------------------------------
securities, other than equity investments, included
in long-term investments 90 -
securities, other than equity investments, included
in current assets 638,065 -
other income
interest and fees from subsidiaries 35,859,244 57,163,147
interest and fees from affiliated companies 2,550,633 8,336,127
interest and fees from others and miscellaneous income 148,922,941 108,168,456
-----------------------------------------------
Total other income 187,332,818 173,667,730
-----------------------------------------------
Total other financial income from 205,114,376 188,051,506
-----------------------------------------------
Interest and other financial expense
interest and fees paid to subsidiaries 217,345,362 257,799,579
interest and fees paid to affiliated companies 914,833 1,454,675
interest and fees paid to others and miscellaneous
expense 1,073,366,852 1,553,551,229
-----------------------------------------------
Total interest and other financial expense (1,291,627,047) (1,812,805,483)
-----------------------------------------------
TOTAL FINANCIAL INCOME AND EXPENSE 1,031,244,315 397,335,844
-----------------------------------------------
VALUE ADJUSTMENTS TO FINANCIAL ASSETS
Upward adjustments of
equity investments - 13,792
-----------------------------------------------
Total upward adjustments - 13,792
-----------------------------------------------
Writedowns of
equity investments 654,332,869 774,881,369
-----------------------------------------------
Total writedowns (654,332,869) (774,881,369)
-----------------------------------------------
TOTAL VALUE ADJUSTMENTS TO FINANCIAL ASSETS (654,332,869) (774,867,577)
-----------------------------------------------
EXTRAORDINARY INCOME AND EXPENSE
Income
gains on disposals 451,941,771 264,388,273
miscellaneous 431,487,024 230,823,224
-----------------------------------------------
Total income 883,428,795 495,211,497
-----------------------------------------------
Expense
losses on disposals 19,161 1,134,306
prior years' taxes 1,324,604 1,225,839
provisions and writedowns of equity investments 5,765,466,512 2,526,767,530
miscellaneous 1,209,796,215 859,005,899
-----------------------------------------------
Total expense (6,976,606,492) (3,388,133,574)
-----------------------------------------------
TOTAL EXTRAORDINARY ITEMS (6,093,177,697) (2,892,922,077)
-----------------------------------------------
-----------------------------------------------
INCOME (LOSS) BEFORE TAXES (1,670,975,593) 712,830,922
-----------------------------------------------
Income taxes
current taxes 926,203,111 73,554,063
deferred taxes (951,803,192) 488,467,152
-----------------------------------------------
Total income taxes 25,600,081 (562,021,215)
-------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (1,645,375,512) 150,809,707
=======================================================================================================
174
NOTES TO FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with the provisions
of the Italian Civil Code. The accounting policies adopted in the preparation
of the financial statements have been applied on a basis consistent with the
prior year and are described below.
No special situations arose during the year that would require the use of the
waivers allowed under Article 2423, paragraph 4, of the Italian Civil Code.
Reclassifications made to certain captions of the financial statements have
also been made to the consolidated financial statements at December 31, 2001
for purposes of comparison.
As required by Legislative Decree No. 127/1991, consolidated financial
statements have also been prepared and are presented together with the
financial statements of Telecom Italia.
The statement of cash flows, although presented in the Report on Operations,
constitutes an integral part of these Notes to financial statements pursuant to
Article 2423, paragraph 3 of the Italian Civil Code.
Unless otherwise specified, all figures are stated in thousands of euro.
It should be pointed out that as a result of the sale and contribution
transactions carried out during 2002, the balance sheet does not include the
assets and liabilities that were transferred, whereas the statement of income
takes into account the results of the companies sold/contributed up to the date
the transactions went into effect.
Summary of significant accounting policies
Intangible assets
Intangible assets are recorded at acquisition or production cost and are
amortized systematically over their estimated period of benefit. Intangible
assets are written down when there is a permanent impairment to below their net
book value, in accordance with article 2426, paragraph 1, item 3 of the Italian
Civil Code.
Intangible assets refer to the following:
"Industrial patents and intellectual property rights" are amortized over their
estimated period of benefit on a five-year basis (industrial patents) or on a
three-year basis (software), starting from the year of their initial use.
"Concessions, licenses, trademarks and similar rights" refer mainly to
satellite utilization rights and are amortized over the contract period.
Amortization also includes the amortization charge, calculated over the
contract period, on the rights of way (DDP) and indefeasible rights of use
(IRU), conferred to Telecom Italia Sparkle on December 31, 2002 upon the
contribution of the "International Wholesale Services" business segment.
"Goodwill relates to the acquisition of the "administrative services" business
segment from Holding Media e Comunicazioni and is amortized over five years;
"Others" refer almost entirely to leasehold improvements. Amortization is
calculated on the basis of the remaining period of the lease contracts.
"Research, development and advertising costs" are charged to income in the year
incurred.
Fixed assets
Fixed assets are recorded at acquisition or production cost and depreciated on
the straight-line method at rates determined on the basis of their estimated
remaining useful life. They include monetary revaluations made on the basis of
the special laws regarding assets existing on or before December 31, 1981,
entries required under Law No. 823 of December 19, 1973, regarding the
settlement of tax liabilities, as well as mandatory inflation adjustments of
buildings as required by Law No. 413 of December 30, 1991.
Fixed assets are written down when there is a permanent impairment to below
their net book value, in accordance with article 2426, paragraph 1, item 3 of
the Italian Civil Code.
Construction in progress is stated at the amount of direct costs incurred
(materials used for or intended for installations, third-party services,
miscellaneous expenses, as well as company labor). The value of fixed assets
does not include maintenance costs incurred for their upkeep to guarantee their
expected useful life, their original capacity and productivity, and costs borne
to repair malfunctions and failures; such expenses are charged to the statement
of income in the year incurred.
Depreciation is calculated on the basis of the estimated useful lives of the
installations.
Total accumulated depreciation for fixed assets was upwardly adjusted where
called for by the previously mentioned special laws.
175
The elimination, disposal or sale of fixed assets is recorded in the financial
statements by eliminating the cost and accumulated depreciation from the
balance sheet and booking the related gain or loss in the statement of income.
Equity investments
Equity investments in subsidiaries, affiliated companies and other companies
considered long-term in nature are recorded in long-term investments or, if
acquired for subsequent sale, recorded in short-term financial assets.
Long-term equity investments in "subsidiaries, affiliated companies and other
companies" are valued at acquisition or subscription cost - determined
according to the continuous LIFO method - increased by the statutory inflation
adjustments, as well as the voluntary one made to several investments during
the preparation of the financial statements at December 31, 1981.
The carrying value of investments recorded in long-term investments is adjusted
for any reasonable expectations of a decline in profitability or recoverability
in future years.
In the case of a permanent impairment, the value of such equity investments is
written down and the impairment in value in excess of the corresponding carrying
value is recorded among "reserves for risks and charges".
Writedowns of investments, whether included in long-term investments or current
assets, will be reversed in subsequent years if the underlying assumptions are
no longer correct.
Contracts for the loan of securities are represented in the financial
statements as two functionally related transactions: a loan and a repurchase
transaction on the securities with the obligation of the borrower to resell
them at maturity. Accordingly, "Other receivables" and "Other liabilities"
include, respectively, a receivable and a payable of the same amount at the
fixed amount of the contract (market price of stock at the date of delivery of
the securities).
Equity investments included under current assets, consisting mainly of shares
of subsidiaries listed companies purchased for trading purposes, are stated at
the lower of cost - determined according to the continuous LIFO method - and
realizable value, based on the year-end prices on the Italian Online Stock
Market.
The costs of investments in foreign companies have been translated at
historical exchange rates prevailing at the time of acquisition or
subscription.
Inventories
Inventories - consisting of goods intended for sale, as well as stock on hand
of technical materials and replacement parts to be used in the business during
the year and for maintenance - are valued at the lower of cost, calculated
using the weighted-average method, and realizable value.
The carrying value of goods in stock is reduced, through appropriate
writedowns, for obsolete materials.
Inventories include the amount of work on behalf of third parties in progress at
the end of the year, valued according to the "costs" already incurred.
Accounts receivable and liabilities
Accounts receivable are stated at estimated realizable value and classified
under long-term investments or current assets. Estimated realizable value is
based upon an analysis of receivables at year-end. They include - as far as
telecommunications services are concerned - the amount of services already
rendered to customers and other carriers, already billed or still to be billed,
as well as invoices for the sale of telephone and on-line products.
Liabilities are shown at their nominal value.
Transactions in foreign currency
Monetary assets and liabilities are accounted for at the exchange rate as of
the transaction date and updated to the exchange rates prevailing at year-end,
taking into account hedging contracts. Unrealized positive and negative
differences arising from recording foreign currency assets and liabilities at
the exchange rates at the transaction date and at year-end date are recorded in
the statement of income, respectively, in "financial income" and "financial
expense".
176
Receivables transactions
Securitization
The program for the securitization of trade accounts receivable generated by
the services rendered to the clientele of Telecom Italia Domestic Wireline
(TIDW) begun during 2001 has continued into 2002. Reference should be made to
the 2001 annual report for a description of the program.
In 2002, the total amount of trade accounts receivables sold under
securitization transactions amounted to euro 9 billion and only took into
account the receivables due by Telecom Italia from residential customers. At
December 31, 2002, trade receivables sold totaled euro 849 million (of which
euro 757 million were not yet due).
As far as the accounting treatment of securitization transactions is concerned,
the total amount of receivables sold is reversed from the balance sheet with a
contra-entry for the consideration received on the sale: the amount paid is
represented by the non-repeatable amount received immediately (without
recourse) whereas the deferred portion is recorded in Other receivables
(financial) in current assets. This balance sheet caption is presented net of
the relative allowance for doubtful accounts calculated on the basis of
estimated realizable value; the change in the allowance account is recorded in
financial expense in the statement of income. The difference between the
accounting value of the receivables sold and the consideration on the sale, for
the commercial portion, is charged to Miscellaneous operating costs, and for
the financial portion, to interest and other financial expense in the statement
of income. The costs and expenses relating to the start-up and completion and
implementation of the securitization program (arrangement, underwriting, legal,
rating, audit and other expenses) were charged directly to the 2001 statement
of income in Costs for Services. The securitization transaction led to an
improvement in net financial debt at December 31, 2002 of euro 826 million.
At December 31, 2002, Telecom Italia showed financial payables of euro 165
million due to TI Securitisation Vehicle for the investment of excess temporary
liquid resources by the latter in Telecom Italia.
Lastly, under the securitization program, in January 2003, TI Securitisation
Vehicle S.p.A. (TISV) reimbursed the first tranche of securities denominated
Series 2001-1, Class A1, issued in June 2001 for an amount of euro 100 million.
At the same time, TISV issued a new tranche of securities for the same amount
denominated Series 2003-1, Class A1, at a variable interest rate with a 27
basis point margin on the 3-month Euribor maturing July 25, 2004. The placement
price was above face value with a yield of 24 basis points over the 3-month
Euribor. Therefore, the total securities currently outstanding under the
securitization program continue to be equal to euro 700 million. As was the
case for the securities issued in 2001, this new tranche was awarded the
highest ratings by Fitch, Moody's and Standard & Poors of AAA/Aaa/AAA.
Factoring
In 2002, Telecom Italia entered into certain transactions with leading
factoring companies for the sale of trade accounts receivables without recourse
for a total of euro 414 million. These factoring transactions led to a
reduction in net financial debt at December 31, 2002 of euro 182 million.
Accruals and deferrals
These items are recorded on the accrual basis. "Issue discounts and similar
charges" consist of costs in connection with long-term loans, which are charged
to the statement of income over the duration of the loan in proportion to the
accrued interest.
Reserves for risks and charges
"For taxes": this reserve includes prudent provisions for estimated tax charges
(including any surtaxes and late payment interest) on positions not yet agreed
or in dispute.
"For deferred taxes": this reserve includes deferred taxes calculated as
described in the note on income taxes.
"Other reserves" relate primarily to provisions to cover risks and charges for
losses or liabilities of certain or likely existence whose amount or date of
occurrence could, however, not be determined at the end of the year. The
provisions reflect the best possible estimate, based on the commitments made
and on the available data.
Reserve for employee termination indemnities
The amount of this reserve is determined in accordance with current laws (in
particular Law No. 297 of May 29, 1982, which provides for fixed and variable
cost-of-living adjustments) and collective bargaining agreements. The reserve
is adjusted to the liability matured at the end of the year for personnel in
force at that date and is net of advances paid.
177
Employee benefit obligations under Law No. 58/1992
With regard to Telecom Italia's obligation required by Law No. 58/1992 to
guarantee a uniform insurance status under the Telephone Workers' Social
Security Fund - FPT (part of the general "Employees Pension Fund" beginning
January 1, 2000) to all employees in service in the Group's telephone companies
(Stet, Sip, Italcable and Telespazio) as of February 20, 1992, as well as those
who moved from the Public Administration to Iritel, Article 66, paragraph 1 of
Law 331/1993 and converted into Law No. 427/1993 specifies that the sums due to
the Fund should be recorded in the financial statements and are tax deductible
in the years in which the fifteen equal annual deferred installments are paid
to discharge this obligation.
At the present time, the amount of the liability, which will be determined by
the National Social Security Institute (Istituto Nazionale della Previdenza
Sociale - INPS), can be estimated only roughly, due to problems relating to the
interpretation and application of the social security legislation and to the
lack of certain data which only the social security institutions currently
possess (at December 31, 2002, INPS had notified the Company of around 97% of
the positions, the uniform insurance status of which gives rise to expenses for
Telecom Italia).
Nevertheless, these financial statements include euro 590 million of residual
payables to INPS, (net of the amount attributed to Group companies for the
employees transferred to those companies), relating to the estimate made for
the employees of the former State Company for Telephone Services (ASST) by the
special Ministerial Commission established under Law No. 58/1992 upon the
transfer of the assets of the Post and Telecommunications Administration to
Iritel, and recorded by the latter company in its financial statements at
December 31, 1993. As a result, these charges will have no impact on the
results of future years, since they were already included in the aforementioned
calculation.
A dispute concerning the application and interpretation of this law arose with
INPS regarding, firstly, the effective date for the computation of the accrued
interest due under Law No. 58/1992, in view of the fact that the liability is
paid in installments. Telecom Italia maintains that interest should accrue from
the time INPS notifies it of the actual amount of the liability, while INPS
claims that the computation should be made as from February 20, 1992 or from
the date of the transfer to Iritel, thus giving rise to pre-amortization
interest. The second issue is the exclusion from the estimates under Law No.
58/1992 of all employees (except for employees of the former Iritel) who had
filed an application to join pursuant to Law No. 29/1979 before February 20,
1992, unless that application had not been processed by INPS. The position of
the Company is that the criteria set forth in Law No. 29/1979 - and, therefore,
payment of the respective obligations - apply to these employees.
At the present time, the parties have agreed that the differences in
interpretation shall be settled through test appeals, with recourse to the
Court of Appeals being waived for a final determination of the correct
interpretation of the law in question.
While the proceedings are pending, Telecom Italia has agreed to pay, with
reservation, the amounts requested by INPS based on the criteria determined by
the latter, subject to subsequent equalization adjustments, if the Courts
ultimately accept the Company's interpretation.
As stated later in the report, the dispute concerning pre-amortization interest
was settled in the first half of the year.
Having said that, a reasonable estimate of the principal amount of the
liability attributable to Telecom Italia (excluding, as mentioned earlier, the
part relating to the former Iritel employees) could vary between euro 964
million and euro 1,289 million (euro 409 million of which has already been
paid), depending on conflicting interpretations and taking into account all
personnel involved.
In either case, the impact of the charge should definitely be compatible with
the income of future years, since, as allowed under Article 5, paragraph 3 of
Law No. 58/1992, the payments requested by INPS will be made in fifteen equal
annual deferred installments (including annual interest of 5%), starting when
INPS formally submits its requests.
The remaining liability for obligations under Law No. 58/1992, to be paid in
fifteen annual installments on the basis of the formal requests made by INPS up
to December 31, 2002 and the interpretation of said requests, amounts to euro
1,227 million, divided as follows:
o euro 859 million for the principal amount (except for the portion
attributable to former Iritel employees);
o euro 368 million in accrued interest.
Pre-amortization interest (including that relating to the employees of the
former Iritel), subsequent to the agreement between INPS and Telecom Italia,
was paid by the latter - with reservation - in fifteen equal annual deferred
installments, including interest at an annual rate of 5%, up to the end of
1999, for a total amount of euro 110 million, net of equalization interest and
certain refunds made by INPS. As previously mentioned, Telecom Italia won the
case under the ruling issued by the Court of Cassation No. 3398/2002, in
keeping with the previous ruling No. 4242/2000 (as a result of which, from June
2000, the payment of the aforementioned interest and accrued interest was
suspended). Consequently,
178
Telecom Italia has a credit of euro 131 million (inclusive of an additional
amount at the conventional annual rate of 5%) that was completely offset
against the payment of the regular expense installments. During 2002, Telecom
Italia paid INPS the above-mentioned expenses also on behalf of other Group
companies - mainly TIM and TI Lab - for those employees transferred and covered
by the obligation of a uniform insurance status under Law No. 58/1992,
recovering the amounts paid from these same companies. The recovery is recorded
in the statement of income under "extraordinary income" and amounts to euro 2
million.
Grants
Operating grants (directly credited to the statement of income) and capital
grants or grants for installations are recorded in the accounting period in
which the paperwork documenting the grants is received, or in the period in
which the respective costs are incurred, provided that the certainty of payment
is confirmed by established procedures.
The treatment of capital grants and grants for installations in the balance
sheet is as follows:
a) grants received through December 31, 1992, are included under "reserves
for risks and charges". The portions equivalent to the depreciation taken
on assets financed with the grants in question (the so-called "available"
portion) are transferred to a special equity reserve in order to obtain
the benefits allowed under the tax law;
b) for grants received from January 1, 1993 to December 31, 1997, 50% of the
amount received is recorded in a special reserve of shareholders' equity
in order to take advantage of the benefits available under the tax laws,
and the remaining 50% is recorded under "deferred income". These amounts
are gradually credited to income in accordance with the pertinent laws;
c) for grants received from January 1, 1998, the amount is recorded under
"deferred income" and progressively credited to the statement of income in
relation to the depreciation taken on the assets to which the grants
refer.
Revenues and expenses
Revenues and expenses are recorded on an accrual basis. Revenues relating to
telecommunications services are shown gross of the amounts due to other
carriers which are recorded, for the same amount, in production cost.
Fees for new access lines and line transfers are recorded as income when the
service is provided.
Dividends from subsidiaries are recorded on the maturity principle, that is, in
the year when the income from which they are paid is earned by the subsidiaries,
providing there is a substantial certainty that they will be paid, and, in any
event, when the shareholders' resolution declaring the dividend is passed or
when the appropriation of net income is set forth in the preliminary financial
statements prepared by the management of the subsidiaries prior to the Board
Meeting of the parent company that resolves upon the financial statements.
Dividends from affiliated companies and other companies, on the other hand, are
recognized in the statement of income according to the accrual principle, that
is, in the year in which the respective right to the receivable arises,
following the declaration of dividends approved by the shareholders' resolution
of those companies. The tax credits are recorded in the same manner as the
dividends to which they refer.
Leased assets
Capital goods acquired under leasing agreements are recorded in the financial
statements by a method consistent with current legislation, which requires that
leasing payments be recorded as operating costs.
Income taxes
Current income taxes are computed on the basis of a realistic estimate of the
income tax charge according to the tax law; the related income tax payable is
shown net of payments on account, withholding taxes and tax credits in "income
taxes payable". Any net receivable position is shown in "other receivables".
Deferred income taxes are calculated in the financial statements on the basis
of the temporary differences between the value attributed to the assets and
liabilities for statutory purposes and the value attributed to the same assets
and liabilities for tax purposes. Deferred tax assets, including benefits from
tax loss carryforwards, are booked in "other receivables" in current assets.
The tax benefit relating to tax loss carryforwards is recorded only when there
is reasonable certainty of recovery.
Deferred tax assets and liabilities are offset, whenever the assumptions for
doing so exist. Deferred taxes on the reserves and funds in abeyance of
taxation are book if such reserves will be distributed or, in any case,
utilized and their distribution or utilization gives rise to a tax charge.
179
Memorandum accounts
"Guarantees provided" are shown for the amount of the remaining liability or
other obligation guaranteed; those provided in foreign currencies are
translated at year-end exchange rates.
"Purchases and sales commitments" are determined on the basis of the
unperformed portion of contracts outstanding at the end of the fiscal year
which do not fall under the normal "operating cycle".
Derivative financial instruments
Derivative financial instruments are used by the Company to hedge exposure to
interest rate and exchange rate risks. They are valued consistently with the
underlying asset and liability positions and any net expenses connected with
each single transaction are recognized in the statement of income. For
derivative financial instruments used to hedge interest rate risks, the
interest differentials are recorded in the statement of income in "financial
income and expense" based on the accrual principle. For financial instruments
used to hedge exchange rate risks, the cost (or "financial component"
calculated as the difference between the rate at the date of stipulating the
contract and the forward rate) is recorded in the statement of income in
"financial income and expense" based on the accrual principle.
180
BALANCE SHEETS
ASSETS
INTANGIBLES, FIXED ASSETS AND LONG-TERM INVESTMENTS
Intangible assets euro 1,287,449 thousand
(euro 1,336,128 thousand at December 31, 2001)
A summary of the changes in intangible assets during the year is presented as
follows:
(in thousands of euro) 2002
--------------------------------------------------------------------------------
- additions 648,064
- disposals (20,279)
- sales and contributions of business segments (109,969)
- amortization (566,495)
--------------------------------------------------------------------------------
Total (48,679)
================================================================================
An analysis of the composition and the changes in intangible assets during the year is shown below:
Upward 12/31/2001
(in thousands of euro) Cost adjustments Writedowns Amortization Total
-------------------------------------------------------------------------------------------------------------------------
Start-up and expansion costs 2,635 (2,635) -
Industrial patents and intellectual property
rights 2,850,338 (2,184,617) 665,721
Concessions, licenses, trademarks and similar
rights 169,095 (96,916) 72,179
Work in progress and advances to suppliers 498,167 498,167
Other intangibles (*) 375,103 (275,042) 100,061
-------------------------------------------------------------------------------------------------------------------------
Total 3,895,338 - - (2,559,210) 1,336,128
=========================================================================================================================
(*) of which:
Leasehold improvements 374,696 - (274,635) 100,061
Changes during the year
-------------------------------------------------------------------------------------------------------------------------
Sales/
Reclassifi- Retirements/ Writedowns/
(in thousands of euro) Additions cations Other changes(a) Reinstatements Amortization Total
-------------------------------------------------------------------------------------------------------------------------
Industrial patents and intellectual
property rights 421,531 (33,644) (528,084) (140,197)
Concessions, licenses,
trademarks and similar rights 3,767 (50,267) (14,887) (61,387)
Goodwill 20 (4) 16
Work in progress and advances
to suppliers 648,064 (462,826) (28,129) (18,206) 138,903
Other intangibles (*) 37,508 (2) (23,520) 13,986
-------------------------------------------------------------------------------------------------------------------------
Total 648,064 - (112,042) (18,206) (566,495) (48,679)
=========================================================================================================================
(*) including:
Leasehold improvements - 37,508 (2) - (23,520) 13,986
181
(a) Broken down as follows:
Upward
Cost adjustments Writedowns Amortization Net value
-------------------------------------------------------------------------------------------------------------------------
Start-up and expansion costs (2,635) 2,635 -
Industrial patents and intellectual property
rights (105,546) 71,902 (33,644)
- of which sales of business segments (84,416) 52,767 (31,649)
Concessions, licenses, trademarks and similar
rights (80,712) 30,445 (50,267)
- of which contribution of business segment (80,583) 30,320 (50,263)
Work in progress and advance to suppliers (46,335) 18,206 (28,129)
- of which sale and contribution of
business segment (46,263) 18,206 (28,057)
Other intangibles (90) 88 (2)
- of which leasehold improvements (84) 82 (2)
-------------------------------------------------------------------------------------------------------------------------
TOTAL (235,318) 18,206 105,070 (112,042)
- of which sale and contribution of
business segment (211,262) 18,206 83,087 (109,969)
=========================================================================================================================
12/31/2002
-------------------------------------------------------------------------------------------------------------------------
Upward
(in thousands of euro) Cost adjustments Writedowns Amortization Total
-------------------------------------------------------------------------------------------------------------------------
Start-up and expansion costs - - -
Industrial patents and intellectual property
rights 3,166,323 (2,640,799) 525,524
Concessions, licenses, trademarks and similar
rights 92,150 (81,358) 10,792
Goodwill 20 (4) 16
Work in progress and advances to suppliers 637,070 0 637,070
Other intangibles (*) 412,521 (298,474) 114,047
-------------------------------------------------------------------------------------------------------------------------
Total 4,308,084 - - (3,020,635) 1,287,449
=========================================================================================================================
(*) of which
Leasehold improvements 412,120 (298,073) 114,047
In particular:
"Industrial patents and intellectual property rights" consisted almost entirely
of applications software. Eliminations referred mostly to software projects
contributed to Telecom Italia Sparkle (at the time of the contribution of the
"International Wholesale Service" business) and sold to Telecom Italia Learning
Services (at the time of the sale of Telecom Italia's "Training" business).
"Concessions, licenses, trademarks and similar rights" referred to satellite
utilization rights. Eliminations refer almost entirely to the rights of way
(DDP) and indefeasible rights of use (IRU) that guarantee the extension of the
Company's transmission capacity over a foreign territory. Such rights were
contributed to Telecom Italia Sparkle upon the contribution of the
"International Wholesale Services" business segment. Amortization also included
the amortization charge on the above rights of way (DDP) and indefeasible rights
of use (IRU) calculated over the period of the contracts.
182
"Work in progress and advances to suppliers" mainly referred to software
projects for network and operating program applications. All acquisitions of
intangibles are managed through specific work orders and recorded in this
caption. Reclassifications refer to intangible assets that went into operation
during the year.
"Other intangibles" almost completely comprised leasehold improvements made to
properties owned by third parties and included the costs incurred to meet the
operating requirements of the Company in the rented premises.
In particular, the acquisitions of intangibles from subsidiaries, affiliated
companies and parent companies amounted to euro 522,728 thousand and principally
referred to software projects from Telesoft (euro 400,171 thousand), Italtel
(euro 60,681 thousand), Siemens Informatica (euro 18,756 thousand) and TILAB
(euro 18,000 thousand).
Fixed assets euro 12,678,035 thousand
(euro 14,091,384 thousand at December 31, 2001)
A summary of the changes in fixed assets during the year is presented as
follows:
(in thousands of euro) 2002
--------------------------------------------------------------------------------
- additions 1,674,275
- disposals (57,780)
- sales and contributions of business segments (556,103)
- provisions to reserve for writedowns (21,101)
- utilization of the reserve for writedowns 1,235
- depreciation (2,453,875)
--------------------------------------------------------------------------------
Total (1,413,349)
================================================================================
An analysis of the composition and the changes in fixed assets during the period is shown below:
12/31/2001
----------------------------------------------------------------------------------------------------------------------------
Upward Accumulated
(in thousands of euro) Cost adjustments Writedowns depreciation Total
----------------------------------------------------------------------------------------------------------------------------
Land and buildings
o non-industrial buildings 34,371 1,290 (2,377) 33,284
o industrial buildings 2,212,760 464,248 (1,856) (1,210,965) 1,464,187
2,247,131 465,538 (1,856) (1,213,342) 1,497,471
Plant and machinery 46,349,627 785,054 (711,165) (34,622,928) 11,800,588
Manufacturing and distribution equipment 859,082 0 (831,129) 27,953
Other fixed assets 642,942 4,312 (544,419) 102,835
Construction in progress and advances to
suppliers 662,537 0 0 662,537
----------------------------------------------------------------------------------------------------------------------------
Total 50,761,319 1,254,904 (713,021) (37,211,818) 14,091,384
============================================================================================================================
183
Changes during the year
----------------------------------------------------------------------------------------------------------------------------
Sales/
Reclassifi- Retirements/ Writedowns/
(in thousands of euro) Additions cations Other changes(a) Reinstatements Depreciation Total
----------------------------------------------------------------------------------------------------------------------------
Land and buildings
o non-industrial buildings 13 (12,084) (181) (12,252)
o industrial buildings 26,438 (242,866) (3,499) (86,686) (306,613)
0 26,451 (254,950) (3,499) (86,867) (318,865)
Plant and machinery 1,505,584 (300,376) (17,602) (2,295,904) (1,108,298)
Manufacturing and distribution
equipment 2,613 (2,626) (16,002) (16,015)
Other fixed assets 19,450 (3,472) (55,102) (39,124)
Construction in progress and
advances to suppliers 1,674,275 (1,554,098) (51,224) 68,953
----------------------------------------------------------------------------------------------------------------------------
Total 1,674,275 0 (612,648) (21,101) (2,453,875) (1,413,349)
============================================================================================================================
(a) Broken down as follows:
Upward Accumulated
Cost adjustments Writedowns depreciation Net Value
----------------------------------------------------------------------------------------------------------------------------
Land and buildings
o non-industrial buildings (13,133) (479) 1,528 (12,084)
o industrial buildings (341,874) (70,332) 198 169,142 (242,866)
(355,007) (70,811) 198 170,670 (254,950)
- of which contributions of business
segments (337,032) (68,508) 165,594 (239,946)
- of which non-industrial buildings (555) (304) 150 (709)
- of which industrial (336,477) (68,204) 165,444 (239,237)
Plant and machinery (1,763,662) (40,690) 1,037 1,502,939 (300,376)
- of which contributions of business
segments (753,517) (1) 498,373 (255,145)
Manufacturing and distribution equipment (26,455) 23,829 (2,626)
- of which sales and contributions of
business segments (22,087) 19,157 (2,930)
Other fixed assets (83,695) (18) 80,241 (3,472)
- of which sales and contributions of
business segments (25,474) 17,848 (7,626)
Construction in progress and advances to
suppliers (51,224) (51,224)
- of which contributions of business
segments (50,456) (50,456)
----------------------------------------------------------------------------------------------------------------------------
Total (2,280,043) (111,519) 1,235 1,777,679 (612,648)
- of which sales and contributions of
business segments (1,188,566) (68,509) 0 700,972 (556,103)
============================================================================================================================
184
12/31/2002
----------------------------------------------------------------------------------------------------------------------------
Upward Accumulated
(in thousands of euro) Cost adjustments Writedowns depreciation Total
----------------------------------------------------------------------------------------------------------------------------
Land and buildings
o non-industrial buildings 21,251 811 (1,030) 21,032
o industrial buildings 1,897,324 393,916 (5,157) (1,128,509) 1,157,574
---------------------------------------------------------------------------
1,918,575 394,727 (5,157) (1,129,539) 1,178,606
Plant and machinery 46,091,549 744,364 (727,730) (35,415,893) 10,692,290
Manufacturing and distribution equipment 835,240 (823,302) 11,938
Other fixed assets 578,697 4,294 (519,280) 63,711
Construction in progress and advances to
suppliers 731,490 0 731,490
----------------------------------------------------------------------------------------------------------------------------
Total 50,155,551 1,143,385 (732,887) (37,888,014) 12,678,035
============================================================================================================================
Acquisitions of fixed assets are managed using specific work orders, recorded in
"construction in progress and advances to suppliers". The reclassifications
refer to fixed assets that went into use during the year. In 2002, the
acquisitions of fixed assets from subsidiaries, affiliated companies and parent
companies amounted to euro 371,995 thousand and referred almost entirely to the
acquisition of telephone exchanges from Italtel (euro 341,428 thousand).
Furthermore, transactions with other related parties totaled euro 32,152
thousand and referred to the purchases of network cables from Pirelli.
The reduction in the gross value of fixed assets due to transactions for the
contribution and sale of business segments totaled euro 1,257,075 thousand (of
which euro 791,415 thousand related to the contribution of the "International
Wholesale Service" business segment to Telecom Italia Sparkle and euro 431,703
thousand in connection with the contribution of the "Asset Management" business
segment to Tiglio II). The relative accumulated depreciation amounted to euro
700,972 thousand (of which euro 486,311 thousand was for the contribution to
Telecom Italia Sparkle and euro 186,634 thousand for the contribution to Tiglio
II).
Accumulated depreciation at December 31, 2002, as a whole, was considered
sufficient in relation to the remaining period of utilization of the assets,
determined on the basis of the estimated useful lives of the installations
making up the domestic telecommunications network. Depreciation is calculated by
the rates used in the previous year. Accumulated depreciation, net of
writedowns, covered 74.9% of fixed assets at December 31, 2002, compared to
72.5% at December 31, 2001.
At December 31, 2002, the upward adjustments made to fixed assets in 1952, 1975,
1983 and 1991 as well as those made under Law No. 823/1973 have been depreciated
by an average of 80%.
The Company has fixed assets purchased through lease contracts stipulated at
market terms with its affiliate Teleleasing and with Intesa BCI, as disclosed in
the memorandum accounts and related notes. Had these contracts been accounted
for using the financial method, entries would have been made in the statement of
income for the interest on the financed principal and for the depreciation
charge attributable to the leased assets and assets would have been recorded in
fixed assets and the residual debt under liabilities. The use of this method,
however, would have had no material economic effect on the financial statements.
In January 2003, the Company proceeded to purchase the buildings leased from
Teleleasing under financial leasing contracts before the expiration date.
185
Long-term investments euro 15,597,488 thousand
(euro 18,370,044 thousand at December 31, 2001)
Long-term investments decreased by euro 2,772,556 thousand compared to December
31, 2001. They comprise the following:
(in thousands of euro) 12/31/2002 12/31/2001
---------------------------------------------------------------------------
Equity investments in:
o subsidiaries 14,399,646 17,659,160
o affiliated companies 388,273 386,923
o other companies 55,233 24,327
---------------------------------------------------------------------------
14,843,152 18,070,410
---------------------------------------------------------------------------
Advances on future capital contributions
166,184 78,896
---------------------------------------------------------------------------
Accounts receivable:
o subsidiaries 60,000 60,000
o affiliated companies 117,406 -
o other receivables 123,533 160,738
---------------------------------------------------------------------------
300,939 220,738
---------------------------------------------------------------------------
Treasury stock 287,213 -
---------------------------------------------------------------------------
Total 15,597,488 18,370,044
===========================================================================
Equity investments euro 14,843,152 thousand
Annex 1 presents the changes in each investment during the period together with
the corresponding amount at the beginning of the year and at December 31, 2002.
Overall, investments in subsidiaries, affiliates and other companies decreased
by euro 3,227,258 thousand compared to December 31, 2001, as shown below:
(in thousands of euro)
--------------------------------------------------------------------------------
Increases:
o Subscription to capital increases, recapitalizations and
loss coverage of: Tiglio I (185,985), TILAB (5,600),
IN.TEL.AUDIT (1,500), Emsa Servizi (7,001), Nordcom (2,062),
Stream (233,541), TI Sparkle (92,696), Edotel (8,436),
Telegono (413), Sistemi Formativi Confindustria (12), I.T.
Telecom (376), EPIClink (60,254), Netesi (29,182), TI
Austria (650), TI United Kingdom (602), Telecom Italia of
North America (9,730) Telecom Italia America Latina
(11,100), Consorzio Energia Gruppo Telecom Italia (5),
Telecom Italia Capital (6,826), TE.SS (1,368), Telenergia
(40), IMSER 60 (60), Consorzio TOPIX (100) and Mediocredito
Centrale (36,018). 693,557
o Subscription to shares of I.T. Telecom following the
contribution in kind, to the same company, of the
investments in Netsiel, Telesoft, Saritel and Sodalia. 142,906
o Subscription to shares of TI Sparkle (ex TMI - Telemedia
International Italia) following the contribution, to the
same company, of the "International Wholesale Services"
business segment. 697,768
o Final share capital purchase from payments against future
capital increases in investments relating to Telecom Italia
International (78,896) and Tiglio I (26). 78,922
o Subscription to quotas of Tiglio II following the
contribution, to the same company, of the "Asset Management"
business segment. 74,281
o Subscription to shares of Softe following the merger of TI Media. 51,005
o Subscription to shares of TI Finance (ex TI Web) following the
merger of Softe. 8,050
o Acquisition of investment in EMSA following the partial
non-proportional spin-off of IM.SER 126,118
--------------------------------------------------------------------------------
Total increases (A) 1,872,607
===============================================================================
186
Decreases:
o Sale/reduction of shares/quotas in:
IMMSI (18,228), Emsa (155,494), Telespazio (80,444),
Telemaco Immobiliare (75,798), Consorzio Stet Italia 90
Group (41), Telimm (18), Sistemi Formativi Confindustria
(12), IMSER 60 (1). 330,036
o Writedown for losses of value charged to the statement of
income to the following investments:
Seat Pagine Gialle (2,690,503), Telecom Italia International
(1,101,893), Stream (246,355), Finsiel (115,000), Netesi
(31,227), Nordcom (26,902), Nortel Inversora (19,114), Latin
American Nautilus (15,054), I.T. Telecom (26,959), Telecom
Italia of North America (1,337), TILAB (38,468), Telecom
Italia America Latina (695), TI Finance (ex TI Web)
(16,413), Telecom Italia Learning Services (884) and
Cartesia (516). 4,331,320
o Writedown for losses of value covered by the reserve for
losses of subsidiaries and affiliated to the following
investments:
Fratelli Alinari (2,400), TI Sparkle (ex TMI - Telemedia
International Italia) (5,698), Emsa Servizi (2,001),
Eurescom (9), Telecom Italia America Latina (6,941), Telecom
Italia Capital (4,438), Softe (42,955), Consorzio RES (155)
and Ertico (1). 64,598
o Investments contributed to I.T. Telecom:
Netsiel (108,486), Telesoft (12,550), Saritel (17,783) and
Sodalia (4,087). 142,906
o Investments contributed to TI Sparkle:
TI Austria (1,835), TI Belgium (3,000), TI France (10,308),
TI Germany (9,325), TI Netherlands (3,518), TI Spain (703),
TI Switzerland (2,631), TI United Kingdom (4,305) and
Telecom Italia of North America (10,207). 45,832
o Partial non-proportional spin-off of IM.SER to EMSA and
IMSER 60. 126,118
o Merger of the investment in TI Media to Softe 51,005
o Contribution of the investment in Softe to TI Finance (ex TI
Web) 8,050
-------------------------------------------------------------------------------
Total decreases (B) 5,099,865
--------------------------------------------------------------------------------
Net change for the year (A-B) (3,227,258)
===============================================================================
In particular:
o writedowns were made to the investment held in Telecom Italia International
by euro 1,101,893 thousand mainly for the expenses connected with the sale
of 9Telecom to LDCom (euro 388,328 thousand), for the loss on the sale of
Telekom Austria (euro 187,951 thousand), for the writedown of Netco Redes
(euro 102,727 thousand) and for the writeoff of the carrying value of the
investment in Nortel Inversora (euro 37,000 thousand);
o writedowns were made to the investment held in Seat Pagine Gialle by euro
2,690,503 thousand following the adjustment of the shares of this company
to market value as a result of the decision, taken in conjunction with the
re-definition of Telecom Italia Group's strategy, of no longer considering
the "Directories" business of Seat Pagine Gialle to be of strategic
interest to the Group. The adjustment of the aforementioned shares
(recorded in the financial statements at a carrying value of euro 1.11 per
shares) was made on the basis of the average market price of the shares
over the last six months of 2002 (euro 0.668);
o writedown of the investment in Finsiel by euro 115,000 thousand. Since the
company realized gains on the sale of Lottomatica and Sogei in 2002, the
Board of Directors of Finsiel submitted a motion to the Shareholders'
Meeting for the payment of dividends including the aforementioned gains.
Since Telecom Italia, as usual, recorded the dividends from subsidiaries on
the maturity principle in 2002, effect was given to the writedown;
o under the project for the reorganization of the Information Technology
Group BU, Telecom Italia, in June, subscribed to 14,370,600 I.T. Telecom
shares of par value euro 5 each and the share premium capital of euro 4.944
by contributing - at book value - the investments held in Netsiel (68.65%),
Saritel (100%), Sodalia (100%) and Telesoft (60%). The total amount of the
contribution was euro 142,906 thousand;
o on August 1, 2002, Telecom Italia proceeded to sell the 40% investment held
in Telemaco Immobiliare to Mirtus, a company indirectly controlled by the
American real estate fund Whitehall, promoted by the Goldman Sachs Group;
o on December 18, 2002, Telecom Italia subscribed to the capital increase of
2,269,774 shares of TI Sparkle (ex TMI - Telemedia International Italia) at
the par value of euro 50 each for a total of euro 697,768 thousand (of
which euro 584,279 thousand was for the share premium), by contributing, to
the
187
same company, the "International Wholesale Services" business segment in
the Domestic Wireline BU. This contribution also included the investments
held by Telecom Italia in: TI Austria, TI Belgium, TI France, TI Germany,
TI Netherlands, TI Spain, TI Switzerland, TI United Kingdom and Telecom
Italia of North America;
o under the "Progetto Tiglio", details of which are provided in the report on
operations, the following corporate transactions took place:
> on October 24, 2002, the partial non-proportional spin-off of IM.SER
to EMSA and IMSER 60. As a result of this transactions, EMSA, a
100%-owned subsidiary of Telecom Italia, received 40% of the
shareholders' equity at December 31, 2001 of IM.SER and IMSER 60
received the remaining 60%. After this transaction, Telecom Italia's
investment in EMSA was equal to euro 155,494 thousand;
> on October 29, 2002, the sale of the investments in EMSA to OMS 2 at a
price of euro 219,665 thousand, with a gain of euro 69,524 thousand,
and in TELIMM to MSMC Immobiliare;
> on October 29, 2002, the subscription to quotas amounting to a 36.74%
interest in the share capital of Tiglio I for a total of euro 185,985
thousand, of which euro 184,074 thousand is a share premium, and
advances on future capital contributions of euro 26 thousand. This
advance was converted into share capital in December, raising the
total ownership to 36.85% of share capital;
> on October 29, 2002, the subscription to quotas amounting to 49.47% of
the share capital of Tiglio II by contribution of the "Asset
Management" business segment at market value, with a gain of euro
126,355 thousand;
o on November 22, 2002, the sale of the investment in IMMSI to
Omniapartecipazioni at a price of euro 68,310 thousand, with a gain of euro
50,206 thousand;
o on November 29, 2002, the sale of the investment in Telespazio to
Finmeccanica at a price of euro 127,210 thousand, with a gain of euro
46,767 thousand;
o on December 16, 2002, the merger of TI Media and Softe. After this
operation Softe issued 36,936,740 shares of par value euro 4.07 to Telecom
Italia, shareholder of TI Media. Subsequent merger of the "new" Softe and
TI Web against the issue of 3,193,533 shares of par value US $10 by the
latter company to Telecom Italia, shareholder of Softe. The new company
thus formed took the name of Telecom Italia Finance;
o at December 31, 2002, the Seat Pagine Gialle shares loaned to Morgan
Stanley numbered 58,000,000. In February and March, all the Seat Pagine
Gialle shares on loan to Morgan Stanley were returned;
o certain investments in subsidiaries and affiliated companies are recorded
at an amount in excess of the corresponding share of the underlying
shareholders' equity, net of dividends and after consolidation adjustments.
These investments are maintained at their carrying values since they are
expected to show future earnings and their assets are worth more than their
respective book values.
A comparison between the market price of listed shares at December 31, 2002 and
their carrying value shows an unrealized gain of euro 15,888 million. Further
details are given in Annex 3.
Advances on future capital contributions euro 166,184 thousand
Advances on future capital contributions increased by euro 87,288 thousand
compared to December 31, 2001, following payments made to I.T. Telecom for the
acquisitions, from Finsiel, of the interests in the companies Netsiel, Telesoft
and Netikos (euro 83,401 thousand) and, from Olivetti, of the interest in Webegg
(euro 57,500 thousand). Furthermore, euro 78,896 thousand was converted into
capital and referred to advances made in previous years to Telecom Italia
International for the acquisition of foreign investment
Accounts receivable euro 300,939 thousand
Accounts receivable increased by euro 80,201 thousand compared to December 31, 2001, and are analyzed as follows:
(in thousands of euro) 12/31/2001 Changes during the year 12/31/2002
----------------------------------------------------------------------------------------------------------------------------
Reimburse- Reclassifications/
Disbursements ments Other Total
----------------------------------------------------------------------------------------------------------------------------
Subsidiaries 60,000 - - - - 60,000
Affiliated companies - 117,406 - - 117,406 117,406
Other receivables 160,738 21,690 (56,029) (2,866) (37,205) 123,533
----------------------------------------------------------------------------------------------------------------------------
Total 220,738 139,096 (56,029) (2,866) 80,201 300,939
============================================================================================================================
188
Subsidiaries euro 60,000 thousand
------------
Accounts receivables from subsidiaries refer to a loan made in 2001 to Stet
Hellas for the acquisition of UMTS licenses.
Affiliated companies euro 117,406 thousand
--------------------
Accounts receivable from affiliated companies refer mainly to loans made to the
companies Tiglio I, Tiglio II, Telegono and Mirror International Holding.
Other receivables euro 123,533 thousand
-----------------
These mainly refer to:
o the remaining loans receivable from employees (euro 45,306 thousand);
o the prepayment of the tax on the reserve for employee termination
indemnities (euro 71,350 thousand), required under Law No. 662 of December
23, 1996 and subsequent amendments, revalued as required by law.
As regards accounts receivable included in long-term investments, the portion
due within and beyond five years is presented in the attached Annex 4, as
required by art. 2427, point 6, of the Italian Civil Code.
Treasury stock euro 287,213 thousand
--------------
"Treasury stock" purchased up to December 31, 2002 totaled 5,280,500 ordinary
shares and 45,647,000 savings shares, for an equivalent amount of euro 287,213
thousand. Moreover, the Telecom Italia Ordinary Shareholders' Meeting on
November 7, 2001, in authorizing the Board of Directors of the Company to
buy-back ordinary and/or savings shares for a maximum amount of euro
1,500,000,000, within the limits established by law, also authorized the
directors to dispose of, for an unspecified period of time, the shares purchased
for any stock option plans.
* * * * *
As required by Article 10 of Law No. 72/1983 the table below sets forth a
breakdown of upward adjustments by type of asset held at December 31, 2002.
(in thousands of euro)
Description Fixed assets Investments
------------------------------------------------------------------------------------------------------------------------------------
Manufacturing Construction
and in progress
Land and Plant and distribution Other and advances
buildings machinery equipment assets to suppliers Total Subsidiaries Affiliates
------------------------------------------------------------------------------------------------------------------------------------
Historical cost of additions to
12/31/2001:
o Upward adjustments under
special laws 690,902 2,002,718 - 7,865 - 2,701,485 768,400 2,417
o Not adjusted 1,227,673 44,047,415 835,240 570,832 731,490 47,412,650 20,274,670 654,872
------------------------------------------------------------------------------------------------------------------------------------
Total 1,918,575 46,050,133 835,240 578,697 731,490 50,114,135 21,043,070 657,289
------------------------------------------------------------------------------------------------------------------------------------
Upward adjustments:
o under Law No. 74 of 2/11/1952 212 - - - - 212 374 -
o under Law No. 823 of 12/19/1973 1,084 - - - - 1,084 546 -
o under Law No. 576 of 12/2/1975 20,605 27,650 - 475 - 48,730 12,653 -
o under Law No. 72 of 3/19/1983 161,800 716,714 - 3,819 - 882,333 84,820 1,424
o under Law No. .413 of 12/30/1991 211,026 - - - - 211,026 - -
o voluntary adjustment made in 1981 - - - - - - 38,012 -
------------------------------------------------------------------------------------------------------------------------------------
Total 394,727 744,364 - 4,294 - 1,143,385 136,405 1,424
------------------------------------------------------------------------------------------------------------------------------------
Grand total 2,313,302 46,794,497 835,240 582,991 731,490 51,257,520 21,179,475 658,713
====================================================================================================================================
189
CURRENT ASSETS
Inventories euro 69,572 thousand
(euro 76,894 thousand at December 31, 2001)
Inventories, which decreased by euro 7,322 thousand compared to December 31,
2001, consist of "contract work in process" (euro 16,868 thousand) and
"merchandise " (euro 52,704 thousand).
Accounts receivable euro 9,632,258 thousand
(euro 9,220,393 thousand at December 31, 2001)
Accounts receivable increased by euro 411,865 thousand compared to December 31,
2001. A breakdown and the changes that occurred during the year are given in
the table below:
12/31/2001 Changes during the year 12/31/2002
---------------------------------------------------------------------------------------------------------------------------
(in thousands of euro) Utilizations Provisions Other Change
---------------------------------------------------------------------------------------------------------------------------
Trade accounts receivable 4,548,154 (446,824) 4,101,330
o allowance for doubtful accounts (306,500) 225,682 (299,642) 32,598 (41,362) (347,862)
Total trade accounts receivable 4,241,654 (488,186) 3,753,468
---------------------------------------------------------------------------------------------------------------------------
Accounts receivable from subsidiaries 2,214,020 617,103 2,831,123
o allowance for doubtful accounts of
subsidiaries (17,100) (17,400) (17,400) (34,500)
Total accounts receivable from
subsidiaries 2,196,920 599,703 2,796,623
o of which financial receivables 496,989 1,403,610 1,900,599
---------------------------------------------------------------------------------------------------------------------------
Accounts receivable from affiliated companies 324,870 (171,560) 153,310
o allowance for doubtful accounts of affiliated
companies (13,300) 13,300 (61,790) (48,490) (61,790)
Accounts receivable from affiliated
companies 311,570 (220,050) 91,520
o of which financial receivables 122,490 (121,769) 721
---------------------------------------------------------------------------------------------------------------------------
Accounts receivable from parent
companies 1,090 153 1,243
---------------------------------------------------------------------------------------------------------------------------
Other receivables 2,469,159 520,245 2,989,404
o Government and other public entities for
grants and subsidies 1,265 -- 1,265
o deferred tax assets 509,094 1,079,945 1,589,039
o other receivables 1,958,800 (559,700) 1,399,100
---------------------------------------------------------------------------------------------------------------------------
Total 9,220,393 411,865 9,632,258
===========================================================================================================================
Trade accounts receivable euro 3,753,468 thousand
Trade accounts receivable are shown net of the relative allowance accounts
(euro 347,862 thousand, of which euro 299,642 thousand were provided in the
year) and decreased by euro 488,186 thousand. They included euro 685,732
thousand of receivables from other wireline and mobile telecommunications
carriers.
Following the contribution of Telecom Italia's "International Wholesale
Services" business segment to Telecom Italia Sparkle on December 31, 2002, on
that date, receivables from foreign correspondents were transferred to the
latter company totaling euro 579,188 thousand, net of the related allowance for
doubtful accounts of euro 32,598 thousand.
The securitization and factoring of receivables led to a reduction in trade
accounts receivable at December 31, 2002 of euro 1,031,309 thousand.
Accounts receivable from subsidiaries euro 2,796,623 thousand
Accounts receivable from subsidiaries increased by euro 599,703 thousand,
compared to December 31, 2001, and include trade, financial and other
receivables.
The financial receivables, equal to euro 1,900,599 thousand, reflect current
account transactions carried out at market rates for cash management purposes
and short-term loans granted principally to TIM (euro 1,252,321 thousand),
TILAB (euro 174,460 thousand) and I.T. Telecom (euro 329.033 thousand).
190
Trade accounts receivables (euro 453,164 thousand) related to TLC services
rendered mainly to TIM (euro 201,657 thousand), Seat Pagine Gialle (euro 29,667
thousand), Path.Net (euro 50,684 thousand) and management fees from Telecom
Italia International (euro 48,899 thousand net of the relative allowance for
doubtful accounts of euro 34,500 thousand, set aside for uncollectible
receivables by Telecom Italia International from Telekom Srbija). Other
receivables (euro 442,860 thousand) represent accrued dividends from
subsidiaries (euro 333,536 thousand, the details of which are shown in the note
on "income from equity investments" in the statement of income, and other
receivables connected with the Group's VAT settlement system (euro 87,863
thousand).
Accounts receivable from affiliated companies euro 91,520 thousand
Accounts receivable from affiliated companies decreased by euro 220,050
thousand compared to December 31, 2001, and mainly refer to financial and trade
accounts receivable. Financial receivables, equal to euro 721 thousand,
consisted almost entirely of the loan receivable from Stream (euro 27,887
thousand) that is nearly completely covered by the allowance for doubtful
accounts of euro 27,166 thousand that was set aside purposely. Trade accounts
receivable (euro 83,239 thousand) refer to TLC services rendered principally to
Stream (euro 33,768 thousand) and TLC products sold to Teleleasing (euro 37,703
thousand). Other receivables (euro 7,560 thousand) mainly refer to Stream (euro
34,689 thousand) - following the enforcement of the guarantee provided by
Telecom Italia, at the time of the sale of Italtel, on receivables of the
latter from Stream - almost entirely covered by the relative allowance for
doubtful accounts, and receivables from Tiglio I (euro 5,707 thousand).
Accounts receivable from parent companies euro 1,243 thousand
These accounts receivable are trade in nature and are receivable from the
parent company Olivetti.
Other receivables euro 2,989,404 thousand
Government and other public entities for grants and
subsidies euro 1,265 thousand
These consist of the receivable from the Ministry of Industry, Commerce and
Handicrafts for grants to defray the costs incurred for the realization of the
telecommunications installations in Southern Italy.
Deferred tax assets euro 1,589,039 thousand
These are shown net of the reserve for deferred taxes (euro 215,680 thousand).
The main items which gave rise to deferred tax assets are tax credits on
dividends accrued but not yet received and provisions to the reserves for risks
and charges. Deferred tax assets include the effects of applying Legislative
Decree No. 209/2002, as well as the amendments made upon its conversion into
Law No. 265/2002. At December 31, 2002, about euro 305 million of deferred tax
assets have not been recorded since their future recovery is not assured.
The balance of deferred tax assets and liabilities was made up as follows:
12/31/2002 12/31/2001
------------------------------------------------------------------------------------------------------
Amount due Amount due
------------------------------------------------------------------------------------------------------
Within 1 From 2 to 5 Beyond 5 Within 1 From 2 to 5 Beyond 5
(in thousands of euro) year years years Total year years years Total
--------- ---------- -------- --------- -------- ----------- -------- ----------
Deferred tax assets 932,309 872,410 - 1,804,719 988,499 108,831 - 1,097,330
Reserve for deferred
taxes (193,998) (21,682) - (215,680) (573,895) (14,341) - (588,236)
--------- ------- -------- --------- -------- -------- ------- ----------
Net balance 738,311 850,728 - 1,589,039 414,604 94,490 - 509,094
======== ======= ======== ========= ======== ======= ======= =========
191
Other receivables euro 1,399,100 thousand
-----------------
Other receivables decreased by euro 559,700 thousand compared to December 31,
2001 and can be analyzed as follows:
(in thousands of euro) 12/31/2002 12/31/2001
--------------------------------------------------------------------------------
o receivables from the Tax Administration 390,167 986,212
o receivables relating to personnel 145,559 114,335
o transaction for the loan of securities 175,872 235,552
o customer payments in transit with the
banking and postal banking system 94,281 89,670
o receivable from TISV for the
"Deferred Purchasing Price" 369,958 308,049
o other items 223,263 224,982
--------------------------------------------------------------------------------
Total 1,399,100 1,958,800
================================================================================
In particular, the receivables from the Tax Administration fell by euro 596,045
thousand, mainly due to lower receivables for direct income taxes and the VAT
receivable positions that were transferred to the parent company Olivetti.
The contra-entry to transactions for the loan of securities, described under
"Investments" in the accounting policies, is in "Other liabilities". As
previously pointed out, in February and March 2003, all the Seat Pagine Gialle
shares loaned to Morgan Stanley were returned. Therefore, as of March 7, 2003,
there are no Seat Pagine Gialle shares surrendered under contracts for the loan
of securities.
Short-term financial assets euro 165,283 thousand
(euro 240,457 thousand at December 31, 2001)
The composition and changes during the year are shown in the following table:
(in thousands of euro) 12/31/2001 Changes during the year 12/31/2002
------------------------------------------------------------------------------------------------------
Sales/Reim- Writedowns/
Acquisitions bursements Reinstatements Total
======================================================================================================
Equity investments in
subsidiaries 240,457 10,739 (10,711) (75,202) (75,174) 165,283
------------------------------------------------------------------------------------------------------
Total 240,457 10,739 (10,711) (75,202) (75,174) 165,283
======================================================================================================
"Equity investments in subsidiaries" refer to the value of TIM and Seat Pagine
Gialle ordinary shares, purchased for later trading.
Further details are provided in Annex 3.
Liquid assets euro 235,538 thousand
(euro 80,613 thousand at December 31, 2001)
Liquid assets increased by euro 154,925 thousand compared to December 31, 2001
mainly for a guarantee provided by Royal Bank of Scotland on behalf of
Mediobanca in the interest of IS Tim.
(in thousands of euro) 12/31/2002 12/31/2001
--------------------------------------------------------------------------------
Bank and postal accounts 235,045 80,220
Checks 15 9
Cash and valuables on hand 478 384
-------------------------------------------------------------------------------
Total 235,538 80,613
-------------------------------------------------------------------------------
192
Accrued income and prepaid expenses euro 479,926 thousand
(euro 695,039 thousand at December 31, 2001)
These decreased by euro 215,113 thousand compared to December 31, 2001 and
include the following:
(in thousands of euro) 12/31/2002 12/31/2001
-------------------------------------------------------------------------------
Issue discounts and similar charges 40,952 25,097
-------------------------------------------------------------------------------
Accrued income
o financial income 9,669 11,944
-------------------------------------------------------------------------------
9,669 11,944
-------------------------------------------------------------------------------
Other prepaid expenses
o production costs 44,147 54,652
o financial expense 4,227 4,715
o other 380,931 598,631
-------------------------------------------------------------------------------
429,305 657,998
-------------------------------------------------------------------------------
Accrued income and other prepaid expenses 438,974 669,942
-------------------------------------------------------------------------------
Total 479,926 695,039
===============================================================================
Issue discounts and similar charges euro 40,952 thousand
"Issue discounts and similar charges" increased by euro 15,855 thousand
compared to December 31, 2001 owing to the issue, at below face value, of a new
note on the market. See also the comment on "Debentures" in the liabilities.
They also include consulting expenses incurred to connection with the
transaction.
Accrued income and other prepaid expenses euro 438,974 thousand
Accrued income mainly includes the interest (euro 3,864 thousand) subsidized
until 1991 by the government under Law No. 67/1988, equivalent to three
percentage points of the cost of the loans which replaced those assigned to the
Company, through Cassa Depositi e Prestiti, under Law No. 887/1984, interest
income from subsidiaries and affiliated companies (euro 2,424 thousand) and
income on derivative financial instruments (euro 1,384 thousand).
Prepaid expenses mainly pertain to building rents (euro 32,806 thousand) and
financial expenses (euro 380,919 thousand) relating to Telecom Italia
International for the deferral of the put option on Seat Pagine Gialle shares.
See also "Purchases and sales commitments" in the memorandum accounts.
***
A breakdown of receivables and accrued income by maturity and type is given in
Annex 4.
193
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity euro 10,955,270 thousand
(euro 15,870,654 thousand at December 31, 2001)
Shareholders' equity decreased by euro 4,915,384 thousand, compared to December
31, 2001; the table below shows the changes that occurred during the year:
12/31/2001 Changes during the year 12/31/2002
----------------------------------------------------------------------------------------------------------------------------
Appropriation of Other Net loss
(in thousands of euro) 2001 net income changes for the loan Total
----------------------------------------------------------------------------------------------------------------------------
Share capital 4,023,061 - 756 - 756 4,023,817
Additional paid-in capital 1,812,283 - 1,226,091 - 1,226,091 3,038,374
Reserves for inflation adjustments
under
o Law No. 72 of 3/19/1983 2,294,720 - - - - 2,294,720
o Law No. 413 of 12/30/1991 468,944 - - - - 468,944
Legal reserve 652,026 7,633 160,341 - 167,974 820,000
Reserve for treasury stock in portfolio - - 287,213 - 287,213 287,213
Other reserves:
o reserve Law No. 488/92 118,678 - - - - 118,678
o reserve Law No. 342 of 11/21/2000,
art. 14 716,378 - - - - 716,378
o special reserve 1,369,062 - (1,369,062) - (1,369,062) -
o reserve for capital grants 471,947 - 13,756 - 13,756 485,703
o reserve, Leg. Decree No. 124/93, ex
art. 13 169 - - - - 169
o miscellaneous reserves 2,324,722 - (2,324,722) - (2,324,722) -
o miscellaneous income reserves 1,467,854 (1,122,351) (1,122,351) 345,503
Retained earnings - 1,147 - - 1,147 1,147
Net income (loss) 150,810 (8,780) (142,030) (1,645,376) (1,796,186) (1,645,376)
----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 15,870,654 - (3,270,008) (1,645,376) (4,915,384) 10,955,270
============================================================================================================================
Share capital
Share capital amounted to euro 4,023,817 thousand and increased by euro 756
thousand compared to December 31, 2001 as a result of the subscription against
payment, by executives of the Group, of 1,375,150 ordinary shares of par value
euro 0.55 each, under the stock option plan.
Additional paid-in capital
Additional paid-in capital of euro 3,038,374 thousand increased by euro
1,226,091 thousand, compared to December 31, 2001, as a result of the following
transactions:
> reclassifications of euro 2,159,995 thousand from "miscellaneous reserves"
of euro 820,000 thousand to the "legal reserve" as voted by the Ordinary
Shareholders' Meeting on December 12, 2002;
> increase of euro 8,582 thousand to service the aforementioned stock option
plan;
> reclassification to the "reserve for treasury stock in portfolio" of euro
122,486 thousand for the purchases, made between October 1, and December
31, 2002, of 833,500 ordinary shares of treasury stock at the average
price of euro 7.69 and 22,607,000 savings shares of treasury stock at the
average price of euro 5.20 under the buy-back program authorized by the
Ordinary Shareholders' Meeting on November 7, 2001.
Legal reserve
The legal reserve amounted to euro 820,000 thousand and increased by euro
167,974 thousand as a result of the following changes:
> reclassification of euro 820,000 thousand from "additional
paid-in-capital" as described above;
> reclassification of euro 659,659 thousand to "miscellaneous reserves" -
which, at the same time, were renamed "miscellaneous income reserves" - as
voted by the Ordinary Shareholders' Meeting on December 12, 2002;
194
> appropriation of 5.1% of 2001 profits as voted by the Ordinary
Shareholders' Meeting of May 7, 2002.
Reserve for treasury stock in portfolio
This reserve totaled euro 287,213 thousand. The amount referred to the
following:
> reclassification of euro 164,727 thousand from "miscellaneous reserves"
and purchases, between January 1 and September 30, 2002, of 4,447,000
ordinary shares of treasury stock at an average price of euro 8.30 and
23,040,000 savings shares of treasury stock at an average price of euro
5.55 under the buy-back program authorized by the Ordinary Shareholders'
Meeting on November 7, 2001;
> reclassification of euro 122,486 thousand from the "reserve for treasury
stock in portfolio" for the aforementioned purchases of treasury stock
during the period October 1, to December 31, 2002.
Special reserve
The special reserve showed a nil balance after the distribution of the entire
reserve to shareholders as voted by the Ordinary Shareholders' Meeting on May
7, 2002.
Reserve for capital grants
The reserve for capital grants totaled euro 485,703 thousand and increased by
euro 13,756 thousand as a result of the transfer, from the "reserves for risks
and charges", of the portion of grants received up to December 31, 1992 that
became available during the year, in relation to the depreciation of the assets
to which such grants refer.
Miscellaneous reserves
Miscellaneous reserves showed a nil balance after the aforementioned
reclassifications of euro 2,159,995 thousand to the "reserve for additional
paid-in-capital" and euro 164,727 thousand to the "reserve for treasury stock
in portfolio".
Miscellaneous income reserves
The reserve came about by renaming "miscellaneous reserves", voted by the
Ordinary Shareholders' Meeting on December 12, 2002, and was entirely formed by
income reserves. The reserves have been reduced by euro 1,122,351 thousand as a
result of the following changes:
> euro 795,431 thousand drawn for the distribution to shareholders as voted
by the Ordinary Shareholders' Meeting on May 7, 2002;
> euro 986,579 thousand drawn for the distribution to shareholders as voted
by the Ordinary Shareholders' Meeting on December 12, 2002;
> reclassification of euro 659,659 thousand from the "legal reserve"
shareholders as voted by the same shareholders' meeting.
Reserves for risks and charges euro 3,144,986 thousand
(euro 1,612,737 thousand at December 31, 2001)
These increased by euro 1,532,249 thousand, compared to December 31, 2001. The
composition and changes in these reserves are described as follows:
Change during the year
----------------------------------------------------------------------------------------------------------------------------------
Released Reclassifications/
(in thousands of euro) 12/31/2001 Provisions Utilizations to income Other Total 12/31/2002
----------------------------------------------------------------------------------------------------------------------------------
Reserve for taxes 116,648 178,729 (584,280) (528) 424,113 18,034 134,682
For taxes 116,648 - (548) (528) 19,110 18,034 134,682
For deferred taxes - 178,729 (583,732) - 405,003 - -
Other reserves 1,496,089 2,356,792 (731,314) (64,827) (46,436) 1,514,215 3,010,304
Reserve for litigation 140,625 5,902 (10,938) - (5,751) (10,787) 129,838
Reserve for capital grants 115,513 - - - (13,756) (13,756) 101,757
Reserve for losses of subsidiaries 80,932 71,433 (64,598) - - 6,835 87,767
and affiliates
Reserve for corporate restructuring - 194,614 - - (717) 193,897 193,897
Reserve for purchase commitments 568,622 1,941,843 (568,622) - - 1,373,221 1,941,843
Reserve for contractual risks and
other risks 590,397 143,000 (87,156) (64,827) (26,212) (35,195) 555,202
----------------------------------------------------------------------------------------------------------------------------------
Total 1,612,737 2,535,521 (1,315,594) (65,355) 377,677 1,532,249 3,144,986
==================================================================================================================================
195
Reserve for taxes euro 134,682 thousand
The reserve for taxes increased by euro 18,034 thousand compared to December
31, 2001 and refers entirely to income taxes and other duties and taxes. The
reserve for deferred taxes shows a nil balance attributable to the set-off with
deferred tax assets.
Other reserves euro 3,010,304 thousand
These include the following reserves:
o reserve for litigation (euro 129,838 thousand): this included prudent
provisions - charged to various items of the statement of income - for
probable expenses in connection with personnel disputes and litigation
with third parties which had not yet been settled at the end of the year;
o reserve for capital grants (euro 101,757 thousand): this included the
unavailable portion of capital grants received up to December 31, 1992.
Utilizations during the year (euro 13,756 thousand) stem from the transfer
to shareholders' equity of the portion of the capital grants which became
available;
o reserve for losses of subsidiaries and affiliates (euro 87,767 thousand):
this included the provisions to account for the losses in excess of the
carrying value of certain investments, in particular Telecom Italia
Finance (euro 66,902 thousand);
o reserve for corporate restructuring (euro 193,897 thousand): this included
the provision (euro 194,614 thousand) for the framework agreement with the
labor unions concerning the layoffs for the month of May 2002;
o reserve for purchase commitments (euro 1,941,843 thousand): the amount
provided in 2002 related to the forward commitment to purchase Seat Pagine
Gialle shares. The amount set aside in 2001 for this purpose (euro 568,622
thousand) was completely utilized following the renegotiation of the put
and call option exercise price on February 25, 2002, reclassifying the
amount to "due to other lenders" under liabilities. In November, this
liability was extinguished before the expiration date by paying JP Morgan
Chase consideration equal to euro 499,822 thousand, corresponding to the
present value of the liability. The transaction had no impact on the
statement of income;
o reserve for contractual risks and other risks (euro 555,202 thousand):
this included provisions mainly to cover potential regulatory disputes
(euro 40,189 thousand), expenses connected with the sale of Italtel (euro
15,000 thousand) and Telespazio (euro 38,200 thousand) and guarantees
relating to the reorganization of real estate assets under Progetto Tiglio
(euro 29,500 thousand); utilizations referred mainly to guarantees
provided by Telecom Italia for the sale of Sirti (euro 21,781 thousand)
and Italtel (euro 36,152 thousand); amounts released to income almost
entirely referred to the failure to execute the agreement for the sale of
Stream to News Corporation and Vivendi Universal/Canal+ (euro 59,360
thousand); reclassifications regarded mainly the transfer to the
"allowance for doubtful accounts of affiliated companies" of euro 25,823
thousand to adjust to estimated realizable value, the receivable from
Stream arising from the extinguishment of Stream's debt payable to
Italtel, guaranteed by Telecom Italia.
Reserve for employee termination indemnities euro 968,553 thousand
(euro 1,025,349 thousand at December 31, 2001)
This reserve decreased by euro 56,796 thousand, compared to December 31, 2001.
The following changes took place during the year:
(in thousands of euro)
Balance at December 31, 2001 1,025,349
--------------------------------------------------------------------------------
Changes during the year:
- Provisions charged to income for amounts to fund employee
termination indemnities accrued in favor of
employees
during the year plus the fixed and variable cost-of-living
adjustments required under Law No. 297/1982 138,991
- Utilizations for:
o Indemnities paid to employees who took retirement or resigned
during the year (135,638)
o Advances (14,566)
o Supplementary benefits (Telemaco) (17,488)
o Substitute tax on the revaluation of the reserve (3,572)
- Amounts transferred to/from subsidiaries (24,523)
--------------------------------------------------------------------------------
Balance at December 31, 2002 968,553
================================================================================
196
Liabilities euro 23,972,750 thousand
(euro 24,898,003 thousand at December 31, 2001)
Liabilities, which decreased by euro 925,253 thousand compared to December 31, 2001, included the following:
12/31/2002 12/31/2001
-----------------------------------------------------------------------------------------------------------------
Trade Trade
accounts accounts
(in thousands of euro) Financial payable and Financial payable and
accounts other accounts other
payable payables Total payable payables Total
-----------------------------------------------------------------------------------------------------------------
Debentures 10,941,662 -- 10,941,662 8,250,000 -- 8,250,000
Due to banks 3,447,500 -- 3,447,500 7,308,420 -- 7,308,420
Due to other lenders 502,545 -- 502,545 657,777 -- 657,777
Advances -- 9,967 9,967 -- 2,447 2,447
Trade accounts payable -- 1,855,721 1,855,721 -- 2,240,654 2,240,654
Notes payable 20,000 -- 20,000 -- -- --
Accounts payable to subsidiaries 2,169,195 1,012,742 3,181,937 1,218,043 1,132,687 2,350,730
Accounts payable to affiliated
companies 5,125 150,898 156,023 29,205 215,539 244,744
Accounts payable to parent
companies -- 213,969 213,969 -- 11 11
Taxes payable 31,920 189,341 221,261 50,162 410,390 460,552
Contributions to pension and social
security institutions -- 691,021 691,021 -- 767,412 767,412
Other liabilities 181,498 2,549,646 2,731,144 395,266 2,219,990 2,615,256
-----------------------------------------------------------------------------------------------------------------
Total 17,299,445 6,673,305 23,972,750 17,908,873 6,989,130 24,898,003
=================================================================================================================
Debentures euro 10,941,662 thousand
Debentures included euro 10,750,000 thousand of notes issued under the "Global
Note Program" and euro 191,662 thousand for the issue of notes 2002 - 2022
reserved for subscription by employees, in service and retired, of companies,
directly and indirectly, controlled by Telecom Italia with headquarters in
Italy. The 20-year notes, with a face value of euro 50 each, issued at the same
price, are not listed and can only be negotiated with Telecom Italia. The
semi-annual deferred interest is payable on January 1 and July 1 of every year
and is indexed at the 6-month Euribor.
Under the "Global Note Program", in February, Telecom Italia issued a new note
on the market listed on the Luxembourg stock exchange for euro 2,500,000
thousand in two tranches of euro 1,250,000 thousand each, maturing February 1,
2007 and February 1, 2012.
Due to banks euro 3,447,500 thousand
These decreased by euro 3,860,920 thousand compared to December 31, 2001. They
comprised medium/long-term debt totaling euro 1,801,152 thousand - of which
euro 24,790 thousand is secured by collateral - and short-term borrowings
totaling euro 1,646,348 thousand. Of the latter amount, euro 1,035,000 thousand
refers to loans taken out to cover temporary liquidity requirements and euro
611,348 thousand to bank overdrafts.
Due to other lenders euro 502,545 thousand
These decreased by euro 155,232 thousand compared to December 31, 2001. They
consisted of medium/long-term financing (euro 337,927 thousand), referring
principally to loans made by the Cassa Depositi and Prestiti (euro 284,268
thousand), and short-term loans payable to TI Securitisation Vehicle S.r.l. for
financing funded by the excess liquidity generated by the securitization of
receivables (euro 164,618 thousand).
Trade accounts payable euro 1,855,721 thousand
These decreased by euro 384,933 thousand compared to December 31, 2001. At
December 31, 2002, trade accounts payable due to foreign correspondents (euro
336,542 thousand) were transferred to Telecom Italia Sparkle following the
contribution of Telecom Italia's "International Wholesale Services" business
segment to the latter company on December 31, 2002. The balance included euro
259,455 thousand due to other wireline and mobile operators.
197
Notes payable euro 20,000 thousand
There referred to 3-month notes issued by Telecom Italia on October 25, 2002
and subscribed by RAS S.p.A. (euro 10,000 thousand), RAS Asset Management SGR
S.p.A. Ras Obbligazionario (euro 2,000 thousand), RAS Asset Management SGR
S.p.A. Ras Cedola (euro 2,000 thousand) and RAS Asset Management SGR S.p.A. Ras
Monetario (euro 6,000 thousand). The interest rate is equal to 3.52% plus a
spread of 0.27% over the Euribor rate. Placement of the notes was carried out
by RASFIN SIM S.p.A..
Accounts payable to subsidiaries euro 3,181,937 thousand
These increased by euro 831,207 thousand compared to December 31, 2001. They
consisted of financial payables, trade accounts payable and other payables.
Financial payables (euro 2,169,195 thousand), refer to current account
transactions negotiated at market rates for cash management purposes and mainly
include accounts payable to Telecom Italia International (euro 1,200,000
thousand), Seat Pagine Gialle (euro 529,198 thousand) and Finsiel (euro 215,273
thousand). Trade accounts payable (euro 943,205 thousand) mainly consisted of
accounts payable to TIM (euro 256,975 thousand) and Seat Pagine Gialle (euro
37,962 thousand) for the portion of TLC services invoiced by Telecom Italia to
customers, and I.T. Telecom (euro 462,467 thousand) and TILAB (euro 83,398
thousand) for supply transactions. Other payables (euro 69,537 thousand)
primarily referred to capital contributions paid to the company PathNet (euro
18,074 thousand) and sundry payables to Telecom Italia Sparkle (euro 43,164
thousand).
Accounts payable to affiliated companies euro 156,023 thousand
These decreased by euro 88,721 thousand, thousand, compared to December 31,
2001. They referred to financial payables, trade accounts payable and other
payables. Financial payables (euro 5,125 thousand), referred to current account
transactions negotiated at market rates for cash management purposes and mainly
refer to accounts payable to Teleleasing (euro 4,830 thousand). Trade accounts
payable (euro 148,908 thousand) mainly referred to payables to Italtel (euro
112,257 thousand) and Siemens Informatica (euro 20,612 thousand). Other
payables (euro 1,990 thousand) almost entirely regarded amounts due to Tiglio
II.
Accounts payable to parent companies euro 213,969 thousand
Accounts payable to parent companies referred almost entirely to the payable to
Olivetti for Group VAT.
Taxes payable euro 221,261 thousand
These decreased by euro 239,291 thousand, compared to December 31, 2001, and
mainly referred to:
> the payable to the Italian Treasury for withholding taxes of euro 79,750
thousand;
> the VAT liability totaling euro 57,459 thousand;
> medium/long-term taxes payable (euro 31,920 thousand) relative to the
agreement reached with
> the Financial Administration over the assessments received in 2001.
Contributions to pension and social security institutions euro 691,021 thousand
These decreased by euro 76,391 thousand compared to December 31, 2001. They
included amounts owed to social security and health institutions with regard to
personnel. These specifically included euro 590,084 thousand payable to INPS
for the remaining balance of the estimated charges assessed for employees of
the former ASST pursuant to Law No. 58/1992, described under the accounting
policies.
Other liabilities euro 2,731,144 thousand
These increased by euro 115,888 thousand compared to December 31, 2001. They
included, in particular, liabilities for the:
> payable to customers totaling euro 1,151,549 thousand, including deposits
by subscribers against telephone conversations and basic charges;
> employee-related items amounting to euro 405,485 thousand;
> payable for the TLC license fee totaling euro 849,077 thousand. Telecom
Italia contested the Ministerial Decree dated March 21, 2000 that
introduced Law No. 448/1998, which set forth a new license fee as from
January 1, 1999 in lieu of the previous concession fee. Consequently, it
did not pay the license fee for the years 2000, 2001 and 2002;
> loan of Seat Pagine Gialle ordinary shares to Morgan Stanley (euro 175,872
thousand); the contra-entry is to "Other receivables ".
198
Accrued expenses and deferred income euro 1,103,990 thousand
(euro 704,209 thousand at December 31, 2001)
These increased by euro 399,781 thousand, compared to December 31, 2001, and
included the following:
(in thousands of euro) 12/31/2002 12/31/2001
-----------------------------------------------------------------
Accrued expenses
o production costs 119 3,109
o financial expense 578,929 265,069
-----------------------------------------------------------------
579,048 268,178
-----------------------------------------------------------------
Deferred income
o capital grants (unavailable portion) 132,854 134,975
o production value 389,403 297,368
o financial income 2,685 3,688
-----------------------------------------------------------------
524,942 436,031
-----------------------------------------------------------------
Total 1,103,990 704,209
=================================================================
Accrued financial expenses mainly relate to interest accrued on notes (euro
552,592 thousand). Deferred income mainly includes basic charges and rentals of
telephone equipment (euro 298,468 thousand), the unavailable portion of capital
grants received after December 31, 1992, and financial items mainly connected
to loans to employees.
***
An analysis of liabilities and accrued expenses by maturity and type is
provided in Annex 5.
199
MEMORANDUM ACCOUNTS
Memorandum accounts totaled euro 13,613,376 thousand at December 31, 2002 and
can be analyzed as follows:
Guarantees provided euro 10,804,761 thousand
Guarantees provided consisted of sureties (net of counter-guarantees received
totaling euro 1,299,953 thousand), of which euro 10,504,478 thousand were on
behalf of subsidiaries, euro 157,028 thousand on behalf of affiliated companies
and euro 143,255 thousand on behalf of third parties. The guarantees were given
mainly in respect of the notes issued by Sogerim (merged with Telecom Italia
Finance) for a total of euro 7,964,500 thousand (part of the Global Note
Program which is completely guaranteed by Telecom Italia), other
medium/long-term financial transactions, supply contracts and guarantees on
bids to acquire licenses abroad.
Purchases and sales commitments euro 2,802,362 thousand
Purchases commitments totaling euro 2,785,119 thousand mainly consisted of
commitments for the purchase of Seat Pagine Gialle shares (euro 2,416,642
thousand) relating to the put option on these same shares, described below, the
commitment of euro 263,639 thousand for the early purchase of two building
complexes under financial leases held by Teleleasing, located in Rome (Parco
dei Medici) and Lecce, future lease obligations plus the related purchase
options (euro 72,195 thousand), Telecom Italia's five-year commitment with the
"Interaction Design Institute" Association of Ivrea (euro 18,889 thousand), the
commitment for the purchase, from Pirelli, Camozzi, Evoluzione and Intesa, of
the entire interests held by each in EPIClink for euro 9,800 thousand. Sales
commitments of euro 17,243 thousand mainly referred to the agreement with
Accenture for the sale of TESS (euro 10,043 thousand) and the agreement with
the other shareholders of SITEBA to sell the stake held by Telecom Italia (euro
7,200 thousand).
Put option on Seat Pagine Gialle shares
---------------------------------------
Under the contract stipulated on March 15, 2000 (as subsequently amended and
integrated), Telecom Italia gave Huit II a put option on No. 710,777,200 Seat
Pagine Gialle shares at a strike price of euro 4.2 per share. The contract
provided for the exercise of such option after the deed of merger between Seat
Pagine Gialle and Tin.it was recorded in the Companies Register. Huit II later
transferred the put option to JPMorgan Chase Equity Limited (JPCEL, at that
time called Chase Equity Limited), together with the ownership of the
corresponding Seat Pagine Gialle shares. On December 4, 2000, JPCEL
renegotiated the contract with Telecom Italia, extending the period to five
years, with the possibility of exercising the option at an earlier date in
April and May 2003, 2004 and 2005. The time extension made it possible to defer
the financial impact.
Telecom Italia International (at that time called Stet International
Netherlands, a wholly-owned subsidiary of Telecom Italia) then purchased from
JPCEL, through the Liberator Ltd. trust, a call option on 660,777,200 Seat
Pagine Gialle ordinary shares with the same expiry date and strike price as the
put option, paying a total premium of euro 747,016,226. Moreover, for the
purpose of transferring the effects of this latter transaction to Telecom
Italia, a call option was stipulated, with the same features, between the same
Telecom Italia and Telecom Italia International.
On February 25, 2002, Telecom Italia concluded the renegotiation of the
December 4, 2000 put and call options with the JPMorgan Chase group.
In particular, it was agreed to reduce the price to exercise the aforementioned
options from euro 4.2 to euro 3.4 per share; in view of the reduction, Telecom
Italia agreed to pay JPMorgan Chase an amount of euro 568,622 thousand at the
original expiration date of December 2005, unless Telecom Italia's elected to
pay the consideration earlier, in which case the consideration would be
discounted to its present value at the time of payment.
It was also agreed to eliminate the right of either party to exercise the
options at an earlier date, which therefore expire on December 6, 2005, except
for Telecom Italia's right to exercise part of the call options beforehand; the
early exercise of the option per tranche, beginning from December 2004, covers
355 million Seat Pagine Gialle shares.
As a result of this renegotiation, the aforementioned expense connected with
the revision of the strike price of the options (euro 568,622 thousand) was
recorded in the caption "due to other lenders" and had no effect on the
statement of income for the period following the utilization of the reserve for
risks and charges set aside, for the same amount, at the end of 2001 for the
estimated nonrecoverability of the original price of the put option. In
November, this liability was extinguished by Telecom Italia at an earlier date
by paying JP Morgan Chase consideration equal to euro 499,822 thousand,
corresponding to the present value of the liability.
Furthermore, the valuation of the forward commitment to purchase Seat Pagine
Gialle shares at the end of 2002 led to a provision in the reserves for risks
and charges (other reserves) of euro 1,941,843
200
thousand. This was to account for the estimated nonrecoverability of the option
exercise price as a result of the decision, taken in conjunction with the
redefinition of the strategy of the Telecom Italia Group, of no longer
considering the "Directories" business of Seat Pagine Gialle to be of strategic
interest.
Other memorandum accounts euro 6,253 thousand
These mainly referred to assets of third parties on loan, on deposit for
safekeeping or for similar purposes (euro 5,289 thousand).
***
Moreover:
o the Company issued weak letters of patronage totaling euro 1,154,651
thousand, chiefly on behalf of subsidiaries and affiliated companies to
guarantee insurance polices, lines of credit and overdraft arrangements;
o assets held by third parties on loan, on deposit for safekeeping or for
similar purposes amounted to euro 253,808 thousand and consisted of
equipment leased to customers (euro 238,386 thousand), assets given on loan
to the Telcal consortium (euro 50 thousand) and telephone cards owned by
the company and held by third parties (euro 15,372 thousand);
o guarantees provided by others for Company obligations totaled
euro 2,297,431 thousand and consisted of a guarantee provided by Telecom
Italia Finance, in the form of a Direct Participation Letter of Credit
(euro 1,940,000 thousand) to JPMorgan Chase Equity Limited to guarantee
the performance of the obligations relating to the put option on Seat
Pagine Gialle shares, sureties provided to guarantee the proper
performance of non-financial contractual obligations (euro 349,931
thousand) and a banking surety (euro 7,500 thousand) provided in order to
take part in a bid set up by the Lombardy Region for the Regional Service
Card-Health Care Information System;
o the shares of employees and private shareholders deposited at December 31,
2002 with Telecom Italia, and therefore subdeposited with Monte Titoli
S.p.A., were equal to euro 67,569 thousand, whereas those awaiting
assignment or in the process of being replaced totaled euro 31,168
thousand;
o at December 31, 2002, the expense fund to safeguard the holders of savings
shares, set up by resolution of the Shareholders' Meeting on June 21, 1999,
amounted to euro 2,176 thousand; the compensation to the common
Representative of said shareholders will be paid out of this fund, as voted
by the Meeting of the Savings Shareholders on October 31, 2001;
o the total amount of commitments at December 31, 2002 for building rental
obligations to be paid to IMSER 60, Tiglio I and Tiglio II, under 21-year
contracts was euro 3,817,762 thousand. The amount for each single year is
euro 209,218 thousand. Furthermore, Telecom Italia provided guarantees to
IMSER 60 for contractual risks on previously sold buildings for a maximum
amount of euro 450,000 thousand.
Derivative financial instruments
In 2002, transactions in derivatives mainly regarded the management of debt
exposure through the use of instruments to hedge interest rate and exchange
rate risks. The following table gives a description of the derivative financial
contracts outstanding at December 31, 2002 used to hedge medium/long-term debt
positions, compared to those at December 31, 2001.
Notional amount/ Notional amount/
(in millions of euro) Capital exchanged Capital exchanged
at December 31, 2002 at December 31, 2001
-------------------------------------------------------------------------------
Interest rate swaps 1,097 1,437
Cross currency and
interest rate swaps 313 390
===============================================================================
The following table indicates the notional amount and the average interest rate
to be paid/received for interest rate swaps by maturity date.
201
Maturity
--------------------------------------------------------------------------------------------
(in millions of euro)
2003 2004 2005 2006
--------------------------------------------------------------------------------------------
Interest rate swaps:
Fixed pay rate, variable receive
rate:
o notional amount 568 2 18 =
o weighted average pay rate 3.89% 4.25% 4.71% =
o received parameter 3 mo. Libor 3 mo. Libor 3 mo. Libor =
euro euro euro
--------------------------------------------------------------------------------------------
Variable pay rate, variable
receive rate:
o notional amount = 152 182 175
o paid parameter = 6 mo. Euribor 6 mo. Euribor 6 mo. Euribor
o received parameter = Rolint Rendint Rendint
Robot Rendibot Rendibot
Rolint Rolint
Robot Robot
============================================================================================
Currency forward agreements hedging exchange rate risks on short-term cash
management transactions totaled euro 212 million (euro 311 million at December
31, 2001, of which euro 300 million related to forward rate agreements and euro
11 to currency forward agreements.
202
STATEMENTS OF INCOME
Production value euro 17,292,712 thousand
(euro 17,537,266 thousand in 2001)
Production value, which decreased by euro 244,554 thousand compared to 2001,
included the captions below.
Sales and service revenues euro 17,055,185 thousand
Sales and service revenues decreased by euro 253,881 thousand compared to 2001
and are shown gross of the amount due to other carriers (euro 3,646,360
thousand), which are recorded, for the same amount, in production cost.
