GRUPPO EDITORIALE L ESPRESSO. Società per azioni

Transcription

1 GRUPPO EDITORIALE L ESPRESSO Società per azioni CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 1999

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3 CONTENTS Financial statements of Gruppo Editoriale L Espresso S.p.A. at 31 December 1999 Board of Directors' annual report 11 Proposal for allocation of 1999 profits 35 Consolidated financial statements of the Espresso Group at 31 December 1999 Consolidated balance sheet and income statement 39 Consolidated balance sheet and income statement stated in Euro 47 Notes 55 Annexes to notes 89 Supplementary tables 95 Supplementary tables stated in Euro 103 Audit report 109 Espresso Group 5

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5 Corporate Name Gruppo Editoriale L Espresso Società per Azioni Share Capital Euro ,20 Registered Office Roma, Via Po 12 Board of Directors: Chairman Carlo Caracciolo (*) Managing Director Marco Benedetto (*) Directors Cristina Busi Giulia Maria Crespi Mozzoni Carlo De Benedetti Rodolfo De Benedetti Sergio Erede Pierluigi Ferrero Milvia Fiorani Franco Girard Antonio Grigolini Paolo Mancinelli Alberto Milla Piero Ottone Vittorio Ripa di Meana Executive Committee Carlo Caracciolo Marco Benedetto Rodolfo De Benedetti Pierluigi Ferrero Franco Girard Board of Auditors: Chairman Standing auditors Auditors Vittorio Bennani Claudio Berliri Federico Gamna PricewaterhouseCoopers S.p.A. (*) Mandate with separate signature, for ordinary administration and mandate with joint signatures, limited to certain operations and specific amounts, for extraordinary administration. Espresso Group 7

6 ESPRESSO GROUP FINANCIAL HIGHLIGHTS CONSOLIDATED RESULTS (billions of Lire) Revenues 1,254 1,348 1,501 1,642 Value added Gross operating margin Operating profit Net profits 29,4 48,4 62,4 79,2 Capital invested (excluding employee severance) ,011 Net financial position (62) (180) Shareholders' equity Net profits + depreciation Workforce 2,532 2,574 2,930 3,102 PROFITABILITY INDICATORS Gross operating margin/revenues 11.2% 12.3% 13.9% 16.9% ROS (Return on sales) 7.0% 8.2% 9.2% 11.8% ROCE (Return on capital invested) 12.7% 15.7% 14.8% 19.2% ROE (Return on equity) 5.5% 7.6% 9.3% 12.2% 8 Espresso Group

7 ESPRESSO GROUP FINANCIAL HIGHLIGHTS CONSOLIDATED RESULTS PER SHARE (millions of Lire) Operating profit ,122 Net profit Net profit + depreciation ,075 (millions) No. of shares Reparameterised no. of shares The results per share have been calculated on the basis of the reparameterised number of shares, in order to take into account the share splitting (52 new shares for 15 old ones) resolved by the Extraordinary Shareholders' meeting of 20 October, 1999 (cf. page 85). CONSOLIDATED RESULTS PER EMPLOYEE (millions of Lire) Revenues Operating profit Net profits Espresso Group 9

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9 BOARD OF DIRECTORS REPORT

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11 1999 BOARD OF DIRECTORS' ANNUAL REPORT The Espresso Group closed the year with consolidated net profits of Lire 79.2 billion, from revenues of Lire 1,642.1 billion, a 26.9% increase compared with consolidated net profits of Lire 62.4 billion in 1998 and a 9.4% increase over the Lire 1,500.6 billion in revenues for that year. If losses deriving from the start of Internet initiatives (Lire 8.1 billion after tax) are excluded, net profits would have increased from Lire 62.4 billion to Lire 87.3 billion. Net profits per share, reparameterised to take into account the splitting of the par value of shares from Euro 0.52 to Euro 0.15, increased from Lire 146 in 1998 to Lire 184 in The consolidated gross operating margin rose from Lire billion in 1998 to Lire billion in Its impact on revenues increased from 13.9% to 16.9%. The operating profit was Lire billion (11.8% of revenues), against Lire billion (9.2% of revenues) in The Group's consolidated net financial position at 31 December, 1999, reflected indebtedness of Lire 180 billion, an increase compared with the Lire 62.1 billion at 31 December, This was the result of distribution of dividends (ordinary and extraordinary) totalling Lire 116 billion, technical investments of Lire 115 billion and Lire 45 billion for acquisition of stakes in other companies. Consolidated shareholders' equity at 31 December, 1999 was Lire billion, decreasing from the Lire billion at 31 December, 1998 as a result of the aforementioned extraordinary distribution of part of reserves. ROE (return on equity) increased from 9.3% in 1998 to 12.2% in Lines of action in 1999 The Espresso Group continued its strategy of investment in the sectors with the highest growth rates in 1999, focusing efforts and considerable resources on development of Internet activities, but also concentrating resources and energy on development of publishing activities, which is the Group's point of strength. Activities on the Internet focused specifically on consolidating the sites of the Group's titles and radio stations, activities which also protect the traditional publishing role, namely: editing of the repubblica.it site was upgraded to provide up-to-the-minute information 24 hours a day, the radio station sites allow listening in real audio and images from web cams and the local newspapers are preparing to make their sites more interesting for 'surfers' in the areas of publication. However, the most important news on activity in this sector is the setting up at the start of the year of Kataweb SpA, the company which will be responsible for all Internet activities. This company will be responsible for creating an integrated system of supply of con- Espresso Group 13

