Bringing Sound. Life

Transcription

1 Annual Report 2012

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3 Bringing Sound to Life Our commitment is to restore a fully active life and joie de vivre to people with hearing difficulties by achieving complete satisfaction in auditive communication in all listening situations.

4 TRANSLATION FROM THE ORIGINAL TEXT The CEO s Message to the Shareholders Highlights 6 Company Profile 12 Positioning 12 Business Sectors 12 Strenghts 13 The History of the Group 15 The Group s Brands 16 Organisational Structure 18 Index Annual Report 2012 The Business 20 The Market 20 Amplifon s Strategy 22 A Dual Role 22 Added Value Service 22 Amplifon s Stores 25 The Sales Network 26 Corporate Governance and People 30 The Code of Ethics 30 Corporate Bodies 31 The Board of Diretors 32 Human Resources 36 Corporate Social Responsibility 42 The Mission s Social Aims 42 Working with the Medical Profession 43 Playing our Role in Society 45 Shareholder Information 50 Borsa Italiana Listing 50 Main Shareholders 50 Share Performance, Volume Traded and Market Capitalisation 50 Internal Dealing 51 Relations with the Financial Markets 51 Brokers Coverage 53 Financial Calendar

5 Report on Operations at 31 December Comments on the Financial Results 55 Statement of Changes in Net Equity and the results for the period of the Parent Company Amplifon S.p.A. and the Group Net Equity and results for the period in question as at 31 December Risk Management 110 Treasury Shares 118 Research and Development 118 Transactions between Group Companies and with Related Parties 118 Contingent Liabilities 119 Subsequent Events after 31 December Outlook 120 Corporate Governance Report 121 Comments on the Financial Results of Amplifon S.p.A. 134 Consolidated Financial Statements at 31 December Consolidated Statement of Financial Position 150 Consolidated Income Statement 152 Statement of Comprehensive Income 153 Statement of changes in Consolidated Net Equity 154 Consolidated Cash Flow Statement 156 Supplementary Information to the Financial Statements 157 Explanatory Notes 158 Annexe I Consolidation Area 234 Annexe II Information pursuant to 149-duodecies of Consob Issuers Regulations 236 Annexe III Declaration in respect of the Consolidated Financial Statements pursuant to 154-bis of Legislative Decree 58/ Independent Auditor s Report at 31 December Amplifon Annual Report 2012

6 The CEO s Message to the Shareholders Dear Shareholders, 2012 was a particularly challenging year, from which we emerged strengthened, thanks to the solidity of our global leadership and the continuing validity of our strategy of geographical diversification of the business, achieving positive results in terms of both financial structure and profits despite the difficulties in the economic environment. The Amplifon Group continued to benefit from its diversified international presence, succeeding in offsetting the criticalities that characterised the Dutch market and those caused by the changes in legislation in Switzerland with outstanding growth in North America and Asia-Pacific and a positive performance in the main countries of Europe. In 2012 we once again achieved positive results, slightly up on 2011, when the result was the best in the history of the Group. Total revenue reached million - an increase of 2.3% over 2011 due not least to external growth and favourable trends in exchange rates. EBITDA was million, an increase of 0.5% over 2011, thanks to a significant improvement in profits in the US and to break-even being broadly achieved in the UK. These results offset the performance in Continental Europe, which was adversely affected by the mentioned problems in the Netherlands and Switzerland, while profitability in the Asia-Pacific area was once more the highest in the Group. Net profit was 43.2 million slightly up on 2011 (+1.1%): this is extremely significant, since it was achieved against the background of difficult economic conditions. 4

7 The CEO s Message to the Shareholders In 2012 we continued to: focus strongly on cost optimisation and an effective reduction in our debt in order to optimise our financial structure and reaffirm our ability to generate significant cash flow without renouncing our vocation to grow internationally; invest significant resources - thanks to the cash flow generated by operations - in projects designed to sustain and develop the business and consolidate our world leadership, while at the same time laying the foundations for even sounder growth in the future; maintain our brand s strength and the excellence of our service by investing in marketing, training and information systems, increasing the coverage of our specialist points of sale, improving our market share in the countries where we operate and at the same time increasing the Group s presence in high-potential markets with interesting growth opportunities. In 2012 we entered the Turkish and Polish markets, but above all we extended our geographical coverage in India where we are now the largest retail chain in the country following the acquisition made during the year. The results we achieved in 2012, the undoubted strength of our leadership in an industry with enormous growth potential in the short, medium and long term, together with the equally strong ambition to grow which marks us out, best positions the Amplifon Group to continue along the path of solid and stable growth in sales and profits. Striving for operational excellence, a firm focus on the customer s needs, our people s high professional standards and expertise and our unique global business model have enabled us to achieve important results by offering a personalised, advanced solution to the increasing demand for hearing care. These strengths will continue to be the fulcrum of our strategies and the basis for further strengthening of our global leadership. On behalf of the Board of Directors CEO Franco Moscetti 5 Amplifon Annual Report 2012

8 2012 Highlights Despite economic weakness, particularly in Europe, the Amplifon Group continued to grow in 2012, while maintaining its strong focus on debt reduction and cost control. TURNOVER Turnover reached million, an increase of 2.3% over The company continued to benefit from the international diversification of its business by achieving outstanding growth in North America (+5.4% in US dollar terms) and Asia-Pacific (+5.0% in AU dollar terms), which offset a fall seen in Continental Europe (-2.9%), mainly due to changes in regulations in The Netherlands and Switzerland, while UK revenues were stable in sterling terms (-0.8% in GBP). The favourable trends in the exchange rate contributed as to 2.9% to the overall growth of the Group s revenues. Ugo Giorcelli (CFO) EBITDA Group EBITDA reached the record level of million, a slight increase of 0.5%, or 0.7 million, and the EBITDA margin was 17.1% - a contraction of 0.4% from NET PROFIT Group net profit was 43.2 million, a slight increase of 0.5 million (+1.1%) over 42.7 million in NET FINANCIAL INDEBTEDNESS At 31 December 2012 net financial indebtedness was million, a reduction of 46.0 million from the end 2011 figure of million. This once again indicates the Group s ability to generate significant cash flow, which inter alia financed capital expenditure of 35.4 million, acquisitions worth 12.6 million, interest payments and other net finance cost totalling 22.1 million and dividends to the shareholders of 8 million. 6

9 2012 Highlights Sales by Region FY 2012 ( million) Asia Pacific Africa North America UK and Ireland Continental Europe EBITDA by Region FY 2012 ( million) Asia Pacific Africa North America Continental Europe UK and Ireland -0.7 Growth and Profitability ( million) SALES CAGR : +8.0% EBITDA CAGR : +11.4% % % % % % % % % % % % CAGR: Compound Annual Growth Rate: the weighted growth rate for the period considered. 7 Amplifon Annual Report 2012

10 MAIN ECONOMIC AND FINANCIAL DATA ( thousands) FY 2012 FY 2011 Change Economic data: Revenues from sales and services 846, % 827, % 2.3% Gross operating margin (EBITDA) 145, % 144, % 0.5% Operating result before the amortisation and impairment of customers lists, trademarks, non-competition agreements and goodwill arising from business combinations (EBITA) 114, % 116, % -1.7% Operating income (EBIT) 97, % 100, % -2.4% Profit (loss) before income taxes 72, % 72, % -0.1% Group net income (loss) 43, % 42, % 1.1% ( thousands) 31/12/ /12/2011 Change Financial data: Fixed Assets 829, , % Net Invested Capital 735, , % Total Net Equity 430, , % Total Net Financial Indebtedness 305, , % 31/12/ /12/2011 Net Financial Indebtedness/Group Net Equity Financial Indebtedness /Net Equity Financial Indebtedness /EBITDA

11 Highlights 2012 EBITDA is the operating result (earnings) before depreciation, amortisation and impairment of tangible and intangible assets. EBITA is the operating result before the amortisation and impairment of customer lists, trademarks, non-competition agreements and goodwill arising from business combinations. EBIT is the operating result before financial income and charges and taxes. Free cash flow is the cash flow from operations and investment activities before cash flows used for acquisitions and payment of dividends. The Net financial indebtedness/group Net Equity indicator is the ratio of net financial indebtedness to the Group s net equity. The Net financial indebtedness/net Equity indicator is the ratio of net debt to total net equity. The Net Debt/EBITDA indicator is the ratio of net debt to EBITDA for the last four quarters (determined with reference only to recurring operations and on a pro forma basis in case of significant changes in the Group Structure). 9 Amplifon Annual Report 2012

12 A Global Business Environment Hearing loss is increasing constantly throughout the world 20 % Average penetration rate in industrialised countries: 20% Average social cost of hearing impairment: circa 6,600 per person (source: Shields, 2003)

13 The facts and the numbers underpin our potential Hearing loss is a pathology that affects people of all ages and may have very serious consequences in everyday life, above all in learning and interpersonal relationships. In the world over 650 million people have hearing problems (source: WHO). Amplifon s business is such that its mission is bound up with socio-economic factors like the acceleration of demographic growth around the world, higher life expectation, increasing urbanisation and idustrialisation - causing an increase in the level of noise pollution - and low awareness of hearing impairment and its implications. These conditions are in turn involved with an increasingly widespread welfare and health culture, continuous technological innovation and growth in per capita income in emerging economies. These are decisive drivers for our Group s business development.

14 Company Profile The Amplifon Group is world leader in the distribution, application and customisation of hearing solutions. Its ability to innovate, the extensive market coverage and its unique and ground-breaking business model have enabled the Company - founded in Italy in to grow continuously over the years and to consolidate its leadership around the world. Positioning The Group has a 9% share of the world market and operates in Italy, France, the Netherlands, Germany, Spain, Portugal, Switzerland, Belgium, Luxembourg, Hungary, Turkey, Poland, the UK, Ireland, the US, Canada, Australia, New Zealand, India and Egypt. More than 10,000 people work in Amplifon around the world: in over 3,200 stores, 2,400 service centres, 1,665 affiliated stores and in back-office units. 10,390 people 3,237 stores 2,401 service centres 1,665 affiliated stores Business Sectors The Group s business is divided into three areas: 1. the sale of hearing solutions and related application and customisation services (87%); 2. the sale of accessories such as batteries, consumables and spare parts (12%); 3. the distribution of biomedical equipment (1%). Revenues by Segment Other related Products and Services 12% 1% Biomedical 87% Hearing Aids 12

15 Company Profile Strengths The Group s ability to fulfill its Mission, by providing a personalised and always advanced response to the growing demand for hearing solutions is based on a number of distinctive strengths. Its unique and innovative global business model that combines the best medical-retail skills with a thoroughgoing focus on the needs of the customer. Highly professional international know-how with a full range of skills and best practices acquired in over 60 years of experience. The widespread geographical coverage of its distribution network and a forward-looking strategy of internationalisation which has enabled Amplifon to attain and consolidate its global leadership and to strengthen the Group s financial structure and solidity. The qualified relationship with the medical community and the support provided for the development of new ways of treating hearing loss. These are made possible by the work of the Group s Centre for Research and Studies (CRS) and have enabled Amplifon to become a specialised partner and an international authority in the audiological and otorhinolaryngological fields. The high quality and professionalism of Amplifon s people, and their ability to take the growth and development opportunities that the Company offers them. 13 Amplifon Annual Report 2012

16 2012 Market Shares Country Brand Market Share Position Italy Amplifon 41% # 1 France Amplifon 11% # 2 The Netherlands Beter Horen 32% # 1 Germany Amplifon 4% # 3 Spain Amplifon 10% # 2 Portugal Amplifon 8% # 4 Switzerland Amplifon 21% # 1 Belgium & Luxembourg Amplifon 19% # 2 Hungary Amplifon 14% # 1 Turkey Maxtone N/A # 4 Poland Amplifon N/A - UK & Ireland Amplifon 14% # 2 USA Miracle Ear/ Elite/ Sonus 10% # 1 Canada Sonus 1% - Australia NHC 23% # 2 New Zealand Bay Audiology/ NHC +50% # 1 India Amplifon N/A - Egypt Amplifon 30% # 1 Markets of Operation** 14% # 1 Global market ** 9% # 1 (*) These figures refer to the private sector only, excluding the National Health Service. (**) Source: National Trade Associations and figures provided by insurance brokers. Amplifon market shares are calculated by local Management based on information received from the suppliers. There is no official certified data source for the volumes sold. Since our average selling price is in the upper market range, it is reasonable to expect that market shares calculated on revenue will exceed those based on volumes Revenues from Sales and Services ( thousands) FY 2012 FY 2011 Change Italy 224, , % France 98,325 96, % The Netherlands 89,807 97, % Germany 41,762 42, % Spain & Portugal 31,967 32, % Switzerland 25,995 41, % Belgium & Luxembourg 21,461 21, % Hungary 6,014 4, % Turkey 1,402 0 N/A Eliminations Continental Europe 541, , % UK & Ireland 41,825 39, % USA & Canada 130, , % Australia 91,827 78, % New Zealand 37,904 35, % India 1, % Asia - Pacific 130, , % Africa (Egypt) 2,483 1, % Eliminations 0 0 Total Group 846, , % 14

17 Company Profile The History of the Group 1950 In Milan, Charles A. Holland sets up Amplifon S.p.A., specialising in distribution of hearing aids. 1960s Starting in the 1960s the Company grows and consolidates its leadership in the Italian market, opening new shops in all regions. 1990s The process of international expansion begins with entry into the Spanish and Portuguese markets in Between 1998 and 2000 the Group makes more and more acquisitions throughout Europe and lays the foundations for entry to the North American market. The New Millennium On 27 June 2001 the Company s share is listed on the Borsa Italiana, the Italian stock exchange. The internationalisation strategy is pursued in the following years, in which the Amplifon Group strengthens its position in key markets like the US, The Netherlands and France and expands into Canada, Hungary, Egypt, Germany, the UK and Ireland, Belgium and Luxembourg Thanks to the acquisition of NHC (National Hearing Care) and its stores in Australia, New Zealand and India, Amplifon enters Oceania and Asia for the first time, thus extending its presence to all five continents. In 2012 the Group acquires 38 stores in India, increasing its coverage of the country and becoming market leader. In the same year, Amplifon enters the Turkish market through the acquisition of 51% of Maxtone and by setting up Amplifon Poland extends its coverage to a total of twenty countries. 15 Amplifon Annual Report 2012

18 The Group s Brands The Amplifon Group s international growth strategy initiated in the 1990s was implemented by means of acquisition of a number of local firms with a strong well-known brand of their own. 16

19 Company Profile Amplifon, created in Italy in 1950 and now used in 14 countries, an expression of attention to the customer, professionalism and service excellence. Beter Horen, a Dutch brand with over 100 years of history, acquired in 2003: it has been kept within the Amplifon brand image by virtue of its being highly recognisable and widely available in the local market. Miracle Ear, the brand of the franchisee network market leader in the US. Sonus, the brand of a chain of clinics acquired in the US in 2002: this is an up-market brand with a strongly medical identity. In the recent years the Sonus brand has been repositioned in terms of its business model, which changed from a direct-channel to an indirect-channel franchise model. National Hearing Care (NHC), is a highly recognisable brand with a consolidated position in Australia and New Zealand, which entered the Group in Bay Audiology, the long-standing market leader in New Zealand, acquired in 2010 together with NHC. İŞİTME MERKEZİ Maxtone, the brand of the largest retail chain in the Turkish market; a guarantee of high-quality service and clear customer orientation. 17 Amplifon Annual Report 2012

20 Organisational Structure The Group is organised in four Regions, each of which is responsible for the full implementation of the Group s strategic guidelines while coordinating operations in its markets. The Management of each Country is responsible for the development of the Group s business, with a specific focus on sales and marketing. NORTH AMERICA USA Canada EUROPE Italy France The Netherlands Germany Spain Portugal Switzerland Belgium Luxembourg Hungary Poland Turkey United Kingdom Ireland ASIA-PACIFIC Australia New Zealand India REST OF THE WORLD Egypt 18

21 Company Profile The Executive Leadership Team Group strategy and international steering and control functions - strategic planning and business development, marketing and institutional communication, finance and control, investor relations, information systems, coordination of human resources management, acquisition management and legal support, supply and procurement strategy, research support and quality control - are the responsibility of the Executive Leadership Team. Franco Moscetti Chief Executive Officer Gilbert Ferraroli Europe Regional Market Director Alberto Baroli Chief Innovation & Development Officer Enrico Bortesi Chief Supply Chain & Purchasing Officer Giovanni Caruso Chief Human Resources Officer Ugo Giorcelli Chief Financial Officer Massimiliano Gerli Chief Information Officer Paul Mirabelle APAC Regional Market Director Heinz Ruch North America Regional Market Director 19 Amplifon Annual Report 2012

22 The Business Amplifon is a provider of a personalised and highly qualified service whereby exclusive and technologically advanced solutions for the fitting of hearing aids manufactured by outside entities are offered. This is the Group s core business: it enables millions of people around the world to improve their hearing ability in every listening situation. The Market Amplifon s business is directed at all those who suffer from some form of hearing impairment: this is more frequently the case in senior citizens, but may occur at any age, from childhood to adulthood. Currently in the industrialised countries only one-fifth of those who could benefit from a hearing aid use one. This is due to a combination of factors, including social stigma, psychological barriers and the still persistent belief that hearing aids are difficult to use and ineffective. It follows that this industry still has enormous growth potential. First, world demographic trends and increased noise pollution will cause the incidence of hearing loss to rise. Additionally, technology and scientific advances have practically eliminated the problems linked to the appearance and the efficiency of hearing aids: together with a more universal culture of wellbeing and health, this should enable greater penetration of the hearing aid market. Lastly, rapid development in emerging economies, the increase in per capita income, industrialisation and urbanisation will be supposedly further drivers of the business. 20

23 The Business Hearing Loss Hearing impairment afflicts some 10% of the population of the industrialised countries but is perhaps one of the least properly treated problems. The origin of hearing difficulties cannot always be clearly defined; though generally it can be always attributed to injury to or congenital or acquired malformation of one or more parts of the ear. Congenital hearing impairments are often linked to heredity or pathologies occurring during pregnancy and childbirth. These forms are however rare and are becoming more so thanks to public health policies encouraging neonatal prevention and treatment. Acquired hearing impairments are often associated with ageing or other external agents such as: accidental injury; infections (e.g. scarlet fever, German measles or meningitis); untreated otitis; otosclerosis, which impairs the mobility of the midear ossicles; consumption of substances such as medicines, alcohol or smoking; noise pollution in its various forms. Various types of hearing loss may result from these causes: - conductive hearing loss, when the conductive apparatus is compromised, i.e. the outer or middle ear (the auricle, the external ear canal, the tympanic membrane, the ossicles that deliver sound vibrations to the inner ear); - sensorineural hearing loss, where the problem lies in the inner ear (cochlea, auditory nerve, central auditory paths) which becomes unable to transform sound vibrations into nerve impulses; - mixed hearing loss, where the above two problems are combined; - central hearing loss, where the problem lies in the cerebral cortex. These hearing problems, whatever the origin or the site, may occur with varying intensity and thus varying seriousness. Hearing loss is usually classified as mild, medium-mild, moderate, moderately severe, severe or profound, according to the minimum sound intensity perceived by the patient. The commonest form of hearing loss is sensorineural, which constitutes almost 90% of cases. Hearing aids, implants and cochlear implants are designed to compensate for and correct sensorineural, conductive and mixed hearing loss, and are in practice the only remedies. 21 Amplifon Annual Report 2012

24 Amplifon s Strategy Within this market scenario, Amplifon constantly strives to improve and diversify its product and solution offering, using direct communication to educate its users on the importance of obtaining highly personalised service hearing care and wellbeing. Our business model has evolved into an optimal combination of medical and retail skills, closer to the needs of existing and potential customers, giving particular attention to the baby-boomers, who in the coming years will be the population with the highest potential. The customer - no longer just a patient - is at the centre of all our corporate decisions, plans, strategies and operations. A Dual Role Hearing impairment or loss bears strongly on questions of integration, equal opportunities and the right to quality of life. This is why Amplifon s mission includes - together with its business objectives - significant social aims, by offering solutions that enable people to use their sense of hearing to the full and enjoy a better life. Guaranteeing maximum satisfaction in daily auditory communication is an objective that the Company pursues indirectly as well through the adoption of a holistic approach which is directed not only at end users but also the medical profession and the scientific and academic communities. Our constant commitment to our mission has meant that Amplifon has become the most important hearing loss expert in the world, by virtue of its leadership not only in the market but also in cultural terms, and that the name of the company is identified with a certain type of product as well as being a synonym for the care and well-being of people s hearing. Added Value Service Amplifon s over 5,000 Audiologists working around the world strive to be close to their customers, by listening carefully to them and interpreting their physical needs as well as the psychological problems relating to the acceptance of their hearing impairment. Within this confidential relationship, the service of personalised fitting of a hearing aid is central and highly rewarding: improving hearing and communication where there is hearing impairment depends not only on the efficiency and intrinsic quality of the aid that has been chosen, but above all on the ability and skill of those charged with fitting the device and exploiting its characteristics to the full in line with the customer s needs. For example: two people with a similar form of hearing loss may need two different hearing solutions in line with their life style, the recurrent sounds that they hear, their aesthetic preferences or particular physical or psychological conditions. The type of fitting required may also depend on whether it is a first fitting of the hearing aid or a repurchase after an initial use. Therefore Amplifon s thinking is that the product is an essential element, but the added value comes from the service that makes it possible to satisfy the personal needs of the customer. 22

25 The Business Improving hearing: a complex and structured process It is commonly thought that to solve a hearing problem it is sufficient to fit a hearing aid. In reality this is only one step of a complex process involving several meetings whereby customers are helped to reach a satisfactory hearing level for their needs and their way of life. In simplified terms the process whereby hearing is restored comprises four key stages: 1) Interview: the Audiologist becomes acquainted with the specific case by gathering information on the patient s history and her or his expectations and motivation and performing a prosthetic audiometry following the indications of the referring doctor if any. The ability to hear sounds is visualised in an audiogram. db HL 0 Right ear Left ear Hearing loss degree z v d n m ng e l u i o a r P h g ch sh K th Mild Moderate Severe 80 Profound k 1.5k 2k 3k 4k 6k 8k Hz 2) Solution selection: having analysed all the data available the Audiologist proposes the most suitable solution for the customer, bearing in mind the non-auditory aspects such as aesthetic preferences and manual dexterity as well as psychological aspects and all the features of the customer s life style. 3) Fitting and personalisation: the selected device is personalised according to the patient s auditory needs using computerised systems which adapt the hearing aid to the wearer s listening ability. 4) Assessment and follow up: sophisticated instruments are used to measure the improvements and advantages that the new hearing solution brings to the customer s life. These data are the basis for a follow up plan, i.e. consolidation of the results in the short, medium and long term. In all the stages of this process, Amplifon gives the customer - for whom it is usually the first encounter with hearing aids and accessories - great human and psychological support, both to come to terms with the hearing impairment and to have an accurate perception of the progress made during the fitting. Amplifon also offers an exclusive portfolio of high value-added services which are fundamental to give each customer excellent results and complete satisfaction in all listening situations. These include free regulation checks, cleaning, home visits and international assistance in the 20 countries in which the Group operates. 23 Amplifon Annual Report 2012

26 Amplifon contacts both potential customers or users - who usually do not perceive their problem or, believing it to be a handicap, have difficulty in taking it on board - and the so-called influencers, i.e.: the customer s family and friends, who may help her or him to become aware of her or his problem and take concrete action; the family doctor, who directs the patient to a specialist for an examination; the specialist, since the rules and regulations in most of Amplifon s countries of operation require a doctor s prescription for the fitting of a hearing aid. With the aim of maximising the satisfaction of the customer s needs and expectations, the Amplifon Group also contributes to the development of examination and rehabilitation methodologies by providing doctors with the indispensable tools, assistance and know-how for otologic diagnosis and for computerised and integrated management of audiological systems. Hearing Aids Hearing aids are one of the various elements of the solution provided: the most up-to-date models are miniaturised electronic instruments, which receive, analyse, process and amplify the sounds of the environment, differentiating and selecting them over many frequencies, in order to relay them to the ear in a clear, controlled and comfortable manner. They can deal with all the various hearing impairments, from mild loss through to profound deafness, since they are able to: identify background noise and tone it down, while picking out and emphasising speech; recognise and reduce loud, annoying or sudden sounds in order to maintain a natural listening experience; reduce disturbing wind noises. Thanks to Bluetooth TM and other wireless technologies it is possible to synchronise the signals of all electronic appliances (television, telephone, mp3 player, computer, etc.) wirelessly and without headphones, to listen to music, watch films or talk over the telephone without intereference from surrounding noise sources. With specific regard to technology, one of our main challenges will be to give an appropriate response to the so-called baby-boomers, who - for reasons of age and life style - will soon enter our market: they have a decidedly greater familiarity with technology than the previous generation and will have much more sophisticated and specific needs in terms of personal wellbeing; this will require specific customised solutions and should improve market penetration rates in the future. 24

27 The Business Amplifon s Stores The format of Amplifon s stores embodies the evolution of our medical-retail business model: we offer a revolutionary store experience which communicates the greatest attention and care for the client. In line with the social aims of our mission, our stores are a space designed to reduce the anxieties normally associated with the medical experiences in general and help each customer to feel that they are treated as a person, not someone with a medical condition. To enter an Amplifon store is no longer a medical/technical experience, but an entirely positive emotional experience, in which each person is guided step by step through a series of paths leading to the recovery of the joy of efficient hearing. Each store area promotes the development of a coherent sequence of interactions: between the people involved (patient, supporter - e.g. spouse, child, friend - the ENT specialist, the audiologist and the shop assistant); between the people and the equipment used to produce a thorough analysis of the auditory profile - an indispensable element for the selection and fitting of the ideal hearing aid. Charles Holland Award In 2011 we set up a special award designed to identify and reward annually the 50 Amplifon stores around the world that distinguish themselves for the excellence of their service and performance on the basis of criteria such as customer care, innovation, growth, teamwork and productivity. This is an international initiative whereby we reaffirm the centrality of excellence among the Group s values and we share those best practices that contribute to continuous improvements and innovation in our services. 25 Amplifon Annual Report 2012

28 The Sales Network Among the fundamental strategies for the growth of the Group was that of expanding and internationalising operations, which started in the 1990s and brought about the development of an efficient worldwide distribution network with good coverage of each geography, divided into two main channels. Direct Points of Sale (Corporate) This is our direct channel, in which the relationship between Amplifon and its customers is a direct one. Direct points of sale may be run by Amplifon employees or people working for the Company on a commission basis. This channel includes the Amplifon Points, which are often opened only part-time and are located in third-party premises such as pharmacies, opticians and doctors surgeries. The initial contact with customers will generally occur in these service centers, given their geographical spread, and the customer will then if necessary be directed to a store. Indirect Points of Sale (Non-Corporate) This is our indirect channel, through which Amplifon sells to independent commercial entities, which in turn distribute our hearing aids and the various accessories and complementary services to end users. According to the relative prevalence of Group brands within a point of sale, we may distinguish between: a) Franchisees These are commercial firms doing business under a franchise, at their own enterprise risk but with the benefit of being able to use advanced marketing tools, a brand that is market leader (e.g. Amplifon or Miracle Ear) and other value-added services (e.g. training, back office and accounting, pension funds etc.); they purchase products only from Amplifon Group and may use service centers (like the above described Amplifon Points) as customer contact points. b) Network Affiliates This channel operates mainly in the US: firms may purchase products and services from other suppliers as well as Amplifon. According to the business structure, they may further be divided into: independent commercial firms, which are given access to special terms and conditions as part of a buying group coordinated by Amplifon to which a commission is paid for each order; independent buying associations, to which the Group supplies hearing aids in certain pre-agreed quantities; associations and insurance companies who address customers to both direct and indirect points of sale. 26

29 The Business Points of Sale around the World 2012 Direct POS: Indirect POS: Brand Corporate POS Amplifon Points Franchisee/ Service Centers Network Affiliates Italy Amplifon 469 2,007 France Amplifon The Netherlands Beter Horen Germany Amplifon 200 Spain & Portugal Amplifon Switzerland Amplifon 79 4 Belgium & Luxembourg Amplifon Hungary Amplifon Turkey Maxtone 9 Poland Amplifon 2 UK & Ireland Amplifon North America: Miracle Ear 6 1,166 Sonus - US Sonus - Canada 10 Elite Hearing Network 1,665 Australia NHC New Zealand Bay Audiology 77 NHC 15 India Amplifon 73 Egypt Amplifon 13 Total 1,908 2,401 1,329 1, Direct POS: Indirect POS: Brand Corporate POS Amplifon Points Franchisee/ Service Centers Italy Amplifon 455 1,889 France Amplifon The Netherlands Beter Horen Germany Amplifon 192 Spain & Portugal Amplifon Switzerland Amplifon 79 4 Belgium & Luxembourg Amplifon Hungary Amplifon UK & Ireland Amplifon North America: Miracle Ear 9 1,211 Sonus Elite Hearing Network Australia NHC 119 New Zealand: Bay Audiology 69 NHC 21 India Amplifon 24 Egypt Amplifon 11 Network Affiliates 1,500 Total 1,795 2,231 1,378 1, Amplifon Annual Report 2012

30 Personalised Pathways for each Customer Separate areas dedicated to diagnosis, application and fitting Specific solutions for all types of hearing loss and every need Lasting relationships founded on trust and dialogue

31 We offer all-round, specialised and continuing support Inside the Amplifon store, an innovative concept which has been specifically designed to put customers at their ease by using dedicated functional areas - all diagnostic, solution selection, fitting, checking and assistance activities are carried out. On average the whole process consists of a cycle of from three to five appointments. Amplifon s Audiologists not only have sound scientific and technical skills, but also use a counselling approach, involving interaction with each customer whereby she or he is guided to make best use of the hearing aid, such that rehabilitation is comfortable from all viewpoints, whether physical or psychological.

32 Corporate Governance and People The Code of Ethics The Amplifon Group is a global organisation and as such faces a multiplicity of competitive, social and institutional environments with different, often rapidly changing legal systems and cultures. While complying with all legislation, Amplifon shares and declares the values and business model in accordance with which it operates both within and outside its organisation. These principles are contained in the Code of Ethics, which the Board of Directors has approved since It can be downloaded from in the Investors/Corporate Governance/Statutory and Codes section. The Code is based on the premise that - due to the nature of its business - Amplifon makes an important contribution to the development of the welfare of all the communities of which it is part: it is therefore a tool used by the Company to foster uniform standards of behaviour and ethical awareness in all the people working in its global network. It is applied in all the Group s subsidiaries and associates, as well as business partners, in all the countries in which the Group operates. The Code applies to all levels of responsibility in the workplace and promotes principles of straightforwardness and transparency towards not only our customers but also all public entities and private individuals coming into contact with Amplifon. The Company is committed to bringing the Code to the attention of all those concerned and to take all necessary steps for its implementation, while making it clear that it does not desire to initiate or continue business relations with any person refusing to observe the principles it contains. The Code lays down detailed policies governing business conduct. These are to be followed by all the Code s recipients and cover situations such as conflicts of interest, confidentiality, responsibility and the condemnation of corrupt practices and illicit payments. The Code emphasises Amplifon s commitment to ensure that all its workers have equal opportunities and a healthy and safe workplace and the formal ban on all discriminatory behaviour or harassment. The principles of precision, clarity and completeness in bookkeeping, implemented through the adoption of high standards in financial planning and control over the accounts in accordance with the accounting principles adopted and followed, are also codified. Finally the Code lays down the rules for its recipients conduct when dealing with suppliers, public officers and institutions, customers and the press. The Corporate Governance structure - described in detail in the Report on Corporate Governance and Shareholdings which is included in full in the Report on Operations (see page 121) - is also based on the Corporate Governance Code for Listed Companies, proposed by the Listed Companies Corporate Governance Committee: Amplifon adopted the first version issued in 2001 and now follows the version issued by the Committee in December

33 Corporate Governance and People Corporate Bodies Directors Honorary Chairperson Anna Maria Formiggini Executive Non-Executive Independent C.C.R. 1 C.R. 2 Chairperson Susan Carol Holland Chief Executive Officer Franco Moscetti Director Giampio Bracchi* Director Maurizio Costa* Director Andrea Guerra* Director Umberto Rosa* C.C.R.: Members of the Risk and Control Committee - C.R.: Members of the Remuneration Committee. (*) These Directors declare that they fulfill the independency requirements according to current legislation and of the Corporate Governance Code of Borsa Italiana. Board of Statutory Auditors The Board of Statutory Auditors, appointed by the Shareholders Meeting held on 18 April 2012, remains in office for the three financial years and comprises: Chairperson Giuseppe Levi Standing Auditor Emilio Fano Standing Auditor Maria Stella Brena Alternate Auditor Mauro Coazzoli Alternate Auditor Claudia Mezzabotta External Auditors Risk and Control Committee Chairperson Member Member Remuneration Committee Chairperson Member Member Member Supervisory Body Chairperson Member Group Compliace Officer Secretary to the Board of Directors Lead Independent Director Executive Responsible for Corporate Financial Information Group Compliance Officer PricewaterhouseCoopers S.p.A. Umberto Rosa Giampio Bracchi Susan Carol Holland Maurizio Costa Susan Carol Holland Andrea Guerra Umberto Rosa Umberto Rosa Giampio Bracchi Paolo Tacciaria Luigi Colombo Umberto Rosa Ugo Giorcelli Paolo Tacciaria 31 Amplifon Annual Report 2012

34 The Board of Directors Anna Maria Formiggini (born in 1924, Italian citizen) Her professional career began in 1945 when she was appointed Marketing Director at Elizabeth Arden S.p.A., where she remained until In 1950 she married Algernon Charles Holland, a former Major in the British Special Forces, who, after moving to Italy, set up a business importing modern hearing aids and founding in the same year Amplifon S.r.l.. In 1959 she joined Amplifon s Marketing Department, promoting and supporting direct marketing, which in the following years was crucial to the growth of the company. In 1980 she was appointed a Director of Amplifon S.p.A., of which in 1990 she was appointed Chairperson of the Board of Directors. She was appointed Chairperson of the Board of Directors of Amplifin S.p.A., and subsequently Chairperson of Ampliter NV and Chairperson of the A. Charles Holland Foundation. In former years she was also Vice Chairperson of the Managing Council of the Alzheimer Federation Italy and Deputy Chairperson of the Board of Ager, an Association for geriatric research and the study of longevity. In 2011 she was appointed Honorary Chairperson of Amplifon S.p.A.. Susan Carol Holland (born in 1956, Italian citizen) She graduated in Psychology and Sociology from the Keele University in the UK. She then took a diploma in Logopaedia from the Università degli Studi, Milan, and in 1982 began her professional career as a logopaedist in Milan s General Hospital. In 1988 she was appointed to the Board of Directors of Amplifon S.p.A. and in 1993 she became Deputy Chairperson of the Board of Directors, an office held with that of Deputy Chairperson of the Board of Directors of Amplifin S.p.A. and since 2006 Chairperson of the Board of Directors of Ampliare S.r.l., the Amplifin Group s real estate company. In 2011 she was appointed Chairperson of Amplifon S.p.A.. Franco Moscetti (born in 1951, Italian citizen) He began his career in the Air Liquide Group in In 1989 after gaining varied experience he was appointed General Manager of Vitalaire Italia, a company specialising in home care. In 1995 he was appointed General Manager and Chief Executive Officer of the Air Liquide Sanità, a sub-holding controlling all the Group s health operations in Italy. In 1999 he was also made Chief Executive Officer of the parent company, Air Liquide Italia. In 2001 he moved to Paris where he managed the Hospital Division at an International level and, at the same time, filled the role of Président-Directeur Général of Air Liquide Santé France. Since December 2004 he has been General Manager and Chief Executive Officer of the Amplifon Group. Currently he is also a member of the Board of Directors of the Italian Touring Club and the American Chamber of Commerce in Italy, and Independent Director of Diasorin S.p.A. and Fideuram Investimenti SGR S.p.A. (IntesaSanpaolo Group). In 2012 he was decorated by the President of the Italian Republic with the title of Cavaliere al merito del lavoro. Giampio Bracchi (born in 1944, Italian citizen) He is graduated in Electronic Engineering from the Milan Polytechnic. He is the author of more than 20 books and over 200 scientific publications in Italy and abroad on business and financial innovation. 32

35 Corporate Governance and People He has been a member of the strategic committee of a number of Italy s leading industrial companies, banks and public-sector organisations, overseeing innovation. He is President of the Milan Polytechnic Foundation and also Chairperson of IntesaSanpaolo Private Banking and Perennius Capital Partners. He is a Member of the Board of Directors of CIR S.p.A. and of the Don Carlo Gnocchi Foundation. He is a member of the Consultation Committee of the Italian Stock Exchange, and Coordinator of the Rosselli Foundation s Annual Report on the Italian Financial System. He was Deputy Chairman of Banca Intesa, Chairman of AIFI the Italian association of private equity and venture capital, an adviser to the Prime Minister s Office and a Director of companies and organisations including IMPS, Cariplo and SORIN. Maurizio Costa (born in 1948, Italian citizen) He graduated in Mechanical Engineering from the University of Genoa. He was General Manager of the Standa Group from 1989 to He joined Mondadori in 1992 to manage Group subsidiaries and acquisitions, divestments and development of new businesses, until he became Chief Executive Officer of Elemond in Appointed Chief Executive Officer of Mondadori Group in 1997 he also became its Deputy Chairperson in He is also Deputy Chairperson of Mondadori France and a member of several boards of directors of Mondadori Group companies. He is a member of the Confindustria Council and also participates in the Chairperson s Committee of F.I.E.G.. Andrea Guerra (born in 1965, Italian citizen) He graduated in Economics and Business from La Sapienza University in Roma in 1989; he has been the CEO of Luxottica since 27 July 2004; he is a Director of its main subsidiaries. Previously he worked for ten years at Merloni Elettrodomestici, having joined in 1994, and was CEO from Before Merloni he worked at Marriott Italia for five years in roles with increasing responsibility up to that of Marketing Manager. In the Luxottica Group he is inter alia a Director of Luxottica S.r.l., Chairman of OPSM Group PTY Limited, a Director of Luxottica U.S. Holdings Corp., Luxottica Retail North America Inc. and Oakley Inc.. He is also a Director of Ariston Thermo S.p.A.. Umberto Rosa (born in 1933, Italian citizen) He graduated in Industrial Chemistry from the University of Turin. In 1959 he joined FIAT s Nuclear Division and worked forming part of various research groups at several centres in Italy and abroad. In 1967 he became a lecturer in Radiochemistry at the Scuola Normale in Pisa. In 1973 he took over the management of the SORIN Nuclear Research Centre (FIAT), which he converted into an industrial producer of biomedical technology (artificial organs and diagnostic reagents) of which he became General Manager in 1975 and then Chief Executive Officer in Following the acquisition of Sorin by the SNIA Group in 1986, he was appointed Member of the Management Committee and then Chief Executive Officer in 1991 and Chairperson in Up until December 31 st 2008 he was Chairperson of Sorin S.p.A., listed on the Milan Stock Exchange. From 2004 to 2009, he was Executive Chairperson of Nerviano Medical Sciences, the largest oncological research centre in Europe. He is also Director of Finlombarda SGR, of Falck Renewables S.p.A., Chairperson of Telbios S.p.A., Director of Hugef (Human Genetics Foundation). From 1995 to 1999 he was Deputy Chairperson of Confindustria, responsible for research, innovation and the environment and Chairperson of the Institute for the Environment (IPA). In 1997 he was decorated with the Légion d Honneur by the President of the Republic of France. 33 Amplifon Annual Report 2012

36 A Structured Team at the Service of the Business All the strength of a world brand leader A dynamic workplace that rewards commitment and merit Objective: to create sustainable value for all our stakeholders

37 An international Company dedicated to growth Every day numerous professionals work in the Amplifon Group alongside the Audiologists; their work is essential to run the business with continuity and the necessary efficiency. The International Key Manager is responsible for communicating strategic objectives within the organisation, the transfer of best practices, stimulating change and the attainment of targets and specific priorities as set by Top Management. The Shop Assistant welcomes each customer, makes a first assessment of her or his needs, provides information, sells materials and accessories and manages the use and maintenance of the product. The Sales Manager manages the sales area and the implementation of sales strategies, by planning, coordinating and developing the activities of the sales network in existing and new stores, as well as coaching staff. These roles - and many more - are actors within a structured system of relations based on teamwork. The Company organises dedicated programmes of training, development, communication and rewarding.

38 Human Resources Over 10,000 people work for Amplifon around the world. They bring a wealth of skills and excellent international experience to the Company. The Group strives to create value for its customers, shareholders and people. To do so it relies on a competitive edge which can be built through human resource management strategies aiming to: share strategy and business objectives with all staff; create a corporate culture based on performance and skills, developed thanks to continuous training and on-the-job learning; organize on its international reach and best practices, by having colleagues from different departments and countries comparing and exchanging their experience; draw up and spread advanced HR policies and systems; invest in the development of talents, combined with a slim and efficient organization; maintain the highest levels of integrity and ethics. Audioprosthesists Other front office staff Total stores Support functions Total employees Sales force not on payroll The Italy France Netherlands Germany Iberian Peninsula Switzerland December 2012 Belgium and Luxembourg Hungary Turkey United Kingdom and Ireland December 2011 North New America Australia Zealand India Egypt Total Total ,072 1, ,946 1, ,018 3, ,235 1, ,253 5,005 1, ,900* ,137** 5,070** Grand Total 1, , ,390 10,075 (*) estimated number (**) of which approximately 2,900 are audio-prosthesists The Regulatory Environment The industry is regulated by the health institutions. In each country the rules differ in respect of the following factors: the professional qualification of audiologists and hearing-aid specialists; whether or not a medical examination and prescription for the use of a hearing aid is mandatory; the predominance of the private or the public sector; whether the national health service reimburses the cost. For this reason we select our staff in each country according to the qualifications required by the regulations and carry out training and courses which, where necessary, supplement the programs required by the local government department with those used throughout the Group. 36

39 Corporate Governance and People COUNTRY Sales Force Qualification ITALY Audiologists / 3 years FRANCE Audiologists / 3 years THE Dispensers and NETHERLANDS Audiologists / 0-3 years GERMANY Audiologists / 3 years SPAIN Audiologists / 2 years PORTUGAL Audiologists / 4 years SWITZERLAND No formal qualification required Audiologists / 3 years (required only for pediatric fitting) BELGIUM Audiologists / 3-5 years LUXEMBOURG No formal qualification required Medical Prescription Mandatory Mandatory medical prescription & verification Mandatory medical prescription & verification Mandatory medical prescription & verification Mandatory only below 16 years Mandatory for public tenders and private insurances Mandatory medical prescription & verification Mandatory HUNGARY Audiologists / Mandatory aprox. 1-1,5 years TURKEY Audiologists/ 2-4 years POLAND Audiologists / 2 years course + 2 years practice UK IRELAND Dispensers and Audiologists / 2-4 years Hearing Aid Specialists / 0-2 years USA Audiologists / 4 years Dispensers / 0-2 years CANADA Audiologists / 0-2 years System of reimbursement and fiscal deduction Average reimbursement of 600 per hearing aid which covers the basic device cost. Eligible individuals are entitled to purchase a higher level device and fund the gap privately. Moreover Hearing Aids are considered within the medical expenses fiscally deductible from the income taxes to be paid for an amount equal to the 19% of the device cost. French Social Security: the amount of the reimbursement is fixed, 119,83 (for any HA). Private Insurance Company (or Mutuals): the level of reimbursement depends on the contract that has been signed. Very often, the reimbursement is between 300 and 500. The total reimbursement (Social Security + Private Insurance) is around 30%. No fiscal deductions for our customer linked to the purchase of HA. Full or partial reimbursement by private health insurance and/or government. Partial fiscal deduction allowed if taxable income does not exceed approx. 35K gross income. New reimbursement scheme effective from , with 75% of the device s price to be covered by private insurance and 25% out-of-pocket by the end user. Eligibility Everyone is eligible for contribution regardless the personal income, provided that the best of the two ears has lost at least 65db. French Social Security: all clients are eligible for this repayment. For children under 18 years old: the reimbursement by the Social Security covers 100 % of the HA price. Private Insurance Company (or Mutuals): it is not compulsory for French people to sign a contract with a Private Insurance Company. Minimum loss of 35 Db on worst ear. There s no guideline related to income, but there are some social governamental funds that compensate the own contribution of the client if he/she has a very low income. Full or partial reimbursement by National Federal Association of People with amblyacousia at one of the Statutory Health Insurance Funds based on functional fitting. For following levels (World Health Organization moderate and severe level of impairment (WHO 2+3) reimbursement Classification) of 400 mono/ 720 stereo + 35 per HA ear mould service - LEVEL 2-3: Moderate-Severe Impairment: fee every 6 years. For profound impairment (WHO 4) reimbursement from 41 to 80 Behl (db HL) of 840 mono/ 1,515 stereo + 35 per HA ear mould service - LEVEL 4: Profound impairment inluding fee. deafness: 81 Behl (db HL). % of Amplifon revenues from reimbursement Full reimbursement only for certain patients up to 16 years of age. 1% Reimbursement from private insurances, Portuguese state employes insurance (ADSE) or some private companies with their own insurance. IV (Invalidity Insurance): CHF 840 monaural, CHF 1,650 binaural AHV (old peoples pension insurance) CHF 630 monaural. The fiscal treatment in Switzerland is not clearly defined and varies from Canton to Canton. In general part of the out of pocket cost can be deducted from taxable income leading to a saving between 10% and 20% of the cost deducted (depending on the income level of the person, the Canton and the village). Reimbursement of approx. 660 for monaural fittings/ 1,300 for binaural for adults. Higher reimbursement of approx. 1,120 for monaural fittings/ 2,220 for binaural fitting for children <18 yrs. Paid-up allowed. The minimum threshold is a total hearing loss of 20% for IV (Invalidity insurance) and 35% for AHV (Old peoples pension insurance). The personal income is not relevant. Minimal hearing loss of 40dB for the ear which needs a HA. Mandatory Rate mono-aural in between 890 minimum and 1,900 maximum. Eligibility criteria for reimbusement are not publically available. Variable reimbursement rate, based on hearing loss, social life, employed or retired, patient s motivation, etc. Mandatory Full or partial reimbursement by private health insurance and/or government (up to 70% of total amount). Partial reimbursement provided by public health service (up to 200 for adults; up to 400 for kids <4 yrs). Mandatory Partial reimbursement provided by public health service only for public ( 150 for each digital instrument). reimbursement None Free of charge in case of NHS. Private market with no reimbursement. People with >30 db hearing loss. Mandatory 830 per HA. Reimbursement dependent on ratification from ISHAA- registered acousticians and customer having paid sufficiently into NH scheme and signed by GP (Approx 60% of all HA are provided with this subsidy). None AUSTRALIA Audiologists / 5 years university Audiometrist Dispenser - 4 years with supervision None NEW ZEALAND Audiologists / 2 years INDIA EGYPT Dispensers / 0 years No formal qualification required No formal qualification required Each State manages its own program and level of reimbursement complying with Federal regulations. Veteran Affairs: hearing aid benefits. Amplifon USA does not do business with Veteran Affairs (done directly through manufacturers). Private health insurances: reimbursement of out of pocket expenses. Tax deduction: for hearing aids it is limited to the amount by which an individual total medical care expenses for the year exceed 7.5% of his/her adjusted gross income. None Private Insurance for about 5%. Few provinces give contributions to the purchase of hearing aids. None Government reimbursement: based on income, age, and/or disability (Medicaid). - Veteran Affairs: War Veterans. The total avarage amount reimbursed for a binaural fitting is There is a government program that entitles AUSD 1,464 (including the fees for Device, Assessment and Fitting). pensioners and war veterans to basic free Hearing devices are not tax deductible against income. hearing devices. To be eligible an individual must However, an individual can claim a tax offset of 20% of their net have a three-frequency hearing loss in the low medical expenses over AUSD 2,060. frequencies of at least 23db or a three-frequency There is no upper limit on the amount you can claim and hearing aids hearing loss of 40db in the high frequencies and a qualify as medical expenses. positive score in a motivation test. Eligible individuals are also entitled to purchase a higher level device and fund the gap privately. NZ Ministry of Health - NZ$ 511 (incl. GST) per device for all non-injury related prescriptions (NZ$ 1,022 for a binaural fitting). ACC - NZ$ 1,725 (incl. GST) per device plus the cost of fitting. The level of funding will depend on the severity of the hearing loss. Accessable NZ - Wholesale cost of the device. War Pension - Wholesale cost of the device. NZ Ministry of Health: everyone is eligible to claim this subsidy once every 6 years (if no other subsidy is claimed). ACC: eligibility will depend on whether the hearing loss is a result of: exposure to a noisy work environment or to a sudden, extremely loud noise or sudden accident (congenital hearing loss, age-related or illness-related hearing loss are not covered). 21% 30% 56% 40% 3% 25% 48% 65% 70% 30% N/A 0% 50% 5% (Miracle Ear)/ 40% (Sonus)/ 10% (HearPO) None None 0% Mandatory Variable level of reimbursement from some private insurances. 10% 5% 60% 40% The table refers to the current situation 37 Amplifon Annual Report 2012

40 Training and Development Programmes Training and continuous skill enhancement are the basis for Amplifon s growth. To this end the Company dedicates resources, organisation and specialised contributions, both internal and external, and designs customised programmes for the various target groups. FIELD DEVELOPMENT Special attention is paid to staff working in the stores and thus in contact with our customers. Traditional classroom courses, e-learning and workshops are some of the means used. Over 5,000 people are trained every year; the investment is continuous and considerable. We have also developed dynamic mechanisms and internal processes whereby the best experience obtained in Amplifon s global network is transferred, the aim being to align daily operations with the most advanced standards of excellence. One example is the store-school, a virtuous pathway whereby the best stores become operational training centres for other stores staff. MANAGEMENT TRAINING To develop the managerial skills of key staff, Amplifon has designed international programmes for the whole Group; this training is carried out with the cooperation of Ashridge Business School. COMPASS is a growth pathway for the development of Talents self-awareness and skills. Its format varies according to two target groups, viz.: young people with potential just starting their careers; managers with potential for further growth. DEAL (Developing Excellence in Amplifon Leadership) is the programme Amplifon has developed for the International Key Managers of the Group. It consists of various modules and focuses specifically on the development of leadership qualities; the aim is to strengthen both individual and group qualities and enhance the ability to integrate and cooperate. TALENT MANAGEMENT PROGRAM The Company is committed to identifying - by means of regular structured formal processes - those staff members of the Group with ability to grow and the potential to occupy key positions in their country or internationally. This process involves all staff. The people selected take part in a programme consisting of: greater visibility at an international level and an accelerated career path; international courses at the best business schools to develop skills; a programme of mentoring, in which the mentors are Senior Managers of the Group; specific incentive and retention plans. 38

41 Corporate Governance and People Remuneration Policy Amplifon s remuneration policy is based on four cardinal principles. 1. Performance based: remuneration is largely linked to the performance of the individual, the team and the Group; specific performance assessment processes and tools identify the Top Performers and reward them by means of highly motivational mechanisms; in the pay-mix the variable component has considerable importance and is differently weighted according to roles and responsibilities; results achieved in excess of target are specially rewarded. 2. Competitive & attractive: comparison with the appropriate market is on-going in order to ensure that our people are rewarded in line with the most advanced standards. The flexibility and mix of compensation packages attract the best talents and increase their loyalty. 3. Fair and equitable: Amplifon s bonus schemes are based on proven international methods of mapping and assessing roles, thus guaranteeing the maximum equity within the firm and compliance with transparency principles throughout the salary review process. 4. Lean and cost effective: the Group s remuneration policy is based on the return on investment principle and is linked to rigorous control of staff cost. Mobility within the Group There is a functioning exchange programme within the Group, mainly for Executives and Managers, which optimises the allocation of resources, provides opportunities for personal growth and development, facilitates intercultural exchanges and makes best use of people s skills. Audiologists however encounter greater obstacles to an international career due mainly to problems regarding: recognition of their qualification outside their own country; linguistic diversity: in their profession language is a fundamental work tool. However they have the option of changing their role while staying within the sales area, for example by becoming an Area Manager, or taking up another position in the Head Office. 39 Amplifon Annual Report 2012

42 The Crucial Role of the Audiologist The customer s and her or his family s reference point Interaction, relation, empathy, listening and understanding A qualified approach for the customer satisfaction

43 Personalising means simplifying complexity Whether dealing with childhood, adult or old-age hearing loss, the job of the Audiologist is to assist and accompany the customer through a structured process, which has been studied in the deepest detail and includes the patient s family and supporters as well as the family doctor. Our Audiologists training enables them to offer solutions to complex problems that are easily used by anyone thanks to the thorough assessment of the ability to hear, definition of the anatomy of the auditory canal and a review of the individual s expectations and motivation. The customer relationship continues beyond the first fitting through periodical check-ups, assistance and maintenance. Our priority is to ensure maximum satisfaction in every respect.