A breakdown of sales and service revenues by type of business and geographical
area, as required under Article 2427, paragraph 10 of the Italian Civil Code,
is provided below:
Breakdown by type of business
(in thousands of euro) 2002 2001 Change
---------------------------------------------------------------------
Sales:
- telephone products 251,549 260,207 (8,658)
- other goods 344 3,751 (3,407)
---------------------------------------------------------------------
251,893 263,958 (12,065)
---------------------------------------------------------------------
Services:
- Traffic (*): 8,280,672 8,813,352 (532,680)
- Basic charges 7,740,044 7,270,113 469,931
- Activation fees 323,679 259,871 63,808
- Other 458,897 701,772 (242,875)
---------------------------------------------------------------------
16,803,292 17,045,108 (241,816)
---------------------------------------------------------------------
Total 17,055,185 17,309,066 (253,881)
=====================================================================
Breakdown by geographical area
(in thousands of euro) 2002 2001 Change
----------------------------------------------------------------------
Italy 15,834,630 15,823,442 11,188
Rest of Europe 691,625 810,590 (118,965)
North America 230,833 231,612 (779)
Central and South America 100,626 215,307 (114,681)
Australia, Africa and Asia 197,471 228,115 (30,644)
---------------------------------------------------------------------
Total 17,055,185 17,309,066 (253,881)
=====================================================================
Traffic revenues, in particular, were composed of the following:
(in thousands of euro) 2002 2001 Change
---------------------------------------------------------------------
o Traffic by Telecom Italia customers:
- domestic 5,234,151 6,005,914 (771,763)
- outgoing non-domestic 419,355 482,584 (63,229)
- special services and other 580,947 480,553 100,394
6,234,453 6,969,051 (734,598)
---------------------------------------------------------------------
o Traffic by other operators:
- domestic 1,220,164 1,042,499 177,665
- foreign correspondents 826,055 801,802 24,253
2,046,219 1,844,301 201,918
---------------------------------------------------------------------
Total 8,280,672 8,813,352 (532,680)
=====================================================================
Revenues for pre-billed basic charges were composed of the following:
(in thousands of euro) 2002 2001 Change
---------------------------------------------------------------------
o Network access 4,390,525 4,073,343 317,182
o TLC operator interconnections 1,043,749 924,581 119,168
- mobile operators 554,581 563,147 (8,566)
- wireline carriers 489,168 361,434 127,734
o Transmission and outsourcing 610,197 675,207 (65,010
o Subscriptions to services 639,103 581,659 57,444
o Maintenance and rental 780,437 822,633 (42,196)
o Discount packages 276,033 192,690 83,343
---------------------------------------------------------------------
Total 7,740,044 7,270,113 469,931
=====================================================================
203
As regards the geographical breakdown of revenues from sales and services, the
"Rest of Europe", "North America", "Central and South America" and "Australia,
Africa and Asia" referred almost entirely to revenues from traffic to and from
these geographical areas.
Transactions for revenues from sales and services with subsidiaries, affiliated
companies and parent companies totaled euro 1,308,364 thousand. In particular
they refer to:
<< TIM (euro 723,280 thousand) - revenues for mobile-fixed interconnections
and lines leased;
<< Telespazio (euro 87,582 thousand) - sale of satellite capabilities;
<< Path.Net (euro 82,774 thousand) - TLC services and infrastructures
dedicated to the Public Administration;
<< Seat Pagine Gialle (euro 57,894 thousand) - telecommunications services;
<< Teleleasing (euro 105,222 thousand) - sales of products;
<< I.T. Telecom (euro 36,313 thousand) - telecommunications services.
Transactions for revenues from sales and services with other related parties
totaled euro 20,445 thousand and refer to . In particular they refer to
telecommunications services provided to Pirelli group (euro 5,448 thousand) and
to Edizione Holding group (euro 14,997 thousand).
Changes in inventory of contract work in process euro 275 thousand
Changes in inventory of contract work in process represented the difference
between the increase in work in progress and the decrease as a result of
completed contracts.
Increases in capitalized internal construction costs euro 10,583 thousand
These consisted entirely of capitalized labor costs. The item increased by euro
4,968 thousand compared to 2001.
Other revenues and income euro 226,669 thousand
Other revenues and income included the following:
(in thousands of euro) 2002 2001 Change
------------------------------------------------------------------------------
Operating grants - 278 (278)
Gains on disposal of production assets 1,761 2,532 (771)
Reimbursements for costs of employees
on loan at Group companies 31,485 28,734 2,751
Capital grants recorded in income 24,897 29,941 (5,044)
Late payment fees 91,042 95,658 (4,616)
Indemnification, reimbursements
and recoveries and other
miscellaneous income 77,484 84,760 (7,276)
------------------------------------------------------------------------------
Total 226,669 241,903 (15,234)
===============================================================================
Transactions involving other revenues and income with subsidiaries, affiliated
companies and parent companies totaled euro 50,328 thousand. They referred to
the recovery of costs for personnel on loan and sundry services, mainly in
respect of:
<< TIM (euro 19,922 thousand);
<< Seat Pagine Gialle (euro 5,356 thousand);
<< TILAB (euro 4,331 thousand);
<< I.T. Telecom (euro 4,089 thousand);
<< Finsiel (euro 2,746 thousand);
Production cost euro 13,247,421 thousand
(euro 13,553,981 thousand in 2001)
Production cost, which decreased by euro 306,560 thousand compared to 2001,
included the following captions:
Raw materials, supplies and merchandise euro 244,546 thousand
204
These decreased by euro 56,901 thousand, compared to 2001, mainly due to lower
purchases of inventory items.
This item included euro 25,214 thousand of costs incurred on behalf of
subsidiaries, affiliated companies and parent companies mainly in reference to
Teleleasing (euro 11,423 thousand) per TLC products and Italtel (euro 7,223
thousand) for the maintenance costs of telephone exchanges.
Services euro 5,906,772 thousand
Service costs, which decreased by euro 39,189 thousand compared to 2001,
included the following:
(in thousands of euro) 2002 2001 Change
--------------------------------------------------------------------------------
Direct service costs 493,645 702,824 (209,179)
Operating costs 1,102,412 1,172,237 (69,825)
Marketing costs 522,738 574,541 (51,803)
Know-how development costs 141,617 81,484 60,133
Amounts due to other carriers 3,646,360 3,414,875 231,485
--------------------------------------------------------------------------------
Total 5,906,772 5,945,961 (39,189)
================================================================================
An analysis of the composition of such costs shows the following:
a) "direct service costs" included the operating and maintenance costs of the
TLC network (euro 184,782 thousand), operating and maintenance costs of
customer installations (euro 80,193 thousand), public telephone
installations (euro 61,867 thousand), the satellite systems (euro 49,164
thousand) and rented products (euro 49,200 thousand);
b) "operating costs" referred to the operating and maintenance costs of
buildings, motor vehicles, information systems as well as general
expenses. In particular, operating costs included euro 276,919 thousand
for information systems, euro 80,024 thousand for the operating and
maintenance of buildings and technological plant, euro 143,215 thousand
for electricity for buildings and installations; euro 121,811 thousand for
indirect personnel costs, euro 32,502 thousand for motor vehicle costs and
euro 51,743 thousand for miscellaneous professional services;
c) "marketing costs" included selling expenses, after-sales assistance,
customer relations, advertising and promotion. In particular, such costs
included euro 148,304 thousand for advertising and promotions, euro 91,198
thousand for outsourcing costs from Postel for printing telephone bills
and transportation costs for telephone books, euro 60,411 thousand for
trade agreements with Internet Service Providers, euro 170,711 thousand
for compensation to dealers and other commercial costs and euro 27,992
thousand for product sales costs;
d) "know-how development costs" consisted mainly of expenditures for studies
and research (euro 61,401 thousand) and consulting fees (euro 60,337
thousand);
e) "amounts due to other carriers" mainly comprised euro 2,047,673 thousand
due to Italian mobile operators, euro 808,814 thousand to domestic fixed
carriers and euro 744,857 thousand to foreign correspondents.
The costs for services included euro 2,131,465 thousand regarding transactions
with subsidiaries, affiliated companies and parent companies. They referred, in
particular, to:
<< TIM (euro 1,292,480 thousand) - amounts due for telecommunications
services;
<< I.T. Telecom (euro 324,078 thousand) - operating information systems;
<< Seat Pagine Gialle (euro 86,851 thousand), Etec S.A. (euro 39,291
thousand), Entel Chile (euro 37,089 thousand) - TLC services;
<< TILAB (euro 52,145 thousand) - studies and research costs;
<< Telespazio (euro 37,277 thousand) - use of satellite circuits;
<< TESS (euro 25,819 thousand) - outsourcing of administration requirements
for personnel.
Use of property not owned euro 599,807 thousand
Use of property not owned, which decreased by euro 19,692 thousand, compared to
2001, included mainly "service costs " of euro 187,879 thousand (for the lease
of TLC lines and satellite systems), and "operating costs" of euro 411,928
thousand (for building rentals, building and vehicle leases and equipment
rentals). As regards lease installments, principal and interest totaled,
respectively, euro 19,123 thousand and euro 19,393 thousand.
This item comprised euro 250,392 thousand of costs for the use of property not
owned relating to subsidiaries, affiliated companies and parent companies. They
regarded, in particular:
205
<< IM.SER (euro 152,553 thousand), Telemaco Immobiliare (euro 36,776
thousand) and Tiglio I (euro 16,682 thousand) - building rentals;
<< Teleleasing (euro 34,795 thousand) - mainly building leases.
Personnel euro 2,582,956 thousand
Personnel costs decreased by euro 61,284 thousand. They comprised "wages and
salaries" (euro 1,823,410 thousand), "social security contributions" (euro
577,147 thousand), "termination indemnities" (euro 138,991 thousand) and "other
costs" (euro 43,408 thousand). Personnel costs include the costs of employees
on loan to other Group companies (euro 31,485 thousand) and recovered from the
same Group companies and the income from the recovery of such costs is recorded
in "Other revenues and income".
A comparative breakdown of the average number of employees by professional
category is given below:
2002 2001 Change
------------------------------------------------------------
Executives 948 1,005 (57)
Middle management 1,688 1,655 33
Clerical staff 47,223 49,953 (2,730)
Technicians 7,519 8,846 (1,327)
------------------------------------------------------------
Total 57,378 61,459 (4,081)
============================================================
Amortization, depreciation and writedowns euro 3,359,117 thousand
Amortization, depreciation and writedowns, which decreased by euro 120,664
thousand compared to 2001, included the following:
Amortization of intangible assets euro 566,495 thousand
Amortization of intangible assets decreased by euro 51,070 thousand and
referred to the following assets:
(in thousands of euro) 2002 2001 Change
----------------------------------------------------------------------
Industrial patents and intellectual
property rights 528,084 578,542 (50,458)
Concessions, licenses trademarks
and similar rights 14,887 37 14,850
Goodwill 4 - 4
Other intangibles 23,520 38,986 (15,466)
----------------------------------------------------------------------
Total 566,495 617,565 (51,070)
======================================================================
Depreciation of fixed assets euro 2,453,875 thousand
Depreciation of fixed assets decreased by euro 249,799 thousand compared to
2001 on account of the reduction in depreciable assets and the change in the
mix of depreciable assets.
The average depreciation rate, calculated by taking into account the above
depreciation charge and the assets being depreciated, is equal to 8.0% (8.4% in
2001).
The following table shows the depreciation charge for each asset category and
the related depreciation rate:
(in thousands of euro) 2002 2001 Change
--------------------------------------------------------------------------------
Land and building 3.3% 86,867 3.3% 89,888 (3,021)
Plant and machinery 8.3% 2,295,904 8.8% 2,548,024 (252,120)
Manufacturing and
distribution equipment 19.4% 16,002 23.9% 18,806 (2,804)
Other fixed assets 22.7% 55,102 19.0% 46,956 8,146
--------- --------- --------
Total 2,453,875 2,703,674 (249,799)
==================================================
206
Other writedowns of intangibles and fixed assets euro 39,307 thousand
Other writedowns of intangibles and fixed assets included euro 18,206 thousand
for the writedoff of the Indefeasible Rights of Use - IRUs, transferred on
December 31, 2002 to Telecom Italia Sparkle as part of the contribution of the
"International Wholesale Services" business segment, euro 3,499 thousand for
the writedown of industrial buildings and euro 17,206 thousand for the
writedown of telephone exchanges.
Writedowns of receivables included in current
assets and liquid assets euro 317,042 thousand
This item comprises provisions to the allowance for doubtful accounts and
includes euro 299,642 thousand in respect of trade accounts receivables from
customers and euro 17,400 thousand in respect of trade accounts receivable from
subsidiaries set aside in respect of the risk of uncollectibility of
receivables from Telecom Italia International verso Telekom Srbija.
Changes in inventories of raw materials,
supplies and merchandise euro 7,597 thousand
The change is due to lower purchases in respect of supplies destined for sale
and maintenance following the optimization of inventory levels and also takes
into account writedowns for obsolete materials and materials with diminished
utilization.
Provisions for risks euro 44,119 thousand
These refer to provisions made to the "reserve for litigation" to cover
expenses connected with the probable outcome of disputes with third parties of
euro 3,150 thousand and to the "reserve for contractual risks and other risks"
to cover risks stemming from the settlement of trade and regulatory questions
of euro 40,969 thousand.
Miscellaneous operating costs euro 484,905 thousand
Miscellaneous operating costs, which increased by euro 3,008 thousand compared
to 2001, included the following:
Losses on disposal of assets euro 31,386 thousand
These losses mainly refer to the disposal of fixed assets relating to public
telephone installations.
License fee euro 224,769 thousand
The TLC license fee decreased by euro 64,813 thousand compared to 2001, owing
to a reduction in the revenue base and a reduction in the rate which decreased
from 2.5% in 2001 to 2% in 2002; this item mainly includes the fee on amounts
invoiced under Law No. 448/1998 (euro 203,826 thousand), the fee for the
assignment of available numbers (euro 7,800 thousand) and the free for the use
of radio frequencies (euro 8,746 thousand) established by the Ministerial
Decree of February 5, 1998, in addition to the contribution for the operation
of the regulatory body (euro 3,895 thousand).
Other miscellaneous costs euro 228,750 thousand
Other miscellaneous costs, which increased by euro 61,182 thousand, include the
following:
(in thousands of euro) 2002 2001 Change
-------------------------------------------------------------------------------
o Other indirect duties and annual taxes,
relating mainly to the local property tax,
local duties, stamp and register tax, vehicle
tax, Technical and Finance Office
taxes and permits, license tax on mobile equipment 84,991 87,857 (2,866)
o contributions and membership fees 15,842 14,601 1,241
o losses due to settlements 45,305 10,381 34,924
o losses on the sale of receivables 59,099 36,769 22,330
o other costs, essentially relating to
compensation due to customers under
service regulations for delays in
hookups or line transfers, damages paid
to third parties for line installations
and maintenance 23,513 17,960 5,553
-------------------------------------------------------------------------------
Total 228,750 167,568 61,182
===============================================================================
207
Financial income and expense euro 1,031,244 thousand
(euro 397,336 thousand in 2001)
The income balance, net, of financial income and expense, which increased by
euro 633,908 thousand, compared to 2001, included the following:
(in thousands of euro) 2002 2001 Change
--------------------------------------------------------------------------------
Income from equity investments (A) 2,117,757 2,022,090 95,667
Other financial income (B) 205,114 188,052 17,062
Interest and other financial expense (C) 1,291,627 1,812,806 (521,179)
--------------------------------------------------------------------------------
Total (A+B-C) 1,031,244 397,336 633,908
================================================================================
Income from equity investments referred to the following:
(in thousands of euro) 2002 2001 Change
-------------------------------------------------------------------------------
Dividends from subsidiaries,
affiliates and other companies 1,413,709 1,304,634 109,075
Other income from equity investments:
o tax credits on dividends 702,440 717,456 (15,016)
o gains on sales of investments 1,608 - 1,608
704,048 717,456 (13,408)
-------------------------------------------------------------------------------
Total 2,117,757 2,022,090 95,667
===============================================================================
Dividends can be analyzed as follows:
(in thousands of euro) 2002 2001 Change
---------------------------------------------------------------------------------------------------------------------------
Dividends from
subsidiaries Accrued Received Total Accrued Received Total Accrued Received Total
---------------------------------------------------------------------------------------------------------------------------
o TIM 143,225 1,051,511 1,194,736 940,117 7,398 947,515 (796,892) 1,044,113 247,221
o Finsiel 152,989 - 152,989 26,682 280 26,962 126,307 (280) 126,027
o Atesia 14,236 - 14,236 19,625 - 19,625 (5,389) - (5,389)
o Saiat 22,984 - 22,984 6,792 249,059 255,851 16,192 (249,059) (232,867)
o Saritel - - - 6,445 - 6,445 (6,445) - (6,445)
o Emsa - 11,140 11,140 2,795 - 2,795 (2,795) 11,140 8,345
o Tecnoservizi Mobili 102 - 102 - - - 102 - 102
o Telecom Italia Gmbh - 180 180 - 180 180
o TELIMM - 107 107 - - - - 107 107
---------------------------------------------------------------------------------------------------------------------------
333,536 1,062,938 1,396,474 1,002,456 256,737 1,259,193 (668,920) 806,201 137,281
---------------------------------------------------------------------------------------------------------------------------
Dividends from affiliated Received Total Received Total Received Total
companies
o Eutelsat - - 32,265 32,265 (32,265) (32,265)
o Nortel Argentina - - 4,372 4,372 (4,372) (4,372)
o Siemens Informatica - - 4,186 4,186 (4,186) (4,186)
o Siteba 316 316 233 233 83 83
o Telemaco Immobiliare 16,456 16,456 - - 16,456 16,456
---------------------------------------------------------------------------------------------------------------------------
16,772 16,772 41,056 41,056 (24,284) (24,284)
---------------------------------------------------------------------------------------------------------------------------
Dividends from other Received Total Received Total Received Total
companies
o Intelsat - - 3,044 3,044 (3,044) (3,044)
o Accel - - 990 990 (990) (990)
o SIA 307 307 279 279 28 28
o Emittenti Titoli 156 156 72 72 84 84
463 463 4,385 4,385 (3,922) (3,922)
---------------------------------------------------------------------------------------------------------------------------
Total 333,536 1,080,173 1,413,709 1,002,456 302,178 1,304,634 (668,920) 777,995 109,075
===========================================================================================================================
Tax credits on dividends related to dividends from subsidiaries accrued in 2002
(euro 187,614 thousand) and received in 2002 (euro 514,826 thousand).
208
Other financial income included the following:
2002 2001 Change
----------------------------------------------------------------------------------------------------------
Included in Included in
long-term current
(in thousands of euro) investments assets Total
----------------------------------------------------------------------------------------------------------
Interest and fees on:
o accounts receivable
o from subsidiaries 3,420 35,859 39,279 59,629 (20,350)
o from affiliated companies 1,265 2,551 3,816 8,336 (4,520)
o from others 12,458 - 12,458 11,918 540
o banks and the Postal Administration 7,990 - 7,990 3,966 4,024
o securities - 638 638 - 638
----------------------------------------------------------------------------------------------------------
25,133 39,048 64,181 83,849 (19,668)
----------------------------------------------------------------------------------------------------------
Foreign exchange gains 38,619 38,971 (352)
Income on derivative financial instruments 22,812 50,398 (27,586)
Other income 79,502 14,834 64,668
----------------------------------------------------------------------------------------------------------
Total 205,114 188,052 17,062
=========================================================================================================
Other financial income included euro 43,095 thousand of interest and fees on
receivables from subsidiaries, affiliated companies and parent companies almost
all of which refer to interest on current accounts for cash management
purposes, mainly with:
<< I.T. Telecom (euro 9,568 thousand);
<< TIM (euro 6,772 thousand);
<< TILAB (euro 4,583 thousand);
<< Telespazio (euro 2,404 thousand);
<< Stream (euro 2,166 thousand);
<< Sogei (euro 2,029 thousand);
<< Stet Hellas (euro 3,420 thousand) - income on long-term receivables in
long-term investments.
Interest and other financial expense can be analyzed as follows:
2002 2001 Change
----------------------------------------------------------------------------------------------------
Medium/long- Short-term
(in thousands of euro) term debt borrowings Total
----------------------------------------------------------------------------------------------------
Interest and fees:
o subsidiaries - 217,345 217,345 257,800 (40,455)
o affiliated companies - 915 915 1,455 (540)
o banks 84,505 58,209 142,714 563,347 (420,633)
o other lenders 41,927 5,291 47,218 48,346 (1,128)
o suppliers - 174 174 858 (684)
o others 20,987 1,515 22,502 13,878 8,624
---------------------------------------------------------------------------------------------------
147,419 283,449 430,868 885,684 (454,816)
---------------------------------------------------------------------------------------------------
Interest, premiums and other similar
charges on notes 645,366 - 645,366 215,328 430,038
Accrued portion of issue discounts
and similar charges on loans - 7,508 7,508 2,197 5,311
Forward commitment to purchase
Seat Pagine Gialle shares - - - 568,622 (568,622)
Provision to allowance for doubtful
financial accounts receivable from - 27,167 27,167 - 27,167
affiliated companies
Provision to the allowance for
doubtful receivable for the "Deferred
Purchasing Price" - 12,520 12,520 29,400 (16,880)
Expenses on derivative financial 20,807 - 20,807 29,234 (8,427)
instruments
Foreign exchange losses - 53,640 53,640 34,255 19,385
Other financial expense - 93,751 93,751 48,086 45,665
---------------------------------------------------------------------------------------------------
Total 813,592 478,035 1,291,627 1,812,806 (521,179)
===================================================================================================
209
Interest and other financial expense included euro 218,260 thousand of interest
and fees on payables to subsidiaries, affiliated companies and parent companies
principally with regard to:
<< Telecom Italia International (euro 159,358 thousand) - financial expenses
on the call option on Seat Pagine Gialle shares as part of the put option
on the same shares;
<< TIM (euro 17,652 thousand) and Seat Pagine Gialle (euro 16,570 thousand) -
interest expenses accrued on current accounts for cash management
purposes.
Value adjustments to financial assets -euro 654,333 thousand
(-euro 774,881 thousand in 2001)
This item refers to the writedowns of investments in the following companies:
---------------------------------------------------------------------------------------------------------
Writedowns to the Writedowns recorded in the
(in thousands of euro) carrying values reserve for losses of
subsidiaries and affiliates Total
---------------------------------------------------------------------------------------------------------
Recorded in long-term investments
o Stream 246,354 - 246,354
o Finsiel 115,000 - 115,000
o Telecom Italia Finance 16,414 66,903 83,317
o Latin American Nautilus 15,054 - 15,054
o TILAB 38,469 - 38,469
o IT Telecom 26,959 - 26,959
o Nordcom 26,902 - 26,902
o Nortel Inversora 19,114 - 19,114
o Trainet - 2,425 2,425
o Telecom Italia of North America 1,337 - 1,337
o Other companies 2,095 2,105 4,200
---------------------------------------------------------------------------------------------------------
Total 507,698 71,433 579,131
---------------------------------------------------------------------------------------------------------
Recorded in short-term financial assets
o TIM 75,200 - 75,200
o Seat Pagine Gialle 2 - 2
---------------------------------------------------------------------------------------------------------
Total 75,202 - 75,202
=========================================================================================================
Extraordinary income and expense -euro 6,093,178 thousand
(-euro 2,892,922 thousand in 2001)
Extraordinary income and expense showed a net expense balance, with an increase
of euro 3,200,256 thousand compared to 2001. Details are as follows:
210
(in thousands of euro) 2002 2001 Change
-----------------------------------------------------------------------------------------------
Income
o gains on disposals 451,942 264,388 187,554
o interest on pre-amortization interest Law 58/1992 131,188 -- 131,188
o release of sundry reserves to income 59,360 120,478 (61,118)
o recovery of centralized expenses 191,997 -- 191,997
o other 48,942 110,346 (61,404)
-----------------------------------------------------------------------------------------------
(A) 883,429 495,212 388,217
-----------------------------------------------------------------------------------------------
Expense
o Purchase commitment on Seat Pagine Gialle 1,941,843 -- 1,941,843
o provisions and writedowns of investments 3,823,623 2,526,768 1,296,855
o restructuring costs (employee reduction plans,
territorial and other layoffs) 378,806 202,556 176,250
o expenses under ex Law 58/1992 153,615 155,245 (1,630)
o INPS extraordinary contribution to abolish FPT 71,234 71,431 (197)
o charges for centralized expenses 191,997 -- 191,997
o prior period expense for telephone cards 157,963 -- 157,963
o expenses for the sale of Stream 21,562 247,373 (225,811)
o provision for other sales of investments 89,126 55,877 33,249
o other 146,838 128,884 17,954
(B) 6,976,607 3,388,134 3,588,473
-----------------------------------------------------------------------------------------------
Total (A-B) (6,093,178) (2,892,922) (3,200,256)
===============================================================================================
In particular:
Extraordinary income related to the following:
o gains realized on the sales of investments in Telemaco Immobiliare (euro
134,420 thousand), Telespazio (euro 46,767 thousand), IMMSI (euro 50,627
thousand), EMSA (euro 69,524 thousand), the contribution of the "Asset
Management " business segment to Tiglio II, (euro 126,355 thousand), the
sale of the "non-facility" business segment (property, project e agency)
to the Pirelli & C. Real Estate Group (euro 15,163 thousand), the sale of
the "Training" business segment to Telecom Italia Learning Services (euro
1,900 thousand) and the disposal of buildings (euro 6,782 thousand);
o prior period income arising from the recovery of accrued pre-amortization
interest (euro 131,188 thousand) on the expenses for employee benefit
obligations under Law 58/1992 that were paid, with reserve, to INPS up to
1999 following the termination of litigation after the courts ruled in
Telecom Italia's favor;
o recovery, from subsidiaries (mainly Telecom Italia International and TIM
International), of expenses connected with extraordinary transactions
(euro 191,997 thousand) incurred by Telecom Italia on their behalf;
o release to income (euro 59,360 thousand) of a part of the reserve for
risks and charges, set up in 2001 to cover the expenses connected with the
agreement for the sale of Stream to News Corporation and Vivendi
Universal/Canal+, after the parties did not go through with the agreement;
o other prior period income of euro 48,942 thousand.
Extraordinary expenses comprised the following:
o writedown of the investment in Seat Pagine Gialle (euro 2,690,503 thousand)
and the provision for the forward commitment to purchase Seat Pagine Gialle
shares (euro 1,941,843 thousand);
o extraordinary provisions regarding the investments in Netesi (euro 31,227
thousand) and Telecom Italia International (euro 1,101,893 thousand), the
latter mainly in conjunction with the expenses on the sale of the
investment in 9Telecom to LDCom (euro 388,328 thousand), the loss on the
sale of Telekom Austria (euro 187,951 thousand), the writedown of Netco
Redes (euro 102,727 thousand), and the writeoff of the carrying value of
the investment in Nortel Inversora (euro 37,000 thousand);
o expenses and provisions (euro 378,806 thousand) for corporate restructuring
relating to employees cutbacks and layoffs;
211
o expenses under Law 58/1992 (euro 153,615 thousand) to cover employees
under the former fund "Telephone Employees Pension Fund" (FPT), which
became part of the general "Employees Pension Fund", in accordance with
the 2000 Finance Bill ;
o expenses incurred on behalf of Group companies and recovered from the same
companies (euro 191,997 thousand);
o extraordinary contribution to INPS, euro 71,234 thousand, (established by
the 2000 Finance Bill for the three years 2000 - 2002);
o provisions following the guarantees provided upon the disposals of Italtel
(euro 15,000 thousand) and Telespazio (euro 38,200 thousand) and at the
time of the reorganization of real estate assets (Progetto Tiglio) euro
29,500 thousand, as well as other matters, euro 28,780 thousand, of which
euro 21,562 thousand refers to relations with Stream;
o prior period expenses (euro 157,963 thousand) relating to the adjustment
of the estimated value of unused prepaid telephone cards as a result of
the introduction of technical data collection procedures;
o other prior period expenses of euro 146,838 thousand relating mainly to
expenses connected with extraordinary transactions, damage compensation to
third parties and sundry charges.
Income taxes -euro 25,600 thousand
(euro 562,022 thousand in 2001)
Income taxes showed a credit balance of euro 25,600 thousand and comprised
current income tax expense of euro 919,471 thousand and deferred tax credits of
euro 945,071 thousand. The total reduction of euro 587,622 thousand compared to
2001 is the result of the loss for the year, which was mainly caused by the
aforementioned writedowns of investments which contributed to the increase in
deferred tax credits.
Income taxes can be broken down into a credit for taxes on income (IRPEG) of
euro 325,049 thousand and the expense for the Regional Tax on Production
Activities (IRAP) of euro 299,449 thousand. Details used in the determination
of income taxes in 2002 are as follows:
(in thousands of euro) IRPEG IRAP TOTAL
--------------------------------------------------------------------------------------------
Theoretical taxes (A) (601,551) 297,549 (304,002)
o Temporary differences taxed and deductible in
future years
- dividends accrued (187,614) -- (187,614)
- writedowns of receivables 135,103 -- 135,103
- provision to the reserves for risks and charges 149,382 -- 149,382
- writedowns of investments 1,155,060 1,155,060
- net change relating to installation writedowns
and other items 86,154 3,193 89,347
o Reversal of prior years' temporary differences
- prior years' dividends received 563,881 563,881
- writedowns of receivables (83,995) (83,995)
- provision to the reserves for risks and (70,780) (46) (70,826)
charges
- writedowns of investments (31,876) (31,876)
- net change relating to installation writedowns
and other items (73,056) (4,701) (77,757)
o Permanent differences 202,925 1,900 204,825
o Differences arising from tax benefits (81,621) -- (81,621)
o Tax credits (576,881) -- (576,881)
o Substitute tax and foreign taxes 43,177 -- 43,177
--------------------------------------------------------------------------------------------
Current income taxes 628,308 297,895 926,203
--------------------------------------------------------------------------------------------
Deferred income taxes, net (953,357) 1,554 (951,803)
--------------------------------------------------------------------------------------------
Taxes booked to statement of income (B) (325,049) 299,449 (25,600)
============================================================================================
***
The following Annexes numbered 1 to 5 are an integral part of these notes.
212
OTHER INFORMATION
Compensation to Directors, Statutory Auditors and General Manager
In compliance with the art. 78 giving effect to Legislative Decree 58 dated
February 24, 1998, that was adopted by Consob under resolution No. 11971 of May
14, 1999 and subsequent changes and integrations, the compensation to which the
Directors, Statutory Auditors and General Manager are entitled for fiscal 2002
are presented in the following table.
The column "Fees for the post held in the company preparing the financial
statements" includes the pertinent fees voted by the Telecom Italia S.p.A.
Shareholders' Meeting and the compensation pursuant to ex art. 2389, paragraph
2, of the Italian Civil Code.
The column "Non-cash benefits" refer to fringe benefits subject to taxes based
on current tax laws.
The column "Bonuses and other incentives" include one-off compensation.
The column "Other compensation" includes: (i) fees due for posts held in listed
and unlisted subsidiaries; (ii) employee compensation (gross of the employees'
portion of social security charges and taxes, excluding the employers' portion
of obligatory social security contributions and expenses for employee
termination indemnities).
INDIVIDUAL DESCRIPTION OF POST COMPENSATION (in thousands of euro)
-------------------------------------------------------------------------------------------------------------------------
Fees for
the post
held in the
company
Expiration preparing
date of the Bonuses Other
term of financial Non-cash and other compen-
First and last name Post held Term of office office statements benefits incentives sation
-------------------------------------------------------------------------------------------------------------------------
BOARD OF DIRECTORS
-------------------------------------------------------------------------------------------------------------------------
Marco
TRONCHETTI PROVERA Chairman 1/1-12/31/2002 12/31/2003 1,756 1) 1,200 2)
Gilberto BENETTON Deputy Chairman 1/1-12/31/2002 12/31/2003 103 13 3)
Carlo Orazio BUORA Managing Director 1/1-12/31/2002 12/31/2003 2,066 1) 1,200 2) 80 4)
Riccardo RUGGIERO Managing Director 9/5-12/31/2002 12/31/2003 71 1) 5 5)
General Manager 5/7-12/31/2002 178 1,201 646 6)
Enrico BONDI Managing Director 1/1-9/5/2002 12/31/2003 1,406 1) 650 118 7)
Umberto COLOMBO Director 1/1-12/31/2002 12/31/2003 155 8)
Francesco DENOZZA Director 1/1-12/31/2002 12/31/2003 103
Luigi FAUSTI Director 1/1-12/31/2002 12/31/2003 155 8)
Guido FERRARINI Director 1/1-12/31/2002 12/31/2003 155 9)
Paolo GRANDI Director 1/1-25/7/2002 12/31/2003 60 10)
Natale IRTI Director 1/1-12/31/2002 12/31/2003 155 9)
Gianni MION Director 1/1-12/31/2002 12/31/2003 103 11) 183 12)
Pietro MODIANO Director 7/26-12/31/2002 12/31/2003 34 13)
Massimo MORATTI Director 1/1-12/31/2002 12/31/2003 103
Carlo Alessandro
PURI NEGRI Director 1/1-12/31/2002 12/31/2003 103
Pier Francesco
SAVIOTTI Director 1/1-12/31/2002 12/31/2003 155 8)
Roberto ULISSI Director 1/1-12/31/2002 12/31/2003 155 14)
-------------------------------------------------------------------------------------------------------------------------
BOARD OF STATUTORY
AUDITORS
-------------------------------------------------------------------------------------------------------------------------
Paolo GERMANI Chairman 1/1-12/31/2002 2003 155 15)
Mario BOIDI Acting Auditor 1/1-12/31/2002 2003 116
Paolo GOLIA Acting Auditor 1/1-12/31/2002 2003 116
Fabrizio QUARTA Acting Auditor 1/1-12/31/2002 2003 116
Gianfranco ZANDA Acting Auditor 1/1-12/31/2002 2003 116 129 16)
-------------------------------------------------------------------------------------------------------------------------
(1) The amount includes the compensation ex art. 2389, section 2, of the Italian Civil Code.
(2) The amount refers to year 2002, was voted by the Board of Directors on March 11, 2003 and will be paid in
the current year.
(3) Compensation for the post of Director in the subsidiary Seat Pagine Gialle.
(4) Compensation for the post of Chairman and Deputy Chairman in the subsidiary Telecom Italia Mobile not
received but paid over to Telecom Italia.
(5) Compensation for the post of Director in the subsidiary Holding Banca della Rete not received but paid over
to Telecom Italia.
(6) Employee income.
(7) Compensation for the post of Chairman of the subsidiaries Telecom Italia Mobile, Telespazio, Seat Pagine
Gialle and Stream not received but paid over to Telecom Italia.
213
(8) The amount includes the compensation paid as a member of the Compensation Committee.
(9) The amount includes the compensation paid as a member of the Audit and Corporate Governance Committee.
(10) Compensation not received but paid over to Banca Intesa BCI.
(11) Compensation not received but paid over to Edizione Holding;
(12) Compensation for the posts of Director and Committee member in Seat Pagine Gialle and Director and Deputy Chairman
in Telecom Italia Mobile not received but paid over to Edizione Holding.
(13) Compensation not received but paid over to Unicredito.
(14) The amount includes the compensation paid as a member of the Audit and Corporate Governance Committee paid over by
the person to the Administration Fund of the entity for which he works.
(15) Compensation for the post not received by the person but paid over to the Administration Fund of the entity for
which he works.
(16) Compensation for the post of Chairman of the Board of Statutory Auditors in the subsidiary IT Telecom and Acting
Statutory Auditor in the subsidiaries Finsiel, Immsi, Telespazio and Telecom Italia Mobile. Immsi and Telespazio
were sold on November 2002.
The following table is presented in compliance with the Legislative Decree dated February 24, 1998, that was adopted by Consob under
resolution No. 11971 of May 14, 1999 and subsequent changes and integrations, relating to the stock option granted to the Directors
and General Manager.
-----------------------------------------------------------------------------------------------------------------------------
Options
expired
New options granted Options exercised during
Options existing at 1/1/2002 during the year during the year the year
-----------------------------------------------------------------------------------------------------------------------------
(A) (B) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
-----------------------------------------------------------------------------------------------------------------------------
Market
Exercise Average Exercise Average Exercise average
First and No. average expiration No. average expiration No. average price at No.
last name Post held options price date options price date options price exercise options
-----------------------------------------------------------------------------------------------------------------------------
Riccardo M.D./G.M. 750,000 10.488 2007 -- -- -- -- -- -- --
Ruggiero
-----------------------------------------------------------------------------------------------------------------------------
750,000 10.488 2008 -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------
-- -- -- 150,000 9.203 2008 -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------
-- -- -- 150,000 9.203 2009 -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------
-- -- -- 200,000 9.203 2010 -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------
-------------------------------------------
Options existing
at 12/31/2002
-------------------------------------------
(11)-1+4
(A) -7-10 (12) (13)
-------------------------------------------
Exercise Average
First and No. average expiration
last name options price date
-------------------------------------------
Riccardo 750,000 10.488 2007
Ruggiero
-------------------------------------------
750,000 10.488 2008
-------------------------------------------
150,000 9.203 2008
-------------------------------------------
150,000 9.203 2009
-------------------------------------------
200,000 9.203 2010
-------------------------------------------
214
ANNEX 1
LONG-TERM INVESTMENTS AND ADVANCES ON FUTURE CAPITAL CONTRIBUTIONS OF SUBSIDIARIES AND AFFILIATED COMPANIES
(in thousands of euro) 12/31/2001 Changes during the year
---------------------------------------------------------------------------------- --------------------------------------------
Upward Purchases/
adjust- Write- Carrying Subscrip- Reclassi- Disposals
Cost ments downs value tions fications (1)
-----------------------------------------------------------------------------------------------------------------------------------
Equity investments in
subsidiaries
ATESIA 3,707 -- -- 3,707 -- -- --
EDOTEL 620 -- (116) 504 8,436 -- --
EMSA 29,136 240 -- 29,376 -- 126,118 (155,494)
EMSA SERVIZI 1,340 -- (1,340) -- 2,001 (2,001) --
EPIClink -- -- -- -- 60,254 -- --
FINSIEL 364,251 -- -- 364,251 -- -- --
IMMSI 4,428 13,800 -- 18,228 -- -- (18,228)
IN.TEL.AUDIT -- -- -- -- 1,500 -- --
IREOS (in liquidation) 103 -- (103) -- -- -- --
IRIDIUM ITALIA
(in liquidation) 775 -- (775) -- -- -- --
I.T. TELECOM 25,823 -- (1,085) 24,738 376 142,906 --
LATIN AMERICAN
NAUTILUS S.A 47,863 -- (28,566) 19,297 -- -- --
MED-1 Submarine Cables 5 -- -- 5 -- -- --
MEDITERRANEAN
NAUTILUS S.A 14,352 -- -- 14,352 -- -- --
NETESI -- -- -- -- 18,150 13,893 --
NETSIEL 108,486 -- -- 108,486 -- (108,486) --
PATH.NET 25,820 -- -- 25,820 -- -- --
SAIAT 34,743 11,617 -- 46,360 -- -- --
SARITEL 17,783 -- -- 17,783 -- (17,783) --
TELECOM ITALIA
LEARNING SERVICES
(EX SCUOLA SUPERIORE
GUGLIELMO REISS
ROMOLI) 1,549 -- -- 1,549 -- -- --
SEAT PAGINE GIALLE 6,732,912 -- -- 6,732,912 -- (2,690,503) (2,690,503)
SODALIA 4,138 -- (51) 4,087 -- (4,087) --
SOFTE 5,882 38,056 (43,938) -- -- -- --
TECNO SERVIZI MOBILI 53 -- -- 53 -- -- --
TELECOM ITALIA AMERICA
LATINA
(ex TELECOM ITALIA DO
BRASIL) 2,120 -- (2,120) -- 11,100 (6,941) --
TELECOM ITALIA CAPITAL 1,069 -- (1,069) -- 6,826 (4,438) --
TELECOM ITALIA GMBH
(in liquidation) 43 -- -- 43 -- -- --
TELECOM ITALIA
INTERNATIONAL
(ex Stet International
Netherlands) 7,772,567 -- (2,040,842) 5,731,725 -- 78,896 --
TELECOM ITALIA MOBILE 4,202,226 84,144 -- 4,286,370 -- -- --
TELECOM ITALIA of
NORTH AMERICA 3,585 -- (1,771) 1,814 9,730 (10,207) --
TELECONTACTCENTER 110 -- 110 -- -- -- --
TELENERGIA -- -- -- -- 40 -- --
TELE PAY ROLL SERVICE 3,391 -- (731) 2,660 -- -- --
TELESOFT 12,550 -- -- 12,550 -- (12,550) --
TELESPAZIO 86,260 -- (5,816) 80,444 -- -- (80,444)
TELIMM 18 -- -- 18 -- -- (18)
TI AUSTRIA 1,185 -- -- 1,185 650 (1,835) --
TI BELGIUM 3,000 -- -- 3,000 -- (3,000) --
TI FRANCE 10,308 -- -- 10,308 -- (10,308) --
TI GERMANY 9,325 -- -- 9,325 -- (9,325) --
TI IRELAND (in
liquidation) -- -- -- -- -- -- --
TI LAB 85,157 2,588 (49,609) 38,136 5,600 -- --
TI MEDIA 51,005 -- -- 51,005 -- (51,005) --
TI NETHERLANDS 3,518 -- -- 3,518 -- (3,518) --
TI SPAIN 703 -- -- 703 -- (703) --
TI SWITZERLAND 2,631 -- -- 2,631 -- (2,631) --
TI UNITED KINGDOM 3,703 -- -- 3,703 602 (4,305) --
TI FINANCE (ex TI WEB) 550,620 -- (542,257) 8,363 -- 8,050 --
TI SPARKLE (ex TMI -
TELEMEDIA
INTERNATIONAL ITALIA) 86,521 -- (86,521) -- 6,184 692,070 --
TRAINET (in liquidation) 674 -- (674) -- -- -- --
Consorzio Energia Gruppo
Telecom Italia -- -- -- -- 5 -- --
Consorzio GRUPPO STET PER
ITALIA 90
(in liquidation) 41 -- -- 41 -- -- (41)
-----------------------------------------------------------------------------------------------------------------------------------
20,316,099 150,445 (2,807,384) 17,659,160 131,454 808,810 (254,225)
-----------------------------------------------------------------------------------------------------------------------------------
(1) TI SPARKLE (ex EMSA Cons. Stet
TMI) SERVIZI IMMSI TE.SS EMSA TELIMM talia 90 TELESPAZIO NETESI TI CAPITAL
------------------------------------------------------------------------------------------------------------------------------------
Cost 92,219 3,341 18,228 730 155,494 18 41 86,260 25,064 5,508
Writedowns (92,219) (3,341) - (730) - - - (5,816) (25,064) (5,508)
------------------------------------------------------------------------------------------------------------------------------------
- - 18,228 - 155,494 18 41 80,444 - -
====================================================================================================================================
Table Continue
ANNEX 1
LONG-TERM INVESTMENTS AND ADVANCES ON FUTURE CAPITAL CONTRIBUTIONS OF SUBSIDIARIES AND AFFILIATED COMPANIES
(in thousands of euro) Changes during the year 12/31/2002
----------------------------------------------------------------------- -----------------------------------------
Writedowns(-)/ Capital
Reinstatements Replenish- Write- Carrying
of value(+) ments Total Cost downs value
--------------------------------------------------------------------------------------------------------------------
Equity investments in
subsidiaries
ATESIA -- -- -- 3,707 -- 3,707
EDOTEL -- -- 8,436 9,056 (116) 8,940
EMSA -- -- (29,376) -- -- --
EMSA SERVIZI -- 5,000 5,000 5,000 -- 5,000
EPIClink -- -- 60,254 60,254 -- 60,254
FINSIEL (115,000) (115,000) 364,251 (115,000) 249,251
IMMSI -- -- (18,228) -- -- --
IN.TEL.AUDIT -- -- 1,500 1,500 -- 1,500
IREOS (in liquidation) -- -- -- 103 (103) --
IRIDIUM ITALIA
(in liquidation) -- -- -- 775 (775) --
I.T. TELECOM (26,959) -- 116,323 169,156 (28,095) 141,061
LATIN AMERICAN
NAUTILUS S.A (15,054) -- (15,054) 47,863 (43,620) 4,243
MED-1 Submarine Cables -- -- -- 5 -- 5
MEDITERRANEAN
NAUTILUS S.A -- -- -- 14,352 -- 14,352
NETESI (31,227) -- 816 14,744 (13,928) 816
NETSIEL -- -- (108,486) -- -- --
PATH.NET -- -- -- 25,820 -- 25,820
SAIAT -- -- -- 34,743 -- 46,360
SARITEL -- -- (17,783) -- -- --
TELECOM ITALIA
LEARNING SERVICES
(EX SCUOLA SUPERIORE
GUGLIELMO REISS
ROMOLI) (884) -- (884) 1,549 (884) 665
SEAT PAGINE GIALLE (2,690,503) (2,690,503) 6,732,912 (2,690,503) 4,042,409
SODALIA -- -- (4,087) -- -- --
SOFTE -- -- -- -- -- --
TECNO SERVIZI MOBILI -- -- 53 -- 53
TELECOM ITALIA AMERICA
LATINA
(ex TELECOM ITALIA DO
BRASIL) (695) -- 3,464 13,220 (9,756) 3,464
TELECOM ITALIA CAPITAL -- -- 2,388 2,388 -- 2,388
TELECOM ITALIA GMBH
(in liquidation) -- -- -- 43 -- 43
TELECOM ITALIA
INTERNATIONAL
(ex Stet International
Netherlands) (1,101,893) -- (1,022,997) 7,851,463 (3,142,735) 4,708,728
TELECOM ITALIA MOBILE -- -- -- 4,202,226 -- 4,286,370
TELECOM ITALIA of
NORTH AMERICA (1,337) -- (1,814) -- -- --
TELECONTACTCENTER -- -- -- 110 -- 110
TELENERGIA -- -- 40 40 -- 40
TELE PAY ROLL SERVICE -- 1,368 1,368 4,028 -- 4,028
TELESOFT -- -- (12,550) -- -- --
TELESPAZIO -- -- (80,444) -- -- --
TELIMM -- -- (18) -- -- --
TI AUSTRIA -- -- (1,185) -- -- --
TI BELGIUM -- -- (3,000) -- -- --
TI FRANCE -- -- (10,308) -- -- --
TI GERMANY -- -- (9,325) -- -- --
TI IRELAND (in
liquidation) -- -- -- -- -- --
TI LAB (38,468) -- (32,868) 90,757 (88,077) 5,268
TI MEDIA -- -- (51,005) -- -- --
TI NETHERLANDS -- -- (3,518) -- -- --
TI SPAIN -- -- (703) -- -- --
TI SWITZERLAND -- -- (2,631) -- -- --
TI UNITED KINGDOM -- -- (3,703) -- -- --
TI FINANCE (ex TI WEB) (16,413) -- (8,363) 607,507 (645,563) --
TI SPARKLE (ex TMI -
TELEMEDIA
INTERNATIONAL ITALIA) 86,512 784,766 784,766 -- 784,766
TRAINET (in liquidation) -- -- -- 674 (674) --
Consorzio Energia Gruppo
Telecom Italia -- -- 5 5 -- 5
Consorzio GRUPPO STET PER
ITALIA 90
(in liquidation) -- -- (41) -- -- --
--------------------------------------------------------------------------------------------------------------------
(4,038,433) 92,880 (3,259,514) 21,043,070 (6,779,829) 14,399,646
--------------------------------------------------------------------------------------------------------------------
(in thousands of euro) 12/31/2001 Changes during the year
------------------------------------------------------------------------ ----------------------------------------------------
Upward Purchases/ Writedowns(-)/
adjust- Write- Carrying Subscrip- Reclassi- Disposals Reinstatements
Cost ments downs value tions fications (1) of value(+)
-------------------------------------------------------------------------------------------------------------------------------
Equity investments in
affiliated companies
ASTELIT 1 -- (1) -- -- -- -- --
CARTESIA 516 -- -- 516 -- -- -- (516)
CZECH TELESPAZIO
(in liquidation) 17 -- (17) -- -- -- -- --
IM.SER 127,277 -- -- 127,277 -- (126,118) -- (126,118)
MIRROR INTERNATIONAL
HOLDING 100,351 -- -- 100,351 -- -- -- --
NORDCOM 26,983 -- -- 26,983 2,062 -- -- (26,902)
NORTEL INVERSORA 19,114 -- -- 19,114 -- -- -- (19,114)
SIEMENS INFORMATICA 2,417 1,424 -- 3,841 -- -- -- --
SITEBA 751 -- -- 751 -- -- -- --
STREAM 247,940 -- (216,024) 31,916 50,750 -- -- (246,355)
TELEGONO -- -- -- -- 413 -- -- --
TELEMACO IMMOBILIARE 75,798 -- -- 75,798 -- -- (75,798) --
TIGLIO I -- -- -- -- 185,985 26 -- --
TIGLIO II -- -- -- -- -- 74,281 -- --
VOICE MAIL INTERNATIONAL
(in liquidation) 3,801 -- (3,801) -- -- -- -- --
Consorzio R.E.S 155 -- -- 155 -- (155) -- --
Consorzio TELCAL 211 -- -- 211 -- -- -- --
Consorzio TELEMED
(in liquidation) 10 -- -- 10 -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
605,342 1,424 (219,843) 386,923 239,210 (51,966) (75,798) (292,887)
-------------------------------------------------------------------------------------------------------------------------------
TELEMACO CZECH Consorzio
(1) STREAM ASTELIT MMOBILIARE TELESPAZIO R.E.S.
------------------------------------------------------------------------------------
Cost 242,271 1 75,798 17 155
Writedowns (242,271) (1) (17) (155)
------------------------------------------------------------------------------------
-- -- 75,798 -- --
=====================================================================================
215
Table continue
(in thousands of euro) Changes during the year 12/31/2002
-------------------------------------------------- ----------------------------------
Capital
Replenish- Write- Carrying
ments Total Cost downs value
-------------------------------------------------- ----------------------------------
Equity investments in
affiliated companies
ASTELIT -- -- -- -- --
CARTESIA -- (516) 516 (516) --
CZECH TELESPAZIO
(in liquidation) -- -- -- -- --
IM.SER -- (126,118) 1,159 -- 1,159
MIRROR INTERNATIONAL
HOLDING -- -- 100,351 -- 100,351
NORDCOM -- (24,840) 29,045 (26,902) 2,143
NORTEL INVERSORA -- (19,114) 19,114 (19,114) --
SIEMENS INFORMATICA -- -- 2,417 -- 3,841
SITEBA -- -- 751 -- 751
STREAM 182,791 (12,814) 239,209 (220,107) 19,102
TELEGONO -- 413 413 -- 413
TELEMACO IMMOBILIARE -- (75,798) -- -- --
TIGLIO I -- 186,011 186,011 -- 186,011
TIGLIO II -- 74,281 74,281 -- 74,281
VOICE MAIL INTERNATIONAL
(in liquidation) -- -- 3,801 3,801 --
Consorzio R.E.S -- (155) -- -- --
Consorzio TELCAL -- -- 211 -- 211
Consorzio TELEMED
(in liquidation) -- -- 10 -- 10
------------------------------------------------------------------------------------------
182,791 1,350 657,289 (270,440) 388,273
------------------------------------------------------------------------------------------
216
(in thousands of euro) 12/31/2001 Changes during the year
------------------------------------------------------------------------------ ----------------------------------------
Upward Purchases/
adjust- Write- Carrying Subscrip- Reclassi- Disposals
Cost ments downs value tions fications (1)
---------------------------------------------------------------------------------------------------------------------------
Equity investments
in other companies
ANCITEL 93 -- -- 93 -- -- --
CAF ITALIA 1 -- -- 1 -- -- --
EDINDUSTRIA 44 -- (6) 38 -- -- --
EMITTENTI TITOLI 423 -- -- 423 -- -- --
ERTICO 1 -- -- 1 -- (1) --
EURESCOM
(in liquidation) 9 -- -- 9 -- (9) --
FRATELLI ALINARI 3,101 -- -- 3,101 -- (2,400) --
IDROENERGIA -- -- -- -- -- -- --
IMSER 60 -- -- -- -- 60 (1) 59
INSULA 248 -- -- 248 -- -- --
ISTITUTO DELLA
ENCICLOPEDIA
ITALIANA FONDATA DA
GIOVANNI TRECCANI 5,255 -- (1,424) 3,831 -- -- --
MEDIOCREDITO
CENTRALE -- -- -- -- 36,018 -- --
MIX 10 -- -- 10 -- -- --
NETESI 10,625 -- (7,764) 2,861 11,033 (13,894) --
SIA 11,278 -- -- 11,278 -- -- --
SISTEMI FORMATIVI
CONFINDUSTRIA -- -- -- -- 12 -- (12)
SODETEL 4 -- -- 4 -- -- --
TELEPORTO ADRIATRICO 124 -- -- 124 -- -- --
UBAE 1,897 -- -- 1,897 -- -- --
Consorzio C.I. MARK 3 -- -- 3 -- -- --
Consorzio CAISI
(in liquidation) -- -- -- -- -- -- --
Consorzio CEFRIEL 36 -- -- 36 -- -- --
Consorzio CIES 26 -- -- 26 -- -- --
Consorzio CO.TIM
(in liquidation) 4 -- (2) 2 -- -- --
Consorzio DI
BIOINGEGNERIA ED
INFORMATICA MEDICA 15 -- -- 15 -- -- --
Consorzio Nazionale
Imballaggi
(CONAI) 1 -- -- 1 -- -- --
Consorzio ELIS 3 -- -- 3 -- -- --
Consorzio ENERGIA
FIERA DISTRICT 2 -- -- 2 -- -- --
Consorzio GE.SE.CE.DI 72 -- -- 72 -- -- --
Consorzio NETTUNO 41 -- -- 41 -- -- --
Consorzio QUALITAL -- -- -- -- -- -- --
Consorzio TECHNAPOLI 207 -- -- 207 -- -- --
--------------------------------------------------------------------------------------------------------------------------
Consorzio TOPIX -- -- -- -- 100 -- --
--------------------------------------------------------------------------------------------------------------------------
33,523 -- (9,196) 24,327 47,223 (16,304) (13)
--------------------------------------------------------------------------------------------------------------------------
Total long-term
equity investments 20,954,964 151,869 (3,036,423) 18,070,410 417,887 740,540 (330,036)
--------------------------------------------------------------------------------------------------------------------------
FRATELLI
(1) EURESCOM IMSER 60 SFC ALINARI ERTICO
--------------------------------------------------------------------------------------------
Cost
9 1 13 127 1
Writedowns
(9) -- -- (127) (1)
--------------------------------------------------------------------------------------------
-- 1 13 -- --
--------------------------------------------------------------------------------------------
12/31/2001 Changes during the year
------------------------------------------------------------------------------- ------------------------------------------
Advances on future capital
contributions of subsidiaries Upward Purchases/
and affiliated companies adjust- Write- Carrying Subscrip- Reclassi- Disposals
Cost ments down value tions fications (1)
---------------------------------------------------------------------------------------------------------------------------
EPIClink -- -- -- -- 12,000 -- --
I.T. TELECOM -- -- -- -- 140,901 -- --
NETESI -- -- -- -- 1,650 -- --
TIGLIO I -- -- -- -- 26 (26) --
TELECOM ITALIA
LEARNING SERVICES -- -- -- -- 10,000 -- --
TELECOM ITALIA
INTERNATIONAL 78,896 78,896 -- (78,896) --
TELE PAY ROLL SERVICE -- -- -- -- 1,633 -- --
---------------------------------------------------------------------------------------------------
78, 896 -- -- 78,896 166,210 (78,922) --
---------------------------------------------------------------------------------------------------
TOTAL 21,033,860 151,869 (3,036,423) 18,149,306 584,097 661,618 (330,037)
---------------------------------------------------------------------------------------------------
Table continue
(in thousands of euro) Changes during the year 12/31/2002
------------------------------------------------------------------- -----------------------------
Writedowns(-)/ Capital
Reinstatements Replenish- Write- Carrying
of value(+) ments Total Cost downs value
---------------------------------------------------------------------------------------------------------
Equity investments
in other companies
ANCITEL -- -- 93 -- 93
CAF ITALIA -- -- 1 -- 1
EDINDUSTRIA -- -- -- 44 (6) 38
EMITTENTI TITOLI -- -- -- 423 -- 423
ERTICO -- -- (1) -- -- --
EURESCOM
(in liquidation) -- -- (9) -- -- --
FRATELLI ALINARI -- -- (2,400) 2,974 701
IDROENERGIA -- -- -- -- -- --
IMSER 60 59 -- 59
INSULA -- -- -- 248 -- 248
ISTITUTO DELLA
ENCICLOPEDIA
ITALIANA FONDATA DA
GIOVANNI TRECCANI -- -- -- 5,255 3,831
MEDIOCREDITO
CENTRALE -- -- 36,018 36,018 -- 36,018
MIX -- -- -- 10 -- 10
NETESI -- -- (2,861) -- -- --
SIA -- -- 11,278 -- 11,278
SISTEMI FORMATIVI
CONFINDUSTRIA -- -- -- -- -- --
SODETEL -- -- -- 4 -- 4
TELEPORTO ADRIATRICO -- -- -- 124 -- 124
UBAE -- -- -- 1,897 --- 1,897
Consorzio C.I. MARK -- -- -- 3 -- 3
Consorzio CAISI
(in liquidation) -- -- -- -- -- --
Consorzio CEFRIEL -- -- -- 36 -- 36
Consorzio CIES -- -- -- 26 -- 26
Consorzio CO.TIM
(in liquidation) -- -- -- 4 (2) 2
Consorzio DI
BIOINGEGNERIA ED
INFORMATICA MEDICA -- -- -- 15 -- 15
Consorzio Nazionale
Imballaggi
(CONAI) -- -- -- 1 -- 1
Consorzio ELIS -- -- -- 3 -- 3
Consorzio ENERGIA
FIERA DISTRICT -- -- -- 2 -- 2
Consorzio GE.SE.CE.DI -- -- -- 72 -- 72
Consorzio NETTUNO -- -- -- 41 -- 41
Consorzio QUALITAL -- -- -- -- -- --
Consorzio TECHNAPOLI -- -- -- 207 -- 207
---------------------------------------------------------------------------------------------------------
Consorzio TOPIX -- -- 100 100 -- 100
---------------------------------------------------------------------------------------------------------
-- -- 30,906 58,938 (3,705) 55,233
---------------------------------------------------------------------------------------------------------
Total long-term
equity investments (4,331,320) 275,671 (3,227,258) 21,759,297 (7,053,974) 14,843,152
---------------------------------------------------------------------------------------------------------
Changes during the year 12/31/2002
----------------------------------------------------------------------------- ----------------------
Advances on future capital
contributions of Writedowns(-)/ Capital
subsidiaries and Reinstatements Replenish- Write- Carrying
affiliated companies of value(+) ments Total Cost downs value
---------------------------------------------------------------------------------------------------------
EPIClink -- 12,000 12,000 -- -- 12,000
I.T. TELECOM -- 140,901 140,901 -- -- 140,901
NETESI -- 1,650 1,650 -- -- 1,650
TIGLIO I -- -- -- -- -- --
TELECOM ITALIA LEARNING SERVICES -- 10,000 10,000 -- 10,000
TELECOM ITALIA INTERNATIONAL -- -- (78,896) -- -- --
TELE PAY ROLL SERVICE -- 1,633 1,633 -- 1,633
---------------------------------------------------------------------------
-- -- 87,288 166,184 -- 166,184
---------------------------------------------------------------------------
TOTAL (4,331,320) 275,671 (3,139,970) 21,925,481 (7,053,974) 15,009,336
---------------------------------------------------------------------------
217
ANNEX 2
LIST OF EQUITY INVESTMENTS IN SUBSIDIARIES AND AFFILIATED COMPANIES AT 12/31/2002
------------------------------------------------------------------------------------------------------------------------------------
(in thousands of euro) Net
Registered office Share Shareholders' income/ Percentage
capital equity (loss) ownership
(1) (1) (2) (1) (%)
------------------------------------------------------------------------------------------------------------------------------------
Equity investments in subsidiaries
ATESIA Rome 3,150 38,474 15,818 100.00%
EDOTEL Turin 15,081 14,870 (30) 60.00%
EMSA SERVIZI Rome 5,000 5,068 68 100.00%
EPIClink Cesano Maderno (MI) 12,500 13,005 (29,995) 86.00%
FINSIEL Rome 59,982 382,888 210,629 77.92%
IN.TEL.AUDIT Milan 2,750 2,750 -- 54.55%
IREOS (in liquidation) Rome 100 (1,483) (144) 100.00%
IRIDIUM ITALIA (in liquidation) Rome 2,575 (3,767) -- 30.00%
I.T. TELECOM Rome 96,853 281,961 (69,172) 100.00%
LATIN AMERICAN NAUTILUS S.A. Luxembourg US$ (.000) 60,000 6,312 (17,983)
57,214 6,019 17,147 70.00%
MED-1 Submarine Cables Tel Aviv NIS (.000) 100 (94,572) 6,238
(Israel) 20 (19,038) 1,256 23.17%
MEDITERRANEAN NAUTILUS S.A. Luxembourg US$ (.000) 326,480 328,930 3,797
311,318 313,654 3,621 62.51%
NETESI Milan 14,745 2,467 (24,004) 100.00%
PATH.NET Rome 25,800 28,040 1,859 99.99%
SAIAT Turin 35,745 66,140 23,011 100.00%
SEAT PAGINE GIALLE (7) Milan 341,184 1,488,906 (151,946) 53.21%
TECNO SERVIZI MOBILI (ex HITECO) Rome 26 589 477 51.00%
TELECOM ITALIA LEARNING SERVICES L'Aquila 1,560 8,734 (2,583) 100.00%
(ex SSGRR)
TELECOM ITALIA INTERNATIONAL Amsterdam
(ex STET INTERNATIONAL NETHERLANDS) (Holland) 2,399,483 4,686,728 (281,236) 100.00%
TELECONTACTCENTER Naples 110 1,002 744 100.00%
TELECOM ITALIA CAPITAL Luxembourg 2,336 2,661 (268) 99.99%
TELECOM ITALIA GMBH (in liquidation) Vienna 36 99 (113) 100.00%
(Austria)
TELECOM ITALIA AMERICA LATINA Rio de Janeiro R$ (.000) 43,614 12,835 (25,616)
(Brazil) 11,771 3,464 (6,913) 99.99%
TELECOM ITALIA MOBILE (7) Turin 513,964 7,044,790 264,154 54.82%
TELENERGIA Rome 50 48 (2) 80.00%
TELE PAY ROLL SERVICE Rome 2,840 5,019 (641) 100.00%
TI IRELAND Dublin (Ireland) -- (12) (5) 100.00%
TELECOM ITALIA FINANCE (ex TIWEB) Luxembourg 869,163 (77,155) (108,041) 100.00%
TI LAB Turin 27,455 5,268 (38,468) 100.00%
TELECOM ITALIA SPARKLE (ex TMI Italia) Rome 200,000 857,698 73,419 100.00%
TRAINET (in liquidation) Rome 674 (11,381) (2,734) 100.00%
Consorzio ENERGIA GRUPPO TELECOM Rome 10 10 -- 50.00%
ITALIA
------------------------------------------------------------------------------------------
==========================================================================================
Table continue
LIST OF EQUITY INVESTMENTS IN SUBSIDIARIES AND AFFILIATED COMPANIES AT 12/31/2002
------------------------------------------------------------------------------------------------------------------------------
(in thousands of euro) Share of
Registered office shareholders' Carrying
equity value Difference
(A) (3) (B) (4) (B-A)
------------------------------------------------------------------------------------------------------------------------------
Equity investments in subsidiaries
ATESIA Rome 24,238 3,707 (20,531)
EDOTEL Turin 8,922 (5) 8,940 18
EMSA SERVIZI Rome 5,068 5,000 (68)
EPIClink Cesano Maderno (MI) 11,184 (9) 72,254 61,070
FINSIEL Rome 143,307 (6) 249,251 105,944
IN.TEL.AUDIT Milan 1,500 1,500 --
IREOS (in liquidation) Rome (1,483)(5) -- 1,483
IRIDIUM ITALIA (in liquidation) Rome (1,130)(5) -- 1,130
I.T. TELECOM Rome 288,425 (6) 281,961 (6,464)
LATIN AMERICAN NAUTILUS S.A. Luxembourg US$ (.000)
4,243 (6) 4,243 --
MED-1 Submarine Cables Tel Aviv NIS (.000) -- --
(Israel) (4,411)(6) 5 4,416
MEDITERRANEAN NAUTILUS S.A. Luxembourg US$ (.000) -- --
196,062 14,352 (181,710)
NETESI Milan 2,467 2,467 --
PATH.NET Rome 28,037 25,820 (2,217)
SAIAT Turin 43,156 46,360 3,204
SEAT PAGINE GIALLE (7) Milan 832,484 (6) 4,042,409 3,209,925
TECNO SERVIZI MOBILI (ex HITECO) Rome 198 53 (145)
TELECOM ITALIA LEARNING SERVICES L'Aquila 8,734 (5) 10,666 1,932
(ex SSGRR)
TELECOM ITALIA INTERNATIONAL Amsterdam
(ex STET INTERNATIONAL NETHERLANDS) (Holland) 4,686,728 4,708,728 22,000
TELECONTACTCENTER Naples 1,002 110 (892)
TELECOM ITALIA CAPITAL Luxembourg 2,661 2,388 (273)
TELECOM ITALIA GMBH (in liquidation) Vienna 99 43 (56)
(Austria) --
TELECOM ITALIA AMERICA LATINA Rio de Janeiro R$ (.000) --
(Brazil) 3,464 3,464 --
TELECOM ITALIA MOBILE (7) Turin 2,822,026 (6) 4,286,370 1,464,344
TELENERGIA Rome 38 40 2
TELE PAY ROLL SERVICE Rome 5,019 5,660 641
TI IRELAND Dublin (Ireland) (12)(5) -- 12
TELECOM ITALIA FINANCE (ex TIWEB) Luxembourg (66,902)(5)(11) -- 66,902
TI LAB Turin 5,268 5,268 --
TELECOM ITALIA SPARKLE (ex TMI Italia) Rome 873,078 (6) 784,766 (88,312)
TRAINET (in liquidation) Rome (11,381)(5) -- 11,381
Consorzio ENERGIA GRUPPO TELECOM Rome 5 5 --
ITALIA
------------------------------------------------------------------------------------
14,565,830 4,653,736
====================================================================================
218
------------------------------------------------------------------------------------------------------------------------------------
(in thousands of euro) Net
Registered office Share Shareholders' income/ Percentage
capital equity (loss) ownership
(1) (1) (2) (1) (%)
------------------------------------------------------------------------------------------------------------------------------------
Equity investments in affiliated companies
CARTESIA Rome 1,033 (726) (840) 50.00%
IM.SER Turin 1,316 895 (1,897) 40.00%
MIRROR INTERNATIONAL HOLDING Luxembourg 250 324,116 (10,388) 30.00%
NORDCOM Milan 5,000 5,398 400 42.00%
NORTEL INVERSORA Buenos Aires Pesos Arg. (.000) 78,633 445,000 (2,385,000)
(Argentina) 22,250 125,915 (674,850) 16.58%
SIEMENS INFORMATICA Milan 6,192 48,574 (1,062) 49.00%
SITEBA Milan 2,600 13,320 3,504 30.00%
STREAM Rome 302,399 47,350 (432,377) 50.00%
TELEGONO Rome 1,000 14,934 13,910 40.00%
TIGLIO I Milan 5,256 497,445 (7,289) 36.85%
TIGLIO II Milan 14,185 149,040 (1,112) 49.47%
VOICE MAIL INTERNATIONAL Santa Clara (USA) US$ (.000) 49 49 --
(in liquidation) 46 46 -- 37.07%
Consorzio TELCAL Catanzaro 878 878 -- 24.00%
Consorzio TELEMED (in liquidation) Rome 103 21 (7) 33.33%
------------------------------------------------------------------------------------------
==========================================================================================
Table continue
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands of euro) Share of
Registered office shareholders' Carrying
equity value Difference
(A) (3) (B) (B-A)
-----------------------------------------------------------------------------------------------------------------------------------
Equity investments in affiliated companies
CARTESIA Rome (363)(5) -- 363
IM.SER Turin 358 1,159 801
MIRROR INTERNATIONAL HOLDING Luxembourg 97,235 100,351 3,116
NORDCOM Milan 2,267 2,143 (124)
NORTEL INVERSORA Buenos Aires Pesos Arg. (.000) -- -- --
(Argentina) (22,562)(8) -- 22,562
SIEMENS INFORMATICA Milan 25,383 (6) 3,841 (21,542)
SITEBA Milan 3,996 751 (3,245)
STREAM Rome 23,675 (10) 19,102 (4,573)
TELEGONO Rome 5,974 413 (5,561)
TIGLIO I Milan 183,331 186,011 2,680
TIGLIO II Milan 73,730 74,281 551
VOICE MAIL INTERNATIONAL Santa Clara (USA) US$ (.000)
(in liquidation) 17 -- (17)
Consorzio TELCAL Catanzaro 211 211 --
Consorzio TELEMED (in liquidation) Rome 7 (5) 10 3
-----------------------------------------------------------------------------------------
388,273 (4,986)
=========================================================================================
(1) Data taken from the latest financial statements.
(2) Includes net income (loss).
(3) Net of dividends paid.
(4) Includes advances on future capital contributions of subsidiaries and affiliated companies.
(5) Covered by reserve for losses of subsidiaries and affiliated companies
(6) Data taken from the consolidated financial statements.
(7) Does not include stock included in short-term financial assets.
(8) At December 31, 2001, the percentage of the ordinary share capital is 32.50%, while the percentage of total shareholders'
equity, taking into account the redemption of the Class A preferred shares, is 16,58%. Consolidated data conformed to the
Principles of Telecom Italia Group.
(9) Includes the advance on future contributions (euro 12 million) only effected by Telecom Italia.
(10 Data taken from the financial statements at November 30, 2002.
(11) Adjusted data showing Telsi accounted for using the equity method.
219
ANNEX 3
COMPARISON OF BOOK VALUE OF LISTED SHARES WITH MARKET PRICES
December 31, 2002 Market value Carrying value Difference
-------------------------------------------------------------------------------------
Total Total Total
Shares Unit price (thousands Unit price (thousands Unit price (thousands
held (in euro) of euro) (in euro) of euro) (in euro) of euro)
-------------------------------------------------------------------------------------
(A) (B) (A-B)
-----------------------------------------------------------------------------------------------------------------------------------
Long-term equity investments
TELECOM ITALIA MOBILE
- ordinary shares 4,695,889,519 4.33 20,319,114 0.91 4,286,371 3.41 16,032,743
============= ========== ========= ==========
SEAT PAGINE GIALLE
- ordinary shares 6,051,510,901 0.64 3,897,173 0.67 4,042,409 (0.03) (145,236)
============= ========== ========= ==========
====================================================================================================================================
Short-term financial assets
TELECOM ITALIA MOBILE
- ordinary shares 38,192,000 4.33 165,257 4.33 165,257 -- --
============= ========== ========= ==========
SEAT PAGINE GIALLE
- ordinary shares 50,000 0.52 26 0.52 26 -- --
============= ========== ========= ==========
220
ANNEX 4
ACCOUNTS RECEIVABLE AND ACCRUED INCOME BY MATURITY AND TYPE
(in thousands of euro) 12/31/2002 12/31/2001
-------------------------------------------------------------------------------------------- ----------------------------------
Amounts due Amounts due
-------------------------------------------------------------------------------------------- ----------------------------------
within from two after within after
one year to five years five years Total one year five years Total
------------------------------------------------------------------------------------------------------------------------------------
Accounts receivable in long-term investments
Subsidiaries -- 60,000 -- 60,000 -- -- 60,000
Affiliated companies -- 117,406 -- 117,406
Others
.. customers 666 166 -- 832 709 -- 886
.. employees 5,887 28,395 11,024 45,306 8,887 16,108 49,385
.. security deposits 1,521 3,668 253 5,442 1,347 787 5,926
.. miscellaneous 26,721 45,232 -- 71,953 49,581 -- 104,541
---------------------------------------------------------------------------------------
34,795 254,867 11,277 300,939 60,524 16,895 220,738
------------------------------------------------------------------------------------------------------------------------------------
Accounts receivable in current assets
Other loans from
Subsidiaries 1,900,599 -- -- 1,900,599 496,989 -- 496,989
Affiliated companies 721 -- -- 721 122,490 -- 122,490
Others 561,055 -- -- 561,055 547,878 -- 547,878
---------------------------------------------------------------------------------------
2,462,375 -- -- 2,462,375 1,167,357 -- 1,167,357
---------------------------------------------------------------------------------------
Trade receivables
Customers 3,753,468 -- -- 3,753,468 4,241,654 -- 4,241,654
Subsidiaries 453,164 -- -- 453,164 671,132 -- 671,132
Affiliated companies 83,239 -- -- 83,239 188,847 -- 188,847
Parent companies 1,243 -- -- 1,243 1,090 -- 1,090
Other receivables due from
.. Government and other public entities
for grants and subsidies 1,265 -- -- 1,265 1,265 -- 1,265
---------------------------------------------------------------------------------------
4,292,379 -- -- 4,292,379 5,103,988 -- 5,103,988
---------------------------------------------------------------------------------------
Other receivables
Subsidiaries 442,860 -- -- 442,860 1,028,799 -- 1,028,799
Affiliated companies 7,560 -- -- 7,560 233 -- 233
Miscellaneous receivables
.. deferred tax assets 738,311 850,728 -- 1,589,039 414,604 -- 509,094
.. other 838,045 -- 838,045 1,410,922 -- 1,410,922
---------------------------------------------------------------------------------------
2,026,776 850,728 -- 2,877,504 2,854,558 -- 2,949,048
---------------------------------------------------------------------------------------
Total accounts receivable 8,781,530 850,728 -- 9,632,258 9,125,903 -- 9,220,393
---------------------------------------------------------------------------------------
Accrued income 9,670 -- -- 9,670 11,944 -- 11,944
====================================================================================================================================
221
ANNEX 5
LIABILITIES AND ACCRUED EXPENSES BY MATURITY AND TYPE
(in thousands of euro) 12/31/2002 12/31/2001
----------------------------------------------------------------------------------------- -------------------------------------
Amounts due Amounts due
----------------------------------------------------------------------------------------- -------------------------------------
within from two after within after
one year to five years five years Total one year five years Total
------------------------------------------------------------------------------------------------------------------------------------
Medium/long-term debt
Debentures -- 7,550,000 3,391,662 10,941,662 -- 1,950,000 8,250,000
Due to banks 1,143,704 657,010 438 1,801,152 810,364 3,126 2,581,365
Due to other lenders 102,653 215,330 19,944 337,927 172,330 44,358 489,988
Taxes payable 18,240 13,680 31,920 18,241 -- 50,162
---------------------------------------------------------------------------------------------
1,264,597 8,436,020 3,412,044 13,112,661 1,000,935 1,997,484 11,371,515
---------------------------------------------------------------------------------------------
Short-term borrowings
Due to banks 1,646,348 -- -- 1,646,348 4,727,055 -- 4,727,055
Due to other lenders 164,618 -- -- 164,618 167,789 -- 167,789
Liabilities represented
by credit instruments 20,000 -- -- 20,000
Subsidiaries 2,169,195 -- -- 2,169,195 1,218,043 -- 1,218,043
Affiliated companies 5,125 -- -- 5,125 29,205 -- 29,205
Other liabilities 181,498 -- -- 181,498 395,266 -- 395,266
---------------------------------------------------------------------------------------------
4,186,784 -- -- 4,186,784 6,537,358 -- 6,537,358
---------------------------------------------------------------------------------------------
Trade payables (1)
Suppliers 1,854,831 -- -- 1,854,831 2,240,654 -- 2,240,654
Subsidiaries 943,205 -- -- 943,205 1,090,902 -- 1,090,902
Affiliated companies 149,798 -- -- 149,798 215,446 -- 215,446
Parent companies 52 -- -- 52 11 -- 11
---------------------------------------------------------------------------------------------
2,947,886 -- -- 2,947,886 3,547,013 -- 3,547,013
---------------------------------------------------------------------------------------------
Other payables
Subsidiaries 69,537 -- -- 69,537 41,785 -- 41,785
Affiliated companies 1,990 -- -- 1,990 93 -- 93
Parent companies 213,917 -- -- 213,917
Taxes payable 184,958 4,383 -- 189,341 398,336 -- 410,390
Contributions to pension and social
security institutions 161,122 280,562 249,337 691,021 174,051 325,539 767,412
Other liabilities 2,548,626 1,020 -- 2,549,646 2,218,030 53 2,219,990
---------------------------------------------------------------------------------------------
3,180,150 285,965 249,337 3,715,452 2,832,295 325,592 3,439,670
---------------------------------------------------------------------------------------------
Total liabilities (1) 11,579,417 8,721,985 3,661,381 23,962,783 13,917,601 2,323,076 24,895,556
====================================================================================================================================
------------------------------------------------------------------------------------------------------------------------------------
Accrued expenses 579,048 -- -- 579,048 268,178 -- 268,178
====================================================================================================================================
(1) Does not include advances
222
[] Reconta Ernst & Young S.p.A. [] Tel. (+39)011 5161611
Corso Vittorio Emanuele II, 83 Fax (+39)011 5612554
10128 Torino www.ey.com
[LOGO] ERNST & YOUNG
AUDITOR'S REPORT
pursuant to article 156 of Legislative Decree of February 24, 1998 n. 58
(Translation from the original Italian text)
To the Shareholders
of Telecom Italis S.p.A
1. We have audited the financial statements of Telecom Italia S.p.A. as of
and for the year ended December 31, 2002. These financial statements are
the responsibility of the Telecom Italia S.p.A.'s management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
2. Our audit was made in accordance with auditing standards and procedures
recommended by CONSOB. In accordance with such standards and procedures we
planned and performed our audit to obtain the information necessary in
order to determine whether the financial statements are materially
misstated and if such financial statements, taken as a whole, may be
relied upon. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, as well
as assessing the appropriateness of the accounting principles applied and
the reasonableness of the estimates made by management. We believe that
our audit provides reasonable basis for our opinion.
For the opinion on the financial statements of the prior year, which are
presented for comparative purposes as required by law, reference should be
made to our auditors' report dated April 15, 2002.
3. In our opinion, the financial statements of Telecom Italia S.p.A. comply
with the Italian regulations governing financial statements; accordingly,
they clearly present and give a true and fair view of the financial
position of Telecom Italia S.p.A. as of December 31, 2002, and the results
of its operations for the year then ended.
4. We draw your attention to the information presented in the explanatory
notes, "Summary of significant accounting policies", regarding the
accounting criteria utilized for the employee benefit obligations as
required by Law no. 58/1992.
[] Reconta Ernst and Young, S.p.A.
Sede Legale: 00196 Roma - Via G.D. Romagnosi, 187A
Capitale Sociale Euro 1,111,000,00 i.v.
Iscritta alla S.O. del Registro delle Imprese presso la C.C.I.A.A. di Roma
Codice fiscale e numero di Iscrizione 00434000584
P.I. 00891231003
(vecchio numero R.I. 6697/89 - numero R.E.A. 250904)
5. On March 11, 2003, the Board of Directors of Telecom Italia S.p.A.,
approved the proposal for a project aimed to shorten the corporate
structure through the merger of Telecom Italia S.p.A. into Olivetti S.p.A
and subsequently, on April 15, 2003 it approved the related plan for the
merger, prepared in accordance with art. 2501 - bis of the Italian Civil
Code.
Turin, April 18, 2003
Reconta Ernst & Young S.p.A.
signed by: Felice Persico (Partner)
Amendment of Article 7 paragraph 5 of the Company's bylaws
Dear shareholders,
In this extraordinary part of the meeting you are called upon to consider,
before addressing the matters related to the annual accounts, an amendment to
Article 7 of the Company's bylaws aimed at ensuring greater flexibility in
satisfying the special property rights attaching to savings shares and thus,
more generally, in formulating the policy for distributing the value created
and accumulated by the Company in carrying on its business.
In determining the substance of the preference accorded to savings shares, as
required by Article 145.2 of Legislative Decree 58/1998, the bylaw in question
basically reproduces what is already established in Article 15 of Legislative
Decree 216/1974 by providing for a higher claim on the net profit for the year
and better treatment than ordinary shares in the distribution of such profit.
In particular, where the Company has recorded a net profit for the year, each
savings share is entitled to receive a dividend up to 5% of its par value, and
in any case larger by 2 per cent of its face value than any dividend paid to
the ordinary shares. As it stands Article 7 also establishes that if, owing to
the absence or insufficient amount of the profit for the year, a dividend is
paid to the savings shares that is less than the minimum to which they are
entitled, the difference goes to increase the preferred dividend in the two
following financial years.
The proposal we submit for your approval would authorize the shareholders'
meeting called to approve the annual accounts, if the net profit for the year
is nil or insufficient, to satisfy both rights by drawing on the reserves,
without carryover to the following financial years.
In accordance with Consob Regulation 11971/1999 as amended, the comparative
presentation of the article of the bylaws whose amendment is recommended is
shown below in the text of the proposed resolution.
In the light of what has been set out above, we submit the following proposal
for your approval:
The shareholders' meeting of Telecom Italia S.p.A.
o having considered the explanatory report on the proposal;
o whereas the Company has an interest in having as much flexibility as
possible in its policy for the distribution of dividends, within the
limits established by law;
resolves
1. to amend Article 7 paragraph 5 of the bylaws with immediate effect as
follows:
Existing text Proposed text
-------------------------------------------------------------------------------------------------
Savings shares shall have the preferential Unchanged
rights set forth in this article.
-------------------------------------------------------------------------------------------------
The net profit shown in the duly approved Unchanged
annual accounts, less the amount allocated
to the legal reserve, must be distributed to
the savings shares up to five per cent of
their par value.
-------------------------------------------------------------------------------------------------
The net profit that remainsafter the Unchanged
allocation to the savings shares of the
preferred dividend provided for in the
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
second paragraph, payment of which must
be approved by the Shareholders' Meeting,
shall be divided among all the shares in
such a way that the dividend per savings
shares in such a way that the dividend per
savings shares is higher by two per cent of
its par value than the dividend per ordinary
share.
-------------------------------------------------------------------------------------------------
When ithe dividend paid on the savings Unchanged
shares in a fiscal year is less than that
indicated in the second paragraph, the
difference shall go to increase the preferred
dividend in the next two fiscal years.
-------------------------------------------------------------------------------------------------
In the event of a distribution of reserves, the In the event of a distribution of reserves, the
savings shares have the same rights as the savings shares have the same rights as the
other shares. other shares. However, if the net profit for
the year is nil or insufficient to satisfy the
property rights referred to in the
preceding paragraphs, the Shareholders'
Meeting called to approve the annual
accounts may resolve to satisfy the right
referred to in the second paragraph
and/or the right to the premium referred
to in the third paragraph by drawing on
the reserves. Payment made by drawing
on the reserves shall exclude application
of the mechanism for carrying over, to
the two following financial years, the
right to preferred dividends not received
through the distribution of profits
referred to in the fourth paragraph.
-------------------------------------------------------------------------------------------------
A reduction of the share capital due to Unchanged
losses shall not entail a reduction of the par
value of the savings shares except for the
amount of the loss that exceeds the total par
value of the other shares.
-------------------------------------------------------------------------------------------------
Upon dissolution of the Company, the Unchanged
savings shares shall have priority in the
repayment of the capital up to their entire
par value.
-------------------------------------------------------------------------------------------------
If the Company's ordinary or savings shares Unchanged
are delisted, holders of savings shares may
apply to the Company for their conversion
into ordinary shares, in the manner
approved by an Extraordinary Shareholders'
Meeting called ad hoc within two months for
the delisting.
-------------------------------------------------------------------------------------------------
2. to grant the Chairman and the Deputy Chairman, jointly and severally, the powers needed for
them to perform all the formalities necessary for the entry of the resolutions adopted in the
Company Register and to accept and make any non-substantial amendments thereto that the
competent authorities may require.
DRAFT REPORT TO THE FORTHCOMING SHAREHOLDERS' MEETING
Financial Statements for the year ended 31 December 2002 - distribution of the
profit for 2001 carried forward and of reserves. Related and consequent
resolutions.
Dear shareholders,
The report on operations accompanying the Company's annual accounts and the
Group consolidated accounts clearly describes the factors that contributed to
the loss recorded for the year. Very briefly, while revenues were basically
unchanged compared with the previous year (-1.5%) and despite the efficiency
gains achieved, the exceptional level of non-recurring expense resulted in a
net loss of (euro)1,645,375,511.87, as against a net profit of
(euro)150,809,706.79 in 2001.
The solidity of the Company's balance sheet means that the loss can be
immediately covered by drawing on the reserves, specifically the revaluation
reserve created under Law 72/1983.
This balance sheet solidity - together with the good performance of operations
and the promising outlook for business - has also led the Board of Directors to
recommend meeting the expectations of the market in terms of maintaining the
policy for dividends, by keeping them basically in line with the plans announced
in the shareholders' meeting of 12 December 2002. To this end, it is proposed
the payment of a special dividend, which, together with the dividend already
paid in December 2002, will permit shareholders to receive total amounts per
share analogous to the dividends distributed to the holders of ordinary shares
and savings shares on the basis of the resolutions adopted by the shareholders'
meeting of 7 May 2002. In accordance with the amendment to the bylaws already
passed by this extraordinary shareholder's meeting, it is also recommended that
the supplement for savings shares provided for in the bylaws, equal to 2% of
their face value, also be paid by drawing on the reserves.
The amounts thus established, equal to (euro)0.1768 per ordinary share and
(euro)0.1878 per savings share, will be divided pro rata into two parts subject
to different tax treatments:
o 25.97% will be withdrawn from the profit for 2001 carried forward and -
for the part not so covered - from sundry reserves created out of profits,
up to a maximum of (euro)346,152,775.38 (of which (euro)1,146,812.02 will
be 2001 profits), with the assignment of a tax credit of 56.25% with no
restrictions on its use;
o 74.03% will be withdrawn, instead, from the share premium account, up to a
maximum of (euro)986,826,642.33, without the assignment of a tax credit.
The total value of the dividend distributed will vary with the number of shares
having entitlement on the day the dividend is paid, taking into account the own
shares held by the Company and the number of shares eligible for subscription,
as per the increases in capital provided for in Article 6 of the bylaws, and
effectively issued by that date.
In the light of what has been set out above, we submit the following proposal
for your approval:
The shareholders' meeting of Telecom Italia S.p.A.
o having considered the Company's accounts for the year ended 31 December
2002, which show a loss for the year of (euro)1,645,375,511.87;
o having considered the report on operations;
o on the basis of the power attributed to it by Article 7.5 of the Company's
bylaws, as amended in this extraordinary shareholder's meeting;
o whereas the increases in capital referred to in Article 6 of the Company's
bylaws, for the part that can be subscribed by the dividend payment day,
may increase the total number of shares with regular entitlement up to a
maximum of 7,411,736,852;
o having regard to the resolution authorizing the purchase and subsequent
disposals of own shares adopted by the ordinary shareholder's meeting of 7
November 2001;
o taking into account the quantity of the Company's bonds and commercial
paper in issue;
o having taken note of the reports of the Board of Auditors and the external
auditors, Reconta Ernst & Young;
resolves
1. to approve the Board of Directors' report on operations, the balance
sheet, the income statement and the notes to the accounts of Telecom
Italia S.p.A. for the year ended on 31 December 2002, which show a loss
for the year of (euro)1,645,375,511.87;
2. to cover the loss for the year of (euro)1,645,375,511.87 by withdrawing an
equal amount from the revaluation reserve created under Law 72/1983;
3. to declare a dividend calculated on the basis of the following amounts,
which will be applied to the number of ordinary shares and savings shares
owned by shareholders (thus excluding the own shares held by the Company)
on the dividend payment day:
o (euro)0.1768 for each ordinary share or savings share, of which:
- (euro)0.0459 per share withdrawn first from the profit for 2001
carried forward ((euro)1,146,812.02) and then, for the remaining
part, from sundry reserves created out of profits, up to a
maximum of (euro)339,051,909.49, with the assignment of a tax
credit of 56.25% with no restrictions on its use pursuant to
Article 14 of Presidential Decree 917/22 December 1986 as
amended;
- (euro)0.1309 per share withdrawn from the share premium account
up to a maximum of (euro)970,196,353.93, without the assignment
of a tax credit pursuant to Article 44 of Presidential Decree
917/22 December 1986 as amended;
o (euro)0.011 for each savings share, of which:
- (euro)0.0029 per share withdrawn from sundry reserves created
out of profits, up to a maximum of (euro)5,954,053.87, with the
assignment of a tax credit of 56.25% with no restrictions on its
use pursuant to Article 14 of Presidential Decree 917/22
December 1986 as amended;
- (euro)0.0081 per share withdrawn from the share premium account
up to a maximum of (euro)16,630,288.40, without the assignment
of a tax credit pursuant to Article 44 of Presidential Decree
917/22 December 1986 as amended;
4. to confer a mandate on the Board of Directors - and on behalf of the Board
on its Chairman and the Chief Executive Offiser, Mr. Buora - to ascertain
in due course, in relation to the exact number of shares to be
remunerated:
o the total amount of the dividend distributed;
o the amounts actually withdrawn from sundry reserves created out of
profits and the share premium account to pay the dividend;
5. to pay the above dividend starting on 26 June 2003, with coupon detachment
on 23 June 2003.
Reduction of the revaluation reserve under Law 72/1983 by the amount used to
cover the loss shown in the financial statements for the year ended 31 December
2002
Dear shareholders,
In the ordinary part of the meeting you were asked to consider using the
revaluation reserve created under Law 72/1983 to cover the loss for the year
ended 31 December 2002, as provided for by specific legislation.