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13 BOARD OF DIRECTORS' ANNUAL REPORT tents, means of communication and interactive services, both through in-house development and through acquisitions, alliances and technological and business agreements in the two major sectors of business-to-business and business-to-consumer. The concerted efforts made in the Group's typical activity paid off, with increased circulation for La Repubblica newspaper and a return to primacy for Radio D.J. Important industrial development projects were also undertaken and new plans for expansion examined. The search for greater efficiency and better use of in-house resources in traditional sectors also continued, together with consolidation of presence on the various reference markets. New investments In 1999, Gruppo Editoriale L Espresso SpA further increased its presence in the local dailies sector, by acquiring: a 17.8% stake in the share capital of NCE Newco Edit SpA, the holding company owning the "Messaggero Veneto" of Udine and "Il Piccolo" of Trieste, thereby increasing its stake from 70% to 88%; a 9.3% stake in the share capital of Editoriale Il Piccolo SpA; this is now wholly owned by the Group, both directly and through the NCE Newco Edit SpA holding company; a 16% stake in the share capital of Cima Brenta SpA, the parent company of SETA SpA, the publishing house which publishes the "Alto Adige" di Bolzano and "Corriere delle Alpi" of Belluno, increasing its stake from 55% to 71%. Taking effect from 1 January, 2000, GMP SpA also disposed of the company branch publishing titles in Lombardy, the Triveneto area and Emilia, none of which had achieved sufficient levels of profitability over the years. GMP will continue to operate in Romagna and Bologna, home of the most firmly established and profitable titles in the area. The company also purchased a 1.1% stake in the share capital of the US company E Ink Corporation, which specialises in technologies for the transmission and reproduction of text and images on flexible mediums. The US corporation is currently working on developing a flexible medium which is as similar as possible to a sheet of paper, on which the news items in the current dailies may be written using special "electronic ink". Espresso Group 15

14 BOARD OF DIRECTORS' ANNUAL REPORT Consolidated results of the Espresso Group CONSOLIDATED RESULTS The following table shows the most significant data in the consolidated 1999 financial statements of the Espresso Group, compared to those of the previous year. (billions of Lire) D% Revenues 1, , % from: circulation % advertising , % Gross operating margin % Operating profit % Financial income/(charges) (2.6) (7.2) Net profits for the year Shareholders' equity Net financial position (62.1) Employees 2,930 3,102 With the market showing signs of recovery (sales of titles included in the FIEG samples, which represent three quarters of the market, increased by 1% compared with 1998), the average daily sales of the dailies owned by the Espresso Group was 1,100,000 copies. This constitutes a 2.1% increase in circulation compared with the previous year. Circulation of La Repubblica newspaper increased by 4.1%, from an average of 590,000 copies to 614,000 copies per issue. In the absence of promotional initiatives, circulation of the local dailies remained stable at 480,000 copies. L Espresso magazine increased average circulation from 377,000 copies to 383,000 copies per issue, thanks to a greater number of subscriptions and promotional activities. Circulation of the Italian edition of National Geographic magazine reached an average of 157,000 copies per issue, of which over 80,000 were subscriptions. Revenues from circulation basically remained stable compared with the previous year, due mainly to a lower number of issues as a result of strikes. Consolidated advertising revenue reached Lire 1,026.3 billion, totalling 62.5% of consolidated revenue (58.4% in 1998). This was due to growth in revenue of 17% compared with 1998, Lire 6 billion of which derived from Internet revenue. Gross advertising collection for La Repubblica was particularly positive (+17.3%, against a dailies market which increased by 15.2%), due to a 25.1% increase in national advertising, in turn boosted by a 41.8% increase in colour advertising. Il Venerdì magazine and the women's magazine 'D la Repubblica delle Donne' continued to increase their market shares, with increases in collection of 15.7% and 14.9% respectively compared with Advertising revenue of local dailies increased by 11%, whereas this increased by only 1.1% for L'Espresso, on an extremely difficult market. 16 Espresso Group

15 BOARD OF DIRECTORS' ANNUAL REPORT An important contribution was also made by the three national radio stations (Radio DeeJay, Radio Capital and Italia Radio), with total collection of Lire 81.6 billion (a 33.8% increase in equivalent terms). Consolidated operating profits increased more than proportionately compared with the growth in revenues, despite start-up costs for Internet initiatives (which registered losses of around Lire 10 billion). This good result is attributable to stability of raw materials costs and limiting of structural costs, which made it possible to obtain higher margins from incremental sales. Financial charges increased from Lire 2.6 billion to Lire 7.2 billion, due to greater average indebtedness of the controlling company, caused mainly by acquisitions during 1998, distribution of reserves and the lower income registered by other group companies, which have positive financial positions due to the fall in interest rates. The current structure of indebtedness (mainly short-term), should regain balance during 2000 through the taking out of the subsidised long-term loans for technical investments contemplated by the law for the publishing sector, for a total of around Lire 100 billion. All the investments commenced during the previous year for introduction of four-colour printing (16 pages) of the local dailies owned by the Group were completed during the year. Elemedia continued investments in frequencies (for over Lire 25 billion) and Rotosud undertook further activities to complete the new printing plants. Agreements were also signed with suppliers during the year for expansion of printing capacity of La Repubblica rotary presses up to 96 pages and for a further increase in colour printing possibilities. The Group workforce, including employees on temporary contracts, increased from 2,930 in 1998 to 3,102 at 31 December, 1999, an increase of 172 employees, 165 of which for the activities of the new Internet company. In equivalent terms, the workforce therefore remained basically unchanged compared with the previous year, despite the development of activities (branches of Manzoni in the Friuli Venezia Giulia region, technical structure of Elemedia and the new Rotosud rotary press), due to reorganisation and the halt in turnover, particularly for the local dailies. Espresso Group 17

