First Half 2005 PDF File
Transcript
First Half 2005 PDF File
Gruppo Editoriale L’Espresso Società per azioni Report on the first half of 2005 (Translation from the original issued in Italian) CONTENTS Financial Highlights Report of the Board of Directors on the first six months of 2005 Adoption of international financial reporting standards Operating performance and consolidated results at June 30, 2005 Results by area Subsequent events and outlook Consolidated balance sheet and income statements results at June 30, 2005 Results of parent company Gruppo Editoriale L’Espresso SpA page 7 page page page page 11 12 14 20 page 21 page 28 Interim Financial Statements at June 30, 2005 Balance Sheet Income Statement Statement of Cash Flows Statement of Changes in the Shareholders’ Equity Notes Attachments page page page page page page 34 35 36 37 41 85 Financial Statements of parent company Gruppo Editoriale L’Espresso SpA at June 30, 2005 Balance Sheet Income Statement Statement of Cash Flows Statement of Changes in the Shareholders’ Equity page page page page 98 99 100 101 Reclassified key financial information of subsidiaries page 105 Auditors’ Report page 109 Transition to IFRS Foreword Opening Balance Sheet Effect of the adoption of IFRS page 113 page 114 page 116 Auditors’ Report on the IFRS reconciliation schedules page 131 Company Gruppo Editoriale L’Espresso Società per Azioni Share Capital Euro 65,003,439.45 Tax ID and Rome Company Register no. 00488680588 VAT no. 00906801006 Registered office Secondary office Rome, Via Cristoforo Colombo, 149 Rome, Via Cristoforo Colombo, 90 Board of Directors: Chairman Carlo Caracciolo Managing Director Marco Benedetto Directors Oliviero Maria Brega Cristina Busi Giulia Maria Crespi Mozzoni Carlo De Benedetti Rodolfo De Benedetti Francesco Dini Pierluigi Ferrero Milvia Fiorani Franco Girard Paolo Mancinelli Gianluigi Melega Alberto Milla Piero Ottone Alberto Piaser Vittorio Ripa di Meana Executive Committee: Carlo Caracciolo Marco Benedetto Oliviero Maria Brega Rodolfo De Benedetti Alberto Piaser Board of Statutory Auditors: Chairman Vittorio Bennani Auditors Claudio Berliri Federico Gamna Independent Auditors PricewaterhouseCoopers SpA GRUPPO ESPRESSO FINANCIAL HIGHLIGHTS CONSOLIDATED OPERATING DATA st (€ million) Revenues 1 Half 2004 2004 st 1 Half 2005 1,080 546 568 Gross operating profit 239 122 130 Operating profit 192 101 106 Pre-tax profit 175 94 97 99 52 55 Net profit FINANCIAL DATA (€ million) Jan. 1, 2005 June 30, 2004 June 30, 2005 Net capital employed 636 633 755 Shareholders' Equity (Group and minority interests) 495 459 499 484 448 489 11 11 11 Net financial position (141) (174) (256) Dividends distributed (47) (47) (56) Group Shareholders' Equity Minority interests PERSONNEL 2004 1st Half 2004 1st Half 2005 Employees at period-end 3,271 3,184 3,409 Average no. of employees 3,204 3,181 3,386 RATIOS st 2004 1 Half 2004 st 1 Half 2005 ROS 17.8% 18.5% 18.7% ROCE 30.2% 15.9% 14.1% ROE 20.0% 11.4% 11.0% 7 Report of the Board of Directors Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 REPORT OF THE BOARD OF DIRECTORS ON THE FIRST SIX MONTHS OF 2005 ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS Starting with the Interim Financial Statements at June 30, 2005 the Espresso Group adopted international financial reporting standard (IFRS) in the preparation of its financial statements. From 2005, the Law requires all companies listed in a European regulated market to prepare their year-end consolidated financial statements under IFRS. The Group chose to adopt IFRS also in the preparation of the statutory accounts of the parent company and its subsidiaries at the same date. To allow a like-for-like comparison with figures for the previous, the balance sheets at January 1, 2004, at June 30, 2004 and at December 31, 2004 were restated under IFRS. Independent auditors PricewaterhouseCoopers SpA issued an Audit Report certifying the correctness of figures reported. The adoption of IFRS has had a positive impact on the results of the Group. The most relevant one is represented by the book value of titles and radio and television frequencies, that are no longer amortized but subject annually to an impairment test. In the opening Balance Sheet at January 1, 2004, the historical cost of such items was restored and accumulated amortization was reversed, resulting in an increase in the Shareholders’ Equity. The table below shows the main effect of the adoption of IFRS on the Financial Statements at December 31, 2004. 2004 Italian GAAP 2004 IFRS 1,080.3 1,080.3 Operating profit 177.4 192.2 Pre-tax profit 160.0 174.5 87.7 98.9 Shareholders’ Equity 375.2 484.1 * Net financial position (131.1) (141.4) * Sales Net profit * Figures are at January 1, 2005 11 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 OPERATING PERFORMANCE AND CONSOLIDATED RESULTS AT JUNE 30, 2005 The Espresso Group closed the first six months of 2005 reporting a consolidated net profit of €54.8 million, up from €52.4 million in the first six months of 2004. In the same period, consolidated revenues grew by 3.9% from €546.1 million to €567.6 million. Consolidated operating profit also grew from €100.9 million in the first half of 2004 (18.5% of sales) to €106.3 million in the first six months of 2005 (18.7% of sales). The consolidated net financial position at June 30, 2005 was equal to an indebtedness of €255.5 million, up from a net indebtedness of €141.4 million at January 1, 2005 due primarily to the disbursement of €110 million for the purchase of the Rete A SpA television network. Consolidated Shareholders’ Equity increased from €484.1 million at January 1, 2005, to €488.7 million at June 30, 2005. Trends registered in the last months of 2004 were confirmed in the first six months of the year. Advertising revenues grew by 6.7% (up 5.3% on a comparable basis and not including advertising sales for third parties) on the same period in the previous year, with the Group’s media registering an increase above the average for the market. Growth was stronger in the second quarter than in the first. Advertising sales benefited primarily from the introduction of full color printing by la Repubblica (with national commercial and local advertising revenues up 7.4%) and stronger advertising sales of the Group’s radio stations (up 11.2%) and Internet sites (up 33.4%). The sale of products sold optionally with the Group’s publications met growing success, not only in the case of products sold in conjunction with la Repubblica and L’espresso, but also those distributed with local newspapers. Over 16 million of books, DVDs and music CDs were sold, with revenues growing from €116.8 million to €127.1 million. Results of national commercial TV network Rete A – All Music were consolidated from April 2005. After the conclusion of the acquisition, on April 14, 2005, the Group made investments in the development of a digital terrestrial television broadcasting network and the upgrade of the existing analogue broadcasting network, while a new corporate structure was put in place. The next few months will be dedicated to the reshuffle of the programs and the strengthening of the image of the network, which will continue to focus on music and programming for a young audience, while synergies with other Group media are being sought. From 2006, advertising sales will be managed by a specific sales network within A.Manzoni&C., the Group’s advertising concessionaire. In the first half of 2005, RepubblicaRadio started broadcasting solely on the Internet, becoming in a few months an online information reference point. RepubblicaRadio 12 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 broadcasts three hours of live programs, and users can listen to or download in MP3 format sections of any of its programs throughout the day. Circulation of Group newspapers was substantially stable in the first six months of the year. La Repubblica sold an average of 617 thousand copies per issue, local newspapers an average of 471 thousand and L’espresso an average of 416 thousand copies per week. The number of readers registered instead an increase: in the last market poll carried out by Audipress (2005/I Edition), la Repubblica continued to rank first in terms of readers among information newspapers in Italy, with an average of close to 3 million daily readers, while L’espresso exceeded 2.3 million readers per issue and local newspapers registered an average of 3.1 million daily readers. The Group’s radio stations continue to have the largest audience in Italy with 22.4 million listeners per week and 8.7 million in the average day. Audiradio figures for the first half of 2005 show the consolidation of the leadership of Radio Deejay which, with an average weekly listenership of 13.4 million (up from 12.1 million in the first six months of 2004), confirmed its ranking as the radio station with the largest weekly audience, ahead of Rai Radio Uno. In the average day Radio Deejay is still the first among the private radio stations with 5.7 million listeners. Both Radio Capital - with 6.3 million listeners per week and nearly 2 million listeners in the average day - and m2o with over 1 million in the average day have consolidated their positions. Internet site Repubblica.it maintained its leadership position among domestic information sites with an average of 170 million page views and 3.9 million unique users (over 400 thousand readers per day). Overall, the Kataweb/Gruppo Espresso internet site network exceeded in June 6.5 million unique users and 248.7 million page views. At June 30, 2005, the Group employed 3,409 persons, including personnel under term contracts, 138 more than the 3,271 it employed at the end of 2004. Such increase is due to the inclusion of personnel of newly acquired Rete A and the insurcing of Padua’s and Rome’s (Rotocolor) printing centers, still carried out by third parties in the first six months of 2004. 13 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 RESULTS BY AREA National newspapers 1st Half 2004 1st Half 2005 % change 275.6 280.9 +1.9% (216.1) (219.1) -1.4% Gross operating profit 59.5 61.8 +3.8% Depreciation, amortization and write-downs (6.5) (6.6) -0.8% Operating profit 53.0 55.3 +4.2% Employees 701 701 Revenues Operating and personnel costs Figures for the division include the share in revenues and costs that may not be attributed to a specific activity The sale of publications and products in conjunction with la Repubblica continued through sales initiatives that allowed to achieve higher margins than those registered in the first six months of the previous years. The continuation of the book series launched in 2004 and new series launched in the year, sold a total of 10.7 million copies, as compared with 12.5 million copies in the first six months of 2004, which were however positively affected by sales of l’Enciclopedia di Repubblica that alone sold over 4.5 million copies. Among the most successful initiatives in the first six months of the year were Le Guide d’Italia tourist guide series and Le Religioni series which sold respectively over 175 thousand and 115 thousand copies on average per issue, while the comics book series, by now at its 40th issue, sold an average of about 80 thousand copies per issue. The success of add-on products was accompanied by an increase in advertising revenues favored primarily by the recovery of national commercial advertising. Many printed press advertisers, particularly in the automobile and finance sector, attracted by the stronger availability of color advertising space and formats, resumed campaigns on la Repubblica. In the first six months of 2005, la Repubblica refined its graphic design as a result of the introduction of full color and launched two inserts, l’Almanacco dei libri and la Domenica di Repubblica, that were very well received by the public. Thanks to the growth in advertising sales and margins achieved on products sold optionally with publications, operating profit grew from €53 million in the first six months of 2004, to €55.3 million in the same period in 2005, while the operating margin on sales increased from 19.2% to 19.7%. 14 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Periodicals 1st Half 2004 1st Half 2005 % change 55.5 70.1 +26.3% (46.2) (62.6) -35.6% 9.4 7.5 -20.0% (0.4) (0.4) -1.6% Operating profit 9.0 7.1 -20.9% Employees 124 125 Revenues Operating and personnel costs Gross operating profit Depreciation, amortization and write-downs Figures for the division include the share in revenues and costs that may not be attributed to a specific activity The Periodicals area includes weekly magazine L’espresso, by-monthly magazine TvMagazine, the two monthly magazines National Geographic and Le Scienze, the two quarterly magazines Limes and Micromega, and L’espresso Guide Books. In the first six months of the year, L’espresso, also thanks to the multimedia products packaged with the magazine, sold a total of 4.1 million copies, registering at the same time an improvement in profit margins through pricing policies and careful management of production costs and returns. The first six months of the year benefited in particular from the success of Stanley Kubrick’s DVD series (with sales averaging 75 thousand copies per issue) and the English language course (with average sales in excess of 45 thousand copies per issue). Other publications gave a positive contribution to results for the first half of the year, with circulation and margins in line with the same period in 2004. Monthly magazine National Geographic sold an average of 124.6 thousand copies per issue, generating a profit of €0.9 million. Among periodicals of affiliate Le Scienze SpA, Mente & Cervello reached average sales of 20.4 thousand copies per issue, while sales of monthly magazine Le Scienze averaged 64.5 thousand copies per issue. A new bi-weekly magazine, TvMagazine, dedicated to TV programming and offering a guide to TV programs for the two weeks following its publication, was launched on January 10. Three other competing magazines were launched in the same period, making the sector of TV magazines all the more competitive. Circulation of TvMagazine averaged in any case 197 thousand copies per issue. The investment in the campaign for the launch of TvMagazine affected the operating profit that declined by 20.9% on the same period in the previous year from €9 million to €7.1 million. The improvement in the profit generated by add-on products, accompanied by the 15 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 increase in advertising revenues, the good level of circulation and a careful monitoring of subscription management costs (subscriber lists, promotional materials, etc.) allowed to maintain profit margins of the area high: the operating margin was equal to 10.2%. Local newspapers 1st Half 2004 1st Half 2005 % change Revenues 124.8 131.1 +5.0% Operating and personnel costs (96.5) (101.5) -5.2% Gross operating profit 28.3 29.6 +4.5% Depreciation, amortization and write-downs (5.6) (7.4) -30.7% Operating profit 22.7 22.2 -2.1% 1,290 1,318 Employees The area includes all local publications published by the Group, consisting in 16 newspapers and a bi-weekly magazine. In the first six months of the year, circulation declined by 1% on the same period in the previous year, to an average of 471 thousand copies per issue. Newspapers La Nuova Sardegna and Le Gazzette encountered some difficulties due to the launch of competing papers in the respective areas, while circulation of Veneto area newspapers grew by 3.4%. The decline in circulation was offset by the success of add-on products. In developing sales initiatives the Group aimed at enhancing local history and traditions while at the same time offering products involving the largest possible number of publications. Following this policy, two regional series Il Friuli Venezia Giulia in cucina and La Grande Musica della Sardegna were launched together with two other series of books, L’Enciclopedia universale and La Grande Storia della Canzone Italiana that provide for the participation in subsequent phases of all local newspapers. Sales for the first six months of the year were close to 1 million copies. Advertising revenues for the first half of the year fluctuated widely, growing in the first three months of the year while declining in the second quarter. The sale of color advertising spaces grew instead steadily throughout the period, up 23% on the first six months in the previous year. From April 1, all production processes of the Padua plant, in charge of printing newspapers Il Mattino di Padova, Tribuna di Treviso and La Nuova di Venezia e Mestre in addition to the copies of la Repubblica distributed in the Veneto area, are managed 16 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 directly. The direct management of production processes resulted in a different cost structure as compared to the previous year, with a decline in printing costs and an increase in personnel cost due to the hiring of personnel formerly employed with the cooperative that was in charge of printing in the past. Such change is expected to produce an improvement in production efficiency and in the saving of production cost. Radio stations 1st Half 2004 1st Half 2005 % change 33.6 37.5 +11.5% (17.2) (18.4) -7.3% Gross operating profit 16.5 19.1 +15.8% Depreciation, amortization and write-downs (1.7) (1.5) +12.9% Operating profit 14.8 17.6 +19.1% Employees 145 146 Revenues Operating and personnel costs Radio broadcasting activities are grouped under subsidiary Elemedia, holder of the broadcasting licences for Radio Deejay, Radio Capital and m2o and owner of two radio broadcasting companies in Eastern Europe, Radio Bonton a.s., broadcasting through radio station Radio Deejay Prague, and Radio Deejay Kft., broadcasting through Radio Deejay Budapest. In the first half of 2005 the radio sector continues to represent one of the most profitable areas for the Group. Operating profit increased by 19.1% on the first half of 2004, growing from €14.8 million to €17.6 million, while operating margin was close to 47%. All three radio stations are steadily gaining audience and Radio Deejay has become the reference point for the market both in terms of programming and personalities working in its programs. Advertising revenues continue to grow (up 11.2% on the first half of 2004) despite the fact that advertising for the radio sector registered a 3.5% contraction in the first months of 2005, while costs remain stable thanks to ongoing efforts to improve efficiency. To maintain a high quality standard in radio broadcasting, investments were made on plant and equipment, renovating recording studios and introducing signal monitoring equipment in a large part of the 846 broadcasting plants nationwide. In line with the strategy followed in the past two years to promote publishing initiatives under the trademark of the three radios at newsstands and specialized stores, 2 music CDs and one video CD bearing a double audio and DVD track were published under the m2o 17 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 trademark. Sales exceeded 122 thousand copies and the compilations reached top rankings. The Radio Deejay internet site, that contributed to role in the success of the radio station, was completely renovated in February. In June, unique users of the site approached 500 thousand, while page views were 8 million. Internet site m2o.it also registered a steady growth and is set to pass the 100 thousand unique user per month mark. Results achieved in the first half of the year by foreign radio stations were in line with the same period in the previous year. Czech company Radio Bonton a.s. reported an operating breakeven, while Hungarian company Radio Deejay Kft reported an operating loss of €0.5 million. Internet 1st Half 2004 1st Half 2005 % change 6.7 6.2 -7.8% Operating and personnel costs (7.8) (6.4) +17.4% Gross operating profit/(loss) (1.1) (0.2) +78.4% Depreciation, amortization and write-downs (0.4) (0.2) +56.2% Operating profit/(loss) (1.4) (0.4) +72.4% 76 68 Revenues Employees The Internet area includes the activities of Kataweb that, in addition to managing the portal bearing the same name, acts as service provider and supplies contents for all online activities of the Espresso Group. In the first six months of 2005 the company continued to streamline costs and services, reducing further its operating loss, now close to zero. Among activities carried out, Kataweb contributed to the renewal of the Repubblica.it and Deejay.it sites, the start of broadcasting of RadioRepubblica on the web and the launch of il Passaporto, the new online magazine aimed at immigrants. In the second half of the year, a new portal dedicated to classified ads for all Group publications will be launched. 18 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Television Revenues Operating and personnel costs Gross operating profit Depreciation, amortization and write-downs Operating profit Employees 1st Half 2004 1st Half 2005 % change 0.8 6.0 n.s. (0.5) (3.8) n.s. 0.3 2.2 n.s. (0.1) (0.6) n.s. 0.2 1.6 n.s. 5 106 n.s. Television network Rete A and its subsidiary All Music were included in the consolidation from April 1, 2005. In the second quarter the two companies reported revenues of €5.7 million and an operating profit of €1.6 million (representing a 27.4% margin on sales). The operating performance of the network and plans for the next months were discussed in the first part of the present report to which we refer for further information. In the first half of 2005, subsidiary Ele Tv, broadcaster of satellite channel Deejay Tv, reported revenues of €0.7 million, down slightly from €0.8 million in the same period in 2004. Operating profit declined from €0.2 million in the first half of 2004, to €0.1 million in the first half of 2005. The subsidiary continued to cooperate with satellite network Sky Italia, while the grafic design of videoclips was enhanced to include subtitles with the words of songs broadcasted. Advertising sales 1st Half 2004 1st Half 2005 % change 279.3 290.7 +4.1% (274.9) (288.4) -4.9% 4.4 2.3 -48.2% (3.4) (1.3) +60.3% Operating profit 1.0 0.9 -6.3% Employees 456 449 Revenues Operating and personnel costs Gross operating profit Depreciation, amortization and write-downs Advertising sales of A.Manzoni&C. do not include sales of Rete A, whose advertising for 2005 is still managed by PubliKompass. The increase in advertising sales is due to Group publications, registering a 5.3% increase on the first six months of 2004, while advertising sales on third parties’ media declined (down 12.3%) due to the discontinuation of some publications. 19 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Advertising revenues for all media recorded a growth above the average for the market. The growth of advertising expenditure at the national level was in fact slightly higher than 2%, the printed media was equal to 2.7%, television grew by 2.6%, cinema and outdoors advertising declined by 4.9% and 1.7% respectively, and advertising on radio stations declined by 3.2% (source: Nielsen Media Research). SUBSEQUENT EVENTS AND OUTLOOK Advertising on the Group’s media continued to grow also in the third quarter of 2005. Publishing initiatives continue to register good sales and the launch of new book series sold in conjunction with la Repubblica and L’espresso is planned for the fall. A new monthly magazine named XL will be launched on August 25. The magazine, targeted at a young public, will be sold as a supplement of la Repubblica. The economic performance for the whole year is expected to improve on the performance registered in 2004. 