This would lead, however, to a ban on the distribution of profits until the
reserve had been restored to its original value. Alternatively, the law
provides for a definitive reduction in the reserve by an amount equal to that
used, subject to approval by the extraordinary shareholder's meeting.
Since it is not desirable to impose constraints on the accounts of the company
resulting from the merger this meeting is called upon to consider, it is
proposed that the reserve should be reduced definitively and its subsequent
replenishment excluded.
In the light of what has been set out above, we submit the following proposal
for your approval:
The shareholders' meeting of Telecom Italia S.p.A.
o whereas part of the revaluation reserve created under Law 72/1983 has been
used to cover the loss recorded in the Company's accounts for the year
ended 31 December 2002;
o having regard to the special legislation applicable;
resolves
to reduce the revaluation reserve created under Law 72/1983 by an amount equal
to that used to cover the loss for the 2002 financial year, and thus by
(euro)1,645,375,511.87, from (euro)2,294,719,877.62 to (euro)649,344,365.75.
PLAN FOR THE MERGER
OF TELECOM ITALIA S.p.A.
INTO OLIVETTI S.p.A.
(under Article 2501-bis of the Civil Code)
Milan, April 15, 2003
The following is an English translation of the official version in Italian
language. In case of conflict, the Italian language version will prevail.
Except as provided below, any offer to purchase or sell securities
described herein is not being made, directly or indirectly, in or into, or by
the use of the mails of, or by any means or instrumentality (including, without
limitation by mail, telephonically or electronically by way of internet or
otherwise) of interstate or foreign commerce, or any facility of any securities
exchange, of the United States of America and any such offer will not be
capable of acceptance by any such use, means, instrumentality or facility.
The information contained herein does not constitute an offer of
securities for sale in the United States or offer to acquire securities in the
United States.
The Olivetti securities referred to herein have not been, and are not
intended to be, registered under the U.S. Securities Act of 1933 (the
"Securities Act") and may not be offered or sold, directly or indirectly, into
the United States except pursuant to an applicable exemption. The Olivetti
ordinary shares and Olivetti savings shares are intended to be made available
within the United States in connection with the merger pursuant to an exemption
from the registration requirements of the Securities Act.
The proposed cash tender offer for a portion of the Telecom Italia
ordinary shares described herein is intended to be made available in or into
the United States pursuant to an exemption from the tender offer rules
available pursuant to the Securities Exchange act of 1934.
The proposed cash tender offer for a portion of the Telecom Italia savings
shares described herein is not being made and will not be made, directly or
indirectly, in or into the United States
***
The merger described herein relates to the securities of two foreign
companies. The merger in which Telecom Italia ordinary shares will be converted
into Olivetti ordinary shares is subject to disclosure and procedural
requirements of a foreign country that are different from those of the United
States.Financial statements included in the document, if any, will be prepared
in accordance with foreign accounting standards that may not be comparable to
the financial statements of United States companies.
It may be difficult for you to enforce your rights and any claim you may
have arising under the federal securities laws, since Olivetti and Telecom
Italia are located in Italy, and some or all of their officers and directors
may be residents of Italy or other foreign countries. You may not be able to
sue a foreign company or its officers or directors in a foreign court for
violations of the U.S. securities laws. It may be difficult to compel a foreign
company and its affiliates to subject themselves to a U.S. court's judgment.
You should be aware that Olivetti may purchase securities of Telecom
Italia otherwise than under the merger offer, such as in open market or
privately negotiated purchases.
PLAN FOR THE MERGER
OF TELECOM ITALIA S.P.A.
INTO OLIVETTI S.P.A.
(under Article 2501-bis of the Civil Code)
1. Companies participating in the Merger
Absorbing Company
OLIVETTI S.P.A.
Olivetti S.p.A. ("Olivetti" or the "Absorbing Company"), with registered office
at 77 Via Jervis, Ivrea, fully paid-up share capital of Euro 8,845,537,520
divided into 8,845,537,520 ordinary shares with a par value of Euro 1 each, tax
code and registration number in the Turin Company Register: 00488410010.
Company to be Absorbed
TELECOM ITALIA S.P.A.
Telecom Italia S.p.A. ("Telecom Italia" or the "Company to be Absorbed"), with
registered office at 2 Piazza degli Affari, Milan, and headquarters and
secondary office at 41 Corso d'Italia, Rome, fully paid-up share capital of
Euro 4,023,816,860.80 divided into 5,262,908,631 ordinary shares with a par
value of Euro 0.55 each and 2,053,122,025 savings shares with a par value of
Euro 0.55 each, tax code and registration number in the Milan Company Register:
00471850016.
2. Bylaws of the Absorbing Company and amendments thereto deriving from the
Merger
As a consequence of the Merger, Olivetti will basically adopt the current
bylaws of Telecom Italia.
In particular:
(i) the Absorbing Company will change its name to "Telecom Italia S.p.A.";
(ii) the Absorbing Company will take over the corporate purpose of Telecom
Italia in its entirety, so as to be able to continue to perform the
activities that Telecom Italia is authorized to perform under
administrative measures. The amendment to the corporate purpose will give
the right of withdrawal to
Olivetti shareholders who are absent or contrary to the Merger, pursuant
to Article 2437 of the Civil Code;
(iii) the bylaws of the Absorbing Company will be amended to take account of
the changes that will be made to the number and par value (which will be
fixed at Euro 0.55) of the ordinary and savings shares at the end of the
Merger and hence following the application of the share exchange ratio
and assignment procedure described in Sections 3 and 4. As a further
consequence of the Merger the bylaws will also be amended to take account
of (a) the updating of the amount of the increases in capital already
approved by Olivetti for the purposes of the "Piano triennale di Stock
Option 2002-2004" stock-option plan, the "Piano triennale di Stock Option
febbraio 2002-dicembre 2004" stock-option plan, the "Warrant Azioni
Olivetti ex Tecnost 1999-2004" warrants, and the convertible bond issues
"Prestito Olivetti 1,5% 2001-2004 convertibile con premio al rimborso"
and "Prestito Olivetti 1,5% 2001-2010 convertibile con premio al
rimborso", and (b) the increases in capital that the Olivetti
shareholders' meeting will be called to approve for the purposes of the
stock-option plans of the Company to be Absorbed (Piano 1999, Piano
2000, Piano 2001, Piano Top 2002 and Piano 2002), for the part still
applicable;
(iv) the bylaws of the Absorbing Company will contain an article concerning
the savings shares that will be assigned in exchange to the holders of
Telecom Italia savings shares on the basis of the exchange ratio and
assignment procedure described in Sections 3 and 4. In accordance with
Article 145 of Legislative Decree 58/1998, this article will specify the
substance of the preferential rights attaching to the savings shares
issued for the purpose of the exchange, the related conditions, limits
and procedures for the exercise thereof and describe the legal treatment
of this class of shares in the event of the delisting of the ordinary or
savings shares of the Absorbing Company. The preferential rights of the
savings shares to be issued in exchange will be the same as those of the
Telecom Italia savings shares, including the possibility of satisfying
the rights attaching to them by distributing reserves, whose introduction
in the Telecom Italia bylaws will be proposed at the shareholders'
meeting called to consider the Merger Plan;
(v) the Minister for the Economy and Finance has notified Telecom Italia that
he does not consider there are grounds for vetoing the adoption of the
merger resolution by the Telecom Italia shareholders. With regard to the
inclusion in the bylaws of the clauses providing for special powers, the
Minister for the Economy and Finance has communicated that he considers
it necessary to maintain the power of approval of the acquisition of
major equity interests in the company and the veto powers, in the text
currently contained in the Telecom Italia bylaws. The Minister for the
Economy and Finance has also communicated that he has reached the
agreement on these decisions with the Minister for Productive Activities.
This premised, pending the formalization of the measure most appropriate
to these decisions and the opinion, if any,
that the competent European Union authorities may see fit to express on
the matter, the Minister for the Economy and Finance has requested that
the bylaws to be submitted to the shareholders meetings of the Companies
Participating in the Merger contain the provisions specified above.
(vi) It is also pointed out the shareholders' meeting of the Absorbing Company
called to approve the Merger Plan will also be requested to grant a
delegation under Article 2443 of the Civil Code to increase the share
capital following the Merger by means of the issue of up to a maximum of
88,445,000 ordinary shares with a par value of Euro 0.55 each (and thus
for a maximum of Euro 48,644,750), to be offered for subscription to
employees of the Absorbing Company or its subsidiaries, with the
exclusion of the right of pre-emption under the combined effects of
Article 2441, last paragraph, of the Civil Code and Articles 134(2) and
134(3) of Legislative Decree 58/1998.
(vii) Lastly, it is pointed out that the shareholders' meeting of the Absorbing
Company called to approved the Merger Plan will first be requested to
approve the replacement of Article 20 (Board of Auditors) and the
amendment of Article 13 (Board of Directors) of Olivetti's bylaws.
The complete text of the Absorbing Company's bylaws incorporating all the
amendments deriving from the Merger, including what is provided for at points
(v) and (vi), is annexed to this Merger Plan. The numbers contained in such
bylaws will be specified in the merger instrument, on the basis of the
principles and methods described in Sections 3 and 4.
3. Exchange ratio
The draft financial statements for the year ended 31 December 2002 of Olivetti
and Telecom Italia were taken as showing their assets and liabilities in
accordance with and for the purposes of Article 2501-ter of the Civil Code.
The exchange ratio has been fixed as follows:
o 7 Olivetti ordinary shares with a par value of Euro 1 (one) each for every
Telecom Italia ordinary share with a par value of Euro 0.55;
o 7 Olivetti savings shares with a par value of Euro 1 (one) each for every
Telecom Italia savings share with a par value of Euro 0.55;
No cash consideration is envisaged.
4. Procedure for assigning the shares of the Absorbing Company
The exchange ratio between the economic values underlying the shares will be
satisfied principally by redistributing Olivetti's capital at the time of the
Merger's implementation, net of the Olivetti shares with a par value of Euro 1
(one) for which the right of withdrawal referred to in Section 2(ii) has been
exercised. This redistribution, subsequent to the change of the par value of
the shares of the Absorbing Company from Euro 1 to Euro 0.55, will be made to
the shareholders of Olivetti and the shareholders of Telecom Italia other than
Olivetti at the time of the implementation of the Merger on the basis of the
exchange ratio specified above and will thus give rise to the following
assignment ratios:
o for every Olivetti share (with a par value of Euro 1) withdrawn and
cancelled, "x" newly-issued ordinary shares of the Absorbing Company (with
a par value of Euro 0.55) will be assigned;
o for every Telecom Italia ordinary share (with a par value of Euro 0.55)
withdrawn and cancelled, "7x" newly-issued ordinary shares of the
Absorbing Company (with a par value of Euro 0.55) will be assigned;
o for every Telecom Italia savings share (with a par value of Euro 0.55)
withdrawn and cancelled, "7x" newly-issued savings shares of the Absorbing
Company (with a par value of Euro 0.55) will be assigned;
where "x" is the ratio between
> the total number of shares of the Absorbing Company with a par value
of Euro 0.55 to be redistributed
> the sum of (i) the total number of Olivetti shares with a par value
of Euro 1 outstanding (for which the right of withdrawal has not been
exercised) at the time of the Merger's implementation and (ii) 7
times the total number of Telecom Italia shares to be exchanged at
the time of the Merger's implementation.
Moreover, if the capital to be redistributed is less than Euro 8,845,537,520,
the redistribution will be accompanied by the assignment to all the holders of
the Absorbing Company's ordinary and savings shares, in proportion to their
respective holdings following the redistribution and therefore on the basis of
the above-mentioned exchange ratio, of up to a maximum of 11,103,237,961 new
ordinary or savings shares with a par value of Euro 0.55 each (and hence up to
a total maximum of Euro 6,106,780,879.1) until the share capital of the
Absorbing Company reaches a total of Euro 8,845,537,520 (more precisely: Euro
8,845,537,520.05, taking account of the change of the par value of the
Absorbing Company's shares to Euro 0.55), without prejudice to any rounding
deriving from the exchange operations.
A service will be provided to the shareholders of both Olivetti and Telecom
Italia through authorized intermediaries to handle any fractions of shares, at
market prices and at no cost in terms of expenses, stamp duty or commissions,
which will permit the number of newly-issued shares due to be rounded down or
up to the nearest whole number.
In the event that the Olivetti shares held do not entitle the holder to
receive, in accordance with the assignment mechanism, even one newly-issued
Olivetti share at the end of the Operation, maintenance of the position of
shareholder can be ensured by the assignment free of charge to such persons of
one share of the Absorbing Company made available by Olivetti International
S.A.
The ordinary and savings shares assigned in exchange as specified above will be
listed in the same way as the Olivetti ordinary shares currently outstanding.
Upon completion of the assignment procedure described above, the share capital
of the Absorbing Company will be fixed in an amount between a minimum of Euro
8,845,537,520 (more precisely: Euro 8,845,537,520.05, taking account of the
change of the par value of the Absorbing Company's shares to Euro 0.55)
corresponding to Olivetti's paid-up share capital and certified as per Article
2444 of the Civil Code at the date of this Merger Plan, and a maximum of Euro
11,926,697,278 (more precisely: Euro 11,926,697,277.55, taking account of the
change of the par value of the Absorbing Company's shares to Euro 0.55)
corresponding to the Absorbing Company's share capital assuming that the
conversion and subscription rights attaching respectively to the bonds and to
the warrants and stock options issued by Olivetti are exercised in full,
without prejudice to any rounding deriving from the exchange operations.
5. Date from which the ordinary and savings shares assigned in exchange will
be entitled to a share of profits
The ordinary and savings shares issued by the Absorbing Company in exchange for
the shares of the Company to be Absorbed that are cancelled as a result of the
Merger will have regular dividend rights.
6. Date of effectiveness of the Merger. Recording of Telecom Italia
transactions in the accounts of Olivetti. Start of the tax effects of the
Merger
In accordance with Article 2504-bis of the Civil Code, the effects of the
Merger shall start on the date of the last filing of the merger instrument, or
from such later date as may be specified in that instrument.
The effectiveness of the Merger is subject to the admission to listing on the
MTA electronic share market operated by Borsa Italiana S.p.A. of the savings
shares assigned by the Absorbing Company for the purpose of the exchange.
With reference to point 6 of Article 2501-bis of the Civil Code, the
transactions carried out by the Company to be Absorbed will be recorded in the
accounts of the Absorbing Company from 1 January of the year in which the
Merger will become effective in respect of third parties. The tax effects of
the Merger will also start on that date.
7. Treatment reserved to particular categories of shareholders or holders of
securities other than shares. Special advantages for directors
No special treatment is envisaged in connection with the Merger for any
categories of shareholders or for holders of financial instruments other than
the shares of the Absorbing Company or the shares of the Company to be
Absorbed, although:
a) the number of shares obtainable by exercising warrants (Olivetti) and
stock options (Olivetti and Telecom Italia) and the conversion ratios for
the convertible bonds issued by Olivetti will be adjusted to take account
of the exchange ratio and assignment procedure described in Sections 3 and
4, with ensuing amendment to all the respective rules;
b) the savings shares issued by the Absorbing Company in exchange for the
savings shares of the Company to be Absorbed will have the same rights and
features as the latter, as specified in Section 2(iv).
The Absorbing Company will assume the bonds already issued by Telecom Italia
and adopt the rules thereof.
No special advantages are envisaged in favour of the directors of the Companies
Participating in the Merger.
All numerical and other changes, additions and updates to this Merger Plan or
the bylaws of the Absorbing Company annexed hereto shall be made that may be
required by the administrative authorities, inter alia with reference to the
powers referred to in Section 2(v), or on the occasion of filing with the
Company Register or in connection with and/or attendant upon the operations
envisaged in this Plan.
Milan, 15 April 2003.
TELECOM ITALIA S.p.A. OLIVETTI S.p.A.
(in original signed by the respective Legal Representatives)
Annexes:
Bylaws of the Absorbing Company after the Merger
Annexed to the plan for the merger
of Telecom Italia S.p.A. into Olivetti S.p.A.
POST-MERGER BYLAWS OF THE ABSORBING COMPANY
NAME - REGISTERED OFFICE - PURPOSE AND DURATION OF THE COMPANY
Article 1
The name of the Company shall be "TELECOM ITALIA S.p.A."
Article 2
The registered office of the Company shall be at 2 Piazza degli Affari, Milan,
and the headquarters and secondary office at 41 Corso d'Italia, Rome.
Article 3
The Company's purpose shall be:
o the installation and operation, using any technique, method or system, of
fixed and mobile equipment and installations, including space systems
which use artificial satellites, radio stations, including shipboard
stations, links for maritime wireless communications, and dedicated and/or
integrated networks, for the purpose of providing and operating, without
territorial restrictions, licensed telecommunications services for public
use and telecommunications services in a free-market environment,
including those resulting from technological progress, and the performance
of activities directly or indirectly related thereto, including the
design, construction, operation, maintenance and distribution of
telecommunications, remote-computing, online and electronic products,
services and systems;
o the performance of activities related to or otherwise serving the pursuit
of the corporate purpose, including publishing, advertising, information
technology, online and multimedia activities and, in general, all
commercial, financial, property, research, training and consulting
activities;
o the acquisition, provided it is not the Company's principal activity, of
equity interests in other companies and undertakings falling within the
scope of the corporate purpose or related, complementary or similar
thereto, including companies involved in manufacturing electronic products
and insurance;
o the control and the strategic, technical and administrative and financial
coordination of subsidiary companies and undertakings, and the financial
planning and management thereof, with the implementation of all related
transactions.
Activities reserved to persons entered in a professional register,
activities involving dealings with the public covered by Article 106 of
Legislative Decree 385/1993, and those which are otherwise prohibited by
applicable legislation shall be expressly excluded.
Article 4
The duration of the Company shall be until 31 December 2100.
SHARE CAPITAL - SHARES - BONDS
Article 5
The share capital shall be Euro [-],divided into [-] ordinary shares with a par
value of Euro 0.55 each and [-] savings shares with a par value of Euro 0.55
each.
The Extraordinary Shareholders' Meeting of 4 October 2000 approved the increase,
in one or more steps, of the share capital by up to a maximum amount now
remaining, partly as a consequence of the resolution adopted by the
Extraordinary Shareholders' Meeting of [-], of Euro 56,992,575.20, which is
reserved exclusively for the exercise of the Warrant Tecnost 1999-2004 (now
Warrant Azioni Olivetti ex Tecnost 1999-2004) warrants, by means of the issue of
up to a maximum of 103,622,864 ordinary shares with a par value of Euro 0.55
each.
The Shareholders' Meeting of [-], reiterating, updating and, where necessary,
renewing earlier resolutions of the Shareholders' Meeting and the Board of
Directors resolved to increase the share capital by the following divisible
amounts:
1. up to a maximum of Euro 492,726.30, by means of the issue of up to a
maximum of 895,866 shares with a par value of Euro 0.55 each for the
exercise of the "Piano triennale Stock Option 2002-2004" stock options,
increase to be implemented by 15 December 2004;
2. up to a maximum of Euro 10,743,649.40, by means of the issue of up to a
maximum of 19,533,908 shares with a par value of Euro 0.55 each for the
exercise of the "Piano triennale Stock Option febbraio 2002-dicembre 2004"
stock options, increase to be implemented by 31 December 2004;
3. up to a maximum of Euro 180,568,488.10, by means of the issue of up to a
maximum of 328,306,342 shares with a par value of Euro 0.55 each to be
reserved irrevocably and exclusively for the conversion of the "Olivetti
1,5% 2001-2004 convertibile con premio al rimborso" convertible bonds, on
the basis of a conversion ratio equal to the assignment ratio established
for the shareholders of Olivetti S.p.A. in the context of the merger of
Telecom Italia S.p.A. into Olivetti S.p.A.;
4. up to a maximum of Euro 892,681,820.80, by means of the issue of up to a
maximum of 1,623,057,856 shares with a par value of Euro 0.55 each to be
reserved irrevocably and exclusively for the conversion of the "Olivetti
1,5% 2001-2010 convertibile con premio al rimborso" convertible bonds, on
the basis of a conversion ratio equal to the assignment ratio established
for the shareholders of Olivetti S.p.A. in the context of the merger of
Telecom Italia S.p.A. into Olivetti S.p.A.
The Shareholders' Meeting of [-] also resolved to increase the share capital by
up to a maximum of Euro 261,956,575.10, by means of the issue of up to a
maximum of 476,284,682 shares with a par value of Euro 0.55 each, divided into
the following divisible tranches:
1. a tranche of up to a maximum of Euro 21,969,104.30 for the exercise of the
"Piano di Stock Option 1999" stock options, increase to be implemented by
31 January 2005 by means of the issue of up to a maximum of 39,943,826
shares with a par value of Euro 0.55 each, to be subscribed for at a total
price of Euro 6.79 per option held;
2. a tranche of up to a maximum of Euro 53,421,890.50 for the exercise of the
"Piano di Stock Option 2000" stock options, increase to be implemented by
30 July 2008 by means of the issue of up to a maximum of 97,130,710 shares
with a par value of Euro 0.55 each, to be subscribed for at a total price
of Euro 13.815 per option held;
3. a tranche of up to a maximum of Euro 84,158,927.60 for the exercise of the
"Piano di Stock Option 2001" stock options, increase to be implemented by
30 April 2008 by means of the issue of up to a maximum of 153,016,232
shares with a par value of Euro 0.55 each, to be subscribed for at a total
price of Euro 10.488 per option held;
4. a tranche of up to a maximum of Euro 30,600,889.00 for the exercise of the
"Piano di Stock Option Top 2002" stock options, increase to be implemented
by 28 February 2010 by means of the
issue of up to a maximum of 55,637,980 shares with a par value of Euro
0.55 each, to be subscribed for at a total price of Euro 9.203 per option
held;
5. a tranche of up to a maximum of Euro 71,805,763.70 for the exercise of the
"Piano di Stock Option 2002" stock options, increase to be implemented by
31 March 2008 for the first lot, by 31 March 2009 for the second lot and
by 31 March 2010 for the third lot by means of the issue of up to a
maximum of 130,555,934 ordinary shares with a par value of Euro 0.55 each,
to be subscribed for at a total price for the different options of
respectively Euro 9.665, Euro 7.952 and Euro 7.721 per option held.
The Extraordinary Shareholders' Meeting of 8 May 2002 authorized the directors,
under Article 2420-ter of the Civil Code, to issue, in one or more steps, for
up to a maximum of five years from the date of the resolution referred to
above, bonds, in euros or other currencies, possibly convertible into the
shares of other companies, with or without warrants giving the right to acquire
shares of other companies, up to a maximum amount of Euro 9 billion, within the
limits permitted from time to time by law, and to establish the procedures,
time limits, conditions and related rules of such issues.
The Shareholders' Meeting of [-] authorized the Board of Directors, under
Article 2443 of the Civil Code and for a period of up to a maximum of five
years from [-], to increase the share capital in one or more steps by means of
the issue for cash of up to a maximum of 88,445,000 ordinary shares with a par
value of Euro 0.55 each (and thus for up to a maximum of Euro [-]), to be
offered for subscription to employees of Telecom Italia S.p.A. or its
subsidiaries, with the exclusion of the right of pre-emption pursuant to the
combined effects of Article 2441, last paragraph, of the Civil Code and
Articles 134(2) and 134(3) of Legislative Decree 58/1998. The Board of
Directors' resolutions shall establish a time limit for the subscription of the
shares and provide that, in the event of the increase approved not being
subscribed for within the time limit established from time to time for the
purpose, the share capital be increased by an amount equal to the subscriptions
collected by such time limit.
Article 6
The savings shares shall have the preferential rights set forth in this Article.
The net profit shown in the duly approved annual accounts, less the amount
allocated to the legal reserve, must be distributed to the savings shares up to
five per cent of their par value.
The net profit that remains after the allocation to the savings shares of the
preferred dividend provided for in the second paragraph, payment of which must
be approved by the Shareholders' Meeting, shall be divided among all the shares
in such a way that the dividend per savings share is higher by two per cent of
its par value than the dividend per ordinary share.
When the dividend paid on savings share in a fiscal year is less than that
indicated in the second paragraph, the difference shall go to increase the
preferred dividend in the next two fiscal years.
In the event of a distribution of reserves, the savings shares have the same
rights as the other shares. If the net profit for the year is nil or
insufficient to satisfy the property rights referred to in the preceding
paragraphs, the Shareholders' Meeting called to approve the annual accounts may
resolve to satisfy the right referred to in the second paragraph and/or the
right to the premium referred to in the third paragraph by drawing on the
reserves. Payment made by drawing on the reserves shall exclude application of
the mechanism for carrying over, to the two following fiscal years, the right
to preferred dividends not received through the distribution of profits
referred to in the fourth paragraph.
A reduction of the share capital due to losses shall not entail a reduction of
the par value of the savings shares, except for the amount of the loss that
exceeds the total par value of the other shares.
Upon dissolution of the Company, the savings shares shall have priority in the
repayment of the capital up to their entire par value.
If the Company's ordinary or savings shares are delisted, holders of saving
shares may apply to the Company for their conversion into ordinary shares, in
the manner approved by an Extraordinary Shareholders' Meeting called ad hoc
within two months of the delisting.
Article 7
The shares shall be indivisible. In the event of joint ownership, the rights of
the joint owners shall be exercised by a common representative. Fully paid-up
shares may be bearer shares when the law permits. In such case, shareholders
may apply for their shares to be converted, at their own expense, into
registered shares or vice versa.
Vis-a-vis the Company, shareholders shall be deemed to elect domicile for all
legal purposes at the domicile indicated in the Shareholders' Register.
Article 8
The Company may issue bonds and shall establish the terms and conditions of
their placement.
BOARD OF DIRECTORS
Article 9
The Company shall be managed by a Board of Directors consisting of not less
than seven and not more than twenty-three members. The Shareholders' Meeting
shall establish the number of members of the Board, which shall remain
unchanged until the Meeting establishes a different number.
The Board of Directors shall be appointed on the basis of slates presented by
the shareholders pursuant to the following paragraphs or by the outgoing Board
of Directors, on which the candidates shall be listed by serial number.
When the Board of Directors presents its own slate, it shall be filed at the
registered office of the Company and published in at least one Italian daily
newspaper with national circulation, at least twenty days prior to the date set
for the Shareholders' Meeting on the first call.
The slates presented by the shareholders shall be filed at the registered
office of the Company and published at the expense of the shareholders in the
manner indicated in the preceding paragraph at least ten days prior to the date
set for the Shareholders' Meeting on the first call.
Each shareholder may present or participate in the presentation of only one
slate and each candidate may appear on only one slate on pain of ineligibility.
Only shareholders who alone or together with other shareholders hold a total
number of shares representing at least 1% of the share capital entitled to vote
at the Ordinary Shareholders' Meeting may submit slates. To evidence ownership
of the number of shares necessary to present slates, shareholders must present
and/or deliver to the registered office of the Company, at least five days
prior to the date set for the Shareholders' Meeting on the first call, a copy
of the documentation attesting their right to attend the meeting.
Together with each slate, and within the respective time limits specified
above, declarations must be filed in which the individual candidates agree to
their candidacy and attest, on their own responsibility, that there are no
grounds for ineligibility or incompatibility, and that they meet any
requirements prescribed for the positions in question. Together with the
declarations, a curriculum vitae shall be filed for each candidate setting out
their main personal and professional data with an indication, where
appropriate, of the grounds for their qualifying as independent.
Each person entitled to vote may vote for only one slate.
The Board of Directors shall be elected as specified below:
a) four fifths of the directors to be elected shall be chosen from the slate
that obtains the majority of the votes cast by the shareholders, in the
order in which they are listed on the slate; in the event of a fractional
number, it shall be rounded down to the nearest whole number;
b) the remaining directors shall be taken from the other slates; to that end,
the votes obtained by the various slates shall be divided first by one,
then by two, then by three and then by four, up to the
number of directors to be chosen. The quotients thus obtained shall be
assigned to the candidates on each slate in the order specified thereon.
On the basis of the quotients assigned, the candidates on the various
slates shall be arranged in a single decreasing ranking. Those who have
obtained the highest quotients shall be elected.
If more than one candidate obtains the same quotient, the candidate from
the slate that has not yet elected any director or that has elected the
smallest number of directors shall be elected.
If none of such slates has yet elected a director or all of them have
elected the same number of directors, the candidate from the slate that
obtained the largest number of votes shall be elected. If the different
slates have received the same number of votes and their candidates have
been assigned the same quotients, a new vote shall be held by the entire
Shareholders' Meeting and the candidate obtaining the simple majority of
the votes shall be elected.
In appointing directors who for any reason have not been appointed pursuant to
the procedure specified above, the Shareholders' Meeting shall vote on the
basis of the majorities required by law.
If in the course of the fiscal year one or more vacancies occur on the Board,
the procedure specified in Article 2386 of the Civil Code shall be followed.
Should a majority of the seats on the Board of Directors become vacant for any
cause or reason, the remaining directors shall be deemed to have resigned and
they shall cease to hold office from the time the Board has been reconstituted
by persons appointed by the Shareholders' Meeting.
Article 10
The Board of Directors shall elect a Chairman from among its member - if the
Shareholders' Meeting has not already done so - and may also appoint a Deputy
Chairman; both may be re-elected.
In the absence or disability to act of the Chairman, the Deputy Chairman, if one
has been appointed, shall take his/her place or, if the Deputy Chairman is
absent, the most senior director by age.
The Board of Directors may elect a Secretary who need not be a director.
Extracts from the register of the minutes of meetings of the Board of Directors
signed by the Chairman or by two directors and countersigned by the Secretary
shall be conclusive evidence.
Article 11
The Chairman or whoever takes his/her place shall call meetings of the Board of
Directors at the Company's registered office or elsewhere, indicating the time
and place, whenever he/she deems this appropriate in the interests of the
Company or receives a written request to do so from at least one third of the
directors holding office or from the members of the Board of Auditors.
In general, meetings shall be called at least five days prior to the date
thereof, except in urgent cases, when it may be given by telegram, fax or
e-mail with at least twenty-four hours' notice.
Notice shall be given to the Board of Auditors within the same time limits.
Meetings of the Board of Directors may be held - if the Chairman or the person
acting in his/her place deems it necessary - by video-conference or
audio-conference, provided that all those taking part can be identified by the
Chairman and all the other participants, that they are able to follow the
debate and intervene in real time in relation to the matters under discussion,
that they are able to exchange documents pertaining to such matters and that
all the above is fully recorded in the minutes. Once the above conditions have
been verified, the Board meeting shall be considered to have taken place where
the Chairman is located, where the Secretary to the meeting must also be.
Article 12
The Board of Directors shall have the broadest possible powers of ordinary and
extraordinary administration of the Company, since all matters not expressly
reserved to the General Shareholders' Meeting by law or these bylaws are within
its jurisdiction.
The Board of Directors, through the Chairman or other directors delegated for
the purpose, shall report to the Board of Auditors on the activities carried
out and the transactions of greatest economic, financial or asset-related
significance concluded by the Company or its subsidiaries; in particular,
transactions involving a potential conflict of interest must be reported on.
The report shall be made in good time, and at least once in each quarter, on
the occasion of the meetings of the Board of Directors and the Executive
Committee or in a written memorandum addressed to the Chairman of the Board of
Auditors.
In accordance with the times and procedures for disclosing information to the
market, the representative of the holders of savings shares must be informed by
the Board of Directors or the persons delegated for the purpose of any
corporate transactions that might affect the price of the shares of that class.
Article 13
To implement its own resolutions and manage the Company, the Board of
Directors, subject to the limits provided for by law, may:
o create an Executive Committee, establishing its powers and the number of
members;
o delegate suitable powers, establishing the limits thereof, to one or more
directors, possibly with the title of Chief Executive Officer;
o appoint one or more General Managers, establishing their powers and
duties;
o appoint attorneys, who may be members of the Board of Directors, for
specific transactions and for a limited period of time.
Article 14
The company signature and the legal representation of the Company vis-a-vis
third parties and in legal proceedings shall pertain to the Chairman and, in
his absence or disability to act, the Deputy Chairman, if one is appointed;
they shall also pertain to the directors with delegated powers.
Article 15
The directors shall be entitled to the reimbursement of expenses incurred in
the performance of their duties. The Ordinary Shareholders' Meeting shall also
decide the annual compensation payable to the Board. Once fixed, this
compensation shall remain unchanged until the Meeting establishes a different
amount.
BOARD OF AUDITORS
Article 16
The Board of Auditors shall consist of five or seven auditors. The
Shareholders' Meeting shall establish the exact number, which shall remain
unchanged until the Meeting establishes a different number. The Meeting shall
also appoint two alternates.
The Board of Auditors shall elect a Chairman from among its members by majority
vote. In the absence or disability to act of the Chairman, he/she shall be
replaced by the most senior auditor by age.
Without prejudice to the situations of incompatibility established by law,
persons who are members of the boards of auditors of more than five companies
listed on Italian regulated markets may not be appointed auditors and shall
forfeit the post if they are elected. TELECOM ITALIA S.p.A. and its
subsidiaries shall not be included when computing the above limit.
For the purposes of Articles 1(2)(b) and 1(2)(c) of the regulation referred to
in Justice Minister Decree 162/2000, the following sectors of activity and
matters shall be considered closely linked to those of the Company:
telecommunications, information technology, online systems, electronics and
multimedia technology, and matters related to private and administrative law,
economics and business administration.
The appointment of the Board of Auditors shall be based on the slates presented
by shareholders who individually or together with other shareholders hold a
total number of shares representing at least 1% of the share capital entitled
to vote at the Ordinary Shareholders' Meeting. To evidence ownership of the
number of shares necessary to present slates, shareholders must present and/or
deliver to the registered office of the Company, at least five days prior to
the date set for the Shareholders' Meeting on the first call, a copy of the
documentation attesting their right to attend the meeting.
Each shareholder may present or participate in the presentation of only one
slate and each candidate may appear on only one slate on pain of ineligibility.
The slates must be filed at the registered office of the Company and published
at the expense of the shareholders who present them in at least one Italian
daily newspaper with national circulation, at least ten days prior to the date
set for the Shareholders' Meeting on the first call.
Together with each slate, declarations must be filed in which the individual
candidates agree to their candidacy and attest, on their own responsibility,
that there are no grounds for ineligibility or incompatibility, and that they
meet the requirements prescribed by law and these bylaws. Together with the
declarations, a curriculum vitae for each candidate shall be filed setting out
their main personal and professional data.
The slates shall be divided into two sections: one for candidates to the
position of auditor and the other for candidates to the position of alternate.
The first candidate in each section must be selected from among persons entered
in the register of auditors who have worked on statutory audits for a period of
not less than three years.
Each person entitled to vote may vote for only one slate.
The Board of Auditors shall be elected as specified below:
a) from the slate that obtains the majority of the votes cast by the
shareholders (the Majority Slate) one alternate and all the auditors not
chosen from the other slates (the Minority Slates) shall be chosen in the
order in which they are listed on the slate;
b) from the Minority Slates two auditors shall be chosen. One alternate shall
be chosen from the Minority Slate that obtains the largest number of
votes.
For the appointment of the auditors from the Minority Lists, the votes
obtained by the various slates shall be divided first by one and then by
two. The quotients thus obtained shall be assigned to the candidate
auditors on each slate in the order specified thereon. On the basis of the
quotients assigned, the candidates on the various slates shall be arranged
in a single decreasing ranking and those who have obtained the highest
quotients shall be elected.
If more than one candidate obtains the same quotient, the candidate from
the slate that has not yet elected an auditor shall be elected or,
subordinately, there shall be a tiebreaker vote by the entire
Shareholders' Meeting and the slate that obtains the simple majority of
the votes shall prevail.
In appointing auditors who for any reason have not been appointed pursuant to
the procedure specified above, the Shareholders' Meeting shall vote on the
basis of the majorities required by law.
In the event of the substitution of an auditor chosen from the Majority Slate
or one of the Minority Slates, the alternate chosen respectively from the
Majority List or the Minority Lists shall take his/her place. Appointments to
fill vacancies on the Board of Auditors pursuant to Article 2401 of the Civil
Code shall be made by the Shareholders' Meeting on the basis of the majorities
required by law.
After notifying the Chairman of the Board of Directors, the Board of Auditors,
or at least two auditors, may call, as provided for by law, a meeting of the
shareholders, the Board of Directors or the Executive Committee.
Meetings of the Board of Auditors - if the Chairman deems it necessary - may be
validly held by video-conference or by audio-conference, provided all those
taking part can be identified by the Chairman and by all the other
participants, that they are able to follow the debate and intervene in real
time in dealing with the matters being discussed, that they are able to
exchange documents pertaining to such matters and that all the above is fully
recorded in the minutes. Once the above conditions have been verified, the
meeting of the Board of Auditors shall be considered to have taken place where
the Chairman is located.
SHAREHOLDERS' MEETING
Article 17
An Ordinary Shareholders' Meeting shall be called to approve the annual
accounts every year within six months of the end of the fiscal year. Ordinary
and Extraordinary Shareholders' Meetings may be held in a place other than the
Registered Office, provided it is in Italy.
An Extraordinary Shareholders' Meeting shall be called whenever it is deemed
advisable by the Board of Directors and when it is required by law.
Article 18
Every shareholder entitled to attend may be represented at the Shareholders'
Meeting by giving a proxy to an individual or legal entity, subject to the
restrictions established by law.
In order to facilitate the collection of proxies among employee shareholders of
the Company and its subsidiaries who belong to shareholder associations
satisfying the requirements established by law, special areas shall be made
available in accordance with the procedures and time limits established by the
Board of Directors either directly or through its agents where information can
be provided and proxy forms collected.
Article 19
The Chairman of the Board of Directors or whoever takes his/her place or, in
the absence thereof, the person appointed by those present, shall chair the
Shareholders' Meeting and set the rules for the proceedings.
The Secretary shall be appointed by the Meeting, which may select a person who
is not a shareholder.
The proceedings of shareholders' meetings shall be governed by law, these
bylaws and the Meeting Rules approved by the Ordinary Shareholders' Meeting.
Article 20
Resolutions may be adopted by a show of hands. The Chairman shall establish the
procedures for recording votes and may choose two or more tellers from among
the persons present.
Each shareholder may exercise his/her right to vote by mail, in accordance with
the applicable law.
FISCAL YEAR - DIVIDENDS
Article 21
The fiscal year shall end on 31 December of each year.
From the net profit reported in the annual accounts, 5% shall be allocated to
the legal reserve until this reaches an amount equal to one-fifth of the share
capital.
The remainder shall be used to pay the dividend determined by the Shareholders'
Meeting, and for such other purposes as the Meeting deems most appropriate or
necessary.
During the course of the fiscal year, the Board of Directors may distribute
interim dividends to the shareholders.
SPECIAL POWERS
Article 22
Pursuant to Article 2(1) of Decree Law 332/1994, ratified with amendments by
Law 474/1994, the Minister for the Economy and Finance, in agreement with the
Minister for Productive Activities, shall have the following special powers:
a) approval, to be granted expressly upon the acquisition by parties subject
to the limitations on share ownership referred to in Article 3 of Decree
Law 332/1994, ratified with amendments by Law 474/1994, of major holdings,
taken to mean holdings that, as specified by Treasury Minister Decree of
24 March 1997, are equal to at least 3% of the share capital represented
by shares with a right to vote at the Ordinary Shareholders' Meeting.
Approval must be granted within sixty days of the date of the
communication that the Board of Directors must send at the time of the
application for entry in the Shareholders' Register. Until approval has
been granted and after expiration of the time limit without any action,
the transferee may not exercise the voting rights or any rights other than
the property rights attaching to the shares that represent the major
holding. If approval is refused or the time limit expires without action,
the transferee must sell the shares within one year. If this is not done,
the Court, at the request of the Minister for the Economy and Finance,
shall order the sale of the shares representing the major holding pursuant
to the procedures established in Article 2359-ter of the Civil Code;
b) veto of any resolution to dissolve the Company, transfer the business,
merge or divide the Company, transfer the registered office outside Italy,
change the corporate object, or amend these bylaws with a view to
eliminating or modifying the powers specified in subparagraphs a) and b).
In accordance with the provisions of the Prime Ministerial Decree issued on 21
March 1997 pursuant to Law 474/1994 and the Treasury Minister Decree issued
pursuant to the same law on 21 March 1997, this article shall remain in the
bylaws for three years and in any case until the liberalization of the
telecommunications industry has reached a sufficiently advanced stage and the
industry regulatory authority has become firmly established; the decision that
these conditions have been met shall be adopted in an instrument issued in the
form indicated in the above-mentioned Prime Ministerial Decree.
ERNST& YOUNG [LOGO] Reconta Ernst & Young S.p.A.
PLAN FOR THE MERGER OF
TELECOM ITALIA S.p.A.
INTO
OLIVETTI S.p.A.
AUDITORS' REPORT
Relating to the exchange ratio of shares
pursuant to Art. 2501 quinquies of the Italian Civil Code.
(Translation from the original Italian text)
PLAN FOR THE MERGER OF
TELECOM ITALIA S.P.A.
INTO OLIVETTI S.P.A.
AUDITORS' REPORT
Relating to the exchange ratio of shares
pursuant to Art. 2501 quinquies of the Italian Civil Code.
(Translation from the original Italian text)
To the Shareholders of
Telecom Italia S.p.A.
1. OBJECTIVE, SUBJECT AND SCOPE OF THE ENGAGEMENT
We have been appointed by Telecom Italia S.p.A. to prepare our report on the
exchange ratio of shares (hereinafter the "exchange ratio") of Telecom Italia
S.p.A. (hereinafter "Telecom Italia" or the "company to be absorbed") and
Olivetti S.p.A. (hereinafter "Olivetti" or the "absorbing company" and,
together with Telecom Italia, the "Companies"), in accordance with Article 2501
quinquies of the Italian Civil Code. To this end, we have been provided by
Telecom Italia with the plan for the merger, accompanied by the Directors'
Report, which identifies, explains and justifies, pursuant to Article 2501
quater of the Italian Civil Code, the exchange ratio, as well as the Balance
Sheet as of December 31, 2002 provided by Article 2501 ter of the Italian Civil
Code.
The plan for the merger will be subject to approval at the Extraordinary General
Meeting of the shareholders of Telecom Italia to be held on May 24, 2003, first
meeting, or on May 25, 2003, second meeting.
Similarly, the shareholders of Olivetti will be required to approve the plan
for the merger at the Extraordinary General Meeting to be held on May 24, 2003,
first meeting, or on May 25, second meeting or, on May 26, 2003, third meeting
if required.
Deloitte & Touche Italia S.p.A. has been appointed by Olivetti to prepare a
similar report on the exchange ratio.
In order to provide the shareholders with adequate information regarding the
exchange ratio, this report illustrates the methods adopted by the Directors in
determining the exchange ratio and the difficulties encountered by them; in
addition, this report also indicates whether, under the circumstances, such
methods are reasonable and not arbitrary, whether the Directors have considered
the respective importance of such methods and whether the methods have been
correctly applied.
In our examination of the valuation methods adopted by the Directors, also
based on indications from their Professional Advisors, we have not made a
valuation of the Companies participating to the merger. This was done solely by
the Directors and the Professional Advisors appointed by them.
2. SUMMARY OF THE TRANSACTION
The Boards of Directors of Telecom Italia and of Olivetti have developed a
plan, the purpose of which is to simplify the corporate structure of the
Olivetti and Telecom Italia Group.
As indicated in the report of the Board of Directors of Telecom Italia, the
proposed transaction provides for the merger of Telecom Italia into Olivetti,
pursuant to Articles 2501 and following of the Italian Civil Code. Such
transaction, with respect to its scope and main characteristics, was approved
by the Boards of Directors of the companies participating to the merger, held
on March 11, 2003.
On April 15, 2003, the Board of Directors of Telecom Italia approved the plan
for the merger of Telecom Italia into Olivetti, confirming the exchange ratio
preliminarily indicated by the Board of Directors on March 11,2003.
The merger will be effected on the basis of the draft financial statements of
Telecom Italia and of Olivetti as of December 31, 2002, adopted by the Boards
of Directors of the Companies as the balance sheets required by Article 2501
ter of the Italian Civil Code.
As a result of the merger, the absorbing company will take the name and the
corporate scope of Telecom Italia and will adopt new by-laws, based on the
current by-laws of Telecom Italia.
As a consequence of the change in the corporate scope, the shareholders of
Olivetti who are absent or contrary to the resolutions approving the
transaction, will have the right to withdraw pursuant to Article 2437 of the
Italian Civil Code.
In the context of the transaction, Olivetti announced the intention to proceed
with a voluntary and partial tender offer on Telecom Italia's ordinary and
savings shares. In particular, Olivetti intends to offer a consideration based
on the average of the stock- market prices of Telecom Italia's ordinary and
savings shares in the period between March 12, 2003 and the date of the
shareholders' meeting called to approve the merger project, increased by a
premium of 20%. In any case, the consideration will not be (i) higher than Euro
8.40 for each ordinary share and Euro 5.65 for each
2
savings share and (ii) lower than Euro 7 for each ordinary share and Euro 4.70
for each savings share.
Based on information already made public, the number of shares subject to the
tender offer will be determined when the period to exercise the right of
withdrawal pursuant to Article 2437 of the Italian Civil Code will expire and,
accordingly, at the time Olivetti will have determined the total amount of
disbursement to be incurred for such withdrawals. The maximum total amount for
the tender offer will be Euro 9 billion, net of the amount of withdrawals. The
financial resources allocated to the tender offer for each class of shares
(ordinary and savings), if non totally utilized for a class will be assigned to
the other class. If the acceptances of the tender offer by the holders of
ordinary shares and savings shares were to exceed the quantity tendered for,
they will be prorated with respect to each class.
The tender offer will start subsequent to the expiration of the term for the
exercise of the right of withdrawal and will be completed prior to the
execution of the merger deed. The offering will cease its effects in case the
registration of the merger deed at the Companies' Register will not be
completed.
The offering will be evaluated by the Board of Directors of Telecom Italia,
pursuant to Article 39 of the Ruling for the Issuers on the Italian Stock
Exchange.
The merger will result with the cancellation of Olivetti's investment in
Telecom Italia. Olivetti's share capital, as resulting on the date the merger
will become effective, will be re-determined on the basis of the reduction of
the par value of the shares (from Euro 1.00 to Euro 0.55), of its allocation to
ordinary and savings shares (the latter category being introduced in the new
by-laws of the absorbing company as a result of the merger) and of the
necessity to maintain its current level in terms of absolute value. After the
allocation, the capital of the company resulting from the merger will be
distributed to the shareholders of Olivetti and those of Telecom Italia on the
basis of a distribution ratio which will reflect the exchange ratio of
Olivetti's shares with the ordinary and savings shares of Telecom Italia. In
particular, with respect to the criteria for the allocation of Olivetti's
shares, the Directors propose to proceed to the exchange by adopting
principally the method of the re-distribution of Olivetti's capital and issuing
new shares only within the limits eventually required to maintain the share
capital at the current level. The re-distribution method consists in the
allocation of the absorbing company's share capital among the shareholders of
the absorbing company and those of the company to be absorbed, on the basis of
the so called "natural" exchange ratio. The determination of the share capital
and the exchange transaction will be made in accordance with the following
principles:
- Olivetti will set the par value of its shares - to the amount resulting
from the conversions of the convertible bonds, the exercise of the
warrants and the exercise of the stock options on one hand, and the
exercise of the right of withdrawal on the other hand - at Euro 0.55 each
(equal to the par value of Telecom Italia's shares), in place of the
current par value of Euro 1. Therefore, the share capital of Olivetti will
be divided in a greater number of shares. These shares, will be divided
into ordinary and savings shares;
3
- the new shares, ordinary and savings, with a par value of Euro 0.55 each,
representing the share capital of Olivetti at the time of the merger, will
be distributed to Olivetti's ordinary shareholders and to ordinary and
savings shareholders of Telecom Italia, respectively. This distribution
will be made on the basis of the distribution ratios, which will reflect
the so called "natural" exchange ratio, with reference to the actual
number of shares to be distributed, not yet known as of to date. Paragraph
6.4 below indicates this ratio as 7 ordinary or savings shares of Olivetti
for each of ordinary and savings shares of Telecom Italia.
Should the capital of the absorbing company at the time of the merger fall, as
a result of the effect of the withdrawals in respect to those of the
conversions, below the current amount of Euro 8,845,537,520, the distribution
of the share capital will be accompanied by the issuance of new ordinary and
savings shares of the company resulting from the merger, to service the
exchange of shares, up to a maximum number of 11,103,237,962, with a par value
of Euro 0.55 each, in respect to the assignment to capital of the portion of
minority interests of the company to be absorbed. These additional shares will
be allocated to the shareholders of the absorbing company as well as those of
the company to be absorbed, in respect of their proportional ownership.
At the time of the exchange of shares, Olivetti will assign to the savings
shareholders of Telecom Italia new savings shares with characteristics
corresponding to those currently issued by Telecom Italia.
The transaction provides for the listing of savings shares that will be issued
by the absorbing company to service the exchange of shares in favor of the
savings shareholders of Telecom Italia. The new Olivetti savings shares will
have a par value of Euro 0.55 each, corresponding to that of the current
savings shares of Telecom Italia.
Pursuant to Articles 2504 bis, last paragraph and 2501 bis, first paragraph, n.
5 of the Italian Civil Code, the new shares of the company resulting from the
merger will have regular dividend rights.
Pursuant to Article 2504 bis, last paragraph of the Italian Civil Code, the
effects of the merger, except for those effects provided for by Article 2501
bis, numbers 5 and 6 of the Italian Civil Code, will start from the last of the
registrations of the merger deed, or from such subsequent date provided for by
the merger deed.
The operations of the company to be absorbed, including income taxes, will be
imputed to the financial statements of the absorbing company, with effect from
January 1 of the year in which the transaction will become effective.
3. DOCUMENTATION UTILIZED
In performing our work, we obtained from Telecom Italia and Olivetti, such
documentation and information as was considered useful in the circumstances. We
analyzed such documentation and, in particular:
4
a) the plan for the merger and the reports of the Boards of Directors of the
two Companies addressed to the respective Extraordinary General Meetings
which, on the basis of the Balance Sheet as at December 31, 2002, propose
an exchange ratio as follows:
7 Olivetti ordinary shares, with a par value of Euro 1.00 (one) each for
each Telecom Italia ordinary share, with a par value of Euro 0.55 each;
7 Olivetti savings shares, with a par value of Euro 1.00 (one) each for
each Telecom Italia ordinary share, with a par value of Euro 0.55 each.
This exchange ratio, so called "natural", corresponds to the exchange
ratio that would be applied, had the merger been realized without
re-distribution, but issuing new shares to service the exchange ratio.
The ratio for the exchange of shares has been determined by the Directors
also taking into account the valuation reports of the Professional
Advisors indicated in points b) and c) below. The report of the Board of
Directors sets out in detail the valuation criteria adopted, the reasons
for their choice, the values resulting from their application and the
related comments;
b) the appraisal report of the exchange ratio prepared by Lazard, as
Professional Advisor of the Directors; this report, dated May 11, 2003,
and prepared at the request of Telecom Italia, sets out the valuation
criteria adopted, the reason for which they were chosen and the results of
their application;
c) the fairness opinion issued by Goldman Sachs on March 11, 2003 at the
request of Telecom Italia, with respect to the fairness of the exchange
ratio;
d) the following documentation, used by the Professional Advisors to prepare
their appraisal reports and, subsequently, within the scope of our
engagement, also utilized by us:
- the financial statements and the consolidated financial statements of
Telecom Italia and Olivetti as at December 31, 2001 accompanied by
the Report of the Board of Directors, the Report of the Board of
Statutory Auditors and the Independent Auditors' Report;
- draft financial statements and draft consolidated financial
statements of Telecom Italia and of Olivetti as at December 31, 2002
accompanied by the Report of the Board of Directors;
- Telecom Italia's consolidated Business Plan 2003 - 2005 (version dated
January 16, 2003) and related updates;
- Tecnost Group's condensed business plan;
- historical market prices and trading volumes of ordinary and savings
shares of Telecom Italia and Olivetti;
- publicly available information about companies operating in the same
sector;
5
- financial research and analyses, published by specialized
institutions and investment banks;
e) additional documentation, as follows, has been utilized by us:
- data and information obtained from the Professional Advisors and used
by them for the determination of the exchange ratio;
- rulings of convertible bonds of Olivetti;
- appraisal report of the exchange ratio dated March 11, 2003, issued
by JP Morgan as Professional Advisor of Olivetti and the report
prepared by Professor Angelo Provasoli, who reviewed and concurred
with the valuation methodologies adopted by JP Morgan;
- by-laws of the companies participating to the merger;
- accounting elements and other information as deemed necessary for
this report.
Finally, we obtained representation from Telecom Italia that, as to the
Directors' best knowledge, no significant changes occurred in the data and
information considered during our analysis. The same representation has been
obtained by Deloitte & Touche Italia S.p.A. from the Directors of Olivetti.
4. VALUATION METHODS ADOPTED BY THE BOARDS OF DIRECTORS FOR THE DETERMINATION
OF THE EXCHANGE RATIO
The Directors, also supported by their Professional Advisors, considering the
importance and complexity of the merger transaction, deemed it appropriate to
identify the valuation methods which, in addition to be in accordance with
current best practice, would enable the two companies to be valued on a
homogeneous basis.
4.1. Selection of the methods and valuation criteria
The Board of Directors of Telecom Italia determined the exchange ratio by
selecting, among a number of valuation methods, those deemed more appropriate
to express the value of the entities involved in the merger, considering the
activities carried-out by the absorbing company and by the company to be
absorbed.
In addition, as suggested by corporate doctrine and professional practice, the
Directors compared the values attributed to the companies participating in the
merger process under the assumption that they will continue as a going concern.
These values cannot be considered representative of a valuation in absolute
terms of the two companies participating to the merger, nor can they be
compared with any acquisition or sale prices (which normally reflect majority
premiums or minority discounts).
The Directors of Telecom Italia, supported by their Professional Advisors,
selected the valuation methods and principles to be adopted taking into
account:
a) the specific objectives attributed to the valuations with reference to the
underlying transaction;
6
b) the nature of the activities carried-out by each company participating to
the merger.
In connection with the first aspect, in the selection of the valuation
principles the Directors referred to the purpose of the valuation and to the
relevant factors that allow to estimate the value of the entities being valued.
As the objective is to express comparable values in order to determine the
exchange ratio, the Directors adopted, for both companies participating to the
merger, valuation methods based on homogeneous criteria.
As to the second aspect, the Directors considered on one hand the various areas
of operations of Telecom Italia and, on the other hand, the circumstances that
the controlling investment of Olivetti in Telecom Italia represents a
significant component of total assets of Olivetti.
On the basis of the above, the Directors, for the purpose of determining the
values of Olivetti and Telecom Italia, have utilized, given the equal
significance level in the valuation process, the method of stock-market prices
as the principal method and the sum-of-parts method as the control method.
Stock-market prices method: when the companies involved in the merger have
shares listed on regulated markets, doctrine and professional practice suggest
to consider the results deriving from the stock prices of the respective
shares, averaged over an adequate period of time. In this case, the Directors
deemed the stock prices particularly significant and, on the basis of the
stock-market prices at March 7, 2003 (last date of stock trading prior to the
announcement of the transaction by the Boards of Directors), they note that
both companies show high levels of volumes exchanged, high capitalization and a
high liquidity of their respective shares.
Sum-of-parts method: according to this method, the value of a company is
determined as the sum of the values of each of its businesses (intended as
economic entities which can be individually evaluated), adjusted to take into
account the financial position of the company, minority interests and, where
significant, other effects such as those relating to off-balance sheet items,
if any, and to potential tax benefits.
In the application of the valuation methods described, the Directors considered
the expected distribution of reserves by Telecom Italia, approved by the Board
of Directors on March 11, 2003.
4.1.1. Stock-market prices method
The stock-market prices method estimates the value of the equity on the basis
of stock-market prices during a significant period, that expires on a date
close to which the valuation is prepared. The Directors believe that the
stock-market prices following the announcement of the transaction are not
relevant.
In order to mitigate short-term fluctuations that typically characterize
financial markets, the Directors extended the analysis of stock-market prices
to the average prices expressed by the market over sufficiently long periods.
7
Accordingly, in the application of the stock-market prices method, with
reference to the date of March 7,2003, the Directors proceeded to:
a) analyze the historical simple averages over a period covering the
preceding 12 months;
b) analyze the historical averages weighted for volumes over a period
covering the preceding 12 months;
c) analyze the mobile averages for 1, 3, 6 and 12 months;
d) adjust the value of Telecom Italia's shares, to take into account the
expected distribution of reserves.
From the analysis of the historical trends, the Directors identified the
averages for 1, 3, 6 and 12 months as those within a range of constant ratios of
values.
4.1.2. Sum-of-Parts method
According to the sum-of-parts method, the value of Telecom Italia and Olivetti
is determined as the sum of the values of the individual businesses of each
company, considered as economic entities which can be individually evaluated.
This sum, for each of the companies participating to the merger, is adjusted to
reflect the financial position, minority interests and, where significant,
other effects, such as off-balance sheet items, if any, and potential tax
benefits.
On the basis of the significance of the investment in Telecom Italia in respect
to Olivetti's total assets, the valuation process was concentrated on the
estimated value of Telecom Italia, decisive element to identify Olivetti's
value.
Taking into account the complexity of the company's structure and the various
areas of the operations of the Telecom Italia Group, the individual businesses
were evaluated on the basis of those methodologies, among those utilized by the
practice, considered more suitable in the specific situation. In particular,
the method of the discounted cash flow ("DCF") was utilized for the main
businesses, such as for instance, the services connected to mobile and
wire-line communications.
The remaining assets and liabilities of Telecom Italia have been valued
principally on either book or market value basis, in consideration of their
limited weight with respect to the entire value of Telecom Italia.
The DCF method has been applied by computing the present value of operating
cash flows, gross of any component of financial nature ("Free Cash Flow" or
"FCF"). According to this method, the economic value of an enterprise is equal
to the sum of the following components:
- operating cash flows that the company will be able to generate in the
future, discounted at a rate representing the weighted average cost of
capital;
8
- net financial position and minority interests, which, in this case, refer
to December 3 1,2002.
In applying the DCF method, the Directors made reference to the operating cash
flows connected to the main activities, as resulting from the economic and
financial forecasts made for Telecom Italia.
For Olivetti, which is a holding company, the main asset of which is
represented by the investment in Telecom Italia, the sum-of-parts method has
been applied by evaluating this investment according to the principles
described above and by evaluating the remaining assets and liabilities at book
or market value, in light of their limited weight in respect to the valuation
of the company taken as a whole.
In the valuation of Telecom Italia and Olivetti, the Directors have also taken
into consideration the tax assets, for the portion deemed utilizable by the
companies participating to the merger, regardless if the merger transaction
will become effective or not, on the basis of expected taxable income on a
stand alone basis. The Directors have also considered, for Telecom Italia, the
expected distribution of reserves and, for Olivetti, the pro-forma effect of
the conversion of convertible bonds consistent with the fully-diluted
methodology.
4.2. Treatment of saving shares
With respect to the category of savings shares, which, as of to date are not
issued by Olivetti, the Directors supported by their Professional Advisors
assumed that, also considering the economic benefits that will be granted to
Olivetti's savings shares, the discount currently recognized by the market to
Telecom Italia's savings shares, with respect to the ordinary shares, may be
utilized in the determination of the exchange ratio applicable to Olivetti's
savings shares to be issued. The Directors therefore deemed appropriate to
adopt the same exchange ratio, as that adopted for ordinary shares.
The Directors believe that, on the basis of a generally accepted principle,
different methods of allocation between ordinary and savings shares would imply
discretionary factors in the valuation, not supported by objective factors.
5. VALUATION DIFFICULTIES ENCOUNTERED BY THE BOARD OF DIRECTORS
In carrying out the valuations for the purpose of determining the exchange
ratio, the Board of Directors of Telecom Italia encountered the following main
difficulties:
a) asset disposals during 2003, if any: at present, it is not possible to
precisely determine the outcome of the expected disposal of the new
company that will be incorporated, as a result of the de-merger of Seat
Pagine Gialle. In any case, the Directors, on the basis of the
significance of the investment in Seat Pagine Gialle in respect of the
total value of Telecom Italia, expect that the disposal should not have
such effects that would require changes to the exchange ratio;
9
b) taxation: the valuation was made on the basis of current tax legislation;
therefore, the Directors did not consider the tax reform currently in
process, and not yet enacted, the effects of which are to date difficult
to be quantified;
c) valuation of savings shares: as of to date there are no Olivetti savings
shares; in order not to include in the analysis discretionary factors, not
supported by objective factors, lacking historical data of reference for
Olivetti, the Directors took into account the price differentials of
ordinary and savings shares of Telecom Italia only.
The Directors, supported by their Professional Advisors, made a thorough
analysis of the argumentations raised by some institutional investors, in
connection with the application of the NAV method to Olivetti as holding
company owing as its main asset the investment in Telecom Italia, and in
particular in respect to the opportunity to value such investment at
stock-market prices. In light of the purposes of the valuation, the Directors,
even though recognizing the complexity of the subject, deemed to adopt
homogeneous criteria for both companies and therefore to utilize for Olivetti
the same method as that utilized for Telecom Italia (Sum-of-Parts).
6. RESULT OF THE VALUATION PERFORMED BY THE BOARDS OF DIRECTORS
6.1. Stock-market prices method
The results obtained with the application of the principal method led the
Directors supported by their Professional Advisors to identify the following
values:
Values (Euro)
Telecom Italia
Stock market prices post dividend Olivetti Value Ratio
Weighted averages
March 7, 2003 5.7 0.86 6.7
Average 1 month 6.3 0.91 7.0
Average 3 months 6.8 0.99 6.9
Average 6 months 7.2 1.02 7.1
Average 12 months 7.6 1.11 6.9
Arithmetic averages
March 7, 2003 5.7 0.86 6.7
Average 1 month 6.4 0.91 7.0
Average 3 months 6.9 0.99 7.0
Average 6 months 7.2 1.01 7.1
Average 12 months 7.7 1.11 6.9
Maximum and minimum prices
Maximum price last 12 months 9.5 1.47 6.5
Minimum price last 12 months 5.7 0.84 6.8
10
The Directors noted that the above results are confirmed also when expanding the
time range to 18 months.
6.2. Sum-of-Parts method
As to the sum-of-parts method, the Directors of Telecom Italia supported by
their Professional Advisors identified the following values for each ordinary
share:
--------------------------------------------------------------------------------
Value
Telecom Italia Olivetti Ratio
--------------------------------------------------------------------------------
Value per each ordinary share (Euro) 8.8 1.27 6.9
--------------------------------------------------------------------------------
6.3. Determination of the exchange ratio
On the basis of the valuations performed with the support of the respective
Professional Advisors and in accordance thereto, the Directors defined the
relative values of the companies participating to the merger, for the purpose
of the exchange ratio.
The value ratios resulting from the application of the methods adopted by the
Board of Directors of Telecom Italia are summarized as follows:
--------------------------------------------------------------
Method Value ratio
--------------------------------------------------------------
Stock-maket prices method
- March 7,2003 6.7
Weighted averages:
- Average 1 month 7.0
- Average 3 months 6.9
- Average 6 months 7.1
- Average 12 months 6.9
--------------------------------------------------------------
Sum-of-parts method 6.9
--------------------------------------------------------------
On the basis of the valuation methods applied to the companies participating to
the merger described above, the Directors identified the following exchange
ratio, so called "natural", corresponding to the exchange ratio that would
result, had the merger been realized without re-distribution, but through the
issuance of new shares to service the exchange:
7 ordinary shares of Olivetti, with a par value of Euro 1.00 (one) each,
for each ordinary share of Telecom Italia with a par value of Euro 0.55
each;
7 savings shares of Olivetti, with a par value of Euro 1.00 (one) each,
for each ordinary share of Telecom Italia with a par value of Euro 0.55
each.
11
6.4. Procedures for assigning the shares and carrying out the share exchange
As previously described, the Directors considered advisable to leave the
nominal capital of Olivetti basically unchanged at the completion of the
transaction. Accordingly, they proposed that the share exchange be carried out
primarily by redistributing Olivetti's capital, with recourse to the issue of
new shares only insofar as this is required to maintain the share capital at
the current level.
The redistribution technique consists of dividing the share capital of the
absorbing company and hence the shares composing it among the shareholders of
the absorbing company and those of the company to be absorbed, according to the
so called "natural" exchange ratio between the shares.
The redistribution takes the share capital of the absorbing company at the time
the merger is implemented as the baseline.
The amount of capital will be determined and the share exchange transaction
will be carried out according to the following methodologies:
a) Olivetti will set the nominal value of its shares - in the amount resulting
after the conversions and withdrawals - at Euro 0.55 (equal to the par
value of Telecom Italia shares), in place of the current par value of Euro
1.00. Accordingly, Olivetti's share capital will be divided into a larger
number of shares. Such shares will be divided into ordinary shares and
savings shares, the latter category with the same rights and features of
the Telecom Italia savings shares;
b) the new ordinary and savings shares with a par value of Euro 0.55 each
constituting the share capital at the time of the merger of Olivetti will
be redistributed, respectively, to the holders of Olivetti and Telecom
Italia ordinary shares and the holders of Telecom Italia savings shares
according to the assignment ratios reflecting, with reference to the
actual number of shares to be redistributed, the so called "natural"
exchange ratio of 7 Olivetti ordinary or savings shares for each Telecom
Italia ordinary or savings share.
The variables represented by conversions, exercise of stock options,
withdrawals and acceptances of the tender offer can only be quantified exactly
at the time the merger is effective. Accordingly, the determination of the
assignment ratio for the purpose of redistribution can be established precisely
only at the time the merger becomes effective.
At the end of the merger transaction, the ratio between the shares assigned to
the Olivetti shareholders and those assigned to the Telecom Italia shareholders
will exactly reflect the "natural" exchange ratio between the shares of the two
companies prior to the merger (1/7) determined above.
12
7. WORK DONE
7.1. Work done on the "documentation utilized" as mentioned at point 3.
The valuation methods applied by the Directors, also on the basis of the
indications of their Professional Advisors, take as a reference basis the draft
financial statements of the Companies as at December 31, 2002, in accordance
with art. 2501 ter of the Italian Civil Code. It should be noted that the
statutory and consolidated financial statements of Telecom Italia and of
Olivetti as at December 31, 2002, were audited by us.
In addition, we have performed the following activities:
- We have met with the Telecom Italia management to obtain information on
the subsequent events with respect to the financial statements mentioned
above that could have a significant effect on the amounts being examined
here;
- With regard to the three-year plan 2003 - 2005 and cash flow forecasts of
Telecom Italia, while considering the inherent uncertainty and limits of
any type of forecast, we have discussed with the management of Telecom
Italia the main characteristics of the forecasting process and the
criteria used for their compilation.
The above activities have been performed to the extent necessary for the
purpose of our engagement, indicated in paragraph 1 above.
7.2. Work done on the methods used to determine the exchange ratio
We have examined the methods followed by the Directors, also based on the
indications given by their Professional Advisors, for the determination of the
relative value of the Companies and, thus, of the exchange ratios, ascertaining
their technical suitability under the circumstances.
We have also performed the following procedures:
- analysis of the Directors' report and of the Professional Advisors reports
to verify the completeness and consistency of the processes followed by
the Directors in the determination of the exchange ratio, as well as the
homogeneity in the application of the valuation methods;
- sensitivity analyses within the valuation methods adopted, with the aim to
verify to what extent the exchange ratio would be affected by changes in
the assumptions and parameters, considered as significant, utilized in the
reports of the Professional Advisors;
- verification of the consistency of data utilized, with respect to the
reference sources and with the "Documentation used", described in
paragraph 3 above;
13
- verification of the mathematical correctness of the computation of the
exchange ratio, by applying the valuation methods adopted by the
Directors, also on the basis of the indications from their Professional
Advisors;
- meetings with the Professional Advisors of Telecom Italia, to discuss the
activities performed, the matters encountered and the solutions adopted.
We have also obtained representation that, to the management of Telecom Italia
best knowledge, no significant changes occurred in the data and information
considered in our analyses.
8. COMMENTS ON THE SUITABILITY OF THE METHODS USED AND THE ACCURACY OF THE
ESTIMATES
With reference to this engagement we believe it is worth noting that the
principal purpose of the decisional process used by the Directors was to make
an estimate of relative values of the companies involved in the merger, by
applying homogeneous criteria, in order to obtain comparable values. In fact,
the main objective of valuations for mergers is to identify comparable values
in order to determine the exchange ratio, rather than to determine absolute
values of the companies involved. As such, valuations for merger transactions
have a meaning solely in respect of their relative profile and cannot be
regarded as estimates of the absolute values of the companies involved, for
transactions different from the merger and for which they were not made.
In connection with the valuation methods adopted, we note that:
- they are widely spread in Italian and international practice, they have
solid doctrinal bases and are based on parameters determined according to
a rigorous methodology process;
- they appear adequate in the circumstances, in light of the characteristics
of the companies involved in the merger;
- in conformity with the valuation context required for a merger, the
methods have been developed on a stand alone basis;
- the methodology approach adopted by the Directors allowed to meet the
criterion of homogeneity of valuation methods and thus that of
comparability of values;
- the application of a principal method and of a control method allowed, in
any case, to enlarge the valuation process and to verify the results
obtained.
With reference to the development of the valuation methodologies made by the
Directors, we note that:
- the stock-market prices method is particularly suitable in connection with
companies with a high capitalization, an ample and spread floating and
high
14
volumes of exchange. In this case, the adoption of averages over a
sufficiently long period of time allowed to mitigate the effect of shares
fluctuations, connected to the general situation of the stock markets; the
results are confirmed also by expanding the analysis over 18 months;
- the sum-of-parts method is generally applied by professional practice in
the valuation of complex enterprises, characterized by various areas of
business. In the specific case, the utilization of the DCF method allowed
to appreciate the operational characteristics of the companies
participating to the merger. The selection of the DCF method for the main
business areas of Telecom Italia is justified by the activity carried on
which turns both the balance sheet and the economic and financial aspects
into relevant elements for the valuation process;
- the results obtained with the sum-of-parts method, utilized by the
Directors for verification purposes, are supported by the analysis of the
"consensus" expressed by financial analysts on target prices of Telecom
Italia in the three months preceding the announcement of the transaction;
- lacking the historical data for Olivetti, the determination of the
exchange ratio for the savings shares of Telecom Italia, provided for in
the merger, even in consideration of the limits of the empirical process
described in paragraph 4.2, is appropriate under the circumstances and in
any case objective.
9. SPECIFIC LIMITATIONS ENCOUNTERED BY THE AUDITORS IN CARRYING OUT THE
ENGAGEMENT
During our engagement we did not encounter limitations or difficulties that
should be mentioned in this section of the report.
15
10. CONCLUSION
Based on the documentation we have examined and on the procedures described
above, and considering the nature and extent of our work as described in this
report, we believe that the valuation methods adopted by the Directors, also
based upon the advice of their Professional Advisors are, under the
circumstances, reasonable and not arbitrary and they have been correctly
applied by them in their determination of the following exchange ratio of
shares:
7 Olivetti ordinary shares, with a par value of Euro 1.00 (one) each, for
each ordinary share of Telecom Italia, with a par value of Euro 0.55 each,
7 Olivetti saving shares, with a par value of Euro 1.00 (one) each, for
each savings share of Telecom Italia, with a par value of Euro 0.55 each,
indicated in the plan for the merger.
Milan, April 22, 2003
Reconta Ernst & Young S.p.A.
Signed by Giovanni Aspes, partner
16
PROPOSAL TO THE SHAREHOLDERS' MEETING
The meeting of ordinary shareholders of Telecom Italia S.p.A.,
o having seen the plan for the merger of Telecom Italia S.p.A. into Olivetti
S.p.A., entered respectively in the Turin Company Register and the Milan
Company Register on April 18 and 22, 2003 (the Merger Plan);
o having examined the Directors' report on the merger operation (the
Merger);
o having taken note of the balance sheets of the companies participating in
the Merger, as shown in their draft financial statements for the year
ended 31 December 2002;
o having taken note of the reports on the congruousness of the merger
exchange ratio prepared by the auditing firms Deloitte & Touche Italia
S.p.A. for Olivetti and Reconta Ernst & Young S.p.A. for Telecom Italia;
o having taken note of the timely filing of the documentation required under
the applicable law;
resolves
1. to approve the Merger Plan and consequently to proceed - with the
accounting and tax effects starting on 1 January of the year in which the
Merger becomes effective in respect of third parties, as provided for in
the Merger Plan - with the merger of Telecom Italia S.p.A. into Olivetti
S.p.A. (the Absorbing Company) on the basis of the following exchange
ratio:
o 7 Olivetti ordinary shares with a par value of Euro 1 (one) for every
Telecom Italia ordinary share with a par value of Euro 0.55 each;
o 7 Olivetti savings shares with a par value of Euro 1 (one) for every
Telecom Italia savings share with a par value of Euro 0.55 each;
with the effectiveness of the whole operation subject (i) to the adoption
by the shareholders' meeting of Olivetti of a like resolution and (ii) to
the admission to listing on the MTA electronic share market operated by
Borsa Italiana S.p.A. of the savings shares to be issued by the Absorbing
Company, taking note that the Olivetti shares with a par value of Euro 1
each (net of those for which the right of withdrawal has been exercised)
will be withdrawn and that new ordinary and savings shares will be issued
with a par value of Euro 0.55 each and regular dividend entitlement, in
the number resulting from their assignment to Olivetti shareholders and
Telecom Italia shareholders other than Olivetti in accordance with the
following criteria:
A. satisfaction of the exchange ratio between the economic values
underlying the Olivetti and Telecom Italia shares by redistributing
Olivetti's capital at the time of the implementation of the Merger,
net of the Olivetti shares with a par value of Euro 1 (one) for which
the right of withdrawal has been exercised, subsequent to the change
in the par
value of the shares of the Absorbing Company from Euro 1 to Euro
0.55, and thus by applying the following assignment ratios:
o for every Olivetti share (with a par value of Euro 1) withdrawn
and cancelled, assignment of "x" newly-issued ordinary shares of
the Absorbing Company (with a par value of Euro 0.55 each);
o for every Telecom Italia ordinary share (with a par value of
Euro 0.55) withdrawn and cancelled, assignment of "7x"
newly-issued ordinary shares of the Absorbing Company (with a
par value of Euro 0.55 each);
o for every Telecom Italia savings share (with a par value of Euro
0.55) withdrawn and cancelled, assignment of "7x" newly-issued
savings shares of the Absorbing Company (with a par value of
Euro 0.55 each);
where the number "x" is the ratio between
> the total number of shares of the Absorbing Company with a par
value of Euro 0.55 each to be redistributed and
> the sum of (i) the total number of Olivetti shares with a par
value of Euro 1 outstanding (for which the right of withdrawal
has not been exercised) at the time of the implementation of the
Merger and (ii) 7 times the total number of Telecom Italia
shares to be exchanged at the time of the implementation of the
Merger;
B. assignment, if necessary, to all the holders of the Absorbing
Company's ordinary and savings shares, in proportion to their
respective holdings following the redistribution and therefore on the
basis of the above-mentioned exchange ratio, of up to a maximum of
11,103,237,961 new shares, of the same class as the shares already
assigned under the redistribution, with a par value of Euro 0.55 each
(and thus up to a total maximum amount of Euro 6,106,780,879.10)
until the share capital of the Absorbing Company reaches a total of
Euro 8,845,537,520.05.
A service will be provided to shareholders to handle any fractions of
shares, without prejudice to any rounding deriving from the aforesaid
assignment operations;
2. to grant severally to the Chairman, the Deputy Chairman and each of the
Managing Directors the powers needed:
(a) to complete all the formalities required for the resolutions adopted
to obtain all the necessary authorizations, with the right to approve
and introduce into such resolutions, the Merger Plan and the Bylaws
of the Absorbing Company annexed thereto any amendments, additions or
deletions that may be requested or suggested by administrative
authorities and/or following the exercise of the special powers
referred to in Article 5 of the bylaws of Telecom Italia S.p.A. or on
the occasion of filings with the Company Register;
(b) to draw up and sign, inter alia by having ad hoc recourse to
attorneys or agents, in conformity with the resolution of point 1,
the public merger instrument, defining every agreement, condition,
clause, time limit and procedure thereof in conformity with and in
implementation of the Merger Plan;
(c) to do - inter alia by having ad hoc recourse to attorneys or agents -
whatever else may be necessary for and conducive to the complete
implementation of the foregoing resolutions, authorizing entries,
transcriptions, annotations, amendments and corrections in public
registers and every other competent seat.
Appointment of the Board of Auditors - related and consequent resolutions
Dear shareholders,
the mandate of the Company's Board of Auditors has expired. Accordingly, even
though the merger of Telecom Italia into Olivetti (on the agenda of the
extraordinary part of the meeting) will entail the termination of all the
Company's governing bodies, it is necessary to appoint a new Board of Auditors
on the basis of the bylaws currently in force.
The resolutions to be approved consequently concern:
o the number of members of the Board (from a minimum of five to a maximum of
eight auditors);
o the establishment of their annual retribution; and
o the appointment of the auditors and the alternates.
As regards the selection mechanism, it should be noted that, following the
termination of the agreements connected with the concession for the provision
of the public telecommunications service, the designation rights previously
pertaining to the Minister of the Treasury (now the Minister for the Economy
and Finance) and the Minister for Communications and still referred to in the
second paragraph of Article 17 of the bylaws no longer apply. The same
provision also refers to the appointment rights pertaining to the Minister for
the Economy and Finance under subparagraph d) of the first paragraph of Article
5 of the bylaws; in this case, the right (one of the special powers introduced
in the bylaws in accordance with Article 2(1) of Decree Law 332/1994, ratified
with amendments by Law 474/1994), remains effective until the Minister in
question decides otherwise, and no such decision had been notified as of the
date this report was approved.
With this premise, the Board of Auditors will be appointed in accordance with
the procedure established in the bylaws for the appointment of the Board of
Directors, on the basis of slates submitted by shareholders who, alone or
together with other shareholders, hold a total number of shares representing at
least 1% of the share capital entitled to vote at the Ordinary Shareholders'
Meeting.
In the light of the foregoing, the Board of Directors,
o having regard to the applicable provisions of laws, regulations and these
bylaws regarding the number, term of office, appointment and remuneration
of the members of the Board of Auditors;
o having taken note of the expiry of the Board of Auditors appointed by the
Shareholders' Meeting of 3 July 2000;
o having recommended that shareholders who intend to submit a slate for the
selection of auditors and alternates should make a curriculum vitae
available for each candidate setting out their main personal and
professional data;
invites the meeting
1. to establish the number of auditors and their annual remuneration;
2. to choose a slate from among those submitted and publicized in the manner
and within the time limits established in the bylaws in compliance with
the rules and limits established therein.
Annex VI.
Report of the auditing firm Deloitte & Touche Italia S.p.A.
pursuant to Article 2501-quinquies of the Civil Code
OLIVETTI S.p.A.
REPORT ON THE FAIRNESS OF THE RATIO
FOR THE EXCHANGE OF SHARES RELATED
TO THE PROPOSED MERGER OF TELECOM
ITALIA S.p.A. INTO OLIVETTI S.p.A.
PURSUANT TO ART. 2501 QUINQUIES OF
THE ITALIAN CIVIL CODE.
(Translation of Original Issued in Italian)
Deloitte
& Touche
To the Shareholders of
Olivetti S.p.A.:
1. OBJECTIVE, SUBJECT AND SCOPE OF THE ENGAGEMENT
In the context of the proposed merger of Telecom Italia S.p.A.
(hereinafter also Telecom Italia or the Absorbed Company) into Olivetti
S.p.A. (hereinafter also Olivetti or the Absorbing Company; Olivetti,
subsequent to the effective date of the merger, is also defined as the
"Company Resulting from the Merger"), on March 18, 2003, we were appointed
by the President of the Ivrea Tribunal, following the petition presented
by Olivetti, as experts for the preparation of the report on the fairness
of the ratio for the exchange of the shares of the Absorbed Company with
those of the Absorbing Company, in accordance with Article 2501 quinquies,
last paragraph, of the Italian Civil Code.
To this end, we have received from the Board of Directors of Olivetti the
proposed merger project together with the report prepared by the Board
which identifies, explains and justifies in accordance with Article 2501
quater of the Italian Civil Code the exchange ratio as well as the Balance
Sheet situation as of December 31, 2002, prepared in accordance with
Article 2501 ter, last paragraph, of the Italian Civil Code.
The proposed merger project will be subject to approval at the
Extraordinary General Meeting of the Shareholders of Olivetti called for
the days of May 24, 25 and 26, 2003, in first, second and third
convocation, respectively. In the same way, the Shareholders of Telecom
Italia will also be required to be called to deliberate at an
Extraordinary General Meeting.
The audit firm Reconta Ernst & Young S.p.A. has been appointed to prepare a
similar report on the fairness of the ratio for the exchange of shares for
Telecom Italia.
In order to provide the Shareholders with suitable information regarding
the ratio for the exchange of shares, this report indicates the methods
followed by the Directors for its determination and the valuation
difficulties encountered by them; it also contains our evaluation of the
adequacy in the circumstances of such methods, from the point of view of
their reasonableness and non-arbitrariness, on the relative importance
attributed to each method by the Directors and on their correct
application.
In examining the valuation methods adopted by the Directors, also on the
basis on the indications of the Advisor used by them, we have not
performed an economic valuation of the Companies. Such valuation has been
performed exclusively by the Directors and the Advisor.
2
2. SUMMARY OF THE OPERATION
The Boards of Directors of Olivetti and Telecom Italia have prepared a
project aimed at simplifying the corporate structure of the Olivetti
Group, as summarized in the following points:
o Merger of Telecom Italia into Olivetti and adoption of the corporate
object and name of Telecom Italia by Olivetti.
o Obtaining, on the part of Olivetti, of a credit line up to Euro 9
billion to meet the financial requirements deriving from eventual
withdrawal requests by Olivetti Shareholders communicated in
accordance with Article 2437 of the Italian Civil Code, and to
promote the public offering discussed in the following point.
o The Euro 9 billion financing not eventually utilized for the
aforementioned withdrawal of Olivetti Shareholders will then be
destined to promote a voluntary and partial public offer by Olivetti
to acquire Telecom Italia shares (OPA). The purchase price of the OPA
will be equal to the average of the share price in the period between
March 12 and the date of the Meeting of Olivetti called to approve
the merger, increased by a premium of 20%, with a minimum and
maximum, respectively, of Euro 7.0 and Euro 8.4 for each ordinary
share and Euro 4.7 and Euro 5.65 for each savings share. The right of
withdrawal and OPA are both subordinate to the realization of the
merger.
o Distribution of reserves by Telecom Italia prior to the completion of
the merger, up to a maximum amount estimated to approximate Euro
1,333 million.
o The merger will result in the elimination of the investment held by
Olivetti in the capital of Telecom Italia, and the capital of
Olivetti, which will result as of the effective date of the merger,
will be re-determined in relation to the reduction in the nominal
value of the shares (which will pass from Euro 1.OO to Euro 0.55),
to their division between ordinary and savings shares (a category
that will be introduced in the new articles of incorporation of the
Absorbing Company subsequent to the merger) and to the eventual need
to maintain the present consistency in terms of absolute value. After
having been so divided, the capital of the Company Resulting from the
Merger will be re-allocated between the Shareholders of Olivetti and
the Shareholders of Telecom Italia on the basis of an allotment ratio
which will reflect the ratio of exchange between the shares of
Olivetti and the ordinary and savings shares of Telecom Italia. In
particular, with regard to way of allotment of the Olivetti shares,
the report of the Olivetti Board of Directors informs that
considering the adequacy of Olivetti's share capital - in relation
also to the overall size of the debt when this is measured against
the cash generating capacity of the Company Resulting from the
Merger, both in absolute terms and relative to the main European
competitors - it was decided to carry out the share exchange
primarily by redistributing Olivetti's capital and have recourse
3
to the issue of new shares only insofar as this proved necessary to
maintain the share capital at the level currently subscribed. The
redistribution technique consists in dividing the share capital of
the Absorbing Company among the shareholders of the Absorbing Company
and those of the Absorbed Company, in accordance with the "natural"
exchange ratio between the shares. In the light of the method and
principles described in paragraph 4 below, the share capital will be
established and the share exchange operation carried out according to
the following rules:
- Olivetti will fix the nominal value of its shares - in the
amount resulting after conversions on the one hand and
withdrawals on the other - at Euro 0.55 (equal to the par value
of Telecom Italia shares), in place of the current par value of
Euro 1. Consequently, Olivetti's share capital will be divided
into a larger number of shares. Such shares will be divided into
ordinary shares and savings shares;
- the new ordinary and savings shares with a par value of Euro 0.55
each making up the share capital of Olivetti at the time of the
merger will be redistributed, respectively, to the holders of
Olivetti and Telecom Italia ordinary shares and the holders of
Telecom Italia savings shares according to assignment ratios
reflecting, with reference to the actual number of shares to be
redistributed, not known as of to-day, the "natural" exchange
ratio, by which for each Telecom Italia share of par value Euro
0.55 will correspond 7 Olivetti shares of par value Euro 1.
3. DOCUMENTATION UTILIZED
In the performance of our work we have obtained the documents and the
information considered useful in the circumstances. To this end we have
analyzed the documentation and information received, and in particular:
o The merger project and the reports of the Boards of Directors of the
two Companies addressed to the respective Extraordinary General
Meetings which, on the basis of the draft financial statements as of
December 31, 2002, taken as the basis for the reference financial
position, propose a ratio for the exchange of 7 Olivetti shares for
each Telecom Italia share, following the planned distribution of
reserves. This ratio for the exchange of shares has been determined
by the Directors also using the indications resulting from the
reports discussed in the following point.
o The reports on the ratio for the exchange of shares prepared by
JPMorgan appointed by Olivetti and by Lazard and Goldman Sachs for
Telecom Italia (also described below as "Advisors"), dated March 1 1,
2003, and updated on April 15, 2003. These reports detail the
valuation criteria adopted, the work performed and
4
the conclusions reached. In addition, we have examined the report of
Prof. A. Provasoli, requested by Olivetti to check the consistency
and relevancy with respect to the finalities of the operation of the
valuation criteria applied by JPMorgan for the determination of the
ratio for the exchange of shares.
o The following documentation, used by JPMorgan for the preparation of
its report and subsequently also by us, for the performance of our
engagement:
- the consolidated financial statements and Company financial
statements for 2001 and the draft financial statements for 2002
of Olivetti, Telecom Italia, Telecom Italia Mobile, Seat Pagine
Gialle;
- the half-year and quarterly reports of the years 2001 and 2002
of Olivetti, Telecom Italia, Telecom Italia Mobile, Seat Pagine
Gialle;
- the Group Business Plan of Telecom Italia 2003-2005 (January
2003 version) and the related updates;
- the condensed Business Plan 2003-2005 of Olivetti Tecnost;
- research and financial analyses published by specialized
institutes and investment banks;
- research and analyses related to companies which are comparable
or have similar operating characteristics;
- stock market trends;
- other detailed documentation on specific aspects which Olivetti
provided to the Advisor in the course of their work.
o Further documentation obtained and information received are:
- the reports of the audit firm Reconta Ernst & Young S.p.A. and
analyses of certain work papers and information obtained
verbally from the firm relating to the audit of the financial
Statements for 2002 of the Companies involved in the merger;
- accounting and statistical elements as well as other information
publicly available considered useful for the purposes of this
report.
We have also obtained representation that, as far as the Management of the
Company are aware, there have been no significant changes to the data and
information taken into consideration in the performance of our analyses.