16 BOARD OF DIRECTORS' ANNUAL REPORT The results of the parent company Gruppo Editoriale I Espresso SpA GRUPPO EDITORIALE L ESPRESSO SpA The parent company publishes the weekly L Espresso and the newspaper La Repubblica, as well as guiding and co-ordinating the subsidiaries. The following table shows the main 1999 data in summary, compared with the data for the previous year. (billions of Lire) D% Revenues % from: circulation % advertising % Gross operating margin % Operating profit % Financial income/(charges) (9.2) (8.4) Net profits for the year Shareholders' equity Net financial position (205.3) (315.5) Employees Following the decision of Claudio Rinaldi to resign as editor of L'Espresso for personal reasons, the Board of Directors' meeting of 5 July, 1999, appointed Giulio Anselmi as editor of the news magazine. The Board of Directors thanked Mr. Rinaldi for his work and expressed satisfaction over his decision to remain at the publishing house as a commentator and to dedicate time to new publishing projects. * * * For greater clarity, the performance of the two operating divisions is commented on separately. The operating profits also contain the proportional shares of the holding company's common expenses. L Espresso division L ESPRESSO DIVISION (billions of Lire) D % Revenues % from: circulation % advertising % Gross operating margin 3.8 (14.4) n.s. Operating profit 2.1 (15.9) n.s. The considerable decrease in the operating profit of the L'Espresso division is mainly attributable to the combined effect of lower efficiency, higher costs and the greater number of initiatives needed to sustain circulation compared with previous years. 18 Espresso Group

17 BOARD OF DIRECTORS' ANNUAL REPORT Extensive promotion was nonetheless necessary to maintain the market shares in a sector where competition is fierce, in the absence of an increase in reading, due partly to the policies of the dailies and television, which tend to invade the traditional market of news magazines. Following this trend, L'Espresso began offering its readers other optional products at an additional cost besides the traditional film video cassettes (which have gradually lost ground over time). These include the advanced English course on video, the Bignami books and sets of CD-Roms, such as Encyclomedia, which was prepared by Umberto Eco and proved particularly successful. Circulation of L'Espresso increased from an average of 377,000 copies per issue in 1998 to 383,000 in The workforce of this division decreased from 130 to 127 due to the block in turnover. Of the other titles in the L'Espresso division, Limes performed well, partly as a result of the great success of the special on the Kosovo (65,000 copies), whilst Micromega (average of 14,000 copies per issue) remained stable at the 1998 values. Le Scienze monthly magazine, published in a joint venture with Scientific American, registered revenue of Lire 8 billion, as in 1998, and net profits of Lire 0.5 billion (Lire 0.7 billion in 1998). La Rivista dei Libri, a monthly published in a joint venture with the New York Review of Books, doubled its circulation to an average 12,000 copies per issue, due to the formula of an optional combination at an additional cover price with La Repubblica, although the income statement still registered slight losses (Lire 0.2 billion). La Repubblica Division LA REPUBBLICA DIVISION (billions of Lire) D% Revenues % from: circulation % advertising % Gross operating margin % Operating profit % The increase in advertising collection, already discussed, was significant in all segments and on almost all titles in the "Repubblica" division and combined with lower promotional costs to constitute the principal factors behind the increase in operating profitability which, despite the increase in depreciation of investments in doubling colour printing capacity, increased from 9.8% of revenues in 1998 to 15.7% in It was decided to further limit the number of promotional initiatives (141, against 202 in 1998), but circulation of La Repubblica was not adversely affected and actually increased by 4.1%, from an average 590,000 copies per issue in 1998 to 614,000 in This result is attributable to the constant attention focused on publishing quality of the title, an Espresso Group 19

18 BOARD OF DIRECTORS' ANNUAL REPORT improved distribution network in Italy and abroad for the daily and co-marketing initiatives with overseas titles. Circulation revenue remained basically unchanged compared with the previous year, despite being adversely affected by four issues less. In view of the success being encountered for colour advertising, it was decided to further increase four-colour printing capacity, through a series of investments (due for completion by the end of 2000) based on "rewinding" technology, and to increase the number of pages which may be printed on each rotary press at the printing centres. The workforce at this division remained the same as in 1998, with 679 employees. Gruppo Editoriale L'Espresso SpA The operating profit of the parent company as a whole increased from Lire 72.8 billion to Lire 108 billion, with an incidence on revenues up 3% on the previous year, from 8.4% to 11.5%. Income from investments totalled Lire 22.5 billion, against Lire 17.8 billion in This increase was due to the higher dividends received from the companies in which interests are held, which was only partially off-set by coverage of losses of around Lire 6 billion for Kataweb SpA. Financial charges fell from Lire 9.2 billion in 1998 to Lire 8.4 billion in 1999, due to lower interest rates, despite greater average indebtedness. The net financial position passed from indebtedness of Lire billion at the end of 1998 to Lire billion at 31 December, This negative variance, due to cash outlays of Lire 116 billion for the aforementioned extraordinary dividend, Lire 56 billion for stakeholdings and Lire 31 billion for investments, was partially offset by positive cash flows of Lire 78 billion and an increase in capital by way of implementation of the stock option plans of around Lire 16 billion. * * * The Extraordinary Shareholders' meeting of Gruppo Editoriale L Espresso SpA held on 20 October, 1999, approved restating in Euro and splitting of the par value of 123,093,485 shares (Lire 1,000 each) representing share capital of Lire 123,093,485,000, setting the number of new shares as 426,723,960, with a par value of Euro 0.15 and representing share capital of Euro 64,008,594. On 20 December, 1999, and 27 December, 1999, two increases in share capital were subscribed and paid up. These were reserved for employees of the company and its subsidiaries in accordance with the last paragraph of art of the Civil Code and decided by the Board of Directors' meeting of Gruppo Editoriale L Espresso SpA of 8 September, 1999, on the basis of the mandate conferred by the Extraordinary Shareholders' meeting 20 Espresso Group