44 Corporate Social Responsibility Amplifon strives to give people needing a hearing aid an improved quality of life buy fulfilling its Mission, which includes significant social aims. The Mission s Social Aims Our awareness of the duty towards society, which arises from the role of global market leader in our industry, has stimulated the Group to act with the highest sense of responsibility in all areas, but particularly: by consolidating its proactive support role and that of a specialised partner for the medical profession and the scientific community; by contributing to the growth of ENT culture and scientific knowledge worldwide; by promoting prevention and supporting various social initiatives. The international scientific community universally recognises the fundamental importance of hearing for the growth of each human being: it is the first sense - together with sight - to be developed in the foetus and is essential to interact with the world. Being able to hear is essential for the development of the ability to communicate, for understanding speech and thus for relationships with others and feeling part of a community, and for the enjoyment of sound making life more pleasant and also safer. Auditory dysfunction causes highly complex problems in children, with implications for the relational and communication sphere, especially with regard to the construction of language, its codification and decodification and thus the overall development of the child s personality. 80% of hypoacusia cases are of the sensorineural type: this means that the use of a hearing aid can resolve most of the deficit, not least due to the continuous improvement of diagnostic techniques and the technology applied to the product. 42

45 Corporate Social Responsibility Working with the Medical Profession In its role as a world leader in the fields of audiology and ENT, the Amplifon Group works as a specialised partner of the medical profession and the scientific community through the activities of the CRS, support provided to a number of research and teaching schemes and the products in its biomedical line. Amplifon s CRS (Centre for Research and Studies) was founded by Algernon Charles Holland in 1971, with the aim of promoting basic clinical research and spreading progress and new developments in audiology and otology. Over the years the CRS has worked alongside Amplifon as it grew first in Italy and then abroad, by enabling the Company to develop important cooperation with universities, domestic and international public bodies and scientific entities. The CRS has recourse to the scientific and technical advice of an independent Scientific Committee composed of academics who each year identify the initiatives to be undertaken. CRS supports doctors in several areas, including: cooperation with university departments of Audiology and Otorhinolaringology to organise training and conferences accredited by ECM (Educazione Continua in Medicina - Continuing Education in Medicine) which give the participants an up-to-date account of the latest scientific developments in this area; involvement in European basic research projects such as AHEAD (Advancement of Hearing Assessment methods and Devices), I and II HEAR (Hereditary Deafness Epidemiology And clinical Research) and GENDEAF (Genetic Deafness) as contract coordinator on behalf of the European Commission and in cooperation with the foremost University Research Centres in Europe; extensive publishing activities: - studies, manuals and scientific conference papers; - compiling INDEX, a bibliographical review that collects the most important articles that appear in medical literature on audiology, otology, vestibulogy, hearing aids and implants, rhinology and phoniatry, published online ( quarterly; - the twice yearly publications Logopaedia (the Italian journal for Speech Pathologists) and the official texts of AOOI (Associazione Otorinolaringologi Ospedalieri Italiani - the Association of Italian Clinical ENT Specialists); managing one of the richest private libraries serving the fields of audiology e otorhinolaringology, which subscribes to the most authoritative international journals and provides a critical abstract review of the selected articles created by a professional reader group. In 2013 scientific communication will be strengthened by the creation of reports on conferences and critical compendiums on a selection of the most important online training courses. This will give professionals an overview of what is happening in scientific research. 43 Amplifon Annual Report 2012

46 CRS Courses in 2012 Date Location Title Speakers March Paris-France In situ therapy for inner ear disorders April Seville-Spain Deglutologia May Milan-Italy Tinnitus evaluation and treatment: an update 12 May Paris-France Middle Ear Imaging Prof. Olivier Sterkers Prof. Bruno Frachet Dr. Domenico Cuda Dr. Miguel A. López González Dr. Daniele Farneti Prof. Giovanni Ruoppolo Prof. Denis Ayache 9 June Paris-France The practice of examining vertigo Prof. Didier Boucara June Cagliari-Italy La patologia delle ghiandole salivari maggiori: quando la chirurgia? Prof. Roberto Puxeddu June Piacenza- Italy La chirurgia funzionale dell orecchio medio Prof. Mario Sanna September Florence- Italy Vestibologia L. Cipparrone Prof. Paolo Pagnini 22 September Paris-France How to start with functional exploration in ENT Prof. Andre Chays 4-5 October Tarquinia- Italy Disturbi dell elaborazione uditiva (APD) Prof. Elisabetta Genovese Prof. Guido Conti October Rome-Italy Le urgenze in Audiologia-Otologia: inquadramento clinico, diagnosi e trattamento Prof. Giancarlo Cianfrone October Milan-Italy Ipoacusia infantile e linguaggio Prof. Edoardo Arslan 8-9 November Milan-Italy Attualità in tema di laringectomie subtotali Prof. Mario Bussi November Catania-Italy IV Corso di chirurgia endoscopica rinosinusale Prof. Agostino Serra 17 November Paris-France Pediatric Audiometry Prof. N. Loundon, Dr. V. Couloigniers, Dr. M. François November Milan-Italy November Milan-Italy Profili di responsabilità nella patologia iatrogena in ORL Analisi posturale cranio cervico mandibolare: diagnosi, terapia, e protocolli clinici Prof. Vito Mallardi Dr. Francesco Grazioli Dr. Piero Ranaudo 3-4 December Milan-Italy Menière 2012 Dr. Elio Cunsolo December Milan-Italy Evoluzione del trattamento chirurgico del sinus frontale: dal balloon sinuplasty alla tecnica di Riedel Prof. Paolo Castelnuovo Prof. Piero Nicolai December Alexandria- Egypt Otology on the Nile - Review of Otologic Research and current trends Prof. Aziz Belal 44

47 Corporate Social Responsibility Playing our Role in Society Amplifon is committed to the fulfillment of the principles that guide its business activity in concrete initiatives by promoting and supporting important social projects and annual events to raise awareness of deafness in the public all over the world. Italy For the year 2012 Amplifon Italy supported UNICEF, the international organisation working to save children all over the world, by supporting the Vogliamo Zero campaign, which aims to achieve zero child mortality in the poorest countries. Over 19,000 children die each day before reaching the age of five due to preventable or avoidable causes such as hunger, lack of medicines and contagious diseases. In the first five months of the year Amplifon donated 50,000 to provide food, treatment, protection and education to needy children. This amount will be supplemented with money collected by end December by promoting the purchase of the UNICEF Donation Card in our Italian points of sale. This is a concrete embodiment of the Group s long-standing commitment to improve people s lives, not only by helping them to hear better, but also by contributing positively to social development. Following the serious damage caused by the earthquake in Emilia Romagna, Amplifon Italy contributed by donating an evoked potentials system and a paediatric audiometer together with an impedancometer to Carpi s and Modena s Hospitals. Amplifon also donated a soundproof booth for paediatric audiometry to Modena s Istituto Figlie della Provvidenza, an elementary and middle school where two people from our Group assist with the regulation and maintenance of hearing aids on a voluntary basis. 45 Amplifon Annual Report 2012

48 The Netherlands Beter Horen has always sent stock of last-generation hearing aids to countries such as Indonesia, Thailand and Guatemala. The company also sponsors two Dutch foundations engaged in researching ways of improving service to deaf people and providing objective information on hearing loss. Germany In 2012 Amplifon Deutschland was the official sponsor of the famous classical music festival held in the cities of Hamburg, Berlin and Munich. It distributed special hearing protection devices at events where a high level of decibels was produced, such as various concerts and the Oldtimer Grand Prix car race. France Since 2002 Amplifon France has cooperated with two associations known as Enfants du Monde and Enfants Sourds du Cambodge : this partnership focuses on the collection of unused hearing aids to give them a new life by sending them to specialised structures which help less fortunate children in Asia and Africa. In over ten years of activity Audiologists and ENT specialists have travelled together to African and Asian countries like Cambodia to help over 1,500 children to wear and to regulate their hearing aids and hear better. 46

49 Corporate Social Responsibility Hungary During 2012, in cooperation with the Hungarian Ministry of Health and with Amplifon s support, a special event to raise awareness of deafness was organised: volunteer Amplifon Audiologists took part. USA and Canada The activities of the Miracle Ear Children s Foundation, which takes care of American children with hearing impairments from low-income families, continued: they were provided with both hearing aids and personalised assistance. Various activities were also organised in 2012 to support American communities: sending packages of supplies to US soldiers abroad offering support to the Enduring Freedom Operation; collecting funds for the American Diabetes Association; providing verious scholarships to Audiology students in partnership with Scholarship America. There was intense cooperation with the franchisees to organise collections to help those who suffered damage in the spring tornado and those hit by hurricane Sandy. Australia In Australia National Hearing Care has been supporting charitable campaigns for a number of years, thanks to which unused hearing aids are sent to third-world children and adults. Periodically NHC also manages fund-raising events in favour of Make a Wish, an organisation that makes the wishes of children affected by potentially lethal conditions come true enriching their human experience with hope, strength and joy. 47 Amplifon Annual Report 2012

50 Key Factors for Market Leadership Continuous, shared and up-to-date training A consolidated partnership with the medical community CRS s commitment to spread knowledge and awareness

51 Integrated skill-sets mean excellence in a highly specialised industry The Audiologists are our customers main point of reference. In Amplifon all our Audiologists - thanks to their professional and legally recognised skills - are able to diagnose their customers hearing impairment profile and then design customised hearing rehabilitation and recovery programmes. Group-wide continuing education and training programmes - whose holistic approach aims to prepare the audioprosthesist not only in technical terms but also in relationships, listening ability and providing psychological support - supplement the qualifications required by the regulations and government departments of each country.

52 Shareholder Information Borsa Italiana Listing Amplifon S.p.A. shares have been listed on the Mercato Telematico Azionario (MTA - Screen-based Stock Market) since 27 June 2001 and since 10 September 2008 in the STAR segment, in relation to which Banca Akros has taken the role of specialist. STAR (Segmento Titoli con Alti Requisiti) is the share segment of Borsa Italiana dedicated to small and medium-sized companies which undertake to meet more stringent requirements in terms of information transparency, liquidity and corporate governance. The Amplifon share is also included in the FTSE Italy Mid Cap index. Main Shareholders The main shareholders of Amplifon S.p.A. at 31 December 2012 were: 31.44% Market Shareholder % held 3.09% Treasury shares 11.00% Other named shareholders with significant holdings 54.47% Ampliter N.V. Ampliter N.V % Other named shareholders with significant holdings % Treasury shares 3.09 % Market % Total % Share Performance, Volume Traded and Market Capitalisation The chart gives the performance of the Amplifon share and the volumes traded from 2 January 2012 to 15 February Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb 50

53 Shareholder Information At 31 December 2012 market capitalisation was million. Trading in Amplifon shares on the Mercato Telematico Azionario was as follows: average daily amount 1,458,654; average daily volume traded 413,650 shares; total volume traded 104,653,673 shares, or 48.34% of the total of the shares making up company capital net of treasury shares. Internal Dealing Rules on dealing in financial instruments issued by the Company were laid down by Amplifon in May 2006 in a specific Internal Dealing Code drawn up pursuant to 152-octies Consob s Issuers Regulations No Additionally, principles more generally concerning proper conduct and confidentiality when at work within the Group are contained in the Code of Ethics. Both documents may be consulted on Relations with the Financial Markets The Group takes care to inform its investors promptly and continuously. The main objective of Investor Relations in Amplifon is to ensure maximum transparency, clarity and timeliness when informing the financial community and to maintain an uninterrupted flow of information between the Company and the market. To this end press releases are regularly issued, there are periodical meetings with institutional investors and the international financial community and constantly updated documentation is placed on the Company website for consultation. The Head of Investor Relations is charged with managing the flow of information directed to shareholders, financial analysts and institutional investors while ensuring that the rules regarding the transmission of Company information and documentation are fully complied with. In Amplifon the activity of Investor Relations is developed by means of a proactive process performed both inside and outside the Company. Senior management is constantly updated on the market s perception of the Company, in order to facilitate strategic decision-making. Every year a Presentation to the Financial Community is held in the Company HQ; on this occasion management analyses the annual results and communicates the guidelines for operations in the future. Conference calls with the financial community are held at the end of each Board meeting approving quarterly results. Management plays an active role in road shows and broker conferences with shareholders and investors organised in the most important international marketplaces. 51 Amplifon Annual Report 2012

54 The following were the main events in which the Company s management took part in 2012: Date Location/Event Participants 07/03/2012 Investor Day Full Year 2011 Results CEO, CFO, IRM, CHRO, MD AU, MD NZ 13-14/03/2012 Morgan Stanley European MedTech & Services Conference, London CFO 15/03/2012 Roadshow Edinburgh CFO 19/03/2012 Reverse Roadshow Handelbanken, Milan CFO 22/03/2012 Roadshow Frankfurt CFO 23/03/2012 Reverse Roadshow Kepler, Milan CFO 26/03/2012 Reverse Roadshow Carnegie, Milan CEO, IRM 27-28/03/2012 STAR Conference, Milan CEO, IRM 27-28/03/2012 Roadshow New York / Boston CFO 02-03/04/2012 Roadshow Toronto / Chicago CFO 18/04/2012 Annual Shareholders Meeting EGM 26/04/2012 Conference call 2012 First Quarter Results CEO, CFO, IRM 15/05/2012 Roadshow Milan CFO, IRM 16/05/2012 Roadshow Paris CEO 18/05/2012 Roadshow London CFO 18/05/2012 Roadshow Milan CEO, IRM 29/05/2012 Citi s Swiss Healthcare Investor Day, Zurich IRM 31/05/2012 Italian Investment Conference, Milan CFO, IRM 31/05/2012 Nordea Markets Hearing Aid Seminar 2012, Copenhagen CEO 05/06/2012 Jefferies Global Healthcare Conference, New York CEO, CFO 06/06/2012 Roadshow New York CFO 14/06/2012 Citi s European Healthcare Conference, London CFO 25/07/2012 Conference call 2012 Half Year Results CEO, CFO, IRM 06/08/2012 Roadshow San Francisco CFO 29-30/08/2012 Roadshow Boston CFO 5-6/09/2012 Goldman Sachs Medtech&Healthcare Conference, London CEO, CFO 12/09/2012 Evento ISMO, Milan CEO 13/09/2012 Bofa Global Healthcare Conference, London CFO 18/09/2012 Reverse roadshow CEO Tour, Milan CEO 24/10/2012 Conference call 2012 Third Quarter Results CEO, CFO, IRM 15/11/2012 Jefferies Global Healthcare Conference, London CFO 26-29/11/2012 Roadshow New York / Boston / Toronto CFO 05/12/2012 Roadshow Paris CEO CEO: Chief Executive Officer - CFO: Chief Financial Officer - IRM: Investor Relations Manager - CHRO: Chief HR Officer MD AU: Market Director Australia - MD NZ: Market Director New Zealand 52

55 Shareholder Information Communication with the investor and financial analyst community continues throughout the year: in 2012 management held over 300 one-to-one meetings, conference calls and presentation to the Group. In addition, the Company has dedicated a large section of its website to the provision of information to shareholders. The Group Investor Relations Manager is Emilia Trudu. Brokers Coverage The share is continuously covered by the following brokers, which in 2012 actively followed the development of the Company in specific studies and analyses: Banca Akros Banca Aletti Bank of America Merrill Lynch Citigroup Crédit Agricole Cheuvreux Commerzbank Equita Sim Exane BNP Paribas Fidentiis Equities Goldman Sachs Intermonte Jefferies International Kepler Capital Markets Mediobanca During the year more than 100 notes were published on the Group. Financial Calendar 2013 Date Event 06 March 2013 Board of Directors to approve the draft Financial Statements as at December 31 st, April 2013 AGM to approve Financial Statements as at December 31 st, April 2013 Board of Directors to approve First Quarter Results as at March 31 st, July 2013 Board of Directors to approve Interim Management Report as at June 30 th, October 2013 Board of Directors to approve Quarterly Report as at September 30 th, Amplifon Annual Report 2012

56 Comments on the Financial Results 55 Consolidated Income Statement 58 Reclassified Consolidated Balance Sheet 60 Condensed Reclassified Consolidated Cash Flow Statement 61 Indicators 62 Consolidated Income Statement By Geographical Area 64 Consolidated Balance Sheet By Geographical Area 94 Net Financial Indebtedness 102 Cash Flow 105 Acquisitions of Companies and Businesses 107 Report on Operations at 31 December 2012 Statement of Changes in Net Equity and the results for the period of the Parent Company Amplifon S.p.A. and the Group Net Equity and results for the period in question as at 31 December Risk Management 110 Treasury Shares 118 Research and Development 118 Transactions between Group Companies and with Related Parties 118 Contingent Liabilities 119 Subsequent Events after 31 December Outlook 120 Corporate Governance Report 121 Comments on the Financial Results of Amplifon S.p.A

57 Report on Operations at 31 December 2012 Comments on the Financial Results The year 2012 was characterized by decidedly weak international markets and even though the risks for the world economy lessened at the end of the period following the agreement reached in the United States to avoid the fiscal cliff, the easing of the financial tensions in the Euro zone and the improvement in the prospects for the emerging markets, they did not disappear. The global economy, in fact, remained weak in the second half of 2012 and estimates for growth in world trade were lowered. More in detail, the economic activity in the Euro zone continued to suffer from a lack of resilience in the last quarter of 2012 and the repercussions of the financial tensions that impacted a few Euro zone countries during the year, along with the effects of the necessary austerity measures, were felt by economies which had previously been considered more solid. On the other hand, thanks also to the decisions made on a European level, the renewed support for Greece, the agreement reached to create a single bank regulator, designed to prevent the vicious circle between sovereign debt and the health of the banking system, improved the financial markets, the deterioration of which had been a persistent obstacle to any cyclical recovery. Yields on government bonds fell in the countries most affected by the tensions; the capital inflows toward a few of the economies hardest hit by the sovereign debt crisis returned and are slowly creating the conditions needed for a recovery which, however, will be slow, very volatile and, based on analysts forecasts, not strengthen until In this environment the Amplifon Group benefitted from its international dimension. Thanks in particular to the contribution made by the United States and Australia, the Group was able to offset the negative effects of the difficulties encountered in a few European countries in the first nine months of the year and managed, due to the excellent recovery recorded in Continental Europe in the last months of the period, to post growth both year-on-year and quarter-on-quarter. The year closed with a net profit of 43,182 thousand, an increase of 1.1% with respect to the prior year ( 42,698 thousand). 55 Amplifon Annual Report 2012

58 Revenue Performance Revenue from sales and services amounted to 846,611 thousand in the year (versus 827,442 thousand 2011), an increase with respect to the prior year of 19,169 thousand (+2.3%) due to positive exchange differences, net of which a decline of 0.6% would have been posted, but with different trends in the different geographic areas: in Continental Europe the Amplifon Group recorded a drop in revenue of 16,388 thousand (-2.9%), due primarily to the difficulties encountered in the Netherlands and Switzerland, while good results were recorded in Italy and Hungary; in the United Kingdom, despite the persistence of the general economic difficulties and the competition of the National Healthcare Service, revenue was largely stable falling slightly by 288 thousand (-0.8%); in the United States the completion of the transformation of the subsidiary Sonus s business model from a direct to an indirect channel and management s constant focus on operating and developing the remaining channels made it possible to post an increase in turnover in local currency of 5.4%. This growth was slowed by the effects of Hurricane Sandy which struck the country s north-eastern seaboard. In addition to causing the temporary closure of stores, Sandy also resulted in the closure of the distribution center of Amplifon s main North American supplier for about two weeks and, consequently, the year-end promotional sales to the franchisees and other members of the indirect channels with which Amplifon does business in this market were not held; in Australia and New Zealand turnover for the year rose by 5.0% in local currency reaching A$162,269 thousand. Profit Performance Gross operating profit (EBITDA) amounted to 145,172 thousand in 2012, an increase of 661 thousand with respect to the prior year. The EBITDA margin reached 17.1%, close to the record 17.5% reached in In Continental Europe EBITDA fell by 14,474 thousand (-14.6%) and the EBITDA margin by 2.2% due to the problems encountered in the Netherlands, Switzerland and Germany which weighed heavily on the results for the first three quarters of the year and which were only partially offset by the excellent results recorded in the last quarter of the year; In the United Kingdom the Group almost reached its break even point (a loss of 529 thousand was reported) posting an improvement of 2,942 thousand with respect to the prior year; In the United States an increase of $9,354 thousand was posted while the EBITDA margin rose to 18.9% (+480bps with respect to the prior year); In Australia and New Zealand EBITDA reached A$44,996 thousand with the EBITDA margin coming in at 27.7%. 56

59 Report on Operations at 31 December 2012 Changes in net debt Net financial indebtedness at 31 December 2012 amounted to 305,835 thousand, a drop of 46,001 thousand with respect to 31 December 2011, confirming the Group s ability to generate significant cash flow capable of financing capital expenditures totalling 35,387 thousands, acquisitions amounting to 12,576 thousand, while also absorbing interest payable and other financial charges of 22,145 thousand and the dividends paid to shareholders which amounted to 7,992 thousand. At the end of the period cash and cash equivalents totalled 111,180 thousand, versus total debt of 417,015 thousand, the short term portion of which amounted to 123,370 thousand. What appears to be a slight imbalance in the short term portion is due to the reclassification of maturing debt as short term such as, for example, the second tranche of the private placement which falls due in August 2013 amounting to, including the effect of currency hedging, 67,056 thousand. While it can count on available cash, cash generation in the period and available credit lines, in light of these obligations the Group is already evaluating various options for refinancing a portion of the current debt as long term. 57 Amplifon Annual Report 2012

60 Consolidated Income Statement ( thousands) FY 2012 % FY 2011 % Revenues from sales and services 846, % 827, % Raw materials, consumables and supplies and change in raw materials, consumables and supplies (189,731) -22.4% (178,527) -21.6% Personnel expenses (257,783) -30.4% (248,932) -30.1% External services (255,336) -30.2% (256,779) -31.0% Other costs and revenues 1, % 1, % Gross operating margin (EBITDA) 145, % 144, % Depreciation and write-downs of non-current assets (31,059) -3.7% (28,450) -3.4% Operating result before the amortisation and impairment of customer lists, trademarks, non-competition agreements and goodwill arising from business combinations (EBITA) 114, % 116, % Amortization and impairment of trademarks, customer lists, lease rights and non-competition, agreements and goodwill (16,227) -1.9% (15,768) -1.9% Operating income (EBIT) 97, % 100, % Income, expenses, valuation and adjustments of financial assets % (92) 0.0% Net financial expenses (25,896) -3.1% (28,007) -3.4% Exchange differences and non hedge accounting instruments (366) 0.0% % Profit (loss) before tax 72, % 72, % Current tax (30,199) -3.6% (28,370) -3.4% Deferred tax 1, % (1,202) -0.1% Group and minority interests results 43, % 42, % Profit (loss) of minority interests (40) 0.0% % Group net profit (loss) 43, % 42, % EBITDA is the operating result before charging amortisation, depreciation and impairment of both tangible and intangible fixed assets. EBITA is the operating result before amortisation and impairment of customer lists, trademarks, noncompetition agreements and goodwill arising from business combinations. EBIT is the operating result before financial income and charges and taxes. 58

61 Report on Operations at 31 December 2012 ( thousands) Q % Q % Revenues from sales and services 250, % 238, % Raw materials, consumables and supplies and change in raw materials, consumables and supplies (54,314) -21.7% (49,272) -20.7% Personnel expenses (68,015) -27.2% (64,763) -27.1% External services (71,821) -28.7% (71,147) -29.8% Other costs and revenues % 1, % Gross operating margin (EBITDA) 56, % 54, % Depreciation and write-downs of non-current assets (8,653) -3.5% (7,853) -3.3% Operating result before the amortisation and impairment of customer lists, trademarks, non-competition agreements and goodwill arising from business combinations (EBITA) 48, % 46, % Amortization and impairment of trademarks, customer lists, lease rights and non-competition, agreements and goodwill (4,086) -1.6% (4,895) -2.1% Operating income (EBIT) 44, % 41, % Income, expenses, valuation and adjustments of financial assets % % Net financial expenses (6,985) -2.8% (6,965) -2.9% Exchange differences and non hedge accounting instruments (184) -0.1% % Profit (loss) before tax 37, % 35, % Current tax (12,075) -4.8% (12,115) -5.1% Deferred tax 1, % (570) -0.2% Group and minority interests results 26, % 22, % Profit (loss) of minority interests (7) 0.0% % Group net profit (loss) 26, % 22, % 59 Amplifon Annual Report 2012

62 Reclassified Consolidated Balance Sheet The reclassified Consolidated Balance Sheet aggregates assets and liabilities according to operating functionality criteria, subdivided by convention into the following three key functions: investments, operations and finance. ( thousands) 31/12/ /12/2011 Change Goodwill 551, ,443 8,410 Non-competition agreements, trademarks, customer lists and lease rights 119, ,456 (11,360) Software, licences, other intangible fixed assets, fixed assets in progress and advances 25,525 23,363 2,162 Tangible assets 94,070 91,380 2,690 Financial fixed assets (1) 36,509 37,514 (1,005) Other non-current financial assets (1) 2,828 2, Fixed assets 829, ,756 1,125 Inventories 34,196 34,651 (455) Trade receivables 111, ,838 6,277 Other receivables 27,319 25,337 1,982 Current assets (A) 172, ,826 7,804 Operating assets 1,002, ,582 8,929 Trade payables (98,016) (96,613) (1,403) Other payables (2) (113,458) (110,533) (2,925) Provisions for risks and charges (current portion) (689) (1,107) 418 Current liabilities (B) (212,163) (208,253) (3,910) Net working capital (A) - (B) (39,533) (43,427) 3,894 Derivative instruments (3) (5,695) (3,808) (1,887) Deferred tax assets 48,039 48,408 (369) Deferred tax liabilities (53,081) (53,572) 491 Provisions for risks and charges (non-current portion) (32,525) (27,123) (5,402) Liabilities for employees benefits (non-current portion) (15,260) (11,786) (3,474) Loan fees (4) 4,442 6,057 (1,615) Other non-current payables (275) (499) 224 NET INVESTED CAPITAL 735, ,006 (7,013) Group net equity 429, ,644 38,918 Minority interests Total net equity 430, ,170 38,988 Net medium and long-term financial indebtedness (4) 293, ,752 (115,107) Net short-term financial indebtedness (4) 12,190 (56,916) 69,106 Total net financial indebtedness 305, ,836 (46,001) OWN FUNDS AND NET FINANCIAL INDEBTEDNESS 735, ,006 (7,013) Notes for reconciling the condensed balance sheet with the statutory balance sheet: (1) Financial fixed assets and Other non-current financial assets include equity interests valued using the net equity method, financial assets at fair value through profit and loss and other non-current assets; (2) Other Payables includes other liabilities, accrued liabilities and deferred income and tax liabilities; (3) Derivative instruments includes cash flow hedging instruments not comprised in the net financial position; (4) The item Loan fees is presented in the balance sheet as a direct deduction of the short-term and medium/long-term components of the items financial payables and financial liabilities for the short term and long term portion respectively. 60

63 Report on Operations at 31 December 2012 Condensed Reclassified Consolidated Cash Flow Statement The condensed consolidated cash flow statement represents a summary version of the reclassified cash flow statement detailed in the following pages and its purpose is, starting from the EBIT, to detail the flows generated or absorbed by operating, investing and financing activities. ( thousands) FY 2012 FY 2011 Operating Income (EBIT) 97, ,293 Amortization, depreciation and write down 47,286 44,218 Provision, other non monetary items and gain/losses from disposals 15,339 12,164 Net financial expenses (22,072) (27,154) Taxes paid (28,580) (23,309) Changes in net working capital (9,542) (29,514) Cash flow generated (absorbed) by operating activities (A) 100,317 76,698 Cash flow generated (absorbed) by operating investing activities (B) (33,567) (32,009) Free cash flow (A+B) 66,750 44,689 Cash flow generated (absorbed) by business combinations (C) (12,576) (3,532) (Purchase) sale of other investments and securities (D) 4,176 (868) Cash flow generated (absorbed) by investing activities (B+C+D) (41,967) (36,409) Cash flows provided by (used in) operating activities and investing activities 58,350 40,289 Dividends (7,992) (7,051) Fees paid on medium/long-term financing - - Capital increases, third parties contributions, dividends paid to third parties by the subsidiaries 2, Hedging instruments and other changes in non current assets (5,428) (2,979) Net cash flow from the period 47,318 30,742 Opening net financial indebtedness (351,836) (381,414) Effect of the disposal of assets and of exchange rate fluctuations on the net financial position (1,317) (1,164) Change in net financial position 47,318 30,742 Closing net financial indebtedness (305,835) (351,836) 61 Amplifon Annual Report 2012

64 Indicators 31/12/ /12/2011 Net financial indebtedness ( thousands) 305, ,836 Net Equity ( thousands) 430, ,170 Group Net Equity ( thousands) 429, ,644 Net financial indebtedness/net Equity Net financial indebtedness/group Net Equity Net financial indebtedness/ebitda EBITDA/ Net financial expenses Earnings per share (EPS) ( ) Diluted EPS ( ) Net Equity per share ( ) Dividend per share (DPS) ( ) Pay out ratio (%) (*) 21.49% 18.52% Dividend yield (%) (*) 1.15% 1.13% Period-end price Highest price in period ( ) Lowest price in period ( ) Price/earnings ratio (P/E) Share price/net equity per share Market capitalisation ( millions) Number of shares outstanding 216,502, ,191,950 (*) values determined based on the dividend proposed by the Board of Directors at the Shareholders General Meeting convened for 17 April The net financial indebtedness/net equity ratio is the ratio of net financial indebtedness to total net equity. The net financial indebtedness/group net equity ratio is the ratio of the net financial indebtedness to the Group s net equity. The net financial indebtedness/ebitda ratio is the ratio of net financial indebtedness to EBITDA for the last four quarters (determined with reference to recurring business only on the basis of pro forma figures where there were significant changes to the structure of the Group). The EBITDA/net financial charges ratio is the ratio of EBITDA for the last four quarters (determined with reference to recurring business only on the basis of restated figures where there were significant changes to the structure of the Group) to net interest payable and receivable of the same last 4 quarters. Earnings per share (EPS) ( ) is net profit for the period attributable to the Parent s ordinary shareholders divided by the weighted average number of shares outstanding during the period, considering purchases and sales of treasury shares as cancellation or issue of shares. Diluted earnings per share (EPS) ( ) is net profit for the period attributable to the Parent s ordinary shareholders divided by the weighted average number of shares outstanding during the period adjusted for the dilution effect of potential shares. In the calculation of outstanding shares, purchases and sales of treasury shares are considered as cancellations and issues of shares respectively. Net Equity per share ( ) is the ratio of Group equity to the number of outstanding shares. Dividend per share (DPS) ( ) is the dividend paid in the following year resolved by the shareholders meeting approving the accounts for the year indicated. This indicator is not given in interim reports since it is only meaningful with reference to the full year result. Pay out ratio (%) is the ratio of the dividend to EPS. 62

65 Report on Operations at 31 December 2012 Dividend yield (%) is the ratio of the dividend per share paid in the following year and the share price on 31 December of the year indicated. Period-end price ( ) is the closing price on the last stock exchange trading day of the period. Highest price ( ) and lowest price ( ) are the highest and lowest prices from 1 January to the end of the current period. Price/Earnings ratio (P/E) is the ratio of the share price on the last stock exchange trading day of the period to earnings per share. Share price/net equity per share is the ratio of the share closing price on the last stock exchange trading day of the period to net equity per share. Market capitalisation is the closing price on the last stock exchange trading day of the period multiplied by the number of shares outstanding. The number of shares outstanding is the number of issued shares less treasury shares. 63 Amplifon Annual Report 2012

66 Consolidated Income Statement by Geographical Area ( thousands) FY 2012 Continental Europe UK & Ireland North America Asia Pacific Africa Elim. Total Revenues from sales and services 541,112 41, , ,787 2, ,611 Raw materials, consumables and supplies and change in raw materials, consumables and supplies (91,253) (7,485) (71,074) (18,966) (954) 1 (189,731) Personnel expenses (170,919) (18,139) (17,415) (50,734) (514) (62) (257,783) External services (194,883) (16,709) (18,368) (24,781) (656) 61 (255,336) Other costs and revenues 481 (149) 1,146 (67) - - 1,411 Gross operating margin (EBITDA) 84,538 (657) 24,693 36, ,172 Depreciation and write-downs of non-current assets (20,083) (2,327) (4,176) (4,418) (55) - (31,059) Operating result before the amortisation and impairment of customer lists, trademarks, non-competition agreements and goodwill arising from business combinations (EBITA) 64,455 (2,984) 20,517 31, ,113 Amortization and impairment of trademarks, customer lists, lease rights and non-competition, agreements and goodwill (6,151) (1,809) (1,426) (6,841) - - (16,227) Operating income (EBIT) 58,304 (4,793) 19,091 24, ,886 Income, expenses, valuation and adjustments of financial assets 581 Net financial expenses (25,896) Exchange differences and non hedge accounting instruments (366) Profit (loss) before tax 72,205 Current and deferred tax (29,063) Group and minority interests results 43,142 Profit (loss) of minority interests (40) Group net profit (loss) 43,182 64

67 Report on Operations at 31 December 2012 ( thousands) FY 2011 Continental Europe UK & Ireland North America Asia Pacific Africa Elim. Total Revenues from sales and services 557,500 39, , ,573 1, ,442 Raw materials, consumables and supplies and change in raw materials, consumables and supplies (91,098) (6,502) (62,666) (17,511) (750) - (178,527) Personnel expenses (168,238) (18,071) (18,239) (43,597) (100) (687) (248,932) External services (199,186) (18,973) (18,330) (20,228) (749) 687 (256,779) Other costs and revenues ,158 (4) - - 1,307 Gross operating margin (EBITDA) 99,012 (4,017) 16,073 33, ,511 Depreciation and write-downs of non-current assets (19,052) (2,127) (3,233) (3,993) (45) - (28,450) Operating result before the amortisation and impairment of customer lists, trademarks, non-competition agreements and goodwill arising from business combinations (EBITA) 79,960 (6,144) 12,840 29, ,061 Amortization and impairment of trademarks, customer lists, lease rights and non-competition, agreements and goodwill (5,948) (1,690) (1,771) (6,359) - - (15,768) Operating income (EBIT) 74,012 (7,834) 11,069 22, ,293 Income, expenses, valuation and adjustments of financial assets (92) Net financial expenses (28,007) Exchange differences and non hedge accounting instruments 110 Profit (loss) before tax 72,304 Current and deferred tax (29,572) Group and minority interests results 42,732 Profit (loss) of minority interests 34 Group net profit (loss) 42, Amplifon Annual Report 2012

68 follow Consolidated Income Statement by Geographical Area ( thousands) Q Continental Europe UK & Ireland North America Asia Pacific Africa Elim. Total Revenues from sales and services 174,076 10,496 32,853 32, ,250 Raw materials, consumables and supplies and change in raw materials, consumables and supplies (30,912) (1,661) (16,389) (5,111) (242) 1 (54,314) Personnel expenses (46,163) (4,602) (4,510) (12,587) (135) (18) (68,015) External services (55,789) (3,703) (5,301) (6,873) (172) 17 (71,821) Other costs and revenues 382 (27) 531 (105) Gross operating margin (EBITDA) 41, ,184 7, ,881 Depreciation and write-downs of non-current assets (5,409) (583) (1,495) (1,151) (15) - (8,653) Operating result before the amortisation and impairment of customer lists, trademarks, non-competition agreements and goodwill arising from business combinations (EBITA) 36,185 (80) 5,689 6, ,228 Amortization and impairment of trademarks, customer lists, lease rights and non-competition, agreements and goodwill (1,575) (454) (352) (1,705) - - (4,086) Operating income (EBIT) 34,610 (534) 5,337 4, ,142 Income, expenses, valuation and adjustments of financial assets 54 Net financial expenses (6,985) Exchange differences and non hedge accounting instruments (184) Profit (loss) before tax 37,027 Current and deferred tax (10,573) Group and minority interests results 26,454 Profit (loss) of minority interests (7) Group net profit (loss) 26,461 66

69 Report on Operations at 31 December 2012 ( thousands) Q Continental Europe UK & Ireland North America Asia Pacific Africa Elim. Total Revenues from sales and services 166,291 9,687 32,332 29, ,564 Raw materials, consumables and supplies and change in raw materials, consumables and supplies (25,550) (1,631) (17,592) (4,296) (203) - (49,272) Personnel expenses (44,406) (4,568) (4,245) (10,978) (26) (540) (64,763) External services (57,247) (3,826) (4,869) (5,522) (223) 540 (71,147) Other costs and revenues 665 (45) ,210 Gross operating margin (EBITDA) 39,753 (383) 6,115 9, ,592 Depreciation and write-downs of non-current assets (5,097) (555) (934) (1,253) (14) - (7,853) Operating result before the amortisation and impairment of customer lists, trademarks, non-competition agreements and goodwill arising from business combinations (EBITA) 34,656 (938) 5,181 7, ,739 Amortization and impairment of trademarks, customer lists, lease rights and non-competition, agreements and goodwill (1,489) (428) (502) (2,476) - - (4,895) Operating income (EBIT) 33,167 (1,366) 4,679 5, ,844 Income, expenses, valuation and adjustments of financial assets 136 Net financial expenses (6,965) Exchange differences and non hedge accounting instruments 37 Profit (loss) before tax 35,052 Current and deferred tax (12,685) Group and minority interests results 22,367 Profit (loss) of minority interests 14 Group net profit (loss) 22, Amplifon Annual Report 2012

70 Revenues from Sales and Services ( thousands) FY 2012 FY 2011 Q Q Revenues from sales and services 846, , , ,564 Consolidated revenue from sales and services reached 846,611 thousand in 2012, an increase of 19,169 thousand (+2.3%) with respect to the prior year explained, for 6,620 thousand (0.8%) by acquisitions, for 24,195 thousand (2.9%) by positive exchange differences, while organic growth fell by 11,646 thousand (-1.4%). In the fourth quarter alone, revenue from sales and services reached 250,250 thousand, an increase of 11,686 thousand (+4.9%) with respect to the prior year explained for 1,901 thousand (0.8%) by acquisitions, for 4,399 thousand by positive exchange differences, and for 5,386 thousand (2.3%) by organic growth. The following table shows the breakdown of revenue from sales and services by geographical area: ( thousands) FY 2012 % FY 2011 % Change Change % Exchange diff. Italy 224, % 221, % 3, % - France 98, % 96, % 1, % - The Netherlands 89, % 97, % (7,336) -7.6% - Germany 41, % 42, % (964) -2.3% - Iberian Peninsula 31, % 32, % (823) -2.5% - Switzerland 25, % 41, % (15,105) -36.8% 576 Belgium and Luxembourg 21, % 21, % % - Hungary 6, % 4, % 1, % (212) Turkey 1, % n.a. n.a. 1,402 n.a. n.a. Intercompany eliminations (117) 0.0% (175) 0.0% Total Continental Europe 541, % 557, % (16,388) -2.9% 364 United Kingdom and Ireland 41, % 39, % 2, % 2,689 United Kingdom and Ireland 41, % 39, % 2, % 2,689 USA - Canada 130, % 114, % 16, % 9,993 Total America 130, % 114, % 16, % 9,993 Australia 91, % 78, % 13, % 7,333 New Zealand 37, % 35, % 2, % 3,733 India 1, % % % (60) Total Asia Pacific 130, % 114, % 16, % 11,006 Egypt 2, % 1, % % 143 Total Africa 2, % 1, % % 143 Intercompany eliminations - 0.0% - 0.0% - 0.0% - Total 846, % 827, % 19, % 24,195 68

71 Report on Operations at 31 December 2012 Continental Europe Consolidated revenue from sales and services in the European market amounted to 541,112 thousand in 2012 versus 557,500 thousand in 2011, a drop of 16,388 thousand (-2.9%), explained for 0.9% by acquisitions, for 0.1% by positive exchange differences, and for -3.9% by negative organic growth as below detailed with particular reference to the Netherland and Switzerland. In fourth quarter 2012 alone, consolidated revenue from sales and services in the European market amounted to 174,076 thousand versus 166,292 thousand in the fourth quarter of the prior year, an increase of 7,785 thousand (+4.7%) explained for 1,737 thousand (1.0%) by acquisitions, for 198 thousand (0.1%) by positive exchange differences and for 5,850 thousand (3.6%) by organic growth. The number of stores (direct and indirect) through which the Group operates in Continental Europe reached 1,493 at 31 December 2012 compared to 1,443 at 31 December In addition to the stores (direct and indirect) there are also 2,312 customer contact points (2,163 at 31 December 2011). Italy Period ( thousands) Change Change % I quarter 48,070 48, II quarter 59,057 59,221 (164) -0.3% I Half-year 107, ,282 (155) -0.1% III quarter 41,962 42,167 (205) -0.5% IV quarter 75,407 71,888 3, % II Half-year 117, ,055 3, % Total year 224, ,337 3, % Revenue from sales and services amounted to 224,496 thousand in 2012 versus 221,337 in the prior year, an increase of 3,159 thousand (+1.4%). The positive performance posted in the fourth quarter is not only testimony to the revenue s stability in a difficult macroeconomic context, but also demonstrates the solidity of the business. This result was, in fact, obtained thanks to both an increase in the number of units sold and a higher average sales price due to a better product mix geared to offer customers better quality. The year s latest advertising campaign, launched mid-september with a new version of the spot with Lino Banfi acting as testimonial, made a positive contribution to the fourth quarter results. In 2012, Amplifon continued to expand its geographical coverage reaching 469 points of sale (455 at December 2011) and renewing existing ones on the basis of a new layout. In addition to the proprietary stores, there are also 2,007 customer contact points (1,889 at the end of 2011). 69 Amplifon Annual Report 2012

72 France Period ( thousands) Change Change % I quarter 24,940 24, % II quarter 25,641 25,735 (94) -0.4% I Half-year 50,581 50, % III quarter 20,142 19, % IV quarter 27,602 26, % II Half-year 47,744 46,619 1, % Total year 98,325 96,909 1, % Revenue from sales and services in 2012 rose 1,416 thousand (1.5%) with respect to the 96,909 thousand reported in 2011 to 98,325 thousand. A positive performance was also recorded in the fourth quarter of the year thanks to the contribution of the acquisitions made in the year of 2.4%. Organic growth, however, was impacted by consumer uncertainty and the negative macroeconomic context, while the average sales price held thanks to effective investments in marketing, which made it possible for the company to strengthen brand awareness and maintain the brand s position in the middle/high-end. The total number stores in France at 31 December 2012 reached 300 versus 291 at the end of the prior year. The number of customer contact points also increased from the 63 recorded at 31 December 2011 to

73 Report on Operations at 31 December 2012 The Netherlands Period ( thousands) Change Change % I quarter 16,899 21,305 (4,406) -20.7% II quarter 17,673 25,164 (7,491) -29.8% I Half-year 34,572 46,469 (11,897) -25.6% III quarter 19,106 21,434 (2,328) -10.9% IV quarter 36,129 29,240 6, % II Half-year 55,235 50,674 4, % Total year 89,807 97,143 (7,336) -7.6% Revenue from sales and services amounted to 89,807 thousand in 2012 versus 97,143 thousand in 2011, a drop of 7,336 thousand (-7.6%). The result for the year was significantly impacted by the adverse market conditions which persisted throughout the year, particularly in the first half. In addition to the recession, this environment is also explained by both the significant pressure exerted by the local media on the hearing aid sector which referred to unduly high prices without, however, bearing in mind the cost of the service provided to customers, as well as the intense competition between the market players. After a particularly difficult first half, Amplifon, which operates in the Netherlands under the brand Beter Horen, noted that volumes began to recover beginning in the third quarter to then accelerate significantly in the fourth quarter with respect to fourth quarter 2011 (+23.6%) which made it possible to recover a large part of the gap accumulated with respect to previous quarters. The different marketing activities undertaken and the communications strategy designed to stress the high value added services provided to customers were not, however, sufficient to completely offset the pressure on prices and the uncertainty surrounding possible regulatory changes relating to insurance coverage beginning January 2013 keeps visibility regarding sales trends going forward low. There are 192 stores in the Netherlands, versus 179 at the end of the previous year, as well as 110 customer contact points, a number which is unchanged with respect to 31 December Amplifon Annual Report 2012

74 Germany Period ( thousands) Change Change % I quarter 11,233 10, % II quarter 9,173 11,580 (2,407) -20.8% I Half-year 20,406 22,018 (1,612) -7.3% III quarter 9,438 9,668 (230) -2.4% IV quarter 11,918 11, % II Half-year 21,356 20, % Total year 41,762 42,726 (964) -2.3% Revenue from sales and services fell 964 thousand (-2.3%) in 2012 from the 42,726 thousand recorded in 2011 to 41,762 thousand. The positive result posted in the fourth quarter made it possible to recover a large part of the gap created with respect primarily to the second quarter of the year which was affected by the stiff competition of the two main market players which Amplifon, lacking the necessary critical mass, could only counteract through the use of local marketing campaigns and, therefore, in a less than optimal manner. The number of units sold did increase significantly in the year, however, which offset the drop in the average sales prices due to the competitive pressure described above. Acquisitions also helped to sustain turnover with a contribution that reached 3.2%. The German market (Europe s largest) is extremely fragmented and includes approximately 3,300 points of sale. Amplifon, with 200 locations at 31 December 2012 (192 at the end of 2011), is the third largest player in terms of the number of stores. 72

75 Report on Operations at 31 December 2012 Iberian Peninsula Period ( thousands) Change Change % I quarter 7,784 7,968 (184) -2.3% II quarter 9,004 8, % I Half-year 16,788 16,936 (148) -0.9% III quarter 6,062 6,578 (516) -7.8% IV quarter 9,117 9,276 (159) -1.7% II Half-year 15,179 15,854 (675) -4.3% Total year 31,967 32,790 (823) -2.5% Revenue from sales and services reached 31,967 thousand in 2012 versus 32,790 thousand in 2011, a drop of 823 thousand (-2.5%). The overall performance was impacted by the particularly negative situation which persists in the Iberian Peninsula and the restrictive measures undertaken by the government to limit debt. Public healthcare services in Spain and Portugal do not provide any subsidies for the purchase of hearing aids and sales are, therefore, more sensitive to the general economic environment. More in detail, revenue declined in Spain while sales increased in Portugal, where the crisis began much earlier, thanks also to the steps taken by management to increase customer loyalty and the repurchase rates. The same measures are currently being implemented in Spain. The region is served by 108 direct stores and 24 franchises (109 and 34, respectively, at 31 December 2011), as well as by 31 customer contact points (5 at 31 December 2011). 73 Amplifon Annual Report 2012

76 Switzerland Period ( thousands) Change Change % I quarter 7,309 6, % II quarter 7,132 10,402 (3,270) -31.4% I Half-year 14,441 17,056 (2,615) -15.3% III quarter 5,476 12,575 (7,099) -56.5% IV quarter 6,078 11,469 (5,391) -47.0% II Half-year 11,554 24,044 (12,490) -51.9% Total year 25,995 41,100 (15,105) -36.8% Period (CHF thousands) Change Change % I quarter 8,829 8, % II quarter 8,570 13,088 (4,518) -34.5% I Half-year 17,399 21,652 (4,253) -19.6% III quarter 6,588 14,903 (8,315) -55.8% IV quarter 7,344 14,105 (6,761) -47.9% II Half-year 13,932 29,008 (15,076) -52.0% Total year 31,331 50,660 (19,329) -38.2% Revenue from sales and services fell by 15,105 thousand (-36.8%) in 2012 from the 41,100 thousand posted in 2011 to 25,995. The result was partially offset by the positive exchange effect; in local currency the drop, in fact, reaches 38.2%. The negative trend which characterized the first part of the year was confirmed in the fourth quarter, though there was a slight recovery in sales revenue. This dynamic is largely explained by the unusual growth in sales in the prior year, due to the regulatory changes which took effect in second quarter 2011, which caused consumers to concentrate their purchases in the period. Regulatory changes, in fact, caused a significant acceleration in purchases in 2011 and, consequently, a significant drop in the same market in This had a negative impact on the result for FY 2012 which suffered from reduced sales volumes while average prices remained largely unchanged. A gradual return to historic market volumes is expected to take place in There are 79 direct stores in the region and the number of points of sale is unchanged with respect to 31 December

77 Report on Operations at 31 December 2012 Belgium and Luxembourg Period ( thousands) Change Change % I quarter 5,261 5,512 (251) -4.6% II quarter 5,143 5,427 (284) -5.2% I Half-year 10,404 10,939 (535) -4.9% III quarter 5,442 5, % IV quarter 5,615 5, % II Half-year 11,057 10, % Total year 21,461 21, % Revenue from sales and services reached 21,461 thousand in 2012, versus 21,375 thousand in 2011, an increase of 86 thousand (+0.4%) The positive trend recorded in the third quarter continued in the fourth quarter which made it possible to offset the decline recorded in the first part of the year and post growth with respect to the prior year, thanks also to the marketing initiatives undertaken by local management which resulted in an increase in both volumes and the average sales price. The region is served by 61 direct points of sale and 21 franchises (57 and 19, respectively, in the prior year), as well as by 84 customer contact points (83 at 31 December 2011). 75 Amplifon Annual Report 2012

78 Hungary Period ( thousands) Change Change % I quarter 1, % II quarter 1,414 1, % I Half-year 3,035 2,018 1, % III quarter 1,169 1, % IV quarter 1,810 1, % II Half-year 2,979 2, % Total year 6,014 4,295 1, % Period (HUF thousands) Change Change % I quarter 481, , , % II quarter 415, , , % I Half-year 896, , , % III quarter 327, ,588 42, % IV quarter 514, , , % II Half-year 842, , , % Total year 1,739,497 1,199, , % Revenue from sales and services reached 6,014 thousand in 2012 versus 4,295 thousand in 2011, an increase of 1,719 thousand (+40.0%) notwithstanding the negative impact of the Forint s depreciation against the Euro. In local currency the increase was 45.0%. The positive result, already very strong in the prior year when growth reached 32.1%, was also confirmed in 2012, particularly in the fourth quarter. The excellent performance is explained by both the good trend in the sale of hearing aids and the sale of cochlear implants to the national healthcare service. Regional coverage is guaranteed by the presence of 26 points of sale (24 at 31 December 2011). In addition to the proprietary stores there are also 11 customer contact points (13 at 31 December 2011). 76

79 Report on Operations at 31 December 2012 Turkey Period ( thousands) Change Change % I quarter 356 n.a. 356 n.a. II quarter 341 n.a. 341 n.a. I Half-year 697 n.a. 697 n.a. III quarter 293 n.a. 293 n.a. IV quarter 412 n.a. 412 n.a. II Half-year 705 n.a. 705 n.a. Total year 1,402 n.a. 1,402 n.a. Period (TL thousands) Change Change % I quarter 838 n.a. 838 n.a. II quarter 790 n.a. 790 n.a. I Half-year 1,628 n.a. 1,628 n.a. III quarter 658 n.a. 658 n.a. IV quarter 957 n.a. 957 n.a. II Half-year 1,615 n.a. 1,615 n.a. Total year 3,243 n.a. 3,243 n.a. Revenue from sales and services reached 1,402 thousand (3,243 thousand in Turkish Lira) in As Amplifon acquired Maxtone at the beginning of 2012, there are no comparative figures. The region is served by 9 points of sale. 77 Amplifon Annual Report 2012

