2. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2007 page Corporate officers page The Group page 22

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2 CONTENTS ANNUAL REPORT 2007 page 1 1. DIRECTORS REPORT ON GROUP OPERATIONS page Main factors that have influenced the results for the financial year page Results of operations page Financial position and cash flow page Reconciliation with the Parent Company s financial statements page Sources of funds page Research and innovation page Financial risk management page Strengths and resources not reflected in the financial statements page Shareholdings of management and supervisory bodies, general managers and key managers page Continuity with data published in the fourth quarter of 2007 page Subsequent events page Outlook page CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2007 page Corporate officers page The Group page CONSOLIDATED FINANCIAL STATEMENTS page NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS page Principal activities page Accounting standards used in preparation of the financial statements page Basis of presentation page Consolidation policies page Critical accounting estimates and judgements page Segment information page Notes to the income statement page Notes to the balance sheet page Assets page Liabilities and shareholders equity page Net funds page Additional disclosures on financial instruments and financial risk management page Contingencies page Commitments page Third-party assets held by the group page Related party transactions page Compliance with Legislative Decree no. 196/2003 page Other information page 68 ANNEXES TO THE CONSOLIDATED FINANCIAL STATEMENTS page 70 PARENT COMPANY S REPORT page DIRECTORS REPORT ON THE PARENT COMPANY S OPERATIONS page Financial review page Sources of funds page Research and innovation page Financial risk management page 79 i

3 5.5 Strengths and resources not reflected in the financial statements page Shareholdings of management and supervisory bodies, general managers and key managers page Shareholder structure and corporate governance page Other information page Subsequent events page Outlook page Proposed appropriation of net profit for the year page Shareholder resolutions page PARENT COMPANY S FINANCIAL STATEMENTS page NOTES TO THE PARENT COMPANY S FINANCIAL STATEMENTS page Corporate information page Accounting standards used in preparation of the financial statements page Basis of presentation page Accounting policies page Critical accounting estimates and judgements page Notes to the income statement page Notes to the balance sheet page Assets page Liabilities and shareholders equity page Net funds page Additional disclosures on financial instruments and financial risk management page Contingencies page Commitments page Shareholder pacts page Compliance with Legislative Decree no. 196/2003 page Related party transactions page Other information page 118 ANNEXES TO THE PARENT COMPANY S FINANCIAL STATEMENTS page 120 ATTESTATION OF THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS PURSUANT TO ART. 81-TER OF CONSOB REGULATION NO OF 14 MAY 1999 AND SUBSEQUENT AMENDMENTS AND ADDITIONS page 122 REPORT OF THE BOARD OF STATUTORY AUDITORS TO THE GENERAL MEETING OF SHAREHOLDERS page 125 REPORT OF THE INDEPENDENT AUDITORS page 127 ESSENTIAL INFORMATION ON SUBSIDIARIES page 130 ii

4 ANNUAL REPORT

5 DIRECTORS REPORT ON GROUP OPERATIONS 2

6 1.1 MAIN FACTORS THAT HAVE INFLUENCED THE RESULTS FOR THE FINANCIAL YEAR The Acotel Group earned revenue of 70.3 million euros in 2007, marking an increase of 11% on the 63.2 million euros of From a geographical point of view, 48.4% of turnover, amounting to 34 million euros, was generated in North America. Although substantially in line with 2006 in volume terms, this result confirms this area to be the Group s principal market. Italy continues to be the second most important market, generating turnover of 15.7 million euros, compared with the 13.8 million euros of 2006, and accounting for 22.3% of the total. Among the Group s traditional markets, Latin America saw the best performance in terms of revenue growth, with revenues up from 5.2 million euros in 2006 to 7.8 million euros in This marks a 50% increase and accounts for 11% of total revenue. In contrast, another of the Group s traditional markets, the Middle East, reports a downturn in revenues from the 5.9 million euros of 2006 to 5.6 million euros in 2007, accounting for 8% of the total. During 2007 the Group made further progress with its geographical diversification strategy, recording revenues of 3.9 million euros in Africa and 2 million euros in Asia, representing growth of 98% and 152% on 2006, respectively. Finally, to complete the geographical segment information, the Group generated revenues of 1.3 million euros in Europe, excluding Italy, marking an increase on the 1 million euros of In terms of business segment, value added services (VAS) for mobile operators saw revenues increase from 55.3 million euros in 2006 to 60 million euros in 2007, recording growth of 8.5% and continuing to represent the Group s main source of revenue, representing 85.3% of the total (87.5% in 2006). The business segment regarding the design of ICT equipment boosted revenue growth with respect to recent years, recording a 42.4% increase from 6.2 million euros in 2006 to 8.9 million euros in This segment contributed 12.6% to the Group s total revenue. Finally, security systems design generated revenues of 1.5 million euros, marking a reduction from the 1.7 million euros of 2006 and accounting for 2.1% of total revenue. SERVICES In this area of business, which, as already reported, saw a significant increase in revenues compared with 2006, the Group operates in Italy, the USA, Brazil, the Middle East and Turkey, providing services in line with the following business models: B2C (or Business to Consumer): in this segment Acotel sells its services primarily content, ringtones, images, games and information - directly to the final customer, carrying out all the related activities from communications to customer care; 3