19 BOARD OF DIRECTORS' ANNUAL REPORT of 29 April, The increases in share capital led to total issuing of 3,900,728 shares, divided between Euro 585, in par value and Euro 7,615, in share premium. Following these operations, share capital at 31 December, 1999, therefore totalled Euro 64,593,703.20, divided into 430,624,688 shares of a par value of Euro By way of partial implementation of the mandate conferred by the Extraordinary Shareholders' meeting of 29 April, 1999, the Board of Directors' meeting of 17 December, 1999, also voted for a further increase in share capital up to a maximum of Euro 64,620,253.20, via issuing of a maximum of 177,000 shares, reserved for employees of the company and its subsidiaries, in accordance with the last paragraph of art of the Civil Code, setting 31 December, 2003, as the last date for exercising these stock options. * * * The parent company Gruppo Editoriale L'Espresso SpA has commercial, service supply, operating and financial advice relationships with its subsidiaries. The commercial relationship with A. Manzoni & C. SpA, for the sale of advertising space in L Espresso e La Repubblica, and those with subsidiaries Kataweb SpA, for Internet activities, and Rotosud Srl and CPS Srl, for composition and printing, are considered to be the most relevant. Gruppo Editoriale L Espresso SpA also manages an intragroup checking account, shared by almost all the subsidiaries and affiliates in their different debt and credit positions. All operations take place at market rates. Gruppo Editoriale L'Espresso SpA obtains, in its turn, services and various advice relating to strategic, administrative, financial and fiscal matters from the controlling company, CIR SpA. Providing of these services by the controlling company is considered preferable to having them performed by a third party. This is due to the vast knowledge of the market on which Gruppo Editoriale L'Espresso operates which the company has acquired over the years. In addition to the registered office in Rome, via Po n. 12, the company also has a branch office in Rome, Piazza Indipendenza n. 23/c. THE RESULTS OF THE MAIN SUBSIDIARIES K ATAWEB SpA Kataweb SpA was set up in January to handle all the Internet activities previously developed within the Group. During the year, the company focused attention on the following areas of activity: Free ISP (Internet service provider), i.e. free access to the web; "Business to consumer", i.e. the activities and services destined for final users, namely: information, advertising, e-commerce, radio and TV broadcasting, search Espresso Group 21

20 BOARD OF DIRECTORS' ANNUAL REPORT engines, , etc.; "Business to business", i.e. the supply to companies of complete service packages, ranging from simple graphic art to platforms for e-commerce and web hosting. The major acquisitions and business agreements made by Kataweb during its first year of activity are summarised below. Acquisitions and joint ventures in the business to consumer sector E-commerce A 70% stake in the share capital of IFE Srl, a company operating in the e-commerce of top-quality food and wines under the Esperya brand name. This company will also operate in the USA through a US associate in A 70% stake in the share capital of Enotrya Srl, a company set up to develop sale of wines. An 80% stake in the share capital of Easy Commerce Srl, a company specialising in on-line sales of tickets for concerts, exhibitions and events. A 50% stake in the share capital of Zivago SpA, in equal partnership with Librerie Feltrinelli SpA, for the on-line sale of books and records. A 50% stake in the share capital of Katama SpA, in equal partnership with Amadeus Marketing Italia SpA, for the on-line sale of air and railway tickets, car hire and travel packages in general. News and community A 30% stake in the share capital of CNN Italia SpA, for the creation of an information site in Italian, in collaboration with CNN International. Acquisitions in the business to business sector An 80% stake in the share capital of Uhuru Digital Design Srl, which creates sites for companies and supplies customers with communication and marketing services. A 51% stake in the share capital of Aleph Srl, a company specialising in the field of software development and integrated services for companies, with particular focus on e-commerce solutions. A 70% stake in the share capital of Quadrante Srl, which plans and designs solutions for companies intending to operate on the Internet. An 8% stake in the share capital of the US company, Presto Technologies Inc, which has developed a new technology allowing quick and easy Internet connection. Technological and business agreements An agreement has been reached with Inktomi Inc., a US leader in the reference technology and provider of all the major search engines world-wide, for the development of the company's own search engine. An agreement with Real Networks Inc, the world leader on Internet broadcasting technology, for development of audio and video multi-media services on the Internet. 22 Espresso Group