5
VALUATION METHODS ADOPTED BY THE BOARD OF DIRECTORS
The Directors of Olivetti, also on the basis of the indications of its
Advisor, in consideration of the significance and complexity of the merger
operation, considered it appropriate to identify valuation methods which,
as well as having consolidated authoritative and applicative bases, would
enable the two Companies to be valued in a homogeneous manner. In
particular:
o Since the exclusive aim of the estimates is to establish
significantly comparable values, the methods adopted in the context
of valuations for merger purposes and the related results may differ
from those used for valuations having a different purpose. On the
basis of these assumptions and as a consequence of the adoption of
the redistribution method for the assignment of the shares of the
Company Resulting from the Merger, summarized in paragraph 2 above,
it is first necessary to establish a "natural" exchange ratio between
the shares of the two Companies, corresponding to the exchange ratio
that would have been applied if the merger had involved the issue of
new shares for the purpose of the exchange. This "natural" exchange
ratio will correspond to a variety of assignment ratios, which will
depend on other variables and in particular on the change in the
nominal value of the shares, the number of withdrawals and
conversions and total amount of share capital. With this premise, the
"natural" exchange ratio was established by applying valuation
methods that are commonly used, also internationally, for operations
of this kind and for businesses in this sector. In particular,
account was taken of the comparative valuation of the Companies
involved and priority given to the homogeneousness and comparability
of the methods used with respect to the simple estimate of the
economic capital of each Company considered on its own. In this
perspective, the valuations were carried out considering the two
Companies as separate entities and therefore ignoring all the
strategic, operational and financial synergies expected from the
merger, as well as the question of control premiums/minority
discounts associated with the possession of equity interests.
o Telecom Italia has been valued applying, as the basic method, the
criterion known as the Sum of Parts (SOP) method, which it is
standard market practice to use to estimate the value of a group
operating in several sectors. Under this method the value of a
company's economic capital is calculated as the sum of the values of
its separate units, in the sense of economic entities that can be
valued independently and suitably adjusted to take account of the
company's net financial position and minority interests where
material as well as other factors such as off-balance-sheet items and
potential tax benefits. It was considered appropriate to use this
method in view of the numerous areas in which Telecom Italia is
active. As regards the single units, the Board of Directors of
Olivetti
6
decided that it was advisable to value each of them using the methods
deemed most appropriate to each situation. In particular, the
valuation of the principal units was based primarily on the
Discounted Cash Flow method, following the logic of determining the
fundamental value for the financial investor, on the basis of the
following methodological approach:
- reference was made to the cash flows of the individual units as
set out in the economic and financial plans drawn up by Telecom
Italia;
- the growth rates used for the financial projections beyond the
time horizon of Telecom Italia's business plan and for the
calculation of the terminal value reflect growth prospects
consistent with the relevant market benchmarks; the terminal
value, determined on the basis of the flows estimated in the
manner indicated, is basically consistent with the multiples
implicit in the current prices of comparable companies;
- the weighted average cost of capital (WACC) was calculated on
the basis of a capital structure basically in line with the
present one.
The remaining activities (not valued applying the Discounted Cash Flow
method), which have a limited weight within the overall valuation, have
been valued using the stock market price method for companies listed on
regulated markets and/or the market multiples method, with use also made
for testing and control purposes of financial statement values and the
values published in analysts' research reports on such companies, where
available.
o Olivetti has been valued applying, as the basic method, the Net Asset
Value (NAV) criterion - an approach substantially equivalent to the
Sum of Parts criterion from a methodological point of view - since
commonly considered the most suitable for the valuation of a holding
company without significant operations. At the basis of the NAV
criterion, the value of the economic capital of a company is
determined as the sum of the values of the equity investments and of
its other assets, appropriately adjusted to take into account the net
financial position of the company and third party interests where
significant, as well as other aspects, including those relative to
the central costs of the holding, off-balance sheet items and
potential tax benefits. In the specific case, for the purposes of
such computation, the principal equity investment is that in Telecom
Italia, which has been valued using the Sum of Parts method
(described above), adjusted for the effect of the distribution of
reserves planned for June 2003. The other equity investments and
assets were valued using the Discounted Cash Flow method (Olivetti
Tecnost). the stock market price method for
7
companies listed on regulated markets and/or the market multiples
method, with use also made for testing and control purposes of
financial statement values and the values published in analysts'
research reports on such companies, where available. To the sum of
the values of the assets and the Tax Asset, described more fully
below, was added the value of the net financial position as of
December 31, 2002, adjusted for the effect of Telecom Italia's
distribution of reserves planned for June 2003. Finally, account was
taken of the pro forma effect of the conversion of the "Olivetti 1.5%
2001-2010 convertibile con premio a1 rimborso" convertible bonds,
consistently with the fully-diluted method, which assumes the
conversion into ordinary shares (the price of such conversion, equal
to Euro 1 per bond, is lower than the value of the economic capital
per Olivetti ordinary share obtained using the Net Asset Value
valuation method).
o In addition, the Board of Directors of Olivetti has tested the ratio
of exchange for shares resulting from the application of the above
methods by using, as the control method, the stock market prices
method. This method expresses the value of the enterprise on the
basis of the share prices negotiated on regulated stock markets. In
particular, the stock market prices method is considered significant
when the average volumes traded are large, since in such
circumstances the value attributed by the market represents a
reference which is certainly of significance in the relative
assessment of profiles of profitability, patrimonial solidity, growth
prospects and riskiness. In applying this method it is necessary to
strike a balance between the need to mitigate the volatility of daily
share prices by considering a sufficiently long period and the need
to use recent data that are indicative of the market values of the
companies in question. Since both Telecom Italia and Olivetti are
listed on Borsa Italiana's MTA electronic share market and are among
the largest Italian companies in terms of market value, the Board of
Directors considered that the stock market prices of their securities
constituted a reliable benchmark and reference was made to the
average exchange ratio (Olivetti ordinary shares per Telecom Italia
ordinary share) obtaining in the market in different periods prior to
the day on which Borsa Italiana S.p.A. suspended trading in the
Olivetti and Telecom Italia securities in view of the forthcoming
announcement of the Operation (data as of March 7, 2003 and the
weighted averages of the official prices in the preceding 1, 3, 6 and
12 months).
In the application of the valuation methods described above, the Directors
of Olivetti have taken into account the following:
o The valuations of the tax assets generated from the adjustments to
the values of the controlling equity investments held by Olivetti
and Telecom Italia, respectively, Telecom Italia itself and Seat
Pagine Gialle have been made on the basis of the expected taxable
income and limits effectively utilizable by the
8
Companies, independent of the realization of the merger operation. In
this respect, it should be noted that: (a) the adjustments made to
the investment in Telecom Italia were made to obtain tax benefits not
otherwise available; (b) those regarding Seat Pagine Gialle, of an
economic nature, are, among other things, the result of the decision
of Telecom Italia to consider no longer strategic the Directories
business of Seat Pagine Gialle. This has been taken into account in
the application of the SOP and NAV methodologies used, respectively,
for Telecom Italia and Olivetti.
o Since there are no Olivetti savings shares as of to-day, the
hypothesis has been made that the quotations of the savings shares of
the Company Resulting from the Merger may reflect a discount
analogous to that recognized by the market to the Telecom Italia
savings shares with respect to the ordinary shares. This discount was
quantified in the measure of 33% as illustrated below in paragraph 6.
This has been taken into account in the determination of the ratio
for the exchange of shares applicable to the Telecom Italia savings
shares, calculated applying both the basic SOP and NAV methods and
the stock market price method.
o In the determination of the values attributed to Olivetti, the
Directors decided not to calculate the NAV on the basis of the
current stock market prices of the investment held by Olivetti in
Telecom Italia since, in the contest of a valuation made to determine
an exchange ratio, having considered appropriate the valuation of
Telecom Italia on the basis of the fundamental methodology (SOP), the
valuation of the investment Telecom Italia within the context of the
valuation of Olivetti with the NAV method must also be based on a
fundamental methodology, in order to assure the homogeneity of
criteria adopted and the overall reliability of the valuation
conclusions. On the contrary, the calculation of the NAV of Olivetti
based on the stock market quotations of Telecom Italia would be
characterized, apart from the lack of homogeneousness of the criteria
adopted, also by the high volatility determined by the financial
lever present in Olivetti, which would render the resulting valuation
unreliable.
o The Olivetti own shares and the Olivetti shares held by the
subsidiary Olivetti International S.A. have been valued at the
implicit final value resulting from the Net Asset Value of Olivetti.
o The values attributed to Olivetti and Telecom Italia for the purpose
of determining the ratio for the exchange of shares take account of
the planned distribution of reserves by Telecom Italia up to a
maximum of about Euro 1,333 million, since the timing of the merger
provides that the share exchange will take place subsequent to the
payment of these reserves.
9
o Lastly, account was taken in determining the exchange ratio of the
eventuality of the exercise of financial instruments giving rise to
the subscription of Olivetti and Telecom Italia shares (stock
options, convertible bonds and warrants) exclusively to the extent
that their exercise was reasonable likely in the light of the related
economic and financial benefits.
The choice of the methods and valuation criteria adopted by the Board of
Directors of Telecom Italia is substantially in line with that adopted by
the Olivetti Board, with the clarification that the Telecom Italia
Directors have used, with equal weight, the stock market price method (as
the principal method) and the Sum of Parts method (as the control method).
5. VALUATION PROBLEMS ENCOUNTERED BY THE DIRECTORS
In making the valuations, as described in their report, the Olivetti
Directors encountered the following main difficulties:
o The valuations were made assuming that the present tax system will
remain in force in the future. The tax reform under way envisages a
series of changes (including new rates, consolidation for tax
purposes and the abolition of Dual Income Tax, etc.), whose effects
are difficult to assess.
o The estimation of the value of the savings shares assigned by the
Company Resulting from the Merger for the purpose of the exchange was
based on the differential found between the stock market prices of
Telecom Italia ordinary and savings shares. As explained in detail in
the report, the decision to differentiate the estimated values of the
shares of different classes according to the differences between
their market prices is consistent with standard practice in this
field. However, even though in the case in question there were no
objective elements permitting any other solution, some empirical
analyses have shown that the differentials between the prices of
ordinary and savings shares tend to be larger for companies, such as
the Company Resulting from the Merger, where control is contestable.
In such cases, in fact, the importance of the administrative rights
exceeds that of the property rights. This principle, however, is not
applicable objectively to the case in question in the absence of
historical data regarding Olivetti and it would only be possible to
estimate its effects generically on the basis of data regarding
comparable companies. Acting in the opposite direction to the
foregoing, is both the increase in the property rights attached to
the savings
10
shares as a result of the planned introduction of more extensive
property rights which will be introduced with the Meeting called to
deliberate the Merger and the fact that to each Savings Shareholder
of Telecom Italia will be assigned, for each Telecom Italia savings
share held, more than one savings share of the Company Resulting from
the Merger (in proportion to the exchange ratio).
o The own shares held by Olivetti and the Oiivetti shares held by the
subsidiary Olivetti International S.A., which can be likened to own
shares, were valued on the basis of the overall economic value of
Olivetti itself. This approach assumes that the economic value is the
same as the realizable value, i.e. the market value, of the shares in
question, an assumption that has not always been true in practice.
However, the valuation method adopted comes close to one of the
technical solutions suggested by the literature and practice, which
recommend treating own shares as early retirement of capital and
accordingly setting their value equal to zero and calculating the
value per share with reference to a smaller number of shares than the
total issued, equal to those actually in circulation.
o At the present time it is not possible to make an accurate forecast
of the outcome of the proposed disposal of the new company that will
be created as a result of the spin-off of Seat Pagine Gialle. It is
nonetheless considered, in view of the percentage of Telecom Italia's
overall value accounted for by its equity investment in Seat Pagine
Gialle, that the disposal cannot produce effects requiring the
exchange ratio to be changed.
o In view of the size of the holding in Telecom Italia, the Directors
of Olivetti, with the help of the Advisor, have made a careful
analysis of the arguments put forward by some institutional investors
regarding the application of the NAV method to Olivetti, as a holding
company whose most important asset is the holding in Telecom Italia
and with special reference to the appropriateness of valuing that
holding on the basis of stock market prices. Given the purpose of
the valuation, the Directors, whilst recognizing the complexity of
the question, have decided to adopt uniform criteria for both the
Companies and thus to use for the valuation of Olivetti the same
method used for the valuation of Telecom Italia (Sum of Parts).
6. RESULTS OF THE VALUATION PERFORMED BY THE DIRECTORS
In the light of the indications provided by JPMorgan, the Board of
Directors of Olivetti, using the principal method (SOP and NAV) has
identified the following estimated interval of the ratio for the exchange
of shares, calculated as a quotient between the value estimated per
Telecom Italia shares and the value estimated per Olivetti shares (rounded
data):
11
Minimum Mean Maximum
----------------------------------
(Exchange ratio)
Olivetti ordinary shares per Telecom
Italia ordinary share 6.6 6.9 7.2
Olivetti savings shares per Telecom
Italia savings share 6.6 6.9 7.2
In particular, the above reflects, allocated in the respective categories
of "Minimum, Mean and Maximum", the ratios between the following values of
the shares of the Companies involved in the merger (rounded data):
Minimum Mean Maximum
----------------------------------
(Euro)
Value per Telecom Italia
ordinary share, after
distribution of reserves (a) 8.1 8.6 9.1
Value per Telecom Italia
savings share (b) 5.4 5.8 6.1
Value per Olivetti ordinary
share (c) 1.13 1.26 1.39
Value per Olivetti savings
share (d) 0.76 0.84 0.93
a) Minimum, mean and maximum values of Telecom Italia ordinary shares
determined using the principal method SOP, adjusted for the effect of
the distribution of the reserves planned for month of June 2003.
b) Minimum, mean and maximum values of Telecom Italia savings shares
calculated on the basis of the average market discount of the last
month prior to the announcement of the Operation (March 7, 2003),
equal to circa 33%, which is in line with the discount on the last
trading day of Olivetti and Telecom Italia shares before March 7,
2003, and substantially in line with the average discount of the last
3, 6 and 12 months.
c) Minimum, mean and maximum values of Olivetti shares determined using
the NAV method.
d) Minimum, mean and maximum values of the savings shares of the Company
Resulting from the Merger, calculated assuming the above discount of
33% relative to the savings shares of Telecom Italia.
12
The minimum, mean and maximum values of the Telecom Italia ordinary
shares, determined using the principal method SOP, prior to the
distribution of the reserves planned for the month of June 2003, are the
following (rounded data):
Minimum Mean Maximum
-----------------------------------
(Euro)
Value per Telecom Italia ordinary
share 8.3 8.8 9.3
The above results were tested by analyzing the target prices identified by
financial analysts. The research reports published by specialized
institutes and investment banks available at March 7, 2003, which gave a
sample of 20 target prices for the Telecom Italia ordinary share, showed a
mean value of Euro 9.2 per Telecom Italia ordinary share, a value within
the above range.
Moreover, in order to test the accuracy of the exchange ratio obtained in
the manner described above, the Board of Directors of Olivetti, with the
help of its Advisor, made a further test using the method based on stock
market prices, on the basis of the ratio between the average exchange
ratio (Olivetti ordinary shares per Telecom Italia ordinary share)
obtaining in the market in different periods prior to the last trading day
of Olivetti and Telecom Italia shares before the suspension of trading by
Borsa Italiana S.p.A. in view of the forthcoming announcement of the
Operation (data as of March 7, 2003 and averages weighted for the
preceding 1, 3, 6 and 12 months), which evidence the following (taking
account of the necessary roundings):
Telecom Italia (1) Olivetti Exchange Ratio
------------------------------------------------
(Euro) (Euro)
March 7, 2003 5.7 0.9 6.7
Average - 1 month 6.3 0.9 7.0
Average - 3 months 6.8 1.0 6.9
Average - 6 months 7.2 1.0 7.1
Average - 12 months 7.6 1.1 6.9
(1) Value adjusted for the effect of the distribution of reserves planned
for the month of June 2003.
The following table evidences the minimum, mean and maximum exchange
ratios (Olivetti ordinary shares for Telecom Italia ordinary share)
expressed by the stock market detailed above (rounded data):
Minimum Mean Maximum
--------------------------------
(Euro) (Euro)
Olivetti ordinary shares for
Telecom Italia ordinary share 6.7 6.9 7.1
13
The above figures are consistent with the exchange ratio established using
the main valuation method. It should be noted that the stock market price
method cannot be used to test the exchange ratio for the savings shares
owing to the non-existence of Olivetti savings shares. Nonetheless, in the
light of the arguments put forward in paragraph 4 above regarding the
hypothesis of a basically unchanged discount for the savings shares of the
Company Resulting from the Merger with respect to its ordinary shares
compared with that recorded by Telecom Italia's savings shares, the
consistency of the exchange ratio established using the main valuation
method can also be confirmed for the savings share ratio.
7. DETERMINATION OF THE EXCHANGE RATIO
The Directors of Olivetti, taking account of the indications provided by
JPMorgan and after examining the results of the application of the
above-mentioned valuation methods, have thus reach a valuation of the
ratio existing between the economic values of the two Companies involved
in the merger, which has then been compared with the conclusions reached
by the Board of Directors of Telecom Italia, taking into account the
indications provided by Lazard and Goldman Sachs.
At the end of the valuation process, the Board of Directors of Olivetti
and the Board of Directors of Telecom Italia have established that the
"natural" exchange ratio on the basis of which to determine the assignment
of the shares of the Company Resulting from the Merger is:
7 Olivetti shares, assuming the current par value of Euro 1.00 each
for every
1 Telecom Italia share, assuming the current par value of Euro 0.55 each
The exchange ratio will be the same for both the Telecom Italia ordinary
shares and for the Telecom Italia savings shares. To this "natural"
exchange ratio will correspond a different assignment ratio, made
necessary by the decision to carry out the exchange through the
redistribution of the capital of the Company Resulting from the Merger, as
summarized in paragraph 2 above.
8. WORK PERFORMED
The work performed on the documentation utilized as described in the
preceding paragraph 3 is summarized as follows:
o Analysis of the reports and the work papers of the audit firm Reconta
Ernst & Young on the Company financial statements and the
consolidated financial statements of Olivetti and of Telecom Italia
as of December 31, 2002.
14
o Analysis of the valuation criteria used for the preparation of the
Company financial statements and consolidated financial statements of
Olivetti and Telecom Italia as of December 31, 2002, to determine the
consistency thereof or to assess the effects of any inconsistencies.
o Obtaining information from Management regarding events subsequent to
the closing of the 2002 financial statements which could have a
significant effect on the determination of the values object of this
examination.
o Discussion with the Management of the Companies involved in the
merger regarding the criteria used for the preparation of the Group
Business Plan of Telecom Italia and the condensed Business Plan of
Olivetti Tecnost, the uncertainties and limitations inherent in all
forecasts being understood. In particular, we have examined the
principal characteristics of the forecasting process and the
methodological coherence of the process itself, also with regard to
the comparability of the data obtained, taking into account the
specificity and characteristics of the Companies involved.
o Verification of the stock market prices referring to the shares of
the Companies involved in the merger, considered important in
connection with the determination of the ratio for the exchange of
shares.
The work performed with reference to the methods of determination of the
ratios for the exchange of shares is summarized as follows:
o Critical examination of the valuation methods adopted and of all
elements considered necessary to determine whether such methods were
technically appropriate, in the specific circumstances, to determine
the economic values of the two Companies involved in the merger in
relation to the ratio for the exchange of shares.
o Participation in meetings with JPMorgan in order to obtain
information regarding the work they performed and the calculations
they made.
o Comparison between the procedures and results obtained by the Advisor
of Olivetti with those of the Advisors of Telecom Italia.
o Verification of the completeness and uniformity of the procedures
followed by the Directors of Olivetti in the determination of the
ratio for the exchange of shares.
o Verification that the valuation methods were applied in the uniform
way.
15
o Verification of the consistency of the data utilized with respect to
the reference sources and with the "Documentation utilized" described
in the preceding paragraph 3.
o Verification of the mathematical accuracy of the calculation of the
ratio for the exchange of shares performed through the application of
valuation methods adopted by the Directors of Olivetti also on the
basis of the indications of JPMorgan.
o Sensitivity analyses in relation to the valuation methods adopted
with the objective of verifying the extent to which the ratio for the
exchange of shares are influenced by changes in the hypotheses and
parameters.
COMMENTS ON THE SUITABILITY OF THE METHODS USED AND THE VALIDITY OF
ESTIMATES PRODUCED
With reference to the present engagement we believe it appropriate to
emphasize that the principal purpose of the Directors' decisional process
was to arrive at an estimate of the relative economic values of the
individual Companies involved in the merger by applying uniform criteria
for the purpose of the determination of the ratio for the exchange of
shares. The estimate, therefore, is not suitable for other purposes.
That being stated, we bring to the attention of the Shareholders the
following:
o The ratio for the exchange of shares has been determined, as
suggested by business doctrine and generally applied in professional
practice, on the basis of the comparison of the values attributed to
each of the Companies involved in the merger on a going concern
basis, that is excluding, in general, considerations of any synergies
deriving from the integration of the activities of the two Companies.
In particular, with reference to the tax assets, these have only been
considered for the part recoverable by the Companies involved in the
merger on a stand-alone basis, as described in the following
paragraph.
o The determination of the relative economic values of the Companies
involved in the merger include the value of the tax benefits deriving
from the write-down of investments, in particular those relating to
the write-down of Telecom Italia in Olivetti and of Seat Pagine
Gialle in Telecom Italia. Such value has been calculated at the
present value of the tax savings utilizable by Olivetti and Telecom
Italia, on the basis of forecast taxable income, on a stand-alone
basis. The cited valuations, and, more generally, all the assumptions
of a fiscal nature considered, are based on current fiscal
legislation and therefore exclude consideration of future
developments deriving from the tax reform in process. This approach
seems acceptable since it allows for a reasonable valuation of the
position, without taking into consideration future effects not
presently reasonably
16
quantifiable. More specifically, we believe it to be correct that no
account has been taken of the eventual benefit of a complete and more
rapid recovery of the tax benefit which should derive from the
merger. In fact, such benefit should be shared with the shareholding
structure of the Company Resulting from the Merger and, prior to the
merger, does not represent for either the Absorbing Company or the
Absorbed Company an asset that can be ascribed directly and
exclusively to one of these.
o The savings shares which will be issued by the Company Resulting from
the Merger in favor of the Telecom Savings Shareholders will have
more extensive property rights than those enjoyed by Telecom Italia
savings shares presently in circulation and on which was calculated
the spread, both with regard to the extent of the privilege in the
distribution of reserves which will be introduced statutorily by the
Telecom Italia General Meeting called to deliberate the merger and
for the improvement of the basis on which the privilege will be
quantified in absolute value terms; in fact, to each Telecom Italia
Savings Shareholder will be allocated for each Telecom Italia savings
share more than one savings share of the Company Resulting from the
Merger (as a result of the allocation ratio through which the ratio
for the exchange of shares will be satisfied). The estimate of the
value of the savings shares allotted to the Company Resulting from
the Merger has been effected by reference to the spread between the
quotations for Telecom Italia ordinary and savings shares. In this
regard we bring to your attention that the methodology adopted by the
Olivetti Directors presents the limits inherent whenever an empirical
method is used, even if it appears to be the only one with the
quality of a degree of objectivity otherwise lacking. Furthermore,
the creation of one new Olivetti savings share with the
characteristics described above and the lower takeover risk of the
Company Resulting from the Merger compared to Telecom Italia,
constitute a further limit on the utilization of the spread on which
the ratio for the exchange of the savings shares of the Company
Resulting from the Merger and Telecom savings shares has been
defined. However, the method used, even with the above-mentioned
limits, is considered to be the most appropriate in the circumstances
and, in any event, the most objective.
o The approach used to value the own shares and the Olivetti shares
owned by Olivetti International S.A. assumes that economic value and
the realizable value are substantially in line. The simplification
implicit in the method adopted seems, however, acceptable.
o Following the decision taken by Telecom Italia no longer to consider
as strategic the "Directories" business of Seat Pagine Gialle, such
investment has been written down to reflect a permanent loss of
value. In the light of the impact of the investment in Seat Pagine
Gialle on the total value of Telecom Italia and of the information
available as of to-day, we agree with the Directors of Olivetti in
considering that such disinvestment should not reasonably have
effects such as to require modifications to the ratio for the
exchange of shares. However, we point out that only when the
disinvestment has been concluded wil1 it be possible to evaluate
fully the correctness of such assumption.
17
o The values attributed to Olivetti and Telecom Italia take into
account the planned distribution of reserves by Telecom Italia, up to
a maximum of approximately Euro 1,333 million. This relates to the
distribution of reserves forming part of shareholders' equity not
tied to the results for 2002. This approach is to be considered
correct and consistent with the methodological approach followed in
the valuation under consideration.
o The methods adopted by the Directors of Olivetti are commonly
accepted and utilized, both nationally and internationally. We
believe that such methods, in this specific case, have adequately
taken into account the characteristics of the Companies being valued
and the factors which are significant to the valuation itself. In
particular, in the application of the analytical methodologies used
to value the two Companies (SOP for Telecom Italia and NAV for
Olivetti), the numerous operational areas of the Telecom Italia Group
and the fact that the controlling interest held by Olivetti in
Telecom Italia represents the most significant component of its
assets have been taken into consideration. Furthermore, we have
verified the substantial uniformity in application of the valuation
process and the consistency of the methods. Finally, we point out
that the Directors of Telecom Italia have also utilized substantially
equivalent methods (even if with the inversion between the principal
method and that of control), which confirms the acceptability of the
valuation approach adopted.
o In the development of the valuations, the individual components have
been valued by the Directors of Olivetti on the basis of the
methodologies considered suitable in the circumstances. In
particular, even with the different gradations of the two analytical
valuation methods adopted (NAV and SOP), the Discounted Cash Flow
(DCF) method has been consistently used for the valuation of the
principal activities of both Companies. This method is generally
considered to be the most rational of those alternatively used.
However, it is to be noted that the implicit difficulty in expressing
an opinion on the realizability of economic forecasts on which the
DCF method is constructed is inherent in every forecasting process.
On the whole, however, the forecasts seem to have been developed
through a rigorous and methodologically coherent process. In
particular, for Telecom Italia such forecasts are based on the
detailed Business Plan 2003-2005.
o Considering that both Companies involved in the merger have a high
stock market capitalization and a high flotation and that both
Companies represent a significant share of the total capitalization
of Mibtel and Mib30, the utilization of stock market prices over a
sufficient period of time, as performed in the case under
examination, is considered to be a particularly important parameter
and in any event necessary at least as a point of comparison and
control. Moreover, it is to be noted that the difficulties is fully
assessing the potential incongruities originating, on the one hand,
from a depressed stock market and, on the other, from the possible
gaps between quotations and absolute values represents an inherent
limitation in the valuation process; however, this difficulty is
mitigated
18
by the convergence in the ratios for the exchange of shares provided
by the methods used. Moreover, we agree with the reasons provided by
the Directors of Olivetti in support of the utilization of the NAV
method for not considering the current stock market value for the
valuation of Telecom Italia. This because the inclusion of current
market quotations in a valuation made with the NAV method, in the
presence of significant controlling interests, can originate
incongruities for the possible high volatility of the quotations
(with a distortive effect on the exchange ratio) and, in this
specific case, a lack of homogeneity of criteria, which is certainly
inappropriate when the objective is the estimate of an exchange ratio
and not the estimate of absolute values.
o The Directors, in the determination of the exchange ratio, have
performed an analysis of the effects which can be reasonably foreseen
of the possible exercise of the right of withdrawal by Olivetti
Shareholders, and have considered that, also on the basis of the
stock market trends of the significant period already elapsed, the
outcome of such withdrawals will not be such as to render necessary a
modification of the exchange ratio. As a result of the checks
performed, we believe we are in a position to agree with the
Directors' considerations supporting their decisions.
Similar considerations could be made with regard to the effects which
the planned OPA on Telecom Italia shares could determine. The
simulations performed independently by us on the possible outcomes of
the OPA, the results of which, however, are also linked to the extent
and conditions of the eventual withdrawals, confirm that the fairness
of the exchange ratio cannot be significantly influenced.
o The sensitivity analyses we performed to evaluate better the impact
of the variations in the different hypotheses and parameters assumed,
always within the context of the valuation methods adopted, confirm
that the results reached by the Directors are reasonable and not
arbitrary.
SPECIFIC LIMITATIONS ENCOUNTERED BY THE AUDITOR IN CARRYING OUT THE
ENGAGEMENT
Notwithstanding the complexity of the problems faced in the course of our
activity, we did not encounter any limitations or difficulties in the
performance of this engagement worthy of specific mention in this Section
of our report.
19
11. CONCLUSIONS
On the basis of the documentation examined and the procedures described
above and considering the nature and extent of our work as described in
this report, we believe that the valuation methods adopted by the
Directors also on the basis of the indications of their Advisor are, under
the circumstances, reasonable and not arbitrary and have been correctly
applied by them in the determination of the ratio for the exchange of
shares contained in the proposed merger project.
DELOITTE & TOUCHE ITALIA S.p.A.
S/Vincenzo Ceppa
Partner
Milan, Italy
April 22, 2003
Annex VII.
Report of the auditing firm Reconta Ernst & Young S.p.A.
pursuant to Article 2501-quinquies of the Civil Code
[logo] ERNST& YOUNG Reconta Ernst & Young S.p.A.
PLAN FOR THE MERGER OF
TELECOM ITALIA S.P.A.
INTO
OLIVETTI S.P.A.
AUDITORS' REPORT
Relating to the exchange ratio of shares
pursuant to Art. 2501 quinquies of the Italian Civil Code.
(Translation from the original Italian text)
[logo] ERNST& YOUNG Reconta Ernst & Young S.p.A.
PLAN FOR THE MERGER OF
TELECOM ITALIA S.P.A.
INTO OLIVETTI S.P.A.
AUDITORS' REPORT
Relating to the exchange ratio of shares
pursuant to Art. 2501 quinquies of the Italian Civil Code.
(Translation from the original Italian text)
To the Shareholders of
Telecom Italia S.p.A.
1. OBJECTIVE, SUBJECT AND SCOPE OF THE ENGAGEMENT
We have been appointed by Telecom Italia S.p.A. to prepare our report on the
exchange ratio of shares (hereinafter the "exchange ratio") of Telecom Italia
S.p.A. (hereinafter "Telecom Italia" or the "company to be absorbed") and
Olivetti S.p.A. (hereinafter "Olivetti" or the "absorbing company" and,
together with Telecom Italia, the "Companies"), in accordance with Article 2501
quinquies of the Italian Civil Code. To this end, we have been provided by
Telecom Italia with the plan for the merger, accompanied by the Directors'
Report, which identifies, explains and justifies, pursuant to Article 2501
quarter of the Italian Civil Code, the exchange ratio, as well as the Balance
Sheet as of December 3 1, 2002 provided by Article 2501 ter of the Italian
Civil Code.
The plan for the merger will be subject to approval at the Extraordinary
General Meeting of the shareholders of Telecom Italia to be held on May 24,
2003, first meeting, or on May 25,2003, second meeting.
Similarly, the shareholders of Olivetti will be required to approve the plan
for the merger at the Extraordinary General Meeting to be held on May 24, 2003,
first meeting, or on May 25, second meeting or, on May 26, 2003, third meeting
if required.
Deloitte & Touche Italia S.p.A. has been appointed by Olivetti to prepare a
similar report on the exchange ratio.
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In order to provide the shareholders with adequate information regarding the
exchange ratio, this report illustrates the methods adopted by the Directors in
determining the exchange ratio and the difficulties encountered by them; in
addition, this report also indicates whether, under the circumstances, such
methods are reasonable and not arbitrary, whether the Directors have considered
the respective importance of such methods and whether the methods have been
correctly applied.
In our examination of the valuation methods adopted by the Directors, also
based on indications from their Professional Advisors, we have not made a
valuation of the Companies participating to the merger. This was done solely by
the Directors and the Professional Advisors appointed by them.
2. SUMMARY OF THE TRANSACTION
The Boards of Directors of Telecom Italia and of Olivetti have developed a
plan, the purpose of which is to simplify the corporate structure of the
Olivetti and Telecom Italia Group.
As indicated in the report of the Board of Directors of Telecom Italia, the
proposed transaction provides for the merger of Telecom Italia into Olivetti,
pursuant to Articles 2501 and following of the Italian Civil Code. Such
transaction, with respect to its scope and main characteristics, was approved
by the Boards of Directors of the companies participating to the merger, held
on March 11,2003.
On April 15, 2003, the Board of Directors of Telecom Italia approved the plan
for the merger of Telecom Italia into Olivetti, confirming the exchange ratio
preliminarily indicated by the Board of Directors on March 11, 2003.
The merger will be effected on the basis of the draft financial statements of
Telecom Italia and of Olivetti as of December 31, 2002, adopted by the Boards
of Directors of the Companies as the balance sheets required by Article 2501
ter of the Italian Civil Code.
As a result of the merger, the absorbing company will take the name and the
corporate scope of Telecom Italia and will adopt new by-laws, based on the
current by-laws of Telecom Italia.
As a consequence of the change in the corporate scope, the shareholders of
Olivetti who are absent or contrary to the resolutions approving the
transaction, will have the right to withdraw pursuant to Article 2437 of the
Italian Civil Code.
In the context of the transaction, Olivetti announced the intention to proceed
with a voluntary and partial tender offer on Telecom Italia's ordinary and
savings shares. In particular, Olivetti intends to offer a consideration based
on the average of the stock- market prices of Telecom Italia's ordinary and
savings shares in the period between March 12, 2003 and the date of the
shareholders' meeting called to approve the merger project, increased by a
premium of 20%. In any case, the consideration will not be (i) higher than Euro
8.40 for each ordinary share and Euro 5.65 for each
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savings share and (ii) lower than Euro 7 for each ordinary share and Euro 4.70
for each savings share.
Based on information already made public, the number of shares subject to the
tender offer will be determined when the period to exercise the right of
withdrawal pursuant to Article 2437 of the Italian Civil Code will expire and,
accordingly, at the time Olivetti will have determined the total amount of
disbursement to be incurred for such withdrawals. The maximum total amount for
the tender offer will be Euro 9 billion, net of the amount of withdrawals. The
financial resources allocated to the tender offer for each class of shares
(ordinary and savings), if non totally utilized for a class will be assigned to
the other class. If the acceptances of the tender offer by the holders of
ordinary shares and savings shares were to exceed the quantity tendered for,
they will be prorated with respect to each class.
The tender offer will start subsequent to the expiration of the term for the
exercise of the right of withdrawal and will be completed prior to the
execution of the merger deed. The offering will cease its effects in case the
registration of the merger deed at the Companies' Register will not be
completed.
The offering will be evaluated by the Board of Directors of Telecom Italia,
pursuant to Article 39 of the Ruling for the Issuers on the Italian Stock
Exchange.
The merger will result with the cancellation of Olivetti's investment in
Telecom Italia. Olivetti's share capital, as resulting on the date the merger
will become effective, will be re-determined on the basis of the reduction of
the par value of the shares (from Euro 1.00 to Euro 0.55), of its allocation to
ordinary and savings shares (the latter category being introduced in the new
by-laws of the absorbing company as a result of the merger) and of the
necessity to maintain its current level in terms of absolute value. After the
allocation, the capital of the company resulting from the merger will be
distributed to the shareholders of Olivetti and those of Telecom Italia on the
basis of a distribution ratio which will reflect the exchange ratio of
Olivetti's shares with the ordinary and savings shares of Telecom Italia. In
particular, with respect to the criteria for the allocation of Olivetti's
shares, the Directors propose to proceed to the exchange by adopting
principally the method of the re-distribution of Olivetti's capital and issuing
new shares only within the limits eventually required to maintain the share
capital at the current level. The re-distribution method consists in the
allocation of the absorbing company's share capital among the shareholders of
the absorbing company and those of the company to be absorbed, on the basis of
the so called "natural" exchange ratio. The determination of the share capital
and the exchange transaction will be made in accordance with the following
principles:
- Olivetti will set the par value of its shares - to the amount resulting
from the conversions of the convertible bonds, the exercise of the
warrants and the exercise of the stock options on one hand, and the
exercise of the right of withdrawal on the other hand - at Euro 0.55 each
(equal to the par value of Telecom Italia's shares), in place of the
current par value of Euro 1. Therefore, the share capital of Olivetti
will be divided in a greater number of shares. These shares, will be
divided into ordinary and savings shares;
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- the new shares, ordinary and savings, with a par value of Euro 0.55 each,
representing the share capital of Olivetti at the time of the merger,
will be distributed to Olivetti's ordinary Shareholders and to ordinary
and savings shareholders of Telecom Italia, respectively. This
distribution will be made on the basis of the distribution ratios, which
will reflect the so called "natural" exchange ratio, with reference to
the actual number of shares to be distributed, not yet known as of to
date. Paragraph 6.4 below indicates this ratio as 7 ordinary or savings
shares of Olivetti for each of ordinary and savings shares of Telecom
Italia.
Should the capital of the absorbing company at the time of the merger fall, as
a result of the effect of the withdrawals in respect to those of the
conversions, below the current amount of Euro 8,845,537,520, the distribution
of the share capital will be accompanied by the issuance of new ordinary and
savings shares of the company resulting from the merger, to service the
exchange of shares, up to a maximum number of 11,103,237,962, with a par value
of Euro 0.55 each, in respect to the assignment to capital of the portion of
minority interests of the company to be absorbed. These additional shares will
be allocated to the shareholders of the absorbing company as well as those of
the company to be absorbed, in respect of their proportional ownership.
At the time of the exchange of shares, Olivetti will assign to the savings
shareholders of Telecom Italia new savings shares with characteristics
corresponding to those currently issued by Telecom Italia.
The transaction provides for the listing of savings shares that will be issued
by the absorbing company to service the exchange of shares in favor of the
savings shareholders of Telecom Italia. The new Olivetti savings shares will
have a par value of Euro 0.55 each, corresponding to that of the current
savings shares of Telecom Italia.
Pursuant to Articles 2504 bis, last paragraph and 2501 bis, first paragraph, n.
5 of the Italian Civil Code, the new shares of the company resulting from the
merger will have regular dividend rights.
Pursuant to Article 2504 bis, last paragraph of the Italian Civil Code, the
effects of the merger, except for those effects provided for by Article 2501
bis, numbers 5 and 6 of the Italian Civil Code, will start from the last of the
registrations of the merger deed, or from such subsequent date provided for by
the merger deed.
The operations of the company to be absorbed, including income taxes, will be
imputed to the financial statements of the absorbing company, with effect from
January 1 of the year in which the transaction will become effective.
3. DOCUMENTATION UTILIZED
In performing our work, we obtained from Telecom Italia and Olivetti, such
documentation and information as was considered useful in the circumstances. We
analyzed such documentation and, in particular:
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a) the plan for the merger and the reports of the Boards of Directors of the
two Companies addressed to the respective Extraordinary General Meetings
which, on the basis of the Balance Sheet as at December 3 1, 2002,
propose an exchange ratio as follows:
7 Olivetti ordinary shares, with a par value of Euro 1.00 (one) each for
each Telecom Italia ordinary share, with a par value of Euro 0.55 each;
7 Olivetti savings shares, with a par value of Euro 1.00 (one) each for
each Telecom Italia ordinary share, with a par value of Euro 0.55 each.
This exchange ratio, so called "natural", corresponds to the exchange
ratio that would be applied, had the merger been realized without
re-distribution, but issuing new shares to service the exchange ratio.
The ratio for the exchange of shares has been determined by the Directors
also taking into account the valuation reports of the Professional
Advisors indicated in points b) and c) below. The report of the Board of
Directors sets out in detail the valuation criteria adopted, the reasons
for their choice, the values resulting from their application and the
related comments;
b) the appraisal report of the exchange ratio prepared by Lazard, as
Professional Advisor of the Directors; this report, dated May 11, 2003,
and prepared at the request of Telecom Italia, sets out the valuation
criteria adopted, the reason for which they were chosen and the results
of their application;
c) the fairness opinion issued by Goldman Sachs on March 11, 2003 at the
request of Telecom Italia, with respect to the fairness of the exchange
ratio;
d) the following documentation, used by the Professional Advisors to prepare
their appraisal reports and, subsequently, within the scope of our
engagement, also utilized by us:
- the financial statements and the consolidated financial statements
of Telecom Italia and Olivetti as at December 31, 2001 accompanied
by the Report of the Board of Directors, the Report of the Board of
Statutory Auditors and the Independent Auditors' Report;
- draft financial statements and draft consolidated financial
statements of Telecom Italia and of Olivetti as at December 31,
2002 accompanied by the Report of the Board of Directors;
- Telecom Italia's consolidated Business Plan 2003 - 2005 (version
dated January 16,2003) and related updates;
- Tecnost Group's condensed business plan;
- historical market prices and trading shares of Telecom Italia and
Olivetti;
- publicly available information about sector; volumes of ordinary
companies operating and savings in the same
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- financial research and analyses, published by specialized
institutions and investment banks;
e) additional documentation, as follows, has been utilized by us:
- data and information obtained from the Professional Advisors and
used by them for the determination of the exchange ratio;
- rulings of convertible bonds of Olivetti;
- appraisal report of the exchange ratio dated March 11,2003, issued
by JP Morgan as Professional Advisor of Olivetti and the report
prepared by Professor Angelo Provasoli, who reviewed and concurred
with the valuation methodologies adopted by JP Morgan;
- by-laws of the companies participating to the merger;
- accounting elements and other information as deemed necessary for
this report.
Finally, we obtained representation from Telecom Italia that, as to the
Directors' best knowledge, no significant changes occurred in the data and
information considered during our analysis. The same representation has been
obtained by Deloitte & Touche Italia S.p.A. from the Directors of Olivetti.
4. VALUATION METHODS ADOPTED BY THE BOARDS OF DIRECTORS FOR THE
DETERMINATION OF THE EXCHANGE RATIO
The Directors, also supported by their Professional Advisors, considering the
importance and complexity of the merger transaction, deemed it appropriate to
identify the valuation methods which, in addition to be in accordance with
current best practice, would enable the two companies to be valued on a
homogeneous basis.
4.1. Selection of the methods and valuation criteria
The Board of Directors of Telecom Italia determined the exchange ratio by
selecting, among a number of valuation methods, those deemed more appropriate
to express the value of the entities involved in the merger, considering the
activities carried-out by the absorbing company and by the company to be
absorbed,
In addition, as suggested by corporate doctrine and professional practice, the
Directors compared the values attributed to the companies participating in the
merger process under the assumption that they will continue as a going concern.
These values cannot be considered representative of a valuation in absolute
terms of the two companies participating to the merger, nor can they be
compared with any acquisition or sale prices (which normally reflect majority
premiums or minority discounts).
The Directors of Telecom Italia, supported by their Professional Advisors,
selected the valuation methods and principles to be adopted taking into
account:
a) the specific objectives attributed to the valuations with reference to
the underlying transaction;
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b) the nature of the activities carried-out by each company participating to
the merger.
In connection with the first aspect, in the selection of the valuation
principles the Directors referred to the purpose of the valuation and to the
relevant factors that allow to estimate the value of the entities being valued.
As the objective is to express comparable values in order to determine the
exchange ratio, the Directors adopted, for both companies participating to the
merger, valuation methods based on homogeneous criteria.
As to the second aspect, the Directors considered on one hand the various areas
of operations of Telecom Italia and, on the other hand, the circumstances that
the controlling investment of Olivetti in Telecom Italia represents a
significant component of total assets of Olivetti.
On the basis of the above, the Directors, for the purpose of determining the
values of Olivetti and Telecom Italia, have utilized, given the equal
significance level in the valuation process, the method of stock-market prices
as the principal method and the sum-of-parts method as the control method.
Stock-market prices method: when the companies involved in the merger have
shares listed on regulated markets, doctrine and professional practice suggest
to consider the results deriving from the stock prices of the respective
shares, averaged over an adequate period of time. In this case, the Directors
deemed the stock prices particularly significant and, on the basis of the
stock-market prices at March 7, 2003 (last date of stock trading prior to the
announcement of the transaction by the Boards of Directors), they note that
both companies show high levels of volumes exchanged, high capitalization and a
high liquidity of their respective shares.
Sum-of-parts method: according to this method, the value of a company is
determined as the sum of the values of each of its businesses (intended as
economic entities which can be individually evaluated), adjusted to take into
account the financial position of the company, minority interests and, where
significant, other effects such as those relating to off-balance sheet items,
if any, and to potential tax benefits.
In the application of the valuation methods described, the Directors considered
the expected distribution of reserves by Telecom Italia, approved by the Board
of Directors on March 11,2003.
4.1.1. Stock-market prices method
The stock-market prices method estimates the value of the equity on the basis
of stock-market prices during a significant period, that expires on a date
close to which the valuation is prepared. The Directors believe that the
stock-market prices following the announcement of the transaction are not
relevant.
In order to mitigate short-term fluctuations that typically characterize
financial markets, the Directors extended the analysis of stock-market prices
to the average prices expressed by the market over sufficiently long periods.
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Accordingly, in the application of the stock-market prices method, with
reference to the date of March 7,2003, the Directors proceeded to:
a) analyze the historical simple averages over a period covering the
preceding 12 months;
b) analyze the historical averages weighted for volumes over a period
covering the preceding 12 months;
c) analyze the mobile averages for 1, 3, 6 and 12 months;
d) adjust the value of Telecom Italia's shares, to take into account the
expected distribution of reserves.
From the analysis of the historical trends, the Directors identified the
averages for 1, 3, 6 and 12 months as those within a range of constant ratios
of values.
4.1.2. Sum-of-Parts method
According to the sum-of-parts method, the value of Telecom Italia and Olivetti
is determined as the sum of the values of the individual businesses of each
company, considered as economic entities which can be individually evaluated.
This sum, for each of the companies participating to the merger, is adjusted to
reflect the financial position, minority interests and, where significant,
other effects, such as off-balance sheet items, if any, and potential tax
benefits.
On the basis of the significance of the investment in Telecom Italia in respect
to Olivetti's total assets, the valuation process was concentrated on the
estimated value of Telecom Italia, decisive element to identify Olivetti's
value.
Taking into account the complexity of the company's structure and the various
areas of the operations of the Telecom Italia Group, the individual businesses
were evaluated on the basis of those methodologies, among those utilized by the
practice, considered more suitable in the specific situation. In particular,
the method of the discounted cash flow ("DCF") was utilized for the main
businesses, such as for instance, the services connected to mobile and
wire-line communications.
The remaining assets and liabilities of Telecom Italia have been valued
principally on either book or market value basis, in consideration of their
limited weight with respect to the entire value of Telecom Italia.
The DCF method has been applied by computing the present value of operating
cash flows, gross of any component of financial nature ("Free Cash Flow" or
"FCF"). According to this method, the economic value of an enterprise is equal
to the sum of the following components:
- operating cash flows that the company will be able to generate in the
future, discounted at a rate representing the weighted average cost of
capital;
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- net financial position and minority interests, which, in this case, refer
to December 3 1,2002.
In applying the DCF method, the Directors made reference to the operating cash
flows connected to the main activities, as resulting from the economic and
financial forecasts made for Telecom Italia.
For Olivetti, which is a holding company, the main asset of which is
represented by the investment in Telecom Italia, the sum-of-parts method has
been applied by evaluating this investment according to the principles
described above and by evaluating the remaining assets and liabilities at book
or market value, in light of their limited weight in respect to the valuation
of the company taken as a whole.
In the valuation of Telecom Italia and Olivetti, the Directors have also taken
into consideration the tax assets, for the portion deemed utilizable by the
companies participating to the merger, regardless if the merger transaction
will become effective or not, on the basis of expected taxable income on a
stand alone basis. The Directors have also considered, for Telecom Italia, the
expected distribution of reserves and, for Olivetti, the pro-forma effect of
the conversion of convertible bonds consistent with the fully-diluted
methodology.
4.2. Treatment of saving shares
With respect to the category of savings shares, which, as of to date are not
issued by Olivetti, the Directors supported by their Professional Advisors
assumed that, also considering the economic benefits that will be granted to
Olivetti's savings shares, the discount currently recognized by the market to
Telecom Italia's savings shares, with respect to the ordinary shares, may be
utilized in the determination of the exchange ratio applicable to Olivetti's
savings shares to be issued. The Directors therefore deemed appropriate to
adopt the same exchange ratio, as that adopted for ordinary shares.
The Directors believe that, on the basis of a generally accepted principle,
different methods of allocation between ordinary and savings shares would imply
discretionary factors in the valuation, not supported by objective factors.
5. VALUATION DIFFICULTIES ENCOUNTERED BY THE BOARD OF DIRECTORS
In carrying out the valuations for the purpose of determining the exchange
ratio, the Board of Directors of Telecom Italia encountered the following main
difficulties:
a) asset disposals during 2003, if any: at present, it is not possible to
precisely determine the outcome of the expected disposal of the new
company that will be incorporated, as a result of the de-merger of Seat
Pagine Gialle. In any case, the Directors, on the basis of the
significance of the investment in Seat Pagine Gialle in respect of the
total value of Telecom Italia, expect that the disposal should not have
such effects that would require changes to the exchange ratio;
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b) taxation: the valuation was made on the basis of current tax legislation;
therefore, the Directors did not consider the tax reform currently in
process, and not yet enacted, the effects of which are to date difficult
to be quantified;
c) valuation of savings shares: as of to date there are no Olivetti savings
shares; in order not to include in the analysis discretionary factors,
not supported by objective factors, lacking historical data of reference
for Olivetti, the Directors took into account the price differentials of
ordinary and savings shares of Telecom Italia only.
The Directors, supported by their Professional Advisors, made a thorough
analysis of the argumentations raised by some institutional investors, in
connection with the application of the NAV method to Olivetti as holding
company owing as its main asset the investment in Telecom Italia, and in
particular in respect to the opportunity to value such investment at
stock-market prices. In light of the purposes of the valuation, the Directors,
even though recognizing the complexity of the subject, deemed to adopt
homogeneous criteria for both companies and therefore to utilize for Olivetti
the same method as that utilized for Telecom Italia (Sum-of-Parts).
6. RESULT OF THE VALUATION PERFORMED BY THE BOARDS OF DIRECTORS
6.1. Stock-market prices method
The results obtained with the application of the principal method led the
Directors supported by their Professional Advisors to identify the following
values:
Values (Euro)
Telecom Italia
Stock market prices post dividend Olivetti Value Ratio
Weighted averages
March 7, 2003 5.7 0.86 6.7
Average 1 month 6.3 0.91 7.0
Average 3 months 6.8 0.99 6.9
Average 6 months 7.2 1.02 7.1
Average 12 months 7.6 1.11 6.9
Arithmetic averages
March 7,2003 5.7 0.86 6.7
Average 1 month 6.4 0.91 7.O
Average 3 months 6.9 0.99 7.0
Average 6 months 7.2 1.01 7.1
Average 12 months 7.7 1.11 6.9
Maximum and minimum prices
Maximum price last 12 months 9.5 1.47 6.5
Minimum price last 12 months 5.7 0.84 6.8
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The Directors noted that the above results are confirmed also when expanding
the time range to 18 months.
6.2. Sum-of-Parts method
As to the sum-of-parts method, the Directors of Telecom Italia supported by
their Professional Advisors identified the following values for each ordinary
share:
--------------------------------------------------------------------------------
Telecom Italia Olivetti Value Ratio
--------------------------------------------------------------------------------
Value per each ordinary share (Euro) 8.8 1.27 6.9
--------------------------------------------------------------------------------
6.3. Determination of the exchange ratio
On the basis of the valuations performed with the support of the respective
Professional Advisors and in accordance thereto, the Directors defined the
relative values of the companies participating to the merger, for the purpose
of the exchange ratio.
The value ratios resulting from the application of the methods adopted by the
Board of Directors of Telecom Italia are summarized as follows:
--------------------------------------------------------------------------------
Method Value ratio
--------------------------------------------------------------------------------
Stock-market prices methods
-March 7, 2003 6.7
Weighted averages:
-Average 1 month 7.0
-Average 3 month 6.9
-Average 6 month 7.1
-Average 12 month 6.0
--------------------------------------------------------------------------------
Sum-of-parts method 6.9
--------------------------------------------------------------------------------
On the basis of the valuation methods applied to the companies participating to
the merger described above, the Directors identified the following exchange
ratio, so called "natural", corresponding to the exchange ratio that would
result, had the merger been realized without re-distribution, but through the
issuance of new shares to service the exchange:
7 ordinary shares of Olivetti, with a par value of Euro 1.00 (one) each,
for each ordinary share of Telecom Italia with a par value of Euro 0.55
each;
7 savings shares of Olivetti, with a par value of Euro 1.00 (one) each,
for each ordinary share of Telecom Italia with a par value of Euro 0.55
each.
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6.4. Procedures for assigning the shares and carrying out the share exchange
As previously described, the Directors considered advisable to leave the
nominal capital of Olivetti basically unchanged at the completion of the
transaction. Accordingly, they proposed that the share exchange be carried out
primarily by redistributing Olivetti's capital, with recourse to the issue of
new shares only insofar as this is required to maintain the share capital at
the current level.
The redistribution technique consists of dividing the share capital of the
absorbing company and hence the shares composing it among the shareholders of
the absorbing company and those of the company to be absorbed, according to the
so called "natural" exchange ratio between the shares.
The redistribution takes the share capital of the absorbing company at the time
the merger is implemented as the baseline.
The amount of capital will be determined and the share exchange transaction
will be carried out according to the following methodologies:
a) Olivetti will set the nominal value of its shares - in the amount
resulting after the conversions and withdrawals - at Euro 0.55 (equal to
the par value of Telecom Italia shares), in place of the current par
value of Euro 1.00. Accordingly, Olivetti's share capital will be divided
into a larger number of shares. Such shares will be divided into ordinary
shares and savings shares, the latter category with the same rights and
features of the Telecom Italia savings shares;
b) the new ordinary and savings shares with a par value of Euro 0.55 each
constituting the share capital at the time of the merger of Olivetti will
be redistributed, respectively, to the holders of Olivetti and Telecom
Italia ordinary shares and the holders of Telecom Italia savings shares
according to the assignment ratios reflecting, with reference to the
actual number of shares to be redistributed, the so called "natural"
exchange ratio of 7 Olivetti ordinary or savings shares for each Telecom
Italia ordinary or savings share.
The variables represented by conversions, exercise of stock options,
withdrawals and acceptances of the tender offer can only be quantified exactly
at the time the merger is effective. Accordingly, the determination of the
assignment ratio for the purpose of redistribution can be established precisely
only at the time the merger becomes effective.
At the end of the merger transaction, the ratio between the shares assigned to
the Olivetti shareholders and those assigned to the Telecom Italia shareholders
will exactly reflect the "natural" exchange ratio between the shares of the two
companies prior to the merger (1/7) determined above.
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7. WORK DONE
7.1. Work done on the "documentation utilized" as mentioned at point 3.
The valuation methods applied by the Directors, also on the basis of the
indications of their Professional Advisors, take as a reference basis the draft
financial statements of the Companies as at December 31, 2002, in accordance
with art. 2501 ter of the Italian Civil Code. It should be noted that the
statutory and consolidated financial statements of Telecom Italia and of
Olivetti as at December 31, 2002, were audited by us.
In addition, we have performed the following activities:
- We have met with the Telecom Italia management to obtain information on
the subsequent events with respect to the financial statements mentioned
above that could have a significant effect on the amounts being examined
here;
- With regard to the three-year plan 2003 - 2005 and cash flow forecasts of
Telecom Italia, while considering the inherent uncertainty and limits of
any type of forecast, we have discussed with the management of Telecom
Italia the main characteristics of the forecasting process and the
criteria used for their compilation.
The above activities have been performed to the extent necessary for the
purpose of our engagement, indicated in paragraph 1 above.
7.2. Work done on the methods used to determine the exchange ratio
We have examined the methods followed by the Directors, also based on the
indications given by their Professional Advisors, for the determination of the
relative value of the Companies and, thus, of the exchange ratios, ascertaining
their technical suitability under the circumstances.
We have also performed the following procedures:
- analysis of the Directors' report and of the Professional Advisors
reports to verify the completeness and consistency of the processes
followed by the Directors in the determination of the exchange ratio, as
well as the homogeneity in the application of the valuation methods;
- sensitivity analyses within the valuation methods adopted, with the aim
to verify to what extent the exchange ratio would be affected by changes
in the assumptions and parameters, considered as significant, utilized in
the reports of the Professional Advisors;
- verification of the consistency of data utilized, with respect to the
reference sources and with the "Documentation used", described in
paragraph 3 above;
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- verification of the mathematical correctness of the computation of the
exchange ratio, by applying the valuation methods adopted by the
Directors, also on the basis of the indications from their Professional
Advisors;
- meetings with the Professional Advisors of Telecom Italia, to discuss the
activities performed, the matters encountered and the solutions adopted.
We have also obtained representation that, to the management of Telecom Italia
best knowledge, no significant changes occurred in the data and information
considered in our analyses.
8. COMMENTS ON THE SUITABILITY OF THE METHODS USED AND THE ACCURACY OF THE
ESTIMATES
With reference to this engagement we believe it is worth noting that the
principal purpose of the decisional process used by the Directors was to make
an estimate of relative values of the companies involved in the merger, by
applying homogeneous criteria, in order to obtain comparable values. In fact,
the main objective of valuations for mergers is to identify comparable values
in order to determine the exchange ratio, rather than to determine absolute
values of the companies involved. As such, valuations for merger transactions
have a meaning solely in respect of their relative profile and cannot be
regarded as estimates of the absolute values of the companies involved, for
transactions different from the merger and for which they were not made.
In connection with the valuation methods adopted, we note that:
- they are widely spread in Italian and international practice, they have
solid doctrinal bases and are based on parameters determined according to
a rigorous methodology process;
- they appear adequate in the circumstances, in light of the
characteristics of the companies involved in the merger;
- in conformity with the valuation context required for a merger, the
methods have been developed on a stand alone basis;
- the methodology approach adopted by the Directors allowed to meet the
criterion of homogeneity of valuation methods and thus that of
comparability of values;
- the application of a principal method and of a control method allowed, in
any case, to enlarge the valuation process and to verify the results
obtained. With reference to the development of the valuation
methodologies made by the Directors, we note that:
- the stock-market prices method is particularly suitable in connection
with companies with a high capitalization, an ample and spread floating
and high
14
[logo] ERNST& YOUNG Reconta Ernst & Young S.p.A.
volumes of exchange. In this case, the adoption of averages over a
sufficiently long period of time allowed to mitigate the effect of shares
fluctuations, connected to the general situation of the stock markets;
the results are confirmed also by expanding the analysis over 18 months;
- the sum-of-parts method is generally applied by professional practice in
the valuation of complex enterprises, characterized by various areas of
business. In the specific case, the utilization of the DCF method allowed
to appreciate the operational characteristics of the companies
participating to the merger. The selection of the DCF method for the main
business areas of Telecom Italia is justified by the activity carried on
which turns both the balance sheet and the economic and financial aspects
into relevant elements for the valuation process;
- the results obtained with the sum-of-parts method, utilized by the
Directors for verification purposes, are supported by the analysis of the
"consensus" expressed by financial analysts on target prices of Telecom
Italia in the three months preceding the announcement of the transaction;
- lacking the historical data for Olivetti, the determination of the
exchange ratio for the savings shares of Telecom Italia, provided for in
the merger, even in consideration of the limits of the empirical process
described in paragraph 4.2, is appropriate under the circumstances and in
any case objective.
9. SPECIFIC LIMITATIONS ENCOUNTERED BY THE AUDITORS IN CARRYING OUT THE
ENGAGEMENT
During our engagement we did not encounter limitations or difficulties that
should be mentioned in this section of the report.
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[logo] ERNST& YOUNG Reconta Ernst & Young S.p.A.
10. CONCLUSION
Based on the documentation we have examined and on the procedures described
above, and considering the nature and extent of our work as described in this
report, we believe that the valuation methods adopted by the Directors, also
based upon the advice of their Professional Advisors are, under the
circumstances, reasonable and not arbitrary and they have been correctly
applied by them in their determination of the following exchange ratio of
shares:
7 Olivetti ordinary shares, with a par value of Euro 1.00 (one) each, for
each ordinary share of Telecom Italia, with a par value of Euro 0.55
each,
7 Olivetti saving shares, with a par value of Euro 1.00 (one) each, for
each savings share of Telecom Italia, with a par value of Euro 0.55 each,
indicated in the plan for the merger.
Milan, April 22,2003
Reconta Ernst & Young S.p.A.
Signed by Giovanni Aspes, partner
16
Annex VIII.
JP Morgan Chase Bank Fairness Opinion,
used by the directors of Olivetti S.p.A.
for the purpose of establishing the exchange ratio
ORIGINAL DOCUMENT ISSUED ON JPMORGAN CHASE BANK HEADED PAPER.
TRANSLATION FROM THE ORIGINAL DOCUMENT ISSUED IN ITALIAN PREPARED
EXCLUSIVELY FOR INFORMATIVE PURPOSES. THE ORIGINAL DOCUMENT IN ITALIAN
PREVAILS ON ANY TRANSLATION.
Dottor Carlo Buora
Managing Director
Olivetti S.p.A.
Via Jervis, 77
Ivrea (TO)
Italy
Milan, March 11 2003
1. INTRODUCTION
On March 5 2003, Olivetti S.p.A. ("Olivetti") engaged JPMorgan Chase Bank
("JPMorgan") to act as its financial adviser (the "Engagement") in connection
with the acquisition of Telecom Italia S.p.A. ("Telecom Italia") ordinary and
savings shares (the '"Acquisition") and the merger between Olivetti and Telecom
Italia (the "Merger") (the Acquisition and the Merger together, the
"Transaction").
As part of the Engagement, Olivetti has requested that JPMorgan provide an
opinion (the "Opinion") as to the fairness of the exchange ratio with respect
to the Merger. Olivetti has not requested that JPMorgan express its opinion on
the underlying business decision to proceed with and/or to execute the
Transaction, nor does the Opinion provided by JPMorgan have regard to that
decision. Likewise, Olivetti has not requested that JPMorgan provide, nor has
JPMorgan provided, any legal, accounting or tax advice in connection with the
Transaction.
This letter represents the final report of JPMorgan (the "Final Report") with
regards to the Opinion requested.
The Final Report has been prepared for the internal and exclusive use of the
Board of Directors of Olivetti (the "Board of Directors") in support of the
decisions to be taken by it. Therefore, the Final Report may not be disclosed,
in whole or in part, to any third party or used for any purpose whatsoever
other than those indicated in the Engagement and in the Final Report itself,
provided
p. 1
that the Final Report may be transmitted to the experts appointed in compliance
with the law and its content may be disclosed publicly where required by
regulations of the Italian and/or U.S. stock exchange authorities. Any other
use, in whole or in part, of the Final Report will have to be previously agreed
and authorised in writing by JPMorgan.
In preparing the Final Report, JPMorgan has relied upon and assumed, without
independent verification, the truthfulness, accuracy and completeness of the
information and the financial data provided by Olivetti. JPMorgan has therefore
relied upon all specific information as received and declines any
responsibility should the results presented be affected by the lack of
completeness or truthfulness of such information. Publicly available
information deemed relevant for the purpose of the analyses contained in the
Final Report has also been used. Therefore the Final Report is based on: (i)
our interpretation of the information which Olivetti, as well as its
representatives and advisers, have supplied to us to date; (ii) our
understanding of the terms upon which Olivetti intends to consummate the
Transaction and upon which Olivetti intends to execute the Acquisition; (iii)
the assumption that the Transaction will be consummated in accordance with the
expected terms and within the expected time periods.
In the execution of the Engagement, JPMorgan has elaborated its own analyses
based on the methodologies illustrated below, reaching the conclusions
contained in the final paragraph of this Final Report.
The conclusions described in the Final Report have been prepared with the sole
purpose of determining relative values and identifying the share exchange ratio
for the purpose of the Merger and, therefore, the values contained in this
Final Report have no relevance for purposes other than those related to the
Merger. The Final Report and the Opinion concern exclusively the share exchange
ratio in connection with the Merger and do not constitute an opinion by
JPMorgan as to the absolute value of the shares of Olivetti and Telecom Italia.
The conclusions contained in this Final Report are based on the whole of the
valuations contained herein and therefore no part of the Final Report may be
used apart from the document in its entirety.
The Final Report and the Opinion are necessarily based on economic, market and
other conditions as of the date hereof, and the written and oral information
made available to us until March 11 2003. It is understood that subsequent
developments may affect the conclusions of the Final Report and of the Opinion
and that, in addition, JPMorgan has no obligation to update, revise, or
reaffirm the Opinion.
p. 2
In addition, JPMorgan is expressing no opinion as to the price at which any
securities of Olivetti or Telecom Italia will trade on the stock market at any
time. Other factors after the date hereof may affect the value of the
businesses of Olivetti or Telecom Italia either before or after completion of
the Acquisition and/or the Merger, including but not limited to: (i) the total
or partial disposal of the shares of Olivetti or Telecom Italia by their
respective shareholders within a short period of time after the date of
announcement or completion of the Acquisition or the Merger, (ii) changes in
prevailing interest rates and other factors which generally influence the price
of securities, (iii) adverse changes in the current capital markets, (iv) the
occurrence of adverse changes in the financial condition, the businesses,
certain extraordinary transactions or the prospects of Olivetti or Telecom
Italia, (v) any actions taken or restrictions imposed by any state or
governmental agencies or regulatory authorities, and (vi) the execution of the
Transaction in accordance with the expected terms and within the expected time
periods. No opinion is expressed by JPMorgan whether any alternative
transaction might have been more beneficial to Olivetti.
JPMorgan has acted as financial advisor to Olivetti with respect to the
proposed Transaction and will receive a fee from Olivetti for the services
provided, as well as an additional fee upon completion of the Transaction or in
certain other circumstances.
It is understood that JPMorgan or certain JPMorgan affiliates, in the ordinary
course of their activities, may actively trade, for their own account or for
the account of customers, the equity and debt securities of Olivetti or Telecom
Italia or companies directly or indirectly controlled by, affiliated with
Olivetti and/or Telecom Italia or in which Olivetti or Telecom Italia holds
securities, and, accordingly, may at any time hold long or short positions in
such securities. It also remains understood that JPMorgan or certain JPMorgan
affiliates may currently have and may in the future have commercial banking,
investment banking, trust and other relationships and/or engagements with
counterparties which may have interests with respect to Olivetti, Telecom
Italia or companies directly or indirectly controlled by, affiliated with
Olivetti and/or Telecom Italia or in which Olivetti or Telecom Italia holds
securities. Finally, it remains understood that JPMorgan or certain JPMorgan
affiliates may have fiduciary or other relationships and engagements whereby
JPMorgan or certain JPMorgan affiliates may exercise voting power over
securities of various persons, which securities may from time to time include
securities of Olivetti, Telecom Italia, or companies directly or indirectly
controlled by, affiliated with Olivetti and/or Telecom Italia, or in which
Olivetti or Telecom Italia holds securities, or other parties with an interest
in the Transaction.
p. 3
2. PURPOSES OF THE ASSESSMENT OF THE EXCHANGE RATIO
This Final Report is intended to:
o Provide the Board of Directors with all the useful elements, data and
references in order to assess the fairness of the Merger exchange ratio
and, if appropriate, propose it for approval to the Shareholders' Meeting
o Provide the same elements to the auditing firm appointed to express its
own opinion as required by law
This Final Report is provided solely for the benefit of the Board of Directors
of Olivetti. Therefore, no one, with the exception of members of the Board of
Directors of Olivetti, is authorised to rely upon this opinion. The
shareholders of Olivetti, to whom this Final Report does not confer any rights,
shall use their own financial advisers if they deem it necessary.
3. SOURCES OF INFORMATION USED FOR THE VALUATION
In the execution of the Engagement, JPMorgan has collected and analysed certain
publicly available data and information and other documentation provided by
Olivetti (the "Information").
In particular:
o Consolidated and statutory 2000 and 2001 accounts and draft 2002 accounts
of Olivetti, Telecom Italia, Telecom Italia Mobile, Seat Pagine Gialle
o Half-yearly and quarterly reports for the years 2000, 2001 and 2002 of
Olivetti, Telecom Italia, Telecom Italia Mobile, Seat Pagine Gialle
o The Group Business Plan 2003-2005 of Telecom Italia (January 15, 2003
version) and its update (March 10, 2003)
o Summary table of Telecom Italia concerning the holdings of the Telecom
Italia Group
o Note of Telecom Italia regarding the debt "ex legge 58/1992"
o Note of Telecom Italia regarding certain details on the calculation of
certain items of the cash flow statement and the taxes on the income
statement included in the Group Business Plan 2003-2005
o Summary note of Telecom Italia on the write-down of the Seat Pagine Gialle
holding and of the Seat Pagine Gialle derivative
o Summary note of Telecom Italia on the stock option plans
o Summary table of Olivetti concerning the holdings of the Olivetti Group
o Summary table of Olivetti on outstanding convertible bonds and warrants
o Summary note of Olivetti on the write-down of its holding in Telecom
Italia
o Summary Business Plan 2003-2005 of Olivetti Tecnost
p. 4
In addition, JPMorgan has analysed publicly available information, including:
o Financial research and analysis published by brokers and investment banks;
o Research and analysis concerning competitors or companies with similar
operating characteristics;
o Share price performance
JPMorgan has not been requested to conduct, nor has JPMorgan conducted, any
independent evaluation or appraisal of any assets or liabilities of Olivetti or
Telecom Italia.
The Final Report is necessarily based on financial, economic and market
information available for evaluation as of the date hereof. The accuracy,
truthfulness, and completeness of the Information has not been independently
verified by JPMorgan.
4. DESCRIPTION OF THE TRANSACTION
The Transaction is part of a unified project aimed at the
simplification of the structure of the Olivetti Group, described below in its
key terms:
o Merger by incorporation of Telecom Italia into Olivetti
o Issuance of Olivetti savings shares assigned to Telecom Italia savings
shareholders in accordance with the Merger exchange ratio
o Technique of redistribution of the post Merger Olivetti shares to Telecom
Italia and Olivetti shareholders as way of implementation of the exchange
ratio, with the stock split of the existing share capital from a par value
of Euro 1 per share to Euro 0.55 per share
o Adoption of the corporate purpose and company name of Telecom Italia by
Olivetti
o Withdrawal right due to Olivetti shareholders, as provided for by law
o Preservation of the privilege currently established by art. 7 of the
Bylaws of Telecom Italia for the savings shareholders of Telecom Italia
and inclusion in the Bylaws of the opportunity to benefit from the same
privilege in the event of distribution of reserves as well
o Expected distribution of a dividend by Telecom Italia prior to the
completion of the Merger and crystallisation of the fiscal benefits
connected with the write-down of the stake in Telecom Italia owned by
Olivetti in the draft 2002 accounts
o Securing of a Euro 9 billion credit facility by Olivetti to meet the needs
deriving from the potential exercise of the withdrawal right
p. 5
o The portion of the Euro 9 billion funds not used for the withdrawal right
will be used to launch a partial voluntary public tender offer by Olivetti
on Telecom Italia ordinary and Telecom Italia savings shares in equal
percentages of the total number of each category of shares. Such public
tender offer will be made at a price calculated as the average share price
between March 12 and the date of the Olivetti's Shareholders' Meeting for
the approval of the Merger, increased by a premium of 20%. The resulting
tender offer price will be subject to a minimum and a maximum of Euro 7.0
and Euro 8.4 respectively per Telecom Italia ordinary share, and of Euro
4.7 and Euro 5.65 respectively per Telecom Italia savings share
o Preliminary timetable envisaging the completion of the Merger by the month
of July 2003
5. VALUATION METHODOLOGIES USED FOR THE ASSESSMENT OF THE EXCHANGE RATIO
In the assessment of the exchange ratio, we have used the valuation
methodologies that are commonly used, in an international context, for
transactions of a similar nature and for companies operating in this sector.
In particular, the exchange ratio has been assessed by looking at the relative
valuation of the companies considered, giving priority to the consistency and
comparability of the criteria adopted rather than the estimate of the absolute
value of the economic capital of those companies considered as individual
entities.
As a consequence, the results indicated in this document refer to the
assessment of the relative values of the economic capital of Olivetti and
Telecom Italia. From such perspective, the valuations have been performed by
considering the two companies as independent entities from an operating
standpoint. Hence, they do not include any considerations concerning strategic,
operating and financial synergies that may result from the Merger.
The valuation of Telecom Italia has been performed using the Sum-of-the-Parts
fundamental methodology, which it is market practice to employ to assess the
value of a group operating in various business sectors, and the main businesses
have been valued with the Discounted Cash Flow methodology. The results
obtained employing the Sum-of-the-Parts methodology have been verified with the
analysis of the target prices expressed by research analysts.
The valuation of Olivetti has been performed using the NAV ("Net Asset Value")
methodology, which it is market practice to employ to value financial holding
companies without substantial operating activities.
p. 6
The estimated range for the exchange ratio has therefore been calculated as the
ratio between the estimated value of a Telecom Italia share and the estimated
value of an Olivetti share based on the minimum and maximum values of the
respective ranges.
In order to verify the accuracy of the assessment of the exchange ratio
determined using the criterion mentioned above, we have also performed an
additional check based on the average exchange ratio expressed by the stock
market over different time periods.
6. VALUATION OF TELECOM ITALIA
The valuation of Telecom Italia has been performed using the Sum-of-the-Parts
fundamental methodology, in which the main businesses (Telecom Italia S.p.A.,
Telecom Italia Mobile, Seat Pagine Gialle-directory) have been valued primarily
with the Discounted Cash Flow method. The other remaining businesses have been
valued using the criterion of market values, where listed on regulated stock
markets, and/or the market multiples method, also using book values and values
identified by research analysts for such businesses, where available, as a
verification and control criterion.
To the sum of the values of the activities calculated using the criteria
indicated above, we have added up algebraically the value of the net financial
position as at 31/12/2002 adjusted to take into account the effects of
proportionate net debts, where relevant, and the net value of other adjustments
including the value of certain off-balance sheet items and certain tax
benefits.
The following table shows the minimum, the mid-point and the maximum value for
each Telecom Italia ordinary share identified using the Sum-of-the-Parts
fundamental methodology, before adjustment for the dividend payment expected
for the month of June 2003 and hence prior to completion of the Merger.
Minimum Mid-point Maximum
------- --------- -------
Values per Telecom Italia 8.3 8.8 9.3
ordinary share (Euro)
Note: the figures in this table have been rounded up
The results obtained using the Sum-of-the-Parts fundamental methodology have
been verified with the analysis of the target prices expressed by research
analysts. The research and financial analyses published by brokers and
investment banks available as of the date hereof, resulting in a sample of 20
data for the target prices for a Telecom Italia ordinary share, highlight a
value range comprised between Euro 7.5 and Euro 12.0 for each Telecom Italia
ordinary share. The average value of such sample equals Euro 9.2 for each
Telecom Italia ordinary share; the midpoint value of the range identified
equals Euro 9.8 for each Telecom Italia ordinary share.
p. 7
The following table shows the minimum, the mid-point and the maximum value per
Telecom Italia ordinary share identified by the Sum-of-the-Parts fundamental
methodology, adjusted to take into account the effect of the dividend payment
expected for the month of June 2003.
Minimum Mid-point Maximum
------- --------- -------
Values per Telecom Italia 8.1 8.6 9.1
ordinary share (Euro)
Note: the figures in this table have been rounded up
The following table shows the minimum, the mid-point and the maximum value for
each Telecom Italia savings share calculated based on the average market
discount in the last month of approximately 33%, which is in line with the
discount of the last day of trading (March 7) and substantially in line with
the average discount in the last 3, 6 and 12 months.
Minimum Mid-point Maximum
------- --------- -------
Values per Telecom Italia 5.4 5.8 6.1
savings share (Euro)
Note: the figures in this table have been rounded up
7. VALUATION OF OLIVETTI
The valuation of Olivetti has been performed using the NAV ("Net Asset Value")
methodology, which reflects Olivetti's nature as a financial holding company
without substantial operating activities. The Net Asset Value is calculated as
an algebraic sum of the value of the holdings and other activities, deducting
net financial liabilities. In calculating this algebraic sum, the main holding
is the stake held in Telecom Italia shares, which is valued based on the range
of values identified by the Sum-of-the-Parts fundamental methodology, adjusted
for the effect of the payment of the dividend expected for the month of June
2003. The other holdings and activities are valued utilising the discounted
cash flow methodology (Olivetti Tecnost), utilising the criterion of market
values, where listed on regulated stock markets, and/or the market multiples
method, also using book values and the values identified by research analysts
for such activities, where available, as the verification and control
criterion. The calculation of the Net Asset Value also includes the value of
the tax benefits in connection with the write-down of the stake in Telecom
Italia held by Olivetti in the draft 2002 accounts of Olivetti. The value of
such tax benefit is calculated as the net present value of the tax savings
expected for Olivetti on a "stand-alone" basis as provided by Olivetti.
To the sum of the values of the activities and the tax benefit calculated using
the criteria indicated above, we have added algebraically the value of the net
financial position as of 31/12/2002, adjusted for the effect of the dividend
relative to the Telecom Italia shares to be received in the
p. 8
month of June 2003, and also adjusted for the pro-forma effect of the
conversion of the convertible bonds 1.5% 2001-2010 consistent with the
fully-diluted methodology, which assumes their conversion into ordinary shares.
The following table shows the minimum, the mid-point and the maximum value for
each Olivetti ordinary share consistent with the fully-diluted methodology.
Minimum Mid-point Maximum
------- --------- -------
Values per Olivetti ordinary 1.13 1.26 1.38
share (Euro)
Note: the figures in this table have been rounded up
The following table shows the minimum, the mid-point and the maximum value for
each Olivetti savings share, calculated assuming the same discount of 33%
assumed for each Telecom Italia savings share, having taken into account that
Olivetti savings shares will enjoy economic and administrative rights which are
not less than those enjoyed by Telecom Italia savings shares.
Minimum Mid-point Maximum
------- --------- -------
Values per Olivetti savings 0.76 0.84 0.93
share (Euro)
Note: the figures in this table have been rounded up
8. CONCLUSIONS OF THE ASSESSMENT AND VERIFICATION OF THE EXCHANGE
RATIO The following table summarises the estimated range for the exchange ratio
calculated as a ratio between the estimated value for each Telecom Italia share
and the estimated value for each Olivetti share based on the minimum and the
maximum of their respective ranges previously identified.
Minimum Mid-point Maximum
------- --------- -------
Olivetti ordinary shares for 6.6 6.9 7.2
each Telecom Italia ordinary
share
Olivetti savings shares for 6.6 6.9 7.2
each Telecom Italia savings
share
Note: the figures in this table have been rounded up
In order to verify the accuracy of the estimated exchange ratio determined with
the criterion mentioned above, we have also performed an additional control
based on the exchange ratio (Olivetti ordinary shares for each Telecom Italia
ordinary share) expressed by the stock market over different time periods (data
as of March 7, 1-month, 3-month, 6-month and 12-month averages) adjusted to
take into account the effect of the payment of the dividend expected for the
month of June 2003 prior to the Merger.
p. 9
7 1 3 6 12
March month months months months
----- ----- ------ ------ ------
Olivetti ordinary shares for 6.7 7.0 6.9 7.1 6.9
each Telecom Italia ordinary
share
Note: the figures in this table have been rounded up
The following table shows the minimum, the mid-point, and the maximum exchange
ratio (Olivetti ordinary shares for each Telecom Italia ordinary share)
expressed by the stock market calculated above.
Minimum Mid-point Maximum
------- --------- -------
Olivetti ordinary shares for 6.7 6.9 7.1
each Telecom Italia ordinary
share
Note: the figures in this table have been rounded up
The results of the valuation carried out using the main methodology, further
verified in light of the control methodology based on the average exchange
ratio expressed by the stock market, show that the pre-redistribution Merger
exchange ratio of 7.0 Olivetti ordinary shares for each Telecom Italia ordinary
share and of 7.0 Olivetti savings shares for each Telecom Italia savings share
is within the identified ranges and is therefore fair, from a financial point
of view, to Olivetti.
Best regards,
/s/ FRANCESCO ROSSI FERRINI /s/ GUIDO TUGNOLI
--------------------------- -----------------
Francesco Rossi Ferrini Guido Tugnoli
Managing Director Managing Director
JPMorgan Chase Bank JPMorgan Chase Bank
p. 10
Annex IX.
Summary description of the analyses carried out by JP Morgan Chase Bank, as
Olivetti's financial advisor, with reference to its Fairness Opinion
Summary description of the analyses carries out by JPMorgan Chase Bank, as
Olivetti's financial advisor, with reference to its Fairness Opinion
Olivetti retained JPMorgan Chase Bank (JPMorgan) to advise it in connection
with the proposed Merger and related transactions, including as to the
fairness, from a financial point of view, to Olivetti of the exchange ratio
with respect to the Merger.
In selecting JPMorgan as its financial advisor, Olivetti considered JPMorgan's
knowledge of the business and affairs of Olivetti and Telecom Italia, as well
as its qualification as an internationally recognized investment banking firm
that has substantial experience in transactions similar to the Merger and
related transactions. JPMorgan, as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes.
On March 11, 2003, at a meeting of the Olivetti board of directors held to
consider the Merger and related transactions, JPMorgan delivered a written
opinion to the Olivetti board to the effect that, as of that date, based on the
procedures followed, and subject to the premises, qualifications and
assumptions on the scope of review undertaken described in the opinion, the
pre-redistribution Merger exchange ratio of seven Olivetti ordinary shares for
each Telecom Italia ordinary share and of seven Olivetti savings shares for
each Telecom Italia savings share was fair, from a financial point of view, to
Olivetti.
On April 15, 2003, JPMorgan confirmed to the board of directors of Olivetti in
writing that, to JPMorgan's knowledge, taking into account the criteria upon
which the March 11, 2003 opinion was based, as well as the premises,
qualifications and assumptions set out therein, no material event had occurred
since March 11, 2003 that would lead JPMorgan to change, as of the date of the
confirmation, the conclusion of its March 11, 2003 opinion. In providing this
confirmation, JPMorgan did not take into account the prices of the shares of
Telecom Italia or Olivetti subsequent to the announcement of the proposed
Merger.
JPMorgan's March 11, 2003 opinion and its April 15, 2003 letter (the JPMorgan
reports) were directed to the Olivetti board of directors and addressed only
the fairness, from a financial point of view, to Olivetti of the
pre-redistribution Merger exchange ratio, which was arrived at by the boards of
directors of Olivetti and Telecom Italia after considering the advice of their
respective financial advisors. JPMorgan provided the reports to inform and
assist the Olivetti board of directors in connection with its consideration of
the Merger and related transactions. This summary of the JPMorgan reports is
included only for informational purposes, and neither this summary nor the
JPMorgan reports constitute a recommendation to any securityholder of Olivetti
or Telecom Italia as to whether they should take any action with respect to the
Merger and related transactions including, without limitation, with respect to
the right of withdrawal available to Olivetti shareholders or the tender offer
that may be made available to Telecom Italia shareholders. The JPMorgan reports
did not address the underlying decision of the Olivetti board or the Telecom
Italia board to approve the Merger and related transactions, or whether any
alternative transaction might have been more beneficial.
The full text of JPMorgan's March 11, 2003 opinion, which sets forth the
assumptions made, procedures followed, matters considered, documents reviewed
and limitations on the review undertaken by JPMorgan in connection with the
opinion, as well as the full text of JPMorgan's April 15, 2003 confirmation
letter, are attached as Annex VIII and Annex X and are incorporated by
reference into this document. You are urged to read the opinion and
confirmation letter carefully and in their entirety.
In the course of performing its review and analyses for the purpose of
rendering its March 11, 2003 opinion, JPMorgan, among other things:
o reviewed documents that set out the terms of the proposed Merger and
related transactions;
o reviewed financial and other information that was publicly available or
furnished to JPMorgan by Olivetti, including internal financial analyses,
budgets and forecasts for Olivetti and for Telecom Italia prepared by
Olivetti or Telecom Italia management;
o held discussions with various members of the senior management of Olivetti
and Telecom Italia and with their respective representatives and advisors;
o reviewed the historical market price and trading activities of Olivetti
and Telecom Italia securities;
o reviewed publicly available equity analyst research reports; and
o conducted other financial studies, analyses and investigations as it
deemed appropriate.
In the course of its review and analysis and in rendering the JPMorgan reports,
JPMorgan relied upon the accuracy and completeness of all financial and other
information reviewed by it and did not assume any responsibility for
independent verification of such information. With respect to the financial and
operating forecasts provided by Olivetti and by Telecom Italia, JPMorgan
assumed that those forecasts had been reasonably prepared on bases reflecting
the best estimates and judgments then available of the respective managements
of those companies as to the future financial and operating performance of
those companies.
JPMorgan did not prepare any independent evaluation or appraisal of the assets
or liabilities of, nor did JPMorgan conduct a physical inspection of any of the
assets of, Olivetti or Telecom Italia or any of their subsidiaries. With
respect to the projections provided to JPMorgan, JPMorgan notes that projecting
future results is inherently subject to substantial uncertainty. Although those
projections constituted one of many items that JPMorgan employed in the
formation of its reports, changes to the projections could affect JPMorgan's
conclusion. JPMorgan's reports were based on economic, industry, regulatory,
market, political and other conditions existing at the date of its reports,
including in the case of its March 11, 2003 opinion, market prices of
Olivetti's and Telecom Italia's securities. These conditions are generally
beyond Olivetti's or Telecom Italia's control and are subject to rapid and
unpredictable changes, which changes could affect the conclusion JPMorgan
expressed. JPMorgan made no independent investigation of any legal matters
affecting Olivetti or Telecom Italia and assumed the correctness of all legal,
tax and accounting advice given to each of Olivetti and Telecom Italia and
their respective boards of directors, including without limitation advice as to
the legal, tax and accounting consequences of the Merger and related
transactions to Olivetti, Telecom Italia and their respective securityholders.
JPMorgan assumed that the Merger and related transactions will be consummated
in accordance with the expected terms and within the expected time periods.
The following is a brief summary of the material financial analyses performed
by JPMorgan in connection with rendering its March 11, 2003 opinion. The
summary is not a complete description of the analyses performed by JPMorgan.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The order
of the analyses described, and the results of those analyses, do not
necessarily represent the relative importance or weight given to
2
the analyses by JPMorgan. Selecting portions of this summary without
considering the analyses as a whole could create an incomplete view of the
processes underlying JPMorgan's analyses and opinion. The analyses JPMorgan
performed are not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than those suggested
by the analyses. Additionally, the analyses relating to the value of businesses
do not purport to be prices realizable in a transaction or to reflect actual or
future market valuations or trading ranges.
JPMorgan expressed no opinion as to the prices at which the ordinary shares or
savings shares of Olivetti will trade following completion of the Merger, or as
to the prices at which the ordinary shares and savings shares of Telecom Italia
or the ordinary shares of Olivetti will trade prior to completion of the
Merger, including during any period relevant to withdrawal rights. Although
JPMorgan reviewed the withdrawal rights, the tender offer and the financing
therefor as part of its review of the general terms of the Merger and related
transactions, JPMorgan expressed no opinion as to the likelihood that Olivetti
shareholders would exercise their withdrawal rights or as to the amount of
funds available to or the participation by shareholders of Telecom Italia in
the tender offer.
JPMorgan did not use the values resulting from its analyses
for any purpose other than that of evaluating the fairness of the
pre-redistribution Merger exchange ratio to Olivetti and those values should
not be used for any other purpose. In accordance with customary investment
banking practice, JPMorgan employed generally accepted valuation methods in
preparing its March 11, 2003 opinion. In particular, in evaluating the Merger
exchange ratio, JPMorgan focused on the relative valuations of Olivetti and
Telecom Italia, giving priority to the consistency and comparability of the
criteria adopted, rather than the absolute value of those companies. JPMorgan
carried out its analyses considering the two companies as separate entities and
therefore ignored any strategic, operational or financial synergies that may
result from the Merger, as well as any control premiums and minority discounts.
JPMorgan adopted a "sum-ofthe- parts" approach with respect to Telecom Italia
because Telecom Italia's businesses operate in different operational,
industrial and strategic environments and because of the differing importance
and materiality of those businesses in relation to Telecom Italia as a whole.
JPMorgan adopted a "net asset value" approach, which is substantially
equivalent in methodological terms to the sum-of-the-parts approach, with
respect to Olivetti, analyzing the value of its stake in Telecom Italia based
on the range of values identified by the sum-of-the-parts method. JPMorgan did
not use the market price of Telecom Italia shares to analyze the value of
Olivetti's stake in Telecom Italia in deriving the net asset value of Olivetti
because the use of a market value method in this instance would not have been
consistent with the analyses performed with respect to Telecom Italia. Lastly,
JPMorgan compared the range of exchange ratios calculated using the above
criteria with the exchange ratios derived from the relative historical trading
prices of the ordinary shares of Olivetti and Telecom Italia over selected time
periods prior to the announcement of the transaction.
Sum-of-the-Parts Analysis of Telecom Italia. JPMorgan analyzed the three main
businesses of Telecom Italia, Telecom Italia S.p.A., Telecom Italia Mobile and
the directory business of Seat Pagine Gialle, using the discounted cash flow
method. The remaining Telecom Italia businesses, which are minor in relation to
Telecom Italia as a whole, were analyzed using their market value, where their
securities are publicly traded, and on various other criteria depending on the
nature of the business, including market multiples and book value. In addition,
JPMorgan compared the values derived by the foregoing analyses with values
identified by research analysts for such businesses, where available.