7 Network Operators: in this segment the Group provides services on behalf of telephone companies (mainly mobile) in accordance with the Application Service Provisioning model; Corporate: in this segment the Group supplies interactive mobile services to companies that, for example, intend to carry out mobile marketing campaigns or, as in the case of banks, that want to offer mobile information and services to their customers; Media: this segment manages value added services on behalf of TV, radio or other media, offering, for example, viewers or listeners the chance to vote or buy content relating to a certain television or radio programme. As in 2006, B2C operations once again proved to be the most important in terms of revenues, generating 35.5 million euros out of total service revenues of 60 million euros, and thus accounting for 59.2% of the total for this area of business. The next largest contribution in revenue terms was provided by the sale of services to Network Operators, which generated turnover of 22 million euros, equal to 36.8% of total service revenues. The other two areas of activity, corporate and media services, contributed 1.4 million euros (2.3% of the total) and 1.1 million euros (1.8%), respectively. In terms of subsidiaries, the US company, Flycell Inc., made the largest contribution to service revenues. This subsidiary, which has been assigned worldwide responsibility for B2C operations, now operates in the United States, Turkey and Brazil through its own subsidiaries, Flycell Telekomunikasion Hizmetleri A.S., incorporated during the second half 2005 and based in Istanbul, and Flycell Latin America LTDA, incorporated in 2006 and based in Rio de Janeiro. Flycell Inc. and its subsidiaries generated revenues of 35.5 million euros in 2007, practically accounting for all B2C revenues. The business model adopted by Flycell Inc. since its commercial launch on the North American market, which took place in late 2005, continues to focus on the sale of services based on weekly or monthly subscriptions. This model has been continually refined and improved in order to boost customer acquisitions, driving so-called redemptions, and build customer loyalty, thus reducing the churn rate. Thanks to these initiatives, the company has earned a reputation for providing high quality services that meet the very strictest consumer protection laws. Flycell Inc. exclusively uses the web in order to acquire new customers, as this channel has proved to be far more effective than other channels for promoting this kind of service. The company now manages websites aimed at the US ( Brazilian ( and Turkish ( markets. The sites graphics and content are continually renewed to enhance their attractiveness to customers. A total of 19 million euros was invested in advertising initiatives during This money was paid to affiliated websites that promote Flycell s sites and are paid on the basis of the number of subscriptions generated. Customer loyalty initiatives focus mainly on improving the quality of the content provided, offering, for example, an increasingly wide range of new content, and on the transparency of the services supplied, above all by giving the customer clear information about pricing and contract terms and conditions. During 2007 Flycell Inc. also made efforts to diversify its business, identifying potential new revenue sources to add to the subscription fees paid by customers. This involved the creation of 4

8 dual and gaming communities designed to increase the number of pageviews on Flycell s websites and, therefore, explore the possibility of generating advertising business. The second biggest contribution to service revenues was made by the Italian subsidiary, Acotel S.p.A., with turnover amounting to 14 million euros in The Company generated most of its revenues from Network Operator services provided to Telecom Italia within the scope of a relationship that began over 10 years ago. In addition to continuous commercial development and improvements to the quality of the services provided over the years, such as the Script TIM service for SMS and MMS, the outsourcing contract by which the subsidiary manages the i-games Store portal, developed by Acotel S.p.A. and integrated into TIM s official WAP portal, has been renewed until 31 December These activities are fully in line with current market developments, with the increasing spread of UMTS phones having revitalised WAP portals, which have turned out to be one of end users favourite channels for choosing, accessing and downloading content, especially ringtones and games. Other sources of Acotel S.p.A. s revenue derive from services provided to media companies, primarily connected to programmes broadcast by the television companies, RAI, MTV and La7, and those supplied to corporate customers, especially Unicredit Banca. A substantial contribution to the increase in service revenues was also made by the subsidiary, Acotel do Brasil, which generated revenues of 5.9 million euros during the year, up 25.6% on the 4.7 million euros of The revenue growth achieved by Acotel do Brasil was due to an increase in the volume of services provided to Network Operators within the context of the long-term contract with TIM Brasil. In addition to already producing and managing infotainment services and the download of games, from the third quarter of the year Acotel do Brasil also began operating and managing the TIM Studio portal, a site that enables end users to produce and share their own multimedia content (videos, wallpapers and music). The company also continued to operate as TIM Brasil s Centro Stella, functioning as a gateway between TIM and smaller service providers for the supply of services and connectivity. Despite a slowdown in Media services with respect to 2006, during the fourth quarter of the year Acotel do Brasil launched an SMS service associated with the TV programme, Panico, which in just a few weeks generated over 300,000 text messages. The subsidiary, Info2cell, which operates essentially in the Middle East, generated revenues of 4.3 million euros, which is substantially in line with the 4.4 million euros of In 2007 the Company, which generates most of its business from Network Operators, embarked on the process of creating its own content, thus reducing its dependence on external content providers in order to offer more distinctive services and boost margins. From a geographical viewpoint, being directly connected with around 30 mobile operators means that Info2cell continues to be the service provider with the largest footprint in the Middle East. In this regard, 2007 saw the company further expand its coverage by beginning to serve mobile operators in the Zain Group. 5