21 BOARD OF DIRECTORS' ANNUAL REPORT An agreement has been reached with Critical Path for an service for final users. An agreement has been initialled with Vicinity Inc. for development of geomarketing services. An agreement has been initialled with Albacom for the free Internet access service. The Kataweb portal The number of registered users of the free ISP service at 31 December, 1999, had already exceeded 120,000, reaching 164,000 by the end of January. Access to Internet is via the www. kataweb.it portal, which provides information, community services, radio broadcasts and e-commerce sites. The nu.mber of page views of the Kataweb/Espresso system exceeded 50 million in December and increased to 60 million in January. Contents include the sites of the Espresso Group titles, new sites developed by the subsidiary, Kataweb News, and other sales agreements. The KW Finanza site is having particular success, with over 13 million page views and 80,000 registered users in January, The portal also offers the innovative search engine, Katalogo.it, the Kata.com and the possibility of sending SMS messages to mobile phones. Kataweb.it also offers a wide range of music and videos on the KW Radio and KW Video broadcasting sites. The results 1999 Company revenue was Lire 3.7 billion, of which Lire 3.3 billion related to advertising revenue from July, Consolidated revenue was Lire 9 billion. The forecast for 2000, within the same perimeters, is for consolidated revenue of Lire billion. Company losses were Lire 7.3 billion, with consolidated losses of Lire 10.4 billion. Acquisitions for around Lire 12 billion were made during the year, as well as investments for technology purchase and other investments totalling approximately Lire 28 billion. The net financial position at 31 December, 1999, reflected indebtedness of Lire 7.4 billion, after collecting Lire 21 billion from the parent company, Gruppo Editoriale L'Espresso SpA, by way of coverage of losses and an increase in capital. The workforce at the end of 1999 numbered 58, increasing to 165 if the employees of the subsidiary companies are counted. Espresso Group 23

22 BOARD OF DIRECTORS' ANNUAL REPORT A. MANZONI & C. SpA A.Manzoni & C. SpA is the franchise which sells advertising space in the titles, radio stations and Internet activities of the Espresso Group, in addition to other publishers. The 1999 results, compared to 1998, are summarised below. (billions of Lire) D% Gross advertising collection , % Revenue , % Gross operating margin n.s. Operating profit n.s. Financial income/(charges) 0.1 (0.3) Net profits Net financial position (9.1) 5.4 Employees All the titles in portfolio contributed to the growth in revenues, with an increase in both the number of spaces sold and prices. In equivalent terms, and including revenues from the concessions acquired at the beginning of 1999 in the previous year (national and local advertising in the Messaggero Veneto and Il Piccolo and record advertising for the three Elemedia broadcasters, the former collected on its own behalf), growth was 16%, which is higher than the reference market average. As a whole, the Espresso Group titles obtained gross collection of Lire 1,060.1 billion (+24% in absolute terms, +16.2% in equivalent terms), with highly positive performance for La Repubblica (+17.3%) and the radio stations (+57.2% in absolute terms, % in equivalent terms). Collection from other publishers' titles totalled Lire 52.5 billion, thanks partly to the new concessions acquired (national advertising for the Nuova Basilicata and the Nuovo Giornale of Bergamo, local advertising for the Quotidiano of Calabria, national and local advertising for il Popolo). Revenues increased by 17.6% in equivalent terms. A dedicated network was created during the year for collection on Internet, which totalled revenue of around Lire 6 billion in 1999, among the highest in Italy for this rapidly expanding sector. Growth in advertising revenue, achieved in an area with predominantly fixed costs, was reflected in an increase from Lire 3 billion to Lire 8.8 billion in the operating profit and from Lire 1 billion to Lire 3.2 billion in net profits. The net financial position passed from indebtedness of Lire 9.1 billion at the end of 1998 to a cash surplus of Lire 5.4 billion at 31 December, 1999, due to cash flows generated by operations. The workforce at 31 December, 1999 totalled 441, with an increase of 30 compared with 1998, due to the opening of three new branches in Friuli Venezia Giulia and development of the sales network for Internet spaces and radio advertising. 24 Espresso Group

23 BOARD OF DIRECTORS' ANNUAL REPORT LOCAL NEWSPAPER DIVISION FINEGIL GROUP The following table shows the main data for 1999, compared with 1998, for the local newspapers controlled by Finegil Editoriale SpA (twelve dailies and one twice-weekly). (billions of Lire) D% Revenues % from: circulation % advertising % Gross operating margin % Operating profit % Financial income / (charges) Pre-tax profits Net profits Net financial position Employees Profitability of the Finegil Group improved greatly during 1999, due to the good performance of advertising revenue, which was boosted in part by the introduction of colour. The full effects of the reorganisation and technological innovation plans commenced over recent years were also felt. Circulation as a whole remained unchanged compared with 1998, although there was some differentiation between the titles. Sales of the various Gazettes (Mantua, Reggio, Modena and Ferrara) increased, as did the Città di Salerno, whilst the dailies in the Veneto region were adversely affected by the decision to suspend free home distribution (Nuova Venezia) and promotions (Mattino of Padua). Advertising revenue increased by 9.3%, due to increases in both prices and spaces. Almost all the Finegil Group dailies began four-colour printing of up to 16 pages in 1999 and the fist signs from the advertising market are encouraging for a return on the investment (around Lire 50 billion) in the short-term, thanks partly to a policy of high prices. Growth of gross operating margin, as well as being based on stability of production costs and lower promotional costs, is also a result of good performance of revenues and reduced operating costs. This increased from Lire 43.4 billion in 1998 to Lire 52.9 billion in 1999, improving the incidence on revenues by 2.5%, from 15.7% to 18.2%. The operating profit, penalised in part by greater depreciation of technical investments in colour printing, increased from Lire 32.7 billion in 1998 to Lire 38.8 billion in 1999, with an incidence increasing from 11.8% to 14.4%. Lower financial income (Lire 2 billion), linked to lower interest rates, worsening of the balance of extraordinary management (Lire 2.5 billion), due to the absence of contingent gains in 1998, and, above all, the greater incidence of income tax, offset the improvement in the operating profit. Net profits fell from Lire 19.8 billion in 1998 to lire 17.7 billion in Espresso Group 25