80 United Kingdom and Ireland Period ( thousands) Change Change % I quarter 10,782 9, % II quarter 9,728 9, % I Half-year 20,510 19,269 1, % III quarter 10,819 10, % IV quarter 10,496 9, % II Half-year 21,315 20,141 1, % Total year 41,825 39,410 2, % Period (GBP thousands) Change Change % I quarter 8,998 8, % II quarter 7,872 8,290 (418) -5.0% I Half-year 16,870 16, % III quarter 8,570 9,171 (601) -6.6% IV quarter 8,475 8, % II Half-year 17,045 17,474 (429) -2.5% Total year 33,915 34,203 (288) -0.8% Revenue from sales and services reached 41,825 thousand in 2012, versus 39,410 thousand in 2011, an increase of 2,415 thousand (+6.1%) explained by the positive exchange effect. In local currency sales reached 33,915 thousand, down slightly with respect to the prior year (-0.8%). The slight recovery begun in September continued in the fourth quarter and the drop posted in third quarter tied to the seasonality of this quarter was almost entirely recovered. The recovery was driven, in particular, by the increase in volumes, versus a slight reduction in the average sales price. The competitive scenario, despite a few regulatory changes designed to facilitate an initial collaboration between the private and public sectors, continues to be greatly affected by the fact that the National Health Service (NHS) provides hearing aids free of charge. Regional coverage is guaranteed by the presence of 141 points of sale (unchanged with respect to 31 December 2011). In addition to the proprietary stores there are also 69 customer contact points (68 at 31 December 2011). 78

81 Report on Operations at 31 December 2012 North America Period ( thousands) Change Change % I quarter 31,132 27,734 3, % II quarter 33,069 26,283 6, % I Half-year 64,201 54,017 10, % III quarter 33,350 27,801 5, % IV quarter 32,853 32, % II Half-year 66,203 60,133 6, % Total year 130, ,150 16, % Period (USD thousands) Change Change % I quarter 40,809 37,940 2, % II quarter 42,426 37,859 4, % I Half-year 83,235 75,799 7, % III quarter 41,710 39,276 2, % IV quarter 42,596 43,817 (1,221) -2.8% II Half-year 84,306 83,093 1, % Total year 167, ,892 8, % Revenue from sales and services reached 130,404 thousand in 2012 versus 114,150 thousand in 2011, an increase of 16,254 thousand (+14.2%). This figure was positively impacted by the exchange effect. In local currency sales revenue amounted to $167,541 thousand in 2012, versus $158,892 thousand in the prior year, an increase of 5.4% ($ 8,649 thousand). It is difficult to compare the fourth quarter result with the same quarter of the prior year insofar as Hurricane Sandy struck the country s northeastern seaboard which, in addition to causing stores to be closed for a period of time, resulted in the closure of the distribution center of Amplifon s main North American supplier for about two weeks and, consequently, the year-end promotional sales to the franchisees and other members of the indirect channels with which Amplifon does business in this market were not held. Without this serious natural disaster, the fourth quarter result would have shown important growth with respect to the comparison period. On the other hand, it is reasonable to expect that the lack of the year-end promotional sales will result in sales growth in the first few months of The completion of the transformation of the subsidiary Sonus s business model from a direct to an indirect channel and management s constant focus on operating and developing the remaining channels made it possible for Amplifon to post continuous growth in the North American market in More in detail, Elite s wholesale channel reported excellent results thanks to better product mix and the ability to attract new members, as did Miracle Ear s retail franchising channel. To date, Amplifon has 17 direct stores in North America, 1,279 franchises and 1,665 wholesale points of sale. At the end of the previous year, there were 25 direct stores, 1,320 franchises and 1,500 wholesale points of sale. 79 Amplifon Annual Report 2012

82 Asia Pacific In 2012 revenue in Asia Pacific amounted to 130,787 thousand, an increase of 16,214 thousand (+14.2%) with respect to The result is primarily attributable to the good performance posted by NHC Australia and the positive exchange effect of 11,006 thousand (+9.6%). At 31 December 2012 the Group had 292 stores in Asia Pacific (versus 233 at 31 December 2011), as well as 20 customer contact points (versus none at 31 December 2011). Australia Period ( thousands) Change Change % I quarter 21,636 16,850 4, % II quarter 23,396 19,387 4, % I Half-year 45,032 36,237 8, % III quarter 24,624 21,524 3, % IV quarter 22,171 20,611 1, % II Half-year 46,795 42,135 4, % Total year 91,827 78,372 13, % Period (AUD thousands) Change Change % I quarter 26,883 22,939 3, % II quarter 29,670 26,278 3, % I Half-year 56,553 49,217 7, % III quarter 29,690 28, % IV quarter 27,688 27, % II Half-year 57,378 56, % Total year 113, ,676 8, % Revenue from sales and services reached 91,827 thousand in 2012 (A$113,931 thousand), versus 78,372 thousand in 2011 (A$105,676 thousand), an increase of 13,455 thousand (+17.2%). This result reflects the positive exchange effect: the change in local currency amounted to +7.8%. NHC Australia confirmed its growth trend in 2012, as well, posting positive results in every quarter. The performance, which through September had benefitted from an increase in volumes including due to repurchases (NHC Australia is, in fact, a relatively young company and, up until now, growth has been driven by the acquisition of new customers, customers who begin to repurchase after 4-5 years), slowed in the fourth quarter due to the introduction of trials, another marketing instrument which caused part of the sales to be postponed until In Australia there are 127 direct points of sale (119 at 31 December 2011). In addition to the proprietary stores there are also 20 customer contact points (versus none at 31 December 2011). 80

83 Report on Operations at 31 December 2012 New Zealand Period ( thousands) Change Change % I quarter 8,511 8,591 (80) -0.9% II quarter 9,700 8,670 1, % I Half-year 18,211 17, % III quarter 10,162 9, % IV quarter 9,531 9, % II Half-year 19,693 18,570 1, % Total year 37,904 35,831 2, % Period (NZD thousands) Change Change % I quarter 13,642 15,555 (1,913) -12.3% II quarter 15,737 15, % I Half-year 29,379 31,155 (1,776) -5.7% III quarter 15,750 16,240 (490) -3.0% IV quarter 15,013 15,668 (655) -4.2% II Half-year 30,763 31,908 (1,145) -3.6% Total year 60,142 63,063 (2,921) -4.6% Revenue from sales and services reached 37,904 thousand in 2012, versus 35,831 thousand in 2011, an increase of 2,073 thousand (+5.8%) thanks to the positive exchange difference which amounted to 3,744 thousand. In local currency there was a decline of -4.6%. Sales in 2012 were affected by internal reorganization. The two operating structures were grouped together and the two brands under which the Group is active in this market now have the same management and are structured in a clearer and more cohesive manner. In cumulative terms, the comparison reflects the impact of regulatory changes which took effect at the end of 2010 on first quarter 2011 sales (which had benefitted from the higher number of orders received at the end of 2010 from customers seeking to benefit from the greater coverage offered by the National Health Service). The region is served by 92 stores (90 at 31 December 2011). 81 Amplifon Annual Report 2012

84 India Period ( thousands) Change Change % I quarter % II quarter % I Half-year % III quarter % IV quarter % II Half-year % Total year 1, % Period (INR thousands) Change Change % I quarter 8,697 4,043 4, % II quarter 9,985 6,820 3, % I Half-year 18,682 10,863 7, % III quarter 20,577 6,504 14, % IV quarter 33,199 6,662 26, % II Half-year 53,776 13,166 40, % Total year 72,458 24,029 48, % Revenue from sales and services reached 1,056 thousand in 2012, versus 370 thousand in 2011, an increase of 686 thousand (+185.4%). Sales in local currency amounted to 72,458 thousand Indian Rupees in 2012, an increase of 48,429 thousand Indian Rupees (+201.5%) with respect to The positive growth trend is explained by the continuous development of the distribution network, as well as organic growth in the business like-for-like which also benefitted, beginning in September, from the contribution of the 38 recently acquired stores which reached 290 thousand. There are 73 points of sale in the Indian region (24 at 31 December 2011). This figure includes both direct stores and points of sale found inside hospitals. 82

85 Report on Operations at 31 December 2012 Africa Period ( thousands) Change Change % I quarter % II quarter % I Half-year 1, % III quarter % IV quarter % II Half-year 1, % Total year 2,483 1, % Period (EGP thousands) Change Change % I quarter 4,517 3,229 1, % II quarter 4,683 3, % I Half-year 9,200 7,086 2, % III quarter 5,067 3,688 1, % IV quarter 5,098 4, % II Half-year 10,165 7,885 2, % Total year 19,365 14,971 4, % Revenue from sales and services in Egypt reached 2,483 thousand in 2012, versus 1,809 thousand in 2011, an increase of 674 thousand (+37.3%) due also to the revaluation of the Egyptian Lire against the Euro. In local currency the increase amounted to 29.4%. If, in the first quarter, the important increase in turnover was tied to the fact that the first months of 2011 were negatively impacted by the political turmoil which resulted in the closure of stores for several days, in the following quarters it is explained by constant and persistent organic growth. The business is carried out through 13 points of sale (11 at 31 December 2011). 83 Amplifon Annual Report 2012

86 Gross operating margin (EBITDA) ( thousands) FY 2012 FY 2011 Q Q Gross operating margin (EBITDA) 145, ,511 56,881 54,592 Gross operating profit (EBITDA) amounted to 145,172 thousand in 2012 versus 144,511 thousand in 2011, a slight increase of 661 thousand (+0.5%) while the EBITDA margin dropped 0.4% with respect to the prior year to 17.1%. In the fourth quarter alone, EBITDA amounted to 56,881 thousand, an increase of 2,289 thousand (+4.2%) with respect to the fourth quarter of the previous year. The EBITDA margin dropped 0.2% with respect to the comparison period to 22.7%. During the fourth quarter there was a decided recovery in Continental Europe which had previously been impacted by the problems described below. This recovery made it possible to completely offset the slowdown recorded in Australia and described below. In the United States and the United Kingdom, rather, the growth which characterized all of FY 2012 was also confirmed in the last quarter. The following table gives the distribution of EBITDA by geographical area. ( thousands) FY 2012 EBITDA Margin FY 2011 EBITDA Margin Change Change % Continental Europe 84, % 99, % (14,474) -14.6% UK and Ireland (657) -1.6% (4,017) -10.2% 3, % North America 24, % 16, % 8, % Asia Pacific 36, % 33, % 3, % Africa % % % Total 145, % 144, % % ( thousands) Q EBITDA Margin Q EBITDA Margin Change Change % Continental Europe 41, % 39, % 1, % UK and Ireland % (383) -4.0% % North America 7, % 6, % 1, % Asia Pacific 7, % 9, % (1,535) -17.0% Africa % % % Total 56, % 54, % 2, % 84

87 Report on Operations at 31 December 2012 Continental Europe Gross operating profit (EBITDA) amounted to 84,538 thousand in 2012 versus 99,012 thousand in 2011, a decrease of 14,474 (-14.6%). The EBITDA margin fell by 2.2% from the 17.8% posted in 2011 to 15.6% in In the fourth quarter alone EBITDA amounted to 41,594 thousand, an increase of 1,841 thousand (+4.6%) with respect to the fourth quarter of the prior year. The EBITDA margin reached 23.9%, unchanged with respect to the comparison period. The fourth quarter benefitted from the diminishing impact of the problems described in current year s quarterly reports. More in detail, sales had fallen in the Netherlands as a consequence of the strong pressure exerted by the media on the hearing aid sector and Germany suffered from the lack of sufficient critical mass that limits Amplifon to using only local marketing campaigns which can result in highly volatile quarterly results. In the last quarter the positive performance recorded in the Netherlands along with the excellent results reported in Italy made it possible to post a growth offsetting the impact of the regulatory changes in Switzerland which took effect in the second quarter of 2011 and which had caused an unusual surge in orders beginning in July 2011 which peaked in the fourth quarter of the prior year. Nonetheless the difficult economic environment and the uncertainty surrounding possible regulatory changes in the Netherlands relating to insurance coverage beginning January 2013 keeps visibility of profitability going forward low. Total operating costs amounted to 457,055 thousand, resulting in an higher incidence on sales of approximately two percentage points due primarily to personnel expenses, which are largely fixed costs, rose as a percentage of sales in a year in which total sales dropped, despite the solid result reported in the last quarter. 85 Amplifon Annual Report 2012

88 United Kingdom and Ireland Gross operating profit (EBITDA) amounted to a negative 657 thousand in 2012, versus a negative 4,017 thousand in 2011, an improvement of 3,360 thousand (+83.7%) with the EBITDA margin rising from a negative 10.2% to a negative 1.6% (+8.6%). The result for the comparison period was impacted by provisions made for a legal dispute, the relative legal fees and restructuring costs which amounted to 1,051 thousand. Net of these items, EBITDA growth amounted to 2,309 thousand (+77.8%) with an increase in the EBITDA margin of 6.0%. In the fourth quarter alone, EBITDA reached a positive 503 thousand, an improvement of 886 thousand (+231.3%) with respect to the figure posted in the fourth quarter of the prior year. The EBITDA margin came in at 4.8% versus a negative 4.0% in the comparison period. The result for the comparison period was impacted by restructuring costs and legal fees totalling 425 thousand. Net of these items, EBITDA growth would have amounted to 461 thousand (+1,097.6%) with an increase in the EBITDA margin of 4.4%. The fourth quarter confirmed that thanks to what is, at this point, an optimal cost structure and solid business management the region has practically reached its break-even point despite the fact that the national health service continues to be a competitor. North America Gross operating profit (EBITDA) amounted to 24,693 thousand in 2012, versus 16,073 thousand in 2011, an increase of 8,620 thousand (+53.6%). The EBITDA margin rose by 4.8% from the 14.1% recorded in 2011 to 18.9%. In the fourth quarter alone EBITDA amounted to 7,184 thousand, an increase of 1,069 thousand (+17.5%) with respect to the fourth quarter of the prior year. The result is even more significant in light of the problems caused by Hurricane Sandy described in the section on revenue. The EBITDA margin rose by 3.0% from the 18.9% recorded in 2011 to 21.9%. As described above in the section on revenue, the completed transformation of the business model into an indirect channel gave management the opportunity to focus on growth and increasing turnover in order to better absorb overhead. This resulted in an immediate improvement in profitability. 86

89 Report on Operations at 31 December 2012 Asia Pacific Gross operating profit (EBITDA) amounted to 36,239 thousand in 2012, versus 33,233 thousand in 2011, an increase of 3,006 thousand (+9.0%). The EBITDA margin, however, fell by 1.3% from the 29.0% recorded in 2011 to 27.7%. In the fourth quarter alone EBITDA amounted to 7,506 thousand, a decrease of 1,535 thousand (-17.0%) with respect to the figure posted in the fourth quarter of the prior year. The EBITDA margin fell by 7.1% from the 30.4% recorded in 2011 to 23.3%. The drop in profitability is largely explained by the results posted in India which in 2012 made a significantly larger contribution to revenue growth, but as the business is still in a start up phase, there was a nominal increase in operating losses. Net of the results posted in India, the EBITDA margin in 2012 reached 29.0% (compared to 29.7% in 2011) and 25.5% in the fourth quarter alone (compared to 30.4%) which suffered a slowdown due to the introduction of trials, another marketing tool which caused part of the sales to be postponed until Africa Egypt s gross operating profit (EBITDA) amounted to 359 thousand at 31 December 2012 (with an EBITDA margin of 14.4%) versus 210 thousand at 31 December 2011 (and an EBITDA margin of 11.6%), an increase of 149 thousand (+71.0%). In the fourth quarter alone, EBITDA amounted to 94 thousand, an increase of 28 thousand (+42.4%) with respect to the figure posted in the prior year. The EBITDA margin came in at 14.7% versus 12.7% in the comparison period. This positive result should also be assessed taking into account that the results in the comparison period were impacted by political events which took place in the first part of Amplifon Annual Report 2012

90 Operating Income (EBIT) ( thousands) FY 2012 FY 2011 Q Q Operating Income (EBIT) 97, ,293 44,142 41,844 Operating income (EBIT) amounted to 97,866 thousand in 2012, versus 100,293 thousand in 2011, a decrease of 2,407 thousand (-2.4%) while the EBIT margin came in at 11.6%, a drop of 0.5% with respect to the prior year. In the fourth quarter alone EBIT amounted to 44,142 thousand, an increase of 2,298 thousand (+5.5%) with respect to the figure posted in the fourth quarter of the prior year. The EBIT margin reached 17.6%, an increase of 0.1% with respect to the comparison period. The decrease in EBIT is explained by the impact of the higher amortization and depreciation recognized in the first nine months of the year linked to the increased investments made primarily in store renovation, while in the fourth quarter the total amount of the latter was in line with the comparison period and, consequently, the improvement posted in EBITDA was reflected in an improved EBIT. The following table gives the distribution of EBIT by geographical area: ( thousands) FY 2012 EBIT Margin FY 2011 EBIT Margin Change Change % Continental Europe 58, % 74, % (15,708) -21.2% UK and Ireland (4,793) -11.5% (7,834) -19.9% 3, % North America 19, % 11, % 8, % Asia Pacific 24, % 22, % 2, % Africa % % % Total 97, % 100, % (2,407) -2.4% ( thousands) Q EBIT Margin Q EBIT Margin Change Change % Continental Europe 34, % 33, % 1, % UK and Ireland (534) -5.1% (1,366) -14.1% % North America 5, % 4, % % Asia Pacific 4, % 5, % (662) -12.5% Africa % % % Total 44, % 41, % 2, % 88

91 Report on Operations at 31 December 2012 Continental Europe Operating income (EBIT) amounted to 58,304 thousand in 2012 versus 74,012 thousand in 2011, falling by 15,708 thousand (-21.2%). The EBIT margin fell by 2.5% from the 13.3% recorded at 31 December 2011 to 10.8%. In the fourth quarter alone EBIT amounted to 34,610 thousand, an increase of 1,443 thousand (+4.4%) with respect to the fourth quarter of the prior year. The EBIT margin was unchanged with respect to the comparison period coming in at 19.9%. Along with the change in EBITDA due to the problems described above, there was also higher amortization and depreciation explained by the increased investments made primarily in the store renovation carried out over the last few years. In the fourth quarter the total amount of amortization and depreciation was in line with that of the comparative period, and consequently the improvement in EBITDA was reflected in an improvement in EBIT. 89 Amplifon Annual Report 2012

92 United Kingdom and Ireland Operating income (EBIT) amounted to a negative 4,793 thousand in 2012 versus negative 7,834 thousand in 2011, an improvement of 3,041 thousand (+38.8%) The EBIT margin came in at -11.5% (versus -19.9% at 31 December 2011). The comparison figure was impacted by provisions made for a legal dispute, the relative legal fees and restructuring costs which amounted to 1,051 thousand. Net of these items, EBIT rose 1,990 thousand (+29.3%) with the EBIT margin up by 5.8%. In the fourth quarter alone, EBIT amounted to a negative 534 thousand, an increase of 832 thousand (+60.9%) with respect to the fourth quarter of the prior year. The EBIT margin reached a -5.1% versus a -14.1% in the comparison period. The result posted in the comparison period reflected restructuring costs and legal fees which totalled 425 thousand. Net of these items, EBIT rose to 407 thousand (+43.3%) with the EBIT margin up by 4.6%. The trend in EBIT was in line with the EBITDA trend described above. North America Operating income(ebit) amounted to 19,091 thousand in 2012 versus 11,069 thousand in 2011, an increase of 8,022 thousand (+72.5%). The EBIT margin rose by 4.9% from the 9.7% posted in 2011 to 14.6%. In the fourth quarter alone EBIT amounted to 5,337 thousand, an increase of 658 thousand (+14.1%) with respect to the fourth quarter of the prior year. The EBIT margin rose by 1.7% from the 14.5% posted in 2011 to 16.2%. Along with the change in EBITDA due to the problems described above, there was also higher amortization and depreciation explained by the increased investments made to support development of the indirect network. 90

93 Report on Operations at 31 December 2012 Asia Pacific Operating income (EBIT) amounted to 24,980 thousand in 2012 versus 22,881 thousand in 2011, an increase of 2,099 thousand (+9.2%). The EBIT margin, however, fell by 0.9%, from the 20% posted in 2011 to 19.1%. In the fourth quarter alone EBIT amounted to 4,650 thousand, a decrease of 662 thousand (-12.5%) with respect to the fourth quarter of the prior year. The EBIT margin fell by 3.5% from the 17.9% posted in 2011 to 14.4%. The changes reflect the same changes that impacted EBITDA described above. The drop in profitability is largely explained by the results posted in India which in 2012 made a significantly larger contribution to revenue growth, but as the business is still in a start-up phase, there was also a nominal increase in operating losses. Net of the results posted in India, the EBIT margin reached 20.4% in 2012 (versus 20.7% in 2011) and 16.6% in the fourth quarter alone (versus 18.7% in the fourth quarter of 2011). Africa Operating income (EBIT) amounted to 303 thousand in 2012 versus 165 thousand in the same period of the prior year, an increase of 139 thousand (+84.2%). The EBIT margin rose 3.1%, from 9.1% to 12.2%. In the fourth quarter alone EBIT amounted to 79 thousand, an increase of 27 thousand (+51.9%) with respect to the fourth quarter of the prior year. The EBIT margin reached 12.3%, an increase of 2.3% with respect to the comparison period. This positive result should also be assessed taking into account that the results in the comparison period were impacted by political events which took place in the first part of Amplifon Annual Report 2012

94 Profit Before Taxes ( thousands) FY 2012 FY 2011 Q Q Profit before taxes 72,205 72,304 37,027 35,052 Profit before tax in 2012 amounted to 72,205 thousand, basically in line with the profit before tax posted in 2011 ( 72,304 thousand). The gross profit margin fell slightly from 8.7% to 8.5%. The drop in EBIT described above was partially offset by effective cash management which resulted in a significant drop in interest payable due to (i) a drop in the spread on the syndicated loan due to improved leverage (the spread fell from the 300bps applied in 2011 to 275bps beginning 1 January 2012 and to 200bps beginning 1 July 2012); (ii) a reduction of approximately one percentage point in the interest applied to the Australian component of the same loan and (iii) less average debt in the period following the repayments made in the second part of This benefit was partially offset by the actualization of the provisions for employee severance and agents leaving indemnities in Italy which had a negative impact of 2,130 thousand due to the significant drop in the discount rate applied. In the fourth quarter alone profit before tax amounted to 37,027 thousand, an increase of 1,975 thousand with respect to the same period of the prior year (+6.0%). The profit before taxes margin rose from 14.7% to 14.8%. The improvement in the fourth quarter is strictly tied to the improvement in quarter s EBIT described above. The financial charges in the quarter, in fact, were in line with the fourth quarter of the prior year due to the impact of the actualization of the provisions for employee severance (TFR) and agents leaving indemnities in Italy mentioned above. 92

95 Report on Operations at 31 December 2012 Net profit attributable to the Group ( thousands) FY 2012 FY 2011 Q Q Net profit attributable to the Group 43,182 42,698 26,461 22,353 Net profit attributable to the Group amounted to 43,182 thousand in 2012 compared to 42,698 thousand in 2011, a slight increase of 484 thousand (+1.1%). The tax rate was 40.3%, an improvement with respect to the 40.9% reported in the prior year due to the recognition in Italy of a receivable for the refund of a the corporate income tax due to the partial deductibility of IRAP (regional business tax) from the tax base. The figure booked and related to priors period amount to 1,320 thousand, and helped to offset the negative effects caused by the change in the geographic distribution of the profits in countries with different tax rates: the problems encountered in the Netherlands and Switzerland resulted in a noticeable drop in income where the Group s tax rates are lower, while the increased profits recorded in the United States and Australia are taxed at a higher rate. The high tax rate was also explained by the impact of taxes such as IRAP, in Italy, and CVAE, in France, where taxable income is not directly related to profit before tax, as well as, in accordance with the principle of prudence, by the lack of recognition of additional deferred tax assets against losses recorded in the United Kingdom and Germany. In the fourth quarter alone the net profit attributable to the Group rose by 4,108 (18.4%) with respect to same period in 2011 to 26,461 thousand. 93 Amplifon Annual Report 2012

96 Consolidated Balance Sheet by Geographical Area ( thousands) 31/12/2012 Cont. Europe United Kingdom and Ireland North America Asia Pacific Africa Elim. Total Goodwill 188,915 15,013 59, , ,853 Non-competition agreements, trademarks, customer lists and lease rights 22,701 6,290 3,509 86, ,096 Software, licences, other intangible fixed assets in progress and advances 15, , ,525 Tangible fixed assets 67,950 5,137 1,573 18, ,070 Financial fixed assets 4, , ,509 Other non-current financial assets 2, ,828 Non-current assets 301,918 26, , , ,881 Inventories 30, , ,196 Trade receivables 75, ,549 7, (1,651) 111,115 Other receivables 15,663 2,464 8,063 1, (76) 27,319 Current assets (A) 122,087 3,890 36,666 10, (1,727) 172,630 Operating assets 424,005 30, , ,652 1,229 (1,727) 1,002,511 Trade payables (58,719) (5,830) (23,651) (11,197) (270) 1,651 (98,016) Other payables (81,872) (2,736) (7,427) (21,253) (246) 76 (113,458) Provisions for risks and charges (current portion) (304) (137) - (248) - - (689) Current liabilities (B) (140,895) (8,703) (31,078) (32,698) (516) 1,727 (212,163) Net working capital (A)-(B) (18,808) (4,813) 5,588 (21,734) (39,533) Derivative instruments (5,695) (5,695) Deferred tax assets 37,545 1,450 6,511 2, ,039 Deferred tax liabilities (9,105) (1,447) (16,836) (25,684) (9) - (53,081) Provisions for risks and charges (M/L term) (18,263) - (13,459) (803) - - (32,525) Liabilities for employees benefits (non-current portion) (12,428) - (783) (2,049) - - (15,260) Loan fees 3, ,442 Other non-current payables - - (11) (264) - - (275) NET INVESTED CAPITAL 278,954 22,103 85, , ,993 Group net equity 429,562 Minority interests 596 Total net equity 430,158 Net medium and long-term financial indebtedness 293,645 Net short-term financial indebtedness 12,190 Total net financial indebtedness 305,835 OWN FUNDS AND NET FINANCIAL INDEBDETNESS 735,993 94

97 Report on Operations at 31 December 2012 ( thousands) 31/12/2011 Cont. Europe United Kingdom and Ireland North America Asia Pacific Africa Elim. Total Goodwill 182,285 14,667 60, , ,443 Non-competition agreements, trademarks, customer lists and lease rights 25,604 7,901 4,640 92, ,456 Software, licences, other intangible fixed assets in progress and advances 12, , ,363 Tangible fixed assets 65,771 5,443 1,809 17, ,380 Financial fixed assets 8, , ,514 Other non-current financial assets 2, ,600 Non-current assets 297,083 29, , , ,756 Inventories 31, , ,651 Trade receivables 72, ,594 5, (1,551) 104,838 Other receivables 12,601 2,807 7,975 1, (22) 25,337 Current assets (A) 116,940 4,332 35,683 8, (1,573) 164,826 Operating assets 414,023 33, , ,857 1,345 (1,573) 993,582 Trade payables (57,154) (4,622) (29,675) (6,346) (367) 1,551 (96,613) Other payables (86,013) (2,643) (4,412) (17,316) (171) 22 (110,533) Provisions for risks and charges (current portion) (193) (681) - (233) - - (1,107) Current liabilities (B) (143,360) (7,946) (34,087) (23,895) (538) 1,573 (208,253) Net working capital (A)-(B) (26,420) (3,614) 1,596 (15,296) (43,427) Derivative instruments (3,808) (3,808) Deferred tax assets 38,441 1,978 5,871 2, ,408 Deferred tax liabilities (9,527) (1,975) (14,696) (27,364) (10) - (53,572) Provisions for risks and charges (M/L term) (15,652) - (10,729) (742) - - (27,123) Liabilities for employees benefits (non-current portion) (9,737) - (691) (1,358) - - (11,786) Loan fees 5, ,057 Other non-current payables - - (11) (488) - - (499) NET INVESTED CAPITAL 275,553 25,412 86, , ,006 Group net equity 390,644 Minority interests 526 Total net equity 391,170 Net medium and long-term financial indebtedness 408,752 Net short-term financial indebtedness (56,916) Total net financial indebtedness 351,836 OWN FUNDS AND NET FINANCIAL INDEBDETNESS 743, Amplifon Annual Report 2012

98 Non-current assets Non-current assets amounted to 829,881 thousand at 31 December 2012, versus 828,756 thousand at 31 December 2011, a net increase of 1,125 thousand, explained (i) for 35,387 thousand by capital expenditure; (ii) for 13,932 thousand by acquisitions; (iii) for 47,286 thousand by depreciation, amortization and impairment and for 908 thousand by other net decreases. Investments In 2012 the Amplifon Group, in line with its strategy to further increase the focus on customer care and to maximize operating efficiency, continued and accelerated store renovation on the basis of the concept store developed over the last few years. Investments were made in restructuring and relocating stores. The customer focus and the goal to increase control of the business operations drove the investments made in Information Technology. Of note, in this regard, is the work done on the front and back office systems which included the implementation of the Group s ERP system in Australia. 96

99 Report on Operations at 31 December 2012 The following table shows the breakdown of non-current assets by geographical area: ( thousands) 31/12/ /12/2011 Change Continental Europe United Kingdom & Ireland North America Asia Pacific Africa Goodwill 188, ,285 6,630 Non-competition agreements, trademarks, customer lists and lease rights 22,701 25,604 (2,903) Software, licences, other intangible fixed assets in progress and advances 15,093 12,862 2,231 Tangible assets 67,950 65,771 2,179 Financial fixed assets 4,696 8,215 (3,519) Other non-current financial assets 2,563 2, Non current assets 301, ,083 4,835 Goodwill 15,013 14, Non-competition agreements, trademarks, customer lists and lease rights 6,290 7,901 (1,611) Software, licences, other intangible fixed assets in progress and advances (192) Tangible assets 5,137 5,443 (306) Financial fixed assets (347) Other non-current financial assets Non current assets 26,913 29,023 (2,110) Goodwill 59,604 60,853 (1,249) Non-competition agreements, trademarks, customer lists and lease rights 3,509 4,640 (1,131) Software, licences, other intangible fixed assets in progress and advances 9,052 9,198 (146) Tangible assets 1,573 1,809 (236) Financial fixed assets 31,137 28,382 2,755 Other non-current financial assets 8 10 (2) Non current assets 104, ,892 (9) Goodwill 288, ,638 2,683 Non-competition agreements, trademarks, customer lists and lease rights 86,596 92,311 (5,715) Software, licences, other intangible fixed assets in progress and advances Tangible assets 18,931 17,857 1,074 Financial fixed assets Other non-current financial assets Non current assets 395, ,258 (1,570) Goodwill Non-competition agreements, trademarks, customer lists and lease rights Software, licences, other intangible fixed assets in progress and advances Tangible assets (21) Financial fixed assets Other non-current financial assets Non current assets (21) 97 Amplifon Annual Report 2012

100 Continental Europe Non-current assets, which amounted to 301,918 thousand at 31 December 2012 versus 297,083 thousand at 31 December 2011, increased by 4,835 thousand explained: for 18,544 thousand by investments in plant, property and equipment, relating primarily to the renewal of stores as part of the introduction of the new concept store; for 5,230 thousand by investments in intangible assets, relating primarily to the implementation of new store and sales support systems; for 10,545 thousand by acquisitions made during the period; for 26,234 thousand by amortization, depreciation and impairment; for 17 thousand by decreases following disposals; for 3,233 thousand by other net decreases relating primarily to the partial disinvestment of the securities portfolio held by the subsidiary active in providing reinsurance on the policies sold on the Dutch market. UK & Ireland Non-current assets, which amounted to 26,913 thousand at 31 December 2012 versus 29,023 thousand at 31 December 2011, decreased by 2,110 thousand explained: for 1,714 thousand by investments in plant, property and equipment, relating primarily to the renewal of stores as part of the introduction of the new concept store; for 4,136 thousand by amortization and depreciation; for 312 thousand by other net increases including positive exchange effects. 98

101 Report on Operations at 31 December 2012 North America Non-current assets, which amounted to 104,883 thousand at 31 December 2012 versus 104,892 thousand at 31 December 2011, decreased by 9 thousand explained: for 1,494 thousand by investments in plant, property and equipment, relating primarily to the renewal of stores; for 2,867 thousand by investments in intangible assets, relating primarily to joint investment plans with the franchisees for the renewal and relocation of stores and further implementation of front-office systems; for 537 thousand by acquisitions made in the period; for 5,602 thousand by amortization, depreciation and impairment; for 652 thousand by decreases following disposals and relating primarily to the sale of direct stores to members of the indirect channel, in particular to the franchise network; for 1,347 thousand by other net increases relating primarily to non-current receivables payable by franchisees. Asia Pacific Non-current assets, which amounted to 395,688 thousand at 31 December 2012 versus 397,258 thousand at 31 December 2011, decreased by 1,570 thousand explained: for 5,151 thousand by investments in plant, property and equipment; for 318 thousand by investments in intangible assets; for 2,850 thousand by acquisitions made in the period; for 11,259 thousand by amortization and depreciation; for 200 thousand by decreases following disposals; for 1,570 thousand by other net increases relating primarily to positive exchange differences. Africa Non-current assets, which amounted to 479 thousand at 31 December 2012 versus 500 thousand at 31 December 2011, decreased by 21 thousand explained: for 69 thousand by investments in plant, property and equipment; for 55 thousand by amortization and depreciation; for 35 thousand by other net decreases linked primarily to changes in exchange rates. 99 Amplifon Annual Report 2012

102 Net invested capital Net invested capital amounted to 735,993 thousand at 31 December 2012 versus 743,006 thousand at 31 December 2011, a decrease of 7,013 thousand: the slight increase in non-current assets detailed above was offset by an increase in non-current liabilities partially compensated by an increase in working capital. The following table shows the breakdown of net invested capital by geographical area. ( thousands) 31/12/ /12/2011 Change Continental Europe 278, ,553 3,401 United Kingdom & Ireland 22,103 25,412 (3,309) North America 85,893 86,232 (339) Asia Pacific 348, ,012 (6,673) Africa (93) Total 735, ,006 (7,013) Continental Europe Net invested capital amounted to 278,954 thousand at 31 December 2012, an increase of 3,401 thousand with respect to the figure posted at 31 December In addition to the increase in non-current assets described above, there was also an increase in working capital explained primarily by the decrease in taxes owed due to a drop in the income generated in the region with respect to the prior year, net of an increase, due also to the decrease in the discount rate, in the provisions for employee benefits and agents leaving indemnities described in the section on profit before tax. Factoring without recourse in the period involved trade receivables with a face value of 46,576 thousand ( 43,349 in the prior year) and VAT credits with a face value of 11,961 thousand ( 12,965 thousand in the prior year). 100

103 Report on Operations at 31 December 2012 UK & Ireland Net invested capital amounted to 22,103 thousand at 31 December 2012, a decrease of 3,309 thousand with respect to the figure posted at 31 December 2011, in line with the change in non-current assets described above. Working capital reached a negative 4,813 thousand versus a negative 3,614 thousand at 31 December North America Net invested capital amounted to 85,893 thousand at 31 December 2012, a decrease of 339 thousand with respect to the figure posted at 31 December 2011: the increase in working capital which reached 5,588 thousand, versus 1,596 thousand at 31 December 2011, was offset by an increase in non-current liabilities. Asia Pacific Net invested capital amounted to 348,339 thousand at 31 December 2012, a decrease of 6,673 thousand with respect to the figure posted at 31 December 2011: the decrease in non-current assets described above was accompanied by a drop in working capital which reached a negative 21,734 thousand versus a negative 15,296 thousand at 31 December Africa Net invested capital amounted to 704 thousand at 31 December 2012, a decrease of 93 thousand with respect to the figure recorded at 31 December Amplifon Annual Report 2012

104 Net Financial Indebtedness ( thousands) 31/12/ /12/2011 Change Net medium and long-term financial indebtedness 293, ,752 (115,107) Net short-term financial indebtedness 123,370 51,389 71,981 Cash and cash equivalents (111,180) (108,305) (2,875) Net Financial Indebtedness 305, ,836 (46,001) Group net equity 429, ,644 38,918 Minority interests Net Equity 430, ,170 38,988 Financial indebtedness/group net equity Financial indebtedness/net equity Net financial indebtedness at 31 December 2012 amounted to 305,835 thousand, a drop of 46,001 thousand with respect to 31 December 2011, confirming the Group s ability to generate significant cash flow capable of financing capital expenditures totalling 35,387 thousands, acquisitions amounting to 12,576 thousand, while also absorbing interest payable and other financial charges of 22,145 thousand and the dividends paid to shareholders which amounted to 7,992 thousand. The medium/long term portion of debt fell by 115,107 thousand due primarily to the reclassification of debt as short term, including the second tranche of the private placement which matures in August 2013 amounting to, including the effect of currency hedging, 67,056 thousand, and the changes in exchange rates. The short term portion of net debt rose by 69,106 thousand due primarily to the reclassification of debt as short term described above net of the repayments made in the period which amounted to 42,758 thousand. At 31 December 2012 total financial indebtedness amounted to 305,835 thousand with the short term portion, net of liquidity, reaching 12,190 thousand and long term debt 293,645 thousand; the undrawn portion of the credit lines granted amounted to 60.5 million. There is also a 30 million line of credit available as of August 2013 for the scheduled repayments called for under the private placement agreement. As shown in the chart below liquid assets at 31 December 2012 totalled 111,180 thousand, more than sufficient to cover all the obligations maturing through the last quarter of In light, however, of the relevant size of the second tranche of the private placement to be repaid in August 2013 ( 67 million), the Group has already been in contact with different financial institutions to evaluate various refinancing options. 102

105 Report on Operations at 31 December 2012 Debt Maturity & Cash and Cash Equivalents as at ( million) Bank Overdraft Private Placement Bank Loans Others 60.2 Cash Gross Debt CASH On Demand 31/03/ /06/ /09/ /12/ Over 2017 Gross Debt Interest on financial indebtedness at 31 December 2012 was 24,442 thousand, as against 27,218 thousand at 31 December The drop is due to (i) a drop in the spread on the syndicated loan due to improved leverage (the spread fell from the 300bps applied in 2011 to 275bps beginning 1 January 2012 and to 200bps beginning 1 July 2012); (ii) a reduction of approximately one percentage point in the interest applied to the Australian component of the same loan and (iii) less average debt in the period following the repayments made starting from the second part of Interest on bank deposits was 951 thousand at 31 December 2012 as against 706 thousand at 31 December To manage interest-rate risk the Group has hedged the interest-rate risk on the Amplifon S.p.A. syndicated loan tranches ( million) and those pertaining to the French branch ( 46.5 million) up to 30 June 2014 by means of interest rate swaps whereby the floating rate was swapped for a fixed rate of 2.397% as was the rate of the tranche pertaining to Amplifon Nederland ( 86.5 million) for a fixed rate of 2.075%. In respect of the private placement there is a hedge against interest-rate risk on nominal US$143 million. 103 Amplifon Annual Report 2012

106 Covenants The amount of financial indebtedness consisting of the private placement of US$155 million (equivalent to million including the fair value of derivatives which fix the Euro-Dollar exchange rate at ) are subject to the following covenants (which in the presence of covenants which are more restrictive on other loans should be considered aligned to these more restrictive values): the ratio of Group net debt to shareholders equity must not exceed the value of 1.5; the ratio of Group net debt to EBITDA in the last four quarters (determined with reference to recurring operations only on the basis of restated figures where there were significant changes to the structure of the Group) must not exceed the value of 3.5. As regards the syndicated loans granted to Amplifon S.p.A., Amplifon Nederland BV and Amplifon Australia Pty Ltd amounting in total to million and AU$60.5 million, and the tranche granted to the French branch and amounting to 46.5 million, the following covenants are in place which being more restrictive, also extend to the private placement. The net financial indebtedness/ebitda ratio of the last 4 quarters (determined with reference to recurring operations only on the basis of restated figures where there were significant changes to the structure of the Group) must not exceed: Period Value Up to 31 December Up to 30 June Up to 31 December Up to 30 September The ratio of the EBITDA for the last 4 quarters (determined with reference to recurring operations only on the basis of restated figures where there were significant changes to the structure of the Group) to the net interest charges for the same last 4 quarters should not be less than a value of 4.0. At 31 December 2012 the value of the ratios was as follows: Net financial indebtedness/group net equity 0.71 Net financial indebtedness/ebitda for the last 4 quarters 2.11 EBITDA for the last 4 quarters to net finance charges 5.69 Value There will be other covenants with reference to the syndicated loan and the private placement limiting the amount of guarantees that may be issued, the sale of certain investments and entering into sale and lease back transactions or extraordinary transactions. More in detail, investments will be capped only if the ratio of net financial indebtedness and EBITDA exceeds 2.5x in the last four quarters of the prior fiscal year, namely These undertakings and covenants are normal international practice. There are no covenants on the remaining 0.4 million of medium/long-term financial debt including shortterm instalments. The ratio of net financial indebtedness to net invested capital at 31 December 2012 was 41.55% as against 47.35% at 31 December The reasons for the changes in net debt are detailed in the next paragraph, in the cash flow section. 104

107 Report on Operations at 31 December 2012 Cash Flow The reclassified cash flow statement shows the change in net debt between the start and the end of the period. The financial statements include a cash flow statement based on cash holdings as per IAS 7 showing the change in opening and closing cash in the period. ( thousands) FY 2012 FY 2011 OPERATING ACTIVITIES Group net profit (loss) 43,182 42,698 Minority interests (40) 34 Amortization, depreciation and write-downs: - intangible fixed assets 23,505 21,784 - tangible fixed assets 23,640 22,426 - goodwill Total amortization, depreciation and write-downs 47,286 44,218 Provisions 15,276 12,638 (Gains) losses from sale of fixed assets 63 (475) Group s share of the result of associated companies (63) (86) Financial income and charges 25,744 28,076 Current and deferred income taxes 29,063 29,572 Change in assets and liabilities: - Utilization of provision (8,076) (10,642) - (Increase) decrease in inventories 1,285 1,814 - Decrease (increase) in trade receivables (6,701) (5,140) - Increase (decrease) in trade payables 1,504 (14,376) - Changes in other receivables and other payables 2,446 (1,170) Total change in assets and liabilities (9,542) (29,514) Dividends received Net interest charges (22,145) (27,188) Taxes paid (28,580) (23,309) Cash flow generated from (absorbed by) operating activities 100,317 76,698 INVESTING ACTIVITIES: Purchase of intangible fixed assets (8,415) (7,140) Purchase of tangible fixed assets (26,972) (27,981) Consideration from sale of tangible fixed assets and businesses 1,820 3,112 Cash flow generated from (absorbed by) investing activities (33,567) (32,009) Cash flow generated from operating and investing activities (Free cash flow) 66,750 44,689 Business combinations* (12,576) (3,532) (Purchase) sale of other investments and securities 4,176 (868) Cash flow generated from acquisition activities (8,400) (4,400) Cash flow generated from (absorbed by) investing activities (41,967) (36,409) FINANCING ACTIVITIES: Changes in hedging derivatives - 21 Fees paid on medium/long-term financing - - Other non-current assets (5,428) (3,000) Dividend distributions (7,992) (7,051) Capital increases (reduction)/third parties contributions in subsidiaries / Dividends paid to third parties by subsidiaries 2, Cash flow generated from (absorbed by) financing activities (11,032) (9,547) Changes in net financial indebtedness 47,318 30,742 Opening net financial indebtedness (351,836) (381,414) Effect disposal of assets on net financial indebtedness - - Effect of exchange rate fluctuations on net financial indebtedness (1,317) (1,164) Changes in net indebtedness 47,318 30,742 Closing net financial indebtedness (305,835) (351,836) (*) The item relates to net cash flows absorbed by acquisitions of business units and investments. 105 Amplifon Annual Report 2012

108 The change in net debt of 46,001 thousand comprised the effects of: (i) Investing activities: capital expenditures on tangible and intangible assets amounting to 35,387 thousand and - as noted in the comment on the changes to non-current assets - chiefly relating to store renovation based on the concept store developed over the last three years and the implementation of new store and sales support software; acquisitions of companies and businesses amounting to 12,576 thousand; proceed for disposal of assets, equity interests and securities amounting to 5,996 thousand. (ii) Operating activities: interest payable on financial debt and other net finance costs of 22,145 thousand; payment of taxes of 28,580 thousand; cash flow generated by operations of 151,042 thousand. (iii) Financing activities: net proceeds from share capital increase consequent to the exercise of stock option for 2,512 thousand; dividends paid to shareholders for 7,992 thousand; dividends paid to third parties by the subsidiaries for 124 thousand; increases in other fixed assets mainly due the funding granted by the US companies to franchises to support the store renovations, investment and development in the U.S.A. for 5,428 thousand. (iv) Negative changes due to exchange rate differences of 1,317 thousand. 106

109 Report on Operations at 31 December 2012 Acquisitions of Companies and Businesses In 2012 the Amplifon Group made acquisitions totalling 12,576 thousand, including the debt assumed, in order to both strengthen its position in certain countries and enter markets where it was not yet present. More in detail: In Turkey at the beginning of January, the Amplifon Group acquired 51% of Maxtone (Makstone İşitme Ürünleri Perakende Satış A.Ş.) a distributor of hearing aids. The Maxtone acquisition represents a transaction of significant strategic importance for the Group as it allows Amplifon to enter a geographic area where it is not yet present and which has great potential for future growth. This potential is reflected in a few key factors which position Turkey as the 14 th largest economy in the world, with a hearing solutions market that is growing at a robust pace, from the 25,000 hearing aids sold in 2001 to the more than 100,000 sold in 2010 (CAGR +15%). Turkey also possesses unique characteristics, both structural and specific to the sector, which render it a particularly interesting market for the Amplifon Group: the public healthcare system has an efficient, sustainable regulated reimbursement policy and there are approximately 72 million inhabitants, some 26 million of which are concentrated in 5 of the country s largest cities alone. Maxtone is the first Turkish player to have begun developing a highly innovative retail approach through the completion of modern, avant-garde concept stores. Thanks to this approach the company provides the Turkish market with an advanced business model which consists in a mixed medical/retail formula that is profoundly different with respect to the local market, in which a largely medical approach still prevails. Maxtone operates in Turkey through 9 stores strategically located in Turkey s most important cities (Ankara, Istanbul, Izmir). The consideration for the transaction amounts to approximately 1.5 million euro, including the earn-out linked to the achievement of sales and profitability targets over the next 5 years. On 31 August, thanks to an agreement with GN Resound, one of the world s most important manufacturers of hearing aids, and aimed to strength the Amplifon Group presence in India, 38 stores belonging to Beltone India and found in the country s most important cities have been acquired. Already active in the Indian market with 35 retail stores, with this acquisition the Amplifon Group significantly expands its network in India to a total of 73 stores, becoming the country s market leader. The partnership with GN Resound Group represents a strategic transaction for the Amplifon Group as it makes it possible to further increase the company s presence in a geographic area with great potential for future development. India is, in fact, the world s fourth largest economy with a hearing solutions market featuring robust growth, including due to the medical community s growing awareness about the ever improving diagnosis and treatment of problems linked to hypoacusis (approximately 220,000 hearing aids were sold in 2011, an increase of +15% with respect to 2010). Despite the fact that it is still largely underdeveloped and fragmented, the Indian hearing aid market has very interesting future prospects linked to the growing purchasing power of the population and the low penetration rate of digital devices. Today high end solutions represent only 10% of the total, but just five years ago they were entirely absent from the market. A total of 3,212 thousand was recognized for the transaction which includes the consideration paid of 631 thousand, while the remaining 2,581 thousand represents the best current estimate available today of the deferred contingent consideration payable in 2016 which will be determined based on the results achieved in this period. 107 Amplifon Annual Report 2012

110 In France have been acquired the companies: Laboratoire Faggiano - Assistance Auditive, which manages two stores in the country s northwest found respectively in Caen and Deauville, Audivi which manages one store in Paris, and Audition Pertuis which manage a store in Pertuis (Provence); as well as a store in Sens, southeast of Paris and one in Pontivy, Brittany. In Germany four stores were acquired in the Stuttgart region, five stores were acquired in Westfalia along with a store in the Dortmund region. In Spain a store in Mostoles, near Madrid, was acquired, as well as an additional 19% of the already 56% held Audiosalud in Murcia. In the United States, the Miracle Ear Franchisee network acquired 7 new indirect stores in Florida, 2 new indirect stores in Virginia and 5 new indirect stores in New Mexico, while 4 of the few direct stores still held were sold to the Sonus Franchisee network. In August the company Amplifon Poland was formed. Amplifon holds 49%, while the majority stake of 51% is held by two local partners. Thanks to the two partners profound understanding of the local business and management expertise, Amplifon will be able to use a modern and highly innovative retail approach to develop its presence in the Polish market. This transaction is part of the strategic growth path defined in order to strengthen the Amplifon Group s presence in markets with the greatest development potential. Poland is, in fact, the sixth largest economy in Europe and twenty-first in the world, with a highly fragmented hearing solutions market and interesting possibilities for a player that uses an advanced medical/retail business model. As Amplifon does not hold a controlling interest in Amplifon Poland, it is consolidated using the equity method. 108

111 Report on Operations at 31 December 2012 Statement of Changes in Net Equity and the results for the period of the Parent Company Amplifon S.p.A. and the Group Net Equity and results for the period in question as at 31 December 2012 ( thousands) Net Equity Net Result Net equity and year-end result as reported in the Parent company s financial statements 296,652 17,277 Elimination of carrying amount of consolidated investments: - difference between carrying amount and the pro-quota value of Net equity (444,972) - - pro-quota results reported by the subsidiaries 173, ,111 - pro-quota results reported by investments valued at equity 1, difference from consolidation 397,049 - Elimination of the effects of intercompany transactions: - elimination of impairment net of reversals of investments and intercompany receivables 7,874 10,482 - intercompany dividends - (157,805) - intercompany profits included in the year-end value of inventories net of fiscal effect (1,000) exchange differences and other changes (195) (159) Net equity and year-end result as stated in the consolidated financial statements 430,158 43,142 Minority equity and result for the year 596 (40) Group net equity and result for the year 429,562 43, Amplifon Annual Report 2012

112 Risk Management In line with the most advanced management systems and best practices in the design and implementation of internal control systems Amplifon focuses strongly on risk management. All enterprises deal with risk: this exercise is all the more vital in a continually changing situation, where moreover there is an ongoing recession. Amplifon s management carefully assesses the balance between risk and opportunity and channels resources towards the achievement of the best balance in line with the risk threshold which is considered acceptable. Risks are identified both at Group level and locally, in the Group s countries of operation by regularly performing risk assessment exercises involving the whole management of the Group using the selfassessment method. Risks are then ranked according to priority in light of the Group s objectives and those of its subsidiaries and on the basis of the combined effect of probability and severity of the residual risks. Systems are then put in place to monitor the factors contributing to risk with the aim of mitigating risk and exploiting business opportunities in relation to the ability to anticipate competitive dynamics. In this way risk management and risk monitoring continuously complete the Group s risk analysis work. For ease of assessment, risk factors are grouped into categories: those originating outside the company, those stemming from Amplifon s own organisation, and those of a more specifically financial nature. The main external risks identified, grouped by type, are the following: Political, economic, social, legal and regulatory The Amplifon Group operates in the medical sector which is regulated differently in different countries. A change in regulations (for example, in reimbursement conditions, the way in which coverage is calculated, in the ability to access national health coverage, in the role of the ENT doctors and, more in general, in the laws relating to hearing aids), similar to what happened in 2011 in Switzerland and New Zealand, or what will happen early 2013 in the Netherlands and in Germany, has and will have a significant and immediate impact on performances, as would any changes in social policies which result in the public sector having a larger or smaller role in the treatment of hearing pathologies. Typically the distorting impact of any regulatory changes relating to the amounts reimbursed is felt for a limited time of two/six quarters, after which the market returns to the pre-change growth rates. It is more difficult to understand the possible impact of changes in the regulations governing the final retail price of hearing aids, as this could result in an immediate decline in results, but also in greater market growth. Well aware that other unexpected and unforeseen changes could take place in addition to those mentioned above in Switzerland, New Zealand, the Netherlands and Germany, including in light of the persistent tensions in the debt market and pressure on public accounts, the Group has implemented a series of measures which ensure the ability to react in a timely manner to these events with a view to reducing the impact of any unfavourable changes or maximizing the upside in the event the changes are favourable. In particular: (i) regular reporting has been set up on the main changes in regulations, on analyses of their impact and on plans made to adapt them, which are discussed with the company management and approved centrally; (ii) mapping of the sector regulations in all countries of operation has been initiated, 110

