Report And Accounts 2 0 0 4 C E

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COSTRUZIONI ELETTROMECCANICHE BRESCIANE REPORT and ACCOUNTS 2004 Cembre S.p.A. Head Office: Via Serenissima, 9, Brescia, Italy Share Capital: EUR 8,840,000 (fully paid-up) Registration no: CF 00541390175 (Commercial Register of Brescia) This document contains translations of the official financial statements and managements reports prepared in the Italian language for the purpose of the Italian law. R E P O RT AND ACCOUNTS 2004 INDEX Group Structure 12 Company Boards 18 Cembre S.p.A. Management Report at December 31, 2004 - Attachments 19 Cembre S.p.A. Financial Statements at December 31, 2004 - Balance Sheet and Income Statement - Notes to the Financial Statements - Attachments - Statutory auditors report - Auditors report 33 Cembre Group Management Report at December 31, 2004 - Attachments 71 Consolidated Financial Statements at December 31, 2004 - Balance Sheet and Income Statement - Notes to the Financial Statements - Attachments - Statutory auditors report - Auditors report 81 Abstract of 12th May 2005 Shareholders General Meeting resolutions 107 1 Cembre S.p.A. Group headquarters located in Brescia, Italy 2 Cembre is today the leading Italian manufacturer* and one of the largest European manufacturers of electric compression connectors and related installation tools. The company’s extensive know-how in the field of electrical connectors, strong R&D activity and the continuous innovation in manufacturing technologies and product specifications, allow Cembre to respond quickly to the needs of an increasingly demanding market offering high-quality products that are reliable, durable and safe. The wide product range, the capillary and efficient domestic and international sales network and the strong focus on customer needs represent the strengths of the Cembre Group and ensure a strong competitive advantage in a continuously evolving world market. * Source Cembre S.p.A. 3 Product PRODUCT RANGE Cembre designs and manufactures a wide range of electrical connectors and tools for their installation. Cembre, in particular, has adopted and developed a ‘compression’ connection system that enables it to exploit the hardening properties of selected metals (copper and aluminium), whereby these metals acquire greater strength and resistance when bent by force, thereby guaranteeing the achievement of better performances by these types of connectors than would have otherwise been obtained by more conventional welding and mechanical clamping (screws and bolts) connection methods. 4 Compression connectors are characterised by lower electrical resistance and by excellent quality electrical contact. Installation tools used for compressing the connectors and cutting the cables enable quick installation and the achievement of easy and safe optimal connections. The range of tools includes, according to the application, mechanical, pneumatic, hydraulic and electrical tools. 5 Strategy STRATEGIES The Cembre Group is growing rapidly and investing strongly in the development of its product range and the consolidation of its sales and distribution network, seeking to increase its presence in the international markets. New unit for the insertion and extraction of “e” type clips fastening rails on sleepers DEVELOPMENT OF THE PRODUCT RANGE R&D activities focuse primarily on the development of new products aimed at markets with the highest growth potential such as rail transport, civil and industrial equipment. Implementation of new European Union safety regulations require the adoption of modern connection systems as those manufactured by Cembre Group. Constant attention devoted to trends in demand and the monitoring of customer satisfaction allowed Cembre to develop solutions in line with an increasingly demanding market, stretching the use of own technologies to a growing number of applications. Cembre Group’s expansion of product offer was achieved by launching leading-edge technology products, including new battery powered hydraulic tools, a new range of professional mechanical tools, electrically insulated hydraulic tools, linked cable terminals insulated with halogen free material, drills for wooden rail-sleepers etc. Whole families of already existing products were moreover updated and improved to enhance user friendliness and New hydraulic, qualitative and performance standards. battery operated The wide knowledge of the sector and the strong presence pump 6 New range of hydraulic tools featuring extended head on the territory allowed Cembre to identify and understand the needs of the different local markets, adapting products to the specific requirements in terms of quality imposed by safety regulations in the different countries in which it operates. INTERNET SITE w The Internet site allows the company to interact with customers, providing a number of services such as technical assistance, promotions, the presentation of new products and the possibility to liaise with wholesalers operating in the territory. m o c . e c m . e r b w w 7 Strengthenin INCREASE IN PRODUCTION CAPACITY Cembre made significant investments in the optimization of its manufacturing activities and enlarging its production capacity at the Brescia, Birmingham and Bergamo facilities. In Brescia, Cembre have modern numerical control work centres as well as other equipment guaranteeing high flexibility and quality of the production. The Company has an automated warehouse and its own tinplating department which allows to reduce production time and costs, ensuring tight quality control. The strengthening of production capacity and efficiency involved also the Birmingham plant, dedicated to the production of particular specific product lines for some markets. General Marking Srl during the 2003 moved its operating headquarters nearby Bergamo, in a new bigger building suitable to cope with the development foreseen for the next years. Selection of our current hydraulic, battery operated tools 8 QUALITY To ensure a high quality standard, since 1990 Cembre’s Quality System has been certified by the Lloyd’s Register Quality Assurance in accordance with the ISO 9002 standard. Since 1992 the certification of the Quality System was extended also to the design process, in accordance with the ISO 9001 standard. The activities of the Brescia head office, those of regional offices in Italy and of subsidiaries in the United Kingdom, France, Spain, Norway, Germany and the United States are currently managed according to a single Quality System. In 1998, this Quality System was successfully audited for compliance with the ISO 9001 standard, following its 1994 successful audit for certification by the Lloyd’s Register Certification regarding the design, manufacture and commercialisation of accessories for cables, electric connectors and related equipment, and for the repair, overhaul and related recalibration of equipment. This ensures a high and uniform quality for the products and services supplied by Cembre to its customers. Multi-site Certificates attesting the conformity to ISO 9001-2000 standards have been issued relating to the Group’s head office, its regional offices in Italy and its associated companies in the United Kingdom, France, Spain, Norway, Germany and the United States. 9 Manufacturin MANUFACTURING Cembre quickly developed after its creation in 1969, until it became the leading company* in Italy specialising in the manufacture of electrical compression connectors and related installation tools, while gaining important market shares elsewhere in Europe, where it is now recognised as the leading crimping tools manufacturer. Cembre Group’s growth has traditionally been driven by its ability to continually anticipate the evolution of the electrical connectors market, enabling it to develop new products with the highest standards in quality, reliability and safety, as well as to improve the performance of existing products. Press and high speed press machines department 10 CNC Machine Department View of the automated warehouse View of insulated connectors and terminal blocks assembly department Cembre is currently a group employing 462 persons, with a turnover in 2004 amounting to € 65 million. The parent company, Cembre S.p.A., is based in Brescia where, on an area of aproximately 47,000 square meters, are the Head Office, sales offices, technical offices, Research & Development, the automated warehouse, production facilities and test laboratories. Tin plating department * Source Cembre S.p.A. 11 Group Structur GROUP STRUCTURE Cembre SpA Brescia (Italy) Cembre AS Stokke (Norway) Cembre Ltd Birmingham (UK) Cembre GmbH Munich (Germany) Cembre S.a.r.l. Paris (France) Cembre Inc. Edison (USA) STOKKE Cembre España S.L. Madrid (Spain) BIRMINGHAM PARIS MUNICH BRESCIA MADRID BARCELONA VALENCIA Group companies and branch offices Main importers Agents in Italy 12 Marketing Companies Production Units Participation situation updated to 29/03/2004 The Cembre Group consists of eight companies. The parent company is based in Brescia and is the largest manufacturer of the Group. Other manufacturing companies are the UK subsidiary, based in Birmingham, and Italian subsidiary General Marking, based in Brescia and with manufacturing facilities in Bergamo. The other five subsidiaries are all commercial companies and are based in Paris, Madrid, Stokke (Norway), Munich, and Edison (New Jersey, USA). Direct presence in important Western European countries allows the Group to effectively reach individual markets, establishing close contact with its customers and ensuring timely and qualified technical and sales assistance. Cembre operates in Italy through a capillary distribution network, with offices and own warehouses in Milan, Turin, Padua, Bologna and Rome. Other regions in Italy are served by agents trained to provide both technical and commercial assistance and by warehouses providing fast deliveries. The sales network assists customers in the choice of the product and the maintenance of tools, optimizing efficiency and speed of delivery. It also informs management of market trends, national standards and competitors. Cembre Group is present in the USA market through Cembre Inc. located in Edison (New Jersey). 13 Cembre Ltd Birmingham Cembre Ltd is Cembre Group’s second largest manufacturing operation. Since its establishment in 1986, it has enjoyed constant growth and presently benefits from a good positioning in the market. Cembre Ltd is located in a manufacturing centre on the north-eastern outskirts of Birmingham, England’s second largest city, in the heart of the Midlands region, recognised for its high concentration of manufacturing industries, particularly in the areas of steel and motor vehicles. It therefore provides Cembre with an excellent source of highly trained labour skilled in the advanced mechanical technologies fundamental to Cembre’s manufacturing needs. Its operations cover an area of 8,000 m2, of which 5,100 m2 are occupied by manufacturing facilities and office buildings. Cembre Ltd is primarily focused on serving the specific needs of the United Kingdom market. In addition, its flexibility enables it to support other Group operations. Productions Departments Test Laboratory 14 line Line Oelma Srl was acquired by Cembre in February 1999 and subsequently merged into the parent company from January 1, 2002. Oelma’s product line consists of over 1,500 articles for industrial and civil applications. Maxiblock and brass cable glands Brass terminal block and cable clamps 15 General Marking “Industrial Marking Systems” General Marking was recently incorporated and is a wholly-owned subsidiary of Cembre SpA. The company is active in the sector of industrial marking, manufacturing cable marking equipment and products for the marking of cables and electrical components. The company has its registered office in Brescia, has operating facilities in Calcinate (Bergamo) and a catalogue of over 12,000 articles. Pc-driven thermal transfer marker printing system Pc-driven ink plotter marker printing system RING cablesys Manual cable marking systems SIGN stick-onsys Warning and safety signs 16 Development Cembre has progressed and developed steadily with the dedication and responsible attitude of all the staff.We can look forward to the future with confidence and commitment. Cembre Group Cembre SpA C e m b r e S. p. A. 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 66,2 64,6 TURN OVER € (millions) 62,0 59,4 56,8 54,2 51,6 49,1 46,5 43,9 41,3 38,7 36,2 33,6 31,0 28,4 25,8 23,2 20,7 18,1 15,5 12,9 10,3 7,7 5,2 0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 9,3 CASH FLOW € (millions) 8,3 7,2 6,2 5,2 4,1 3,1 2,1 1,0 0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 475 460 445 430 415 400 385 370 355 340 325 310 295 280 265 250 235 220 205 190 175 160 145 130 115 100 STAFF (n°) Group C e m b r e S. p. A. 1983 1984 1985 1986 1987 1988 1989 1990 1991 TURN OVER € (millions) 4,6 5,8 7,1 EXPORT € (millions) % of turn over 1,5 1,7 32 28 CASH FLOW € (millions) 0,6 STAFF (N°) 107 8,8 10,9 11,4 14,4 16,4 2,2 2,1 2,3 2,9 3,7 30 23 20 24 0,8 1 1,4 1,8 1,7 2,2 122 128 141 142 153 172 Our balance sheets are audited by 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 18 18,5 20,5 26,7 28,7 33,5 37,8 45 50,4 56 56,9 59,9 4,4 5,8 5,9 6,2 7,2 9,3 9,4 14,7 17,3 20,8 24 27,9 29,4 30,1 34 25.7 26.8 32 32 33.7 34.8 35 32.7 44 45.6 46,2 47,7 49,8 51,7 50,3 52,1 2,4 2,6 2,3 2,5 2,8 4,5 4,1 5,8 5,5 7 7,5 7,9 7,2 7,5 8,6 174 176 183 183 192 214 216 285 312 353 384 417 453 468 462 TE UO D ON T H E I Q 18,4 65,3 E NG A TAL H IAN STOCK EXC S.p.A. since 1989. 17 REPORT AND ACCOUNTS 2004 Attachment C – Cembre SpA Management Report Company Boards Board of Directors Chairman and Chief Executive Officer Carlo Rosani Vice-Chairman and Managing Director Anna Maria Onofri Managing Director Aldo Copetta Director and Italy Division General Manager Giovanni De Vecchi Director (and foreign subsidiaries’ Managing Director) Director Director Director Aldo Bottini Bongrani Mario Comana Paolo Lechi di Bagnolo Giovanni Rosani Secretary of the Board Giorgio Rota Board of Statutory Auditors Chairman Guido Astori Statutory Auditor Statutory Auditor (1) Leone Scutti Andrea Boreatti Alternate Auditor Alternate Auditor Giorgio Astori Maria Grazia Lizzini The above list reflects the situation at March 23, 2005. The Board of Directors and the Board of Auditors term expires with the approval of the 2005 Financial Statements. The Chairman of the Board of Directors and CEO, Mr. Carlo Rosani, acts as the Company’s legal representative. The Board of Directors conferred to the Chairman all executive management powers that may be delegated in accordance with the Law. In the event of absence or inability of the Chairman to exercise his duties, Vice-Chairman of the Board of Directors Anna Maria Onofri is appointed with all delegable executive management powers, with the exception of the power to resolve professional appointments. Aldo Copetta is appointed to represent the Company in all matters relating to labour unions, employees, State authorities and in any litigation. As General Manager of the Italy Division, Giovanni De Vecchi has been conferred by the Board of Directors ample contractual and legal representation powers. (1) Andrea Boreatti was appointed Auditor by the Shareholders Meeting held on May 14, 2004 in replacement of Augusto Rezzola. 18 Cembre S.p.A. - Brescia Management Report for the financial year ended December 31, 2004 REPORT AND ACCOUNTS 2004 Cembre SpA Management Report for the financial year ended December 31, 2004 To our Shareholders: we submit to Your attention the Financial Statements for the year ended December 31, 2004, in which Cembre SpA reported net profits of €5,931,357. In the present Report we summarize the most significant events and transactions that occurred in the year and describe our Company’s expectations for 2005. In 2004, the Italian market showed signs of a recovery which failed however to materialize, as the market continues to be weak. The European market continues to be negative, particularly in Germany, with the only exception of the Spanish market, helped by strong investment in infrastructure. The growth in sales registered by Cembre was helped by the steady renewal of the product range and by new products developed by our technical department that allow us to remain competitive and to respond more effectively to the needs of our customers. Sales by geographical area: (€’000) 31/12/2004 31/12/2003 Italy 31,147 29,305 Rest of Europe 15,743 14,405 Rest of the World 4,225 3,577 Total 51,115 47,287 Sales revenues grew by 8.1% from €47,287 thousand in 2003 to €51,115 thousand in 2004 due mainly to a 6.3% growth in sales on the Italian market and a 9.3% increase in sales in other European countries. The largest distribution channel continues to be that of electrical supplies wholesalers, accounting both in Italy and abroad to about 60% of overall sales. To provide a better understanding of the Company’s financial performance for 2004, a Reclassified Income Statement at December 31, 2004 and a Statement of Cash Flows for 2004 are enclosed respectively as Attachments A and B. To allow a like-for-like comparison for the two years, the Reclassified Income Statement for 2004 (Attachment A) includes two columns for 2003, one of which reports figures published in 2003 for the year, and the other reporting restated data for the same year, adjusted for depreciation in line with new criteria adopted in 2004. Net profit for the year, equal to €5.9 million, is moreover strongly affected by a nonrecurring €2.9 million positive component due to the elimination of tax-related entries. Net of such extraordinary component, net profit for 2004 amounts to €3 million, as compared with an adjusted net profit for 2003 of €2.3 million, up 30.4% on comparable terms. The table that follows shows the effect on net profit for 2004 of the elimination of tax-related items carried out in application of accounting principles under which accelerated depreciation charges are not recorded. The column for 2003 shows the effect on net profit that would have been produced by 20 REPORT AND ACCOUNTS 2004 the omission of accelerated depreciation charges, thus obtaining comparable figures with those for 2004. Net profit from accounts 2004 2003 5,931,357 2,448,336 -Depreciation not recorded in the period 315,975 -Related deferred tax effect -Extraordinary gain recorded on cumulative effect of the recalculation of depreciation charges -Extraordinary charge relating to deferred taxes on cumulative effect (167,600) 4,673,933 (1,741,040) Total interference, net of taxes 2,932,893 148,375 Net profit on comparable terms 2,998,464 2,299,961 The cumulative effect reported as extraordinary items in the Income Statement of the parent company in 2004 are described in the notes to the Financial Statements at December 31, 2003 in the paragraph about Fixed-asset depreciation. Gross operating profit (EBITDA) amounts to €10,629 thousand, representing a 20.8% margin on sales, up 12.1% on the previous year when it amounted to €9,485 thousand, representing a 20.1% margin on sales. The increase is due to the growth in the overall margin, up from €22,826 thousand (representing a 48.3% margin