JPMorgan performed a discounted cash flow analysis based on operating and
financial assumptions, forecasts and other information prepared by Telecom
Italia for the years 2003 through 2005, which were extended through 2012, and
for the calculation of terminal values, as described below. Assumptions
regarding weighted average cost of capital (WACC) were based on market
conditions and on a capital
3
structure substantially in line with the current one. The growth rates used by
JPMorgan for the projections from the years 2006 through 2012 and for the
terminal values are consistent with relevant market benchmarks.
With regards to Telecom Italia S.p.A. activities, a 2005-2012 revenue compound
annual growth rate (CAGR) of 0.0% and an average earnings before interest,
taxes, depreciation and amortization (EBITDA) margin of 45.2% were assumed for
the 2006-2012 financial projections, and a terminal value growth rate of 0.0%
and a WACC of 7.4% were used in the discounted cash flow valuation. With
regards to Telecom Italia Mobile, a 2005-2012 revenue CAGR of 5.0% and an
average EBITDA margin of 45.7% were assumed for the 2006-2012 financial
projections, and a terminal value growth rate of 2.0% and a WACC of 8.8% were
used in the discounted cash flow valuation. With regards to the directory
business of Seat Pagine Gialle, a 2005-2012 revenue CAGR of 3.1% and an average
EBITDA margin of 44.8% were assumed for the 2006-2012 financial projections,
and a terminal value growth rate of 2.0% and a WACC of 8.9% were used in the
discounted cash flow valuation.
As a further part of its analysis, JPMorgan compared the values derived from
the discounted cash flow analysis to values derived for the businesses by
applying relevant multiples in line with those of certain comparable companies
and to values identified by research analysts for such businesses, where
available.
The values derived from the foregoing analyses were adjusted to take into
account net debt as of December 31, 2002, and where relevant, the net value of
other adjustments, including certain off-balance sheet items and certain tax
benefits.
The sum-of-the-parts method described above resulted in the following
minimum, mid-point and maximum values for each Telecom Italia ordinary share on
a fully diluted basis before adjustment for the dividend expected to be paid in
June 2003.
Minimum Mid-point Maximum
------- --------- -------
Value per Telecom Italia 8.3 8.8 9.3
ordinary share euro
Note: the figures in this table have been rounded up
JPMorgan compared the results obtained using the sum-of-the-parts method before
adjustment for the dividend expected to be paid in June 2003 with target prices
published by equity research analysts prior to March 11, 2003. These target
prices for a Telecom Italia ordinary share ranged from euro 7.5 to euro 12.0
for each Telecom Italia ordinary share with an average value of euro 9.2 for
each Telecom Italia ordinary share and a mid-point of euro 9.8 for each Telecom
Italia ordinary share.
The following table shows the minimum, mid-point and maximum values per Telecom
Italia ordinary share identified by the sum-of-the-parts fundamental method,
adjusted to take into account the effect of the dividend expected to be paid in
June 2003.
Minimum Mid-point Maximum
------- --------- -------
Value per Telecom Italia 8.1 8.6 9.1
ordinary share in euro
Note: the figures in this table have been rounded up
The following table shows the minimum, mid-point and maximum values for each
Telecom Italia savings share, calculated based on the average market discount
to the Telecom Italia ordinary shares during the last month before public
announcement of the proposed Merger of approximately 33%, which is in line
4
with the discount of the last day of trading prior to the announcement of the
transaction, March 7, 2003, and substantially in line with the average market
discount during the previous three, six and 12 months.
Minimum Mid-point Maximum
------- --------- -------
Value per Telecom Italia 5.4 5.8 6.1
savings share in euro
Note: the figures in this table have been rounded up
Net Asset Value Analysis of Olivetti. JPMorgan performed a net asset value
analysis of Olivetti, reflecting Olivetti's nature as a financial holding
company without substantial operating activities. JPMorgan analyzed Olivetti's
net asset value as the sum of the value of Olivetti's holdings and other
activities (including the effect of treasury shares), considering the negative
net present value of the centralized costs of the holding company and deducting
net financial liabilities. Olivetti's principal asset is its stake in Telecom
Italia shares, the value of which JPMorgan derived using the sum-of-the-parts
method described above, adjusted for the effect of the dividend expected to be
paid by Telecom Italia in June 2003. The remaining Olivetti holdings form a
minor component of its overall valuation and were analyzed using a variety of
valuation methods depending on the nature of the holding, including a
simplified discounted cash flow method for Olivetti Tecnost, market value,
where the holding is publicly traded, market multiples and book values. In
addition, JPMorgan compared the values derived using the methods described
above with values identified by research analysts for such holdings, where
available. The calculation of Olivetti's net asset value also included the
value of tax benefits in connection with the write-down of Olivetti's stake in
Telecom Italia, which were calculated using the net present value of the tax
savings expected by Olivetti on a "stand-alone" basis.
The values derived from the foregoing analyses were adjusted to take into
account Olivetti's net debt as of December 31, 2002, adjusted for the effect of
the dividend on Telecom Italia shares expected to be paid in June 2003 and
adjusted to reflect the pro-forma effect on a fully diluted basis of the
conversion of all Olivetti's 1.5% convertible bonds due 2010.
This method resulted in the following minimum,
mid-point and maximum values for each Olivetti ordinary share on a
fully-diluted basis.
Minimum Mid-point Maximum
------- --------- -------
Value per Olivetti 1.13 1.26 1.39
ordinary share in euro
Note: the figures in this table have been rounded up
This method would result in the following minimum, mid-point and maximum
values for each Olivetti savings share, if the same discount of 33% assumed for
each Telecom Italia savings share were applied, taking into account, among
other things, that Olivetti savings shares will enjoy economic and
administrative rights not less than those of Telecom Italia savings shares.
Minimum Mid-point Maximum
------- --------- -------
Value per Olivetti savings 0.76 0.84 0.93
share in euro
Note: the figures in this table have been rounded up
Analysis of the Exchange Ratio. JPMorgan compared the results derived from the
application of the above valuation methods for Telecom Italia and Olivetti,
obtaining the following range of implied Merger exchange ratios.
5
Minimum Mid-point Maximum
------- --------- -------
Olivetti ordinary shares for 6.6 6.9 7.2
each Telecom Italia ordinary
share
Olivetti ordinary shares for 6.6 6.9 7.2
each Telecom Italia savings
share
Note: the figures in this table have been rounded up
JPMorgan also compared the range of Merger exchange ratios set forth above
against the Merger exchange ratios derived from the relative historical trading
prices of the ordinary shares of the two companies over selected time periods
prior to the announcement of the transaction, adjusted to take into account the
effect of the dividend expected to be paid in June 2003. A similar comparison
could not be made with respect to the savings shares because there are
currently no Olivetti savings shares.
Average Average Average Average
of 1 of 3 of 6 of 12
month months months months
Ending Ending Ending Ending
March 7 March 7 March 7 March 7 March 7
------- ------- ------- ------- -------
Olivetti ordinary shares 6.7 7.0 6.9 7.1 6.9
for each Telecom Italia
ordinary share
Note: the figures in this table have been rounded up
On 13 January 2003, JPMorgan was retained by Olivetti initially to assist in
considering the feasibility of, and, upon Olivetti's decision to proceed, to
act as its financial advisor with respect to, the Merger and related
transactions, which engagement was formalized in an engagement letter dated 5
March 2003. Pursuant to the terms of the engagement letter, JPMorgan was paid a
fee of euro 5 million by Olivetti, which became due upon the public
announcement of the proposed Merger. In addition, Olivetti has agreed to pay
JPMorgan a fee of between euro 10 million and euro 15 million upon completion
of the Merger (the amount in excess of euro 10 million to be paid will be
decided by Olivetti based on the performance of JPMorgan in executing its
duties) or in certain other circumstances. Olivetti has also agreed to
reimburse JPMorgan for its reasonable expenses incurred in connection with its
services, including the fees and disbursements of outside counsel, and will
indemnify JPMorgan against certain liabilities. In addition J.P. Morgan plc, an
affiliate of JPMorgan, acted as global co-ordinator, bookrunner and mandated
lead arranger of the euro 9 billion term loan facility entered into in
connection with the Merger and related transactions, for which it will receive
maximum total fees of approximately euro 21 million, of which approximately
euro 4.9 million became due on 24 April 2003. JPMorgan and its affiliates, in
the ordinary course of their activities, may actively trade for their own
account or for the accounts of customers the equity and debt securities of
Olivetti or Telecom Italia or companies directly or indirectly controlled by,
affiliated with Olivetti or Telecom Italia or in which Olivetti or Telecom
Italia holds securities, and, accordingly, JPMorgan and its affiliates may at
any time hold long or short positions in such securities. JPMorgan and its
affiliates have in the past represented Olivetti and Telecom Italia or
companies directly or indirectly controlled by, affiliated with Olivetti or
Telecom Italia or in which Olivetti or Telecom Italia holds securities in
connection with a variety of commercial banking, investment banking, capital
markets, and other transactions. JPMorgan and its affiliates may currently have
and may
6
in the future have commercial banking, investment banking, trust or other
relationships or engagements with counterparties that may have interests with
respect to Olivetti, Telecom Italia or companies directly or indirectly
controlled by, associated with Olivetti or Telecom Italia or in which Olivetti
or Telecom Italia holds securities, which interests may in some cases be
contrary to the interests of any of those companies. JPMorgan and its
affiliates may have fiduciary or other relationships or engagements in which
JPMorgan or its affiliates may exercise voting power over securities of various
persons, which securities may from time to time include securities of Olivetti,
Telecom Italia, or companies directly or indirectly controlled by, affiliated
with Olivetti or Telecom Italia or in which Olivetti or Telecom Italia holds
securities, or other parties with an interest with respect to the Merger and
related transactions.
7
Annex X.
JP Morgan Chase Bank Confirmation Letter
ORIGINAL DOCUMENT ISSUED ON JPMORGAN CHASE BANK HEADED PAPER.
TRANSLATION FROM THE ORIGINAL DOCUMENT ISSUED IN ITALIAN PREPARED
EXCLUSIVELY FOR INFORMATIVE PURPOSES. THE ORIGINAL DOCUMENT IN ITALIAN
PREVAILS ON ANY TRANSLATION.
Milan, April 15 2003
Olivetti S.p.A.
Via Jervis, 77
Ivrea (TO)
Italia
To the kind attention of Dott. Carlo Buora, Managing Director
Dear Sirs,
With reference to our fairness opinion dated 11 March 2003 on the share
exchange ratio of the merger of Olivetti S.p.A. with Telecom Italia S.p.A.
provided pursuant to our engagement letter dated 5 March 2003 (the "Fairness
Opinion"), we hereby confirm that, to our knowledge - taking into account the
same criteria upon which the Fairness Opinion was given as well as the same
premises, qualifications and assumptions set out therein -, no material event
has occurred since the date of the Fairness Opinion that would lead us to
change, as of the date hereof, the conclusions of the Fairness Opinion.
Please note that in providing this confirmation we have not taken into account
the share prices of either Olivetti S.p.A. or Telecom Italia S.p.A. subsequent
to the announcement of the proposed merger between these two companies.
Best regards,
/s/ FRANCESCO ROSSI FERRINI /s/ GUIDO TUGNOLI
--------------------------- -----------------
Francesco Rossi Ferrini Guido Tugnoli
Managing Director Managing Director
JPMorgan Chase Bank JPMorgan Chase Bank
Annex XI.
Lazard Fairness Opinion, used by the directors
of Telecom Italia S.p.A. for the purpose
of establishing the exchange ratio
Execution Copy
STRICTLY CONFIDENTIAL LAZARD & CO. S.R.L
Via dell'Orso - 2 - 20121 MILANO
CAP.SOC. Euro 9.000.000
R.E.A. 1630616
C.F. e P.IVA 13233960155
TELEFONO +39 02 72312.1
FAX +39 02 72312387
To:
Telecom Italia S.p.A.
The Board of Directors
Piazza Affari 2
20123 Milano
Attn: Dott. Carlo Buora, Amministratore Delegato
March 11, 2003
Dear Members of the Board,
The present document (the "Assessment") is addressed to the Board of Directors
of Telecom Italia S.p.A. ("Telecom") for its exclusive use and is intended to
provide elements to permit the Board of Directors of Telecom, in its full
independence of judgment and decision, to put forward the appropriate exchange
ratio for the implementation of an operation involving the merger to
incorporate Telecom into Olivetti S.p.A. ("Olivetti", and together with
Telecom, the "Companies"), which will be accompanied by the launch of a tender
offer by Olivetti for the ordinary shares and the savings shares of Telecom
(the "Proposed Merger"). The holders of the ordinary shares and the savings
shares of Telecom other than Olivetti are collectively referred to herein as
the "Public Shareholders".
The contents of the Assessment are confidential and may not be used for any
purpose other than the purpose for which the Assessment has been prepared nor
be disclosed to third parties. Any possible different use of the Assessment is
subject to the prior written authorization of Lazard & Co. S.r.l. ("Lazard").
In addition, the use of partial results and data referred to in individual
aspects of the present Assessment may not be used outside the context and the
purpose for which the entire Assessment has been carried out. You are reminded
that the conclusions set forth in the Assessment are based on the totality of
the valuations included herein, and consequently none of the components of the
Assessment may be used separately from the other components.
The Assessment is necessarily based on economic, monetary and market conditions
existing as of the date hereof, and the information made available to us as of
the date hereof. Events occurring after the date hereof may affect this
Assessment and the assumptions on which it has been prepared, and Lazard has no
obligation and may not be in a position to update, revise or reaffirm this
Assessment. In addition, it is finally pointed out that the Assessment has been
carried out in a normative, regulatory and competitive context that is in
constant evolution. Subsequent changes to the structural aspects of the
telecommunications sector, laws and regulations could influence the variables
affecting the value of the Companies.
Lazard does not express any opinion with respect to Telecom's decision to
proceed with or implement the Proposed Merger and the Assessment does not
constitute an indication as to how Telecom should make its decision with
respect to the Proposed Merger. Lazard hereby
acknowledges that the exchange ratio of the ordinary shares and the savings
shares of Telecom, which will be determined by the Boards of Directors of
Telecom and Olivetti, will be subject to a fairness opinion issued by experts
appointed by the President of the Court of Milan, pursuant to article
2501--quinquies, last paragraph of the Italian Civil Code. The engagement of
Lazard and the Assessment expressed herein are solely for the benefit of the
Board of Directors of Telecom and are not on behalf of, and are not intended to
grant any rights or remedies upon, Telecom, Olivetti, or any their respective
shareholders or any other person.
Lazard was been requested to deliver this Assessment at a preliminary stage of
the Proposed Merger, and to assume and take into consideration that: (i) the
Boards of Directors of the Companies will, in their sole and independent
judgment and discretion, each respectively evaluate the Proposed Merger and
prepare and approve merger plans, reports, and related documentation, which
will contain customary terms and conditions, as well as obtain appraisals of
independent experts, all in accordance with applicable Italian and foreign laws
and regulations, (ii) the Proposed Merger will be consummated on the terms and
conditions to be described in the aforementioned merger plans and related
documentation, and (iii) the obtaining of the necessary regulatory approvals
for the Proposed Merger will not have an adverse effect on the Companies.
Consequently, it is hereby underlined that the Assessment is necessarily
preliminary in nature and the conclusions contained herein could vary depending
on several factors, including the actual terms and conditions of the merger
plans and related documentation prepared by the Boards of Directors of Telecom
and Olivetti.
Lazard is acting as financial advisor to Telecom in connection with the
Proposed Merger and will receive a fee for its services, a considerable part of
which is contingent upon the Proposed Merger being completed. Lazard has in the
past provided financial advisory services to Telecom for which it has received
customary fees. Lazard and its affiliate companies have also provided financial
advisory services to Olivetti and Pirelli S.p.A., including with respect to
acquisition transactions, in particular with respect to Telecom. Lazard may
provide financial advisory services to Olivetti or Pirelli S.p.A. in the
future. In addition, certain of companies affiliated with Lazard may trade
shares and other securities of the Companies for their own account and for the
accounts of their customers.
Subject Companies.
------------------
Olivetti.
---------
Olivetti is an industrial holding company, which as of the date hereof holds
approximately 54,94% of the outstanding ordinary shares of Telecom. Olivetti
indirectly acquired, through a subsidiary Tecnost S.p.A., and following a
Public Tender and Exchange Offer launched in February 1999 and realized in June
1999, 52,12% of the ordinary shares of Telecom. Thereafter, Tecnost S.p.A. was
incorporated by merger into Olivetti at the end of 2000 within the framework of
a project to rationalize the structure of the Olivetti group. Such shareholding
subsequently increased as a result of new acquisitions on the market carried
out by Olivetti.
The Olivetti group is also present in areas of activity other than
telecommunications services through it subsidiaries, the most significant of
which are Olivetti Tecnost S.p.A. (formerly Olivetti Lexikon S.p.A.), which is
involved in the production of office products and Olivetti Multiservices
S.p.A., which is involved in the management of realty.
Telecom.
--------
The core business of the Telecom group (Telecom, TIM S.p.A., SEAT S.p.A)
consists of the supply of fixed and mobile telecommunications services and
Internet services. In addition, Telecom is present in a few specific
information and communications technology sectors.
Overseas, Telecom has an active presence through investments in other companies
and joint ventures which manage fixed and mobile telecommunications services in
different markets, in particular in Europe, in the Mediterranean basin and in
South America (Argentina, Brazil and Chile, etc.).
With respect to information and communications technology, Telecom is present
through I.T. Telecom Italia S.p.A., a company that was formed in July 2000 to
group all of Telecom's information technology activities carried out by several
companies of the Telecom Group, including Finsiel S.p.A., leader in Italy and
in top positions in Europe in the information services market, Telesoft S.p.A.
and Sodalia S.p.A., which are active in software for telecommunications and
information services, and Netsiel S.p.A., which manages the outsourcing of
information systems for Telecom and other companies.
Documents Considered.
---------------------
The Assessment is based on:
(i) historical economic-financial information relating to the Companies;
(ii) financial forecasts and other data relating to its activities
provided to us by Telecom;
(iii) the historical stock prices and trading volumes of the ordinary
shares and the savings shares of Telecom as well as the shares of
Olivetti;
(iv) meetings with members of the senior management of Telecom who
delivered and explained the documentation provided;
(v) publicly available information on companies operating in business
lines we believe to be generally comparable to those of Telecom and
Olivetti; and
(vi) such other financial analyses and investigations deemed appropriate.
Lazard has relied upon the accuracy and completeness of the foregoing
information and data, and does not assume any responsibility with respect to
any independent verification of such information or any independent valuation
or appraisal of any of the assets or liabilities of the Companies. With respect
to financial forecasts, Lazard has assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of management of Telecom as to its future performance. Lazard does
not assume any responsibility for, nor expresses any opinion as to such
forecasts or the assumptions on which they are based.
Valuation.
----------
The relative market prices valuation (the "Market Prices Valuation") was used
as principal criterion to determine the exchange ratio with respect to the
Proposed Merger. In addition, the so-called sum of the parts ("SOP") control
methodology was carried out for Telecom ed Olivetti (on a fully diluted basis).
In compliance with the engagement conferred by Telecom on February 5, 2003 and
your requests, Lazard expresses no opinion with respect to the absolute value
of such securities or any other method of analyzing the exchange ratio and
Lazard has not undertaken any independent evaluation of the absolute value of
the securities of Telecom or Olivetti.
With respect to the application of the principal methodology, the following is
deduced:
o the significance of the prices expressed by the market where the
securities subject of the valuation are traded;
o the significance of the prices expressed by the market for the shares
of the Companies being studied;
o the existence of comparable share prices for the Companies being
examined over a sufficiently broad time period.
In such regard, the following is pointed out:
o both Companies have a high market capitalization and a significant
and broadly diffused float;
o the considerably high volume of trading of the securities leads to
one to consider that the market prices can be considered to be
indicative of the potential value of Telecom and Olivetti;
o high volumes of the securities of Telecom and Olivetti are traded
daily (on the average approximately 1% of the capital is traded):
> over the course of the last twelve months, 240% of Olivetti's
capital has been traded (excluding Olimpia S.p.A.) for a
countervalue of approximately Euro 16,9 billion; and
> over the course of the last twelve months, approximately 289% of
Telecom's capital has been traded (excluding the shares held by
Olivetti) for a countervalue of approximately Euro 54 billion
Average traded Cumulative traded
Average Volume Cumulative Volume Share Capital Share Capital
('000) ('000) (%)(*) (%)(*)
------------------ ------------------------- -------------- -----------------
TI Olivetti TI Olivetti TI Olivetti TI Olivetti TI Olivetti
---- -------- -------- -------- ----------- ------------ ---- -------- ------ --------
Prices
3/7/2003 5.93 0.86 42,121.3 90,695.9 42,131.3 90,695.9 1.8% 1.0% 1.8% 1.0%
Last week 6.25 0.88 38,225.3 86,240.0 191,126.4 431,200.0 1.6% 1.4% 8.1% 6.8%
Last month 6.57 0.91 28,994.8 59,319.6 579,895.0 1,186,392.2 1.2% 0.9% 24.5% 18.8%
Last 3 months 7.05 0.99 31,411.6 61,400.2 1,884,693.5 3,684,009.3 1.3% 1.0% 79.5% 58.3%
Last 6 months 7.39 1.01 30,126.5 61,220.3 3,765,810.3 7,652,538.4 1.3% 1.0% 158.8% 121.2%
Last year 7.90 1.11 27,073.7 59,851.9 6,849,656.0 15,142,528.8 1.1% 1.0% 288.8% 240.6%
(*) On total number of shares owned by market shareholders.
o Both Companies have a high float such that they represent a
considerable share of the total capitalization of Mibtel and MIB30
(at January 31, 2003):
> Olivetti - 2% on the total Mibtel, 2,5% MIB30; and
> Telecom - 8% on the total Mibtel, 11% MIB30.
o The float of Telecom and Olivetti proves to be significantly divided
among Italian and foreign institutional investors and Italian retail
investors, none of which enjoys a position such that it could
influence the course of the securities;
o in addition, it has been assumed that the new entity resulting from
the merger by incorporation of Telecom into Olivetti will maintain a
dividend distribution policy such that it will assure an equivalent
dividend for the current shareholders of Telecom.
With respect to the Market Prices Valuation method, we have proceeded, among
other things, to carry out the following analyses:
o analyses of the historical simple averages for a time period covering
the preceding 18 months;
o analyses of the historical weighted averages for the volumes for a
time period covering the preceding 18 months;
o analyses of the moving averages at 1, 2, 3, 6 and 12 months for a
time period covering the preceding 18 months;
o adjustment to the value of the Telecom shares to take into account
the expected dividend distribution for fiscal year 2002.
In order to mitigate short-term fluctuations that typically characterize the
financial markets, and consistent with customary practise, we proceeded to
extend the analysis of the prices, including average data expressed by the
market, over a sufficiently broad time period.
From the analysis of the historical trends, the averages at 1, 2, 3 and 12
months were identified to fall within a steady valuation corridor. The
arithmetic mean of the weighted averages calculated at intervals of 3, 6, and
12 months was equal to 6,94.
Values considered for the
Market values determination of the exchange ratio
----------------------------- -------------------------------------
TI
TI Oli Exch. ex div. Oli Exch.
(Euro) (Euro) Ratio (Euro) (Euro) Ratio Average
------ ------ -------- ------- ------ -------- -------
Market price: weighted average
07/03/2003 5,93 0,86 6,90 5,75 0,86 6,69
1 month average 6,51 0,91 7,18 6,34 0,91 6,98
3 months average 7,02 0,99 7,06 6,85 0,99 6,88
6 months average 7,38 1,02 7,24 7,20 1,02 7,07 6,94
12 months average 7,79 1,11 7,04 7,61 1,11 6,88
18 months average 8,06 1,15 6,98 7,88 1,15 6,82
Sept. 11, 2001 average 8,06 1,16 6,97 7,88 1,16 6,82
July 27, 2001 average 8,14 1,20 6,76 7,96 1,20 6,61
Last 12 months highest price 9,72 1,47 6,60 9,54 1,47 6,48
Last 12 months lowest price 5,93 0,84 7,02 5,75 0,84 6,81
Market price: simple average
07/03/2003 5,93 0,86 6,90 5,75 0,86 6,69
1 month average 6,57 9,91 7,19 6,39 0,91 7,00
3 months average 7,03 0,99 7,11 6,85 0,99 6,93
6 months average 7,39 1,01 7,30 7,21 1,01 7,12
12 months average 7,90 1,11 7,10 7,72 1,11 6,94
Last 12 months highest price 9,72 1,47 6,60 9,54 1,47 6,48
Last 12 months lowest price 5,93 0,84 7,02 5,75 0,84 6,81
With respect to the methodology of control, we proceeded to:
o evaluate the different business lines and investments of Telecom,
applying, principally, the discounted cash flow method;
o apply the SOP methodology to Olivetti, on the basis of the results
that surfaced from the evaluation of Telecom's different activities.
Such methodology of control substantially confirmed the indications resulting
from the Market Prices Valuation analysis.
With respect to the expected issuance of savings shares of Olivetti -a class of
shares which does not yet exist--which will be issued to the current savings
shareholders of Telecom, there were no elements for which the savings shares of
Olivetti should reflect a different discount than that currently in existence
between the savings/ordinary shares of Telecom, also taking into consideration
the expected increase in capital rights inuring to the savings shareholders of
Telecom following the merger with Olivetti.
Finally, the withdrawal price for the shareholders of Olivetti, estimated on
the basis of the arithmetic mean of the prices for the last 4 months (from
November 25, 2002) resulted to be equal to Euro 1,008. Such value is, moreover,
lower than the value of Olivetti on the basis of SOP, lower than the average of
the prices of Olivetti at 6 and 12 months and slightly higher than the value on
the basis of 3 months.
Therefore, exclusively from a basic value point of value and absent
considerable fluctuations in the market in the next two months, the possible
exercise of the withdrawal right on the part of the shareholders of Olivetti
should not influence the exchange ratio.
Conclusions.
------------
Lazard does not express any opinion in relation to the price at which the
ordinary shares or the savings shares of Telecom or any securities of Olivetti
may be traded subsequent to the announcement of the Proposed Merger or in
relation to the price at which the securities of Olivetti may be traded
subsequent to the implementation of the Proposed Merger.
Based on and subject to the foregoing, we are of the opinion, as of the date
hereof, that an exchange ratio of around 7 savings/ordinary shares of Olivetti
for 1 ordinary/savings share of Telecom in relation to the Proposed Merger is
fair from a financial point of view to the Public Shareholders.
In accepting this Assessment and in accordance with the mandate, entered into
effective February 5, 2003, between Telecom and Lazard, the Board of Directors
of Telecom hereby agrees that this Assessment is confidential and may not be
disclosed to any third party or otherwise reproduced, in whole or in part,
without our prior written authorization.
Very truly yours,
LAZARD & CO. S.R.L.
Name:
Title:
________________________________
Annex XII.
Summary description of the analyses carried out by Lazard, as
Telecom Italia's financial advisor, with reference to its report
May 13, 2003
Summary Description of the analyses carried out by Lazard as financial advisor
to Telecom Italia with reference to its Assessment
In accordance with the mandate between Telecom Italia and Lazard, the Board of
Directors of Telecom Italia engaged Lazard to act as financial advisor for the
Operation. Lazard was requested to carry out an assessment regarding the
appropriate exchange ratio for the realization of an operation of merger by
incorporation of Telecom Italia into Olivetti to be accompanied by the launch
of a partial tender offer by Olivetti with respect to the ordinary and savings
shares of Telecom Italia.
On March 11, 2003, Lazard provided the Board of Directors of Telecom Italia a
written document (the "Assessment") in which it was considered that, at such
date and subject to the assumptions and qualifications set forth in the
Assessment, an exchange ratio of around 7 ordinary / savings shares of Olivetti
for 1 savings / ordinary share of Telecom was fair from a financial point of
view to the shareholders of Telecom Italia (excluding Olivetti).
Subsequently, by letter dated April 15, 2003, Lazard reaffirmed, at such date,
the conclusions expressed in the aforementioned Assessment on the basis of, and
subject to, the assumptions and qualifications described in the letter and in
the Assessment.
Lazard was requested to carry out the Assessment, and to assume and consider,
among other things, that the Boards of Directors of Telecom Italia and Olivetti
will evaluate and propose, in their sole and independent judgment and
discretion, each respectively, the Operation and the exchange ratio, and
prepare and provide for the approval of the merger plans, the reports and
related documentation which will contain customary terms and conditions, as
well as obtain appraisals of independent experts, all in accordance with
applicable Italian and foreign laws and regulations. In addition, Lazard was
instructed by Telecom Italia to assume that, except for an increase in the
aggregate nominal value and related economic privileges and the further ability
to satisfy such privileges also through the distribution of reserves, the
rights of holders of the New Telecom Italia savings shares will be identical to
the rights of the holders of the Telecom Italia savings shares and that neither
the relative rights nor the relative values of the Telecom Italia ordinary and
savings shares will change, in any material respect, as a result of the
Operation.
The Assessment was addressed to the Board of Directors of Telecom Italia for
its exclusive use and solely addresses the fairness of the exchange ratio from
a financial point of view for the ordinary and savings shareholders of Telecom
Italia (excluding Olivetti) as of the date of the Assessment. The Assessment
does not address any other aspect of the Operation and does not constitute a
recommendation to any shareholder of Telecom Italia as to how such shareholder
should vote with respect to the Operation, if presented for its approval.
Lazard did not express any opinion in relation to the price at which the
ordinary shares or the savings shares of Telecom Italia or any security of
Olivetti could be traded following the announcement of the Operation or in
relation to the price at which the securities of Olivetti could be traded
following the realization of the Operation.
The Assessment does not constitute a "perizia" within the meaning of Annex 3A
no. 1 of the Regolamento Emittenti no. 11971 dated May 14, 1999 and subsequent
amendments, nor a "relazione di stima" within the meaning generally assigned to
such term in such Regulation.
The Assessment, which describes the assumptions adopted, the methodologies
applied, and the elements considered and the limitations of the analyses
carried out by Lazard for the purposes of completing the valuation is attached
to this Information Document as Annex
XII. The following is simply a summary of the Assessment and you are urged to
make reference to and read the full Assessment in its entirety.
The Assessment carried out by Lazard was based, among other things, on the
following elements:
i) historical economic-financial information relating to Telecom Italia
and Olivetti;
(ii) financial forecasts and other data relating to activities provided by
Telecom Italia;
(iii) the historical stock prices and trading volumes of the ordinary shares
and the savings shares of Telecom Italia as well as the ordinary shares
of Olivetti;
(iv) information -gathered in a limited number of meetings with members of
the senior management of Telecom Italia- who provided and explained the
documentation supplied;
(v) publicly available information on companies operating in business lines
believed to be generally comparable to those of Telecom Italia and
Olivetti; and
(vi) such other financial analyses and investigations deemed appropriate.
For the purpose of completing the necessary analyses for the Assessment, Lazard
relied upon the accuracy and completeness of the information and the data of a
financial, legal, accounting, fiscal, etc. nature provided and did not assume
any responsibility with respect to any independent verification of such
information or any independent valuation or appraisal of any of the assets or
liabilities of Telecom Italia or Olivetti.
With respect to the financial forecasts, Lazard assumed that they were
reasonably prepared on bases reflecting the best and most current, available
estimates and judgments of management of Telecom Italia as to the future
financial performance of the group. Lazard did not assume any responsibility
for, nor express any opinion as to such forecasts or the assumptions on which
they were based.
The Assessment was necessarily based on the economic, monetary, market and
other conditions and the information made available to Lazard, on the date of
the Assessment. The methods adopted and the analyses carried out in connection
with the valuation of the companies participating in the merger are illustrated
in summary form in the following paragraphs. It should be pointed out that the
summaries do not constitute an exhaustive representation of the analyses
carried out by Lazard.
Lazard utilized, it being understood the equivalent level of significance, for
the purpose of the valuation procedures, the following methodologies:
o as principal method that of the stock exchange quotation or the
market prices ("Market Prices Valuation") utilizing the market prices
of Telecom Italia and Olivetti over different time periods. In the
present case, the stock exchange quotations resulted to be
particularly significant, taking into account the high levels of
capitalization and liquidity of Telecom Italia and Olivetti;
o as control method that of the sum of the parts ("SOP"), by
determining the value of Telecom Italia through the methodology of
the discounted cash flow, and applying the SOP criterion to Olivetti
on the basis of the results which emerged from the valuation of the
different activities of Telecom Italia. Lazard did not consider that
under the circumstances the method of the SOP applied with reference
to the current market value of the shareholding held by Olivetti in
Telecom Italia would be useful insofar as such application (i) would
have lead to strongly volatile results also by effect of the
financial leverage present in Olivetti itself, (ii) would have
implied a reference to the market values for only one of the
companies participating in the merger, an aspect that was not
-2-
deemed to be admissible and consistent from the methodological point of view.
The aforementioned valuation methodologies were applied with homogeneous
criteria to the companies participating in the merger.
Market Prices Valuation
-----------------------
The method of Market Prices Valuation assessed the value of the capital on the
basis of the stock exchange quotations of Telecom Italia and Olivetti gathered
during a significant period prior to the announcement of the Operation.
On the basis of the market data as of March 7, 2003 (last day of trading of the
securities prior to the date on which the Boards of Directors announced the
Operation), it was considered that:
a) both companies participating in the merger have a high market
capitalization and a significant and broadly diffused float;
b) high volumes of the ordinary shares of Telecom Italia and Olivetti
are traded daily (on the average approximately 1% of the float is
traded); in addition, during the course of the twelve months
preceding the announcement of the Operation:
- trading of the shares of Olivetti was carried out for
approximately 240% of the share capital (not considering the
quota held by Olimpia S.p.A.) for a countervalue of
approximately 16,9 billion Euro;
- trading of the ordinary shares of Telecom Italia was effected
for approximately 289% of the social capital of the company
represented by such category of shares (excluding the shares
held by Olivetti) for a countervalue of approximately 54 billion
Euro;
c) both Telecom Italia and Olivetti represent a considerable quota of
the total capitalization of Mibtel and MIB30. As of January 31, 2003,
according to the data provided by the Italian Stock Exchange S.p.A:
- Olivetti represented 2% of Mibtel and 2,5% of MIB30; and
- Telecom Italia represented 8% of Mibtel and 11% of MIB30;
d) the float of Telecom and Olivetti proved to be significantly divided
among Italian and foreign institutional investors and Italian retail
investors, none of which enjoyed a position such that it could
influence the course of the securities.
In order to mitigate short-term fluctuations that typically characterize the
financial markets, Lazard proceeded to extend the analysis of the simple and
weighted average data expressed by the market over a sufficiently broad time
period, correcting the value of the shares of Telecom Italia to take into
account the expected distribution of the dividend with respect to the 2002
fiscal year.
-3-
From the analyses of the historical trends, the averages at 1, 3, 6 and 12
months were identified, as illustrated in the following table, as falling
within a steady valuation corridor.
Values for
Market Prices Purposes of the Ratio
Market Prices Valuation Exchange Ratio (*)
TI
TI OL post div
(euro) (euro) (euro) (euro)
Weighted Averages
March 7, 2003 5,9 0,86 5,7 0,86 6,7
Average at 1 month 6,5 0,91 6,3 0,91 7,0
Average at 3 months 7,0 0,99 6,8 0,99 6,9
Average at 6 months 7,4 1,02 7,2 1,02 7,1
Average at 12 months 7,8 1,11 7,6 1,11 6,9
Arithmetic Average
March 7, 2003 5,9 0,86 5,7 0,86 6,7
Average at 1 month 6,6 0,91 6,4 0,91 7,0
Average at 3 months 7,0 0,99 6,9 0,99 7,0
Average at 6 months 7,4 1,01 7,2 1,01 7,1
Average at 12 months 7,9 1,11 7,7 1,11 6,9
Maximum and Minimum Prices
Maximum Price during the last 12 months 9,7 1,47 9,5 1,47 6,5
Minimum Price during the last 12 months 5,9 0,84 5,7 0,84 6,8
Source: Datastream
(*) possible differences attributable to rounding
The results set forth above were also confirmed by extending the timeline of
the analyses over a 18-month time period.
Sum of the Parts Method
-----------------------
On the basis of the SOP method, the value of Telecom Italia and of Olivetti was
determined as the sum of the values of the different business lines and
investments applying, principally, the methodology of discounted cash flows.
Such sum was duly corrected to take into account the financial position of, and
the interests of third parties in, each of the companies participating in the
merger and, when important, other effects such as, among other things, those
relating to possible off-balance sheet items and possible tax benefits.
Telecom Italia
The discounted cash flow ("DCF") methodology was utilized for the principal
activities, such as, for example, fixed and mobile telephone services.
The remaining assets and liabilities were evaluated with principal reference
to, as the case may be, the book or market value, in consideration of their
limited weight within the comprehensive valuation of Telecom Italia.
In applying the DCF methodology reference was made to the cash flows from
operations for the principal activities resulting from the plans developed by
management of Telecom Italia with reference to the period 2003-2005 which was
extended until 2009 assuming progress in
-4-
accordance with the market consensus for each single business unit.
The DCF methodology was applied by discounting the cash flows from operations
gross of any element of a financial nature (Free Cash Flows or "FCF") that the
company would be able to generate in the future, discounted at a rate
representing the weighted average cost of capital, after the net financial
position and third parties' interests, which in the present case were taken
into consideration as of December 31, 2002.
The DCF methodology was applied in accordance with the logic for determining
the basic value to the financial investor and reflects the following
assumptions and methodologies:
o the weighted average cost of capital (Weighted Average Cost of
Capital o "WACC") is calculated on the basis of a capital structure
in accordance with the actual structure. The WACC of the Group
utilized was equal to 7,7%;
o the growth rates of sales and margins utilized for the purpose of the
financial projections beyond the business plan of Telecom Italia
(2006-2009) reflect growth prospects which are consistent with the
relevant benchmarks of the market, in particular during the 2006-2009
period, with regard to fixed telephony, revenues of CAGR equal to
-0,5% with an EBITA margin included within a range of 31% - 35% were
assumed; and with regard to mobile telephony, revenues of CAGR equal
to around 5% with an EBITA margin of about 37% were assumed;
o For the purpose of assessing the final value, Lazard proceeded to
capitalize the standardized cash flows from operations (or the
current value of the cash flows from operations expected for the
period following the time periods of the express projections); to
such end, Lazard selected the perpetual growth rates for the
different business lines in accordance with the benchmarks of the
market included within a range of -0,5% and 3%;
o In addition, the values of the single business lines, as determined
above, were compared against a range of relevant multiples for a
panel of comparable companies.
Olivetti
For Olivetti, which is set up as a holding company, and whose assets consist
mainly of the shareholding held in Telecom Italia, the SOP methodology was
applied by evaluating such shareholding in accordance with the procedures
described above and by evaluating the remaining assets and liabilities
primarily at their book or market value, by virtue of the limited weight
thereof within the comprehensive valuation.
Furthermore, within the framework of evaluating Telecom Italia and Olivetti,
the tax assets generated by the correction to the value of the controlling
interest held, respectively, by Telecom Italia in Seat Pagine Gialle and by
Olivetti in Telecom Italia were taken into account for the part that can
actually be used by the companies participating in the merger - independently
of the realization of the Operation -on the basis of expected taxable profits
on an individual basis and considering the current tax regulations.
From the sum of the values of the assets and the tax assets, calculated using
the criteria indicated above, the net financial position at December 31, 2002
was deducted, corrected (i) for Telecom Italia for the expected distribution of
reserves (June 2003) and (ii) for Olivetti, to take into account the pro-forma
effect of the conversion of the convertible bonds of "Olivetti 1,5% 2001-2010
Convertible with a Reimbursement Premium", consistent with the fully-diluted
methodology which assumes the conversion into ordinary shares.
Summary of the Results
With reference to the SOP method and considering the afore-described
assumptions relative to the perpetual growth rate and the tax assets, a range
of values was identified for the ordinary shares of Telecom Italia and
Olivetti, the average values of which are as follows:
-5-
Value per ordinary Value at the end
share of the Exchange Ratio
TI
TI OL post div OL
(euro) (euro) (euro) (euro)
Sum of the Parts (average value) 8,9 1,28 8,8 1,28 6,8
The results obtained by applying the SOP method confirmed the relative values
evidenced by the Market Prices Valuation method.
With respect to the savings shares, because as of today such category of shares
has not been issued by Olivetti, it was assumed -taking also into account the
capital rights that will be accorded the savings shares of Olivetti -that the
quotations of the savings shares of Olivetti may reflect an analogous discount
as that recognized by the market with respect to the savings shares of Telecom
Italia, and it was, therefore, deemed to be appropriate to adopt the same
exchange ratio identified for the ordinary shares.
Determination of the Exchange Ratio
-----------------------------------
The following is a summary of the exchange ratios inferred from the application
of the methods used by the Board of Directors of Telecom Italia:
----------------------------------------------------------------------------
TI post div Exchange
(euro) OL (euro) Ratio
----------------------------------------------------------------------------
Market Prices Valuation Method
7/3/2003 5,7 0,86 6,7
Weighted Averages:
Average at 1 month 6,3 0,91 7,0
Average at 3 months 6,8 0,99 6,9
Average at 6 months 7,2 1,02 7,1
Average at 12 months 7,6 1,11 6,9
Sum of the Parts Method
Average Value 8,8 1,28 6,8
As described above, Lazard carried out the Assessment by applying and comparing
various financial methodologies, solely for the purpose of providing the Board
of Directors of Telecom Italia an opinion regarding the fairness of the
exchange ratio, considered to be fair, both for the ordinary and the savings
shareholders of Telecom Italia (excluding Olivetti). The summary of such
valuations is not a complete description of the valuations and analyses carried
out by Lazard. The preparation of a valuation is, from an analytical point of
view, a complex process that cannot be entirely described by partial analyses
or summary descriptions but must be considered in its entirety. The selection
of partial, single aspects, without considering all the valuations or factors
could create a misleading or incomplete view of the processes underlying the
Assessment.
In carrying out its analyses, Lazard made numerous assumptions with respect to
industry performance, general business, macroeconomic, market and financial
conditions and other aspects, many of which are beyond the control of Telecom
Italia. The estimates contained in the analyses do not necessarily indicate
actual values or predict future results or values, which may
-6-
be significantly better or worse than those suggested by the analyses carried
out. In addition, analyses and estimates relating to the value of the
businesses or securities do not reflect the prices at which the businesses or
securities may actually be listed or traded in the market. As a result, the
analyses and estimates carried out reflect substantial uncertainty. Because the
analyses are subject to such uncertainty, none of Lazard, Telecom Italia,
Olivetti or any other person, assumes any responsibility in the event that
future results are different from the projections.
The Assessment of Lazard and the financial valuations were not the only factors
considered by the Board of Directors of Telecom Italia in approving the
resolution concerning the Operation and, therefore, must not be viewed as
determinative of the decision of the Board of Directors or the management of
Telecom Italia.
Lazard is acting as financial advisor to Telecom Italia with respect to the
proposed merger for which a fee of Euro 5,0 million matured upon the public
announcement of the Operation (March 12, 2003). In addition, Telecom Italia has
agreed to pay Lazard an additional fee of up to Euro 20,0 million upon
consummation of the Operation as well as reimbursement of expenses incurred.
Lazard has in the past provided financial advisory services to Telecom Italia
for which it has received customary fees; in addition, Lazard is currently
providing advisory services in connection with an operation for the disposal of
the entity resulting from the spin-off of Seat Pagine Gialle SpA for which it
will receive customary fees for such type of transaction.
Lazard is an internationally recognized investment banking firm and is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, capital increases, secondary
distributions of listed and unlisted securities, private placements, valuations
of real estate, corporate and other purposes. Lazard was chosen by the Board of
Directors of Telecom Italia to carry out the role of financial advisor because
of its expertise and market reputation.
-7-
Annex XIII.
Lazard Confirmation Letter
English Translation
To:
Telecom Italia S.p.A.
The Board of Directors
Piazza Affari, 2
20123 Milano
Attn: Dr. Carlo Buora, Managing Director
Milan, April 15, 2003
Subject: Merger operation for the incorporation of Telecom Italia S.p.A. into
Olivetti S.p.A.
We refer to our letter dated March 11, 2003 (the "Letter") pursuant to which an
assessment was delivered to the Board of Directors of Telecom Italia S.p.A.
with respect to the exchange ratio concerning the present merger operation.
You have informed us that from March 11, 2003 to the date hereof, it has been
confirmed that no event has affected or could affect in any material respect
any of the documents, information, data, projections or assumptions referred to
in the Letter or the economic financial condition, the business, the assets or
liabilities or prospects of Telecom Italia S.p.A. or its subsidiaries, or, to
our knowledge, of Olivetti S.p.A. or its subsidiaries.
Based on, and subject to the foregoing and the assumptions and qualifications
identified in the Letter, we reaffirm, as of the date hereof, the conclusions
expressed in the Letter.
Consistent with the mandate, entered into effective February 5, 2003, between
the Board of Directors of Telecom Italia S.p.A. and Lazard & Co. S.r.l., this
letter is confidential for the exclusive use of the Board of Directors of
Telecom Italia S.p.A. and may not be disclosed to any third party or otherwise
referred to, in whole or in part, without our prior written authorization.
Best regards.
Lazard & Co.
Annex XIV.
Goldman Sachs Covering Letter and Fairness Opinion,
used by the directors of Telecom Italia S.p.A.
for the purpose of establishing the exchange ratio
[LETTERHEAD OF GOLDMAN SACHS SIM S.p.A]
PERSONAL AND CONFIDENTIAL
-------------------------
April 15, 2003
Board of Directors
Telecom Italia S p A.
Corso Italia, 41
00198 Roma
Italy
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders, other than Olivetti S.p.A. ("Olivetti"), of the
outstanding ordinary shares, par value (euro)0.55 per share (the "Ordinary
Shares"), and of the savings shares, par value (euro)0.55 per share (the
"Savings Shares") (together, the "Shares"), of Telecom Italia S.p.A. (the
"Company") of the exchange ratio of seven (7) ordinary shares of Olivetti
S.p.A. (the "Olivetti Ordinary Shares") to be received for each Ordinary Share
(the "Ordinary Shares Exchange Ratio") and of the exchange ratio of seven (7)
savings shares of Olivetti (the "Olivetti Savings Shares") to be received for
each Savings Share (the "Savings Shares Exchange Ratio") (together, the
"Ordinary Shares and the Savings Shares Exchange Ratios") in connection with
the potential merger by incorporation ("fusione per incorporazione") of the
Company into Olivetti (the "Merger") pursuant to the merger plan and the board
report ("progetto di fusione" and "relazione degli amministrator", together the
"Transaction Documents") approved by you on the date hereof and as previously
announced by you on March 12, 2003. We further understand that as a result of
the Merger, the approximate 55% ownership interest of Olivetti in the Company
will be diluted and that Olimpia S.p.A. will own less than approximately 15% of
the voting equity in the corporation surviving the Merger (excluding the effect
of convertible securities, options and warrants, a portion of which is held by
Olimpia S.p.A. and certain other related entities).
You have advised us that (i) following the Olivetti shareholders meeting
convened to approve the Merger and the amendment to the definition of
Olivetti's corporate object included in its by-laws ("ragione sociale")
(the "Olivetti Shareholders' Meeting"), Olivetti shareholders who vote against
the change in corporate object or do not participate in the Olivetti
Shareholders' Meeting will be entitled to put their shares to Olivetti
("diritto di recesso") (the "Withdrawal Rights") for a cash consideration equal
to the average price of the Olivetti Ordinary Shares during the six months
ending on the date prior to the Olivetti Shareholders' Meeting (the "Valuation
Period"), such consideration to be paid to withdrawing shareholders upon
completion of the Merger and (ii) Olivetti will make a conditional cash tender
offer (the "Tender Offer") for up to a maximum amount ranging between
approximately 16% and 19% of each of the outstanding Ordinary Shares (which
includes Ordinary Shares owned by Olivetti) and Savings Shares at a price equal
to a 20% premium to the average share price of the Ordinary Shares and Savings
Shares, respectively, between March 12, 2003 and the date of the Olivetti
Shareholders' Meeting, subject to (1) a minimum price of (euro)7.00 and a
maximum price of (euro)8.40 for each Ordinary Share, (2) a minimum price of
(euro)4.70 and a maximum price of (euro)5.65 for each Savings Share, and (3) an
aggregate cap of (euro)9 billion, less the aggregate amount paid, if any, to
shareholders of Olivetti in connection with the exercise of Withdrawal Rights.
In rendering this opinion, you have instructed us to assume that, except for
(i) an increase in aggregate nominal value and related economic privileges and
(ii) the further ability to satisfy such privileges also through the
distribution of reserves, the rights of the holders of the Savings Shares will
be identical to their rights as holders of the Olivetti Savings Shares and that
neither the relative rights of the holders of the Ordinary Shares and the
Savings Shares nor the relative values of such Ordinary Shares and Savings
Shares will change, in any material respect, as a result of the Merger.
Goldman Sachs SIM S.p.A. (together with its affiliates, "Goldman Sachs"), as
part of its investment banking business, is continually engaged in performing
financial analyses with respect to businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities and private
placements as well as for estate, corporate and other purposes. We are familiar
with the Company having provided certain investment banking services to the
Company from time to time, including having acted as its financial advisor in
connection with the separation of the Italtel joint venture and the subsequent
sale of an 80% stake in Italtel. We also have provided certain investment
banking services to Olivetti from time to time, including having acted as joint
bookrunner on a number of recent Eurobond offerings and as counterparty to
certain derivatives transactions. We also may provide investment banking
services to the Company and Olivetti in the future. Goldman Sachs provides a
full range of financial advisory and securities services and, in the course of
its normal trading activities, may from time to time effect transactions and
hold positions in securities, including derivative securities, of the Company
or Olivetti and their affiliates for its own account and for the accounts of
customers.
In connection with this opinion, we have reviewed (i) drafts of the Transaction
Documents; (ii) the Annual Report of the Company and of certain of its
subsidiaries and of Olivetti for the years ended 31 December 2000 and 2001;
(iii) the Semi-Annual Financial Statements of the Company and of certain of its
listed subsidiaries and of Olivetti for the six months ended 30 June 2002; (iv)
the Quarterly Financial Statements of the Company and certain of its listed
subsidiaries and of Olivetti for the three months ended 30 September 2002; (v)
a draft of the 2002 Annual Report for the Company, including the Company's 2002
financial statements, the audit of which is not yet completed; (vi) a draft of
the 2002 Annual Report for Olivetti, including Olivetti's 2002 financial
statements, the audit of which is not yet completed; and (vii) certain internal
financial analyses and forecasts of Olivetti, the Company and certain of its
subsidiaries
approved for use in this opinion by the Company's management. We also have held
limited discussions with certain members of the senior management of the
Company and of Olivetti as well as with Olivetti's advisors and representatives,
regarding their assessment of the past and current business operations,
financial condition and future prospects of the Company and of Olivetti,
including the expected credit rating and the expected dividend policy of the
combined company subsequent to the Merger. We did not, however, participate in
any of the negotiations leading up to the Merger. In addition, we have reviewed
the reported price and trading activity for the Shares and the Olivetti Shares,
compared certain financial and stock market information for the Company and its
listed subsidiaries and for Olivetti with similar information for certain other
companies the securities of which are publicly traded, reviewed the financial
terms of certain recent business combination transactions and reorganizations
and performed such other studies and analyses as we considered appropriate.
We have relied, without independent verification, upon the accuracy and
completeness of all of the financial, accounting, tax and other information
discussed with or reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. With respect to financial
forecasts and other information and data provided to or otherwise reviewed by
or discussed with us, we have been advised by the Company's and Olivetti's
management that such financial forecasts and other information and data were
reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company and of Olivetti. and
we express no opinion with respect to such financial forecasts or other
information and data or the assumptions on which they are based. In addition,
we have not made an independent evaluation or appraisal of the assets and
liabilities (including any derivative or off-balance-sheet assets and
liabilities) of the Company or Olivetti or any of their respective subsidiaries
and we have not been furnished with any such evaluation or appraisal.
Our advisory services and the opinion expressed herein are provided exclusively
for the information and assistance of the Board of Directors of the Company in
connection with its consideration of the Merger and such opinion does not
constitute a "perizia" within the meaning of Annex 3A no. 1 of the Regolamento
Emittenti no. 11971 dated May 14, 1999 as subsequently amended, nor a
"relazione di stima" within the meaning of that statute, nor a recommendation
as to how any holder of Shares should vote with respect to the Merger.
We express no opinion as to the likely trading value of the Shares or the
Olivetti Ordinary Shares during either the Valuation Period or the period
during which Withdrawal Rights may be exercised, the likelihood of Olivetti
shareholders exercising Withdrawal Rights or the amount of funds available to
or the participation of shareholders of the Company in the Tender Offer. We
also express no opinion as to the likely trading value of the Olivetti Ordinary
Shares or the Olivetti Savings Shares upon consummation of the Merger. Our
opinion is necessarily based upon information available to us and financial,
economic, political, market and other conditions as they exist and can be
evaluated on the date hereof, and we assume no duty to update or revise our
opinion based on circumstances or events after the date hereof.
Our opinion does not address the relative merits of the transactions
contemplated pursuant to the Transaction Documents as compared to any
alternative business transaction that might be available to the Company.
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that, as of the date hereof, the Ordinary
Shares and the Savings Shares Exchange Ratios pursuant to the Merger are fair
from a financial point of view to the holders (other than Olivetti) of the
Ordinary Shares and Savings Shares respectively.
Very truly yours,
GOLDMAN SACHS SIM S.p.A.
By: /s/ [ILLEGIBLE]
-----------------------------------
Managing Director
Annex XV.
Summary description of the analyses carried out by Goldman Sachs, as Telecom
Italia's financial advisor, with reference to its report
Summary description of the analyses carried out by Goldman Sachs, as Telecom
Italia's financial advisor, with reference to its Fairness Opinion
On March 11, 2003, Goldman Sachs SIM S.p.A. delivered an oral opinion to
the board of directors of Telecom Italia, subsequently confirmed by delivery of
a written opinion, dated as of March 11, 2003, which opinion was reconfirmed by
a subsequent written opinion, dated as of April 15, 2003, to the effect that,
as of those dates and subject to the matters and assumptions set forth in the
opinions, the exchange ratios of 7 ordinary shares of Olivetti to one ordinary
share of Telecom Italia and 7 savings shares of Olivetti to one savings share
of Telecom Italia, respectively, were fair from a financial point of view to
the holders (other than Olivetti) of ordinary shares and savings shares of
Telecom Italia.
The full text of the written opinion of Goldman Sachs, dated as of April
15, 2003, which sets forth the assumptions made, procedures followed, matters
considered and limitations on the review undertaken by Goldman Sachs in
connection with the opinion, is attached as Annex XIV and is incorporated by
reference into this document. Holders of Telecom Italia ordinary shares and
savings shares should read the opinion in its entirety.
In connection with its April 15, 2003 opinion, Goldman Sachs reviewed,
among other things:
o drafts of the merger plan ("progetto di fusione") and the board report
("relazione degli amministratori");
o the Annual Report of Telecom Italia and various of its subsidiaries and
the Annual Report of Olivetti for the years ended December 31, 2000 and
2001;
o the Semi-Annual Financial Statements of Telecom Italia and various of its
listed subsidiaries and the Semi-Annual Financial Statements and of
Olivetti for the six months ended June 30, 2002;
o the Quarterly Financial Statements of Telecom Italia and various of its
listed subsidiaries and the Quarterly Financial Statements of Olivetti for
the three months ended September 30, 2002;
o a draft of the 2002 Annual Report for Telecom Italia, including Telecom
Italia's 2002 financial statements, the audit of which was not completed;
o a draft of the 2002 Annual Report for Olivetti, including Olivetti's 2002
financial statements, the audit of which was not completed; and
o various internal financial analyses and forecasts for Olivetti, Telecom
Italia and various subsidiaries of Telecom Italia approved by Telecom
Italia's management for use in Goldman Sachs' opinion.
Goldman Sachs also held limited discussions with various members of the
senior management of Telecom Italia and Olivetti and with Olivetti's advisors
and representatives regarding their assessment of the past and current business
operations, financial condition and future prospects of Telecom Italia and
Olivetti, including the expected credit rating and the expected dividend policy
of the combined company subsequent to the merger. Goldman Sachs did not
participate in any of the negotiations leading up to the merger. In addition,
Goldman Sachs:
o reviewed the reported price and trading activity for the ordinary shares
of each of Telecom Italia and Olivetti;
o compared financial and stock market information for Telecom Italia and
Olivetti with similar information for the securities of other publicly
traded companies;
o reviewed the financial terms of recent business combinations and
reorganizations; and
o performed other studies and analyses that Goldman Sachs considered
appropriate.
In connection with its written opinion, dated April 15, 2003, Goldman
Sachs noted that, as a result of the merger, the approximate 55% ownership
interest of Olivetti in Telecom Italia will be diluted and that Olimpia S.p.A.
will own less than approximately 15% of the voting equity in the corporation
surviving the merger
1
(excluding the effect of convertible securities, options and warrants, a
portion of which is held by Olimpia S.p.A. and related entities).
Goldman Sachs relied, without independent verification, upon the accuracy
and completeness of all of the financial, accounting, tax and other information
that was discussed with or reviewed by it, and Goldman Sachs assumed the
accuracy and completeness of that information for purposes of rendering its
opinion. The managements of each of Telecom Italia and Olivetti advised Goldman
Sachs that the financial forecasts and other information and data provided to
or otherwise discussed with Goldman Sachs were reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
managements of Telecom Italia and Olivetti, and Goldman Sachs expressed no
opinion with respect to those financial forecasts or other information and data
or the assumptions on which they were based. In addition, Goldman Sachs did not
make an independent evaluation or appraisal of the assets and liabilities
(including any derivative or off-balance-sheet assets and liabilities) of
Telecom Italia or Olivetti or any of their respective subsidiaries, and Goldman
Sachs was not furnished with any such evaluation or appraisal. In rendering its
opinion, Goldman Sachs was instructed by Telecom Italia to assume that, except
for (i) an increase in aggregate nominal value and related economic privileges
and (ii) the further ability to satisfy such privileges also through the
distribution of reserves, the rights of the holders of the Telecom Italia
savings shares will be identical to their rights as holders of the Olivetti
savings shares and that neither the relative rights nor the relative values of
the Telecom Italia ordinary and savings shares will change, in any material
respect, as a result of the merger.
Goldman Sachs provided its advisory services and opinion exclusively for
the information and assistance of the board of directors of Telecom Italia in
connection with its consideration of the merger and Goldman Sachs' opinion does
not constitute a "perizia" within the meaning of Annex 3A no. 1 of the
Regolamento Emittenti no. 11971 dated May 14, 1999 as subsequently amended, nor
a "relazione di stima" within the meaning of that statute. Goldman Sachs'
opinion does not constitute a recommendation as to how any holder of Telecom
Italia shares should vote with respect to the merger.
Goldman Sachs expressed no opinion as to the likely trading value of the
ordinary shares or savings shares of Telecom Italia or the ordinary shares of
Olivetti during the period for determining the value of Olivetti ordinary
shares in connection with the exercise of withdrawal rights (which period
covers the six-months ending on the date prior to the Olivetti shareholders'
meeting), or during the 15-day period following the day the shareholders
resolution is deposited with the Registro delle Imprese, in which period
holders of Olivetti ordinary shares may exercise withdrawal rights. In
addition, Goldman Sachs expressed no opinion as to the likelihood of Olivetti
shareholders exercising withdrawal rights or as to the amount of funds
available to or the participation of shareholders of Telecom Italia in the
tender offer. Goldman Sachs expressed no opinion as to the likely trading value
of the ordinary shares or savings shares of Olivetti upon consummation of the
merger. Goldman Sachs' opinion was necessarily based upon information available
to it and financial, economic, political, market and other conditions as they
existed and could be evaluated on April 15, 2003, the date the opinion was
rendered, and Goldman Sachs assumed no duty to update or revise its opinion
based on circumstances or events after that date. Goldman Sachs' opinion does
not address the relative merits of the transactions contemplated by the merger
plan and board report as compared to any alternative business transaction that
might be available to Telecom Italia.
The following is a summary of the material financial analyses presented by
Goldman Sachs to the board of directors of Telecom Italia on March 11, 2003 in
connection with the rendering of its March 11, 2003 opinion, which analyses, as
updated, Goldman Sachs also relied upon in connection with the rendering of its
April 15, 2003 opinion. The following summary does not purport to be a complete
description of the analyses performed by Goldman Sachs. The order of the
analyses described, and the results of those analyses, do not represent the
relative importance or weight given to the analyses by Goldman Sachs.
The following summary includes information presented in tabular format.
You should read these tables together with the text of each summary.
In connection with these analyses, Goldman Sachs
used two main valuation methodologies: a market exchange ratio analysis and a
sum of the parts analysis. In performing these analyses, Goldman Sachs believed
it was appropriate to apply uniform and comparable valuation methodologies.
Therefore, when performing a
2
market value methodology, Goldman Sachs used the respective market prices of
Telecom Italia and Olivetti shares. In performing the sum of the parts
analysis, Goldman Sachs analyzed the various Telecom Italia assets utilizing
primarily a discounted cash flow methodology; and the resulting value for
Telecom Italia from the application of that methodology was used for the
Olivetti sum of the parts analysis. Goldman Sachs did not use the market price
of Telecom Italia shares in the sum of the parts analysis of Olivetti because
the use of a market value methodology in this instance would not have been
consistent with the valuation methodology performed with respect to Telecom
Italia.
Market Exchange Ratio Analysis. Goldman Sachs analyzed the relative share
prices for various periods ending March 7, 2003, including, for purposes of
mitigating the impact of short-term market fluctuations, the twelve-month
period ending March 7, 2003. Goldman Sachs calculated the implied historical
exchange ratios of Telecom Italia ordinary shares to Olivetti ordinary shares
based on the weighted average ordinary share prices as reported as the official
prices on Telematico, an automated screen trading system managed by Borsa
Italiana, for March 7, 2003 and the periods set forth below. In performing this
analysis, Goldman Sachs adjusted the price of Telecom Italia ordinary shares to
take into account the dividend distribution in June 2003 of the remaining
portion of the dividend in respect of 2002. Additionally, Goldman Sachs took
into account that both Telecom Italia and Olivetti ordinary shares have
significant market capitalization and liquidity. The results of this analysis
were as follows:
Period Implied Exchange Ratio
------ ----------------------
March 7, 2003........................... 6.7x
Three months ended March 7, 2003 ....... 6.9
Six months ended March 7, 2003.......... 7.1
Twelve months ended March 7, 2003....... 6.9
Sum of the Parts Analysis of Telecom Italia. Goldman Sachs computed for
Telecom Italia an implied total equity value and implied exchange ratio based
on the value of the sum of the various business segments (valued as separate
economic entities) less net debt as of December 31, 2002 and anticipated
dividend payments in June 2003 of the remaining portion of the dividend in
respect of 2002. The values of the main businesses were calculated using a
discounted cash flow methodology based on:
o management projections of future operating cash flows for the years 2003
through 2005;
o discount rates ranging from 7.5% to 9.8% based on the weighted average
cost of capital for each business; and,
o terminal values determined on the basis of:
- the net present value of future operating cash flows beyond 2005 (the
"Perpetuity Growth Method"); and
- multiples applied to the 2005 projected earnings before interest,
taxes, depreciation and amortization, or EBITDA (the "Exit Multiple
Method").
For purposes of the Perpetuity Growth Method, Goldman Sachs selected
perpetual growth rates for each business based on growth rates estimated by
research analysts for comparable businesses ranging from a low of -1.0% to a
high of 3.0%. For purposes of the Exit Multiple Method, Goldman Sachs utilized
EBITDA trading multiples ranging from 3.8x to 8.9x based on companies
comparable to each of the businesses.
The equity values of Telecom Italia's minority investments, certain real
estate assets and other businesses were based upon carrying values as of
December 31, 2002. Goldman Sachs calculated the implied share price for savings
shares and ordinary shares assuming a 35% discount of savings shares to
ordinary shares, corresponding to the average discount of those shares over the
three-month period prior to March 7, 2003. The implied equity value of Telecom
Italia reflects the dilutive impact of in-the-money stock options, which was
immaterial. In performing this analysis, Goldman Sachs also took into account
the tax benefits (based on the pre-merger stand-alone taxable income of Telecom
Italia) generated by the writedown of Telecom Italia's controlling interest in
SEAT PG. For purposes of its presentation, Goldman Sachs used the mid-point of
the
3
value range derived from the application of the Exit Multiple Method and the
Perpetuity Growth Method as follows:
Mid-point of value range of
Telecom Italia ((euro)in
billions, except per share data)
--------------------------------
Implied Total Equity Value
(post-dilution).......................... (euro)58.7
Implied Total Equity Value
Per Ordinary Share (postdilution)........ 8.9
Implied Total Equity Value
Per Savings Share (postdilution)......... 5.8
Sum of the Parts Analysis of Olivetti. Goldman Sachs computed for Olivetti
an implied equity value, an implied ordinary share price and an implied
exchange ratio based on valuations of Olivetti's ownership stake in Telecom
Italia (using the discounted cash flow methodology based on the Exit Multiple
Method and Perpetuity Growth Method set forth above), Olivetti's other
investments at carrying value as of December 31, 2002 or at market prices where
available and net debt as of December 31, 2002. The implied price of ordinary
shares of Olivetti reflects the dilutive impact of in-the-money convertible
securities, including the Olivetti 1.5% 2001-2010 convertible notes. In
performing this analysis, Goldman Sachs also took into account the tax benefits
(based on the pre-merger stand-alone taxable income of Olivetti) generated by
the writedown of Olivetti's controlling interest in Telecom Italia. Goldman
Sachs presented the mid-point of the value range derived from the application
of the Exit Multiple Method and the Perpetuity Growth Method as follows:
Mid-point of value range of
Olivetti ((euro)in
billions, except per share data)
--------------------------------
Implied Equity Value (pre-dilution)......... (euro)12.2
Implied Ordinary Share Price
(post-dilution) ............................ 1.3
Implied Exchange Ratio...................... 6.9x
Review of Expected Impact of the Merger on Cash Earnings. Goldman Sachs
analyzed the expected impact of the proposed merger to the cash earnings per
share, or cash EPS (defined as net income plus depreciation and amortization)
for the Telecom Italia shareholders. In performing this analysis, Goldman Sachs
assumed that no holder of Olivetti ordinary shares will exercise withdrawal
rights and that the tender offer will be fully subscribed and completed at the
maximum price. Based on these assumptions and management projections, this
analysis indicated that the merger would be substantially accretive to the
estimated cash EPS for Telecom Italia shareholders for 2003, 2004 and 2005,
respectively.
Review of Combined Entity Key Credit Ratios. Goldman Sachs reviewed the
estimated ratio of net debt to EBITDA and the estimated interest coverage ratio
for 2003 for Telecom Italia/Olivetti as a combined entity on both a pre-merger
and post-merger basis. Goldman Sachs compared those ratios to similar ratios
for selected companies consisting of Deutsche Telekom, Telefonica and France
Telecom. Goldman Sachs' review of these ratios for Telecom Italia/Olivetti were
based on estimates provided by Telecom Italia management and, for the
comparable companies, Goldman Sachs public analyst estimates. This review
indicated that, while the leverage of Telecom Italia/Olivetti will increase and
its interest coverage will decrease, the leverage and interest coverage ratios
of Telecom Italia/Olivetti following the merger will be in line with the
average of those ratios for the selected companies. Additionally, Goldman Sachs
was informed that, based on a preliminary assessment by Standard & Poor's,
Telecom Italia/Olivetti is expected to maintain a credit rating of BBB+
following the completion of the merger.
4
Public Comparable Multiples Analysis. Goldman Sachs also reviewed implied
EBITDA and free cash flow multiples for Telecom Italia/Olivetti on a combined
basis at various levels of enterprise value and compared those multiples to
similar information for the selected companies.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all these analyses. No company or
transaction used in the above analyses as a comparison is directly comparable
to Telecom Italia or Olivetti or the contemplated transactions.
The analyses were prepared solely for purposes of providing an opinion to
the board of directors of Telecom Italia as to the fairness from a financial
point of view to the holders of ordinary shares and savings shares of Telecom
Italia of the exchange ratios to be received in connection with the merger. The
analyses do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities actually may be sold. Analyses based upon
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than those suggested
by these analyses. Because these analyses are inherently subject to
uncertainty, being based upon numerous factors or events beyond the control of
the parties or their respective advisors, none of Telecom Italia, Olivetti,
Goldman Sachs or any other person assumes responsibility if future results are
materially different from those forecast. As described above, the financial
analyses presented by Goldman Sachs to the board of directors of Telecom Italia
was one of many factors taken into consideration by the board of directors of
Telecom Italia in making its determination to approve the merger.
Goldman Sachs, as part of its investment banking business, is continually
engaged in preparing financial analyses with respect to businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and financial analyses for estate,
corporate and other purposes. Goldman Sachs is familiar with Telecom Italia
having provided investment banking services to it from time to time, for which
Goldman Sachs has received customary compensation for its services, including
having acted as its financial advisor in connection with the separation of the
Italtel joint venture and the subsequent sale of an 80% stake in Italtel.
Goldman Sachs is also familiar with Olivetti having provided investment banking
services to it from time to time, for which Goldman Sachs has received
customary compensation for its services, including having acted as joint
bookrunner on various recent Eurobond offerings and as counterparty to various
derivatives transactions.
Goldman Sachs provides a full range of financial advisory and securities
services and, in the course of its normal trading activities, may from time to
time effect transactions and hold positions in securities, including derivative
securities, of Telecom Italia or Olivetti for its own account and for the
accounts of customers.
Telecom Italia retained Goldman Sachs on March 6, 2003 as a financial advisor
in connection with the proposed transactions, which engagement was formalized
in a letter dated March 10, 2003. Under the terms of that letter,
(euro)3,750,000 became payable to Goldman Sachs on March 11, 2003. Telecom
Italia has also agreed to pay Goldman Sachs an additional(euro)11,250,000 upon
the completion of the merger. In addition, Telecom Italia has agreed to
reimburse Goldman Sachs for its out-of-pocket expenses, including fees and
disbursements of its lawyers, plus value added tax, up to a maximum amount
of(euro)100,000 and to indemnify Goldman Sachs against various liabilities
arising out of or in connection with the engagement or any matter referred to
in the engagement letter.
Annex XVI.
Conclusions reached by Professor Angelo Provasoli
with regard to the estimation methods applied by JP Morgan
to determine the exchange ratio
REPORT ON THE SHARE EXCHANGE RATIOS IN THE
MERGER OF TELECOM ITALIA S.P.A. INTO OLIVETTI S.P.A.
Professor Angelo Provasoli
(Universita L. Bocconi)
1. THE ENGAGEMENT.
In the matter of the merger of Telecom Italia S.p.A. into Olivetti S.p.A.,
I was asked at the conclusion of the valuations performed by Olivetti's
Advisor, JP Morgan, to express a professional opinion concerning the
consistency and appropriateness with respect to the purpose of the
operation of the valuation methodologies applied in determining the
exchange ratio, taking account of the relevant literature and practice.
In accordance with the engagement conferred, the analysis performed did
not enter into the merits of the application of the valuation
methodologies adopted by the Advisor.
2. VALUATIONS FOR MERGER PURPOSES.
To begin with, it is necessary to observe that the merger raises a complex
valuation problem whose initial prerequisite is the valuation of the
individual companies directly involved in the operation and whose final
objective is the determination of the exchange ratio between their shares.
It follows that the ultimate objective of the valuations for a merger is
to obtain essentially comparable values for the calculation of the
exchange ratio.
Consistently with this objective, and in accordance with standard practice
in this field, a uniform yardstick must be adopted throughout the whole
valuation process in order to protect the interests of the shareholders of
the company being absorbed and of the absorbing company.
The adoption of a uniform yardstick does not necessarily mean that
identical valuation methods must be used for all the companies
2
directly or indirectly involved in the merger, especially if they operate
in different sectors, but rather that there must be the same approach to
valuation.
In the case considered here, it is possible to confirm that in determining
the exchange ratio uniform valuation criteria were adopted both for the
principal valuation methodologies and for those used for control purposes.
It should also be noted that in a merger the calculation of the values of
the companies participating therein and, consequently, of the exchange
ratios must have the pre-eminent objective of preserving for the
shareholders directly involved in the exchange the value of the investment
held. Where the shares are listed on regulated markets and also have a
large float, this objective is achieved by paying due consideration to the
expectations of financial investors, expectations that under the
assumptions adopted are normally reflected in the behavior of stock-market
prices, above all where the shareholders involved in the exchange own
holdings not included in the controlling interest.
In the case examined the Advisor calculated the absolute and relative
values of the shares of the companies involved in the merger with a
variety of methodologies, divided into principal methodologies and those
used for control purposes.
The former, with some exceptions suggested by the specific characteristics
of the activities carried on by marginal business units, involve
fundamental analysis, in that they are based on estimation and discounting
of expected unlevered cash flows for aggregated business segments. The
manner of applying these methods, in accordance with the conceptual
approach mentioned above, appears directed towards capturing and
expressing in the
3
reference data the economic and financial prospects either known to
financial investors or that they have estimated or can estimate. The
control methodology, used to test the results obtained from applying the
principal methodologies, refers to stock-market prices.
The valuations of the two companies directly involved in the merger, in
accordance with the prevailing practice designed to protect the property
rights of minority shareholders, were formulated, moreover, on a
stand-alone basis. In other words, the synergies deriving from the merger
were not taken into account for the purposes of determining the exchange
ratios. In addition, for the same reasons and, again, as suggested by the
literature and practice concerning valuations for merger purposes, the
valuations were performed without considering control premiums / minority
discounts connected with the ownership of interests by the companies
directly involved in the operation.
3. THE VALUATION METHODOLOGIES USED AND THE EXCHANGE RATIO.
The absorbing company, Olivetti S.p.A., operates mainly in the
telecommunications sector through its subsidiary Telecom Italia S.p.A.
The latter, together with its subsidiaries, is the technological and
market leader in all the segments of wireline and mobile telephony.
It also constitutes Olivetti's principal asset.
The company being absorbed is Telecom Italia S.p.A., referred to above.
For the reasons stated, the valuation of Telecom Italia is the critical
aspect of the procedure serving to determine the exchange ratio in the
merger in question.
From the methodological point of view, this means that the methods adopted
in the autonomous valuation of Telecom Italia must also be
4
adopted for the purposes of valuing Olivetti's investment in Telecom
Italia.
Moreover, where available information permits, in keeping with the general
principle set forth above, the values of Olivetti's main investee
companies must also be estimated with consistent methods, possibly
analogous to those adopted in valuing Telecom Italia and its subsidiaries
in the different segments.
For the purposes of determining the exchange ratios of ordinary and
savings shares, the values per share of Telecom Italia ordinary and
savings share, as will be reported below, were calculated in proportion to
the ratio between the stock-market prices of the two classes of shares.
The values per share of Telecom Italia and Olivetti shares, calculated
using both the principal methodology and the control methodology, were
determined taking account of the dividend payment planned for June 2003.
The values per share were also determined using the so-called
fully-diluted method.
The utilization of analytical valuation methodologies as the principal
methodologies appears consistent with the literature and practice
regarding valuations for merger purposes.
In more detail, the methodologies adopted in valuing the business segments
of Telecom Italia can be summarized as follows:
5
Business segment - company
--------------------------------------------------------------------------------
Core Business Telecom Italia S.p.A. Financial method (unlevered DCF)
and other domestic wireline assets
--------------------------------------------------------------------------------
Mobile Telephony Financial method (unlevered DCF)
--------------------------------------------------------------------------------
Seat (Internet and media) Financial method for "Directory"
segment (unlevered DCF) and market
multiples for other segments
--------------------------------------------------------------------------------
Information Technology Market multiples
--------------------------------------------------------------------------------
Companies operating in Latin America Market values and mulitples
--------------------------------------------------------------------------------
Other business segments Market multiples and negotiated prices
--------------------------------------------------------------------------------
Net financial position Book value
--------------------------------------------------------------------------------
Off balance sheet Net present value
(Seat put and expected pension
charges)
--------------------------------------------------------------------------------
Tax Asset Net present value
--------------------------------------------------------------------------------
The table above shows that the individual business segments of Telecom
Italia were valued separately and autonomously.
The most important business segments within the Telecom group, as
mentioned earlier, were valued using an unlevered financial method that is
well known in the literature and widespread in practice. As mentioned, it
was applied with an approach attaching particular importance to the
prospects of financial investors.
Its use appears consistent with the purposes of the valuations in
question.
In particular, the principal methodological approaches informing the
application of the DCF method to the concept of "fundamental value for the
financial investor" include the following:
(i) the forecasts of the financial flows within the horizon of Telecom
Italia's business plan are those formulated by management and the
essential data thereof are known to the financial markets;
(ii) the growth rates used for the purposes of the financial projections
beyond the horizon of Telecom Italia's business plan and for the
purposes of calculating the terminal value
6
reflect growth prospects consistent with the market benchmarks. The
terminal value calculated by the Advisor is therefore basically
consistent with the multiples implicit in the current market prices
of comparable companies;
(iii) the weighted average cost of capital was calculated on the basis of
financial structures of the companies broadly in line with the
present ones (not targets) and taking into account risk premiums
derived from the expected rate of return implied by the market prices
on the valuation date.
As a consequence of this methodological approach, the value that was
determined basically reflects reasoned expectations of a financial
investment in the capital of Telecom Italia.
The tax variable considered in calculating the cash flows and the cost of
capital is that determined on the basis of the tax rules in force today.
The trends reflected in the recently approved reform (diminution of the
corporate income tax rate, gradual abolition of the regional tax on
productive activities and of the dual income tax, introduction of
consolidation for tax purposes, etc.) were not taken into account. It has
been noted that it is difficult to translate the effects of these trends
into estimated values, given the great uncertainty surrounding the timing
and manner of the application of the new tax system, for which the
implementing measures envisaged by the enabling law have yet to be issued.
The business segments/companies of relatively minor importance were valued
with market methods. These estimate the market value of the business
considered on the basis of ratios between stockmarket prices of the shares
and performance indicators per share of comparable companies and on the
basis of prices established in specific transactions. For the reasons
given above, in recent times
7
these methods have been widely used and appear acceptable especially for
the valuation of business segments/companies for which estimates of
medium-term cash flows to refer to in constructing "fundamental" economic
values are unavailable, precisely as in some of the cases considered by
the Advisor.
For the purposes of the estimation, the net financial position was assumed
to be equal to book value. This assumption presupposes broad equivalence
between the contractual terms of the debt and current and expected market
conditions.
Other assets and liabilities, marginal in terms of the overall valuation,
were valued in accordance with conceptually appropriate criteria and in
line with practice.
The overall valuation of Telecom Italia was also checked in the light of
the findings of research carried out by the main investment banks in the
last six months. This check corroborates the congruity of the result of
the valuation and confirms the overall orientation of the valuations as
reflecting the fundamental values for financial investors.
The valuation of Olivetti S.p.A. was performed on an analytical basis. In
particular, the valuation of business segments/companies and surplus
assets was performed with the methodologies summarized in the following
table:
8
Business segment - company
--------------------------------------------------------------------------------
Telecom Italia holding In proportion to the value determined
with the methods described earlier
--------------------------------------------------------------------------------
Tecnost Financial method (unlevered DCF)
/Market multiples
--------------------------------------------------------------------------------
Financial investments Market values
--------------------------------------------------------------------------------
Own shares Implicit economic value of Olivetti
--------------------------------------------------------------------------------
Net financial position Book value
--------------------------------------------------------------------------------
Tax Asset Net present value
--------------------------------------------------------------------------------
Central holding costs Net present value
--------------------------------------------------------------------------------
The table shows that the absorbing company's main assets, first and
foremost the holding in the company being absorbed, were valued with the
financial method, which is to be appreciated for the reasons already
stated.
The other assets and liabilities were valued using methodologies
consistent with standard practice.
In the light of the foregoing considerations, it is possible to conclude
that the methodologies used for the valuation of the absorbing company are
fully homogeneous with the methodologies used for the valuation of the
company being absorbed.
In estimating the value of Olivetti, the tax variable was also considered
in the same terms described earlier in connection with the valuation of
the company being absorbed.
Furthermore, in the valuation of Olivetti account was taken of the
estimated tax benefits (Tax Asset) arising from the writedown of the
investment in Telecom Italia recorded in Olivetti's financial statements
at 31 December 2002.
For the purposes of the valuation, the net financial position was assumed
to be equivalent to the book value at the reference date of
9
the valuation, with account also taken of the dividends being distributed
by Telecom Italia.
The treasury stock held by Olivetti (through Olivetti International S.A.)
was valued on the basis of the overall value of Olivetti, determined as
described above. This solution assumes that the value considered is
equivalent to the market value of the shares in question. Such equivalence
is not automatic. In any event, the result obtained following the
described approach was verified by the Advisor using the prevailing
valuation practice, which treats treasury stock as early retirement of
capital.
* * *
The exchange ratio resulting from the application of the principal
methodologies was checked, as mentioned, with the direct stockmarket price
methodologies. To this end, the Advisor determined the average prices for
periods of various duration and also selected an individual price before
the announcement of the operation and then calculated the ratios.
As remarked above, ratios between the values of the shares of companies
involved in a merger, as expressed by regulated financial markets, are
particularly significant when, as in the case in question, both companies
are listed, the floats are substantial and the average daily volumes
traded are high. When such circumstances obtain, the prices established
are important composite indicators for the assessment of the relative
attractiveness in terms of profitability, risk, growth, liquidity, etc.,
of the financial investments being compared.
Under Italian law, moreover, examination of stock-market prices is an
important aspect that cannot be ignored in the valuation process. For the
purposes of determining the value of listed firms, Italian law often makes
reference to the stock-market prices (for example, in
10
the case of withdrawal of shareholders, in capital increases with the
exclusion of the right of pre-emption, in complete-acquisition tender
offers, and in the right of acquisition referred to in Article 111 of the
Consolidated Law on Financial Intermediation).
In the case in question, the Advisor applied the direct stock-market price
methodology referring to prices observed at different times and in
different periods consistent, however, with the announcement of the
operation (7 March, average of the preceding month, average of the
preceding three months, average of the preceding six months, average of
the preceding twelve months).
The exchange ratios expressed by the stock market for the different time
horizons considered fall within a very small range around the exchange
ratio obtained using the principal methodology.
As regards the determination of the exchange ratio, it is necessary to
observe that the capital of Telecom Italia consists of both ordinary and
non-convertible savings shares, whereas that of Olivetti consists
exclusively of ordinary shares.
The value of the savings shares that will be issued by Olivetti for the
purposes of the exchange was determined on the basis of the price
differential found between Telecom Italia ordinary and savings shares.
The decision to differentiate the estimated values of the shares of
different classes according to the differences between their market prices
is fully consistent with standard practice in this field. However, even
though in the case in question there were no objective elements permitting
any other solution, some empirical analyses in the past have shown that
the differentials between the prices of ordinary and savings shares tend
to be larger for companies, such as Olivetti, where control is
contestable. In such cases, in fact, the importance of the administrative
rights exceeds that of the property rights. This principle, however, is
not applicable
11
objectively to the case in question in the absence of historical data
regarding Olivetti (its effects can only be estimated on the basis of data
regarding comparable companies). This circumstance was pointed out by the
Advisor in describing the difficulties of making the valuation.
In conclusion, the analysis of the methodologies utilized and the overall
conceptual approach adopted by the Advisor permit a positive opinion to be
given concerning the appropriateness of the valuation criteria adopted for
the purposes of the exchange and the logical and economic consistency of
their application.
Milan, 14 April 2003.
Professor Angelo Provasoli
ANNEX XVII.
Extract from shareholders' agreements published pursuant to
Article 122 of Italian Legislative Decree No. 58 of February 24, 2998
(PAGE INTENTIONALLY LEFT BLANK)
AGREEMENT AMONG PIRELLI S.P.A. AND EDIZIONE HOLDING S.P.A.
-EDIZIONE FINANCE INTERNATIONAL S.A.
Whereas:
- on August 7, 2001, PIRELLI S.P.A., with headquarters in Milan, viale
Sarca 222, registered with the Company Register of Milan, tax and VAT
identification number 00886890151 (hereinafter "Pirelli") and
EDIZIONE HOLDING S.p.A., with headquarters in Treviso, Calmaggiore
23, registered with the Company Register of Treviso under No. 13945,
tax and VAT identification number 00778430264 (hereinafter
"Edizione") Pirelli and Edizione signed a Shareholders' Agreement
concerning, among other things, the discipline of the mutual
relationships as shareholders of a vehicle for the purpose of
acquiring from BELL S.A. and from other persons 1,552,662,120
Olivetti ordinary shares (the "Shares") and 68,409,125 "Olivetti
ordinary shares warrants 2001-2002" (the "Warrants" and, together
with the Shares, the "Stake") of Olivetti S.p.A. ("Olivetti");
- on August 9, 2001 Edizione and Pirelli (each a "Party" and, together,
the "Parties") have transferred to Olimpia S.p.A. (with headquarters
in Milan, Viale Sarca No. 222, hereinafter "Newco" or "Olimpia")
134,322,250 and 130,980,000 Olivetti ordianary shares, respectively,
corresponding to 1.84% and 1.80% of Olivetti's voting share capital;
- on August 9, 2001 Pirelli has transferred to Newco 147,337,880
Olivetti ordinary shareswhich Pirelli previously purchased, through a
controlled company, from BELL S.A. and another party on July 30, 2001
(corresponding to 2.02% of Olivetti's voting share capital);
- with effect starting from August 7, 2001, Edizione Finance
International S.A. (controlled by Edizione) has been subrogated in
the rights and obligations of Edizione under the agreement, as
defined below;
- on September 14, 2001 Pirelli, Edizione and Edizione Finance (the
"Party" or "Parties") amended the agreement, as already made public
through an announcement dated September 22, 2001 pursuant to
applicable law,
and whereas:
- on February 13, 2002 the Parties have further amended the Agreement
as evidenced in boldface under the paragraph "Further Commitments"
below, in order to allow the Parties to purchase (and convert)
Olivetti bonds convertible into Olivetti ordinary shares (the
"Bonds"), the content of the agreement is hereby summarized.
Currently, Olimpia holds 28.7% of Olivetti's share capital.
1. Content of the Agreement
Purpose and content of the agreement
Among the Parties there is the following agreement (the "Agreement") for the
discipline of the mutual relationships as shareholders of a vehicle ("Olimpia")
established for the purpose of acquiring the Stake from BELL S.A. and/or from
other persons designated by Olimpia.
Transfer of Olivetti shares to Newco
The Stake will be transferred to Newco.
Newco's share capital
Pirelli will hold 80% of Newco's share capital while Edizione will hold 20%.
Pirelli will have the right to sell to one or more persons up to 20% of Newco's
share capital, with the previous consent of Edizione.
Meetings of the Shareholders, Board of Directors and Board of Statutory
Auditors of Newco
The By-laws of Newco will provide that the Extraordinary Meeting of the
Shareholders's voting quorum is set at 81% of the share capital, for both the
first and the second call.
The Board of Directors of Newco is composed of 10 members appointed through the
"voto di lista" system. Edizione will have the right to name two directors.
Pirelli has agreed to do everything in its power, within the limits permitted
by law, so that no decision should be made by the Board of Directors of Newco
without the favorable vote of at least one of the board members named by
Edizione (if present) on the following key points of business:
- an indication of the vote to be made by the Ordinary and
Extraordinary Shareholders' Meetings of Olivetti;
- the purchase, sale, or arrangement in any manner of shares with a
total value greater than 100,000,000 Euros per transaction.
The Parties agree to do everything in its power so that one Auditor and one
Alternate Auditor of the Board of Statutory Auditors is appointed among those
named by Edizione.
Corporate bodies of Olivetti and of listed companies controlled by Olivetti,
resolutions of the Board of Directors of Olivetti and of listed companies
controlled by Olivetti
The Parties have agreed to do everything in their power, within the limits
established by Law, that in the Board of Directors of Olivetti S.p.A., Telecom
Italia S.p.A., TIM - Telecom Italia Mobile S.p.A., and Seat - Pagine Gialle
S.p.A. (the "Listed Companies"), Edizione can name one fifth of the components
of the Board of Directors of the Olivetti Companies (net of the number of the
Directors to be appointed by the minority shareholders and by the Italian
Government) and that Edizione can name the Vice-Chairman of the Board of
Directors of the Listed Companies, with the powers of vice-legal
representative;
- the Parties have agreed, to do everything in its power, within
the limits of law, so that no decision should be made by the
Board of Directors of Olivetti and the Listed Companies without
the favorable vote of at least one of the board members named by
Edizione on the following points of business:
o individual investments greater than 250 million Euros;
o purchase, sale and deeds of disposition for any reason
whatsoever of controlling and connecting shareholdings with
a unit value of more than 250 million Euros;
o deeds of disposition for any reason whatsoever of firms or
branches thereof individually greater than 250 million
Euros;
o proposals to call the Extraordinary Meeting
o Intra-group transactions between the Olivetti group and the
Pirelli group for amounts individually greater than 50
million Euros;
o Transactions with related parties.