113 Report on Operations at 31 December 2012 together with monitoring of changes in regulations by the Group s Compliance function with the support of Legal Affairs; (iii) mapping of trade bodies and associations in the Group s countries of operation has been initiated, as well as participation in them by Amplifon s manager with the aim of agreeing future strategy. With regard to the economic context, while the market sector in which the Amplifon Group operates is less sensitive than others to fluctuations in the general economic cycle, it is, however, influenced and the significant uncertainty of the current situation lessens the visibility of future results. A drop in sales in the short term could have a direct impact on margins as the stores costs are primarily fixed. Furthermore, in the United States, where the Group s business model is based on commercial partners (Sears, franchisees and other indirect channels), the economic performance and financial solidity of the latter must be monitored carefully in order to react quickly, including by repositioning stores as is being done right now with some of the Miracle Ear franchise stores that are part of structures managed by partners who are currently experiencing difficulties. From the viewpoint of demographic changes, several factors such as the number of elderly people (baby boomers), the rise in average life expectancy and the reduction of the age at which the hearing-aid market is accessed are on the one hand a great opportunity, but on the other there is the risk of not taking it. In our marketing operation we have made a special effort to pick up all the signs of these trends and attempt to influence them with a suitable development of our communication. Competition and the Market The entry of new competitors into the market, intensifying competition, constitutes an obstacle to growth by acquisition due to increased competition for acquisition targets. Entry into the market by new players, especially optician chains, which are able to use distribution channels based on already existing stores, or by the hearing aid producers themselves, who could have higher margins on their product, or by e.commerce or on line players entails greater price competition. The risk that new players may enter the market could also be facilitated by regulatory changes relating to the store personnel qualified to sell hearing aids in the event qualifications should become less stringent (as has already happened in some countries) and/or professions like audiologist/hearing aid specialists becomes more accessible which would make it easier to recruit these professionals. In order to counter competition and develop our market, we consider our investment in store renovation and new acquisitions to be a key factor. They require significant financial commitments that were taken into account in the determination of the covenants related to the financing of the acquisition of the NHC Group completed at the end of 2010, and that in line with international practice, involve fixed annual and absolute ceilings on borrowings and other expenditures. In the United States the Group is, at this point, totally focused on the indirect channel which showed strong growth in In order, however, for this growth to be sustained over time new partners must be added going forward. At the moment, including due to the general economic situation which has improved but has yet to reach a phase of stable development, the expansion of the indirect network in some channels is continuing, albeit at a slower pace than originally planned. Technological Innovation The Amplifon Group s distinctive features are the quality of customer assistance at the sales stage and the personalisation of the hearing aid. Any technological changes affecting the development of the self-fitting 111 Amplifon Annual Report 2012

114 hearing aid would entail a reduction of the importance of personalisation, but would remain fundamental in the assistance and support given to the customer when choosing the best solution, and in post-sale service. The Amplifon Group has set up a work-group to monitor continuously the technological changes in the fitting of the product and to inform Corporate Managers on all innovations or alterations. This work-group is also studying and developing alternatives to the hearing aid and new marketing methods. The risk that an alternative to the hearing aid may be developed to remedy hearing loss (e.g. by surgical techniques or the use of pharmaceuticals) would have a very significant impact, but is considered very remote. Relationships with the Medical Profession Doctors are important influencers over our customers buying choices. We consider our relationship with the medical profession of primary importance, though in different ways, both in countries where a prescription is obligatory (such as Italy, France, Germany, Belgium, Switzerland and Hungary), and in those where it is not, since there is a strong bond between patients and their doctor. We have therefore created a position in the corporate centre to coordinate relationships with the medical profession internationally with the aim of disseminating information and providing professional and scientific support. At the same time the Group continues to be a reference-point - through our CRS (the Company s research centre) - for the international scientific community both by organising numerous conferences and scientific seminars and cooperating with numerous universities, and through its scientific publications. Customer Relationships Amplifon s business essentially consists of providing high quality service to the customer in terms of both technical performance and personal relations. This is what distinguishes us from our competitors. Should the customer not be satisfied, the Company would be running a risk. To monitor customer satisfaction continuously, Amplifon carries out regular customer satisfaction surveys, and frequent training programmes for its audio-prosthesists; our sales policies are also orientated to customer satisfaction. The main internal risks identified, grouped by type, are as follows: Organisation and Processes In the current economic situation, in which the decisive factors for our business are highly volatile, the ability to take rapid strategic and tactical action is vital in all the countries where the Group operates. It follows that the Company must possess an adequate level of formalisation and application and control over its processes in order to maximise its operating efficiency and effectively control its stores in terms of the profitability, effectiveness and efficiency of each one. These processes are still more important with acquisitions, where it is crucial to assess all the risks arising from such operations: mistakes in assessing those risks, like slow and delayed integration of acquired businesses into the Group s processes, might entail significantly higher costs and inefficiency levels for the Group. After having implemented a project to standardize the Group s IT processes, including in geographical regions where recent acquisitions were made, as well as the Compliance 262 and the Business Performance Management projects in the stores, with a view to more effective monitoring of activities and international comparison, at the end of 2012 the Group completed its worldwide cash pooling project which will make it possible to more efficiently manage liquidity and monitor daily availability in order to take timely action with regard to any critical areas. 112

115 Report on Operations at 31 December 2012 Rapid implementation of strategic decisions is ensured by an organisation based on uniform geographical regions and a leadership team working with the Managing Director which includes the Directors of each macro geographical area and the corporate heads of the various functions: innovation and development, HR, administration and finance and purchasing. Human Resources One of Amplifon s strengths is its customer service and in this context our people are a vital factor, while they also present certain issues and areas of risk. Specifically: limited availability of audio-prosthesists in our market, the difficulty of attracting new ones and some of them moving to the competition can pose significant risks for the Group s organic growth together with the risk of losing customers and increased labour cost due to salary increases; staff deficiencies in technical and sales skills might make the sales effort ineffective in certain countries and would be a significant risk in terms of reaching our organic growth targets; the risk of illegal acts or behaviour out of line with Group rules committed by the sales force. To mitigate these risks the Group has taken the following actions: we have defined and set out our values in our Code of Ethics, which has been distributed in all our countries of operation; we have drawn up the ideal audio-prosthesist s profile, with the aim of having a profile consistent with our recruitment methods and the Group s business policies. We have also acted to increase the supply of audioprosthesists in the market, through agreements with universities and specialist courses; we have stepped up our internal training programmes and developed central coordination of the training organised in our countries of operation; we have implemented a structured performance management system with the aim of aligning individual objectives, corporate strategies, the incentive system and the results achieved, and to provide all employees and collaborators with a valid tool for their professional development; in order to check that procedures are being followed, for a long time we have been inspecting our branches in Italy, this is repeated frequently over time. Similar activities have been started in France and in UK, and will be started soon in the other countries. Financial risks With a view to structured management of treasury activities and financial risks, in 2012 the Group finalized and adopted a Treasury Policy which contains guidelines for the management of: currency risk; interest rate risk; credit risk; price risk; liquidity risk. Currency risk This includes the following types: foreign exchange transaction risk, that is the risk of changes in the value of a financial asset or liability, a forecasted transaction or a firm commitment due to exchange rate fluctuations; foreign exchange translation risk, that is the risk that the conversion of the assets, liabilities, costs and revenues relating to a net investment in a foreign operation into the presentation currency gives rise to a positive or negative difference in the balances of the converted items. 113 Amplifon Annual Report 2012

116 In the Amplifon Group, the foreign exchange transaction risk is highly limited in consideration of the fact that each country is largely autonomous in the operation of its business, sustaining costs in the same currency as it realises the revenue and derives primarily from intragroup transactions (medium-long term and short term loans, chargebacks for intercompany service agreements) which give rise to an exchange rate risk exposure to the companies operating in a currency other than that of the intragroup transaction. Additionally, exposure to foreign exchange transaction risk arises from investments in listed financial instruments denominated in a currency other than the investing company s functional currency. Foreign exchange translation risk arises from investments in the United States, United Kingdom, Switzerland, Hungary, Turkey, Poland, Australia, New Zealand, India and Egypt. The group s strategy is to minimise the impact on the income statement of the exchange rate changes and envisages covering the risk deriving from the financial positions in foreign currencies of the individual companies and in particular: (i) by bonds in US dollars issued by Amplifon S.p.A. and subscribed by Amplifon USA Inc, (ii) by intercompany loans in currencies other than the Euro between Amplifon S.p.A. and the Group companies in the United Kingdom, (iii) by intercompany loans between the Australian and New Zealand companies (iv) by chargebacks for intercompany service agreements which generate debt positions in Euros with the English, Swiss, American, Australian and New Zealand subsidiaries. The risks arising from other intercompany transactions and investments in quoted instruments in foreign currency are not high since the amounts involved are not significant, hence they are not hedged. Taking the foregoing into account, the fluctuations in exchange rates during the financial year had no significant effects on the Amplifon Group s consolidated financial statements. With regard to foreign exchange translation risk, as individual countries earn income and pay expenses in their own currency no hedging is undertaken, having also considered the potential complexity of similar hedging transactions. Interest rate risk Interest rate risk includes the following situations: fair value risk, that is the risk that the value of a financial asset or liability at fixed interest rate changes due to fluctuations in market interest rates; cash flow risk, that is the risk that the future cash flows of a variable interest rate financial asset or liability fluctuate due to changes in market interest rates. In the Amplifon Group fair value risk arises on the issue of fixed-income bonds (private placements). The cash flow risk derives from taking out variable-rate bank loans. The Group s strategy is to minimise cash flow risk, especially in respect of long-term exposures, through a balanced division between fixed- and floating-rate loans, judging whether to transform floating-rate borrowings to fixed-rate both when each loan is taken out and during the life of the loans, while noting the interest rate levels seen in the markets on each occasion. In any event, at least 50% of the debt must be hedged against changes in interest rates. At 31 December 2012, of medium-term indebtedness (including the short-term instalments of medium-term loans) amounting to million, million, i.e. about 85% of the debt, have been swapped into fixed rate through appropriate hedging instruments. Credit risk Credit risk is the possibility that the issuer of a financial instrument defaults on its obligations and causes a financial loss to the holder. 114

117 Report on Operations at 31 December 2012 In the Amplifon Group credit risk arises from: (i) sales made as part of ordinary business operations; (ii) the use of financial instruments that require settlement of positions with the counterparty; (iii) from the transfer of Group-owned american stores to franchises, with the payment spread over up to 12 years, following the transformation of the business model of the subsidiary Sonus, from the direct to the indirect channel. With regard to the risk under (i) above, it is noted that the only positions with a high unitary value are amounts due from Italian public-sector entities, whose risk of insolvency while existing is remote and further mitigated by the fact that they are sold on a quarterly basis without recourse to specialised finance houses. Additionally, the credit risk arising out of sales to private individuals to whom payment by instalments has been allowed, is becoming significant as is that arising from sales to US indirect channel firms (wholesalers and franchisees). Due to the continuance of the general economic crisis and to the typical business risks, some may not be able to honor their debts. This causes a risk of increased working capital and debtor losses. The Group, through its Corporate functions, has set up a system of monthly reporting on its debtors, to monitor their composition and due dates for each country and decide with local management the action to be taken to recover overdue accounts and determine credit policy. In particular, with regard to private customers, that are however largely paying cash, instalment or financed sales have been limited to a maximum term of 12 months and where possible they are managed by external finance companies which advance the whole amount of the sale to Amplifon, while with regard to the indirect channel in US, the situation is strictly monitored by local management. The risk referred to in (ii) above, notwithstanding the inevitable uncertainties linked to sudden and unforeseeable counterparty default, is managed by diversifying the main national and international investment grade financial institutions and through the use of specific counterparty limits with regard to both liquidity invested and/or deposited and to the notional amount of derivative contracts. The counterparty limits are higher if the counterparty has a Standard & Poor s and Moody s short term rating equal to at least A-1 and P-1, respectively. The Group s CEO and CFO may not carry out transactions with non-investment grade counterparties unless specifically authorized to do so. Exceptions to the counterparty limits may be made for transactions entered into prior to the effective date of the Treasury Policy (August 2012): more in detail, the currency and interest-rate hedges relating to the private placement, which were entered into with a single counterparty, and the interest-rate hedges relating to the syndicated loan stipulated in 2011 for the NHC Group acquisition, which were divided up equally between four primary investment grade banks, exceed the more stringent counterparty limits defined in the August 2012 Treasury Policy. The risk referred to in (iii) above is overcome by ensuring the return of the sold stores to form part of Amplifon property in the instance where payment is not made. Price risk This arises from the possibility that the value of a financial asset or liability may change due to changes in market prices (other than those caused by currency or interest-rate fluctuations) whether these changes arise from specific characteristics of the financial asset or liability or the issuer of the financial liability, or are caused by market factors. This risk is typical of financial assets not listed on an active market, which may not easily be realised at a value close to their fair value. In the Amplifon Group price risk arises from certain financial investments in listed instruments, mainly bonds. Given the size of these investments, this risk is not significant and is therefore not hedged. 115 Amplifon Annual Report 2012

118 Liquidity risk Liquidity risk consists of the risk that an entity may have difficulty in finding sufficient cash to meet its obligations and includes the risk that the counterparties that have granted loans or lines of credit may request repayment. This risk has become particularly significant in recent years, first with the financial crisis of 2008, and more recently with those of the sovereign debt of the peripheral countries of the euro area, and of the Euro currency itself. In this situation the Group, which when the NHC Group was acquired significantly restructured its debt, continues to pay the utmost attention to cash flow and debt management, maximizing the positive cash flow from operations. This made it possible to easily pay back all the loans expiring in 2012 which amounted to 42.8 million. In addition, while the existing liquidity of million and the irrevocable lines of credit totalling 30 million are more than sufficient to meet all the Group s obligations maturing through the first part of 2014, steps are being taken to refinance them in order to transform the million portion of debt expiring in 2013 into long term debt. Furthermore, in order to improve financial management and maximize utilization and investment of the cash generated, a worldwide cash pooling project was completed and implemented in the early part of These activities, along with the liquidity, borrowings, credit lines and the positive cash flow that the Group continues to generate, lead us to believe that, at least in the short term, liquidity risk is not significant. Hedging instruments Hedging instruments are used by the Group exclusively to mitigate - in line with company strategy - interest rate and currency risk and are exclusively financial derivatives. In order to maximise the economic effectiveness of these hedges Group strategy prescribes that: the counterparties be of large size and high credit standing and the transactions will not exceed the counterparty limits defined in the treasury policy, in order to minimise counterparty risk; the instruments used match, as far as possible, the characteristics of the risk they hedge; the performance of the instruments used be monitored, not least in order to check and, if necessary, optimise the appropriateness of the structure of the instruments used to attain the aims of the hedge. The derivatives used by the Group are generally represented by non-structured financial instruments (so-called plain vanilla). In particular, the types of derivatives adopted are the following: cross currency swaps; interest rate swaps; interest rate collars; forward foreign exchange contracts. On initial recognition these instruments are measured at fair value. On subsequent balance-sheet dates the fair value of derivatives must be re-measured and: (i) if these instruments fail to qualify for hedge accounting, any changes in fair value that occur after initial recognition are taken to profit and loss; (ii) if these instruments subsequently qualify as fair hedge value, from that date any changes in the fair value of the derivative are taken to profit and loss; at the same time, any fair value changes due to the hedged risk are recorded as an adjustment to the book value of the hedged item and the same amount is recorded in the income statement; any ineffectiveness of the hedge is recognised in profit and loss; (iii) if these instruments qualify as cash flow hedge, from that date any changes in the fair value of the derivative are taken to net equity; changes in the fair value of the derivative that are recognised in net equity are subsequently transferred to the income statement in the period in which the transaction 116

119 Report on Operations at 31 December 2012 that is hedged against affects the income statement; when the object of the hedge is the purchase of a non-financing activity, changes to the fair value of the derivative taken to net equity are reclassified to adjust the purchase cost of the activity which is the object of the hedge (so-called basis adjustment); any ineffectiveness of the hedge is recognised in profit and loss. The Group s hedging strategy is recognised in the accounts as described above starting from the time at which the following conditions are satisfied: the hedging relationship, its purpose and the overall strategy are formally defined and documented; the documentation includes the identification of the hedging instrument, the hedged item, the nature of the risk to be neutralised and the procedures whereby the entity will assess the effectiveness of the hedge; the effectiveness of the hedge may be reliably assessed and that there is a reasonable expectation, confirmed by ex post evidence, that the hedge will be highly effective for the period in which the hedged risk is present; if the hedged risk is that there may be changes in the cash flow arising from a future transaction, the latter is highly probable and has exposure to changes in cash flow that could affect profit and loss. Derivatives are recorded as assets if their fair value is positive and as liabilities if their fair value is negative. These balances are shown under assets or liabilities if related to derivatives which do not meet hedge accounting criteria, conversely they are classified according to the hedged item. In particular, if the hedged item is classified as a current asset or liability, the positive or negative fair value of the hedging instrument is included under current assets or liabilities; if the hedged item is classified as a non-current asset or liability, the positive or negative fair value of the hedging instrument is included under non-current assets or liabilities. The Group does not have in place any hedges of a net investment. Intercompany hedges, if any, are eliminated on consolidation. 117 Amplifon Annual Report 2012

120 Treasury Shares No authorizations for the purchase of treasury shares were in effect at 31 December 2012 and in 2012 no transactions involving the purchase or disposal of Amplifon s treasury shares purchased in prior years took place. Treasury Shares purchased in 2005, 2006 and 2007 and held in the Company s portfolio No. of shares Average Price Total Paid Data at 31 December ,900, ,091,446 Research and Development The Group did not carry out any research and development activity in the period. Transactions between Group Companies and with Related Parties Pursuant to and in accordance with Consob Regulation n of 12 March 2010, on 24 October 2012, subject to the favourable opinion of the Independent Directors Committee, Amplifon S.p.A. s Board of Directors adopted new Regulations for Related Party Transactions which took effect 1 December 2012 and superseded the version approved by the Board on 3 November Transactions with related parties, including intercompany transactions, do not qualify as atypical or unusual, and form part of the ordinary business activities of companies in the Group. Such transactions are concluded at standard market terms for the nature of goods and/or services offered. Information on transactions with related parties, including specific disclosures required by the Consob Communication of 28 July 2006, is provided in Note 33 of the Consolidated Financial Statements and in Note 32 of the Financial Statements. 118

121 Report on Operations at 31 December 2012 Contingent Liabilities The dispute between the UK tax authorities and the provider of press advertising services relating to the treatment of VAT described in previous reports was resolved in October 2012 and Amplifon was found liable for some 300 thousand, 240 thousand less than the provisions accrued. Currently the Group is not subject to any particular risks or uncertainties. Subsequent Events after 31 December 2012 On 25 January 2013 and on 25 February 2013 the company s Articles of Association were amended following the partial subscription of the share capital increase servicing the stock option plans approved by the Board of Directors on 28 October 2010 and the subsequent issue of, respectively, 150,262 (112,500 of which were subscribed in December 2012) and 108,238 ordinary shares of Amplifon S.p.A. with a par value of 0.02 each. The share capital subscribed and fully paid-in at 25 February 2012 amounted to 4,470,961 On 5 March 2013 an agreement was reached on several amendments to the syndicated loan agreement signed in 2010 to finance the NHC Group acquisition which will give Amplifon greater flexibility in refinancing the debt falling due in 2013 making possible, among other things, and subject to the cancellation of the 30 million line of credit to be used in August 2013 for repayment of the private placement, to issue long term debt on the capital markets without having to make early repayment of the syndicated loan. 119 Amplifon Annual Report 2011

122 Outlook In 2013 the Amplifon Group will have to continue working in a global market environment characterized by a very unstable Euro zone, where the financial tensions that impacted a few Euro zone countries and the effects of the necessary austerity measures were also felt by economies which had previously been considered more solid, and where analysts have lowered their estimates for growth going forward. The Amplifon Group remains confident about the resilience of the hearing aids market and confirms its commitment to taking the steps needed to mitigate the negative repercussions of the problems encountered in certain regions. The development and internationalization of the business are a constant objective, as are cost optimization and debt reduction so that we can benefit from an increasingly solid and efficient financial structure. More in detail: in Continental Europe the Group will work to prolong the recovery begun in the fourth quarter, but the difficult economic environment in the region and the uncertainty surrounding possible regulatory changes in the Netherlands relating to insurance coverage beginning January 2013 keep visibility of results going forward low; in the United Kingdom the Group will dedicate even more attention to increasing operating efficiency in order to maintain the break even point reached in 2012; in the United States the Group will maintain its focus on growth and, in particular, on the development of Miracle Ear, paying particular attention to the management and repositioning of some of its stores and Elite, which continues to attract new members; in Asia Pacific the Group expects to see organic growth in Australia and a recovery of the New Zealand market while working to solidify the benefits stemming from the restructuring completed in New Zealand; with regard to the emerging markets, particular attention will be paid to India where the Group now has 73 stores and to the Turkish market which the Group entered at the beginning of

123 Report on Operations at 31 December 2012 Corporate Governance Report In accordance with art 123-bis of the Consolidate Act on Financial Intermediation (TUF, Law decree No. 58 of 24 Feb 1988) below is reported the Report on Corporate Governance and Ownership Structure at 31 December Issuer profile Amplifon S.p.A. is an Italian multinational company with its registered office in Milan, worldwide leader in the distribution, fitting, adaptation and personalization of hearing systems (hearing aids) designed to meet the needs of those suffering from hearing disabilities. Founded in 1950, Amplifon also contributes to the development of detection and rehabilitation techniques, while also providing the ENT community with the assistance and know-how that are key to otology diagnosis and the management of computerised and integrated auditory systems. The Group is active in 20 Countries: directly in Italy through Amplifon S.p.A, through its subsidiaries in France, Germany, Switzerland, the Netherlands, Belgium, Luxembourg, the UK, Ireland, Spain, Portugal, Hungary, Turkey, the USA, Canada, Australia, New Zealand, India and Egypt, and through an affiliate, of which Amplifon S.p.A owns 49%, in Poland. The hearing aids are fitted in dedicated points of sale, service centres and, to a marginal extent, at customers homes. The points of sale are managed both directly and indirectly by agents and franchisees. The company s mission is to help the hard of hearing to rediscover the joy of a full and active life through solutions which provide maximum hearing satisfaction in all of daily life s different situations. Amplifon S.p.A. s corporate governance is based on the traditional organisational model with Shareholders Meetings, a Board of Directors and a Board of Statutory Auditors. Descriptions of these bodies are provided below and are found throughout this report. The Shareholders Meeting is convened at least once a year, in ordinary session, to approve the annual financial report, appoint and remove members of the Board of Directors and the Statutory Auditors, as well as approve their remuneration, and to also resolve on other matters falling under its prerogative as provided for by law. In extraordinary session, the Shareholders meeting resolves to amend the Company s articles of incorporation and articles of association, as well as on other matters falling under its prerogative as provided for by law. An auditing firm, listed in the special register kept by CONSOB, is responsible for carrying out the independent audit of the financial statements in accordance with the law. 2. Information on ownership structure (pursuant to art. 123-bis, par. 1 TUF) at 31 December 2012 a) Structure of share capital (pursuant to art. 123-bis, par. 1, letter b), TUF) The share capital at 31 December 2012 amounts to 4,468,041 broken down in 223,402,039 ordinary shares with a nominal value of 0.02 each, n. 216,502,039 of which are shares with voting rights and n. 6,900,000 shares with voting rights suspended pursuant to art ter, paragraph 2 of the Italian Civil Code as they represent the Company s treasury shares. There are no shares with limited voting rights at 31 December n. of shares % of share capital Ordinary shares 223,402, % Of which shares with limited voting rights - Of which shares with no voting rights 6,900, % Listed (indicate the markets) / non listed MTA STAR Segment Rights and obligations Treasury shares The Company, as from financial year 2001, has implemented stock option plans which involve capital increases: the description of these plans can be found in the notes to the accounts in the annual report under Note 31, Stock Options Performance Stock Grant and in the information circular prepared as per art. 84bis of the Issuers Regulations published on the Company s website in the sections Investors/Financial Reports and Investors/Other Corporate Documents. There are no instruments granting subscription rights of newly issued shares in existence at 31 December b) Share transfer restrictions (pursuant to art. 123-bis, par. 1, letter b), TUF) At 31 December 2012 Amplifon S.p.A and its majority shareholder Ampliter N.V. were no longer bound by lock ups and all shares are freely transferable. c) Significant interests in share capital (pursuant to art. 123-bis, par. 1, letter c), TUF) Based on the declarations received under art. 120 of TUF, the following shareholders hold significant interests in the Company s share capital at 31 December 2012: % of ordinary capital % of voting capital Direct Declarant shareholder Ampliter NV Ampliter NV FMR LLC FMR LCC Tamburi Investment Partners S.p.A. Tamburi Investment Partners S.p.A Allianz SE Allianz Lebensversicherungs AG Allianz SE Allianz Versicherungs AG Allianz SE Allianz RAS Allianz SE Martin Maurel Vie Allianz SE Dresdner Bank Notes: The percentages refer to the share capital disclosed to CONSOB pursuant to art. 120 of T.U.F. with regard, specifically, to the majority shareholder Ampliter NV reference is made to the declaration dated 20 March d) Shares with special rights (pursuant to art. 123-bis, par. 1, letter d), TUF) At 31 December 2012 there are no shares granting special rights of control. 121 Amplifon Annual Report 2012

124 e) Employee share ownership: exercise of voting rights (pursuant to art. 123-bis, par. 1, letter e), TUF) No specific mechanisms for the exercise of voting rights under employee share ownership are provided for. f) Restrictions on voting rights (pursuant to art. 123-bis, par. 1, letter f), TUF) At 31 December 2012, the only limits on voting rights are those pursuant to art ter, paragraph 2 of the Italian Civil Code (voting rights suspended) related to the Company s treasury shares as described in paragraph 2 a. g) Shareholders agreements (pursuant to art. 123-bis, par. 1, letter g), TUF) At 31 December 2012, there are no known shareholder agreements pursuant to art. 122 of TUF. h) Change of control clauses (pursuant to art. 123-bis, par. 1, letter h), TUF) and provisions relating to takeover bids (pursuant to art. 104, par. 1-ter, and art. 104-bis, par. 1) In the course of their normal business, the Company and its subsidiaries may stipulate agreements with financial partners which, as is common practice in international contracts, include clauses which grant each of the parties the right to rescind or amend said agreements in the event the direct or indirect control of the parties themselves should change. As at 31 December 2012, a loan granted by a bank syndicate organized by Banca Imi S.p.A., BNP Paribas Italian Branch, Citigroup Global Markets Limited and UniCredit Corporate Banking S.p.A. when the NHC Group was acquired and relating to the refinancing of other loans, expiring at the end of 2015, and a loan granted to Amplifon S.p.A. of million, to Amplifon Nederland BV of 86.5 million, to the French branch of 46.5 million and to Amplifon Australia Pty Ltd for A$60.5 million, as well as an $155 million private placement expiring in 2016 issued by Amplifon USA which, as is normally the practice in these kinds of financial transactions, included change of control clauses in the event the controlling shareholder of Amplifon S.p.A. should change based on which the Company must advise the parties of same and the latter may request repayment. i) Authority to increase share capital and authorizations to buyback shares (pursuant to art. 123-bis, par. 1, letter m), TUF) i.1) authority to increase share capital Pursuant to the powers granted by the Extraordinary Shareholders Meeting held on 27 April 2006 pursuant to art of the Italian Civil Code, on 28 October 2010 the Board of Directors resolved to increase share capital against payment in one or more instalments for up to a maximum amount of 150, through the issue of 7,500,000 ordinary shares of a nominal value of 0.02 per share, share with dividend rights, to be offered in subscription to employees of the Company and of its subsidiaries without option rights pursuant to art. 2441, final paragraph, of the Italian Civil Code and art. 114 bis and art. 134, second paragraph, of Legislative Decree 58/98 and subsequent amendments, based on the strategic importance of the position held within the Group. Any board resolution to increase share capital as per the powers granted must be subscribed within the period indicated (at any rate, not after 31 December 2020) and the share capital will be considered increased by an amount equal to the subscriptions tendered at the expiration date. For a detailed description of the stock option plans, please refer to the notes to the accounts in the annual report, specifically Note 31, Stock Options Performance Stock Grant, and the information circular prepared as per art. 84 bis of the Issuers Regulations published on the Company s website in the Investors/Other Corporate Documents section. i i.2) authorizations to buyback shares No authorizations for the purchase of treasury shares were granted or in effect at 31 December At the close of financial year 2012 Amplifon held a total of 6,900,000 ordinary shares, equal to 3.089% of the share capital; these shares were already held at the close of financial year 2007 as part of the previous buyback programmes. In 2012 no transactions involving the disposal of Amplifon s treasury shares purchased in prior years took place. l) Co-ordination and direction activities (pursuant to art et seq. of the Italian Civil Code) The Company is not subject to direction or co-ordination by other parties. It is opportune to point out that Anna Maria Formiggini, Sole Administrator of the direct Parent Company Ampliter N.V. and Chairman of the Board of Directors of the indirect Parent Company Amplifin S.p.A., is the non-executive Honorary Chairman of Amplifon S.p.A. and that Susan Carol Holland, Deputy Chairman of the indirect Parent Company of Amplifin S.p.A., is the non-executive Chairman of Amplifon S.p.A. It is the Company s view that the mere presence of Directors serving on the boards of both the Company and its parent companies is not to be construed as exercising control or co-ordination given the lack of involvement in operations. Furthermore, none of the factors commonly recognized as indicative of exercising direction and co-ordination activities were found to exist in Amplifon S.p.A. and its parent company. The information requested in art. 123-bis, first paragraph, letter i), agreements between the company and the directors and members of the Internal Control and Supervisory committees which call for indemnity in the event of resignation or dismissal without cause or termination following a takeover bid can be found in the Remuneration Statement published in accordance with art. 123-bis of TUF. The information requested in art.123-bis, first paragraph, letter l), the norms governing nomination and replacement of directors and members of the Internal Control and Supervisory Committees, as well as amendments to the bylaws, if different from those provided for under the applicable laws and regulations can be found in the section regarding the Board of Directors found in this report. 3. Compliance (pursuant to art. 123-bis, par. 2, letter a), TUF) The Company adopted the Corporate Governance Code issued in December 2011 as approved by the Corporate Governance Committee. The Corporate Governance Code is available on the Borsa Italiana S.p.A. s website ( in the Regulations/ Corporate Governance section. Neither the Company nor its strategically relevant subsidiaries are subject to foreign legislation which could impact or influence the Company s corporate governance structure. At 31 December 2012, other delegations were not in place to increase the share capital or the issuance of securities holdings. 122

125 Report on Operations at 31 December Board of Directors 4.1 Appointment and replacement (pursuant to art. 123-bis, par. 1, letter l), TUF) The Company is managed by a Board of Directors comprised of between three and eleven members, as resolved by shareholders. The members of the Board of Directors are elected based on a list of candidates presented by the Shareholders and/or a group of Shareholders who own at least 2.5% of share capital (please refer to CONSOB Resolution n dated 30 January 2013). The lists presented must indicate the candidates in sequential numerical order and must be filed at the Company s registered office at least 25 days prior to the date of the Shareholders Meeting in first call. The Company will also publish the lists on its website and in accordance with other modalities indicated in the CONSOB regulation issued pursuant to art. 147-ter, par. 1-bis of Legislative Decree 58/1998 at least 21 days prior to the Shareholders Meeting. Each shareholder who submits a list or is party to a list must submit the certificate issued by the authorized intermediary, by the legal deadline set for the Company s publication of said lists. Based on the Company s Articles of Association, at least one of the members of the Board of Directors or two if the Board is comprised of more than seven members, must meet the requisites for an independent statutory auditor set forth in the applicable norms and regulations. Only those candidates included in lists presented by shareholders holding voting rights equal to half the amount required in order to be entitled to present lists will be considered. Based on the Articles of Association the Board of Directors will be appointed in compliance with the current law governing gender equality rounding up the number of candidates belonging to the least represented gender in the event application of the quota criteria does not result in a whole number. The Directors will be elected based on the lists submitted, the majority of votes obtained in the sequential numerical order in which the candidates appear on said lists. One Director, in possession of the requisite of independence pursuant to the law and in no way connected, even indirectly, to the shareholders who submitted or cast more votes for the list, will be elected from the minority list on the basis of sequential numerical order and the majority of votes obtained. The Directors are appointed for a maximum term of three years and may be re-elected. If one or more of the Directors should resign, for whatever reason, during their term, the Board of Directors will act in accordance with art of the Italian Civil Code. If one or more of the resigned Directors was included in a list containing candidates who were not elected, the Board of Directors will appoint substitute Directors based on the sequential numerical order of said list providing the candidates are still eligible for election and willing to accept the assignment. In any event the Board will ensure that the total number of Independent Directors appointed complies with the law, including with respect to gender quotas. In the event the exiting Director was an Independent Director, the Board will attempt, to the extent possible, to appoint the first of the non elected Independent Directors included in the exiting Directors list. The Board of Directors is vested with the broadest powers for the Company s ordinary and extraordinary administration. It meets at least once every three months and has adopted an organization and modus operandi which guarantee effective and efficient performance of its functions. The Board of Directors, including through its delegates, reports on a timely basis to the Board of Statutory Auditors on its work and on any transactions carried out by the Company and its subsidiaries having a significant impact on profitability, assets and liabilities or financial position; in particular, it reports on transactions representing a potential conflict of interests. Succession planning During the meeting held on 6 March 2013 the Board of Directors, pursuant to the Risk and Control Committee s proposal, approved the succession plan relative to the appointment of Executive Directors in the event of unexpected vacancies or expiration of the term. Based on this procedure the Chairman of the Board of Directors and, if unable, the Risk and Control Committee, after consulting with the Chairman of the Board of Statutory Auditors, will: seek to understand the situation and decide which is more opportune: succession or a temporary appointment; inform the Directors and the Board of Statutory Auditors; call the Board of Directors meeting in order to adopt the measures deemed opportune. 4.2 Composition (pursuant to art. 123-bis, par. 2, letter d), TUF) At 31 December 2012 the Board of Directors was comprised as follows: Name Office held In office since List Exec. Other Nonexecdep. TUF % BoD appoint- In- Indep. ments Anna Maria Formiggini Honorary Chairman 21/04/ /02/2001 M X 16 1 Susan Carol Holland Chairman 21/04/ /02/2001 M X Chief Executive Officer Franco Moscetti (CEO) 21/04/ /12/2004 M X Giampio Bracchi Director 21/04/ /04/2007 M X X X Maurizio Costa Director 21/04/ /04/2007 M X X X Andrea Guerra Director 8/03/2011-8/03/2011 M X X X Umberto Rosa Director 21/04/ /04/2004 M X X X Key Office held: Chairman, Deputy Chairman, CEO, etc. In office since: Date of first appointment. List: Indicated as M/m depending on whether the Director was elected on a majority list or a minority list (art. 144-decies of the CONSOB s Issuer Regulations). Exec.: Marked if the Director qualifies as executive. Non exec.: Marked if the Director qualifies as non-executive. Indep.: Marked if the Director qualifies as independent under the Code s criteria. Indep. TUF: Marked if the Director meets the independence qualifications established by par. 3, art. 148 of TUF (art. 144-decies of the CONSOB s Issuer Regulations). % BoD: Indicates the Director s attendance record in percentage terms at Board meetings (the calculation of this percentage reflects the number of meetings attended by the Director relative to the number of Board meetings held during the year or after the Director s appointment). Other appointments: Indicates the total number of appointments held in other companies listed on regulated markets (in Italy or abroad), in financial, banking, insurance or large companies, identified on the basis of the criteria established by the Board of Directors. 123 Amplifon Annual Report 2012

126 The professional characteristics of the Directors are described in the annual report in the section Corporate Governance and personnel (the annual report can be found on the Company s website in the section Investors/Financial statements ). For a more detailed description of the criteria used to evaluate the independence of the Directors, please refer to Section 4.6 of this report. The list of the other companies in which the Directors of Amplifon S.p.A. have other appointments can be found in Annex 1 of this report. The members of the Board Committees and their attendance records with regard to the meetings held in the year are shown below: Name Office held E.C. % E.C. N.C. % N.C. R.C. % R.C. I.C.C. % I.C.C. Susan Carol Holland Chairman n/a n/a n/a n/a M 100 M 100 Giampio Bracchi Director n/a n/a n/a n/a M 100 Maurizio Costa Director n/a n/a n/a n/a C 100 Andrea Guerra Director n/a n/a n/a n/a M 60 Umberto Rosa Director n/a n/a n/a n/a M 100 C 100 Key n/a: Not applicable E.C.: Executive Committee; C/M for chairman/member of Executive Committee. % E.C.: Indicates the Director s attendance record in percentage terms at Executive Committee meetings (the calculation of this percentage reflects the number of meetings attended by the Director relative to the number of Executive Committee meetings held during the year or after the Director s appointment to this committee). N.C.: Nominations Committee; C/M for chairman/member of Nominations Committee. % N.C.: Indicates the Director s attendance record in percentage terms at Nominations Committee meetings (the calculation of this percentage reflects the number of meetings attended by the Director relative to the number of Nominations Committee meetings held during the year or after the Director s appointment to this committee). R.C.: C/M for chairman/member of the Remuneration Committee. % R.C.: Indicates the Director s attendance record in percentage terms at Remuneration Committee meetings (the calculation of this percentage reflects the number of meetings attended by the Director relative to the number of Remuneration Committee meetings held during the year or after the Director s appointment to this committee). I.C.C..: C/M for chairman/member of Internal Control Committee. % I.C.C.: Indicates the Director s attendance record in percentage terms at Internal Control Committee meetings (the calculation of this percentage reflects the number of meetings attended by the Director relative to the number of Internal Control Committee meetings held during the year or after the Director s appointment to this committee). Maximum number of appointments allowed in other companies Pursuant to the Corporate Governance Code for listed companies issued by Borsa Italiana S.p.A. in March 2006, and updated in December 2011, on 19 December 2012 Amplifon S.p.A. s Board of Directors defined general criteria for the maximum permitted number of directorships or statutory auditorships in other companies deemed to be compatible with holding the office of Director: Non-excecutive Directors and the Chairman will not be able to assume directorships or statutory auditorships in more than 5 companies listed on regulated markets (including foreign markets), financial, banking, insurance or large companies, while Independent Directors may not assume more than 10 directorships or statutory auditorships. Please note that the limit on the number of appointments does not include subsidiaries of Amplifon S.p.A.. Induction Programme Following the appointment of the Directors specific meetings will be held with the management during which information relating to the sector, the competitive environment, the Group structure, the Company and the organization will be provided. 4.3 Role of the board of directors (pursuant to art. 123-bis, par. 2, letter d), TUF) Activities carried out in 2012 and expected for 2013 During 2012 the Board of Directors met six times on: 7 March 26 April 27 June 25 July 24 October 19 December Meetings lasted an average of four hours each. Four meetings have been scheduled for 2013, with the possibility of holding other ones in order to examine specific topics related to operations and to evaluate strategic development plans as, to date, the Company has not instituted a Strategic Committee insofar as the Company believes that this role can be filled through specific Board of Directors meetings. The Board meetings are called by the Chairman, or on the Chairman s behalf, by way of a registered letter sent to each Director or Standing Auditor at least five days prior to the meeting or, in urgent cases, via telegram, fax, or return receipt at least one day prior to the scheduled meeting date. The Board of Directors may also be called, after having notified the Chairman of the Board itself, by the Board of Statutory Auditors otherwise by two of its members. The Board members usually receive the documentation relating to the meeting together with the summons for the Board of Directors meeting, unless for reasons of confidentiality or lack of readiness it is not advisable or possible. In 2012 the Chairman of the Board of Directors invited the Manager charged with preparing the Company s financial reports to attend all the meetings; several Group Market Directors were also invited to report directly to the Board on the micro and macro economic trends in the countries for which they are responsible, as were a few members of the Leadership Team and of the Management Team in order to discuss specific topics. All aspects relating to the functioning of the Board of Directors are governed by specific regulations, compliance with which is monitored by the Chairman with the assistance of the Board Secretary Role of the Board of Directors The Board of Directors is vested with the broadest powers for the Company s ordinary and extraordinary administration and may perform all activities deemed necessary to achieve the Company s purpose, with the exception of those powers attributed by law or the Articles of Association to the Shareholders Meeting. In detail, the Board of Directors: resolves on the opening and closure of secondary offices and the transfer of the registered office within the borders of Italy; indicates which of the Directors should represent the Company; resolves on reduction in share capital in the event of shareholder withdrawal; resolves on the amendments needed to be made to the Articles of Association in light of new norms and regulations; 124

127 Report on Operations at 31 December 2012 within the limits envisaged in art ter, art and art of the Italian Civil Code, assumes decisions on mergers and spin-offs pursuant to art. 2505, art bis and art ter of the Italian Civil Code; examines and approves the strategic, operational and financial plans of the Company and the Group companies and periodically monitors implementation; defines the corporate governance system for the Company and the Group structure; defines the nature and level of risk compatible with the Company s strategic objectives; evaluates the adequacy of the general organizational and administrative structure of the Company and its strategically relevant subsidiaries put in place by the Chief Executive Officer, particularly with regard to and on an annual basis, the adequacy, efficiency and effective functioning of the internal control and risk management system, and the management of conflicts of interest; grants and revokes the Chief Executive Officer s powers, defining the limits and means of operation, without prejudice to the powers reserved exclusively for the Board pursuant to art of the Italian Civil Code, as well as in relation to art. 20 of the Articles of Association; determines, following the advice of the Remuneration Committee, a remuneration policy for the Directors, the key managers and the head of internal audit; determines, after examining the proposals of the Remuneration Committee and consulting the Board of Statutory Auditors pursuant to art par. 3, of the Italian Civil Code, the remuneration of the Chief Executive Officer and the other Directors holding particular offices, including as members of Board committees, as well as, in the event the shareholders have not done so, the breakdown of the Board s global compensation; evaluates the Company s general performance, paying particular attention to the information received from the executive Directors, and periodically comparing the results achieved with those forecast; examines and approves the Company s and its subsidiaries operations, in case such operations have a significant impact on the Company s profitability, assets and liabilities or financial position, paying special attention to situations in which one or more Directors have a direct or indirect (through third parties) interest and, more in general, transactions involving related parties; toward this end establishes the general criteria to identify relevant transactions; evaluates, at least once a year, the size, composition and performance of the Board of Directors and of its committees and may provide opinions about the profile of the professionals that should serve on the Board; evaluates the need to adopt a succession plan for the Chief Executive Officers; provides information in the report on corporate governance: - on the composition of the Board, indicating, for each member, the qualifications, office held within the Board, the main professional experiences, as well as how long the office has been held; - on how the duties assigned are fulfilled and, more specifically on the number and the average duration of the Board meetings held during the year and the attendance record of each Board member; - on the principal characteristics of the internal control and risk management system expressing the Board s opinion as to the adequacy and efficacy of the latter with respect to Group s characteristics and risk profile; evaluates any exceptions to the non-compete provisions contained in art of the Italian Civil Code authorized by the shareholders in light of organizational needs pointing out any critical areas to the shareholders during their next meeting. Toward this end, each Director will inform the Board, upon accepting his/her appointment, of any activities carried out which could be considered in competition with the Company and, subsequently, of any relevant changes in this regard; provides the shareholders with information about the activities carried out and planned and works to ensure that the shareholders receive the information needed to be able to make informed decisions during Shareholders Meetings. All the Directors usually attend the Shareholders Meetings and any absences must be justified; assesses whether or not it is opportune, in the even of significant changes in the Company s market capitalization or in the composition of its shareholders, to propose that the shareholders amend the Articles of Association with regard to the percentages needed to mobilize shares and to the steps taken to protect minority shareholders. During the meeting held on 19 December 2012 the Board approved the regulations governing the Board s activities contained in the report Board of Directors: role, organisation and modus operandi. During the meeting held on 24 April 2012, the Board allocated the overall remuneration approved, on the same date, by the Shareholders Meeting to its individual members. The Board also resolved to pay the Independent Directors, in the event they should be called upon to chair one of the committees instituted by the Board or the Supervisory Board, an additional fee of 25,000 for each chairmanship or, in the event they are called upon to serve on one of the committees instituted by the Board or the Supervisory Board, an additional fee of 15,000 for each membership. To be noted that the above additional fees have no impact on the overall remuneration approved by the Shareholders Meeting insofar as they are not considered as being additional to said amounts. The Board, in all of the meetings dedicated to examining the yearly and periodic accounting records, also looks at the reports on operations of each subsidiary and the group as a whole presented by the Chief Executive Officer. With the resolution dated 21 April 2010, the Board determined the powers of the Chief Executive Officer and the limits on the exercise of such powers which should be exercised in accordance with the guidelines approved by the Board of Directors, as well as the forecast investments and expenses indicated in the budgets approved by the Board of Directors. Toward this end the Chief Executive Officer was granted single signatory powers for an amount of up to 10 million per transaction, as well as for transfers of funds, without limits, between the Company s bank accounts. The Chief Executive Officer may also exercise powers relating to bank loans and lines of credit in joint signature with the Group s CFO for an amount of up to 20 million per transaction, as well as transfer funds, without limits, to subsidiaries and associates; in joint signature with the Chief HR Officer or a member of the Board of Directors the CEO may stipulate, take disciplinary action relating to, or terminate any employment contract with a company executive. The Chief Executive Officer may also carry out extraordinary transactions by executing the necessary deeds and contracts for an amount of up to 10 million per transaction subject to the approval of the Board of Directors for which these sorts of transactions are reserved. With the resolution dated 21 April 2010, the Board of Directors also granted the General Manager single signatory powers for an amount of up to 10 million per transaction to the extent that the transactions are in accordance with the guidelines, the forecast investments and budgets approved by the Board of Directors. During the meeting held on 24 October 2012, the Board of Directors approved the Regulations for related party transactions issued pursuant to and in accordance with CONSOB Regulation n of 12 March Please refer to Chapter 12 below for information on Directors interests and related party transactions. The Internal Control Committee, now called Risk and Control Committee, with the support of the Head of Internal Audit, prepared a report summarizing the interviews conducted with the members of the Board of Directors regarding the evaluation of the Board s composition and performance. This report was submitted to the Board during the meeting held on 19 December 2012 and the comments included in the report were shared with those present, underlining the areas of improvement highlighted by the survey. 125 Amplifon Annual Report 2012

128 The Shareholders Meeting did not authorise any exceptions to the non-compete provisions contained in art of the Italian Civil Code Executive bodies Chief Executive Officers To date the Company has deemed it sufficient to appoint a single Chief Executive Officer in the person of Franco Moscetti, who also serves as the General Manager. During the meeting held on 21 April 2010 the Chief Executive Officer and General Manager were granted the powers described above in section The Chief Executive Officer reported to the Board every three months on the activities performed in the fulfilment of his duties Chairman of the Board of Directors The Chairman acts in accordance with the law and the Company s Articles of Association, without operational powers and does not have a specific institutional role in determining Company strategies. Reporting to the Board Periodically, usually at least every three months, the Chief Executive Officer reports to the Board on the most significant events which occurred within the Group and on the market conditions which could influence operations. Furthermore, the heads of the various subsidiaries present in the markets where the Group operates are, as deemed appropriate, invited to present to the Board information regarding each subsidiary s operation and the reference markets (please also refer to Section 4.3.1). 4.5 Other executive directors The Chief Executive Officer is the only Executive Director. If deemed opportune, managers from the Leadership Team and from the Management Team may also be called upon to discuss specific transactions with the Board of Directors. 4.6 Independent directors In the meeting held on 19 December 2012, the Board of Directors evaluated the qualifications of Directors Umberto Rosa, Giampio Bracchi, Maurizio Costa and Andrea Guerra as Independent Directors. This evaluation was carried out on the basis of the criteria outlined in the Code and the prudent assessment of the Board which evaluated the qualifications of each Director on a case by case basis. More in detail, the Board examined, on the basis of information made available and the declarations made by the persons concerned, the relationships which could potentially compromise independence and concluded that there were no relationships which could compromise the autonomous judgement of the persons concerned given both the high standards of professionalism and the absence of connections to the Amplifon Group s activities. The Board of Statutory Auditors verified the correct application of the assessment criteria and procedures adopted by the Board of Directors for evaluating the independence of its members, informing the Company of the following findings which will be included in the annual report on supervisory activities: The Board of Statutory Auditors verified correct application of the assessment criteria and procedures adopted by the Board of Directors for evaluating the independence of the Directors Umberto Rosa, Giampio Bracchi, Maurizio Costa and Andrea Guerra. The assessment criteria were found to be adequate. On 19 December 2012 a meeting of the Independent Directors took place in order to discuss the Group s risk system and the results of the Board of Directors self-assessment exercise, topics which had already been presented to the Internal Control Committee, now called Risk and Control Committee, as well as the permanence of the independence requisites of the directors. 4.7 Lead independent director Although without an active role in operations, the Chairman of the Company is a representative of the issuer s Parent Company. Consequently, in accordance with the Code, on 21 April 2010 the Board of Directors, during the first meeting held following the appointment by the Shareholders Meeting, on the same date, appointed Umberto Rosa, non-executive independent director, Lead Independent Director. Umberto Rosa acts as a point of reference for the non-executive Directors (in particular the Independent Directors) to enhance their contribution and the performance of the Board itself. The Lead Independent Director works with the Chief Executive Officer in order to ensure that the Directors receive adequate information in a timely manner. The Lead Independent Director may also call, at his own initiative or at the request of other Directors, special meetings for just the Independent Directors to discuss issues considered of interest in relation to the operation of the Board or management of the business. The Lead Independent Director, in addition to chairing the meetings of the Independent Directors, carried out his activities by attending meetings of the Internal Control Committee, now called Risk and Control Committee, of the Remuneration Committee, as well as of the Supervisory Board. 5. Treatment of corporate information On 24 October 2012 the Board updated the Procedure for handling and publishing corporate information, in particular price sensitive information approved on 15 March The procedure can be found on the corporate website in the Investors/Corporate Governance/Statutory and codes section. 6. Board committees (pursuant to art. 123-bis, par. 2, letter d), TUF) On 21 April 2010 the Board of Directors appointed the Internal Control Committee, now called Risk and Control Committee, and the Remuneration Committee, while it was deemed unnecessary, for the moment, to appoint a Nominations Committee. As described in par above, committee members are to receive a supplementary fee in addition to the overall remuneration approved by the Shareholders Meeting. The Board also indicated that the committees were to perform their activities in accordance with the guidelines found in the Corporate Governance Code. The committees are comprised of at least three non-executive Directors, the majority of which are independent, and minutes are taken at the meetings. In order to perform their duties, the committees may access all information and Company systems as deemed necessary and they may invite non members to attend meetings. The Remuneration Committee and the Risk and Control Committee have a budget which is approved by the Board and have the power to make expenditures if deemed necessary. 126