on sales) to €24,825 thousand (equal to a 48.6% margin on sales), in addition to the lower weight of personnel costs, declining from 27.4% to 26.9% of sales. Operating profit (EBIT) increased from a restated €5,902 thousand, equal to 12.5% of sales, to €7,424 thousand, 14.5% of sales. Net financial expense amounted to €261 thousand, as compared with €467 thousand in 2003, improving slightly from the previous year due to lower financial charges and proceeds from the sale of own shares. Sources of funds amounted to €11,997 thousand and consist prevalently of funds generated internally, amounting to €9,796 thousand. Uses of funds amounted to €4,531 thousand and include primarily capital increases of subsidiaries, amounting to €1,264 thousand, the payment of €1,223 thousand in dividends, and capital expenditure on fixed assets amounting to €938 thousand 21 REPORT AND ACCOUNTS 2004 Net financial position: 2004 2003 Long-term financial debt 0 (645,500) Total long-term financial debt 0 (645,500) 4,737,822 3,139,995 Short-term bank debt (3,040,942) (5,752,504) Marketable securities 291,052 588,230 Total short-term debt 1,987,932 (2,024,279) Net financial position 1,987,932 (2,669,779) Cash and short-term financial receivables During 2004 the company went from a net indebtedness to a positive financial position of €1.99 million. The improvement is due to the good operating performance and a resulting increase in the cash flow generated by operations, in addition to the reduction in capital expenditure on fixed assets – declining from €2.3 million in 2003, to €0.9 million in 2004 – to the absence of extraordinary operations, and to the sale of part of the company’s own shares that generated proceeds amounting to €430 thousand. Revenues by subsidiary: Currency Sales Net profit (loss) 2004 2003 2004 2003 Cembre Ltd. (GB) Euro 10,391,598 8,434,764 639,317 289,955 Cembre S.a.r.l. (F) Euro 4,416,880 4,111,049 288,467 70,730 Cembre España S.L. Euro 6,614,180 5,600,660 188,120 175,890 Cembre AS (NOR) Euro 364,060 380,922 8,756 7,998 Cembre GmbH (D) Euro 3,272,249 3,772,712 67,599 96,235 Cembre Inc (Usa) Euro 2,178,716 2,185,159 115,376 97,663 General Marking srl (I) Euro 1,148,062 1,173,904 (1,036,435) (829,403) For a more direct evaluation of the effect of foreign exchange translation, we include below sales figures of companies operating outside the euro area in the respective currency: 22 REPORT Currency Sales AND ACCOUNTS 2004 Net profit (loss) 2004 2003 2004 2003 Cembre Ltd. (GB) Lst 7,051,232 5,838,066 433,886 200,647 Cembre AS (NOR) Nok 3,047,084 3,048,641 73,282 64,008 Cembre Inc (Usa) Us$ 2,710,105 2,471,765 143,516 110,473 Italian subsidiary General Marking, incorporated in July 2002, closed its second full year reporting a loss. An improvement is however expected in future years. Key financial data obtained from subsidiaries’ last Balance Sheets and Income Statements are included in a table attached to the Notes to the Financial Statements, in accordance with Article 2429 of the Italian Civil Code. ADOPTION OF IAS/IFRS PRINCIPLES In 2003, parent company Cembre started a project for the adoption of international accounting principles by carrying out an analysis aimed at identifying main differences between Italian accounting standards and the IAS/IFRS accounting standards, and to assess, on the basis of differences detected, the most significant impacts on the Group’s Consolidated financial Statements. The projects aims at the following objectives: - identifying main differences between Italian accounting standards and IAS/IFRS – including first-time differences resulting from the application of international standards – at January 1, 2004, and at the assessment of the related impact on individual items; - implementing of administrative processes and information systems that allow the preparation of annual, semi-annual and quarterly reports in accordance with the IAS/IFRS accounting standards. In line with IAS 1, financial statements prepared in accordance with IAS/IFRS must include, in terms of comparative information, data for the previous year and the one under consideration. The Financial Statements at December 31, 2005 will be the first yearly statements issued by the Cembre Group in accordance with international accounting principles and will therefore include for comparative purposes, the financial statements prepared in accordance with the IAS/IFRS at December 31, 2004. The company intends to start preparing its quarterly reports in accordance with international standards by the 3rd Quarter of 2005. Starting with the report for the 2nd Quarter of 2005, a reconciliation of end balances prepared in accordance with Italian and those prepared under international accounting standards will in any case be provided. The analysis thus far carried out resulted in the determination of some differences between accounting principles adopted in Italy and IAS/IFRS (on the basis of the implementation of the Exposure Drafts currently available and excluding differences deriving from the first-time application of international accounting principles), the most relevant of which are illustrated below: - inventories: the weighted average method will be used in place of LIFO in determining the historical cost; - own shares: according to IAS/IFRS, own shares may no longer be recorded as assets and will ha- 23 REPORT AND ACCOUNTS 2004 ve to be cancelled out together with the related reserve. The amount of own shares will also have to be subtracted from the Shareholders’ Equity; - Employee severance indemnities: accounting principles applied in Italy require the recording of the Employee severance indemnity (ESI) based on the face value of the liability accrued at the date of the financial statements. According to IAS/IFRS, the ESI can be assimilated to benefit plans subject to actuarial discounting in determining the present value of the benefit payable at time at which the employee terminates his or her employment, accrued by employees at the date of the financial statements; - extraordinary items: according to IAS/IFRS, extraordinary items are not shown in P&L statement; - exceptions of accounting principles provided for by special laws: for the purposes of IAS/IFRS, the accounting treatment shall not take into account the effect of special legal or tax provisions. At the moment the company is analysing the option to book tangible assets using the “fair market value”, as allowed by International Accounting Standards, instead of historical cost, currently used. A number of projects for the definition of operating procedures aimed at quantifying differences identified, were initiated Capital expenditure In 2004, capital expenditure on tangible assets, gross of depreciation and disposals, amounted to about €0.9 million, as compared with €2.3 million in 2003. Expenditure are concentrated on plant and equipment, in which the company invested €0.3 million, and on industrial equipment, in which the company invested €0.2 million. Research, Development and Technological Innovation In 2004 Research and Development activities focused in the field of cable terminals, pole terminal blocks, railroad equipment, cable glands, hydraulic tools, and cable marking. R&D costs were not capitalized. Research activities and projects carried out in the year consist in the expansion of the Company’s product range through the introduction of innovative products not offered on the market, the improvement of technologies and efficiency of manufacturing processes, and the strengthening of the Company’s presence on foreign markets. Activities focused on the continuation and completion of projects started in the previous year, and the launch of a new project for the development of innovative products in line with new market trends, in addition to the development of innovative processes. Research and development costs for the year included €805,200 of personnel costs, €9,330 relating to instruments and equipment, and €10,225 of costs relating to technical advice and the acquisition of know-how. Development costs in the year included €54,176 of personnel costs. 24 REPORT AND ACCOUNTS 2004 A description of Research and Development activities by sector is included in the section that follows. R&D Projects in the field of cable terminals Work continued on the study and development of a new range of colour cable terminals for the US market and of new chain terminals Railroad Equipment R&D Projects A number of projects in this field were launched or developed further. Main projects relate to: foreign market versions of a railtrack maintenance machine; a new machine for the maintenance of wooden railroad ties; tools and connectors for the maintenance of catenary (wires) supplying power to locomotives through pantographs; a battery-operated rail drill; a new internal-combustion rail drill and two railtrack traffic control devices. Cable glands R&D Projects Development of the metric cable glands range continued with the design and manufacturing of the related dies, the development of brass cable glands and the study of the production process and manufacturing of dies for related components. Hydraulic Tools R&D Projects The following projects were undertaken in 2004: - new battery-operated tool for the compression of connectors that may be used for different types of dies; - a hydraulic head for the compression of connectors; - a new series of hydraulic tools both for connectors and cables, developed for the American market; - a new battery-operated hydraulic tool of small dimensions. Cable marking R&D Projects The development of the following products and the related dies for their manufacturing started: - a system for the labelling of pole terminal blocks consisting of labels and related supports; - a new range of cable labels. 25 REPORT AND ACCOUNTS 2004 Related parties Transactions concluded between Cembre SpA and its subsidiaries in 2004 were exclusively of a commercial nature and are summarized in the table below: (€) Receivables Payables Revenues Expenses 1,681,382 6,320 4,414,571 137,747 609,068 1,292 1,671,876 2,758 1,473,115 91,798 3,381,817 91,873 Cembre AS 83,369 0 169,864 0 Cembre GmbH 719,438 231 1,854,818 31,343 Cembre Inc 432,574 0 993,373 6,944 General Marking srl 83,869 236,371 138,361 543,007 5,082,815 336,012 12,624,680 813,672 Cembre Ltd. Cembre S.a.r.l. Cembre España S.L. TOTAL Cembre S.p.A. issued guarantees for loans extended to Cembre SL, Cembre Inc. and General Marking, amounting respectively to €1,500,000, €478,132 and €3,500,000. The company also leased an industrial building to subsidiary General Marking. Rent for the building in 2004 amounted to €92 thousand. Among assets leased to Cembre by third parties are an industrial building adjacent to the Company’s registered office measuring a total of 5,960 square meters on three floors, in addition to the Milan, Padua and Bologna sales offices owned by company Tha Immobiliare SpA, with registered office in Bergamo, controlled by some members of the Rosani family, with the exception of Carlo Rosani. Lease payments for 2004 amount to €323 thousand for the building adjacent to the Company’s head office, €58 thousand for the Sesto S. Giovanni (Milan) office, €48 thousand for the Selvazzano (Padua) office, and €41 thousand for the Bologna office. Rent received for 2004 is in line with market conditions. It is in the Company’s interest to benefit from the continuity of office space reducing the risk of early termination of leases. In 2004 Aldo Copetta, the Company’s Managing Director, received €10,000 in payment for services rendered regarding personnel safety, health and hygiene, labour agreements and general personnel issues, thanks to his wide experience gained in the Company’s affairs. With reference to assets and liabilities relating to subsidiaries shown above, we confirm that transactions with the same and with related parties fall within the scope of normal operating activities. Cembre S.p.A. does not have direct relationships with its parent company Lysne S.p.A. of any other nature than that of the exercise of shareholders’ rights on the part of the parent. Lysne S.p.A. does not carry out any management or coordination activity with respect to Cembre S.p.A. 26 REPORT AND ACCOUNTS 2004 Own shares At December 31, 2004, Cembre SpA held 100,000 of its own shares recorded at cost, amounting to €291,052. Own shares have a total par value of €52,000, representing 0.59% of Cembre’s share capital. In 2004 the company sold 143,000 own shares and at year-end Cembre SpA had not acquired, disposed of or owned directly or indirectly through subsidiary companies, trust companies or intermediaries, shares or holdings in companies having a controlling share in the Company. Handling of personal information Cembre S.p.A. (responsible for the handling of personal information) drafted a Privacy Plan through its Director for the Handling of Private Information. Subsequent events No event having significant effects on Cembre’s assets or financial performance occurred after the closing of the financial year. Outlook The company expects a growth in activity for 2005, both in the domestic market and foreign markets. Profit levels are expected to remain positive Secondary offices The Company has no secondary registered office. Proposal for the Allocation of the Company’s Net Profit for the 2004 financial year In order to complete the Company’s planned investments and benefit from self-financed growth, it is advisable that at least a portion of net profit generated be retained. In seeking the approval for our actions by submitting to you the present Financial Statements and Management Report, we also invite you to approve our proposed allocation of net profit for 2004, amounting to €5,931,357,32 (rounded off to €5,931,357) as follows: - €296,568, or 5% of net profit, to the legal reserve; - €0,1 to be distributed to each of the Company’s 17,000,000 shares entitled to dividends, for a total of €1,700,000, payable from May 26, 2005, and an ex-dividend date of May 23, 2005; - the remainder, amounting to €3,934,789,32, to the extraordinary reserve. 27 REPORT AND ACCOUNTS 2004 Attachments This Management Report includes four Attachments: Attachment A: Reclassified Income Statement of Cembre SpA for the year ended December 31, 2004; Attachment B: Statement of Cash Flows of Cembre SpA for the year ended December 31, 2004; Attachment C: Company Boards; Attachment D: Company shares held by Board Members . Brescia, March 23, 2005 CHAIRMAN OF THE BOARD OF DIRECTORS CARLO ROSANI 28 REPORT AND ACCOUNTS 2004 ATTACHMENT A - CEMBRE SPA FINANCIAL STATEMENTS RECLASSIFIED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2004 (€) Sales Other revenues and gains TOTAL REVENUES 2004 % 2003 restated % change 2003 51,114,666 116,782 51,231,448 100 47,286,914 127,321 47,414,236 100 8.09% -8.28% 8.05% 47,286,914 127,321 47,414,236 Change in work in progress, semi-finished and finished goods inventories: 231,997 Increase in assets due to internal construction 344,636 TOTAL OPERATING VALUE 51,808,081 0.45 (864,738) (1.83) 0.67 101.36 824,509 47,374,007 1.74 100.18 -58.20% 9.36% 824,509 47,374,007 Materials and services used Other operating costs VALUE ADDED (26,798,138) (185,313) 24,824,630 (52.43) (0.36) 48.57 (24,379,844) (167,918) 22,826,244 (51.56) (0.36) 48.27 9.92% 10.36% 8.75% (24,379,844) (167,918) 22,826,244 Personnel costs Write-down of current receivables and short term investments Accruals to risk provisions GROSS OPERATING MARGIN (EBITDA) (13,748,404) (26.90) (12,958,941) (27.40) 6.09% (12,958,941) (92,134) (355,424) (0.18) (0.70) (91,380) (290,975) (0.19) (0.62) 0.82% 22.15% (91,380) (290,975) 10,628,668 20.79 9,484,949 20.06 12.06% 9,484,949 (162,578) (0.32) (301,133) (0.64) -46.01% (301,133) (3,041,815) 7,424,275 (5.95) 14.52 (3,282,194) 5,901,621 (6.94) 12.48 -7.32% 25.80% (2,015,560) 7,168,255 Financial income (expense) (260,774) PROFIT BEFORE EXTRAORDINARY ITEMS 7,163,502 (0.51) 14.01 (467,440) 5,434,181 (0.99) 11.49 -44.21% 31.82% (467,440) 6,700,815 Extraordinary items and adjustments to the value of financial assets (NOTE 1) Accelerated depreciation PROFIT BEFORE TAXES 2,039,471 0 9,202,973 3.99 0.00 18.00 (826,277) 0 4,607,904 (1.75) 0,00 9.74 (826,277) (950,659) 4,923,879 Income taxes NET PROFIT (3,271,615) 5,931,357 (6.40) 11.60 (2,307,943) 2,299,961 (4.88) 4.86 (2,475,543) 2,448,336 Intangible asset amortization Tangible asset depreciation OPERATING PROFIT (EBIT) (864,738) (NOTE 1): the elimination of tax related items in 2004 resulted in extraordinary gains amounting to €4,673,933 and extraordinary charges amounting ot €1,741,040, resulting in a positive net effect equal to €2,932,893. 