24 BOARD OF DIRECTORS' ANNUAL REPORT The positive net financial position decreased from Lire 66.6 billion at the end of 1998 to Lire 49.7 billion at 31 December, 1999, due to the dividend paid by Finegil Editoriale SpA to the parent company Gruppo Editoriale L Espresso SpA (Lire 17 billion) and outlays for investments (Lire 35 billion). The workforce at 31 December, 1999 was 799, a decrease of 12 compared with the end of 1998, due partly to the reorganisation of the Genoa office of EAG Srl, which involved early retirement for six printers. CIMA BRENTA SPA AND S.E.T.A. SPA Cima Brenta SpA publishes the "Alto Adige" of Bolzano and the Corriere delle Alpi of Belluno through its wholly owned subsidiary, Seta SpA. Total circulation of the two local newspapers remained basically unchanged, at an average of 38,000 copies per issue, although their market share increased, in a region which registered a drop in sales compared with Circulation revenues decreased slightly, due to six issues less as a result of strikes. Advertising revenue totalled Lire 20.4 billion, an increase of 12.7% over 1998, boosted in part by the greater number of colour adverts. The increase in revenues from Lire 34.3 billion to Lire 36.4 billion, combined with the positive effects on costs of the reorganisation which has taken place over recent years and during 1999 (four journalists leaving, two as a result of elimination of the German-language pages), lead to an increase in the operating profit from Lire 0.7 billion to Lire 2.7 billion. The incidence on revenue tripled from 2% to 7.5%. Net profits increased from Lire 0.4 billion to Lire 1.1 billion. The net financial position passed from indebtedness of Lire 1 billion at the end of 1998 to a cash surplus of Lire 0.8 billion at 31 December, 1999, due to cash flows generated by operations. The workforce decreased by 6, from 122 to 116. PICCOLO AND MESSAGGERO VENETO GROUP NCE - Newco Edit SpA This company, which is responsible solely for managing the controlling stakes in Editoriale Messaggero Veneto SpA, Editoriale Il Piccolo SpA and V.I.T.A. SpA, ended 1999 with losses of Lire 1 billion. These losses were due to financial charges sustained following worsening of the net financial position, which passed from a cash surplus of Lire 1.5 billion at the end of 1998 to indebtedness of Lire 34.5 billion at 31 December, 1999, due to payment of debts (around Lire 34 billion) contracted over recent years for the purchase of investments. Data on the three main subsidiary companies is discussed below. Editoriale Messaggero Veneto SpA The following table shows the main 1999 data in summary, compared with the data for the previous year. 26 Espresso Group

25 BOARD OF DIRECTORS' ANNUAL REPORT (billions of Lire) D% Revenues % from: circulation % advertising % Gross operating margin % Operating profit % Financial income / (charges) (0.2) 0.2 Net profits Net financial position (5.9) 22.9 Employees Sales of the Messaggero Veneto increased slightly, from a daily average of 53,200 copies in 1998 to 53,600 in Circulation revenue fell by 2.3% compared with the previous year, due to less issues as a results of four days of strikes. Advertising revenue increased by 17.7%, due to the increase in collection and the better contractual conditions applied by A. Manzoni & C. The improvement in the operating profit, which increased from Lire 5.7 billion to Lire 8.3 billion, with an incidence on revenue rising from 13.5% to 18.5%, also helped limit operating costs, particularly through the decrease in printing costs and promotional expenses. Growth in the operating profit was reflected entirely on net profits, which increased from Lire 2.7 billion to Lire 4.2 billion. The net financial position passed from indebtedness of Lire 5.9 billion at the end of 1998 to a cash surplus of Lire 22.9 billion at 31 December, 1999, due to collection of receivables owed on transfer of an investment to the parent company, NCE Newco Edit SpA and good cash flows from operations. The workforce at 31 December, 1999 was 87, unchanged compared with 31 December, Editoriale Il Piccolo SpA The following table shows the main 1999 data in summary, compared with the data for the previous year. (billions of Lire) D% Revenues % from: circulation % advertising % Gross operating margin % Operating profit % Financial income / (charges) Net profit Net financial position Employees Espresso Group 27