129 Report on Operations at 31 December Nominations committee Following also the application of the amendments made to the Corporate Governance Code approved in December 2011, resolved during meeting on 19 December 2012, the Board of Directors, for the moment, deemed unnecessary to form a Nominations Committee including on the basis of results risen during the self-evaluation process on the well-balanced Board composition itself and on the professional contents acquired. 8. Remuneration committee Please refer to the Remuneration Statement Part 1 Chapter 1 Governance - Section 1.3 Remuneration Committee. 9. Directors compensation Please refer to the Remuneration Statement Part 1 Chapter 4 Directors Compensation ; Chapter 5 Compensation of the Chief Executive Officer/General Manager ; Chapter 6 Compensation of key managers with strategic responsibilities. 10. Risk and control committee Composition and duties of the Risk and Control Committee (pursuant to art. 123-bis, par. 2, letter d), TUF) Introduction: one of the resolutions approved by the Company s Board of Directors during the meeting held on 19 December 2012 relating to amending the Corporate Governance Code of December 2011, was to change the name of the Internal Control Committee into Risk and Control Committee. After having appointed the Directors during the meeting held on 21 April 2010, the Board of Directors also formed a Risk and Control Committee which consists of: Umberto Rosa: Chairman, non-executive Independent Director; Susan Carol Holland: non-executive Chairman; Giampio Bracchi: non-executive Independent Director. The current members were found to possess the qualifications deemed necessary to fulfil the committee s duties as outlined in the Code. In order to perform its tasks, the Risk and Control Committee works with the Group s Head of Internal Audit, Paolo Tacciaria, the Company s Head of Internal Control appointed as per the Chief Executive Officer s recommendation in March Furthermore, in order to carry out its internal audit activities, the Committee may engage KPMG Advisory S.p.A. as a co-sourcer, under the supervision of the Head of Internal Audit. As indicated in chapter 6, the Risk and Control Committee submits a budget to the Board and has the power to make expenditures as deemed necessary. In 2012 the Risk and Control Committee met six times, distributed evenly throughout the year: 27 February; 23 April; 18 July; 22 October; 12 December; 18 December. Minutes are taken regularly during the meetings and are filed with the office of the Head of Internal Audit. All the members of the Risk and Control Committee attended the meetings, which lasted on average more than two hours, along with the Chairman of the Board of Statutory Auditors or who on his behalf. The Head of Internal Audit also attended. In order to encourage a reciprocal exchange of information and in light of discussion on specific issues, the Chief Executive Officer was invited to attend the meetings; in certain instances the Group s CFO and Manager charged with preparing the Company s financial reports was also invited to attend, as were several consultants and Company managers. In 2013 the Risk and Control Committee is expected to meet at least five times Functions of the Risk and Control Committee The Risk and Control Committee assists the Board of Directors with matters related to internal control and risk management, while also monitoring the adequacy and proper working of the internal control system. The Risk and Control Committee: assists the Board in the assessment of the adequacy and proper working of the Company s internal control system and risk management expressing its opinion on specific aspects; examines and approves the proposals identified by the management, the Head of Internal Audit and the independent auditors for improving the structure of the economic and financial reporting needed to monitor and fully represent the Company s performance; express an opinion regarding the appointment, dismissal, compensation and hiring of resources to be dedicated to Internal Audit; monitor the independence, adequacy, efficacy and efficiency of Internal Audit; assesses the work programme prepared by the Head of Internal Audit and receives his periodic reports; assesses any findings emerging from the periodic reports prepared by the Head of Internal Audit, from the information provided by the Board of Statutory Auditors and by its individual members; reports to the Board of Directors, at least once every six months, at the time the annual and half-year financial statements are approved, on its activity and on the adequacy of the internal control system; assesses, along with the Manager charged with preparing Company s financial reports and the independent auditors, the appropriateness of the accounting standards adopted and their uniformity with a view to the preparation of the consolidated financial statements; assesses the work of the independent auditors, also as regards the independence of their opinions, and the results thereof as set out in the independent auditors report and in their letter of recommendations; assesses the proposals presented by the independent auditors in order to obtain the relevant audit engagement; performs the other duties entrusted to it by the Board of Directors, particularly as regards relations with the independent auditors. The internal control activities in 2012, coherently to the above mentioned functions, were focused on the following activity areas: compliance with the Corporate Governance Code and with any new norms and regulations; guidance and supervision of the internal audit activities particularly with regard to maintaining an adequate Group control system, the proper integration of the Australian companies, as well as the constant monitoring of debt and the financial position; constant check of the activities involving the application of the Internal Organizational Model pursuant to Legislative Decree 231/2001; support to the Manager charged with preparing the Company s financial reports; other supervisory activities which, directly or indirectly, are aimed at obtaining information related to the internal control system (including, for example, meetings with Company managers). 127 Amplifon Annual Report 2012

130 11. Internal control and risk management system The internal control system consists in the set of rules, procedures and organizational structures designed to ensure, through a proper identification, assessment, managing and monitoring of the primary risks process, that the business is run safely, correctly and in line with the objectives agreed upon. Such an internal control system helps guarantee the safeguarding of the Company s assets, the efficiency and efficacy of the Company s operations, the reliability of the financial information as well as compliance with laws and regulations. The Board of Directors is responsible for the internal control system and toward this end works with the Risk and Control Committee, the Chief Executive Officer and the Head of Internal Audit. The Board of Directors is responsible for the internal control system and toward this end it works together with the Risk and Control Committee, the Chief Executive Officer and the Head of Internal Audit. The Board of Directors provides the guidelines for the internal control and risk management system in a specific document which summarizes and describes the individuals involved, the different components and the mode of operation along with the criteria to be used to assess the system as a whole. During the year the Board worked with the Risk and Control Committee and the Head of Internal Audit in order to evaluate the adequacy, efficiency and functioning of the internal control system. The Board consulted the internal audit reports, met with the company management, as well as with the Board of Statutory Auditors and the independent auditors; examined the reports presented by the Chairman of the Supervisory Board pursuant to Decree 231/2001, whose purpose is also to verify that the internal control system works properly (albeit for different reasons). It should also be noted that during the meeting held on 19 December 2012, the Board acknowledged and assessed the Group s risk map on the basis of a report entitled Group Risk Reporting 2012 in which there was a summary and an evaluation of the Group s primary risks selected through processing the totality of the risks communicated by each of the different countries. The main features of the existing internal control and risk management systems in relation to the financial reporting process pursuant to Art. 123-bis, par. 2b), TUF are detailed below. Introduction Amplifon, in line with the most advanced management systems and best practices for the design and implementation of internal control systems, treats risk management as one of its highest priorities. Every business has risks to face, and this takes on extra importance when circumstances are in constant flux and the economy is not at its best. Amplifon s Management carefully weighs risks against opportunities, channelling resources to create the best possible balance in keeping with the acceptable threshold of risk. Risks are appraised for the Group as a whole and at a local level (countries where present), through regular risk assessment exercises involving the entire Group s Management team, through the selfevaluation procedure. The risks are then prioritized in relation to the Group s objectives and those of its subsidiaries, and in consideration of the probability/impact matrix of the residual risks. Accordingly, systems are set up to monitor the underlying factors of risk, in order to mitigate the risks themselves and take advantage of business opportunities arising from the ability to anticipate competitive dynamics. Risk management and risk monitoring activities therefore complete the Group s risk analysis activities on an ongoing basis. For ease of assessment, risk factors are grouped into homogeneous categories: those originating outside the Company, those stemming from Amplifon s own organization and those of a more specifically financial nature. The internal control and risk management system in relation to the financial reporting process should therefore be viewed not as an independent system, but as part of the overall risk management apparatus. Below is a description of the main features of Amplifon s internal control and risk management systems in relation to the financial reporting process, i.e. the process leading to preparation and public disclosure of the annual financial report and of the quarterly and halfyearly reports. Main features of the existing internal control and risk management systems in relation to the financial reporting process The Amplifon Group, by the Manager charged with preparing the Company s financial reports, has set up a system of administrative and accounting procedures for the preparation of the separate and consolidated financial statements and of the interim financial reports. The system was designed and implemented with the help of a leading consulting firm and is based on the framework of the Committee of Sponsoring Organizations of the Treadway Commission (CoSO). According to such a framework, the internal control system is viewed as a process involving all business functions, which thus provides reasonable assurance as to: the effectiveness and efficiency of operations; the reliability, accuracy and timeliness of financial reporting; compliance with laws and regulations. The model adopted, after preliminary activities and initial implementation, calls for a set of cyclical activities that keep it up to date, in good working order and correctly applied. Phases of the internal control and risk management processes in relation to the financial reporting process In the initial scoping phase, the single account lines of the consolidated financial statements were studied to identify material and significant accounts, their underlying processes, and the specific Group companies on which to develop and implement the model itself. For purely operational reasons, and to ensure the consistency and governance of the entire system, the model was implemented gradually: starting with Amplifon S.p.A. and then expanding little by little to the Group companies found to be material. Within the individual companies the model was also implemented gradually, again for operational reasons only. It initially addressed certain cycles, and eventually reached full coverage of the processes defined as inscope. At the moment, the model is in place in Italy, the United States, the United Kingdom, The Netherlands, Switzerland, France, Spain, Belgium and Germany, and is currently being implemented in Australia and New Zealand, where several cycles have been completed, while others will be completed in The outcome of the scoping phase is reviewed each year to make sure it is adequate and to determine where coverage is needed, in light of constant changes in the Group s boundaries and of the importance of individual annual report items. For each Company and each process defined as in-scope, the following steps are in place: Narrative mapping of the process with identification of key risks and controls to ensure: - completeness, i.e. that all transactions and data are entered and processed within the systems so that they are duly reflected in the financial statements; - accuracy, i.e. that the transactions and data are entered and processed correctly and neutrally so that the financial statements provide precise, objective information; - cut-off, i.e. that all transactions and data are entered for the period to which they pertain so that the financial statements represent 128

131 Report on Operations at 31 December 2012 the Company s and the Group s real economic and financial situation with respect to the period under review; - promptness, i.e. that all transactions and data are processed speedily so that the financial statements can be prepared correctly by the legal deadline; - reliability, i.e. that the information managed is fair, consistent with the accounting standards used and in line with the legal and regulatory standards. Assessment of controls design in respect of each objective listed above; identification of principal gaps. Identification of actions and remediation processes in order to implement any compensating controls, or process modifications, ensuring proper control of the areas in question. Preparation of a Risk Control Matrix that summarizes: - the sub-process; - the risk; - the objective of the control; - the description of the control; - the type of control (preventive, detective, manual, automatic); - the possibility of fraud risk, if any; - IT support for the control; - the frequency (daily, monthly, quarterly, yearly); - the person in charge of the control; - the gap identified in the control, if any. On the basis of the Risk Control Matrix, at least once a year and under the coordination and supervision of the Manager charged with preparing the Company s financial reports, regular checks are performed by headquarter personnel, internal audit personnel or the external consultant to make sure the tests are being carried out. The initial narrative of the process then evolves into an actual Company procedure, which is reviewed at least once a year to make sure it reflects any changes that have occurred. The results of the tests, kept on file with the Consolidated Financial Statements function, and the progress reports of activities underway at individual Group companies, are analyzed each quarter by a Steering Committee made up of: - the Manager charged with preparing the Company s financial reports - the Head of Internal Audit - the Consolidated Financial Statements Manager. When data is submitted for the periodic financial reports (quarterly, half-yearly and yearly), regardless of the materiality of the country or company, the Market Directors and the CFOs of each country send the parent company a letter confirming that the submitted data is complete, accurate, consistent with the accounting records, as well as compliant with the accounting standards used and with all laws and regulations, and that they are responsible for implementing an adequate internal control system to prevent or identify any fraudulent or erroneous reporting. Bodies and positions involved Board of Directors: issued the regulations for the Manager charged with preparing the Company s financial reports and is brought regularly up to date on the activities of the Risk and Control Committee. Manager charged with preparing the company s financial reports: through a specially appointed team, plays a proactive role in the ongoing implementation and progressive maintenance of the internal control and risk management system in relation to the financial reporting process, and periodically checks the status of operations and tests results. As part of the Steering Committee, evaluates any problems and together with the Head of Internal Audit and the Consolidated Financial Statements Manager, defines any necessary action. Head of Internal Audit: works with the Manager charged with preparing the Company s financial reports on the ongoing implementation and progressive maintenance of the internal control and risk management systems in relation to the financial reporting process, updates the Steering Committee on tests performed at the request of and to support the Manager charged with preparing the Company s financial reports, and periodically checks the status of operations and the results of tests performed by external consultants or headquarter personnel. As part of the Steering Committee, evaluates any problems together with the Manager charged with preparing the Company s financial reports and the Consolidated Financial Statements Manager. Consolidated Financial Statements Manager: coordinates the implementation and progressive maintenance of the internal control and risk management systems in relation to the financial reporting process, oversees testing at foreign affiliates, and updates the Steering Committee on the status of operations and tests results. As part of the Steering Committee, evaluates any problems together with the Manager charged with preparing the Company s financial reports and the Head of Internal Audit defines any necessary action. Market Directors and Chief Financial Officers of the subsidiaries: oversee proper implementation of the administrative and accounting procedures defined in the model and, upon submission of data for the periodic financial reports (quarterly, half-yearly and yearly), regardless of the materiality of the Country or the company, send the parent company a letter confirming that the submitted data is complete, accurate, consistent with the accounting records and compliant with the accounting standards used and with all laws and regulations, and that they are responsible for implementing an adequate internal control system to prevent or identify any fraudulent or erroneous reporting. Company-level manager: at each material subsidiary, a manager has been appointed to serve as the focal point for the implementation and progressive maintenance of the model. Process owner: for each procedure, a process owner is appointed to oversee its ongoing progressive maintenance Executive Director in charge of the internal control and risk management system The Chief Executive Officer oversees the planning and operation of the Internal Control and Risk Management System (Sistema di Controllo Interno e di Gestione dei Rischi or SCIGR ), along with the implementation of the system and identification of the primary business risks. The responsibilities of the Director in charge of the SCIGR are outlined in the document Board of Directors Role, Organization and Mode of Operation and accurately reflect the relative provisions found in the Corporate Governance Code (Application criteria 7.C.4). During the year the Chief Executive Officer, in his capacity as Director in charge of the SCIGR, activated channels of communication and worked with the Head of Internal Audit and the Risk and Control Committee. As mentioned above, the Chief Executive Officer works with the Head of Internal Audit and Company s divisions in order to identify the Company s primary risks and monitors the Internal Control System s existing set of procedures and rules which comprise the internal control system with regard to the operating conditions, laws and regulations Head of internal audit The Board of Directors, as per the Chief Executive Officer s recommendation, appointed the Group Risk and Compliance Officer, Paolo Tacciaria, the Company s Head of Internal Audit (formerly Internal Control Officer). As a formality, the proposal was also submitted to the Risk and Control Committee. The Head of Internal Audit s compensation was established based on company policies and on the Remuneration Committee s recommendations and approved by the Board of Directors. The Head of Internal Audit reports to the Board of Directors and reports on his activities to the Risk and Control Committee which oversees his activities, monitoring the independence, adequacy, efficacy and efficiency of his operations. The Head of Internal Audit also interacts with the Board of Statutory Auditors and the Director in charge of the SCIGR in order to ensure that his duties are fulfilled consistently and comply with the 129 Amplifon Annual Report 2012

132 requirement of independence in line with the Company s corporate governance system and the Corporate Governance Code. The Head of Internal Audit is not responsible for any operations and does not report to the head of any operational area. The Head of Internal Audit must verify that the internal control and risk management system is adequate, fully operational and functional: carries out and facilitates the activities needed to identify, assess and manage the Company s risks; prepares an internal audit plan, which he presents to the Risk and Control Committee, for the verification of the work being carried out by Group companies in order to ensure that the company s risks are being properly monitored in line with the best practices, including those found in the Corporate Governance Code; meets periodically with the Board of Statutory Auditors and the Independent Auditors; oversees and facilitates compliance with the Corporate Governance Code; carries out, coordinates and facilitates the activities linked to implementation of the Internal Organizational Model adopted pursuant to Legislative Decree 231/2001; offers autonomous and independent assistance to the Manager charged with preparing company s financial reports. Periodically prepares reports on the work carried out which he presents to the Risk and Control Committee, the Board of Statutory Auditors and the Director in charge of the SCIGR as well as assisting the Risk and Control Committee with the preparation of the periodic reports for the Board of Directors on the internal control system. Pursuant to the Supervisory Board Regulations, the Head of Internal Audit is also a member of the Supervisory Board. In order to fulfil his duties, the Head of Internal Audit has access to all the information deemed useful as well as the resources and means included in the Risk and Control Committee s budget as per chapter 6 and has, after obtaining an initial estimate, the power to make expenditures as deemed necessary. The Head of Internal Audit plans the internal audits which are carried out in collaboration with the consulting company KPMG Advisory S.p.A.. The general focus of the 2012 Audit Plan, in addition to the customary follow-up activities, was on the purchasing cycle and on gaining further understanding of the relevant strategic topic in the USA. The Head of Internal Audit works on internal orientation, awareness and planning while the operations are carried out by the consultants who also guarantee a professional direct presence in all the different countries where the Group is active Organizational model pursuant to Legislative Decree 231/2001 On 14 March 2005 the Board of Directors resolved to adopt an Internal Organizational Model ( the Model ) in accordance with the recommendations of Legislative Decree 231/2001 which has made companies administratively responsible in criminal proceedings for certain types of crimes committed by directors, managers or employees in the interests of or to the benefit of the companies themselves. The Model was prepared with the purpose of preventing the committing of crimes envisaged under the Decree and is based on the guidelines for Organizational Models issued by Confindustria (the Federation of Italian Industrialists) and other industry associations. The Model consists of a general and an operational part. The general part sets out the guiding principles underlying the conduct of company transactions, describes how the Supervisory Committee is formed and works and describes the system of penalties. The operational part includes the control s procedures of the company activities including the way of carrying out certain sensitive activities. The Model s adoption is a way for fostering the conduct of company activities in accordance with the principles of fairness and transparency in order to safeguard the company s image, the work of its employees and its partners, while at the same time fostering the achievement of the greatest efficiency. The Organizational Model is, by definition, dynamic and for this reason is continuously updated: in the current version, approved by the Board of Directors on 25 July 2012, the most sensitive activities include crimes against public administration, corporate crimes and market abuse. The Supervisory Board, comprised of two independent Directors and the Head of Internal Audit, in 2012 met five times: 27 February; 23 April; 18 July; 22 October; 12 December Independent auditors The Shareholders Meeting held on 21 April 2010 resolved to grant the assignment for the financial audit of the parent company and consolidated financial statements of Amplifon S.p.A. to the company PricewaterhouseCoopers S.p.A. for the nine year period Manager charged with preparing the Company s financial reports The company s Articles of Association call for the Board of Directors to appoint a Manager charged with preparing company s financial reports, subject to the unbinding opinion of the Board of Statutory Auditors. The Manager charged with preparing company s financial reports must possess certain professional requisites or precisely three years of management experience in the field of accounting, finance and control with the Group s companies or other listed companies. In the meeting held on 25 June 2007 the Board, after having received a favourable opinion from the Board of Statutory Auditors, appointed the Group s CFO, Ugo Giorcelli, Manager charged with preparing company s financial reports and approved the Rules for the Manager charged with preparing company s financial reports in the subsequent meeting held on 12 September These rules govern the responsibilities, the activities, the relationships with other corporate divisions, the powers and means of the Manager charged with preparing company s financial reports in accordance with proven best practices Coordination among the personnel involved in the internal control and risk management system The Board of Directors supports the preparation and approves the document Guidelines for the Internal Control and Risk Management System, which indicates the objectives of the internal control and risk management system and also describes the personnel involved, within and outside of the Company, and describes the responsibilities and mode of interaction. The Director in charge of the SCIGR is in charge of the implementation of the guidelines indicated by the Board of Directors. 130

133 Report on Operations at 31 December Directors interests and related party transactions During the meeting held on 24 October 2012, the Board of Directors adopted a new Regulation on related party transactions issued pursuant to and in accordance with CONSOB Regulation n of 12 March 2010, designed to define the rules governing the identification, review, approval and execution of the Related Party Transactions entered into by the Company, either directly or through its direct or indirect, Italian or foreign, Subsidiaries. The document is available on the company s corporate website ( and may be accessed by clicking on the following link: solutions/investors/corporate_governance/statutory_and_codes/. The Regulation adopted by the Board of Directors is designed to ensure the transparency, as well as the substantial and procedural fairness of any related party transactions, in accordance with current norms and regulations and, in particular, with the CONSOB Regulations. Please note that the Company, in light of its characteristics, structure, size, business and internal organization deemed it opportune to: not select other related parties subject to the procedures defined herein; not define materiality thresholds lower than those indicated in the CONSOB Regulations for the definition of material related party transactions; not let the Shareholders Meeting approve transactions underway in the event the Independent Directors Committee issues a negative opinion; without prejudice to mandatory financial and accounting disclosures called for under applicable laws and regulations, not apply the Regulations to: - decisions relating to stock option plans approved during the Shareholders Meetings in accordance with art. 114-bis of the TUF and implementation therein; - resolutions relating to the compensation of members of the Board of Directors and the Directors holding particular offices, key managers with strategic responsibilities, as long as: (i) the Company has adopted a compensation policy; (ii) a committee comprising exclusively non-executive directors, primarily independent, was involved in the definition of the compensation policy; (iii) a report on the compensation policy was presented to the shareholders for approval; and (iv) the compensation assigned is in line with that policy; - ordinary transactions conducted in accordance with market or standard conditions; - the transactions entered into between the Company and its Subsidiaries, or among its Subsidiaries, including where subject to joint control, as well as among affiliates, as long as no related party of Amplifon has a significant interest in the subsidiary or affiliate involved in the transaction; - the transactions which must be completed in order to comply with the supervisory authority s instructions; - immaterial transactions meaning those related party transactions representing a total of not more 1,000,000; regulate the adoption of framework resolutions defining the characteristics and ensuring that complete information about their implementation is provided to the Board at least quarterly; apply the procedure also to urgent transactions. Pursuant to the Regulation, the Company adopted the operational procedures needed to select and manage the related party transactions and, similarly, the Board of Directors defined its own internal regulations governing the approval and execution of the transactions in which a director holds an interest, either directly or indirectly (through third parties). During the year no transactions were carried out which made it necessary to comply with the procedures referred to in the above mentioned regulations. 13. Appointment of statutory auditors As per art. 23 of the Articles of Association, the Board of Statutory Auditors consists of three standing auditors and two alternate auditors, in possession of the requisites (including professional and personal characteristics), including those relative to cumulative appointments and gender equality, rounding up the number of candidates belonging to the least represented gender in the event application of the quota criteria does not result in a whole number, and abilities provided for by law. More in detail, with regard to the professional requisites, pursuant to article 1, par. 3 of Ministerial Decree n. 162 dated 30 March 2000 in reference to par. 2, letters b) and c) of the same article 1, strictly related to the Company s activities is to be construed as related to commercial and corporate law, corporate finance, finance, statistics as well as medicine and electronic engineering, and also like or analogous disciplines while sectors in which the company operates are to be construed as wholesale and retail production and commercialisation of the instruments, devices and products referred to in article 2 of the Articles of Association. The ordinary Shareholders Meeting appoints the Board of Statutory Auditors and determines its remuneration. The minority is entitled to elect one Statutory Auditor and one Alternate Auditor. The Board of Statutory Auditors is appointed, with the exception of what specified in the second to last paragraph of art. 23 of the Articles of Association, on the basis of lists submitted by the shareholders or groups of shareholders who own at least 2% of the shares with voting rights. The lists, where the candidates are listed in sequential numerical order, must be filed at the company registered office at least twenty five days before the date set for the Shareholders Meeting. The Company will publish the lists on its website as well as in accordance with the other modalities indicated by CONSOB in the regulation issued pursuant to art. 147 ter, paragraph 1-bis of Legislative Decree 58/1998 at least twenty one days before the Shareholders Meeting. Each shareholder who presents, or is party to a list, must present the certification issued by a licensed intermediary entitling the shareholder to present the list along with the lists or within the timeframe in which the Company must publish the lists under the law. With regard to the election of a minority Statutory Auditor, if several lists have obtained the same number of votes, the list presented by the majority of shareholders shall prevail. In the event two or more lists which are not connected, including indirectly, with the shareholders who presented or voted for the other, obtain the same number of votes, a run-off election is held between these lists with the participation of all the shareholders present at the Shareholders meeting, with the candidates on the list that obtains the simple majority of votes being elected. With regard to the replacement of the standing auditors in the event of death, resignation or expiration of the term, the alternate auditor belonging to the same list as the previous auditor takes over, provided the compliance with the current law governing gender equality. 131 Amplifon Annual Report 2012

134 14. Composition and functioning of the Board of Statutory Auditors (pursuant to art. 123-bis, par. 2, letter d), TUF) As per the Articles of Association, the Board of Statutory Auditors is comprised of three standing auditors and two alternate auditors who remain in office for three financial years and may be reelected. The Board of Statutory Auditors, appointed on 18 April 2012 and in office through the Shareholders Meeting to approve the 2014 financial statements, consists of the following members: The Statutory Auditors possess the requisite of standing, professional abilities and independence provided for by law, the Articles of Association and the regulations for Corporate Governance to which the issuer adheres and the existence of which is verified by the Board of Statutory Auditors every year. The Board of Statutory Auditors met five times during the year. The meetings lasted, on average, more than two hours. The Board of Statutory Auditors plans to meet, at least five times in The first meeting took place on 4 March. Name Office held In office since List Indep. as per Code % attend. B.S.A. Other appointments Giuseppe Levi Chairman 18/04/2012 M X 100% 12 Maria Stella Brena Standing 18/04/2012 M X 100% 18 Emilio Fano Standing 18/04/2012 M X 100% 13 Mauro Coazzoli Alternate 18/04/2012 M X Claudia Mezzabotta Alternate 18/04/2012 M X -- 5 Key Office held: Chairman, Standing Auditors, Alternate Auditors. List: indicated as M/m depending on whether the statutory auditor was elected on a Majority list or a minority list (art. 144-decies of the Issuer Regulations). Indep.: marked if the statutory auditor qualifies as independent under the Code s criteria, indicating at the bottom of the table if these criteria have been amended or modified in anyway. % attend. B.S.A.: indicates the statutory auditor s attendance record in percentage terms at meetings of the Board of Statutory Auditors (the calculation of this percentage reflects the number of meetings attended by the statutory auditor relative to the number of meetings of the Board of Statutory Auditors held during the year or after the statutory auditor s appointment or through the termination date). Other appointments: indicates the total number of appointments held in companies described in Book V, Title V, Chapters V, VI and VII of the Italian Civil Code. The Board of Statutory Auditors fulfils its duties in accordance with the standards of professionalism and independence provided for by law, in the Articles of Association and the regulations for Corporate Governance to which the issuer adheres. The Board of Statutory Auditors carries out its supervisory activities in accordance with the applicable law. Through a constant exchange of information regarding the independent auditors activities, the Board of Statutory Auditors verifies that the independent auditors possess the requisite independence in existence at the time of their appointment. The Chairman of the Board of Statutory Auditors or a delegated statutory auditor attended all the Internal Control Committee now called Risk and Control Committee - meetings and coordinated his supervisory activities through the exchange of information and updates provided by the Head of Internal Audit. The Board of Statutory Auditors, in its capacity as Internal Control Committee and Internal Audit, carried out all of the supervisory activities referred to in art. 19 of Legislative Decree 39/ Relations with shareholders The company has created an extensive, easily accessible section on its corporate website, containing all the information of interest to shareholders. Currently the Investor Relations and Corporate Communication Manager is Ms. Emilia Trudu who coordinates and monitors the information provided to shareholders, financial analysts and institutional investors in full compliance with the rules established for corporate disclosures. In order to fulfil her duties, the Investor Relations and Corporate Communication Manager is supported by an internal resource and an external company specialized in media relations. The Company actively endeavours to provide investors, the market and the press with adequate information in compliance with the law and the applicable regulations, particularly with regard to the handling of price sensitive information. Toward this end the Company regularly issues press releases, meets periodically with institutional investors and with the financial market, and constantly updates the corporate documentation made available on its website. 16. Shareholders meetings (pursuant to art. 123-bis, par. 2, letter c), TUF) The Shareholders Meetings are regulated by the Articles of Associations as well as by a specific set of regulations which was approved by the Shareholders Meeting held on 24 April 2007 and which can be found in the Investors/Corporate Governance/ Statutory and codes section of the corporate website. The Articles of Association and the Shareholders Meetings Regulations govern all aspects of the Shareholders Meetings in accordance with current norms and regulations. With the exception of those powers attributed by law or the Articles of Association to the Shareholders Meeting, the Board of Directors is vested with the broadest powers for the company s ordinary and extraordinary administration and may perform all activities deemed necessary to achieve the company s purpose (please also refer to Item above). The above mentioned Regulations guarantee each shareholder s right to take the floor and participate in discussions. During the Shareholders Meeting the Board reported on its activities in order to ensure that the shareholders were adequately informed and that they might help contribute to informed resolutions. 17. Other corporate governance practices (pursuant to art. 123-bis, par. 2, letter a), TUF) No other Corporate Governance practices have been adhered to other than those described above. 18. Changes since year end No changes have been made to the company s corporate governance structure since year end. 132

135 Report on Operations at 31 December 2012 Annex 1 List of Amplifon S.p.A s directors appointments in other companies at 31 December Name Office held in Amplifon S.p.A. Other companies Office held Anna Maria Formiggini Honorary Chairman Amplifin S.p.A. Chairman Susan Carol Holland Chairman Amplifin S.p.A. Deputy Chairman Franco Moscetti Giampio Bracchi Maurizio Costa Andrea Guerra Umberto Rosa Chief Executive Officer Independent non-executive Director Independent non-executive Director Independent non-executive Director Independent non-executive Director Diasorin S.p.A. Fideuram Investimenti SGR S.p.A. Touring Club Italiano IntesaSanPaolo Private Banking S.p.A. CIR S.p.A. Banca del Sempione S.A. Perennius Capital Partners SGR Arnoldo Mondadori Editore S.p.A. Mondadori France Sas Luxottica Group S.p.A. Luxottica S.r.l. OPSM Group PTY LIMITED Oakley INC Multiopticas Internacional SL Luxottica US HOLDINGS CORP Luxottica Retail UK LTD Luxottica Retail North America INC CID - Cardiovascular Implantables Devices - S.p.A Finlombarda SGR S.p.A. Independent Director Independent Director Director Chairman Director Director Chairman Deputy Chairman and Chief Executive Officer Deputy Chairman Chief Executive Officer Director Chairman of the Board Director Chairman of the Board Director Director Director Independent Director Independent Director 1 The offices held with listed companies or, at any rate, of note are listed as per the information provided by the Directors. 133 Amplifon Annual Report 2012

136 Comments on the Financial Results of Amplifon S.p.A. Reclassified Income Statement ( thousands) FY 2012 FY 2011 Recurring Total % (on recurring) Recurring Nonrecurring Nonrecurring Total % (on recurring) Revenues from sales and services 224, , ,0% 221, , % Raw materials, consumables and supplies and change in raw materials, consumables and supplies (29,466) (29,466) -13,1% (27,893) (27,893) -12.6% Personnel costs (46,528) (46,528) -20,7% (46,359) (46,359) -20.9% External services (115,770) (115,770) -51,5% (118,355) (118,355) -53.4% Other income 11,270 11,270 5,0% 11,864 11, % Other expenses (181) (181) -0,1% (655) (655) -0.3% Gross operating margin (EBITDA) 44,006-44,006 19,6% 40,117-40, % Depreciation and writedowns of noncurrent assets (6,907) (6,907) -3,1% (6,215) (6,215) -2.8% Operating profit (EBIT) 37,099-37,099 16,5% 33,902-33, % Income, expenses, valuation and adjustments of financial assets 14,191 (10,500) 3,691 1,6% 20,783 20, % Net financial expenses (16,335) (16,335) -7,3% (15,501) (7,874) (23,375) -7.0% Exchange differences and non hedging accounting instruments ,0% % Profit (loss) before taxes 34,985 (10,500) 24,485 10,9% 39,669 (7,874) 31, % Current tax (5,874) (5,874) -2,6% (6,197) (6,197) -2.8% Deferred tax (1,334) (1,334) -0,6% (2,733) (2,733) -1.2% Net profit (loss) 27,777 (10,500) 17,277 7,7% 30,739 (7,874) 22, % EBITDA: the operating result before charging amortisation, depreciation and impairment of both tangible and intangible assets. EBIT: is the operating result before financial income and charges and taxes. 134

137 Report on Operations at 31 December 2012 Reclassified Balance Sheet The reclassified Balance Sheet aggregates assets and liabilities according to operating functionality criteria, subdivided by convention into the following three key functions: investments, operations and finance. ( thousands) 31/12/ /12/2011 Change Goodwill Other intangible assets 6,607 3,929 2,678 Tangible assets 20,162 19,040 1,122 Financial fixed assets 469, ,931 82,476 Other non-current financial assets Non current assets 497, ,676 86,353 Inventories 11,108 10, Trade receivables (1) 44,085 37,448 6,637 Other receivables (2) 8,425 5,549 2,876 Current assets (A) 63,618 53,780 9,838 Operating assets 560, ,456 96,191 Trade payables (3) (28,558) (26,704) (1,854) Other payables (4) (31,047) (32,439) 1,392 Provisions for contingency and obligations (current portion) - (634) 634 Current liabilities (B) (59,605) (59,777) 172 Net working capital (A)+(B) 4,013 (5,997) 10,010 Derivative instruments (5) (3,632) (2,206) (1,426) Deferred tax assets 26,529 27,737 (1,208) Provisions for contingency and obligations (non-current portion) (10,136) (7,759) (2,377) Employee benefits (non-current portion) (9,220) (6,781) (2,439) Loan fees (6) 2,624 3,502 (878) NET INVESTED CAPITAL 507, ,172 88,035 Net Equity 296, ,128 14,524 Net short-tem financial indebtedness 31,448 (64,998) 96,446 Net medium and long-term financial indebtedness 179, ,041 (22,935) Total net financial indebtedness 210, ,043 73,512 OWN FUNDS AND NET FINANCIAL INDEBTEDNESS 507, ,172 88,035 (1) The item Trade receivables includes Trade receivables and Receivables related parties. (2) The item Other receivables includes Other receivables and Other receivables related parties. (3) The item Trade payables includes Trade payables and Trade payables related parties. (4) The item Other payables includes Other payables third parties, Other payables related parties and Tax payables not included in the net financial position. (5) The item Derivative instruments includes cash flow hedging instruments, fair value hedge and non hedge accounting instruments not comprised in the net financial position. (6) The item Loan fees is disclosed in the balance sheet as a direct reduction of the short and long-term components of the Financial Paybles and financial liabilities. 135 Amplifon Annual Report 2012

138 Condensed Reclassified Cash Flow Statement The condensed cash flow statement represents a summary version of the reclassified cash flow statement detailed in the following pages and its purpose is, starting from the EBIT, to detail the flows generated or absorbed by operating, investing and financing activities. ( thousands) FY 2012 FY 2011 Operating Income (EBIT) 37,099 33,903 Amortization, depreciation and write-downs 6,907 6,215 Provision, other non monetary items and gain/losses from disposals 3,812 3,018 Net financial expenses (12,700) (14,550) Write down of financial current assets - (7,874) Dividends received 14,191 20,783 Taxes paid (9,714) (8,161) Change in net working capital (5,652) 2,727 Cash flow generated from (absorbed by) operating activities (A) 33,943 36,061 Cash flow generated (absorbed) by operating investing activities (B) (10,730) (8,712) Free cash flow (A +B) 23,213 27,349 Equity investments purchase/share capital increases in controlled entities (C) (91,168) - (Purchase) sale of other investments and securities (D) - - Cash flow generated from (absorbed by) investing activities (B+C+D) (101,898) (8,712) Hedging instruments - 21 Other non-current assets (77) 178 Fees paid on medium and long term financing - - Dividends paid (7,992) (7,051) Share capital increases 2, Net cash flow from the period (73,512) 21,062 Opening net financial indebtedness (137,043) (158,105) Changes in net financial position (73,512) 21,062 Closing net financial indebtedness (210,555) (137,043) 136

139 Report on Operations at 31 December 2012 Revenue from sales and services ( thousands) FY 2012 % FY 2011 % Change % Hearing Aid Line Sales 217, % 214, % 3, % Biomedical Line Sales 3, % 3, % 4 0.1% Total Sales 221, % 218, % 3, % Hearing Aid Line Services 2, % 2, % (267) -10.5% Biomedical Line Services % % (25) -3.0% Total Services 3, % 3, % (292) -8.6% Revenues from Sales and Services 224, % 221, % 3, % Revenue from sales and services, including the 185 thousand generated by the French branch, increased by Euro thousand (+1.4%) with respect to the prior year rising from the 221,515 thousand posted in 2011 to 224,681 thousand to increased hearing aid sales. The overall market conditions in which the company operated in 2012 continued to be impacted by a recession which has yet to be overcome. All of the main Italian and European economic-financial indicators point to the persistence of important and unresolved systemic economic problems. In light of all this, the ability of Amplifon S.p.A. to improve its performance with respect to 2011 seems all the more significant. The increase in turnover in 2012 reflects the positive impact of the commercial and financial strategies adopted in previous years and implemented with determination by the company s management. At the end of the period the stores in the region amounted to 469, further increasing the widespread presence in all of Italy s provinces. This strategy also made it possible to capitalize even more on the success of this year s TV advertising campaigns. All the new stores are now designed on the basis of the new concept format which has made it possible to achieve qualitative standards of pure excellence. At the same time, the transformation of the old concept stores continued in order to introduce the new standards which have been very well received by our customers. Diversification in the range of accessories offered together with our hearing solutions and great customer interaction have become the unique features of these stores. The business developed through the store in store channel continued to generate important results and the company further increased their number. Store personnel was offered continuous training which provided Amplifon with a regional network capable of offering quality service. Lastly, careful management of the product mix proved key to the company s strategy becoming an integral part of providing hearing solutions which are even more focused on maximizing customer satisfaction. 137 Amplifon Annual Report 2012

140 Gross operating profit (EBITDA) ( thousands) FY 2012 % FY 2011 % Change Change % Gross operating profit (EBITDA) 44, % 40, % 3, % Gross operating profit (EBITDA) amounted to 44,006 thousand in 2012 versus 40,117 thousand in 2011, an increase of 3,889 thousand (9.7%). Operating costs in 2012 amounted to 180,675 thousand, in line with 2011, though sales rose. The significant increase in EBITDA is due to both a positive sales performance and careful management of the company s costs. Greater efficiency in a few processes, above all relating to the distribution of products to the points of sale, made it possible to optimize resources which helped to improve margins. Operating Income (EBIT) ( thousands) FY 2012 % FY 2011 % Change Change % Operating Income (EBIT) 37, % 33, % 3, % The operating income (EBIT) amounted to 37,099 thousand in 2012 versus 33,902 thousand posted in 2011, an increase of 3,197 (9.4%), in line with the increase in EBITDA. 138

141 Report on Operations at 31 December 2012 Profit before tax ( thousands) FY 2012 FY 2011 Nonrecurring Non- Recurring Total Recurring recurring Total Profit before tax 34,985 (10,500) 24,485 39,669 (7,874) 31,795 Profit before tax in 2012 fell with respect to 2011 by 7,310 thousand, due primarily to an increase in non-recurring items relating to the write-downs of equity investments and a drop in the dividends received which was partially offset by the rise in EBIT. Net profit ( thousands) FY 2012 FY 2011 Nonrecurring Non- Recurring Total Recurring recurring Total Net profit 27,777 (10,500) 17,277 30,739 (7,874) 22,865 Net profit reached 17,277 thousand in 2012 versus a net profit of 22,865 thousand in Non-current assets ( thousands) 31/12/ /12/2011 Change Goodwill Other intagible fixed assets 6,607 3,929 2,678 Tangible fixed assets 20,162 19,040 1,122 Financial fixed assets 469, ,931 82,476 Guarantee Deposits Non-current Assets 497, ,676 86,353 Non-current assets amounted to 497,029 thousand at 31 December 2012, versus 410,676 thousand at 31 December 2011, an increase of 86,353 thousand attributable to: an increase in intangible assets relating primarily to the development of new software to support both the sales network and head office; an increase in plant, property and equipment as a result of the expansion of the sales network, as well as the continued renewal of the branch layouts under the New Concept programme launched in 2008; an increase in the value of equity investments due primarily to capital contributions of 18,000 thousand made to the German subsidiary Amplifon Deutschland GmbH and of 71,925 thousand to the Dutch subsidiary Amplifon Nederland B.V. through the capitalization of an intercompany loan of the same amount and the periodic valuation of the stock options and stock grants held by employees of the subsidiaries; a decrease in the value of equity investments after adjusting the book value of the German subsidiary Amplifon Deutschland GmbH and in the English subsidiary Amplifon UK by 7,000 thousand and 3,500 thousand, respectively, to reflect their recoverable value. 139 Amplifon Annual Report 2012

142 Net invested capital Net invested capital amounted to 507,207 thousand at 31 December 2012 versus 419,172 thousand at 31 December 2011, an increase of 88,035 thousand as a result of: the increase in non-current assets described above; an increase in trade receivables of 6,637 thousand due largely to the large number of sales concluded in the latter part of the year; an increase in the amounts owed the French branch by other Group companies in France; an increase in trade payables of 1,854 thousand attributable primarily to the greater amount of merchandise purchased in the latter part of the year; a drop in the fair value of derivatives of 1,426 thousand; a decrease in deferred taxes of 1,208 thousand explained primarily by the brand amortization schedule in effect since 2008; an increase in provisions for risks and charges of 2,377 thousand due mainly to the actuarial value of the agents leaving indemnities; an increase in liabilities relating to employee benefits of 2,439 thousand following recognition of provisions for the top management s long term incentive plans; a decrease in the fees and commissions owed on the bank loans taken out for the NHC Group acquisition in Australia. 140

143 Report on Operations at 31 December 2012 Net Equity ( thousands) 31/12/ /12/2011 Change Share capital 4,468 4, Share premium account 186, ,321 3,458 Statutory reserve Treasury shares (44,091) (44,091) - Stock option reserve 10,790 8,484 2,306 Cash flow hedges reserve (3,074) (2,480) (594) Extraordinary reserve 2,767 2,767 - Income brought forward 120, ,906 14,897 Income for the year 17,277 22,865 (5,588) Net Equity 296, ,128 14,525 Net equity amounted to 296,653 thousand at 31 December 2012 versus 282,129 thousand at 31 December 2011, an increase of 14,525 thousand, explained by: an increase in share capital and the share premium reserve of 2,310,089 shares following the exercise of stock options; an increase in the stock option reserve; the negative impact of interest rate hedges recognized on the basis of hedge accounting principles; the net profit posted in Net Financial Indebtedness ( thousands) 31/12/ /12/2011 Change Net medium and long-term financial indebtedness 179, ,041 (22,935) Short tem net financial indebtedness 85,277 (11,951) 97,228 Cash and equivalents (53,828) (53,047) (781) Net Financial Indebtedness 210, ,043 73,512 Net financial indebtedness amounted to 210,555 thousand at 31 December 2012, an increase of 73,512 thousand with respect to 31 December The increase in debt is primarily attributable to the transactions carried out with subsidiaries described in the section on non-current assets. The careful management of accounts receivable, particularly with regard to credit management, made it possible to generate good operating cash flow which resulted in a drop in the medium/long term portion of debt. The undrawn portion of credit lines granted amounted to 44.5 million, in addition to a 30 million line of credit available as of August 2013 for the scheduled repayments called for under the private placement agreement. 141 Amplifon Annual Report 2012

144 Covenants The USD 155 million private placement (equal to million including the fair value of the currency hedges which set the Euro/USD exchange rate at ) issued by Amplifon USA and guaranteed by Amplifon S.p.A. includes the following covenants (which will be subject to any stricter covenants found in other existing loan agreements): the ratio of Group net financial indebtedness to Group shareholders equity must not exceed the value of 1.5; the ratio of Group net financial indebtedness to Consolidated EBITDA in the last four quarters (determined with reference to recurring business only on the basis of restated figures where there were significant changes to the structure of the Group) must not exceed the value of 3.5. With regard to the syndicated loan granted to Amplifon S.p.A. and the French branch of million, in addition to the tranches granted to Amplifon Nederland BV and Amplifon Australia Pty, guaranteed by Amplifon S.p.A., for a total of 86.5 million and A$ 60.5 million, respectively, the following covenants are in place which, as they are more restrictive, also extend to the private placement. The Consolidated net financial indebtedness/consolidated EBITDA ratio of the last 4 quarters (determined with reference to recurring business only on the basis of restated figures where there were significant changes to the structure of the Group) must not exceed: Period Value Up to 31 December Up to 30 June Up to 31 December Up to 30 September The ratio between the consolidated EBITDA for the last 4 quarters (determined with reference to recurring business only on the basis of restated figures where there were significant changes to the structure of the Group) and the consolidated net interest charges for the last 4 quarters should not be less than a value of 4.0. At 31 December 2012 the value of the ratios was as follows: Value Consolidated Net financial indebtedness/group net equity 0.71 Consolidated Net financial indebtedness/group EBITDA for the last 4 quarters 2.11 Group EBITDA for the last 4 quarters to consolidated net finance charges 5.69 There will be other covenants with reference to the syndicated loan and the private placement limiting the amount of guarantees that may be issued, the sale of certain investments and entering into sale and lease back transactions or extraordinary transactions. More in detail, investments will be capped only if the ratio of net financial indebtedness and EBITDA exceeds 2.5x in the last four quarters of the prior fiscal year, namely These undertakings and covenants are normal international practice. 142

145 Report on Operations at 31 December 2012 Reclassified Cash Flow Statement The reclassified cash flow statement shows the change in net debt between the start and the end of the period. The notes to the financial statements include a cash flow statement based on cash holdings as per IAS 7 showing the change in opening and closing cash in the period. ( thousands) 31/12/ /12/2011 OPERATING ACTIVITIES: Group net income (loss) 17,277 22,865 Amortization, depreciation and write-downs: - other intangible fixed assets 1,314 1,252 - tangible fixed assets 5,592 4,963 Total amortization, depreciation and write-downs 6,906 6,215 Provisions and other non-monetary items 3,813 2,997 (Gains) losses from sale of fixed assets - 21 Financial income and charges 12,614 2,108 Current and deferred income taxes 7,209 8,930 Change in assets and liabilities Utilization of provisions (1,111) (1,250) (Increase) decrease in inventories (358) 1,087 Decrease (increase) in trade receivables (7,135) 6,690 Increase (decrease) in trade payables 1,878 (5,976) Increase (decrease) in other receivables/payables non-financial net of tax receivables/payables 1,073 2,176 Total change in current assets and liabilities (5,653) 2,727 Dividends received 14,191 20,783 Interest received/paid (12,700) (14,550) Taxes paid (9,714) (8,161) Write down of financial current assets - (7,874) Cash flow generated from (absorbed by) operating activities 33,943 36,061 INVESTING ACTIVITIES: Purchase of intangible fixed assets (3,994) (2,180) Purchase of tangible fixed assets (6,745) (6,619) Consideration from sale of tangible fixed assets and businesses 9 87 Cash flow generated from (absorbed by) investing activities (10,730) (8,712) Cash flow generated by operating and investing activities (Free cash flow) 23,213 27,349 Business combinations (91,168) - (Purchase) sale of other investments and securities - - Cash flow generated from (absorbed by) investing activities (91,168) - Cash flow generated from (absorbed by) investing activities (101,898) (8,712) FINANCING ACTIVITIES: Hedging derivatives - 21 Other non-current assets (77) 178 Dividends distributions (7,992) (7,051) Capital increases 2, Cash flow generated from (absorbed by) financing activities (5,557) (6,287) Changes in net financial indebtedness (73,512) 21,062 Opening net financial indebtedness (137,043) (158,105) Changes in net indebtedness (73,512) 21,062 Closing of net financial indebtedness (210,555) (137,043) 143 Amplifon Annual Report 2012

146 The change in net financial indebtedness of 73,512 thousand reflects the effects of: Investing activities: a net increase in plant, property and equipment and intangible assets of 10,730 thousand relating primarily to the renewal of stores and implementation of new centralized IT systems for the processing of corporate data; an increase in the value of equity investments following the transactions carried out with the Dutch and German subsidiaries described above amounting to 91,168 thousand; acquisition of 51% of the Turkish company Maxtone for 1,100 thousand. Operating activities: interest payable on borrowings and other net financial charges amounting to 12,700 thousand; payment of taxes of 9,714 thousand; dividends received from subsidiaries amounting to 14,191 thousand; cash flow generated by current operations of 42,166 thousand. Financing activities: capital increase following the exercise of stock options of 2,512 thousand; dividends paid amounting to 7,992 thousand. 144

147 Report on Operations at 31 December 2012 Related Party Transactions Pursuant to Consob Regulation n of 12 March 2010, on 24 October 2012, Amplifon S.p.A. s Board of Directors, subject to the favourable opinion of the Independent Directors Committee, approved new regulations for related party transactions, with a view to more effective application, which took effect on 1 December 2012 and which substitute the regulations approved by the Board on 3 November The transactions carried out with related parties, including intra-group transactions, do not qualify as atypical, unusual, are part of the Group companies normal course of business and are conducted at arm s length. The information regarding related party transactions, including the information requested in Consob Bulletin of 28 July 2006, can be found in Note 32 of the separate financial statements. Controlling Entities Transactions carried out with Amplifin S.p.A. relate to: a lease for the premises owned by Amplifin S.p.A., located in Milan, via Ripamonti 133, the registered office and head office of Amplifon S.p.A. and the related share of condominium and maintenance costs; leases relating to stores owned by the controlling entity and used in the business; and a partial secondment contract of Amplifon S.p.A. employees. Subsidiaries Financial transactions with Subsidiaries Amplifon S.p.A. and its subsidiaries have short and long term loans outstanding, and participate in cash pooling. All such transactions are subject to market rates. Service contracts with Subsidiaries Amplifon SpA has entered into contracts governing the provision of certain centralised services, such as strategic planning, human resource management (with special reference to the shared remuneration policy, incentives, the training and hiring of personnel, and career internationalisation programmes), marketing, administration and control, assistance in banking relationships and the implementation of common information systems, with its subsidiaries. The cost of these services are charged to them by Amplifon S.p.A. on the basis of contractual parameters. 145 Amplifon Annual Report 2012

148 Security Plan On 11 March 2004 the Board of Directors approved the Security Plan pursuant to 34 (G) Law 196/2003 as supplemented and amended. At the meeting of 24 April 2010 Franco Moscetti was appointed Person in charge of the handling of personal data under the Law; such document has been updated also in FY Branch Offices Amplifon S.p.A. has set up a branch office - Amplifon Succursale de Paris - with permanent offices in Arcueil, 22 avenue Aristide Briand, France. 146

149 Report on Operations at 31 December 2012 Outlook It is foreseeable that the domestic market conditions will continue to be weak in The main international economic-financial forecasts do not envision a recovery in Italy before Moreover any recovery in the GDP would not have a positive effect on unemployment and consumer confidence immediately, but only after several months. It is likely, therefore, that the positive effects of an inverted negative economic trend would not have a significant impact on the retail market in which Amplifon SpA operates before the second half of Despite what appears to be a very complex environment, Amplifon SpA possesses the ability and the determination needed to continue to produce positive results. The success of the commercial policies implemented over the last few years have confirmed Amplifon s capacity to work well even in moments of economic turmoil. The Company will continue to invest in new stores in order to further expand its domestic network and maintain the high quality standards of our points of sale. Providing excellent after-sale care will continue to ensure customer satisfaction. Advertising, which has been the source of great satisfaction over the years, will be developed and renewed with great care on both a national (television campaigns) and a local level. Amplifon S.p.A. will continue to pay a lot of attention to the new products that become available thanks to technological innovations in order to provide the most avant-garde solutions. Continuous training of the sales network will go on being a pillar of our strategic activities. In a market environment as weak as the current one, cost control becomes even more important in order to maximize results. We will continue to work to optimize the main corporate processes which will help to free up resources to support the development of our business. With regard to the outlook for the operations of the other Group companies, please refer to the Report on Operations attached to the consolidated financial statements. 147 Amplifon Annual Report 2012

150 Consolidated Statement of Financial Position 150 Consolidated Income Statement 152 Statement of Comprehensive Income 153 Statement of Changes in Consolidated Net Equity 154 Consolidated Cash Flow Statement 156 Supplementary Information to the Financial Statements 157 Explanatory Notes General information 158 Consolidated Financial Statements at 31 December Measurement criteria Financial risk management Segment information Acquisitions and goodwill Intangible fixed assets Tangible fixed assets Other non-current assets Derivatives and hedge accounting Inventories

151 Consolidated Financial Statements at 31 December Receivables Cash and cash equivalents Share capital and net equity Net financial position Financial liabilities Provisions for risks and charges (medium/long term) Liabilities for employees benefits Other long-term liabilities Trade payables Other payables Provisions for risks and charges (current portion) Short-term financial debt Deferred tax assets and liabilities Revenues from sales and services Employee costs Other income and revenue Amortisation, depreciation and impairment Financial income, charges and changes in value of financial assets Income tax Stock option - Performance stock grant Investments in jointly-controlled and associated companies Earnings per share Transactions with parent companies and related parties Guarantees provided, commitments and contingent liabilities Transactions arising from untypical/unusual operations Translation of foreign companies financial statements Subsequent events 233 Annexe I Consolidation Area 234 Annexe II Information pursuant to 149-duodecies of Consob Issuers Regulations 236 Annexe III Declaration in respect of the Consolidated Financial Statements pursuant to 154-bis of Legislative Decree 58/ Independent Auditor s Report at 31 December Amplifon Annual Report 2012