20 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT RESULTS AT JUNE 30, 2005 Income Statement Below is the Consolidated Income Statement of the Group for the first six months of 2005 compared with the corresponding period of 2004. st (€ million) Revenues st 1 Half 1 Half 2004 2005 546.1 567.6 4.7 12.6 (80.3) (79.6) Services received (207.7) (216.4) Personnel costs (134.6) (147.1) (6.7) (8.1) 0.7 0.5 Depreciation, amortization and write-downs (21.3) (23.2) Operating income 100.9 106.3 Financial income/(expense) (6.4) (9.4) Pre-tax profit 94.5 96.9 (41.8) (41.9) 52.7 55.0 0.3 0.2 52.4 54.8 Other operating income Purchases Other operating costs Investments valued at equity Taxes NET PROFIT Minority interests Group net profit Revenues and operating performance were already discussed in the first part of the current report. The section that follows examines costs, results of financial management and those of subsidiaries. Other operating income includes €7.9 million of grants on paper purchases (€0.5 million at June 30, 2004), on the distribution of newspapers abroad and on capital expenditure. Purchases include paper and supplies for printing, in addition to costs for the acquisition of products sold optionally with Group publications. These are in line with the same period in the previous year. Services received and other operating costs include printing costs and work carried out by third parties, in addition to the cost of rights, promotion and transport, editorial costs for photographs, freelance work, traveling expenses and news agencies. The increase on the first six months of 2004 was equal to €10.1 million due to the launch of TvMagazine, the production, promotion and sale of the numerous sales inizitives carried out in conjunction with la Repubblica and L’espresso, the increase in costs due to the 21 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 introduction of color for la Repubblica, and the operating costs related to the newly acquired Rete A. Savings were instead achieved through the direct management of preprinting and printing at the Rotocolor and Padua printing plants. Personnel costs amount to €147.1 million, up €12.6 million on the first six months of 2004 due to the combined effect of contractual increases and the hiring by Rotocolor and the Padua operating division of Finegil Editoriale respectively of personnel of STEC and of the former printing cooperative. In the first half of 2005, personnel costs include also €0.9 million of cost relating to personnel of Rete A. Depreciation, amortization and write-downs increase by €1.8 million due primarily to the depreciation expense of la Repubblica’s full color rotary presses. Net financial charges amount to €9.4 million. The increase on the first six months of 2004 is due to the higher average debt and the negative spread between interest paid on ten-year bond issued in October 2004 and interest earned on the available cash and cash equivalents. To limit the effect of the negative spread between the fixed interest paid out and the floating interest earned, until the expiration of the old bond issue (August 1, 2005) and the payment for the acquisition of Rete A, the Group entered into interest rate hedging contracts, swapping the fixed rate into a floating rate. The operation was reversed in March 2005 with a gain of about €9 million, achieved thanks to a further reduction in interest rates in the period. In line with IFRS, such gain is accounted for over the residual term of the bond issue. 22 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Balance Sheet Below is presented the Consolidated Balance Sheet of the Group. ASSETS (€ million) Intangible assets with indefinite useful life Other intangible assets Total intangible assets Tangible assets Investments valued at equity Other investments Financial receivables Deferred tax assets NON-CURRENT ASSETS Inventories Trade receivables Marketable securities Financial receivables Tax receivables Other receivables Cash and equivalents CURRENT ASSETS TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY (€ million) Share capital Reserves Retained earnings Net income Group Shareholders’ Equity Minority interests SHAREHOLDERS’ EQUITY Financial debt Provisions for risks and charges Employee severance reserve and other retirement benefits Deferred tax liabilities NON-CURRENT LIABILITIES Financial debt Provisions for risks and charges Trade payables Tax payables Other payables CURRENT LIABILITIES TOTAL LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY Jan. 1, 2005 460.3 5.5 465.7 259.0 23.9 3.9 9.3 26.8 788.5 30.2 241.7 20.1 1.7 41.5 22.0 383.2 740.4 1,528.9 Jan. 1, 2005 June 30, 2005 613.3 5.4 618.8 259.1 14.5 3.9 3.6 25.2 925.1 27.7 253.5 10.1 3.5 60.3 26.2 306.1 687.4 1,612.5 June 30, 2005 64.9 187.7 132.6 98.9 484.1 11.0 495.1 330.9 13.0 65.0 194.3 174.6 54.8 488.7 10.6 499.3 330.4 13.2 95.9 54.2 493.9 224.8 10.3 209.5 16.5 78.8 539.9 1,033.9 1,528.9 101.2 95.5 540.3 248.4 10.2 183.1 50.7 80.4 572.9 1,113.2 1,612.5 23 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Intangible assets amount to €618.8 million, up €153 million on €465.7 million at January 1, 2005. The increase is due primarily to the consolidation of television broadcasting frequencies of newly acquired network Rete A. Tangible assets amount to €259.1 million, up €0.1 million on January 1, 2005 (€259 million). Increases in the period amount to €25.2 million, of which €8.8 million resulting from the consolidation of Rete A, offset by net divestments amounting to €0.2 million, and depreciation, amortization and write-downs amounting to €24.9 million. Investments amount to €18.4 million (€27.8 million at January 1, 2005). The €9.3 million decline is due to the reduction in the share held in Editoriale Libertà SpA, declining from 35% to 19%. Non-current financial receivables amount to €3.6 million and consist of security deposits and tax receivables on advances paid on employee termination indemnities. The €5.7 million decline on the end of 2004 is due primarily to the unwinding in March 2005 of interest rate swaps entered into to hedge interest rate risk relating to the new €300 million bond issue. Deferred tax assets amount to €25.2 million and include temporary differences between amounts recorded in the balance sheet and those recognized for tax purposes. Inventories amount to €27.7 million and include inventories of paper, printing material, for publications and products sold optionally with publications. Trade receivables amount to €253.5 million, up €11.8 million on January 1, 2005 due primarily to higher trade receivables resulting from the growth in advertising sales. Marketable securities amount to €10.1 million and relate to Government Bonds held by the parent company. In the first six months of 2005, €9.8 million of bonds were redeemed upon expiration. Current financial receivables amount to €3.5 million, up €1.8 million due to higher interest earned on short-term bank deposits. Tax receivables amount to €60.3 million, as compared with €41.5 million at January 1, 2005. The change is due primarily to advances paid in the first half of the year and income tax (Ires) receivables that, in compliance to tax consolidation regulations, will be transferred to parent company CIR only at the closing of the financial year. 24 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Other receivables amount to €26.2 million, up €4.2 million on €22 million at January 1, 2005. Cash and cash equivalents decline by €77.1 million due to the disbursement of €110 million for the purchase of Rete A. Shareholders’ Equity at June 30, 2005 amounts to €499.3 million (€495.1 million at January 1, 2005), of which €488.7 million belonging to the Group (€484.1 million at the end of 2004), and €10.6 million relating to minority interests (€11 million at January 1, 2005). Non-current financial debt amounts to €330.4 million and includes €307 million relating to the bonds issued on October 8, 2004. Provisions for risks and charges, both current and non-current, are in line with the previous year. Employee severance reserve and other retirement benefits amount to €101.2 million (€95.9 million at January 1, 2005) and cover personnel benefits accrued at June 30, 2005. Deferred tax liabilities grow by €41.3 million due primarily to the tax impact of the consolidation of TV broadcasting frequencies of Rete A. Current financial debt amounts to €248.4 million and includes €212.2 million relating to the 5-year 2000-2005 bond issue expiring on August 1, 2005. Trade payables amount to €183.1 million, down €26.4 million due to the reduction in debt relating to capital expenditure (down €8.9 million), which on January 1, 2005 included the unpaid balance for the purchase of la Repubblica’s full color rotary presses, and payables on paper and printing supplies purchased (down €16.5 million). Tax payables amount to €50.7 million and include income tax (Ires) payables which, as a result of the participation in the fiscal consolidation of parent company CIR, will be transferred to the same only at the end of the fiscal year. Other payables amount to €80.4 million, up €1.6 million on January 1, 2005 due to the increase in payables to personnel on account of deferred retribution (13th monthly salary payments), partly offset by the reduction in social security payables paid out at the beginning of the year. 25 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Consolidate Statement of Cash Flows Below are presented the Cash Flows for the first half of 2005 compared with the corresponding period of 2004. st (€ million) OPERATING ACTIVITIES Net income Minority interests 1 Half 2004 st 1 Half 2005 52.4 54.8 0.3 0.2 10.1 11.8 Adjustments: - Accruals to provisions for personnel, risks and charges - Accruals to provisions for stock option costs 0.9 1.3 - Depreciation, amortization and write-downs 21.3 23.2 - Other adjustments (0.6) (0.5) Cash flow from operating activities 84.4 90.8 8.4 2.5 (3.9) (18.0) 9.2 (24.8) Decrease in tax receivables/Increase in tax payables 10.7 15.4 Decrease in current assets/Increase in current liabilities 24.3 (24.9) 0.7 42.9 Decrease (Increase) in inventories Decrease (Increase) in current receivables Decrease (Increase) in current payables Decrease in deferred tax receivables/Increase in deferred tax payables Uses of provisions for personnel, risks and charges (7.4) (6.4) 102.1 102.4 (0.8) (154.1) (60.1) (20.2) 0.5 9.4 (60.4) (164.9) 1.5 7.0 4.2 7.8 (4.8) 10.1 6.6 19.2 Dividends paid (47.1) (55.8) CASH FLOW FROM FINANCING ACTIVITIES (36.9) (14.6) Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the period 4.8 69.8 (77.1) 383.2 CASH AND CASH EQUIVALENTS AT END OF THE PERIOD 74.6 306.1 CASH FLOW FROM OPERATING ACTIVITIES INVESTING ACTIVITIES (Increase)/Decrease in intangible assets (Increase)/Decrease in tangible assets (Increase)/Decrease in equity investments CASH FLOW FROM INVESTING ACTIVITIES FINANCING ACTIVITIES Increases in capital and reserves and other changes in the Shareholders' Equity Increase (decrease) in other financial debt Net change in marketable securities (and own shares in 2004) Net change in other financial receivables/payables Cash generated by operating activities is in line with the previous year. Net current assets decline due to the increase in advertising trade receivables resulting from the growth in advertising sales, and the simultaneous decline in payables to suppliers due to the payment 26 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 of the last installment relating to the full color project, in addition to the insurcing of the printing of part of the copies of la Repubblica. The joint effect of these two components and the recording of €40 million in provisions for deferred tax liabilities resulted in a stable operating cash flow. Cash flow from investing activities is negative by €164.9 million due primarily to the acquisition of Rete A SpA. Other investments in the period relate primarily to the television sector (€5.9 million) for the development of broadcasting equipment of the newly acquired television station and the development of the digital terrestrial television network, to the printing centers of la Repubblica and local newspapers (€4.3 million), to the renovation of the new Rome offices of the Group (€3 million), to the renovation of the offices of Veneto Region newspapers, La Nuova Sardegna and Il Piccolo (€1 million), in addition to the upgrade of information systems and the development of i.c.t. network infrastructure (€2.8 million). Cash flow from financing activities absorbed resources amounting to €14.6 million, due to the payment of €55.8 million in dividends. Despite the good cash flow from operations, capital expenditure for the first six months of the year, together with the disbursement of €110 million for the purchase of national television network Rete A and the payment of €55.8 million in dividends, determined an increase in net consolidated debt from €141.4 million at January 1, 2005, to €255.5 million at June 30, 2005. The table that follows shows the breakdown of the net financial position of the Group. (€ million) Jan 1, June 30, 2005 2005 Marketable securities 20.1 10.1 Financial receivables 10.9 7. 1 Cash and cash equivalents 383.2 306.1 Total financial assets 414.3 323.3 (511.0) (526.4) (37.0) (45.9) (7.6) (6.6) Total financial liabilities (555.7) (578.8) NET DEBT (141.4) (255.5) Bonds Bank debt Other financial debt 27 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 RESULTS OF PARENT COMPANY - GRUPPO EDITORIALE L’ESPRESSO SPA Income Statement st (€ million) Revenues st 1 Half 1 Half 2004 2005 331.2 351.0 1.6 8.0 (59.0) (59.1) (147.1) (166.9) (54.4) (59.1) Other operating costs (3.3) (4.6) Depreciation, amortization and write-downs (6.9) (6.9) Other operating income Purchases Services received Personnel costs Operating income 62.0 62.4 Financial income/(expense) (6.0) (9.0) Dividends 27.2 47.2 Pre-tax profit 83.2 100.6 (22.9) (22.0) 60.3 78.5 Jan. 1, 2005 June 30, 2005 Taxes NET PROFIT Balance Sheet ASSETS (€ million) Intangible assets with indefinite useful life 220.7 220.7 Other intangible assets 2.9 2.9 Total intangible assets 223.6 223.6 78.0 77.3 256.0 376.5 6.9 1.5 20.0 19.0 584.5 697.9 Tangible assets Other investments Financial receivables Deferred tax assets NON-CURRENT ASSETS Inventories 25.8 22.3 103.2 98.8 Marketable securities 20.1 10.0 Financial receivables 32.0 55.9 Tax receivables 34.0 37.8 Other receivables 14.4 8.5 Cash and cash equivalents 372.6 291.9 CURRENT ASSETS 602.2 525.3 1,186.7 1,223.2 Trade receivables TOTAL ASSETS 28 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 LIABILITIES AND SHAREHOLDERS' EQUITY (€ million) Share capital Jan. 1, 2005 June 30, 2005 2005 64.9 65.0 124.5 121.7 Retained earnings 43.2 68.0 Net income 72.4 78.5 SHAREHOLDERS' EQUITY 305.0 333.3 Financial debt 315.4 315.8 7.3 7.9 41.8 32.6 44.0 31.8 NON-CURRENT LIABILITIES 397.1 399.4 Financial debt 285.1 299.1 4.5 5.0 150.6 123.7 8.2 26.6 36.2 36.2 CURRENT LIABILITIES 484.6 490.5 TOTAL LIABILITIES 881.7 889.9 1,186.7 1,223.2 Reserves Provisions for risks and charges Employee severance reserve and other retirement benefits Deferred tax liabilities Provisions for risks and charges Trade payables Tax payables Other payables TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 29 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Statement of Cash Flows st (€ million) OPERATING ACTIVITIES Net income 1 Half 2004 st 1 Half 2005 60.3 78.5 - Accruals to provisions for personnel, risks and charges 4.8 6.1 - Accruals to provision for stock option costs 0.9 1.3 - Depreciation, amortization and write-downs 6.9 6.9 (27.1) (47.2) 45.8 45.7 Decrease (Increase) in inventories 8.1 3.5 Decrease (Increase) in current receivables 7.1 9.9 (0.5) (26.9) 7.2 14.6 Adjustments - Other adjustments Cash flow from operating activities Decrease (Increase) in current payables Decrease in tax receivables/Increase in tax payables Decrease in current assets/Increase in current liabilities Decrease in deferred tax receivables/Increase in deferred tax payables Uses of provisions for personnel, risks and charges 21.9 1.0 (0.1) (3.0) 0.2 (3.0) CASH FLOW FROM OPERATING ACTIVITIES 64.5 43.9 (0.4) (0.6) (Increase)/Decrease in tangible assets (13.3) (5.2) (Increase)/Decrease in equity investments (27.0) (120.5) 27.2 47.2 (13.5) (79.1) FINANCING ACTIVITIES Increases in capital and reserves and other changes in the Shareholders' Equity Increase (decrease) in other financial debt 1.1 (0.6) 4.3 (3.1) Net change in marketable securities (and own shares in 2004) (4.8) 10.1 1.9 (1.0) Dividends paid (47.1) (55.8) CASH FLOW FROM FINANCING ACTIVITIES (49.6) (45.5) Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the period 1.4 58.4 (80.7) 372.6 CASH AND CASH EQUIVALENTS AT END OF THE PERIOD 59.8 291.9 INVESTING ACTIVITIES (Increase)/Decrease in intangible assets Dividends received CASH FLOW FROM INVESTING ACTIVITIES Change in other financial receivables/liabilities 30 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 The operating performance was described in the section on individual divisions to which we refer. Below we discuss the financial performance of the parent company and that of its equity investments. Capital expenditure of the parent company in the first half of 2005 amounts to €5.8 million and relate primarily to the renovation of new offices, the development of information systems of the Group, and the optimization of the operation of new rotary presses of La Repubblica Division. At June 30, 2005, net financial debt of the parent company amounted to €255.7 million, up on €168.9 million at January 1, 2005. The increase from the end of 2004 is due primarily to the acquisition of Rete A for €110 million, the distribution of €55.8 million in dividends and capital expenditure, offset only in part by cash generated by operations (€43.9 million). At the end of June, the Company employed 952 persons, 12 more than at December 31, 2004. Newly hired personnel was employed primarily in publishing initiatives launched in the first half of the year – TvMagazine – and in publications to be launched in the near future – XL, the new monthly supplement of la Repubblica. 31 Interim Financial Statements at June 30, 2005 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Espresso Group Consolidated Balance Sheet ASSETS (€ thousand) Intangible assets with an indefinite useful life Other intangible assets Total intangible assets Tangible assets Investments valued at equity Other investments Financial receivables Deferred tax assets Notes (1) (2) (3) (4) (5) (6) NON-CURRENT ASSETS Inventories Trade receivables Marketable securities Financial receivables Tax receivables Other receivables Cash and cash equivalents (7) (8) (9) (5) (10) (11) (12) CURRENT ASSETS TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY (€ thousand) Share capital Reserves Retained earnings Net income Notes (13) (14) Jan. 1, June 30, 2005 2005 460,275 5,459 465,734 258,972 23,907 3,868 9,254 26,811 613,349 5,418 618,767 259,075 14,547 3,883 3,603 25,209 788,546 925,084 30,189 241,727 20,142 1,671 41,471 21,976 383,214 27,734 253,537 10,068 3,505 60,288 26,157 306,115 740,390 687,404 1,528,936 1,612,488 Jan. 1, June 30, 2005 2005 64,896 187,738 132,575 98,869 65,003 194,314 174,560 54,810 484,078 488,687 11,005 10,592 495,083 499,279 330,851 13,022 95,887 54,181 330,409 13,236 101,176 95,499 493,941 540,320 224,841 10,273 209,520 16,481 78,797 248,429 10,183 183,146 50,735 80,396 539,912 572,889 TOTAL LIABILITIES 1,033,853 1,113,209 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,528,936 1,612,488 Group Shareholders' Equity Minority interests (15) SHAREHOLDERS' EQUITY Financial debt Provisions for risks and charges Employee severance reserve and other retirement benefits Deferred tax liabilities (16) (17) (18) (6) NON-CURRENT LIABILITIES Financial debt Provisions for risks and charges Trade payables Tax payables Other payables CURRENT LIABILITIES (16) (17) (19) (20) (21) The notes from page 41 to page 81 are an integral part of these interim financial statements. 34 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Espresso Group Consolidated Income Statement st (€ thousand) Notes 1 Half 1 st Half 2004 2005 Revenues (22) 546,057 567,613 Other operating income Purchases (23) (24) 4,735 (80,303) 12,591 (79,560) Services received Personnel costs Other operating costs (25) (26) (27) (207,665) (134,576) (6,705) (216,395) (147,129) (8,069) (28) 685 (21,327) 460 (23,174) 100,901 106,337 (6,449) (9,435) 94,452 96,902 (41,772) (41,856) NET PROFIT 52,680 55,046 Minority interest share in net profit Group share in net profit 315 52,365 236 54,810 0.122 0.119 0.128 0.124 Investments valued at equity Depreciation, amortization and write-downs Operating income Financial income (expense) (29) Pre-tax profit Income taxes Base, income per share Diluted, income per share (30) (31) (31) The notes from page 41 to page 81 are an integral part of these interim financial statements. 35 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Espresso Group Consolidated Statement of Cash Flows 1st Half 1st Half 2004 2005 52,365 54,810 315 236 Adjustments: - Accruals to provisions for personnel, risks and charges - Accruals to provisions for stock option costs - Depreciation, amortization and write-downs - Other adjustments 10,071 894 21,327 (550) 11,813 1,280 23,174 (495) Cash flow from operating activities 84,422 90,818 Decrease (Increase) in inventories Decrease (Increase) in current receivables Decrease (Increase) in current payables Decrease in taxreceivables/Increasein tax payables 8,362 (3,862) 9,169 10,660 2,455 (18,036) (24,775) 15,437 Decrease in current assets/Increase in current liabilities 24,329 (24,919) 744 42,920 (€ thousand) Notes OPERATING ACTIVITIES Net income Minority interests Decrease in deferred tax receivables/Increase in deferred tax payables Uses of provisions for personnel, risks and charges (7,365) (6,400) 102,130 102,419 (Increase)/Decrease in intangible assets (Increase)/Decrease in tangible assets (Increase)/Decrease in equity investments (764) (60,148) 466 (154,074) (20,191) 9,380 CASH FLOW FROM INVESTING ACTIVITIES (60,446) (164,885) 1,455 7,049 (4,842) 6.568 (47,114) 4,163 7,791 10,074 19.172 (55,833) (36,884) (14,633) 4,800 (77,099) Cash and cash equivalents at beginning of the period 69,815 383,214 CASH AND CASH EQUIVALENTS AT END OF THE PERIOD 74,615 306,115 CASH FLOW FROM OPERATING ACTIVITIES INVESTING ACTIVITIES FINANCING ACTIVITIES Increases in capital and reserves and other changes in the Shareholders' Equity Increase (decrease) in other financial debt Net change in marketable securities (and own shares in 2004) Change in other financial receivables/liabilities Dividends paid CASH FLOW FROM FINANCING ACTIVITIES (32) Increase (decrease) in cash and cash equivalents The notes from page 41 to page 81 are an integral part of these interim financial statements. 36 - Net profit (loss) Other changes - Other changes - Net profit (loss) Other changes Share 77,306 - - - - 2,156 - - 75,150 - - 13,192 61,958 - - 313 - 1,439 - 60,206 - - (4,842) - 1,057 - 63,991 premium Own (11,575) - - 2,437 - - - - (14.012) - (14,012) (13,192) 13,192 - - (313) - - - 13,505 - - 4,842 - - - 8,663 shares - - - - - - - - - - - - - - - - - (2,323) (83) - - - - - - (2.240) (2,240) reserve Fair value IFRS 114,124 1,559 - - - - - - 112,565 1,680 - 110,885 - - - - - - 110,885 - - - - - - 110,885 reserve * 3,781 - - (795) 1,280 - - - 3,296 - - - 3,296 - - - 1,571 - 1,725 - - - 894 - - 831 reserve Stock option * Gross of the effect of the adoption of IFRS, amounting to about €2 million, recorded under "Retained earnings". 65,003 - Own shares transactions Balance at June 30, 2005 - Stock options 107 - Dividends Capital increases, capital contributed by shareholders - Allocation of net profit 64,896 - Effect of adotion of IAS 39 Balance at January 1, 2005 - Effect of adotion of IAS 32 Elimination reserve for own shares under Italian GAAP 64,896 - Net profit (loss) Balance at December 31, 2004 - Own shares transactions 74 - Stock options Capital increases, capital contributed by shareholders Allocation of net profit 64,822 - Own shares transactions Balance at June 30, 2004 - 53 Stock options Capital increases, capital contributed by shareholders - 64,769 Balance at January 1, 2004 Dividends capital (€ thousand) Share Statement of Changes in the Consolidated Shareholders' Equity Espresso Group Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Equity 13,001 22 - - - - - 12,979 - - - 12,979 15 - - - - - 12,964 10 - - - - - 12,954 reserves 174,560 (1,552) - 501 - - (55,833) 98,869 132,575 59 820 - 131,696 (46) - - - - - 131,742 (7) - - - - (47,114) 178,863 earnings Retained Net - - - - 54,810 - 54,810 - - - - (98,869) 98,869 - - - 98,869 - 46,504 - - - - 52,365 - 52,365 profit Group 488,687 (54) 54,810 2,143 1,280 2,263 (55,833) - 484,.078 (501) (13,192) - 497,771 (31) 46,504 - 1,571 1,513 - 448.214 3 52,365 - 894 1,110 (47,114) 440,956 Sh. Equity (467) 499,279 (413) 54,810 2,143 1,280 2,263 (55,833) 10,592 - - - - - - 495,083 11,005 - (501) (13,192) - - - 508,776 11,005 - 382 46,504 - 1,571 1,513 413 - - - - - 458,806 10,592 - (25) 52,365 - 894 1,110 (28) - - - - (47,114) 451,576 - 10,620 Total Sh. Equity Minority Sh. Equity Notes to the consolidated financial statements Gruppo Editoriale L’Espresso – Interim Financial Statement at 30 June, 2005 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL INFORMATION Gruppo Editoriale L’Espresso SpA (the “parent company”) and those companies in which it holds either directly or indirectly an interest (further on in the present document referred jointly to as the “Espresso Group” or the “Group”) operates mainly in the publishing sector and more specifically publishes newspapers and periodicals, owns and manages radio stations, sells advertising on various media, has online publishing interests and interests in terrestrial and satellite television. Gruppo Editoriale L’Espresso SpA has its registered office in Italy at Via Cristoforo Colombo, 149, Rome. The Espresso stock is listed on the screen-based trading circuit (Mercato Telematico Azionario, MTA) of the Italian Stock Exchange (Reuters code: ESPI.MI, Bloomberg code: ES IM). The stock is included in the S&P/MIB and MIDEX indexes. The present interim report for the first six months of 2005 with starting date January 1, 2005 were approved by the Board of Directors of the parent company on July 27, 2005. 