9 Info2cell also launched two highly successful services for the Zain Group in Jordan, one offering SMS and MMS information services for subscribers and the other a Ring-back Tone service based on Islamic content. In early 2007 Info2cell also signed a three-year agreement with the Jordanian operator, Jawwal, for the turnkey supply of a Ring-back Tone platform and service. The service was launched in May and in less than two months the number of customers signed up was more than double initial estimates. Finally, in the Arab Emirates Info2cell signed a new agreement with the operator, Etisalat, that will see it offer services via the Weyak portal, which generates large volumes of traffic thanks to the fact that it is heavily advertised by the operator. Info2cell has both a direct presence on the portal, distributing its Breaking News service, and an indirect presence, distributing news programmes from CNN, Al Arabiya, the BBC and AMEinfo. DESIGN OF ICT EQUIPMENT The Acotel group of companies operates as a provider of technology platforms for mobile messaging via the subsidiary, Jinny Software Ltd, which reports revenues of 8.9 million euros for 2007, an increase from the 6.2 million euros on the previous year. The range of products offered in 2007, positioned in the four categories drawn up in 2006 (Next Generation Messaging, Media, Routing and Filtering, and Rating and Charging), proved more than capable of responding to market needs, enabling the company to achieve strong revenue growth by satisfying demand from mobile operators around the world. Whilst the majority of revenues derive from the sale of core messaging platforms, such as SMSC and MMSC, more recent products, such as the real-time charging gateway and the Ring-back Tone Server, have also proved a commercial success. Using the commercial successes achieved as a launch pad, the company has continued to pursue the organic growth strategy embarked on in This is reflected in the increase of approximately 20% in the workforce, which now numbers around 120, in the opening of a second Research & Development Centre in Romania in 2007, and in the recruitment of commercial staff for the Kuala Lumpur and Rio de Janeiro offices. One of the key results reached during the year regards sales to emerging markets in Asia and Africa, which almost doubled with respect to Africa, in particular, has become a key market for the company, representing over 40% of total turnover. The company s activities in this area include the supply of Ring-back Tone Servers to African mobile operators in the Zain Group. SECURITY SYSTEMS DESIGN The Italian subsidiary, AEM S.p.A., which operates in this business segment, generated revenues of 1.5 million euros in 2007, marking a 14% reduction on the 1.7 million euros of The company has long-standing relationships with the Bank of Italy and Telecom Italia, which contribute the majority of its revenues and regard both the maintenance and improvement of existing security systems. 6

10 Two major projects carried out on behalf of the ACEA Group in Rome were initiated and completed during the year. These regarded installation of 115 items of equipment for the new videosurveillance system, and a system for controlling vehicle access based on RFID (radio frequency identification) technologies. The latter involved the design and construction of two new control panels to decode the protocols used by the old equipment, some of which has remained in service, and make it compatible with the new system. Thanks to its expertise in this area, AEM has established a privileged relationship with the ACEA Group, which has resulted in the company becoming the lead supplier of security and remote control systems. 7

11 1.1.1 RESULTS OF OPERATIONS RECLASSIFIED CONSOLIDATED INCOME STATEMENT Increase/Decrease % inc./(dec.) Revenues % Other income 2 75 (73) (97%) Total revenue % Gross operating profit (1.946) (41%) 3,99% 7,51% Operating profit/(loss) (2.222) (57%) 2,39% 6,16% Net finance income/(costs) 293 (359) % PROFIT/(LOSS) BEFORE TAX (1.570) (44%) 2,81% 5,60% NET PROFIT/(LOSS) BEFORE MINORITY INTERESTS (1.278) (2.509) (204%) -1,82% 1,94% NET PROFIT/(LOSS) ATTRIBUTABLE TO PARENT COMPANY (1.278) (2.509) (204%) -1,82% 1,94% Earnings per share (0,33) 0,31 Diluted earnings per share (0,33) 0,31 Compared with the previous year, the Acotel Group reports an 11% increase in revenue for the year ended 31 December 2007, accompanied by a positive pre-tax earnings performance. The increase in revenue, totalling 70,301 thousand euros in 2007, derives from the Group s activities in the services segment, where the subsidiaries, Acotel S.p.A., Flycell Inc. and Acotel do Brasil, all reported growth in turnover, and from the design of ICT equipment, where the Irish subsidiary, Jinny Software, saw a significant improvement, with revenue rising by more than 42%. Gross operating profit amounts to 2,806 thousand euros, representing a margin of 4%, while the Group reports operating profit, after amortisation and depreciation, of 1,680 thousand euros (a margin of 2.4%). After net finance income, pre-tax profit is 1,973 thousand euros (a margin of 2.8%). The net after-tax loss is 1,278 thousand euros. 8

12 Revenue In terms of business segment, 85.3% of revenue was earned from the supply of services, 12.6% was generated by the design and sale of ICT equipment, and the remaining 2.1% by the design of security systems: Turnover by business segment ( 000) 2007 % 2006 % Services 59, % 55, % Design of ICT equipment 8, % 6, % Security systems design 1, % 1, % Total 70, % 63, % Service revenues are up 8.5% on the previous year, a performance that is even more significant if the strong revenue growth already registered in 2006 is taken into account (up 164% on 2005). Revenues from the design of ICT equipment also grew strongly in 2007, rising 42.4% as the segment benefited from the commercial initiatives undertaken during the previous year. A breakdown of the Group s revenue by geographical segment is as follows: Turnover by geographical segment ( 000) 2007 % 2006 % North America 34, % 34, % Italy 15, % 13, % Latin America 7, % 5, % Middle East 5, % 5, % Africa 3, % 1, % Asia 1, % % Other European countries 1, % % 70, % 63, % The above table confirms the importance for the Acotel Group of the US market, in which Flycell Inc. operates. In 2007 this company also began to generate substantial turnover in Brazil and Turkey via its direct subsidiaries, Flycell Latin America and Flycell Telekomünicasyon Hizmetleri A.Ş. The Group also recorded revenue growth in Africa and Asia, confirming our commitment to the geographical diversification of revenue sources. 9