152 Consolidated Statement of Financial Position ( thousands) 31/12/ /12/2011 Change ASSETS Non-current assets Goodwill Note 5 551, ,443 8,410 Intangible fixed assets with finite useful life Note 6 144, ,819 (9,198) Tangible fixed assets Note 7 94,070 91,380 2,690 Investments valued at equity 1,348 1, Financial assets measured at fair value through profit or loss Note 8 3,742 7,421 (3,679) Long-term hedging instruments Note 9 6,605 10,744 (4,139) Deferred tax assets Note 23 48,039 48,408 (369) Other assets Note 8 34,247 31,610 2,637 Total non-current assets 884, ,908 (3,383) Current assets Inventories Note 10 34,196 34,651 (455) Trade receivables Note , ,838 6,277 - parent companies Note (53) Tax receivables Note 11 7,955 5,297 2,658 Other receivables Note 11 19,364 20,040 (676) Hedging instruments Note Cash and cash equivalents Note , ,305 2,875 Total current assets 284, ,131 11,211 TOTAL ASSETS 1,168,867 1,161,039 7,

153 Consolidated Financial Statements at 31 December 2012 ( thousands) 31/12/ /12/2011 Change LIABILITIES Net Equity Note 13 Share capital 4,468 4, Share premium account 186, ,317 3,458 Treasury shares (44,091) (44,091) - Other reserves 19,627 19, Profit (loss) carried forward 219, ,908 34,693 Profit (loss) for the period 43,182 42, Group net equity 429, ,644 38,918 Minority interests Total net equity 430, ,170 38,988 Non-current liabilities Financial liabilities Note , ,132 (116,418) - related parties Note Provisions for risks and charges Note 16 32,525 27,123 5,402 Liabilities for employees benefits Note 17 15,203 11,101 4,102 Hedging instruments Note 9 15,319 16,668 (1,349) Deferred tax liabilities Note 23 53,081 53,572 (491) Payables for business acquisitions Note 18 3,774 1,063 2,711 Other long-term debt Note (224) Total non-current liabilities 404, ,158 (106,267) Current liabilities Trade payables Note 19 98,016 96,613 1,403 -related parties Note Payables for business acquisitions Note Other payables Note 20 87,827 86, Hedging instruments Note 9 2, ,774 Tax payables 25,631 23,563 2,068 Provisions for risks and charges Note ,107 (418) Liabilities for employees benefits (628) Financial payables Note ,046 49,104 69,942 - related parties Note Total current liabilities 333, ,711 75,107 TOTAL LIABILITIES 1,168,867 1,161,039 7, Amplifon Annual Report 2012

154 Consolidated Income Statement ( thousands) FY 2012 FY 2011 Change Revenues from sales and services Note , ,442 19,169 Raw materials, consumables and supplies and change in raw materials, consumables and supplies (189,731) (178,527) (11,204) Personnel expenses Note 25 (257,783) (248,932) (8,851) - parent companies Note (34) Services (255,336) (256,779) 1,443 - parent companies Note 33 (1,973) (1,921) (52) Other income Note 26 1,628 2,663 (1,035) Other expenses (217) (1,356) 1,139 Gross operating profit (EBITDA) 145, , Amortization, depreciation and impairment Note 27 Amortisation of intangible fixed assets (22,888) (21,784) (1,104) Depreciation of tangible fixed assets (23,571) (22,028) (1,543) Impairment and impairment reversals of non-current assets (827) (406) (421) (47,286) (44,218) (3,068) Operating result 97, ,293 (2,407) Financial income, charges and value adjustments to financial assets Note 28 Group's share of the result of associated companies valued at equity (23) Other income and charges, impairment and revaluations of financial assets 518 (178) 696 Interest income and charges (23,194) (26,067) 2,873 - related parties Note 33 (41) - (41) Other financial income and charges (2,702) (1,940) (762) Exchange gains and losses (478) Gain (loss) on assets measured at fair value (753) (755) 2 (25,681) (27,989) 2,308 Profit (loss) before tax 72,205 72,304 (99) Current and deferred tax Note 29 Current tax (30,199) (28,370) (1,829) Deferred tax 1,136 (1,202) 2,338 (29,063) (29,572) 509 Total net profit (loss) 43,142 42, Minority interests (40) 34 (74) Net profit (loss) attributable to the Group 43,182 42, Profit (loss) per share ( per share) and dividend per share Note 32 FY 2012 FY 2011 Earnings per share - Base Diluted Dividend per share 0.043(*) (*) Proposed by the Board of Directors to the shareholders meeting called for April 17 th

155 Consolidated Financial Statements at 31 December 2012 Statement of Comprehensive Income ( thousands) FY 2012 FY 2011 Income (loss) for the period 43,142 42,732 Gains (losses) recognised directly in cash flow hedge reserve (A) (5,609) (5,770) Deferred tax assets (liabilities) on gains (losses) recognised directly in cash flow hedge reserve (B) 1,512 1,545 Gains (losses) recognised directly in translation reserve (C) (878) 13,770 Income (loss) recognised directly in net equity (4,975) 9,545 Transfers from cash flow hedge reserve (D) 4,030 (2,542) Deferred tax assets (liabilities) on transfers from cash flow hedge reserve (E) (1,171) 700 Transfers from translation reserve (F) - - Comprehensive consolidated income (loss) for the period (A)+(B)+(C)+(D)+(E)+(F) (2,116) 7,703 Comprehensive income (loss) for the period 41,026 50,436 Attributable to Group 41,079 50,403 Attributable to Third parties (53) Amplifon Annual Report 2012

156 Statement of Changes in Consolidated Net Equity ( thousands) Share capital Share premium account Legal reserve Other reserves Treasury shares reserve Balance at 1 January , , ,770 (44,091) Appropriation of FY 2010 result Share capital increase Dividends paid Implicit cost of stock options and stock grants Note 30 Other changes hedge accounting Note 9 - translation difference - result as at 31 December 2011 Total comprehensive income (loss) for the period Balance at 31 December , , ,770 (44,091) Balance at 1 January , , ,770 (44,091) Appropriation of FY 2011 result Share capital increase 46 2,466 Dividends paid Implicit cost of stock options and stock grants Note 30 Other changes hedge accounting Note 9 - translation difference - result as at 31 December 2012 Total comprehensive income (loss) for the period Balance at 31 December , , ,770 (44,091) 154

157 Consolidated Financial Statements at 31 December 2012 Stock option reserve Cash flow hedge reserve Profit (loss) carried forward Translation difference Profit (loss) for the year Total Shareholders equity Minority interests net equity Total net equity 6,436 2, ,440 (3,375) 30, , ,822 30,527 (30,527) (7,051) (7,051) (7,051) 2,472 2,472 2,472 (214) (8) (8) (66) (74) (6,066) (6,066) (6,066) 13,771 13,771 (1) 13,770 42,698 42, ,732 (6,066) 13,771 42,698 50, ,436 8,694 (3,404) 184,908 10,396 42, , ,170 8,694 (3,404) 184,908 10,396 42, , ,170 42,698 (42,698) - - 2,512 2,512 (7,992) (7,992) (7,992) 3,332 3,332 3,332 (992) (13) (13) (1,238) (1,238) (1,238) (865) (865) (13) (878) 43,182 43,182 (40) 43,142 (1,238) (865) 43,182 41,079 (53) 41,026 11,034 (4,642) 219,601 9,531 43, , , Amplifon Annual Report 2012

158 Consolidated Cash Flow Statement ( thousands) FY 2012 FY 2011 OPERATING ACTIVITIES Net profit (loss) 43,142 42,732 Amortization, depreciation and write-downs: 47,286 44,218 - intangible fixed assets 23,505 21,784 - tangible fixed assets 23,640 22,426 - goodwill Provisions 15,275 12,638 (Gains) losses from sale of fixed assets 63 (475) Associated companies' share of profit (63) (86) Financial income and charges 25,744 28,076 Current, deferred tax assets and liabilities 29,063 29,572 Cash flow from operating income before working capital change 160, ,675 Utilization of provisions (8,076) (10,642) (Increase) decrease in inventories 1,285 1,814 Decrease (increase) in trade receivables (6,701) (5,140) Increase (decrease) in trade payables 1,504 (14,376) Changes in other receivables and other payables 2,445 (1,170) Total change in assets and liabilities (9,543) (29,514) Dividends received Interest received (paid) (22,230) (28,221) Taxes paid (28,580) (23,309) Cash flow generated from (absorbed by) operating activities (A) 100,230 75,665 INVESTING ACTIVITIES: Purchase of intangible fixed assets (8,415) (7,140) Purchase of tangible fixed assets (26,972) (27,981) Consideration from sale of tangible fixed assets 1,820 3,112 Cash flow generated from (absorbed by) investing activities (B) (33,567) (32,009) Purchase of subsidiaries and business units (13,029) (3,927) Increase (decrease) in payables through business acquisition 2,956 (5,240) (Purchase) sale of other investments and securities 4,176 (868) Cash flow generated from (absorbed by) acquisition activities (C) (5,897) (10,035) Cash flow generated from (absorbed by) investing activities (B+C) (39,464) (42,044) FINANCING ACTIVITIES: Increase (decrease) in financial payables (48,656) (42,387) (Increase) decrease in financial receivables 1, Derivative instruments and other non-current assets (5,428) (2,979) Dividend distributions (7,992) (7,051) Capital increases and minorities contributions 2, Cash flow generated from (absorbed by) financing activities (D) (58,294) (51,447) Net increase in cash and cash equivalents (A+B+C+D) 2,472 (17,826) Cash and cash equivalents at beginning of period 108, ,926 Effect of discontinued operations on liquid funds - - Effect of exchange rate fluctuations on liquid funds (50) 810 Liquid assets acquired Flows of cash and cash equivalents 2,472 (17,826) Cash and cash equivalents at the end of period 111, ,305 Related-party transactions relate to rentals of the main office and certain stores. The detail is exposed in the Note

159 Consolidated Financial Statements at 31 December 2012 Supplementary Information to the Financial Statements The fair value of the assets and liabilities acquired is summarised in the following table: ( thousands) FY 2012 FY Goodwill 9,216 1,271 - Customer lists 3,670 2,168 - Trademarks and non-competition agreements Other intangible fixed assets Tangible fixed assets Financial fixed assets Current assets 1, Provisions for risks and charges (378) (61) - Current liabilities (880) (315) - Other non-current assets and liabilities (1,497) (46) - Minority interest (2) 2 Total investments 12,611 3,872 Net financial debt acquired Total business combination 13,029 3,927 (Increase) decrease in payables for businesses combinations (2,956) 5,240 Disposal of businesses (reduction in earn-outs), purchase of investments and shares (4,176) 868 Cash flow absorbed by (generated from) acquisition activities 5,897 10,035 (Cash and cash equivalents acquired) (453) (395) Net cash flow absorbed by (generated from) acquisition activities 5,444 9, Amplifon Annual Report 2012

160 Explanatory Notes 1. General information The Amplifon Group is the world leader in the distribution of hearing systems (hearing aids) and their adjustment and customization to hypo-acusic patients needs. The Parent company, Amplifon S.p.A. is based in Milan, in Via Ripamonti 133. The Group is controlled directly by Ampliter N.V. and indirectly by Amplifin S.p.A., owned by Susan Carol Holland, with 100% of the shares, whilst Anna Maria Formiggini Holland retains usufruct. The consolidated financial statements at 31 December 2012 have been prepared in accordance with International Accounting Standards and the regulations implementing Article 9 of legislative Decree No. 38 of 28 February These standards include the IAS and IFRS issued by the International Accounting Standard Board, as well as the SIC and IFRIC interpretations issued by the International Financial Reporting Interpretations Committee, which were endorsed in accordance with the procedure set out in Article 6 of Regulation (EC) no of 19 July 2002 by 31 December International Accounting Standards endorsed after that date and before the preparation of these financial statements are adopted in the preparation of the consolidated financial statements only if early adoption is allowed by the Endorsing Regulation and the accounting standard itself and the Group has elected to do so. The publication of the consolidated financial statements of the Amplifon Group at 31 December 2012 was authorised by the resolution of the Board of Directors of 6 March These financial statements are subject to the approval of the Shareholders Meeting of Amplifon S.p.A. on 17 April

161 Consolidated Financial Statements at 31 December Measurement criteria 2.1. Financial statement presentation The consolidated financial statements at 31 December 2012 have been prepared in accordance with the historical cost convention with the exception of derivative financial instruments, certain financial investments measured at fair value and assets and liabilities hedged by a fair value hedge, as more fully explained hereafter, as well as on the going concern assumption. The following table lists the international accounting standards and the interpretations approved by IASB and endorsed to be adopted in Europe and applied for the first time in the financial year under review. Description Endorsement date Publication in O.J.E.C Effective date Effective date for Amplifon Amendments to IFRS 7 Financial Instruments: Disclosures Transfers of Financial Assets 22 Nov Nov 2011 Annual periods beginning after 30 Jun Jan 2012 The adoption of the standards and interpretations did not have, and will not have in the future, any material impact on the valuation of the assets, liabilities, costs and revenues of the Group and the information provided in the financial statements. With respect to the presentation of the financial statements it should be noted that: statement of financial position: the Group distinguishes between current and non-current assets and liabilities; income statement: the Group classifies costs by nature, as such classification is deemed to be more representative of the mainly commercial and distribution activities carried out by the Group; statement of comprehensive income (loss): includes the net result of the period and the effects of changes in exchange rates and the cash flow hedge reserve that are recognised directly in net equity; statement of changes in net equity: the Group includes all changes in net equity, including those arising from transactions with the shareholders (dividend distributions, increases in share capital); cash flow statement: this is prepared using the indirect method for defining cash flows deriving from operating activities Use of estimates in preparing the financial statements Preparation of the financial statements schedules and explanatory notes required the use of estimates and assumptions in respect of the following items: provisions for depreciation, calculated on the basis of the asset s estimated realisable value; provisions for risks and charges, calculated on the basis of a reasonable estimate of the amount of the potential liability, not least in relation to any claim made by the counterparty; provisions for obsolescence, in order to adjust the carrying value of inventory to reflect realisable value; provisions for employee benefits, recognised on the basis of regular adjustments of the actuarial valuations made; income tax, which is recognised on the basis of the best estimate of the expected tax rate for the full year; IRSs and currency swaps, which are marked to market at the reference date, their prices being calculated on the basis of market interest-rate and exchange-rate curves. 159 Amplifon Annual Report 2012

162 Estimates are periodically reviewed and any adjustments due to changes in the circumstances which determined such estimates or additional information are recognised in the income statement. The use of reasonable estimates is an essential part of the preparation of the financial statements and does not affect their overall reliability. The Group tests goodwill for impairment at least once a year (see 2.10). This requires an estimation of the value in use of the cash-generating unit to which the goodwill pertains. This calculation requires estimating of future cash flows and the after-tax discount rate reflecting market conditions at the date of the valuation Future accounting principles and interpretations The following table lists the IFRS/Interpretations approved by the IASB and endorsed for mandatory adoption in Europe after 31 December Endorsement Description date Amendments to IAS 1 presentation of items of other comprehensive income Amendment to IAS 19: Accounting for post employment benefits Amendments to IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters Amendments to IAS 12 Deferred Tax: Recovery of Underlying Assets Publication in O.J.E.C 5 June June June June Dec Dec Dec Dec 2012 IFRS 13 Fair Value Measurement 11 Dec Dec 2012 IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine 11 Dec Dec 2012 IFRS 10 Consolidated Financial Statements 11 Dec Dec 2012 IFRS11 Joint Arrangements 11 Dec Dec 2012 IFRS 12 Disclosure of interest in Other Entities 11 Dec Dec 2012 IAS 27 Separate Financial Statements 11 Dec Dec 2012 IAS 28 Investments in Associates and Joint Ventures 11 Dec Dec 2012 Disclosures - Offsetting financial assets and financial liabilities (amendments to IFRS 7) Amendments to IAS 32 Financial Instruments - Presentation Offsetting Financial Assets and Financial Liabilities 13 Dec Dec Dec Dec 2012 Effective date Periods beginning on or after 1 Jul 12 Periods beginning on or after 1 Jan 13 Periods beginning on or after 1 Jan 13 Periods beginning on or after 1 Jan 13 Periods beginning on or after 1 Jan 13 Periods beginning on or after 1 Jan 13 Periods beginning on or after 1 Jan 14 Periods beginning on or after 1 Jan 14 Periods beginning on or after 1 Jan 14 Periods beginning on or after 1 Jan 14 Periods beginning on or after 1 Jan 14 Periods beginning on or after 1 Jan 13 Periods beginning on or after 1 Jan 14 Effective date for Amplifon 1 Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan 2014 The adoption of IAS 19 Employee benefits will mean that actuarial gains and losses will be included in total gains and losses. We do not believe that this will have any significant effect on the consolidated financial statements. It is not expected that the adoption of the other valuation standards will materially affect the valuation of Group assets, liabilities, income and expense either. 160

163 Consolidated Financial Statements at 31 December 2012 Below are the International Financial reporting Standards, interpretations, amendments to existing standards and interpretations, or specific provisions contained in the standards and interpretations approved by the IASB which on February 17th 2013 had not yet been endorsed for adoption in Europe. Description Effective date IFRS 9 Financial Instruments (Issued 12 November 2009) and subsequent amendments (amendments to IFRS 9 and IFRS 7 issued 16 December 2011) Periods beginning on or after 1 Jan 2015 Amendment to IFRS 1 Government Loans Periods beginning on or after 1 Jan Annual Improvement Periods beginning on or after 1 Jan 2013 Amendments to IFRS 10, IFRS 11 and IFRS 12 Transition Guidance Periods beginning on or after 1 Jan 2013 Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) Periods beginning on or after 1 Jan 2014 The adoption of the above standards and interpretations is not expected to significantly affect the valuation of assets, liabilities, costs and revenues of the Group Subsidiaries The consolidation area includes companies which are controlled by the Group. Control is defined as the power to influence the financial and operating policies of a company. The existence of control over a company is determined on the basis of: (i) voting rights, including potential ones, that the Group is entitled to and by virtue of which the Group may exercise the majority of the votes that can be cast at the ordinary Shareholders meeting; (ii) the content of possible agreements between shareholders or the existence of specific clauses in the Statutes which grant the Group the power to manage the company; (iii) control by the Group of a sufficient number of votes to control the Shareholders meeting of the company. Income statement items are included in the consolidated financial statements starting from the date control is acquired and up to the date such control ceases. All payables and receivables, as well as the revenue and expense items deriving from transactions between companies included in the consolidation are eliminated entirely; capital gains and losses deriving from transfers of assets between consolidated companies are also eliminated, as are the profits and losses arising from transfers of assets between consolidated companies that come to form inventories of the acquiring company, write-downs and reversals of holdings in consolidated companies, and intragroup dividends. Assets, liabilities, costs and revenues of subsidiaries are recorded in full, allocating to minority shareholders their share of net equity and of the net result. The financial statements of of subsidiaries are adjusted in order to make the measurement criteria consistent with those adopted by the Group. The closing dates of subsidiary companies are aligned with the parent company; where this is not the case, the subsidiary companies prepare appropriate financial statements for parent company use Jointly-controlled companies The financial statements of companies that are jointly controlled are consolidated using the proportional method, with the exception of those relating to non-operating companies, which are valued using the equity method. Joint control arises from a shareholders agreement and exists only where unanimous approval by all the parties having joint control is required for financial and strategic decisions. Based on the proportional method of consolidation, only the Group s share of the assets, liabilities, costs and revenues of the investee are included in the consolidated financial statements based on the Group s ownership percentage, hence the exclusion of the minority s share of net equity and result. Transactions carried out by the Group with jointly controlled companies consolidated using the proportional method are proportionately eliminated according to the Group s percentage holding. The financial statements of subsidiaries and jointly-controlled companies are adjusted in order to make the measurement criteria consistent with those adopted by the Group. 161 Amplifon Annual Report 2012

164 2.6. Associated companies Investments in associated companies are valued using the equity method. A company is considered as an associated company if the Group is able to participate in the definition of the financial and operating policies of the company and the said company is neither controlled nor jointly-controlled by the Group. In accordance with the equity method, an investment in an associated company is included in the statement of financial position at acquisition cost as adjusted (written-up or down) by the Group s share of the changes in the associated company s net assets. The goodwill relating to the associated company is included in the book value of the investment and is not amortised. Transactions generating internal profits carried out by the Group with associated companies are eliminated based on the Group s ownership percentage. The financial statements of companies valued using the equity method are adjusted in order to make the valuation criteria consistent with those adopted by the Group Business combinations Business combinations are accounted for in the financial statements as follows: acquisition cost is determined on the basis of the fair value of assets transferred, liabilities taken over, or the shares transferred to the seller in order to obtain control; acquisition- costs related to business combinations are recognised in the income statement for the period in which the costs were incurred; the fair value of the shares transferred is determined according to the market price at the exchange date; where the agreement with the seller provides for a price adjustment linked to the profitability of the business acquired, over a defined timeframe or at a pre-established future date (earn-out), the adjustment is included in the acquisition price as of the acquisition date and is valued at fair value as at the date of acquisition; at the acquisition date, the assets and liabilities, including contingent ones, of the acquired company are recognised at their fair value at that date. When determining the value of these assets we also consider the potential tax benefits applicable to the jurisdiction of the acquired company; when the values of assets, liabilities and contingent liabilities recorded differ from their corresponding tax base at the acquisition date, deferred tax assets and liabilities are recognised; any difference between the acquisition cost of the investment and the corresponding share of net assets acquired is recorded as goodwill, if positive, conversely it is charged to the income statement, if negative; income items are included in the consolidated financial statements starting from the date control is acquired and up to the date control ceases Functional currency, presentation currency and translation criteria applied to foreign currency items The consolidated financial statements of the Amplifon Group are presented in Euros, the functional currency of the parent company, Amplifon S.p.A. The financial statements of subsidiaries and jointly-controlled companies are prepared in the functional currency of each company. When this currency differs from the reporting currency of the consolidated financial statements, the financial statements are translated using the current exchange rate method: income statement items are translated using the average exchange rates of the year, asset and liability items are translated using year-end rates and net equity items are translated at historical rates. The exchange differences are recorded under translation difference in the consolidated net equity; when the company is disposed of, the cumulative differences booked in net equity are recognised in the income statement to offset the gain or loss on disposal. Foreign currency transactions are recorded at the exchange rate at the transaction date. Monetary assets and liabilities denominated in foreign currency are translated at the exchange rate at the reporting date. 162

165 Consolidated Financial Statements at 31 December 2012 Non-monetary assets and liabilities denominated in foreign currency and valued at cost are reported at the exchange rate used when initially recorded. Non-monetary assets and liabilities denominated in foreign currency and valued at fair value, at recoverable value, or realizable value, are translated using the exchange rate of the date when the value was determined. Any exchange rate differences arising from the settlement of monetary assets and liabilities or from the translation at exchange rates that are different from those used when they were originally recorded, during the year or in previous financial statements, are recognised in the income statement Intangible fixed assets Intangible assets purchased separately and those acquired through business combination carried out prior to the adoption of the IFRS are initially measured at cost, whilst those acquired through business combinations completed after the date of transition to the IFRS, are initially measured at fair value. Expenditure incurred after the initial acquisition is recorded as an increase in the cost of the intangible asset to the extent that the expenditure can generate future economic benefits. Intangible assets having a finite useful life are amortised systematically along their useful life and written down for impairment (see 2.12). Amortisation begins when the asset is available for use and ceases when the asset is classified as held for sale (or included in a disposal group classified as held for sale). Both the useful life and the amortisation criterion are periodically reviewed and, where significant changes have occurred compared to the previously adopted assumptions, the amortisation charge for the current year and subsequent ones is adjusted. The periods of amortisation are shown in the following table: Asset type Amortisation period (years) Software Licences Non-competition agreements 5-7 Customer lists Trademarks and concessions 3-15 Other Goodwill Goodwill is recognised in the financial statements following business combinations and is initially recorded at cost, which is the excess of the cost of acquisition over the Group s share in the fair values of the assets, liabilities and contingent liabilities acquired. Goodwill is classified as an intangible asset. As of the acquisition date, the goodwill acquired in a business combination is allocated to each of the acquirer s cash-generating units or groups of cashgenerating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are allocated to those units or groups of units. Subsequent to initial recognition, goodwill is not amortised but valued at cost less any cumulative impairment losses (see 2.12). If goodwill has been allocated to a cash-generating unit and the company disposes of an asset which is part of the unit, the goodwill associated with the asset disposed of is included in the book value of the 163 Amplifon Annual Report 2012

166 asset when the gain or loss on disposal is calculated; this proportion is determined according to values relating to the asset disposed of and the retained portion Tangible assets Tangible fixed assets are recorded at purchase or production cost, inclusive of accessory costs that are directly attributable to the assets. Operating assets acquired under finance lease agreements whereby all risks and benefits of ownership are substantially transferred to the Group are recognised at the time of signing the agreement (finance lease) at the lower of their fair value and the present value of the minimum payments due under the lease terms. A liability equal to the amount due to the lessor is recorded under financial liabilities. Leases where the lessor does not substantially transfer all the risks and rewards of ownership associated with the assets are classified as operating leases. The costs incurred for operating leases are recognised in the income statement on a straight-line basis over the term of the lease. The initial recognition of tangible fixed assets, or their significant elements (except for land), net of their residual value, is depreciated on a straight-line basis over their useful life and is written down for impairments (see 2.12). The depreciation starts when the asset is available for use and terminates when it is classified as held for sale (or included as part of a disposal group classified as held for sale). The useful life and the depreciation rate, as well as the residual value, are periodically reviewed and, where significant changes have occurred compared to the previously adopted assumptions, the depreciation charge for the current year and subsequent ones is adjusted. Maintenance costs that do not add value to an asset are charged to the income statement in the year in which they are incurred. Maintenance costs that add value to an asset are recorded with the fixed asset item to which they relate and are depreciated on the basis of the future residual useful life of the asset. Improvement costs in respect of third party s assets, such as premises, shops and branches under operating leases, are capitalised and depreciated over the shorter of the term of the lease and the useful life of the tangible asset installed. The periods of depreciation are shown in the following table: Asset type Amortisation period (years) Buildings, constructions and leasehold improvements 5-33 Plant and machinery 5-10 Industrial and commercial equipment 4-10 Motor vehicles Computers and office machinery Furniture and fittings 4-8 Other tangible fixed assets Impairment of intangible fixed assets, tangible fixed assets, investments in associated companies and goodwill The Group verifies the recoverable value of an asset whenever an impairment indicator exists and, for intangible fixed assets with an indefinite life, other tangible assets and goodwill, the assessment is carried out yearly. The recoverable value is defined as the higher of the asset s fair value less costs to sell and its value in use. The fair value is determined by reference to a binding sales agreement between independent and willing 164

167 Consolidated Financial Statements at 31 December 2012 counterparties at arms length. In the absence of such an agreement, the fair value is estimated on the basis of the market prices of the asset and the information available so as to reflect the amount that the company may obtain, at the statement of financial position date, from the disposal of the asset in an arms length transaction between informed and willing parties. Value in use is determined by reference to the present value of the future estimated cash flows that are expected to be generated by the continued use of an asset and its disposal at the end of its useful life, discounted using a post-tax discount rate that reflects current market assessments of the time value of money and the specific risks associated with the asset. Where the value in use of a single asset cannot be determined due to the fact that the asset does not generate independent cash flows, the value in use is estimated by reference to the cash-generating unit that the asset relates to. With regard to goodwill, the impairment test is performed for the smallest cash-generating unit that the goodwill relates to and which is used by the Group to evaluate, either directly or indirectly, the return on the investment which includes the goodwill itself. Impairment losses are recognised in the income statement when the carrying value of the asset is higher than its recoverable value. Except for goodwill, for which impairment losses cannot be reversed, when there is an indication that an impairment loss is no longer justified or may have decreased, the carrying value of the asset is adjusted to its recoverable value. The increased carrying value of an asset due to an impairment reversal does not, however, exceed the carrying value that the asset would have had (net of the write-down or depreciation) if the impairment had not been recognised in previous years. The reversal is immediately recognised in the income statement Financial assets (excluding derivatives) Financial assets are initially recognised in the financial statements, at the transaction date, at their fair value. This value is increased by the transaction costs that are directly attributable to the purchase of the asset, excluding ancillary costs related to the purchase of financial assets held for trading that are recognised in the income statement when incurred. Subsequent to initial recognition, the accounting treatment of financial assets depends on their functional destination: financial assets held for trading, acquired for the purpose of generating short-term gains from price fluctuations, are measured at fair value and any gains and losses arising from the changes in fair value are included in the income statement; receivables and loans represented by non-derivative financial assets with fixed or determinable payments that are not quoted in an active market are valued at amortised cost using the effective interest rate method and written down for impairment; any impairment losses are measured as the difference between the carrying amount of the receivable and the present value of estimated future cash flows based on the original effective interest rate of the financial asset; the amount of the impairment loss is charged to provision if it originated from revising an estimate, or it is charged directly against the asset s carrying value in the event that it is related to a finally determined loss, and is recognised in the income statement. If in a subsequent period the amount of the impairment loss is reduced and such reduction can be objectively traced to an event occurring after the impairment was recognised, the impairment loss may be reversed up to its amortised cost by using provisions if it originated from revising an estimate, or it is charged directly against the asset s carrying value in the event that it is related to a finally determined loss, and is recognised in the income statement. Impairment losses are recognised where there are objective difficulties in 165 Amplifon Annual Report 2012

168 recovering receivables, e.g. (i) financial difficulties experienced by the debtor, (ii) non-payment of several instalments under the contract and/or significantly delayed payment of instalments or (iii) the significant age of the receivables; shares and other securities which do not fall into the above categories are classifed as financial assets measured at fair value through profit or loss. Such classification is in line with the Group strategy which requires the return on such assets to be managed and measured at fair value. Financial assets are derecognised from the financial statements when the related contractual rights expire, or when Amplifon S.p.A. substantially transfers all the risks and rewards of ownership associated with the financial asset. In the latter case the difference between the sale consideration and the net book value of the asset sold is recognised in the income statement Inventories Inventories are valued at the lower of purchase or production cost and their net realizable value (represented by their open market value). Inventories are valued using the weighted average cost method Cash and cash equivalents and financial assets The item cash and cash equivalents comprises liquid funds and financial investments with a maturity, at the acquisition date, of less than three months and for which there is an insignificant risk of a change in value. These financial assets are recorded at their nominal value Provisions for risks and charges Provisions for risks and charges relate to costs and charges of a specific nature which are certain or probable and whose amount or timing is uncertain at the reporting date. Provisions are recognised if the following conditions apply: (i) the Group has a present obligation (legal or constructive) that has arisen as a result of a past event; (ii) it is probable that the fulfilment of the obligation will require the use of resources which produce economic benefits; (iii) the amount can be estimated reliably. The amount recognised as a provision in the financial statements represents the best estimate of the expenditure required by the company to settle the obligation at the reporting date or to transfer it to a third party. When the time value of money is significant and the due dates of the obligations can be reliably estimated, the provision is discounted to its present value; when the provision is discounted, the increase in provision related to the passage of time is charged to the income statement as a financial charge. Specifically: the agents termination provision includes the estimate of amounts due to agents, calculated using actuarial methods and having regard to the probability that such amounts will be paid, as well as the expectations as to the time of payment; the warranty and repair provision includes the estimate of costs for warranty services to be provided on products sold, calculated on the basis of historical/statistical data and the warranty period; the provision for risks arising from legal disputes includes the estimate of charges relating to legal disputes with employees, agents or associated with the supply of services. 166

169 Consolidated Financial Statements at 31 December Employees benefits Post-employment benefits are defined on the basis of plans, even if not formalised, which due to their characteristics can be either defined-contribution or defined-benefit plans. Under a defined-contribution plan the company s obligation is limited to the payment of the contributions agreed with the employees and it is determined on the basis of the contributions due at the end of the period, as reduced by any amounts already paid. Under defined-benefit plans the liability recorded in the books is equal to: (a) the present value of the defined-benefit obligation at the reporting date; (b) plus any actuarial gains (minus any actuarial losses); (c) less any past service costs that have not yet been recorded; (d) less the fair value at the reporting date of plan assets (if any) out of which the obligations are to be settled directly. Under defined-benefit plans, the cost charged to the income statement is equal to the algebraic sum of the following elements: (a) current service cost; (b) the financial charges arising from the increase in liability due to the passage of time; (c) the expected return on plan assets; (d) actuarial gains and losses; (e) past service cost; (f) the effect of any curtailments or settlements under the plan Stock options and stock grants The Group grants certain top executives and other beneficiaries who hold key positions within the Group the right to participate in share capital plans (stock options and stock grant). Stock options plans are the equity settled; the beneficiary has the right to purchase Amplifon S.p.A. shares at a predefined price if certain conditions are met. Stock grants are equity settled too and the beneficiary receives a free allotment of shares in Amplifon S.p.A. at the end of the vesting period (4 years). For equity settled stock option and stock grants, the fair value is recognised in the income statement under personnel expenses over the period running from the date they are granted to the vesting date and a corresponding amount is recorded in a net equity reserve. The fair value of the stock option and stock grant is determined at the date they are granted, taking account of the market conditions at that date. At each reporting date, the Group reassesses the assumption about the number of stock option and stock grants which are likely to be exercised and records the effect of any change in estimate in the income statement adjusting the corresponding net equity reserve. In the event that the stock options are exercised, the amount received from the exercise of the stock options at the strike price is recorded as an increase in share capital and in the share premium account. In case of free stock allotment (i.e. stock grant ), the corresponding increase in net equity is recognised at the end of the vesting period Financial liabilities (excluding derivatives) Financial liabilities include financial payables, lease obligations and trade payables. Financial payables are initially recognised at fair value less any directly attributable transaction costs. Lease obligations are initially recognised at the fair value of the operating assets that are the subject of the agreements or, if lower, at the present value of the minimum payments due. Trade payables are generally recorded at nominal value except in those cases where the fair value of the consideration significantly differs from the nominal value. 167 Amplifon Annual Report 2012

170 Subsequent to initial recognition, the financial liabilities are valued at the amortised cost; the difference between the initial book value and the repayment value is recognised in the income statement using the effective interest rate method. When a financial liability is hedged against interest rate risk in a fair value hedge, any changes in fair value due to the hedged risk are not included in the calculation of the amortised cost. These changes are amortised starting from the moment fair value hedge accounting is discontinued ( 2.23). Financial liabilities are derecognised from the financial statements when the underlying obligation is settled, cancelled or fulfilled Revenues, interest income and dividends Revenues are recognised on the basis of the fair value of the sale consideration agreed, net of discounts, reductions, returns, rebates and tax, if any. Revenues from the sale of products are recognised at the time when the Group transfers to the purchaser the risks and rewards of ownership, that is on transfer of title (which usually coincides with the dispatch or delivery of the products) or with the end of the trial period, if applicable. Revenues - less any implicit financial component, interest receivable being indicated separately are discounted to their present value and if the discounting effect is significant, the implicit financial element is separated. The financial element is allocated between the amount pertaining to the current year and future years, with the latter being accounted for as deferred income. Revenues from services are recognised when the services are provided, based on the accrual method of accounting and based on the stage of completion of the transaction at the reporting date. Interest income is recognised on the basis of the effective interest rate. Dividends are recognised when the shareholders right to receive payment is established Current and deferred income taxes Tax payables and receivables for current income tax are recorded at the amount that is expected to be paid to/received from the tax authorities at current rates and on the basis of the laws in force, or substantially approved at the reporting date. Deferred tax assets and liabilities are recognised on the temporary differences between the value of assets and liabilities in the financial statements and the corresponding tax bases. Deferred income taxes are not recognised: (i) when they derive from the initial recognition of goodwill or of an asset or liability in a transaction other than a business combination and which, at the time of the transaction, does not affect either the accounting profit or the taxable profit /loss; (ii) when they relate to temporary differences related to investments in subsidiaries and joint ventures, where the reversal of temporary differences may be controlled and it is probable that it will not occur in the foreseeable future. Deferred tax assets, including those arising from unused tax losses and tax credits, are recorded only to the extent their recovery is highly probable. Deferred tax assets are not discounted to present value and are calculated using tax rates that are expected to apply when the taxes are paid or settled in the respective countries where the Group operates. 168

171 Consolidated Financial Statements at 31 December 2012 Deferred tax assets and liabilities are debited or credited directly to net equity if they relate to elements which are recognised directly in net equity. Deferred tax assets and liabilities are recorded respectively under non-current assets and liabilities and are offset only when a legally enforceable right to offset current tax assets against current tax liabilities exists and this will result in a lower tax charge. Moreover, when there is a legally enforceable right of set-off, deferred tax assets and deferred tax liabilities are offset only if at the time of their reversal they will not generate any current tax asset or liability. When an asset is revalued for tax purposes and the revaluation does not relate to an accounting revaluation of an earlier period, or to one that is expected to be carried out in a future period, deferred tax assets are recognised in the income statement on the temporary difference arising as a result of the revaluation Value added tax Revenues, costs and assets are recognised net of valued added tax (VAT), except where VAT applied to the purchase of goods or services is non-deductible, in which case it is recognised as part of the purchase cost of the asset or as part of the expense recorded in the income statement. The net amount of indirect tax on sales which may be recovered from/paid to the tax Authorities is included in the financial statements under other receivables or payables, depending on whether it is a debit or a credit balance Derivative financial instruments The Group trades in derivative financial instruments for the purpose of neutralizing the financial risks it is exposed to and which it decides to hedge against in accordance with its adopted strategy (see 3). The documentation which formalises the hedging relationship subject to Hedge Accounting includes the identification of the: hedging instrument; hedged item or transaction; nature of the risk; methods that the company intends to adopt to assess the hedge effectiveness in offsetting the exposure to changes in the fair value of the hedged item or the cash flows associated with the risk that is hedged against. On initial recognition these instruments are measured at fair value. On subsequent reporting dates the fair value of derivatives must be re-measured and: (i) if these instruments fail to qualify for hedge accounting, any changes in fair value that occur after initial recognition are taken to profit and loss; (ii) if these instruments qualify as fair value hedges, from that date any changes in the fair value of the derivative are taken to profit and loss; at the same time, any fair value changes due to the hedged risk are recorded as an adjustment to the book value of the hedged item and the same amount is recorded in the income statement; any ineffectiveness of the hedge is recognised in profit and loss in an item separate from that in which changes in the fair value of the hedging instrument and the hedged item are recognised; (iii) if these instruments qualify as cash flow hedges, starting from that date, any changes in the fair value of the derivative are recognised in net equity, but only to the extent of the effective amount of the hedge, with the amount of any hedge ineffectiveness being recognised in the 169 Amplifon Annual Report 2012

172 income statement; changes in the fair value of the derivative that are recognised in net equity are subsequently transferred to the income statement in the period in which the transaction that is hedged against affects the income statement; when the hedged item is the purchase of a non financial asset, changes to the fair value of the derivative taken to equity are reclassified and adjusted according to the purchase cost of the asset which is the hedged item (referred to as basis adjustment); (iv) if these instruments qualify as hedges of net investment of a foreign operation, starting from that date any changes in the fair value of the derivative are adjusted as part of the translation difference, to the extent of the effective amount of the hedge and the ineffective portion is charged to the income statement; (v) hedging is carried out by the designated instrument, considered as a whole. In the case of options or forward contracts, however, only part of the derivative instrument is designated as the hedging instrument; the remainder is recognised in the income statement. More specifically, in the case of options, only the changes in fair value due to changes in the intrinsic value are designated as hedging instrument; conversely, fair value changes of options due to changes in the time value are recognised in the income statement and are not considered in the assessment of the hedge effectiveness. In the case of forward contracts, only changes in fair value due to changes in the spot rate are designated as a hedging instrument; conversely the fair value changes due to changes in the forward points are recognised in the income statement and are not considered in the assessment of the hedge effectiveness. If the hedge becomes ineffective or the Group changes its hedging strategies, hedge accounting is discontinued. In particular, hedge accounting is discontinued prospectively when the hedge becomes ineffective or when there is a change in the hedging strategies. If, in a fair value hedge, the hedged item is a financial instrument measured using the effective interest rate method, the adjustments made to the book value of the hedged item are amortised starting from the date when fair value hedge accounting is discontinued and the hedged item is no longer adjusted for fair value changes attributable to the hedged risk. Financial instruments hedging exchange rate risk due to forecasted transactions and firm commitments are represented on the statement of financial position according to the cash-flow hedge accounting model. Derivatives are recognised as assets if their fair value is positive and as liabilities if their fair value is negative. These balances are shown under assets or liabilities if related to derivatives which do not qualify for hedge accounting criteria, conversely they are classified according to the hedged item. In particular, if the hedged item is classified as a current asset or liability, the positive or negative fair value of the hedging instrument is included under current assets or liabilities; if the hedged item is classified as a non-current asset or liability, the positive or negative fair value of the hedging instrument is included under non-current assets or liabilities Share capital, treasury shares, dividend distribution and other net equity items Ordinary shares issued by the parent company Amplifon S.p.A. are classified as part of net equity. Any costs incurred to issue new shares, also following the exercise of stock option plans, are classified as a 170

173 Consolidated Financial Statements at 31 December 2012 reduction in net equity. Purchases and disposals of treasury shares, as well as any gains or losses on purchase/disposal, are recognised in the financial statements as changes in net equity. Dividends distributed to the shareholders are recorded as a reduction in net equity and as a liability of the period when the dividend payment is approved by the Shareholders Meeting Earnings (loss) per share Earnings per share are determined by comparing the Group s net profit to the weighted-average number of shares outstanding during the accounting period. For the calculation of the diluted earnings per share, the weighted average number of shares outstanding is adjusted assuming the conversion of all potential shares with a dilutive effect. 171 Amplifon Annual Report 2012

174 3. Financial risk management With a view to structured management of treasury activities and financial risks, in 2012 the Group finalized and adopted a Treasury Policy which contains guidelines for the management of: currency risk; interest rate risk; credit risk; price risk; liquidity risk. Currency risk foreign exchange transaction risk, that is the risk of changes in the value of a financial asset or liability, of a forecasted transaction or a firm commitment, changes due to exchange rate fluctuations; foreign exchange translation risk, that is the risk that the translation of the assets, liabilities, costs and revenues relating to net investment in a foreign operation into the reporting currency gives rise to a positive or negative difference in the balances of the translated items. In the Amplifon Group, the foreign exchange transaction risk is highly limited in consideration of the fact that each country is largely autonomous in the operation of its business, incurring costs in the same currency as it realises the revenue and derives primarily from intragroup transactions (medium long-term and short term loans, recharges for intercompany service agreements), which give rise to an exchange rate risk exposure to the companies operating in a currency other than that of the intragroup transaction. Additionally, exposure to foreign exchange transaction risk arises from investments in listed financial instruments denominated in a currency other than the investing company s functional currency. Foreign exchange translation risk arises from investments in the following countries: United States, United Kingdom, Switzerland, Hungary, Turkey, Poland, Australia, New Zealand, India and Egypt. The Group s strategy is to minimise the impact on the income statement of the changes in exchange rates and provides for hedging of the exposure of the financial positions of individual companies denominated in currencies other than the reporting currency, and specifically: (i) by bonds in US Dollars issued by Amplifon S.p.A. and subscribed by Amplifon USA Inc; (ii) the inter-company loans denominated in currencies other than the Euro between Amplifon S.p.A. and the Group associates in the United Kingdom; (iii) the intragroup loans in place between the Australian companies and the New Zealand companies; (iv) by chargebacks for intercompany service agreements which generate debt positions in Euros with the English, Swiss, American, Australian and New Zealand subsidiaries. The risks arising from other intercompany transactions and investments in quoted instruments in foreign currency are not high since the amounts involved are not significant, hence they are not hedged. Taking the foregoing into account, the fluctuations in exchange rates during the financial year had no significant effects on the Amplifon Group s consolidated financial statements. With regard to foreign exchange translation risk, as individual countries earn income and pay expenses in their own currency and most of the margins are achieved in countries using the same currency as the Group, no hedging is undertaken, having also considered its potential additional complexity. 172

175 Consolidated Financial Statements at 31 December 2012 Currency risk - sensitivity analysis The outstanding amount of the private placement issued by Amplifon S.p.A. of US$155 million is fully hedged against currency risk. In particular, as a result of the derivative instruments entered into, the Group has fixed the Euro/Dollar exchange rate for the entire above mentioned term of this loan. Therefore, it is reasonable to assume that any change in exchange rates will not give rise to a significant profit and loss effect as the foreign currency positions and the hedging derivatives will automatically generate changes of the same amount but of the opposite sign. Similar considerations may be made with regard both to intercompany loans, denominated in Pounds Sterling between Amplifon S.p.A. and its UK affiliates, both to payables denominated in Euros due under Intercompany Service Agreements with associates from countries outside the Euro area. The loan arrangements in being between the Australian and New Zealand companies, just like those between Amplifon S.p.A. and the UK associate company are included in the investments as they are not interest-bearing or repayable. The effects of exchange rate fluctuations are therefore recognised in the translation reserve of net equity without recognition in the income statement. The analysis excludes receivables, payables and future commercial flows which have not been hedged since, as stated above, these are not significant. Interest rate risk Interest rate risk includes the following situations: fair value risk, that is the risk that the value of a financial asset or liability at fixed interest rate changes due to fluctuations in market interest rates; cash flow risk, that is the risk that the future cash flows of a variable interest rate financial asset or liability fluctuate due to changes in market interest rates. In the Amplifon Group fair value risk arises on the issue of fixed-income bonds (private placements). The cash flow risk derives from taking out variable-rate bank loans. The Group s strategy is to minimise cash flow risk, especially in respect of long-term exposures, through a balanced division between fixed- and floating-rate loans, judging whether to transform floating-rate borrowings to fixed-rate both when each loan is taken out and during the life of the loans, while noting the interest rate levels seen in the markets on each occasion. In any event, at least 50% of the debt must be hedged against changes in interest rates. At 31 December 2012, of mediumterm indebtedness (including the short-term installments of medium-term loans) amounting to million, million, i.e. about 85% of the debt, has been swapped into fixed rate through appropriate hedging instruments. Interest rate risk - sensitivity analysis The private placement denominated in US dollars and amounting to US$155 million is partly hedged against interest rate risk. In particular, as a result of the hedging transactions entered into: (i) an amount of approximately US$143 million generates fixed-rate interest; (ii) an amount of approximately US$12 million generates variable-rate interest. With respect to the amount under (i) above, any change in exchange rates will not give rise to a significant profit and loss effect as the loan and the hedging derivatives are bound to generate changes of the same amount but of the opposite sign. As a consequence the sensitivity analysis related to this item is not presented. 173 Amplifon Annual Report 2012

176 With regard to the amount under (ii) the decrease/increase in interest rates signifies higher/lower pre-tax profit, as exposed on the table reported below. The syndicated loan amounting to million and AU$60.6 million for the acquisition of the NHC Group is hedged against interest rate risk for an amount of million through Interest Rate Swaps which convert the floating rate to a fixed rate amounting to 2.397% (on the Italian and French tranche amounting million) and 2.075% (on the Dutch tranche amounting 86.5 million) until the maturity on 30 June Consequently, in the period detailed above, any change in exchange rates will not give rise to a significant profit and loss effect as the loan and the hedging derivatives are bound to generate changes of the same amount but of the opposite sign. With respect to the remaining amount in question, as well as the other floating-rate loans and derivative instruments not accounted for according to the rules of hedge accounting, the following table highlights the higher/lower income before tax arising from increases/decreases in interest rates. In light of interest rate levels at 31 December 2012 (ECB Euro rate of 0.75%), sensitivity analysis considers an upside of 1% and a downside of -0.5%. 174

177 Consolidated Financial Statements at 31 December 2012 ( thousands) 2012 Note Balance as at 31 December 2012 Average exposure Increase/decrease in interest rates (in %) Effect on income before tax Current assets Bank current accounts ,944 84, % 843 Short-term bank deposits , % 28 Current liabilities Bank current accounts 22 (425) (2,231) 1.00% (22) Short-term bank borrowings 22 (263) (534) 1.00% (5) Non-current liabilities Loans in Australian Dollars including current portion (disclosed in ) 15 (47,632) (52,175) 1.00% (522) Floating interest part of the bond (US$12m): equivalent in at the hedging rate 15 (9,934) (9,934) 1.00% (99) Total effect on income before tax 223 Current assets Bank current accounts ,944 84, % (421) Short-term bank deposits , % (14) Current liabilities Bank current accounts 22 (425) (2,231) -0.50% 11 Short-term bank borrowings 22 (263) (534) -0.50% 3 Non-current liabilities Loans in Australian Dollars including current portion (disclosed in ) 15 (47,632) (52,175) -0.50% 261 Floating interest part of the bond (US$12m): equivalent in at the hedging rate 15 (9,934) (9,934) -0.50% 50 Total effect on income before tax (110) 175 Amplifon Annual Report 2012

178 ( thousands) 2011 Note Balance as at 31 December 2011 Average exposure Increase/decrease in interest rates (in %) Effect on income before tax Current assets Bank current accounts 12 99,998 69, % 699 Short-term bank deposits 12 6,121 3, % 39 Current liabilities Bank current accounts 22 (2,457) (4,540) 1.00% (45) Short-term bank borrowings 22 (1,131) (1,132) 1.00% (11) Non-current liabilities Loans in Euro (including current portion) 15 (273,438) (292,589) 1.00% (1,254) Loans in Australian Dollars (disclosed in ) 15 (53,643) (51,589) 1.00% (516) Floating interest portion of the bond (US$12m): equivalent in at the hedging rate 15 (9,934) (9,934) 1.00% (99) Total effect on income before tax (1,187) Current assets Bank current accounts 12 99,998 69, % (349) Short-term bank deposits 12 6,121 3, % (20) Current liabilities Bank current accounts 22 (2,457) (4,540) -0.50% 23 Short-term bank loans 22 (1,131) (1,132) -0.50% 6 Non-current liabilities Loans in Euro (including current portion) 15 (273,438) (292,589) -0.50% 627 Loans in Australian Dollars (disclosed in ) 15 (53,643) (51,589) -0.50% 258 Floating interest portion of the bond (US$12m): equivalent in at the hedging rate 15 (9,934) (9,934) -0.50% (50) Total effect on income before tax

179 Consolidated Financial Statements at 31 December 2012 Credit risk Credit risk is the possibility that the issuer of a financial instrument defaults on its obligations and causes a financial loss to the holder. In the Amplifon Group credit risk arises from: (i) sales made as part of ordinary business operations; (ii) the use of financial instruments that require settlement of positions with the counterparty; (iii) from the transfer of Group-owned American stores to franchisees, with the payment spread over up to 12 years, following the transformation of the business model of the subsidiary Sonus, from the direct to the indirect channel. With regard to the risk under (i) above, it is noted that the only positions with a high unitary value are amounts due from Italian public-sector entities, whose risk of insolvency while existing is remote and further mitigated by the fact that they are sold on a quarterly basis without recourse to specialised finance houses. Additionally, the credit risk arising out of sales to private individuals to whom payment by installments has been allowed, is becoming significant as is that arising from sales to US indirect channel firms (wholesalers and franchisees). Due to the continuance of the general economic crisis, some may not be able to honor their debts. This causes a risk of increased working capital and debtor losses. The Group, through its Corporate functions, has set up a system of monthly reporting on its debtors, to monitor their composition and due dates for each country and decide with local management the action to be taken to recover overdue accounts and determine credit policy. In particular, with regard to private customers, that are however largely paying cash, instalment or financed sales have been limited to a maximum term of 12 months and where possible they are managed by external finance companies which advance the whole amount of the sale to Amplifon, while with regard to the indirect channel in US, the situation is strictly monitored by local management. The risk referred to in (ii) above, notwithstanding the inevitable uncertainties linked to sudden and unforeseeable counterparty default, is managed by diversifying the main national and international investment grade financial institutions and through the use of specific counterparty limits with regard to both liquidity invested and/or deposited and to the notional amount of derivative contracts. The counterparty limits are higher if the counterparty has a Standard & Poor s and Moody s short term rating equal to at least A-1 and P-1, respectively. The Group s CEO and CFO may not carry out transactions with non-investment grade counterparties unless specifically authorized to do so. Exceptions to the counterparty limits may be made for transactions entered into prior to the effective date of the Treasury Policy (August 2012): more in detail, the currency and interest-rate hedges relating to the Private Placement, which were entered into with a single counterparty, and the interest-rate hedges relating to the syndicated loan stipulated in 2011 for the NHC Group acquisition, which were divided up equally between four primary investment grade banks, exceed the more stringent counterparty limits defined in the August 2012 Treasury Policy. The risk referred to in (iii) above is mitigated by ensuring the return of the sold stores to form part of Amplifon property in the instance where payment is not made. Price risk This arises from the possibility that the value of a financial asset or liability may change due to changes in market prices (other than those caused by currency or interest-rate fluctuations) whether these changes arise from specific characteristics of the financial asset or liability or the issuer of the 177 Amplifon Annual Report 2012