2. FORM AND CONTENT OF THE FINANCIAL STATEMENTS As allowed by article 81 of the Issuers’ Regulation no. 11971, modified by CONSOB Resolution no. 14990 dated April 14, 2005, the present Consolidated Interim Financial Statements were prepared in accordance with accounting principles established for the consolidated accounts of financial year 2005, adopted according to the procedure described in article 6 of EU Regulation no. 1606/2002 (International Financial Reporting Standards, referred to in the present document individually as IAS/IFRS or, jointly, as IFRS) and approved until the reporting date. In application of IAS 34 (“Interim financial reporting”) and of paragraphs no. 45 and 46 of IFRS 1 (“First-time adoption of International Financial Reporting Standards”) section “Transition to IFRS” of the present document provides reconciliations prescribed in paragraphs no. 39 and no. 40 of IFRS 1, and the related notes. Changes made to the Issuers’ Code follow EU Regulation no. 1606/2002 of July 19, 2002, requiring, starting with the financial year beginning January 1, 2005, the preparation of consolidated financial statements of companies whose stock is admitted to listing in a regulated market of the EU, under IFRS in place of the accounting principles of individual Member States. With regard to certain aspects, the implementation and interpretation process carried out by official organisms in charge, in addition to the necessary approval of measures taken by the European Commission, is still underway. As a result, at the present date it cannot be ruled out that further changes or amendments to the said accounting principles and their interpretation could in the future oblige or allow the Espresso Group to modify accounting, valuation and classification criteria adopted in the preparation of the present Consolidated Interim Report. 41 Gruppo Editoriale L’Espresso – Interim Financial Statement at 30 June, 2005 In the first half of 2005, the IASB (International Accounting Standard Board) and the IFRIC (International Financial Reporting Interpretation Committee) published new Principles and Interpretations. Despite the fact that at the present date such Principles and Interpretations have not yet been included in EU legislation, the Group has taken into account their effect, describing in note 9 of the present document the potential impact on its Balance Sheet and Income Statement. As required by IFRS 1, principles of consolidation and valuation criteria described below were applied in addition to the preparation of the present Consolidated Interim Report, also to the opening Consolidated Balance Sheet at January 1, 2004, to the Consolidated Financial Statements at December 31, 2004, the Consolidated Balance Sheet at January 1, 2005 and the Consolidated Financial Statements at June 30, 2004, with the exception of those relating to financial instruments, whose application was postponed to January 1, 2005, as allowed under IFRS 1, and to exemptions to the retroactive application of IFRS allowed under IFRS 1, as reported in the section “Transition to IFRS”. The principle adopted is that of the historical cost for all assets and liabilities, with the exception, from January 1, 2005, of derivative instruments and certain financial assets, accounted for at their fair value. Unless otherwise specified, amounts reported in the financial statements and tables are stated in thousands of euro, rounded off to the nearest unit. 3. PRINCIPLES OF CONSOLIDATION The consolidation includes the Financial Statements of the parent company, its subsidiaries and affiliated companies without exception. Subsidiaries are those companies in which the parent company exercises control. Control is deemed to occur when more than half of actual voting rights or those potentially exercisable at a shareholders’ meeting are held by the company either directly or indirectly at the date of the financial statements. Affiliated companies are those in which the parent company exercises a significant influence. Such influence is deemed to occur when the Group controls 20% or more of actual voting rights or those potentially exercisable at the date of the financial statements. Subsidiaries are consolidated from the date at which the Group acquires control and deconsolidated from the date at which control is lost. Subsidiaries and affiliated companies are recorded at the acquisition cost, corresponding to the current value of assets acquired, shares issued or liabilities generated at the time of acquisition, in addition to other costs directly incurred in the acquisition. The excess of the acquisition cost over the book value of assets of subsidiaries acquired by the Group is recorded as goodwill, while that of affiliated companies acquired is included in the value of the investment. The accounting treatment of goodwill is described in note 5.1. Subsidiaries were consolidated under the line-by-line method, thus including all assets and liabilities, costs and revenues of subsidiaries regardless of the share held. The book value of consolidated companies was therefore netted against the related Shareholders’ Equity. 42 Gruppo Editoriale L’Espresso – Interim Financial Statement at 30 June, 2005 Transactions, balances and unrealized gains and losses among Group companies were therefore eliminated. The share in the Shareholders’ Equity and profits accruing to minority shareholders were recorded separately under Shareholders’ Equity in the consolidated Balance Sheet and under a separate caption in the consolidated Income Statement. At the time of their acquisition, investments in affiliated companies are recorded under the equity method, recording the share of the Group in the profit and in the change in reserves, respectively in the income statement and in the balance sheet under Shareholders’ Equity. The share in unrealized gains and losses between affiliated companies is eliminated depending on the quota held. When the Group’s share in the loss of an affiliated company is equal or higher than the book value of the investment, the Group does not recognize further losses unless it has obligations to cover losses or has made payments on behalf of the affiliated company. All financial statements of Group companies are prepared at the same date and relate to a financial year of the same duration. 4. FINANCIAL DATA BY SECTOR Sectors of activity and primary and secondary sectors in which the Group is active were determined keeping into account the principal source and nature of risks and returns of the Group, the organizational structure and the internal reporting system. As the Group’s risks and returns are influenced exclusively by differences in products and services rendered, the primary reporting schedule adopted by the Group is the breakdown by type of activity, while information by geographical area is not applicable and is therefore not provided. For assets or liabilities that cannot be attributed to a specific sector, specific parameters were applied in their attribution. Assets and liabilities that may not be attributed to specific parameters are reported separately in the table below. 43 55.3 53.0 Tax liabilities Total Liabilities and Shareholders’ Liabilities Total assets Tax assets (€ million) Assets (4.0) (5.2) (6.2) 840.9 1,132.7 831.6 1,166.4 National newspapers and Periodicals Dec. 31, Jun. 30, 2004 2005 (5.8) Non-monetary costs 5.3 (0.4) 134.4 123.8 13.7 (0.7) 146.5 151.8 Deprec./amortiz. Write-downs Net Profit/(loss) for the period Net capital expenditure Taxes (€ million) Revenues from others Revenues from other sectors Operating profit/(loss) Financial income/(expense) Adj. to value of financial assets st 1 Half 2005 1 Half 2004 st National newspapers st st (0.9) (0.3) 0.0 (0.0) 7.1 17.2 52.9 1 Half 2005 115.1 398.8 Dec. 31, 2004 st 125.4 393.7 Jun. 30, 2005 22.2 66.0 65.1 16.0 97.3 1.8 16.3 92.8 st 6.9 26.8 st (0.2) (0.3) 0.0 (0.1) (1.4) 4.5 2.2 1 Half 2004 5.8 29.9 st (0.0) (0.1) 0.3 2.9 0.0 - 0.2 0.6 0.3 17.1 177.9 Jun. 30, 2005 1.6 0.5 5.5 st (0.8) (0.3) (0.1) (3.1) 1.0 3.8 275.5 1 Half 2004 194.7 217.7 Dec. 31, 2004 207.8 227.8 Jun. 30, 2005 st (0.4) (4.0) 14.2 (0.5) 1.7 19.3 11.0 1 Half 2004 52.4 103.5 Dec. 31, 2004 52.8 94.5 Jun. 30, 2005 st (0.1) (263.3) (518.9) (2.8) (289.8) (656.0) Jun. 30, 2005 0.0 0.4 0.1 (285.6) st 1 Half 2005 Elisions and adj. 0.0 1.3 0.0 (260.7) st 1 Half 2004 Elisions and adj. Dec. 31, 2004 (0.7) (5.2) 0.7 (0.5) 1.9 28.0 5.5 1 Half 2005 Other activities Other activities (0.7) (0.2) (0.0) (1.2) 0.9 2.3 288.3 st 1 Half 2005 Advertising Advertising (0.1) (0.6) 167.1 (0.0) st 1 Half 2005 Television 1 Half 2004 Television (0.2) (0.2) 0.1 - (0.4) 1.7 4.5 Dec. 31, 2004 st 1 Half 2005 Internet Jun. 30, 2005 Internet (0.3) (1.4) 1.4 (0.1) 17.6 35.4 2.1 1 Half 2005 Dec. 31, 2004 (0.3) (1.4) 1.1 (0.3) 14.8 31.8 Jun. 30, 2005 st Radio stations 1 Half 2004 Radio stations (3.7) (7.1) 4.2 (0.3) Dec. 31, 2004 (3.6) (5.4) 30.7 (0.2) 22.7 60.3 64.5 st 1 Half 2005 Local newspapers 1 Half 2004 Local newspapers (0.8) (0.3) 0.0 (0.1) 9.0 16.6 39.0 1 Half 2004 Periodicals Operating and financial data by sector Gruppo Editoriale L’Espresso – Interim Financial Statement at 30 June, 2005 st st (0.0) (41.9) (0.1) (41.8) 1,113.2 1,033.9 44 146.2 967.0 1,612.5 85.5 1,527.0 Jun. 30, 2005 (11.8) (21.1) 178.8 (2.1) 70.7 963.2 1,528.9 68.3 1,460.7 Dec. 31, 2004 TOTAL (10.1) (17.6) 59.7 (3.7) 55.0 (9.4) (6.3) 52.7 106.3 - 567.6 1 Half 2005 100.9 - 546.1 1 Half 2004 TOTAL Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 5. VALUATION CRITERIA 5.1 Intangible assets Intangible assets are initially recorded at the acquisition or production cost. The acquisition cost is represented by the fair value of the price paid for the asset, inclusive of any direct cost incurred to put the asset to use. The acquisition cost is the equivalent of price paid in cash at the time of the acquisition. In case the amount paid for the acquisition is deferred beyond normal payment terms, the difference with respect to the equivalent cash price is recorded as interest over the longer payment term. The cost of intangible assets developed internally is recorded by separating costs incurred in the research phase (not capitalized) and costs incurred in the subsequent development phase (capitalized). In case the two phases cannot be separated, the whole project is accounted for as research. Interest charges on the acquisition are not capitalized. The book value of intangible assets is in line with the amount expected to be retrieved through future use. In case there arise doubts as to possibility to retrieve the book value of an asset, the latter is subjected to an impairment test, as described in note 5.5. Publications and frequencies The useful life of newspaper mastheads, broadcasting frequencies and certain trademarks is considered as undefined. Such assets are not amortized and are instead subjected annually, or any time there is an indication that the asset may have experienced a loss in value, to an impairment test. Goodwill Goodwill represents the premium paid over the fair value of the share of assets and liabilities acquired by the Group. Goodwill arising from the acquisition of affiliated companies is included in the value of the related equity investment. Goodwill acquired for a consideration is not amortized and is subjected at least annually to an impairment test. With such end, goodwill is allocated from the date of acquisition or by the end of the subsequent financial year, to one or more cash generating units (CGU). Possible reductions in value resulting from an impairment test do not give rise to adjustments in subsequent years. Other intangible assets Other intangible assets are represented by industrial patents and intellectual property rights, concessions, licenses, trademarks and similar rights, and software. They are recorded at cost, net of accumulated amortization calculated on a straight line over their expected useful life, and possible durable losses in value. In view of the homogeneity of assets recorded in the balance sheet, barring specific relevant cases, the useful life of other intangible assets is estimated at 3 to 5 years. Amortization criteria applied, assets’ useful life and residual values are reviewed and redefined at least at the end of each financial period to keep into account possible significant changes. 45 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 5.2 Tangible assets Tangible assets are recorded at cost, represented by the fair value of the price paid for the acquisition of the asset, inclusive of any direct cost incurred to put the asset to use. The acquisition cost is the equivalent of price paid in cash at the time of the acquisition. In case the amount paid for the acquisition is deferred beyond normal payment terms, the difference with respect to the equivalent cash price is recorded as interest over the longer payment term. Interest charges on the acquisition are not capitalized. The capitalization of costs for the upgrade, update or improvement of structural elements owned or leased from third parties is carried out exclusively when the same fulfill the requisites that allow their separate classification as assets or part of assets. After the initial recording, tangible assets are carried at cost, net of accumulated depreciation and possible durable losses in value. The amortizable value of each significant component of a tangible assets having a different useful life is calculated on a straight line over its expected useful life. In view of the homogeneity of assets recorded in the balance sheet, barring specific relevant cases, the expected useful life of tangible assets by category is as follows: Land Industrial buildings Printing plants Full color rotary presses Rotary presses Editorial systems indefinite 30 years 7 years 10 years 5 years 4 years Amortization criteria, the useful life of assets and their residual value are reviewed and redefined at least at the end of each financial period to keep into account possible significant changes. Capitalized costs relating to leasehold improvements are attributed to the classes of assets to which they relate and amortized over the shorter between the residual term of the lease and the residual useful life of the asset to which the leasehold improvement relates. The book value of tangible assets is in line with the amount expected to be retrieved through future use. In case doubts arise as to possibility to retrieve the book value of an asset, the latter is subjected to an impairment test, as described in note 5.5. The original value is restored when the reasons that gave rise to the impairment cease to exist. 5.3 Leasing contracts Leasing contracts relating to assets for which the Group bears all costs and benefits deriving from ownership are classified as financial leases. Assets held under a financial lease are recorded at the lower between the current value of the asset leased and the present value of minimum lease payments provided for in the lease contract. Such payments are accounted for as interest and principal so as to obtain a fixed rate of interest on the residual part of the debt. Residual lease payments, net of interest, are recorded as financial debt. Interest 46 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 payments are charged to the income statement over the life of the lease. Assets held under a financial lease are depreciated in line with assets owned. Leasing contracts in which the lessor holds a significant share of risks and benefits deriving from ownership are instead classified as operating leases. Lease payments are recorded in the income statement in equal installments over the life of the lease contract. In sale and lease-back operations, the difference between the sale price and the book value of the asset is not recorded, except in the case of a write-down in the value of the asset. 5.4 Grants Grants are recorded when there exists, regardless of the formal granting of the amount, a reasonable certainty that the company will meet the conditions for the entitlement to the grant and that the same will actually be received. Capital grants are recorded in the balance sheet as deferred income and not as an adjustment to the value of the item for which the grant has been obtained. The contribution is credited in the income statement based on the useful life of the asset for which it is granted by discounting it so as to net out the related amortization expense recorded. Any grant receivable as compensation for expenses and costs already incurred or aimed at providing immediate financial help to the company not correlated to future costs is recorded as income in the year in which it becomes receivable. 5.5 Impairment of assets A loss in value of an asset originates whenever the book value of an asset is higher than the amount expected to be retrieved from the same. At each accounting date, the presence of factors indicating a possible loss in value is assessed. Whenever one of these factors is present, the retrievable value of the asset is assessed through an impairment test and the write-down is recorded where appropriate. Assets not yet available for use, those recorded in the financial statements in the current financial year, intangible assets having an indefinite useful life and goodwill are subject at least annually to an impairment test, independently from the presence of factors indicating possible loss in value. The retrievable value of an asset is the higher between its fair market value, net of sales costs, and its usage value. The retrievable value is calculated with reference to each individual asset, unless the said asset is able to generate positive financial flows deriving from ongoing use independently from positive cash flows generated by other assets or groups of assets, in which case the test is carried out at the level of the smallest Cash Generating Unit that includes the said asset. Values are restored if the conditions for the impairment no longer obtain, except for goodwill. 47 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 5.6 Financial assets Valuation criteria from January 1, 2004 to December 31, 2004 Other investments and securities are recorded at cost, written-down as appropriate in case of durable losses in value. Securities classified under current assets are valued at the lower between cost and market value. Valuation criteria from January 1, 2005 Financial assets are classified into the following categories: • financial assets valued at fair value, recorded also in the income statement; • financial assets held to maturity; • loans and other financial receivables; • financial assets available for disposal. The Group carries out the classification of financial assets at the time of acquisition. Financial assets are classified as follows: • financial assets valued at fair value, recorded also in the income statement consist of financial assets acquired primarily with the intent of realizing a gain from short-term trading (over a term no longer than 3 months), or financial assets designated as such from inception; • financial assets held to maturity consist of financial assets having a set maturity and generating a fixed cash flow or one that may be determined, which the Group intends and has the ability to hold to maturity; • loans and other financial receivables consist of financial assets generating a fixed cash flow or one that may be determined, not listed on a market and different from those classified from inception as Financial assets valued at fair value, recorded also in the income statement or Financial assets available for disposal; • financial assets available for disposal consist of financial assets other than the above or those designated as such from inception. Acquisitions and sales of financial assets are recorded at the settlement date. The acquisition cost corresponds to the fair value at the acquisition date, inclusive of transaction costs. After the initial recording, Financial assets valued at fair value, recorded also in the income statement and Financial assets available for disposal are valued at fair value, while Financial assets held to maturity and Loans and other financial receivables are valued at the amortized cost. Realized and unrealized gains and losses resulting from fluctuations in the fair value of Financial assets valued at fair value, recorded also in the income statement, are recorded in the income statement in the year in which they occur. Unrealized gains and losses resulting from fluctuations in the fair value of Financial assets available for disposal are recorded under Shareholders’ Equity. The fair value of financial assets is determined according to listed bid prices or through the use of financial models. The fair value of unlisted financial assets is estimated using specific estimation techniques adjusted to the specific condition of the issuer. Financial assets for 48 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 which the current value cannot be reliably determined are recorded at cost, adjusted downwards for losses in value. At each financial closing date, the presence of factors indicating loss of value is assessed. The write-down is recorded in the Income Statement. Losses in value accounted for are reversed in case the circumstances that led to their recording no longer exist, with the exception of assets valued at cost. 5.7 Inventories Inventories are recorded at the lower of the acquisition cost, determined applying the weighted average cost method, and the net realizable value. The cost is represented by the fair value of the price paid and any other cost that may be attributed, with the exception of interest expenses. The net realizable value is represented by the estimated sale price under normal conditions, net of completion costs and selling expenses. Write-downs are reversed in subsequent years when the reasons for their recording cease to exist. 5.8 Trade receivables Trade receivables are recorded at the fair value of future cash flows, written-down for losses in value. 5.9 Contract work in progress Contract work in progress is represented by specific projects being completed. In the case of projects for which the outcome can be estimated in a reliable manner, contractual revenues and related costs are recorded under the stages of completion method. The percentage of completion is determined according to the ratio between costs and time employed in the activity carried out at the closing date of the accounts and total costs estimated to the completion. When it appears probable that total costs will exceed contractual revenues, the expected loss is recorded in the income statement. In the case of projects for which a reliable estimate is not available, contractual revenues are recorded in line with costs incurred, provided such costs are expected to be retrieved. The sum of costs incurred and of profits recorded on each project is compared with invoices issued against the work carried out up until the date of the financial statements. When costs incurred and profits recorded (net of losses) are higher that invoices issued, the difference is recorded among current assets under “Trade receivables”. When invoices issued are higher than the sum of costs incurred and profits recorded (net of losses), the difference is accounted for among current liabilities under “Trade payables”. 5.10 Cash and cash equivalents Valuation criteria from January 1, 2004 to December 31, 2004 Cash and cash equivalents are represented by cash and demand or short-term bank and post office deposits. These are recorded at their nominal value. 49 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Valuation criteria from January 1, 2005 Cash and cash equivalents are represented by short-term investments (generally having a term not exceeding 3 months) in highly liquid assets that may easily be converted in known amounts of cash posing a minimal risk of fluctuation in value. In the context of the Statement of Cash Flows, cash and cash equivalents consist of cash, demand deposits with banks, other highly liquid short-term financial assets with an original maturity not exceeding 3 months, and bank overdrafts. In the preparation of the Balance Sheet, the latter are included under financial debt among current liabilities. Cash and cash equivalents are recorded at fair value. 5.11 Share capital The share capital is represented by capital underwritten and paid-up. Costs strictly correlated with the issue of shares are recorded as a reduction of the share capital, provided they consist of marginal variable costs directly attributable to operations involving the share capital and not avoidable. Costs relating to operations involving the share capital subsequently abandoned are recorded in the income statement. 5.12 Own shares Valuation criteria from January 1, 2004 to December 31, 2004 Within the limits set by article 2357 of the Italian Civil Code and in the manner established by the Shareholders’ Meeting, own shares are recorded at the acquisition cost, adjusted for ascertained durable losses in value and recorded under non-current assets. Valuation criteria from January 1, 2005 Own shares are recorded in a specific Shareholders’ Equity reserve. Gains or losses on the purchase, sale, issue or cancellation of own shares are not recorded in the income statement. 5.13 Fair value reserves Fair value reserves include changes in the fair value, net of the related tax effect, of items recorded at fair value and under Shareholders’ Equity. 