26 BOARD OF DIRECTORS' ANNUAL REPORT Circulation of Il Piccolo, at a daily average of 53,000 copies, remained basically unchanged compared with the previous year, although the market share continued to increase in all areas where the newspaper is distributed. Circulation revenue fell slightly (-1%), due to three issues less than in The 17.8% growth in advertising revenues, boosted by contribution of the A. Manzoni & C. sales network and the better conditions applied by that company, combined with careful control of costs, improved the operating profit, which increased from Lire 4.9 to Lire 7.1 billion. Its incidence on revenues increased by 4%, from 12.5% to 16.7%. Good operating performance, combined with the absence of the extraordinary charges in 1998, considerably improved net profits, which increased from Lire 1.3 billion to Lire 3.7 billion The net financial position passed from a cash surplus of Lire 9.9 billion at the end of 1998 to one of Lire 17.4 billion, due to cash flows from operations. The workforce at 31 December, 1999 totalled 154 and remained unchanged compared with the end of VITA SpA This company, which carries out printing activities for the Messaggero Veneto and nongroup publishers, registered revenues of Lire 25 billion, a 3.1% increase compared with the previous year. This was due mainly to activities for Il Sole 24 Ore, which prints its north-eastern edition and several supplements at the Udine plant. Generalised limiting of operating costs and a net decrease in depreciation contributed towards doubling the operating profit, which increased from Lire 2.4 billion in 1998 to Lire 5 billion in Net profits rose from Lire 0.9 billion to Lire 2.6 billion. Following financial agreements with Il Sole 24 Ore, work commenced during the year to increase four-colour printing capacity from 8 to 12 pages and for implementation of a new insertion and shipment system. The investment, which involved outlays of Lire 6 billion. will become operative from February The net financial position decreased from a cash surplus of Lire 7.1 billion at the end of 1998 to one of Lire 5.9 billion at 31 December, 1999, due to the aforementioned investments. The workforce decreased from 83 to Espresso Group

27 BOARD OF DIRECTORS' ANNUAL REPORT RADIO BROADCASTING DIVISION The company owns three national radio stations (Radio DeeJay, Radio Capital and Italia Radio). ELEMEDIA SpA The following table shows the main 1999 data in summary, compared with the data for the previous year. (billions of Lire) D% Revenues % Gross operating margin % Operating profit % Financial income / (charges) (1.6) (1.0) Net profits Net financial position (25.6) (33.0) Employees The large growth in revenues, particularly for Radio D.J. and Radio Capital, led to an increase in the operating profit of Elemedia SpA from Lire 4.6 billion in 1998 to Lire 11.1 billion in 1999, with an incidence on revenues increasing from 8.8% to 15.9%. This result was achieved in the presence of heavy investments for the purchase of frequencies and actions aimed at improving the publishing product. Net profits, which benefited from extraordinary income of Lire 2 billion, totalled Lire 6.9 billion (Lire 0.2 billion in 1998). The net financial position at 31 December, 1999 registered indebtedness of Lire 33 billion, an increase over the Lire 25.6 billion at the end of due to investments of Lire 23 billion during the year, particularly in frequencies, only partially offset by the greater cash flow from operations. The workforce, including those on temporary contracts, increased from 111 to 120. Performance of the three radio stations is discussed separately below. Radio DeeJay regained its place at the top of the national listener ratings for nation-wide commercial broadcasters, reaching an average of 5.3 million daily contacts at the end of This result is partly due to numerous initiatives undertaken during the year to firmly establish the already strong positioning in the young people's segment. In particular, promotional campaigns were undertaken, new frequencies were acquired to increase the listener area and improve the quality of the transmission signal (active stations increased from 286 to 330) and the schedule was improved to find programs and people capable of innovating and "setting trends". Advertising revenue also increased, from Lire 48 billion in 1998 to Lire 61.2 billion in 1999 (+28%). This was due to the increase in collection and the better contractual condi- Espresso Group 29

28 BOARD OF DIRECTORS' ANNUAL REPORT tions negotiated with the broker A. Manzoni & C. SpA, following entry into normal operation of the dedicated sales network. Though adversely affected by greater promotional and signal diffusion costs, the operating profit increased from Lire 19.5 billion to Lire 27.7 billion. The organisational structure of the radio station was improved, with an increase in the number of employees to 51. Radio Capital continued its strategy of increasing the geographical coverage of the signal, promotion and devising of an editorial format hinging on a mixture of music and information. The initial results of these actions have already been witnessed: at the end of 1999, the ratings shot past the one million mark (600,000 in 1998) and advertising revenue doubled from Lire 3.6 billion in 1998 to Lire 7.4 billion in The station continued to register operating losses (Lire 11 billion), due to the fact that revenue is still low compared with the costs (mainly fixed) of a national radio station. Investments in plant (there were approximately 200 stations at 31 December, 1999) absorbed financial resources totalling over Lire 10 billion. Following transfer of the entire station to Rome, the number of employees decreased from 49 to 42. Italia Radio perfected its editorial format during the year, which is based on news and discussion programs, and began a program of investment aimed at guaranteeing geographical coverage in line with the station's objectives. The year ended with operating losses of Lire 5.5 billion, partly as a result of repositioning costs. The number of employees at 31 December, 1999 totalled 27, with 7 additional employees working on completion of the technical structure, work which was previously performed by external collaborators. OTHER ACTIVITIES EDIZIONI LA REPUBBLICA SpA The company registered revenue of Lire 29.5 billion in 1999, a slight drop against the Lire 30.1 billion in The revenue mix is varied and revenue from the traditional activity of multimedia products actually fell from Lire 17.7 billion to Lire 14.3 billion. This was due to the decision to limit the number of products launched directly on the market, in favour of service activities for the Group's titles. National Geographic magazine, on the other hand, registered a considerable increase, from Lire 12.4 billion to Lire 15.2 billion. The combination of these two factors led to a considerable increase in the operating pro- 30 Espresso Group