Penalties
In the event of the non-performance of one or more of the commitments assumed
pursuant to the provisions set forth in the agreement, the breaching Party,
shall be required to pay an amount equal to 10% (ten per cent) of the principal
amount invested by the non-breaching Party without prejudice to the right to
higher damages.
Term
The agreement shall run for three years as of its effective date and shall be
deemed to be automatically renewed on each expiration date unless notice of
withdrawal has been given six months in advance by Edizione.
Further Commitments
4
The agreement provides that the Parties, including through their respective
subsidiaries and/or parent companies, pursuant to Art. 2359, paragraph one of
the Italian Civil Code, may not acquire or own common shares, bonds convertible
to Olivetti shares and/or warrants, which give the right to purchase shares or
bonds convertible to Olivetti shares issued, or to be issued, by Olivetti or by
the Olivetti Companies (nor acquire voting rights in Olivetti common shares
under any status).
In derogation to the provisions set forth above, each of the Parties, with
communication sent to the other Party at the same time, may acquire Bonds. The
Party owning or otherwise receiving the Bonds may exercise the respective
conversion right, after communication is issued to the other Party at least 60
(sixty) days in advance, only to the extent that the amount of the Olivetti
shares obtained from the conversion itself (possibly increased by the number of
Olivetti shares owned as of the same date, arising from prior conversions of
Bonds), does not exceed, after the conversion, the percentage of the capital of
Olivetti corresponding to the difference between 28.74% and the percentage of
the holding of the Company in the voting capital in Olivetti at the time of the
conversion. Said limit may be exceeded with the approval of the other
Party--which may not be unreasonably withheld--without prejudice to complying
with the applicable floors in matters of OPA [take-over bid]. In the event
referred to above, the other Party will have the right to acquire, and the
Party which exercised the conversion right will have the obligation to sell,
shares of the same nature and type as those arising from the exercise of the
conversion of the Bonds, to the extent that said shares are divided between the
Parties, respecting the original proportions of the Parties' holdings in the
capital of the Company (80% Pirelli - 20% Edizione).
The Parties hereby agree that, in the event that third parties should make a
public offer of purchase with the intention of acquiring the Olivetti shares,
Edizione hereby agrees, from this time forward, when so requested by Pirelli
not to oppose, and to do everything so that the members of the Board of
Directors of the Company do not oppose the acceptance of the public offer of
purchase of Newco.
In the event that the agreement term should lapse without the agreement being
renewed due to Pirelli's actions or behaviour, Edizione will have the right to
sell to Pirelli, and Pirelli will have the obligation to purchase, all the
Newco's shares held by Edizione.
The agreement also disciplines deadlok situations in Newco or in the Board of
Directors of the Listed Companies. In case of deadlock, Edizione will have have
the right to sell to Pirelli, and Pirelli will have the obligation to purchase,
all the Newco's shares held by Edizione and Pirelli will have the right to sell
to Edizione, and Edizione will have the obligation to purchase, all the Newco's
shares held by Pirelli.
Newco's by-laws will provide for pre-emption rights in the event of sale,
directly or indirectly, of Newco's shares and a right of co-sale, for the
benefit of the minosrity shareholders where Newco's shares were offered to a
third party by a majority shaeholder (50.01%).
Whenever, during the term of the agreement, following one or several acts inter
vivos carried out for any reason, a significant change of the structure of
control of Edizione or Pirelli (including for this purporse Pirelli & C.
Accomnadita per Azioni) happens (meaning by significant change the exercise by
persons other than the current parties to name the majority of the members of
board of directors, with a potential change in the strategic objectives of the
subject company), such change shall be deemed a "Key Event".
In the presence of the Key Event concerning one party, the other Party will
have the right to transfer all of its Newco shares to the party which incurred
the Key Event.
2. Deposit with the Company Register
This agreement is deposited with the Company Register - Offices of Milan and
Turin/Ivrea
February 21, 2002
5
AGREEMENT AMONG PIRELLI S.P.A, UNICREDITO ITALIANO S.P.A. AND INTESABCI S.P.A.
Notice published pursuant to article 122 of Legislative Decree No. 58 dated
February 24, 1998 and CONSOB Regulation 11971 dated May 14, 1999, as amended.
Whereas:
on October 24, 2001 Pirelli S.p.A., IntesaBci S.p.A. and UniCredito Italiano
S.p.A., entered into an amendment agreement to the agreement mentioned above
such amendment being shown in bold-face below at paragraph 11, "Further
Commitments", paragraphs 11.1 and 11.2, in order to allow the Parties to
purchase bonds convertible in Olivetti shares and/or warrants that would give
the right to purchase shares and/or bonds convertible into Olivetti shares,
below is a summary of the entire content of the agreement including updated
data relating to the stake in Olivetti held by Olimpia (paragraph 1, "Purpose
and content of the agreement") and the stake in Olimpia held by the
shareholders (paragraph 2, "Olimpia's share capital"):
1. Purpose and content of the agreement
The Parties entered in the following agreement (the "Agreement") relating to
the participation by UniCredito Italiano S.p.A. ("UCI") and IntesaBCI S.p.A.
("BCI", and BCI together with UCI, the "New Partners", and each a "New Partner"
and together with Pirelli, the "Parties") into the share capital of Olimpia
S.p.A. ("Olimpia" or the "Company") and relating to the governance and
relationships among the shareholders of Olimpia, a company that currently holds
2,019,302,250 ordianry shares of olivetti S.p.A. ("Olivetti"), corresponding to
approximately 27.7% of Olivetti's share capital and 68,409,125 2001-2002
warrants for Oliveti's ordinary shares.
2. Olimpia's Share Capital
Olimpia's share capital is held as follows: Pirelli (60%), Edizione Finance
International S.A. (20%), UCI (10%) (the "UCI Olimpia Stake") and BCI (10%)
(the "BCI Olimpia Stake").
3. Olimpia's Board of Directors
3.1 It is understood that, within the limits allowed by law and for the entire
term of this Instrument:
(i) the Board of Directors of the Company will be made up of 10 (ten)
members;
(ii) 1 (one) director out of 10 (ten) will be appointed at the request and
indication of UCI;
(iii) 1 (one) director out of 10 (ten) will be appointed at the request
and indication of BCI;
(iv) should an Executive Committee be created, UCI and BCI will have,
respectively, the right to request at any time the inclusion of the
directors designated by them in said committee.
3.2 It is understood that the power of UCI and BCI to designate, each, a
member of the Board of Directors of the Company will remain valid even
after the first expiration of this Instrument, if it is extended pursuant
to Art. 8.1, provided UCI and BCI hold, jointly, a percentage of the
company capital above 10%. However, if the joint holding of BCI and UCI in
the company capital is 10% or less, then BCI and UCI may designate,
jointly, only one director.
4. Management of Olivetti, Telecom Italia S.p.A. ("Telecom"), SEAT - Pagine
Gialle S.p.A. ("SEAT") and Telecom Italia Mobile S.p.A. ("TIM")
4.1 The Agreement provides that, within the limits allowed by law and for the
entire term of the Agreement, in the Board of Directors of Olivetti,
Telecom, Seat and TIM (the "Olivetti Companies"), one director must be
appointed at the request and designation of UCI and another director at
the request and designation of BCI.
4.2 It is understood that the power of UCI and BCI to designate, each, a
member of the Board of Directors of Olivetti Companies will remain valid
even after the first expiration of this Instrument, if it is extended
pursuant to Art. 8.1, provided that, UCI and BCI hold, jointly, a
percentage of the company capital above 10%. However, if the joint holding
of BCI and UCI in the company capital is 10% or less, then BCI and UCI may
designate, jointly, only one director.
5. Key Issues
Pursuant to Art. 6 below, the following will be deemed Key Issues:
a) the decisions of the Extraordinary Shareholders' Meeting and those of
the Board of Directors of the Company, the latter referring to the
following:
o indication as to how to vote in Olivetti's Ordinary
Shareholders' Meeting on Key Issues, for the purposes of the
application of Articles 104 or 107 T.U. No. 58 of February 24,
1998, and in matters of acquisition of own shares, as well as
voting in Olivetti's Extraordinary Shareholders' Meeting;
o acquisition, sale and acts of disposal under any status (i) of
own shares in any amount and (ii) holdings (including shares and
financial instruments of any type issued by Olivetti and/or the
Olivetti Companies) at a value, by individual operation, above
100,000,000 Euros;
o determination of the ratio between equity and debt of the
Company and methods, terms and conditions for resorting to
outside financing sources;
o draft proposals to be submitted to the Company's Extraordinary
Shareholders' Meeting;
b) resolutions of the Board of Directors of Olivetti and Telecom,
referring to:
o individual investments above 300 million Euros;
o acquisition, sale and acts of disposal under any status (i) of
own shares in any amount and (ii) affiliate and subsidiary
holdings (including shares and other financial instruments
issued by the Company or the Olivetti Companies) at a value, by
individual operation, above 300 million Euros;
o acts of disposal under any status of companies or branches
thereof, with an individual value above 300 million Euros;
o proposals to call the Extraordinary Shareholders' Meeting for
resolutions in matters of modification of the corporate purpose,
capital operations of any nature, merger, spin-off,
transformation and dissolution;
o operations between Olivetti, Telecom and Gruppo Pirelli, with an
individual value above 50 million Euros;
o operations with related parties.
6. Provisions on Deadlock
6.1 Obligation to Consult.
Pirelli and the New Partners, the latter jointly between them, pledge to
consult each other previously whenever a decision on one of the Key Issues
(as identified under Article 5 above) must be discussed or decided upon.
6.2 Manifestation of will.
Whenever the situation described in item 6.1 above occurs, the dissenting
New Partners, separately or jointly, will have, or the single dissenting
New Partner will have, the right to send to Pirelli, by telegram or
2
registered letter a "Notice of Deadlock" within 15 (fifteen) days of the
end of the consultation referred to in paragraph 6.1.
6.3 Rights of the New Partners.
(a) Whenever UCI and/or BCI send a Notice of Deadlock, the New Partner
which sent the Notice of Deadlock will have the right to sell to
Pirelli, which will have the corresponding obligation to buy from the
respective New Partner, respectively, all but not part of the Olimpia
UCI Holding and/or all but not part of the Olimpia BCI Holding at a
price determined pursuant to the provisions in item (b) below.
(b) For the purposes of item (a) above, the Parties agree, including in
an aleatory manner, that the object of the decision must be: (x) the
price of the Olimpia BCI Holding and/or Olimpia UCI Holding,
corresponding proportionately to the value of the Company's economic
capital ("Price of the Olimpia UCI Holding" and/or "Price of the
Olimpia BCI Holding"), as well as (y) an increase expressing the
proportion of the increase premium, as if the Olimpia BCI Holding
and/or Olimpia UCI Holding were the expression of Olivetti's control,
assuming that the latter controls Telecom and the companies
controlled by the latter ("Premium").
(c) The price owed by Pirelli will not be lower than the amounts paid by
the New Partner for the acquisition and underwriting of shares in the
Company, less any dividends received ("Floor"), nor higher than an
amount which implies, in connection to the same amounts, less any
dividends received, an annual IRR, including taxes, equal to 15%
("Cap").
7. Penalty For Breach
In the event of breach of one or several commitments made pursuant to the
provisions of this Instrument, the breaching Party, will be obligated to
pay, a single and total amount equal, for each breach, to 5% (five
percent) of the amounts paid by the breaching Party for the acquisitions
and subscriptions of shares made in the Company as of that date without
prejudice to any other of its/their rights (including the right to higher
damages).
8. Term
8.1 This Instrument will have a term of three years starting from October 5,
2001 (the "Execution Date") and will be deemed automatically renewed from
time to time on expiration for the following two years, in the absence of
an opt-out notice from one of the Parties, without prejudice to the
provisions of paragraph 9 below.
8.2 Except in the cases required by law, each of the Parties may opt out of
this Instrument before every expiration, with notice sent 6 (six) months
in advance.
9. Absence of Renewal
(a) If, before the first expiration of this Instrument or successive
ones, Pirelli should send to the New Partners, jointly or separately,
in the terms set forth in paragraph 8.2, UCI and BCI will
individually have the right to send to Pirelli which, upon simple
request, will have the corresponding obligation to acquire,
respectively, all but not part of the Olimpia UCI Holding and Olimpia
BCI Holding held by the New Partner which exercised the option right
set forth herein, under terms and conditions determined, mutatis
mutandis, pursuant to paragraph 6.3(c) above (and the provisions
mentioned therein), giving notice to Pirelli within 30 (thirty)
Business Days.
The aforementioned price will be paid in cash.
(b) If, on the first expiration date of this Instrument, both or one of
the New Partners should, jointly or separately, send to Pirelli, the
opt-out notice referred to in item 8.2above, Pirelli will have the
right to acquire from both New Partners opting out, or from the
single New Partner opting out, which, upon
3
simple request, will have the corresponding obligation to sell,
respectively, all but not part of the Olimpia UCI Holding and Olimpia
BCI Holding held by the New Partner which exercised the opt out right
set forth herein, under terms and conditions determined, mutatis
mutandis, pursuant to paragraph 6.3(B) above (and the provisions
mentioned therein), less the Premium, giving notice to the New
Partner which sent the opt-out notice, within 30 (thirty) Business
Days.
(c) If both or one of the New Partners should send to Pirelli, on the
expiration of the first renewal in the following two years, the
opt-out notice referred to in paragraph 8.1 above, and therefore, on
the expiration of the fifth year after the effective Date of this
Instrument, or on the successive additional expiration dates, both
New Partners opting out, jointly or separately, or the single New
Partner opting out, will have the right to sell to Pirelli, which,
upon simple request, will have the corresponding obligation to
acquire, respectively, all but not part of the Olimpia UCI Holding
and/or all but not part of the Olimpia BCI Holding held by the New
Partner which exercised the opt out right set forth herein, under
terms and conditions determined, mutatis mutandis, pursuant to
paragraph 6.3(b) above (and the provisions mentioned therein), giving
notice to the New Partner that sent the opt-out notice, within 30
(thirty) Business Days.
10. Changes in Stockholding
10.1 For the purposes of this paragraph, "Change of Control" means a
substantial modification in the direct and indirect stockholding control
of Pirelli, which means the stoppage of the control of Pirelli & C
s.a.p.a. over Pirelli S.p.A., as exercised today.
10.2 If the Change of control occurs, each of the New Partners will have the
right to transfer, respectively, all but not part of the Olimpia UCI
Holding and/or all but not part of the Olimpia BCI Holding owned by
Pirelli which, upon simple request, will have the obligation to acquire,
under terms and conditions determined, mutatis mutandis, pursuant to
paragraph 6.3 (b) above (and theprovisions mentioned therein), giving
notice to Pirelli within 30 (thirty) Business Days of the date the New
Partners, separately or jointly, declared in writing that they have
learned about the Change of Control, or received written communication
about this circumstance. It is, however, agreed, including in an aleatory
manner, that the price owed by Pirelli will not be lower than the amounts
paid by the New Partner for the acquisitions and subscriptions of shares
in the Company, less any dividends received ("FLOOR"), nor higher than an
amount which implies, in connection to the same amounts, less any
dividends received, an annual IRR, including taxes, equal to 15% ("Cap").
10.3 If Pirelli intends to divest, in any form, part of its holding in the
Company, so that Pirelli would hold less than a majority of the capital
thereof, Pirelli may not sign any agreement in this sense, being first
obligated to give prior timely notice to both the New Partners about the
planned transfer, fully indicating the terms and conditions of the
transfer operation and any possible outside agreements (of blockage and
vote) with the buyers.
10.4 Within 30 (thirty) Business Days of receipt of the aforementioned
communication, UCI and/or BCI will, individually, have the right to sell
to Pirelli, which, upon simple request, will have the corresponding
obligation to acquire, respectively, all but not part of the Olimpia UCI
Holding and/or all but not part of the Olimpia BCI Holding held by the New
Partner that exercised the Option Right set forth herein, under terms and
conditions determined, mutatis mutandis, pursuant to paragraph 7.05 (b)
above, with the understanding, including in an aleatory manner, that the
price owed by Pirelli will not be lower than the amounts paid by the New
Partner for the acquisitions and subscriptions of shares in the Company,
less any dividends received ("FLOOR").
11. Further Commitments
11.1 For the entire term of this Agreement the Parties, including the companies
they control or they are controlled by pursuant to Aticle 2359, pargraph
1, of the Italian Civil Code, agree not to purchase or hold Olivetti
ordinary shares (including shares deriving from the conversion of
convertible bonds and/or from the exercise of warrants). UCI and BCI will
retain the power to purchase and hold the above mentioned securities
within the maximum limit allowed for them (0.4% of Olivetti's share
capital).
4
11.2 The Company, unless otherwise agreed in writing by the Parties, agrees not
to purchase or hold Olivetti ordinary shares (including the exercise
conversion rights or purchase or subscription of Olivetti ordinary shares
mentioned under paragraph 11.1 above) so to exceed the current opa
threshold, currently set at 30% (thirty percent), including within the
calculation of this threshold the securities mentioned under paragraph
11.1 above held by BCI and UCI and the securities held, directly or
indirectly, pursuant to applicable rules and regulations, inclufing CONSOB
regulations.
12. Disputes
Any dispute arising from this Instrument will be submitted to the judgment of
an Arbitration Board.
13. Company Register
This agreement is deposited with the Company Register - Offices of Milan and
Turin/Ivrea
November 3, 2001
Pirelli S.p.A. Unicredito Italiano S.p.A. IntesaBCI S.p.A.
5
AGREEMENT AMONG PIRELLI S.P.A., EDIZIONE FINANCE INTERNATIONAL S.A./EDIZIONE
HOLDING S.P.A., BANCA INTESA S.P.A., UNICREDITO ITALIANO S.P.A., OLIMPIA S.P.A.
AND HOPA S.P.A.
Communication pursuant to Article 122 of Italian Legislative Decree 58/98 and
to Artciles 127 and 129 of CONSOB Regulation No. 11971/99
Pursuant to Article 122 of Italian Legislative Decree 58/98 and to Article 127
of CONSOB Regulation No. 11971 of May 14, 1999 (as amended by No. 12475 of
April 6, 2000, No 13086 of April 18, 2001, No. 13106 of May 3, 2001, No. 13130
of May 22, 2001, No. 13605 of June 5, 2002 and No. 13616 of June 12, 2002),
Pirelli S.p.A. with company's headquarters in Milan, Viale Sarca 222,
registered with the Milan Company Register under Nos. 00886890151, ("Pirelli")
states that on February 21, 2003 it has entered into an agreement (the
"Agreement") with Edizione Finance International S.A., with company's
headquarters in Place d'Armes, 1, L-1136, Luxembourg, registered with the
Luxembourg Chamber of Commerce No. B77504 ("Edizione Finance"); Banca Intesa
S.p.A. (formerly known as Intesa BCI S.p.A.), with company's headquarters in
Milan, Piazza Paolo Ferrari 10, Direzione Generale Via Monte di Pieta 8,
registered with the Company Register of Milan No. and 00799960158, and VAT No.
108107000152 ("Intesa"); Unicredito Italiano S.p.A., with company's
headquarters in Genua, via Dante 1, Direzione Centrale in Milan, Piazza
Cordusio, registered with the Company register of Genua No. 00348170101
("Unicredito"); Olimpia S.p.A., with company's headquarters in Milan, viale
Sarca 222, registered with the Company Register of Milan, No. 03232190961
("Olimpia"); Hopa S.p.A., with company's headquarters in Brescia, Corso
Zanardelli 32, registered with the Company Register of Brescia, fiscal code and
VAT No. 03051180176 ("Hopa"); e Edizione Holding S.p.A., with company's
headquarters in Treviso, Calmaggiore 23, registered with the Company Register
of Treviso No. 13945, fiscal code and VAT No. 00778430264 (as guarantor of
Edizione Finance, "Edizione") - including, inter alia, the following
shareholders' agreements that - by will of the parties- are hereby published in
their entirety:
[omitted]
ARTICLE I
DEFINITIONS
1.01 "Olivetti Stock": common shares in with voting rights in Olivetti (as
defined in paragraph 1.23 below).
1.02 "Current Olimpia Partners": Pirelli, Edizione Finance, Unicredito and
Intesa, collectively.
1.03 "Hopa Controlling Companies": Fingruppo Holding S.p.A., Banca Monte dei
Paschi di Siena, S.p.A., Compagnia Assicuratrice Unipol S.p.A., Banca
Popolare di Lodi S.c.a.r.l. and other private individuals signatory to
the syndication pact with regard to Hopa.
1.04 "Standstill notice": shall have the meaning set forth in paragraph
8.04(d) below.
1.05 "Accelerated standstill notice": shall have the meaning set forth in
paragraph 8.06(b)(i) below.
1.06 "Control", "to control", "Subsidiary," and "Controlling companies":
other than cases that expressly differ from the context herein, shall
have the meaning set forth in Article 2359, paragraph 1, no. 1 and no. 2
of the Civil Code.
1.07 "Relevant date": shall have the meaning set forth in paragraph 9.01 of
the present Contract.
1.08 "Agreement Term": shall have the meaning set forth in paragraph 6.00
below.
[omitted]
1.12 "Business Day": every calendar day other than Saturday, Sunday, and
other days when as a general rule the banks of Milan are not open for
performing their usual activities.
6
1.13 "Holinvest": Holinvest S.p.A., with home offices in Brescia, at Corso
Zanardelli 32, capital of(euro)700,000,000 and subscribed capital of
(euro)514,000,000.00, registered in the Brescia Business Registry under
registration no., tax code no. and VAT no. 03562710172.
1.14 "Holy": Holy s.r.l., with home offices in Brescia, at Corso Zanardelli
32, capital of(euro)10,000.00, registered in the Brescia Business
Registry under registration no., tax code no., and VAT no. 03517530170.
[omitted]
1.16 "Net Financial Borrowing": unless otherwise specified with regard to
specific cases, shall be the algebraic consolidated sum (with the
understanding that for each case net financial borrowing for Olimpia,
borrowing for Olivetti and its subsidiaries will not be taken into
account) of the following items entered in the statement of assets and
liabilities prepared pursuant to Art. 2424 of the Civil Code: "bonds
(D1) = convertible bonds (D2) + due to banks (D3) + due to other
financial backers (D4) + financial debts owed to unconsolidated
subsidiaries (D8) + financial debts owed to affiliates (D9) + financial
debts owed to controlling companies (D10) - amounts due from
unconsolidated subsidiaries ( C II 2) - amounts due from subsidiaries (C
II 3) - amounts due from controlling companies ( C II 4) - financial
assets other than fixed assets (C III) - liquid assets (C IV)." Any
existing updated value must be added to this amount, for financial
leasing fees, if such are not included in the aforementioned items.
[omitted]
1.18 "Relevant Subjects": shall have the meaning set forth in paragraph 6.02
below.
1.19 "Net Asset Value": shall mean the evaluation method used for calculating
increase in value, according to market practice and at current values,
of financial assets and liabilities.
1.20 "Olimpia bonds": 1.5% Olimpia bonds, 2001-2002, each of which is an
"Olimpia bond."
1.21 "Olivetti Bonds": 1.5% convertible bonds, 2001-2010, convertible to
Olivetti Stock issued by Olivetti, each of which is an "Olivetti Bond".
[omitted]
1.24 "Extraordinary Operations": every merger or split involving Olivetti, on
the one hand, and one or more of its directly or indirectly controlled
companies, on the other.
1.24bis "Capital Transactions": such extraordinary transactions as may involve
Olivetti capital and which change the number of shares or which result
in, by way of example though not exclusively: stock split, reverse
split, assignment of Olivetti stock to partners for capitalization of
capital.
1.25 "Holy holding in Holinvest": Holy holding of Holinvest capital, or
19.999% of this capital.
1.26 "Hopa holding in Holinvest": Hopa holding of Holinvest capital, or
80.001% of this capital.
1.27 "Olivetti holding": alternately:
(i) when there are no Extraordinary Operations, holding with full
voting rights equal to at least 25% of Olivetti capital on the
date the present Contract is signed, or
(ii) when there are Extraordinary Operations, the entire package of
Olivetti Stock and/or Financial Instruments (granting equal
voting rights) arising from the exchange of shares with voting
rights equal to at least 25% of Olivetti capital that would be
attained through Extraordinary Operations executed prior to the
Relevant Date.
[omitted]
7
1.29 "Net Assets": the difference - to be determined in accordance with
Accounting Principles - between assets and liabilities on the "civil"
balance sheets of a corporation where, upon drafting the resultant
consolidated balance sheet, it is understood that for purposes of
determining Olimpia's Net Assets the assets of Olivetti and its
subsidiaries are not taken into account.
1.30 "Pacts": agreements of a paracorporate nature set forth in Articles VI
and VII of the present Contract.
[omitted]
1.32 "Increase Premium": shall have the meaning set forth in paragraph 10.00
below.
1.33 "Accounting Principles": Accounting principles as provided by law, and
when not specifically stated therein, those set forth by the National
Council of Professional Accountants, or otherwise by the International
Accounting Standards Committee.
1.34 "Debt/equity ratio": the ratio between Net Assets (as defined in
paragraph 1.29 above) and Net Financial Borrowing (as defined in
paragraph 1.16 above). Possible derivative instruments (as defined in
Decree Law 24.2.1998, no. 58 - Draghi Law, Article 1, paragraph 2), not
for coverage (as defined by Banca d'Italia Measure of July 30, 2002)
created as of 11-30-02, must be valued at cost or market price,
whichever is less, and any necessary write-off must result in a
reduction in Net Assets. Possible derivative instruments for coverage
must be valued in a manner consistent with the asset or liability
pertaining to the coverage, with it understood that the so-called equity
swap underwritten by Olimpia on November 20, 2001, will be customarily
valued at cost.
[omitted]
1.36 "Split": shall have the meaning set forth in paragraph 9.01 below.
1.37 "Holinvest Split": shall have the meaning set forth in paragraph 9.05
below. 1.38 "Seat": Seat - Pagine Gialle S.p.A, with home offices at Via
Grosso 10/8, Milan, registration number in the Milan Business Registry
and tax code no. 12213600153.
[omitted]
1.39 "Holy Position": Financial statements of Holy at December 31, 2002, with
the accompanying reports, attached hereto as number 5.02(ii) which - in
accordance with the provisions of paragraph 5.02(ii) below - shall
represent the Holy financial position of reference for the Merger
project.
1.40 "Olimpia Position": Financial statements of Olimpia at November 30,
2002, with the accompanying reports, attached hereto as number 5.02(i)
which - in accordance with the provisions of paragraph 5.02(i) below -
shall represent the Olimpia financial position of reference for the
Merger project.
1.41 "Olivetti Companies": Telecom, TIM, and Seat, collectively.
1.42 "Standstill": shall have the meaning set forth in paragraph 8.01 below.
1.42bis "Accelerated Standstill": shall have the meaning set forth in paragraph
8.06 below.
1.43 "Financial Instruments": every financial instrument (including Olivetti
Instruments as defined below) that directly or indirectly grants
subscription rights to Olivetti Stock (which, by way of example and not
exclusively, includes convertible bonds, forward contracts, call
options, and prepaid swaps).
1.44 "Olivetti Instruments": instruments with the characteristics as set
forth in the document attached hereto as no. 1.44.
[omitted]
1.46 "Initial Term": shall have the meaning set forth in paragraph 8.05
below.
8
[omitted]
ARTICLE II
OBJECT OF CONTRACT
(a) Under the present Contract, the various operations governed
thereby and the Shareholders' Agreements contained herein, the
Current Olimpia Partners, Olimpia, and Hopa hereby agree on the
terms and conditions for creating a partnership with strategic
connotations.
(b) The partnership referred to in the previous paragraph shall be
achieved by Hopa's joining its capital to that of Olimpia (by
Holy's merger with Olimpia) together with the Current Olimpia
Partners, and the subsequent joining of Olimpia's capital to that
of Holinvest, together with Hopa.
(c) The following stipulations in the present Contract shall, inter
alia, govern:
(i) the steps taken to achieve the aforesaid situation
(setting the terms and conditions thereof), in particular
with regard to the provisions of Articles II, IV, and V
below;
(ii) the rules of corporate governance and other provisions of
a paracorporate nature to which the Parties have agreed,
in particular with regard to the provisions of Articles VI
and VII below;
(iii)
(A) the mechanisms for settling possible Standstills or
Accelerated Standstills such as may arise in the
administration of Olimpia (to include with regard
to voting instructions as determined by the
Olivetti Extraordinary Shareholders' Meeting)
and/or of Holinvest; and
(B) the means of any possible breakup of the
partnership carried out under the present Contract,
with regard to confirming a Standstill or
Accelerated Standstill, as well as to the failure
to renew Pacts upon their expiration;
with particular regard to the provisions of Articles VIII,
IX, and X below.
ARTICLE III
PRELIMINARY OBLIGATIONS OF THE PARTIES
[omitted]
ARTICLE IV
CONDITIONS PRECEDENT
[omitted]
ARTICLE V
MERGER
[omitted]
9
5.09 Olimpia and Holinvest post-Merger ownership. The Parties mutually
recognize that, on the basis of the Stipulated Exchange Rate:
(i) Olimpia post-Merger shall be owned as follows:
Pirelli : 50.40%;
Edizione : 16.80%;
Hopa : 16.00%;
Unicredito : 8.40%; and
Intesa : 8.40%.
(ii) Holinvest post-Merger shall be owned as follows:
Hopa : 80.001%; and
Olimpia : 19.999%
[omitted]
ARTICLE VI
AGREEMENTS BETWEEN SHAREHOLDERS CONCERNING OLIMPIA AND OLIVETTI COMPANIES
6.00 Agreements and Agreement Term. (a) The Parties mutually recognize that
the provisions in this Article VI, as well as those in Article VII below
(collectively, the "Agreements") shall be effective for the entire
period ("Agreement Term") between the effective date of the Merger and
either:
(i) the natural expiration of such Agreements, as regulated under
paragraph (b) below; or
(ii) the date on which, in compliance with the applicable provisions
herein, (A) - as a result of a Standstill, the Split and
Holinvest Split become effective; (B) as a result of an
Accelerated Standstill, the Current Olimpia Shareholders receive
an Accelerated Standstill notice.
(b) The Agreements shall have a term of three years as of the
effective date of the Merger, and upon expiration shall be
deemed tacitly extended [for an equal period], unless a
notice of termination is served by either Party to the
other, subject to the provisions in paragraph (c) below.
(c) Subject to law requirements concerning particular cases,
the Parties may withdraw from the Agreements, effective on
the earliest expiration date, by written notice to the
other Party 3 (three) months before such expiration date.
6.01 Board of Directors of Olimpia.
(a) For the entire Duration of the Agreements, the Board of Directors
of Olimpia will be made up of a fixed and non-changeable group of
10 members, one of which will be appointed upon designation by
Hopa. The first Director appointed by Hopa will be Emilio Gnutti.
(b) In the event the Director appointed by Hopa should cease to be on
the Board, a replacement shall be designated within the next 20
(twenty) Work Days, and it is understood that the designation of
the replacement will be still made by Hopa, with the consent of
Pirelli, which shall not withhold it unreasonably.
(c) Should Hopa wish to revoke one or more of the Directors it
designated, the Current Olimpia Partners will cooperate fully, in
order for this revocation to proceed as rapidly as possible. Hopa
shall have the right to designate - in accordance to what was set
forth in the preceding paragraph (b) - the Director to
10
be appointed as a replacement for the Director who was revoked,
subject to the consent of Pirelli, which shall not withhold such
consent unreasonably.
(d) The Parties commit to holding each other harmless and to holding
Olimpia harmless from any onus or damage deriving from the
revocation without just cause of the Directors that each one of
them from time to time designates, pursuant to paragraph 6.01.
6.02 Relevant Subjects.
(a) For the purposes of this contract and in particular of subsequent
Article VIII the following shall be considered to be Relevant
Subjects:
(i) In reference to the resolutions to be adopted by Olimpia's
Shareholders' Extraordinary Meeting in relation to any
subject that pertains to it, any time the resolution is
adopted:
(A) In opposition to a proposal by Olimpia's Board of
Directors passed with the agreement of the
Directors appointed by Olimpia's Current Partners
and by Hopa; or
(B) In agreement with a proposal by Olimpia's Board of
Directors passed without the agreement of the
Director appointed by Hopa;
(ii) In reference to the resolutions to be adopted by Olimpia's
Board of Directors in relation to those pertaining to:
(A) The suggested vote to be cast during Olivetti's
Shareholders' Extraordinary Meeting;
(B) The purchase, sale and transfer of any security
interest valued over (euro)100,000,000.00 per
transaction, or for multiple transactions performed
during the same calendar year, with the exception
of that which is provided for in the subsequent
paragraph (b);
(C) Acts or initiatives that modify or will modify the
debt/equity ratio from a 1:1 ratio (while keeping
open the option to remedy this situation pursuant
to the procedure outlined in subsequent paragraph
8.07(a)(ii) and with the understanding that in this
case it will not be considered to be a situation
inducing stalling) and/or that concern the
definition of the terms and conditions for using
outside sources of financing;
(D) Proposals for resolutions to be submitted to
Olimpia's Shareholders' Extraordinary Meeting.
(b) The Parties reciprocally acknowledge that - in spite of being
slightly different from what was outlined in the preceding
paragraph (a) (ii) (B) - the following shall not be considered
Relevant Subjects for the purposes of this Contract: actions
relating to the purchase or sale of Olivetti stock, the
conversion of convertible Olivetti bonds in to Olivetti stock or
equivalent financial instruments, as long as even after these
transactions Olimpia's debt/equity ratio remains below 1:1.
6.03 Board of Directors of Olivetti Companies.
(a) For the entire Duration of the Agreements the current Olimpia
partners will do whatever is in their power to ensure that, in
the meetings of the Boards of Directors of the Olivetti
Companies, a director be appointed as a result of being
designated by Hopa. The first directors that Hopa designates to
this end are those indicated in the attached document by number
6.03(a).
(b) The new Boards of Directors of the Olivetti Companies, made up
according to the dispositions in the preceding paragraph (a),
will be appointed as soon as possible after the Merger and in any
event within and no later than 60 Business Days after the
effective date of the Merger itself.
(c) The dispositions in the preceding paragraphs 6.01(b) and (c) will
apply, mutatis mutandis, also regarding the meetings of the Board
of Directors of the Olivetti Companies.
11
6.04 Tender Offers on Olivetti Stock. Hopa commits itself to the fact that,
in the event Olivetti Stock is subject to a tender offer, the Director
that it designated in Olimpia's Board of Directors - if the Current
Olimpia Partners requests it in writing - will not oppose Olimpia's
agreeing to such tender offer.
6.05 Stand still.
(a) Except for what set forth in the subsequent paragraph (b) or
expressly provided for by this Contract, the Current Olimpia
Partners and Hopa (also with respect to its respective
controlling companies and affiliates) commit themselves not to
purchase Olivetti Stock for the Duration of the Agreements, and
agree to the fact that Olimpia - in partial derogation from this
limitation - notwithstanding what is set forth in subsequent
paragraph 8.06, will have the right to buy and sell Olivetti
Stock as long as these transactions do not cause the limits
described in paragraph 4.01(iii) to be exceeded, notwithstanding
the fact that in order to calculate the threshold specified in
the aforementioned paragraph, one shall have to bear in mind the
quantities allowed by paragraph (a) of Article III.
(b) The following cases are exceptions to the Stand Still commitment
specified in paragraph 6.05(a):
(i) The exercise on Pirelli's part of the rights already
acquired before executing this Contract, in relation to
the exercise of call options and swap contracts relating
to the purchase of Olivetti Stocks and Bonds (which are
described in detail in the attached document designated by
number 6.05(b)(i);
(ii) For purchases of Olivetti Stock which were already
allowed:
(A) From Unicredito and Intesa, by the current
shareholders' agreement agreed to by these entities
with Pirelli, which is described in the attached
document designated by number 6.05 (b) (ii) (A);
and
(B) From Edizione, within the limits outlined by the
current shareholders' agreement agreed to by this
entity with Pirelli, which are described in the
attached document designated by number 6.05(b) (ii)
(B).
(iii) The maximum number of Olivetti Stock that the Hopa
Controlling Companies are authorized to possess pursuant
to paragraph 4.01.
(c) Notwithstanding the above mentioned rights, furthermore the
Parties reciprocally acknowledge that the purchase by one Side of
convertible bonds and/or warrants that grant the right to
underwrite convertible bonds in to Olivetti Stock and the
exercise of the rights that go with it will be allowed only
following the consent of the other Party, consent that shall not
be unreasonably withheld, with the proviso that in the event of a
request by Hopa there will have to be the unanimous consent of
all the Current Olimpia Partners that at the time of this request
are Olimpia partners.
6.06 Olimpia's Business Purpose. The Current Olimpia Partners commit
themselves not to change Olimpia's business purpose (as reflected in the
sample Articles of Incorporation which are found under Addendum 5.07
(b)) up to the latter of the following dates (i) the date of the natural
expiration of the Agreements as set forth by paragraph 6 (b) of this
Contract; and (ii) in the event of a Stall or an accelerated Stall, the
effective date of the Break-up and the Holinvest Break-up.
6.07 Other Commitments Relating to Olimpia. The current Olimpia Partners
commit to make it so that, for the entire duration of the Agreements,
Olimpia:
(i) Does not have other holdings or financial investments other than
its holding in Olivetti, Olivetti's bonds, Olivetti's instruments
and the holding by Olimpia in Holinvest possessed as a result of
the merger;
(ii) Has a debt/equity ratio that does not exceed 1:1; and
12
(iii) Does not sell its holding in Olivetti to entities controlled by
Olimpia or that are parts of groups whose ownership can be
ascribed to the Current Olimpia Partners.
6.08 Co-sale Rights and Obligations.
(a) Except when otherwise set forth in this Contract and in
particular in the following paragraph 8.06(b)(iii) and
8.07(b)(ii), for the entire Term of the Agreements - and in any
case until the effective date of the Spinoff and of the Holinvest
Spinoff - if the holding of Pirelli in the capital of Olimpia is
reduced by transfer, contribution, assignment (including by
spinoff), or transfer of a portion thereof, directly or
indirectly, or a financial instrument that may be converted
and/or which gives right to a holding in the capital of Olimpia
(hereinafter jointly the "Signed Holding") for payment, free of
charge, for cash, or for payment in kind, under any status,
including in several branches as compared to that held as of the
signing date of this Contract, Hopa will have the right to claim
(and therefore Pirelli will be obligated to cause) the buyer
(hereinafter the "Third Party Buyer") - pursuant to the
applicable provisions of this paragraph 6.08:
(i) whenever, notwithstanding the transfer and/or assignment
of the Assigned Holding, Pirelli, together with Unicredito
and Intesa, maintains absolute majority in the capital of
Olimpia by acquiring:
(A) a percentage of the holding of Holinvest equal to
the percentage between the Assigned Holding and
50.4% according to the following formula:
PpiH : PiH = PC : 50.4%
Where:
o PpiH: is the holding percentage of Hopa in
Holinvest for which Hopa may claim transfer
to the Third Party Buyer;
o PiH: is the total holding (expressed as a
percentage of the capital of Holinvest) of
Hopa in Holinvest;
o PC: is the Assigned Holding (expressed as a
percentage of the capital of Olimpia);
or, as an alternative
(B) a percentage of the Olivetti Instruments and/or of
the Olivetti Shares and/or of the Financial
Instruments held by Holinvest on the date Pirelli
communicates its intent, equal to the percentages
between the Assigned Participation and 50.4%
according to the following formula:
PSOH : SOH = PC : 50.4%
Where:
o PSOH: is the portion of the Olivetti
Instruments and/or Olivetti Shares and/or of
the Financial Instruments held by Holinvest
on the date Pirelli communicates its intent,
for which Hopa may claim transfer to the
Third Party Buyer;
o SOH: the total number of Olivetti
Instruments and/or Olivetti Shares and/or of
the Financial Instruments on the date
Pirelli communicates its intent, held by
Holinvest;
o PC: is the Assigned Holding (expressed as a
percentage of the capital of Olimpia);
and therefore
13
(C) a percentage of its own holding in Olimpia equal to
the percentage between the Assigned Holding and
50.4%:
PpiO : PiO = PC : 50.4%
Where:
o PpiO: is the portion of Hopa's holding in
Olimpia for which Hopa may claim transfer to
the Third Party Buyer;
o PiO: the total holding held by Hopa in
Olimpia;
o PC: Assigned Holding (expressed as a
percentage of the capital of Olimpia);
(ii) whenever the assignment and/or transfer with price paid in
kind (contribution and/or spinoff) of the Assigned Holding
implies the loss of the absolute majority in the common
capital of Olimpia by Pirelli together with Unicredito and
Intesa, acquiring the entire holding held by Hopa in
Olimpia and/or Holinvest;
(iii) whenever the assignment and/or transfer with the price
paid in cash of the Assigned Holding implies the loss of
the absolute majority in the common capital of Olimpia, by
Pirelli, together with Unicredito and Intesa, Hopa will
also have the obligation to sell (and, respectively,
Pirelli will have the obligation and the right to cause
Hopa to sell) to the Third Party Buyer the entire holding
of Hopa in Olimpia and/or in Holinvest;
with the understanding that:
(x) for the purposes of this paragraph 6.08, the
financial instruments whose acquisition by the
Third Party Buyer must be imposed by Hopa
exercising the alternative power set forth in this
paragraph 6.08(a), will be identified as
"Instruments to be Assigned";
(y) once Hopa communicates - pursuant to the following
paragraph (c) - to Pirelli that it wishes to
exercise the co-sale right set forth in this
paragraph 6.08(a), Hopa will be obligated to sell
the Instruments to be Assigned under the terms and
conditions set forth in this paragraph 6.08 and, in
particular, the following paragraphs (d) and (e);
and
(z) the choice between the options referred to in the
previous paragraph 6.08(a)(i) will be exercised
discretionally by Hopa and will be unavailable.
(b) In order to allow Hopa to exercise the rights set forth in the
previous paragraph (a), Pirelli undertakes to communicate to Hopa
any intention to sell, transfer, assign (including by spinoff) or
otherwise transfer under any status or part of its own holding in
Olimpia, as soon as allowed by the negotiations with the Third
Party Buyer (taking into consideration possible reasons of
confidentiality), communicating to Hopa the nature of the Third
Party Buyer and the terms and conditions of the possible transfer
transaction.
(c) Hopa, after receiving the communication about the transfer
project of the Assigned Holding by Pirelli, must communicate to
Pirelli within twenty (20) Business Days from receipt of the
communication, whether or not it intends to exercise its own
co-sale right and whenever Pirelli's communication refers to a
transaction of the type indicated in the previous paragraph
(a)(i), which of the options set forth in Sections (A) through
(C) of said paragraph (a)(i) it intends to choose.
(d) Should Hopa exercise the co-sale right set forth in this
paragraph 6.08, the transfers of the Instruments to be Assigned
to the Third Party Buyer following such exercise must be
perfected simultaneously with the transfer of the Assigned
Holding by Pirelli to the Third Party Buyer.
(e) The transfer price of the Instruments to be Assigned must be
established pursuant to the following provisions:
14
(i) whenever Hopa exercised the co-sale right set forth in its
favor in the previous paragraph 6.08(a)(i)(C) or
6.08(a)(ii), the latter in the portion referring to the
Olimpia holding, the price will be equal to the same price
for each Olimpia share obtained by Pirelli from the
assignment of the Assigned Holding;
(ii) whenever Hopa exercised the co-sale right in its favor
pursuant to the previous paragraph 6.08(a)(i)(A) or
6.08(a)(ii), the latter in the portion referring to the
holding in Holinvest, the price will be established by
considering the implicit value assigned by the Third Party
Buyer to the Olivetti securities and to any Financial
Instrument held by Olimpia evaluating Holinvest on this
basis at Net Assets Value;
(iii) whenever Hopa exercised the co-sale right in its favor
pursuant to the previous paragraph 6.08(a)(i)(B), the
price of the Olivetti Instruments will be established
considering the implicit value assigned by the Third Party
Buyer to the Olivetti securities and to any Financial
Instrument held by Olimpia.
with the understanding that, for the purposes of this paragraph,
the Net Asset Value (referred to in the previous paragraph (ii))
and the price of the Financial Instruments (referred to in the
previous paragraph (iii)) will be established pursuant to the
previous paragraph (e) and, in the event of this agreement
between Pirelli and Hopa, by an audit firm included among the
so-called "Big Four" - appointed by the Parties by mutual
agreement or, in the absence of such agreement, by the Presiding
Judge of the Court of Milan at the request of the most diligent
Party; with the understanding that - the determinations made by
audit firm will be unappealable and final.
(f) It is understood between the Parties that the obligations set
forth in this paragraph 6.08 must be considered exclusively at
the charge of Pirelli, excluding any joint liability of the
Current Olimpia Shareholders.
6.08bis Co-sale Rights concerning Olimpia's assets.
(a) For the entire Term of the Agreements - and in any event until
the effective date of the Spinoff and of the Holinvest Spinoff -
if the holding of Olimpia is reduced to a level below 25% of
Olivetti's capital or, whenever it is so reduced, it is further
reduced by transfer, assignment (including by spinoff) or sale of
a portion thereof for payment, free of charge, for cash or by
payment in kind, under any status, including in several tranches
(hereinafter, together, the "Assigned Olivetti Holding"),
Holinvest will have the right to claim (and therefore Olimpia
will be obligated to cause) the buyer (hereinafter the "Third
Party Buyer of Olivetti Instruments") - pursuant to the
applicable provisions of this paragraph - to buy a percentage of
the Olivetti Shares (and/or Financial Instruments) held by it on
that date, equal to the percentage between the Assigned Olivetti
Holding and Olimpia's holding in Olivetti, held before the
assignment of the Assigned Olivetti Holding:
PAOH : AOH = POC : PO
Where:
o PAOH: is the number of Olivetti Shares (and/or Financial
Instruments) held by it, for which Holivest [sic] may
claim the transfer to the Third Party Buyer;
o AOH: is the total number of Olivetti Shares (and/or
Financial Instruments) held by Holinvest on the date
Olimpia communicates its intent to transfer the Assigned
Participation; POC: is the Assigned Olivetti Holding
(expressed as a percentage of the Olivetti Shares (and/or
of the Financial Instruments) held by Olimpia on the date
Olimpia communicates its intent to transfer Assigned
Olivetti Holding);
o PO: the total holding in Olivetti and/or all Financial
Instruments held by Olimpia before the assignment of the
Assigned Olivetti Holding;
15
with the understanding that:
(x) for the purposes of this paragraph 6.08bis, the
Olivetti Shares and/or Financial Instruments for
which Holinvest must impose the acquisition of the
Olivetti Instruments by the Third Party Buyer will
be identified as "Olivetti Instruments to be
Assigned";
(y) once Holinvest communicates - pursuant to the
following paragraph (c) - to Olimpia that it wishes
to exercise the co-sale right set forth in this
paragraph 6.08bis, Holinvest will be obligated to
sell the Olivetti Instruments to be Assigned under
the terms and conditions set forth in this
paragraph 6.08bis and, in particular, the following
paragraphs (d) and (e); and
(b) In order to allow Holinvest to exercise the rights set forth in
the previous paragraph (a), Olimpia undertakes to communicate to
Holinvest any intention to sell, transfer, assign (including by
spinoff), or otherwise transfer under any status or part of its
own holding in Olivetti, as soon as allowed by the negotiations
of the Olivetti Instruments with the Third Party Buyer (taking
into consideration possible reasons of confidentiality),
communicating to Holinvest the nature of the Third Party Buyer of
the Olivetti Instruments and the terms and conditions of the
possible transfer transaction.
(c) Holinvest, after receiving the communication about the transfer
project of the Assigned Olivetti Holding by Olimpia, must
communicate to Olimpia within twenty (20) Business Days from
receipt of the communication, whether or not it intends to
exercise its own co-sale right.
(d) Should Holinvest exercise the co-sale right set forth in this
paragraph 8.06(ii)[sic], the transfers of the Assigned Olivetti
Instruments to the Third Party Buyer of the Olivetti Instruments
to be Assigned following such exercise must be perfected
simultaneously with the transfer by Olimpia to the Third Party
Buyer of the Olivetti Instruments of the Assigned Olivetti
Holding.
(e) The transfer prize of the Olivetti Instruments to be Assigned
will be equal to the price for each Olivetti share (and/or
Financial Instrument) obtained by Olimpia from the transfer for
the assignment of the Assigned Olivetti Holding.
(f) The Parties mutually take note and agree that - as a partial
exception to the provisions of this paragraph 6.08bis - whenever
Holinvest exercises the co-sale right referred to in this
paragraph 6.08bis, the assignment of the Assigned Olivetti
Holding which - pursuant to the terms of the preceding paragraph
would include an event of Accelerated Standstill - it will not be
considered Accelerated Standstill.
6.09 Taking Note. The parties mutually take note that:
(i) the Agreements set forth in this Contract do not replace and
therefore do not impair the validity, efficacy and enforceability
of the Agreements referred to in the Paracorporate Pact executed
on September 14, 2001 between Pirelli, Unicredito, and Intesa;
(ii) in light of the preceding paragraph (i), the exercise by
Unicredito and/or Intesa of the rights set forth in their favor
in the Paracorporate Pact referred to in the previous paragraph
(i) may not in any manner represent nonperformance of any
commitments assumed by Unicredito and Intesa (as Current Olimpia
Shareholders) under this Contract, nor cause under any other
status any liability for Unicredito and Intesa themselves;
(iii) whenever Unicredito and/or Intesa exercise the put right pursuant
to the Paracorporate Pact referred to in the preceding paragraph
(i), they will immediately be released from any obligation
towards Hopa arising from this Contract, regardless of the date
of the actual transfer of the Olimpia shares subject to the put,
without prejudice to the fact that Pirelli will be automatically
obligated towards Hopa to perform all such obligations towards
Hopa itself;
16
(iv) for whenever Unicredito and/or Intesa exercise the put right
referred to in the previous paragraph (iii), Edizione Finance and
Hopa waive, as of now, exercising the preference right
established in their favor in the bylaws.
ARTICLE VII
SHAREHOLDERS' AGREEMENTS CONCERNING HOLINVEST
7.01 Board of Directors of Holinvest.
(a) For the entire Term of the Agreements, the board of directors of
Holinvest will be made up of a fixed, unchangeable number of 7
members, one of whom will be appointed by Olimpia's designation.
(b) The provisions of the previous paragraphs 6.01(b), (c) and (d)
will apply, mutatis mutandis, to the Board of Directors of
Holinvest.
7.02 Lock-up Commitments.
(a) As of the date of this Contract and for a period of twenty months
from the effective date of the Merger, Hopa:
(i) undertakes not to:
(A) offer, constitute in pledge, sell, carry out
preliminary sale steps, lend or otherwise transfer
or assign (including by contribution or partial
spinoff), directly or indirectly, Hopa's Holinvest
Holding or any financial instrument that may be
converted or which would give right to a holding in
the capital of Holinvest, or
(B) execute swap contracts and other acts and/or
contracts transferring to a different party, in
full or in part, any risk or economic profit
arising from Hopa's ownership of the Holinvest
Holding, regardless of the fact that the
transactions described in the preceding points (A)
and (B) must be liquidated by delivery of Hopa's
Holinvest Holding or of the aforementioned
financial instruments, for cash or otherwise.
(ii) it pledges - without prejudice to the provisions of the
following paragraphs (b) and (c) - to take all necessary
steps to prevent Holinvest from:
(A) offering, selling, carrying out preliminary sales
steps, lending, granting in pledge to guarantee
obligations of third parties or otherwise
transferring or assigning (including by
contribution or partial spinoff), directly or
indirectly, the Olivetti Instruments which, as of
the date of this Contract, are owned by it, or any
other financial instrument that may be converted or
which gives right to a holding in the capital of
Olivetti; or
(B) executing swap contracts or other acts and/or
contracts transferring to a different party, in
full or in part, any risk or economic profit
arising from the ownership of the Olivetti
Instruments which, as of the date of this Contract,
are owned by it, regardless of the fact that the
transactions described in the preceding points (A)
and (B) must be liquidated by delivery of the
Olivetti Instruments or of the other aforementioned
financial instruments, for cash or otherwise.
(b) Concerning the provisions of the following paragraph 7.03:
(i) the Parties mutually take note that they know the
following:
(A) Holinvest gave in pledge to the banks which
financed it (the "Creditor Banks") the Olivetti
Instruments which, as of the date of this Contract,
are owned by it (as identified in the
17
document enclosed herewith under No.
7.02(b)(ii)(A)) as guarantee of the obligations to
reimburse the financing granted to it by said
Creditor Banks;
(B) Hopa undertakes to take all possible steps to avoid
a possible discussion of the pledge by the Creditor
Banks and therefore to preserve the preferred
rights in favor of Olimpia referred in paragraph
7.03 below;
(ii) in light of the provisions of the preceding paragraph (i),
the Parties agree that:
(A) following the execution of this Contract, Hopa will
do everything possible so that the Creditor Banks:
(1) consent that, in the event of sale of the
Olivetti Instruments following the
discussion of the pledge referred to in the
preceding paragraph (i)(A), Olimpia be
granted a preferred right concerning the
acquisition of the Olivetti Instruments so
sold; or, whenever such hypothesis is not
feasible,
(2) to accept - in the event that the pledge
referred to in the preceding paragraph
(i)(A) must be discussed - to transfer to
Olimpia the financing contracts and the
respective guarantees, at a price equal to
the market value as of that date of the
credit given by the Creditor Banks to
Holinvest, under the same financing
contracts so assigned; on the other hand, it
is understood that Hopa undertakes as of now
to cause Holinvest - in the event that the
Creditor Banks declare their availability to
transfer the contract as indicated in this
paragraph (ii)(A)(2) to accept - and
therefore consent to - such assignments:
(B) without limitation to the provisions of the
preceding paragraph (A), immediately after the
execution of the this contract, the Parties will
send a joint communication to the Creditor Banks to
inform them of the existence of the preferred right
referred to in paragraph 7.03 below, and also
requesting the Creditor Banks to a meeting to
discuss the provisions of the aforementioned
paragraph (ii)(A);
(C) in order to help Olimpia achieve the purposes set
forth in the previous paragraph (i)(C), Hopa will
allow a representative of Olimpia (chosen by
Olimpia with the consent of Hopa - which may not be
unreasonably denied) to participate in all the
meetings with the Creditor Banks which are the
consequence or related to the provisions of the
previous paragraph (ii)(A); (iii) the sections in
the previous paragraphs(i) and (ii) will apply,
mutatis mutandis, also in the case of subsequent
financing and the respective pledges, with the
understanding that the pledges so granted by
Holinvest may refer only to the debts contracted by
it, to the exclusion of the guarantee pledges of
the debts of other parties.
(c) Hopa's obligation referred to in the previous paragraph (a)(ii)
is understood in the sense of allowing Holinvest to freely
dispose - during the lock-up period - of the Olivetti Instruments
and/or Financial Instruments (but without application of the
preferred right referred to in paragraph 7.03 below) provided
that during said period, Holinvest keeps its ownership of a
number of securities of not less than 65% and not more than 125%
of those listed in the previous paragraph 4.01(ii)(A) and
provided the shares of the companies director or indirectly
controlled by Olivetti do not exceed 10% of the assets of
Holinvest, without prejudice to the composition of the assets of
Holinvest on the Relevant Date.
7.03 First Preferred Right in Favor of Olimpia.
(a) At the end of the Lock-up period referred to in the previous
paragraph 7.02(a)(ii) and for the entire residual Term of the
Agreements - and in any case until the effective date of the
Spinoff and of the Holinvest Spinoff - Holinvest may freely
dispose of the Financial Instruments and of the Olivetti Shares,
provided it - should it carry out any of the transactions set
forth in the previous paragraph 7.02(a)(ii)(A) and (B) - grant
Olimpia (with written communication detailing the identity of the
18
potential buyer whenever it is known to Holinvest, regardless of
the fact that the sale takes place on the regulated market, and
all the elements necessary for the adequate evaluation of the
offer of the latter and of the elements showing his seriousness)
a preferred right in the Olivetti Instruments which are the
object of such transaction.
(b) It is understood that:
(i) the offer must be presented by the third party within (30)
thirty Business Days from the date Olimpia received
Holinvest's communication referred to in the previous
paragraph 7.03(a);
(ii) the preferred right referred to in the previous paragraph
(b) must be exercised by the Olimpia within two (2)
Business Days after Olimpia's receipt of the respective
denunciatio.
7.04 Holinvest's Bylaws. Hopa will take all necessary steps so that, by the
date of the Merger and not later, Holinvest's bylaws be amended to allow
Holinvest exclusively to engage in the holding and financial activity
concerning ownership and trading of the Olivetti Shares, Olivetti
Instruments and Financial Instruments, as well as the shares and/or
financial instruments of the companies directly or indirectly controlled
by Olivetti; Hopa's commitment is subject to the admissibility of such
amendment pursuant to current legislation, without prejudice to the fact
that Hopa will not be obligated to make such amendment whenever it
implies the prohibition to Holinvest from continuing to own the holdings
in securities other than those indicated in this paragraph, as currently
owned, with the understand that, in this case, Hopa undertakes to cause
Holinvest not to acquire new securities other than those described
above. In addition, within the same term, Hopa undertakes to make in the
current bylaws of Holinvet [sic] the amendments necessary to make it
consistent with the model bylaws enclosed herewith under No. 7.04.
7.05 Second Preferred Right in Favor of Olimpia. (a) In the absence of a
scenario of Accelerated Standstill, on the expiration of the first
three-year period of the term of the Agreements (but completely
independently from the fact that the agreements are extended for a
subsequent three-year period or not) Hopa will cause Holinvest to
execute with Olimpia a preferred rights agreement with a term of two
years, under which - as of that date - Holinvest - whenever it intends
to offer, pledge, sell, carry out preliminary sale steps, sell any sale
option or contract, grant any option, right or warrant for acquisition,
lend or otherwise transfer, assign or dispose (including by contribution
or partial spinoff), directly or indirectly, all or part of Olivetti's
holding post-Spinoff - it must offer it preferentially to Olimpia to the
extent that, due to the transaction planned, Hopa and Holinvest would
own together less than:
(i) 65% of the holding in Olivetti belonging to them by the effect of
the Spinoff; or
(ii) 65% of the Olivetti Instruments owned by Holinvest on the
reference date of the Spinoff.
(b) The preferred right referred to in the previous paragraph
(a) must be exercised by Olimpia within 15 days after its
receipt of the respective denunciatio.
(c) For the entire term of the preferred rights agreement set
forth in this paragraph 7.05, the provisions of the
previous paragraph 6.05 apply, mutatis mutandis.
ARTICLE VIII
STANDSTILL AND ACCELERATED STANDSTILL
8.01 Identification of standstill cases. For the purposes of this Contract,
"Standstill" means a situation of disagreement, expressed in preliminary
consultations or, in the absence thereof, in the Extraordinary
Shareholders' Meeting of Olimpia or in the Board of Directors of
Olimpia, among the Current Olimpia Shareholders, on the one hand, and
Hopa, on the other hand, on a Relevant Subject, at any time during the
Term of the Agreements.
19
8.02 Obligation of consultation. The Current Olimpia Shareholders undertake
to first consult Hopa whenever a Relevant Deliberation must be discussed
or approved.
8.03 Procedure. (a) For the performance of the obligation referred to in
paragraph 8.02 above, the Current Olimpia Shareholders and Hopa
undertake to meet, or to first consult each other by telephone
conference or videoconference, subject to the appropriate minutes,
within and not later than the third (3rd) day prior to the day scheduled
for the meeting of the board or shareholders of Olimpia, or immediately
after they become aware, in the event of urgent invitation from the
meeting of the Board of Olimpia pursuant to the applicable bylaws'
provisions.
(b) In the consultation referred to in this paragraph, the Current
Olimpia Shareholders and Hopa will do everything possible to
reach an agreement and/or identify a common position in the
issues submitted to their examination, and undertake for this
purpose to act in good faith.
(c) The unjustified absence of a Party in the preliminary
consultation or its abstention from decisions reached during the
consultation, implies acceptance of the decisions reached by the
other Party and impose on the absent or abstaining Party the
obligation to comply with and observe such decisions.
8.04 Manifestation of will. (a) Whenever the Current Olimpia Shareholders and
Hopa, in the preliminary consultation referred to in paragraphs 8.02 and
8.03 above, reached an agreement concerning the issues submitted to said
consultation, they will be obligated to express their will at the
competent levels, according to the following provisions:
(i) by giving a joint representative delegation to participate in
Olimpia's extraordinary shareholders' meeting and to cast the
vote in said meeting, according to the decision made; or, as
applicable,
(ii) to cause its representatives in the Board of Directors of Olimpia
to participate in the meeting of the board and cast their vote
there, according to the joint decisions reached in the
preliminary consultation.
(b) Otherwise, in the absence of mutual agreement on the
issues submitted to consultation, Hopa will be obligated
to refrain from participating in the meeting of the
shareholders or of the board and from casting or causing
its vote to be cast at said level and/or refrain from
expressing, at any level and mode, its will or position
concerning the issue subject to said preliminary
consultation, except as indicated in point (d) below.
(c) Whenever the preliminary consultation referred to in the
previous paragraphs 8.02 and 8.03 does not take place by
the fault of the Current Olimpia Shareholders, Hopa will
have the right to participate in the meeting of the
shareholders and/or board and cast or cause casting of its
vote at that level and/or to express, at any level and
mode, its will or position concerning the Relevant
Subject, except as set forth in point (d) below.
(d) Whenever the situation referred to in point (b) or the
situation referred to in point (c) above occur, Hopa will
have the right to send to the Current Olimpia
Shareholders, by telegram or registered letter and
pursuant to paragraph 12.03, a "Standstill Notice" within
the term of 15 (fifteen) days from the end of the
consultation referred to in paragraph 8.03 or, in the
absence of consultation, from the date of the decision
referred to in the preceding paragraph 8.04(c).
(e) Within 30 Business Days from the date the Current Olimpia
Shareholders received the Standstill Notice, the Parties
must request - for the only purpose referred to in
paragraph 10.01 below - by unappealable judgment of an
Arbitration Board, to be appointed in accordance with
Article XIII below, the ascertainment, for the purposes
set forth in Article X, of whether or not the Standstill
situation was declared by Hopa in good faith.
In any event, it is understood in order to avoid any doubt, that
Hopa's right (as referred to in Article IX below) to have the
Spinoff [and] the Holinvest Spinoff take place without the
results of such
20
ascertainment and therefore the Current Olimpia Shareholders must
implement all necessary steps for the Spinoff and Holinvest
Spinoff to take place within the term indicated in paragraph
9.01(c) below.
8.05 Rights of the Parties.
(a) Whenever Hopa sends to the Current Olivetti Shareholders a
Standstill Notice pursuant to paragraph 9.04 (c) above, Hopa will
have the right (which will be deemed exercised by the receipt of
the Standstill Notice by the Current Olimpia Shareholders
pursuant to point (c) paragraph 8.04 above) to claim - as of the
end of the thirty-sixth (36) month after the date of the Merger
(the "Initial Term") - all necessary steps to be taken so that
within 6 months from the Initial Term, the Spinoff and Holinvest
Spinoff take place pursuant to the applicable provisions of
Article IX below.
(b) The Parties agree that in any case of absence of opt-out of the
Parties and their consequent automatic renewal pursuant to the
provisions of paragraph 6.00(b) above, the Initial Term must be
considered from time to time [the end of the thirty-sixth (36)
month after the date of each renewal].
8.06 Identification of Cases of Accelerated Standstill.
(a) Whenever - during the Term of the Agreements - one of the
following events takes place (each of them an event of
"Accelerated Standstill"):
(i) a decision is made for the merger and/or spinoff of
Olimpia and/or Olivetti with companies other than
companies directly or indirectly controlled;
(ii) Olimpia stops owning a holding in Olivetti at least equal
to the Holding in Olivetti, including as a consequence of:
(A) transfer and/or assignment (including by spinoff)
and/or contribution of all or part of its holding
in Olivetti and/or Financial Instruments (with
voting right) to companies belonging to the groups
in which the Current Olimpia Shareholders are
members or which are managed by them; or
(B) transfer and/or assignment (including by spinoff)
of all or part of its holding in Olivetti and/or
Financial Instruments (with voting right) to third
parties with payment in kind (for example by swap
or contribution).
(iii) Olimpia's debt/equity Ratio - without prejudice to
paragraph (b) below - exceeds 1:1;
(iv) the Current Olimpia Shareholders decide to contribute all
or part of their total holding in Olimpia to companies
belonging to groups in which the Current Olimpia
Shareholders are members or which are managed by them;
(v) without prejudice tot he provisions of paragraph 8.06(b)
(iii) (C) below, there are plans for transfer, assignment
and/or conveyance (including by spinoff) under any status,
of all or part of the total holding of the Current Olimpia
Shareholders in Olimpia, to companies belonging to groups
in which the Current Olimpia Shareholders are members or
which are managed by them, at a price lower than the
market price of Olimpia's holding in Olivetti plus (euro)
0.60 per Olivetti Share and/or Financial Instrument owned
by Olimpia. It is understood that, whenever Extraordinary
Transactions or Capital Transactions are carried out, such
increase of (euro) 0.60 must be determined for a number of
Olivetti Shares and/or Financial Instruments appropriately
adjusted or adapted as a consequence of such Transactions,
according to market practice, with the understanding that
whenever, due to the determination of such number there is
a disagreement between the Parties, such determination
will be requested by the most diligent Party from a prime
business bank chosen by mutual agreement or, in the
absence thereof, designated by the President Judge of the
Court of Milan;
21
(vi) there are plans for assignment and/or conveyance
(including by spinoff) of all or part of the total
participation of the Current Shareholders in Olimpia to
third parties, with payment in kind (for example by swap
or contribution), whenever the third party does not assume
towards Hopa the same obligations assumed by the Current
Olimpia Shareholders pursuant to the agreements, without
prejudice to the fact that in such case Hopa will not be
subject to any co-sale obligation;
in all these cases, Hopa will have the right to ask Olimpia and
the Current Olimpia Shareholders to take all necessary steps in
order to decide - pursuant to the applicable provisions of
Article IX below - on the Spinoff and Holinvest Spinoff.
(b) The Parties mutually take note that:
(i) the right granted to Hopa in paragraph (a) above
will be deemed exercised when the Current Olimpia
Shareholders receive a written communication from
Hopa indicating to the Current Olimpia Shareholders
its desire to enforce its rights established in the
event of Accelerated Standstill, "Accelerated
Standstill Notice";
(ii) this communication must be sent by Hopa to the
Current Olimpia Shareholders not later than by the
fifteenth (15th) day after the occurrence of one of
the events referred to in paragraph (a) above;
(iii) in the event referred to in paragraph
8.06(a)(v) above, Hopa will not have:
(A) the right to exercise the co-sale rights
reserved in its favor in paragraph 6.08(a)
above;
(B) the right to exercise its preferred right
established in the bylaws; and
(C) any co-sale obligation.
8.07 Exceptions to Cases of Accelerated Standstill.
(a) In partial derogation to the provisions of paragraph 8.06(a)(iii)
above, the Parties mutually take note that:
(i) the occurrence of a possible excess over the ratio of 1:1
in the debt/equity Ratio of Olimpia, relevant for the
purposes of paragraph 8.06(iii) above, will exclusively be
that carried out by Olimpia and the Current Olimpia
Shareholders and communicated by them to Hopa (including
as part of the approval of the periodic financial
statements and balance sheets of Olimpia by its Board of
Directors) quarterly, and at any time following a written
request from Hopa to Olimpia; and
(ii) it may be considered that the event referred to in the
previous paragraph 8.06(iii) took place only if, following
said event, the debt/equity Ratio of Olimpia is not
restored to a value equal to or lower than 1:1 within the
next 5 days from the date of the communication by which
Olimpia notifies Hopa that the debt/equity Ratio of
Olimpia has exceeded 1:1 or, as an alternative, the latter
does not irrevocably undertake to restore it, with the
understanding that such restoration may occur (A) by
non-refundable payments to the capital account made by the
Current Olimpia Shareholders and without causing economic
difficulties for Hopa or dilutions of the latter's holding
in Olimpia or (B) by subordinated financing, with the
understanding that, in this case, the current Olimpia
Shareholders will be obligated (in order to avoid an
Accelerated Standstill) to convert or replace within 60
(sixty) days such subordinated financing by non-refundable
payments to the capital account, without causing economic
difficulties for Hopa or dilution of the latter's holding
in Olimpia.
(b) In addition, the Parties mutually take note that:
(i) the transfer or contribution of their holding in Olimpia
will not constitute a case of Accelerated Standstill
pursuant to paragraph 8.06(v) above:
22
(A) by one of the Current Olimpia Shareholders, to a
company which is (and remains) controlled by it;
and
(B) by Unicredito and Intesa to:
(1) a company subject to joint control of said
parties in their respective bank group and
as long as they remain members thereof;
and/or
(2) to Pirelli, pursuant to the provisions of
the current Pool Agreement between Pirelli,
on the one hand, and Unicredito and Intesa
on the other hand, provided that Pirelli -
simultaneously with such assignment or
contribution - is subrogated in the
obligations assumed by Unicredito and Intesa
towards Hopa pursuant to the Agreements and
in general pursuant to this Contract;
(C) by Edizione to Pirelli pursuant to the provisions
of the current Pool Agreement between Pirelli, on
the one hand, and Edizione, on the other hand,
whereby Pirelli is subrogated as of now, in the
event of such assignment or contribution, in the
obligations assumed by Edizione towards Hopa
pursuant to the Agreements and, in general,
pursuant to this Contract;
(ii) the assignments referred to in paragraph 8.07(b)(i) above
will not give Hopa the right to exercise the co-sale
rights reserved to it under paragraph 6.08(a) above, nor
the preferred right established for it in the bylaws, nor
will they create any co-sale obligation for Hopa.
8.08. Relations between Standstill and Accelerated Standstill. The Parties
mutually take note that whenever, in the event of a Standstill, there is
an event of Accelerated Standstill, the applicable provisions in the
case of Accelerated Standstill will prevail and, whenever there is an
Accelerated Standstill, there may be no Standstill or a subsequent
Accelerated Standstill, with the understanding that in the event of a
Standstill, an Accelerated Standstill may take place but a subsequent
Standstill may not be deemed to occur.
ARTICLE IX
SPINOFF AND HOLINVEST SPINOFF
9.00 Triggering Events. Should Hopa exercise the rights set forth in its
favor in paragraphs 8.05 and 8.06(a) above, and in the event of failure
to renew the Agreements on their initial expiration or at the expiration
of the subsequent renewals periods pursuant to paragraph 6.00 above:
(i) the Current Olimpia Shareholders undertake to do everything
necessary so that - pursuant to the following paragraphs of this
Article IX and in particular paragraph 9.01 - the Spinoff takes
place; and
(ii) Hopa and Olimpia undertake to do everything necessary so that -
pursuant to the following paragraphs of this Article IX and in
particular paragraph 9.04 - the Holinvest Spinoff takes place.
9.01 The Spinoff.
(a) The Spinoff will consist of a partial spinoff of Olimpia as a
consequence of which Hopa will receive the pro-quota of Olimpia's
assets and liabilities.
(b) The reference date, including for the determination of the
pro-quota of the assets and liabilities and without prejudice to
paragraph 9.02, of the Spinoff (the "Relevant Date") will be:
(i) the Initial Term, in the event of Standstill and in the
event of failure to renew the Agreements on the original
expiration or on the expiration of the subsequent renewal
periods (without prejudice to paragraph 8.05(b) above);
and
23
(ii) a date coinciding with the third (3rd) Business Day
following the date of the relevant event for the purposes
of Accelerated Standstill, in the event of Accelerated
Standstill.
(c) Without prejudice to paragraph 9.06 below, the Current Olimpia
Shareholders must take all necessary steps to complete the
Spinoff within six (6) months:
(i) from the Initial Term, in the event of Standstill and in
the event of failure to renew the Agreements on the
original expiration or on the expiration of the subsequent
renewals periods; and
(ii) from the date of receipt of the Accelerated Standstill
Notice, in the event of Accelerated Standstill.
9.02 Commitment of the Current Olimpia Shareholders. Without prejudice to
paragraph 9.07 below for the so-called cash settlements, in all cases in
which, pursuant to this Contract, it is necessary to proceed with the
Spinoff, the Current Olimpia Shareholders must do everything necessary
so that, on the Relevant Date:
(i) the assets of Olimpia consist at least of the Olivetti Holding
(ii) the share of the Olivetti Holding and Financial Instruments
to be attributed to Hopa in the Spinoff is equal to the
percentage of Hopa's holding in the capital of Olimpia, without
prejudice to the fact that, in the Spinoff, Hopa must be
attributed a share of the Olivetti Holding including in the event
that, on the Relevant Date, Olimpia has a holding lower than the
Olivetti Holding, except that, upon the reduction of Olimpia's
holding in Olivetti below the Olivetti Holding, the exercise of
the co-sale right is obtained by Hopa; in this case, Hopa will be
attributed the pro rata of Olimpia's holding in Olivetti and of
its financial instruments;
(ii) Hopa will be attributed a portion, in a percentage equal to
Hopa's holding percentage in Olimpia's capital,
(A) of Olimpia's holding in Holinvest on the Relevant Data; or
(B) the share reserved to Olimpia in connection with
Holinvest's assets and liabilities on the same date.
9.03 Further Commitments in the Event of Standstill, Accelerated Standstill
and Failure to Renew. In addition to the provisions of Paragraph 9.02
above, in the event of Spinoff following a Standstill, and an
Accelerated Standstill or failure to renew the Agreements, the Current
Olimpia Shareholders must take all necessary steps so that the
debt/equity Ratio of Olimpia on the Relevant Date is not higher than
1:1.
9.04 Subsequent Commitments only in the Event of Accelerated Standstill. In
addition to the provisions of paragraph 9.02 above, in the event of
Spinoff following an Accelerated Standstill (and therefore not in the
case of Standstill or failure to renew the Agreements), the Current
Olimpia Shareholders must take all necessary steps so that the effects
of the event which gives rise to Hopa's right to enforce the Accelerated
Standstill (provided it does not consist of the events referred to in
paragraphs 8.06(ii) and 8.06(iii) below) do not damage the Spinoff.
9.05 Holinvest Spinoff.
(a) The Holinvest Spinoff will consist of a partial spinoff of
Holinvest as a consequence of which Olimpia will be attributed
the pro-quota of the assets and liabilities of Holinvest.
(b) Without prejudice to paragraph 9.07 below, the reference date of
the Holinvest Spinoff will be the Relevant Date of the Spinoff
(and must therefore be determined pursuant to paragraph 9.01(b)
above).
(c) Without prejudice to paragraph 9.07 below, Hopa must take all
necessary steps for the Holinvest Spinoff to be completed within
six (6) months:
24
(i) from the Initial Term, in the event of Standstill and in
the event of failure to renew the Agreements on the
original expiration or on the expiration of the subsequent
renewals periods; and
(ii) from the date of receipt of the Accelerated Standstill
Notice, in the event of Accelerated Standstill.
9.06 Commitment of Hopa. In all cases in which the Holinvest Spinoff must be
carried out, Hopa will take all necessary steps so that, on the Relevant
Date:
(i) Holinvest's debt/equity Ratio is not higher than 1:1; and
(ii) Holinvest's assets do not include financial instruments other
than Olivetti Bonds or other Olivetti Instruments or financial
instruments derivative from Extraordinary Transactions or
Olivetti Shares arising from the conversion of the instruments of
mentioned above, in addition to the Olivetti Shares referred to
in paragraph 4.01 (a) (ii) (A) (4) above.
9.07 Modalities of the Spinoff and Holinvest Spinoff.
(a) Without prejudice to the previous paragraphs of this Article IX,
the Parties mutually take note that, in order to carry out the
agreement of the Parties in the event that it is necessary to
proceed with the Spinoff and the Holinvest Spinoff:
(i) the Holinvest Spinoff must proceed and be effective before
the Spinoff becomes effective, and must attribute to
Olimpia (or, should it so require, in writing, to one of
its fully-held subsidiaries) the pro-quota of the assets
and liabilities of Holinvest (as set forth in paragraphs
9.05 and 9.06 above); however, it is understood that,
whenever Hopa so desires, instead of the Holinvest Spinoff
(and therefore instead of the allocation to Olimpia of the
pro-quota of the assets and liabilities of Holinvest) Hopa
may liquidate Olimpia [and therefore buy Olimpia's holding
in Holinvest] with a payment in cash (so-called cash
settlement) whose amount must be calculated equal to the
difference, calculated at market prices on the Relevant
Date, between the assets and liabilities which, in the
event of the Holinvest Spinoff (and therefore in the event
of allocation to Olimpia of the pro-quota of the assets
and liabilities of Holinvest) would have been reserved for
Olimpia; with the understanding that this right may be
exercised by Hopa only within 15 (fifteen) Business Days
from the Relevant Date, and that the payment of the
aforementioned amount must take place within 15 (fifteen)
Business Days after the exercise of said right.
(ii) subsequently - although without solution of continuity -
at the time the Holinvest Spinoff becomes effective, the
Spinoff will be carried out attributing to Hopa (or, if it
so desires, to one of its fully-held subsidiaries) the
pro-quota of the assets and liabilities of Olimpia (as set
forth in paragraphs 9.01 to 9.04 above); however, it is
understood that, whenever the Current Olimpia Shareholders
so desire, instead of the Spinoff (and therefore instead
of the allocation to Hopa of the pro-quota of the assets
and liabilities of Olimpia) the Current Olimpia
Shareholders may liquidate Hopa [and therefore buy the
pro-quota, unless decided otherwise, of Hopa's entire
holding in Olimpia] with a payment in cash (so-called cash
settlement) whose amount must be calculated equal to the
difference, calculated at market prices on the Relevant
Date, between the assets and liabilities which, in the
event of the Spinoff (and therefore in the event of
allocation to Hopa of the pro-quota of the assets and
liabilities of Olimpia) would have been reserved for Hopa;
with the understanding that this right may be exercised by
the Current Olimpia Shareholders only within 15 (fifteen)
Business Days from the Relevant Date, and that the payment
of the aforementioned amount must take place within 15
(fifteen) Business Days after the exercise of said right.
(iii) including in the event of cash settlement, Hopa will be
paid or attributed the Increase Premium to which it is
entitled pursuant to Article X below.
25
(iv) the stipulation of the Spinoff instrument will be subject
to the stipulation of the preferred right agreement
referred to in paragraph 7.05 above, whose enforceability
will be, in turn, subject, as a suspensive condition, to
the completion of the Spinoff.
(b) Furthermore, the Parties mutually take note of the fact that
Olimpia's liabilities include a "syndicated loan," in the amount
of (euro) 1.8 billion maturing in October 2006, which cannot be
distributed as part of the Spinoff between the company subject to
spinoff and the beneficiary, and that therefore:
(i) such syndicated loan will fully remain in the liabilities
of Olimpia;
(ii) as part of the Spinoff, Olimpia will attribute to the
beneficiary another financial loan, equal to the portion
of the syndicated loan receivable by the beneficiary of
the Spinoff, without changing the preexisting pro-quota of
the assets and liabilities to which the beneficiary is
entitled.
(c) The Parties mutually take note that, as part of the Holinvest
Spinoff, as part of the attribution of the pro-quota of the
applicable assets and liabilities, Hopa will be attributed
1,000,000 Olivetti Bonds and the respective debt as referred to
in paragraph 4.01(ii)(D)(2).
[omitted]
ARTICLE X
INCREASE PREMIUM
10.00 Description. In all the events in which it is necessary to proceed with
the spin-off, pursuant to the applicable provisions of this contract and
in particular Article 9 above (in the calculation of the pro quota of
the assets and liabilities to which the beneficiary is entitled under
the spin off) Olimpia or the current Olimpia shareholders, if Olimpia
fails to do so, must pay to Hopa, by the methods referred to in
paragraph 10.04 below, but in addition to any right of Hopa by the
effect of the spin-off pursuant to Article IX above, an Increase Premium
(the "Increase Premium") for each Olivetti share and/or financial
instrument which, by the effect of the spin-off, must be attributed to
Hopa (or should have been attributed to Hopa in the event that the
current Olimpia shareholders would have exercised their right to the
cash settlement pursuant to the paragraph 9.07(a) above, to be
determined and paid pursuant to the provisions of the following
paragraphs of this Article X. It is understood that, whenever
Extraordinary Transactions or Capital Transactions are carried out, such
Increase Premium must be paid for the entire number of Olivetti shares
and/or financial instruments timely adjusted or adapted as a consequence
of such transactions, according to market practice, with the
understanding that whenever, due to the determination of such number
there is a disagreement between the Parties, such determination will be
requested by the most diligent Party from a prime business bank chosen
by mutual agreement or, in the absence thereof, designated by the
Presiding Judge of the Court of Milan; with the understanding that,
without prejudice to paragraph (i) above, the Increase Premium will be
paid only for the Olivetti shares and Financial Instruments directly or
indirectly owned, held, or available to Olimpia as of the date of the
Spinoff (net of those arising from the Holinvest Spinoff, which will
consequently not be considered for the determination of the Increase
Premium). Whenever actually paid, the Increase Premium must be
considered to include all Hopa's claims following the Standstill or the
accelerated Standstill, as the case may be.
10.01 The Increase Premium In The Event of Standstill: In the event that the
spin-off takes place following a standstill, the Increase Premium must
be determined as follows:
(i) at (euro) 0.35, whenever the arbitration board referred to in
Article XIII below, selected by the parties pursuant to paragraph
8.04(d) above, determines that the standstill was declared by
Hopa not in good faith; or instead
26
(ii) at (euro) 0.60, whenever the arbitration board referred to in
Article XIII below, selected by the parties pursuant to paragraph
8.04(d) above, determines that the standstill was declared by
Hopa in good faith.
10.02 The Increase Premium in the Event of Accelerated Standstill. In the
event that the spin-off takes place following an accelerated standstill,
the Increase Premium will be equal to (euro) 0.60, without prejudice to
the fact that, in the case referred to in paragraph 8.06 (ii) above, the
Increase Premium will be equal to (euro) 0.70.
10.03 The Increase Premium in the Event of Failure to Renew the Agreements. In
the event that the spin-off takes place as the consequence of the
failure to renew the agreements, the Increase Premium will be determined
according to the following provisions:
(i) the Increase Premium may not in any event and therefore not even
if the parties resort to the evaluation of the investment banks
referred to in paragraph (ii) below, be determined at an amount
of less than (euro) 0.35;
(ii) the Increase Premium will be determined by mutual agreement
between the current Olimpia shareholders and Hopa within 10
business days from the last day of the term of the agreement or,
in the absence of such agreement, by two "investment banks"
within the national standing selected one by each party; for the
purposes of this paragraph 10.03. party means Hopa, on the one
hand, and the current Olimpia shareholders on the other hand,
without prejudice to the fact that, whenever the "investment
banks" so appointment disagree on the evaluation within 30
business days from their appointment, the evaluation will be made
by a third "investment bank" with the same standing, selected by
agreement between the first two (at the time the parties give the
task) or, in the absence of agreement, by the presiding judge of
the Court of Milan;
(iii) the Presiding Judge of the Court of Milan will be (in the order
and in the terms indicated above) also requested to appoint the
"investment bank" which one of the parties may have omitted to
appoint or to replace it, in the event of its subsequent transfer
of the task; (iv) the evaluation referred to in point (i) above
will be final and binding for the parties pursuant to articles
1349 and 1473 of the Civil Code, for the purposes of this Article
X and in particular this paragraph 10.03.
10.04 Terms and Modalities of Payment of the Increase Premium. The Increase
Premium must be paid or allocated to Hopa by Olimpia - or by the current
Olimpia shareholders pursuant to paragraph 10.00 above - in immediately
available funds;
(i) in the event referred to in paragraph 10.01 above;
(A) concerning the (euro) 0.35, at the time of affecting the
spin-off: and
(B) concerning the possible balance (equal to (euro) 0.25)
within 15 (fifteen) business days from the decision of the
arbitration board, determining that the standstill was
determined by Hopa in good faith;
(ii) in the event referred to in paragraph 10.02 above, concerning the
(euro) 0.35, within 30 (thirty) calendar days from receipt of the
accelerated standstill notice by the current Olimpia
shareholders, and the balance of the applicable Increase Premium
at the time of perfecting the spin-off;
(iii) in the event referred to in paragraph 10.03 above, within 30
(thirty) business days from the determination referred to in
points (ii) to (iv) of paragraph 10.03 above;
27
ARTICLE XI
EXPENSES AND BURDENS
[omitted]
ARTICLE XII
GENERAL PROVISIONS
[omitted]
ARTICLE XIII
DISPUTE
[omitted]
Please note that the entire agreement (without omitted parts):
(i) will be deposited with the Company Registry of Milan and
Turin/Ivrea pursuant to Article 122, paragraph 1(c) of Article
122 of Legislative Decree 58/98; and
(ii) is already available on Pirelli's web-site at www.pirelli.com
Milan, March 1, 2003
28
Annex XVIII.
Report of the auditing firm Reconta Ernst & Young S.p.A.
[on the pro-forma consolidated and company financial statements
of Olivetti S.p.A. for the year ended 31 December 2002]
[GRAPHIC] ERNST & YOUNG Reconta Ernst & Young S.p.A.
Olivetti S.p.A.
PRO-FORMA FINANCIAL INFORMATION
as of and for the year ended December 31, 2002
INDEPENDENT ACCOUNTANTS' REPORT ON EXAMINATION
OF PRO-FORMA FINANCIAL INFORMATION
(Translation from the original Italian text)
[LETTERHEAD OF ERNST & YOUNG]
INDEPENDENT ACCOUNTANTS' REPORT ON EXAMINATION
OF PRO-FORMA FINANCIAL INFORMATION
(Translation from the original Italian text)
To the Board of Directors of Olivetti S.p.A.
1. We examined the financial information consisting of pro-forma consolidated
balance sheet and income statement, accompanied by the explanatory notes,
of the Olivetti Group as of and for the year ended December 31, 2002 (the
"pro-forma financial information").
Such financial information derive from the historical financial data
included in the consolidated financial statements of Olivetti S.p.A. as of
and for the year ended December 31, 2002 and from the pro-forma
adjustments applied to such data and examined by us. The consolidated
financial statements as of and for the year ended December 31, 2002 have
been audited by us and we have issued our auditors' report on April 18,
2003.
The pro-forma financial information have been prepared on the basis of the
assumptions described in the explanatory notes to reflect the effects of
the merger of Telecom Italia S.p.A. into Olivetti S.p.A., detailed in the
Plan for the Merger adopted by the Boards of Directors of Olivetti S.p.A.
and Telecom Italia S.p.A. on April 15, 2003.
2. The financial information of the consolidated pro-forma balance sheet and
income statement, accompanied by the explanatory notes, as of and for the
year ended December 31, 2002, have been prepared as required by article 70
of CONSOB Rule n.1197l/99, and subsequent changes, in application of Law
Decree n. 58/98 concerning the regulations governing listed companies.
The scope of the preparation of the consolidated pro-forma balance sheet
and income statement is to present, in accordance with valuation criteria
consistent with the historical financial data and with the applicable
regulations, the effects of the above mentioned merger transaction on the
consolidated economic trend and on the consolidated balance sheet of the
Olivetti Group, as if such transaction virtually occurred on December 31,
2002 and, with respect to the economic effects only, at the beginning of
the year 2002. However, it should be noted that if the merger transaction
had actually occurred on such dates, the results that are presented
therein would not be necessarily obtained.
The directors of Olivetti S.p.A. are responsible for the preparation of
the pro-forma financial information. Our responsibility is to express an
opinion on the reasonableness of the assumptions adopted by the directors
for the preparation of the pro-forma financial information and on the
correctness of the methodology utilized in preparing such data. In
addition, it is our responsibility to express an
opinion on the correctness of the valuation criteria and of the accounting
principles applied.
3. Our examination has been made in accordance with the criteria recommended
by CONSOB in its Recommendation n. DEM/1061609 of August 9, 2001 for the
examination of the pro-forma data and applying the procedures we deemed
necessary in the circumstances with respect to the engagement received.