5.14 Other reserves Other reserves are represented by specific capital reserves of the parent company. 5.15 Retained earnings (loss carry-forwards) Retained earnings (loss carry-forwards) include the part not distributed and not accrued to reserves (in case of profits) or not used to cover losses for the current year and previous years (in case of loss). The item includes also transfers from other Shareholders’ Equity reserves freed-up, in addition to the effect of the change in accounting principles and relevant errors. 50 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 5.16 Employee benefits Short-term benefits Short-term employee benefits are recorded in the income statement in the period in which the employment takes place. Defined benefit plans Employee severance indemnities and Fixed indemnities for managers of newspapers are determined by independent actuaries to estimate the amount of the future benefits that the employees have accrued at the balance sheet date. Net discounting gains (losses) accrued are not recorded until their absolute value exceeds 10% of the present value of the liability (“corridor approach”). In the year in which such threshold is exceeded, net discounting gains (losses) are recorded in full. Defined contribution plans The Group participates in defined contribution plans contributing to mandatory, contractual or voluntary public or private pension plans. The payment of contributions extinguishes the obligation of the Group towards its employees. Contributions constitute therefore costs for the period in which they are due. Employee benefits contributed in shares The Group recognizes additional benefits to certain top managers through stock option plans. The cost of such operations involving shares is calculated based on the fair value of options at the time at which they are assigned. The cost is recorded in the period included between the date at which the options are assigned and that at which they become exercisable, and is recorded also under Shareholders’ Equity. 5.17 Provisions for risks and charges, contingent assets and liabilities Provisions for risks and charges are accrued against possible liabilities whose amount and/or timing is uncertain and whose fulfillment requires the use of financial resources. Accruals are made exclusively when there exists an actual obligation, either legal or implicit, towards third parties that requires the use of financial resources, and whenever a reliable estimate of the obligation can be made. The accrual recorded represents the best estimate of the liability relating to the fulfillment of the obligation at the date of the financial statements. Accruals made are reviewed at each accounting date and adjusted to the best available estimate. Where the payment of the obligation takes place beyond normal payment terms and the discounting effect is relevant, the amount accrued is represented by the present value of expected future payments needed to extinguish the obligation. Contingent assets and liabilities are not recorded in the financial statements, though information about the same is provided. 51 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 5.18 Financial liabilities Valuation criteria from January 1, 2004 to December 31, 2004 Financial liabilities are valued at cost, adjusted for permanent losses in value. Valuation criteria from January 1, 2005 Financial liabilities are recorded initially at the fair value of amounts received, net of transaction costs, and subsequently valued at the amortized cost. 5.19 Derivative instruments Valuation criteria from January 1, 2004 to December 31, 2004 Derivative instruments used to hedge risks relating to specific assets or liabilities are valued at cost, in line with assets and liabilities hedged. Differentials accrued on hedging contracts relating to assets and liabilities that produce interest, are recorded in the income statement under the accrual method. Differentials accrued on “paper swap” contracts are recorded as an increase or deduction of the cost of the supply, as appropriate. Valuation criteria from January 1, 2005 Derivative contracts are recorded in the income statement at fair value. The recording of differences in the fair value varies according to the purpose of the derivative instrument (speculative or hedging) and the nature of the risk hedged (Fair Value Hedge or Cash Flow Hedge). In the case of contracts designated as speculative, changes in the fair value are recorded directly in the income statement. In the case of contracts designated as hedging contracts, the Group documents the relationship with the instrument hedged at the time it enters into the contract. The documentation includes the identification of the hedging contract, the item or operation hedged, the nature of the risk hedged, the criteria with which the effectiveness of the hedging contract will be evaluated, and the related risk. The effectiveness of the hedge is evaluated by comparing fluctuations in the fair value or the cash flow of the instrument hedged with fluctuations in the fair value or the cash flow of the hedging instrument. The effectiveness of the hedge is evaluated both at the start of the operation and regularly throughout the duration of the hedge. The evaluation is in any case carried out at least at each accounting date. More specifically, the hedge is considered as efficient when the fluctuation in the fair value or the cash flow of the instrument is “almost entirely” offset by the fluctuation in the fair value or cash flow of the hedging instrument and results are included in an interval between 80% and 125%. Fair Value Hedge instruments are accounted for by recording in the income statement changes in the fair value of the hedging instrument and the instrument covered, regardless of the valuation criteria adopted for the latter. Adjustments to the book value of hedged financial instruments producing interest are amortized in the income statement over the residual term of the asset/liability hedged using the effective interest rate method. 52 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Cash Flow Hedge instruments are accounted for by suspending under Shareholders’ Equity the portion of the change in the fair value of the hedging instrument which is recognized as effective, while recording in the income statement the ineffective part. Changes recorded directly under Shareholders’ Equity are released to the income statement in the same year or in the years in which the asset or liability hedged influences the income statement. The effect on the financial statements of the termination of a hedge contract are recorded differently for Fair Value Hedges and Cash Flow Hedges. In the case of Fair Value Hedges the underlying instrument recorded in the financial statements ceases to be hedged from the date at which the hedging contract is terminated and the instrument is thus again valued according to the method used in absence of a hedge. In case of financial instruments valued at the amortized cost, the difference between the valuation at the fair value of the risk covered and the amortized cost at the date of the termination of the hedge accounting period, is amortized over the residual life of the financial instruments based on rules used in the calculation of the effective rate of interest. In the case of Cash Flow Hedge, the gain or loss suspended in the Shareholders’ Equity remain suspended until the transaction takes place, when it is no longer probable or it is no longer expected to be carried out, or when flows originally hedged have an impact on the income statement. 5.20 Cost and revenue recognition Revenues from the disposal of assets are valued at the fair value of the amount received or receivable, keeping into account trade discounts. Revenues from the provision of services are accounted for under the percentage of completion method, defined as the ratio between the amount of services provided at the accounting date and the total value of services to be provided. Revenues from contract work are recorded as described in note 5.9. Revenues are recorded in accordance with the following criteria: • revenues from the sale of publications are recorded at the time of shipping, net of related returns; • revenues from the sale of advertising are recorded at the time of publication. Costs are recorded according to criteria in line with those applied for revenues, and in any case under the accrual method. Interest received and paid is recorded based on the accrual method, keeping into account the residual principal liability and the effective rate of interest applicable to maturity. Dividends are recorded in the year in which distribution is resolved. 5.21 Taxes Income taxes for the year are calculated based on expectable taxable income and current tax regulations. 53 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Deferred and prepaid taxes arising from timing differences between the profit reported in the financial statements and that reported for tax purposes, the carry-forward of losses and tax credits not retrieved are also recorded, provided their retrieval (elimination) reduces (increases) future tax payments with respect to the amount that would be payable in the future in case such retrieval (elimination) did not have a tax effect. The tax effect of operations or other events are recorded in the income statement or directly under Shareholders’ Equity in the same manner as operations or events that originate a tax liability. 5.22 Translation of amounts originally expressed in currencies other than the euro Entries in the financial statements of each Group company are recorded in the currency of the primary economic environment in which each company operates (“functional currency”). The consolidated financial statements are prepared in euro, which is the functional currency of the parent company. Transactions denominated in other currencies are translated into the functional currency at the exchange rate at the date of the transaction. Foreign-exchange gains and losses arising from the settlement of these transactions and the translation of assets and liabilities denominated in currencies other than the functional currency are recorded in the income statement. 6. CHANGE IN ACCOUNTING PRINCIPLES, ERRORS AND ADJUSTMENTS TO ESTIMATES Accounting principles adopted are modified from one financial year to the next only in case the change is required by an accounting principle or it contributes to provide more reliable and relevant information on the effect of transactions carried out on the financial position, economic performance or financial flows of the entity involved. The effect of changes in accounting principles is recorded retrospectively in the Shareholders’ Equity for the year prior to the one of the accounts, and comparative information is adapted accordingly. Such approach is adopted only when it is impractical to restate the accounts for comparative purposes. The application of a new or modified accounting principle is accounted for as required by the same principle. In case the principle does not provide for the transition, the change is accounted for under the retrospective method or, when this is impractical, through the use of projections. In case of relevant errors, the method described in the paragraph above with reference to accounting principles applies. In case of immaterial errors, the recording is carried out in the income statement in the period in which it is detected. Changes in estimates that have an impact exclusively on the income statement are accounted for on a prospective basis in the same year in which the change takes place if it impacts on the income statement, or in the year in which the change takes place and in subsequent years in case the change also impacts on subsequent accounting periods. 54 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 7. SUBSEQUENT EVENTS Events occurred after the date of the financial statements are events occurred between such date and the date at which the publication of the same is authorized. The date of approval for the publication of the financial statements is the date at which the Board of Directors approves them. Such date is indicated in note 1. Subsequent events relate to facts that provide evidence of situations existing at the date of the financial statements (subsequent events that imply adjustments) or facts providing evidence of situations after the balance sheet date (subsequent events that do not require adjustments). The effect related to the first is recorded in the financial statements and the appropriate note is adjusted accordingly, while in the second case only relevant information is provided in the notes, where relevant. 8. RISK MANAGEMENT In the management of financial resources the Group adopts a binding procedure that implies the application of strict prudence and limited risk criteria in the choice of financial and investment policies, prohibiting all speculative operations except for those motivated and approved by the Board of Directors of the parent company. The parent company manages and coordinates a centralized intragroup current account, in which all subsidiaries take part, aiming at obtaining economic advantages in relationships with financial counterparts and stronger operating efficiency. Centralization allows in fact more efficient planning and control of financial flows, ensures higher consistency in financing and investment choices, optimizes the risk profile of the overall Group and, above all, strengthens its contractual power with other parties. The Group, whose rating issued by Standard&Poors is BBB- with a positive outlook, uses prevalently two channels to raise financial resources: the international bond market and longterm bank loans extended against subsidized investments in publishing activities, reducing the interest rate on the loan by several percentage points. In this framework and in view of the good liquidity of the market and of favorable interest rates, the parent company placed on the market in October 2004 a €300 million, 10-year bond, bearing a 5.125% fixed rate of interest to be used to repay the existing €200 million bond expiring August 1, 2005, in addition to providing liquidity for future acquisitions and investments. Bond issues and related interest payments are not guaranteed and do not contain covenants or clauses providing for their early repayment. The proceeds of the bond resulted temporarily in a strong liquidity, invested in time deposits with primary Italian banks. To limit the effect of the negative spread between the fixed interest paid out and the floating interest earned until the expiration of the old bond issue (August 10, 2005) and the settlement of the acquisition of Rete A, the Group entered into interest rate contracts, swapping the fixed rate into a floating rate. The operation was reversed in March 2005 with a gain of about €9 million, achieved thanks to a further reduction in interest rates in the period. Through the bond issue and the assumption of 10-year loans extended against productive investments made, the Group ensured sufficient long-term financial resources. In case the Group requires financial resources in addition to those generated by the operating cash flow, 55 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 – which in the past years was however consistent – the Group will be in a position to draw on a number of uncommitted credit lines of about €150 million. As it operates exclusively in the euro area, the Group is not exposed to financial risk connected with fluctuations in exchange rates. As it is active in the publishing sector, the Group acquires large quantities of paper. Fluctuations in price of paper have had in the past a strong impact on the financial statements of publishers. Price increases were however connected with the frequent devaluation of the Italian lira against other European currencies, while, with the introduction of the euro, the volatility in paper prices was strongly reduced, subject mainly to economic swings. Over the course of time, the Group stipulated a number of three-year “paper swap” contracts on paper used to print newspapers and periodicals, with the aim of fixing the price of paper for a portion of its needs, thus reducing the negative impact of a possible rapid increase in prices. At the current date, a single contract expiring September 30, 2005 is held by the Group, though the market price of paper is continuously monitored. Since this contract does not meet all hedging requirements under IAS 39, it has been recognized at fair value and a counter-value charged to the income statement. The Group has moreover maintained a high number of paper suppliers so as to be always in a position to obtain supplies at times in which there exist price tensions by promoting competition among them. In view of the sectors in which it operates, the Group does not have a significant credit risk. 9. NEW IFRS AND INTERPRETATIONS OF THE IFRIC In the first half of 2005, the IASB and the IFRIC published new Principles and Interpretations. Despite the fact that at the present date such Principles and Interpretations have not yet been included in EU legislation, the Group has taken into account their effect, summarizing the potential impact on its balance sheet and income statement as follows: IFRS FRIC Interpretation Effect on the accounts of the Group IAS 39 Amendment fair value option IFRS 6 Exploration rights and valuation of mining activities IFRIC 2 Shares in cooperatives and similar instruments None None: the Group does not carry our exploration and does not own mining activities IFRIC 3 Issue rights IFRIC 4 Assessment of a leasing operation in a contract IFRIC 5 Rights over grants for decommissioning and reclaim of sites None None: the Group does not participate to Emission rights schemes The Group does not foresee any change in the recording of current contracts None: the Group does not have rights over grants for decommissioning and reclaim of sites 10. MAIN CAUSES OF UNCERTAINTY OVER ESTIMATES Estimates are made primarily in the context of the recording of write-downs on the value of assets, accruals to provisions for bad accounts, employee benefits, taxes and other accruals and provisions. Estimates and assumptions are reviewed periodically and the effect of each resulting change are reflected immediately in the income statement. 56 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 CONSOLIDATION AREA Companies included in the consolidation area are listed in Attachment 1. The investment in Editoriale La Libertà SpA was accounted for under the equity method as, despite the fact that the Group holds a 19% share in the company, it exercises a significant influence over major operating decisions. On April 14, 2005, the Espresso Group acquired 100% of Rete A SpA, owner of national TV network Rete A, which in turn holds 100% of company All Music SpA. The price paid for the acquisition amounts to €115 million, financed using part of the proceeds of the €300 million bond issue launched in October 2004. At June 30, 2005, the two companies contributed to consolidated revenues and net profit of the Group respectively €5,744 thousand and €897 thousand. Below we report the Balance Sheet of Rete A at March 31, 2005, the closest date to the conclusion of the acquisition (in thousands of euros). Assets Liabilities and Shareholders’ Equity Intangible assets Employee severance indemnities Industrial patents 7 Tangible assets Employee severance indemnities 1,150 Payables Land and buildings 1,055 Banks 3,652 Plant and machinery 1,363 Trade payables 3,999 Technical equipment 2 Tax payables 1,308 Other assets 74 Financial assets Social security payables 98 Other payables 1,089 10,146 Investment in All Music 77 Total payables Other investments 14 Accrued liabilities and deferred income Long-term receivables 36 SHAREHOLDERS’ EQUITY 5,619 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 16,931 Total fixed assets 2,627 Trade receivables 6,188 Tax receivables 360 Other receivables 453 Marketable securities 53 Bank deposits 7,088 Cash on hand 5 Total current assets Accrued income and prepaid expenses TOTAL ASSETS 16 14,146 158 16,931 57 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 The fair value of the portion of a building owned by Rete A, carried at €1,055 thousand, was estimated through an independent expert opinion at €2,673 thousand. The value of television broadcasting frequencies, determined using market multiples used in recent similar transactions, is equal to €118,192 thousand. The premium paid upon an acquisition over the value of identifiable assets and liabilities acquired, in addition to potential liabilities, represents goodwill. In the case of Rete A, goodwill amounted to €30,315 thousand, representing the difference between the €115,000 thousand paid for the acquisition, and the fair value of assets and liabilities acquired, amounting to €84,685 thousand. Goodwill can be attributed to the creation of synergies with other trademarks and activities of the Group in the media sector, leading to the integrated use of all media platforms to publish editorial content. The cash outflow for the acquisition was financed as follows: Price paid Cash of acquired company Cash outflow 115,000 (7,093) 107,907 58 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 BALANCE SHEET ASSETS Intangible assets (1) The breakdown and changes occurred in intangible assets are shown in Attachments 2 a), b) and c). The impairment test carried out on publications and frequencies, considered assets having an indefinite useful life, and on goodwills did not result in the emergence of losses in value to be recorded in the financial statements. The retrievable value of assets was estimated with reference to the fair value less costs to sell and the usage value. The fair value less cost to sell was determined based on direct multipliers and the price previously recorded in similar transactions. The usage value was calculated by discounting at an appropriate rate of interest future financial flows, both positive and negative, generated by the unit in its productive phase and at the time of its disposal (discounted cash flow method). Cash flows were estimated taking into account actual data and business plans for years 2005-2009 prepared by management. Such plans were elaborated on the basis of trends recorded in previous years and making projections on the performance of the advertising market and more in general the media sector. The rate used in the discounting was determined according to the weighted average cost of capital (WACC), net of inflation and gross of taxes, calculated independently from the financial structure of the acquiring or controlling entity. Tangible assets (2) The breakdown and changes in tangible assets and of assets held under a lease is shown in Attachments 3 a), b) and c). Investments valued at equity (3) Book value at January 1, 2004 Share in income/(loss) 23,482 685 (Dividends received) (1,119) Book value at June 30, 2004 23,048 Share in income/(loss) 859 Book value at January 1, 2005 23,907 (Disposal of investments) (9,559) Share in income/(loss) (Dividends received) Book value at June 30, 2005 460 (261) 14,547 59 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 The value of investments at June 30, 2005 includes €10,584 thousand relating to goodwill of Editoriale Libertà SpA and Altrimedia SpA. Le Scienze SpA Saire Srl Editoriale Libertà SpA Altrimedia SpA Total investments valued at equity Le Scienze SpA Saire Srl Editoriale Libertà SpA Altrimedia SpA Le Scienze SpA Saire Srl Editoriale Libertà SpA Altrimedia SpA Jan 1, 2004 50% 50% 35% 35% % ownership Jan. 1, June 30, 2005 2005 50% 50% 50% 50% 35% 19% 35% 35% Jan 1, 2004 167 327 22,317 671 23,482 Jan 1, 2004 2,204 826 20,272 4,093 Jan 1, 2004 3,920 110 15,369 10,035 Assets Jan. 1, 2005 2,878 749 21,376 3,899 Revenues Jan. 1, 2005 3,358 110 16,131 10,005 June 30, 2005 2,353 772 23,629 3,708 Jan 1, 2004 1,869 166 7,034 2,678 June 30, 2005 1,721 55 8,183 5,204 Jan 1, 2004 230 32 3,162 411 Book value Jan. 1, June 30, 2005 2005 185 139 348 356 22,691 13,441 683 611 23,907 Liabilities Jan. 1, 2005 2,507 60 7,035 2,450 Profit (loss) Jan. 1, 2005 242 30 3,571 434 14,547 June 30, 2005 2,070 61 7,663 1,221 June 30, 2005 154 22 1,625 195 Other investments (4) Book value at January 1, 2004 Book value at June 30, 2004 (Disposal of investments) Book value at January 1, 2005 Acquisition of investments Book value at June 30, 2005 3,999 3,999 (131) 3,868 14 3,883 Jan. 1, 2004 Sandalyaweb Srl (not operational) Ansa Soc. Coop.a r.l. E Ink Corporation Inc. DAB Servizi SpA Trento Press Service Srl A.G.F. Srl Audiradio Srl Other investments Total other investments 100% 16.68 % 0.69% 12.5% 14.4% 10% 4% % ownership Jan. 1, June 30, 2005 2005 100% 16.97% 0.43% 14.4% 10% 4% 100% 16.97% 0.43% 14.4% 10% 4% Jan. 1, 2004 75 2,209 1,481 114 37 10 26 47 3,999 Book value Jan. 1, June 30, 2005 2005 75 2,209 1,481 37 10 26 30 3,868 75 2,209 1,481 37 10 26 45 3,883 60 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Financial receivables (5) Jan. 1, 2005 June 30, 2005 Security deposits 1,441 1,320 Withholding taxes on employee severance indemnities receivable 2,371 2,283 Other receivables 5,442 - TOTAL NON-CURRENT FINANCIAL RECEIVABLES 9,254 3,603 In application of IAS 39, the fair value of interest rate swap contracts entered into to hedge the fixed/floating interest rate risk resulting from bonds issued on October 8, 2004, amounting to €5,435 thousand was recorded under “Other receivables” at January 1, 2005. A matching liability was recorded under “Non-current financial receivables” as an increase of the liability resulting from the bond issue. Jan. 1, 2005 June 30, 2005 Security deposits 131 81 Other receivables 1,540 3,424 TOTAL CURRENT FINANCIAL RECEIVABLES 1,671 3,505 Deferred taxes (6) January 1, 2005 Temporary differences Deferred tax assets: Provision for legal risks and adv. on legal expenses Provision for risks on labor litigation Tax rate June 30, 2005 Tax effect Temporary differences Tax rate Tax effect 11,271 37.25% 4,064 10,361 37.25% 3,860 10,630 33.00% 3,452 10,815 33.00% 3,569 3,159 37.25% 1,148 2,210 37.25% 823 Other write-downs of fixed assets 23,102 33.00% 7,624 18,686 33% 6,166 Write-down of inventories 4,870 37.25% 1,814 6,764 37.25% 2,520 Write-down of receivables Leasing payments (principal) Stock options 3,227 33.00% 1,065 3,447 33.00% 1,137 3,874 37.25% 1,443 3,386 37.25% 1,261 3,297 33.00% 1,088 2,813 37.25% 1,048 Fair value swap on bond issue 5,435 33.00% 1,794 8,109 33.00% 2,676 Other 9,504 33-37% 3,319 6,433 33-37% 2,149 26,811 73,024 Write-down of tangible assets Total deferred tax assets 78,369 25,209 61 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Deferred tax liabilities: Accumulated depreciation and amortization (123,583) 37.25% - - Rete A frequencies (46,034) - (129,236) 37.25% (48,140) (109,643) 37.25% (40,842) Discounting of employee severance indemnities (4,262) 33.00% (1,406) (4,320) 33.00% (1,426) Leasing (depreciation) (9,821) 37.25% (3,658) (10,270) 37.25% (3,826) Fair value swap on bond issue (5,435) 33.00% (1,794) Other (3,703) 33-37% (1,289) (3,698) (54,181) (257,167) Total deferred tax liabilities (146,804) NET DEFERRED TAX LIABILITIES (ASSETS) - 33-37% (1,265) (95,499) (27,370) (70,290) Some Group companies have significant loss carry-forwards. In compliance with IAS 12, deferred tax assets were not recorded as at the present date these companies are not deemed likely to generate sufficient taxable income in the future to offset these losses. Inventories (7) Paper Offset and printing materials Publications Publications sold optionally and multimedia products Other goods TOTAL INVENTORIES Jan. 1, 2005 June 30, 2005 23,846 20,832 2,179 2,471 384 1,106 2,868 2,206 912 1,119 30,189 27,734 At June 30, 2005, the change in inventories recorded in the income statement amounted to €2,572 thousand (€5,100 thousand at June 30, 2004), of which €59 thousand relating to the change in inventories included under “Revenues” (at June 30, 2004 such change was negative by €1,609 thousand), and €2,513 thousand relating to the change in raw material inventories and other goods included under “Purchases” (as compared with €6,709 thousand in the same period in the previous year). Trade receivables (8) Newsstands and distributors Advertising Other trade receivables Receivables from Group companies TOTAL TRADE RECEIVABLES Jan. 1, 2005 12,783 218,438 10,008 498 241,727 June 30, 2005 10,508 230,103 12,694 232 253,537 62 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Marketable securities (9) Balance at January 1, 2004 Purchase of own shares Sales Balance at June 30, 2004 Sales Revaluations/(write-downs) Balance at December 31, 2004 Impact of application of IAS 32 and 39 Balance at January 1, 2005 Purchases Sales Revaluations/(write-downs) Balance at June 30, 2005 of which: • Current portion • Non-current portion Issuer Security 28,989 4,842 (64) 33,767 (120) (313) 33,334 (13,192) 20,142 52 (9,831) (295) 10,068 10,068 - B.T.P. 3.5% Government bond 2,500 Sept. 15, 2005 Interest rate 3.5% B.T.P. 4.0% Government bond 5,000 July 15, 2005 4.0% 5,014 B.T.P. 4.0% Government bond 2,500 July 15, 2005 4.0% 2,501 C.C.T. floating Government bond 150 March 1, 2006 Floating 52 Total Nominal value Maturity 10,150 Amount 2,501 10,068 Tax receivables (10) Corporate income tax (Ires) and regional tax on productive activities (Irap) receivable Ires/Irap to be reimbursed Ires receivables from parent companies VAT receivable Receivable from Tax Authorities for grants Other tax receivables TOTAL TAX RECEIVABLES Jan. 1, 2005 June 30, 2005 958 8,659 10,345 10,416 1,734 13,933 552 243 27,685 26,874 197 163 41,471 60,288 Receivable from Tax Authorities for grants relate to tax credits on capital expenditure as per Law 62/2001 (Law on Publishing), in addition to subsidies on paper purchases granted by Law 350 dated December 24, 2003. 63 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Law 62/2001 grants a 3% tax credit per year on eligible capital investments for the following five years. Grants not pertaining to the period are discounted and used-up over time based on the depreciation schedule of the assets to which they relate. Law 350 dated December 24, 2003 provides subsidies for paper used in 2004 for the printing of publications, granting a 10% tax credit on total paper purchases. Other receivables (11) Jan. 1, 2005 June 30, 2005 Contributions and subsidies receivable 1,855 1,386 Advances to personnel, suppliers and agents 7,009 3,184 372 389 - 9,500 Other 12,740 11,698 TOTAL OTHER RECEIVABLES 21,976 26,157 Jan. 1, 2005 June 30, 2005 383,026 305,947 21 1 167 167 383,214 306,115 Social security receivables Receivable on disposal of investments Cash and cash equivalents (12) Current account balances Checks Cash on hand TOTAL CASH AND EQUIVALENTS Current account balances are remunerated at an agreed rate of interest based on the Euribor rate. Short-term deposits have maturities varying between one day and three months, according to the financial needs of the Group, and interest accrued is paid out at the respective expiration date. 64 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 LIABILITIES AND SHAREHOLDERS’ EQUITY SHAREHOLDERS’ EQUITY Share capital (13) The share capital amounts to €65,003,439.45 and is made up of 433,356,263 shares with par value of €0.15 each. With respect to January 1, 2005, the share capital increased by €107,381.25 as a result of the underwriting of 715,875 shares in execution of stock option plans. Jan. 1, 2005 June 30, 2005 No. of shares resolved 442,882,188 444,367,188 No. of ordinary shares 432,640,388 433,356,263 3,300,000 2,450,000 of which: No. of own shares All ordinary shares issued are fully paid-in. There do not exist shares on which there is a restriction on the distribution of dividends, with the exception of the provisions of article 2357 of the Italian Civil Code regarding own shares. Reserves (14) The breakdown of reserves and changes incurred in the period are reported in the “Statement of Changes in the Consolidated Shareholders’ Equity”. Minority interests (15) Editoriale FVG SpA Jan. 1, 2005 June 30, 2005 9,243 9,052 201 201 1,561 1,339 11,005 10,592 Edigraf Srl Seta SpA TOTAL MINORITY INTERESTS Financial debt (16) Bonds Bank loans Leasing payables TOTAL NON-CURRENT FINANCIAL DEBT Jan. 1, 2005 June 30, 2005 Maturing between 1 and 2 years Maturing between 2 and 5 years over 5 years 305,435 307,026 - - 307,026 22,187 19,788 5,725 10,446 3,617 3,229 3,595 1,921 1,585 89 330,851 330,409 7,646 12,031 310,732 65 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 In application of IAS 39, and in particular applying the hedge accounting method to record derivative instruments used to hedge in full or in part the profit or loss resulting from a change in the fair value of an asset or liability, at January 1, 2005, the original €300 million amount of the bond issue was valued at fair value. To hedge against fluctuations in the fair value of the fixed-interest bond issue resulting from fluctuations in interest rates, at the time of the issue the company entered into fixed/floating interest rate swap transactions covering the full amount and duration of the issue. At June 30, 2005 as a result of the early termination of such contracts and also in application of IAS 39, in recording the bond issue at its amortized cost, the value of the same was determined keeping into account issue costs and discounts, in addition to the current portion (calculated on the basis of the residual life of the bond) of the difference between the fair value at the time of the termination of the hedge, and the original cost of the issue. The bond has a term of 10 years and bears an annual interest of 5.125%. The effective interest rate is 4.824%. Jan. 1, 2005 June 30, 2005 205,592 212,183 14,852 26,106 Leasing payables 1,048 2,456 Payables to other financing entities 3,344 506 5 7,178 224,841 248,429 Bonds Bank loans Other financial payables TOTAL CURRENT FINANCIAL DEBT Item “Bonds” includes the €200 million 2000-2005 bond issue expiring August 1, 2005 (6.25% nominal half-yearly interest rate, equivalent to a 6.68% effective yearly rate). In application of IAS 39, on January 1, 2005 the value of the paper swap contract with which the price of part of paper supplies is fixed until September 2005 was recorded on January 1, 2005 under “Payables to other financing entities”, while a matching reduction in the Reserve for fair value was recorded at the same date. The impact of the valuation at fair value of the hedging contract resulted in a €3,344 thousand increase in current financial liabilities. Subsequent to January 1, 2005, the two payments made reduced such amount to €506 thousand. Leasing payables are shown in the table that follows: Balance at Jan. 1, 2005 Repayment of principal Increases Balance at Repurchases June 30, 2005 Short-term portion 1,048 1,904 (496) Coming due between 1 and 5 years 3,111 942 (547) 118 - (29) - 89 4,277 2,846 (1,072) - 6,051 Coming due over 5 years TOTAL - 2,456 3,506 66 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Provisions for risks and charges (17) Legal proceedings Social security litigation Renewal of contracts Early retirement incentives Sundry risks Total provisions 10,831 7,089 - 2,724 4,307 24,951 2,029 248 24 350 63 2,714 Uses and discounting (1,700) 137 - (249) (596) (2,408) June 30, 2004 of which: • Current portion • Non-current portion Accruals 11,160 7,474 24 2,825 3,774 25,257 4,682 6,478 274 317 7,157 165 24 - 2,440 385 - 1,587 2,187 408 9,050 16,207 847 Uses and discounting (1,582) 110 (24) (1,421) 108 (2,809) Jan. 1, 2005 of which: • Current portion • Non-current portion 9,852 7,749 - 1,404 4,290 23,295 4,530 5,322 2,354 5,395 - 1,404 - 1,985 2,305 10,273 13,022 Accruals 3,148 - 394 - 136 3,678 Uses and discounting (1,161) 129 - (614) (1,908) (3,554) June 30, 2005 of which: • Current portion • Non-current portion 11,839 7,878 394 790 2,518 23,419 5,232 6,607 2,347 5,531 394 - 790 - 1,420 1,098 10,183 13,236 Jan. 1, 2004 Accruals The long-term components of such provisions were discounted at a 4% rate, gross of the related tax effect. Provisions for legal proceedings and social security litigation include risks deriving from libel suits, common to all publishers, risks connected with trade litigation, labor litigation and risks connected with social security assessments. The provision for early retirement incentives relates to the accrual of costs expected to be incurred in 2005 in the restructuring of Internet subsidiaries Kataweb and Ksolutions, in addition to the Udine division of Editoriale FVG. The provision for sundry risks includes accruals for tax contestation on premium transactions, and other risks. Employee severance reserve and other retirement benefits (18) Defined benefit plans The Provision for Employee Severance and Fixed Indemnities for managers and journalists of newspapers fall within the defined benefit plan category and are therefore determined according to actuarial methods. 67 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Benefits are calculated based on the following: Discounting rate 4.5% Inflation rate 2.0% Yearly increase in retributions 3.5% Yearly increase in Employee Severance Provision 3.0% Advances expected to be paid-out annually 4.0% Amounts recorded in the balance sheet are made up as follows: Jan. 1, 2004 ESP Fixed indemnity June 30, 2004 ESP Fixed indemnity Jan. 1, 2005 Fixed indemnity ESP June 30, 2005 ESP Fixed indemnity Nominal value of the fund 90,607 7,300 92,539 7,768 94,884 7,778 95,408 5,768 Net actuarial loss recorded in the period (3,614) (2,603) (3,614) (2,603) (4,060) (2,715) n.a. n.a. TOTAL EMPLOYEE SEVERANCE RESERVE AND OTHER RETIREMENT BENEFITS 86,993 4,697 88,925 5,165 90,824 5,063 95,408 5,768 Changes in liabilities in the period and their effect on the income statement are shown in the table that follows: Employee Severance Provision Fixed indemnity 86,993 4,697 7,240 487 Interest on obligations assumed n.a. n.a. (Gain)/loss on discounting n.a. n.a. (Indemnities paid) (5,308) (19) Liability at June 30, 2004 88,925 5,165 Current cost of the service 3,038 77 Interest on obligations assumed 3,939 137 (38) 86 (Indemnities paid) (5,040) (402) Liability at January 1, 2005 90,824 5,063 7,703 826 Interest on obligations assumed n.a. n.a. (Gain)/loss on discounting n.a. n.a. (Indemnities paid) (3,119) (121) Liability at June 30, 2005 95,408 5,768 Liability at January 1, 2004 Current cost of the service (Gain)/loss on discounting Current cost of the service 68 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Employee benefits contributed in shares Stock option plans for managers of the parent company and its subsidiaries holding strategic positions within the Group assign the right to exercise at a pre-determined price and for a set term an option for the underwriting of new shares to be issued by the company pursuant to the related stock option plan resolutions. The related rules regulate, among other terms and conditions, also the case in which the assignee of the said options ceases for whatever reason to be employed by the company. Starting from 2001, ad hoc stock option plans were assigned to the Managing Director of the company, Marco Benedetto, giving him the right to acquire from the company at a predetermined price and for a set term, a number of shares equal to the options already assigned to him. Current stock option plans are: “2000” Stock option plan On February 23, 2000, the Board of Directors, in application of the proxy assigned by the Shareholders’ Meeting on April 29, 1996, resolved a capital increase pursuant to article 2441, last paragraph, of the Italian Civil Code, for a total of 2,155,000 shares at a price of €25.60 of which €0.15 of nominal value and €25.45 of premium over par, determined in relation to the higher between the official price and the listed price on the Italian Stock Market (Borsa Italiana S.p.A.) on February 22, 2000 to service the “2000” Stock Option Plan. The stock option plan provides for the options to be exercised by each assignee in the following periods: a) up to a maximum of 12% of the total of options assigned starting from September 30, 2000 and at subsequent quarterly intervals until September 30, 2010; b) up to a maximum for each quarter of 6% of options assigned in the period between December 31, 2000 and March 31, 2004, and at subsequent quarterly intervals until September 30, 2010; c) the residual 4% of options assigned starting from June 30, 2004 and up until September 30, 2010. To the present date no option was exercised and, pursuant to the stock option plan, 570,000 options have expired. The residual number of shares is thus 1,585,000. “April 24, 2001” Stock option plan On April 24, 2001, the Board of Directors, in application of the proxy assigned by the Shareholders’ Meeting on April 6, 2001, resolved a capital increase pursuant to article 2441, last comma, of the Italian Civil Code, for a total of 930,000 shares at a price of €6.25 of which €0.15 of nominal value and €6.10 of premium over par, determined in relation to the provision article 9, comma IV of the Testo Unico tax law that makes reference to the simple arithmetic mean of official stock market prices of the company’s shares in the previous month, to service the “April 24, 2001” Stock Option Plan. The stock option plan provides for the options to be exercised by each assignee in the following periods: a) up to a maximum of 12% of the total of options assigned starting from September 30, 2001 and at subsequent quarterly intervals until September 30, 2011; b) up to a maximum for each quarter of 6% of options assigned in the period between December 31, 2001 and March 31, 2005, and at 69 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 subsequent quarterly intervals until September 30, 2011; c) the residual 4% of options assigned starting from June 30, 2005 and up until September 30, 2011. To the present date no option was exercised and, pursuant to the stock option plan, 175,000 options have expired. The residual number of shares is thus 755,000. “October 24, 2001” Stock option plan On October 24, 2001, the Board of Directors, in application of the proxy assigned by the Shareholders’ Meeting on April 6, 2001, resolved a capital increase pursuant to article 2441, last comma, of the Italian Civil Code, for a total of 885,000 shares at a price of €2.51 of which €0.15 of nominal value and €2.36 of premium over par, determined in relation to the provision article 9, comma IV of the Testo Unico tax law that makes reference to the simple arithmetic mean of official stock market prices of the company’s shares in the previous month, to service the “October 24, 2001” Stock Option Plan. The stock option plan provides for the options to be exercised by each assignee in the following periods: a) up to a maximum of 12% of the total of options assigned starting from March 31, 2002 and at subsequent quarterly intervals until March 31, 2012; b) up to a maximum for each quarter of 6% of options assigned in the period between June 30, 2002 and September 30, 2005, and at subsequent quarterly intervals until March 31, 2012; c) the residual 4% of options assigned starting from December 31, 2005 and up until March 31, 2012. To the present date 594,075 options were exercised and, pursuant to the stock option plan, 14,200 options have expired. The residual number of shares is thus 276,725. “March 6, 2002” Stock option plan On March 6, 2002, the Board of Directors, in application of the proxy assigned by the Shareholders’ Meeting on April 6, 2001, resolved a capital increase pursuant to article 2441, last comma, of the Italian Civil Code, for a total of 1,330,000 shares at a price of €3.30 of which €0.15 of nominal value and €3.15 of premium over par, determined in relation to the provision article 9, comma IV of the Testo Unico tax law that makes reference to the simple arithmetic mean of official stock market prices of the company’s shares in the previous month, to service the “March 6, 2002” Stock Option Plan. The stock option plan provides for the options to be exercised by each assignee in the following periods: a) up to a maximum of 12% of the total of options assigned starting from September 30, 2002 and at subsequent quarterly intervals until September 30, 2012; b) up to a maximum for each quarter of 6% of options assigned in the period between December 31, 2002 and March 31, 2006, and at subsequent quarterly intervals until September 30, 2012; c) the residual 4% of options assigned starting from June 30, 2006 and up until September 30, 2012. To the present date 683,475 options were exercised and, pursuant to the stock option plan, 61,900 options have expired. The residual number of shares is thus 584,625. “July 24, 2002” Stock option plan On July 24, 2002, the Board of Directors, in application of the proxy assigned by the Shareholders’ Meeting on April 6, 2001, resolved a capital increase pursuant to article 2441, last comma, of the Italian Civil Code, for a total of 1,322,500 shares at a price of €3.36 of which €0.15 of nominal value and €3.21 of premium over par, determined in relation to the 70 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 provision article 9, comma IV of the Testo Unico tax law that makes reference to the simple arithmetic mean of official stock market prices of the company’s shares in the previous month, to service the “July 24, 2002” Stock Option Plan. The stock option plan provides for the options to be exercised by each assignee in the following periods: a) up to a maximum of 12% of the total of options assigned starting from December 31, 2002 and at subsequent quarterly intervals until December 31, 2012; b) up to a maximum for each quarter of 6% of options assigned in the period between March 31, 2003 and June 30, 2006, and at subsequent quarterly intervals until December 31, 2012; c) the residual 4% of options assigned starting from September 30, 2006 and up until December 31, 2012. To the present date 610,200 options were exercised and, pursuant to the stock option plan, 59,800 options have expired. The residual number of shares is thus 652,500. “February 26, 2003” Stock option plan On February 26, 2003, the Board of Directors, in application of the proxy assigned by the Shareholders’ Meeting on April 6, 2001, resolved a capital increase pursuant to article 2441, last comma, of the Italian Civil Code, for a total of 1,367,500 shares at a price of €2.86 of which €0.15 of nominal value and €2.71 of premium over par, determined in relation to the provision article 9, comma IV of the Testo Unico tax law that makes reference to the simple arithmetic mean of official stock market prices of the company’s shares in the previous month, to service the “February 26, 2003” Stock Option Plan. The stock option plan provides for the options to be exercised by each assignee in the following periods: a) up to a maximum of 12% of the total of options assigned starting from September 30, 2003 and at subsequent quarterly intervals until September 30, 2013; b) up to a maximum for each quarter of 6% of options assigned in the period between December 31, 2003 and March 31, 2007, and at subsequent quarterly intervals until September 30, 2012; c) the residual 4% of options assigned starting from June 30, 2007 and up until September 30, 2013. To the present date 488,175 options were exercised and, pursuant to the stock option plan, 80,700 options have expired. The residual number of shares is thus 798,625. “July 23, 2003” Stock option plan On July 23, 2003, the Board of Directors, in application of the proxy assigned by the Shareholders’ Meeting on April 6, 2001, resolved a capital increase pursuant to article 2441, last comma, of the Italian Civil Code, for a total of 1,332,500 shares at a price of €3.54 of which €0.15 of nominal value and €3.39 of premium over par, determined in relation to the provision article 9, comma IV of the Testo Unico tax law that makes reference to the simple arithmetic mean of official stock market prices of the company’s shares in the previous month, to service the “July 23, 2003” Stock Option Plan. The stock option plan provides for the options to be exercised by each assignee in the following periods: a) up to a maximum of 12% of the total of options assigned starting from December 31, 2003 and at subsequent quarterly intervals until December 31, 2013; b) up to a maximum for each quarter of 6% of options assigned in the period between March 31, 2004 and June 30, 2007, and at subsequent quarterly intervals until December 31, 2013; c) the residual 4% of options assigned starting from September 30, 2007 and up until December 31, 2013. 