13 Earnings Gross operating profit of 2,806 thousand euros for the year ended 31 December 2007 is down 41% on the previous year, mainly due to: - the decision, taken partly in response to the current round of consolidation in the sector, to speed up expansion of the business and the Group s entry into new markets, resulting in a significant increase in the advertising costs incurred by the companies operating B2C services in the USA, Turkey and Latin America; - an increase in the staff costs incurred by Group companies. After amortisation and depreciation of 1,126 thousand euros, operating profit totals 1,680 thousand euros, compared with a profit of 3,902 thousand euros for the previous year. After net finance income of 293 thousand euros and taxation for the year of 3,251 thousand euros, the net loss for 2007 amounts to 1,278 thousand euros. 10

14 1.1.2 FINANCIAL POSITION AND CASH FLOW RECLASSIFIED CONSOLIDATED BALANCE SHEET ( 000) 31 Dec Dec 2006 Increase/(Decrease) % inc./(dec.) Non-current assets: Property, plant and equipment 3,221 2, % Intangible assets 12,464 12, % Financial assets Other assets (257) (48%) TOTAL NON-CURRENT ASSETS 15,960 15, % Net current assets: Inventories % Trade receivables 18,620 18, % Other current assets 3,442 2, % Trade payables (9,526) (7,660) (1,866) (24%) Other current liabilities (4,020) (4,334) 314 7% TOTAL NET CURRENT ASSETS 9,158 9,748 (590) (6%) STAFF TERMINATION BENEFITS AND OTHER EMPLOYEE BENEFITS (947) (1,031) 84 8% NON-CURRENT PROVISIONS (318) (27) (291) (1,078%) NET INVESTED CAPITAL 23,853 24,424 (571) (2%) Shareholders' equity: Share capital 1,084 1, Retained profit/(accumulated losses) 48,469 47, % Net profit/(loss) for the year (1,278) 1,231 (2,509) 204% Minority interests TOTAL SHAREHOLDERS' EQUITY 48,305 49,871 (1,566) (3%) MEDIUM/LONG-TERM DEBT (30) (18%) Net cash and cash equivalents: Current financial assets (12,702) (15,050) 2,348 16% Cash and cash equivalents (12,178) (10,620) (1,558) (15%) Current financial liabilities % (24,585) (25,610) 1,025 4% NET FUNDS (24,452) (25,447) 995 4% TOTAL SHAREHOLDERS' EQUITY AND NET FUNDS 23,853 24,424 (571) (2%) 11

15 The Acotel Group s net invested capital at 31 December 2007 is 23,853 thousand euros, made up of non-current assets of 15,960 thousand euros, net current assets of 9,158 thousand euros, staff termination benefits of 947 thousand euros and other non-current provisions of 318 thousand euros. Net invested capital is financed by shareholders equity of 48,305 thousand euros and net funds of 24,452 thousand euros. A detailed analysis of changes in the principal balance sheet items shows that: non-current assets are 15,960 thousand euros, marking an increase of 226 thousand euros compared to the end of the previous year, primarily due to investment in the development of the VOIP platform owned by the subsidiary, Noverca S.r.l.; the changes to net current assets derive from growth in turnover, generating an increase in trade receivables and trade payables, including advances received from the Group s customers within the context of our trading relations; net funds at 31 December 2007 amount to 24,452 thousand euros, marking a decrease of 995 thousand euros compared to 31 December 2006, and largely reflecting the cost to the Group of launching B2C services in Brazil and Turkey and IP communications services in Italy RECONCILIATION WITH THE PARENT COMPANY S FINANCIAL STATEMENTS Pursuant to CONSOB Resolution no. DEM/ of 28 July 2006, the reconciliation between the net result and shareholders equity of Acotel Group S.p.A., and the corresponding consolidated items is as follows: Net result 2007 profit / (loss) Shareholders' equity at 31 Dec 2007 positive/(negative) Shareholders' equity and net result reported in the Parent Company's financial statements 2,939 57,169 Effect of consolidation of Group companies (4,217) (3,364) Accumulated amortisation and impairment of goodwill arising from consolidation - (5,872) Consolidation reserve Cash flow hedge and currency translation reserve - (567) Shareholders' equity and net result for the year attributable to the Parent Company (1,278) 48,275 Shareholders' equity and net result for the year attributable to minority interests - 30 Shareholders' equity and net result reported in the consolidated financial statements (1,278) 48,305 12