29 BOARD OF DIRECTORS' ANNUAL REPORT fit, from Lire 0.4 billion to Lire 4.5 billion. The incidence of the operating profit on revenue increased from 1.4% to 15.6%. In its second year of publication, National Geographic achieved a positive economic result (Lire 2.1 billion), boosted by the growth in both circulation (an average of 160,000 copies per issue, of which 80,000 were subscriptions) and advertising (which reached gross revenue of Lire 6.2 billion, an increase of 19.2% in equivalent terms compared with the previous year). Net profits for the company, which benefited from gains of approximately Lire 0.8 billion on the disposal of an investment in 1998, increased from Lire 1.3 billion to Lire 3 billion. The good performance was also reflected in the net financial position, which passed from Lire 13.7 billion at the end of 1998 to Lire 18.3 billion at 31 December, The workforce at the end of the year, including those on temporary contracts, totalled 17 (18 at 31 December, 1999). G.M.P.SpA (Free Press) Company revenue in 1999 was Lire 27.7 billion, an 0.8% increase compared with the previous year. This result is especially significant for the fact that it was achieved in a particularly difficult market situation and derives mainly from the good results obtained with repositioning and product improvement (enhancement of the colour printing process and addition of news and features to the titles). The operating profit increased from Lire 0.6 billion to Lire 0.8 billion, whereas net profits fell from Lire 0.2 billion to Lire 0.1 billion, due to reorganisation costs. The net financial position improved from indebtedness of Lire 1.3 billion at the end of 1998 to Lire 0.2 billion at 31 December, The workforce fell from 84 to 76. As already mentioned in another part of the report, the company branch publishing 12 titles in Lombardy, Triveneto and Emilia which did not produce margins in line with company prospects was sold to third parties on 22 December, 1999 (taking effect from 1 January, 2000). GMP SpA therefore maintained only 8 titles, distributed in the Bologna and Romagna areas, which should guarantee a high level of profitability with a workforce of just 25. ROTOSUD Srl This company, which prints Espresso Group periodicals using rotogravure technology, as well as accepting a small amount of non-group work, registered revenues of Lire 52 billion, a 4.2% increase compared with the previous year. The operating result, which increased from Lire 14.6 billion to Lire 14.8 billion, benefited only in part from the increase in revenue and the 2.7% fall in labour costs following reor- Espresso Group 31

30 BOARD OF DIRECTORS' ANNUAL REPORT ganisation in 1998, due to the increase in production costs (ink) and mainly to greater depreciation for investments made over the previous two years. The variation in net profits from Lire 2.3 billion to Lire 0.9 billion was caused in part by higher payments on the lease-purchase of the new rotary press and by higher taxes due to the end of the ten-year tax subsidies from which the company benefited in the past. The net financial position at 31 December, 1999 registered indebtedness of Lire 23.4 billion, basically unchanged from the Lire 23 billion at 31 December, The workforce, including those on temporary contracts, increased from 110 at the end of 1998 to 115 at the end of 1999, due to requirements linked with new organisation of labour which, by adding a new team of operatives, will allow a further recovery of efficiency. CPS Srl SOMEDIA Srl The company, which prepares Espresso Group periodicals for printing, registered an increase in revenue from Lire 6.1 billion to Lire 6.5 billion. In the presence of greater costs for outside processing (linked to greater production volumes) and greater depreciation, the operating profit increased from Lire 1.1 billion in 1998 to Lire 1.3 billion in Net profits remained basically stable at Lire 0.6 billion, due to higher tax for the year. The net financial position passed from a cash surplus of Lire 1.4 billion at the end of 1998 to one of Lire 2.3 billion at 31 December, The workforce, including those on temporary contracts, increased from 34 to 35. Alongside its traditional publishing activities (Career Book), organisation of conferences and seminars and Auditel services, Somedia made a series of investments in developing on-line training activities, the effects of which should be seen in In particular, the company started the research and studies necessary for developing distance learning, based mainly on the Internet, in the fields of university and professional training. In the case of the former, an agreement was signed with the Milan Polytechnic in December for creation of a three-year degree course in IT engineering via Internet. In 1999, the company registered revenue of Lire 8 billion, a slight drop compared with 1998 (Lire 8.6 billion), due to lower revenue from Auditel services, which have been superseded with the arrival of the Internet. Partly as a result of the investments made, the operating profit fell from Lire 0.7 billion to Lire 0.4 billion, while net profits fell from Lire 0.4 billion to Lire 0.2 billion. The net financial position at 31 December, 1999 was positive at Lire 0.8 billion (Lire 1.1 billion at 31 December, 1998) and the workforce was 9, the same as at the end of * * * 32 Espresso Group

31 BOARD OF DIRECTORS' ANNUAL REPORT The Year 2000 Problem The dreaded "millennium bug" had no repercussions on the company or group information systems. Costs sustained for the year 2000 problem were approximately Lire 2 billion. Introduction of the Euro Partly as a result of the characteristics of the publishing sector in which it operates, the company decided not to adopt the Euro as an accounting currency yet. However, both the parent company and its associated companies are capable of issuing/receiving invoices or other accounting documents in the European currency for anyone requiring this. An interfunctional working group has been set up to co-ordinate transition to the Euro, in collaboration with category associations. The only costs sustained in 1999 related to consultancy and alteration of accounting systems and sales procedures. * * * Espresso Group 33