71 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 To the present date 355,650 options were exercised and, pursuant to the stock option plan, 66,850 options have expired. The residual number of shares is thus 910,000. “February 25, 2004” Stock option plan On February 25, 2004, the Board of Directors, in application of the proxy assigned by the Shareholders’ Meeting on April 6, 2001, resolved a capital increase pursuant to article 2441, last paragraph, of the Italian Civil Code, for a total of 1,485,000 shares at a price of €4.95 of which €0.15 of nominal value and €4.80 of premium over par, determined in relation to the provision article 9, comma IV of the Testo Unico tax law that makes reference to the simple arithmetic mean of official stock market prices of the company’s shares in the previous month, to service the “February 25, 2004” Stock Option Plan. The stock option plan provides for the options to be exercised by each assignee in the following periods: a) up to a maximum of 12% of the total of options assigned starting from September 30, 2004 and at subsequent quarterly intervals until September 30, 2014; b) up to a maximum for each quarter of 6% of options assigned in the period between December 31, 2004 and March 31, 2008, and at subsequent quarterly intervals until September 30, 2013; c) the residual 4% of options assigned starting from June 30, 2008 and up until September 30, 2014. To the present date no options were exercised and, pursuant to the stock option plan, 75,000 options have expired. The residual number of shares is thus 1,410,000. “July 28, 2004” Stock option plan On July 28, 2004, the Board of Directors, in application of the proxy assigned by the Shareholders’ Meeting on April 6, 2001, resolved a capital increase pursuant to article 2441, last comma, of the Italian Civil Code, for a total of 1,450,000 shares at a price of €4.80 of which €0.15 of nominal value and €4.65 of premium over par, determined in relation to the provision article 9, comma IV of the Testo Unico tax law that makes reference to the simple arithmetic mean of official stock market prices of the company’s shares in the previous month, to service the “July 28, 2004” Stock Option Plan. The stock option plan provides for the options to be exercised by each assignee in the following periods: a) up to a maximum of 12% of the total of options assigned starting from December 31, 2004 and at subsequent quarterly intervals until December 31, 2014; b) up to a maximum for each quarter of 6% of options assigned in the period between March 31, 2005 and June 30, 2008, and at subsequent quarterly intervals until December 31, 2014; c) the residual 4% of options assigned starting from September 30, 2008 and up until December 31, 2014. To the present date no options were exercised and, pursuant to the stock option plan, 30,000 options have expired. The residual number of shares is thus 1,420,000. “February 23, 2005” Stock option plan On February 23, 2005, the Board of Directors, in application of the proxy assigned by the Shareholders’ Meeting on April 6, 2001, resolved a capital increase pursuant to article 2441, last comma, of the Italian Civil Code, for a total of 1,485,000 shares at a price of €4.75 of which €0.15 of nominal value and €4.60 of premium over par, determined in relation to the provision article 9, comma IV of the Testo Unico tax law that makes reference to the simple arithmetic mean of official stock market prices of the company’s shares in the previous 72 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 month, to service the “February 23, 2005” Stock Option Plan. The stock option plan provides for the options to be exercised by each assignee in the following periods: a) up to a maximum of 12% of the total of options assigned starting from six calendar months from the date of their attribution; b) up to a maximum for each quarter of 6% of options assigned at the end of each of the fourteen quarters subsequent to six calendar months from the date of their attribution; c) up to a maximum of 4% of options assigned at the end of the fifteen quarter subsequent to six calendar months from the date of their attribution and up until September 30, 2015. To the present date no options were exercised and, pursuant to the stock option plan, 30,000 options have expired. The residual number of shares is thus 1,455,000. Stock option plans attributed to Marco Benedetto, Managing Director of the Company On February 23, 2005, Marco Benedetto, Managing Director of the Company, was assigned 750,000 options to acquire an equivalent number of ordinary shares of the Company according to terms and conditions in line with previous stock option plans. The 750,000 options may be exercised on a daily basis starting from March 31, 2007 and until March 31, 2010 at a strike price of €4.75. Stock options assigned are in addition to those attributed in years 2001, 2002, 2003 and 2004, part of which have been exercised. In the first half of 2005, Marco Benedetto exercised all of its 600,000 stock options assigned through the February 26, 2003 plan at a price of €2.86 each, in addition to the 600,000 options assigned pursuant to the July 23, 2003 plan at a price of €3.54. At June 30, 2005, the following stock option plans were still effective: 1) the April 24, 2001 stock option plan, assigning 500,000 options for the acquisition of an equivalent number of shares at €6.25, exercisable on a daily basis until April 30, 2006. 2) the February 25, 2004 stock option plan, assigning 600,000 options for the acquisition of an equivalent number of shares at €4.95, exercisable on a daily basis from March 31, 2006 until March 31, 2009. 3) the July 28, 2004 stock option plan, assigning 600,000 options for the acquisition of an equivalent number of shares at €4.80, exercisable on a daily basis from March 31, 2006 until March 31, 2009. The strike price of all of the above plans are determined in accordance with article 9, comma 4 of the Testo Unico consolidated tax law, and are therefore calculated with reference to the simple arithmetic average of official stock market prices of the shares of the company for the month prior to the issue of the plan. The company has committed itself to purchase an equivalent number of shares to service stock option plans in favor of Marco Benedetto. Based on the above, at the present date unexercised stock options giving the right to purchase shares of the company amount to 9,847,475, representing 2.27% of the overall share capital of the company. Attachment 4 a) and b) summarize information relating to each stock option plan in force at June 30, 2005. 73 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Stock option plans were valued according to the binomial tree method based on the original Cox, Ross and Rubinstein approach. This entails the subdivision of the life of the stock option contract into discrete intervals, ∆t (thus determining the so-called nodes), assuming that the price of the share can rise by a certain percentage (u), or decline by a certain percentage (d) in the space of the interval. The value of the option is thus calculated according to its pay-off. Assumptions used in determining the fair value of stock option plans are summarized in the table below. No. of options assigned Average price of the stock at time of assignment Value of stock at time of assignment Average strike price Expected volatility Term of the option (residual no. of years) Expected dividend growth rate Risk-free rate Feb. 25, 2004 Plan 600,000 July 28, 2004 Plan 600,000 Feb. 23, 2005 Plan 750,000 5.03 4.54 4.77 3,018,000 2,724,000 3,577,500 4.95 4.80 4.75 24.19% 25.86% 20.84% 3.75 3.75 4.75 10.899% 10.899% 10.899% 4.312% 4.49% 3.788% At June 30, 2005, the cost relating to stock option plans recorded in the financial statements was equal to €1,280 thousand (€894 thousand at June 30, 2004). Trade payables (19) Jan. 1, 2005 June 30, 2005 Payables to suppliers of: • Paper 41,319 36,482 • Printing services 32,229 20,566 • Capital goods 31,089 22,161 • Promotions 12,157 8,434 • Products sold optionally with publications 17,461 22,385 • Other suppliers 74,673 71,136 Advances received 169 95 Other payables 423 1,887 209,520 183,146 TOTAL TRADE PAYABLES Terms of payment range normally between 60 and 90 days. 74 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Tax payables (20) Jan. 1, 2005 June 30, 2005 1,608 31,363 - 5,325 Personnel withholding and income taxes payable 9,305 6,310 VAT payable 5,335 7,466 233 271 16,481 50,735 Corporate (Ires) and local income taxes (Irap) payable Corporate taxes payable to parent company Other tax payables TOTAL TAX PAYABLES Other payables (21) Jan. 1, 2005 June 30, 2005 Social Security payables 14,032 9,790 Payables to personnel 14,810 18,767 Payables for personnel for holidays 14,209 19,340 611 400 Payables on subscriptions 10,087 10,633 Payables for contributions ex Law 62/2001 20,267 17,571 4,781 3,895 78,797 80,396 Payables to Directors, Auditors and minority shareholders Other payables TOTAL OTHER PAYABLES 75 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 INCOME STATEMENT Revenues (22) Circulation Change in inventories Advertising Sale of hardware and software E-commerce Sale of internet service and software development Sale of other products Other revenues TOTAL REVENUES 1st Half 2004 1st Half 2005 249,640 258,648 (1,609) 59 276,328 294,710 2,905 89 326 59 1,843 1,177 444 800 16,180 12,071 546,057 567,613 Other operating revenues (23) 1st Half 2004 1st Half 2005 Grants 504 7,896 Capital gains on disposal of assets 118 78 Extraordinary gains 1,702 3,457 Other operating income 2,411 1,160 TOTAL OTHER OPERATING REVENUES 4,735 12,591 Purchases (24) 1st Half 2004 1st Half 2005 54,607 58,640 Printing materials 5,947 8,858 Other consumables 2,078 2,174 Publications sold optionally with newspapers and magazines 7,585 7,123 117 3 3,260 441 - (192) 6,709 2,513 80,303 79,560 Paper E-commerce goods Other goods Capitalized cost of internal construction Change in raw material and merchandise inventories TOTAL PURCHASES 76 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Services received (25) 1st Half 2004 1st Half 2005 55,580 31,892 14,678 16,160 19,637 11,081 14,302 8,329 3,433 8,509 4,042 7,239 12,783 48,417 32,549 15,685 21,757 22,582 9,871 15,554 8,108 3,721 10,205 3,703 10,202 14,041 207,665 216,395 1st Half 2004 1st Half 2005 Wages and salaries 94,251 101,582 Social Security 28,874 32,581 7,240 7,703 Accruals for retirement benefits and similar 491 826 Underwriting of stock options 894 1,280 Early retirement incentives 533 184 2,293 2,973 134,576 147,129 1st Half 2004 1st Half 2005 2,340 3,284 Printing and other work carried out by third parties Editing costs Transports Reproduction rights and other copyright costs Promotions Publisher fees Commissions and agent fees Advisory Postage, telephone and data transmission Maintenance and utilities TV production and Internet sites’ technical services Rent Other services TOTAL SERVICES RECEIVED Personnel costs (26) Accruals for employee severance indemnities Other personnel costs TOTAL PERSONNEL COSTS Other operating costs (27) Accruals to provisions for risks and charges Taxes 518 951 Public relations and gifts 382 385 Membership fees 464 475 86 117 Extraordinary losses 1,576 1,650 Other operating costs 1,339 1,207 TOTAL OTHER OPERATING COSTS 6,705 8,069 Settlements and reimbursements 77 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Depreciation, amortization and write-downs (28) Intangible asset amortization Depreciation of tangible assets Write-down of intangible assets Write-down of tangible assets Write-down of receivables TOTAL DEPRECIATION, AMORTIZATION AND WRITE-DOWNS 1st Half 2004 1,225 16,357 36 208 3,501 1st Half 2005 1,041 20,080 8 2,045 21,327 23,174 1st Half 2004 1,129 94 369 273 1,865 (96) (234) (508) (6,482) (104) (117) (773) (8,314) 1st Half 2005 4,101 1,311 28 297 266 6,003 (57) (243) (408) (13,792) (215) (94) (629) (15,438) (6,449) (9,435) Financial income/(expense) (29) Interest received on current accounts and short-term deposits Financial income on derivatives Foreign-exchange gains Interest on securities Other financial income Net financial income Interest paid on current account overdrafts Accessory banking expenses Interest on loans Interest on bond issued Foreign-exchange losses Leasing payments Other financial charges Net financial charges TOTAL FINANCIAL INCOME/(EXPENSE) Income taxes (30) CORPORATE INCOME TAX (IRES) 1st Half 2005 Pre-tax profit Theoretical income tax expense Increases (decreases): temporary differences deductible in future years permanent differences for the period temporary differences from previous years dividends tax-exempt income Taxable income Adjustment to taxable income due to tax consolidation CURRENT INCOME TAX LIABILITY ON PROFIT FOR THE PERIOD 96,902 31,978 Tax rate 33% 12,268 7,673 (21,560) (35) (5,867) 89,381 (1,808) 29,606 30.55% 78 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 REGIONAL TAX ON PRODUCTIVE ACTIVITY (IRAP) 1st Half 2005 Difference between operating profit and operating costs Income exempt from IRAP Costs that may not be deducted for IRAP purposes (personnel, freelance work, receivables, other) Deductions for IRAP purposes Total Theoretical IRAP tax expense Net tax effect on revenues Net tax effect on costs Net production value CURRENT IRAP TAX LIABILITY ON PRODUCTION VALUE Tax rate 106,337 (1,687) 160,556 (1,728) 263,528 11,200 4.25% 472 (1,391) 262,609 11,182 4.25% Base income per share (31) Base income per share is calculated by dividing the net profit for the period pertaining to the Group by the weighted average number of ordinary shares in circulation in the period. The diluted income per share is calculated by dividing the net profit for the year attributed to ordinary shareholders by the weighted average number of ordinary shares in circulation in the period, adjusted for the diluting effect of stock options. The table that follows shows income per share and other information used in the calculation of the diluted income per share. Net profit weighted average number of ordinary shares in circulation (‘000) Base income per share (€ per thousand shares) Net profit weighted average number of ordinary shares in circulation (‘000) No. of options (‘000) Diluted income per share (€ per thousand shares) 1st Half 2004 1st Half 2005 52,365 54,810 428,533 429,423 0.122 0.128 1st Half 2004 1st Half 2005 52,365 54,810 428,533 429,423 11,205 12,819 0.119 0.124 Dividends paid (32) At June 30, 2004, dividends recorded for the 2003 financial year, as resolved by the Shareholders’ Meeting held on April 21, 2004 in a proportion of €0.11 for each of the 428,306,388 ordinary shares in circulation, amounted to €47,114 thousand. The Shareholders’ Meeting held of April 20, 2005 resolved the distribution of an ordinary dividend of €55,833 thousand, to be distributed to shareholders in a proportion of €0.13 for each of the 429,486,288 ordinary shares in circulation. Dividends paid at June 30, 2005 amounted to €55,833 thousand. 79 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 OTHER INFORMATION Related parties transactions Transactions between Group companies and related parties, including intragroup transactions, are carried out in the normal course of business and are settled at market rates. In the period under consideration there were no atypical or unusual transactions falling outside the scope of ordinary business to report. The parent company, Gruppo Editoriale L'Espresso SpA, holds with its subsidiaries and affiliated companies both trade relationships and relationships involving the provision of services and of operating and financial advice. Among the most important trade relationships are those held with subsidiary A.Manzoni&C. SpA, concessionaire for the advertising space of L’espresso and la Repubblica, those with the subsidiary Kataweb SpA for the management of sites, and those held with subsidiaries Rotosud SpA and CPS SpA, supplying typeset and printing services. Gruppo Editoriale L'Espresso SpA also manages a current account for transactions within the Group to which most subsidiaries and affiliated companies participate according to individual debit and credit positions. Gruppo Editoriale L'Espresso SpA receives in turn from its parent company CIR SpA, services and advice on strategic, administrative, financial and tax matters. It is to be noted that the provision of such services on the part of the parent company is deemed as preferable to the provision of the same on the part of third parties thanks, among other things, to the wide knowledge and experience CIR SpA has acquired over time on the company and the sector in which Gruppo Editoriale L'Espresso SpA operates. The new Income Tax Code (TUIR, Testo Unico delle Imposte sui Redditi ) introduced the possibility for companies of a same Group to determine an overall profit corresponding in principle to the algebraic sum of taxable profits of each company (parent company and companies controlled directly and/or indirectly with a share over 50%) and, consequently, to determine a single income tax liability for the whole Group. Starting with the 2004 financial year, Gruppo Editoriale L'Espresso SpA participates in parent company’s CIR “tax consolidation” procedure pursuant to a general agreement regulating the rights and obligations of CIR and consolidated companies (thus including Gruppo Editoriale L’Espresso SpA) with respect to the participation in the tax consolidation. The table below shows operating and financial data of Gruppo Editoriale L'Espresso SpA and its parent companies, subsidiaries and affiliated companies. 80 Gruppo Editoriale L’Espresso – Interim Financial Statement at June 30, 2005 Transactions between Gruppo Editoriale L’Espresso SpA and other Group companies (thousands of euro) Costs Revenues Financial charges Financial Receivables income(*) Payables Guarantees Financial Trade Financial Trade granted 1,722 - 2,995 17,190 SUBSIDIARIES Finegil Editoriale SpA 8,792 Editoriale La Nuova Sardegna SpA 2,426 901 - 18 - 254 78 141 E A G SpA Edizioni Nuova Europa SpA Editoriale La Città SpA S.E.T.A. SpA Editoriale FVG SpA 1,360 - 23,030 12,096 179 (12) 15 3,207 301 1,868 966 79 117 (85) - - 259 9,154 300 1,728 (10) - - 28 1,096 - - (3) - - 139 541 - - (36) 550 - 277 4,857 50 1,192 2 258 (193) 4,853 - 568 19,829 1 - 40 859 (60) 15,009 2,188 1,793 7 239 - EleTv SpA - 19 (20) - - 20 2,321 - - Deejay Budapest kft - - - - 1 - - - 100 Elemedia SpA Radio Bonton a.s. - - - - - - - - 200 Rete A SpA 2 21 - 24 9,101 25 - 3 - All Music SpA A. Manzoni & C. SpA Rotosud SpA - - (12) - - - 6,012 - - 1,916 147,073 (39) 40 12,220 88,227 33 1,300 - 15,311 133 (3) 3,128 7,030 149 3 5,724 5,766 C.P.S. SpA 1,683 38 (16) 520 - 213 1,808 680 - Rotocolor SpA 9,369 137 - 55 682 257 - 2,745 - Selpi SpA 64 3 (22) 246 - 12 2,540 7 - Somedia SpA 2,462 202 (5) 1 1 715 771 1,917 - Kataweb SpA 2,229 1,279 (176) - - 927 22,247 1,478 - - - - - - - - 4 - Ksolutions SpA - 59 - 114 5,913 60 - 29 - Esperya SpA - - - - - - 50 - 509 Studio Vit Srl - - - - - - 29 38 66 - 56 - 120 - 127 - 674 - 1,225 - - - - - - 1,225 - Kataweb News Srl AFFILIATED COMPANIES Le Scienze SpA PARENT COMPANIES CIR SpA (*) including dividends received by subsidiaries Commitments At June 30, 2005, commitments of the Group amounted to €5,122 thousand and consisted of: • contracts for the purchase of plant and equipment (€3,484 thousand) relating primarily to la Repubblica, Finegil Editoriale and Editoriale La Nuova Sardegna in the context of the full color project; • risks connected to bills discounted (€1,157 thousand), relating primarily to advertising concessionaire A.Manzoni&C.; • guarantees granted and other minor commitment (€481 thousand). Guarantees granted amount to €4,492 thousand and relate to guarantees in favor of Kataweb, Elemedia and A. Manzoni&C. on the lease of the respective head offices. 81 Attachments Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30,2005 GROUP COMPANIES ATTACHMENT No. 1 Name and activity PARENT COMPANY Gruppo Editoriale L’Espresso SpA publishing Registered office Share capital Rome 65,003 % owned Shares owned by SUBSIDIARIES CONSOLIDATED LINE-BY-LINE - Finegil Editoriale SpA publishing - Editoriale La Nuova Sardegna SpA publishing - EAG SpA publishing - Edizioni Nuova Europa SpA publishing - Editoriale La Città SpA publishing - S.E.T.A. SpA publishing - Editoriale FVG SpA publishing - Edigraf Srl printing - A.Manzoni&C. SpA advertising concessionaire - Elemedia SpA radio broadcasting - EleTV SpA digital television - Radio Deejay Kft radio broadcasting - Radio Bonton a.s. radio - Rete A SpA national TV network - All Music SpA national TV network - Rotosud SpA printing - C.P.S. SpA pre-printing - Rotocolor SpA printing Rome 18,161 100 Gruppo Editoriale L’Espresso SpA Sassari 776 100 Finegil Editoriale SpA Pavia 815 100 Finegil Editoriale SpA Ivrea (TO) Salerno 104 100 Finegil Editoriale SpA 774 100 Finegil Editoriale SpA Bolzano 775 71 Gruppo Editoriale L’Espresso SpA Udine 87,960 91.95 Gruppo Editoriale L’Espresso SpA Trieste 312 66.67 Editoriale FVG SpA Milan 15,000 100 Gruppo Editoriale L’Espresso SpA Milan 3,000 100 Gruppo Editoriale L’Espresso SpA Milan 2,120 Budapest Hungary Prague Czech Rep. Sesto San Giovanni (MI) Sesto San Giovanni (MI) Oricola (AQ) Rome 50,000 (HUF ‘000) 12,000 (CZK ‘000) 6,198 95 5 95 5 100 Gruppo Editoriale L’Espresso SpA Elemedia SpA Elemedia SpA EleTV SpA Elemedia SpA 100 Gruppo Editoriale L’Espresso SpA 6,500 100 Rete A SpA 2,860 100 Gruppo Editoriale L’Espresso SpA 520 100 Gruppo Editoriale L’Espresso SpA Rome 23,000 100 Gruppo Editoriale L’Espresso SpA NB: Figures are in thousands of euros unless otherwise specified. 85 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30,2005 Name and activity - Somedia SpA services - Selpi SpA publishing and services - Kataweb SpA publishing and internet services - Kataweb News Srl internet publishing - Ksolutions SpA internet services - Esperya SpA e-commerce - Studio Vit Srl internet services Registered office Milan Share capital 500 % owned Shares owned by 100 Gruppo Editoriale L’Espresso SpA Rome 3,202 Rome 25,000 70 30 100 Gruppo Editoriale L’Espresso SpA Finegil Editoriale SpA Gruppo Editoriale L’Espresso SpA Rome 10 100 Kataweb SpA San Giuliano Terme (PI) Porto Recanati (MC) Rome 1,000 100 Kataweb SpA 500 100 Kataweb SpA 25 100 Kataweb SpA Rome 103 50 Gruppo Editoriale L’Espresso SpA Milan 47 50 Gruppo Editoriale L’Espresso SpA Piacenza 1,000 19 Finegil Editoriale SpA Piacenza 517 35 Finegil Editoriale SpA AFFILIATED COMPANIES CONSOLIDATED ON EQUITY - Le Scienze SpA publishing - Saire Srl printing - Editoriale Libertà SpA publishing - Altrimedia SpA advertising concessionaire UNCONSOLIDATED SUBSIDIARIES AND AFFILIATED COMPANIES - Benedettine Srl in liquidation real estate - Alsoft Srl in liquidation internet services - Uhuru Multimedia Srl not operational internet services - SandalyaWeb Srl not operational e-commerce - Enotrya Srl in liquidation e-commerce - Zivago SpA in liquidation e-commerce - Cellularmania.com Srl in liquidation internet services Piacenza 255 35 Finegil Editoriale SpA San Giuliano Terme (PI) Rome 52 100 Ksolutions SpA 10 100 Ksolutions SpA Sassari 75 Rome 78 51 49 70 Editoriale La Nuova Sardegna SpA Kataweb SpA Kataweb SpA Milan 3,096 50 Kataweb SpA Rome 10 100 Kataweb SpA NB: Figures are in thousands of euros unless otherwise specified. 86 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30,2005 Name and activity Registered office Share capital % owned Shares owned by MAIN INVESTMENTS IN OTHER COMPANIES - A.G.F. Srl photo agency - Agenzia ANSA Soc. Coop. a r.l. news agency Rome 102 10 Gruppo Editoriale L’Espresso SpA Rome 12,539 - Club DAB Italia-consortium radio broadcasting services - E-Ink Corporation printing technologies - Presto Technologies Inc. not operational internet services - Consorzio Energia Sassari purchase of electricity - Agenzia Informativa Adriatica d.o.o. production and transmission of news - Trento Press Service Srl newspaper distribution - Immobiliare Editori Giornali Srl real estate - Protagon Periodici SpA under bankruptcy Milan 18 3.14 3.14 3.14 3.14 1.89 2.52 14.3 Gruppo Editoriale L’Espresso SpA Finegil Editoriale SpA Editoriale La Nuova Sardegna SpA Editoriale FVG SpA EAG SpA S.E.T.A SpA Elemedia SpA Cambridge (USA) Cambridge (USA) Sassari 43,284 ($ ‘000) 7,664 ($ ‘000) 4 0.43 Gruppo Editoriale L’Espresso SpA 7.83 Kataweb SpA 12.5 Editoriale La Nuova Sardegna SpA Capodistria 2,120 Slovenia (Taller ‘000) Gardolo di 260 Trento Rome 830 19 publishing - Audiradio Srl market research - Consuledit Srl market research Perugia Editoriale FVG SpA 14.4 S.E.T.A SpA 0.17 0.12 10 S.E.T.A SpA Editoriale La Nuova Sardegna SpA Finegil Editoriale SpA Milan 234 4 Milan 20 Gruppo Editoriale L’Espresso SpA Finegil Editoriale SpA Editoriale La Nuova Sardegna SpA EAG SpA S.E.T.A. SpA Editoriale FVG SpA Rete A SpA Rete A SpA - Consorzio Emittenti Radio radio broadcasting services Bologna 179 6.62 3.99 0.62 0.39 0.49 0.47 6.67 - Consorzio Colle Maddalena radio broadcasting services Torino 62 4.17 A.Manzoni&C. SpA NB: Figures are in thousands of euros unless otherwise specified. 