4. In our opinion, the assumptions adopted by Olivetti S.p.A. for the
preparation of the financial information of the pro-forma consolidated
balance sheet and income statement of the Olivetti Group as of and for the
year ended December 31, 2002, accompanied by the explanatory notes, to
reflect the merger of Telecom Italia S.p.A. into Olivetti S.p.A.,
described under paragraph 1 above, are reasonable and the methodology
utilized for the preparation of the above mentioned financial information
has been properly applied for the information purposes described above. In
addition, we believe that the valuation criteria and the accounting
principles have been properly applied for the preparation of such data.
5. In order to integrate the required financial information, Olivetti S.p.A.
also presented the financial data with respect to the pro-forma balance
sheet and income statement as of and for the year ended December 31, 2002
of the company resulting from the merger, derived from the historical data
of the financial statements of Olivetti S.p.A. and of Telecom Italia
S.p.A., also audited by us. We believe that, consistently with what
reflected in the consolidated pro-forma financial information, the
assumptions adopted for the preparation of the pro-forma adjustments
included in these financial information are reasonable.
Turin, May 13, 2003
Reconta Ernst & Young S.p.A.
Signed by: Mario Lamprati, Partner
Annex XIX.
Quarterly report of Olivetti S.p.A. as of March 31,2003
Olivetti S.p.A.
Quarterly Report at 31 March 2003
(CONSOB resolution no. 11971 of 14.5.1999, art. 82)
Olivetti
The Olivetti Group
SUMMARY OF BUSINESS AND FINANCIAL RESULTS
In the first quarter of 2003, the Group posted a consolidated loss of 397
million euros, down by 210 million euros from the 2002 first-quarter loss of
187 million euros; the year-earlier figure included gains of 728 million euros
realised on disposals (Bouygues Decaux Telecom and Lottomatica), which had a
net impact of 243 million euros on the Group result. Excluding this effect, the
2003 first-quarter result would have reflected an improvement of 33 million
euros on the year-earlier first quarter.
Group net financial indebtedness at 31 March 2003 totalled 31,891 million euros
(16,079 million euros for the Telecom Italia Group), a decrease of 1,508
million euros from 31 December 2002 (33,399 million euros), of which 2,039
million euros attributable to the Telecom Italia Group.
Olivetti Group total shareholders' equity at 31 March 2003 was 20,659 million
euros (11,233 million euros after minority interests); at 31 December 2002 it
was 20,624 million euros (11,640 million euros after minority interests).
The table below sets out key business and financial data for the Olivetti
Group:
1st quarter 1st quarter Full year
(in millions of euros) 2003 2002 2002
----------- ----------- ---------
INCOME FIGURES
Revenues 7,291 7,533 31,408
Result before interest and taxes
(EBIT) and non recurring income and
charges 1,515 1,391 6,016
EBIT 1,508 2,041 520
Income before taxes and minority interests 868 1,313 (2,516)
Net result for the period (397) (187) (773)
Net result before amortization of goodwill (70) 136 520
on Telecom Italia
BALANCE SHEET AND FINANCIAL FIGURES 31.3.2003 31.12.2002
--------- ----------
Net financial indebtedness 31,891 33,399
Total shareholders' equity 20,659 20,624
Group shareholders' equity 11,233 11,640
31.3.2003 31.12.2002
--------- ----------
EMPLOYEES (in units) 104,379 106,620
The Parent Company Olivetti S.p.A. posted a loss of 222 million euros in the
first quarter of 2003, compared with a loss of 60 million euros in the
year-earlier first quarter, which reflected the positive impact of the gain of
158 million euros realised from acceptance of the public tender offer on
Lottomatica.
5 | The Olivetti Group
The breakdown of Group personnel at 31 March 2003 by company was as follows:
31.3.2003 31.12.2002 Changes
(employees) (a) (b) (a-b)
-------------------------- --------- ---------- -------
Olivetti S.p.A. 70 70 -
Finance companies 8 8 -
Telecom Italia Group 100,765 101,713 (948)
Olivetti Tecnost Group 3,223 4,527 (1,304)
Olivetti Multiservices * 313 302 11
-------------------------- -------- -------- ------
Total Olivetti Group 104,379 106,620 (2,241)
-------------------------- -------- -------- ------
* property management and services
The net decrease of 948 heads at the Telecom Italia Group compared with 31
December 2002 was largely due to the change in the consolidation area (-819
heads).
The number of employees with the Olivetti Tecnost Group decreased by 1,304
heads overall, mainly as a result of the sale of manufacturing operations in
Mexico (1,266 heads).
6 | The Olivetti Group
ACCOUNTING SCHEDULES AND COMMENTS
Basis of presentation of the quarterly financial statements
The Quarterly Report at 31 March 2003 consists of the reclassified quarterly
consolidated accounting schedules, whose form and content are consistent with
the schedules in the Directors' Report on Operations for the year to 31
December 2002, and these comments.
The accounting schedules comprise the consolidated income statement for the
first quarter of 2003 compared with 2002 first-quarter and full-year income,
and the consolidated balance sheet at 31 March 2003 compared with the situation
at 31 December 2002.
The Report also includes a schedule analysing the Group's net financial
position at 31 March 2003 by due dates, with a comparison to the position at 31
December 2002.
The above schedules and related comments provide the information required from
listed companies pursuant to CONSOB resolution no. 11971 of 14 May 1999 and
subsequent amendments, implementing Legislative Decree no. 58 of 24 February
1998.
Where appropriate, the criteria used to draw up the quarterly financial
statements at 31 March 2003 are consistent with those used to draw up the
financial statements at 31 December 2002, as illustrated in the Explanatory
Notes in the "2002 Annual Report".
Group business performance
Business performance in the first quarter of 2003 is analysed in the
reclassified income statement set out below, which classifies income components
by nature, with separate disclosure of non-recurring income and expense items
that are not expected to continue at a similar level in future periods.
7 | The Olivetti Group
1st quarter 1st quarter Full year
(in millions of euros) 2003 % 2002 % 2002 %
-------------------------------------------- ----------- ----- ---------- ----- --------- -----
Net revenues 7,291 100.0 7,533 100.0 31,408 100.0
Operating costs:
Labour (1,114) (15.3) (1,226) (16.3) (4,727) (15.1)
Materials and services (2,872) (39.4) (3,017) (40.1) (12,668) (40.3)
Grants 3 0.1 - 2 -- - 20 0.1
Depreciation of tangible assets (880) (12.1) (965) (12.8) - (3,807) (12.1)
Amortization of intangible assets:
Consolidation goodwill (491) (6.7) (537) (7.1) (2,142) (6.8)
Other (294) (4.0) (266) (3.5) (1,320) (4.2)
Value adjustments and provisions for risks
and charges (113) (1.6) (123) (1.6) (776) (2.5)
Other (costs) income, net (15) (0.2) (10) (0.1) 28 0.1
-------- ----- ------- ----- --------- -----
Result before interest and taxes (EBIT)
and non recurring income and charges 1,515 20.8 1,391 18.5 6,016 19.2
-------- ----- ------- ----- --------- -----
Gains on disposals and other income 70 1.0 792 10.5 2,990 9.5
Losses on disposals and other charges (77) (1.1) (142) (1.9) (8,486) (27.0)
-------- ----- ------- ----- --------- -----
EBIT 1,508 20.7 2,041 27.1 520 1.7
-------- ----- ------- ----- --------- -----
Income from equity investments, net 1 -- 7 0.1 57 0.1
Financial charges, net (518) (7.1) (665) (8.8) (2,307) (7.3)
Value adjustments to financial assets (123) (1.7) (70) (1.0) (786) (2.5)
-------- ----- ------- ----- --------- -----
Result before taxes 868 11.9 1,313 17.4 (2,516) (8.0)
-------- ----- ------- ----- --------- -----
Taxes (713) (9.8) (636) (8.4) 2,210 7.0
-------- ----- ------- ----- --------- -----
Result after taxes before minority interests 155 2.1 677 9.0 (306) (1.0)
-------- ----- ------- ----- --------- -----
Minority interests (552) (7.5) (864) (11.5) (467) (1.5)
-------- ----- ------- ----- --------- -----
Net result for the period (397) (5.4) (187) (2.5) (773) (2.5)
-======= ===== ======= ===== ========= =====
Olivetti Group revenues for the first three months of 2003 totalled 7,291
million euros, against 7,533 million euros in the first quarter of 2002, a
decrease of 242 million euros, or 3.2% (+4.8% on a like-for-like basis and net
of the exchange rate effect). Telecom Italia Group revenues (which accounted
for 97.7% of total revenues) decreased by 140 million euros, or 1.9%. Excluding
the exchange rate effect and the changes in the consolidation area, Telecom
Italia Group revenues improved by 6.4%.
1st quarter 1st quarter Changes Changes
(in millions of euros) 2003 2002 absolute %
---------------------- ----------- ----------- ------- -------
Telecom Italia Group 7,124.4 7,264.8 (140.4) (1.9)
Olivetti Tecnost Group 153.4 233.7 (80.3) (34.5)
Olivetti Multiservices 12.9 22.1 (9.2) (41.6)
Webegg Group -- 12.8 (12.8)
---------------------- --------- --------- ------- -----
Total Group 7,290.7 7,533.4 (242.7) (3.2)
====================== ========= ========= ======= =====
8 | The Olivetti Group
2003 first-quarter operating costs and other net recurring charges totalled
5,776 million euros (5,250 million euros for the Telecom Italia Group),
compared with 6,142 million euros in the first quarter of 2002 (5,524 million
euros at the Telecom Italia Group); excluding amortisation of consolidation
goodwill, operating costs and other net recurring charges represented 72.5% of
2003 first-quarter revenues (74.4% in the first quarter of 2002).
EBIT before non-recurring income and charges was 1,515 million euros, an
increase of 124 million euros from the first quarter of 2002 (1,391 million
euros).
Non-recurring income and charges generated a net charge of 7 million euros (2
million euros for the Telecom Italia Group); this compared with net income of
650 million euros in the year-earlier first quarter (543 million euros for the
Telecom Italia Group), arising largely from gains realised on disposals.
EBIT after the foregoing net non-recurring charge was 1,508 million euros, down
by 533 million euros from the 2,041 million euros posted in the first quarter
of 2002.
Other financial income and charges generated a net charge of 518 million euros,
of which 297 million euros for the Telecom Italia Group, a decrease of 147
million euros from the net charge of 665 million euros (451 million euros for
the Telecom Italia Group) posted in the year-earlier first quarter.
This reduction, attributable largely to the Telecom Italia Group, arose as a
result of lower average debt exposure in the first quarter and improved
exchange rates in some South American countries (Brazil and Venezuela).
Value adjustments to financial assets generated a charge of 123 million euros
(120 million euros for the Telecom Italia Group, including 64 million euros for
losses referring to Stream), compared with 70 million euros in the first
quarter of 2002 (60 million euros for the Telecom Italia Group).
Income taxes amounted to an estimated 713 million euros, of which 703 million
euros for Telecom Italia Group companies.
After taxes and 552 million euros of minority interests, the Olivetti Group
posted a consolidated net loss of 397 million euros for the first quarter of
2003 (a loss of 187 million euros in the first quarter of 2002).
Before amortisation of goodwill on Telecom Italia, the Group had a consolidated
loss of 70 million euros, a downturn of 206 million euros from the year-earlier
first quarter, when it had net income of 136 million euros.
9 | The Olivetti Group
The Group financial position
The Olivetti Group balance sheet at 31 March 2003 is set out in the table
below:
(in millions of euros) 31.3.2003 % 31.12.2002 % Changes
------------------------------- --------- ---- ---------- ---- -------
Short-term assets
Financial resources 11,261 13.2 7,894 9.4 3,367
Operating assets 14,727 17.4 14,981 18.0 (254)
------------------------------- -------- ---- --------- ---- -----
Total short-term assets 25,988 30.6 22,875 27.4 3,113
------------------------------- -------- ---- --------- ---- -----
Medium/long-term assets
Financial assets 477 0.6 495 0.6 (18)
Intangible fixed assets 34,235 40.4 34,561 41.4 (326)
Tangible fixed assets 18,898 22.2 19,449 23.3 (551)
Other assets 5,235 6.2 6,004 7.3 (769)
------------------------------- -------- ---- --------- ---- -----
Total medium/long-term assets 58,845 69.4 60,509 72.6 (1,664)
------------------------------- -------- ---- --------- ---- -----
TOTAL ASSETS 84,833 100.0 83,384 100.0 1,449
=============================== ======== ===== ========= ===== =====
Short-term liabilities
Short-term debt 8,292 9.8 7,984 9.6 308
Operating liabilities 17,979 21.2 18,396 22.1 (417)
------------------------------- -------- ---- --------- ---- -----
Total short-term liabilities 26,271 31.0 26,380 31.7 (109)
------------------------------- -------- ---- --------- ---- -----
Medium/long-term liabilities
Medium/long-term debt 35,337 41.6 33,804 40.5 1,533
Other medium/long-term liabilities 2,566 3.0 2,576 3.1 (10)
---------------------------------- -------- ---- --------- ---- -----
Total medium/long-term liabilities 37,903 44.6 36,380 43.6 1,523
---------------------------------- -------- ---- --------- ---- -----
TOTAL LIABILITIES 64,174 75.6 62,760 75.3 1,414
---------------------------------- -------- ---- --------- ---- -----
Total shareholders' equity 20,659 24.4 20,624 24.7 35
---------------------------------- -------- ---- --------- ---- -----
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY 84,833 100.0 83,384 100.0 1,449
================================== ======== ===== ========= ===== =====
Capital invested amounted to 55,116 million euros, a decrease of 1,483 million
euros from 31 December 2002. External financial sources provided coverage for
57.9%, a decrease compared to 31 December 2002 (59.0%).
(in millions of euros) 31.3.2003 % 31.12.2002 % Changes
---------------------------------- --------- ----- ---------- ----- -------
Short-term operating assets 14,727 26.7 14,981 26.5 (254)
Short-term operating liabilities (17,979) (32.6) (18,396) (32.5) 417
---------------------------------- --------- ----- -------- ----- ------
Operating working capital (3,252) (5.9) (3,415) (6.0) 163
Intangible fixed assets 34,235 62.1 34,561 61.0 (326)
Tangible fixed assets 18,898 34.3 19,449 34.4 (551)
Other assets 5,235 9.5 6,004 10.6 (769)
---------------------------------- -------- ----- -------- ----- ------
Capital invested (A) 55,116 100.0 56,599 100.0 (1,483)
---------------------------------- -------- ----- -------- ----- ------
Medium/long-term non financial 2,566 4.6 2,576 4.5 (10)
liabilities
Minority interests 9,426 17.1 8,984 15.9 442
Group shareholders' equity 11,233 20.4 11,640 20.6 (407)
---------------------------------- -------- ----- -------- ----- ------
Total non financial sources (B) 23,225 42.1 23,200 41.0 25
---------------------------------- -------- ----- -------- ----- ------
Net financial indebtedness (A-B) 31,891 57.9 33,399 59.0 (1,508)
================================== ======== ===== ======== ===== ======
10 | The Olivetti Group
The table below analyses Group net financial indebtedness by due dates:
The table below analyses Group net financial indebtedness by due dates:
31.3.2003 31.12.2002 Changes
(in millions of euros) (a) (b) (a-b)
----------------------------------------- --------- ---------- -------
Current portions of medium/long-term debt 4,758 3,450 1,308
Other short-term payables to banks and
other lenders 2,300 3,377 (1,077)
Interest accruals and deferrals 1,234 1,157 77
Financial resources (9,916) (6,353) (3,563)
Financial receivables (721) (1,011) 290
Interest accruals and prepayments (624) (530) (94)
========================================= ========= ========== =======
Total short-term net financial
indebtedness (resources) (A) (2,969) 90 (3,059)
----------------------------------------- --------- ---------- ------
Bonds and other medium/long-term debt 35,337 33,804 1,533
Medium/long-term financial receivables
and interest accruals and prepayments (477) (495) 18
----------------------------------------- --------- ---------- ------
Total medium/long-term net financial
indebtedness (B) 34,860 33,309 1,551
========================================= ========= ========== =======
Total net financial indebtedness (A+B) 31,891 33,399 (1,508)
========================================= ========= ========== =======
Analysis by company
31.3.2003 31.12.2002 Changes
(in millions of euros) (a) (b) (a-b)
----------------------------------------- --------- ---------- -------
Telecom Italia Group 16,079 18,118 (2,039)
Olivetti S.p.A., and other operating and
finance companies 15,812 15,281 531
========================================= ========= ========== =======
Total net financial indebtedness 31,891 33,399 (1,508)
========================================= ========= ========== =======
The Olivetti Group had a net financial surplus of 1,508 million euros in the
first quarter of 2003:
(in millions of euros) 1st quarter 2003
---------------------------------------------------- ----------------
Telecom Italia Group
Capital expenditure 697
Financial investments 163
Operating cash flows (2,807)
Disposals (92)
Net financial surplus of Telecom Italia Group (2,039)
Other companies
Financial charges, net 218
Other, net 313(*)
Net financial requirement of other companies 531
==================================================== ============
Total net financial surplus (1,508)
==================================================== ============
(*) of which 299 million euros arising from the re-classification during the
first quarter of 41,401,250 Telecom Italia shares, from current assets
(marketable securities) to financial fixed assets, Telecom provides for the in
connection with the merger with Italia, which cancellation of all Telecom
Italia shares held by Olivetti
The programme launched in June 2001 for the securitisation of Telecom Italia
S.p.A. trade receivables continued, generating an improvement of approximately
839 million euros in net financial indebtedness at 31 March 2003 (826 million
euros at the end of 2002).
11 | The Olivetti Group
Information by sector (CONSOB communication no. 98084143)
A) Information by business sector
The following pages set out:
- the consolidated income statement showing the results of the operating
companies as adjusted for consolidation purposes. These results differ
from the companies' quarterly results, mainly due to the elimination of
items not eligible for consolidation, that is, intercompany gains and
depreciation charges on assets transferred within the Group, the reversal
of tax-related entries made largely in respect of depreciation, the
valuation of equity investments (equity investments, by definition, appear
in the consolidated accounts as the appro priate portion of the company's
net equity used for consolidation purposes) and other adjustments and
reclassifications made to align the results of the individual companies
with the accounting policies adopted by the Group.
- the reclassified consolidated balance sheet showing the balances by
operating company.
B) Other information
It should be noted that:
- intercompany transactions between different business sectors or
geographical areas are executed at market prices and eliminated during
consolidation;
- pursuant to art. 150, par 1 of Legislative Decree no. 58 of 24 February
1998, no operations were performed by members of the Board of Directors
that could represent a potential conflict of interest with the Parent
Company.
12 | The Olivetti Group
OLIVETTI GROUP- INCOME STATEMENT FOR THE 1st QUARTER 2003 BY COMPANY
Telecom Olivetti
Olivetti Finance Italia Tecnost Olivetti Consolidation
(in millions of euros) S.p.A. companies Group Group Multiservices adjustments
----------------------------------------------------------------------------------------------------------------------
Third party revenues 7,124.4 153.4 12.9
Revenues from Olivetti Group
companies 4.2 6.8
Total net revenues 7,124.4 100.0 157.6 100.0 19.7 100.0 (11.0)
OPERATING COSTS
Labour (1.6) (0.1) (1,079.0) (15.1) (29.8) (18.9) (3.7) (18.8)
Materials and services (4.6) (0.3) (2,745.7) (38.5) (118.5) (75.2) (13.6) (69.0) 11.0
Grants 3.5 0.0 0.2 0.1
Depreciation of tangible assets (0.2) (875.4) (12.3) (2.7) (1.7) (1.1) (5.6)
Amortisation of intangible assets:
Consolidation goodwill (326.8) (164.4) (2.3) (0.1)
Other (18.4) (2.0) (271.5) (3.8) (2.2) (1.4)
Value adjustments and provision for
risks and charges (2.0) (108.1) (1.5) (3.2) (2.0)
Other income (costs), net (0.5) (9.3) (0.1) (5.4) (3.4) (0.2) (1.0)
-----------------------------------------------------------------------------------------------------------------------------------
Result before interest and taxes
(EBIT) and non recurring income
and charges (354.1) (2.4) 1,874.5 26.3 (4.0) (2.5) 1.1 5.6 (0.1)
-----------------------------------------------------------------------------------------------------------------------------------
Non recurring income 0.3 69.4 1.0 0.1 0.1 0.2 1.0
Non recurring charges (5.4) (71.4) (1.0) (0.1) (0.1)
-----------------------------------------------------------------------------------------------------------------------------------
EBIT (359.2) (2.4) 1,872.5 26.3 (4.0) (2.5) 1.3 6.6 (0.1)
-----------------------------------------------------------------------------------------------------------------------------------
Income from equity investments 1.2
Financial income and charges, net (192.7) (34.8) (296.7) (4.2) (2.4) (1.5) (0.5) (2.5) 8.7
Value adjustments to financial assets (0.2) (3.2) (119.6) (1.7)
-----------------------------------------------------------------------------------------------------------------------------------
Result before taxes (552.1) (39.2) 1,456.2 20.4 (6.4) (4.1) 0.8 4.1 8.6
-----------------------------------------------------------------------------------------------------------------------------------
Taxes 0.4 (702.6) (9.9) (2.5) (1.6) 0.1 0.5 (8.6)
-----------------------------------------------------------------------------------------------------------------------------------
Result after taxes before minority
interests (551.7) (39.2) 753.6 10.6 (8.9) (5.6) 0.9 4.6
Minority interests (552.0) (7.7) 0.6 0.4 (0.1)
-----------------------------------------------------------------------------------------------------------------------------------
Net result for consolidation
purposes (551.7) (39.2) 201.6 2.8 (8.3) (5.3) 0.9 4.6 (0.1)
-----------------------------------------------------------------------------------------------------------------------------------
Table continue
OLIVETTI GROUP- INCOME STATEMENT FOR THE 1st QUARTER 2003 BY COMPANY
Consolidation Total
(in millions of euros) adjustments Group
----------------------------------------- -------------------
Third party revenues 7,290.7
Revenues from Olivetti Group
companies (11.0)
Total net revenues (11.0) 7,290.7 100.0
OPERATING COSTS
Labour (1,114.2) (15.3)
Materials and services 11.0 (2,871.7) (39.4)
Grants 3.7 0.1
Depreciation of tangible assets (879.4) (12.1)
Amortisation of intangible assets:
Consolidation goodwill (0.1) (491.3) (6.7)
Other (294.1) (4.0)
Value adjustments and provision for
risks and charges (113.3) (1.6)
Other income (costs), net (15.4) (0.2)
-----------------------------------------------------------------------------
Result before interest and taxes
(EBIT) and non recurring income
and charges (0.1) 1,515.0 20.8
----------------------------------------------------------------------------
Non recurring income 70.0 1.0
Non recurring charges (76.9) (1.1)
----------------------------------------------------------------------------
EBIT (0.1) 1,508.1 20.7
----------------------------------------------------------------------------
Income from equity investments 1.2 0.0
Financial income and charges, net 8.7 (518.4) (7.1)
Value adjustments to financial assets (123.0) (1.7)
----------------------------------------------------------------------------
Result before taxes 8.6 867.9 11.9
----------------------------------------------------------------------------
Taxes (8.6) (713.2) (9.8)
----------------------------------------------------------------------------
Result after taxes before minority
interests 154.7 2.1
Minority interests (0.1) (551.5) (7.5)
----------------------------------------------------------------------------
Net result for consolidation
purposes (0.1) (396.8) (5.4)
----------------------------------------------------------------------------
13 | The Olivetti Group
OLIVETTI GROUP - BALANCE SHEET AS OF 31 MARCH 2003 BY COMPANY
Telecom Olivetti
Olivetti Finance Italia Tecnost Olivetti Consolidation Total
(in millions of euros) S.p.A. companies Group Group Multiservices adjustments Group
------------------------------------------------------------------------------------------------ -------
Assets
Short-term assets 1,793 10,964 16,211 605 104 (3,689) 25,988
Medium/long-term assets:
- intangible 162 35 12,677 29 21,332 34,235
- tangible 1 18,748 59 89 1 18,898
- other 24,251 9,258 3,859 14 8 (31,678) 5,712
------------------------------------------------------------------------------------------------------------------------
Total assets 26,207 20,257 51,495 707 201 (14,034) 84,833
------------------------------------------------------------------------------------------------------------------------
Liabilities
Short-term liabilities 5,791 2,410 21,112 549 126 (3,717) 26,271
Medium/long-term liabilities: 11,607 17,495 17,365 107 25 (8,696) 37,903
------------------------------------------------------------------------------------------------------------------------
Total liabilities 17,398 19,905 38,477 656 151 (12,413) 64,174
========================================================================================================================
Total shareholders' equity 8,809 352 13,018 51 50 (1,621) 20,659
------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity 26,207 20,257 51,495 707 201 (14,034) 84,833
========================================================================================================================
------------------------------------------------------------------------------------------------------------------------
Net financial indebtedness 15,706 (26) 16,079 85 56 (9) 31,891
------------------------------------------------------------------------------------------------------------------------
14 | The Olivetti Group
EVENTS SUBSEQUENT TO 31 MARCH 2003
The main events subsequent to 31 March 2003 are illustrated below:
Merger of Telecom Italia into Olivetti
At a meeting on 15 April 2003, the Board of Directors adopted the plan to merge
Telecom Italia into Olivetti, with the following exchange ratio:
7 Olivetti ordinary shares each with a par value of 1 euro for every
Telecom Italia ordinary share with a par value of 0.55 euros,
7 Olivetti savings shares each with a par value of 1 euro for every
Telecom Italia savings share with a par value of 0.55 euros.
As a result of the merger, Olivetti's controlling stake in Telecom Italia will
be cancelled, and Olimpia's stake in Olivetti will be significantly diluted.
The exchange ratio will be serviced largely through re-distribution of Olivetti
post-merger capital, after re-determination of the post-merger par value of
Olivetti ordinary and savings shares at 0.55 euros (equal to the par value of
Telecom Italia shares), in place of the present par value of 1 euro.
The Company resulting from the merger will adopt the name and comp any purpose
of Telecom Italia. The headquarters of the Company resulting from the merger
will be in Milan, at the current headquarters of Telecom Italia.
More generally, Olivetti will adopt new by-laws drafted on the basis of Telecom
Italia's current by-laws. As a consequence of the variation in the company
purpose, Olivetti shareholders will be entitled to exercise withdrawal rights.
Olivetti has entered into a 9 billion euro facility agreement to meet
requirements arising from the possible exercise of withdrawal rights. Any
portion of this facility that is not used to service withdrawals will be set
aside for a partial voluntary tender offer on Telecom Italia ordinary and
savings shares. The tender offer purchase price will be equivalent to the
average price of the shares in the period between 12 March and the date of the
Olivetti Shareholders' Meeting convened to approve the merger plus a premium of
20%, with a minimum and maximum price respectively of 7.0 euros and 8.4 euros
per ordinary share and 4.7 euros and 5.65 euros per savings share. Withdrawal
rights and the public tender offer are both subject to execution of the merger.
The merger will take effect as from the date of final registration of the
merger deed in the relevant companies register, or as from a later date if so
established in the merger deed. The merger deed is expected to take place in
early August 2003.
For accounting purposes, operations transacted by Telecom Italia will be posted
to Olivetti income as from 1 January 2003. For tax purposes too, the merger
will be effective as from 1 January 2003.
The ordinary and savings shares issued by Olivetti in exchange for Telecom
Italia shares, which shall be cancelled as a result of the merger, will carry
regular dividend rights. The merger shall take effect subject to the admission
for trading on the automated screen-based system run by Borsa Italiana S.p.A.
of the Olivetti savings shares issued in exchange for Telecom Italia shares.
15 | The Olivetti Group
An application will be made for the new ordinary and savings shares of the
post-merger company to be admitted for trading on the New York Stock Exchange.
Seat Pagine Gialle split-up
At a meeting on 1 April 2003, the Board of Directors of Seat Pagine Gialle
approved plans for the proportional partial split-up of Seat Pagine Gialle
S.p.A. (the "split" company) in favour of a newly established company (the
"beneficiary"), based on the split company's balance sheet at 31 December 2002.
Subject to approval by the shareholders of Seat Pagine Gialle, the following
business areas will be spun off to the beneficiary: Directories (Italian
telephone directory publishing operations and the equity investments in TDL
Infomedia and Thomson), Directory Assistance (89.24.24 Pronto Pagine Gialle and
Telegate) and Business Information (Consodata Group). The split company will
change its name to Telecom Italia Media, while the beneficiary will take the
name of Seat Pagine Gialle. Under the split-up plan, when the operation takes
effect, the present shareholders of Seat Pagine Gialle will receive for every
40 ordinary (or savings) shares owned:
- 29 new ordinary (or savings) shares of the beneficiary Seat Pagine Gialle
- 11 new ordinary (or savings) shares of the split company Telecom Italia
Media.
Telecom Italia has begun proceedings for the sale of its controlling
shareholding in the foregoing beneficiary company that will be established as a
result of the split-up.
Disposal of equity investment in Stream
On 30 April 2003, following approval by the authorities, the agreement with
News Corporation announced on 1 October 2002 for the creation of a single
Italian pay-TV company was finalised.
The new company created as a result of the merger between Stream and Tele+ will
be called SKY ITALIA. Telecom Italia will hold 19.9% and News Corporation
80.1%.
Strategic outsourcing agreement between Telecom Italia and Hewlett-Packard
The Management Services & Outsourcing agreement between Telecom Italia and
Hewlett-Packard announced on 21 February became operational following
completion of the procedures required by law. The agreement provides for
outsourcing contracts: HP is to provide asset management, help desk,
maintenance and workstation management services, while IT Telecom will manage
Hewlett-Packard Italiana operations and host systems for the SAP environment at
its Data Centres. The agreement for the sale of the Desktop Management unit of
IT Telecom (100% Telecom Italia) to the new Hewlett- Packard unit, HP DCS
(Hewlett-Packard Distributed Computing Services), was also finalised.
16 | The Olivetti Group
Integration of Olivetti and Pirelli & C. Real Estate Facility Management
operations
As envisaged under Project Tiglio, on 4 April 2003 Pirelli & C. Real Estate and
Olivetti signed an agreement for the integration of the facility management
operations of Olivetti Multiservices and Pirelli & C. RE Facility Management.
The operation will take place through the transfer to Olivetti of Pirelli & C.
Real Estate treasury shares, in line with the approach adopted by the Group in
its latest acquisitions of services companies. Olivetti will in turn cede its
facility management operations, which are valued at 22.5 million euros and
headed by a specific company, OMS Facility.
The number of Pirelli & C. Real Estate shares transferred to Olivetti is
809,946 (just under 2% of share capital) and was agreed by the parties on the
basis of valuations conducted by Mediobanca and KPMG.
Lazard acted as financial advisor on the operation, while the Chiomenti law
firm acted as legal advisor.
The agreement also provides for a further price adjustment, if required, to be
finalised on 31 December 2005, based on the stock market performance of Pirelli
& C. Real Estate shares.
17 | The Olivetti Group
OPERATING OUTLOOK
As envisaged by the merger plan adopted by the Olivetti and Telecom Italia
Boards of Directors on 15 April 2003, which requires approval by a resolution
of the extraordinary Shareholders' Meeting convened on first call for 24 May
next, Olivetti's net result for financial year 2003 will include the results of
Telecom Italia as from 1 January 2003.
Compared with the previous financial years, when Olivetti's net result
reflected accrued dividends and related tax credits, set against financial
charges and operating costs, the net result for financial year 2003 will
reflect the total net result posted by Telecom Italia, set against financial
charges in respect of Olivetti's net debt - which will show a temporary
increase due to the impact of merger-related operations (withdrawal and partial
voluntary tender offer) - as well as the year's operating costs and the costs
of the merger operation.
Also considering the additional tax benefits produced by the merger, the
post-merger company is expected to report a positive net result.
The Group consolidated operating result for 2003, before amortisation of
consolidation goodwill, is expected to be positive, given that Telecom Italia
has confirmed its expectation of continued operating profitability.
18 | The Olivetti Group
TRANSACTIONS WITH RELATED PARTIES
Unconsolidated
subsidiary and
Main income and financial items associated
(in millions of euros) companies Description
-------------------------------- -------------- ------------------------------------------------
Revenues from sales 37 They include revenues from Teleleasing (euro 16
million), Stream (euro 3 million), Telecom
Argentina (euro 3 million),
Telekom Srbija (euro 2 million)
Consumption of materials and 107 They include principally costs for rentals
services payable to Tiglio I (euro 20 million)
and Tiglio II (euro 6
million) and costs for TLC
services to Etecsa Cuba
(euro 36 million) and for
maintenance and service
contracts to Italtel (euro
12 million)
Other income, net 1 They refer principally to recoveries of payroll
costs for
personnel moved temporarily to some foreign
subsidiaries
Financial income, net 1 They include interest income accrued on loans
granted to some group companies (euro 6 million)
and interest payable to Teleleasing accrued on
financial lease contracts (euro 5 million)
Receivables of financial fixed 444 They include medium/long term loans to Is Tim
assets (euro 302 million), Tiglio I (euro 70
million), Telegono (euro 24 million) and
Tiglio II (euro 30 million)
Financial receivables 38 They include short-term loans to TMI Group
companies (euro 14 million) and Golden Lines (euro 8
million net of allowance)
Financial payables 45 They refer principally to amounts due to
Teleleasing (euro 29 million)
Trade receivables and other 202 They refer principally to receivables from
Stream (euro 66 million), Telekom Srbija (euro
22 million net of allowance), Teleleasing (euro
23 million) and Consorzio Telcal (euro 11
million)
Trade payables and other 335 They refer to supply contracts for investing
and operating activities: Italtel Group (euro
84 million), Siemens Informatica (euro 40
million), Teleleasing (euro 13 million) as well
as advances from Consorzio Telcal (euro 103
million)
Contract work-in progress 110 They refer to work-in-progress on job orders
from Consorzio Telcal for Piano Telematico Calabria
Capital investments 46 They refer principally to purchase of telephone
exchanges from Italtel Group (euro 30 million)
and Siemens Informatica (euro 4 million)
Guarantees given 947 They include suretyships given in favor of Is
Tim (euro 617 million), Consorzio Csia (euro 85
million), Stream (euro 49 million) as well as
guarantees on assets given in favor of Is Tim
(euro 102 million)
Purchase and sale commitments 12 They refer to commitments to Teleleasing
relating to operating lease contracts
19 | The Olivetti Group
In the first quarter of 2003, transactions with related parties other than
Group companies included transactions with the Pirelli Group and the Edizione
Holding Group (some of whose directors are also members of the boards of
directors of Olivetti Group companies).
(in millions of euros)
-------------------------------- -------------- ------------------------------------------------
Revenues from sales 9 They refer principally to IT and energy services
supplied to the Pirelli Group (euro 7 million)
and phone services supplied to the Pirelli
Group and to the Edizione Holding Group (euro 1
million)
Consumption of materials and external 12
They refer principally to
expenses for engineering and
services technical support
to the Pirelli Group (euro
11 million) and the Edizione
Holding Group (euro 1
million)
Trade receivables and other 9 They refer principally to phone services above
mentioned to Pirelli Group (euro 7 million) and
to Edizione Holding Group (euro 1 million)
Trade payable and other 24 They refer principally to supplies relating to
investment activities and services rendered to
the Pirelli Group (22 million) and the Edizione
Holding Group (1 million)
Capital investments 6 They refer principally to purchase of
telecommunication cables from Pirelli Group
Furthermore:
- in the first quarter of 2003, TIM sold telephone cards for approximately 7
million euros to Autogrill S.p.A. (Edizione Holding Group), for re-sale to
the public;
- Telecom Italia has a commitment to purchase a further 5% of Epiclink from
Pirelli S.p.A. for a total of 3 million euros
20 | The Olivetti Group
The Parent Company Olivetti S.p.A.
The business performance of Olivetti S.p.A. in the first quarter of 2003
compared with performance in the corresponding year-earlier period is
illustrated in the income statement set out below, which has been reclassified
in accordance with the CONSOB model for industrial holdings as per
communication no. 94001437 of 23 February 1994:
1st 1st
quarter quarter Year
(in millions of euros) 2003 2002 2002
---------------------------------------------- ------ ------- -------
Financial income and charges
1. Income from equity investments 1 -- 1,979
2. Other financial income 20 7 41
3. Interest and other financial charges (213) (209) (813)
---------------------------------------------- ------ ------- ------
Total financial income and charges (192) (202) 1,207
---------------------------------------------- ------ ------- ------
Value adjustments to financial assets
4. Revaluations on equity investments -- -- --
5. Write-downs on equity investments -- -- (8,400)
---------------------------------------------- ------ ------- ------
Total value adjustments to financial assets -- -- (8,400)
============================================== ====== ====== ======
6. Other income from operations 2 2 14
Other costs from operations
7. Non-financial services received (6) (6) (26)
8. Leases and rentals -- (1) (2)
9. Payroll (2) (4) (14)
10. Depreciation, amortisation and write-downs (17) (18) (72)
11. Provisions for risks (2) -- --
12. Other operational expenses -- -- (3)
============================================== ====== ====== ======
Total other costs from operations (27) (29) (117)
---------------------------------------------- ------ ------- ------
Result from ordinary operations (217) (229) (7,296)
---------------------------------------------- ------ ------- ------
Extraordinary income and charges
13. Income -- 159 240
14. Charges (5) (4) (76)
============================================== ====== ====== ======
Extraordinary income (loss) (5) 155 164
---------------------------------------------- ------ ------- ------
Result before taxation (222) (74) (7,132)
---------------------------------------------- ------ ------- ------
15. Taxation -- 14 892
============================================== ====== ====== ======
Result of the period (222) (60) (6,240)
============================================== ====== ====== ======
The first-quarter net loss of 222 million euros (a net loss of 60 million euros
in first quarter 2002) included a loss of 217 million euros from ordinary
operations (a loss of 229 million euros in first quarter 2002), which arose as
follows: net financial charges of 192 million euros, down by 10 million euros
from first quarter 2002 (202 million euros), depreciation and amortisation (17
million euros, compared with 18 million euros in first quarter 2002) relating
to costs for share-capital increases and bond issues, and other net costs of 8
million euros (9 million euros in the year-earlier period).
Extraordinary operations in the first quarter of 2003 generated a net loss of 5
million euros (net income of 155 million euros in the year-earlier first
quarter, which included a gain of 158 million euros on Lottomatica).
The Parent Company posted a first-quarter net loss of 222 million euros (60
million euros in first quarter 2002).
22 | The Parent Company
The Parent Company reclassified balance sheet is set out below:
(in millions of euros) 31.3.2003 % 31.12.2002 % Changes
------------------------------------------ --------- ----- ---------- ----- -------
Short-term assets
Financial resources 363 1.4 1,068 4.0 (705)
Operating assets 1,430 5.4 1,153 4.4 277
------------------------------------------ --------- ----- ---------- ----- -------
Total short-term assets 1,793 6.8 2,221 8.4 (428)
------------------------------------------ --------- ----- ---------- ----- -------
Medium/long-term assets
Financial receivables and marketable
securities 16 0.1 16 0.1 --
Medium/long-term interest accruals and 386 1.5 405 1.5 (19)
prepayments
Equity investments 23,187 88.5 22,888 86.8 299
Other assets 825 3.1 846 3.2 (21)
------------------------------------------ --------- ----- ---------- ----- -------
Total medium/long-term assets 24,414 93.2 24,155 91.6 259
========================================== ========= ===== ========== ===== =======
Total assets 26,207 100.0 26,376 100.0 (169)
------------------------------------------ --------- ----- ---------- ----- -------
Short-term liabilities
Short-term debt 4,866 18.6 3,791 14.4 1,075
Operating liabilities 925 3.5 658 2.5 267
------------------------------------------ --------- ----- ---------- ----- -------
Total short-term liabilities 5,791 22.1 4,449 16.9 1,342
------------------------------------------ --------- ----- ---------- ----- -------
Medium/long-term liabilities
Medium/long-term debt 11,605 44.3 12,893 48.9 (1,288)
Other liabilities 2 -- 3 -- (1)
========================================== ========= ===== ========== ===== =======
------------------------------------------ --------- ----- ---------- ----- -------
Total medium/long-term liabilities 11,607 44.3 12,896 48.9 (1,289)
------------------------------------------ --------- ----- ---------- ----- -------
Total liabilities 17,398 66.4 17,345 65.8 53
------------------------------------------ --------- ----- ---------- ----- -------
Shareholders' equity 8,809 33.6 9,031 34.2 (222)
========================================== ========= ===== ========== ===== =======
Total liabilities and shareholders' equity 26,207 100.0 26,376 100.0 (169)
========================================== ========= ===== ========== ===== =======
Shareholders' equity at 31 March 2003 totalled 8,809 million euros, a decrease
of 222 million euros from 31 December 2002 arising entirely from the
first-quarter loss.
Parent Company financial indebtedness at 31 March 2003 amounted to 15,706
million euros (15,195 million euros at 31 December 2002).
The increase of 511 million euros included 192 million euros of financial
charges and 299 million euros as a result of the reclassification during the
first quarter of the 41,401,250 Telecom Italia shares from current assets
(marketable securities) to fixed assets, in connection with the merger with
Telecom Italia, under which all Telecom Italia shares held by Olivetti are to
be cancelled.
23 | The Parent Company
Transactions with related parties
Olivetti S.p.A.'s financial and commercial dealings with subsidiaries are
conducted at normal market conditions and consist mainly of the provision of
services, centralised treasury operations and, in line with its role as a
holding company, coordination of the activities of the subsidiaries.
Subsidiary Associated
(in millions of euros) companies companies
-------------------------------------- ---------- ---------
Dividend income (excluding tax credit) 1 -
Other financial income 2 -
Financial charges 155 -
Other revenues 2 -
Purchase of goods and services 1 -
Trade and other receivables 589 1
Financial receivables 190 16
Trade and other payables 4 1
Financial payables 9,927 -
24 | The Parent Company
ANNEX XX
Quarterly Report of the Telecom Italia Group
for the three months ended 31 March 2003
[TELECOM ITALIA LOGO]
TELECOM ITALIA GROUP
FIRST QUARTER 2003 REPORT
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] CONTENTS
------------------------------------------------------------------------------------------------------------------------
Summary data and Corporate boards Page 2
general information Selected economic and financial data of Telecom Italia Group Page 3
Key data of the Business Units/Operating Activities of Telecom Italia Group Page 4
Operating highlights of Telecom Italia Group Page 5
Shareholder information Page 6
Organization structure of Telecom Italia Group at March 31, 2003 Page 8
------------------------------------------------------------------------------------------------------------------------
Report on operations Economic and financial performance - Telecom Italia Group Page 9
Economic and financial performance - Telecom Italia S.p.A. Page 16
Subsequent events Page 22
Business outlook Page 23
Related party transactions Page 23
Economic and financial performance - Telecom Italia Business Units/Operating
Activities:
Domestic Wireline Page 25
Mobile Page 29
South America Page 33
Internet and Media Page 36
Information Technology Market Page 39
Information Technology Group Page 42
Other activities Page 45
Other information
The regulatory framework Page 50
Pending litigation Page 51
------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
The "First quarter 2003 report" was approved by the Board of Directors on May 5, 2003.
----------------------------------------------------------------------------------------------------------------
- 1 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] CORPORATE BOARDS
Board of Directors 1 Chairman Marco Tronchetti Provera (E)
Deputy Chairman Gilberto Benetton
Managing Directors Carlo Orazio Buora (E)
Riccardo Ruggiero (E) *
Directors Umberto Colombo (I)
Francesco Denozza (I)
Luigi Fausti (I)
Guido Ferrarini (I)
Natalino Irti (I)
Gianni Mion
Pietro Modiano **
Massimo Moratti
Carlo Alessandro Puri Negri
Pier Francesco Saviotti
Roberto Ulissi (I)
Secretary to the Board Francesco Chiappetta
Directors' Compensation Committee Chairman Luigi Fausti
Members Umberto Colombo
Pier Francesco Saviotti
Audit Committee Chairman Roberto Ulissi
Members Guido Ferrarini
Natalino Irti
Board of Statutory Auditors 2 Chairman Paolo Germani
Acting auditors Mario Boidi
Paolo Golia
Fabrizio Quarta
Gianfranco Zanda
Alternate auditors Enrico Bignami
Leonida Liuni
Common representative of savings
shareholders 3 Carlo Pasteris
Independent auditors 4 Reconta Ernst & Young S.p.A.
------------------------------------------------------------------------------------------------------
(E) Executive director.
(I) Independent director.
1 Appointed by the Shareholders' Meeting on November 7, 2001.
2 Appointed by the Shareholders' Meeting on July 3, 2000.
3 Appointed by the special Savings Shareholders' Meeting on October 31,
2001.
4 Appointed by the Shareholders' Meeting on June 12, 2001.
* Appointed by the Shareholders' Meeting on December 12, 2002; he holds the
position of general manager since May 7, 2002.
** Appointed by the Shareholders' Meeting on December 12, 2002.
- 2 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] SELECTED ECONOMIC AND FINANCIAL DATA - TELECOM ITALIA GROUP
The accounting pollicies and the principles of consolidation adopted for the
preparation of the interim financial statements at March 31, 2003, taking into
account the adjustments required in preparing interim statements, are
consistent with those applied in the 2002 consolidated financial statements.
The statements themselves have been changed for purposes of permitting a more
meaningful understanding the statement of income and balance sheet figures and
the new statement of cash flows which shows the composition of free cash flows.
The quarterly statements are unaudited.
Compared to the year 2002, there were no significant changes in the scope of
consolidation in the first quarter of 2003. Moreover, during 2002 and
subsequent to the first quarter, the following companies are no longer included
in consolidation: the 9Telecom group, the Telespazio group and the companies
Sogei S.p.A., Consiel S.p.A., DataHouse S.p.A., Emsa S.p.A., Immsi S.p.A. and
Telimm S.p.A. while Blu S.p.A., the Webegg group and other minor companies were
added to the scope of consolidation. The effects of such changes were described
in the comments on the key economic data, for purposes of comparison between
the periods.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIALS.]
Revenues
(euro/millions)
1st Quarter 1st Quarter
2002 2003 % Change
----------- ----------- -----------
7,265 7,125 -1.9%
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIALS.]
Operating Income
(euro/millions)
1st Quarter 1st Quarter
2002 2003 % Change
----------- ----------- -----------
1,731 1,866 7.8%
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIALS.]
Revenues/Employees
(euro/millions)
1st Quarter 1st Quarter
2002 2003 % Change
----------- ----------- -----------
69.6 73.7 5.9%
1st Quarter 1st Quarter Year
2003 2002 2002
Results of operations (millions of euro)
Sales and services revenues 7,125 7,265 30,400
Gross operating profit 3,303 3,274 13,964
Operating income 1,866 1,731 7,381
Income (loss) before income taxes 1,448 1,764 (419)
Income (loss) before minority interest 745 1,140 297
Net income (loss) 503 721 (322)
Free cash flows from operations 2,413 1,608 8,610
Investments: 860 1,227 6,919
- Industrial 697 812 4,842
- Differences on consolidation 21 10 369
- Financial 142 405 1,708
Financial condition (millions of euro)
Total assets 51,400 62,361 52,786
Net invested capital 29,570 41,542 30,945
Shareholders' equity 13,491 20,924 12,827
- Parent company's interest 9,518 14,519 9,049
- Minority interest 3,973 6,405 3,778
Net debt 16,079 20,618 18,118
Profit and financial indexes
Gross operating profit/Revenues 46.4% 45.1% 45.9%
Operating income/Revenues (ROS) 26.2% 23.8% 24.3%
Free cash flows/Revenues 33.9% 22.1% 28.3%
(Debt ratio) Net debt/ Net invested capital 54.4% 49.6% 58.5%
Employees
Employees (number in Group at period-end) 100,765 108,831 101,713
Employees (average number in Group) 96,638 104,331 101,789
Revenues/Employees (Group average), euro/thousands 73.7 69.6 298.7
- 3 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] KEY DATA - TELECOM ITALIA BUSINESS UNITS /OPERATING ACTIVITIES
Telecom Italia Group operated with the following Business Unit/Operating
Activities structure:
---------------------------------------------------------------------------------------------
Domestic Mobile South Internet IT Market IT Group Sub-total Other Consoli-
Wireline America and Media activities dated
and total
(millions of euro) elimina-
tions
(1) (2) (2) (3)
---------------------------------------------------------------------------------------------------------------------------------
Sales and 1st quarter 2003 4,235 2,616 292 345 156 229 7,873 (748) 7,125
services --------------------------------------------------------------------------------------------------------------
revenues 1st quarter 2002 4,175 2,498 370 333 278 168 7,822 (557) 7,265
--------------------------------------------------------------------------------------------------------------
Year 2002 17,035 10,867 1,409 1,991 994 996 33,292 (2,892) 30,400
---------------------------------------------------------------------------------------------------------------------------------
Gross operating 1st quarter 2003 1,973 1,262 102 47 10 11 3,405 (102) 3,303
profit --------------------------------------------------------------------------------------------------------------
1st quarter 2002 1,941 1,221 127 27 33 11 3,360 (86) 3,274
--------------------------------------------------------------------------------------------------------------
Year 2002 7,966 5,039 450 593 111 98 14,257 (293) 13,964
---------------------------------------------------------------------------------------------------------------------------------
Operating income 1st quarter 2003 1,233 897 37 (35) (23) 2,109 (243) 1,866
--------------------------------------------------------------------------------------------------------------
1st quarter 2002 1,198 831 46 (69) 25 (12) 2,019 (288) 1,731
--------------------------------------------------------------------------------------------------------------
Year 2002 4,698 3,358 146 232 61 (40) 8,455 (1,074) 7,381
---------------------------------------------------------------------------------------------------------------------------------
Investments:
- Industrial --------------------------------------------------------------------------------------------------------------
1st quarter 2003 433 171 30 20 6 12 672 25 697
--------------------------------------------------------------------------------------------------------------
1st quarter 2002 433 264 70 14 5 7 793 19 812
--------------------------------------------------------------------------------------------------------------
Year 2002 2,465 1,715 216 81 38 149 4,664 178 4,842
---------------------------------------------------------------------------------------------------------------------------------
- Differences on 1st quarter 2003 21 21 21
consolidation --------------------------------------------------------------------------------------------------------------
1st quarter 2002 10 10
--------------------------------------------------------------------------------------------------------------
Year 2002 196 40 24 260 109 369
---------------------------------------------------------------------------------------------------------------------------------
Number of 3/31/2003 53,177 18,913 5,412 7,559 5,478 5,059 95,598 5,167 100,765
employees at --------------------------------------------------------------------------------------------------------------
3/31/2002 57,140 17,124 5,793 8,740 6,689 5,141 100,627 8,204 108,831
--------------------------------------------------------------------------------------------------------------
12/31/2002 53,857 18,702 5,461 7,715 5,506 5,039 96,280 5,433 101,713
---------------------------------------------------------------------------------------------------------------------------------
(1) The data relates to the Entel Chile group, the Entel Bolivia group, the
companies Telecom Italia America Latina and the South American business
segment of Telecom Italia.
(2) Beginning January 1, 2003, the Netikos group, the Webegg group, the TI Lab
group, Loquendo and Eustema are no longer consoldiated by the IT Group
business unit. The TI Lab group became part of Other Activities, Loquendo
is now in Domestic Wireline, whereas the other companies became part of
the IT Market business unit. The 2002 data has been restated for purposes
of comparison.
(3) The data presented above includes the Foreign Holdings Central Function,
the TI Lab business unit, the Real Estate operating activity and the
Telespazio business unit, sold in the last quarter of 2002 and
consolidated only with respect to the statement of income for the first
nine months of 2002.
- 4 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
Major economic and operating indicators in first quarter of 2003 by Business
Unit / Operating Activity
Sales and Gross
services operating Operating Industrial
revenues margin income investments Employees(*)
Domestic Wireline 53.8% 57.9% 58.5% 64.4% 52.8%
Mobile 33.2% 37.1% 42.5% 25.4% 18.8%
South America (1) 3.7% 3.0% 1.8% 4.5% 5.4%
Internet and Media 4.4% 1.4% (1,7)% 3.0% 7.5%
IT Market 2.0% 0.3% 0.0% 0.9% 5.4%
IT Group 2.9% 0.3% (1.1)% 1.8% 5.0%
(*) 5.1% of employees work in Other Activities of the Telecom Italia Group
(1) The data relates to the Entel Chile group, the Entel Bolivia group, the
companies Telecom Italia America Latina and the South America business segment
of Telecom Italia
[ ] OPERATING HIGHLIGHTS - TELECOM ITALIA GROUP
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIALS.]
Voice flat rate plans
(thousands)
3/31/2002 % Change 12/31/2002 % Change 3/31/2003
--------- -------- ---------- -------- ---------
4,379 +19.3% 5,224 +3.2% 5,392
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIALS.]
TIM lines in Italy
(thousands)
3/31/2002 % Change 12/31/2002 % Change 3/31/2003
--------- -------- ---------- -------- ---------
24,083 +5.1% 25,302 +1.4% 25,657
1st Quarter 1st Quarter Year
2003 2002 2002
DOMESTIC WIRELINE
Fixed network connections in Italy (thousands) 27,107 27,344 27,142
- of which digital (equivalent ISDN channels) 5,888 5,545 5,756
Voice flat rate plans (thousands) 5,392 4,379 5,224
Network infrastructure in Italy
- access network in copper (millions of km - pair) 104.3 104.3 104.3
- access network and transport in fiber optics 3.6 3.3 3.6
(millions of km of fiber optics)
Network infrastructure abroad
- European backbone (km of fiber optics) 36,600 36,600 36,600
MOBILE
TIM lines in Italy (at period-end, thousands) 25,657 24,083 25,302
TIM group foreign lines (at period-end, thousands) (1) 14,514 11,599 13,809
TIM group lines total (Italy + foreign in thousands) (1) 40,171 35,682 39,111
GSM penetration in Italy (% of population) 99.8 99.8 99.8
E-TACS penetration in Italy (% of population) 97,9 98.0 98.0
INTERNET AND MEDIA
Directories:
- published by Seat Pagine Gialle (units) 38 38 304
- published by Thomson (TDL Infomedia Ltd.) (units) 24 26 173
Internet:
Page views Virgilio (millions) 1,641 1,359 5,267
Active users ISP (at period-end, thousands) 2,377 1,930 2,226
(1) The foreign lines at March 31, 2002 have been rendered comparable to those
at December 31, 2002 and March 31, 2003, except for the lines of the Mobilkom
Austria group which was sold in the first half of 2002. The foreign lines
include those of the affiliate Aria - IS TIM Turchia and the subsidiary
Radiomobil.
- 5 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] SHAREHOLDER INFORMATION
[ ] TELECOM ITALIA S.p.A. shares
Share capital euro 4,023,816,860.80
Ordinary shares (par value euro 0.55 each) No. 5,262,908,631
Savings shares (par value euro 0.55 each) No. 2,053,122,025
Market capitalization (based on average
March 2003 prices) euro 40,126 million
[ ] PERFORMANCE OF THE MAIN STOCKS OF THE TELECOM ITALIA GROUP
Relative performance TELECOM ITALIA
S.p.A. April 1, 2002 - March 31, 2003
vs. MIBTEL and DJ Eurostoxx TLC index (ordinary shares)
(Source: Reuters)
[GRAPHIC OMITTED]
Relative performance TIM S.p.A.
April 1, 2002 - March 31, 2003
vs. MIBTEL and DJ Eurostoxx TLC index (ordinary shares)
(Source: Reuters)
[GRAPHIC OMITTED]
- 6 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
Relative performance SEAT Pagine Gialle S.p.A.
April1, 2002 - March 31, 2003
vs. MIBTEL and DJ Eurostoxx TLC index (ordinary shares)
(Source: Reuters)
[GRAPHIC OMITTED]
[ ] RATINGS AT MARCH 31, 2003
Following the announcement of the merger by incorporation of Telecom Italia in
Olivetti to the financial community on March 12, 2003, the agencies have
provided perspective ratings in this regard.
Standard & Poor's confirmed the current rating of BBB+ for Telecom Italia,
anticipating it to be the rating for the company resulting from the merger on
the basis of the plan of merger presented to the financial community, with a
stable outlook.
Moody's is still evaluating the transactions and has placed Telecom Italia's
current rating of Baa1 positive outlook under a "review" status.
Fitch confirmed the current rating for Telecom Italia at A- stable outlook.
- 7 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] MACRO-ORGANIZATION CHART OF TELECOM ITALIA GROUP AT MARCH 31, 2003
------------------------ -----------------
Chairman Deputy Chairman
Marco Tronchetti Provera --------- Gilberto Benetton
------------------------ -----------------
|
--------------- |
C.E.O. |
---| Assistant of the Deputy Chairman
Carlo Buora |---- Giuseppe Sala
--------------- |
Assistant to the C.E.O. | |
Fausto Federici --------| |
| |-----------------------------------------------------------------------------
| | | | | | | |
| | -------------- ---------- --------- ------------- ---------- -------------
| | Communication Brand Human Public and General IN.TEL. AUDIT
| | and Image Enrichment Resources Economic Counsel (1)
| | Affairs
| | R. Perissich
| | G. Carlo Rocco Andrea Gustavo A. Camanzi Francesco Armando
| | di Torrepadula Kerbaker Bracco (Co-director) Chiappetta Focaroli
| | -------------- ---------- --------- ------------- ---------- -------------
| ------|
----------------------------------------|--------------------------------------------------------------------------------
| | | | | | | | | | | | |
-------------- ---------- --------- --------- | ------------ ----------- --------- -------- -------- ----------- ----------- |
Finance Purchasing Corporate Security | Mergers and Research Investor Venture Foreign Real Estate Information |
Administration and Legal (2) | Acquisitions and Relations Capital Holdings and General Technology |
and Control Affairs | Development (3) (4) Services(5) Group |
| |
Enrico Germanio Aldo Luciano | Francesca Andrea Alberto Andrea Francesco Salvatore Arrigo |
Parazzini Spreafico Cappuccio Gallo M. | Di Carlo Granelli Borgia Granelli S. Bruno Sardo Andreoni |
-------------- ---------- --------- --------- | ------------ ----------- --------- -------- --------- ----------- ----------- |
| |
| |
------------------------------------------------ - - - - - - - - - - - - - |
| | | | |
----------------- ------------------ -------------- ---------------- -----------------------|
Domestic Wireline Mobile Internet and Media Latin America Information Technology
Operations Market
(6)
Riccardo Ruggiero Marco De Benedetti Paolo Dal Pino Oscar Cristianci Nino Tronchetti Provera
----------------- ------------------ -------------- ---------------- -----------------------
(1) Consortium company which carries out Internal Auditing activities in the
Telecom Italia Group and Olivetti.
(2) Beginning April 1, 2003, the company Telecom Italia Lab, which was the
Research & Development function, was merged by incorporation in Telecom Italia
S.p.A.. At the same time, this function took the name of Telecom Italia Lab.
(3) The function coordinates the activities of the Telecom Italia Group in
Latin America. Beginning February 2003, Latin America Operations report
directly to the CEO Carlo Buora for wireline TLC and to the head of the Mobile
Business Unit Mobile for Mobile TLC.
- 8 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] ECONOMIC AND FINANCIAL PERFORMANCE - TELECOM ITALIA GROUP
RESULTS OF OPERATIONS
The consolidated net income of the Group in the first quarter of 2003 was euro
503 million (euro 745 million before minority interest). The consolidated net
income of the Group for the same period of 2002 was euro 721 million (euro
1,140 million before minority interest) and included net gains of euro 339
million on the sale of the investments in Bouygues Decaux Telecom and
Lottomatica. Excluding such effects, the net income of the Group in the first
quarter of 2003 grew by euro 121 million compared to the corresponding period
of the prior year.
Income before extraordinary items and income taxes was euro 1,450 million, an
increase of euro 229 million compared to the first quarter of 2002, due to the
improvement in operating income (+euro 135 million, +7.8%) and net financial
income (expenses) (+euro 178 million, 37.4%) which was offset by a worsening of
net other income (expenses) (-euro 84 million).
Sales and service revenues in the first quarter of 2003 amounted to euro 7,125
million, with a decrease of 1.9% compared to the same period of 2002 (-euro 140
million). Excluding the negative foreign exchange effect (euro 348 million) and
the change in the scope of consolidation (euro 218 million), organic growth was
6.4% (+euro 426 million). A particularly incisive effect on the change in the
scope of consolidation was brought about by the exit of the 9Telecom group,
Sogei (consolidated for the first six months of 2002) and the Telespazio group
(consolidated up to September 30, 2002) and the addition of the Webegg group.
Contributing to organic growth were:
o the significant increase in the revenues of the Mobile business unit
which grew as a consequence of the positive performance of voice
traffic (+5%), the development of value-added services (+39%) and
sales of mobile phones boosted by the expansion of MMS services
(+55%);
o the increase in the revenues of wireline/integrated companies in
South America and Domestic Wireline (+1.4% compared to the first
quarter of 2002) were especially affected by the growth in income
from basic subscription charges and from sales. It more than
compensated the slight drop in traffic (-euro 7.2 million compared to
the first quarter of 2002) which decreased in the retail segment and
increased in the wholesale area;
o the positive addition of the Internet and Media business unit.
Gross operating profit, equal to euro 3,303 million, grew in comparison to the
first quarter of 2002 by euro 29 million (+0.9%); excluding the foreign
exchange effect and the change in scope of consolidation (euro 96 million),
organic growth was 3.9% (euro 125 million). As a percentage of revenues, the
gross operating profit was 46.4% (45.1% in the same period of 2002).
In greater detail, gross operating profit was impacted in the first quarter of
2003 by:
o raw materials and outside services, equal to euro 2,903 million, down
by 0.7% compared to the first quarter of 2002. The percentage of raw
materials and outside services to revenues was 40.7% (40.2% in the
corresponding period of 2002).
o labor costs, equal to euro 1,079 million, were euro 91 million lower
than the first quarter of 2002 (-7.8%), due to the change in the
scope of consolidation and the reduction in the work force. As a
percentage of revenues, labor costs were 15.1% (16.1% in the first
quarter of 2002).
Employees at March 31, 2003 numbered 100,765 (101,713 at December 31,
2002). A breakdown is presented below:
--------------------------------------------------------------------
3/31/2003 12/31/2002 3/31/2002 Change
(a) (b) (a - b)
--------------------------------------------------------------------
Italy 82,361 83,541 89,231 (1,180)
Outside Italy 18,404 18,172 19,600 232
--------------------------------------------------------------------
Total employees 100,765 101,713 108,831 (948)
--------------------------------------------------------------------
Compared to December 31, 2002, the reduction was caused by the change
in the scope of consolidation, with a net decrease of -819, related
to the sale of Tess (-404), the spin-off of the Logistics business
from Telecom Italia's Domestic Wireline (-337) and the sale of minor
companies in the Internet and Media business unit (-78).
- 9 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
Operating income, equal to euro 1,866 million, increased by euro 135 million
(+7.8%) compared to the first quarter of 2002 and as a percentage of revenues
rose from 23.8% in the first quarter of 2002 to 26.2% in the first quarter of
2003. Excluding the foreign exchange effect and the impact of the change in the
scope of consolidation, the gain was 6.4%.
The increase in the amount itself reflects a higher gross operating profit and
a reduction in amortization and depreciation charges.
In particular:
o the amortization of the differences on consolidation, of euro 167
million (euro 216 million in the first quarter of 2002), showed a
reduction of euro 49 million, mainly as a result of the writedown of
the difference on consolidation relating to Seat Pagine Gialle in the
2002 financial statements.
o Depreciation of fixed assets and amortization of other intangibles,
equal to euro 1,152 million (euro 1,205 million in the first quarter
of 2002), recorded a reduction of euro 53 million. Details are as
follows:
----------------------------------------------------------------------
1st Quarter 1st Quarter Change
2003 2002 (a - b)
(millions of euro) (a) (b)
----------------------------------------------------------------------
Fixed assets 875 957 (82)
Other intangibles 277 248 29
----------------------------------------------------------------------
Total 1,152 1,205 (53)
----------------------------------------------------------------------
The percentage of amortization of other intangibles and depreciation
of fixed assets to revenues was 16.2% (16.6% in the first quarter of
2002).
o Other valuation adjustments, equal to euro 75 million (euro 89
million in the first quarter of 2002), decreased by euro 14 million
compared to the prior year. Such adjustments were principally for
writedowns to reduce receivables from customers to their estimated
realizable value.
o Provisions to reserves for risks and charges, amounting to euro 33
million, have remained more or less the same as in the first quarter
of 2002 (euro 30 million).
o Net other income (expenses) showed an expense balance of euro 10
million (an expense balance of euro 3 million in the first quarter of
2002).
Net financial income (expenses) was an expense balance of 298 million which
shows an improvement of euro 178 million compared to the first quarter of 2002.
Details are as follows:
------------------------------------------------------------------------------------------
1st Quarter 1st Quarter Change
2003 2002 (a - b)
(millions of euro) (a) (b)
------------------------------------------------------------------------------------------
Net financial income (expenses) (296) (450) 154
Value adjustments to financial assets, other than
equity investments (2) (26) 24
------------------------------------------------------------------------------------------
Total (298) (476) 178
------------------------------------------------------------------------------------------
The improvement in the net balance of financial income (expenses) was due to
lower financial charges as a result of the reduction in the Group's average
debt exposure and better exchange rates in certain South American countries
(Brazil and Venezuela).
Net investment income (expenses) was an expense balance of euro 118 million (an
expense balance of euro 34 million in the first quarter of 2002). with higher
net expenses of euro 84 million compared to the first quarter of 2002. Details
are as follows:
---------------------------------------------------------------------------------------------
1st Quarter 1st Quarter Change
2003 2002 (a - b)
(millions of euro) (a) (b)
---------------------------------------------------------------------------------------------
Net revaluations (writedowns) of equity investments (115) (4) (111)
Amortization of differences on consolidation (3) (30) 27
---------------------------------------------------------------------------------------------
Total (118) (34) (84)
---------------------------------------------------------------------------------------------
- 10 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
Net revaluations (writedowns) in the first quarter of 2003 included the Group's
share of equity in the losses of Stream (euro 64 million; euro 43 million in
the first quarter of 2002) and other companies (euro 15 million) as well as
writedowns of equity investments in current assets (euro 35 million).
Net extraordinary income (expenses) showed an expense balance of euro 2 million
(an income balance of euro 543 million in the first quarter of 2002). The
higher net expenses of euro 545 million compared to the corresponding period of
the prior year are due to the following:
------------------------------------------------------------------------------------------
1st Quarter 1st Quarter Change
2003 2002 (a - b)
(millions of euro) (a) (b)
------------------------------------------------------------------------------------------
Gains from divestiture plan - 617 (617)
Other extraordinary income 69 59 10
Extraordinary expenses (71) (133) 62
------------------------------------------------------------------------------------------
Total (2) 543 (545)
------------------------------------------------------------------------------------------
The gains on the disposal of investments in the first quarter of 2002
particularly referred to the sale of Bouygues Decaux Telecom (euro 484 million)
and Lottomatica (euro 133 million).
Income taxes amounted to euro 703 million, with an increase of euro 79 million
compared to the first quarter of 2002. The first quarter of 2002 benefited from
the non-taxable gain on the sale of Bouygues Decaux Telecom.
FINANCIAL CONDITION
Intangibles, fixed assets and long-term investments, amounting to euro 34,043
million, decreased by euro 1,543 million from the end of 2002.
The reduction in the differences on consolidation, intangible and fixed assets
can be ascribed to the decrease in amortization and depreciation charges that
was partly compensated by investments during the period. The decrease in
long-term investments was principally due to the reclassification of the
remaining stake held in Telekom Austria to working capital since it is expected
to be sold within twelve months.
Investments made in the first quarter of 2003 amounted to euro 860 million
(euro 1,227 million in the first quarter of 2002). The breakdown was as
follows:
------------------------------------------------------------------------------------------
1st Quarter 1st Quarter Change
2003 2002 (a - b)
(millions of euro) (a) (b)
------------------------------------------------------------------------------------------
Industrial investments 697 812 (115)
Differences on consolidation 21 10 11
Financial investments 142 405 (263)
------------------------------------------------------------------------------------------
Total investments 860 1,227 (367)
------------------------------------------------------------------------------------------
The reduction in industrial investments (euro 115 million) was principally on
account of lower capital expenditures by the Mobile BU (euro 93 million) and by
wireline and integrated companies in South America (euro 40 million), partly
compensated by the net increase in investments by other companies (euro 18
million).
Financial investments in the first quarter of 2003 included the acquisition of
the equity investment in Lisit Informatica (euro 54 million), the buy-back of
treasury stock and the purchase of other long-term securities (euro 48 million)
and loans made to subsidiaries and affiliated companies (euro 40 million). In
the first quarter of 2002, financial investments included payments made to Auna
(euro 192 million, repaid on August 1, 2002) and Stream (euro 113 million), in
addition to the buy-back of treasury stock and the purchase of other financial
investments (euro 100 million).
Working capital was a negative balance of euro 4,473 million (a negative
balance of euro 4,641 million at December 31, 2002), with a change of euro 168
million.
- 11 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
Shareholders' equity amounted to euro 13,491 million (euro 12,827 million at
the end of 2002), of which euro 9,518 million was the Parent Company's
interest, Telecom Italia, (euro 9,049 million at December 31, 2002), and euro
3,973 million was the minority interest (euro 3,778 million at December 31,
2002). The increase of euro 664 million was essentially due to the net income
for the period (euro 745 million), net of dividends due to minority
shareholders declared during the first quarter (euro 18 million) and
translation adjustments and other changes (euro 63 million). In particular,
translation adjustments principally reflected the deterioration of the exchange
rates in certain South American countries such as Chile and Bolivia.
Net debt of euro 16,079 million fell by euro 2,039 million compared to euro
18,118 million at the end of 2002. The decrease was achieved as a result of the
positive contribution of free cash flows from operations during the period
(euro 2,413 million) and the receipt of the two installments on the sale of
Telekom Srbija (euro 60 million).
Furthermore, securitization transactions brought an improvement in the net
indebtedness position at March 31, 2003 of euro 839 million (euro 826 million
at the end of 2002).
The following chart summarizes the major items which had an impact on the
change in net indebtedness during the course of the first quarter of 2003.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIALS.]
Financial
investments and
Net financial Industrial differences on Net financial
debt 12/31/2002 investments consolidation Disposals Cash flows debt 3/31/2003
--------------- ----------- ------------- --------- ---------- --------------
18.118 697 163 92 (2.807) 16.079
The portion of debt due beyond one year rose from 75% at December 31, 2002 to
81% at March 31, 2003: when also considering the current portion due next year
(euro 2,273 million) as medium/long-term, the percentage rises to 93% (88% at
December 31, 2002). Gross debt is detailed in the following table:
------------------------------------------------------------------------------------------------------
At 3/31/2003 At 12/31/2002
-------------------------------------------------------------------------
euro % Foreign % Total % Total %
(millions of euro) currency
------------------------------------------------------------------------------------------------------
Medium/long-term debt 13,607 83 1,282 63 14,889 81 15,018 75
Short-term borrowings 2,852 17 747 37 3,599 19 5,089 25
------------------------------------------------------------------------------------------------------
Total 16,459 100 2,029 100 18,488 100 20,107 100
------------------------------------------------------------------------------------------------------
- 12 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
Telecom Italia Group
Consolidated Statements of Income
-------------------------------------------------------------------------------------------------------------------------------
Change
1st Quarter 1st Quarter Year (a-b)
2003 2002 2002 --------------------
(millions of euro) (a) (b) (a) amount %
-------------------------------------------------------------------------------------------------------------------------------
A. SALES AND SERVICE REVENUES 7,125 7,265 30,400 (140) (1.9)
Changes in inventories of work in progress,
semifinished and finished goods 1 2 1
Changes in inventory of contract work in process 11 26 (42) (15) (57.7)
Increases in capitalized internal construction costs 145 73 675 72 98.6
Operating grants 3 2 19 1 50.0
-------------------------------------------------------------------------------------------------------------------------------
B. STANDARD PRODUCTION VALUE 7,285 7,366 31,054 (81) (1.1)
Raw materials and outside services (1) (2,903) (2,922) (12,558) 19 0.7
-------------------------------------------------------------------------------------------------------------------------------
C. VALUE ADDED 4,382 4,444 18,496 (62) (1.4)
Labor costs (1) (1,079) (1,170) (4,532) 91 7.8
-------------------------------------------------------------------------------------------------------------------------------
D. GROSS OPERATING PROFIT 3,303 3,274 13,964 29 0.9
Amortization of differences on consolidation (167) (216) (844) 49 22.7
Amortization of other intangibles and depreciation of
fixed assets (1,152) (1,205) (5,033) 53 4.4
Other valuation adjustments (75) (89) (599) 14 15.7
Provisions to reserves for risks and charges (33) (30) (153) (3) (10.0)
Net other income (expense) (10) (3) 46 (7) (233.3)
-------------------------------------------------------------------------------------------------------------------------------
E. OPERATING INCOME 1,866 1,731 7,381 135 7.8
Net financial income (expenses) (2) (298) (476) (1,634) 178 37.4
Net investment income (expenses) (118) (34) (529) (84) (247.1)
-------------------------------------------------------------------------------------------------------------------------------
F. INCOME BEFORE EXTRAORDINARY
ITEMS AND TAXES 1,450 1,221 5,218 229 18.8
Net extraordinary income (expenses) (2) 543 (5,637) (545) -
-------------------------------------------------------------------------------------------------------------------------------
G. INCOME BEFORE TAXES 1,448 1,764 (419) (316) (17.9)
Income taxes (703) (624) 716 (79) (12.7)
-------------------------------------------------------------------------------------------------------------------------------
H. NET INCOME (LOSS) FOR THE PERIOD BEFORE MINORITY INTEREST 745 1,140 297 (395) (34.6)
Minority interest - Net (income) loss (242) (419) (619) 177 42.2
-------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 503 721 (322) (218) (30.2)
-------------------------------------------------------------------------------------------------------------------------------
(1) Reduced by related cost recoveries
(2) Includes value adjustments to financial assets, other than investments
- 13 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
Telecom Italia Group
Consolidated Balance Sheets
--------------------------------------------------------------------------------------------------------------------
3/31/2003 12/31/2002 Change
(millions of euro) (a) (b) (a-b)
--------------------------------------------------------------------------------------------------------------------
A. INTANGIBLES, FIXED ASSETS AND LONG-TERM INVESTMENTS
Intangible assets:
o differences on consolidation 6,411 6,597 (186)
o other intangible assets 6,381 6,455 (74)
Fixed assets 18,748 19,291 (543)
Long-term investments:
o equity investments and advances on future capital
contributions 1,497 2,286 (789)
o other 1,006 957 49
--------------------------------------------------------------------------------------------------------------------
(A) 34,043 35,586 (1,543)
--------------------------------------------------------------------------------------------------------------------
B. WORKING CAPITAL
Inventories 447 411 36
Trade accounts receivable, net 8,069 8,201 (132)
Other assets 2,714 2,822 (108)
Trade accounts payable (5,210) (5,704) 494
Other liabilities (7,030) (6,863) (167)
Reserves for employee termination indemnities
and pensions and similar obligations (1,367) (1,356) (11)
Capital and/or investment grants (307) (325) 18
Deferred tax assets net of reserve for income taxes 3,045 3,104 (59)
Other reserves for risks and charges (4,834) (4,931) 97
--------------------------------------------------------------------------------------------------------------------
(B) (4,473) (4,641) 168
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
C. NET INVESTED CAPITAL (A+B) 29,570 30,945 (1,375)
--------------------------------------------------------------------------------------------------------------------
Financed by:
D. SHAREHOLDERS' EQUITY
Parent Company interest 9,518 9,049 469
Minority interest 3,973 3,778 195
--------------------------------------------------------------------------------------------------------------------
13,491 12,827 664
--------------------------------------------------------------------------------------------------------------------
E. MEDIUM/LONG-TERM DEBT 14,889 15,018 (129)
--------------------------------------------------------------------------------------------------------------------
F. NET SHORT-TERM FINANCIAL DEBT (LIQUIDITY)
Short-term borrowings 3,599 5,089 (1,490)
Liquid assets and short-term financial receivables (2,694) (2,271) (423)
Financial accrued expenses (income) and deferred
expenses (income), net 285 282 3
--------------------------------------------------------------------------------------------------------------------
1,190 3,100 (1,910)
--------------------------------------------------------------------------------------------------------------------
NET FINANCIAL DEBT (E+F) 16,079 18,118 (2,039)
--------------------------------------------------------------------------------------------------------------------
G. TOTAL FINANCING (D+E+F)=C 29,570 30,945 (1,375)
--------------------------------------------------------------------------------------------------------------------
- 14 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
Telecom Italia Group
Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------------
1st Quarter 1st Quarter Year
(millions of euro) 2003 2002 2002
-----------------------------------------------------------------------------------------------------------------------------------
A. NET DEBT, AT BEGINNING OF YEAR (18,118) (21,942) (21,942)
-----------------------------------------------------------------------------------------------------------------------------------
Operating income 1,866 1,731 7,381
Depreciation of fixed assets and amortization of intangible assets 1,319 1,421 5,877
Investments in fixed assets and intangible assets (1) (697) (812) (4,842)
Receipt of capital and/or operating grants 3 42
Proceeds from disposal of intangible assets and fixed assets 4 62 135
Change in operating working capital and other changes (79) (797) 17
-----------------------------------------------------------------------------------------------------------------------------------
B. Free cash flows from operations 2,413 1,608 8,610
-----------------------------------------------------------------------------------------------------------------------------------
Investments in long-term investments and differences on consolidation (1) (163) (415) (2,077)
Proceeds from sale/redemption value of other intangible assets, fixed assets
and long-term investments 88 1,014 5,563
Change in non-operating working capital and other changes (281) (897) (3,385)
-----------------------------------------------------------------------------------------------------------------------------------
C. (356) (298) 101
-----------------------------------------------------------------------------------------------------------------------------------
D. NET CASH FLOWS BEFORE DISTRIBUTION OF INCOME/RESERVES AND
CONTRIBUTIONS BY SHAREHOLDERS (C+B) 2,057 1,310 8,711
-----------------------------------------------------------------------------------------------------------------------------------
E. Distribution of income/reserves (18) (17) (4,945)
-----------------------------------------------------------------------------------------------------------------------------------
F. Contributions by shareholders 31 58
-----------------------------------------------------------------------------------------------------------------------------------
G. NET CHANGE IN DEBT (D+E+F) 2,039 1,324 3,824
-----------------------------------------------------------------------------------------------------------------------------------
H. NET DEBT, AT END OF YEAR (A+G) (16,079) (20,618) (18,118)
-----------------------------------------------------------------------------------------------------------------------------------
The net change in debt is the result of the following
-----------------------------------------------------------------------------------------------------------------------------------
(millions of euro)
-----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in medium/long-term debt (129) 2,751 (1,065)
Increase (decrease) in short-term borrowings (1,910) (4,075) (2,759)
-----------------------------------------------------------------------------------------------------------------------------------
Net change in debt (2,039) (1,324) (3,824)
-----------------------------------------------------------------------------------------------------------------------------------
(1) Total cash used for investments can be analyzed as follows:
-----------------------------------------------------------------------------------------------------------------------------------
(millions of euro)
-----------------------------------------------------------------------------------------------------------------------------------
Industrial investments:
- differences on consolidation 21 10 369
- other intangible assets 239 212 1,584
- fixed assets 458 600 3,258
Investment in long-term investments 142 405 1,708
-----------------------------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTMENTS 860 1,227 6,919
-----------------------------------------------------------------------------------------------------------------------------------
- 15 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] ECONOMIC AND FINANCIAL PERFORMANCE - TELECOM ITALIA S.p.A.
The results of operations in the first quarter of 2003 and the financial
condition at March 31, 2003 of the Parent Company, Telecom Italia, reflect the
situation after the contribution of the "International Wholesale Services"
business segment to Telecom Italia Sparkle on December 31, 2002 and after the
merger by incorporation of the subsidiary Telecom Italia Lab, agreed on March
18, 2003 and effective for accounting and tax purposes on January 1, 2003.
The following table presents the results for the first quarter of 2003,
compared to the proforma results for the first quarter of 2002, which take into
account the changes ensuing from the above-mentioned corporate transactions,
shown in the column "adjustments".
------------------------------------------------------------------------------------------------------------------------------------
1st Quarter 1st Quarter Adjustments 1st Quarter Change
2003 2002 2002 %
proforma ---------------------
(millions of euro) (a) (b) (c) (a / b) (a / c)
------------------------------------------------------------------------------------------------------------------------------------
A. SALES AND SERVICE REVENUES 3,959 4,190 (240) 3,950 (5.5) 0.2
Changes in inventory of contract work in process - (4) (1) (5) - -
Increases in capitalized internal construction costs 2 - 3 3 - (33.3)
Operating grants 4 - 1 1 - (degree)
-----------------------------------------------------------------------------------------------------------------------------------
B. STANDARD PRODUCTION VALUE 3,965 4,186 (237) 3,949 (5.3) 0.4
Raw materials and outside services (1) (1,528) (1,655) 199 (1,456) 7.7 (4.9)
-----------------------------------------------------------------------------------------------------------------------------------
C. VALUE ADDED 2,437 2,531 (38) 2,493 (3.7) (2.2)
Labor costs (1) (639) (656) (6) (662) 2.6 3.5
-----------------------------------------------------------------------------------------------------------------------------------
D. GROSS OPERATING PROFIT 1,798 1,875 (44) 1,831 (4.1) (1.8)
Depreciation and amortization (686) (726) 14 (712) 5.5 3.7
Other valuation adjustments (24) (23) (23) (4.3) (4.3)
Provisions to reserves for risks and charges (17) (13) 1 (12) (30.8) (41.7)
Net other income (expenses) (19) (16) (16) (18.8) (18.8)
-----------------------------------------------------------------------------------------------------------------------------------
E. OPERATING INCOME 1,052 1,097 (29) 1,068 (4.1) (1.5)
-----------------------------------------------------------------------------------------------------------------------------------
(1) Reduced by related cost recoveries
- 16 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
The Parent Company, Telecom Italia S.p.A., reported a net income of euro 356
million in the first quarter of 2003, an increase of euro 76 million compared
to the first quarter of 2002.
As usual, dividends from subsidiaries arising from the current year's earnings
are not included in the result for the first quarter of 2003 but are recorded
at the end of the year in accordance with the accrual principle.
The improvement in earnings, compared to first quarter of 2002, can be ascribed
to net financial income (expenses) (+euro 41 million), net investment income
(expenses) (+euro 96 million) and net extraordinary income (expenses) (+euro 57
million) offset by lower net operating income (expenses) (-euro 45 million) and
higher income taxes (+euro 73 million).
Sales and service revenues, equal to euro 3,959 million, decreased by euro 231
million, -5.5%, compared to the first quarter of 2002 (an increase of euro 9
million, +0.2% on a comparable basis).
The reduction was attributable to traffic, the equivalent amount of which
decreased by euro 300 million, -14.5%, mainly on account of the effect of the
contribution of the "International Wholesale Services" business to Telecom
Italia Sparkle and the resultant allocation to the latter of revenues from
international traffic (euro 238 million in the first quarter of 2002).
On a comparable basis, the reduction in traffic was euro 62 million, -3.4%.
This result was partly compensated by the increase in income from basic
subscription charges which benefited from the growth in commercial rate plans
(principally Teleconomy and Alice) offering rate discounts on traffic aimed at
retaining customer "loyalty".
Gross operating profit, equal to euro 1,798 million, decreased by euro 77
million compared to the first quarter of 2002 (-4.1%). As a percentage of
revenues, the gross operating profit was 45.4% (44.7% in the same period of the
prior year). On a comparable basis, the reduction was euro 33 million, -1.8%.
The decrease is due to the aforementioned fall in revenues that was partly
compensated by the reduction in the consumption of raw materials and outside
services (-euro 127 million) and labor costs (-euro 17 million).
The reduction in the consumption of raw materials and outside services can
mainly be ascribed to the contraction in the costs of providing service and a
decrease in the amounts payable to foreign correspondents as a result of the
cited contribution to Telecom Italia Sparkle.
Operating income, equal to euro 1,052 million, decreased by euro 45 million
compared to the first quarter of 2002 (-4.1%) and as a percentage of revenues
was 26.6% compared to 26.2% in the corresponding period of the prior year. On a
comparable basis, the reduction was euro 16 million, -1.5%.
Net financial income (expenses) was an expense balance of euro 246 million
(-euro 287 million in the first quarter of 2002). This is an improvement of
euro 41 million mainly as a result of the contraction in average debt exposure.
Net investment income (expenses) is composed of the following:
--------------------------------------------------------------------------------------
1st Quarter 1st Quarter Change
2003 2002
(millions of euro) (a) (b) (a-b)
--------------------------------------------------------------------------------------
Value adjustments to financial assets (136) (258) 122
Income from investments, net - 26 (26)
--------------------------------------------------------------------------------------
Total (136) (232) 96
--------------------------------------------------------------------------------------
Specifically:
o value adjustments to financial assets principal refer to the
writedowns of the investments in Stream (euro 64 million), I.T.
Telecom (euro 20 million), Telecom Italia Learning Services (euro 6
million), Latin American Nautilus (euro 7 million), Edotel (euro 7
million) and the writedown of TIM shares held in current assets (euro
21 million). The reduction (-euro 122 million) compared to the first
quarter of 2002, is due to the fact that in 2002 writedowns had
primarily been made to the investments in Stet International
Netherlands (now Telecom Italia International), euro 95 million,
Nortel Inversora (euro 19 million), Softe (now Telecom Italia
Finance), euro 26 million and TMI - Telemedia International Italia
(euro 24 million).
Net extraordinary income (expenses) showed an expense balance of euro 26 (and
expense balance of -euro 83 million in the first quarter of 2002), with an
improvement of euro 57 million. Specifically:
- 17 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
extraordinary income of euro 23 million comprised:
o gains (euro 15 million) realized on the sales of the investments in
Siteba and Tele Pay Roll Services (euro 11 million) and the sale of
the Logistics business to TNT (euro 4 million);
o other prior period income for a total of euro 8 million.
extraordinary expenses of euro 49 million comprised:
o expenses for corporate restructuring relating to employee cutbacks
and layoffs (euro 23 million);
o expenses relating to corporate transactions (euro 9 million);
o other expenses and provisions (euro 17 million).
Income taxes, equal to euro 288 million, rose by euro 73 million compared to
the first quarter of 2002, mainly on account of a higher taxable base.
Employees at March 31, 2003 numbered 55,308, with an increase of 603 compared
to December 31, 2002, principally due to the addition of the employees of TI
Lab (+1,169) after the merger and the reduction in number following the sale of
the Logistics business (337).
Investments totaled euro 827 million (euro 521 million in the first quarter of
2002). The breakdown was as follows:
----------------------------------------------------------------------------
1st Quarter 1st Quarter Change
(millions of euro) 2003 2002 (a-b)
(a) (b)
----------------------------------------------------------------------------
Industrial investments 743 379 364
----------------------------------------------------------------------------
Financial investments 84 142 (58)
----------------------------------------------------------------------------
Total investments 827 521 306
----------------------------------------------------------------------------
Industrial investments, in particular, included the early purchase of buildings
under financial lease contracts with Teleleasing for euro 312 million.
Net debt of euro 14,887 million decreased by euro 241 million compared to
December 31, 2002 (euro 15,128 million). The improvement was the result of cash
flows from operations (euro 768 million) which more than compensated cash flows
used for financing and extraordinary activities (euro 358 million), plus the
addition of the beginning net debt of the merged company TI Lab (euro 169
million).
Net debt also benefited from the effect of the securitization transaction for
an amount of euro 839 million at March 31, 2003 (euro 826 million at December
31, 2002).
Gross debt at March 31, 2003 was euro 15,856 million (euro 17,299 million at
December 31, 2002). Details are as follows:
------------------------------------------------------------------------------------------------------------------
At 3/31/2003 At 12/31/2002
--------------------------------------------------------------------------------
Foreign
(millions of euro) euro % currency % Total % Total %
------------------------------------------------------------------------------------------------------------------
Medium/long-term debt 11,725 75 81 26 11,806 74 11,848 68
Short-term borrowings 3,815 25 235 74 4,050 26 5,451 32
------------------------------------------------------------------------------------------------------------------
Total 15,540 100 316 100 15,856 100 17,299 100
------------------------------------------------------------------------------------------------------------------
The portion of medium/long-term debt rose from 68% at December 31, 2002 to 74%
at March 31, 2003.