29 REPORT AND ACCOUNTS 2004 ATTACHMENT B CEMBRE SPA FINANCIAL STATEMENTS STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2004 (€) SOURCES OF FUNDS: Net profit Adjustments for items not having an impact on cash flow: Depreciation expense Employee termination indemnities Cash flow generated by operating activities Net book value of assets sold New loans Decline in long-term receivables 31.12.2004 5,931,357 31.12.2003 2,448,336 3,204,393 659,919 9,795,669 81,947 565,083 1,554,136 11,996,836 3,267,353 620,756 6,336,445 308,989 2,500,000 210,226 9,355,661 84,721 938,155 1,263,904 645,500 375,364 1,223,261 4,530,905 103,837 2,258,570 515,942 5,145,500 520,453 1,340,560 9,884,862 Non-cash changes in balance sheet items: Reduction in provision for depreciation as a result of recalculation of depreciation 4,673,933 based exclusively on ordinary rates (elimination of tax-related items) INCREASE (DECREASE) IN WORKING CAPITAL 2,791,998 (529,201) TOTAL SOURCES OF FUNDS USES OF FUNDS: Increase in intangible assets Acquisition of tangible assets Increase in long-term receivables Increase in investments Transfer of current portion of long-term debt Payment of employee termination indemnities Dividends paid TOTAL USES OF FUNDS CHANGES IN WORKING CAPITAL: Current assets: Cash and banks Short-term financial assets Trade receivables Other receivables Inventories Accrued income and prepaid expenses Current liabilities: Bank overdrafts Trade payables Taxes and Social Security payables Other payables Accrued expenses and deferred income CHANGES IN WORKING CAPITAL 30 2,091,939 (297,178) 559,551 144,034 (170,485) 14,763 2,342,623 1,000,688 122,934 (1,230,662) (323,679) (1,329,956) 848 (1,759,827) (2,711,562) 1,058,858 1,192,796 2,087 8,447 (449,374) (91,289) (1,535,031) 67,438 336,804 (8,548) (1,230,627) 2,791,998 (529,201) Cembre SpA Cembre SpA Cembre SpA Cembre SpA Cembre SpA Cembre SpA Cembre SpA Cembre SpA Anna Maria Onofri Aldo Copetta Giovanni De Vecchi Aldo Bottini Bongrani Mario Comana Sara Rosani Giovanni Rosani Andrea Boreatti 1,500 540,000 560,000 5,000 365,000 380,661 5,000 900,096 7,000 PURCHASED AT DEC. 31, 2003 10,105,892 SHARES SHARES HELD (5,000) (80,661) SOLD SHARES 1,500 540,000 560,000 5,000 360,000 300,000 5,000 900,096 10,112,892 AT DEC. 31, 2004 SHARES HELD full full full full full full full full full RIGHTS OWNERSHIP directly directly directly directly directly directly directly and indirectly (2) directly directly and indirectly (1) METHOD OWNERSHIP (1) 9,072,892 shares are held through Lysne SpA, controlled by Carlo Rosani to whom changes in the year reported above relate; this figure excludes the 100,000 own shares held by Cembre SpA, controlled by Carlo Rosani through Lysne SpA (2) 2,000 shares are held by his spouse. Statutory Auditors and Directors not listed above did not hold Cembre SpA shares at December 31, 2003 and did not acquire Cembre SpA shares in 2004. Cembre SpA Carlo Rosani COMPANY ATTACHMENT D - CEMBRE SPA MANAGEMENT REPORT COMPANY SHARES HELD BY BOARD MEMBERS REPORT AND ACCOUNTS 2004 31 Cembre S.p.A. Financial Statements at December 31, 2004 REPORT AND ACCOUNTS 2004 Cembre S.p.A. Financial Statements at December 31, 2004 Balance Sheet - Assets (€) Dec. 31, 2004 Dec. 31, 2003 - - 43,341 - 50,650 102,299 684,807 754,356 778,798 856,655 1) Land and buildings 7,949,591 7,766,778 2) Plants and machinery 5,177,733 3,581,785 3) Equipment 641,366 367,375 4) Other assets 853,970 421,126 92,286 89,556 14,714,946 12,226,620 7,006,983 5,743,079 5,224 5,224 - 494,112 54,890 105,194 7,067,097 6,347,609 22,560,841 19,430,884 A) Capital not paid-in B) Fixed assets I - Intangible assets 2) Research and development costs and advertising expenses 3) Industrial patents and intellectual property rights 7) Other Total II - Tangible assets 5) Work in progress and advances Total III - Financial assets 1) Investments in: a) subsidiaries d) other companies 2) Receivables a) from subsidiaries - short-term d) from others - long-term Total Total fixed assets 34 REPORT AND ACCOUNTS 2004 C) Current assets I - Inventories 1) Raw materials 2) Work in progress and semi-finished goods 4) Finished goods Total II - Receivables 1) Trade 2) From subsidiaries 4-bis) Tax receivables 4-ter) Prepaid taxes - short-term - long-term Total 5) From others - short-term - long-term Total Total receivables III - Marketable securities 5) Own shares (par value €52,000) IV - Cash and cash equivalents 1) Bank deposits 3) Cash Total cash and cash equivalents Total current assets D) Accrued income and prepaid expenses Total assets 3,459,940 4,626,887 6,337,929 14,424,757 3,862,423 4,543,450 6,189,369 14,595,242 12,948,869 5,082,815 16,257 12,266,404 5,205,729 74,602 356,069 76,979 433,048 154,997 94,164 249,161 58,076 58,076 18,539,065 56,770 3,482 60,252 17,856,148 291,052 588,230 4,727,449 10,372 4,737,822 2,634,659 11,224 2,645,883 37,992,695 35,685,503 39,842 25,079 60,593,379 55,141,466 35 REPORT AND ACCOUNTS 2004 Liabilities and Shareholders' Equity Dec. 31, 2004 Dec. 31, 2003 8,840,000 12,244,869 585,159 1,366,445 291,052 - 8,840,000 12,244,869 585,159 1,244,028 588,231 - 68,412 11,090,640 5,931,357 40,417,935 68,412 9,690,804 2,448,336 35,709,839 B) Provision for risks and charges 2) Deferred Income taxes 3) Other Total provisions for risks and charges 1,566,074 639,112 2,205,186 651,050 651,050 C) Employee termination indemnities 3,805,556 3,521,002 3,040,942 3,040,942 20,373 6,598,245 424,270 1,575,388 895,596 1,586,850 14,141,664 5,752,504 645,500 6,398,004 6,625 5,907,917 69,488 567,177 711,011 1,584,763 15,244,985 E) Accrued expenses and deferred income 23,037 14,590 Total Liabilities and Shareholders' Equity 60,593,379 55,141,466 5,539,989 5,478,132 19,821 5,562,295 5,521,177 81,796 A) Shareholders' Equity I - Share capital II - Paid-in capital in excess of par value III - Revaluation reserve IV - Legal reserve V - Reserve for own shares VI - Statutory reserves VII - Other reserves: Provisions for suspended tax reserves Extraordinary reserve VIII - Retained earnings IX - Net profit Total Shareholders' Equity D) Payables 4) Bank loans - short-term - long-term Total bank loans 6) Advances 7) Trade payables 9) Payables to subsidiaries 12) Tax payables 13) Social security payables 14) Other payables Total payables Commitments 2) Guarantees given - of which in favor of subsidiaries 3) Guarantees received 36 REPORT Income Statement (€) A) Revenues 1) Sales 2) Change in work in progress, semi-finished and finished goods inventories 4) Increase in assets due to internal construction 5) Other revenues: a) sundry b) contributions received Total operating value B) Operating costs 6) Raw materials 7) Services 8) Leases and rentals 9) Personnel a) Wages and salaries b) Social security c) Employee severance indemnities d) Retirement benefits e) Other costs Total personnel costs 10) Depreciation and write-downs a) Amortization of intangible assets b) Depreciation of tangible assets d) Write-down in the value of current assets Total depreciation and write-downs 11) Change in raw material inventories 12) Accruals to risk provisions 14) Other operating costs Total operating costs Operating profit (A-B) AND ACCOUNTS 2004 Dec. 31, 2004 Dec. 31, 2003 51,114,666 47,286,914 231,997 344,636 (864,738) 824,509 104,267 12,515 51,808,081 94,544 32,777 47,374,006 (18,502,227) (7,195,051) (698,378) (15,880,856) (7,342,689) (691,081) (9,920,193) (3,066,704) (712,495) (5,414) (43,599) (13,748,404) (9,366,757) (2,862,773) (684,562) (5,373) (39,476) (12,958,941) (162,578) (3,041,815) (301,133) (2,966,220) (92,134) (3,296,527) (91,380) (3,358,733) (402,482) (355,424) (185,313) (44,383,806) (465,218) (290,975) (167,918) (41,156,411) 7,424,275 6,217,595 37 REPORT AND ACCOUNTS 2004 C) Financial income and expense 16) Other financial income: c) marketable securities (excluding subsidiaries) d) other income 17) Interest and other financial charges 17-bis) Foreign exchange gains and losses Total D) Adjustments to the value of financial assets 18) Revaluations b) of long-term financial assets c) of marketable securities 19) Write-downs a) of investments in subsidiaries Total adjustments to the value of financial assets E) Extraordinary items 20) Gains 21) Losses Total extraordinary items Profit before taxes (A-B+C+D+E) 22) Income taxes a) current b) deferred and prepaid Total income taxes 23)Net profit (note 1) (note 2) Dec. 31, 2004 Dec. 31, 2003 83,974 20,563 (191,873) (173,437) (260,774) 11,834 (251,289) (227,985) (467,440) 1,147 48,982 2,930 122,934 (692,637) (642,507) (549,699) (423,835) 4,705,228 (2,023,250) 2,681,978 19,296 (421,737) (402,441) 9,202,973 4,923,878 (3,634,359) 362,744 (3,271,615) (2,544,774) 69,231 (2,475,543) 5,931,357 2,448,336 note 1: for year 2004, extraordinary gains arising from the elimination of the entries made only for tax purposes, amounts to € 4,673,933 note 2: for year 2004, extraordinary charges arising from the elimination of the entries made only for tax purposes, amounts to € 1,741,040 Brescia, March 23, 2005 CHAIRMAN OF THE BOARD OF DIRECTORS CARLO ROSANI 38 REPORT AND ACCOUNTS 2004 Notes to the Financial Statements of Cembre SpA at December 31, 2004 Foreword To our Shareholders: Before analyse each item of Balance Sheet and Income Statement for the year ended December 31, 2004, as requested by Article 2427 of the Italian Civil Code, we illustrate the accounting policies and methods used in the preparation of the Financial Statements. Valuation principles and methods The financial statements of Cembre SpA are consistent with principles contained in Articles 2423 and following of the Italian Civil Code. The following criteria were applied in their preparation: - items are valued according to prudent criteria and on the basis of an ongoing concern; - revenues and expenses are recorded under the accrual method; - risks and losses are charged to the year also when their existence becomes known after the date of the financial statements; - revenues and gains are recorded only when realised at the date of the financial statements, in accordance with prudent principles; - no exceptional case requiring recourse to exemptions contained in Article 2423 paragraph 4 and Article 2423 bis, paragraph 2 of the Italian Civil Code occurred; - no item of the Balance Sheet or Income Statement was reclassified; - no asset or liability item appears more than once in the Balance Sheet; - amounts recorded in the Financial Statements are consistent with those reported for the previous year. Where necessary for comparative purposes, figures for the previous year were reclassified. Valuation criteria and methods used are in accordance with those set in Article 2426 of the Italian Civil Code, and consistent with those adopted in the previous financial year. Valuation criteria adopted in the preparation of the Financial Statements are described in the section that follows. Intangible assets Intangible assets are recorded at cost, net of amortization calculated on a straight-line basis over their expected useful economic life. Tangible assets Tangible assets are recorded at their acquisition or production cost which includes all related costs directly attributable to the assets, all revaluations pursuant to Laws no. 576 of December 2, 1975 and no. 72 of March 19, 1983, and all other revaluations pursuant to Law no. 413 of December 30, 1991, carried out pursuant to applicable regulations, up to their related fair market values. Tangible assets are depreciated on straight-line basis over the expected useful life of the assets, taking into account their residual values. Ordinary maintenance costs are charged to the Income Statement for the year in which they are incurred. Extraordinary maintenance expenses are attributed to the asset to which they relate and are depreciated over the residual useful life of the same. Investments Investments in subsidiaries are recorded at the acquisition or underwriting cost, adjusted where necessary for permanent losses in value. Consolidated financial statements have been prepared in accordance with Legislative Decree no. 127, April 9, 1991. 39 REPORT AND ACCOUNTS 2004 Inventories Inventories are valued at the lower of acquisition or production cost and their expected realizable value. Raw materials, semi-finished and finished goods inventories are valued using the annual LIFO method. Work in progress inventories are valued at their processing cost, inclusive of raw materials, labour, direct and indirect manufacturing costs, taking into account percentage of completion. Receivables and Payables Receivables are recorded at their expected realizable value, taking into account the solvency of debtors, the credit term, litigation in process and guarantees received. The expected realizable value is represented by the difference between the face value of receivables and the amount accrued to the provision for doubtful accounts, deducted from the amount of trade receivables whenever appropriate. Payables are recorded at face value, representative of the value of liabilities accrued. Tax liabilities are based on realistic estimates reflecting the tax expense for the year, adjusted for prepaid and withholding taxes paid. Tax credits are recorded only where there exists reasonable certainty that sufficient taxable income will be generated in future years to cover future tax deductions. Payables and receivables denominated in currencies other than the euro are recorded at the exchange rate at the time of the transaction. Exchange rate gains and losses are credited or debited to the Income Statement on the day of payment or collection. Marketable securities Marketable securities are recorded at the lower of cost – represented by the weighted average acquisition cost – and market value. Write-downs are reversed whenever the impairment in value ceases to exist. Provisions for risks and charges Provisions for risks and charges are accrued against known or probable liabilities whose amount and timing could not be determined at the date of their recording. Deferred taxes payable, recorded in the related provision, represent taxes payable in future years generated by timing differences. Provision for employee termination indemnities The provision for employee termination indemnities reflects the amount owed by the Company at the end of the year to its employees upon termination of their employment, in accordance with labour agreements and laws applicable in Italy. The amount accrued represents the liabilities at the end of the year. Accrued income and prepaid expenses, accrued expenses and deferred income These are determined based on the accrual method. Income taxes Current, deferred and prepaid taxes are determined according to applicable tax rates and expected taxable income, keeping into account tax facilitations provided by current regulations. Revenues and expenses Revenues for the sale of products are recognized at the time title is transferred, normally identifiable with the delivery or shipping of the goods. Financial revenues are recognized based on the accrual method. Revenues and expenses are recorded net of returns, discounts, allowances and bonuses. Commitments These represent guarantees given to and received from others and commitments made. Guarantees are recorded at face value. 40 REPORT AND ACCOUNTS 2004 Assets B) NON-CURRENT ASSETS I - Intangible assets Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 778,798 856,655 Change € (77,857) Increases Amortization expense Book value at Dec. 31, 2004 54,176 (10,835) 43,341 Book value at Dec. 31, 2003 R&D and advertising costs Industrial patents and intellectual property rights 102,299 24,045 (75,694) 50,650 Other 754,356 6,500 (76,049) 684,807 856,655 84,721 (162,578) 778,798 The book value at the beginning of the year is made up as follows: Gross book value Accumulated amortization Net book value Industrial patents and intellectual property rights 185,056 (82,757) 102,299 Goodwill 142,976 (142,976) 0 Other 829,756 (75,400) 754,356 1,157,788 (301,134) 856,655 Development costs relate to the widening of the product range with the development of new products. Industrial patents and intellectual property rights consist exclusively of open-ended software licenses. Other assets are represented by capitalized costs incurred in work relating to a leased industrial building adjacent to the Brescia main complex to adapt it to the specific production needs of the Company. 41 REPORT AND ACCOUNTS 2004 Intangible assets are amortized systematically. Development costs are amortized over 5 years, software licenses over 3 years, while leasehold improvements are expensed over the residual term of the lease contract. II - Tangible assets Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 14,714,946 12,226,620 Change € 2,488,326 1) Land and buildings (€) Gross book value Revaluation less: accumulated depreciation 10,462,292 935,661 (3,631,175) Balance at Dec. 31, 2003 7,766,778 Elimination of tax-related entries Disposals Acquisitions Depreciation expense 385,360 15,571 69,790 (287,908) Balance at Dec. 31, 2004 7,949,591 The increase registered in the year is due to the acquisition of a parcel of land close to the Brescia offices. 2) Plant and machinery (€) Gross book value Revaluation Accumulated depreciation Balance at Dec. 31, 2003 Elimination of tax-related entries Acquisitions Disposals Uses of provisions Depreciation expense Balance at Dec. 31, 2004 23,150,001 131,770 (19,699,986) 3,581,785 3,202,409 318,959 (74,839) 71,754 (1,922,335) 5,177,733 Capital expenditure in the year includes mainly internal construction of equipment, amounting to €210 thousand, and internal construction of plant, amounting to €61 thousand. Decreases consist of disposals and equipment decommissioned during the year. 42 REPORT AND ACCOUNTS 2004 3) ) Industrial and commercial equipment (€) Gross book value Accumulated depreciation Balance at Dec. 31, 2003 Elimination of tax-related entries Increases Depreciation expense Balance at Dec. 31, 2004 4,338,162 (3,970,787) 367,375 525,881 212,440 (464,330) 641,366 Capital expenditure on equipment relates almost exclusively to the manufacture and purchase of dies, of which €90 thousand were manufactured in-house. 4) Other assets (€) Gross book value Revaluation Accumulated depreciation Balance at Dec. 31, 2003 Elimination of tax-related entries Increases Decreases Uses of provisions Depreciation expense Balance at Dec. 31, 2004 3,358,545 7,976 (2,945,395) 421,126 560,283 244,680 (122,451) 117,573 (367,241) 853,970 The increase in other assets is due mainly to the acquisition of hardware and accessories (€117 thousand) and the acquisition of motor vehicles (€112 thousand). Decreases relate to disposals and decommissioning in the year. 5) Work in progress and advances (€) Balance at Dec. 31, 2003 Increases Decreases Balance at Dec. 31, 2004 89,556 70,439 (67,709) 92,286 Increases in work in progress and advances are due mainly to the in-house construction of assets. The table enclosed in the present Notes shows changes in property, plant and equipment for the year. 43 REPORT AND ACCOUNTS 2004 Revaluation of property, plant and equipment carried out in the year Pursuant to Article 10, Law no. 72/1983, revaluations of property, plant and equipment recorded in the Financial Statements at December 31, 2004 are listed in the table that follows: Law 576/75 Land and buildings Law 72/83 Law 413/91 248,220 Plant and machinery Other assets Total 687,441 935,661 2,386 129,384 131,770 308 7,664 7,972 2,694 385,268 687,441 1,075,403 After the merger of Oelma Srl into Cembre SpA in 2002, the building located in San Giuliano Milanese was booked in the financial statements of Cembre SpA at €993 thousand, a value that includes the €917 revaluation carried out as a result of the allocation of goodwill on the merger. III - Investments Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 7,067,097 6,347,609 Change € 719,488 1) Investments in: a) subsidiaries Subsidiary Dec. 31, 2003 Change Cembre Ltd Cembre Sarl Cembre España SL Cembre AS Cembre GmbH Cembre Inc. General Marking 2,681,918 1,048,197 858,104 293,070 481,508 380,282 380.280 755,515 Total 5,743,079 44 Write-downs Dec. 31, 2004 508,389 692,636 (692,636) 3,437,433 1,048,197 858,104 293,070 481,508 888,671 380.280 1,956,540 (692,636) 7,006,983 REPORT AND ACCOUNTS 2004 Subsidiary General Marking Srl was incorporated in July 2002. The company has its registered office in Brescia and a capital stock equal to €99 thousand. In 2004 it reported a loss of €1,036,435, as a result of which the investment was written-down in full for an amount equal to €692,636, while a provision of €343,799 was accrued against the remaining portion of loss reported by the subsidiary. In February 2005, €442,799 were paid to the subsidiary for the coverage of losses and its recapitalization. The table that follows shows information on subsidiaries, all held directly by the parent company. Amounts are expressed in euro: Name and head office Capital stock Shareholders’ Equity Net profit (loss) % held Cembre Ltd (Sutton Coldfield Birmingham) 2,411,177 6,303,193 639,317 100 Cembre Sarl (Morangis - Paris) 1,071,000 2,334,494 373,467 95(a) Cembre España SL (Coslada - Madrid) 900,000 1,622,134 188,120 95(a) Cembre AS (Stokke - Norway) 291,386 168,444 8,756 100 Cembre GmbH (Monaco - Germany) 512,000 1,126,549 67,599 95(a) 1,057,191 782,371 115,376 71(b) 99,000 (343,799) (1,036,435) 100 Cembre Inc. (Edison New Jersey-Usa) General Marking (Brescia - Italy) (a) the residual 5% is held through Cembre Ltd (b) the residual 29% is held through Cembre Ltd Financial data relating to the capital stock, Shareholders’ Equity and net profit for the year are those contained in the Financial Statements for 2004 approved by the respective boards of subsidiaries. The translation of capital stocks expressed in foreign currencies was carried out at the exchange rate on the last day of the financial year, while net profits were translated at the average exchange rate for the year. The book value of investments in Cembre AS and Cembre Inc. recorded in the Financial Statements of the Group parent company, is higher than the share in the Shareholders’ Equity held. Such difference is justified by expected profits, confirmed by profits achieved in 2004 by both subsidiaries. b) other companies Descrizione Dec. 31, 2004 Dec. 31, 2003 Inn.tec. srl Conai 5,165 59 5,165 59 Total 5,224 5,224 The above represent non-controlling shares in Consorzio Nazionale Imballaggi (National Packaging Consortium) and Inn.tec Srl, a technology innovation consortium, with registered head offices at the Brescia Province main office. 