87 TOTAL INTANGIBLE ASSETS Other intangible assets Work in progress and advances Concessions, licenses and trademarks intellectual property rights (4,015) (72,268) 539,012 - (27,654) (6,847) (31,040) (2,639) 4,095 187 33,973 0,688 33,547 Goodwill Industrial patents and 61,183 Frequencies (73) and impairment write-downs cost 399,146 Acc. amortization, Original January 1, 2004 466,744 80 187 6,319 34 2,507 58,544 399,073 balance Opening OPENING BALANCES Publications (in thousand of euro) ATTACHMENT 2 (a) 764 - 50 656 - - 58 - development Internal - - - - - - - companies disposal of - - - - (20) - - (20) Decreases ORIGINAL COST Aggregation/ CHANGES IN INTANGIBLE ASSETS FROM JANUARY 1, 2004 TO JUNE 30, 2004 - - (188) 188 - - - - - - - (1,225) (41) - (1,166) (18) internal Reclassifications Amortization - - - - - - - - companies disposal of Aggregation/ CHANGES IN THE PERIOD - - - 20 - - 11 9 Decreases (36) - - (36) - - - - - 22 - (22) - - - - Write-downs Reclassifications PROVISIONS 539,756 4,095 49 34,797 6,881 33,547 61,241 399,146 cost Original (73,509) (4,034) - (28,867) (6,856) (31,040) (2,639) (73) and impairment write-downs Acc. amortization, June 30, 2004 466,247 61 49 5,930 25 2,507 58,602 399,073 balance Closing CLOSING BALANCES TOTAL INTANGIBLE ASSETS Other intangible assets Work in progress and advances Concessions, licenses and trademarks intellectual property rights (4,034) (73,509) 539,756 - (28,867) (6,856) (31,040) (2,639) 4,095 49 34,797 6,881 33,547 Goodwill Industrial patents and 61,241 Frequencies (73) and impairment write-downs cost 399,146 Acc. amortization, Original June 30, 2004 466,247 61 49 5,930 25 2,507 58,602 399,073 balance Opening OPENING BALANCES Publications (in thousand of euro) ATTACHMENT No 2 (b) 1,356 12 50 854 7 - 433 - development Internal - - - - - - - - companies disposal of - (659) (97) - (217) (5) - (340) Decreases ORIGINAL COST Aggregation/ CHANGES IN INTANGIBLE ASSETS FROM JUNE 30, 2004 TO JANUARY 1, 2005 - - (60) 60 - - - - Reclassifications - - - (1,318) (64) - (1,055) (199) internal Amortization - - - - - - - - companies disposal of Aggregation/ CHANGES IN THE PERIOD - - - 139 88 - 36 15 Decreases (31) - - (31) - - - - - 16 - (195) 179 - - - Write-downs Reclassifications PROVISIONS 540,453 4,010 39 35,494 6,883 33,547 61,334 399,146 cost Original (74,719) (3,994) - (30,112) (6,861) (31,040) (2,639) (73) and impairment write-downs Acc. amortization, January 1, 2005 465,7340 16 39 5,382 22 2,507 58,695 399,073 balance Closing CLOSING BALANCES TOTAL INTANGIBLE ASSETS Other intangible assets Work in progress and advances Concessions, licenses and trademarks intellectual property rights (3,994) (74,719) 540,453 - (30,112) (6,861) (31,040) (2,639) 4,010 39 35,494 6,883 33,547 Goodwill Industrial patents and 61,334 Frequencies (73) and impairment write-downs cost 399,146 Acc. amortization, Original January 1, 2005 465,7340 16 39 5,382 22 2,507 58,695 399,073 balance Opening OPENING BALANCES Publications (in thousand of euro) ATTACHMENT No 2 (c) 4,656 - 48 969 7 - 3,632 - development Internal 149,844 - - 317 59 34,879 114,589 - companies disposal of (40) - - (14) - - (26) - Decreases ORIGINAL COST Aggregation/ CHANGES IN INTANGIBLE ASSETS FROM JANUARY 1, 2005 TO JUNE 30, 2005 - - - - - - - - - - - (1,041) (7) - (1,024) (10) internal Reclassifications Amortization (369) - - (316) (53) - - - companies disposal of Aggregation/ CHANGES IN THE PERIOD (17) - - (17) - - - - Decreases - - - - - - - - Write-downs PROVISIONS - - - - - - - - Reclassifications 694,913 4,010 87 36,766 6,949 68,426 179,529 399,146 cost Original (76,146) (4,001) - (31,469) (6,924) (31,040) (2,639) (73) and impairment write-downs Acc. amortization, June 30, 2005 618,767 9 87 5,297 25 37,386 176,890 399,073 balance Closing CLOSING BALANCES (324,860) 524,119 TOTAL TANGIBLE ASSETS (214) 495 Property (214) (5,894) (128) (5,694) (72) 495 12,006 244 10,846 916 (318,752) (16,109) - (40,855) (2,136) (218,370) (20,538) (3,124) (17,620) Non operating buildings Fixed assets held under a lease Other leased assets Leased plant and equipment Leased buildings 511,618 17,182 Other assets Fixed assets owned 52,300 80,444 Work in progress and advances 2,413 Furniture, fixtures and vehicles 274,547 Technical equipment 22,418 8,516 47,971 - and write-downs cost 5,827 Acc. depreciation Original January 1, 2004 199,259 281 281 6,112 116 5,152 844 192,866 1,073 80,444 11,445 277 56,177 1,880 5,392 30,351 5,827 balance Opening OPENING BALANCES Plant and machinery Leasehold improvements Other buildings Industrial buildings Land (in thousand of euro) ATTACHMENT No 3 (a) 60,233 - - 9 - - 9 60,224 174 43,362 3,228 50 10,808 2,111 7 484 - development Internal CHANGES IN TANGIBLE ASSETS FROM JANUARY 1, 2004 TO JUNE 30, 2004 - - - - - - - - - - - - - - - - - companies disposal of (1,325) - - - - - - (1,325) (135) - (572) (48) (543) (9) - (18) - Decreases ORIGINAL COST Aggregation/ - - - - - - - - - (65,496) 48 10 59,459 87 - 5,892 - Reclassifications - (16,357) (7) (7) (558) - (543) (15) (15,792) (373) - (2,284) (73) (11,906) (367) (129) (660) internal Depreciation - - - - - - - - - - - - - - - - - companies disposal of Aggregation/ CHANGES IN THE PERIOD 1,240 - - 1 - - 1 1,239 219 - 479 47 487 - 1 6 - Decreases (208) - - - - - - (208) (28) - (33) (7) (140) - - - - - - - (18) (18) - - 18 44 - 2 - (2) (26) - - - Write-downs Reclassifications PROVISIONS 583,027 495 495 12,015 244 10,846 925 570,517 17,221 58,310 55,004 2,425 344,271 24,607 8,523 54,329 5,827 cost Original (340,185) (221) (221) (6,469) (146) (6,237) (86) (333,495) (16,247) - (42,691) (2,169) (229,931) (20,931) (3,252) (18,274) - and write-downs Acc. depreciation June 30, 2004 242,842 274 274 5,546 98 4,609 839 237,022 974 58,310 12,313 256 114,340 3,676 5,271 36,055 5,827 balance Closing CLOSING BALANCES (340,185) 583,027 TOTAL TANGIBLE ASSETS (221) 495 Property (221) (6,469) (146) (6,237) (86) 495 12,015 244 10,846 925 (333,495) (16,247) - (42,691) (2,169) (229,931) (20,931) (3,252) (18,274) Non operating buildings Fixed assets held under a lease Other leased assets Leased plant and equipment Leased buildings 570,517 17,221 Other assets Fixed assets owned 55,004 58,310 Work in progress and advances 2,425 Furniture, fixtures and vehicles 344,271 Technical equipment 24,607 8,523 54,329 - and write-downs cost 5,827 Acc. depreciation Original June 30, 2004 242,842 274 274 5,546 98 4,609 839 237,022 974 58,310 12,313 256 114,340 3,676 5,271 36,055 5,827 balance Opening OPENING BALANCES Plant and machinery Leasehold improvements Other buildings Industrial buildings Land (in thousand of euro) ATTACHMENT No 3 (b) 41,499 - - - - - - 41,499 525 10,813 4,934 481 12,590 7,101 - 4,545 510 development Internal CHANGES IN TANGIBLE ASSETS FROM JUNE 30, 2004 TO JANUARY 1, 2005 - - - - - - - - - - - - - - - - - companies disposal of (12,031) - - - - - - (12,031) (710) (214) (813) (20) (7,435) (2,692) (1) (146) - Decreases ORIGINAL COST Aggregation/ - - - - - - - - 27 (47,024) 59 4 44,479 693 - 1,762 - - (20,148) (6) (6) (555) - (542) (13) (19,587) (481) - (2,577) (134) (14,634) (784) (126) (851) internal Reclassifications Depreciation - - - - - - - - - - - - - - - - - companies disposal of Aggregation/ CHANGES IN THE PERIOD 9,369 - - (1) - - (1) 9,370 575 - 755 24 5,209 2,807 - - - Decreases (2,559) - - - - - - (2,559) (16) - (29) - (2,514) - - - - - - - (19) (19) - - 19 54 - 1 (1) (6) (27) (2) - - Write-downs Reclassifications PROVISIONS 612,495 495 495 12,015 244 10,846 925 599,985 17,063 21,885 59,184 2,890 393,905 29,709 8,522 60,490 6,337 cost Original (353,523) (227) (227) (7,044) (165) (6,779) (100) (346,252) (16,115) - (44,541) (2,280) (241,876) (18,935) (3,380) (19,125) - and write-downs Acc. depreciation January 1, 2005 258,972 268 268 4,971 79 4,067 825 253,733 948 21,885 14,643 610 152,029 10,774 5,142 41,365 6,337 balance Closing CLOSING BALANCES (353,523) 612,495 TOTAL TANGIBLE ASSETS (227) 495 Property (227) (7,044) (165) (6,779) (100) 495 12,015 244 10,846 925 (346,252) (16,115) - (44,541) (2,280) (241,876) (18,935) (3,380) (19,125) Non operating buildings Fixed assets held under a lease Other leased assets Leased plant and equipment Leased buildings 599,985 17,063 Other assets Fixed assets owned 59,184 21,885 Work in progress and advances 2,890 Furniture, fixtures and vehicles 393,905 Technical equipment 29,709 8,522 60,490 - and write-downs cost 6,337 Acc. depreciation Original January 1, 2005 258,972 268 268 4,971 79 4,067 825 253,733 948 21,885 14,643 610 152,029 10,774 5,142 41,365 6,337 balance Openening OPENING BALANCES Plant and machinery Leasehold improvements Other buildings Industrial buildings Land (in thousand of euro) ATTACHMENT No 3 (c) 14,133 - - 1,255 520 735 - 12,878 333 1,328 2,511 33 5,185 2,882 - 571 35 development Internal CHANGES IN TANGIBLE ASSETS FROM JANUARY 1, 2005 TO JUNE 30, 2005 11,337 - - 5,257 357 4,900 - 6,080 232 - - 103 2,559 - - 3,186 - companies disposal of (1,125) - - - - - - (1,125) (162) - (339) (1) (618) (5) - - - Decreases ORIGINAL COST Aggregation/ - - - - - - - - 9 (20,913) (9) - 17,163 160 - 3,590 - Reclassifications - (20,080) (7) (7) (967) (131) (822) (14) (19,106) (228) - (2,389) (105) (14,187) (1,019) (126) (1,052) internal Depreciation (5,129) - - (2,608) (133) (2,475) - (2,521) (190) - - (100) (1,718) - - (513) - companies disposal of Aggregation/ CHANGES IN THE PERIOD 975 - - - - - - 975 154 - 161 1 655 4 - - - Decreases (8) - - - - - - (8) - - - - - (8) - - - Write-downs PROVISIONS - - - - - - - - (9) - 9 - - - - - - Reclassifications 636,840 495 495 18,527 1,121 16,481 925 617,818 17,475 2,300 61,347 3,025 418,194 32,746 8,522 67,837 6,372 cost Original (377,765) (234) (234) (10,619) (429) (10,076) (114) (366,912) (16,388) - (46,760) (2,484) (257,126) (19,958) (3,506) (20,690) - and write-downs Acc. depreciation June 30, 2005 259,075 261 261 7,908 692 6,405 811 250,906 1,087 2,300 14,587 541 161,068 12,788 5,016 47,147 6,372 balance Closing CLOSING BALANCES 25.60 6.25 2.51 3.30 3.36 2.86 3.54 4.95 4.80 780,000 372,900 728,850 834,975 985,450 1,084,675 1,440,000 1,450,000 April 24, 2001 Stock Option Plan October 24, 2001 Stock Option Plan March 6, 2002 Stock Option Plan July 24, 2002 Stock Option Plan February 26, 2003 Stock Option Plan July 23, 2003 Stock Option Plan February 25, 2004 Stock Option Plan July 28, 2004 Stock Option Plan 4.75 1,485,000 7.87 Total 9,291,850 4.75 1,485,000 February 23, 2005 Stock Option Plan - - - - - - - - - - - - - - - - - - 2000 Stock Option Plan Options assigned in the period Options expired in the period Options exercised in the period 213,500 30,000 30,000 30,000 21,750 19,500 12,750 10,500 4,000 25,000 30,000 7.40 4.75 4.80 4.95 3.54 2.86 3.36 3.30 2.51 6.25 25.60 715,875 - - - 152,925 167,325 169,725 133,725 92,175 - - 3.16 - - - 3.54 2.86 3.36 3.30 2.51 - - 4.71 - - - 4.72 4.71 4.71 4.70 4.67 - - 9,847,475 1,455,000 1,420,000 1,410,000 910,000 798,625 652,500 584,625 276,725 755,000 1,585,000 7.75 4.75 4.80 4.95 3.54 2.86 3.36 3.30 2.51 6.25 25.60 8.10 10.25 9.50 9.25 8.50 8.25 7.50 7.25 6.75 6.25 5.25 Average expiration (years) Options in circulation at end of the period Average market Weighted Weighted Weighted Weighted Average price No. of options average price No. of options average price No. of options average price No. of options average price price at exercise No. of options for period date for period for period for period for period Options in circulation at beginning of the period 1,615,000 ATTACHMENT No 4 (a) EMPLOYEE STOCK OPTION PLANS AT JUNE 30, 2005 4,413,675 340,800 423,000 265,200 221,325 312,300 317,325 193,725 755,000 1,585,000 12.05 4.75 4.80 4.95 3.54 2.86 3.36 3.30 2.51 6.25 25.60 Weighted No. of options average price for period Options that may be exercised at end of the period 3.54 4.95 4.80 - 600,000 600,000 600,000 - July 23, 2003 Stock Option Plan February 25, 2004 Stock Option Plan July 28, 2004 Stock Option Plan Total 4.42 2.86 600,000 February 26, 2003 Stock Option Plan 2,900,000 6.25 500,000 February 23, 2005 Stock Option Plan Options assigned in the period Options expired in the period Options exercised in the period 750,000 750,000 - - - - - 4.75 4.75 - - - - - - - - - - - - - - - - 600,000 600,000 - 1,200,000 - - - - - - 2.86 - - - 2.86 2.86 - 4.61 - - - 4.61 4.61 - 2,450,000 750,000 600,000 600,000 - 500,000 5.12 4.75 4.80 4.95 3.54 2.86 6.25 3.46 4.75 3.75 3.75 - - 0.83 Average expiration (years) Options in circulation at end of the period Average market Weighted Weighted Weighted Weighted Average price No. of options average price No. of options average price No. of options average price No. of options average price price at exercise No. of options for period date for period for period for period for period Options in circulation at beginning of the period April 24, 2001 Stock Option Plan ATTACHMENT No 4 (b) MANAGING DIRECTOR STOCK OPTION PLANS AT JUNE 30, 2005 500,000 500,000 6.25 6.25 Weighted No. of options average price for period Options that may be exercised at end of the period Financial Statements of Gruppo Editoriale L’Espresso SpA at June 30, 2005 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Gruppo Editoriale L'Espresso SpA Balance Sheet ASSETS (€ thousand) Intangible assets with an indefinite useful life Jan. 1, June 30, 2005 2005 220,661 220,661 Other intangible assets 2,947 2,949 Total intangible assets 223,608 223,610 Tangible assets Other investments Financial receivables Deferred tax assets NON-CURRENT ASSETS Inventories 77,998 77,324 256,020 376,521 6,882 1,454 19.988 19.011 584,496 697,920 25,791 22,340 103,248 98,834 Marketable securities 20,142 10,016 Financial receivables 31,976 55,859 Tax receivables 34,044 37,829 Other receivables 14,429 8,520 Cash and cash equivalents 372,577 291,872 CURRENT ASSETS 602,207 525,270 1,186,703 1,223,190 Trade receivables TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY (€ thousand) Share capital Jan. 1, June 30, 2005 2005 64,896 65,003 124,538 121,685 Retained earnings 43,177 68,040 Net income 72,350 78,542 SHAREHOLDERS' EQUITY 304,961 333,270 Financial debt 315,401 315,783 Reserves Provisions for risks and charges 7,325 7,857 Employee severance reserve and other retirement benefits 41,780 43,954 Deferred tax liabilities 32,593 31,796 NON-CURRENT LIABILITIES 397,099 399,390 Financial debt 285,087 299,068 4,542 5,000 150,606 123,745 8,203 26,562 36,205 36,155 CURRENT LIABILITIES 484,643 490,530 TOTAL LIABILITIES 881,742 889,920 1,186,703 1,223,190 Provisions for risks and charges Trade payables Tax payables Other payables TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 98 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Gruppo Editoriale L'Espresso SpA Income Statement st st 1 Half 1 Half (€ thousand) 2004 2005 Revenues 331.169 350,986 1,593 8,020 (59,031) (59,122) (147,102) (166,861) (54,433) (59,074) Other operating costs (3,286) (4,637) Depreciation, amortization and write-downs (6,885) (6,940) Operating income 62,025 62,372 Financial income/(expense) (6,008) (8,958) Dividends 27,231 47,176 Pre-tax profit 83,248 100,590 (22,944) (22,048) 60,304 78,542 Other operating income Purchases Services received Personnel costs Taxes NET PROFIT 99 Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 Gruppo Editoriale L'Espresso SpA Statement of Cash Flows (€ thousand) 1 st Half 1 st Half 2004 2005 OPERATING ACTIVITIES Net income 60,304 78,542 4,802 6,134 894 1,280 Adjustments: - Accruals to provisions for personnel, risks and charges - Accruals to provisions for stock option costs - Depreciation, amortization and write-downs 6,885 6,940 (27,064) (47,176) 45,821 45,720 Decrease (Increase) in inventories 8,075 3,451 Decrease (Increase) in current receivables 7,145 9,878 Decrease (Increase) in current payables Decrease in tax receivables/Increase in tax payables (526) (26,911) 7,160 14,574 21,854 992 (129) 180 Uses of provisions for personnel, risks and charges (3,027) (2,970) CASH FLOW FROM OPERATING ACTIVITIES 64,519 43,922 (419) (629) - Other adjustments Cash flow from operating activities Decrease in current assets/Increase in current liabilities Decrease in deferred tax receivables/Increase in deferred tax payables INVESTING ACTIVITIES (Increase)/Decrease in intangible assets (Increase)/Decrease in tangible assets (13,341) (5,194) (Increase)/Decrease in equity investments (27,000) (120,501) 27,231 47,176 (13,529) (79,148) Dividends received CASH FLOW FROM INVESTING ACTIVITIES FINANCING ACTIVITIES Increases in capital and reserves and other changes in the Shareholders' Equity Increase (decrease) in other financial debt Net change in marketable securities (and own shares in 2004) Change in other financial receivables/liabilities 1,113 4,320 (634) (3,050) (4,842) 10,126 1,886 (1,042) Dividends paid (47,114) (55,833) CASH FLOW FROM FINANCING ACTIVITIES (49,591) (45,479) 1,399 (80,705) Cash and cash equivalents at beginning of the period 58,448 372,577 CASH AND CASH EQUIVALENTS AT END OF THE PERIOD 59,847 291,872 Increase (decrease) in cash and cash equivalents 100 Share - Net profit (loss) Other changes - Other changes - - Net profit (loss) Other changes 65,003 - Own shares transactions Balance at June 30, 2005 - Stock options 107 Dividends Capital increases, capital contributed by shareholders - Allocation of net profit 64,896 - Effect of adotion of IAS 39 Balance at January 1, 2005 - Effect of adotion of IAS 32 Elimination reserve for own shares under Italian GAAP 64,896 - Net profit (loss) Balance at December 31, 2004 - Own shares transactions 74 Stock options Capital increases, capital contributed by shareholders Allocation of net profit 64,822 - Own shares transactions Balance at June 30, 2004 - Stock options 53 - Dividends Capital increases, capital contributed by shareholders - 64,769 capital Allocation of net profit Balance at January 1, 2004 (€ '000) Statement of Changes in the Shareholders' Equity Gruppo Editoriale L'Espresso SpA Share 77,306 - - - - 2,156 - - 75,150 - - 13,192 61,958 - - 313 - 1,439 - 60,206 - - (3,785) - - - - 63,991 premium Own (11,575) - - 2,437 - - - - (14,012) - (14,012) (13,192) 13,192 - - (313) - - - 13,505 - - 4,842 - - - - 8,663 shares - - - - - - - - - - - - - - - - - - (2,323) (83) - - - - - - (2,240) (2.240) reserve Fair value IFRS 49,365 - - - - - - - 49,365 1,680 - - 47,685 - - - - - - 47,685 - - - - - - - 47,685 reserve 3,781 - - (795) 1,280 - - - 3,296 - - - 3,296 - - - 1,571 - 1,725 - - - 894 - - - 831 reserve Stock option Equity 13,001 22 - - - - - - 12,979 - - - 12,979 15 - - - - - 12,964 10 - - - - - - 12,954 reserves 60,170 (25) - 501 - - (55,833) 72,350 43,177 59 820 - 42,298 (8) - - - - - 42,306 (7) - - - - (47,114) 57,725 31,702 earnings Retained Net 78,542 - 78,542 - - - - (72,350) 72,350 - - - 72,350 - 12,046 - - - - 60,304 - 60,304 - - - (57,725) 57,725 profit Total 333,270 (86) 78,542 2,143 1,280 2,263 (55,833) - 304,961 (501) (13,192) - 318,654 7 12,046 - 1,571 1,513 - 303,517 3 60,304 1,057 894 53 (47,114) - 288,320 Sh. Equity Reclassified key financial information of subsidiaries Gruppo Editoriale L’Espresso - Interim Financial Statements at June 30, 2005 RECLASSIFIED KEY FINANCIAL DATA OF SUBSIDIARIES (€'000) Shareholders' Net financial Equity position Net capital employed Revenues Gross operating profit Operating profit Net profit Finegil Editoriale 60,939 (16,627) 77,566 69,871 15,529 11,356 14,826 Editoriale La Nuova Sardegna 17,281 (751) 18,032 17,159 4,913 3,468 1,959 EAG 8,252 8,458 (206) 9,333 1,804 1,511 769 S.E.T.A. 4,617 4,510 107 9,346 607 311 10 927 1,287 (360) 1,096 181 160 82 Edizioni Nuova Europa Editoriale La Città Editoriale FVG Edigraf Elemedia EleTv Deejay Budapest kft 664 787 (123) 1,514 (219) (238) (271) 112,489 24,549 87,940 26,392 6,347 5,236 2,901 563 423 140 481 40 15 - 57,057 (2,066) 59,123 36,906 19,575 18,150 10,851 2,570 2,332 238 713 181 71 58 129 56 73 164 (485) (505) (503) 387 277 110 427 (10) (35) (13) Rete A 6,282 (10,581) 16,863 5,252 2,020 1,600 916 All Music 6,470 6,138 332 492 (24) (24) (21) A. Manzoni & C. 16,635 (28,360) 44,995 290,676 2,261 921 (401) Rotosud 12,215 (13,276) 25,491 15,143 5,380 2,012 1,031 Radio Bonton a.s. 1,615 1,838 (223) 1,912 621 537 314 23,470 (601) 24,071 9,440 2,138 753 455 3,501 2,550 951 324 121 101 68 Somedia 391 1,155 (764) 3,033 73 (39) (82) Kataweb 24,390 22,709 1,681 6,208 (227) (398) (1,322) C.P.S. Rotocolor Selpi Kataweb News Ksolutions Esperya Studio Vit 9 11 (2) - (3) (3) (3) 608 (5,073) 5,681 3,507 (690) (1,390) (1,582) 1,316 324 992 54 75 43 24 44 34 10 102 (61) (65) (66) Auditors’ Report Transition to IFRS Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 TRANSITION TO IFRS FOREWORD The Consolidated Financial Statements of the Group at December 31, 2005 will be the first financial statements prepared under IFRS. The Espresso Group adopted IFRS from January 1, 2005 while the transition date is January 1, 2004. The Group has therefore prepared an opening balance sheet at the transition date applying all mandatory exceptions and some of the exemptions to the retroactive application of IFRS allowed under IFRS 1. Until December 31, 2004, the Consolidated Financial Statements of the Espresso Group were prepared in accordance with Italian Law, as interpreted and integrated by the Italian Accounting Profession (referred to jointly as Italian GAAP). For certain aspects such principles differ from IFRS. To conform to IFRS, the Group modified some accounting methods and valuation principles used in the preparation of consolidated financial statements for previous years. The notes that follow describe the choices made by the Group with regard to exemptions to the retroactive application of IFRS allowed under IFRS 1, in addition to the reconciliation and description of effects of the transition from Italian GAAP to IFRS required by Consob. The following reconciliation schedules and related notes were prepared with such end: 1) Shareholders’ Equity Reconciliation of the Shareholders’ Equity at the following dates: • date of transition to IFRS (January 1, 2004); • closing date of the last financial statements prepared under Italian GAAP (December 31, 2004); • closing date of the last interim financial statements prepared under Italian GAAP (June 30, 2004); • date from which IAS 32 and IAS 39 have been adopted (January 1, 2005). 2) Profit Reconciliation of profit for the following periods: • last financial year for which the financial statements were prepared under Italian GAAP (2004 financial year); • last half-year for which the interim financial statements were prepared under Italian GAAP (first half of 2004). The Espresso Group appointed independent auditors PricewaterhouseCoopers SpA, which also audited the financial statements at December 31, 2004, to carry out a full audit of the preliminary IFRS reconciliation schedules at January 1, 2004, December 31, 2004 and January 1, 2005. 113 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 Adjustments were made in accordance with IFRS in force at the date of approval of the present interim report. Figures provided in the reconciliation schedules could therefore be subject to changes to reflect further orientations of the European Commission with regard to the approval of IFRS or possible new pronouncements of the IASB or the IFRIC that should occur by December 31, 2005. IFRS reconciliation schedules are prepared exclusively for the purposes of the transition in the context of the preparation of the first full financial statements under IFRS approved by the European Commission and lack therefore comparative data and the necessary notes that would be required to present fairly the consolidated financial position and consolidated results of operations of the Espresso Group under IFRS. OPENING BALANCE SHEET As required under IFRS 1, a Consolidated Balance Sheet was prepared at the date of transition to IFRS (January 1, 2004) in which: • all assets and liabilities whose recording is required under IFRS, including those not required under Italian GAAP, were recorded; • all assets and liabilities whose recording is not allowed under IFRS were excluded; • assets and liabilities were recorded at the value that would have applied in case IFRS had been applied retrospectively; • items previously reported in the financial statements in a manner different from that provided under IFRS were reclassified. The effect of the adjustment to IFRS of beginning balances of assets and liabilities was recorded in the Shareholders’ Equity in the “IFRS reserve”, net of the related tax effect. In the preparation of the opening Consolidated Balance Sheet at January 1, 2004, the Espresso Group decided to take advantage of the following exceptions to the retroactive application of IFRS: 1. business combinations, acquisition of investments in affiliates and joint ventures: the retroactive application of IFRS 3 (“Business Combination”) requires the review of the recording of all aggregations of companies (mergers, acquisitions, contributions, spinoffs, etc.) carried out in the past from the initial incorporation of the company. IFRS 1 allows the choice not to apply IFRS 3 retroactively, or to apply the same from a date set by the same. The exemption applies also to all acquisitions of shares in affiliated companies and joint ventures. The Espresso Group decided to take advantage of the exemption to the retroactive application of IFRS 3 for the acquisition of shares in affiliated companies and joint ventures occurred before January 1, 2004; 114 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 2. value at which tangible and intangible assets are recorded: the retroactive application of IAS 16 (“Property, plant and equipment”), IAS 38 (“Intangible assets”) and IAS 40 (“Investment property”) requires – for those tangible and intangible assets are recorded at cost – the restatement of the historical cost, accumulated depreciation and write-downs. The Espresso Group decided to apply the “estimated cost” with reference to part of land and buildings on the basis of expert valuations prepared by independent surveyors. There lacking an active market for intangible assets, the Group could not benefit from the application of the “estimated cost” in the valuation of the same. 3. employee benefits (Employee Severance Indemnity and other benefits): in the recording of defined benefit plans (which include the Employee Severance Indemnity) IAS 19 allows the suspension of actuarial gains and losses that do not exceed a certain limit (“corridor approach”). The retroactive application of IAS 19 requires the quantification of actuarial gains and losses arising over time from the initial incorporation of the company for all personnel employed at the date of the transaction with the aim of determining the ones to be recorded and those to be suspended. IFRS 1 allows the use of the corridor approach. The Espresso Group opted for the prospective application of the corridor approach. Actuarial gains and losses at the date of the transition are recorded in full, with a parallel recording under Shareholders’ Equity; 4. designation of financial instruments: IAS 39 requires the designation of a financial instrument to a specific category to be carried out at the time of its first recording. IFRS 1 allows the designation to be carried out at the transition date. The Espresso Group decided to apply IAS 32 and 39 starting from January 1, 2005 and opted for the exemption to the restating of the related comparative data. The designation of financial instruments was therefore carried out at the date of adoption of IAS 32 and IAS 39; 5. stock options: the exemptions to stock options allows to wave the application of IFRS 2 for stock options granted before November 7, 2002 (date of publication of the Standard) and for stock options granted after November 7, 2002 and maturing before January 1, 2005. The early application of the principle is however allowed only when the company has disclosed the fair value of stock options granted. The Espresso Group opted for the exemption to the application of IFRS 2 for stock option plans issued before November 7, 2002 and for stock options granted after such date and expiring before January 1, 2005. 