16 1.2 SOURCES OF FUNDS The Group s financial strength was again confirmed in 2007, with net cash and cash equivalents of 24,585 thousand euros and net funds of 24,452 thousand euros. As in the past, the Group did not resort to external sources of funding, being able to finance investment, above all in its foreign subsidiaries during the start-up of their respective businesses, from operating cash flow and its own funds. Current financial assets not used to finance operations are invested in low-risk financial instruments. 1.3 RESEARCH AND INNOVATION SERVICES Early 2007 witnessed completion of the platform with which, from mid-2007, the Group began to offer VOIP (Voice Over Internet Protocol) communications services, sold under the Noverca brand. This system offers users services such as phone calls, video communication and instant messaging via the internet. The system is based on cooperation between a series of central software applications, called AS Application Servers, operating on hardware that is mainly installed at the Data Centre in Rome, and software applications, called Softclient, operating on end-user devices (e.g. personal computers and smart phones). The Group also concentrated its research and development activities on improving the performance and operations of the platforms that individual companies use in their respective markets to provide value added services. The development and management of platforms continued to be entirely conducted using internal Group resources, in order to guarantee technological independence and the development of know-how. PRODUCTS The Irish subsidiary, Jinny Software Ltd., which designs, produces and develops ICT equipment, continued its strong commitment to research and development in 2007, with the aim of boosting ARPU for its customers and reducing the cost of providing messaging services. SECURITY SYSTEMS The Group s commitment to developing new products and systems for the security market saw it engaged in the study and experimentation of remote video-surveillance solutions for small spaces (homes, shops, small offices, etc.). The technologies experimented with regard: - IP cameras to be used in the above environments; the functional specifications of the devices were identified; cameras made by various producers were purchased and tested; products meeting the required technical specifications were selected; 13

17 - routers to act as localised control panels to manage the cameras and alarm systems; software modules were developed to enable the routers to manage the localised devices and dialogue with a central service platform; - other related devices (HW keys, various types of sensor). Based on the selected technologies, software for the various components was developed, leading to the construction of a number of prototypes, including: - software modules for the routers; - a central applications server for managing security, designed to operate as an integral part of the Noverca service platform; - a plug-in application for the Noverca softclient for personal computers; the plug-in is an additional software module to be integrated with the softclient for telecommunications services, adding remote control surveillance functions, and enabling the customer to manage the situation in the areas under surveillance at a distance. 1.4 FINANCIAL RISK MANAGEMENT Credit risk 42% of total trade receivables relates to amounts due from the mobile transaction network provider, mblox (21%), which supplies Flycell Inc. with operator connectivity in the US, and Telecom Italia (21%). At the date of publication of this report, around 8% of these receivables, amounting to approximately 0.3 million euros, have yet to be collected. There are no significant disputes with customers. Liquidity risk The Group does not resort to external sources of funding, being able to meet its cash requirements from operating cash flow. The cash flows, borrowing requirements and liquidity of Group companies are monitored and managed centrally under the Parent Company s control, with the aim of ensuring effective and efficient management of the Group s financial resources. Foreign exchange risk The Group is not exposed to any significant extent to foreign exchange risk, which is mainly limited to foreign exchange exposures deriving from intercompany loans, which, whilst being eliminated from the consolidated financial statements, generate foreign exchange gains or losses for subsidiaries whose functional currencies are different from the euro. In addition, with the exception of Jinny Software Ltd., the foreign operating companies report substantial convergence between the currencies used for receivables and payables. Interest rate risk As the Group does not rely on external sources of funding it is not exposed to interest rate risk. 14

18 1.5 STRENGTHS AND RESOURCES NOT REFLECTED IN THE FINANCIAL STATEMENTS This paragraph provides a brief summary of the strengths that the Acotel Group considers it has and that are not sufficiently evident from the data in the financial statements. Technological independence: The Group develops all the technology platforms that it utilises internally. This long-standing approach allows the Group, particularly in the Services segment, to replicate its commercial strategy and enter new countries at extremely low costs. Strong business relations: the greater part of the commercial B2B (Business to Business) relationships between Acotel Group companies and their customers are based on long-term partnerships, which help to increase the Group s economic stability. Stable shareholder structure: 57.4% of the share capital of Acotel Group S.p.A. is held by members of the founder s family. This concentration of ownership ensures continuity in the management of the Group, which aims to create value over the medium/long-term. Financial independence: as previously indicated, the Acotel Group, both through its operating activities and shrewd management of its financial resources acquired as a result of the flotation, has the necessary financial resources to finance its development without having to resort to bank borrowings. Geographical diversification: during 2007, 48.4% of the Acotel Group s consolidated turnover was generated in North America, 22.3% in Italy, 11.2% in Latin America, 8% in the Middle East, and the remaining portion in Africa, Asia and other European countries. This distribution supports the strategy of diversification into various geographical areas pursued by the Group with a view to minimising the impact of any local problems. 1.6 SHAREHOLDINGS OF MANAGEMENT AND SUPERVISORY BODIES, GENERAL MANAGERS AND KEY MANAGERS (art. 79, CONSOB Regulation no /99) NAME GROUP COMPANY NO. OF SHARES HELD AT 1 JAN 2007 NO. OF SHARES PURCHASED NO. OF SHARES SOLD NO. OF SHARES HELD AT 31 DEC 2007 PERCENTAGE INTEREST AT 31 DEC 2007 Claudio Carnevale (a) Acotel Group S.p.A. 664, , % Andrea Morante Acotel Group S.p.A. 99,827-63,540 36, % Claudio Carnevale Acotel S.p.A. 20, , % Claudio Carnevale AEM S.p.A. 2, , % (a) Ownership is exercised via Clama S.A. of which Claudio Carnevale owns 93% of the share capital. Claudio Carnevale and Margherita Argenziano each hold 25% of the share capital of Clama S.r.l., which in turn holds 1,727,915 shares of Acotel Group S.p.A. at 31 December No transactions took place between Clama S.r.l. and Acotel Group S.p.A. and other Group companies during the period. 15