45 REPORT AND ACCOUNTS 2004 2) Receivables d) from subsidiaries Dec. 31, 2004 Dec. 31, 2003 Guarantee deposits 12,665 10,721 Withholding taxes on employee severance indemnities receivable 42,225 94,473 54,890 105,194 Total Prepaid taxes on employee termination indemnities (Article 2, Law no. 140/97) include prior years’ revaluations. C) CURRENT ASSETS I - Inventories Inventories Dec. 31, 2004 Raw materials Work in progress and semi-finished goods Finished goods Total Dec. 31, 2003 Change 3,459,940 4,626,887 6,337,930 3,862,423 4,543,450 6,189,369 (402,483) 83,437 148,561 14,424,757 14,595,242 (170,485) Valuation criteria are unchanged from the previous year and are described in the first part of the present Notes. The provision for slow moving inventory, amounting to €900,000, was increased by €591,036. Uses amounted to €45,973 and relate to goods disposed. The provision is recorded directly as a reduction in the value of finished products to bring it into line with their expected realizable value. The value of inventories at current prices is approximately €792 thousand higher than the reported value, of which €491 thousand relating to finished products, €121 thousand to semi-finished goods, and €180 thousand to raw materials. II - Receivables 46 Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 18,539,065 17,856,148 Change € 682,917 REPORT AND ACCOUNTS 2004 1) Trade receivables Dec. 31, 2004 Dec. 31, 2003 Gross book value Provision for doubtful accounts 13,343,891 (395,022) 12,576,120 (309,716) Net trade receivables 12,948,869 12,266,404 Trade receivables by area: (€’000) Dec. 31, 2004 Italy Rest of Europe Oceania Middle East North America Other 12,379 591 192 115 14 53 Total 13,344 2) Receivables from subsidiaries As shown below, receivables from subsidiaries are composed exclusively by trade receivables: Subsidiary Dec. 31, 2004 Dec. 31, 2003 Cembre Ltd (UK) Cembre Sarl (France) Cembre Espana SL (Spain) Cembre AS (Norway) Cembre GmbH (Germany) Cembre Inc. (US) General Marking srl (Italy) 1,681,382 609,068 1,473,115 83,369 719,438 432,574 83,869 1,923,528 496,130 1,452,677 60,727 705,176 553,050 14,441 Total 5,082,815 5,205,729 4-ter) Prepaid taxes Prepaid tax receivables arising from accruals to the provision for slow-moving stock described above, from temporary differences on depreciation of Oelma’s goodwill, and from the amortization of the write-down relating to the investment in General Marking done during year 2003. A more detailed description is provided in the note on income taxes below. No receivables are due beyond five years. 47 REPORT AND ACCOUNTS 2004 III – Marketable securities Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 291,052 588,230 Change € (297,178) A the end of 2004, the Company held 100,000 own shares, declining from December 31, 2003 due to the sale on the market of 143,000 shares in the year. The value of such shares was written-up by €48,982 to bring their acquisition price in line with their listed price on the Italian Stock Exchange. At March 23, 2005, the number of own shares held was 35,000. IV - Cash and cash equivalents Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 4,737,822 2,645,883 Change € 2,091,939 The balance represents cash and cash equivalents at year-end. D) Accrued income and prepaid expenses Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 39,842 25,079 Change € 14,763 Accrued income and prepaid expenses include income and charges that are either deferred or prepaid with respect to the year in which they accrue. They are made up as follows: Dec. 31, 2004 Prepaid maintenance fees Sundry accrued income and prepaid expenses Total Dec. 31, 2004 29,730 10,112 15,884 9,195 39,842 25,079 All prepaid expenses and accrued income are current. Liabilities and Shareholders’ Equity A) SHAREHOLDERS’ EQUITY 48 Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 40,417,935 35,709,839 Change € 4,708,096 REPORT AND ACCOUNTS 2004 The share capital of the company amounts to €8,840,000 and is made up of 17 million ordinary shares of par value €0.52 each, fully underwritten and paid-up. Following the €48,982 write-up in the value of own shares held, an equivalent amount was transferred from the extraordinary reserve to the provision for own shares. A Statement of Changes in the Shareholders’ Equity is enclosed below as Attachment 2 and constitutes an integral part of the present Notes. Changes in all Shareholders’ Equity items are detailed. Other reserves consist of suspended-tax reserves amounting to €68,412. The table that follows shows the origin, availability for use and distribution of Shareholders’ Equity items: Nature Amount Share capital Equity reserves: Share premium reserve Restatement reserve Suspended-tax reserves Reserves accrued from profits: Legal reserve Reserve for own shares Extraordinary reserve Total Uses allowed (1) Available share 8,840,000 12,244,869 585,159 68,412 ABC AB B 11,843,314 ----- 1,366,445 291,052 11,090,640 B --ABC ----11,090,640 34,486,577 22,933,954 Share that may be distributed 3,543,425 Residual share available for distribution 19,390,529 (1) A: capital increases; B: loss coverage; C: distribution to Shareholders B) PROVISIONS FOR RISKS AND CHARGES € € Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 2,205,186 651,050 Change € 1,554,136 The tax provision, representing deferred taxes on timing differences between depreciation recorded in the financial statements and that reported for tax purposes, was recorded following new regulations requiring the elimination of tax-related items. Additional information is provided in the note on income taxes. Changes in provisions for risks and charges occurred in the year are shown in the table that follows: Dec. 31, 2003 35,691 Increases Decreases Dec. 31, 2004 (127,256) Customer indemnities Negative Fair Market Value of IRS Foreign exchange Labour litigation Loss reported by General Marking 6,449 29,625 127,256 208,399 279,704 15,149 343,799 (279,704) 42,140 29,625 0 223,548 343,799 Total 651,050 395,022 (406,960) 639,112 49 REPORT AND ACCOUNTS 2004 The provision for customer indemnities was made pursuant to the applicable national agent agreement. The provision for litigation regarding labour issues was accrued to cover charges that may arise on a different retroactive classification of risk contested by INAIL (Social Security Agency), against whose requests Cembre filed a grounded and substantiated appeal. The provision for the loss reported by General Marking corresponds to the portion of the loss in excess of the capital stock, which was written-down in full. The provision was used up in full in February 2005, as described in the note on investments. The Company entered into an interest rate swap transaction for a notional value of €2.5 million, expiring in 2006. The interest rate recognized to the other party in the swap is 2.81%, against an interest rate recognized to the Company equal to the 3-month Euribor rate. Such swap transaction is not considered a hedging transaction since the loan generating the interest rate risk for which it was originally entered into was repaid in November 2004. The valuation of the financial instrument at its fair market value resulted in the accrual of a provision amounting to about €30 thousand. In 2004, the accounting principle adopted for the recording of receivables and payables denominated in currencies other than the euro changed. These are currently booked at the exchange rate at the time of the transaction, recording in the Income Statement the foreign exchange loss or gain according to the exchange rate at the end of the financial period. The method previously adopted until the 2003 Financial Statements provided for the accrual of a provision for foreign exchange differences in case of losses deriving from the translation of amounts at year-end exchange rates, and the lack of recording of positive differences. In 2004, negative foreign exchange differences arising from the translation of receivables and payables denominated in currencies other than the euro existing at December 31, amounted to €186 thousand, while positive foreign exchange differences amounted to €1 thousand. Under previously applicable accounting principle the amounts recorded would have been equivalent. C) EMPLOYEE TERMINATION INDEMNITIES Changes in the year are shown below: (€) Balance at December 31, 2003 Amounts accrued in the Advances paid Termination indemnities and Social Security contributions 3,521,001 659,919 (250,500) (124,864) Balance at December 31, 2004 3,805,556 Indemnities paid to employees terminating their employment with the company amounted to €10,534. The amount is not included in the accrual for the year. The provision covers in full all amounts accrued by employees at the closing date of the financial statements, net of advances paid. D) PAYABLES Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 14,141,664 15,244,985 Change € (1,103,321) Payables are recorded at face value. Their breakdown by expiration date is reported in the table below: 50 REPORT Less than 1 year Over 1 year AND ACCOUNTS 2004 Over 5 years Total Bank loans Advances 3,040,942 20,373 3,040,942 20,373 Trade payables 6,598,245 6,598,245 424,270 424,270 1,575,388 1,575,388 895,596 895,596 1,586,850 1,586,850 14,141,664 14,141,664 Payables to subsidiaries Tax payables Social Security payables Other payables 3) Bank loans Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 3,040,942 6,398,004 Change € (3,357,062) Bank loans include principal amounts, interest accrued and related charges. The item is made up as follows: Dec. 31, 2004 Dec. 31, 2003 Overdrafts Short-term loans (current portion) Medium-term loans (current portion) Medium-term loans (non-current portion) 395,442 2,000,000 645,500 0 607,004 4,500,000 645,500 645,500 Total 3,040,942 6,398,004 Short-term loans are loans up to 18 months while medium-term loans are loans with a term included between 18 months and five years. Bank loans are all extended by Italian banks. 6) Trade payables Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 6,598,245 5,907,917 Change € 690,328 Trade payables are stated net of trade discounts. Cash discounts are recognised only at the time of payment. The book value of such payments is adjusted for returns or discounts (invoicing adju- 51 REPORT AND ACCOUNTS 2004 stments), in line with the amount agreed upon with the supplier Trade payables by geographical area: Dec. 31, 2004 Italy Rest of Europe America Oceania Other 4,969 1,552 7 65 5 Total 6,598 8) Payables to subsidiaries Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 424,270 69,488 Change € 354,782 Trade payables to subsidiaries are shown below: Dec. 31, 2004 Dec. 31, 2003 Cembre Ltd (UK) General Marking (Italy) Cembre A.S. (Norway) Cembre GMBH (Germany) Cembre Espana (Spain) Cembre Sarl (France) Cembre Inc. (USA) 6,320 324,630 0 230 91,798 1,292 0 489 62,544 4,238 0 1,945 163 109 Total 424,270 69,488 11) Tax payables Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 1,575,388 567,177 Change € 1,008,211 The item is made up as follows: Dec. 31, 2004 Dec. 31, 2003 Taxes withheld on employee remuneration Current taxes payable 566,229 1,009,159 517,746 49,431 Total 1,575,388 567,177 52 REPORT AND ACCOUNTS 2004 The marked increase in current taxes payable is due to the higher spread between advances paid and taxes payable over the previous year. 12) Social Security payables Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 895,596 711,011 Change € 184,585 The balance represents amounts payable to Social Security institutions relating to employees and agents. 13) Other payables Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 1,586,850 1,584,763 Change € 2,087 Dec. 31, 2004 Dec. 31, 2003 612,303 784,625 148,596 27,114 11,211 3,001 652,976 768,748 131,196 22,887 8,956 0 1,586,850 1,584,763 Payable to employees Customer bonuses payable Agent fees payable Insurance payables Statutory Auditors’ compensation payable Other payables Total E) ACCRUED EXPENSES AND DEFERRED INCOME Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 23,037 14,590 Change € 8,447 These represent expenses accrued and deferred revenues recorded based on the accrual method. All items are short-term. Dec. 31, 2004 Dec. 31, 2003 Interest accrued on loans Deferred income 23,037 0 14,355 235 Total 23,037 14,590 53 REPORT AND ACCOUNTS 2004 COMMITMENTS Guarantees granted Guarantees in favour of subsidiaries Guarantees received Dec. 31, 2004 Dec. 31, 2003 Change 61,857 5,478,132 19,821 41,118 5,521,177 81,796 20,739 (43,045) (61,975) Guarantees in favour of subsidiaries consist of guarantees given by Cembre S.p.A. against loans extended to Cembre España SL, Cembre Inc. and General Marking, amounting respectively to €1,500,000, €478,132 and €3,500,000. INCOME STATEMENT Before commenting items in the Income Statement, we draw your attention on the analysis of costs and revenues contained in the Management Report pursuant to article 2428, first comma, of the Italian Civil Code. The current analysis focuses on significant changes in Income Statement items from the previous year, and is supplemented by more detailed analysis included in the notes to the Balance Sheet. A) REVENUES 1) Sales 2004 2003 € € 51,114,666 47,286,914 Change € 3,827,752 Sales by geographical area: (€’000) 2004 2003 Change Italy Rest of Europe Rest of world 31,146 15,744 4,225 29,305 14,405 3,577 1,841 1,339 648 Total 51,115 47,287 3,828 Changes are due to factors described in the Management Report. 5) Other revenues Capital gains on disposal of assets Rent Operating grants Other Total 54 2004 2003 Change 1,996 91,976 12,515 10,294 10,959 68,250 32,777 15,335 (8,963) 23,726 (20,262) (5,041) 116,781 127,321 (10,540) REPORT AND ACCOUNTS 2004 B) OPERATING COSTS 6) Raw materials 2004 2003 € € 18,502,227 15,880,856 Change € 2,621,371 2004 2003 Raw materials and goods Consumables Transport costs and customs duties 16,356,749 2,105,712 39,766 13,590,225 2,232,034 58,597 Total 18,502,227 15,880,856 7) Services 2004 2003 € € 7,195,051 7,342,689 Change € (147,638) 2004 2003 Subcontracted work Transport Maintenance and repairs Electricity, heating, water Consulting services Directors’ compensation Auditors’ compensation Commissions Postage and telephone Fuel Travel and transfers Insurance Canteen Bank expenses Personnel training Advertising and trade fairs Security and cleaning Other 2,084,741 947,205 798,819 696,100 682,800 368,535 52,173 220,638 133,924 111,938 177,240 166,156 194,955 77,111 13,842 49,493 303,805 115,576 2,005,098 949,610 1,040,798 592,260 676,750 399,462 49,677 245,999 139,292 105,101 206,946 158,591 185,659 73,270 11,537 96,160 274,777 131,702 Total 7,195,051 7,342,689 55 REPORT AND ACCOUNTS 2004 8) ) Leases and rentals 2004 2003 € € 698,377 691,081 Change € 7,296 Lease and rental costs relate primarily to the lease of buildings owned by third parties and related parties, as described in the Management Report, and by vehicle leasing costs, 9) Personnel costs 2004 2003 € € 13,748,404 12,958,941 Change € 789,463 The item includes personnel costs, including paid leave and accruals made pursuant to the Law and collective labour contracts in force, Employee termination indemnities include accruals at December 31, 2004 and amounts paid to personnel terminating their employment with the company in the year and pension benefits payable to the COMETA Pension Fund: Average number of employees by category 2004 2003 Management Administrative and commercial staff Warehouse workers 7 144 177 7 142 182 Total 328 331 10) Depreciation and accruals b) Tangible asset depreciation Depreciation rates are unchanged from the previous year, and are as follows: Category Buildings and light construction Plant and machinery Equipment Other assets Depreciation rate 3% - 10% 10% - 15.5% 25% 12% - 25% Accelerated depreciation recorded exclusively for tax purposes is not recorded in the Financial Statements and is reported separately. Information regarding the elimination of tax-related entries pursuant to new regulation is included in the note on income taxes. 56 REPORT AND ACCOUNTS 2004 12) Accrual to provisions for risks and charges The item is made up as follows: Coverage of losses reported by General Marking srl Customer indemnities Other Total 2004 2003 343,799 6,449 5,176 279,705 6,692 4,578 355,424 290,975 An accrual of €343,799 was made against the loss reported by subsidiary General Marking in 2004. The accrual consists of losses in excess of the write-down of the investment in the subsidiary, as described in the note on Provisions for risks and charges. The accrual to the provision for customer indemnities, equal to €6,449, was made against possible charges from termination of agent contracts. 14) Other operating costs 2004 2003 € € 185,313 167,918 Change € 17,395 Other operating costs Donations Taxes Other Total 2004 2003 43,116 129,132 13,065 40,216 111,328 16,374 185,313 167,918 C) ) FINANCIAL INCOME (EXPENSE 2004 2003 € € (260,774) (467,440) Change € 206,666 16) Other financial income Item c) Financial income from marketable securities represents proceeds from the sale of own shares. Item d) Other financial income is made up as follows: 57 REPORT AND ACCOUNTS 2004 2004 2003 18,574 1,989 10,574 1,260 20,563 11,834 2004 2003 132,311 29,937 29,625 198,496 52,793 0 191,873 251,289 2004 2003 110,572 (98,757) 1,277 (186,529) 8,404 (176,820) 0 (59,569) (173,437) (227,985) Interest on bank deposits Other Total 17) Interest and other financial expense The item is made up as follows: Bank interest charges Interest on loans Negative Fair Market Value of IRS Total 17-bis) Foreign exchange gains (losses) The item is made up as follows: Foreign exchange gains Foreign exchange losses Foreign exchange translation gains Foreign exchange translation losses Total Figures for 2003 were reclassified to allow a comparison with 2004. D) WRITE-DOWNS The €692,636 write-down in the value of investments relates to the write-down in full of the investment in subsidiary General Marking due to the loss reported in 2004. E) EXTRAORDINARY ITEMS 58 Balance at Dec. 31, 2004 Balance at Dec. 31, 2003 € € 2,681,978 (402,441) Change € 3,084,419 REPORT AND ACCOUNTS 2004 The item is made up as follows: Extraordinary gains Extraordinary losses Positive effect of elimination of tax-related entries Negative effect of elimination of tax-related entries Returns of goods sold in past years Accrual against labour litigation Losses due to theft Total 2004 2003 31,294 (42,810) 4,673,933 (1,741,040) (230,825) (6,880) (1,694) 19,296 (76,165) 0 0 (326,671) (13,949) (4,952) 2,681,978 (402,441) Returns of goods sold in past years consist of goods returned as a result of agreements reached with customers. The table that follows shows the cumulative effect on profits for the year resulting from the elimination of tax-related entries pursuant to newly adopted principles according to which accelerated depreciation is not recorded in the Financial Statements. In order to make a comparison between year 2003 and year 2004, the net profit of 2003 was restated to take into account the new rule. 2004 2003 Net profit reported in the financial statements 5,931,357 -Lower accruals in the period -Related deferred taxes -Extraordinary gain due to recalculation of past depreciation charges 4,673,933 -Extraordinary loss due to deferred taxes on recalculation of past depreciation charges (1,741,040) 2,448,336 315,975 (167,600) Total effect, net of taxes Income in comparable terms 148,375 2,299,961 2,932,893 2,998,464 The cumulative effect recorded under extraordinary items in the Income Statement for 2004 of the parent company is the same described in the note on Tangible asset depreciation in the Financial Statements at December 31, 2003. 