115 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 EFFECT OF THE ADOPTION OF IFRS ON THE BALANCE SHEET AT JANUARY 1, 2004 ASSETS (€ million) Intangible assets with an indefinite life Other intangible assets Total intangible assets Tangible assets Investments valued at equity Other investments Long-term securities Financial receivables Deferred tax assets NON-CURRENT ASSETS Inventories Trade receivables Marketable securities Financial receivables Tax receivables Other receivables Cash and cash equivalents CURRENT ASSETS TOTAL ASSETS Italian GAAP 326.3 10.0 336.3 181.7 25.6 8.7 4.9 557.1 36.5 231.5 20.3 0.4 55.0 11.8 69.8 425.3 982.4 LIABILITIES AND SHAREHOLDERS’ EQUITY Italian (€ million) GAAP Share capital Reserves Retained earnings Net income Group Shareholders’ Equity Minority interest in the Shareholders’ Equity SHAREHOLDERS’ EQUITY Financial debt Provisions for risks and charges Employee severance reserve and other retirement benefits Deferred tax payables NON-CURRENT LIABILITIES Financial debt Provisions for risks and charges Trade payables Tax payables Other payables CURRENT LIABILITIES TOTAL LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY Reclass. (2.6) (2.6) 2.6 21.6 (21.6) (0.2) 19.5 19.3 (5.5) 15.3 0.2 (19.5) (9.6) 9.8 Reclass. IAS/IFRS adjustments IAS/IFRS Jan. 1, 2004 133.8 (0.8) 133.0 15.0 1.9 0.6 150.5 (0.3) (0.7) (1.0) 149.5 460.1 6.6 466,7 199.3 23.5 4.0 8.7 4.6 20.1 726.9 31.0 246.8 20.3 0.6 35.2 11.1 69.8 414.7 1,141.6 IAS/IFRS IAS/IFRS adjustments Jan. 1, 2004 64.8 199.4 67.8 332.0 9.9 341.9 227.1 - (113.8) 113.8 18.4 111.7 (2.8) 108.9 0.8 109.7 4.3 (1.2) 64.8 197.3 111.0 67.8 441.0 10.6 451.6 231.4 17.2 98.5 (0.5) (6.2) 91.7 5.4 331.0 18.2 25.9 181.1 16.2 68.2 309.5 640.5 17.8 9.8 (18.0) 0.1 0.1 (8.1) 9.8 42.1 39.0 1.0 (0.2) 0.8 39.8 47.5 387.8 28.9 7.7 181.2 16.2 68.3 302.3 690.1 982.4 9.8 149.5 1,141.6 116 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 Main reclassifications consist in the reclassification of leasehold improvements from intangible assets to tangible assets, that of work in progress from inventories to trade receivables, the breakdown of provisions for risks and charges between current and noncurrent, the reclassification of current trade receivables and current financial debt, limited to the part relating to bills discounted with banks and receipts at December 31, 2003 but recorded in 2004. The reserve for capital grants, the reserve for merger differences and the revaluation reserve were reclassified from “Reserves” to “Retained earnings (loss carry-forwards)”. Two new captions were introduced: “Investments valued at equity”, whose amount is reported separately from “Other investments”, and “Deferred tax assets”, whose amount is indicated separately from “Tax receivables”. The table that follows and the related notes summarize main impacts on the Consolidated Shareholders’ Equity at January 1, 2004. (€ million) Consolidated Shareholders’ Equity under Italian GAAP 332.0 1. Intangible assets 133.0 2. Investments valued at equity 1.9 3. Tangible assets 0.8 4. Leased assets 7.7 5. Employee benefits 6.2 6. Provisions for risks and charges 1.4 7. Other adjustments (0.6) Tax effect (41.5) Total IFRS adjustments 108.9 Consolidated Shareholders’ Equity under IFRS 441.0 Notes: 1. Intangible assets (IAS 38) Under IAS 38 intangible assets having an indefinite useful life are not amortized but are subject annually, or any time there is an indication that the asset has experienced a loss in value, to an impairment test to identify possible reductions in value. At the transition date, Publications, Frequencies and Goodwill were classified as intangible assets having an indefinite life. The retroactive application of IAS 38 required the re-recording of the historical costs of these assets (totaling €460.1 million) with the subsequent elimination of accrued amortization (amounting to €133.8 million). The impairment test carried out on these assets did not detect losses in value. Net adjustments to item “Other intangible assets” (equal to €0.8 million) includes prevalently the elimination of the value of self-developed software not covered by 117 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 patents. Such adjustment determined a reduction in the Consolidated Shareholders’ Equity equal to €0.2 million net of the related tax effect. Overall, the adjustments above resulted in an increase in the Consolidated Shareholders’ Equity equal to €97.7 million, net of the related €35.3 million tax effect. Such effect includes taxes calculated by individual companies on the restoring of the historical cost of publications and frequencies (equal to €36.8 million) and taxes resulting from consolidation adjustments (positive €1.5 million). 2. Investments valued at equity (IAS 28) Adjustments relating to investments valued at equity relate to the restoring at the date of transition of accumulated amortization of the publication owned by Editoriale la Libertà. The adjustment resulted in a €1.9 million increase of the Consolidated Shareholders’ Equity. 3. Tangible assets (IAS 16) Under IAS 16, individual components of a complex fixed asset, characterized by a different useful life, are recorded separately and depreciated over their respective useful life. In particular, under IAS 16, it is necessary to identify and record separately the value of land (no longer depreciated) from the value of buildings that insist on the same and, consequently, to depreciate only the buildings. In the transition to IFRS, the Group has therefore identified the two components, eliminating accumulated depreciation relating to land amounting to €1.2 million. Leasehold improvement costs were reclassified under “Tangible assets” and the requisites for their capitalization were verified. Such verification resulted in the elimination of certain capitalized costs amounting to €0.4 million. The above said adjustments resulted in an increase in the Consolidated Shareholders’ Equity equal to €0.2 million net of the related €0.6 million tax effect of which €0.3 million relating to the elimination of the provision for reinvested capital gains accrued pursuant to Article 54, Presidential Decree no. 597/73. In addition to the above described gross effect (€0.8 million), adjustments to item “Tangible assets” includes the effect of the application of IAS 17 (€14.2 million) described in the note below. 4. Leases (IAS 17) Under IAS 17, all assets held under a financial lease are accounted for by recording interest payments and depreciation charges of leased assets in the income statement, and the asset and the residual portion of debt in the balance sheet. In the transition to IFRS, the Group recorded in the balance sheet leased assets amounting to €14.2 million (€8.1 million relating to leases redeemed, and €6.1 million to assets still held under a lease), adjusted prepaid expenses by €1.2 million and recorded under liabilities €5.3 million of financial debt, separating the current portion from the non-current portion. 118 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 These adjustments resulted in an increase in the Consolidated Shareholders’ Equity of €4.8 million, net of €2.9 million of the related tax effect. 5. Employee benefits (IAS 19) Under IAS 19, liabilities relating to the Employee Severance Indemnity and the Fixed indemnity for managers of newspapers were restated under the actuarial method. This adjustment resulted in an increase in the Consolidated Shareholders’ Equity of €4.4 million, net of €1.9 million of the related tax effect. 6. Provisions for risks and charges (IAS 37) Under IAS 37, accruals to the provisions for risks and charges are represented by the present value of expected payments to extinguish the obligation. This adjustment resulted in an increase in the Consolidated Shareholders’ Equity of €1 million, net of €0.4 million of the related tax effect. 7. Other adjustments Other adjustments have a negative impact on the Consolidated Shareholders’ Equity equal to €0.6 million and are represented by individually not significant adjustments. 119 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 2004 INCOME STATEMENT Italian GAAP Reclass. IAS/IFRS (€ million) IAS/IFRS adjustments Revenues 2004 1,080.3 - - 1,080.3 16.5 - (0.7) 15.8 Purchases (160.3) - - (160.3) Services received (428.0) - 1.0 (427.0) Personnel costs (258.8) - 2.3 (256.5) (15.8) - 0.8 (15.0) - 1.1 0.5 1.5 Depreciation, amortization and write-downs (61.9) - 15.2 (46.6) Operating profit 172.0 1.1 19.1 192.2 Financial income/(expense) (12.0) (1.1) (4.6) (17.7) Pre-tax profit 160.0 - 14.6 174.5 Taxes (71.6) - (3.3) (74.9) 88.3 - 11.3 99.6 Other operating income Other operating costs Valuation of investments at equity NET PROFIT Minority interest share in net profit Group’s share in net profit 0.6 - 0.1 0.7 87.7 - 11.1 98.9 The table that follows and the related notes show the main effects on the 2004 Consolidated Net Profit. (€ million) Italian GAAP Consolidated Net Profit 87.7 1. Intangible assets 15.9 2. Investments valued at equity 0.5 3. Tangible assets 0.2 4. Leases (0.2) 5. Stock options (2.5) 6. Employee benefits 7. Provisions for risks and charges 8. Other adjustments 0.7 (0.3) 0.2 Tax effect (3.3) Total IFRS adjustments 11.1 IFRS Consolidated Net Profit 98.9 Notes 1. Intangible assets (IAS 38) The application of IAS 38 resulted in a €0.2 million increase in costs for services received due to those costs that may no longer capitalized, in addition to a €16.1 million decline in the amortization expense of publications and radio frequencies. The overall impact on the Consolidated Net Profit was positive by €11.2 million, net of €4.7 million of deferred taxes. The tax effect includes taxes of individual companies on 120 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 restoring the historical cost of publications and frequencies (€4.6 million) and taxes on consolidation adjustments (positive by €0.1 million). 2. Investments valued at equity (IAS 28) The elimination of the amortization of the publication owned by Editoriale la Libertà had a €0.5 million positive effect on the Consolidated Net Profit. 3. Tangible assets (IAS 16) The elimination of leasehold improvement costs, no longer capitalized (€0.8 million gross of the tax effect), the non- recording of depreciation on land (€0.2 million, gross of the related tax effect) and other negative adjustments to depreciation and amortization (€0.4 million, gross of the related tax effect), resulted in a net positive adjustment to Consolidated Net Profit of €0.3 million, net of €0.2 million of deferred tax assets. The last effect includes €0.4 million relating to the impact of the elimination of the provision for reinvested capital gains accrued pursuant to Article 54, Presidential Decree no. 597/73, as previously mentioned. 4. Leases (IAS 17) The adoption of a new accounting treatment of leasing contracts resulted in the elimination of €1.2 million in leasing payments and a €1.5 million increase in depreciation and amortization, having a combined negative effect on Consolidated Net Profit of €0.1 million, net of the related €0.1 million positive tax effect. 5. Stock options (IFRS 2) The fair value recording of stock options determined a €2.5 million increase in personnel costs and a consequent €1.7 million reduction in the Consolidated Net Profit, net of the related €0.8 million positive tax effect. 6. Employee benefits (IAS 19) The restatement in accordance with the actuarial method of liabilities relating to the Employee Severance Indemnity and the Fixed Indemnity due to managers of companies publishing newspapers resulted in a €4.8 million reduction in the cost of personnel and a €4.2 million increase in financial charges, with a positive impact on Consolidated Net Profit of €0.6 million, net of the €0.1 million positive tax effect. 7. Provisions for risks and charges (IAS 37) The net effect of the discounting of provisions for risks and charges determined a €0.3 million increase in financial charges. The overall impact on Consolidated Net Profit was negative by €0.2 million, net of the €0.1 million positive tax effect. 8. Other adjustments Other adjustments have a positive impact on Consolidated Net Profit of €0.2 million and are represented by adjustments individually not significant. 121 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 BALANCE SHEET AT DECEMBER 31, 2004 ASSETS Italian GAAP Reclass. (€ million) Intangible assets having an indefinite life Other intangible assets Total intangible assets Tangible assets Investments valued at equity Other investments Long-term securities Financial receivables Deferred tax assets NON-CURRENT ASSETS Inventories Trade receivables Marketable securities Financial receivables Tax receivables Other receivables Cash and cash equivalents CURRENT ASSETS TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY 311.4 17.7 329.1 233.2 25.4 13.2 4.0 604.8 36.6 234.6 20.1 4.3 59.6 22.6 383.2 761.0 1,365.9 Italian GAAP (11.3) (11.3) 11.3 21.5 (21.5) (0.1) 19.9 19.7 (6.4) 7.1 0.1 (18.1) (17.3) 2.5 Reclass. (€ million) Share capital Reserves Retained earnings (loss carry-forwards) Net income Group Shareholders’ Equity Minority interest in the Shareholders’ Equity SHAREHOLDERS’ EQUITY Financial debt Provisions for risks and charges Employee severance reserve and other retirement benefits Deferred tax payables NON-CURRENT LIABILITIES Financial debt Provisions for risks and charges Trade payables Tax payables Other payables CURRENT LIABILITIES TOTAL LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY IAS/IFRS IAS/IFRS adjustments Dec. 31, 2004 148.9 (0.9) 148.0 14.4 2.4 4.1 168.9 (0.7) (0.7) 168.1 460.3 5.5 465.7 259.0 23.9 3.9 13.2 3.8 23.9 793.4 30.2 241.7 20.1 4.4 41.5 21.9 383.2 743.1 1,536.5 IAS/IFRS IAS/IFRS adjustments Dec. 31, 2004 64.9 222.6 87.7 375.2 10.1 385.3 322.2 - (134.5) 134.5 13.8 114.2 (2.8) 11.1 122.5 0.9 123.4 3.2 (0.8) 64.9 202.3 131.7 98.9 497.8 11.0 508.8 325.4 13.0 103.2 (0.4) (6.9) 95.9 4.0 429.5 222.4 23.8 209.5 16.5 78.9 551.1 980.5 13.4 2.5 (13.3) (0.2) (10.9) 2.5 48.3 43.9 1.0 (0.2) 0.1 0.9 44.7 52.4 486.7 225.9 10.3 209.5 16.5 78.8 541.0 1,027.7 1,365.9 2.5 168.1 1,536.5 122 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 The table that follows provides a summary of changes in the Consolidated Shareholders’ Equity at December 31, 2004. Such adjustments are not commented as they follow from those recorded in the opening balance sheet above. (€ million) Consolidated Shareholders’ Equity under Italian GAAP 375.2 1. Intangible assets 148.0 2. Investments valued at equity 2.4 3. Tangible assets 1.0 4. Leases 7.5 5. Employee benefits 6.9 6. Provisions for risks and charges 1.1 7. Other adjustments (0.1) Tax effect (44.3) Total IFRS adjustments 122.5 Consolidated Shareholders’ Equity under IFRS 497.8 BALANCE SHEET RECONCILIATION AT JUNE 30, 2004 ASSETS Italian GAAP Reclass. (€ million) Intangible assets with an indefinite life Other intangible assets Total intangible assets Tangible assets Investments valued at equity Other investments Long-term securities Financial receivables Deferred tax assets NON-CURRENT ASSETS Inventories Trade receivables Marketable securities Financial receivables Tax receivables Other receivables Cash and cash equivalents CURRENT ASSETS TOTAL ASSETS 318.8 12.3 331.1 222.7 24.9 13.5 4.2 596.5 30.2 220.5 20.3 0.6 81.3 14.7 74.6 442.2 1,038.7 (5.2) (5.2) 5.2 20.9 (20.9) (0.1) 19.7 19.6 (7.6) 23.6 0.1 (19.7) (3.6) 16.0 IAS/IFRS IAS/IFRS adjustments June 30, 2004 141.4 (1.0) 140.3 14.9 2.1 1.0 158.4 (0.3) (0.6) (0.9) 157.5 460.2 6.1 466.2 242.8 23.0 4.0 13.5 4.2 20.7 774.5 22.6 244.1 20.3 0.7 61.4 14.1 74.6 437.8 1,212.3 123 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 LIABILITIES AND SHAREHOLDERS’ EQUITY Italian GAAP Reclass. (€ million) Share capital Reserves Retained earnings Net income Group Shareholders’ Equity Minority interest in the Shareholders’ Equity SHAREHOLDERS’ EQUITY Financial debt Provisions for risks and charges Employee severance reserve and other retirement benefits Deferred tax payables NON-CURRENT LIABILITIES Financial debt Provisions for risks and charges Trade payables Tax payables Other payables CURRENT LIABILITIES TOTAL LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY IAS/IFRS IAS/IFRS adjustments June 30, 2004 64.8 221.2 47.3 333.3 9.8 343.0 224.6 - (134.5) 134.5 17.2 112.6 (2.8) 5.1 114.9 0.8 115.8 3.8 (1.0) 64.8 199.3 131.7 52.4 448.2 10.6 458.8 228.3 16.2 100.6 (0.3) (6.2) 94.1 4.4 329.6 28.3 67.1 185.1 12.0 73.6 366.1 695.7 16.9 16.0 (57.9) 41.0 (0.1) (0.9) 16.0 44.4 41.0 1.0 (0.2) 0.8 41.8 48.8 387.4 45.3 9.1 185.1 53.1 73.5 366.0 753.4 1,038.7 16.0 157.5 1,212.3 The table that follows provides a summary of changes in the Consolidated Shareholders’ Equity at June 30, 2004. Such adjustments are not commented as they follow from those recorded in the opening balance sheet above. (€ million) Consolidated Shareholders’ Equity under Italian GAAP 333.3 . Intangible assets 140.3 2. Investments valued at equity 2.1 3. Tangible assets 0.9 4. Leases 7.6 5. Employee benefits 6.2 6. Provisions for risks and charges 1.3 7. Other adjustments (0.2) Tax effect (43.4) Total IFRS adjustments 114.9 Consolidated Shareholders’ Equity under IFRS 448.2 124 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 RECONCILIATION MONTHS OF 2004 OF THE INCOME STATEMENT AND NET PROFIT FOR THE FIRST SIX Italian GAAP Reclass. (€ million) Revenues Other operating income Purchases Services received Personnel costs Other operating costs Valuation of investments at equity Depreciation, amortization and write-downs Operating profit Financial income/(expense) Pre-tax profit Taxes NET PROFIT Minority interest share in net profit Group’s share in net profit 546.1 4.7 (80.3) (208.2) (133.7) (6.8) (28.6) 93.1 (5.7) 87.4 (39.9) 47.5 0.2 47.3 IAS/IFRS IAS/IFRS st adjustments 1 Half 2004 0.5 (0.9) 0.1 0.2 7.3 7.3 (0.3) 7.1 (1.9) 5.2 0.1 5.1 546.1 4.7 (80.3) (207.7) (134.6) (6.7) 0.7 (21.3) 100.9 (6.4) 94.5 (41.8) 52.7 0.3 52.4 0.4 0.4 (0.4) - The table that follows provides a summary of changes in the Consolidated Net Profit for the first six months of 2004. Such adjustments are not commented as they follow from those recorded in the opening balance sheet above. (€ million) Italian GAAP Consolidated Net Profit 47.3 1. Intangible assets 7.9 2. Investments valued at equity 0.2 3. Tangible assets 0.1 4. Leases (0.1) 5. Stock options (0.9) 6. Provisions for risks and charges (0.2) 7. Other adjustments (0.0) Tax effect (1.9) Total IFRS adjustments IFRS Consolidated Net Profit 5.1 52.4 125 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 IAS 32 AND 39: RECONCILIATION OF THE BLANCE SEET AT JANUARY 1, 2005 As allowed under IFRS 1, the Espresso Group decided to apply IAS 32 and 39 from January 1, 2005. The table that follows shows the effect of the application of IAS 32 and 39 on Consolidated Balance Sheet balances at January 1, 2005. ASSETS (€ million) Intangible assets with an indefinite life Other intangible assets Total intangible assets Tangible assets Investments valued at equity Other investments Long-term securities Financial receivables Deferred tax assets NON-CURRENT ASSETS Inventories Trade receivables Marketable securities Financial receivables Tax receivables Other receivables Cash and cash equivalents CURRENT ASSETS TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY (€ million) Share capital Reserves Retained earnings Net income Group Shareholders’ Equity Minority interest in the Shareholders’ Equity SHAREHOLDERS’ EQUITY Financial debt Provisions for risks and charges Employee severance reserve and other retirement benefits Deferred tax payables NON-CURRENT LIABILITIES Financial debt Provisions for risks and charges Trade payables Tax payables Other payables CURRENT LIABILITIES TOTAL LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY IAS/IFRS Dec. 31, 2004 IAS 32 - 39 Reclass. IAS 32 - 39 adjustments IAS/IFRS Jan. 1, 2005 460.3 5.5 465.7 259.0 23.9 3.9 13.2 3.8 23.9 793.4 30.2 241.7 20.1 4.4 41.5 21.9 383.2 743.1 1,536.5 (13.2) (13.2) (2.7) (2.7) (15.9) 5.4 2.9 8.3 0.1 0.1 8.4 IAS/IFRS Dec. 31, 2004 IAS 32 - 39 reclass. IAS 32 - 39 adjustments 64.9 202.3 131.7 98.9 497.8 11.0 508.8 325.4 13.0 (14.0) 0.8 (13.2) (13.2) - (0.6) 0.1 (0.5) (0.5) 5.4 - 64.9 187.7 132.6 98.9 484.1 11.0 495.1 330.9 13.0 95.9 - - 95.9 52.4 486.7 225.9 10.3 209.5 16.5 78.8 541.0 1,027.7 (2.7) (2.7) (2.7) 1.8 7.2 1.7 1.7 8.9 54.2 493.9 224.8 10.3 209.5 16.5 78.8 539.9 1,033.9 1,536.5 (15.9) 8.4 1,528.9 460.3 5.5 465.7 259.0 23.9 3.9 9.3 26.8 788.5 30.2 241.7 20.1 1.7 41.5 22.0 383.2 740.4 1,528.9 IAS/IFRS Jan. 1, 2005 126 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 Reclassifications relate to own shares, subtracted from Shareholders’ Equity, and the writeoff of accrued income and liabilities recorded against interest rate swaps having a nominal value of €300 million entered into to hedge the risk arising from the bond issue. The table that follows and the related notes summarize the effect of the application of IAS 32 and 39, net of the related tax effect, on the Consolidated Shareholders’ Equity at January 1, 2005. (€ million) Consolidated Shareholders’ Equity at January 1, 2005 1. Own shares 2. Fair value reserve 3. Application of amortized costs on bond issues Total adjustments due to the adoption of IAS 32 and 39 Restated Consolidated Shareholders’ Equity at January 1, 2005 497.8 (13.2) (2.2) 1.7 (13.7) 484.1 Notes: 1. Own shares (IAS 32) Under Italian GAAP, own shares were recorded under long-term assets and valued at cost, reduced for permanent impairment. An equivalent amount was recorded in a Shareholders’ Equity reserve. The effect of transactions involving own shares were recorded in the income statement. As a result of the adoption of IAS 32, the book value of own shares was reclassified in a specific Shareholders’ Equity reserve, while the reserve for own shares was reclassified in the reserve used for its recording and the original cost was restored. The adjustment resulted in a €13.2 million reduction in the Consolidated Shareholders’ Equity, net of the €14 million effect of the reclassification of the book value of own shares, and the elimination of write-downs carried out in the past, amounting to €0.8 million. 2. Fair value reserve (IAS 39) At January 1, 2005, a paper swap contract was in place through which the company fixed the price of part of its paper needs for its magazines until September 2005. Under Italian GAAP, price differentials on the paper swap were recorded in the income statement under the accrual method. As a result of the adoption of IAS 39, the fair value of the contract, amounting to €2.2 million, net of the related tax effect, was recorded also in a specific Shareholders’ Equity reserve. 3. Application of amortized cost on bond issues (IAS 39) In application of IAS 39, at January 1, 2005, the original value of bond issues was restated keeping into account costs incurred and issue discounts, in addition to the 127 Gruppo Editoriale L'Espresso – Interim Financial Statement at June 30, 2005 portion accrued in the period (based on the residual term of the bond) of the positive difference between the original cost of the issue and its fair value recorded at the time of the reversal of fixed/variable interest rate swap contracts originally entered into to hedge the €300 million bond. The adjustment resulted in a €1.7 million increase in the Consolidated Shareholders’ Equity. MAIN CHANGES TO THE STATEMENT OF CASH FLOWS At December 31, 2004, net consolidated debt amounted to €139.7 million. As a result of the application of IAS 32 and 39, the net debt of the Group amounted to €141.4 million. Main changes relate to the restatement of financial debt at the amortized cost. 128 Auditors’ Report on the IFRS reconciliation schedules