19 At 31 December 2007 Acotel Group S.p.A. does not possess shares or units of holding companies, either directly or through fiduciary companies or proxies, nor has it acquired or sold shares during the financial year. Other Group companies do not possess Acotel Group S.p.A. shares, either directly or through fiduciary companies or proxies, nor have they acquired or sold shares during the financial year. 1.7 CONTINUITY WITH DATA PUBLISHED IN THE FOURTH QUARTER OF 2007 In order to guarantee the continuity of published accounting data, in compliance with the provisions of Annex 3D to the Regulations for Issuers introduced by CONSOB Resolution no of 14 May 1999, the differences reported with respect to fourth-quarter data are shown in the table below. Such differences are not significant. ( 000) 2007 results Q4 FY Difference Revenue 70,246 70, Gross operating profit 2,868 2,806 (62) Operating profit 1,742 1,680 (62) Net profit attributable to the Parent Company (1,209) (1,278) (69) 1.8 SUBSEQUENT EVENTS In January 2008 Flycell Inc. signed an agreement with Island Def Jam, a leading US record company, for the creation of a label for mobile services and the joint supply of content such as ringtones, wallpapers, games and blog and messaging services. Island Def Jam will contribute content produced by its artists, who include the hip-hop star, Kanye West, whilst Flycell Inc. will take care of billing and distribution to the final customer. At the Mobile World Congress in Barcelona in February 2008, the subsidiary, Jinny Software, launched its internally developed mobile advertising platform. This product has already been successfully trialled in the Middle Eastern market. In March 2008 the company also entered into a strategic partnership agreement with the MCN Group (a member of a group that is a world leader in the advertising industry) with the aim of supplying advertising services through Jinny s new platform. Following receipt of authorisation from the Saudi Investment Authority, during the first two months of 2008 the subsidiary, Info2cell, completed the incorporation of its joint venture with a local partner. The venture will supply services in Saudi Arabia, the largest market in the Middle East, using Info2cell s Dubai-based technology platform. The Brazilian subsidiary, Acotel do Brasil, has begun to provide mobile services linked to the wellknown TV show, Big Brother, being aired between January and March

20 Finally, AEM and Telecom Italia have won the contract to supply a contact centre to the Acea Electrabel Group. In February an agreement was reached with Telecom Italia that will enable Noverca a company created by Acotel Group S.p.A. to operate as a mobile virtual network operator, specialising in the development and provision of added value IP (Internet Protocol) services - to offer telecommunications services, internet access and valued added services to end customers over Telecom Italia s mobile network. 1.9 OUTLOOK In the B2C services segment the Group is committed to further expanding its geographical footprint and boosting customer loyalty. The primary purpose is to both drive revenue growth, thanks to an increased customer base, and to implement a diversification strategy that will stabilise the business and reduce the risks linked to operating in a limited market. Improved customer loyalty will enable the Group to increase margins as customers maintain their subscriptions for longer periods. In the B2B services segment the Group will continue to operate according to its existing business models, extending its offering with the introduction of services based on the location of customers (so-called location based services) and advertising (mobile advertising). One avenue to growth consists in exploiting the geographical and distribution potential of Info2cell in the Middle East. This will see the company increasingly position itself as a service provider capable of distributing premium services on behalf of third-parties. As announced in previous reports and press releases, the Group is close to fulfilling the agreement entered into with the Intesa Sanpaolo Group, which will see the bank take a 4.75% stake in the Parent Company, Acotel Group SpA, a 10% interest in the subsidiary, Noverca Srl, and a 34% stake in Noverca Italia Srl, which is in the process of being established. Noverca Italia Srl, in which Noverca Srl will have a 66% interest, will operate in Italy as a mobile virtual network operator, offering added value IP services. The Group began to invest in this sector in 2006, developing its own technology platform. The commercial launch of services for Intesa Sanpaolo customers is expected in the fourth quarter of With regard to product sales, the high volume of orders is confirmation of the good prospects for The subsidiary, Jinny Software, will continue to focus on ensuring that the quality of its offering is in line with market demand and on strengthening its distribution channels, above all those of a direct form. The company operates in an extremely competitive market, which is subject to highly aggressive price competition from new entrants, such as China s Huawei and ZTE. Despite this, Jinny Software is in a good position to respond to the competition, thanks to low labour costs at its development centres in Lebanon and Romania. The company plans to dedicate particular attention to the African market, which has already seen significant growth and where the company already achieved good results in In the security systems segment, the subsidiary, AEM, will continue to operate in the Italian market, exploiting its prestigious customer portfolio and technological expertise in the video surveillance and access control fields. 17

21 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2007 Acotel Group S.p.A. Registered offices at Via della Valle dei Fontanili 29/ Rome, Italy Share capital: 1,084,200.00, fully paid-in Rome Companies Register, Tax and VAT number:

22 2.1 CORPORATE OFFICERS BOARD OF DIRECTORS Claudio Carnevale Chairman and CEO Francesco Ago (1), (2) Director Margherita Argenziano Director Luca De Rita Director Giovanni Galoppi (1), (2) Director Giuseppe Guizzi (1), (2) Director Andrea Morante Director (1) Member of the Remuneration Committee (2) Member of the Internal Audit Committee BOARD OF STATUTORY AUDITORS Antonio Mastrangelo Chairman Maurizio Salimei Auditor Umberto Previti Flesca Auditor INDEPENDENT AUDITORS Deloitte & Touche S.p.A. 19