22) Income taxes 2004 2003 € € (3,271,615) (2,475,543) Change € (796,072) The accrual to the tax provision is made in accordance with expected taxable income, taking into account adjustments made to income reported in the statutory accounts. In 2004, subsidiary General Marking choose to participate in the tax consolidation of the parent company, as allowed by current regulations. The choice resulted in a benefit for parent company Cembre of €88,239, recorded as a reduction of the current tax expense 59 REPORT AND ACCOUNTS 2004 Deferred taxes 2004 Timing differences Prepaid taxes: Inventory write-down 900,000 Amortization of goodwill 200,167 Amortization of write-down of equity investment 59,400 Provision for risks 9,754 Other amortization Total prepaid taxes Deferred taxes: Accelerated depreciation 2003 Tax expense (at a 37.25% tax rate) Timing differences 335,250 74,562 19,602 3,634 354,937 228,763 79,200 4,578 9,445 433,048 4,204,227 1,566,074 Tax expense (at a 37.25% tax rate) 132,214 85,214 26,136 1,705 3,892 249,161 4,673,933 1,741,040 In 2003, item Timing differences originating from accelerated depreciation was inserted to allow a comparison with the current year, though, in the previous year, accelerated depreciation was recorded directly in the Financial Statements and the related provision for deferred taxes was instead not recorded. Deferred and prepaid taxes: 2004 2003 Increase in provision for inventory depletion Goodwill amortization expense Write-down of equity investment Use of deferred tax provision Use of provision for subsidiaries’ losses for Other 203 (11) (6) 175 0 2 73 41 0 0 (46) 1 Total 363 69 For further information relating to events subsequent to the closing date of the Financial Statements and transactions with related parties we refer to the Management Report. Compensation of Directors and emoluments paid to the Board of Statutory Auditors are reported under item B7 “Costs for services” of the Income Statement. Pursuant to disclosure requirements set by Consob, implementing Legislative Decree no. 58 of 2001, we also include in Attachment 4, which represents an integral part of the present Report, the breakdown of compensation paid to Directors and Auditors of the Company. The present Notes include the following attachments: no. 1 Changes in tangible assets no. 2 Statement of Changes in the Shareholders’ Equity no. 3 Summary financial information of subsidiaries, pursuant to Article 2429 of the Italian Civil Code no. 4 Directors and Auditors’ compensation 60 REPORT AND ACCOUNTS 2004 The present Financial Statements, that include a Balance Sheet, Income Statement and explanatory Notes, truly and fairly represent the Company’s assets, liabilities and financial position, in addition to its operating performance for the 2004 financial year, and correspond to its accounting records. Supplementary information required by Consob Pursuant to a CONSOB requirement, the Company’s (Cembre S.p.A) shareholdings over 10% held in limited liability publicly traded companies and unlisted joint-stock companies at December 31, 2004, are shown in the table below. The Company holds full title to the investments listed below. Company Cembre Ltd Head office Capital stock Sutton Coldfield Gbp 1,700,000 (Birmingham - UK) % held directly indirectly through 100% total % of voting rights 100% 100% Cembre Sarl Morangis (Paris - France) Euro 1,071,000 95% 5% Cembre Ltd 100% 100% Cembre España SL Coslada (Madrid-Spain) Euro 900,000 95% 5% Cembre Ltd 100% 100% Cembre AS Stokke (Norway) Nok 2,400,000 100% 100% 100% Cembre GmbH Munich (Germany) Euro 512,000 95% 5% Cembre Ltd 100% 100% 71% 29% Cembre Ltd 100% 100% 100% 100% Cembre Inc. General Marking Edison Us $ 1,440,000 (New Jersey - USA) Brescia (Italy) Euro 99,000 100% Brescia, March 23, 2005 THE CHAIRMAN OF THE BOARD OF DIRECTORS CARLO ROSANI 61 62 42,384,407 42,473,963 938,155 92,286 212,440 (286,845) (89,556) (197,290) (122,451) 0 (74,839) 0 Decreases and write-downs 43,125,273 92,286 43,032,986 3,488,750 4,550,601 23,525,892 11,467,743 Balance at Dec 31, 2004 30,247,343 30,247,343 2,945,396 3,970,786 19,699,987 3,631,175 (4,673,933) (4,673,933) (560,283) (525,881) (3,202,409) (385,360) Accumulated Elimination of tax depreciation at related entries Dec. 31, 2003 (2) 3,041,815 3,041,815 367,241 464,330 1,922,335 287,908 Depreciation expense (1) Decreases and write-downs relating to work in progress and advances include transfers made. (2) This column includes the reduction of accumulated depreciation, calculated using statutory depreciation rate instead of fiscal depreciation rate. TOTAL 89,556 845,869 3,366,521 Other assets Work in progress and advances (1) 244,680 4,338,161 Equipment 318,959 23,281,772 Plants and machinery 69,790 11,397,953 Increases Land and buildings Balance at Dec. 31, 2003 (204,898) (204,898) (117,573) 0 (71,754) (15,571) 28,410,327 28,410,327 2,634,780 3,909,235 18,348,159 3,518,152 Uses of provision Accumulated for accumulated depreciation at depreciation Dec. 31, 2004 DEPRECIATION 14,714,946 92,286 14,622,660 853,970 641,366 5,177,733 7,949,591 Net book value at Dec. 31, 2004 12,226,620 89,556 12,137,064 421,126 367,375 3,581,785 7,766,778 Net book value at Dec. 31, 2003 NET BOOK VALUE AND GROSS BOOK VALUE ATTACHMENT NO.1 NOTES TO THE FINANCIAL STATEMENTS OF CEMBRE SPA AT DECEMBER 31, 2004 CHANGES IN TANGIBLE ASSETS (IN EURO) REPORT ACCOUNTS 2004 465,296 (101,404) 566,700 Reserve for own shares 68,412 68,412 Suspended tax reserves (2,889,440) 2,889,440 Net profit 12,244,869 585,159 588,231 63 68,412 8,840,000 12,244,869 585,159 1,366,445 291,052 11,090,640 1,102,658 297,178 68,412 5,931,357 5,931,357 (2,448,336) (1) With reference to the allocation of net profit, item Total Shareholders' Equity includes dividends approved by resolution at the Ordinary Shareholders' Meeting. Balance at Dec. 31, 2004 Net profit 122,417 (297,178) 9,690,804 40,417,935 5,931,357 (1,223,261) 35,709,839 2,448,336 (1,340,560) 34,602,062 2,692,631 (1,675,700) 33,585,131 Total Shareholders' Equity AND Allocation of 2003 net profit (1) Transfer due to write-down of own shares 1,244,028 2,448,336 8,840,000 (2,692,631) Balance at Dec. 31, 2003 1,217,439 (122,935) 2,448,336 134,632 122,935 Net profit Allocation of 2002 net profit (1) Transfer due to write-down of own shares 8,596,299 1,069,268 101,404 7,425,627 Extraordinary reserve 2,692,631 1,109,396 144,472 964,924 Legal reserve Balance at Dec. 31, 2002 585,159 585,159 Restatement reserve 2,692,631 12,244,869 12,244,869 Share premium Net profit Allocation of 2001 net profit (1) 8,840,000 8,840,000 Balance at Dec. 31, 2001 Transfer due to write-down of own shares Share capital (€) ATTACHMENT NO.2 NOTES TO THE FINANCIAL STATEMENTS OF CEMBRE SPA AT DECEMBER 31, 2004 STATEMENT OF CHANGES IN THE SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2001 TO 2004 REPORT ACCOUNTS 2004 REPORT AND ACCOUNTS 2004 ATTACHMENT 3 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DEC. 31, 2004 FINANCIAL HIGHLIGHTS OF COMPANIES INCLUDED IN THE CONSOLIDATION PURSUANT TO ARTICLE 2429 OF THE ITALIAN CIVIL CODE Total fixed assets Current assets accruals and deferrals Total assets Shareholders' Equity Cembre Ltd 5,182,566 4,286,574 9,469,140 6,303,193 3,165,947 9,469,140 Cembre Sarl 565,306 2,986,499 3,551,805 2,249,494 1,302,311 3,551,805 Cembre Espana SL 979,311 4,776,778 5,756,088 1,622,134 4,133,954 5,756,088 Cembre AS 2,300 277,814 280,113 168,444 111,669 280,113 Cembre GmbH 57,728 1,949,090 2,006,818 1,126,549 880,269 2,006,818 Cembre Inc 51,092 1,670,679 1,721,772 782,371 939,401 1,721,772 1,328,685 3,145,962 (343,799) 3,489,761 3,145,962 Total operating value Operating costs Financial income (expense) Extraordinary items Income taxes Net profit (loss) Cembre Ltd 10,611,625 (9,703,018) 9,575 4,603 (283,467) 639,317 Cembre Sarl 4,418,825 (4,151,713) (8,828) 42,253 (12,070) 288,467 Cembre Espana SL 6,616,356 (6,277,023) (55,386) (16,188) (79,639) 188,120 Cembre AS 364,060 (357,501) 2,197 0 0 8,756 Cembre GmbH 3,280,488 (3,168,790) 968 0 (45,067) 67,599 Cembre Inc 2,178,716 (2,026,091) (10,239) (9,730) (17,281) 115,376 General Marking srl 1,013,454 (2,035,445) (94,159) (2,190) 81,904 (1,036,435) (€) General Marking srl 1,817,277 Total liabilities, Total liabilities provisions, accruals and Shareholders’ and deferrals Equity Figures relate to the Financial Statements at Dec. 31, 2004 The translation of amounts denominated in currencies other than the euro was carried out in accordance with the methods described in the notes to the Consolidated Financial Statements at Dec. 31, 2004. Brescia, March 23, 2005 THE CHAIRMAN OF THE BOARD CARLO ROSANI 64 2003-2005 see note 7 see note 6 2003-2005 2003-2005 2003-2005 2003-2005 2003-2005 2003-2005 2003-2005 2003-2005 2003-2005 Term (1) 14,918 10,431 4,983 21,841 14,400 14,400 44,064 14,400 14,400 54,600 66,600 132,600 3,164 3,273 5,363 26,992 32,508 COMPENSATION (€) Emoluments for Non-monetary Bonuses and position benefits (5) other incentives 43,483 (8) 102,266 (4) 111,138 (3) 10,000 (2) Other compensation AND (1) The expiration of the term coincides with the approval of the 2005 Financial Statements for both Board of Directors and Board of Statutory Auditors. (2) Compensation for services. See Relationships with related parties in the Management report. (3) Gross retribution for employment amounts to €99,138; emoluments for positions held in subsidiaries amount to €12,000. (4) Gross retribution for employment. (5) Made up by fringe benefits represented by the use of a company car and insurance coverage. (6) Appointed by the Shareholders’ Meeting of May 14, 2004 and takes the place of Augusto Rezzola. Will remain in office until the approval of the 2005 Financial Statements. (7) Replaced Augusto Rezzola as Auditor from October 16, 2003 to May 14, 2004, date at which she reverted to her previous status of Alternate Auditor, pursuant to art. 2401 of the Italian Civil Code 16/10/2003 al 14/5/2004. (8) Gross retribution for employment amounts to €38,633; emoluments for positions held in subsidiaries amount to €4,850. Statutory Auditor Director GIOVANNI ROSANI LEONE SCUTTI Director PAOLO LECHI Statutory Auditor (7) Director MARIO COMANA MARIA GRAZIA LIZZINI Director ALDO BOTTINI BONGRANI Statutory Auditor (6) Director GIOVANNI DE VECCHI ANDREA BOREATTI Managing Director ALDO COPETTA Chairman of the Board of Statutory Vice Chairman & Managing Director ANNA MARIA ONOFRI GUIDO ASTORI Chairman & Chief Executive Officer POSITION CARLO ROSANI Position ATTACHMENT NO. 4 – NOTES TO THE FINANCIAL STATEMENTS OF CEMBRE S.P.A. DIRECTORS AND STATUTORY AUDITORS’ COMPENSATION REPORT ACCOUNTS 2004 65 REPORT AND ACCOUNTS 2004 REPORT OF THE BOARD OF STATUTORY AUDITORS ON THE FINANCIAL STATEMENTS AT DECEMBER 31, 2004 OF CEMBRE SpA (PURSUANT TO ARTICLE 2429 OF THE ITALIAN CIVIL CODE AND ARTICLE 153 OF LEGISLATIVE DECREE NO. 58/98) To our Shareholders: in the year ended December 31, 2004 we carried out monitoring activities in compliance with the Law and the provisions of the By-laws and verified the respect of correct management principles, applying the conduct guidelines for statutory auditors provided by the Italian accounting profession. A significant event in the year was the resolution of the Extraordinary Shareholders’ Meeting on May 14, 2004 to amend the By-laws in compliance with new Company Law provisions. In line with reporting guidelines provided by Consob, the Board of Statutory Auditors: • monitored compliance with the Law and the By-laws; • attended in 2004 one Shareholders’ Meeting, six meetings of the Board of Directors and two meetings of the Internal Audit Committee, all carried out pursuant to provisions of the By-laws, Laws and norms that regulate their functioning; • obtained from the Board of Directors quarterly information on main operations of economic and financial relevance carried out by the Company and its subsidiaries. With this regards, we can reasonably state that operations resolved and/or carried out complied with the Law and the provisions of the By-laws, were not imprudent, did not involve an excessive mount of risk, were not in potential conflict of interest or in contrast with shareholders’ resolutions taken or such as to compromise the integrity of the company’s assets. • acquired direct knowledge and monitored, to the extent required by our task, the adequacy of the organizational structure of the Company, gathering information from persons in charge of the organization of the Company and through meetings with the independent auditors involving exchange of data and relevant information. To such regard we have no particular comment to make. • evaluated the adequacy of the internal auditing system and of the administrative and accounting system, in addition to the reliability of the latter in providing a fair representation of the Company’s operations, by obtaining information on an ongoing basis from persons responsible for each sector, also reviewing company records and the results of work carried out by independent auditors, monitoring the activity of the person in charge of Internal Audit and the Internal Audit Committee. To such regard we have no particular comment to make. Internal audit activities are described more in detail in the Report on Corporate Governance approved by the Board of Directors and prepared on the basis of guidelines issued by Italian Stock Exchange. In 2004 the Board of Statutory Auditors met twice and held a number of meetings by telephone, in addition to a meeting on February 11, 2005 with the Company’s independent auditors. There did not emerge relevant data and information pursuant to article 150, comma 2 of Legislative Decree no. 58/98 to be disclosed in the present report. We did not encounter any atypical or unusual transaction. The Board of Statutory Auditors did not receive any report pursuant to article 2408 of the Italian Civil Code or has any knowledge of any other denunciation pursuant to the same received by others. 66 REPORT AND ACCOUNTS 2004 As a result of the participation of the Company to the Code of Conduct prepared by the Committee for Corporate Governance of listed companies, the Company prepared an Annual Corporate Governance Report in accordance with guidelines provided by Italian Stock Exchange containing information on progress made to comply with the Code of Conduct of listed companies. The Board of Directors appointed, as confirmed by the appointee, the Company’s independent auditors to provide assistance in the transition towards the adoption of IAS/IFRS accounting principles. The Report of the Board includes information regarding the transition process for the adoption of IAS/IFRS accounting principles. In the year the Board of Statutory Auditors did not issue opinions pursuant to the Law. In its monitoring activity and based on information obtained, the Board of Statutory Auditors did not encounter omissions, censurable facts, irregularities or in any case significant events worth reporting to relevant Authorities or of mention in the present report. The Report of the Board includes information regarding the transition process for the adoption of IAS/IFRS accounting principles. Pursuant to article 2429 of the Italian Civil Code and of article 153 of Legislative Decree no. 58/1998, we examined the Financial Statements of Cembre SpA at December 31, 2004, consisting of a Balance Sheet, Income Statement and Notes to the accounts, accompanied by a Report of the Board of Directors on operations, regularly delivered to the Board of Statutory Auditors within the term prescribed together with the related attachments. The Balance Sheet, reporting a net profit of €5,931,357, is summarized below: - ASSETS - LIABILITIES - SHAREHOLDERS’ EQUITY (EXCLUDING NET PROFIT) - NET PROFIT Guarantees given: of which in favour of subsidiaries: Guarantees received: € € € € 60,593,379 (20,175,444) 34,486,578 5,931,357 € € € 5,539,989 5,478,132 19,821 € € € € € € € € € 51,808,081 (44,383,806) 7,424,275 (260,774) (642,507) 2,681,978 9,202,973 (3,271,615) 5,931,357 The Income Statement is summarized below: - PRODUCTION VALUE - PRODUCTION COSTS - OPERATING PROFIT - FINANCIAL INCOME (EXPENSE) - ADJUSTMENTS IN THE VALUE OF FINANCIAL ASSETS - EXTRAORDINARY ITEMS - PRE-TAX PROFIT - INCOME TAXES - NET PROFIT 67 REPORT AND ACCOUNTS 2004 The Financial Statements were prepared following the principles stated by new norms contained in Legislative Decrees no. 5 and 6 dated January 17, 2003 introducing changes in Company Law, involving in particular the elimination of tax-related entries. Information regarding such changes is included in the Notes to the accounts in which valuation criteria adopted, agreed upon by the Board of Statutory Auditors are explained. The Report of the Board describes also relationships with related parties. We attest that relationships between Group companies are carried out exclusively in the interest of individual companies involved and are settled at market conditions. The Board of Statutory Auditors therefore proposes to the Shareholders’ Meeting the approval of the Financial Statements, in the form submitted by the Board of Directors and communicated to the Board of Statutory Auditors within the term provided by Law, in addition to the proposed allocation of net profit. Board of Statutory Auditors 68 Dott. Guido Astori Chairman Dott. Andrea Boreatti Auditor Rag. Leone Scutti Auditor REPORT AND ACCOUNTS 2004 69 REPORT 70 AND ACCOUNTS 2004 Cembre Group Management Report for the financial year ended December 31, 2004 REPORT AND ACCOUNTS 2004 Cembre Group Management Report for the financial year ended December 31, 2004 In 2004, the Italian market showed signs of a recovery which failed however to materialize, as the market continues to be weak. The European market continues to be negative, particularly in Germany, with the only exception of the Spanish market, helped by strong investment in infrastructure. The growth in sales registered by Cembre was helped by the steady renewal of the product range and by new products developed by our technical department that allow us to remain competitive and to respond more effectively to the needs of our customers. Sales revenues grew from €59,870 thousand in 2003 to €65,310 thousand in 2004, up 9.1%. Revenues by Group Company (€’000) Parent company Cembre Ltd. (UK) Cembre S.a.r.l. (France) Cembre España S.L. Cembre GmbH (Germany) Cembre AS (Norway) Cembre Inc (USA) General Marking srl (Italy) Total 2004 2003 38,490 9,722 4,409 6,522 3,229 364 2,169 406 35,722 7,700 3,990 5,598 3,737 376 2,115 632 65,310 59,870 2004 2003 31,298 28,480 5,532 29,765 25,310 4,795 65,310 59,870 Sales by geographical area (€’000) Italy Rest of Europe Rest of the World Total A total of 47.9% of Group sales in 2004 were represented by Italy (as compared with 49.7% in 2003), 43.6% by the rest of Europe (42.3% in 2003), and the remaining 8.5% by the rest of the World (8.0% in 2003). Sales in Italy grew by 5.1%, while sales abroad registered a 13% increase. 