***
Furthermore, on March 11, 2003, the Board of Directors of Telecom Italia passed
a resolution to call, at market price, and subsequently cancel, for a maximum
amount of euro 2 billion, a portion of the notes underwritten by the subsidiary
Telecom Italia Finance. This transaction was necessary in order to bring the
ratio of debentures and financial notes to net equity into equilibrium in view
of the proposed distribution of reserves up to a maximum of euro 1,333 million.
- 18 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
Telecom Italia
Statements of income
--------------------------------------------------------------------------------------------------------------------------
Change
1st Quarter 1st Quarter Year (a-b)
2003 2002 2002 ------------------
(millions of euro) (a) (b) (a) amount %
--------------------------------------------------------------------------------------------------------------------------
A. SALES AND SERVICE REVENUES 3,959 4,190 17,055 (231) (5.5)
Changes in inventory of contract work in process - (4) - 4 -
Increases in capitalized internal construction costs 2 - 11 2 -
Operating grants 4 - - 4 -
--------------------------------------------------------------------------------------------------------------------------
B. STANDARD PRODUCTION VALUE 3,965 4,186 17,066 (221) (5.3)
Raw materials and outside services (1) (1,528) (1,655) (6,966) 127 7.7
--------------------------------------------------------------------------------------------------------------------------
C. VALUE ADDED 2,437 2,531 10,100 (94) (3.7)
Labor costs (1) (639) (656) (2,551) 17 2.6
--------------------------------------------------------------------------------------------------------------------------
D. GROSS OPERATING PROFIT 1,798 1,875 7,549 (77) (4.1)
Depreciation and amortization (686) (726) (3,020) 40 5.5
Other valuation adjustments (24) (23) (357) (1) (4.3)
Provisions to reserves for risks and charges (17) (13) (44) (4) (30.8)
Net other income (expenses) (19) (16) (83) (3) (18.8)
--------------------------------------------------------------------------------------------------------------------------
E. OPERATING INCOME 1,052 1,097 4,045 (45) (4.1)
Net financial income (expenses) (246) (287) (1,087) 41 14.3
Net investment income (expenses) (136) (232) 1,464 96 41.4
--------------------------------------------------------------------------------------------------------------------------
F. INCOME BEFORE EXTRAORDINARY ITEMS
AND INCOME TAXES 670 578 4,422 92 15.9
Net extraordinary income (expenses) (26) (83) (6,093) 57 68.7
--------------------------------------------------------------------------------------------------------------------------
G. INCOME (LOSS) BEFORE INCOME TAXES 644 495 (1,671) 149 30.1
Income taxes (288) (215) 26 (73) (34.0)
--------------------------------------------------------------------------------------------------------------------------
H. NET INCOME (LOSS) 356 280 (1,645) 76 27.1
--------------------------------------------------------------------------------------------------------------------------
(1) Reduced by related cost recoveries
- 19 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
Telecom Italia
Balance Sheets
--------------------------------------------------------------------------------------------------------------
3/31/2003 12/31/2002 Change
(millions of euro) (a) (b) (a-b)
--------------------------------------------------------------------------------------------------------------
A. INTANGIBLES, FIXED ASSETS AND
LONG-TERM INVESTMENTS
Intangible assets 1,300 1,287 13
Fixed assets 12,770 12,678 92
Long-term investments:
o equity investments and advances
on future capital contributions 15,007 15,010 (3)
o other 620 588 32
--------------------------------------------------------------------------------------------------------------
(A) 29,697 29,563 134
--------------------------------------------------------------------------------------------------------------
B. OPERATING WORKING CAPITAL
Inventories 80 70 10
Trade accounts receivable, net 4,820 4,385 435
Other assets 1,512 1,786 (274)
Trade accounts payable (2,752) (2,948) 196
Other liabilities (4,458) (4,115) (343)
Reserves for employee termination indemnities
and pensions and similar obligations (1,009) (968) (41)
Capital and/or investment grants (225) (235) 10
Deferred tax assets net of reserve for income taxes 1,454 1,454
Other reserves for risks and charges (2,918) (2,908) (10)
--------------------------------------------------------------------------------------------------------------
(B) (3,496) (3,479) (17)
--------------------------------------------------------------------------------------------------------------
C. NET INVESTED CAPITAL (A+B) 26,201 26,084 117
--------------------------------------------------------------------------------------------------------------
Financed by:
D. SHAREHOLDERS' EQUITY
Share capital 4,024 4,024
Retained earnings and reserves 6,934 8,577 (1,643)
Net income (loss) 356 (1,645) 2,001
--------------------------------------------------------------------------------------------------------------
11,314 10,956 358
--------------------------------------------------------------------------------------------------------------
E. MEDIUM/LONG-TERM DEBT 11,806 11,848 (42)
--------------------------------------------------------------------------------------------------------------
F. NET SHORT-TERM FINANCIAL DEBT (LIQUIDITY):
Short-term borrowings 4,050 5,451 (1,401)
Liquid assets and short-term financial receivables (1,059) (2,698) 1,639
Financial accrued expenses (income) and
deferred expenses (income), net 90 527 (437)
--------------------------------------------------------------------------------------------------------------
3,081 3,280 (199)
--------------------------------------------------------------------------------------------------------------
NET FINANCIAL DEBT (E+F) 14,887 15,128 (241)
--------------------------------------------------------------------------------------------------------------
G. TOTAL FINANCING (D+E+F=C) 26,201 26,084 117
--------------------------------------------------------------------------------------------------------------
- 20 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
Telecom Italia
Statements of Cash Flows
------------------------------------------------------------------------------------------------------------------------------
1st Quarter 1st Quarter Year
(millions of euro) 2003 2002 2002
------------------------------------------------------------------------------------------------------------------------------
A. NET DEBT, AT BEGINNING OF YEAR (15,128) (16,913) (16,913)
------------------------------------------------------------------------------------------------------------------------------
Net debt, at beginning of year, TI Lab (169) - -
------------------------------------------------------------------------------------------------------------------------------
B. ADJUSTED NET DEBT, AT BEGINNING OF YEAR (15,297) (16,913) (16,913)
------------------------------------------------------------------------------------------------------------------------------
Operating income 1,052 1,097 4,045
Depreciation of fixed assets and amortization of intangible assets 686 726 3,020
Investments in fixed assets and intangible assets (1) (743) (379) (2,322)
Receipts of capital and/or operating grants 1 - 23
Proceeds from disposal of intangible assets and fixed assets 1 9 54
Change in operating working capital and other changes (229) (290) 471
------------------------------------------------------------------------------------------------------------------------------
C. FREE CASH FLOW FROM OPERATIONS 768 1,163 5,291
------------------------------------------------------------------------------------------------------------------------------
Investments in long-term investments (1) (84) (142) (1,286)
Proceeds from sale/redemption value of other intangibles 41 31 694
Change in non-operating working capital and other changes (315) (797) 370
------------------------------------------------------------------------------------------------------------------------------
D. (358) (908) (222)
------------------------------------------------------------------------------------------------------------------------------
E. NET CASH FLOWS BEFORE DISTRIBUTION OF
INCOME/RESERVES AND CONTRIBUTIONS BY SHAREHOLDERS (C+D) 410 255 5,069
------------------------------------------------------------------------------------------------------------------------------
F. DISTRIBUTION OF INCOME/RESERVES - - (3,293)
------------------------------------------------------------------------------------------------------------------------------
G. CONTRIBUTIONS BY SHAREHOLDERS - 7 9
------------------------------------------------------------------------------------------------------------------------------
H. NET CHANGE IN DEBT (E+F+G) 410 262 1,785
------------------------------------------------------------------------------------------------------------------------------
I. NET DEBT, AT END OF YEAR (B+H) (14,887) (16,651) (15,128)
------------------------------------------------------------------------------------------------------------------------------
The net change in debt is the result of the following:
------------------------------------------------------------------------------------------------------------------------------
1st Quarter 1st Quarter Year
(millions of euro) 2003 2002 2002
------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in medium/long-term debt (45) 3,185 1,477
Increase (decrease) in short-term borrowings (365) (3,447) (3,262)
------------------------------------------------------------------------------------------------------------------------------------
Net change in debt (410) (262) (1,785)
------------------------------------------------------------------------------------------------------------------------------------
(1) Total cash used for investments can be analyzed as follows
------------------------------------------------------------------------------------------------------------------------------
1st Quarter 1st Quarter Year
(millions of euro) 2003 2002 2002
------------------------------------------------------------------------------------------------------------------------------------
Industrial investments:
- fixed assets 597 294 1,674
- intangible assets 146 85 648
Investment in long-term investments 84 142 1,286
------------------------------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTMENTS 827 521 3,608
------------------------------------------------------------------------------------------------------------------------------------
- 21 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] SUBSEQUENT EVENTS
There follows a description of the significant events subsequent to March 31,
2003.
MERGER OF TELECOM ITALIA IN OLIVETTI
On April 15, 2003, the Board of Directors approved the plan or merger of
Telecom Italia in Olivetti, with the following exchange ratio:
7 Olivetti ordinary shares, of par value euro 1 each, for every
Telecom Italia ordinary share of par value euro 0.55 each
7 Olivetti savings shares, of par value euro 1 each, for every 1
Telecom Italia savings share of par value euro 0.55 each
As a result of the merger, the controlling investment in Telecom Italia held by
Olivetti will be cancelled, whereas the investment held by Olimpia in Olivetti
will be significantly diluted.
The exchange ratio will principally be covered by the redistribution of
Olivetti capital as it stands when the merger is finalized, after the par
values of the ordinary and savings shares post-Olivetti merger have been
adjusted to euro 0.55 (equal to the par value of Telecom shares), in place of
the current par value of euro 1.
The company resulting from the merger will take the name and corporate business
purpose of Telecom Italia. The registered office of the company will be in
Milan, where Telecom Italia currently has its registered office.
More in general, Olivetti will adopt new by-laws that are very similar to
Telecom Italia's by-laws. Since the business purpose has been changed, Olivetti
shareholders are entitled to exercise withdrawal rights. To meet the
requirements that might arise as a result of any withdrawals, Olivetti has
secured euro 9 billion in financing. Any portion of the financing not used for
the withdrawal rights will be set aside by Olivetti for a partial voluntary
tender offer to purchase Telecom Italia ordinary and savings shares. The
purchase price of the tender offer will be equal to the average price of the
shares during the period between March 12 and the date of the Olivetti
Shareholders' meeting called to approve the merger, plus a premium of 20%, with
a minimum and maximum amount of euro 7.0 and euro 8.4 per ordinary share and
euro 4.7 and euro 5.65 per savings share. The withdrawal rights and the tender
offer are both subject to the execution of the merger.
The merger will be effective from the date of the final registrations of the
plan of merger of the companies involved at the registry offices, or eventually
at the later date established in the deed of merger for early August 2003.
For accounting purposes, Telecom Italia's transactions will be taken up in
Olivetti's financial statements starting January 1, 2003, which is also the
effective date of the merger for tax purposes.
The ordinary and savings shares issued by Olivetti in exchange for Telecom
Italia shares, which will be cancelled as a result of the merger, will have
normal dividend rights. The merger will come into effect when the savings
shares issued by Olivetti to service the exchange ratio have been admitted for
listing on the Mercato Telematico Italiana market of Borsa Italiana S.p.A..
Listing on the New York Stock Exchange will be requested for the new ordinary
and savings shares of the company resulting from the merger.
SEAT PAGINE GIALLE SPIN-OFF
On April 1, 2003, the Board of Directors of Seat Pagine Gialle approved the
plan for the partial proportional spin-off of Seat Pagine Gialle S.p.A. (the
"spun-off" company) to a newly formed company (the "beneficiary" company), on
the basis of the balance sheet data of the spun-off company at December 31,
2002. If the plan is approved by the shareholders of Seat Pagine Gialle, the
beneficiary company will receive the corporate complex principally composed of
the following business segments: Directories (consisting of the Italian
operations in telephone publishing and the stakes held in TDL Infomedia and
Thomson), Directory Assistance (89.24.24 Pronto Pagine Gialle and Telegate) and
Business Information (Consodata group). The spun-off company will take the new
name of Telecom Italia Media whereas the beneficiary company will take the name
of Seat Pagine Gialle. On the basis of the plan of spin-off, when the
transaction becomes effective, the shareholders of Seat Pagine Gialle will be
assigned, for every 40 ordinary (savings) held:
- 29 new ordinary (savings) shares of the beneficiary company, Seat Pagine
Gialle
- 22 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
- 11 new ordinary (savings) shares of the spun-off company, Telecom Italia
Media
Moreover, Telecom Italia has started the procedures for the divestiture, using
a competitive process, aimed at the sale of the controlling investment held in
the aforementioned beneficiary company that will take place after the spin-off.
SALE OF EQUITY INVESTMENT IN STREAM
On April 30, 2003, after authorization was received from the relevant
authorities, the agreement, announced October 1, 2002, was concluded with News
Corporation for the creation of a single Italian pay-TV company.
The new company, resulting from of the integration of Steam and Tele+, will be
called SKY ITALIA. Telecom Italia will hold a 19.9% stake and News Corporation
an 80.1% stake.
STRATEGIC OUTSOURCING AGREEMENT BETWEEN TELECOM ITALIA AND HEWLETT-PACKARD
The Management Services & Outsourcing agreement between Telecom Italia and
Hewlett-Packard announced on February 21, 2003 became operational following the
completion of the procedures established by existing laws.
The agreement calls for the following operations outsourcing contracts: HP will
supply asset management, help desk, maintenance and workstation management,
while IT Telecom will manage Hewlett-Packard Italiana's operational activities
in the SAP environment and house the systems in its Data Centers. The agreement
was also executed for the sale of the Desktop Management Services business, IT
Telecom (100%-owned by Telecom Italia), to the new Hewlett-Packard entity HP
DCS (Hewlett-Packard Distributed Computing Services).
[ ] BUSINESS OUTLOOK
The outlook for the Telecom Italia Group for the year 2003 is a
substantially stable operating profitability and a further reduction in
net indebtedness.
Assuming the execution of the merger of Telecom Italia in Olivetti
described above:
o consolidated net indebtedness will be represented by that of the
Olivetti Group which already includes that of Telecom Italia. Such
indebtedness could be higher at the end of 2003 as a result of
transactions related to the merger (withdrawal of a part of
Olivetti's shareholders and the voluntary partial tender offer of
purchase for Telecom Italia ordinary and savings shares) which will
be partly financed by cash flows provided by both operations and the
disposal of non-strategic investments;
o operating profitability of the Group for the year 2003 before
amortization of differences on consolidation is expected remain
stable.
The company resulting from the merger is also expected to report net
earnings in the 2003 financial statements. This will make it possible to
offer the same dividend policy to the current Telecom Italia shareholders
with total dividends that will at least be in line with those from 2002
earnings.
[ ] RELATED PARTY TRANSACTIONS
With reference to related party transactions, the effects of such transactions
on the balance sheet and statement of income in the consolidated financial
statements of the Telecom Italia Group at March 31, 2003 are reported in the
following table.
In the consolidated financial statements, the effects of intercompany
transactions on the balance sheet and statement of income, that is, all
transactions among consolidated companies, have been eliminated.
All related party transactions, including intercompany transactions, fall
within the normal business operations of the Group, are governed by market
terms or on the basis of specific laws; also, there are no atypical or unusual
transactions.
- 23 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
------------------------------------------------------------------------------------------------------------------------------------
Major statement of income and
balance sheet components Transactions with: Nature of transaction
------------------------------------------------------------------------------------------------------------------------------------
(millions of euro) unconsolidated parent companies,
subsidiaries subsidiaries
and and affiliates
affiliates of parent
companies
------------------------------------------------------------------------------------------------------------------------------------
Sales and services revenues 33 3 These comprise revenues from Teleleasing (euro 16 million), Stream
(euro 3 million), Telecom Argentina (euro 3 million), Telekom Srbija
(euro 2 million)
------------------------------------------------------------------------------------------------------------------------------------
Raw materials and outside 100 3 These mainly comprise rent payable to Tiglio 1 (euro 20 million) and
services Tiglio 2 (euro 6 million) as well as TLC service costs from Etecsa
Cuba (euro 36 million) and maintenance and servicing costs from
Italtel (euro 12 million).
------------------------------------------------------------------------------------------------------------------------------------
Net other (income) expenses 1 These mainly relate to cost recoveries for personnel on loan to
certain subsidiaries and affiliates
------------------------------------------------------------------------------------------------------------------------------------
Net financial (income) expenses 1 These include accrued interest income on loans made to certain
subsidiaries and affiliates (euro 6 million) and interest expense
payable to Teleleasing for financial leasing transactions (euro 5
million)
------------------------------------------------------------------------------------------------------------------------------------
Loans under long-term 428 These comprise medium/long-term loans made to IS TIM (euro 302
investments million), Tiglio 1 (euro 54 million), Telegono (euro 24 million) and
Tiglio 2 (euro 30 million)
------------------------------------------------------------------------------------------------------------------------------------
Financial receivables 35 These comprise short-term loans made to Tmi group companies (euro 14
million) and Golden Lines (euro 8 million net of provisions)
------------------------------------------------------------------------------------------------------------------------------------
Financial payables 45 These refer mainly to payables for finance leases to Teleleasing
(euro 29 million)
------------------------------------------------------------------------------------------------------------------------------------
Trade and other accounts 196 4 They mainly regard receivables from Stream (euro 66 million), Telekom
receivable Srbija (euro 22 million net of provisions), Teleleasing (euro 23
million) and Consorzio Telcal (euro 11 million)
------------------------------------------------------------------------------------------------------------------------------------
Trade and other accounts 320 583 These refer to payables to Olivetti for the settlement of Group VAT
payable and receivables from the tax authorities transferred (euro 571
million) and supply contracts connected with operating and investment
activities: they include payables to the Italtel group (euro 84
million), Siemens Informatica (euro 40 million), Teleleasing (euro 13
million) and advances from Consorzio Telcal (euro 103 million)
------------------------------------------------------------------------------------------------------------------------------------
Contract work in process 110 These refer mainly to activities on behalf of Consorzio Telcal for
the Telematico Calabria Plan
------------------------------------------------------------------------------------------------------------------------------------
Guarantees and collateral 947 These comprise sureties provided on behalf of Is Tim (euro 617
provided million), Consorzio Csia (euro 85 million), Stream (euro 49
million) as well as collateral on behalf of Is Tim (euro 102 million)
------------------------------------------------------------------------------------------------------------------------------------
Purchases and sales commitments 12 They refer to commitments with Teleleasing under operating leases
------------------------------------------------------------------------------------------------------------------------------------
Investments in fixed assets and 46 These mainly consist of acquisitions of telephone exchanges from the
intangibles Italtel group (euro 30 million) and computer projects from Siemens
Informatica (euro 4 million)
------------------------------------------------------------------------------------------------------------------------------------
In the first quarter 2003, the buildings leased from Teleleasing under
financial leasing contracts, recorded in the consolidated fixed assets, were
purchased.
Related party transactions, excluding transactions among Group companies, also
comprise those by the Telecom Italia Group with the Pirelli group and the
Edizione Holding group in the first quarter of 2003 are as follows.
-----------------------------------------------------------------------------------
1st Quarter
(millions of euro) 2003
------------------------------------------------------------------------------------------------------------------------------------
Sales and service revenues 9 These mainly refer to computer services and the supply of energy
services to the Pirelli group (euro 7 million) and telephone
services to the Pirelli group and the Edizione Holding group (euro 1
million)
------------------------------------------------------------------------------------------------------------------------------------
Raw materials and outside services 12 These refer to planning and servicing expenditures to the Pirelli
group.
------------------------------------------------------------------------------------------------------------------------------------
Trade and other accounts receivable 9 These mainly refer to the above-mentioned telephone services
rendered to the Pirelli group (euro 8 million) and the Edizione
Holding group (euro 1 million)
------------------------------------------------------------------------------------------------------------------------------------
Trade and other accounts payable 24 These mainly refer to supply contracts connected with investment
activities from the Pirelli group (euro 23 million) and the Edizione
Holding group (euro 1 million)
------------------------------------------------------------------------------------------------------------------------------------
These mainly refer to purchases of telecommunications cables from
Investments in fixed assets and intangibles 6 the Pirelli group
------------------------------------------------------------------------------------------------------------------------------------
Additionally:
- in the first quarter of 2003, TIM sold telephone cards for resale to the
public to Autogrill S.p.A. (Edizione Holding Group), for an equivalent
amount of about euro 7 million;
- Telecom Italia has a commitment to acquire a further 5% interest in
Epiclink from Pirelli S.p.A. for a total of euro 3 million.
- 24 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
DOMESTIC WIRELINE
o Confirmation of the positive trend in profit margins
o Innovation of products and service and development of broadband
o Efficiency in costs and investments
[ ] THE BUSINESS UNIT
The Domestic Wireline Business Unit operates on a national level as the
consolidated market leader in wireline telephone and data services and
call centers, for final (retail) customers and other (wholesale)
providers. On an international level, Domestic Wireline develops fiber
optic networks for wholesale customers, mainly in Europe and South
America. During the period, strong competition in the market continued. It
was more accentuated in the case of national traffic and was countered
with new rate plans offered as part of the action to win back and retain
customers.
[ ] THE STRUCTURE OF THE BUSINESS UNIT
The Business Unit is organized as follows:
Telecom Italia DW National Subsidiaries International Subsidiaries
Wireline TLC services: Atesia S.p.A. Latin American Nautilus Group
Path.Net S.p.A. Mediterranean Nautilus Group
o Traffic and Access Loquendo S.p.A. Med-1 Group
o Data Business Intelcom San Marino S.p.A.
o National Wholesale Telecom Italia Sparkle Group
o Public Telephone Services - Telecom Italia Sparkle S.p.A.
- Pan European Backbone
- Telecom Italia of N.A.Inc.
- Telemedia Int.Lux. Group
[ ] MAJOR CORPORATE EVENTS/SCOPE OF CONSOLIDATION
In the first quarter of 2003, the scope of consolidation changed as a
result of the transfer of the Loquendo S.p.A. (previously consolidated in
the IT Group BU) to Domestic Wireline. The figures relating to 2002 have
been duly restated.
In addition, during the first quarter of 2003, Telecom Italia DW, together
with Finsiel, won the bid for the creation of an Information System for
Health Care and Social Services and a Regional Services Card for the
Lombardy Region. This is a seven-year contract which involves the design
of a network incorporating all the facilities and operators of health care
and social services, as well as new services which the public can access
through a Regional Health Care Card. Following the award of the bid, in
February, Telecom Italia DW acquired a minority stake in LISIT S.p.A..
[ ] ECONOMIC AND FINANCIAL DATA
The following table shows the key results in the first quarter of 2003,
compared to the first quarter of 2002 and the year 2002, restated for
purposes of comparison.
--------------------------------------------------------------------------------------------------------
Change
1st Quarter 1st Quarter Year (a-b)
2003 2002 2002 ----------------
(millions of euro) (a) (b) (a) amount %
--------------------------------------------------------------------------------------------------------
Sales and service revenues 4,235 4,175 17,035 60 1.4
Gross operating profit 1,973 1,941 7,966 32 1.6
% of revenues 46.6% 46.5% 46.8%
Operating income 1,233 1,198 4,698 35 2.9
% of revenues 29.1% 28.7% 27.6%
Investments:
o industrial
o differences on consolidation
433 433 2,465 - -
- - -
Employees at period-end (number) (1) 53,177 57,140 53,857 (680) (1.3)
--------------------------------------------------------------------------------------------------------
(1) The change in the number of employees has been calculated in reference to
the data at the end of 2002
- 25 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIALS.]
Gross Operating Profit
1st Quarter 1st Quarter
2002 2003
----------- -----------
1,941 1,973
Sales and service revenues show growth of 1.4% (euro 60 million),
generated mainly by DW and TI Sparkle.
Factors particularly influencing the growth in revenues include higher
revenues from basic subscription charges and sales which more than
compensated the slight fall in traffic (-euro 7.2 million compared to the
first quarter of 2002) caused, among other things, by a reduction in the
retail sector and an increase in the wholesale sector.
In particular:
o The slight reduction in retail traffic (approximately -euro 13.3
million, equal to -0.8%) was offset by the growth of VAS and data
traffic (a total of +euro 108.8 million compared to the first quarter
of 2002) which almost completely compensated the erosion of revenues
from Voice and On Line Dial Up traffic. In particular, the erosion of
revenues from Voice and On Line Dial Up traffic continues to be
affected by a number of different factors, such as:
- DW's marketing strategy of giving preference to flat rate plans,
which, in terms of economic results, lower the average yield on
traffic and increase revenues from basic subscription charges;
- rate adjustments which lowered average prices and access
charges.
o Revenues from national and international wholesale traffic (a total
of +euro 6.1 million, equal to +1.3% compared to the first quarter of
2002), were marked by the growth of international traffic as a result
of higher volumes of in transit traffic, which compensated the
reduction in national traffic generated mainly by an average
reduction in the yield equal to 30%, compared to the first quarter of
2002.
o Revenues from basic subscription charges and sales increased by
approximately euro 110 million compared to the first quarter of 2002.
Revenues from basic subscription charges rose by approximately euro
80 million, reflecting an increase in the retail segment of
approximately euro 87 million, for access (approx. +euro 54 million)
and ADSL (approx. +euro 27 million), and a reduction in the wholesale
segment.
The increase in the gross operating profit and the operating income were
the result of both the growth of sales and service revenues and
improvements in efficiency compared to the first quarter of 2002. This was
achieved by continuing to implement cost control policies and employing
the utmost attention to the selection of investments.
Investments in the first quarter of 2003 were in line with those of the
same period of the prior year.
The number of employees fell by 680 compared to December 31, 2002. The
reduction is due to 362 employees who terminated employment with the
company, 119 new employees hired (of which 68 refer to seafaring personnel
of Elettra), mobility among Telecom Italia Business Units -100 persons
(relating mainly to the transfer of resources from DW to the "Prevention,
Protection and Environment Services" Function operating in the sphere of
HR Operating Services) and the outsourcing of logistics activities
involving -337 persons.
[ ] INFORMATION ON OPERATIONS
The following table shows the main operating highlights for the first
quarter of 2003, compared to the first quarter of 2002 and the year 2002:
-------------------------------------------------------------------------------------------------------------
Operating data 3/31/2003 3/31/2002 12/31/2002
-------------------------------------------------------------------------------------------------------------
Fixed network connections (in thousands) 27,107 27,344 27,142
o of which ISDN 5,888 5,545 5,756
Annual increase in minutes of traffic on the fixed network (%) 3.5 8.7 2.4
o national traffic 2.9 8.0 1.8
o international traffic 17.6 29.9 17.9
-------------------------------------------------------------------------------------------------------------
- 26 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] Traffic and access
During the first quarter of 2003, three new cordless products were
marketed targeting the residential clientele. In addition, the new ADSL
Smart 1 Time rate plan was launched, based on consumption and directed at
the SOHO (Small Office Home Office) clientele. Another new feature of
broadband services was the production and marketing of small transmitters
that are capable of doubling the radio coverage of Smart Wireless (Access
Point).
With regard to services, the 400 service was enhanced by the introduction
of a new option that provides the name, surname and address of the caller
and a vocal acknowledgement of any unanswered calls. Furthermore the SMS
service was introduced through e-mails that can be sent in the form of a
text message (SMS).
[ ] Data business
During the first quarter of 2003, the main features in terms of
innovations to the product range involved data transmission networks for
companies and Internet access.
The main novelties in the range of web services include:
o launch of the My Server rate plan with regard to the marketing
of hardware configurations on which to apply co-location,
housing and hosting services, within Telecom Italia IDCs
(Internet Data Centers);
o enhancement of the dedicated range of hosting services, through
a technological upgrade of the configurations involved;
o the extension of the hosting and housing product range that can
also be applied to project solutions;
o enhancement of the range of services for Full Business Company
SAM (Corporate Messaging Services).
The new range of data transmission services includes:
o launch of the Broadband Everywhere project, which aims to extend
broadband coverage for companies;
o stipulation of a collaboration agreement with CISCO System;
o definition of special product-range profiles for the Public
Administration which led to the award of the bid for the Consip
agreement.
[ ] National wholesale
The development of Local Loop Unbundling continued. By the end of the
first quarter of 2003, other operators had connected more than 210,000
lines directly to their networks whereas, in the case of ADSL Wholesale,
approximately 290,000 lines had been acquired.
From the commercial point of view, new rate plans were introduced to the
market, including:
o metroGiganet, which enhances and completes the wholesale rate
plan for carrier services on lambda fiber optic cables. The
metropolitan version of the service makes it possible to extend
the advantages of economy, flexibility and reliability, already
offered by Giganet for long distance, to urban areas.
o Single Access ADSL Wholesale flat is a service directed at
operators who want to develop fast access services to data
networks and the Internet to be supplied to their customers by
using the Telecom Italia access network and ADSL technology.
[ ] International wholesale
With regard to international wholesale services, the first quarter of 2003
shows steady growth in volumes of Telephony services, equal to +18%
compared to the first quarter of 2002. This was achieved thanks to
interconnection with new international carriers, to greater traffic by
Italian OLOs (Other Licensed Operators) on the domestic market and to the
competitiveness of the Telecom Italia product range.
With regard to IP and Data transmission services, activity focused on the
sales of innovative international connectivity services, in line with the
trend of development of the market, both in the wholesale and retail
segments, with reference to Italian multinational companies.
- 27 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] National network
With regard to the national network, the first quarter of 2003 was marked
by the installation of the first six ODXC junctions of the Fiber Optic
Backbone (two in Rome and one each in Florence, Pisa, Bologna and
Piacenza)
[ ] International network
As far as the international network is concerned, during the first quarter
of 2003, work continued to develop regional cross-border networks in
Europe, the Mediterranean and Latin America. In particular, in Europe, the
first phase of building the fiber-optic metropolitan links (city rings)
was completed in Paris and London. This will make it possible to extend
the range of IP and data transmission services through a more widespread
presence in the main telehouses.
[ ] EVENTS SUBSEQUENT TO MARCH 31, 2003
In April, Telecom Italia announced that it had further boosted the
development of its broadband network by activating 1,600 new HDSL
exchanges which, in addition to the 2,100 already in operation, will allow
91% of the companies operating nationwide to benefit from the advantages
of connection to a broadband network, including the new "E-vidence"
service for "remote surveillance".
- 28 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
MOBILE
o Growth of revenues and improvement in profitability margins
o Confirmation of leadership on the domestic market
o Significant reduction in net financial indebtedness
o April 7, 2003: alliance between TIM, Telefonica Moviles and
T-Mobile International
[ ] THE BUSINESS UNIT
The Mobile Services Business Unit (TIM group) operates in the sector of
national and international mobile telecommunications. Its international
presence is concentrated in South America and in the Mediterranean Basin.
[ ] THE STRUCTURE OF THE BUSINESS UNIT
The Business Unit is organized as follows:
------------------------------------------------------------------------------------------------------------------------------------
Mobile
------------------------------------------------------------------------------------------------------------------------------------
----------------------- -------------------------------------------------------------------------------- -------------------------
National Subsidiaries International Subsidiaries Affiliated companies
----------------------- -------------------------------------- ---------------------------------------- -------------------------
TIM - Telecom Italia Mobile South America Other Subsidiaries IS TIM T.H.A.S.
Mobile S.p.A. (Turkey)
-------------------------------------- ----------------------------------------
TIM International N.V.
-------------------------------------- ----------------------------------------
o TIM Brasil Group Stet Hellas Telecommunications S.A.
o Bitel Participacoes S.A.(Brazil) (Greece)
o Tele Nordeste Celular Group Telesoft Hellas S.A. (Greece)
Participacoes (Brazil)
o Tele Celular Sul Group
Participacoes (Brazil)
o Maxitel S.A. (Brazil)
o TIM Celular S.A .Brazil)
o TIMNet.com S.A. (Brazil)
o Starcel Ltda (Brazil)
o TIM Peru S.A.C.
o Corporacion Digitel C.A.
(Venezuela)
------------------------------------------------------------------------------------------------------------------------------------
[ ] MAJOR CORPORATE EVENTS/SCOPE OF CONSOLIDATION
On March 28, 2003, Stet Hellas acquired the entire stake in Telesoft
Hellas S.A., a company that develops software for telecommunications, from
IT Telecom S.p.A. (a Telecom Italia Group company), for euro 60,000. This
transaction did not have any significant economic or financial impact.
[ ] ECONOMIC AND FINANCIAL DATA
The following table shows the key results in the first quarter of 2003,
compared to the first quarter of 2002 and the year 2002.
--------------------------------------------------------------------------------------------------------
Change
1st Quarter 1st Quarter Year (a-b)
2003 2002 2002 ----------------
(in millions of euro) (a) (b) amount %
--------------------------------------------------------------------------------------------------------
Sales and service revenues 2,616 2,498 10,867 118 4.7
Gross operating profit 1,262 1,221 5,039 41 3.4
% on Revenues 48.2% 48.9% 46.4%
Operating income 897 831 3,358 66 7.9
% on Revenues 34.3% 33.3% 30.9%
Investments:
o industrial 171 264 1,715 (93) (35.2)
o differences on consolidation - - 196
Employees at period-end (number) (1) 18,913 17,124 18,702 211 1.1
--------------------------------------------------------------------------------------------------------
(1) The change in the number of employees has been calculated in reference to
the data at the end of 2002
- 29 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIALS.]
Gross operating profit
1st Quarter 1st Quarter
2002 2003
----------- -----------
1,221 1,262
Sales and service revenues amounted to euro 2,616 million, with an
increase of 4.7% compared to the first quarter of 2002. Excluding the
foreign exchange effect, revenues increased by 15.4%.
The gross operating profit was euro 1,262 million and shows an increase of
3.4% compared to the first quarter of 2002 (euro 1,221 million); excluding
the foreign exchange effect, the gross operating margin increased by 8.1%.
The increase in the gross operating margin can be attributed to the
positive performance of already-existing activities (in Italy, Greece, and
Brazilian companies operating in the field of TDMA technology), which
offset the higher costs of GSM start-up in Brazil. During the first
quarter of 2003, the gross operating margin represented 48.2% of total
revenues.
The operating income was euro 897 million and shows an increase of 7.9%
compared to the first quarter of 2002 (euro 831 million). The impact of
the foreign exchange effect is virtually nil at the level of operating
income.
Industrial investments amounted to euro 171 million, of which euro 60
million refers to intangible assets and euro 111 million to fixed assets.
Investments were mainly devoted to safeguarding the environment and
building up the network.
The number of employees increased by 211. The number was influenced by the
expansion reported by companies in South America which are in the start-up
phase.
[ ] ECONOMIC AND FINANCIAL DATA FOR MOBILE OPERATIONS IN SOUTH AMERICA
The following table shows the key economic and financial highlights of the
Mobile BU operations in Latin America, coordinated by Latin America
Operations (LAO).
----------------------------------------------------------------------------------------------------------
Change
1st Quarter 1st Quarter Year (a-b)
2003 2002 2002 -------------------
(in millions of euro) (a) (b) amount %
-----------------------------------------------------------------------------------------------------------
Sales and service revenues 292 389 1,298 (97) (24.9)
Gross operating profit 62 114 274 (52) (45.6)
% on Revenues 21.2% 29.3% 21.1%
Operating loss (23) (2) (98) (21) ooo
% on Revenues ooo ooo ooo
Investments:
o industrial 76 186 541 (110) (59.1)
o differences on consolidation
Employees at period-end (number) (1) 7,382 6,184 7,050 332 4.7
-----------------------------------------------------------------------------------------------------------
(1) The change in the number of employees has been calculated in reference to
the data at the end of 2002
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIALS.]
Gross operating profit
1st Quarter 1st Quarter
2002 2003
----------- -----------
114 62
During the first quarter of 2003, the operations of the Mobile
Business Unit in Latin America generated revenues of euro 292
million, with a reduction of 24.9% compared to the first quarter of
2002. This can be attributed exclusively to the decline in value of
the local currencies. Excluding the foreign exchange effect, revenues
would be approximately 135 million higher. The gross operating profit
amounted to euro 62 million.
Excluding the foreign exchange effect, gross operating profit would
be approximately euro 2 million higher; this increase reflects the
positive performance of on-going companies which succeeded in
offsetting the higher expenses deriving from the start-up of GSM
service in Brazil launched last October. The gross operating result
was a loss of euro 23 million.
Excluding the foreign exchange effect, the operating loss would show
a reduction of euro 31 million.
Industrial investments amounted to euro 76 million, of which euro 11
million refers to intangible assets and euro 65 million to fixed
assets.
- 30 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
The number of employees increased by 332 compared to December 31,
2002 following increases connected with start-up activities.
[ ] TELECOM ITALIA MOBILE S.p.A. (PARENT COMPANY)
Held by: Telecom Italia 54.82%, TI Finance 0.17%
The following table shows the key economic highlights for the first
quarter of 2003, compared to the first quarter of 2002 and the year of
2002.
----------------------------------------------------------------------------------------------------------
Change
1st Quarter 1st Quarter Year (a-b)
2003 2002 2002 -------------------
(in millions of euro) (a) (b) amount %
-----------------------------------------------------------------------------------------------------------
Sales and service revenues 2,149 1,972 9,022 177 9,0
-----------------------------------------------------------------------------------------------------------
Gross operating profit 1,136 1,056 4,404 80 7,6
-----------------------------------------------------------------------------------------------------------
Operating income 880 794 3,153 86 10,8
-----------------------------------------------------------------------------------------------------------
The increase in sales and service revenues was given a boost by the
positive performance of voice traffic (+5.3% compared to the same period
of the prior year) and value-added services (VAS), which, in the first
quarter of 2003, amounted to euro 233 million (+38.7% compared to the
first quarter of 2002).
During the first quarter of 2003, VAS revenues represented 11.1% of total
revenues from services, compared to 8.6% in the first quarter of 2002.
Revenues from sales of phones, fostered by a range of services that
requires hi-tech phones (for example, MMS), reported growth of more than
55%.
The gross operating profit shows an increase of 7.6%, compared to the same
quarter of the prior year, representing 52.9% of revenues.
The operating income rose by 10.8%; the improvement compared to the
increase in the gross operating profit is mainly due to lower provisions
and depreciation and amortization. In particular, the latter includes euro
30 million for the amortization of the UMTS licenses, compared to euro 42
million in the first quarter of 2002, when the period of the license had
not yet been reviewed by the Ministry of Communications. As a result of
the review, the period of UMTS licenses was extended from 15 to 20 years.
Activities in the first quarter of 2003:
The following table shows the key results in the first quarter of 2003,
compared to the first quarter of 2002 and the year 2002.
--------------------------------------------------------------------------------------------
TIM - operating highlights 3/31/2003 3/31/2002 12/31/2002
--------------------------------------------------------------------------------------------
TIM lines in Italy (thousands) 25,657 24,083 25,302
--------------------------------------------------------------------------------------------
Mobile traffic (millions of minutes) 8,943 8,766 36,432
--------------------------------------------------------------------------------------------
GSM penetration in Italy (% of population) 99.8 99.8 99.8
--------------------------------------------------------------------------------------------
E-TACS penetration in Italy (% of population) 97,9 98.0 98.0
--------------------------------------------------------------------------------------------
During the first quarter of 2003, TIM continued to develop innovative
services with the aim of building customer loyalty and offering users
greater incentives for using mobile phones. The most important initiatives
are commented as follows:
- the launch of ChiamaOra, a service which, if a TIM number is switched
off or cannot be reached, will inform the caller by SMS when the line
is available;
- the launch of TIMClick, a service which prints the photographs taken
with an MMS mobile phone or converts them to postcards and sends them
anywhere in the world.
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Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] EVENTS SUBSEQUENT TO MARCH 31, 2003
TIM, Telefonica Moviles and T-Mobile International join forces to create
an alliance
On April 7, 2003, TIM signed an agreement with Telefonica Moviles and
T-Mobile International to supply their customers with a single
high-quality range of products and services in the countries where the
three companies operate, in order to strengthen their competitive
capabilities on international markets.
One of the first results of the alliance, thanks to roaming agreements, is
that the partners will be able to develop new joint services for voice,
data transmission and mobile Internet, with the aim of acquiring new
customers, including private individuals, companies and multinational
companies interested in keeping the level of quality of services constant,
regardless of the country or operator involved.
The partnership, which will develop joint solutions, will unite the
technological and commercial forces of the three companies, thus
potentially creating the broadest customer base in the world, with
approximately 162 million customers in 25 countries in three continents.
The three companies are in contact with the relevant national and
Community authorities at this initial stage of the alliance.
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Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
SOUTH AMERICA
[ ] THE BUSINESS UNIT
The Latin America Operations Business Unit coordinates the activities of
the Group in Latin America.
In particular, since February 2003, Latin America Operations reports
directly to the head of the Mobile Business Unit for Mobile TLC and to the
Managing Director Carlo Buora for Wireless TLC.
LAO's structure is organized as follows:
LATIN AMERICA OPERATIONS
-------------------------------------------------------------------------------
Subsidiaries Affiliates
-------------------------------------------------------------------------------
o TIM Brasil Group o Entel Chile Group o Telecom Argentina Group
o TIM Peru S.A.C. o Entel Bolivia Group
o Corporacion Digitel C.A. o Telecom Italia America
(Venezuela) Latina
****
The following commentary provides the main information and presents the
key consolidated economic and financial highlights of the Entel Chile
group, the Entel Bolivia group, the company Telecom Italia America Latina
and the South America business segment of Telecom Italia.
The economic and financial highlights of the companies in the Tim Brasil
group, Tim Peru and Corporacion Digitel are described in the section
pertaining to the Mobile BU.
[ ] MAJOR CORPORATE EVENTS/SCOPE OF CONSOLIDATION
There were no significant changes in the scope of consolidation in the
first quarter of 2003; in January 2003, the Telecom Group sold the 28.57%
interest in GLB Servicos Interativos (Globocom) to TV Globo LTDA.
[ ] ECONOMIC AND FINANCIAL DATA
The following table shows the key results in the first quarter of 2003,
compared to the first quarter of 2002 and the year of 2002, restated for
purposes of comparison.
----------------------------------------------------------------------------------------------------------
Change
1st Quarter 1st Quarter Year (a-b)
2003 2002 2002 -------------------
(in millions of euro) (a) (b) amount %
-----------------------------------------------------------------------------------------------------------
Sales and service revenues 292 370 1.409 (78) (21.1)
Gross operating profit 102 127 450 (25) (19.7)
% on Revenues 34.9% 34.3% 31.9%
Operating income 37 46 146 (9) (19.6)
% on Revenues 12.7% 12.4% 10.4%
Investments:
o industrial 30 70 216 (40) (57.1)
o differences on consolidation - - -
Employees at period-end (number) (1) 5,412 5,793 5,461 (49) (0.9)
-----------------------------------------------------------------------------------------------------------
(1) The change in the number of employees has been calculated in reference to
the data at the end of 2002
- 33 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIALS.]
Gross operating profit
1st Quarter 1st Quarter
2002 2003
----------- -----------
127 102
Sales and service revenues amounted to euro 292 million, a reduction of
21.1% compared to the same period in 2002 (-euro 78 million). The decrease
can be attributed mainly to exchange rate fluctuations, which generated a
total impact of -euro 101 million (-euro 88 million for the Chilean peso
and -euro 13 million for the Bolivian boliviano). Excluding the foreign
exchange effect, growth would be euro 23 million, correlated to the
increased revenues of the Entel Chile group (+8.1% in local currency),
offset by a slight reduction of revenues in Bolivia (-0.8%) and the
suspension, with effect from April 1, 2002, of the contribution relative
to the management fee contract with Telecom Argentina.
The reduction of consolidated revenues was accompanied by a reduction in
the consumption of raw materials and outside services (-21.4%) and in
labor costs (-23.5%).
The gross operating profit shows a reduction of euro 25 million (-19.7%)
compared to the first quarter of 2002, excluding the foreign exchange
effect of euro 9 million. As a percentage of revenues, the gross operating
profit improved from 34.3% in the first quarter of 2002 to 34.9% in the
first quarter of 2003.
The operating income was affected by the above-mentioned phenomena and
shows a reduction of euro 9 million (-19.6%, with an exchange effect equal
to -euro 12 million). In terms of operating income, the ROS was equal to
12.7%, showing a slight increase compared to the first quarter of 2002
(12.4%).
Industrial investments showed a decreasing trend compared to the same
period in 2002, with a contraction of 57.1% which can be attributed to the
plans to rationalize expenditures in the main subsidiaries.
At March 31, 2003, the number of employees, equal to 5,412, showed a
reduction of 49 (-0.9%) compared to the number at December 31, 2002. This
was mainly due to the continuation of the measures to rationalize internal
resources begun in 2002 by the Entel Chile and Entel Bolivia groups (a
reduction, respectively, of -63 and -14 compared to the figure at December
31, 2002) and the increase of 30 employees reported by Telecom Italia
America Latina.
[ ] EVENTS SUBSEQUENT TO MARCH 31, 2003
Having obtained the necessary authorizations, on April 14, 2003, Telecom
Argentina, the company in which Telecom Italia and Telecom Italia
International hold a 13.97% stake through Nortel Inversora, and its
subsidiary, Telecom Personal, officially announced the intention to launch
an offer to purchase a portion of its financial debt for cash and to
effect a partial payment of the interest due.
The transactions described above constitute the beginning of the
restructuring of the financial debt of the Telecom Argentina Group.
- 34 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
****
In order to present an overall picture of Latin America Operations (LAO), the
following table shows the key economic and financial highlights of all the
companies operating in wireline and mobile telephone services in South America
in the first quarter of 2003, compared to the first quarter of 2002 and the
year of 2002, restated for purposes of comparison.
----------------------------------------------------------------------------------------------------------
Change
1st Quarter 1st Quarter Year (a-b)
2003 2002 2002 ------------------
(in millions of euro) (a) (b) amount %
----------------------------------------------------------------------------------------------------------
Sales and service revenues 584 758 2,706 (174) (23,0)
Gross operating profit 165 241 724 (76) (31,5)
% on Revenues 28,3% 31,8% 26,8%
Operating income 14 44 48 (30) (68,2)
% on Revenues 2,4% 5,8% 1,8%
Investments:
o industrial 106 257 757 (151) (58,8)
o differences on consolidation
Employees at period-end (number) (1) 12,794 11,977 12,511 283 2,3
----------------------------------------------------------------------------------------------------------
(1) The change in the number of employees has been calculated in reference to
the data at the end of 2002
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Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
INTERNET AND MEDIA
o Sharp increase in profitability: gross operating profit reaches 13.6%
(8.1% in the first quarter of 2002)
o Start of the spin-off of the Directories, Directory Assistance and
Business Information businesses directed to their subsequent
divestiture
[ ] THE BUSINESS UNIT
The Internet and Media Business Unit leads the field in telephone
publishing in Italy and is the second largest telephone publishing group
in the United Kingdom with a market share of 14%. In Directory Assistance,
the group operates the 89.24.24 Pronto Pagine Gialle 24-hour service in
Italy and has a market share of more than 30% in Germany. At the same
time, Seat Pagine Gialle also operates in the Internet sector (where it
promotes the development of all Internet services for residential
customers and small and medium-size companies: access, portals and web
services), in the marketing of office products and services (through the
Buffetti Group) and in the television sector with La7 and MTV Italia.
During the meeting held on April 1, 2003, the Board of Directors of Seat
Pagine Gialle approved the plan for the partial proportional spin-off of
the corporate complex consisting of the telephone publishing, Directory
Assistance and Business Information businesses to a newly formed company.
These activities are no longer regarded by Telecom Italia as being
strategic to the core business of the Group.
[ ] THE STRUCTURE OF THE BUSINESS UNIT
The Business Unit consists of the Seat Pagine Gialle group, which is
organized as follows (the table shows the main consolidated
companies/areas of consolidated operations):
-----------------------------------------------------------------------------------------------------------------------------------
Seat Pagine Gialle Group
-----------------------------------------------------------------------------------------------------------------------------------
Directory Office Products & Business
Directories Assistance Internet Services Information TV and Other
-----------------------------------------------------------------------------------------------------------------------------------
o Seat Pagine Gialle - o Telegate Group o Seat Pagine o Buffetti Group o Consodata Group o Holding Media e
Directories Italia o Seat Pagine Gialle - Gialle - Tin.it o CIPI o Pan-Adress Comunicazione
Division Directory Assistance o Matrix o NetCreations Group
o TDL Infomedia Group Division
- Thomson Directories
[ ] MAJOR CORPORATE EVENTS/SCOPE OF CONSOLIDATION
As described above, on April 1, 2003, the Board of Directors of Seat
Pagine Gialle approved the plan for the partial proportional spin-off of
Seat Pagine Gialle S.p.A. (the "spun-off" company) to a newly formed
company (the "beneficiary" company), on the basis of the balance sheet
data of the spun-off company at December 31, 2002. If the plan is approved
by the shareholders of Seat Pagine Gialle, the beneficiary company will
receive the corporate complex principally composed of the following
business segments: Directories (consisting of the Italian operations in
telephone publishing and the stakes held in TDL Infomedia and Thomson),
Directory Assistance (89.24.24 Pronto Pagine Gialle and Telegate) and
Business Information (Consodata group). The spun-off company will take the
new name of Telecom Italia Media whereas the beneficiary company will take
the name of Seat Pagine Gialle. On the basis of the plan of spin-off, when
the transaction becomes effective, the shareholders of Seat Pagine Gialle
will be assigned, for every 40 ordinary (savings) held:
- 29 new ordinary (savings) shares of the beneficiary company, Seat
Pagine Gialle
- 11 new ordinary (savings) shares of the spun-off company, Telecom
Italia Media
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Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] ECONOMIC AND FINANCIAL DATA
The following table shows the key highlights of the first quarter of 2003,
compared to the first quarter of 2002 and the year 2002.
------------------------------------------------------------------------------------------------------------
Change
1st Quarter 1st Quarter Year (a-b)
2003 2002 2002 --------------------
(in millions of euro) (a) (b) amount %
------------------------------------------------------------------------------------------------------------
Sales and services revenues 345 333 1,991 12 3.6
Gross operating profit 47 27 593 20 74.1
% of revenues 13.6% 8.1% 29.8%
Operating income (loss) (35) (69) 232 34
% of revenues - - 11.7%
Investments:
o industrial 20 14 81 6 42.9
o differences on consolidation 21 - 40 21 (degree)
Employees at period-end (number) (1) 7,559 8,740 7,715 (156) (2.0)
------------------------------------------------------------------------------------------------------------
(1) The change in the number of employees has been calculated in reference to
the data at the end of 2002
In an economic context that was still extremely difficult, the
consolidated revenues of the first quarter of 2003 of the Seat Group
increased by 3.6% compared to the same period of the prior year, thanks,
in particular, to the positive performance of Internet services and
revenue growth of 2.1% from the Directories business.
The gross operating profit increased significantly, from euro 27 million
in the first quarter of 2002 to euro 47 million in the first quarter of
2003, thanks to improvements in almost all areas of business and, in
particular, in the areas of the Internet, Directories and Television.
The operating result improved considerably, from the loss of euro 69
million in the first quarter of 2002 to a loss of euro 35 million in the
first quarter of 2003, thanks partly to the reduction of adjusting
provisions resulting from a more effective management of credit.
Industrial investments made in the first quarter of 2003 amounted to a
total of euro 20 million, with an increase of euro 6 million compared to
the same period of the prior year.
At March 31, 2003 , the number of employees was 7,559 (7,715 at December
31, 2002).
[ ] INFORMATION ON OPERATIONS
- During the first quarter, in addition to continuing to improve
efficiency, Seat Pagine Gialle strengthened its presence on the
markets in which it operates thanks to a dynamic sales strategy
and to its portfolio of highly acclaimed trademarks. In
particular, it continued to publish the new editions of
PagineGialle(R)and PagineBianche(R), which began last year in
October with the Rome editions and which is scheduled for
completion in October of the current year.
- 37 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] SEAT PAGINE GIALLE S.p.A.
Held by: Telecom Italia 53.21%, TI Finance 2.03%, IT Telecom 0.02%
The company operates in the sectors of telephone publishing and the
Internet.
The table shows the economic highlights for the first quarter of 2003,
compared to the first quarter of 2002 and the year 2002:
------------------------------------------------------------------------------------------------------------
Change
1st Quarter 1st Quarter Year (a-b)
2003 2002 2002 --------------------
(in millions of euro) (a) (b) amount %
------------------------------------------------------------------------------------------------------------
Sales and service revenues 175 141 1,152 34 24.1
------------------------------------------------------------------------------------------------------------
Gross operating profit 50 39 545 11 28.2
------------------------------------------------------------------------------------------------------------
Operating income (loss) 4 (17) 348 21 (degree)
------------------------------------------------------------------------------------------------------------
During the first quarter of 2003, Seat Pagine Gialle S.p.A. reported an
increase in revenues of 24.1%, from euro 141 million in the first quarter
of 2002 to euro 175 million in the first quarter of 2003.
Despite the fact that the recession in the Italian advertising market
continued during the early months of 2003, revenues from the Italian
Directories business increased by 2.8% (on a comparable consolidation
basis) reaching euro 117 million, thanks to product innovations recently
introduced, the efforts of the commercial network and measures implemented
to encourage customer loyalty and counter the negative economic situation.
The considerable increase in the revenues of Tin.it, due to the increase
in access revenues, the introduction of Decade 7 (full title to the phone
charges), and the series of measures to rationalize activities gave a
significant boost both to the gross operating profit which, during the
first quarter of 2003, reached euro 50 million, compared to euro 39
million in the first quarter of 2002, and the operating income of euro 4
million, compared to an operating loss of euro 17 million in the first
quarter of 2002.
- 38 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
INFORMATION TECHNOLOGY MARKET
o Acquisition of important new bids
o Continuation of measures to improve efficiency and reduce costs
[ ] INTRODUCTION
The Information Technology Market Business Unit is responsible for
organizing the IT activities and companies of the Group which provide
information technology solutions and services for the external market.
In line with its main competitors and the evolution of the market, the BU
is organized into three main areas of business - Government, Finance and
Enterprise - with separate departments to deal with commercial matters on
the one hand, and the development and delivery of solutions on the other.
The product range of the ITM BU is organized as a matrix: vertical markets
and cross-market components. Its product range covers the whole ICT chain
of value and is based upon a knowledge of the markets, organizations and
their processes, and the integration of market platforms.
The main technological and commercial partnerships of the BU are the top
platform producers worldwide: Microsoft, SAP, Oracle, FileNET and TIBCO.
Due to the macro-economic situation, as in the first quarter of 2002, the
first quarter of 2003 was marked by a stagnation of the IT services market
and drastic price adjustments with regard to top customers, as well as by
the acquisition of new orders and new customers at lower prices than in
the past. Meanwhile, action continued to improve overall efficiency and to
reduce costs, particularly with reference to Finsiel S.p.A. and the main
subsidiaries.
[ ] THE STRUCTURE OF THE BUSINESS UNIT
With effect from January 1,2003, the Business Unit is organized as
follows:
Information Technology Market
Major subsidiaries
Finsiel: Group
Finsiel S.p.A.
Banksiel S.p.A.
Insiel S.p.A.
Tele Sistemi Ferroviari S.p.A.
Webegg Group:
Webegg S.p.A.
Software Factory S.p.A.
Teleap S.p.A.
Netikos: Group
Netikos S.p.A.
Eustema S.p.A.
[ ] MAJOR CORPORATE EVENTS/SCOPE OF CONSOLIDATION
The following major corporate events and changes in the scope of
consolidation took place during the first quarter:
- beginning January 1, 2003, the Netikos group (including Netikos
S.p.A. and Netikos Finland Oy), the Webegg group (including Webegg
S.p.A., Domus Academy S.p.A, @Live S.p.A., Winner Project B.V.,
Software Factory S.p.A. and Telemedia Applicazioni S.p.A.), and
Eustema S.p.A, previously consolidated by the IT Group, became part
of the IT Market business unit.
- in 2002, moreover, companies that exited the scope of consolidation,
because of their sale, included Sogei S.p.A. (consolidated for the
first six months of 2002) and Consiel S.p.A. (consolidated for the
first eight months of 2002).
- 39 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] ECONOMIC AND FINANCIAL DATA
The table shows the key highlights for the first quarter of 2003, compared
to the first quarter of 2002 and the year 2002, restated for purposes of
comparison. In particular, for purposes of a more meaningful analysis, the
following should be noted:
- 1st Quarter 2003 (Column 1) refers to the current scope of
consolidation of the IT Market BU.
- 1st Quarter 2002 (Column 2) includes data for Sogei S.p.A. and
Consiel S.p.A., as well as data for the Netikos group and Eustema;
the Webegg group is not included in the scope of consolidation since
the Telecom Italia Group acquired the stake in the company after the
first quarter of 2002.
- 1st Quarter 2002 (Column 3) has been restated by excluding data
relating to Sogei S.p.A. and Consiel S.p.A.; the figures include the
Webegg group, the Netikos group and Eustema.
- 2002 (Column 4) includes the Finsiel group, economic data of Sogei
for the first six months of the year and economic figures for Consiel
for the first eight months of the year, the Netikos group, the Webegg
group (for the last six months of 2002, since Telecom Italia acquired
the stake in the company at the end of June 2002) and Eustema S.p.A..
-----------------------------------------------------------------------------------------------------------------------------
1st Quarter 1st Quarter 1st Quarter Year Change
2003 2002 2002 2002 (a - b)
(1) (2) (3) (4) ----------------------
(millions of euro) (a) (b) amount %
-----------------------------------------------------------------------------------------------------------------------------
Sales and service revenues 156 278 188 994 (32) (17.0)
Gross operating profit 10 33 22 111 (12) (54.5)
% on Revenues 6.4% 11.9% 11.7% 11.2%
Operating income 0 25 14 61 (14)
% on Revenues 9.0% 7.4% 6.1%
Investments:
o industrial 6 5 5 38 1 20.0
o differences on consolidation
Employees at period-end (number) (*) 5,478 6,689 5,819 5,506 (28) (0.5)
-----------------------------------------------------------------------------------------------------------------------------
(*)The change in the number of employees has been calculated in reference to
the data at the end of 2002
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIALS.]
Gross operating profit
1st Quarter 1st Quarter
2002 2003
----------- -----------
22 10
Sales and service revenues decreased by euro 32 million compared to the
same period of the prior year on a comparable consolidation basis. This
can mainly be attributed to the reduction in the revenues of Finsiel,
resulting from lower volumes and the generalized reduction in prices
charged to the main customers, and to a contraction in the revenues of the
Webegg group and, to a lesser extent, of Banksiel. This contraction was
offset by an increase from the rise in the activities of Eustema and Eis,
and the effect of the contributions made by Agrisian.
The gross operating profit and the operating income decreased as a result
of the above-mentioned reduction in prices with regard to the main
customers, and can principally be attributed to Finsiel.
Industrial investments, which can mainly be ascribed to Tele Sistemi
Ferroviari, Finsiel and Insiel, showed an increase of euro 1 million.
At March 31, 2003, the number of employees presented a reduction of 28
compared to the number at December 31, 2002.
[ ] INFORMATION ON OPERATIONS
During the first quarter of 2003, the range of services of the BU was
rationalized through an organizational structure focusing on the vertical
markets (government, finance and enterprises). Numerous contracts were
acquired, including the following:
Finsiel:
- Finsiel won the bid to develop and manage the new Information System
for the Ministry of Education in full outsourcing for five years. The
consortium of companies to which Finsiel belongs will design an
information system which will be disseminated to teachers, families
and students who will be able to interact with the system wherever
they are, at school or at home;
- 40 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
- Finsiel also won the bid for an Information System for Health Care
and Social Services and a Regional Services Card for the Lombardy
Region under a seven-year contract, which involves the design of a
network incorporating all the facilities and operators of health care
and social services, as well as new services which the public can
access through a Regional Health Care Card. Following the award of
the bid, in February, Finsiel acquired a minority stake in LISIT
S.p.A.;
- the Ministry of Health has entrusted Finsiel with the operation of
the information system of the National Transplant Center, which
Finsiel has been involved in developing over the last three years;
- the bid for the whole project to create the portal for Italy's
six-month Presidency of the European Union was won by Finsiel as the
head of a consortium of companies which brings together the top
expertise in the sphere of portals for the public;
- Finsiel won the bid launched by the Emilia Romagna Regional Authority
to create applications software for a doctors' network of general
practitioners and pediatricians operating under the socialized health
care scheme;
- in a consortium with the company Engineering, Finsiel won the Consip
bid for the development and maintenance of the Personnel Treasure
Service;
- within the sphere of the Enterprise area, Finsiel acquired the
customer SEA with a contract to manage accounting systems on the SAP
platform.
Other companies:
- on January 30, 2003, along with Ferrovie dello Stato S.p.A.,
Trenitalia S.p.A., Rete Ferroviaria Italiana S.p.A. and Metropolis
S.p.A., Tele Sistemi Ferroviari signed the new outsourcing contracts
which replace the prior outsourcing contract with the companies of
Italian State railways;
- in January 2003, Tele Sistemi Ferroviari won the bid announced by the
Autonomous Province of Trento to supply an electronic ticketing
system for local transport, along with an information system about
local transport for public consultation;
- in January 2003, the "BILTEC" project being conducted by Banksiel and
Finsiel is continuing successfully in the area of Economy for Banca
d'Italia. An application has been created which makes it possible to
determine the accruals in respect of termination pay for the
employees of Banca d'Italia and UIC.
- 41 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
INFORMATION TECHNOLOGY GROUP
o Start-up of operations of the new IT Telecom S.p.A.
[ ] THE OPERATING ACTIVITY
The Information Technology Group Operating Activity is responsible for
organizing technological innovation and service information technology
activities within the Telecom Italia Group. This new operating activity,
which came about as the result of merging five previous corporate
structures, operates with a greater focus on the core business of TLC,
pursuing objectives that will augment efficiency, improve quality and
stimulate innovation. The consequent reduction of the disparate nature of
architectural and infrastructure solutions, which was achieved through a
process of rationalization and standardization, aims to implement
economies of scale and improve performance. At the same time, it is hoped
that the move will strengthen the operational tools and make the best
possible use of existing professional skills.
[ ] THE STRUCTURE OF THE OPERATING ACTIVITY
The Operating Activity is responsible for the companies dedicated to the
Group's information systems within the framework of the plan to integrate
the various companies involved.
------------------------------------
Information Technology
Group
------------------------------------
IT Telecom Group - IT Telecom S.p.A.
- Sodalia North America Inc
- Teco Soft Argentina SA
- Telesoft Russia ZAO
Epiclink S.p.A.
------------------------------------
The Operating Activity is organized as follows:
---------------------------------------------------------------------------------------
| | | | | |
| | | | | |
IT IT Operations Business OSS & VAS Corporate Operational
Architectures & Support Solutions Solutions Planning &
Infrastructures System Client
Management
The new operating activity is organized into six production divisions:
IT Architectures - design and creation of applications and infrastructure
architectures, ensuring the rationalization and standardization;
IT Operations and Infrastructures - design and management of the IT
infrastructures required for running Group systems and applications and
the delivery of investment-based services for the market; the running of
IT systems and solutions;
Business Support System - design and development, for the business
segment, of the IT systems, solutions and applications for the BUs of the
Group;
OSS and VAS Solutions - design, development and maintenance, for the
network segment, of the IT systems, solutions and applications for the BUs
of the Group; development and system integration of hi-tech IT solutions
with high added value, supplying technological support to the BUs of the
Group in the development of innovative services;
Corporate Solutions - design and development of the IT systems, solutions
and applications required for supervising the transversal processes of the
Business Units;
Operational Planning and Client Management - coordination and support for
the operative functions responsible for planning, staffing, operational
control and the monitoring of the main projects; preparation of the
systems plan.
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Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] MAJOR CORPORATE EVENTS/SCOPE OF CONSOLIDATION
On January 1, 2003 the new operating activity IT Telecom S.p.A. became
operational. The company was the result of the merger by incorporation of
Netsiel S.p.A., Saritel S.p.A., Sodalia S.p.A. and Telesoft S.p.A., the
accounting activities of which have been transferred to the Administrative
Services Center of the Group.
The following major corporate events and changes in the scope of
consolidation took place during the first quarter of 2003:
- with effect from January 1, 2003, the Netikos group, the Webegg
group, the TI Lab group, Loquendo and Eustema are no longer included
in the scope of consolidation of the Group's IT operational
activities. The TILab group became part of Other Activities, Loquendo
is now in Domestic Wireline, while the other companies were taken
into the IT Market business unit. The 2002 figures have been restated
for purposes of comparison;
- in February 2003, Telecom Italia and Hewlett-Packard reached an
agreement in the area of Management Services & Outsourcing for a
total value of euro 225 million. Under the terms of this agreement,
HP will supply asset management, help desk, maintenance and
workstation management, while IT Telecom will manage HP Italia's
operational activities in the SAP environment, housing the systems in
its Data Centers. On April 16, 2003, the agreement became operational
and, on the same date, the contract was finalized for the sale of IT
Telecom's Desktop Management services business segment to HP DCS
(Distributed Computing Services);
- on March 28, 2003, the subsidiary Telesoft Hellas was sold to STET
Hellas;
- TecoSoft Espana (formerly a wholly-owned subsidiary of Telesoft
S.p.A.) was sold on July 31, 2002; the figures for the first quarter
of 2002 also include the results of this company;
- on January 1, 2003, Epiclink S.p.A. was included in the scope of
consolidation although still controlled by Telecom Italia S.p.A., it
is managed by the IT Group BU.
[ ] ECONOMIC AND FINANCIAL DATA
The following table shows the key results in the first quarter of 2003,
compared to the first quarter of 2002 and the year 2002, restated for
purposes of comparison.
------------------------------------------------------------------------------------------------------------
Change
1st Quarter 1st Quarter Year (a-b)
2003 2002 2002 --------------------
(in millions of euro) (a) (b) amount %
------------------------------------------------------------------------------------------------------------
Sales and service revenues 229 168 996 61 36.3%
Gross operating profit 11 11 98 -
% on Revenues 4.8% 6.5% 9.8%
Operating loss (23) (12) (40) (11) (91.7%)
% on Revenues (degree) (degree) (degree)
Investments:
o industrial 12 7 149 5 71.4%
o differences on consolidation 24
Employees at period-end (number) (1) 5,059 5,141 5,039 20 0.4%
------------------------------------------------------------------------------------------------------------
(1) The change in the number of employees has been calculated in reference to
the data at the end of 2002
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIALS.]
Gross operating profit
1st Quarter 1st Quarter
2002 2003
----------- -----------
11 11
Consolidated revenues showed an increase of euro 61 million compared to
the first quarter of 2002, associated with higher volumes of work on
business systems, operational systems and institutional projects, as well
as the conclusion of some projects which were still in progress at
December 31, 2002, namely projects for the Domestic Wireline segment of
Telecom Italia on Broadband, UNICA TD and Order Manager.
The gross operating profit, which remained unchanged in absolute terms,
and the operating loss reflect the fall in prices which took place in the
second half of 2002 and the increase in depreciation as a result of higher
investments in infrastructure activities, mainly in the second half of
2002.
Investments were higher than in the same period of the prior year on
account of the continuation of infrastructure projects begun in 2002.
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Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] INFORMATION ON OPERATIONS
During the first quarter of 2003, attention was focused on the development
and design of systems. In particular, work continued on the CRM - Customer
Relation Manager - of residential and business customers, (management of
sales channels, marketing of service plans and invoicing), USAGE
Collection (data traffic management), DWH - Data WareHouse - Market
(supplying a univocal view, certified by the size of data on traffic and
an analysis of the behavior of Telecom Italia's clientele), Service
Assurance of business customers and Order Management (management of the
Alice range of services for residential customers and the range of
services for the business clientele).
Other activities included the Centralized Control Room which, since it
became operational in December 2002, has undertaken the monitoring of
external systems and CRM Residential and Business solutions, and Data
Center Consolidation for which the consolidation of the main frame
environments has been completed. Furthermore, the operating plan for
implementing business continuity is nearing completion.
The task of renovating or replacing local networks and geographical
connections on Group premises has begun, with the implementation of
solutions which ensure the necessary level of security with regard to
communications.
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Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
OTHER ACTIVITIES
The "Other Activities" of the Telecom Italia Group are principally constituted
by the TI Lab Operating Activity, the "Real Estate and General Services"
Operating Activity, by the companies formerly in the ex-International
Operations which, following the reorganization of international activities,
were transferred to the Foreign Holdings Function, by subsidiaries which supply
support activities to the Group and by the affiliated company Stream.
TELECOM ITALIA LAB
o Creation of a new Operating Activity to promote Group innovation
[ ] THE OPERATING ACTIVITY
The Telecom Italia Lab Operating Activity was conceived in the first
months of 2003 as a result of the rationalization of activities which
formerly came under the Information Technology Group Business Unit.
The Operating Activity is responsible for supervising the
technological innovation of the Telecom Italia Group, in the sector
of networks and innovative services.
Today, in keeping with this focus, the activity of Telecom Italia
Lab, which is the Telecom Italia Group's center of excellence, is
chiefly oriented towards providing support to the BUs of the Group by
offering a competitive edge, and, at the same time, pursuing the
objective of improving quality and efficiency and promoting
innovation.
[ ] THE STRUCTURE OF THE OPERATING ACTIVITY
The Operating Activity is organized as follows:
----------------------------------------
TI LAB
----------------------------------------
Telecom Italia - TI Lab business segment
Telsy S.p.A.
The Operating Activity operates with the following organization:
---------------------------------------------------
| | | |
| | | |
Innovation Service Network Security
Delivery Innovation Innovation
Innovation Delivery is for short-term, goal-oriented research
activities geared essentially to the Business Units of the Telecom
Italia Group.
Service Innovation and Network Innovation are devoted to medium- and
long-term research projects with a focus on infrastructures and on
the creation of services and the testing of prototypes through
innovative platforms, partly in synergy with Pirelli Labs.
[ ] MAJOR CORPORATE EVENTS/SCOPE OF CONSOLIDATION
The following major corporate events took place during the first
quarter of 2003:
o merger by incorporation of TI Lab S.p.A. in Telecom Italia
S.p.A, voted by the respective Extraordinary Shareholders'
Meetings on December 12, and December 13, 2002, effective
for civil and tax purposes on January 1, 2003.
o functional repositioning of the company Loquendo S.p.A. in
Domestic Wireline.
o transfer of the Venture Capital business and, consequently,
the portfolio of equity investments held in TI LAB S.A., TI
LAB B.V. and TI LAB GPL, to the Mergers & Acquisitions
Function of Telecom Italia.
[ ] ECONOMIC AND FINANCIAL DATA
The following table shows the key results in the first quarter of
2003, compared to the first quarter of 2002 and the year 2002,
restated for purposes of comparison.
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Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
-----------------------------------------------------------------------------------------------------------
Change
1st Quarter 1st Quarter Year (a-b)
2003 2002 2002 -------------------
(in millions of euro) (a) (b) amount %
-----------------------------------------------------------------------------------------------------------
Sales and service revenues 34 23 155 11 47.8
Gross operating profit (loss) 7 (9) 31 16
% on Revenues 20.6% (degree) 20.0%
Operating income (loss) 2 (14) 9 16
% on Revenues 5.9% (degree) 5.8%
Investments:
o industrial 1 1 13 -
o differences on consolidation - - -
Employees at period-end (number) (1) 1,201 1,250 1,224 (23) (1,9)
-----------------------------------------------------------------------------------------------------------
(1) The change in the number of employees has been calculated in reference to
the data at the end of 2002
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIALS.]
Gross operating profit
1st Quarter 1st Quarter
2002 2003
----------- -----------
(9) 7
Revenues increased by approximately euro 11 million, already in the first
quarter of 2003, both as a result of revenues from subscription fees
charged for access to technological resources, which support the Group's
medium- and long-term research, and higher sales and service revenues from
DW, TIM and IT Telecom.
The gross operating profit and the operating income improved as a result
of the growth in revenues, the increase in grants for research distributed
by national and international organizations, and a lower consumption of
raw materials and outside services due to the policy to reduce costs
pursued in 2003.
Industrial investments remained in line with those of the prior year.
At March 31, 2003, the number of employees was 23 lower than the number at
December 31, 2002.
[ ] INFORMATION ON OPERATIONS
The previously-described merger of TI Lab in Telecom Italia was directed
to a broader reorganization of TI Lab's activities, mainly carried out
with a view to orienting them even more to serving the needs of the
Business Units and companies in the Telecom Italia Group, with which a
technological partnership relationship is gradually being built.
In this context, TI Lab's role as a driver of innovation for the Group
produced significant results even in the first quarter of 2003, during
which R&D activities, conducted in cooperation with Pirelli Labs, involved
the following main reference contexts/environments:
- Use environment and terminals;
- Services and applications
- Control of network protocols and equipment
- Network: access, metro and core
- Management and operating processes of the BUs
In such contexts, the research projects and those destined for the
Business Units of the Group are based on three main research programs:
- Network innovation
- Mobile services
- Broadband services
Within this framework, about 40 medium- and long-term projects have been
agreed with the BUs of the Telecom Italia Group (lasting between one and
three years) as well as more than 100 short- and medium-term projects and
activities. The latter include activities relating to VAS, SMS, MMS and
TELCO capabilities in the sphere of mobile and access services and
Broadband services (in terms of modes of access, content and ways of
protecting content, testing proposals for DTT), as well as intelligent
networks in the wireline environment.
- 46 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
The most significant activities started in the sphere of research include
the following projects: StarSip, Multi Access-Mobile Networking,
MultiService IP Control, New Telephony, MultiServices IP Access&Metro,
NextBox, Access Gateway, GUITAR, Management of QoS radio resources in
mobile networks, Next Generation IP Optical Network, Models of
multi-service traffic and the development of mobile design methodologies,
Radio Over Fiber and Enhanced USIM. During the first quarter of 2003,
significant results were achieved as follows:
- in testing, at two TI LAB sites of data-recovery services using
fiber-optic connections with a storage services center;
- in the launch, with 130 voluntary users, of trials for services
and equipment for Home Networking in order to assess hi-tech
solutions for user environments (terminals, domestic cabling and
applications platforms).
It is worth emphasizing that, compared to 2002, there was an increase in
the number of research activities conducted in collaboration with Pirelli
Labs. Now, in 2003, there are 14 joint projects in progress involving more
than 100 TI LAB employees. During the first months of 2003, these joint
projects generated the following important achievements:
- launch of testing of the Access Gateway
- testing of the first ROF module
- updating of 3G planning tools for the study of the applications
of cryogenic receivers and the size of the network
The following projects also deserve a mention:
- the start of Vendor Management activities which, during the
course of the year, will lead to the creation of a common
database within the Group providing information about the main
vendors and alternatives for the various sectors of the network;
- the definition (still being completed) of a development program
with ITALTEL and DW of the StarSip platform for the delivery of
integrated voice and data services on the network.
[ ] REAL ESTATE AND GENERAL SERVICES
With effect from February 2003, the real estate activities and general
services previously managed by the Real Estate and General Services
Operating Activity, became part of the Central Functions, ensuring
continuity in the role of interface among the various corporate
Functions/Business Units in order to meet the requirements of real estate
and general services.
In particular, the above-mentioned activities and services concern the
planning of the sites and locations of the Group, the design and
construction of civil works, the maintenance of the properties and
technological plant, in addition to providing real estate and general
services, both through internal structures - essentially for the
activities conducted on behalf of the Business Units and Functions of the
Telecom Italia Group - and through the subsidiary Emsa Servizi S.p.A.,
which, for the most part, gears its activities towards the other companies
in the Group.
The following table shows the key highlights for the first quarter of
2003, compared to the first quarter of 2002 and the year 2002. The figures
take into account the exchanges among the functions of Telecom Italia
S.p.A..
-----------------------------------------------------------------------------------------------------------
Change
1st Quarter 1st Quarter Year (a-b)
2003 2002 2002 -------------------
(in millions of euro) (a) (b) amount %
-----------------------------------------------------------------------------------------------------------
Sales and service revenues 166 204 846 (38) (18.6)
Operating costs (163) (188) (758) (25) (13.3)
Gross operating profit 3 16 88 (13) (81.3)
% on Revenues 1.8% 7.8% 10.4%
Operating loss (38) (34) (92) (4) (11.8)
-----------------------------------------------------------------------------------------------------------
Compared to the first quarter of 2002, revenues decreased by euro 38
million. This can be attributed mainly to the continuation of
rationalization activities involving the premises occupied by customers
and the change in pricing policies for some of the services supplied.
- 47 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
Operating costs were euro 163 million during the first quarter of 2003 and
benefited from a contraction of euro 25 million compared to the same
period of the prior year thanks to far-reaching measures to contain the
costs of materials and services and labor costs, which were partly offset
by the higher cost of rent expenses resulting from the sale of real estate
properties associated with Progetto Tiglio, within the framework of the
policy of leveraging the real estate assets of the Group. Consequently,
the gross operating profit, equal to euro 3 million, decreased by euro 13
million compared to the first quarter of 2002. The operating loss was euro
38 million (an operating loss of euro 34 million in the same period of
2002).
Furthermore, during the first quarter of 2003, work continued on the
projects mentioned below:
PROGETTO ORTENSIA
On March 4, 2003 Telecom Italia and the other shareholders of Tiglio I
(MSMC Italy Holding BV, Olivetti, Seat Pagine Gialle and Pirelli) and
Tiglio II (POPOY Holding B.V.), formalized a binding agreement with the
company Marzotto and Pirelli & C. Real Estate relating to the development
of the company known as Ortensia within the framework of the project
Tiglio Aree.
This project involves the transfer (through a spin-off) of the land owned
by Tiglio I and Tiglio II to a vehicle company, Ortensia S.r.l., which
owns land (following the contribution of a business segment), from the
Marzotto Group, according to the terms of the preliminary agreement
formalized on December 23, 2002.
As a result of the transactions described above, which must be completed
by June 30 of the current year, Telecom Italia will own 27.6% of the share
capital of Ortensia, in addition, at Group level, to the 1% stake that
will be held by Seat Pagine Gialle: the size of the investment is
commensurate with the value of the real estate assets transferred to
Ortensia.
PROGETTO DEDALO
At the end of January 2003, the procedures were completed for the early
purchase of 12 property units under financial leasing contracts (for about
300,000 m3) from Teleleasing S.p.A. that are used by Telecom Italia S.p.A.
and other Group companies. The deal, as far as the property belonging to
Telecom Italia S.p.A. is concerned, involved a total payment of some euro
263 million (some euro 369 million for the entire Group).
Negotiations are being held with operators in the sector with the aim of
selling these properties.
[ ] FOREIGN HOLDINGS
The central function Foreign Holdings, operating under the corporate control
structure, heads up the companies Telecom Italia International, the BBNed
group, and the affiliated companies Telekom Austria, Telekom Srbija, Etec S.A.
and Netco Redes. The function ensures the coordination, leveraging and
rationalization of the foreign holdings held by Telecom Italia operating in the
fixed and integrated fixed-mobile TLC business.
The following table shows the key results in the first quarter of 2003,
compared to the first quarter of 2002 and the year of 2002, restated for
purposes of comparison.
-----------------------------------------------------------------------------------------------------------
Change
1st Quarter 1st Quarter Year (a-b)
2003 2002 2002 -------------------
(in millions of euro) (a) (b) amount %
-----------------------------------------------------------------------------------------------------------
Sales and service revenues 9 98 214 (89) (90.8)
Gross operating loss (4) (25) (49) 21 (84.0)
-----------------------------------------------------------------------------------------------------------
The above data refers to the BBNed group and Telecom Italia International.
The first quarter of 2002 and the year of 2002 included, respectively,
three months and six months of the line-by-line consolidation of the
9Telecom group, which was sold in August 2002. The periods are therefore
not comparable.
As far as the principal corporate transactions are concerned, the
following can be said:
- 48 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
- On January 20, 2003, Telecom Italia International did not subscribe
to the share capital increase decided on December 16, 2002 by the
Shareholders' Meeting of the subsidiary Euskaltel, thus reducing its
stake in the company from 15.26% to 13.85%.
- Following the acceptance by Telecom Italia International of the Bona
Fide Offer made on December 28, 2002, a Share Purchase Agreement was
signed on February 20, 2003 by Telecom Italia International and PE
PTT Srbija for the sale of the entire stake held by Telecom Italia
International in Telekom Srbija, corresponding to 29% of the share
capital of the latter company, for a total price of euro 195 million.
The closing is scheduled to take place by the end of June 2003,
subsequent to the payment of a first installment of euro 120 million.
The share certificate - which represents all the shares and
corresponds to 29% of the share capital of Telekom Srbija held by
Telecom Italia International - was deposited with an escrow agent in
order to guarantee the payment by PE PTT Srbija of the whole sum
agreed by the two parties.
- 49 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
OTHER INFORMATION
THE REGULATORY FRAMEWORK
The new regulatory framework will be governed by new standards which will be
introduced to the national regulations by incorporating the EC directives
referred to in the "99 Review" relating to electronic communications networks
and services (directives on "Access", "Authorizations", "Framework", "Universal
Service", "Data Protection" and "Competition"). The new standards will be
included in the national regulatory framework by July 24, 2003. In this
connection, Law No. 166 of August 1, 2002 gave the Government a mandate to
implement the new directives and to adopt a code of legal and regulatory
measures in the field of TLC. Furthermore, the European Commission published
the Recommendation on relevant product and service markets in electronic
communications, as well as Guidelines for market analysis and the evaluation of
significant market power.
There follows a brief description of the main standards adopted during the
first quarter of 2003.
[ ] X-DSL SERVICES
In Resolution 06/03/CIR of April 15, 2003, the National Regulatory Agency
approved the new prices of Telecom Italia's range of wholesale x-DSL
services, that is, the intermediate services which operators must acquire
from Telecom Italia in order to supply ADSL to the public, unless they
have their own infrastructures or use unbundling. The new range of
services includes price reductions for ADSL access, the introduction of
longer time-scales for starting to market new wholesale services, the
specification of the factors used to define the price of wholesale
services based on the retail-minus principle, and the integration of an
operators' Service Level Agreement with regard to the disactivation of
services.
[ ] INTERCONNECTION AND LOCAL LOOP UNBUNDLING
On February 27, 2003, in Resolution 02/03/CIR, the National Regulatory
Agency approved the rates for the Interconnection Reference Rate Plan
(OIR) for 2002 which Telecom Italia will apply to competing operators for
the use of its network, together with criteria for changing the charges of
the OIR over the next four years (the so-called network cap).
[ ] MAXIMUM COSTS OF FIXED-MOBILE CALLS
In Resolution 47/03/CONS of February 5, 2003, the National Regulatory
Agency approved the new maximum costs, with effect from June 1, 2003, for
calls from a wireline phone to a mobile phone. The new prices include a
reduction of rates for termination and retention. With regard to the
latter component, the National Regulatory Agency has also ordered that it
should be included in the new basket of final services subjected to the
price-cap mechanism, which is currently being worked out.
[ ] NATIONAL FREQUENCY PLAN FOR DIGITAL TV
In Resolution 15/03/CONS of January 29, 2003, the National Regulatory
Agency approved the new national plan to assign frequencies for television
broadcasting using digital technology, in a way similar to that
established for frequencies using analog technology. According to the
plan, frequencies will be assigned for national and local networks on a
regional basis. The decision to keep similar structures for the analog and
digital plans will simplify the transition from analog to digital
technology for the holders of the licenses that have been issued.
[ ] NATIONAL PLAN FOR SHARING FREQUENCIES
In the Ministerial Decree approved on February 20, 2003, the Minister of
Communications approved changes to the previous plan by extending the use
of frequencies for Radio-Lan and Hiperlan systems to the public. Use of
such systems by the public will be regulated by a special set of
regulations which are currently being drawn up by the Ministry concerned.
[ ] GRANT FOR THE ACQUISITION OF TOP BOX SETS AND ADSL MODEMS
In the Resolution of March 14, 2003, the Ministry of Communications
implemented the measures contained in Article 89 of Law No. 289 (the 2003
Finance Bill) of December 27, 2002 and established the operational
procedures for receiving grants for the purchase of receivers for digital,
land-based television (euro 150) and broadband access to Internet (euro
75).
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Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
[ ] EVOLUTION OF THE EC REGULATORY FRAMEWORK
New directives have been published that are referred to in the "99
Review":
o Directive 2002/19/CE concerning access to electronic communications
networks and related resources, and interconnection of the said
networks (known as the "Access" directive );
o Directive 2002/20/CE concerning authorizations for electronic
communications networks and services (known as the "Authorizations"
directive);
o Directive 2002/21/CE which establishes a common regulatory framework
for electronic communications networks and services (known as the
"Framework" directive);
o Directive 2002/22/CE concerning the universal service and the rights
of users with regard to electronic communications networks and
services (known as the "Universal Service" directive).
o Directive 2002/58/CE on the treatment of personal information and on
the safeguarding of privacy (known as the "Data Protection"
directive)
o Directive 2002/77/CE on competition in the markets of electronic
communications networks and services (known as the "Competition"
directive).
PENDING LITIGATION
The following comments update the information disclosed in the Annual Report
2002 on major pending litigation in which the Telecom Italia Group is involved.
[ ] Is-Tim
On March 31, 2003, a request for arbitration was filed with the
International Chamber of Commerce of Paris by the subsidiary IS Tim
against the local telecommunications regulatory agency in order to
ascertain the violation of the concession granted in October 2000 wherein
it is stated that the agency has the obligation to create and maintain
market conditions such as to permit effective competition among the
providers.
IS TIM has asked for compensation of damages from the agency that are
provisionally quantifiable in U.S. $2.5 billion and to be ascertained
during the course of the case. Moreover, the company has expressly stated
that it will ask, at some future date, for the resolution of the
concession contract and the consequent restitution of the price that was
once paid.
The arbitration, governed by Turkish legislation, will be conducted in
Istanbul.
[ ] Dispute concerning the National Regulatory Agency resolutions 02/03/CIR
and 03/03/CIR
On April 14, 2003, Telecom Italia challenged the National Regulatory
Agency Resolution 02/03/CIR ("Valuation and request to change the rates of
reference for 2002 by Telecom Italia") and Resolution 03/03/CIR ("Criteria
for the preparation of the rates of reference for 2003 by introducing a
programmed system to adjust the maximum applicable rates").
In particular, the dispute concerns (i) the improper reduction of the
prices for interconnection service proposed by Telecom Italia for the year
2002, which would derive from the application - with retroactive effect -
of a new criteria for the distribution of costs, considered to be
unjustifiable from an economic standpoint, and (ii) the obligation to
present the rates of reference for 2003 in a very short time-frame (30
days) on the basis of criteria that were never discussed during the
preliminary discussions.
[ ] Argentina
On April 24, 2003, Telecom Italia filed a notice with the relevant
Argentine authorities for the formal start of proceedings to resolve the
dispute which arose between the foreign investor (Telecom Italia, in this
case) and the Argentine State, pursuant to the "Bilateral agreement
between Italy and Argentina concerning the promotion and protection of
investments".
The proceedings are aimed at receiving compensation for the damages
deriving from the emanation, on the part of the local government, of
measures considered to be detrimental to the investment made in Telecom
Argentina.
In particular, the notice is required in order to start the six-month
period in which to effect an attempt at an amicable settlement. If no
decision is reached during this period, Telecom Italia will have the right
to start specific arbitration proceedings.
[ ] Fee concerning Article 20, paragraph 2 of Law No. 448 of December 23 1998
- 51 -
Telecom Italia - Confidential - All rights reserved
TELECOM GROUP
FIRST QUARTER 2003 REPORT
The Ministerial Decree of March 21, 2000 introducing Italian Law No. 448
of December 23, 1998, which, on January 1, 1999, established a new license
fee in place of the concession fee was contested by Telecom Italia, Tim,
Wind and Omnitel, before the TAR of Lazio and extraordinary appeals were
presented by Infostrada and Albacom to the Head of State. Furthermore,
with regard to the extraordinary appeals presented to the Head of State,
asking for the annulment of the above-mentioned decree, the Council of
State brought the case before the European Court of Justice, raising the
preliminary question of the compatibility of the fee with Community
regulations relating to telecommunications.
Following the dispute, Telecom Italia and Tim did not proceed to pay the
fee for 2000, 2001 and 2002, although the corresponding costs, included
interest, were recorded in the financial statements in the pertinent
years.
Moreover, in March 2003, Telecom Italia and TIM brought suit, always
before the TAR of Lazio, to obtain the restitution of the concession fee
relating to the year 1998 (paid in 1999) and equal to a total of euro 529
million, of which euro 386 million relates to the Parent Company and euro
143 million to TIM. The request is founded upon the illegitimacy of the
provisions of article 21 of D.P.R. 318/97, which kept the fee in force
even after the EU Directive 97/113 came into effect and the term expired
for its introduction into Italian Law.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 23, 2003
TELECOM ITALIA S.p.A.
BY: /s/ Carlo De Gennaro
-------------------------
Carlo De Gennaro
Company Manager