23 The Board of Directors and the Board of Statutory Auditors of Acotel Group S.p.A. were elected on 28 April 2006 by the General Meeting of Shareholders, which also elected Claudio Carnevale as Chairman. The General Meeting of 28 April 2006 also appointed Deloitte & Touche S.p.A. to audit the consolidated and separate financial statements for the financial years from 2006 until With a resolution of 10 May 2006 the Board of Directors elected Claudio Carnevale as CEO, granting him all the powers of routine and extraordinary administration to be delegated in accordance with the law and the articles of association. At the same board meeting of 10 May 2006 Francesco Ago, Giovanni Galoppi and Professor Giuseppe Guizzi were elected members of the Remuneration Committee and of the Internal Audit Committee. Francesco Ago was elected as Chairman of both committees. During the board meeting of 8 August 2007, Francesco Ago was elected Lead Independent Director. 20

24 2.2 THE GROUP The parent of Acotel Group S.p.A. is Clama S.r.l., which at 31 December 2007 holds 1,727,915 ordinary shares, representing 41.4% of the share capital. Clama S.r.l. does not carry out management and coordination activities pursuant to art of the Italian Civil Code. 21

25 CONSOLIDATED FINANCIAL STATEMENTS 22

26 CONSOLIDATED INCOME STATEMENT ( 000) Note Revenues 1 70,301 63,223 Other income 2 75 Total revenue 70,303 63,298 Movement in work in progress, semi-finished and finished goods 24 (1) Raw materials 2 (2,071) (1,864) External services 3 (47,569) (42,685) Rentals and leases 4 (1,541) (1,553) Staff costs 5 (15,187) (12,512) Amortisation and depreciation 6 (1,126) (813) Internal capitalised costs ,083 Impairment charges/reversal of impairment charges on non-current assets - (37) Other costs 8 (1,946) (1,014) Finance income 9 1,263 1,118 Finance costs 9 (970) (1,477) PROFIT/(LOSS) BEFORE TAX FROM CONTINUING OPERATIONS 1,973 3,543 Taxation 10 (3,251) (2,312) NET PROFIT/(LOSS) FROM CONTINUING OPERATIONS (1,278) 1,231 Net profit/(loss) from discontinued operations - - NET PROFIT/(LOSS) BEFORE MINORITY INTERESTS (1,278) 1,231 Net profit/(loss) attributable to minority interests - - NET PROFIT/(LOSS) FOR THE YEAR ATTRIBUTABLE TO PARENT COMPANY (1,278) 1,231 Earnings per share 11 (0.33) 0.31 Diluted earnings per share 11 (0.33)

27 CONSOLIDATED BALANCE SHEET ASSETS ( 000) Note 31 Dec Dec 2006 Non-current assets: Property, plant and equipment 12 3,221 2,976 Goodwill arising from consolidation 13 11,531 11,531 Other intangible assets Non-current financial assets 2 2 Other non-current assets Deferred tax assets TOTAL NON-CURRENT ASSETS 15,960 15,734 Current assets: Inventories Trade receivables 17 18,620 18,301 Other current assets 18 3,442 2,963 Current financial assets 19 12,702 15,050 Cash and cash equivalents 20 12,178 10,620 TOTAL CURRENT ASSETS 47,584 47,412 NON-CURRENT ASSETS HELD FOR SALE - - TOTAL ASSETS 63,544 63,146 24

28 CONSOLIDATED BALANCE SHEET LIABIITIES AND SHAREHOLDERS' EQUITY ( 000) Note 31 Dec Dec 2006 Shareholders' equity: Share capital 1,084 1,084 Share premium reserve 55,106 55,106 - Treasury shares (3,873) (3,873) - Cost of capital increase (59) (59) Cash flow hedge and currency translation reserve (567) (279) Other reserves Retained profit/(accumulated losses) (2,539) (3,726) Net profit/(loss) for the year (1,278) 1,231 Shareholders' equity attributable to the Parent Company 48,275 49,841 Minority interests TOTAL SHAREHOLDERS' EQUITY 21 48,305 49,871 Non-current liabilities: Non-current financial liabilities Staff termination benefits and other employee benefits ,031 Deferred tax liabilities TOTAL NON-CURRENT LIABILITIES 1,398 1,221 Current liabilities: Current financial liabilities Trade payables 26 9,526 7,660 Tax liabilities 27 1,343 1,570 Other current liabilities 28 2,677 2,764 TOTAL CURRENT LIABILITIES 13,841 12,054 NON-CURRENT LIABILITIES HELD FOR SALE - - TOTAL LIABILITIES 15,239 13,275 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 63,544 63,146 25

29 STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS' EQUITY ( 000) Share capital Share premium reserve - Treasury shares - Cost of capital increases Cash flow hedge and currency translation reserve Other reserves Reserves and retained profit Net profit for the year TOTAL Balances at 31 Dec ,084 55,106 (3,873) (59) (89) 335 (3,143) (561) 48,800 Appropriation of net profit for (583) Other movements (190) (190) Net result for ,231 1,231 Balances at 31 Dec ,084 55,106 (3,873) (59) (279) 357 (3,726) 1,231 49,841 Appropriation of net profit for ,187 (1,231) - Other movements (288) (288) Net result for 2007 (1,278) (1,278) Balances at 31 Dec ,084 55,106 (3,873) (59) (567) 401 (2,539) (1,278) 48,275 The share of shareholders equity attributable to minority interests at 31 December 2007 amounts to 30 thousand euros and has not changed over the years shown in the above statement. 26