72 REPORT AND ACCOUNTS 2004 The decline in sales of German subsidiary Cembre GmbH is due to the continuing weakness of the German market. Figures for General Marking Srl include only sales to third parties managed directly by the subsidiary, whose decline is due to a number of products deemed not strategic. Part of General Marking’s sales to other Group companies that distribute products in their respective markets are not attributed to General Marking in the table above. Such sales grew by 37% from €542 thousand to €742 thousand. Gross operating profit improved from €10,891 thousand in 2003, to €12,535 thousand in 2004, representing a 19.2% margin on sales. Operating profit amounts to €8,053 thousand, representing a 12.3% margin on sales, as compared with €6,364 thousand in 2003, corresponding to a 10.6% margin on sales. Pre-tax profit amounts to €7,715 thousand, up 35.8% on €5,680 thousand in 2003. The year closes with a net profit of €4,144 thousand, equal to 6.3% of sales, up on €2,988 thousand in 2003 in which it amounted to 5.0% of sales. The cash flow (considered as the sum of net profit, depreciation and amortization) grew from €7,516 thousand in 2003 to €8,626 thousand in 2004, representing a 13.2% margin on sales. To provide a better understanding of the Company’s financial performance for 2004, a Reclassified Consolidated Income Statement at December 31, 2004 is enclosed as Attachment A. Net financial position (€’000) Dec. 31, 2004 Dec. 31, 2003 Long-term financial debt (2,260) (2,707) Total long-term financial debt (2,260) (2,707) 6,507 4,059 (6,199) (9,373) Short-term financial debt (47) (37) Short-term financial assets 291 588 Total short-term debt (552) (4,763) Net financial position (1,708) (7,470) Cash and short-term financial receivables Short-term bank debt The decline in debt on the previous year is due to the good operating performance and a resulting increase in the cash flow generated by operations, in addition to the reduction in capital expenditure, declining from €3.7 million in 2003, to €3 million in the current year. 73 REPORT AND ACCOUNTS 2004 Adoption of IAS/IFRS principles In 2003, parent company Cembre started a project for the adoption of international accounting principles by carrying out an analysis aimed at identifying main differences between Italian accounting standards and the IAS/IFRS accounting standards, and to assess, on the basis of differences detected, the most significant impacts on the Group’s Consolidated financial Statements. The projects aims at the following objectives: - identifying main differences between Italian accounting standards and IAS/IFRS – including first-time differences resulting from the application of international standards – at January 1, 2004, and at the assessment of the related impact on individual items; - implementing of administrative processes and information systems that allow the preparation of annual, semi-annual and quarterly reports in accordance with the IAS/IFRS accounting standards. In line with IAS 1, financial statements prepared in accordance with IAS/IFRS must include, in terms of comparative information, data for the previous year and the one under consideration. The Financial Statements at December 31, 2005 will be the first yearly statements issued by the Cembre Group in accordance with international accounting principles and will therefore include for comparative purposes, the financial statements prepared in accordance with the IAS/IFRS at December 31, 2004. The company intends to start preparing its quarterly reports in accordance with international standards by the 3rd Quarter of 2005. Starting with the report for the 2nd Quarter of 2005, a reconciliation of end balances prepared in accordance with Italian and those prepared under international accounting standards will in any case be provided. The analysis thus far carried out resulted in the determination of some differences between accounting principles adopted in Italy and IAS/IFRS (on the basis of the implementation of the Exposure Drafts currently available and excluding differences deriving from the first-time application of international accounting principles), the most relevant of which are illustrated below: - own shares: according to IAS/IFRS, own shares may no longer be recorded as assets and will have to be cancelled out together with the related reserve. The amount of own shares will also have to be subtracted from the Shareholders’ Equity; - Employee severance indemnities: accounting principles applied in Italy require the recording of the Employee severance indemnity (ESI) based on the face value of the liability accrued at the date of the financial statements. According to IAS/IFRS, the ESI can be assimilated to benefit plans subject to actuarial discounting in determining the present value of the benefit payable at time at which the employee terminates his or her employment, accrued by employees at the date of the financial statements; - extraordinary items: according to IAS/IFRS, extraordinary items are not shown in P&L statement; - exceptions of accounting principles provided for by special laws: for the purposes of IAS/IFRS, the accounting treatment shall not take into account the effect of special legal or tax provisions. At the moment the company is analysing the option to book tangible assets using the “fair market value”, as allowed by International Accounting Standards, instead of the historical cost, currently used. A number of projects for the definition of operating procedures aimed at quantifying differences identified, were initiated. 74 REPORT AND ACCOUNTS 2004 Capital expenditure Capital expenditure declined from €3.7 million in 2003, to €3 million in 2004, of which €1.5 million relating to the renovation of UK subsidiary Cembre Ltd’s offices in Birmingham. Capital expenditure of the parent company consists prevalently of expenditure on plant and machinery (€0.3 million), and industrial equipment and other goods (€0.6 million). Research & Development Thanks to its greater experience and numerous technicians, Cembre SpA carries out most of the Group’s research and development activities, described in the Parent Company management report. Nevertheless, other Group companies participate actively in product development and research. R&D activities are described in the management report to the financial statements of parent company Cembre. Related Parties For details regarding transactions with related parties, please refer to the parent company’s management report. Own shares At December 31, 2004, Cembre SpA held 100,000 of its own shares recorded at cost, amounting to €291,052. Own shares have a total par value of €52,000, representing 0.59% of Cembre’s share capital. In 2004 the company sold 143,000 own shares and at year-end Cembre SpA had not acquired, disposed of or owned directly or indirectly through subsidiary companies, trust companies or intermediaries, shares or holdings in companies having a controlling share in the Company Subsequent events No event having significant effects on Cembre’s assets or financial performance occurred after the closing of the financial year. Outlook The company expects a growth in activity for 2005, both in the domestic market and foreign markets. Profit levels are expected to remain positive. 75 REPORT AND ACCOUNTS 2004 ATTACHMENTS The present document includes two attachments: Attachment A: Reclassified Consolidated Income Statement at December 31, 2004; Attachment B: Consolidated Statement of Cash Flows for the year ended December 31, 2004. Brescia, March 23, 2005 CHAIRMAN OF THE BOARD OF DIRECTORS CEMBRE SPA – GROUP PARENT COMPANY CARLO ROSANI 76 REPORT AND ACCOUNTS 2004 ATTACHMENT A - CEMBRE GROUP MANAGEMENT REPORT RECLASSIFIED CONSOLIDATED INCOME STATEMENT FOR 2004 (€) Sales Other revenues and gains TOTAL REVENUES 2004 % 2003 % % change 65,309,688 37,165 65,346,853 100.0 59,870,282 78,045 59,948,327 100.0 9.1% 9.0% Change in work in progress, semi-finished and finished goods inventories Increase in assets due to internal construction TOTAL OPERATING VALUE (10,018) (0.0) (61,138) (0.1) 344,637 65,681,472 0.5 100.6 824,509 60,711,698 1.4 101.4 -58.2% 8.2% Materials and services used Other operating costs VALUE ADDED (32,901,081) (290,547) 32,489,844 (50.4) (0.4) 49.7 (30,774,957) (256,242) 29,680,499 (51.4) (0.4) 49.6 6.9% 13.4% 9.5% Personnel costs Accruals to provision for doubtful accounts Accruals to risk provision GROSS OPERATING MARGIN (EBITDA) (19,795,863) (30.3) (18,613,448) (31.1) 6.4% (140,859) (17,977) (0.2) (150,213) (25,669) (0.3) -6.2% 12,535,145 19.2 10,891,169 18.2 15.1% Intangible asset amortization Tangible asset depreciation and other assets write-downs OPERATING PROFIT (EBIT) Financial income (expense) (251,104) (0.4) (401,451) (0.7) -37.5% (4,231,263) 8,052,778 (359,047) (6.5) 12.3 (0.5) (4,126,199) 6,363,519 (617,848) (6.9) 10.6 (1.0) 2.5% 26.5% -41.9% PROFIT BEFORE EXTRAORDINARY ITEMS 7,693,731 11.8 5,745,671 9.6 33.9% Extraordinary items and adjustments to the value of financial assets PROFIT BEFORE TAXES 21,294 7,715,025 0.0 11.8 (66,141) 5,679,530 (0.1) 9.5 35.8% Income taxes NET PROFIT (3,571,118) 4,143,907 (5.5) 6.3 (2,691,420) 2,988,110 (4.5) 5.0 32.7% 38.7% CASH FLOW (net income plus depreciation and amortization) 8,626,274 13.2 7,515,760 12.6 14.8% 77 REPORT AND ACCOUNTS 2004 ATTACHMENT B - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT DEC. 31, 2004 CONSOLIDATED STATEMENT OF CASH FLOWS (€'000) Sources of funds 2004 2003 Net profit 4,144 2,988 3,826 3,978 656 549 18 26 685 639 9,329 8,180 Increase in long-term bank debt 213 4,000 Increase in other long-term debt 29 0 Decline in long-term receivables 49 0 Decline in long-term deferred tax assets 17 0 Decline in other long-term debt 11 0 326 555 Change in provisions for risks and charges (169) (148) Change in other assets (149) (374) TOTAL SOURCES OF FUNDS 9,656 12,213 118 130 3,085 3,687 Increase in long-term receivables 0 17 Decline in long-term bank debt 43 2,099 2,624 3,146 0 26 387 530 Dividends paid 1,223 1,341 TOTAL USES OF FUNDS 7,480 10,976 INCREASE (DECREASE) IN WORKING CAPITAL 2,176 1,237 Adjustments for items not having an impact on working capital: Tangible asset depreciation and write-downs Intangible asset amortization and write-downs Accruals to provisions for risks and charges Employee termination indemnities Working capital generated by operations Book value of assets disposed Uses of funds: Increase in intangible assets Acquisition of tangible assets Transfer to current portion of long-term debt Decline in other long-term debt Payment of employee termination indemnities 78 REPORT AND ACCOUNTS 2004 Changes in working capital: Cash and banks 2,448 732 Current financial receivables (297) 123 0 (1) Trade receivables 1,276 546 Other receivables 124 (320) Short-term prepaid tax receivables 410 0 Tax receivables (41) 0 (530) (1,276) (94) (56) 3,296 (252) (1,196) (191) 10 (10) 653 (1,883) 1,301 70 Other payables 365 545 Accrued expenses and deferred income (13) (20) Total change in current liabilities 1,120 (1,489) INCREASE (DECREASE) IN NET WORKING CAPITAL 2,176 1,237 Short-term receivables Inventories Accrued expenses and deferred income Total change in current assets Current liabilities: Bank overdrafts Other long-term financial payables Trade payables Tax payables 79 Consolidated Financial Statements at December 31, 2004 REPORT AND ACCOUNTS 2004 Consolidated Financial Statements at December 31, 2004 Balance Sheet (€) - Assets Dec. 31, 2004 Dec. 31, 2003 - - 43,341 - 72,503 690,623 806,467 359,627 224,422 760,754 1,344,803 12,763,693 6,590,475 1,754,318 1,604,000 92,286 22,804,772 11,672,858 8,314,899 2,071,311 1,722,681 89,556 23,871,305 5,224 5,224 71,276 76,500 119,840 125,064 23,687,739 25,341,172 4,056,939 4,754,140 11,292,480 20,103,559 4,382,694 4,655,508 11,595,665 20,633,867 19,474,494 18,198,715 A) Capital not paid-in B) Fixed assets I - Intangible assets 2) Research and development costs and advertising expenses 3) Industrial patents and intellectual property rights 4) Concessions, licenses and trademarks 7) Other assets Total II - Tangible assets 1) Land and buildings 2) Plant and machinery 3) Equipment 4) Other assets 5) Work in progress and advances Total III - Financial assets 1) Investments in: d) other companies 2) Receivables d) long-term receivables from others Total Total assets C) Current assets I - Inventories 1) Raw materials 2) Work in progress and semi-finished goods 4) Finished goods Total II - Receivables 1) Trade - short-term 82 REPORT 4-bis) Tax receivables 4-ter) Prepaid taxes - short-term - long-term Total 5) From others - short-term - long-term Total receivables from others Total receivables III - Marketable securities 5) Own shares (par value euro 52,000) IV - Cash and cash equivalents 1) Bank deposits 3) Cash Total cash and cash equivalents Total current assets D) Accrued income and prepaid expenses Total assets Liabilities and Shareholders' Equity AND ACCOUNTS 2004 153,455 194,421 1,329,595 76,979 1,406,574 919,260 94,164 1,013,424 204,567 73,916 278,483 21,313,006 80,578 84,808 165,386 19,571,946 291,052 588,230 6,488,571 18,144 6,506,715 4,040,875 17,902 4,058,777 48,214,332 44,852,820 372,231 465,943 72,274,302 70,659,935 Dec. 31, 2004 Dec. 31, 2003 8,840,000 12,244,869 585,159 1,366,445 291,052 - 8,840,000 12,244,869 585,159 1,244,028 588,231 - 68,412 5,553,570 (385,255) 11,090,640 4,143,907 43,798,799 68,412 5,042,619 (265,206) 9,690,804 2,988,110 41,027,026 A) Shareholders' Equity I - Share capital II- Paid-in capital in excess of par value III- Revaluation reserve IV- Legal reserve V- Reserve for own shares VI- Statutory reserves VII- Other reserves: Provisions for suspended tax reserves Consolidation reserve Translation difference reserve Extraordinary reserve VIII- Retained earnings IX - Net profit Consolidated Shareholders' Equity 83 REPORT AND ACCOUNTS 2004 B) Provision for risks and charges 2) Deferred Income taxes 3) Other Total provisions for risks and charges 1,917,649 311,062 2,228,711 1,993,651 385,744 2,379,395 C) Employee termination indemnities 3,909,428 3,611,298 D) Payables 4) Bank loans - short-term - long-term Total bank loans 8,177,493 212,751 8,390,244 9,373,384 2,666,677 12,040,061 46,739 69,279 116,018 36,817 40,387 77,204 20,373 6,624 7) Trade payables 7,451,122 6,811,380 12) Taxes payable 2,717,163 1,416,603 974,953 875,334 2,517,204 2,251,396 22,187,077 23,478,602 150,287 163,614 72,274,302 70,659,935 61,857 19,821 63,205 81,796 5) Other financial payables - short-term - long-term Total other financial payables 6) Advances 13) Social security payables 14) Other payables Total payables E) Accrued expenses and deferred income Total liabilities Commitments 2) Guarantees given 3) Guarantees received 84 REPORT Consolidated Income Statement (€) A) Revenues 1) Sales 2) Change in work in progress, semi-finished and finished goods inventories 4) Increase in assets due to internal construction 5) Other revenues: a) sundry b) contributions received Total operating value B) Operating Costs 6) Raw materials 7) Services 8) Leases and rentals 9) Personnel a) Wages and salaries b) Social security c) Employee termination indemnities d) Retirement benefits e) Other costs Total personnel costs 10) Depreciation and write-downs a) Amortization of intangible assets b) Depreciation of tangible assets c) other write-downs of assets d) Write-down in the value of current assets Total depreciation and write downs 11) Change in raw material inventories 12) Accruals to risk provisions 14) Other operating costs Total Operating Costs Operating income (A-B) AND ACCOUNTS 2004 2004 2003 65,309,688 59,870,282 (10,018) 344,637 (61,138) 824,509 24,650 12,515 65,681,472 45,268 32,777 60,711,698 (21,104,747) (10,495,839) (961,994) (18,816,949) (10,586,661) (971,789) (14,850,690) (4,055,789) (733,492) (11,018) (144,874) (19,795,863) (13,973,666) (3,797,468) (706,138) (11,549) (124,627) (18,613,448) (251,104) (3,825,964) (405,299) (401,451) (3,977,703) (148,496) (140,859) (4,623,226) (150,213) (4,677,863) (338,502) (17,977) (290,547) (57,628,694) (399,558) (25,669) (256,242) (54,348,179) 8,052,778 6,363,519 85 REPORT AND ACCOUNTS 2004 C) Finance Income and expense 16) Other financial income: c) marketable securities (excluding subsidiaries) d) other income 17) Interest and other financial charges 17-bis) Foreign exchange gains and losses Total 2004 2003 83,974 31,514 (378,219) (96,316) (359,047) 48,686 (417,055) (249,479) (617,848) 1,147 2,930 48,982 50,129 122,934 125,864 200,993 (229,828) (28,835) 33,760 (225,765) (192,005) 7,715,025 5,679,530 22) Income taxes a) current b) deferred Total income taxes (4,047,242) 476,124 (3,571,118) (2,882,708) 191,288 (2,691,420) 23) NET PROFIT 4,143,907 2,988,110 D) Adjustments to the value of financial assets 18) Revaluations b) long-term financial assets c) marketable securities (excluding subsidiaries) Total adjustments to the value of financial assets E) Extraordinary items 20) Income 21) Losses Total extraordinary items Profit before taxes (A-B+C+D+E) Brescia, March 23, 2005 CHAIRMAN OF THE BOARD OF DIRECTORS CEMBRE S.P.A. – GROUP PARENT COMPANY CARLO ROSANI 86 REPORT AND ACCOUNTS 2004 Notes to the Consolidated Financial Statements for the year ended December 31, 2004 The Consolidated Financial Statements for the year ended December 31, 2004 have been prepared in accordance with Legislative Decree no. 127, April 9, 1991 and subsequent amendments. The included notes contain the following information: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Content and form of the Consolidated Financial Statements Consolidation principles and valuation criteria Significant information relating to Balance Sheet items Sales revenues Cost of services received Personnel costs Write-downs of fixed assets Other financial income Interest and financial charges Adjustments to the value of financial assets Extraordinary charges Income taxes Boards’ compensation List of consolidated companies Valuation criteria used in the Consolidated Financial Statements are those adopted by the Parent Company. These have been consistently and uniformly applied with the exception, consistent with prior years, of Parent Company’s raw material inventories, valued at the average cost instead of under the LIFO method, to allow for consistency in valuation criteria applied throughout the Group. We also bring to your attention that: - no event requiring the application of exemptions provided for by Article 29, paragraphs 4 and 5 of the mentioned Legislative Decree occurred; - amounts recorded in the Consolidated Financial Statements for the year ended December 31, 2004, are consistent with those reported for the previous year. Where necessary, items for the previous year have been reclassified. Changes in Balance Sheet and Income Statement items due to changes in the scope of consolidation are explained and commented upon in the notes, where significant; - valuation criteria applied are in compliance with current regulations; - significant changes relating to Balance Sheet and Income Statement items are commented upon; - risks and charges relating to the year whose existence became known after the closing date of the Financial Statements were taken into account. 