180 financial liability, or are caused by market factors. This risk is typical of financial assets not listed on an active market, which may not easily be realised at a value close to their fair value. In the Amplifon Group price risk arises from certain financial investments in listed instruments, mainly bonds. Given the size of these investments, this risk is not significant and is therefore not hedged. Liquidity risk This risk often arises from the possibility that an entity may have difficulty finding sufficient funds to meet its obligations. It includes the risk that the counterparties that have granted loans or lines of credit may request repayment. This risk has become particularly significant in recent years, first with the financial crisis of 2008, and more recently those of the sovereign debt of the peripheral countries of the Euro area, and of the single currency itself. In this situation the Group, which when the NHC Group was acquired significantly restructured its debt, continues to pay the utmost attention to cash flow and debt management, maximizing the positive cash flow from operations. This made it possible to easily pay back all the loans expiring in 2012 which amounted to 42.8 million. In addition, while the existing liquidity of million and the irrevocable lines of credit totalling 30 million are more than sufficient to meet all the Group s obligations maturing through the first part of 2014, steps are being taken to refinance them in order to transform the million portion of debt expiring in 2013 into long term debt. Furthermore, in order to improve financial management and maximize utilization and investment of the cash generated, a worldwide cash pooling project was completed and implemented in the early part of These activities, along with the liquidity, borrowings, credit lines and the positive cash flow that the Group continues to generate, lead us to believe that, at least in the short term, liquidity risk is not significant. Hedging instruments Hedging instruments are used by the Group exclusively to mitigate - in line with company strategy - interest rate and currency risk and are exclusively financial derivatives. In order to maximise the effectiveness of these hedges Group strategy prescribes that: the counterparties be of large size and high credit standing and that the transactions be within the limits laid down by treasury policy in order to minimise counterparty risk; the instruments used match, as far as possible, the characteristics of the risk they hedge; the performance of the instruments used be monitored, not least in order to check and, if necessary, optimise the appropriateness of the structure of the instruments used to attain the aims of the hedge. The derivatives used by the Group are generally represented by so-called plain vanilla financial instruments. In particular, the types of derivatives adopted are the following: cross currency swaps; interest rate swaps; interest rate collar; forward foreign exchange contracts. On initial recognition these instruments are measured at fair value. On subsequent reporting dates the fair value of derivatives must be re-measured and: (i) if these instruments fail to qualify for hedge accounting, any changes in fair value that occur after initial recognition are taken to profit and loss; (ii) if these instruments subsequently qualify as fair value hedges, from that date any changes in the fair value of the derivative are taken to profit and loss; at the same time, any fair value changes due to the 178

181 Consolidated Financial Statements at 31 December 2012 hedged risk are recorded as an adjustment to the book value of the hedged item and the same amount is recorded in the income statement; any ineffectiveness of the hedge is recognised in profit and loss; (iii) if these instruments qualify as cash flow hedges, from that date any changes in the fair value of the derivative are taken to net equity; changes in the fair value of the derivative that are recognised in net equity are subsequently transferred to the income statement in the period in which the transaction that is hedged against affects the income statement; when the object of the hedge is the purchase of a non-financial activity, changes to the fair value of the derivative taken to net equity are reclassified to adjust the purchase cost of the activity which is the object of the hedge (so-called basis adjustment); any ineffectiveness of the hedge is recognised in profit and loss. The Group s hedging strategy is recognised in the accounts as described above starting from the time at which the following conditions are satisfied: the hedging relationship, its purpose and the overall strategy are formally defined and documented; the documentation includes the identification of the hedging instrument, the hedged item, the nature of the risk to be neutralised and the procedures whereby the entity will assess the effectiveness of the hedge; the effectiveness of the hedge may be reliably assessed and there is a reasonable expectation, confirmed by ex post evidence, that the hedge will be highly effective for the period in which the hedged risk is present; if the hedged risk is that there may be changes in the cash flow arising from a future transaction, the latter is highly probable and has exposure to changes in cash flow that could affect profit and loss. Derivatives are recorded as assets if their fair value is positive and as liabilities if their fair value is negative. These balances are shown under assets or liabilities if related to derivatives which do not meet hedge accounting criteria, conversely they are classified according to the hedged item. In particular, if the hedged item is classified as a current asset or liability, the positive or negative fair value of the hedging instrument is included under current assets or liabilities; if the hedged item is classified as a non-current asset or liability, the positive or negative fair value of the hedging instrument is included under non-current assets or liabilities. The Group does not have in place any hedges of a net investment. Intercompany hedges, if any, are eliminated on consolidation. 179 Amplifon Annual Report 2012

182 Reconciliation table The following table illustrates the link between items reported on the statement of financial position and the categories of financial instrument defined by IAS 39 and IFRS 7. ( thousands) 31 December 2012 Statement of Financial Position Non-current assets Note Total Included in net financial position Excluded from net financial position Amortised cost Fair value through PL Amortised cost Fair value through PL Loans and rec. Fin. liab. at amortised cost FA/FL AFS Fair value hedge Fair value hedge no HA Loans and receivables Fin. liab. at amortised cost FA/FL designated at FV Financial assets measured at FV through PL 8 3,742 3,742 Other assets 8 25,294 25,294 Non hedge derivatives Hedging instruments 9 6,605 (2,168) 8,773 Current assets Cash and cash equivalents , ,180 Trade receivables , ,115 Other receivables 11 19,364 19,364 Hedging instruments (2,571) 173 2,930 Fair value through net equity Cash flow hedge derivatives Non-current liabilities Financial liabilities 15 (284,714) (287,702) 2,988 Hedging instruments 9 (15,319) (15,319) Payables for business acquisitions 18 (3,774) (3,774) Other longterm debt 18 (275) (275) Non-current liabilities Trade payables 19 (98,016) (98,016) Payables for business acquisitions 20 (474) (474) Other longterm debt 20 (87,827) (87,827) Hedging instruments 9 (2,078) (2,078) Financial payables 22 (119,046) (120,499) 1,453 Total (13,093) (288,176) - (4,739) ,498 (181,402) 3,742 (3,616) (2,078) Total net financial position (305,835) Key: Fin. liab. at amortised cost: financial liabilities at amortised cost. FA/FL AFS available for trading: financial assets/liabilities available for trading. FA/FL designated at FV: financial assets/liabilities designated at fair value. Fair value through net equity: fair value recognised directly in net equity. 180

183 Consolidated Financial Statements at 31 December 2012 ( thousands) 31 December 2011 Statement of Financial Position Non-current assets Note Total Included in net financial position Excluded from net financial position Amortised cost Fair value through PL Amortised cost Fair value through PL Loans and rec. Fin. liab. at amortised cost FA/FL AFS Fair value hedge Fair value hedge no HA Loans and receivables Fin. liab. at amortised cost FA/FL designated at FV Non hedge derivatives Financial assets measured at FV through PL 8 7,421 7,421 Other assets 8 31,610 31,610 Hedging instruments 9 10,744 (2,115) 12,859 Current assets Cash and cash equivalents , ,305 Trade receivables , ,838 Other receivables 11 20,040 20,040 Fair Value through net equity Cash flow hedge derivatives Non-current liabilities Financial liabilities 15 (401,132) (405,574) 4,442 Hedging instruments 9 (16,668) (16,668) Payables for business acquisitions 18 (1,063) (1,063) Other long-term debt 18 (499) (499) Non-current liabilities Trade payables 19 (96,613) (96,613) Payables for business acquisitions 20 (365) (365) Other long-term debt 20 (86,970) (86,970) Hedging instruments 9 (304) (304) Financial payables 22 (49,104) (50,720) 1,616 Total 56,522 (405,939) - (2,419) - 155,989 (177,525) 7,421 (3,809) - Total net financial position (351,836) Key: Fin. liab. at amortised cost: financial liabilities at amortised cost. FA/FL AFS available for trading: financial assets/liabilities available for trading. FA/FL designated at FV: financial assets/liabilities designated at fair value. Fair value through net equity: fair value recognised directly in net equity. 181 Amplifon Annual Report 2012

184 Fair value hierarchy levels At 31 December 2012, the Amplifon Group held the following financial instruments measured at fair value: financial assets designated at fair value through profit or loss: this item includes investments in bonds and other listed securities made by the subsidiary Amplinsure RE AG which is a reinsurer. These assets are held in two portfolios managed by specialised managers. The fair value of these instruments at the reporting date is determined on the basis of stock exchange prices on the last trading day; hedging derivatives: these are instruments not listed in official markets; entered into for the purpose of hedging interest-rate and/or currency risk. The fair value of these instruments is determined using valuation models based on market-derived inputs (forward interest-rate curve, exchange rates, etc.). The following table discloses the fair value valuation on the basis of a hierarchy reflecting the level of significance of the data used for the valuation. This hierarchy consists of the following levels: 1. quoted (unadjusted) prices in active markets for identical assets and liabilities; 2. input data other than the above quoted prices, but which can be observed directly or indirectly on the market; 3. input data on assets or liabilities not based on observable market data. ( thousands) Level 1 Level 2 Level 3 Total Assets Financial assets at fair value through profit and loss Note 8 3,742 3,742 Hedging instruments - Long-term Note 9 6,605 6,605 - Short-term Note Liabilities Hedging instruments - Long-term Note 9 (15,319) (15,319) - Short-term Note 9 2,078 2,

185 Consolidated Financial Statements at 31 December Segment information The Amplifon Group operates in a single field of business and is present in five geographical macro-areas determined by uniform market conditions and business dealings, also with respect to the legislation in force and conditions of reimbursement by the health service: Continental Europe (Belgium, France, Germany, Italy, Luxembourg, The Netherlands, Poland, Portugal, Spain, Switzerland, Turkey and Hungary), UK and Ireland, North America (USA and Canada), Asia Pacific (Australia, New Zealand and India) and Africa (Egypt). On a geographical level the performance is measured and monitored down to operating income including depreciation (EBIT) and equity for each item of the statement of financial position. Finance cost is not monitored since it depends on decisions taken at the corporate centre as to the funding of each region (i.e. using capital or borrowings) and thus tax. Profit and loss and statement of financial position data by region are determined using the same methods and accounting principles as are applied when preparing the consolidated accounts. 183 Amplifon Annual Report 2012

186 Statement of Financial Position as at 31 December 2012 ( thousands) Continental Europe United Kingdom and Ireland North America Asia Pacific Africa Elim. Consolidated ASSETS Non-current assets Goodwill 188,915 15,013 59, , ,853 Intangible fixed assets with finite useful life 37,794 6,712 12,561 87, ,621 Tangible fixed assets 67,950 5,137 1,573 18, ,070 Investments valued at equity ,348 Financial assets measured at fair value through profit and loss 3, ,742 Hedging instruments 6, ,605 Deferred tax assets 37,545 1,450 6,511 2, ,039 Other assets 2, , ,247 Total non-current assets 884,525 Current assets Inventories 30, , ,196 Receivables 91,540 3,155 36,612 8, (1,727) 138,434 Hedging instruments Cash and cash equivalents 111,180 Total current assets 284,342 TOTAL ASSETS 1,168,867 LIABILITIES Net equity 430,158 Non-current liabilities Medium/long-term financial liabilities 284,714 Provisions for risks and charges 18,263-13, ,525 Liabilities for employees benefits 12, , ,203 Hedging instruments 15, ,319 Deferred taxes 9,105 1,447 16,836 25, ,081 Payables for business acquisitions 1, , ,774 Other long-term debt Total non-current liabilities 404,891 Current liabilities Trade payables 58,719 5,830 23,651 11, (1,651) 98,016 Payables for business acquisitions Other payables 69,314 2,113 1,476 14, (76) 87,827 Hedging instruments 2, ,078 Tax payables 12, ,951 6, ,631 Provisions for risks and charges Liabilities for employees benefits Financial payables 119,046 Total current liabilities 333,818 TOTAL LIABILITIES 1,168,

187 Consolidated Financial Statements at 31 December 2012 Statement of Financial Position as at 31 December 2011 ( thousands) Continental Europe United Kingdom and Ireland North America Asia Pacific Africa Elim. Consolidated ASSETS Non-current assets Goodwill 182,285 14,667 60, , ,443 Intangible fixed assets with finite useful life 38,466 8,515 13,838 93, ,819 Tangible fixed assets 65,771 5,443 1,809 17, ,380 Investments valued at equity ,083 Financial assets measured at fair value through profit and loss 7, ,421 Hedging instruments 10, ,744 Deferred tax assets 38,441 1,978 5,871 2, ,408 Other assets 2, , ,610 Total non-current assets 887,908 Current assets Inventories 31, , ,651 Receivables 85,049 3,796 35,569 7, (1,573) 130,175 Cash and cash equivalents 108,305 Total current assets 273,131 TOTAL ASSETS 1,161,039 LIABILITIES Net equity 391,170 Non-current liabilities Financial liabilities 401,132 Provisions for risks and charges 15,652-10, ,123 Liabilities for employees benefits 9, , ,101 Hedging instruments 16, ,668 Deferred tax liabilities 9,527 1,975 14,696 27, ,572 Payables for business acquisitions 1, ,063 Other long-term debt Total non-current liabilities 511,158 Current liabilities Trade payables 57,154 4,622 29,675 6, (1,551) 96,613 Payables for business acquisitions Other payables 68,876 2,075 1,958 14, (22) 86,970 Hedging instruments Tax payables 17, ,454 3, ,563 Provisions for risks and charges ,107 Liabilities for employees benefits Financial payables 49,104 Total current liabilities 258,711 TOTAL LIABILITIES 1,161, Amplifon Annual Report 2012

188 Income Statement FY 2012 ( thousands) Continental Europe United Kingdom and Ireland North America Asia Pacific Africa Elim. Consolidated Revenues from sales and services 541,112 41, , ,787 2, ,611 Raw materials, consumables and supplies and change in raw materials, consumables and supplies (91,253) (7,485) (71,074) (18,966) (954) 1 (189,731) Personnel expenses (170,919) (18,139) (17,415) (50,734) (514) (62) (257,783) Services (194,883) (16,709) (18,368) (24,781) (656) 61 (255,336) Other income and expenses 481 (149) 1,146 (67) - - 1,411 Gross operating profit (EBITDA) 84,538 (657) 24,693 36, ,172 Amortization, depreciation and impairment Amortisation (9,081) (2,018) (4,581) (7,208) - - (22,888) Depreciation (16,943) (2,118) (404) (4,051) (55) - (23,571) Impairment and impairment reversals of non-current assets (210) - (617) (827) (26,234) (4,136) (5,602) (11,259) (55) - (47,286) Operating result 58,304 (4,793) 19,091 24, ,886 Financial income, charges and value adjustments to financial assets Group's share of the result of associated companies valued at equity (47) Other income and charges, impairment and revaluations of financial assets 518 Interest income and charges (23,194) Other financial income and charges (2,702) Exchange gains and losses 387 Gain (loss) on assets measured at fair value (753) (25,681) Profit (loss) before tax 72,205 Current and deferred tax Current tax (30,199) Deferred tax 1,136 (29,063) Total net profit (loss) 43,142 Minority interests (40) Net profit (loss) attributable to the Group 43,

189 Consolidated Financial Statements at 31 December 2012 Income Statement FY 2011 ( thousands) Continental Europe United Kingdom and Ireland North America Asia Pacific Africa Elim. Consolidated Revenues from sales and services 557,500 39, , ,573 1, ,442 Raw materials, consumables and supplies and change in raw materials, consumables and supplies (91,098) (6,502) (62,666) (17,511) (750) - (178,527) Personnel expenses (168,238) (18,071) (18,239) (43,597) (100) (687) (248,932) Services (199,186) (18,973) (18,330) (20,228) (749) 687 (256,779) Other income and expenses ,158 (4) - - 1,307 Gross operating profit (EBITDA) 99,012 (4,017) 16,073 33, ,511 Amortization, depreciation and impairment Amortisation (8,680) (1,886) (4,478) (6,740) - - (21,784) Depreciation (16,154) (1,931) (526) (3,372) (45) - (22,028) Impairment and impairment reversals of non-current assets (166) - - (240) - - (406) (25,000) (3,817) (5,004) (10,352) (45) - (44,218) Operating result 74,012 (7,834) 11,069 22, ,293 Financial income, charges and value adjustments to financial assets Group's share of the result of associated companies valued at equity Other income and charges, impairment and revaluations of financial assets (178) Interest income and charges (26,067) Other financial income and charges (1,940) Exchange gains and losses 865 Gain (loss) on assets measured at fair value (755) (27,989) Profit (loss) before tax 72,304 Current and deferred tax Current tax (28,370) Deferred tax (1,202) (29,572) Total net profit (loss) 42,732 Minority interests 34 Net profit (loss) attributable to the Group 42, Amplifon Annual Report 2012

190 5. Acquisitions and goodwill Changes in goodwill and the amounts recorded for the acquisitions completed in the period, divided by country, are provided in the following table. ( thousands) Net carrying value at 31/12/2011 Business combinations Disposals Impairment Other net changes Net carrying value at 31/12/2012 Italy France 52,004 2,421 - (80) - 54,345 Iberian Peninsula 23, ,983 Hungary Switzerland 11, ,871 The Netherlands 32, ,781 Belgium and Luxembourg 9, ,251 Germany 51,477 3,236 - (61) - 54,652 Turkey United Kingdom and Ireland 14, ,012 USA and Canada 60,853 - (110) - (1,139) 59,604 Asia Pacific 285,638 2, ,321 Goodwill 543,443 9,216 (110) (141) (555) 551,853 Business combinations contains the provisional allocation to goodwill of the portion of the purchase price not directly attributable to the fair value of the assets and liabilities, but which reflects the expectations of obtaining a positive contribution in terms of free cash flow for an indefinite period. 188

191 Consolidated Financial Statements at 31 December 2012 The table below summarises all the acquisitions made throughout 2012 (amounts in thousand): Name Date Location Total purchase price Cash acquired Financial debts acquired Total cost Annual turnover (**) Contribution to the turnover from the purchase date Share deals Makstone Isitme Ürünleri Perakende Satis A.S Turkey Audiosalud SL (*) Spain Laboratoire Faggiano- Assistance Auditive France Audivi SAS France Audition Pertuis SAS France Amplifon Poland Sp.z.o.o Poland Total share deals 5, ,989 4,003 2,870 Asset deals Sens France Pontivy France Ligensa II Germany Hörkonzept Germany Kempkes & Groß ohg Germany Móstoles Spain Beltone India Curry USA Curry USA Miller USA Leonard USA Total asset deals 7,586 7,586 5,255 2,019 Total 12, ,575 9,258 4,889 (*) We point out that the Group already held a majority stake amounting to 56.1%. Thanks to the above mentioned transaction the Group now holds a 75.1% stake. (**) Annual turnover is the best available estimate of the turnover of the firm or business acquired. Information on the turnover of the acquired firm or business since the beginning of 2012 is not available Amplifon Annual Report 2012

192 A summary of the book value and fair value of assets and liabilities, deriving from the provisional allocation of the purchase price due to business combinations, is provided in the following table. ( thousands) France Germany India Spain Turkey USA Total Cost of acquisitions of the year 4,207 3,322 3, , ,457 Assets and liabilities acquired Book value Current assets ,249 Current liabilities (252) - (133) - (76) - (461) Net working capital Other intangible and tangible assets Minority interests (156) - (156) Provision for risks and charges - (352) - - (26) - (378) Other non-current assets and liabilities 18 (833) (800) Non-current assets and liabilities 138 (979) (555) Net invested capital 199 (822) Net financial position (354) - 36 NET EQUITY ACQUIRED - BOOK VALUE 589 (822) (141) DIFFERENCE TO BE ALLOCATED 3,618 4,144 2, , ,188 ALLOCATIONS Customer lists 1, ,670 Deferred tax assets Deferred tax liabilities (628) (291) - - (75) - (994) Total allocations 1, ,972 TOTAL GOODWILL 2,421 3,236 2, ,216 Disposals refer to the completion of the refocusing strategy for our US indirect channel, where the sale of four proprietary stores to the indirect channel caused a reduction in goodwill of 110 thousand. Write downs refers to value adjustments made to goodwill pertaining to minor acquisitions booked contra earn-outs no longer due in the period amounting to 141 thousand. Other net changes were mainly due to exchange rate fluctuations during the period. Analysis of the recoverable value of the goodwill allocated to the cash-generating units was made; these CGUs are generally the same as the individual countries in which Amplifon operates. Goodwill allocation by Region is detailed in the table at the beginning of this section. With the exception of the UK, cash generating units (CGUs) were tested for impairment using the discounted cash flow (DCF) method net of tax. 190

193 Consolidated Financial Statements at 31 December 2012 The CGUs value in use was determined by discounting expected cash flows under the three-year business plan ( ) except for those countries in which the third plan year does not reflect a fully functioning business and thus could not reasonably be used as the basis for the perpetual growth formula, due to upcoming legislative changes, changes to the business model or the launch of start-ups as part of the development of new markets. In these cases the impairment test was based on a five-year plan. The plans used for impairment testing reflect - particularly for the European area - the expected general contraction in economic growth and foresee generally lower turnover and profit targets than those of the plans used for the previous year. Additionally - in line with the aim of checking the congruity of the impairment test results in this limited growth environment values in use were checked against the values in use resulting from the previous year s tests and any greater CGU values in use were justified as being a direct consequence of specific and clearly identified circumstances. The DCF calculation assumed a weighted average cost of capital and used a discount rate that reflected current market cost of borrowing estimates, taking into account the specific risks of each CGU. Specific country risks were reflected in the increase of each country s Beta. Final perpetual growth for each country is in line with the IMF s inflation forecasts for Italy France The Netherlands Germany Belgium and United Luxembourg Switzerland Spain Portugal States Hungary Australia New Zealand Turkey India Growth rate 1.4% 1.9% 1.8% 2.0% 2.0% 1.0% 1.5% 1.5% 1.8% 3.0% 2.6% 2.1% 5.5% 4% Weighted average cost of capital 8.8% 5.4% 7.1% 7.2% 6.1% 7.2% 8.5% 10.6% 7.6% 11.8% 6.8% 8.8% 13.9% 14.7% Cash flow time horizon Three years Three years Five years Five years Three years Three years Five years Three years Three years Three years Three years Three years Three years Five years Sensitivity analysis was also carried out to determine value changes due to base assumptions, which after considering any consequent changes to the other variables used make the CGU s recoverable value equal to its book value. 191 Amplifon Annual Report 2012

194 This analysis is given in the following table and shows that, for all CGUs, only significant deviations from achievement of business objectives, variations in interest rate levels and in perpetual growth rates would reduce recoverable value to a level close to book value. Negative % changes growth rate expected on the basis of each business plan which would make the CGU s recoverable value equal to its book value Negative % changes in cash flow expected on the basis of each business plan which would make the CGU s recoverable value equal to its book value % changes in the discount rates which would make the CGU s recoverable value equal to its book value Italy > 100% 96.0% 188.0% France 11.5% 71.5% 8.5% The Netherlands 3.6% 35.0% 2.6% Germany 2.1% 26.5% 1.6% Belgium and Luxembourg 85.0% 88.5% 31.0% Switzerland 25.0% 77.0% 16.0% Iberian Peninsula 1.2% 63.0% 0.9% Portugal 2.8% 21.0% 2.4% USA 6.0% 50.0% 5.0% Hungary >100% 89.0% 61.0% Australia 5.1% 50.0% 4.0% New Zealand 3.0% 28.0% 2.6% Turkey 9.5% 45.0% 7.0% India 2.5% 15.0% 1.5% The UK impairment test where the business plan shows overall positive cash flows, which however do not make it possible to recover the whole cost of book value updated the fair value calculated by external expert in its 2011 impairment test (see the notes to the Accounts as at 31 December It was based on multiples of sales on comparable transactions realized on the European market starting from 2010 together with a calculation of the present value of future cash flows resulting from a business plan including investments to increase the profitability and the effects of possible synergy through integration with a market participant) with appropriate valuations in order to better reflecting the current scenario, break-even more or less (gross of the service agreements with the Parent) in the British Group and the competition it faces, which though still markedly influenced by the public sector s significant role, has witnessed initial cooperation between public and private entities. The estimation was performed through an analysis of multiples of sales, multiples of EBITDA and future cash flows. These two last items take into account possible synergies through integration with a market participant (mainly related to territorial coverage optimization). The test confirmed that fair value was greater than book value. 192

195 Consolidated Financial Statements at 31 December Intangible fixed assets The following tables detail changes in intangible fixed assets. ( thousands) Historical cost at 31/12/2011 Accumulated amortization and writedowns at 31/12/2011 Net book value at 31/12/2011 Historical cost at 31/12/2012 Accumulated amortization and writedowns at 31/12/2012 Net book value at 31/12/2012 Software 45,602 (33,386) 12,216 49,825 (38,393) 11,432 Licences 8,411 (7,149) 1,262 9,055 (7,719) 1,336 Non-competition agreements 4,482 (4,397) 85 4,399 (4,384) 15 Customer lists 155,931 (55,880) 100, ,080 (69,564) 90,516 Trademarks and concessions 32,919 (3,113) 29,806 33,544 (5,483) 28,061 Other 11,523 (2,861) 8,662 13,777 (3,651) 10,126 Intangible assets in progress and advances 1,737-1,737 3,135-3,135 Total 260,605 (106,786) 153, ,815 (129,194) 144,621 ( thousands) Net book value at 31/12/2011 Capital Expenditure Disposals Amortization Business combinations Impairment Other net changes Net book value at 31/12/2012 Software 12,216 2,194 (25) (5,326) 2-2,371 11,432 Licences 1, (91) (574) ,336 Non-competition agreements (70) Customer lists 100,051 - (3) (13,707) 3,670 (177) ,516 Trademarks and concessions 29, (2,361) ,061 Other 8,662 2,985 (277) (850) - (440) 46 10,126 Intangible assets in progress and advances 1,737 2, (1,251) 3,135 Total 153,819 8,415 (396) (22,888) 3,672 (617) 2, ,621 The change in customer lists attributable to business combinations breaks down as follows: as to 1,825 thousand: the provisional allocation of the purchase price paid for six stores in France located in Caen, Deauville, Paris, Pertuis, Sens and Pontivy; as to 373 thousand: allocation of the purchase price of the acquisition Maxtone (Turkey); as to 537 thousand: the acquisition of customer lists by Miracle Ear in Florida, New Mexico and Virginia; as to 908 thousand: the provisional allocation of the purchase price paid for ten stores in Germany; as to 27 thousand: the provisional allocation of the purchase price paid for one store in Móstoles (Spain). The 2012 increases in intangible non-current assets were mainly attributable to: expenditure on intangible fixed assets being essentially work done as part of the joint capital expenditure plan with the franchisees for store renovation and relocation in the US; expenditure on information technology, particularly with regard to the installation of new and optimization of existing software in Italy and on front office systems, including a franchisee management system, in the US; expenditure on infrastructure and installation of a single software in New Zealand, following the 193 Amplifon Annual Report 2012

196 restructuring of the two operating companies NHC New Zealand and Bay Audiology which are now grouped together in a single organizational structure. expenditure relating to the implementation of the Group s ERP system in Australia. Write-downs amounting to 617 thousand reflects the write-off of the book value of intangible fixed assets being joint investments with a US franchisee with whom the relationship was terminated at the beginning of Other net changes include mainly positive exchange differences amounting to 1,165 thousand. 7. Tangible fixed assets The following table shows the changes in tangible fixed assets: ( thousands) Historical cost at 31/12/2011 Accumulated depreciation and writedowns at 31/12/2011 Net book value at 31/12/2011 Historical cost at 31/12/2012 Accumulated amortization and writedowns at 31/12/2012 Net book value at 31/12/2012 Land Buildings, constructions and leasehold improvements 77,800 (40,906) 36,893 86,979 (49,640) 37,339 Plant and machinery 28,416 (20,581) 7,835 29,278 (22,177) 7,101 Industrial and commercial equipment 28,323 (20,412) 7,911 30,625 (21,210) 9,415 Motor vehicles 5,385 (2,748) 2,638 5,669 (3,330) 2,339 Computers and office machines 29,786 (23,485) 6,301 34,652 (26,261) 8,391 Furniture and fittings 57,000 (30,942) 26,058 63,069 (36,732) 26,337 Other tangible fixed assets 1,000 (325) 674 2,970 (1,467) 1,503 Fixed assets in progress and advances 2,907-2,907 1,482-1,482 Total 230,780 (139,400) 91, ,887 (160,817) 94,070 ( thousands) Net book value at 31/12/2011 Investments Disposals Depreciation Business combinations Impairment Other net changes Net book value at 31/12/2012 Land Buildings, constructions and leasehold improvements 36,893 7,192 (97) (8,854) 473-1,732 37,339 Plant and machinery 7,835 1,088 (24) (2,006) 93 (1) 116 7,101 Industrial and commercial equipment 7,911 4,275 (5) (1,947) 9 (42) (786) 9,415 Motor vehicles 2, (1,186) ,339 Computers and office machines 6,301 3,746 (26) (3,439) 12 (1) 1,798 8,391 Furniture and fittings 26,058 5,609 (12) (5,897) 165 (2) ,337 Other tangible fixed assets (3) (243) ,503 Fixed assets in progress and advances 2,907 4,101 (262) - - (22) (5,242) 1,482 Total 91,380 26,972 (389) (23,572) 777 (68) (1,030) 94,

197 Consolidated Financial Statements at 31 December 2012 Capital expenditure made in the period mainly concerned the continuation of the store renovation programme based on the new concept store carried out over the last three years under the Group s strategy of increasing customer focus. This programme includes expenditure on rebuilding and in some cases relocating stores. The increase of 777 thousand in the item business combinations is primarily attributable to: 273 thousand to the provisional purchase price allocation of 38 shops from Beltone in India; 171 thousand provisional purchase price allocation relating to the acquisition of Maxtone (Turkey); 205 thousand to the provisional purchase price allocation relating to the acquisition of 10 shops in Germany; 120 thousand to the provisional purchase price allocation relating to the acquisition of 6 shops in France located in Caen, Deauville, Paris, Pertuis, Sens and Pontivy. Other net changes consist mainly of positive exchange differences of 377 thousand. 8. Other non-current assets ( thousands) 31/12/ /12/2011 Change Financial assets measured at fair value through profit and loss 3,742 7,421 (3,679) Financial long-term receivables 11,560 11, Deposits and other restricted amounts 13,734 10,839 2,895 Other non-current assets 8,953 9,468 (515) Total 37,989 39,031 (1,042) Financial assets designated at fair value through profit and loss essentially include investments in bonds and other listed securities made by the subsidiary Amplinsure RE AG which is a reinsurer of the insurances sold on the Dutch market. These assets are grouped in two portfolios managed by specialised managers. The interest rate on these securities varies between 1% and 4.75%. Financial long-term receivables are composed of loans granted to franchisees by our US subsidiaries in support of investment and development in the US market. Other non-current assets include 5,905 thousand ( 6,302 thousand in the comparative period) relative to the medium long-term receivables made by the American subsidiaries for the transfer of corporate shops the indirect channel. Both long-term financial receivables and other non-current assets are discounted when the interest rate applied differs from the market rate. 195 Amplifon Annual Report 2012

198 9. Derivatives and hedge accounting The following table shows the fair values of the derivatives outstanding at the end of the comparative period and at the reporting date giving separately the fair value of those derivatives that qualify as fair value hedges and cash flow hedges and those that do not qualify for hedge accounting. ( thousands) Type Fair value at 31/12/2012 Fair value at 31/12/2011 Assets (Liabilities) Assets (Liabilities) Fair value hedge Cash flow hedge 6,899 (17,397) 10,226 (16,668) Total hedge accounting 6,963 (17,397) 10,744 (16,668) Non hedge accounting (304) Total 7,137 (17,397) 10,744 (16,972) For each hedging instrument the following table shows: the hedged item, the hedged risk and the type of hedging relationship. Hedging Instrument - Expiry (Notional) Hedged item (Outstanding debt) Hedged risk Type of hedging relationship Cross Currency Swap - 02/08/2013 Private Placement term. 02/08/2013 Exchange rate Fair Value US$ 12,591,761 US$ 12,591,761 Interest rate Hedge Cross Currency Swap - 02/08/2013 Private Placement term. 02/08/2013 Exchange rate US$47,408,239 US$ 47,408,240 Interest rate Collar Interest Rate - 02/08/2013 Private Placement term. 02/08/2013 Interest rate 13,800,000 US$ 17,492,880 equivalent to 13,800,000 Collar Interest Rate - 02/08/2013 Private Placement term. 02/08/2013 Interest rate 23,600,000 US$ 29,915,360 equivalent to 23,600,000 Cross Currency Swap - 02/08/2013 Private Placement term. 02/08/2013 Exchange rate US$ 25,000,000 US$ 25,000,000 Interest rate Interest Rate Swap - 02/08/2013 Private Placement term. 02/08/2013 Interest rate 19,722,309 US$ 25,000,000 equivalent to 19,722,309 Cross Currency Swap - 02/08/2016 Private Placement term. 02/08/2016 Exchange rate US$ 70,000,000 US$ 70,000,000 Interest rate Interest Rate Swap - 02/08/2016 Private Placement term. 02/08/2016 Interest rate 55,222,468 US$ 70,000,000 equivalent to 55,222,468 Interest Rate Swap 30/06/2014 Syndicated loan term. 30/06/2015 Interest rate 103,800, ,800,000 Interest Rate Swap - 30/06/2014 Syndicated loan term. 30/06/2015 Interest rate 46,537,000 46,537,000 Interest Rate Swap - 30/06/2014 Syndicated loan term. 30/06/2015 Interest rate 86,500,000 86,500,000 Cash Flow Hedge 196

199 Consolidated Financial Statements at 31 December 2012 Fair Value Hedges Changes in the fair value of hedging instruments are taken to profit and loss, while any change relating to the hedged item - in respect of the portion attributable to the hedged risk - is recognised as an adjustment to the carrying value of the hedged item with a contra entry in profit and loss. For fair value hedges of items accounted for at amortised cost, adjustments are amortised in profit and loss starting from the date at which the hedged item ceases to be adjusted for changes in fair value attributable to the hedged risk. ( thousands) Fair value at 31/12/2012 Fair value at 31/12/2011 Purpose of hedging Hedged risk Assets (Liabilities) Assets (Liabilities) Private placement Exchange rate and interest rate The following table shows gains/losses arising from outstanding derivatives and the gains/losses and the impact on profit and loss and the statement of financial position from hedging instruments and hedged risk. ( thousands) 31/12/ /12/2011 (Loss) Gain (Loss) Gain Hedging instrument (61) (777) Hedged item 304 1,652 Total P&L impact Cash Flow Hedging In 2012 cash flow hedges were used to hedge currency and interest-rate risk relating to the private placement of US$155 million and interest-rate risk on a portion of the syndicated loan in the amount of 237 million (being the amount outstanding at 31 December 2012 net of repayments made during the year). In respect of these hedges, changes in the fair value of the hedge, initially recognised in equity, were taken to profit and loss only for the amount relating to the period only. ( thousands) Fair value at 31/12/2012 Fair value at 31/12/2011 Purpose of hedging Hedged risk Assets (Liabilities) Assets (Liabilities) Private placement Exchange rate and interest rate 6,899 (11,085) 10,226 (11,094) Syndicated loan Interest rate - (6,312) - (5,574) 197 Amplifon Annual Report 2012

200 The following table shows the impact on profit and loss of outstanding derivatives and the statement of financial position effects of the cash flow hedge reserve. The amounts are gross of the tax effect. ( thousands) Time value (Loss) Gain Recognised in net equity (Debit)/Credit Reclassified to the income statement - Effective portion (Loss) Gain Reclassified to the income statement - Ineffective portion (Loss) Gain 1/1/ /12/ (5,770) 2,543 (2) 1/1/ /12/ (5,609) (3,732) (298) 10. Inventories ( thousands) Cost Balance at 31/12/2012 Balance at 31/12/2011 Obsolescence provision Net Cost Obsolescence provision Net Goods 41,531 (7,370) 34,161 41,796 (7,180) 34,616 Work-in-progress Total 41,566 (7,370) 34,196 41,831 (7,180) 34,651 The movements in the provision for obsolence for inventories in the year are as follows. ( thousands) Balance at 31/12/2011 (7,180) Provision (2,279) Utilization 2,380 Translation differences and other movements (291) Balance at 31/12/2012 (7,370) 11. Receivables ( thousands) 31/12/ /12/2011 Change Trade receivables 111, ,694 6,330 Trade receivables - Subsidiaries Trade receivables Parent company (53) Trade receivables - Associated companies and joint ventures 2 3 (1) Total trade receivables 111, ,838 6,277 Tax receivables 7,955 5,297 2,658 Other receivables 11,226 10, Non-financial prepayments and accrued income 8,138 9,611 (1,473) Total 138, ,175 8,259 Factoring transactions without recourse carried out in 2012 involved a face value of 46,576 thousand and net proceeds of 44,875 thousand (as against 43,349 thousand and 41,727 thousand respectively at 31 December 2011); they related to receivables generated in the year and thus had no significant effect on working capital as compared to that of

201 Consolidated Financial Statements at 31 December 2012 VAT recevaibles totalling 11,961 thousand were factored without recourse in 2012 yielding net proceeds of 11,392 thousand; they related to credits that had arisen from Q up to Q and therefore had no significant effect on working capital compared with that of Other receivables were 11,226 thousand and included: 6,379 thousand relating to short-term instalments of receivables held by the US companies relating to sale to the indirect channel of proprietary stores and loans granted to franchisees to support their store renovation and capital expenditure in and development of the US market; 983 thousand advance payments to suppliers. The breakdown of trade receivables is detailed in the table below: ( thousands) 31/12/ /12/2011 Change Trade receivables 123, ,092 7,093 Sales returns provision (2,838) (2,556) (282) Allowance for doubtful accounts receivables (9,323) (8,842) (481) Total 111, ,694 6,330 All the other receivables have payment term of between 30 and 120 days and there is no significant concentration of credit risk. The current year movements in the allowance for doubtful accounts are as follows: ( thousands) Net value at 31/12/2011 (8,842) Provisions (3,744) Reversals 1,362 Utilisation for charges 1,388 Translation differences and other net changes 513 Net value at 31/12/2012 (9,323) 12. Cash and cash equivalents ( thousands) 31/12/ /12/2011 Change Bank current accounts 108,944 99,998 8,946 Short-term bank deposits 888 6,121 (5,233) Cash on hand 1,348 2,186 (838) Total 111, ,305 2,875 Liquid assets earn interest at market rates. 199 Amplifon Annual Report 2012

202 13. Share capital and net equity At 31 December 2012 the fully paid in and subscribed share capital consisted of 223,402,039 ordinary shares with a par value of At 31 December 2011 share capital was made up of 221,091,950 shares. The increase recorded in the period is due to the exercise of 2,310,089 stock options, equivalent to 1.03% of the share capital. At 31 December 2012 Amplifon S.p.A. held 6,900,000 treasury shares equivalent to 3.09% of the share capital. In 2012 there was no sale of the treasury shares held by the company. 14. Net financial position In accordance with the requirements of the Consob communication dated 28 July 2006 and in compliance with the CESR (now ESMA) Recommendation of 10 February 2005 Recommendations for the consistent implementation of the European Commission s Regulation on Prospectuses, the Group s net financial position at 31 December 2012, was as follows: ( thousands) 31/12/ /12/2011 Change Liquid funds (111,180) (108,305) (2,875) Payables for business acquisitions Other financial payables 56,014 50,720 5,294 Current portion of private placement 64,484-64,484 Hedging derivatives 2,572-2,572 Non hedge accounting derivative instruments (174) 304 (478) Short-term financial position 12,190 (56,916) 69,106 Long-term debt 233, ,428 (50,933) Private placement 53, ,163 (67,109) Finance lease obligations (190) Other medium/long-term debt Hedging derivatives 2,168 2, Medium/long-term acquisition payables 3,774 1,063 2,711 Net medium and long-term indebtedness 293, ,752 (115,107) Net financial indebtedness 305, ,836 (46,001) 200

203 Consolidated Financial Statements at 31 December 2012 In order to reconcile the above items with the statutory statement of financial position, we detail the breakdown of the following items: (i) loans, private placement and finance leases are shown in the main section of the balance sheet: a. Under the item financial liabilities, described in 15 of the explanatory notes for the long-term portion. ( thousands) 31/12/2012 Long-term debt 233,495 Private placement 53,054 Finance lease obligations 792 Other medium/long-term debt 362 Loan fees (2,989) Financial liabilities 284,714 b. Under the item financial payables, described in 22 of the explanatory notes for the current portion. ( thousands) 31/12/2012 Short term debt 55,028 Current portion private placement 64,484 Current portion of finance lease obligations 987 Loan fees (1,453) Financial payables 119,046 (ii) derivative instruments include fair value hedge derivatives. The other items included in the net financial indebtedness table are easily traceable to the statutory statement of financial position. The net short-term financial position was positive 56,916 thousand at 31 December 2011 and negative 12,190 thousand at 31 December 2012 a change of 69,106 thousand, due to reclassification as short-term of the second tranche of the private placement, amounting to US$85 million ( 67,056 thousand including the fair value of the currency hedges that fix the exchange rate at 1/US$1.2676) and maturing on 2 August 2013, as well as the amounts of the syndicated loan falling due on 30 June 2013 and 31 December 2013 which, since they are incremental, are greater than the repayments made in Net medium/long-term financial indebtedness was 408,752 thousand at 31 December 2011 and 293,645 thousand al at 31 December The balance shows a change of 115,107 thousand, due to the reclassification as short-term of maturing portions of the private placement and syndicated loan as described above. 201 Amplifon Annual Report 2012

204 15. Financial liabilities Long-term debt breaks down as follows: ( thousands) 31/12/ /12/2011 Change Private placement 53, ,163 (67,109) Net long term loans 230, ,987 (49,481) - Long term debt 233, ,428 (50,933) - Loan fees (2,989) (4,441) 1,452 Other medium/long-term debt Finance lease obligations (190) Total long term debt 284, ,132 (116,418) Short term debt 119,046 49,104 69,942 - of which current portion of private placement 64,484-64,484 - of which current portion of net long-term debt 49,521 41,037 8,484 - current portion of long-term debts 50,974 42,653 8,321 - loan fees (1,453) (1,616) of which current portion of lease obligations 987 1,044 (57) Total short term debt 119,046 49,104 69,942 Total financial debt 403, ,236 (46,476) Private placement On 2 August 2006 the Amplifon Group closed a private placement of bonds with institutional investors totalling US$180 million, issued by our US subsidiary Amplifon U.S.A. Inc. The first of the three tranches of US$25 million was repaid on 2 August Details of the remaining two tranches are as follows: Issue Date Issuer Maturity Face Value (US$ 000) Coupon 2 Aug 2006 Amplifon U.S.A. Inc. 2 Aug , % 2 Aug 2006 Amplifon U.S.A. Inc. 2 Aug , % TOTAL 155,

205 Consolidated Financial Statements at 31 December 2012 Syndicated loan On 3 December 2010 the Amplifon Group finalised a million and A$70 million syndicated loan with a banking syndicate as follows: Issue Date Issuer Maturity Currency 9 December 2010 Amplifon S.p.A. 9 December December 2010 Amplifon Nederland BV Amplifon French Branch 2 August 2013 Amplifon S.p.A. 9 December 2010 Face Value (/000) (***) 9 December ,000 Euribor 6 months (*) 9 December ,000 Euribor 6 months (**) 9 December ,800 Euribor 6 months (*) 9 December ,000 Euribor 6 months Total in Euros 303,800 Amplifon Australia Pty Ltd 9 December 2015 AUD 70,000 6 months BBR Total in Australian Dollars 70,000 Coupon Spread Repayments % if leverage(****) > 3.00:1 2,75% if leverage < = to 3.00:1 but > than 2.50:1 2.00% if leverage < = a 2.50:1 but > than 2.00:1 1,5% if leverage < = to 2.00:1 Progressive amounts (*) Tranche hedged against interest rate risk by using hedging instruments that fix the interest rate at 2.397% from 1 July 2011 until 30 June (**) Tranche hedged against interest rate risk by using hedging instruments that fix the interest rate at 2.075% from 31 December 2011 until 30 June (***) Please see below the long-term loans table below for a detail of the residual debt. (****) Leverage ratio of net financial indebtedness/ebitda referring to the 4 last quarters (determined with reference to recurring transactions only and on the basis of recalculated figures in case of significant changes to the structure of the Group). The repayment plan for the tranches both in Euros and in Australian Dollars is repaid over five years, in biannual payments, in increasing amounts according to the percentages in the table below: Date of repayment Repayment percentage Cumulative repayment percentage 30/06/ % 1.25% 31/12/ % 2.50% 30/06/ % 8.00% 31/12/ % 13.50% 30/06/ % 21.25% 31/12/ % 29.00% 30/06/ % 38.00% 31/12/ % 47.00% 03/12/ % % The repayment of the first two tranches maturing in 2012 amounting to 36,175 thousands, was performed using liquid funds and without the resorting to new credit lines. 203 Amplifon Annual Report 2012

206 Long-term debt The following table breaks down the debt by maturity. ( thousands) Lender Instalments Amplifon S.p.A. Instalments at 30/6 and 31/12 from 30/06/2009 Syndicated loan Amplifon SpA Instalments at 30/6 and 31/12 from 30/06/2011 Syndicated loan Amplifon Nederland Instalments at 30/6 and 31/12 from 30/06/2011 Syndicated loan Amplifon French Branch Instalments at 30/6 and 31/12 from 30/06/2011 Syndicated loan Amplifon Aus PTY Instalments at 30/6 and 31/12 from 30/06/2011 Nominal expiry date Average rate 2012/360 Balance at 31/12/2011 Business combinations Exchange and other effect changes Repayments as at 31/12/2012 Balance at 31/12/2012 Shortterm portion Medium and longterm portion 30, % 6, (6,483) /12/ , % 117, (13,200) 103,800 18,600 85,200 09/12/ , % 97, (11,000) 86,500 15,500 71,000 09/12/ , % 52, (5,918) 46,537 8,339 38,198 09/12/2015 AUD 70, % 53, (6,057) 47,632 8,535 39,097 09/12/2015 Other (25) TOTAL LONG TERM DEBT 327, (42,683) 284,469 50, ,495 Other 516 (75) Private placement USD 180, % 120,163 (2,625) ,538 64,484 53,054 Amplifon USA (*) Instalments at 2/08/2013 and 02/08/ /08/2016 TOTAL 447,244 (2,579) 541 (42,758) 402, , ,910 (*) Considering the effect of the hedges disclosed above, the Euro equivalent of the private placement was 122,278 thousand. The following table shows the maturities of medium/long-term debt at 31 December 2012 based on contractual obligations: ( thousands) Repayments Syndicated loan Private placement (*) Other Total , , , , , ,423 Total 233,495 55, ,078 (*) Amounts relating to private placement are expressed at the hedging exchange rate. Covenants The amount of financial indebtedness consisting of the private placement of US$155 million (equivalent to million including the fair value of derivatives which fix the Euro-Dollar exchange rate at ) are subject to the following covenants (which in the presence of covenants which are more restrictive on other loans should be considered aligned to these more restrictive values): the ratio of Group net debt to shareholders equity must not exceed the value of 1.5; the ratio of Group net debt to EBITDA in the last four quarters (determined with reference to recurring operations only on the basis of restated figures where there were significant changes to the structure of the Group) must not exceed the value of

207 Consolidated Financial Statements at 31 December 2012 As regards the syndicated loans granted to Amplifon S.p.A., Amplifon Nederland BV and Amplifon Australia Pty Ltd amounting in total to million and AU$60.5 million, and the tranche granted to the French branch and amounting to 46.5 million, the following covenants are in place which being more restrictive, also extend to the private placement. The net financial indebtedness/ebitda ratio of the last 4 quarters (determined with reference to recurring operations only on the basis of restated figures where there were significant changes to the structure of the Group) must not exceed: Period Value Up to 31 December Up to 30 June Up to 31 December Up to 30 September The ratio of the EBITDA for the last 4 quarters (determined with reference to recurring operations only on the basis of restated figures where there were significant changes to the structure of the Group) to the net interest charges for the same last 4 quarters should not be less than a value of 4.0. At 31 December 2012 the value of the ratios was as follows: Value Net financial indebtedness/group net equity 0.71 Net financial indebtedness/ebitda for the last 4 quarters 2.11 EBITDA for the last 4 quarters to net finance charges 5.69 In determining the above mentioned ratios, the EBITDA value has been determined on the basis of restated figures, in order to include the main changes in the Group structure: ( thousands) Group EBITDA ,172 EBITDA related to France and India business combinations (not audited) (428) Total EBITDA relevant for covenant calculation 144,744 There will be other covenants with reference to the syndicated loan and the private placement limiting the amount of guarantees that may be issued, the sale of certain investments and entering into sale and lease back transactions or extraordinary transactions. More in detail, investments will be capped only if the ratio of net financial indebtedness and EBITDA exceeds 2.5x in the last four quarters of the prior fiscal year, namely These undertakings and covenants are normal international practice. There are no covenants on the remaining 0.4 million of medium/long-term financial debt including shortterm instalments. 205 Amplifon Annual Report 2012

208 16. Provisions for risks and charges (medium/long term) ( thousands) 31/12/ /12/2011 Change Product warranty provision 7,000 6, Contractual risks 2,002 1, Agents leaving indemnity 22,495 17,841 4,654 Other risk provisions 1, Total 32,525 27,123 5,402 ( thousands) Net value at 31/12/2011 Provision Utilization Other net changes Translation differences Change in consolidation area Net value at 31/12/2012 Product warranty provision 6,842 2,850 (310) (2,735) ,000 Contractual risks 1, (123) (375) 1-2,002 Agents leaving indemnity 17,841 5,360 (419) - (287) - 22,495 Other risk provisions (169) (14) (1) - 1,028 Total 27,123 9,481 (1,021) (3,124) (287) ,525 The contractual risk provision refers to the risk of claims from employees and agents, as well as those arising from the supply of services. Agents leaving indemnity mainly comprises the agents leaving indemnity provision recognised in Amplifon S.p.A. s separate financial statements amounting to 8,051 thousand and equivalent provisions in the US subsidiaries amounting to 13,459 thousand. The main assumptions used in the actuarial estimate of agents leaving indemnity were: ( thousands) FY 2012 FY 2011 Economic assumptions Annual discount rate 2.40% 4.25% Demographic assumptions Probability of agency contract termination due to company reasons 1.30% 1.30% Probability of agent s voluntary termination 5% 5% Mortality rate RG48 RG48 Disability percentage INPS tables divided by age and sex INPS tables divided by age and sex Actuarial gains and losses are included in the year s finance cost with the financial component relating to the discounting of the provision (see note 28 for details). 206