30 CONSOLIDATED CASH FLOW STATEMENT ( 000) A. NET CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 25,610 31,123 B. CASH FLOWS FROM (FOR) OPERATING ACTIVITIES 645 (2,873) Cash flows from operating activities before changes in working capital 260 2,092 Net profit/(loss) for the year (1,278) 1,231 Amortisation and depreciation 1, Impairment of assets Net change in staff termination benefits (84) 83 Net change in deferred tax assets 291 (43) (Increase) / decrease in receivables (1,003) (7,161) (Increase) / decrease in inventories (164) (179) Increase / (decrease) in payables 1,552 2,375 C. CASH FLOWS FROM (FOR) INVESTING ACTIVITIES (1,352) (2,420) (Purchases)/disposals of fixed assets: - Intangible assets (475) (1,309) - Property, plant and equipment (1,134) (947) - Financial assets 257 (164) D. CASH FLOWS FROM (FOR) FINANCING ACTIVITIES (318) (220) Increase / (decrease) in medium/long-term borrowings (30) (30) Other changes in shareholders' equity (288) (190) E. CASH FLOW FOR THE YEAR (B+C+D) (1,025) (5,513) F. NET CASH AND CASH EQUIVALENTS AT END OF YEAR (A+E) 24,585 25,610 27

31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 28

32 4.1 PRINCIPAL ACTIVITIES Acotel Group S.p.A. is the leader of a Group of companies operating in the ICT sector, based on a single business project. The main companies in The Acotel group of companies of companies, in addition to Acotel Group S.p.A., which basically performs management functions and manages the Acotel Platform, through which it operates directly on the market as an Application Service Provider, are: - Acotel S.p.A., which markets the multimedia services for Italy; - A.E.M. S.p.A., which deals with the design and production of security systems exclusively in Italy; - Acotel Participations S.A. which acts as a sub-holding and controls the majority of the Group s foreign companies responsible for business development in their local markets; - Jinny Software Ltd, deals with the design, production and development of high-tech ICT equipment; - Info2cell.com FZ-LLC, which operates as a Wireless Application Services Provider in partnership with leading Middle-eastern mobile telephone operators; - Acotel do Brasil Ltda, which markets multimedia services to Brazilian operators; - Flycell Inc., which provides consumer services to the US market; - Flycell Telekomunikasyon Hizmetler A.S., which supplies value added services in Turkey; - Noverca S.r.l. (formerly Flycell Media S.p.A.), which provides integrated communications services (data, audio, video) based on IP (Internet Protocol); - Flycell Latin America Conteúdo Para Telefonia Móvel LTDA, which supplies consumer services to the Brazilian market. These financial statements have been drawn up in thousand of euros, the Parent Company s accounting currency. The foreign companies are included in the consolidated financial statements according to the accounting standards indicated in the following notes. 4.2 ACCOUNTING STANDARDS USED IN PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements for the year ended 31 December 2007 have been prepared in accordance with the international financial reporting standards (IFRS) issued by the International Accounting Standards Board (IASB) and approved by the European Union, and in force at the date of preparation of the financial statements. The financial statements also comply with the measures issued in implementation of art. 9 of Legislative Decree 38/2005. IFRS also includes all the revised International Accounting Standards (IAS) and all the interpretations of the International Financial Reporting Interpretations Committee (IFRIC), which was previously called the Standing Interpretations Committee (SIC). Accounting standards and interpretations applied as of 1 January 2007 The new standards and interpretations regard: IFRS 7 Financial instruments: additional disclosures; IFRIC 8 Scope of application of IFRS 2; 29

33 IFRIC 9 Reassessment of embedded derivatives. Adoption of these standards and interpretations has had no effect on the consolidated financial statements, with the exception of IFRS 7, whose application has resulted in the inclusion of additional information in these notes (Note 4.10). As of these financial statements, the complementary amendment to IAS 1, introducing further requirements for disclosures regarding the objectives, policies and processes for managing capital, has also been applied. New standards and interpretations not yet applied This section shows a list of standards, interpretations and updates to previously published standards, whose application will be obligatory in future periods and whose adoption it was decided not to bring forward: IFRS 8 Operating Segments; IFRIC 11 Group and Treasury Share Transactions; IFRIC 12 Service Concession Arrangements; IFRIC 13 Customer Loyalty Programmes; IFRIC 14 on IAS 19 The Limit on a Defined benefit Asset and Minimum Funding; IAS 23 Borrowing Costs; Changes to IAS 1 Presentation of Financial Statements; Changes to IFRS 3 Business Combinations; Changes to IAS 27 Consolidated and Separate Financial Statements; Changes to IFRS 2 Share-based Payments. With the exception of IFRIC 11 and IFRS 8, at the date of publication of these financial statements the relevant EU bodies have yet to complete the endorsement process necessary in order to proceed with application of the above standards and interpretations. The Group is evaluating the eventual impact that these changes may have on the consolidated financial statements. 4.3 BASIS OF PRESENTATION The financial statements were drawn up on the basis of the historical cost principle modified, as required, for the valuation of certain financial instruments. The Acotel group of companies of companies has prepared the income statement on the basis of the nature of expenses format, which is considered more representative of the Group s approach to management of the business and is utilised for internal reporting. The form of presentation used for the balance sheet distinguishes between current and non-current assets and liabilities, as allowed by paragraph 51 et seq of IAS 1. Shareholders equity is presented in columns that reconcile the opening and closing balance of each item that is part of the schedule. Finally, the statement of cash flows was prepared in accordance with the indirect method. 30