87 REPORT AND ACCOUNTS 2004 1. CONTENT AND FORM OF THE CONSOLIDATED FINANCIAL STATEMENTS The Consolidated Financial Statements of the Group include the statutory accounts at December 31, 2004 of Cembre S.p.A., its parent company, and those of the following companies: 1. Cembre Ltd (UK) 2. Cembre Sarl *(France) 3. Cembre España SL *(Spain) 4. Cembre AS (Norway) 5. Cembre GmbH *(Germany) 6. Cembre Inc **(US) 7. General Marking s.r.l. (Italy) Group share at December 31, 2004 Group share at December 31, 2003 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% * 5% share held through Cembre Ltd ** 29% share held through Cembre Ltd The Group has control of the above companies pursuant to Article 2359 of the Italian Civil Code. The consolidation area is unchanged from the previous year. The Consolidated Financial Statements include the statutory accounts at December 31, 2004 approved by the boards of the respective subsidiaries and by the Board of Directors of parent company Cembre SpA. Criteria used in the preparation of the above mentioned financial statements were applied consistently within the Group. Where necessary, financial data was adjusted and reclassified. 2. CONSOLIDATION PRINCIPLES AND VALUATION CRITERIA 2.1 Consolidation principles Consolidation was carried out by applying the line-by-line method, in accordance with principles defined in articles 31, 32 and 33 of Legislative Decree no. 127, April 9, 1991. Criteria adopted in applying this method were the following: a) assets, liabilities, revenues, expenses, gains and losses of consolidated companies were included in full in the consolidated financial statements. The following items were instead eliminated: 1) equity investments in consolidated companies and the corresponding share in the respective Shareholders’ Equity; 2) receivables and payables between consolidated companies; 3) revenues and expenses arising from transactions between consolidated companies; 4) gains and losses arising from transactions concluded between consolidated companies, and the related assets, other than contract work in progress; b) limited to foreign subsidiaries, value adjustments and accruals made exclusively pursuant to tax regulations have been eliminated; c) differences between the acquisition cost and the related book value of consolidated companies existing at the time of their first consolidation or at the date shares in consolidated companies were acquired, were recorded as follows: - under “Consolidation reserve”, where negative; - subtracted from the “Consolidation reserve” or recorded under assets as a “Consolidation difference” when relating to goodwill and in case it cannot be allocated to other asset items, where positive. 88 REPORT AND ACCOUNTS 2004 Income and losses recorded by subsidiaries following their first consolidation are added or subtracted from the “Consolidation reserve”. 2.2 Valuation criteria applied Intangible assets Intangible assets are recorded at cost, net of amortization calculated on a straight-line basis over their expected useful economic life, as provided by the Italian Civil Code. Tangible assets Tangible assets are recorded at the acquisition or production cost, inclusive of all costs directly attributable to the assets. They are adjusted to take into account revaluations made in accordance with the Law, and the recording, where appropriate, of the difference between the cost of the investment and the corresponding share in the Shareholders’ Equity acquired. The book value of intangible assets is adjusted to take into account depreciation calculated on a straight-line basis over the expected residual useful life of the assets, reflecting their physical depletion, in accordance with the provisions of Article 2426 of the Italian Civil Code. Fixed assets acquired through leasing transactions are recorded at cost under assets in the Balance Sheet, net of accumulated depreciation. The amount of the loan relating to the respective asset is recorded under liabilities as payable to other financing entities, in accordance with international accounting principles. Depreciation rates applied, unchanged from the previous year, are: Buildings and light installations Plant and machinery Equipment Other assets (office furniture and equipment, vehicles) 2% – 10% 5% – 25% 6% – 25% 6% – 33% Ordinary maintenance and repair costs are recorded in the income statement in the year in which they are incurred. Inventories Inventories are valued at the lower of acquisition or production cost and their expected realisable value. Raw materials, semi-finished and finished goods inventories are valued under the yearly weightedaverage purchase or production cost method. Work in progress inventories are valued at their processing cost, inclusive of raw materials, labour, direct and indirect manufacturing costs, taking into account percentages of completion. Receivables and payables Receivables are recorded at the expected realisable value, represented by the face value, adjusted, where necessary, for provisions for doubtful accounts. Payables are recorded at face value, representative of liabilities actually accrued. Marketable securities Marketable securities are recorded at the lower of cost, represented by the weighted average acquisition cost, and market value. Write-downs are reversed whenever the impairment in value ceases to exist. Accrued income and prepaid expenses, accrued expenses and deferred income These are accounted for under the accrual method. 89 REPORT AND ACCOUNTS 2004 Provisions for risks and charges Provisions for risks and charges are accrued against known or probable liabilities whose amount and timing could not be determined at the date of the financial statements. Provision for employee termination indemnities The provision for employee termination indemnities reflects the amount owed by the Group at the end of the year to its employees upon termination of their employment, in accordance with labour agreements and laws applicable in Italy. Extraordinary retirement benefits recognized pursuant to French regulations to persons employed in France, are also included in this provision. Deferred tax provision and prepaid taxes The provision includes deferred taxes resulting from differences between taxable and reported income, consisting mainly of accelerated depreciation and the difference between the valuation of the parent company’s inventories at the average cost and the LIFO method. Prepaid taxes, result from the netting of unrealised gains embodied in inventories of goods not sold to a third party at the end of the year, in addition to amounts recorded by Group companies as prepaid taxes relating to accruals that may be deducted only in future years. Deferred tax assets are recorded only where there exists reasonable certainty of their retrieval through future profits. Taxes payable They include taxes payable for the year, net of prepaid and withholding taxes. The tax expense for the year is determined according to applicable tax rates and expected taxable income. Taxes payable include the amount payable by Group companies as taxes withheld from employee’s salaries. Commitments These represent commitments and guarantees given and received from others, excluding those relating to receivables or payables recorded in the Balance Sheet, in accordance with accounting principles applied. Secured guarantees are recorded at face value. Revenues and expenses Revenues and expenses are recorded under the accrual method, net of returns, discounts, allowances and bonuses. 2.3 Translation of financial statements denominated in currencies other than the euro Criteria adopted in the conversion of financial statements denominated in currencies other than the euro are as follows: - assets and liabilities are translated at the exchange rate applicable at the date of the financial statements, with the exception of Equity items, translated at the historical exchange rate; - revenues and expenses are translated at the average exchange rate for the year. Differences emerging from the translation of amounts denominated in currencies other than the euro are recorded in the Provision for currency translation adjustments under Shareholders’ Equity. Exchange rates applied were: Currency Pound Sterling US Dollar Norwegian Krone 90 Year-end exchange rate (€/curr) Average exchange rate for 2004 0.705 1.362 8.236 0.678 1.243 8.369 REPORT AND ACCOUNTS 2004 3. BALANCE SHEET 3.1 Intangible assets 3.1.1 Research, development and advertising costs These are represented by costs incurred by the parent company for the development of new products. 3.1.2 Industrial patents and intellectual property rights The item includes primarily open-ended software licenses acquired. The value of the patent acquired by subsidiary General Marking in 2002, amounting to €211,628, was prudentially written-down in full due to the fact that the company has not achieved a breakeven in 2004. 3.1.3 Concessions, licenses and trademarks Due to the fact that subsidiary General Marking, contrary to expectations, did not generate profits in 2004, trademarks recorded in the financial statements of the same at €193,671 were fully written down. 3.1.4 Other intangible assets These consist of capitalized costs incurred in the adaptation of the industrial building adjacent to the Brescia main complex to the specific production needs of the Group. 3.2 Tangible assets Gross book value Accumulated depreciation December 31, 2004 December 31, 2003 Land and buildings 16,705 3,941 12,764 11,673 Plant and machinery 25,872 19,281 6,591 8,315 Equipment 6,198 4,444 1,754 2,071 Other assets 5,466 3,973 1,493 1,645 Leased assets 220 109 111 77 92 90 22,805 23,871 (€’000) Work in progress Total 92 54,553 31,748 The largest investments were made by UK subsidiary Cembre Ltd. that made additions to its Birmingham site, investing about €1,5 million, and by the parent company, consisting in expenditure on plant, machinery and industrial equipment, as described in the accounts of Cembre SpA. Assets leased relate exclusively to the Spanish subsidiary. The parent company’s tangible assets were written-up by €1,075 thousand, as detailed in the accounts of the same. 91 REPORT AND ACCOUNTS 2004 3.3 Long-term financial assets 3.3.1 Investments in other companies Investments in other companies consist of equity investments in Consorzio Nazionale Imballaggi and Inn.tec. Srl, a technology innovation consortium, both with registered office at the Brescia Province main office. 3.3.2 Long-term receivables The item includes mainly security deposits and prepaid withholding tax receivables on employee termination indemnities of the parent company. 3.4 Inventories (€‘000) Dec. 31, 2004 Dec. 31, 2003 Change Raw materials 4,057 4,383 (326) Work in progress and semi-finished goods 4,754 4,655 99 11,293 11,596 (303) 20,104 20,634 (530) Finished goods Total The value of finished goods inventories is adjusted through a provision for slow-moving stock amounting to approximately €1,446 thousand, recorded in the financial statements of the parent company to bring the value of inventories in line with their expected realisable value. A €940 thousand accrual to the provision was made in 2004, while uses amounted to €46 thousand. The weighted-average cost valuation of inventories is in line with their market value at December 31, 2004. 3.5 Trade receivables (€ ‘000) Dec. 31, 2004 Dec. 31, 2003 Gross trade receivables 20,006 18,830 Provision for doubtful accounts (531) (631) 19,475 18,199 Net trade receivables The increase over the previous year is due to higher sales. Gross trade receivables by geographical area: (€ ‘000) Italy Rest of Europe America Oceania Middle East Other Total 92 Dec. 31, 2004 12,448 6,761 414 195 117 71 20,006 REPORT AND ACCOUNTS 2004 3.6 Prepaid taxes Short-term prepaid tax receivables: (€ ‘000) Dec. 31, 2004 Dec. 31, 2003 Elimination of intragroup margins on inventories 974 760 Provision for slow moving stock 335 132 Other 21 27 Total 1,330 919 A detail is provided on the note on Income taxes. 3.7 Other receivables The increase in short-term receivables from others on December 31, 2003 is due to the recording of a nonrecurring gain of €130 thousand as a result of the positive outcome of litigation. The said amount was collected in 2005. 3.8 Own shares A the end of 2004, the Company held 100,000 own shares, declining from December 31, 2003 due to the sale on the market of 143,000 shares in the year. The value of such shares was written-up by €48,982 to bring their acquisition price in line with their listed price on the Italian Stock Exchange. At March 23, 2005, the company held 35,000 of its own shares. 3.9 Accrued income and prepaid expenses The item consists primarily of a prepaid expense amounting to €227,150 against a non-competition agreement expiring in 2006 recorded in the financial statements of subsidiary General Marking in the context of the acquisition of a business unit operating in the industrial marking segment. The agreement was stipulated with the former exclusive distributor of products manufactured by the business unit acquired. The long-term portion of the prepaid expense amounts to €144,550. 3.10 Shareholders’ Equity The capital stock of the Group parent company amounts to €8,840,000 and is made up of 17 million ordinary shares of par value €0.52 each, fully underwritten and paid-up. Following the €48,982 write-up in the value of own shares held, an equivalent amount was transferred from the extraordinary reserve to the Provision for own shares. The latter was written-down by €346,160 as a result of the sale of part of own shares held. A Statement of Changes in the Shareholders’ Equity is enclosed below and constitutes an integral part of the present Notes. Changes in all Shareholders’ Equity items for the past three years are detailed. The table that follows shows the origin, availability for use and distribution of Shareholders’ Equity 93 REPORT AND ACCOUNTS 2004 items: Nature Amount Share capital Equity reserves: Share premium reserve Restatement reserve Suspended-tax reserves Reserves accrued from profits: Legal reserve Reserve for own shares Extraordinary reserve Total Uses allowed (1) Available share 8,840,000 12,244,869 585,159 68,412 ABC AB B 11,843,314 ----- 1,366,445 291,052 11,090,640 B --ABC ----11,090,640 34,486,577 22,933,954 Share that may be distributed Residual share available for distribution 3,543,425 19,390,529 (1) A: capital increases; B: loss coverage; C: distribution to Shareholders Consolidation adjustments resulted in the following differences between the statutory accounts of parent company Cembre SpA at December 31, 2004 and the Consolidated Financial Statements at the same date: Reconciliation between the parent company’s statutory accounts and the consolidated financial statements of the Group Shareholders’ Equity and net profit reported in the parent company’s statutory accounts at December 31, 2004 Shareholders’ Net Equity income 40,418 5,931 0 (2,933) 12 1 535 (199) 194 (72) 336 122 Elimination of write-down of investment in subsidiary General Marking and provision for the loss reported by the same in 2004 1,036 1,036 Elimination of book value of consolidated companies: - difference between book value of the investment and Shareholders’ Equity and net income acquired 3,687 271 Elimination of inter-company transactions: - unrealised intra-group gains included in the value of inventories (net of tax effect) - conversion difference on elimination of intra-group payables and receivables (1,640) (50) (360) 76 Consolidated Shareholders’ Equity and net income 43,799 4,144 Elimination of entries made exclusively for tax purposes: - Elimination of cumulative effect of accelerated depreciation from the income statement of the parent company - Cembre GmbH provision for product warranty (net of tax effect) - adjustment of parent company’s inventories to Group’s valuation method tax effect 94 REPORT AND ACCOUNTS 2004 The Consolidation reserve is made up as follows: (€’000) Dec. 31, 2004 Dec. 31, 2003 Equity investment elimination reserve 3,801 3,118 Elimination of accelerated depreciation 2,933 3,082 11 11 214 247 (1,280) (1,300) Conversion difference on elimination of intra-group payables and receivables (126) (115) Total 5,553 5,043 German subsidiary product warranty provision reversal Adjustment of inventories from LIFO to average cost Elimination of intragroup income In previous years, item Elimination of accelerated depreciation included the elimination of accelerated depreciation from the Balance Sheet of the parent company as it was recorded in the Income Statement. From 2004, the parent company, according to the International Accounting Standards, decided not to book this amount, recorded only for tax purposes, recording in the Income Statement the cumulative effect of such elimination of tax-related entries. In the financial statements of the parent company this resulted in the recording of a nonrecurring gain of €4,674 thousand and a related nonrecurring loss of €1,741 thousand (resulting from the related deferred taxes). The net effect on the profit of the parent company for the year was €2,933 thousand, while at the consolidated level such component was recorded under the Consolidation reserve, from a consolidated point of view in fact, accelerated depreciation has never been considered. 3.11 Provisions for risks and charges Deferred tax provision (€’000) Dec. 31, 2004 Dec. 31, 2003 1,710 1,859 200 127 8 8 1,918 1,994 Deferred taxes on reversal of Accelerated depreciation Deferred taxes resulting from the use of weighted average vs. LIFO in valuing parent company’s inventory German subsidiary product warranty provision Total The provision for product warranties accrued exclusively for tax purposes by the German subsidiary, was eliminated. Additional information is provided in the note on Income taxes. 