209 Consolidated Financial Statements at 31 December Liabilities for employees benefits ( thousands) 31/12/ /12/2011 Change Defined-benefit plans 6,185 5, Other defined-benefit plans 2, ,798 Other provisions for personnel 6,433 4,953 1,480 Total 15,203 11,101 4,102 Provisions for defined-benefit plans contain mainly the liability for severance pay in the Parent Company, which passed from 4,294 thousand at 31 December 2011 to 4,703 thousand at 31 December The other provisions for personnel mainly relate to provisions made for long term incentives for the General Director and Key Managers. In 2012 provisions were made in the amount of 2,960 thousand. The change in the provision for defined-benefit plans is detailed below: ( thousands) Net present value of the liability at the beginning of the year 5,361 Current service cost 559 Financial charges 179 Actuarial (gains)/losses 641 Amounts paid (415) Transfer of liabilities to external companies (137) Translation differences (3) Net present value of the liability at the end of the year 6,185 It should be noted that the current cost of severance indemnity is recognised under personnel expense in the consolidated financial statements, while actuarial gains and losses are recognised, together with the financial component relating to the discounting of the provision, in the year s finance cost (see note 28 for details). The main assumptions used in the actuarial estimate of the liability for employee benefits were as follows: ( thousands) FY 2012 FY 2011 Economic assumptions Annual discount rate 2.40% 4.25% Expected annual inflation rate 2.00% 2.00% Annual rate of increase of severance indemnity 3.00% 3.00% Demographic assumptions RG48 mortality tables published by the RG48 mortality tables published by the Mortality rate General Accounting Office of the State General Accounting Office of the State Disability percentage INPS tables divided by age and sex INPS tables divided by age and sex Retirement age 100% on meeting requirements for compulsory national social insurance 100% on meeting requirements for compulsory national social insurance 207 Amplifon Annual Report 2012

210 18. Other long-term liabilities ( thousands) 31/12/ /12/2011 Change Payables for business acquisitions 3,774 1,063 2,711 Other long-term debt (224) Total 4,049 1,562 2,487 Acquisition liabilities are the amount of the contingent consideration to be paid on reaching certain sales and/or profit targets in respect of the acquisitions made in India (Beltone), Turkey (Makstone Isitme Ürünleri Perakende Satis A.S.), Germany (Egermaier, Hörkonzept, Kempkes & Groß ohg and Dr. Klaus Ligensa) and Switzerland (Micro-Electric Hörgeräte AG). 19. Trade payables ( thousands) 31/12/ /12/2011 Change Trade payables Associated companies 5-5 Trade payables Joint venture (9) Trade payables Related parties Trade payables Third parties 97,726 96,564 1,162 Total 98,016 96,613 1,403 Trade payables do not bear interest and are paid within 60 to 120 days. 20. Other payables ( thousands) 31/12/ /12/2011 Change Payables for business acquisitions Other payables 53,366 53,603 (237) Accrued expenses and deferred income 34,461 33,367 1,094 Total 88,301 87, Acquisition liabilities are the short-term component of the contingent consideration to be paid on reaching certain sales and/or profit targets in respect of the acquisitions made in Germany (Sanomed GmbH and Egermaier), Turkey (Makstone Isitme Ürünleri Perakende Satis A.S.), Switzerland (Micro-Electric Hörgeräte AG), France (Audivi SAS) and Luxembourg. The other payables mainly comprise: (i) 3,414 thousand relating to customer down-payments; (ii) 9,953 thousand relating to social security liabilities; (iii) 22,261 thousand liabilities to personnel; and (iv) 11,798 thousand relating to commission due to agents. Accrued expenses and deferred income include 25,997 thousand relating to deferred income from aftersales services and guarantees. 208

211 Consolidated Financial Statements at 31 December Provisions for risks and charges (current portion) ( thousands) 31/12/ /12/2011 Change Other provisions for risks 689 1,107 (418) Total 689 1,107 (418) The 418 thousand change from 2011 was due to the settlement of the dispute between the UK tax authority and a supplier of press advertising services in respect of treatment of the VAT applied on the services rendered to Amplifon, as described in previous annual reports. The cost to Amplifon of the settlement was GBP 300 thousand - GBP 200 thousand less than the provision made in previous periods. 22. Short-term financial debt ( thousands) 31/12/ /12/2011 Change Bank current accounts 425 2,457 (2,032) Short-term bank borrowings 263 1,131 (868) Current portion of private placement 64,484-64,484 Current portion of long-term debts 50,974 42,653 8,321 Current portion of finance lease obligations 987 1,044 (57) Payables to banks and other financing 117,133 47,285 69,848 Current portion of fees on loans (1,453) (1,616) 163 Short-term financial debt Financial accrued expenses and deferred income 3,150 3,294 (144) Total 119,046 49,104 69,942 For the current portion of medium and long term loans refer to 15. Financial accrued expenses and deferred income relates for 3,095 thousand to interest payable on the private placement. 209 Amplifon Annual Report 2012

212 23. Deferred tax assets and liabilities The net balance of deferred tax assets and liabilities at 31 December 2012 was as follows: ( thousands) 31/12/ /12/2011 Change Deferred tax assets 48,039 48,408 (369) Deferred tax liabilities (53,081) (53,572) 491 Net position (5,042) (5,164) 122 ( thousands) Balance at 31/12/2011 Recognised in the income statement Recognised in net equity Businesses combinations and changes in consolidation area Exchange differences and other changes Balance at 31/12/2012 Deferred tax on severance indemnity and pension funds 1,471 (79) - 5 (27) 1,370 Deferred tax on tax losses c/fwd 7,857 (423) - - (148) 7,286 Deferred tax on inventory 294 (35) Deferred tax on tangible fixed assets (1,160) (721) (1,518) Deferred tax on trademarks and concessions 15,343 (1,031) - - (173) 14,139 Deferred tax on intangible fixed assets (41,244) 1,671 - (703) 66 (40,210) Deferred tax on provisions not adjusting assets 9,763 1, (596) 10,703 Deferred tax on receivables Other deferred tax 2, (537) 2,916 Total (5,164) 1, (698) (1,050) (5,042) Deferred tax assets on prior-year losses carried forward are as follows: ( thousands) 31/12/ /12/2011 Change Iberian Peninsula 3,633 4,029 (396) Germany 3,308 3,308 - Luxembourg - 4 (4) United States and Canada (269) Hungary - 19 (19) New Zealand - 43 (43) Switzerland Total 7,286 7,857 (571) 210

213 Consolidated Financial Statements at 31 December 2012 At 31 December 2012 the following prior-year losses had not given rise to deferred tax assets: ( thousands) Prior-year tax losses Rate Deferred tax assets not recognised in the accounts UK 55, % 12,759 Germany 21, % 6,744 Total 76,553 19, Revenues from sales and services ( thousands) FY 2012 FY 2011 Change Revenues from sales of products 816, ,017 19,506 Revenues from services 30,088 30,425 (337) Total 846, ,442 19,169 The 19,169 thousand increase in revenues was mainly due, as to 6,620 thousand, to acquisitions and, as to 24,195 thousand, to exchange differences, while organic growth was negative 11,646 thousand. 25. Employee costs ( thousands) FY 2012 FY 2011 Change Wages and salaries (199,373) (193,359) (6,014) Stock options and performance stock grant (3,333) (2,472) (861) Social contributions (41,396) (40,607) (789) Other personnel costs (12,730) (11,432) (1,298) Directors remuneration and oversight bodies (951) (1,062) 111 Total (257,783) (248,932) (8,851) 211 Amplifon Annual Report 2012

214 Staff headcount by geographical area: 31/12/ /12/2011 Number Average Number Average Italy France Switzerland Hungary Germany Iberian Peninsula Belgium and Luxembourg The Netherlands United Kingdom and Ireland Turkey Total Continental Europe 3,732 3,761 3,614 3,600 Total North America Australia New Zealand India Total Asia Pacific 1,178 1,101 1,067 1,030 Egypt Total Group 5,253 5,206 5,005 5, Other income and revenue ( thousands) FY 2012 FY 2011 Change Other income and revenues 1,628 2,663 (1,035) Total 1,628 2,663 (1,035) The item includes 714 thousand other income arising from Amplifon USA Inc s invoicing the IT system Sycle.net to the franchisees ( 655 thousand in 2011). 27. Amortisation, depreciation and impairment ( thousands) FY 2012 FY 2011 Change Amortisation of intangible fixed assets (22,888) (21,784) (1,104) Depreciation of tangible fixed assets (23,571) (22,028) (1,543) Amortisation and depreciation (46,459) (43,812) (2,647) Impairment (827) (406) (421) Total (47,286) (44,218) (3,068) Impairment losses include adjustments to intangible fixed asset amounting to 617 thousand following the write-off of the book value of intangible fixed assets relating to joint investments with a US franchisee whose franchise was terminated at the beginning of

215 Consolidated Financial Statements at 31 December Financial income, charges and changes in value of financial assets ( thousands) FY 2012 FY 2011 Change Share of the result of associated companies valued at equity (23) Other income, charges, revaluation and write-downs of financial assets 518 (178) 696 Interest income on bank accounts Interest payable on short and long-term bank loans (17,686) (20,095) 2,409 Interest expenses on private placement (6,459) (6,678) 219 Interest income and charges (23,194) (26,067) 2,873 Time value collar 4 17 (13) Other financial income and charges (2,706) (1,957) (749) Other financial income and charges (2,702) (1,940) (762) Exchange gains 2,983 5,107 (2,124) Exchange losses (2,596) (4,242) 1,646 Gain/(losses) on financial assets at fair value Non hedge derivatives (753) (755) 2 Total (25,681) (27,989) 2,308 The 2,409 thousand reduction in interest payable on bank borrowing was due (i) to a narrowing of the spread on the syndicated loan (from 300bps in 2011 to 275bps from 1 January 2012 and 200bps from 1 July 2012) following improvement of our leverage; (ii) a reduction of one percentage point of the interest rate on the Australian portion of the loan and (iii) lower average indebtedness in 2012 due to the repayments made in the second half of Interest payable maturing on the US dollar private placement include the amount that would have been payable had there been no hedge in place, i.e. 7,732 thousand, as well as the effect of the hedges, which reduced the cost by 1,273 thousand. Gains and losses on assets valued at fair value relate mainly to currency hedges of intercompany loans which are contra positive and negative exchange differences. Financial charges include 1,866 thousand ( 2,226 thousand in 2011) relating to the cost of factoring without recourse receivables due from the Italian public sector, and 2,130 thousand relating to the discounting of the severance pay (TFR) provision and the agents leaving indemnity in Italy, which was significant due to the sharp fall in discount rates. 29. Income tax ( thousands) FY 2012 FY 2011 Change Current income tax (30,199) (28,370) (1,829) Deferred income tax 1,136 (1,202) 2,338 Total (29,063) (29,572) Amplifon Annual Report 2012

216 The following table reconciles tax recognised in the consolidated financial statements to theoretical tax on the basis of Italy s current tax rates. ( thousands) FY 2012 FY 2011 Pre-tax profit (loss) 72,205 72,304 Tax for the year (29,063) (29,572) Tax rate 40.3% 40.9% Corporate tax rate -27.5% -27.5% Effect of variations from theoretical rate: Effect of different tax rate of companies not taxed in Italy -4.10% -1.74% Non-deductible expense net of non taxable income and non taxable dividends -0.80% -1.01% Deferred tax: effect of rate change, recognition of prior-year assets and liabilities and one-off items (IRES refund) -0.50% -1.84% Germany and the United Kingdom non-recognition of deferred taxes on the year s losses -2.80% -4.13% Effective tax rate, net of IRAP -35.7% -36.2% IRAP [regional tax on productive activity] -4.6% -4.7% Effective tax rate -40.3% -40.9% For a better understanding of the reconciliation of the recognised tax charge to the theoretical tax charge, IRAP is not included since it has a different tax base and would have a distorting effect from one year to the next. Theoretical tax was therefore determined applying only the current corporate tax rate in Italy (IRES of 27.5%) to pre-tax profit. In 2012 the tax rate was 40.3% - an improvement on 2011 s 40.9% - due to the recognition of a credit for the refund of IRES [Italian corporate tax] due to partial deductibility of IRAP [Italian regional tax on productive activity] from taxable income. The amount allowed relating to previous years was 1,320 thousand; it offset the negative effects of the changed distribution of profits between countries with their different tax rates: the problems encountered in the Netherlands and Switzerland caused a sharp fall in profits in those countries where taxes are lower, while higher profits in the US and Australia are subject to higher rates of taxation. The high tax rate is also due to taxes like Italy s IRAP and France s CVAE, where the taxable amount is not directly linked to gross profit, and to the fact that no further deferred tax assets were set aside in respect of losses in the UK and Germany, for prudential reasons. 214

217 Consolidated Financial Statements at 31 December Stock option Performance stock grant General characteristics of stock option plans the purpose of the issue and therefore of the award of the option rights, is to offer the beneficiaries, those who hold particularly important positions within the Group, the possibility to participate in Amplifon s share capital in order to align their interests with those of the Shareholders and to obtain their loyalty, given the significant strategic objectives to be attained; the award of the option rights is unconditional; the price of the shares includes the information related to the company s performance; the award of 14 March 2005, 30 September 2005 and 23 January 2006 were made in accordance with an EGM resolution taken on 19 February 2001 which authorised the Directors to increase Amplifon S.p.A. s share capital, in one or more stages, by up to 750,000 ordinary shares with a par value of 0.20 (that is 7,500,000 ordinary shares with a par value of 0.02 following the share split approved by shareholders on 27 April 2006); the award of 15 March 2007, 18 December 2008 and 6 November 2009, 16 December 2010 and 19 April 2011 were made in accordance with an EGM resolution taken on 27 April 2006 which authorised the Directors to increase Amplifon S.p.A. s share capital, in one or more stages, by up to 150,000 par value through the issuance of 7,500,000 ordinary shares with a par value of 0.02; the shares servicing for the purposes of the stock option plan are ordinary shares, issued in accordance with article 2441, paragraphs 5 and 8 for the purpose of a stock option plan; the exercise of the rights shall be in compliance with the Regulations filed with Borsa Italiana S.p.A. and Consob; the Board of Directors is entitled to draft regulations, choose the beneficiaries and determine the quantity and values for the execution of the stock option plans; Amplifon S.p.A reserves the indisputable right to modify the plan and the regulations when deemed necessary or merely opportune, following any modification to the provisions of the laws in force at the time of the award, or for any other objective reason that might justify such modification. The characteristic of the stock options plans currently in place are as follow: A) Stock options award 14 March 2005 On 14 March 2005 the Board of Directors resolved the first award of stock options. the objective of the plan is to offer option rights to the Group s Managing Director; one-third of the option rights granted vest one year following the award date, one-third two years after the award date and the remaining portion after three years; for each granted option right, the exercise and therefore the subsequent related subscription of Amplifon ordinary shares must take place within seven years, starting from the vesting date; non-exercised rights shall be automatically lost after such term; the price per share which the beneficiary shall pay to Amplifon S.p.A. for the subscription following the exercise of the option rights is equal to the price per share corresponding to the average of the prices reported in the last month before the award date, that is or after the share split; the exercise of the vested option rights shall take place in one or several tranches, as long as the minimum quantity for each tranche, is equal to 1,000 rights, as set out in the new regulation approved by the Remuneration Committee on 23 January 2006 and again on 27 April Amplifon Annual Report 2012

218 Stock option plan of 14 March 2005 No. of options FY 2012 FY 2011 Strike price ( ) Market Price ( ) No. of options Strike price ( ) Market Price ( ) Option rights at 1 January 402, , Option rights awarded in the period (Option rights exercised in the period) (Option rights cancelled in the period) (Option rights forfeited in the period) Option rights at 31 December 402, , of which exercisable at 31 December 402, ,000 B) Stock options award 30 September 2005 On 30 September 2005 the Board of Directors resolved the third award of stock options: the objective of the plan is to offer option rights to beneficiaries covering key positions within the Group; one-third of the granted rights vest one year following the award date, one-third two years after the award date and the remaining portion three years after the same date, with the exception of the employees of companies with headquarters in France and Spain for whom the options vest for two-thirds two years following the award date and for the remaining portion after three years; for each granted option right, the exercise and therefore the subsequent related subscription of Amplifon ordinary shares must take place within seven years, starting from the vesting date, with the exception of the employees of companies having their headquarters in Switzerland for whom the exercise period lasts 10 years; only for employee beneficiaries on the payroll at 1 October 2005 of the companies with registered office in Italy who have undersigned the new Regulation approved by the Remuneration Committee on 12 September 2007, 100% of their option rights may be exercised not earlier than three years from the date of award, meaning that the beneficiary shall subscribe to Amplifon shares and to the terms and conditions listed below only after three years have elapsed from the date of award. The deadline for subscribing to the shares is seven years from the vesting date; non-exercised rights shall be automatically lost after such term; the price per share which the beneficiary shall pay to Amplifon S.p.A. for the subscription following the exercise of the option rights is defined as equal to the price per share corresponding to the average of the prices reported in the last month before the granting date, that is or following the share split approved by the Shareholders Meeting of 27 April 2006; only for employee beneficiaries on the payroll at 1 October 2005 of the companies with registered office in Italy who have undersigned the new Regulation approved by the Remuneration Committee on 12 September 2007, the price per share is fixed at 5.713; the exercise of the vested option rights shall take place in one or several tranches, as long as the minimum quantity for each tranche is equal to 1,000 rights. 216

219 Consolidated Financial Statements at 31 December 2012 Stock Option Plan of 30 September general rules No. of options FY 2012 FY 2011 Strike price ( ) Market Price ( ) No. of options Strike price ( ) Market Price ( ) Option rights at 1 January 967, , Option rights awarded in the period (Option rights exercised in the period) (Option rights cancelled in the period) 55, , (Option rights forfeited in the period) Option rights at 31 December 912, , of which exercisable at 31 December 912, ,000 Stock options plan 30 September 2005 (Italian beneficiaries who subscribed to the Regulation approved on 12 September 2007) No. of options FY 2012 FY 2011 Strike price ( ) Market Price ( ) No. of options Strike price ( ) Market Price ( ) Option rights at 1 January 437, , Option rights awarded in the period (Option rights exercised in the period) (Option rights cancelled in the period) (Option rights forfeited in the period) Option rights at 31 December 437, , of which exercisable at 31 December 437, ,000 C) Stock options award 23 January 2006 On 23 January 2006 the Board of Directors resolved the fourth award of stock options: the objective of the plan is to offer option rights to beneficiaries covering key positions within the Group; one-third of the granted rights vest one year following the award date, one-third two years after the award date and the remaining portion three years after the same date, with the exception of the employees of companies with headquarters in Spain for whom the options mature for two-thirds two years following the award date and for the remaining portion after three years; for each granted option right, the exercise and therefore the subsequent related subscription of Amplifon ordinary shares must take place within seven years, starting from the vesting date; solely for the Beneficiaries employed in companies with registered offices in Italy who have accepted the new Regulation, approved by the Remuneration Committee on 12 September 2007, 100% of the option rights awarded may not be exercised until three years following the award date, meaning that the beneficiary will only be able to subscribe ordinary shares of Amplifon under the terms and conditions indicated below following three years from the award date. The deadline for subscribing to the shares is seven years from the vesting date; non-exercised rights shall be automatically forfeited after such term; 217 Amplifon Annual Report 2012

220 the price per share which the beneficiary shall pay to Amplifon S.p.A. for the subscription following the exercise of the option rights is equal to the price per share corresponding to the average of the prices reported in the last month before the award date, that is or after the share split; solely for employee beneficiaries on the payroll at 12 October 2007 of the companies with registered offices in Italy who have undersigned the new Regulation approved by the Remuneration Committee on 12 September 2007, the price per share is fixed at 5.749; the exercise of the vested option rights shall take place in one or several tranches, as long as the minimum quantity for each tranche is equal to 1,000 rights. Stock Option Plan of 23 January general rules No. of options FY 2012 FY 2011 Strike price ( ) Market Price ( ) No. of options Strike price ( ) Market Price ( ) Option rights at 1 January 115, , Option rights awarded in the period (Option rights exercised in the period) (Option rights cancelled in the period) (Option rights forfeited in the period) Option rights at 31 December 115, , of which exercisable at 31 December 115, ,000 Stock Option Plan of 23 January 2006 (Italian beneficiaries who subscribed to the Regulation approved on 12 September 2007) No. of options FY 2012 FY 2011 Strike price ( ) Market Price ( ) No. of options Strike price ( ) Market Price ( ) Option rights at 1 January 20, , Option rights awarded in the period (Option rights exercised in the period) (Option rights cancelled in the period) (Option rights forfeited in the period) Option rights at 31 December 20, , of which exercisable at 31 December 20,000 20,000 D) Stock options award 15 March 2007 On 15 March 2007, the Board of Directors resolved an award of stock options under the following terms and conditions: the objective of the plan is to offer option rights to beneficiaries covering key positions within the Group; the options awarded to employees resident in Italy vest after three years from the award date; onethird of the granted rights vest one year following the award date, one-third two years after the award date and the remaining portion three years after the same date, with the exception of the employees of 218

221 Consolidated Financial Statements at 31 December 2012 companies with headquarters in France for whom the options mature for two-thirds two years following the award date and for the remaining portion after three years; for each granted option right, the exercise and therefore the subsequent related subscription of Amplifon ordinary shares must take place within seven years, starting from the vesting date; non-exercised rights shall be automatically forfeited after such term; the price per share which the beneficiary will pay to Amplifon S.p.A. for the subscription following the exercise of the option rights is equal to the price per share corresponding to the average of the prices reported in the last month before the award date, that is after the share split; the exercise of the vested option rights shall take place in one or several tranches, as long as the minimum quantity for each tranche is equal to 1,000 rights. Stock Option Plan of 15 March 2007 No. of options FY 2012 FY 2011 Strike price ( ) Market Price ( ) No. of options Strike price ( ) Market Price ( ) Option rights at 1 January 195, , Option rights awarded in the period (Option rights exercised in the period) (Option rights cancelled in the period) (*) - - (Option rights forfeited in the period) Option rights at 31 December 195, , of which exercisable at 31 December 195, ,000 (*) The 2011 cancellations (of 40,000 rights, shown in the Accounts at 31 December 2011) were reversed on correction of an error. This correction was made after the end of the vesting period and had no economic effect. E) Stock options award 18 December 2008 On 18 December 2008, the Board of Directors resolved an award of stock options under the following terms and conditions: the objective of the plan is to offer option rights to beneficiaries covering key positions within the Group; the option rights granted to each beneficiary vest and therefore give right to the subsequent related subscription of Amplifon ordinary shares, under the following terms and conditions, for an amount of 50% after two years and one day from the award date and the remaining portion after three years and one day from the award date; for each granted option right, the exercise and therefore the subsequent related subscription of Amplifon ordinary shares must take place within five years, starting from the date of maturity; non-exercised rights shall be automatically forfeited after such term; the price per share which the beneficiary shall pay to Amplifon S.p.A. for the subscription following the exercise of the option rights shall be equal to the price per share corresponding to the average of the prices reported in the last month before the award date, that is 0.735; 219 Amplifon Annual Report 2012

222 on 19 December 2012 the Board of Directors approved an amendment to the operational regulation of the 2008 Stock Option Plan in respect of French beneficiaries only, in order to align it with local requirements for the qualification of the plan. This amendment applies more restrictive exercise conditions and resulted in a reduction in the fair value of the options concerned; higher costs are not therefore to be recognised; the exercise of the vested option rights shall take place in one or several tranches, as long as the minimum quantity for each tranche is 1,000 rights. Stock option plan of 18 December 2008 No. of options FY 2012 FY 2011 Strike price ( ) Market Price ( ) No. of options Strike price ( ) Market Price ( ) Option rights at 1 January 2,410, ,107, Option rights awarded in the period (Option rights exercised in the period) 1,922, , (Option rights cancelled in the period) ,000(*) - - (Option rights forfeited in the period) Option rights at 31 December 487, ,410, of which exercisable at 31 December 487,411 2,410,000 (*) The 2011 cancellations (of 60,000 rights, shown in the Accounts at 31 December 2011) were reduced by 35,000 rights on correction of an error. Consequently an amount of 9,000 was restored to the 2012 income statement. F) Stock options award 6 November 2009 On 6 November 2009, the Board of Directors resolved an award of stock options under the following terms and conditions: the objective of the plan is to offer option rights to beneficiaries covering key positions within the Group; the option rights granted to each beneficiary vest and therefore give right to the subsequent related subscription of Amplifon ordinary shares, under the following terms and conditions, for an amount of 50% after two years and one day from the award date and the remaining portion after three years and one day from the award date; for each granted option right, the exercise and therefore the subsequent related subscription of Amplifon ordinary shares must take place within five years, starting from the date of maturity; non-exercised rights shall be automatically forfeited after such term; the price per share which the beneficiary shall pay to Amplifon S.p.A. for the subscription following the exercise of the option rights shall be equal to the price per share corresponding to the average of the prices reported in the last month before the award date, that is 2.837; the exercise of the vested option rights shall take place in one or several tranches, as long as the minimum quantity for each tranche is 1,000 rights. 220

223 Consolidated Financial Statements at 31 December 2012 Stock option plan of 6 November 2009 No. of options FY 2012 FY 2011 Strike price ( ) Market Price ( ) No. of options Strike price ( ) Market Price ( ) Option rights at 1 January 765, , Option rights awarded in the period (Option rights exercised in the period) 387, , (Option rights cancelled in the period) , (Option rights forfeited in the period) Option rights at 31 December 377, , of which exercisable at 31 December 377, ,000 G) Stock options award 16 December 2010 On 16 December 2010, the Board of Directors resolved an award of stock options under the following terms and conditions: the objective of the plan is to offer option rights to beneficiaries covering key positions within the Group; the option rights granted to each beneficiary vest and therefore give right to the subsequent related subscription of Amplifon ordinary shares, for an amount of 50% after two years and one day from the award date and the remaining portion after three years and one day from the award date; for each granted option right, the exercise and therefore the subsequent related subscription of Amplifon ordinary shares must take place within five years, starting from the date of maturity; non-exercised rights shall be automatically forfeited after such term; the price per share which the beneficiary will pay to Amplifon S.p.A. for the subscription following the exercise of the option rights shall be equal to the price per share corresponding to the average of the prices reported in the last month before the award date, that is 3.746; the exercise of the vested option rights shall take place in one or several tranches, as long as the minimum quantity for each tranche is 1,000 rights. Stock option plan of 16 December 2010 No. of options FY 2012 FY 2011 Strike price ( ) Market Price ( ) No. of options Strike price ( ) Market Price ( ) Option rights at 1 January 890, ,010, Option rights awarded in the period (Option rights exercised in the period) (Option rights cancelled in the period) 90, , (Option rights forfeited in the period) Option rights at 31 December 800, , of which exercisable at 31 December 400, Amplifon Annual Report 2012

224 H) Stock options award 19 April 2011 On 19 April 2011 Amplifon s Board of Directors, under the stock option plan approved on 16 December 2010 and as indicated by its Remuneration Committee, granted 215,000 options to key Group employees. This completed the stock option plan launched at the EGM held on 27 April The conditions set were as follows: the objective of the plan is to offer option rights to beneficiaries covering key positions within the Group; the option rights granted to each beneficiary vest and therefore give right to the subsequent related subscription of Amplifon ordinary shares, for an amount of 50% after two years and one day from the award date and the remaining portion after three years and one day from the award date; for each option right granted, the exercise and therefore the subsequent related subscription of Amplifon ordinary shares must take place within five years, starting from the vesting date; unexercised rights shall be automatically forfeited after such term; the price per share which the beneficiary will pay to Amplifon S.p.A. for the subscription following the exercise of the option rights shall be equal to the price per share corresponding to the average of the prices reported in the last month before the award date, that is 4.227; the exercise of the vested option rights shall take place in one or several tranches, provided that the minimum quantity for each tranche shall be 1,000 rights. Stock option plan of 19 April 2011 No. of options FY 2012 FY 2011 Strike price ( ) Market Price ( ) No. of options Strike price ( ) Market Price ( ) Option rights at 1 January 215, Option rights awarded in the period , (Option rights exercised in the period) (Option rights cancelled in the period) (Option rights forfeited in the period) Option rights at 31 December 215, , of which exercisable at 31 December - 222

225 Consolidated Financial Statements at 31 December 2012 Residual life of awarded stock options Options assigned up to 31/12/2012 Residual life Strike price Awarded on < 1 year 1-5 years 5-10 years Total Number of shares Exercisable Average expiring date Mar , , , ,000 1 year Sep , , , ,000 2 years Sep , , , ,000 2 years Jan , , ,000 3 years Jan ,000-20,000 20,000 2 years Mar ,000 40, , ,000 5 years Dec , , ,411 3 years Nov , , ,500 4 years Dec , , , ,000 5 years Apr , ,000 6 years Total 583,667 2,722, ,000 3,960,911 3,345,911 General characteristics of the Stock Grant Plan On 16 December 2010 the Board of Directors as resolved by the Shareholders Meeting held on 13 December 2010 approved the regulation of the Performance Stock Grant Plan with the following general characteristics: the Plan provides for the grant of rights, each of which gives the right to Company stock to be granted to beneficiaries in key positions in the Group at the end of the vesting period (4 years). for each grant cycle, the Board of Directors is empowered to identify the beneficiaries and to set the number of rights to be granted to each beneficiary. the Board may also make such changes to the Plan as it considers necessary, at its sole discretion, with the aim e.g. of: (i) accommodating changes in the law; or (ii) making it possible for the Beneficiaries to benefit or continue to benefit from favorable regulations. the vesting of rights and the consequent grant of all or some of the Shares shall be subject to the following conditions: (i) on the award date of the shares the beneficiary must be an employee of a Group company, and not be working out a period of notice following dismissal or resignation; (ii) on the award date of the shares the reference price should be at least equal to the reference price; (iii) the individual performance levels assigned to the beneficiary must not be lower - throughout the reference period - than 100% achievement. Where these conditions are not met, the number of shares due to the beneficiary will be reduced by 25% for each reference period in which targets are not met. On 15 March 2012, under performance stock grant plan approved by the Board of Directors on 16 December 2010, a free award of maximum 2,386,500 rights was made to beneficiaries holding key positions in the Group (international key manager, sales management role e talent key performer) with a vesting period of four years. 223 Amplifon Annual Report 2012

226 On the award date of the shares the reference price shall be at least 3.75, as detailed below: Share price in the reference period Shares to be granted Less than From 3.75 to % From 4.00 to % From 4.25 to % From 4.50 to % From 4.75 to % >_ % The assumptions adopted in the calculation of the fair value are as follows: Model used Valuation of barrier options (options exercisable when a determined level of share price is reached) Current price 3.84 Exercise price 0.00 Volatility (4 years) 49.99% No-risk interest rate 1.507% Duration (years) 4.25 Expected dividend 1.0% The unitary fair value of the performance stock grant allotted in the period is The implicit cost the above mentioned stock grants plan recognised in the income statement in period amounts to 1,076 thousands. With regard to the already existing performance stock grant plans, i.e. those approved on 15 January 2011 and 16 May 2011, described in the Notes to the 31 December 2011 consolidated financial statements, on 7 March 2012 Amplifon S.p.A. s Board of Directors approved a change in the threshold price and the criteria for determining the stock, bearing in mind the significant changes in the economic situation. The new threshold prices are the following: Share price in the reference period Shares to be granted Less than From 3.75 to % From 3.90 to % From 4.05 to % From 4.20 to % From 4.35 to % >_ % The above changes brought the weighted average incremental unitary fair value to This value is the difference between the current fair value of the plans and the current fair value of the plans considering the above parameter changes. The incremental fair value is recognised in profit and loss on the basis of the residual vesting period of the assigned stock grants. The incremental fair value recognised in profit and loss in the first quarter 2012, in respect of the above plans, was 183 thousands. Below are reported the details of the performance stock grant plan. 224

227 Consolidated Financial Statements at 31 December 2012 A) Stock grant 15 January 2011 FY 2012 FY 2011 N. rights granted Market Price ( ) N. rights granted Market Price ( ) Option rights at 1 January 1,436, Rights granted in the period - - 1,555, (Rights converted in the period) (Rights cancelled in the period) 160, ,000 - Option rights at 31 December 1,275, ,436, B) Stock grant 16 May 2011 FY 2012 FY 2011 N. rights granted Market Price ( ) N. rights granted Market Price ( ) Option rights at 1 January 1,152, Rights granted in the period - 1,275, (Rights converted in the period) (Rights cancelled in the period) 7, ,250 - Option rights at 31 December 1,144, ,152, C) Stock grant 15 March 2012 FY 2012 FY 2011 N. rights granted Market Price ( ) N. rights granted Market Price ( ) Option rights at 1 January Rights granted in the period 2,386, (Rights converted in the period) (Rights cancelled in the period) 89, Option rights at 31 December 2,297, Amplifon Annual Report 2012

228 31. Investments in jointly-controlled and associated companies The following table shows the Group s share of the non-current assets, current assets, non-current liabilities, current liabilities, revenues and costs of jointly-controlled companies. ( thousands) 31/12/ /12/2011 Non-current assets Current assets Non-current liabilities Current liabilities Revenues 1,289 1,356 Net profit for the year The following table shows the main profit and statement of financial position data of associates accounted for using the equity method. ( thousands) 31/12/ /12/2011 Non-current assets Current assets 1, Non-current liabilities Current liabilities Revenues 3, Net profit for the year Please see Annexe 1 for a list of associates accounted for using the net equity method, where our interest is between 20% and 49% of capital. 226

229 Consolidated Financial Statements at 31 December Earnings per share Basic EPS Basic earnings per share is obtained by dividing the net income for the year pertaining to the ordinary shareholders of the parent company by the weighted average number of shares outstanding in the year, considering purchases and disposals of own shares as cancellations and issues of shares. Earnings per share is determined as follows: Earnings per share from operating activities FY 2012 FY 2011 Net profit (loss) pertaining to ordinary shareholders ( thousand) 43,182 42,698 Average number of shares outstanding in the year 215,856, ,700,308 Average earnings per share ( per share) Diluted earnings per share Diluted earnings per share is obtained by dividing the net income for the year pertaining to ordinary shareholders of the Parent company by the weighted-average number of shares outstanding during the year adjusted by the diluting effects of potential shares. In the calculation of shares outstanding, purchases and sales of treasury shares are considered as cancellation or issue of shares. The potential ordinary share categories refer to the possible conversion of Group employees stock options and stock grants. The computation of the average number of outstanding potential shares is based on the average fair value of shares for the period; stock options and stock grants are excluded from the calculation since they have anti-diluting effects. Weighted average diluted number of shares outstanding FY 2012 FY 2011 Average number of shares outstanding in the year 215,856, ,700,308 Weighted average of potential and diluting ordinary shares 851,471 2,544,146 Weighted average of shares potentially subject to options in the period 216,707, ,244,454 The diluted earnings per share was determined as follows: Diluted earnings per share FY 2012 FY 2011 Net profit pertaining to ordinary shareholders ( thousand) 43,182 42,698 Average number of shares outstanding in the period 216,707, ,244,454 Average diluted earnings per share ( ) Amplifon Annual Report 2012

230 33. Transactions with parent companies and related parties The Parent company, Amplifon S.p.A. is based in Milan, in Via Ripamonti 133. The Group is directly controlled by Ampliter N.V. and indirectly by Amplifin S.p.A., owned by Susan Carol Holland, with 100% of the shares, whilst Anna Maria Formiggini Holland retains usufruct. Transactions effected by Amplifon S.p.A. and its subsidiaries with related parties essentially concern the rendering of services and loans grated by entities related to minorities in Egypt and Turkey. All transactions form part of ordinary activities and were settled at arm s length and there were no untypical or unusual transactions. The following table details transactions with related parties. Parent company and other related parties 31/12/2012 FY 2012 ( thousands) Trade receivables Trade payables Non current financial liabilities Financial payables (Cost)/ recharges of personnel (Cost)/ recharges of services Interest income and charges Amplifin S.p.A (1,963) - Total Parent Company (1,963) - Bardissi Import Meders (10) (41) Total Other related parties (10) (41) Total related parties (1,973) (41) Total as per financial statement 111,115 98, , ,046 (257,783) (255,335) (23,194) % of financial statement total 0.04% 0.25% 0.13% 0.07% -0.03% 0.77% 0.18% Receivables from parent companies mainly refer to the recovery of maintenance costs and condo fees paid by Amplifin S.p.A. and recharge of personnel costs to Amplifin S.p.A. Expenses charged to Amplifon S.p.A. under existing agreements with the parent company Amplifin S.p.A. refer primarily to: for 1,592 thousand, to the rent paid under the lease agreement for the property in Milan at Via Ripamonti No. 133, the legal office and corporate headquarters of Amplifon S.p.A.; for 35 thousand to the amount charged back by Amplifon S.p.A. to Amplifin S.p.A. as the latter s share of the condominium charges for the space occupied in the same building found on via Ripamonti n.133, Milan. The supply of ancillary services, including routine property maintenance, cafeteria, office cleaning, porters and security is regulated under a separate agreement stipulated between the parties; recharges of personnel costs related to employees seconded in Amplifin S.p.A. for 83 thousand; for 406 thousand, to the rents paid under certain lease agreements for retail store space. Financial liabilities to other related parties related to: a loan made to Maxtone (Turkey) of 323 thousand (equivalent to 760 thousand Turkish Lira) to be repaid in equal amounts over 5 years, granted by Meders (a company owned by Maxtone s minority shareholder, which the Group holds as to 51%) which in 2012 generated interest payable of 41 thousand; an interest-free loan to Amplifon Middle East SAE (Egypt) in the amount of 119 thousand (1,000 thousand Egyptian Lira) granted by Bardissi Import. 228

231 Consolidated Financial Statements at 31 December 2012 Other related parties The total remuneration of Group Directors, Board of Auditors and Key Managers for the period amounted to 9,120 thousand and is made up as follows: Directors and Board of Auditors and Key managers) ( thousands) First Name and Surname Office Held Period in which the office has been held Term of office Fixed compensation Committee attendance fees Bonuses and other incentives Variable Compensation non equity Profit sharing Accrued LTI Fringe benefit Total FV equity compensation Termination allowance Total Anna Maria Formiggini Honorary Chairman 01/01/ /12/2012 Approval 2012 financ. stat Susan Carol Holland Franco Moscetti Giampio Bracchi Maurizio Costa Umberto Rosa Andrea Guerra Giuseppe Levi Mauro Coazzoli Gabriele Pesaresi Emilio Fano Maria Stella Brena Chairman 01/01/ /12/2012 CEO 01/01/ /12/2012 Approval 2012 financ. stat. Approval 2012 financ. stat Man. Director Permanent , ,820 Indep. Director Indep. Director Indep. Director Indep. Director Chairman of the Board of Auditors Standing Auditor Standing Auditor Standing Auditor Standing Auditor 01/01/ /12/ /01/ /12/ /01/ /12/ /01/ /12/ /01/ /12/ /01/ /04/ /01/ /04/ /04/ /12/ /04/ /12/2012 Approval 2012 financ. stat. Approval 2012 financ. stat. Approval 2012 financ. stat. Approval 2012 financ. stat. Approval 2014 financ. stat. Approval 2014 financ. stat. Approval 2014 financ. stat Total 1, , ,850 Other key managers A.Baroli G.Caruso G.Ferraroli M.Gerli (*) U.Giorcelli E.Bortesi P.Mirabelle H. Ruch Permanent 2,488-1,083-1, (**) 5, ,270 Total 2,488-1,083-1, (**) 5, ,270 Grand total 3, ,483-1, (**) 8, ,120 (*) On 19 December 2012 the Board approved the admission of Massimiliano Gerli, Chief Information Officer as Group Key Manager. (**) The amount includes also the Flexible Benefit plan granted in 2012 to all Amplifon S.p.A. employees. 229 Amplifon Annual Report 2012

232 Below are detailed stock options and stock grant awarded to the Board of Directors, General Managers and Key Managers. First Name and Surname Franco Moscetti Office held CEO and Managing Director Plan (when approved) No. Of options Options held at the beginning of the period Exercise price Plan CEO (14/03/2005) 402, Plan ITA (30/09/2005) 200, Exercise period No. of options Options exercised during the period Exercise price Market price of the shares at the exercise date. Options held at the end of the period Options accruing in the FY ( 000) (1/3) 14/03/ /03/2013 (1/3) 14/03/ /03/2014 (1/3) 14/03/ /03/ ,000 - (1/3) 30/09/ /09/2013 (1/3) 30/09/ /09/2014 (1/3) 30/09/ /09/ ,000 - Plan 2008 (18/12/2008) 350, /12/ /12/ , Total 952, , ,000 Other key managers: A.Baroli G.Caruso G.Ferraroli M.Gerli U.Giorcelli E.Bortesi P.Mirabelle H. Ruch Plan 2005 (30/09/2005) 175, Plan ITA (30/09/2005) 130, Plan 2008 (18/12/2008) 650, Plan 2009 (6/11/2009) 250, Plan 2010 (16/12/2010) 250, (1/3) 30/09/ /09/2013 (1/3) 30/09/ /09/2014 (1/3) 30/09/ /09/ ,000-1/3) 30/09/ /09/2013 (1/3) 30/09/ /09/2014 (1/3) 30/09/ /09/ ,000 - (50.000) 19/12/ /12/2015 ( ) 19/12/ /12/ , ,000 - (1/2) 7/11/2011-7/11/2016 (1/2) 7/11/2012-7/11/ , ,500 - (1/2) 17/12/ /12/2017 (1/2) 17/12/ /12/ , Total 1,455, , , First Name and Surname Franco Moscetti Other key managers Office held CEO and Managing Director Programme (when approved) Financial instruments granted during the FY not vested during the period No. and type of financial instrument Vesting period No. and type of financial instrument Financial instruments granted during the FY Fair value at on grant date Performance Stock Grant 15 March , Performance Stock Grant 16 May ,000 Vesting period Date of grant Market price on grant date Financial instruments accruing in the FY Fair value ( 000) Approval 2015 financ. stat. 15/03/ Approval 2014 financ. stat. 74 Performance Stock Grant 15 March , Approval 2015 financ. stat. 15/03/ Total 110, ,

233 Consolidated Financial Statements at 31 December Guarantees provided, commitments and contingent liabilities Guarantees issued in favour of third parties At 31 December 2012 these broke down as follows: ( thousands) 31/12/ /12/2011 Guarantees in favour of third parties 103, ,195 Total 103, ,195 The main guarantees given were the following: a guarantee issued to the investors who subscribed the private placement bond issued by Amplifon USA in the amount of US$83,143 thousand equivalent to 63,015 thousand at the 31 December 2012 exchange rate, whereby interest payable was guaranteed (the guarantee of principal is not given here, since the liability is already disclosed in the accounts); guarantees issued to third parties for tenders and rentals amounting to 2,827 thousand; insurance guarantees released by Amplifon S.p.A. in favour of the Revenue Office for VAT refunds of 16,552 thousand; various guarantees totalling 20,760 thousand, which include comfort letters given to third parties in the interest of subsidiaries. Obligations Obligations with regard to future rent instalments amounted at the 31 December 2012 to 175,490 thousand, of which 148,312 thousand relates to the lease of stores. The average lease term is equal to 3.6 years. Contingent liabilities fiscal litigation The dispute between the UK tax authorities and the provider of press advertising services relating to the treatment of the VAT applied on the services rendered to Amplifon, described in previous reports, was settled in October 2012 and Amplifon was found liable for some 300 thousand, 200 thousand less than the provisions accrued. The Group is not currently exposed to other particular risks or uncertainties. 231 Amplifon Annual Report 2012

234 35. Transactions arising from untypical/unusual operations Pursuant to Consob Communication of 28 July 2006, it should be noted that during 2012 the Group carried out no atypical and/or unusual transactions, as defined by the Communication. 36. Translation of foreign companies financial statements The exchange rates used to transalte non-euro zone companies financial statements are as follows: Average exchange rate 31/12/ /12/2011 Year-end exchange rate Average exchange rate Year-end exchange rate Canadian Dollar US Dollar Hungarian Florin Swiss Franc Egyptian Lira Turkish Lira British Pound Australian Dollar New Zealand Dollar Indian Rupee Polish Zloty (*) For Amplifon Poland the weighted average exchange rate was calculated starting August, that is the incorporation date of the company. 232

235 Consolidated Financial Statements at 31 December Subsequent events On 25 January 2013 and on 25 February 2013 the company s Articles of Association were amended following the partial subscription of the share capital increase servicing the Stock Options plans approved by the Board of Directors on 28 October 2010 and the subsequent issue of, respectively, 150,262 (112,500 of which were subscribed in December 2012) and 108,238 ordinary shares of Amplifon S.p.A. with a par value of 0.02 each. The share capital subscribed and fully paid-in at 25 February 2013 amounted to 4,470,961. On 5 March 2013 an agreement was reached on several amendments to the syndicated loan agreement signed in 2010 to finance the NHC Group acquisition which will give Amplifon greater flexibility in refinancing the debt falling due in 2013 making possible, among other things, and subject to the cancellation of the 30 million line of credit granted to be used in August 2013 for repayment of the Private Placement, to issue long term debt on the capital markets without having to make early repayment of the syndicated loan. Milan, 6 March 2013 On behalf of the Board of Directors CEO Franco Moscetti 233 Amplifon Annual Report 2012

236 Annexe I - Consolidation Area As required by 38 and 39 Law 127/91 and 126 Consob resolution dated 14 May 1999, as amended by resolution dated 6 April 2000, the following is the list of companies included in the consolidation area of Amplifon S.p.A. at 31 December Parent Company: Company name Head office Currency Share Capital Amplifon S.p.A. Milano (Italy) EUR 4,468,041 Subsidiaries consolidated using the line-by-line method: Company name Head office Direct/Indirect ownership Currency Share Capital % ownership 31/12/2012 Amplimedical S.r.l. in liquidation Milano (Italy) D EUR 111, % Amplifon Groupe France SA Arcueil (France) D EUR 48,550, % SCI Eliot Leslie Lyon (France) I EUR % Amplifon Iberica SA Barcelona (Spain) D EUR 26,578, % Amplifon Portugal SA Lisboa (Portugal) I EUR 720, % G.A. Zamorano SL Zamora (Spain) I EUR 36, % Audiosalud SL Murcia (Spain) I EUR 142, % Ampli Lleida SLU Barcelona (Spain) I EUR 5, % Fundación Amplifon Iberica Madrid (Spain) I EUR 30, % Ampli Tres SL Barcelona (Spain) I EUR 15, % Amplifon Magyarország Kft Budapest (Hungary) D HUF 3,500, % Amplibus Magyarország Kft Budaörs (Hungary) I HUF 3,000, % Amplifon AG Baar (Switzerland) D CHF 1,000, % Amplifon RE AG Baar (Switzerland) I CHF 3,000, % Amplinsure RE AG Baar (Switzerland) I CHF 2,800, % Hearing Supplies SA Lugano (Switzerland) I CHF 100, % Amplifon Nederland BV Doesburg (The Netherlands) D EUR 74,212, % Auditech BV Doesburg (The Netherlands) I EUR 22, % Electro Medical Instruments BV Doesburg (The Netherlands) I EUR 16, % Beter Horen BV Doesburg (The Netherlands) I EUR 18, % Amplifon Customer Care Service BV Elst (The Netherlands) I EUR 18, % Amplifon Belgium NV Bruxelles (Belgium) D EUR 495, % Amplifon Luxemburg Sarl Luxembourg (Luxembourg) I EUR 50, % Amplifon Deutschland GmbH Hamburg (Germany) D EUR 6,026, % Amplifon Ost GmbH Cottbus (Germany) I EUR 25, % Amplifon München GmbH München (Germany) I EUR 1,245, % Amplifon Bayern GmbH München (Germany) I EUR 30, % Amplifon Vertriebs GmbH Hamburg (Germany) I EUR 25, % Sanomed GmbH Hamburg (Germany) I EUR 25, % Makstone Isitme Ürünleri Perakende Satis A.S. Istanbul (Turkey) D TRY 300, % Amplifon UK Ltd Manchester (UK) D GBP 59,000, % Amplifon Ltd Manchester (UK) I GBP 1,800, % 234

237 Consolidated Financial Statements at 31 December 2012 Company name Head office Direct/Indirect ownership Currency Share Capital % ownership 31/12/2012 Ultra Finance Ltd Manchester (UK) I GBP % Ultravox Holdings Ltd Manchester (UK) I GBP 8, % Amplifon Ireland Ltd Wexford (Ireland) I EUR 1, % Miracle Ear Inc. St. Paul MN (USA) I USD % Sonus USA Inc. Tumwater WA (USA) I USD % Sonus Canada LTD Vancouver (Canada) I CAD % Amplifon National Hearing Centers Inc. Dover DE (USA) I USD % Amplifon USA Inc. Dover DE (USA) D USD 52,500, % Miracle-Ear of Texas, Inc. St. Paul MN (USA) I USD % Sonus-Texas, Inc. St. Paul MN (USA) I USD % Hear PO, Inc. St. Paul MN (USA) I USD % National Hearing Centers of Texas INC. Dover DE (USA) I USD % Beckwith Consultants, Inc. Tallhassee FL (USA) I USD 7, % Amplifon Middle East SAE Cairo (Egypt) D EGP 3,000, % Amplifon Australia Holding Pty Ltd Sydney (Australia) D AUD 392,000, % Amplifon Australia Pty Ltd Sydney (Australia) I AUD 392,000, % NHC Group Pty Ltd Sydney (Australia) I AUD 126,116, % ACN Pty Ltd Sydney (Australia) I AUD % National Hearing Centres Pty Ltd Sydney (Australia) I AUD % National Hearing Centres Unit Trust Sydney (Australia) I AUD % Amplifon NZ Ltd Takapuna (New Zealand) I NZD 130,411, % Bay Audiology Ltd Takapuna (New Zealand) I NZD 10, % Bay Audiology South Ltd in liquidation Takapuna (New Zealand) I NZD 3,500, % BAS Ltd in liquidation Takapuna (New Zealand) I NZD 1, % Amplifon India Pvt Ltd New Delhi (India) I INR 160,000, % NHanCe Hearing Care LLP * New Delhi (India) I INR 1,000, % * Consolidated company subject to de facto control by the Amplifon Group. Jointly-controlled subsidiaries consolidated using the proportional method: Company name Head office Direct/Indirect ownership Currency Share Capital % ownership 31/12/2012 Comfoor BV Doesburg (The Netherlands) I EUR 18, % Companies valued using the equity method: Company name Head office Direct/Indirect ownership Currency Share Capital % ownership 31/12/2012 Audiogram Audifonos SL Palma de Mallorca (Spain) I EUR 3, % Amplifon Poland Sp.z.o.o. Warszawa (Poland) D PLN 940, % Lakeside Specialist Centre Ltd Mairangi Bay (New Zealand) I NZD % Dilworth Hearing Ltd Epsom (New Zealand) I NZD 232, % Dilworth Hearing Takapuna Ltd Epsom (New Zealand) I NZD 28, % Dilworth Hearing Hamilton Ltd Epsom (New Zealand) I NZD 100, % Dilworth Hearing Tauranga Ltd Epsom (New Zealand) I NZD 100, % 235 Amplifon Annual Report 2012

238 Annexe II - Information pursuant to 149-duodecies of Consob Issuers Regulations The following table, prepared pursuant to 149-duodecies Consob Issuers Regulations, shows the fees for both audit and non-audit services provided by the auditing company and entities that are part of its network in relation to the 2012 financial year. Subject that provided the service Recipient 2012 fees ( ) PricewaterhouseCoopers Parent company - Amplifon S.p.A. 262,572 Audit PricewaterhouseCoopers Subsidiaries 949,471 Other Subsidiaries 10,206 Other services (*) PricewaterhouseCoopers Parent company - Amplifon S.p.A. and its subsidiaries 148,865 Total 1,371,114 (*) Other services mainly relate to tax advisory services rendered to US subsidiaries. 236

239 Consolidated Financial Statements at 31 December 2012 Declaration in respect of the Consolidated Financial Statements pursuant to 154-bis of Legislative Decree 58/98 We, the undersigned, Franco Moscetti, Managing Director and Ugo Giorcelli, Executive Responsible for Corporate Accounting Information for Amplifon S.p.A., taking into account the provisions of 154-bis, paragraphs 3 and 4 of Law 58/98, certify: the adequacy, by reference to the characteristics of the business and the effective application of the administrative and accounting procedures for the preparation of the consolidated financial statements during the course of We also certify that the consolidated financial statements at 31 December 2012: correspond to the underlying accounting entries and records; have been prepared in accordance with the International Financial Reporting Standards endorsed by the European Union as well as the provisions issued to implement 9 of Law 38/2005, and give a true and fair view of the financial position, result of operations ad cash flow of the issuer and of all of the companies included in the consolidation. The report on operations includes a reliable operating and financial review of the Company and all of the companies included in the consolidation as well as a description of the main risks and uncertainties to which they are exposed. 6 March 2013 CEO Franco Moscetti Executive Responsible for Corporate Accounting Information Ugo Giorcelli 237 Amplifon Annual Report 2012

240 238

241 239 Amplifon Annual Report 2012

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