95 REPORT AND ACCOUNTS 2004 Other provisions for risks and charges: (€’000) Dec. 31, 2004 Provision for Social Security litigation Dec. 31, 2003 224 208 0 127 Additional customer indemnities provision 42 36 Negative Fair Value Market of IRS 30 0 Other 15 15 Total 311 386 Provision for currency fluctuations The parent company entered into an interest rate swap transaction for a notional value of €2.5 million, expiring in 2006. The interest rate recognized to the counterpart in the swap is 2.81%, against an interest rate recognized to the Company equal to the 3-month Euribor rate. Such swap transaction is not considered a hedging transaction since the loan generating the interest rate risk for which it was originally entered into was repaid in November 2004. The valuation of the financial instrument at its fair market value resulted in the accrual of a provision amounting to about €30 thousand. In 2004, the accounting principle adopted for the recording of receivables and payables denominated in currencies other than the euro changed. These are currently booked at the exchange rate at the time of the transaction, recording in the Income Statement the foreign exchange loss or gain according to the exchange rate at the end of the financial period. The method previously adopted until the 2003 Financial Statements provided for the accrual of a provision for foreign exchange differences in case of losses deriving from the translation of amounts at year-end exchange rates, and the lack of recording of positive differences. In 2004, negative foreign exchange differences arising from the translation of receivables and payables denominated in currencies other than the euro existing at December 31 were equal to €186 thousand, while positive foreign exchange differences amounted to €1 thousand. Under previously applicable accounting principles the amounts recorded would have been equivalent. 3.12 Provision for employee termination indemnities Dec. 31, 2003 Accruals Uses Dec. 31, 2004 3,611 685 (387) 3,909 Extraordinary termination indemnities recognized pursuant to French law to French employees terminating their employment was classified under this item. 3.13 Payables 3.13.1 Bank debt Dec. 31, 2004 (€’000) Current Short-term loans and bank overdrafts 7,532 Medium- and long-term loans Total 96 645 8,177 Dec. 31, 2003 Long-term Current Long-term 213 8,728 2,021 0 213 646 9,374 645 2,666 REPORT AND ACCOUNTS 2004 Cembre S.p.A. issued guarantees against loans extended Cembre España SL, Cembre Inc. and General Marking, amounting respectively to €1,500,000, €478,132 and €3,500,000. 3.13.2 Trade payables Trade payables by geographical area: (€’000) Dec. 31, 2004 Italy Rest of Europe America Oceania Other 5,109 2,247 25 65 5 Total 7,451 3.13.3 Taxes payable (€’000) Dec. 31, 2004 Withholding taxes payable Dec. 31, 2003 842 764 1,256 157 593 474 26 22 2,717 1,417 Dec. 31, 2004 Dec. 31, 2003 Current taxes VAT and similar foreign taxes Other taxes Total 3.13.4 Other payables (€’000) Payable to employees 816 819 1,301 1,181 148 131 69 51 Other 183 70 Total 2,517 2,252 Bonuses owed to customers Commissions payable Board of Statutory Auditors and equivalent foreign board compensation The increase in bonuses payable to customers is due to higher sales. 97 REPORT AND ACCOUNTS 2004 4. SALES REVENUES Sales by geographical area (€’000) Dec. 31, 2004 Dec. 31, 2003 Italy 31,298 29,765 Rest of Europe 28,480 25,310 5,532 4,795 65,310 59,870 Dec. 31, 2004 Dec. 31, 2003 2,144 2,082 775 745 1,593 1,557 Fuel 205 192 Travelling expenses 524 571 Maintenance and repair 974 1,169 1,009 1,060 Advertising and promotion 321 346 Insurance 385 371 Boards compensation 599 662 Postage and telephone 316 326 Commissions 242 273 Security and cleaning 339 311 Other 1,070 922 Total 10,496 10,587 Rest of the World Total 5. COST OF SERVICES RECEIVED (€’000) Subcontracted work Electricity, heating and water Transport of goods sold Consulting 98 REPORT AND ACCOUNTS 2004 6. PERSONNEL COSTS The average number of employees by category is shown in the table below: 2004 2003 Management 16 16 Administrative and commercial staff 229 225 Warehouse workers 217 227 Total 462 468 7. WRITE-DOWN OF FIXED ASSETS The value of the patent acquired by subsidiary General Marking in 2002, amounting to €211,628 and trademarks recorded in the financial statements of the same at €193,671, were prudentially writtendown in full due to the fact that the company has not achieved a breakeven in 2004. 8. OTHER FINANCIAL INCOME Other financial income includes €83,974 representing proceeds from the sale of own shares on the regulated market managed by Italian Stock Exchange. Other financial income: (€’000) Dec. 31, 2004 Dec. 31, 2003 29 22 Interest on trade receivables 2 1 Other 0 25 Total 31 48 Interest on bank accounts Positive foreign exchange conversion differences in 2004 relate to the elimination of intragroup transactions denominated in currencies other than the euro. 9. INTEREST AND OTHER FINANCIAL EXPENSES (€’000) Dec. 31, 2004 Dec. 31, 2003 Interest on bank loans 326 395 Bank and other charges 52 22 378 417 Total 99 REPORT AND ACCOUNTS 2004 10. FOREIGN EXCHANGE GAINS (LOSSES) (€’000) Foreign exchange gains Foreign exchange losses Foreign exchange translation gains Foreign exchange translation losses Positive foreign exchange conversion difference Total Dec. 31, 2004 Dec. 31, 2003 132 (187) 1 (100) 58 9 (242) (60) 44 (96) (249) Foreign exchange conversion differences relate to the elimination of intragroup transactions denominated in currencies other than the euro. 11. ADJUSTMENT TO THE VALUE OF FINANCIAL ASSETS The revaluation of marketable securities relates to own shares held by the parent company. 12. EXTRAORDINARY INCOME Extraordinary income increases considerably from the previous year due to the recording of a nonrecurring gain of €130 thousand as a result of the positive outcome of litigation. 13. EXTRAORDINARY CHARGES (€’000) Dec. 31, 2004 Dec. 31, 2003 Extraordinary losses 101 77 Returns of goods sold in previous years 112 119 Bonuses to customers relating to the previous year - 16 Social Security payable 7 14 220 226 Total 14. INCOME TAXES As already commented about the consolidation reserve, the elimination of tax-related entries in the financial statements of the parent company did not produce an effect on the consolidated financial statements, as entries made solely for tax purposes were already eliminated in the consolidation. The growth in income taxes on the previous year is due primarily to the increase in taxes paid by the parent company, resulting in part from a €591 thousand non-deductible write-down in the value of inventories due to slow-moving stock. The table below shows timing differences that give rise to the booking of deferred and prepaid taxes: 100 REPORT (€’000) AND ACCOUNTS 2004 2004 2003 Timing differences Tax expense Timing differences 2,613 900 200 59 10 974 335 74 20 4 2,040 355 229 79 5 20 Prepaid taxes: Elimination of intragroup inventory gains (37,25%) Inventory write-down (37,25%) Amortization of goodwill (37,25%) Amortization of write-down of equity investment (37,25%) Risk provision (37,25%) Other amortization (37,25%) Total prepaid taxes 1,407 Deferred taxes: Accelerated depreciation (37,25%) 4,204 Depreciation of Cembre Ltd (30%) 480 Parent company inventory valuation adjustment (37,25%) 535 German subsidiary product guarantee provision (40%) 20 1,566 144 200 8 Total deferred taxes 1,918 Tax expense 760 132 85 26 2 8 1,013 4,674 393 342 20 1,741 118 127 8 1,994 The table that follows shows the value of timing differences and loss carry-forwards that could result in the recording of deferred tax assets. Such deferred tax assets were not recorded, as there does not exist certainty of their full retrieval in the next two years. Group company and description General Marking: Loss carry forward Timing difference on intangible asset amortization Non-deductible accruals Cembre Inc.: Loss carry forward Cembre As: Loss carry forward Tax rate Amount (€’000) Prepaid tax asset (€’000) 33% 33% 33% 34% 28% 901 554 200 275 92 297 183 66 93 26 Loss carry-forwards of General Marking relate to fiscal years prior to 2004 and may therefore be deducted from profits of parent company Cembre in the context of tax consolidation. Deferred and prepaid taxes: (€’000) 2004 2003 Increase in provision for inventory depletion Adjustment of inventory value to weighted average Goodwill amortization expense Tax effect of elimination of intragroup inventory gains Write-down of equity investment Increase in deferred tax provision Use of deferred tax provision Use of provision for subsidiaries’ losses for 2003 Other 203 (72) (11) 213 (6) (28) 175 0 2 73 26 41 (45) (26) 0 167 (46) 1 Total 476 191 101 REPORT AND ACCOUNTS 2004 15. BOARDS’ COMPENSATION Compensation of the Board of Directors and Board of Statutory Auditors is indicated in the Notes to the statutory accounts of Cembre SpA. Directors of the parent company who received compensation from other Group companies are Giovanni De Vecchi, Chairman of General Marking, who received €12,000 for this position, and Giovanni Rosani, Director of General Marking, who received €4,850 for this position. 16. LIST OF CONSOLIDATED COMPANIES Investments in companies consolidated line-by-line, pursuant to Article 26 of Legislative Decree no. 127, April 9, 1991, are listed below: Company Registered office Share capital Share held at Dec. 31, 2004 Cembre Ltd Sutton Coldfield (Birmingham) GBP 1,700,000 100% 100% Morangis (Paris) EURO 1,071,000 100% (*) 100% (*) Coslada (Madrid) EURO 900,000 100% (*) 100% (*) Stokke (Norway) NOK 2,400,000 100% 100% Monaco (Germany) EURO 512,000 100% (*) 100% (*) Edison (New Jersey - Usa) US $ 1,440,000 100%(**) 100%(***) Brescia (Italy) EURO 99,000 100% 100% Cembre Sarl Cembre España SL Cembre AS Cembre GmbH Cembre Inc General Marking srl Share held at Dec. 31, 2003 (*) of which 5% held through Cembre Ltd. (**) of which 29% held through Cembre Ltd (***) of which 50% held through Cembre Ltd To provide more complete information regarding the financial and economic situation of the Company, the Consolidated Financial Statements contain – in addition to the Balance Sheet, Income Statement and Notes – a Statement of Changes in the Consolidated Shareholders’ Equity for the years ended December 31, 2003 and December 31, 2004 (Attachment no. 1). Brescia, March 23, 2005 CHAIRMAN OF THE BOARD OF PARENT COMPANY CEMBRE S.P.A. CARLO ROSANI 102 465,296 (101,404) 566,700 Reserve for own shares 68,412 68,412 Suspended tax reserves 189,753 (435,455) 625,208 8,596,298 1,069,268 101,404 7,425,627 Extraordinary reserve (3,805,981) 3,805,981 Net profit 103 8,840,000 12,244,869 12,244,869 585,159 585,159 1,366,445 122,417 1,244,028 291,052 (297,179) 588,231 68,412 68,412 5,553,570 539,774 (28,823) 5,042,619 520,868 (385,255) (120,049) (265,206) (454,959) 11,090,640 1,102,658 297,179 9,690,803 1,217,440 (122,935) (1) The consolidation reserve includes foreign exchange translation differences resulting from the translation of shares held by Cembre Ltd in other Group companies. Balance at Dec. 31, 2004 Allocation of 2003 net profit 2004 net profit 8,840,000 134,632 122,935 78,694 43,798,799 4,143,907 4,143,907 4,143,907 (1,223,261) (2,988,110) (148,872) 41,027,025 2,988,110 2,988,110 2,988,110 (1,340,560) (3,213,500) (376,265) 39,755,740 3,213,500 155,225 (1,675,700) (435,455) 38,498,171 Total Shareholders' Equity AND Transfer due to write-down of own shares Consolidation difference (1) Balance at Dec. 31, 2003 Allocation of 2002 net profit 2003 net profit Transfer due to write-down of own shares Consolidation difference (1) 4,443,057 155,225 916,541 3,371,291 Consolidation Consolidation reserve differences 3,213,500 1,109,396 144,472 964,924 Legal reserve Balance at Dec. 31, 2002 585,159 585,159 Restatement reserve 3,213,500 12,244,869 12,244,869 Share premium 2002 net profit Allocation of 2001 net profit Other changes, Transfer due to write-down of own shares 8,840,000 8,840,000 Balance at Dec. 31, 2001 Consolidation difference (1) Share capital (€) ATTACHMENT NO.1 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE CEMBRE GROUP AT DECEMBER 31, 2004 STATEMENT OF CHANGES IN THE CONSOLIDATED SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001-2004 REPORT ACCOUNTS 2004 REPORT AND ACCOUNTS 2004 REPORT OF THE BOARD OF STATUTORY AUDITORS ON THE CEMBRE GROUP CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2004 To our Shareholders: The Consolidated Financial Statements for the 2004 financial year delivered by the Board of Directors to the Board of Statutory Auditors within the term provided, close reporting a consolidated net profit of €4,143,907. Total assets amount to €72,274,302, while the Consolidated Shareholders’ Equity is equal to €43,798,799, included a net profit of €4,143,907. The comparison with figures for the previous year shows significant increases, signalling strong activity of the parent company and its subsidiaries. We attest that the Consolidated Financial Statements were prepared in accordance with the provisions of Legislative Decree no. 127 dated April 9, 1991. In line with current regulations, the Consolidated Financial Statements consist of a Balance Sheet, Income Statement and Notes to the accounts and are accompanied by a Report on operations prepared by the Board of Directors of the parent company. They were prepared on the basis of the financial statements of group companies approved by the respective Boards and subject to the verifications of auditing boards, where existing, and in any case audited by independent auditors. The Consolidated Financial Statements were audited, as apparent from the Auditing Report issued by the Brescia branch of independent auditors Reconta Ernst & Young. Accounting principles and valuation criteria adopted by consolidated companies are consistent with those of the parent company and in compliance with current regulations. The same were applied in the previous year. The consolidation area includes the parent company and all subsidiaries consolidated applying the line-by-line method. Intercompany transactions were carried out following the interest of individual companies involved and at current market conditions. Changes from previous year are commented in the notes to the account, which include a Statement of Changes of the Consolidated Shareholders’ Equity. The consolidation area and methods adopted are consistent with the provisions of applicable regulations and are in line with Italian and international accounting practice. The Report of the Board includes information regarding the transition process for the adoption of IAS/IFRS accounting principles. A summary Consolidated Balance Sheet and Income Statement in euro is provided below: CONSOLIDATED BALANCE SHEET - Assets - Liabilities - Group Shareholders’ Equity (incl. net profit and reserves) - Total Liabilities and Shareholders’ Equity - Consolidated net profit COMMITMENTS - Guarantees granted - Guarantees received CONSOLIDATED INCOME STATEMENT - Production value - Production costs - Operating profit - Financial income (expense) - Adjustments to the value of financial assets 104 72,274,302 28,475,503 43,798,799 72,274,302 4,143,907 61,857 19,821 65,681,472 (57,628,694) 8,052,778 (359,047) 50,129 REPORT - Extraordinary items - Pre-tax profit - Income taxes - Consolidated net profit AND ACCOUNTS 2004 (28,835) 7,715,025 (3,571,118) 4,143,907 The date of the above Financial Statements is December 31, 2004, the financial year it’s the same for all consolidated companies and the parent company, it started January 1, 2004 and ended December 31, 2004. Financial statements of consolidated companies were reclassified and adjusted in order to perform the consolidation and, where necessary, adjusted to follow the accounting principles adopted by the Group. Receivables and payables between consolidated companies and revenues and expenses arising from transactions between consolidated companies were eliminated. The Notes to the accounts provide a detail of Balance Sheet and Income Statement items and illustrate valuation criteria applied in the determination of the same. The Board of Statutory Auditors also acknowledges the following: - similarly to the practice adopted in the Consolidated Financial Statements for the previous year, inventories of consolidated companies were valued at the average cost, while inventories of the parent company, valued at LIFO and review annually, were adjusted to average cost. The Report of the Board was reviewed by us to verify that its contents comply with the provisions of article 40, Legislative Decree no. 127/91, that it is consistent with the Consolidated Financial Statements, as provided by article 41, Legislative Decree no. 127/91, and that it responds to the requisites of clarity, concreteness and consistency with the Consolidated Financial Statements. The Board of Statutory Auditors acknowledges that criteria provided by Law and currently applicable accounting principles were followed in the preparation of the Consolidated Financial Statements, and therefore deems that the same were prepared in a correct manner and that the amounts reported fairly represent the accounting records of the parent company and information provided by its subsidiaries. In particular, the Board of Statutory Auditors’ verifications included: • the internal auditing system adopted by the Group; • commercial and financial transactions between Group companies; • methods for appraising normal conditions in transactions with related parties; • the state of subsidiaries; • auditing standards adopted by independent auditors in the auditing of the Consolidated Financial Statements; • consolidation entries; • auditing books kept by Reconta Ernst & Young. Finally, the Board of Directors acknowledges that information supplied by the Board of Directors in the Report on Operations regarding transactions with Group companies and related parties, detailed and motivated in the same, is complete. The Board of Statutory Auditors did not find any atypical or unusual transaction or elements that suggest the need to express exceptions on such issues. The Auditing Report does not contain comments or exceptions. In our opinion the said Consolidated Financial Statements correctly reflect the financial position and profits of the Cembre Group for the year ended December 31, 2004, in line with norms that regulate the preparation of consolidated financial statements. The Board of Statutory Auditors Dott. Guido Astori Chairman Dott. Andrea Boreatti Auditor Rag. Leone Scutti Auditor 105 REPORT 106 AND ACCOUNTS 2004 Abstract of 12 May 2005 Shareholders General Meeting resolutions regarding the Financial Statement for the year ending 31 December 2004 REPORT AND ACCOUNTS 2004 Abstract of 12 May 2005 Shareholders General Meeting resolutions regarding the Financial Statement for the year ending 31 December 2004 - Shareholders General Meeting approved the parent company Financial Statement for the financial year ending 31 December 2004 and the annexed documents. Shareholders General meeting approved the allocation of the Company’s 2004 financial year net profit of 5,931,357.32 (rounded of to 5,931,357 in Financial Statement) as follows: - 5% of Net Profit to the legal reserve € 296,568 - dividend payments to shareholders, in the amount of € 0,1 for each of the Company’s 16,980,000 outstanding shares, whose holders are entitled to dividends pursuant to Article 2357 of the Italian Civil Code € 1,698,000 - to the extraordinary reserve € 3,936,789.32 The dividend, is payable from 26 May 2005, with a date of record of 23 May 2005 and eligible shareholders. The consolidated financial statement and the annexed documents have been presented to Shareholders General meeting. 108 Via Serenissima, 9 - 25135 Brescia (Italy) Phone: 030 3692.1 Telefax: 030 3365766 P.O. Box 392 - 25100 Brescia (Italy) www.cembre.com E-mail: [email protected]